What to do with an Extra Grand

[parker1b2]

Hey All... need some advice. I was just given a one-time reward at work for performance and it comes out to $980 after taxes. Wanted to get everyone's opinion on what to do with it.

We are looking into moving into our "Dream Home" in about 5 years. So should I take the extra money and put it against the principal or put it in our online savings account.

The houses in the area we are looking in sell for between 400-500K and no higher the 600k during the boom. We want to put atleats 20% (hopefully more) down.

In our online savings we have 31K saved
We have 60k (should be more but market came down) equity in our home and owe 260K on it in a HCOL.

No CC or other Debts.

Next 5 years if all goes right should have about another 50K or so saved plus what ever more equity we can build up.

Appreciate the ideas

[gooddecisions]

If you're moving in 5 years, it would not be a good idea to put any extra money toward the principal of your current house. Keep saving away.

[motherto2]

I would definitely save it. You never know if the market will eat that little bit of equity.

[midjd]

Savings account all the way.

[phil5185]

So should I take the extra money and put it against the principal or put it in our online savings account.

You are age 33, young enough to build substantial wealth. I would avoid the two ideas above, they are both 'fixed income' products. You need to put your income to the highest and best use for about 25 yrs. You need investment products, the two appreciating assets are stocks and real estate.

If you lock money in house equity, it has a small effect on the outcome. Say that you buy a $500k house, keep it 20 yrs , and it becomes a $2.3M house (typical). Whether or not you reduced your principal doesn't affect that value, it only affects your equity by the $1000 at that low interest rate.

Or, if you used a savings account at 2% for 20 yrs, the $1000 would be $1500 (almost enough to offset inflation?)

So, use an 11%/yr index, the $1000 would be $8000 in 20 yrs.

[haapai]

Between the two choices that you have mentioned, I would opt for paying down principal. Even after accounting for the mortgage interest deduction, it has a much higher ROI than a savings account.

On the other hand, you may be missing third and fourth options. Avoiding other debts (cough, next car) and souping up retirement savings (including after-tax investment) also come to mind. A lot depends on your current income and when your marginal tax rate and other options will change. We don't have that information or anything close to it.

[parker1b2]

Thanks for all the help...

Current income between DW and myself is approx 95K plus another 20-25K in bonus. It was higher last year but I was laid off and found another job making about 20K less.

Currently saving 11% towards retirement. My bonus is quarterly and we do put some into mutual funds for the future. Just started trying to have our first child and will open a 529 when that happens.

We just really started to manage our finances about 4 years ago after we got married and bought a house. Paid off our CC Debt and SL. Trying to really save and live below our means.

[phil5185]

Trying to really save and live below our means.

IMO you are following the wrong concept - it is nearly impossible for wage earners to 'save' wealth, you might save a few 100,000 but not millions. Eg, if you set aside $10,000/yr (your 11%) at 2% to age 60 you'll have only $360,000 - if you invest it at 11%/yr you'll have $1.6M. And with your good start, plus your solid income stream, you should look at about twice that much.

It appears that you plan to lock $100k or $150k into a house in 5 yrs. Consider keeping that money in reserve (to reduce risk), invested at 11%, and buy the house with a minimum DP. I buy our rental houses with the smallest DP possible & still get a prime mortgage rate.

[Artemis Windsong]

If I made that kind of money, I would live in a small house, stash the cash in investments at the 11% and think about retiring early. You could be a "slum lord" like Phil for added income and entertainment.

[parker1b2]

I do believe in investing in high yielding funds etc. The 11% is going in my 401k and IRA with a mix of 70% Stocks 30% funds.

We also invest some of my bonus checks ever quarter in mutula funds through a brokerage firm.

I just wasn't sure if it was better to put extra towards the mortgage or not. But it looks like the way to go is to save it.

Thinking about just investing it in our Mutual Funds as this was "found" money in away as it was not expected.


Appreciate every ones advice

[Small Biz Owner]

How large is your emergency fund? If you don't have at least 24 months living expenses put it in savings.

[Bob Ross]

You could buy 980 tacos for $980, which would provide adequate sustinance for the Dr. Who marathon.

[tractor]

I am always amazed at those out there who make between $80-120,00/year planning on buying a $400-500,000 house. By the time you factor in mortgage payments, insurance, taxes, and utilities, you will be a slave to your house, if you can even keep it. My household income is @ $120,000 and I know I could never afford a $500,000 house (even without any credit debt, new cars, etc). I guess everyone have different priorities, but hasn't anyone learned from the recent housing crash?

[parker1b2]

Unfortunately, I live in a HCOL area and 400-500k for a home is around the average for something decent. We bought a starter home in 2007 for just under 350k and they were asking 390K. It is a small home with a small yard, and want to upgrade in the future.

I know for some people it seems like a lot for a home, and it is, but thats the price you have to pay in NJ.

[schildi]

Mar 9, 2011 18:31:08 GMT -5 gooddecisions said:

If you're moving in 5 years, it would not be a good idea to put any extra money toward the principal of your current house. Keep saving away.

What is the reasoning behind that? I mean, what does that decision (savings account vs. home loan) have to do with when you move? I would base that decision on interest rates. If savings gives the OP 1% interest, and they pay 5% on the mortgage, then paying the extra towards the mortgage would yield to a higher down payment in 5 years.

[schildi]

Mar 9, 2011 19:10:27 GMT -5 phil5185 said:

So, use an 11%/yr index, the $1000 would be $8000 in 20 yrs.

I searched Fidelity for "11%/year index, and could not find anything ....

[debtheaven]

Schildi I spat all over the screen LOL!

OP, you are a better man than I (and I'm not even a man).

I do appreciate Phil's posts on how one tends to blow "found" money rather than "earned" money.

So we don't it often, but SOMETIMES. If that happened to us today, that 1K would have been converted into airplane tix / vacation fund faster than you could say NY minute.

Am I seriously the only person here who thinks you're doing great and that you could treat yourselves?!

[gooddecisions]

"What is the reasoning behind that? I mean, what does that decision (savings account vs. home loan) have to do with when you move? I would base that decision on interest rates. If savings gives the OP 1% interest, and they pay 5% on the mortgage, then paying the extra towards the mortgage would yield to a higher down payment in 5 years."

Because there are many more variables when it comes to selling your current home and buying a new home. For example, you may not be able to sell your current home before purchasing a new home and need liquid reserves to carry two house payments. You may need the money for a downpayment or escrow on the new home and don't have the current home sold yet. Given the relatively small amount and that five years is the timeline, the money is much more useful if it's not tied up in the home equity.

[schildi]

This message has been deleted.

[schildi]

weird, double post. I do have some problems sometimes here with that new forum setup.


Anyway ...

Mar 11, 2011 23:41:44 GMT -5 gooddecisions said:

"What is the reasoning behind that? I mean, what does that decision (savings account vs. home loan) have to do with when you move? I would base that decision on interest rates. If savings gives the OP 1% interest, and they pay 5% on the mortgage, then paying the extra towards the mortgage would yield to a higher down payment in 5 years."

Because there are many more variables when it comes to selling your current home and buying a new home. For example, you may not be able to sell your current home before purchasing a new home and need liquid reserves to carry two house payments. You may need the money for a downpayment or escrow on the new home and don't have the current home sold yet. Given the relatively small amount and that five years is the timeline, the money is much more useful if it's not tied up in the home equity.

Yeah, I see your point. On the other hand though, the money won't buy much either in terms of a down payment because it is not much. It depends on if the money is needed for a downpayment or not, and if the old house is sold before the new one is purchased (I would probably not buy a new house while the old one is not sold, I'd rather rent that time if necessary).
But yes, I see what you mean .... and at $1K, it does not make much of a difference anyway, a couple hundred in interest at best ....

[phil5185]

400-500k for a home is around the average for something decent. We bought a starter home in 2007 for just under 350k and they were asking 390K. It is a small home with a small yard, and want to upgrade in the future.

In the scheme of things, 'starter home' is a relatively recent concept - invented by realtors as a marketing tool. Two or 3 generations ago, families bought a home, 1200 to 1600 sq ft, maintained it well and lived there 25 or 40 yrs.
As the mcmansion trend hit, the competition to have the biggest house became trendy - became the 'norm' over the past 25 yrs.
The trend may or may not serve you well - a societal shift may occur where small efficient 'green' homes are the desire - and the >2500 ft houses will become white elephants.

[schildi]

Mar 12, 2011 9:29:14 GMT -5 phil5185 said:

400-500k for a home is around the average for something decent. We bought a starter home in 2007 for just under 350k and they were asking 390K. It is a small home with a small yard, and want to upgrade in the future.

In the scheme of things, 'starter home' is a relatively recent concept - invented by realtors as a marketing tool. Two or 3 generations ago, families bought a home, 1200 to 1600 sq ft, maintained it well and lived there 25 or 40 yrs.
As the mcmansion trend hit, the competition to have the biggest house became trendy - became the 'norm' over the past 25 yrs.
The trend may or may not serve you well - a societal shift may occur where small efficient 'green' homes are the desire - and the >2500 ft houses will become white elephants.

Yeah, the term "starter home" certainly sounds like a marketing tool. I also agree with that trend you are mentioning, 4,000 sq.ft. homes may not be sustainable in the future from an energy point of view.

[gooddecisions]

"But yes, I see what you mean .... and at $1K, it does not make much of a difference anyway, a couple hundred in interest at best .... "

Exactly, based on my calculations which included the following assumptions- 280K loan taken out in 2007 (which means it's 260K today as indicated in the OP), at 5% (though the true interest rate was never stated) means that a one time $980 extra interest payment paid in March 2011 will result in the difference of $278 by March 2016 minus a tiny difference in the mortgage interest deduction. To me, that wouldn't be worth the extra strings attached.

I also wouldn't factor any of that $60K equity into the equation since it's not money until you have a buyer willing to pay your price. And, you don't know how much that buyer will require in closing costs, repairs, etc. So right now the OP only has 31K saved to make the transition from a $260K mortgage to a maximum $500K mortgage which is a long way to go on a combined $115k variable income. Like I said in the second post, start stock piling extra money anywhere else- if you're comfortable with a taxable brokerage account, then it's probably your best bet.

Good luck. Hopefully the housing market will be much better in 2016 and you can sell high and buy low.

[brdsl]

Tractor,

It depends on how much you can put down.

[robbase]

we can hardly handle one grand (HoratioleGRAND) on these boards, now there might be an "extra" one?