On The Right Financial Road? (Your Advice)

Your Advice - help answer readers' questionsWhen you make financial decisions, there are times when you’d like to have others take a look at the decisions you have made and give their honest opinion on whether or not they think you’re on the right track. That is exactly what the writer of this email was looking for:

I earn approximately $77k and my wife is a stay-at-home mom. We carry no credit card debt. We have a 3 year old and a four month old. We have about $70,000 in 401(k) savings and between 3-6 months in liquid savings. We currently contribute about 4% of our income to retirement savings which maximizes my company match. We have about 5-10% equity in a $205,000 home and are aggressively overpaying both our 80% fir

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7 Responses to On The Right Financial Road? (Your Advice)

  1. Duane says:

    I suspect the HELOC has the higher rate than the primary mortgage and would suggest that if you intend to pay down the mortgage, only pay down the the HELOC, not the primary.

    If the school loan is through the US Department of Education pay the minimum, as their interest rates are often quite good. Several years ago they had a program where they would reduce the rate by a quarter percent if you elected direct debit, so you might look into that program.

    Regarding selling in a few years, you should consider the possibility of a flat or declining housing market. Given the option to pay down the principle or to bulk up the cash on hand, I think you would be wise to ask a mortgage lender which path would buy you more options. I suspect cash in hand goes further, but I’m not 100% sure.

  2. Ryan says:

    If I was in this situation I would stop over paying your mortgage and save the extra money in a high yielding savings account. If you should lose your job the banker isn’t going to let you work off your “extra payment equity” before foreclosing on your home. You will be creating a cash reserve which can be used to pay off the house in the future. Also remember those extra dollars paid to the bank earn ZERO interest. If you are going to pay off one first make the minimum payment and stuff at $8.5K into a high yielding account and pay off your HELOC first since your rate is higher.

  3. Spokane Al says:

    I think you and your wife definitely have great self discipline.
    That said I would not be paying down the first mortgage at this point, but would continue paying down the HELOC. That probably has a higher rate and paying that down will help you grow some equity and give you some breathing room for home price declines within the next few years.
    I would also suggest that you add additional funds to your non 401(k) savings and perhaps put that into some tax efficient long term investments. It is it worthwhile to have a mix of retirement and non retirement investments. That said you should consider funding Roth IRAs (at least partially) for both you and your wife.
    You should also pay some towards your school loans as well.
    I trust that you are putting enough
    into the 401(k) to take advantage of the full matching of your employer – if not I suggest you do that.
    In conclusion I think you want to continue working on debt, while also building up investments as well. As a previous post said, you want to make sure you have enough on hand for emergencies and downturns.
    One last comment – it might be worthwhile considering not selling your home in the near future if it meets your needs. Keeping that home would allow you to continue to build your net worth through a mix of additional savings/investments and paying off debt.

  4. Teri Newton says:

    I am in a very similar situation, but without student loans and we put more down on our house. A such we are saving a little more to retirement, but I really could have written the rest of your post.

    You didn’t say what rate the student loans were at, but if they are low, I wouldn’t overpay them at this point. I also would not overpay the mortgage. You can invest in tax-deferred accounts (retirement) and earn much more in the long run. We recently decided the extra mortgage payments were pretty futile, we should have more in the bank to pay it early if we save the extra payments instead. Leverage. The only exception is maybe prepaying he HELOC because of the interest rate, and a need to build more equity.

    401k is a great start, but you can also shift some money to IRAs. I prefer IRAs because they are self directed, you have full control over costs and investments. I would do 4% for the match first, then IRAs. In many cases you can do more for tax savings, but since you are so much in my shoes I think you would be better off with ROTH IRAs – your income taxes must be insaneley low. You can put in up to $8k/year between you and your wife.

    A 529 plan would be far last on my list. You have to get on track of retirement and take care of yourself first. However, the flip side is starting early, you will have the power of compounding on your side. So it is tough. Basically means I would maybe put a token aside for now, but not over-save. I haven’t put a dime to my own kids education but not sweating it. When we go back to 2 wages we will start funding it. As with everything else it seems, much needs to wait. For now all we focus on is retirement, and more short term expenses. Since we have to work twice as hard it seems, on 1 income, to save 1/2 as much as we used to. Plus grandma already has a 529 plan and we went to state, so it all seems a little overkill anyway – kids may just have more than they know what to do with.

    The same goes with cash. We have about 3 months expenses and that is about it, but my job is extremely steady and we have many other options to tap cash. IT really depends on what options you have in every scenario. Saving some more cash sounds good if you plan to move before 5 years or so. Will give you more flexibility. For the most part though I would be funneling A LOT more money to retirement. I would consider 10% a bare minimum.

  5. Anon says:

    Hi everyone – thanks for the great comments and perspectives – a lot of great strategies here! This was helpful.

  6. ben says:

    I’m not completely sure from your explanation whether he you are getting all of your company’s 401(k) match. If you are foregoing some matching money to pay off the mortgage early, I would put the money toward the 401(k). I agree that paying off the HELOC before the mortgage makes sense. I would also make sure that you have plenty of money in an emergency fund before continuing to pay off the mortgage quickly. Overall it looks like you’re in pretty good shape and doing the right things for the most part.

  7. Anon says:

    Thanks Ben and others. Yes, maximizing the 401 contribution to achieve full company match. Thanks again for everyone’s thoughts!

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