Advice needed: order of priority

[Anonymous]

Good morning DCUMers,
I have a feeling most of you on this forum are better at handling their money than me, so I was wondering if you have any advice for us.
We have 2 kids (3, 5) and are 37 yo, both work full-time. We have a combined income of about $350K. 2 W-2s and 1 1099.
We do not have any debt except for our mortgage. Our home is worth about 575K and the unpaid balance is around 200K, 15 Year interest rate 3.0%.
Kids were both in private daycare/school but the older one is now going to start at public school come September, so we should be able to save about $12K there.
We are okay at savings and have now saved right over $1 million across our retirement accounts/taxable investment accounts/bank accounts/529s.

My questions: we already max out our 401ks/tsps., along with our SEP-IRA and non-deductible IRAs. Currently we save about $3K a month going into a very low interest rate savings account, which will now become 4K a month come September. Where would you put this extra cash instead?
(1) Pay down our mortgage (this is my preferred choice)
(2) Put the money into our vanguard taxable accounts across 3-4 index funds (DH's preferred choice)
(3) Put more money into our 529s (currently one has 55K and the other 30K) (my second choice, DH's second choice)

Opinions? In my ideal world, by the time our kids went to college (12 years for first child), our mortgage would be paid off, and both 529s would be fully funded (not sure what that even means to be honest!), and we'd be financially "independent" (i.e. the returns from our investments would cover our daily living expenses). We'd still continue working but maybe we'd go work for non-profits, or do our dream jobs.

Thanks in advance!!

[Anonymous]

Our plan is similar and we are about the same ages and HHI. What we figured out was that in order to be completely free to do whatever we wanted to do we needed 2 things to happen.

1 - mortgage paid off
2 - we needed xxx in investible assets/net worth

We figured out that we were closing in on the net worth goal faster than the house was being paid off so we shifted a bit and added additional principal to the mortgage payment each month. We keep revisiting it, but manage the two goals in parallel. The idea is for both of them to complete around the same time which should then free both of us up to do whatever we want to do whether that is keep our day jobs, semi-retire, move to another country, sit around and watch Days, etc.

Good luck!

[Anonymous]

Anonymous wrote:
We have 2 kids (3, 5) and are 37 yo, both work full-time. We have a combined income of about $350K. 2 W-2s and 1 1099.
We do not have any debt except for our mortgage. Our home is worth about 575K and the unpaid balance is around 200K, 15 Year interest rate 3.0%.

Do you have a 15 year mortgage, or 15 years left on your mortgage? It seems like the house may be well on the way to being paid off by the time your oldest gets to college anyway. If you've got 15 years left you can run the numbers to find out how much you should prepay this year to only have 12 years left. I'm guessing it's much less than $48K this year.

My advice is see what it would take to get the mortgage on track to be paid off in 12 years, and put the rest in taxable accounts. I'm assuming you already contribute a set amount to the 529s, based on their current value. Keep that steady.

[Anonymous]

Is there some reason you can't do some of each?

[Anonymous]

I'd just save the money in a brokerage account investing in mutual funds and such. Paying down tax deductible mortgage debt that is at 3% seems like a pretty poor return to me. You can do much better in the stock market and you would be able to access your money much more easily as well if you decide you need it.

[Anonymous]

We are in a similar bind. DH wants to pay down the mortgage and I would like to invest. But markets are doing horribly right now. No clue what to do. We've agreed to put an extra 20k into the mortgage and then see for next year.

[Anonymous]

Anonymous wrote:We are in a similar bind. DH wants to pay down the mortgage and I would like to invest. But markets are doing horribly right now. No clue what to do. We've agreed to put an extra 20k into the mortgage and then see for next year.

So you know for sure that you want to get into the market, but you'd like to wait until prices are a little higher before committing? Good thinking.

[Anonymous]

What vanguard index funds are you using? Mine lost about 10% each last year I'm hesitant to put more money into them. Kinda feel like a failure about that. And the worst part was that they still paid dividends and then I was taxed on that.

[Anonymous]

Anonymous wrote:

Anonymous wrote:
We have 2 kids (3, 5) and are 37 yo, both work full-time. We have a combined income of about $350K. 2 W-2s and 1 1099.
We do not have any debt except for our mortgage. Our home is worth about 575K and the unpaid balance is around 200K, 15 Year interest rate 3.0%.

Do you have a 15 year mortgage, or 15 years left on your mortgage? It seems like the house may be well on the way to being paid off by the time your oldest gets to college anyway. If you've got 15 years left you can run the numbers to find out how much you should prepay this year to only have 12 years left. I'm guessing it's much less than $48K this year.

My advice is see what it would take to get the mortgage on track to be paid off in 12 years, and put the rest in taxable accounts. I'm assuming you already contribute a set amount to the 529s, based on their current value. Keep that steady.

Op here.

We have 11 years on the mortgage left. We refi'ed in 2012 and put more down then.

So you're saying don't put extra in every month to apply to principal? Sometimes I feel like we'll get more return on paying our mortgage down than putting it in more index funds.

Also, would it make more sense to put more money into the 529s because the growth is at least tax-deferred, and withdrawals are tax-free for qualified educational expenses? We could try to grow each one to a certain amount - I don't know maybe $120K each ( assuming public state college is $30K per year?). We'd be saving tax money here instead of putting it more into the brokerage...

[Anonymous]

Your mortgage rate is very low. It is very likely you will earn more than 3% over the next 11 years on your investments. It does not make financial sense to pay your mortgage off early.

[Anonymous]

If you've got 11 years left on a 15-year mortgage, you are already paying down principle at a good clip (you can Google a 15-year amortization schedule to see where you stand).

The thing to remember about pre-paying a mortgage is that you are effectively increasing the interest rate, by giving the bank back its loan principle while you continue to pay according to the amortization schedule. It may feel good, psychologically, but it will cost you.

I would go with a combo of options 2) and 3) if I were you.

[Anonymous]

Anonymous wrote:If you've got 11 years left on a 15-year mortgage, you are already paying down principle at a good clip (you can Google a 15-year amortization schedule to see where you stand).

The thing to remember about pre-paying a mortgage is that you are effectively increasing the interest rate, by giving the bank back its loan principle while you continue to pay according to the amortization schedule. It may feel good, psychologically, but it will cost you.

I would go with a combo of options 2) and 3) if I were you.

Okay, thank you, that all makes sense. So DH wasn't so crazy then (he'll feel vindicated, thanks )

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:
We have 2 kids (3, 5) and are 37 yo, both work full-time. We have a combined income of about $350K. 2 W-2s and 1 1099.
We do not have any debt except for our mortgage. Our home is worth about 575K and the unpaid balance is around 200K, 15 Year interest rate 3.0%.

Do you have a 15 year mortgage, or 15 years left on your mortgage? It seems like the house may be well on the way to being paid off by the time your oldest gets to college anyway. If you've got 15 years left you can run the numbers to find out how much you should prepay this year to only have 12 years left. I'm guessing it's much less than $48K this year.

My advice is see what it would take to get the mortgage on track to be paid off in 12 years, and put the rest in taxable accounts. I'm assuming you already contribute a set amount to the 529s, based on their current value. Keep that steady.

Op here.

We have 11 years on the mortgage left. We refi'ed in 2012 and put more down then.

So you're saying don't put extra in every month to apply to principal? Sometimes I feel like we'll get more return on paying our mortgage down than putting it in more index funds.

Also, would it make more sense to put more money into the 529s because the growth is at least tax-deferred, and withdrawals are tax-free for qualified educational expenses? We could try to grow each one to a certain amount - I don't know maybe $120K each ( assuming public state college is $30K per year?). We'd be saving tax money here instead of putting it more into the brokerage...

.

If your dream scenario is to have the house paid off in 12 years when the first gets to college, and your current payment schedule has it paid off in 11 years, you're on the right track. You might not get great returns from investments this year, but if your strategy is long-term then this is the time to get in. The market is on sale. Buy it now. For the allocation between 529s and taxable accounts, I'd fund the 529s up to the point you feel like you've got it covered for each kid. My earlier post assumed you're already contributing there, since you've got $85K, but if that money is coming out of the $4K/month then I'd do maybe a thousand for each kid and invest the rest. That way you get tax advantages but all of your savings isn't tied up in dedicated accounts.

Long story short: this is a great conundrum to have! You guys are so on track in so many areas that there's not really a "wrong" choice to make (although I'd strongly advise against prepaying an historically-low mortgage because the market is shaky).

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:
We have 2 kids (3, 5) and are 37 yo, both work full-time. We have a combined income of about $350K. 2 W-2s and 1 1099.
We do not have any debt except for our mortgage. Our home is worth about 575K and the unpaid balance is around 200K, 15 Year interest rate 3.0%.

Do you have a 15 year mortgage, or 15 years left on your mortgage? It seems like the house may be well on the way to being paid off by the time your oldest gets to college anyway. If you've got 15 years left you can run the numbers to find out how much you should prepay this year to only have 12 years left. I'm guessing it's much less than $48K this year.

My advice is see what it would take to get the mortgage on track to be paid off in 12 years, and put the rest in taxable accounts. I'm assuming you already contribute a set amount to the 529s, based on their current value. Keep that steady.

Op here.

We have 11 years on the mortgage left. We refi'ed in 2012 and put more down then.

So you're saying don't put extra in every month to apply to principal? Sometimes I feel like we'll get more return on paying our mortgage down than putting it in more index funds.

Also, would it make more sense to put more money into the 529s because the growth is at least tax-deferred, and withdrawals are tax-free for qualified educational expenses? We could try to grow each one to a certain amount - I don't know maybe $120K each ( assuming public state college is $30K per year?). We'd be saving tax money here instead of putting it more into the brokerage...

.

If your dream scenario is to have the house paid off in 12 years when the first gets to college, and your current payment schedule has it paid off in 11 years, you're on the right track. You might not get great returns from investments this year, but if your strategy is long-term then this is the time to get in. The market is on sale. Buy it now. For the allocation between 529s and taxable accounts, I'd fund the 529s up to the point you feel like you've got it covered for each kid. My earlier post assumed you're already contributing there, since you've got $85K, but if that money is coming out of the $4K/month then I'd do maybe a thousand for each kid and invest the rest. That way you get tax advantages but all of your savings isn't tied up in dedicated accounts.

Long story short: this is a great conundrum to have! You guys are so on track in so many areas that there's not really a "wrong" choice to make (although I'd strongly advise against prepaying an historically-low mortgage because the market is shaky).

Op here. So I think that's a good plan. However, what if the kids don't want to go to college? Or what if they want to do college abroad, where its cheaper? Or what if they get a full-ride ? Not sure if any of these things will happen, but you never know.

[Anonymous]

If your dream scenario is to have the house paid off in 12 years when the first gets to college, and your current payment schedule has it paid off in 11 years, you're on the right track. You might not get great returns from investments this year, but if your strategy is long-term then this is the time to get in. The market is on sale. Buy it now. For the allocation between 529s and taxable accounts, I'd fund the 529s up to the point you feel like you've got it covered for each kid. My earlier post assumed you're already contributing there, since you've got $85K, but if that money is coming out of the $4K/month then I'd do maybe a thousand for each kid and invest the rest. That way you get tax advantages but all of your savings isn't tied up in dedicated accounts.

Long story short: this is a great conundrum to have! You guys are so on track in so many areas that there's not really a "wrong" choice to make (although I'd strongly advise against prepaying an historically-low mortgage because the market is shaky).

+1. OP has got real First World problems!

I second the motion on not over-saving in 529s. Those funds will be taxed heavily if not used for approved college expenses. If Larla gets a scholarship, mom and dad will get burned. Similarly, if they're saving for Larla's medical school and Larla decides at 23 she wants to be an astronaut, the Tax Man will be thrilled for her.