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Solid plan. Scaling back. Advice?

December 10th, 2012 at 07:55 am

I stayed up a little late last night to work on a 'solid' plan for 2013.

I posted my goals on the sidebar. I hate to say I've scaled back some goals, like the kids college fund annual goal and hubby's roth goal. In reality, we just don't bring in enough money to do EVERYTHING right now. Sigh. It's sad to admit it.

Our old life of no mortgage and no preschool bills was smooth sailing, but now with those two items eating up a good part of one check every month, something has to give!!

Hubby and I talked about it and agreed paying off the mortgage is still a huge priority, so be it. We need to make an additional $5200 in extra principal payments this year to reach our goal of paying down $15,325 next year.

I'm debating how to approach each goal. I usually plunk away slowly at all of them all year long and then at the end it's 'hey, we made it!'

For some reason, I'm not finding that as satisfying as going all-in on one goal, achieving it, then moving on to the next. Maybe I'm not as good of a multi-tasker as I used to be.

So... with that in mind, I'm thinking of going down the list, concentrating on one goal at a time, as far as snowflakes, applying (little) windfalls, extra income, etc. Then moving on to the next.

The exceptions are our savings account and the 529s.

The 529s: we auto-deduct $200/month per kid, for a total of $2400 each per year.

Savings: We automatically have some transferred to savings every check. If I up that amount by $30/ check, we'll reach our goal for the year. Which now has me wondering if that is a good plan. We have a decent sized savings account , but it earns sad interest rates, and technically that money would be better spent killing the mortgage at 4.6 percent(as far as return on money).

So, what do I do? Stick with the savings plan or divert some of that money to the mortgage payoff? What to do....

**************
We also have some bigger planned expenses this year.
1. bunk beds, new mattresses, and dressers for the kids. Our old stuff is falling apart, and the youngest is way too big for his toddler bed.
2. a trip to Phoenix for the family reunion. Of course hub's family chose to do this during spring training, when it's most expensive to fly and stay there. I'm trying to bite my tongue. It makes me mad.
3. a new backyard patio. I really want this, but we'll see how it goes.
4. A winter weekend at an indoor water park resort for me, grandma, and the boys. They would love this, and it would give hub a weekend alone.

Ideally, I'd like to pay for as much of each of these things out of regular cash flow instead of dipping in to savings.

*****************

I've crunched and crunched the numbers and I think the only way to be ambitious and meet the goals is to keep closer tabs on the everyday money that just kind of dribbles away, like too much spent on groceries, meals out, buying clothes, toys, housewares, or whatever else.

That will require better time management on my part, as I often spend too much because I'm busy and in a hurry. Ugh.

I'm still tinkering with the plan, but any input would be greatly appreciated!

16 Responses to “Solid plan. Scaling back. Advice?”

  1. Petunia in a Flower Garden Says:

    You are probably as good a multi-tasker as you ever were - just with having little kids you probably use up your multi-tasking allotment every day. Nothing wrong with choosing one goal at a time and going all out - it can give a greater sense of satisfaction since you don't have as many "unfinished tasks".

  2. North Georgia Gal Says:

    I would pick one goal and run with it. That way you don't have to wait until the end of the year to hit a goal.

  3. Petunia 100 Says:

    It occurs to me that you might be an ideal candidate for PenFed's home equity loan. (They talk about this all the time over at The Bogleheads' Index Forum). PenFed has a no-cost home equity loan fixed at 1.99% for 5 years. (You do have to be a member, but anyone can join.)

    According to the calculator on BankRate.com, a $72,325.09 loan at 1.99% for 5 years has a monthly payment of $1,267.08. If you closed in December, you would make your last scheduled payment in December of 2017. So even with no additional principal payments, you'd be done in your desired timeframe.

    Maybe this would save you some interest, which could go towards other goals?

  4. MonkeyMama Says:

    Some thoughts:

    1 - Personally, I'd keep the cash savings in cash for the short run. So you are aiming to get the mortgage down to $57k in one year and have cash at $40k? That is just $17k short of paying off the mortgage. In 2014 you could aim for the mortgage balance to be a wash with savings. Not that you would want to literally pay off the mortgage and have no cash. BUT... I could easily foresee a 2015 payoff. It's so soon, I'd hold onto the cash. Basically, hold off for now, but obviously at some point you are going to throw a chunk of that cash at the mortgage.

    1a - Dump the college savings until the mortgage is paid off. If you did so, could you pay off the mortgage in 2014? Make that a goal, and then use the saved mortgage payments to build the college accounts and make up for a lost year or two. I think this is something extra to consider with the preschool/daycare situation. Again, that is more money that can be put to college later. I am not saying lower it as a priority or goal, but I think this gets you to the same end in a more realistic manner.

    1b - I'd seriously consider a refinance - you can pretty much shave that rate in HALF, which is no small beans. I know you weren't in the mood, time or space after just selling and buying a home, but I think it bears serious reconsideration. I don't think depositing some of your cash makes much difference ($10,000 extra saved you $460 this year), but slashing the rate could save you a serious sum in the next couple of years (a few thousand dollars), even if you pay it off in a couple of years. I agree that the 1.99% probably makes sense -not the same as a full blown refi?, but would work very well for your situation.

    3 - I personally can not stand to fund several smaller goals at once. I think "one at a time" would be much more rewarding. Psychologically I do better with putting a large sum to savings every month, and then doling it out to my goals (like once or twice a year). Two reasons - I like the large savings buildup/obvious progress. & then my goals can be a lot more flexible, based on circumstances. Anyway, hitting the goals one by one, by priority, probably amounts to a very similar strategy.

  5. ThriftoRama Says:

    Boy, you guys are great. Really giving me a lot to think about.

    Let me talk about the refinance for a minute. It is an option I have considered. I could never seem to get the math to make it worth it, but it also might be the available calculators. They don't really work well as far as making a lump sum payment, then paying it off in 5 years.

    My payment each month is 1670. About 600 of that goes to escrow. Property taxes are north of 5000 a year. About 870-880 each month goes to principal, assuming no added payment on my part. I have called a couple banks, and neither seemed interested in refinancing a loan under 100k.

    I have considered calling my mortgage guy at my bank and just asking for a lower rate. I did this on behalf of my sister and got her rate knocked down 2 percentage points with no closing and just a few papers to sign, although her rate was about 6.5 percent at the time.

    If you guys think it will save me, I will investigate further. With the calculators, I left with the impression that my payment wouldn't go much lower, and with closing costs I wouldn't save much. Remember also that with new mortgage loans, much more of the payment in the beginning goes to interest. Now, a majority of my payment goes to principal.

    It also sounds like bumping one goal at a time is the way to go. I'm tired of the slow slog, so to speak.

    And yes, MM we are $7,000 from our goal to have 40k in savings. I probably would never use it to pay off the mortgage, as it's literally our laid-off, medical bills, real emergency fund, and knowing it's there brings me peace of mind.

  6. MonkeyMama Says:

    "With the calculators, I left with the impression that my payment wouldn't go much lower, and with closing costs I wouldn't save much. Remember also that with new mortgage loans, much more of the payment in the beginning goes to interest. Now, a majority of my payment goes to principal."

    Yes, definitely call the bank and ask!!

    IT doesn't really matter how much of the loan is going to principal, if you commit to keep making the same payments. The interest calulation will be the same, except the interest will be much lower. So, $72,000 x 1.99% = $1432 interest for year. $72,000 x 4.6% = $3312 interest for the year. This is an over-simplification as the interest recalulates every month with every principal payment. But I don't see why it matters that you are resetting the loan if you are committing to keping the old payment. In that case, less goes to interest and so more has to go to principal.

    Of course, the costs have to be considered, but doesn't mean that it costs much to refi these days. Off the top of my head, the PenFed 1.99% HELOC is no-cost?

  7. Petunia 100 Says:

    "Off the top of my head, the PenFed 1.99% HELOC is no-cost?"

    That is what they say on The Bogleheads' Forum.

  8. carol Says:

    I second the idea to call your own bank first. You could also easily go online to PenFed and see their options and use their calculator for yourself. I would also fund the Roths and then mortgage payoff before college for the kids. The likelihood of your being to work more easily when they are older is high!

  9. ThriftoRama Says:

    College saving while they are young has always been a priority, in part because the money we invest now has time to grow before college, longer than more money put in later...Just thinking out loud.

  10. MonkeyMama Says:

    One more thought: Consider using hubby's ROTH as a college savings vehicle. A ROTH is definitely a better college savings vehicle than a 529 plan - far more flexible. The last comment kind of made a *ding ding ding* in my head that you weren't take full advantage of your ROTHs.

    I suggest hubby's ROTH since I get the sense that your ROTH is most your retirement savings? Are you doing a SEP IRA? (You probably should do a SEP too). But your hubby has a 401k and so his ROTH could really be gravy? Definitely whatever you would not have contributed, if you do start contributing it, earmark it for college. Maybe even a separate ROTH account just for that purpose: "I am only contributing this for the tax efficiency, but plan to use it for college" account.

    This is a very along the lines of a "working smarter/not harder." A ROTH is easily accessible, but grows tax-free "forever" if you don't end up needing it.

  11. ThriftoRama Says:

    I have considered Hub's Roth for all of the extra college savings (above 2k a year per kid, as that is the limit of our state tax deduction.) I had some questions though, about withdrawal penalties, as we won't be 59 when the kids are in college...Not sure if the withdrawal is still penalty free for college if under 59.

    You are probably a much better expert than I on this stuff. Clearly, I don't have a lot of extra time to research!

    As for the SEP-IRA, hubby has had one in the past, so I am very familiar with them. They were great when hubby was a 1099 guy, as we saved almost 25k a year for retirement. As is, my freelance income isn't really high enough yet (about 16k to 20k a year for part time) to get any more benefit out of that versus a typical IRA, but in a few years that might change. Unless... of course, you can also contribute to a Roth if you contribute to a SEP-IRA, without any reduction in the amount you can put into the SEP. Not sure about the rules there.

    Can one of us have two Roth accounts and contribute to both in a single year? I hadn't considered it, but it's a great idea. I could open a second in hubby's name if that's the case and then just divvy up the cash to the different accounts. He does have a 401k at work, so we can fully fund roths every year.

  12. MonkeyMama Says:

    On the ROTHS there is no restriction on withdrawing contributions. Whatever you put in you can take out any time, tax-free and penalty-free. The penalties apply to growth and earnings. This would be a reason to not have a separate ROTH. Because if you put retirement and college savings in the same ROTH, you could take out all the earnings/growth from the college money when the time come: you would be taking back contributions from both retirement and college money - but leaving all the earnings. But that sum might equal the total contributions earnings that you earmarked for college. So it is tax-free. Does that make sense?

    I'd have to look into all the rules more in depth. My thinking has generally always been I could put the money in to make it work, but take out the initial contributions if I need them. So I see why that might not be the best for your circumstances. If you are relying more heavily on the earnings side? The rules get more complicated on the earnings side...

    Yes - you can absolutely contribute to both a ROTH and a SEP IRA. The allowable SEP IRA contribution is just 20% of self-employed income. When you do your taxes for 2012 run your tax return with and without the SEP. It will probably appear to be a no-brainer at that moment.

    You can have as many ROTHs as you want! This is a good way to keep "retirement ROTHs" separate from "other purpose ROTHs." But, more ROTHs get complicated with all the withdrawal rules, and so you may consider keeping them together and maybe just buying different funds within the same ROTH. Now that I think about it, that probably makes more sense. I suppose it depends on your specific situation. Regardless, there are still ways to keep the money "separate" to keep it more simple.

  13. ThriftoRama Says:

    Hmmm. so just so I understand. Right now, I can contribute a total of 5000 a year to my IRA and Roth, combined, total between both accounts can't exceed 5000 this year.

    But if I had a sep-ira, I could contribute my 20 percent of earnings to that AND do an additional 5,000/year to the Roth?? That might be a deal breaker!

  14. MonkeyMama Says:

    I looked closer at the ROTH rules, since I haven't dealt a lot on the distribution side (so didn't know it off the top of my had). Education expenses can be taken out of a ROTH - you'd pay taxes on those earnings, but no penalty. The catch is you have to have had *a* ROTH for 5 years. You have probably already met this hurdle. If you've had a ROTH for 5 years, any new ROTH accounts will automatically meet the 5-year rule. (Except ROTH conversions are different - just FYI).

    It looks like I could be wrong about any downside to keeping the ROTHs separate. All your ROTHS are considered as a whole for any ROTH distribution. So, if you contribute $200k to all your ROTHs over the years, but withdraw $50k from a separate "Education ROTH," you are still well under the $200k "return of contribution" limit for all your ROTHs. So I do think a separate "non-retirement" ROTH is the easiest way to handle this.

  15. MonkeyMama Says:

    I thought I replied earlier but my comment vanished! (I probably forgot to put in the spam code). To answer your question, Yes, you understand right on the ROTH & SEP.

  16. ThriftoRama Says:

    Thanks MM. This has been an eye-opening conversation!

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