mombo wrote:We're still relatively new to BH and want to pick your brains about how to allocate some extra non-retirement money.
ages: 34 and 35
taxes: 33% federal, almost 10% state (CA)
emergency: 5 months of expenses
debt: student loan of $52 at 3.25%, home loan of $775 at 4.25%
retirement is under good control: 401K and IRAs maxed out, 1/3 bonds, 2/3 stocks)
Each month, we have an extra $4000 and need help figuring out where to put it. We've been putting money into various pots but have no idea whether we should be doing things differently.
Our upcoming needs/options are:
1) fund our vanguard 529
2) pay off a student loan of $52K at 3.25% (we're putting in about $500/month, which is more than the minimum $300/mo).
- Should we be thinking of loans as negative bonds and sell bonds to pay off the loan?
3) put extra toward the principal on our home loan
4) saving for our next car which might need replacing in about 5 years
5) in 9 years we have a $100K loan that will be due
6) saving our next vacation!
Right now, we're allocating for these things as follows (I know it's not tax efficient but we were trying to keep things simple since we're beginners at this):
$1000/month to a VG lifestrategy moderate growth fund (for the $100K loan that will be due in 9 years)
Hello and welcome to the forum.
Not the most tax-efficient as it holds Total Bond Market Index and throws off taxable income every quarter. The closer to your target payoff date you want to hold less equity and more stable fixed income, as risk tends to show up just as you need the money. Or just use a plain old FDIC insured savings account - $1K * 108 months (9 years) puts you above your goal with zero risk of loss. The same can not be said of holding equity or bond funds.
$1000/month to the 529 (it's in the moderate age-based option: VG growth portfolio -- we probably should have been more aggressive since we have 17 years on this one) If you continue with the growth portfolio, and the same contribution amount, you should accumulate a large sum of monies for higher education.
$1000/month to a target retirement 2015 (this has $30K in it and is supposed to be for paying off the student loan and saving for the next car)
$500/month to the student loans
$500/month toward vacation savings (this just sits in a checking account)
1. should we sell some bonds to just pay off the student loan (in the vein of treating a loan as a negative bond)
2. should we stop funding the 529 and instead put the money toward the student loan?
3. at what point should we start making extra payments to our home? (I was thinking maybe once the school loan is gone that money could go to the home)
4. are we making any egregious oversights?
dickenjb wrote:Calculate your after tax cost on the mortgage loan and student loans. Use that to decide whether to put extra money towards mortgage or student loans.
mombo wrote:Thanks everyone for the advice! It sounds like we should pay off the student loan first. In terms of how to do it (and how to get rid of the Life Cycle and target retirement funds), should we just pick a day and sell the life cycle and target retirement funds? Or do people tend to sell some fraction each month to sort of "dollar cost average" (so that we don't accidentally sell on a bad market day)?
As far as the 100K loan, it's a 0% interest loan so we're planning to pay it off only when it's due and will use CA tax-exempt bonds to save up.