I seek advice from those more knowledgeable than myself in the ways of money.

The_Jed wrote: I'm a cheap bastid and, despite having by far the best paying job of my life, I have maintained the same standard of living I (my family and I) had when I earned a lower wage. I've been able to sock away an emergency fund of around 8 months worth of living expenses (mortgage, insurance, food, yadda, yadda) and it has been sitting in a savings account reaping a colossal .014% interest. This is separate from the college funds for the kids and primary and secondary checking. Obviously I would like a better interest rate but it also has to remain accessible in case of emergency, without penalties. Is there an option out there like what I'm looking for that is available to a regular guy like me?

You are my hero.

RX Reven' wrote:

alfadriver wrote: We set up our mortgage to be as short as possible with the payment as high as we could deal with- it's going to end up saving thousands of dollars doing that, since the interest way out does the tax break in terms of losses.

Hi alfadriver, Thank you for your good points. I chose to get a 30 year mortgage but I’m on track to have it paid off in 13 years which is 4 years from now. I realize that I could have gotten a 15 year mortgage at a lower interest rate but I was willing to pay a little more to get the lowest possible monthly payment requirement…sounds kooky until you realize it’s no different than buying insurance.

You did the equivalent, which is good.

My point more in replying to your post and not ProDarwin is- don't worry about the taxes, as the paid interest will always be more than the saved taxes. That's all.

No interest in investing in cars? Really? I feel like an intelligently diversified collection would be near-guaranteed to do better than an average fund.

Property is also an option.

The highest interests rates you'll ever see are those you pay... so Alfadriver is right. Put it into the mortgage. Pay off the back end and drop that balance, and even "losing" the mortgage interest deduction, you will be ahead by many points.

People rarely understand that until you are debt free, it's almost impossible to see a net positive return on your money. Everything else is rearranging deck chairs in the titanic.

Margie

white_fly wrote: No interest in investing in cars? Really? I feel like an intelligently diversified collection would be near-guaranteed to do better than an average fund. Property is also an option.

I’d love to diversify and have an investment I could drool over but…

The cost per square foot where I live is over $400 so a 6’ X 14’ car space would have a ~$34,000 carrying cost in addition to the car’s purchase price and insurance.

If I hit an absolute bull’s eye by picking up an aircooled 911 in the mid 90’s, I’d probably be ahead of the return from putting the money in a low load index fund but bull’s eye’s are rare and Aztec’s aren’t.

In term of property, realize that investors tend to be pretty smart and tend to do solid research before committing their money.

If any investment class (real estate, stocks, aircooled 911’s) become a measurably better deal on the whole (risk, reward, liquidity, fun, hassle, buy-in requirements, etc.), investors quickly move into that space and bid prices up to the point where good deals become average deals.

STM317 wrote: In reply to The_Jed: You can do the Vanguard thing anytime, but it will benefit you the most to make sure your tax advantaged options are all maxed out first. This year, the IRS limit on 401k contributions is $18k. Most people don't get close to that. If you have an HSA, the limit is $3350 for single and $6750 annually for more than one user. You can think of this like a 401k for medical costs.

My company offers a health FSA but if you haven't used your funds by the end of the year you lose them and start over with a $0 balance the next year. That didn't sit very well with me so I opted out.

ProDarwin wrote:

Osterkraut wrote:

BoxheadTim wrote: My main issue with keeping the whole e-fund in savings accounts is that they don't even keep up with inflation so you'd have to keep contributing to it to keep its real value stable.

Wonder if anyone's done the numbers on if having no real e-fund and that money invested and floating (rare) emergencies with a credit card comes out ahead of basically paying to have a constant e-fund.

Can your emergencies not wait a day or two? Even if you have to float on a CC, its only for a few days while you liquify money from other areas. Paying off immediately will have zero interest. You can also use a home equity line of credit for this purpose. I never have a big emergency fund. Anything 5 figures or more is almost never a "I need this to happen right this second" transaction. Medical emergencies have billing cycles like everything else. I don't understand the need for such a gigantic fund unless you are expecting to pay ransom at any moment.

For me having a large(ish) emergency fund is as much a psychological comfort as it is a financial cushion. I hope for the best and plan for the worst. I feel completely exposed and vulnerable without one. I also keep at least one spare car.

Which, if you drive old beaters like I do, is pretty much a necessity. That way I can drive one while I whine about fixing the other.

The_Jed wrote:

ProDarwin wrote:

Osterkraut wrote:

BoxheadTim wrote: My main issue with keeping the whole e-fund in savings accounts is that they don't even keep up with inflation so you'd have to keep contributing to it to keep its real value stable.

Wonder if anyone's done the numbers on if having no real e-fund and that money invested and floating (rare) emergencies with a credit card comes out ahead of basically paying to have a constant e-fund.

Can your emergencies not wait a day or two? Even if you have to float on a CC, its only for a few days while you liquify money from other areas. Paying off immediately will have zero interest. You can also use a home equity line of credit for this purpose. I never have a big emergency fund. Anything 5 figures or more is almost never a "I need this to happen right this second" transaction. Medical emergencies have billing cycles like everything else. I don't understand the need for such a gigantic fund unless you are expecting to pay ransom at any moment.

For me having a large(ish) emergency fund is as much a psychological comfort as it is a financial cushion. I hope for the best and plan for the worst. I feel completely exposed and vulnerable without one. I also keep at least one spare car. Which, if you drive old beaters like I do, is pretty much a necessity. That way I can drive one while I whine about fixing the other.

I get that... but what I'm saying is, it doesn't need to be completely liquid and in your bank account.

$3k bank account balance, 2 cards with a $3k limit gets you to almost 10k. Add a home equity credit line of $5k and you are at 15k.

Put your current 'emergency fund' in an index fund and simply call fidelity/vanguard/etc. and withdraw a big chunk in the event of an emergency.

My emergency fund sits in Fidelity money markets and SDY. When it was at my bank, my definition of emergency became rather loose. Now at Fidelity, because I chose not to have a card with them, I have to sell shares and transfer money. It doesn't take long and returns more than 1%.

ProDarwin wrote: I get that... but what I'm saying is, it doesn't need to be completely liquid and in your bank account. $3k bank account balance, 2 cards with a $3k limit gets you to almost 10k. Add a home equity credit line of $5k and you are at 15k. Put your current 'emergency fund' in an index fund and simply call fidelity/vanguard/etc. and withdraw a big chunk in the event of an emergency.

Aren't you then paying taxes on your investment withdrawals? At what rate? Or interest from the cards? If the plan is to make sure the cards are payed off in full before interest accrues, where does that money come from?

For how infrequently an emergency fund should be touched, I can still see how it would be possible for the gains to outpace the costs of accessing the money but the idea of having to pay additional money in an emergency, just to use an emergency fund, kind of sucks.

I put my grandparents' inheritance into a DSIP/UIT fund with my broker. Its not much; barely 5 figures, but in three years, it has earned an impressive 21.15% total. In 31 months, there was only one month that showed a net loss, and it was very insignificant. Even if it only earned 3% in three years, that's still better than the best CD or savings account. The bottom line is; my broker is a rock star and is always able to maximize gain with a minimum of risk.

You can set it up as a Margin account, and basically that means you get a credit card and your limit is about half the value of the account. If you put in $20k, you would get a card with a $10k limit. Squirrel it away for those emergencies. Then you can choose to pay it back like a normal card, or liquidate stock to cover it. Its a line of credit against the value of your holdings.

ProDarwin wrote: I'm still not a fan of paying down mortgage any more than necessary though.

Why not? I've been double-paying my principal since I bought my house in 1993 (we were close to payoff, but refinanced it in 2010 for about 100% of what we paid for it in 1993 to do some major renovations). After the 2010 refi, we're about a year out from paying it off fully. I've saved 5 digits in interest by paying off early both times - more than I could have made investing that money. And once it's paid off, the majority of that mortgage payment will then go straight into retirement funding.

In reply to STM317:

No - these are generally post-tax investments, so you can liquidate them whenever you desire. You WILL however, need to pay taxes on any capital gains. And depending on how large the portfolio is, you may have to make quarterly estimated payments - rather than writing a single big check on 4/15 for the tax owed.

STM317 wrote:

ProDarwin wrote: I get that... but what I'm saying is, it doesn't need to be completely liquid and in your bank account. $3k bank account balance, 2 cards with a $3k limit gets you to almost 10k. Add a home equity credit line of $5k and you are at 15k. Put your current 'emergency fund' in an index fund and simply call fidelity/vanguard/etc. and withdraw a big chunk in the event of an emergency.

Aren't you then paying taxes on your investment withdrawals? At what rate? Or interest from the cards? If the plan is to make sure the cards are payed off in full before interest accrues, where does that money come from? For how infrequently an emergency fund should be touched, I can still see how it would be possible for the gains to outpace the costs of accessing the money but the idea of having to pay additional money just to use an emergency fund kind of sucks.

Yes, I would pay capital gains on withdraws. Just as I will whenever I eventually withdraw money. (Initial money + earned money - taxes on the earned money) is always going to result in more than if you never earned anything with your money.

Lets say your emergency fund is $100k.

In a savings account, 5 years from now you could withdraw $105,100

If you invested it, 5 years from now you could withdraw say $160,000. Even after 15% capital gains, you are left with 150k.

Which is the better option?

I don't pay interest on the cards if I use them. I would pay them off in full with money withdrawn from investment accounts as soon as that money comes available. Think of the cards as just a capacitor in the money system. They can temporarily absorb debt at no cost.

Duke wrote:

ProDarwin wrote: I'm still not a fan of paying down mortgage any more than necessary though.

Why not? I've been double-paying my principal since I bought my house in 1993 (we were close to payoff, but refinanced it in 2010 for about 100% of what we paid for it in 1993 to do some major renovations). After the 2010 refi, we're about a year out from paying it off fully. I've saved 5 digits in interest by paying off early both times - more than *I* could have made investing that money. And once it's paid off, the majority of that mortgage payment will then go straight into retirement funding.

Getting off topic here but...

The amount you saved is a function of the interest rate on your mortgage and your tax bracket.

My mortgage rate is 3.125%. I can also deduct the interest from my taxes. This makes my effective rate <3%.

My money in the market earns close to 10%.

$1000 extra toward your house in 2010 might save you $221.24 in interest, while investing it would make you $805 in cash (after capital gains)

In reply to Duke:

At least for me the return on my investments is far more than the cost of my mortgage. I have most of my invested money in VTSAX and have a 3.25% mortgage. After tax savings my mortgage carry cost is essentially around 2.5% and I've made around 8-10%/yr so I net far more than paying off my mortgage. I'm a high saver so I have plenty in investments to pay off the mortgage but in 27 years when my mortgage is paid off I'll have made tens of thousands of dollars more by having kept the loan.

It's a comfort level thing though - I'm ok playing the long game on averages. I'm not at all afraid of not being able to make a mortgage payment. Some people are more comfortable with the small "sure thing" than the bigger "likely thing."

dculberson wrote: In reply to Duke: It's a comfort level thing though - Some people are more comfortable with the small "sure thing" than the bigger "likely thing."

This is me. I realize that it may be holding me back or costing me money but I just can't tolerate the risk.

I appreciate the discussion!

I can't thank everyone enough for sharing their thoughts and experiences on what can be a very prickly subject. I have a LOT to learn!

In reply to The_Jed:

I'm with you. I have enough in my (barely)interest bearing checking and savings accounts that if I lost my job today we could live for about a year without making any changes to our spending. Is that the smartest thing? Probably not, but it's what makes us comfortable.

Someone mentioned Ally Bank back on page 1. Realize that they are the remnants of GMAC (just renamed so people for that we bailed them out). I would not open an account with them no matter what interest rate they offered and will maintain my boycott against buying any new GM products.

In reply to The_Jed:

I get where you are coming from. While I understand the financial principles behind investing over paying off the mortgage, the risk-averse engineer in me is happier with the title sitting in my safe.

Everyone's situation is difference, so there isn't really a good one-size-fits-all answer.

re: leveraging the house loan to make more money on interest in another area

I understand the math behind it, but I think there are other issues (psychological, as noted is one).

If you do this, do you live in a house well within your means or did you buy as much house as the bank will let you? Theoretically, if you earn a better interest rate than you pay, you would want to maximize the size of the loaned amount to make your "principle" you are leveraging bigger, right?

Also, it would be advantageous to NEVER pay off your mortgage as well, right? So just keep refinancing and taking out home equity lines of credit to ensure you always have the biggest leveraged amount?

Bottom line, if you can earn more interest than you pay, then a rational person would seek to have the largest principle balance possible at all times.

Well within my means. Leveraging more home doesn't make me any more money in investments (unless your home itself is the investment, which is not the case for most). As a matter of fact it makes less because I need a larger down payment to avoid PMI/other nonsense, hence less $ invested.

You don't want to maximize the size of the loaned amount. You want to minimize the amount of cash tied up in assets not earning $.

Never pay it off? Sorta. If you can refinance at ~3%... hell yes (assuming fees still work in your favor). HELOC is much closer to market rates so there isn't much advantage in doing so. I'm happy knowing my mortgage is 26 years from being paid off, but I could pay it off now if I desired

ProDarwin wrote: You don't want to maximize the size of the loaned amount. You want to minimize the amount of cash tied up in assets not earning $.

I see - but the kicker is you have to NOT need the loan for any of this to work. Say you have $125:

If you have a $125 house with a $100 loan ($25 in equity, the rest of your $100 is in vanguard earning interest) that means you are making ~10% on the $100 in vanguard and paying ~4% on the $100 loan amount. $6 first year. If the house appreciates too, that is gravy.

You could also just buy the house with cash, and you make no money on interest (none left over for vanguard), but the property could appreciate.

Clearly, the first situation is more favorable. However (and this is the big piece): If you do not have $125, and you only have $25, then getting the loan is necessary to purchase the house. And you do not have any $$ matching the loan amount left over to invest and earn money on.

And finally to put what you are saying another way, if you have $25 and get a loan for a $125 house, then you owe $100. But if you get an extra $1, it is better to put the extra dollar in vanguard and earn 10% and continue to pay 4% on the loan for that dollar than it is to put that dollar into the house.

Yes. Thats a good way of putting it.

What I guess I should have said was: You want to maximize the size of the loaned amount for a given property.

Say I have $250 cash in your scenario above. I could buy/mortgage a $125 house or a $250 house. Buying a a more expensive house isn't doing me any financial favors.

$125 house = $25 down, $225 invested, $100 loan @ 4%
$250 house = $50 down, $200 invested, $200 loan @ 4%

The $125 house will always result in more $ in my pocket, unless home appreciation is a large factor.