Excess Cash Allocation Critique Please

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FireFlood
Posts: 2
Joined: Mon Mar 12, 2018 7:17 am

Excess Cash Allocation Critique Please

Post by FireFlood » Mon Mar 12, 2018 7:26 am

Long time lurker, first time poster. Learned a lot of great info from this forum that have changed the way I have done things. One of the areas that surprised me was mortgage paydowns (yes sorry another thread). Was hoping I might be able to get some critique on my plans below.

Wife and I currently have a 15-year 2.875% mortgage. We have about 11 years to go on it (after factoring in some extra payments we did make). We believe probably in 2020 we will want to sell this house and move to something larger. That said, we do have some uncertainty around that plan. We currently have 1 kid and would be nice to have 2 by then. My wife’s job might be relocating to a different state within 12-15 months and I don’t know if we can replace her salary on a 1:1 basis. Finally, while in our heads 2020 sounds reasonable there is no certainty around it. She’d move today and I’d stay, make do with the house and save the money. So I think we will compromise and wait some years but ultimately move. Should we move, we both agree we would sell or come under contract first before buying anything so our home equity would be part of the down payment.

Given those three items, I have tentatively planned to split an excess cash we accumulate as follows: 47% to a taxable brokerage using our AA (munis for bonds) at Schwab, 40% to pay down the mortgage, 5.25% to 5-year CDs, 3% to I-Bonds, 2.50% to 529 plans and 2.25% to a home improvement cash account. In my eyes this allows us savings in the form of investments and cash for when we decide to move to use as a down payment while also getting the safe guaranteed return of 2.875% on some funds that we estimate will be needed in ~2-years.

Some additional clarifications if they help. In regards to her job, while I worry if we can replace 1:1, I do think/hope she will be able to land something. She has received offers in the past that she has turned down to stay at the current one. We both currently full fund our 401ks and Roth (backdoor) IRAs. I also contribute a small amount to an after tax 401k that I then backdoor to a Roth IRA. We have a 6 month emergency fund in cash/treasuries/cds established. On top of the small allocation to the 529s above, we also have a regular monthly contribution to the accounts.

My questions:
1. For the smaller chunks of CDs/I-Bonds, would I be better off with a bond ETF such as VCSH (Vanguard Short Term Corporate Bnd Index)?
2. Is 40% of the excess to principal paydowns too high? Would I be better served given the time frame putting all/some in to a balanced ETF such as AOM (iShares S&P Moderate Allocation)?
3. In general is there anything I am missing, should consider or different critiques?

Generator515
Posts: 92
Joined: Sun Mar 08, 2015 5:33 pm

Re: Excess Cash Allocation Critique Please

Post by Generator515 » Mon Mar 12, 2018 6:33 pm

Similar situation to you. I am doing it fairly similar with a portion to investments and a portion to the mortgage. As the board noted do not over think it and start with the plan.

mega317
Posts: 2197
Joined: Tue Apr 19, 2016 10:55 am

Re: Excess Cash Allocation Critique Please

Post by mega317 » Tue Mar 13, 2018 12:56 am

Wow how did you come up with such a hyper specific breakdown?

You have a lot of uncertainty coming up. IMO there is value to liquidity that would be worth paying for. I wouldn't put any extra on the mortgage.

FireFlood
Posts: 2
Joined: Mon Mar 12, 2018 7:17 am

Re: Excess Cash Allocation Critique Please

Post by FireFlood » Tue Mar 13, 2018 8:06 am

mega317 wrote:
Tue Mar 13, 2018 12:56 am
Wow how did you come up with such a hyper specific breakdown?

You have a lot of uncertainty coming up. IMO there is value to liquidity that would be worth paying for. I wouldn't put any extra on the mortgage.
Paralysis by analysis...ha.

I have toyed around with reducing or eliminating the mortgage payment. Ultimately for now I have kept it as is because by my rough calculations even if her income goes to $0 we should be able to get by on my salary with only losing the after tax 401k contributions. Of course our after tax savings rate would decrease but I don't think we'd need to dip in to the E-Fund especially with the approximate 6 months severance she would be due. Additionally, it is a Fannie loan so I think we could recast and reduce the payments if needed.

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