Financial Checkup

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Topic Author
Veni Vidi Decessi
Posts: 35
Joined: Tue Jul 09, 2013 9:09 am

Financial Checkup

Post by Veni Vidi Decessi » Mon Feb 11, 2019 12:04 pm

It's been a few years since I last sought advice on this forums, so I'd like to take the time to ask y'all for a quick financial shakedown. Background: 26 years old, married with one kid (2 yo) and one on the way (thus the high HSA contributions!). We got married and started working when I was 22 yo and we started with about $5,000 in cash, total. We have a mortgage on a home in a LCOL area in the southeast. I work, wife works part-time and brings home ~$250/month. Her income is not included in the analysis below. Profession is a chemical engineer. So, here goes:

Current Assets
401k/IRAs: 84,000
Savings Acct (Cash): $10,000
Checking Acct: $1,500
Incoming Inheritance $20,000 cash, another ~$30,000 in a bequest to our kid for education.

Current Liabilities
$249,000 remaining on a $286,500 loan. 30-year fixed at 4.0%
Credit Cards: $0, balance paid down monthly
Car Notes: None. 2 sedans. 1 6-year old car with 50,000 miles. Another is a 14-year old car with 90,000 miles.

Income: 6,950/month gross

Expenditures (Monthly)
Mortgage PITI: $1,509 (including PMI)
Taxes: $950
Utilities: Gas/Elec/Water/Trash: $265
Internet: $50
Groceries: $550
Eating out: $80
All Insurances (Health, vision, car, etc. Excludes house): $535
HOA: $45
Entertainment: $120
Gas: $120
Tithe/Charities: $488
Gym: $88
Household Supplies: $100
Repairs/Misc: $200
HSA: $472
Gifts: $100 (Christmas, birthdays, etc)

Savings
401k (me): $417
Savings Acct: $600
Extra towards Mortgage: $250

That all doesn't quite equal 6,950, but it's close enough in my estimation.

Our plan is this: After the $20,000 is received, half will go into savings to bump up our emergency savings to about half a year, give or take some. Another $8,000 or so will be used to pay down mortgage (get rid of PMI more quickly, which is ~$75/month!). Savings Acct will be reduced to $250 (I need to replace the deck!, etc), Extra towards Mortgage increased to $500/month. The other $100/month will go to IRAs.

Once the new kid is born (Deo volente), the HSA will be reduced to ~$215/month and the other ~$250 will be re-routed to retirement (IRAs).

This will place the new retirement savings total at (417+250+100) = $767/month, Savings Acct at $250/month, and Extra toward Mortgage at $500/month. If our savings account gets too large, the excess will be put into retirement. I doubt that'll happen, though, as I expect we'll need to save for other things (like a car/minivan) at some point in the future. The goal of the $500/month towards the mortgage payment is to have the mortgage paid off in ~16 years, about the time our first kid is college-aged.

Thoughts/comments/concerns?

*Edited to update some values (some numbers were state as bi-weekly, not monthly, amounts)*
Last edited by Veni Vidi Decessi on Mon Feb 11, 2019 4:26 pm, edited 2 times in total.

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Ben Mathew
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Re: Financial Checkup

Post by Ben Mathew » Mon Feb 11, 2019 12:22 pm

If you have enough extra to pay down a 30 year mortgage fast, you can save a lot by refinancing to a 15 year mortgage and getting a lower interest rate. This thread discusses the issue.

Paying extra till you get rid of the PMI makes sense. But beyond that, you should either invest the money in stocks, or switch to a 15 year mortgage. Paying down a 30 year mortgage on a 15 year schedule is leaving a lot of money on the table.

Topic Author
Veni Vidi Decessi
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Joined: Tue Jul 09, 2013 9:09 am

Re: Financial Checkup

Post by Veni Vidi Decessi » Mon Feb 11, 2019 3:05 pm

Ben Mathew wrote:
Mon Feb 11, 2019 12:22 pm
If you have enough extra to pay down a 30 year mortgage fast, you can save a lot by refinancing to a 15 year mortgage and getting a lower interest rate. This thread discusses the issue.

Paying extra till you get rid of the PMI makes sense. But beyond that, you should either invest the money in stocks, or switch to a 15 year mortgage. Paying down a 30 year mortgage on a 15 year schedule is leaving a lot of money on the table.
I understand the monetary benefits of a 15-year vs 30-year. Not going to a 15-year fixed rate mortgage will cost me ~$7,600. On a discounted basis (2.1% inflation average), it will cost $6,700 over the next 15 years. I am a chemical engineer and am thus very employable, but the downside risk of an extended job loss means that is a cost burden I am willing to bear. I am essentially paying ~$42/month in "insurance" so that if I do come on lean times, I will not have to pay $500/month extra in those lean times. Good suggestion, but it is one I considered when I got the 30-year fixed. I also leave open the option of switching that extra $500/month to retirement instead of the house if our priorities later on in life change.

-buzz-
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Re: Financial Checkup

Post by -buzz- » Mon Feb 11, 2019 6:53 pm

You are doing great. Staying out of debt is a big key.

If I could go back in time and give myself advice as a young father, there are two big things I would change:

Start 529 accounts for your children at birth.

This was the biggest financial mistake we made. 529 plans had only been around a few years and we were not knowledgeable about them. Our "financial adviser" at the time encouraged us just to save in our taxable investment account for the sake of "future flexibility" instead of a 529. Only years later did I realize his conflict of interest. He was raking off AUM fees from our taxable account.

We did later start 529 accounts, but with a lot less time that we could have had. We have had to contribute a lot more to try and catch up.

Vanguard has a nice modeling tool to let you simulate college savings & costs: https://vanguard.wealthmsi.com/csp.php#. Take a few minutes and see what college will cost for your 2 year old.

I know it seems like you have a lot of time. Believe me, that time goes quickly. The money you get in early is what really grows.

It looks like you have have $30k coming in and ear marked for education. I would split that between two 529 accounts (one for each child). Add $100 per month for each child and it is likely you will have college costs covered. Maybe you take that $200 out of the $500 you planned to pay on the mortgage. Put it in your budget and make it automatic.

Which brings me to my second point...

Live on a budget. Discuss it together every month.

For many years of our marriage, I handled our finances by myself. My wife is not a big spender but she was not really involved in keeping bills paid, retirement management, etc. She let me keep up with it all.

We got a lot more intentional in our financial life when we learned to budget together every month. Finances became a shared responsibility. She knows exactly what is going on. We plan our spending together. Our communication around money (and a lot of other things) is way better now. It is a shame that it took us so long to figure that out.

One more comment on paying down your mortgage... you would be statistically unusual if you stay in the current house for the 16 years to pay it off. Most people move before that due to changing jobs, school zones, or changing needs/wants in a home.

As a chemical engineer, it is likely that your income will go up in the future. Prioritizing savings in 401k, Roth IRA, 529, and taxable investments will grow for years to come. Maybe tick up the mortgage payments a little more out of future raises.

Topic Author
Veni Vidi Decessi
Posts: 35
Joined: Tue Jul 09, 2013 9:09 am

Re: Financial Checkup

Post by Veni Vidi Decessi » Tue Feb 12, 2019 12:27 pm

-buzz- wrote:
Mon Feb 11, 2019 6:53 pm
:

Start 529 accounts for your children at birth.



Live on a budget. Discuss it together every month.

1st Comment: Thanks for sharing your experience. However, I never understood the reasoning for investing with a 529 over investing in a Roth IRA if I have the space available (which I do). I know I can only pull my own contributions out of the Roth, but if I am saving with a 16-year timeframe, I don't expect to have large returns in a 529. If I don't expect to have large returns, then I don't see much difference between the two. We are not at a point right now where we are filling up our 401k/IRA accounts.

2nd Comment. Agreed! She actually tracks the budget and we review it each month! We discussed and agreed on investments as well a few years ago, but I *handle* the investments (which means checking in every month or so on the portfolio).

3rd Comment. I do not have an investment vehicle that gives me a guaranteed 4.0% ROI in the market. We are currently allocated 80/20 stocks/bonds. Perhaps I should consider increasing my stock% over reducing payments into the mortgage? I also understand there is intermediate risk to paying the house off early - the money invested in the house is illiquid and will not help us during a crisis, while retirement savings are typically available in times of crisis. The other side of that argument is that once this higher-risk period is over, risk is dramatically reduced by not needing to make a mortgage payment. At this point we are fairly comfortable with that risk profile, and believe the reward of being mortgage-free is worth forgoing the possibility of having higher returns through the market on that extra money.

I believe I've read through quite a few number of "Pay my house off early?" threads, and it seems like there are a good many Bogleheads on both side of the issue. In this regard, I believe we are driven more by the risk aversion of job loss than by seeking higher gains.

hightower
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Re: Financial Checkup

Post by hightower » Tue Feb 12, 2019 12:46 pm

Overall you're fine. I think you're a bit high on the mortgage size for your income, but not terribly so (I recommend the 2X annual income rule for determining the max mortgage size).
I wouldn't bother putting any extra towards the mortgage monthly. You'd be better served saving that money and investing it IMO. If you want to get rid of PMI, that's a different story
I too would have chose a 15 year fixed mortgage (with a full 20% down to avoid PMI), but to each his/her own. If you can refinance to a 15 year, get the 80/20 loan to value and get rid of your PMI that way (assuming your house can appraise for enough), that would be the ideal way to handle it. With your inheritance and possible market appreciation, you might be closer than you think.
But, otherwise I'd leave it alone, save your full inheritance and invest it and not worry about your mortgage any more.

-buzz-
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Re: Financial Checkup

Post by -buzz- » Tue Feb 12, 2019 3:23 pm

Veni Vidi Decessi wrote:
Tue Feb 12, 2019 12:27 pm
1st Comment: Thanks for sharing your experience. However, I never understood the reasoning for investing with a 529 over investing in a Roth IRA if I have the space available (which I do). I know I can only pull my own contributions out of the Roth, but if I am saving with a 16-year timeframe, I don't expect to have large returns in a 529. If I don't expect to have large returns, then I don't see much difference between the two. We are not at a point right now where we are filling up our 401k/IRA accounts.
Our 529 accounts are with Vanguard. I have them invested with a similar asset allocation as my other types of investment accounts, so my expectation is that they will have similar performance. There is nothing inherently limiting about being in a 529 if quality funds are available.

You only have 16 years before college and retirement is 30-35 years away. Since you need the 529 sooner, funding it more aggressively early will maximize the compounding. You would have the benefit of both contributions and investment returns to pay for college. Once the 529 is sufficiently funded, you can shift even more focus on retirement and house pay down.

You asked for recommendations... that is what I wish we had done differently.

Topic Author
Veni Vidi Decessi
Posts: 35
Joined: Tue Jul 09, 2013 9:09 am

Re: Financial Checkup

Post by Veni Vidi Decessi » Tue Feb 12, 2019 4:12 pm

-buzz- wrote:
Tue Feb 12, 2019 3:23 pm

You asked for recommendations... that is what I wish we had done differently.
I did, and I appreciate your's and other's responses so far. I hope I don't come across as not listening! Part of wisdom is the ability to learn from others, and that's what I'm trying to do!

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Ben Mathew
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Re: Financial Checkup

Post by Ben Mathew » Tue Feb 12, 2019 6:04 pm

Veni Vidi Decessi wrote:
Tue Feb 12, 2019 12:27 pm
I never understood the reasoning for investing with a 529 over investing in a Roth IRA if I have the space available (which I do). I know I can only pull my own contributions out of the Roth, but if I am saving with a 16-year timeframe, I don't expect to have large returns in a 529. If I don't expect to have large returns, then I don't see much difference between the two. We are not at a point right now where we are filling up our 401k/IRA accounts.
That is generally correct. But if you get a state tax deduction for 529 contributions, then that can favor 529 contributions over the Roth IRA. And financial aid and flexibility of use (for non-educational expenses) would favor the Roth IRA.

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