July savings plan

I’m maxing out my 401(k). My income is high enough that that is really my only tax-advantaged savings vehicle available to me: 1) I’m past the deduction for the traditional IRA and 2) I’m past the Roth IRA income eligibility for single filers or pretty close to it.

I’m not the sort of person who would *not* take out a loan to invest. I’m the sort of person who would have more job security if I lowered my yearly fixed expenses by $14,469.48 than by having a larger amount of money in the bank.

This would be a somewhat different decision if I, like nicoleandmaggie, I had a ton of tax-advantaged savings room that I would give up if I didn’t use in a particular year.

I also have this strange goal to have an Admiral Shares index fund. So since I can’t get it in my Roth IRA (my account has dipped below the $10,000 that I have contributed to it) and I don’t plan on leaving my employer anytime soon and rolling over my 401(k), the only place I could do that is in a taxable account. I need about $3,600 to accomplish that goal.

I have some more things that I want to do/buy for my condo:

  1. Re-paint the second bathroom and the hallways – $500?
  2. Fix the closets in the master bedroom – $500?
  3. Buy a bed to put in the second bedroom for guests – $500?
  4. Buy a small table to put in the front entryway – $500?

(I realize that some of these estimates are probably way off, but the total could likely add up to $2,000.)

  • Money in my condo savings account right now less the projects listed above: $6,400
  • Savings planned for this month: $12,000

I’m going to take the money necessary to reach the Admiral Shares index fund goal out of my condo savings account, leaving it with $4,800. I’ll leave $2,000 in the condo savings account for those projects, so I’ll take $2,800 and pre-pay the mortgage principal. I’m also going to take the money from my bonus this month and the savings from my paycheck at the end of the month and pre-pay the mortgage. Anything that is leftover in the condo savings account will end up going there too, as well as whatever I get as a refund of the deposit on my apartment (I’m guessing about $100).

Between those two, the mortgage balance could be down to $271,100 by the end of the month, before my first payment is even due! Right now, I see about another $10,000 in savings funds for the year (August through September), which projects an EOY balance of $261,000 (plus a bit lower from the principal in regular payments, maybe just under $260,000), which is below where I need to be to be on track to pay off the mortgage in five years.

It is actually super easy to make a principal only payment on my mortgage. It’s at the credit union I use for my daily banking. I just go to the transfer screen, select the from account (checking or savings), set the to account as the mortgage, enter the amount, and then it confirms whether it is an early payment or a PRINCIPAL ONLY (their emphasis, not mine) payment. It seemed too easy to be true, but the balance was updated correctly based on my payment!

So, in summary: I’m going to use the tax-advantaged savings vehicles that I have, which is only my 401(k), and pay off the mortgage ASAP with the rest since I have a comfortable cash reserve of $24,200, ignoring my goals of investing 20% of my gross income or investing in taxable (other than having an Admiral Shares index fund) or generating $1,000 in passive income for the year.

Maybe I’ll re-evaluate this plan each month, but this is what I’m going to do this month. Mortgage balance after my first (!) pre-payment is now sitting at $283,200!


15 thoughts on “July savings plan

  1. Sorry, what’s the point in paying off the mortgage so fast? Realizing we all have a different stomach for mortgage debt, but this is as low as it will ever be. One the lessons I learned very early in business was when a class instructor asked everyone what they could do with cash. for the next 5 mins, he wrote down on a chalkboard everything we said. And then said, if you have cash, you can choose to do any of these things.

    We’re in the process of a refi to 3.5%, 30 yr. We pay the minimum each month. And even if we have almost enough cash to pay off the mortgage, we’re in no hurry….

    • It is pretty cheap debt, but right now, I’m not comfortable with how much debt is – maybe I will stop paying it down when it’s a lower balance in a year. I have some other reasons too, that I won’t get into on the blog.

    • I think balance is another good reason to pay down the mortgage. Leigh’s networth until now has been cash, bonds, stocks (I’m not sure about REITs, Leigh?). Having equity will give her another “leg”.

      • Balance is a good reason, except that by paying down the mortgage, equity will be a pretty high portion of my net worth for a few years. Not paying down the mortgage would result in it being more equally distributed between cash, stocks, and equity.

        I don’t have any REITs and I actually don’t have any bonds at the moment, unless you count the stable value fund in my 401(k) as a bond.

        • Key equation:

          Debt = Debt = Debt

          Regardless of the interest percentage.

          She has a lot going for her – the solidity of her purchase, her large downpayment, her low interest rate — it all makes her decision a smart move.

          But debt is a form of slavery. Debt is a drain on cash flow. It even increases her risk since the debt won’t disappear but, hypothetically (not at all likely), her income or assets could decrease. It seems funny to say these things, because given her scenario, her mortgage is pretty much as low-risk as it comes. But paying it off quickly is smart.

          I think Leigh’s thinking is an example of a new way for contemplating debt. Leverage is a tool, but it’s a dangerous one so don’t muck around with it. If you’ve got a huge income, you’re saving lots, you’ll get very very rich without taking on debt. As Warren Buffett says, you can’t go bankrupt without debt.

        • @Joe

          Assets could decrease if I put money into stocks and they drop a ton, so even if I had enough assets to pay off the mortgage (which I don’t), I might lose some of them and no longer be able to do that. Income could decrease, but I doubt it could decrease to a point where I couldn’t pay my bills with how little of it I’m spending right now.

          The idea of being highly leveraged scares the hell out of me.

        • And it should. You’re one of the few who learned from the housing bubble and debt crisis (well, one of the few who learned without losing any money or getting foreclosed). If I were DBRS I’d give you a sovereign level rating. You’ll be out of debt promptly.

  2. You are going to have your mortgage paid off in no time. Did you roll your fees into your rate or pay them (I think these things vary from state to state so yours might be different). We’re rolling them into the rate so our rate is slightly higher, but I did the math and it was cheaper in the long run given we plan to pay off the balance early.

    • I actually didn’t pay any closing costs myself at all, so I didn’t investigate rolling the fees into the mortgage. I didn’t pay for any points though – that didn’t seem to be worth it with how quickly I planned on paying it off.

      It’s interesting to see how divided people are on paying off the mortgage quickly!

      • It certainly is interesting how divided people are on paying down mortgages. It is completely speculative to which is better, no one has a crystal ball.

    • I probably could and who knows if it will even cost $500. I just wanted some SWAGs to figure out how much money to leave in that account and not pay down the mortgage with.

  3. I had my mortgage with the credit union twice. Both times they sold my note to a national lender. Bummer!

    • My credit union actually promises to service the loan for its entirety and that they don’t intend to sell or transfer it either. I think that’s pretty uncommon and it definitely made a difference in my decision-making process.

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