Investing/finance help for newly married 25y/o

[DeviceGuy]

Hello fellow Bogleheads,

I have been a very avid reader of the boglehead forum ever since I came across it in a google search last year. I decided to finally post to seek your guidance on my personal finance and investing situation, especially as they relate to the 2012 tax season.

Overview:
25y/o
Household gross income:150-160k
Both new to the workforce and approximately 2 years into current positions

Debt:
-3.5k student loan for me at 6.7%, nothing for her
-9k left on her car at 3.5%
-281k mortgage @ 3.25%(house purchased last July) With PMI our payments are roughly $1870/mo (I pay 2k a month)

Assets:
-our cars combined are probably worth 30k
-5k sitting in savings account
-9k worth of individual stocks in TDA IRA

My questions are the following:
1. Is it more beneficial for me to pay off debt minus mortgage and forgo this years annual contribution to my IRA, or stay on track with my normal max contribution and pay off debt when I can?
2. My wife has an itch to renovate everything in our house(kitchen already done, bathrooms next, finish basement ASAP), and while I would love to potentially increase the value of our house enough to refinance and avoid PMI, I don't want to skip another year that I should be saving for our future. We have limited funds right now due to all of the new found costs of home ownership, and I would like to know what is the most effective way to use our income?


I should mention that my father in law is a carpenter by trade and would do all of our renovations for significantly reduced prices. We are planning on adding to the family in the next 1.5 years and I want to make the best decisions I can with our money now before we are paying for a kid and all associated costs. I very much appreciate any and all thoughts and recommendations.

[BolderBoy]

MHO is to make sure you fund your retirement as much as possible up to the max, EVERY year.

I think your emergency fund is a bit low.

You and your wife need to have a sit-down to discuss your plans (within 5 years) and your GOALS (retirement) so you can make a BUDGET that allows for funding what NEEDs to be funded before you consider your WANTS.

The single best thing you have done in furtherance of that is to join in his forum! Congratulations.

[drs85]

1. I agree with BoulderBoy in that you should always try for the maximum contribution towards your retirement (IRA). Try to put $5500/year into that from both of you. Does either of your work offer a 401k/403b and matching? Contribute up to the match first before the IRA, as that's "free" money.

2. Since your highest interest rate you owe is on your student loans at 6.7%, and it's also the smallest amount you owe, I would contribute the minimum to your mortgage ($1870) and move that extra $130 + anything else you can do towards the higher interest student loan. Once that's paid off, the extra money you'll have from your car loan amount + the $130 + anything else, you can put that towards the next debt. You could even split that payment, once you've paid off the student loan, and put half towards your car loan or mortgage, and the other half towards building your emergency fund more (see #3). You wont even notice the monthly difference if you do that right away.

3. I'd try and get your emergency fund up closer to $10K within the next few years. If it's a Roth IRA you're contributing to, you can always pull out the principal, but keep in mind that's a last resort as you cannot replace past contributions once you do that.

4. Do the math, but your PMI may be just as much as your interest rate, meaning the actual value of paying your house down 20% may make it more beneficial to do that before paying off the student loan. I know when I just got my mortgage, if I paid it down to 20% after the financing the PMI wouldn't go away for 2 years after close. So, depending on your mortgage, you may have 2 years of paying your PMI even if you do pay it down right away... but I suppose that may be why you're considering a refi.

5. If it's more of a want, and less of a need, I'd hold off on the bathroom and especially finishing the basement. And if you do still want to do that, make sure you do #1-3. You should sit down and budget and save up for home improvement options, especially when they're not needed (such an emergency hot-water heater, roof, etc). If you're on the fence between what one to do, a nicer bathroom will increase the value of your home more than a finished basement. I suppose the remodeling more depends on you, and how long you're planning on living in that house. As long as you're still living there, that money you're investing into it isn't liquid.

Happy investing!

[DeviceGuy]

Thank you very much for the suggestions.

My wife has a pension that we can take full benefit of after 30 years. I am a 1099, so I realize how important saving is.
I think I will follow your advice on paying off my student loan first, since that is such a small amount to begin with.

I remember our mortgage specialist saying that our interest with PMI was approximately 4.2% annually, and if I remember correct, PMI added almost 250/month. Needless to say, I feel as though we are throwing away that money. I am torn between either increasing our house value through renovations, or increasing our loan-equity ratio through higher monthly payments to get rid of PMI.

Either way, all of my contributions this year will go into a 3 fund portfolio thanks to everything I have learned on this site.

[NYBoglehead]

After you knock out those student loans you'll be able to direct all of that money towards building up your emergency fund to 6 months of expenses and working on your retirement funding.

Keep in mind that the PMI will go away once you reach 22% equity (for most lenders I've spoken to) in the house, so while it may look like its a waste of money now over the life of a 30 year loan it will have been a modest premium for not having to put 20% down to begin with.

At 3.25%, your mortgage rate isn't high enough in my opinion to justify making extra payments on it. Retirement savings are more important at this point. If you find yourself maxing out all tax-advantaged accounts and have extra cash than making extra mortgage payments might be an option for you.