Update & Financial Questions

[Angel!]

It's been a while, so I wanted to update.  Things are pretty much great.  I feel good & been healthy.  Only been to the ER twice in the past 10 months because I was scared something was wrong with my heart .  Once they admitted me, but both times I was fine.  At the end of the month I should be getting taken off most of my heart meds  .  BF got back from Japan in October & moved in.  At first it was probably temporary until he got his own place, but everyone has been so happy that he is staying.  

Financially things have been fantastic.  My mom retired in June & moved to be closer.  She picks up the kids from school most days, so no after school care costs.  BF has been paying rent.  And I've actually been getting child support  Not sure if that will last though.  All these events turned into ~$1500/month difference for me.  $400 is the CS, so that may not last.  Last year I was finally feeling not so broke all the time.  This year I feel rich.  I've maxed out my 401k contributions for the first time ever  .



All this leads to my question:  What is my next priority financially? After maxing out the 401k I will have anywhere from $200-$700/month left over.


Right now I have the following debt:
- $101,000 mortgage 4.375% - $700 PITI payment
- $13,500 2nd mortgage 5.25% (I think, maybe 5.5%) variable rate.  Interest only right now.  Goes to 5 year repayment period in August
- $12,500 CC 2.99% fixed for life - $155 payment

I figure I have the following options:
- Roth
- 529
- debt repayment - 2nd mortgage
- medical bills to keep HSA contributions in HSA account - this option I don't fully understand. I guess if you save receipts, then there is no timeframe for pulling out money from the HSA to reimburse yourself.  So the money grows tax free and you can reimburse yourself even years down the road.  We have a ton of medical bills.  We are already at ~$4000 for the year.  I'm expect to be in the $7K range by the end of the year.  

Any thoughts on next steps & priorities?  I never thought things would turn around this quickly, so up until a few months ago my 5 year goal was to max out my 401k.  I never thought beyond that step.
    

[Tiny]

This is more of a "warm fuzzy" suggestion than a "do the smartest thing with money thing"   But, what if you do a new 3 year/5year plan... to get the CC and 2nd mortgage paid off?  They both have reasonable interest rates - so this more of a "feel good" thing than a "I'm gonna save tons of money on interest! thing".

I guesstimate the payment on the 2nd mortgage will be about $250 a month when it goes to the repayment plan.  The $155 a month CC payment will take about 27 years to pay off that debt.   (Bankrate's credit card calculator sez:   12500 at 3% with a minimum of 156.25    It will take you 323 months to be rid of your debt. In that time, you will pay  $2,965.43 in interest. )

If you do nothing starting in August you will have the $250 + $155 payments =  $405.00 a month.  

What if starting in February (or March) you commit a fixed total maybe $600 per month and then hit one of your debts with a bigger payment (probably the 2nd mortgage)? And then you just keep paying that $600 a month until your debts go away...   This increases your "monthly required payment" by $200.  Pretend NOW is August and the 2nd mortgage payment just went up...   
  
Then as the year goes along and maybe you continue to have "good fortune" you can use that money for "building wealth" or "fun" - safe in the knowledge that your current debts will be retired in about 5 years  with very little lifestyle change.    There's something to be said for "low stress". 




FWIW:  I don't think you are getting much of "mortgage interest deduction" because you have low rates and haven't borrowed a whole lot... so the tax savings doesn't make for a case to NOT pay down the 2nd mortgage.

[Knee Deep in Water Chloe]

I'm glad you're well. 

The second mortgage hits really close to home for me. I've been devastated by mine. So, if I had extra money, I'd throw as much of it as possible at that albatross until it's gone. Yours seems so small compared to mine of originally $52,000 and now down to $38,000. Please know that I understand the logic behind fully funding the 401(k) and the IRA. I ignored my (essentially) interest only second mortgage for ten years and just left it on auto-pay. It was incredibly stupid of me, and I regret it immensely. I'm now trying desperately to pay it off. My situation is slightly different as I was severly impacted by the real estate market bubble and subsequent crash. Anyway, I'm totally projecting my problems onto yours, but...PAY OFF THE SECOND MORTGAGE ASAP. 




Oh, and definitely don't count on the child support. BTDT. In fact, I'd just send that $400 to the second mortgage as an extra portion toward principal. Then, you're not counting on the $400 and it's still helping you. If the CS stops, you're not dependent on it. And yes, paying that off is supporting your children; they live in that house.  

[Lizard Queen]

So glad you're doing well!

I'm not that familiar with the HSA rules either.  The way you describe it, it sounds like you could put your emergency fund in there (not all of it, if you have more sitting around, just more of it).  I would do that, in that case.  You're going to have increased costs for the 2nd mortgage come August anyway, so this sounds like the extra could be very temporary.  That way you can have your tax shelter, investment growth and EF all rolled into one.

[haapai]

I rather like that sending the CS check toward the second mortgage idea, especially if it will bring down the principal when the amortizing payment is calculated.  The 5.25% return is kinda stinky, but it's definitely a way of keeping unreliable income from slipping into expenditures or choices. 

I'm massively bored today.  Is there any cap on that ARM?  If there is, I can whip out a spreadsheet and calculate the maximum monthly payment.

ETA:  <slaps head>  I missed the Roth mention.  Shoot!  Funding that should probably be top priority.  Oh, and calculating the maximum payment isn't exotic or difficult math either.  I should drink more coffee before posting.

[MJ2.0]

No suggestions, just happy to see you posting and that all is well.

[Rukh O'Rorke]

Sounds fantastic, Angel!! So good to see you posting!

You will likely face the same situation I did: struggling to make ends meet while the kids are small, but doing well when they are college age and nothing in financial aid except expensive loans.

My wisdom says 529.

[GRG a/k/a goldenrulegirl]

Feb 3, 2017 10:36:36 GMT -5 Rukh O'Rorke said:

Sounds fantastic, Angel! ! So good to see you posting!

You will likely face the same situation I did: struggling to make ends meet while the kids are small, but doing well when they are college age and nothing in financial aid except expensive loans.

My wisdom says 529.

Same situation here.  I vote for at least some of the "extra" cash going toward 529s.  You'll be so relieved to have some money socked away when the time comes.  

ETA:  Oh, and so good to see you and hear that you, and your life, are well!!  Don't be such a stranger.  We worry, you know.  

[Gardening Grandma]

Glad you are do,ing well.  I may have missed it, but do you have a good solid EF?  As you already know, life can throw you some real curve balls.

If not, that would be my first priority, followed by debt reduction.

[janee]

Feb 3, 2017 11:09:00 GMT -5 Gardening Grandma said:

Glad you are do,ing well.  I may have missed it, but do you have a good solid EF?  If not, that would be my first priority, followed by debt reduction.

I agree with GG that emergency fund is important. 

If you're all set with that, I would attack the second mortgage first.

[973beachbum]

First glad to hear you are doing better!

Personally I would go with a Roth IRA instead of a 529.  You can still use it if you want for your kids college but with a 529 you would have to, so Roth all the way!  And any money in the IRA isn't counted for fin aid purposes just the amount you put in in that year.  You could have a boat load of money in your IRA and the only part counted would be the $5500 possible contributions from that year.  And if you needed it for something your contributions can be withdrawn penalty free.  It is only the earnings that can't be taken out without paying the penalty.  So I think of mine as my last ditch emergency fund.

The $400 CS is actually almost your max for an IRA so personally I would stuff that in the Roth and it can be your extra EF.  But if it starts raining ten dollar bills my next place would be the CC and third would be the second mortgage.

Good luck with everything!

[tskeeter]

My suggestion would be to not pay off any loan that has an interest rate less than 6%.  Instead, use the money to build an emergency fund, fund a Roth account outside your 401K, or fund a taxable investment account.  Whichever is most appropriate for your situation.  I'd only fund a 529 for the kids educations after I had gotten the funding of my retirement on track to allow me to retire at 50 or 55 (setting yourself up to have choices if your employment situation suddenly changes, as mine did).

If you're concerned about the kids education, you have the option to, at the appropriate point in time, draw from your retirement accounts to help pay off the kids student loans.  Or reduce funding of your retirement accounts to help pay off student loans.

[muttleynfelix]

I would fund your Roth. The Roth provides a lot of flexibility. Yes you are still saving for retirement, but you can take the contributions out without penalty, so theoretically, you could use the contributions for college if your financial situation worked at that time. Also, in a true emergency, you could still get the funds without penalty.

[Peace77]

Glad to hear you're healthy.

Do you have at least 6 months worth of expenses in your emergency fund?

First, contribute enough to your 401k to take advantage of match funds from your employer.

2. Max out a Roth IRA.

3. Pay down/pay off the HELOC and add a small amount to the EF each month.

4. Contribute to the HSA and use it as medical bills arrive. Ask your HR Dept. to explain it if you don't understand it.

5. Consider making additional payments to the mortgage principal. Even just $10 or $20 each month will save thousands of dollars in interest later.

6. After the HELOC is paid off, pay off the credit card.

[debthaven]

I'm so glad you're doing well!

This may be a stupid question (since I'm in Europe), but could you refinance and consolidate both mortgages at a lower interest rate?

[Angel!]

Feb 3, 2017 11:09:00 GMT -5 Gardening Grandma said:

Glad you are do,ing well.  I may have missed it, but do you have a good solid EF?  As you already know, life can throw you some real curve balls.

If not, that would be my first priority, followed by debt reduction.

Yes, I should have stated this in the beginning.  I have a small general use EF with $1K currently.  Then I have $22K in a whole life policy that is 30 years old that I consider my EF if I suffer a huge setback like a job loss.  I don't want to touch it otherwise because it is so old that no payments need to be made on it & it earns at least 5%/year return.  

I go back and forth on whether $1K is enough.  I generally have other money floating around that could be used for EF purposes in an emergency though.  Like right now I have $3K saved for summer daycare expenses.  

[Angel!]

Feb 3, 2017 11:40:51 GMT -5 973beachbum said:

First glad to hear you are doing better!

Personally I would go with a Roth IRA instead of a 529.  You can still use it if you want for your kids college but with a 529 you would have to, so Roth all the way!  And any money in the IRA isn't counted for fin aid purposes just the amount you put in in that year.  You could have a boat load of money in your IRA and the only part counted would be the $5500 possible contributions from that year.  And if you needed it for something your contributions can be withdrawn penalty free.  It is only the earnings that can't be taken out without paying the penalty.  So I think of mine as my last ditch emergency fund.

The $400 CS is actually almost your max for an IRA so personally I would stuff that in the Roth and it can be your extra EF.  But if it starts raining ten dollar bills my next place would be the CC and third would be the second mortgage.

Good luck with everything!

This has me leaning with trying to max the Roth first.  I don't feel financially set up enough to start locking funds into a 529, so this makes sense to me.

[Angel!]

Feb 3, 2017 15:08:00 GMT -5 debthaven said:

I'm so glad you're doing well!

This may be a stupid question (since I'm in Europe), but could you refinance and consolidate both mortgages at a lower interest rate?

I don't think I can get a better rate on my 1st right now.  After some searching it looks like I might be able to get a heloc with a 3.5% variable rate to refi the 2nd mortgage.  I don't know if that is worth the time or effort though.  

Alternatively I have a $12k credit limit with a 0% offer on a CC for 18 months.  Only a 3% fee.  So, I could pay off some or most of the 2nd that way.  But, again not sure if that is more trouble than it is worth.  That would certainly get my butt in gear to get it paid off though.  That would make it top priority immediately.

[Peace77]

I would add to your emergency fund. $1,000 was quite a bit when Larry Burkett first published the idea 40 years ago. But now, $1,000 doesn't even cover 1 month's rent or mortgage payment for many people. Consider adding a regular amount such as $10 or $20 and consider it the same as a necessary expense.

[zibazinski]

I have a friend who almost funded her trip to Iceland by putting in a jar the amount she didn't spend having that Starbucks or going out for a drink. Granted she got a great deal from Groupon at $599 for air and hotel from NY but still, it adds up quickly, that discretionary spending that you can actually live without spending. Think about adding that to your EF as well.

[lund]

My opinion differs a bit from most previous posters'....
And due to the cold from h*ll it might not be very neatly written, but since my opinion differs, I post it anyway.
And while IMO the first part of the answer is easy, what is next is not.

200 to 700 left over, 400 of which is not a reliable income (CS; known history of non-payment) and the second mortgage is a black cloud looming. It will take about 225/month more than now when repayment starts. (Calculated as 13,500/60=225; interest is already paid in the present budget.)
That means that income may suddenly go down 400 at the same time as expenses increases with 225, meaning the money available will go from 200 to 700/month to a range between 75 left over and 425 missing...

I know very little about HSAs, so take this with a grain of salt, but I think that you should use the HSA for the bills this year. Because of the second mortgage looming you may easier get into a tight situation if you don't.

Of course you could stop maxing the 401(k) if finances get tight, but since you have been a single parent without CS, and before that having a H who did not pull his weight, I would assume that your retirement accounts are a bit too low. (You will have to check if maxing the 401(k), taking the lowered AGI/less taxes now, or putting a part of the retirement money in a Roth is best for you at present. You can always change how much you put where later.)

I would concentrate on the second mortgage first, because if you have to pay that back without CS, you may be in a financially unpleasant situation.
I think that you should pay 225/month to the second mortgage, and put all the rest of the money in a "second mortgage savings account" that you can use if you don't have 300/month available one month (what if the CS does not come? Changing 401(k) contribution often is not done over night). When you get enough in the second mortgage savings account to pay off the second mortgage, I think that you should pay it off, provided that you have some EF money available. (The only reason I see not to do this would be if there is a college-bound child and you have a nice amount of non-retirement savings, or if you have difficulties keeping savings saved.)
(If you get any tax refund money or windfalls, put that money in the savings too.)


Then, time to consider the situation again. If everything is as now, I would probably make a split between EF/savings (your 1k is IMO too small, please see below), Roth IRA (please see below), and the CC (which would have something like 3400 and 3 years left after five years of paying 155/month plus interest?). I think that I would put a share of the "extra" money to each for the first six months, and then see where I were. If the CC was a comparably low number and finances steady and stable, I might go back to minimum payments and a smaller amount to savings in order to put more in the Roth.
Once the CC was history, I would either aim for maxing the Roth IRA (and putting any money over that in 529 accounts) or put a certain amount in 529s (partly depending on children's ages, any money saved already, and any tax advantages in your home state) and after that as much as possible in the Roth. The mortgage is slowly getting paid down and seems to be of reasonable size with 14 years remaining, so I would not pay extra on that as long as there is room in the retirement accounts, 529 accounts, and HSA.


The main reason to try to get out of non-mortgage debt is that with less debt, you will be less financially vulnerable should there be some negative changes, such as no CS, plus in case of a college-bound child, the EFC is based on assets and income, but not on debt. As it is, the second mortgage might mean problems, and needs to become history, and getting rid of the cc debt would mean more financial margin.
And previous debt payments can be re-routed to college savings or financial help too.
(Also, in case you would not be able to help one child as much as the siblings, you can still either make a payment to the child's student loan or gift the child money later; just "keep score" in order to help keep peace between the children later in life.)


Probably no news in this paragraph, but still: Putting money in a Roth IRA can have several advantages. One is that in retirement, Roth money is tax-free. A Roth can be very handy in retirement in addition to taxable retirement income, especially for handling large infrequent payments, such as a new roof, without getting into a higher tax bracket. (Also, they are handy for estate planning.)
Before retirement, contributions, but not earnings, can be taken out without the painful penalties that raiding a 401(k) would mean.
But you may need a certain amount to start one, and you may now be in the situation of keeping under a higher tax bracket by lowering the AGI by putting more in the 401(k).
As long as the second mortgage exists, I think that an additional Roth should be on the back burner. (What matters at present is that you get money in your retirement accounts.) But once the second mortgage is gone, I would start a Roth (or a savings account for one).


I don't know the age of your oldest child. In case there will be college after the second mortgage, it is time to do a mock FAFSA yearly as soon as the child starts HS. Debt is not included in the FAFSA, nor is retirement savings. Other assets may be; please check that!
It may be a good thing to have more money in a Roth instead of in a savings account, especially if your life insurance policy is included as an asset.
On the other hand, parental assets are not very highly "taxed" in the FAFSA.

I would keep the life insurance, since it may be difficult to get a new one due to your previous health problems. Just own it, at least as long as you have minor children/dependents. (IMO until they are through college.) This insurance is not through your job, which can be of importance if, Lord prevent, it would be needed. (Many workplaces will terminate long-term sick employees, and then the ex-employee will not have any insurance through work and may be uninsurable.)

Your EF is IMO too small. I think that having 3k available as a first-line EF is better for a generally healthy person, and then more available within a few days. (The 3k is a bit arbitrarily chosen, but to cover a bit more of what car towing and repairs, emergency plumbing repairs, insurance deductibles, air fares and hotels, and similar may cost.) I would suggest that you once the second mortgage is history, start increasing the amount in your EF. Once you hit the target amount, consider putting the money in your Roth.

Handling the HSA is a question of its own where I am rather ignorant.

And I think that it is perfectly OK, even recommendable, to use the (sporadic) CS for the second mortgage or the Roth or the cc! You pay a lot more than twice 400/month in monthly living costs for the children, and have not received CS for a long time, which means that you instead of CS money have used income that should have been paid to debt/saved/used instead of creating debt, so put it to the second mortgage now, and then to the CC and/or the Roth IRA and/or savings.

[lund]

Just wanted to add that I'm glad that you are doing well both health-wise and financially, and that you are back to posting.

[Jaguar]

Welcome back Angel!.