After The Mortgage...What Next?

[jennipurrr]

Nearly two years ago DH and I decided to try to pay off our mortgage in two years. The next payment in about a week would have been our goal date. We aren't there yet but we are getting pretty close...our balance should be down to about $24,000 when we make the payment. We should have it paid off by June-ish.

So, maybe I am getting ahead of myself, but I am wondering what our next step should be? We've learned about ourselves that if we don't have a plan for every dollar we will save less than we want and burn through money on travel or other stuff we don't even care about.

Here's a little bit about our situation. We're both in our 30s (30 and 37). I started a new job about 3 months ago, and although its still new, I really love it. Some days I don't even realize its 5pm...what a change! I'm also still hanging around in school working on a PhD which my employer pays the majority of. DH likes his job but doesn't love it...so we don't have any real plans for early retirement at this time. We don't have any kids but are thinking we will make the decision to have them in the next year or two, or we won't - so no answer there really.

Our only remaining debt is about $35,000 in student loans that DH has from undergrad. These are at a fixed rate of 1.5%. Lots of mental debate about just getting rid of those.

We have four rental properties. One will be paid off in about 2 1/2 years. Two others now have 20 year loans, and the other one has about 27 years left on the loan. They are self sustaining and unless someone gives me a great argument, I don't think I want to use our personal money to pay them off. When the first is paid off we will probably start snowballing the other 3 mortgages.

We have continued house angst on if we want to stay here for any length of time. We both agree we would like a kitchen which is a bit larger (our kitchen floor space is about 6 x 8) and has a dishwasher and a nice screened in porch or deck. Our surrounding area is kind of rough and we don't live in a school zone where our (pretend) kids could go to middle or high school, so I say we should plan to move sooner rather than later and buy a house with our wants. DH would rather spend money on a kitchen, screened in porch (in doing so we would also have to replace the roof) and live here for 10 more years. Although he does admit sometimes he wishes we lived in a nicer area. The house would be at $100K - $200K more than our current house value, so sizable difference in price. However, I would like one with a garage apartment we could rent out, which will subsidize the price increase. Also, the nicer areas we are considering are walkable to work, and our town's zip cars, so there is some debate on the total expense if we don't have to replace our second car when it dies.

We own a 2007 and 2000 Honda CRVs. Both run fine with the 2000 having about 175,000 miles...so maybe time to start putting away a little for a new car? We drive about 12,000 miles a year between the two.

We contribute 5% each to a 403b through TIAA CREF which is up to the employer match limit. We also contribute to a pension through our employer. We've been putting in this amount to retirement since 2004, so we have a nice little amount built up. I have a small Roth IRA I haven't put into since 2007. We have access to a 457 plan but have never used it.

Right now we are keeping about $3,000 in a savings account but I would like to bump that up to about $15,000 when the house is paid off. So I guess that is the first order of business.

So, what would you do / did you do when you paid off the mortgage? I would love input on the next steps for our situation. We will have between $2,000 - $4,000 each month (depending on monthly expenses) that has been going to the mortgage. I would love to hear thoughts!

[SteveinMN]

Will one of you stay home with the (pretend) kids? That will be a sizable difference in income you might want to account for early.

I like the idea of shopping for another home now. Mortgage rates are at historic lows and house prices in lots of areas have yet to climb back up where they were. So it's an excellent time to shop, though it does leave you with the issue of selling your current place (at least you'll have no mortgage) or renting it out (in what you consider to be a rough neighborhood). I'm also not sure if you'll find a place 1) you like that has a 2) garden apartment that 3) you'll be able to rent out legally. If you haven't already, you might want to check the laws in your target area both for the likelihood of finding such a place and the possibility of renting it out. I wouldn't put any more money into your current house except for repairs and possibly to bring a glaring deficiency up to par (if everyone else's kitchen is twice the size, you need to be ready for the financial hit that may cause).

For the older CRV, I'd find a Honda-aware mechanic and ask for a going-over. For the few hours of labor you'll buy, you'll have a much better idea of how much longer it will last (accidents excepted) and that can help you gauge when to replace it (or will help you confirm that it will last you long enough to move to a location where you won't need it).

I also see nothing wrong in putting more money toward retirement. At your age, by the time you're ready to collect Social Security and Medicare, several Congresses and Presidential administrations will have had their way with them, and I'm going to guess the end product will not be as "generous" as it is now. So the rest will be up to you and DH.

Oh, one other thought -- life insurance/disability insurance. Do you have enough, either through work or on your own? You are far more likely to be disabled from your job than killed from it. But most people never think of protecting their income from that.

[fidgiegirl]

I'd feel wary with an EF of that size. For us, that would be the #1 order of business, followed by a car fund.

I agree with Steve on whether one or the other would stay home with kids. We are batting around the idea of kids more seriously than ever, and it weighs heavy on my mind that either of us would have to work and put the child in daycare. Selfishly, this is more about me than about a child! I think they do fine no matter what, but I don't possibly foresee myself, who is (emotion-wise) super sensitive to lack of sleep, being able to cope with full-time, outside-of-the-home work and an infant. Ok, thread drift . . . sorry ;)

I also think you may want to consider moving. You have written about being unsatisfied in your area in the past. If you know you don't want to stay there for the long haul, bite the bullet and go . . . OR, stick it out but sock away money toward a down payment on a new place. Then add your current house to your rental portfolio, or sell it and use the money toward the new house. We knew we didn't want to be in our former home long-term, so we did move. Sometimes I regret the expenditure, but I never regret the move/the house itself. We will be set here for a long time whether or not kids come on the scene.

[Zoebird]

In this instance I would:

1. for rentals: do the snowball bit when the other one gets paid off;

2. consider rolling the current house into that, and then looking at getting another;

3. get all living expenses onto one income -- the lesser of the two incomes is the right way to go, imo. this will help you adjust to living on a single income should someone want to stay home with the kids. While you are adjusting to everything on one income, all additional income can go to savings.

4. budget for things that you do value -- we budget for travel and also for experiences for ourselves and DS. that includes things like movies, plays, going bowling, ice cream, . . . you know, stuff like that. if you have a budget, you're more likely to stick to it, right? we are anyway. :)

[Dhiana]

1. Your Emergency Fund is really, really, REALLY low! That would be my first priority. Even before paying off your own home mortgage!

You are responsible for a lot of expenses. Those 4 rental mortgages are never as self sustaining as we would all hope. Life happens and it usually all happens at the same time.
It was generally recommended that having a 3 month EF would be ok, then it moved to 6 months, then 1 year and after seeing all the 99 Weekers out there...ouch. Save, Save, Save!

$3K doesn't even cover 1 month of the expenses you are responsible for. Be sure to include not just your own personal mortgage but also the rental mortgages in the calculations of your EF needs. And the cost of replacing a furnace or a hot water heater at just that inopportune moment. You never know what will happen when.

2. After fully funding an Emergency Fund start putting more money away for retirement. I read so many articles about how we do not save enough for retirement. Yes, your properties are one type of funding for retirement but it is best to have a diversified portfolio. Maybe max out your contributions to the TIAA CREFF not just up to the employee matching, Max out both of your Roth IRAs and check into the 457. Check expense ratios of all the options.
Put all of this on automatic as much as possible so you don't think about it, just save it.

3. Then I would see how much money I have to make the personal move/update the kitchen or add to your property holdings.

Plan for the worst, Hope for the best.

[try2bfrugal]

I agree on upping the emergency fund to more than a year before paying down any mortgages beyond the set payments. Also if it were me I would focus on a more diversified investment portfolio than just real estate.

[lhamo]

not much to add to the good advice offered above -- I would also focus on getting the emergency fund bumped up, and basically also continue focusing on growing that into a general contingency fund that would cover:

1) Replacing a car
2) Moving to a different house
3) Extra funds that could be drawn on if one partner goes part time or SAH if you decide to have a kid (though ideally you'd want to get your expenses down to what one income can support if you want to go this route).

I would also not be comfortable with just 5% of my salary going toward retirement, even though the employer match bumps that up to 10% overall and you have the pension. But maybe that is partly because I didn't start seriously saving for retirement until after 30 (was in school before that -- had a small IRA but nothing else), and DH didn't start until after 40 (he's 10 years older than me, both started post-PhD careers at the same time). I currently contribute the max to my Roth 403b PLUS I get a 7.5% of salary contribution from my employer (will go to 10% in January) PLUS I put what I can in a separate Roth IRA every year (usually around 2k -- depends on how many days I work in the US and how that compares to overall work hours). DH also contributes the max (including catch up contribution), though he only gets a 2% employer contribution. Between the two of us we're putting close to 1/3 of our gross into retirement. I still wish I could do more. we do have extra cash savings every month so for now I've upped our contribution to the kids college funds. We aren't paing down the mortgage because it is actually better for us to wait until we sell and have the buyer pay it off (that way we don't have to deal with getting even more hard currency out of China than the profit we will make). I do hope we can ER, so that is a different situation than yours.

Congrats on making such great progress toward your goals! Basically it looks to me that you need to figure out the bigger picture of your life and figure out what the smart financial choices will be next as related to that.

lhamo

[jennipurrr]

Thank you for the replies! I also told DH I posted this and read him the replies, so we've been discussing also.

I think lhamo kind of hit it in that we need to figure out the bigger picture. I was pretty restless earlier this year and thought maybe it was time to have kids...then I applied for new job and convinced my self to go for it by saying if it doesn't work out I can leave gracefully by having a baby and now I love the job and wouldn't want to change anything for a while now. So, maybe I just needed a change not necessarily a child. But, we are getting to the age where we need to decide I guess.

I know myself well enough to know I would go insane being a stay at home parent. DH is not interested in that route either. However, I worry about the quality of daycare, but there is a really good place here that of course has few few openings. Whatever we did I would try my best not to be my overly price conscious self and get the best overall option for our family. So, I am sure even if we both were employed full time, our expenses would go up a lot with a child/ren. Definitely something to consider when thinking about the future.

Fortunately, over the course of the year, we do just about live off DH's take home income. Zoegirl, I like your idea about living off the lesser income. My income is about $700 less per month, and that would definitely make things secure. However, when we pay off the mortgage that will reduce our monthly expenses by just about that amount, so I guess if we keep things the same we will accomplish this in a few months.

Emergency fund...yes, that will be the first order of business. We do keep our rentals entirely separate and have built up about 10K in that account...but I know about everything going wrong that can...in 2011 we had a tornado put two of our rentals out of commission for a bit, and two air conditioners go out over the course of the year :/ Fortunately, 2012 was a good year with a chance to build things back up and we have had little expenses and high occupancy. Also, we do keep a bit in our checking account, so it is not as though the 3K is all we have...but I know it is too low. It is far too low if we had to replace a car or something of that nature. Our expenses when we are in frugal mode are definitely less than $3k a month, so I thought $15k was a good 6 month-ish number. Its also plenty to pay for a new to us car should something happen.

Insurance is something that I haven't put a lot of thought into...but probably should put more. We both have short and long term disability through our employer, but I really don't even know what that means. I probably need to learn the details and see what is covered. Also, once we are vested in the pension plan (10 years, 3 to go) then we could get disability retirement should we become disabled. I do know that basically means you get your retirement check right then, smaller amount since you didn't work that long, and also get in the health insurance plan for retirees. We have life insurance through work which is double our salaries. I feel like this is probably enough since we are both working adults with low debt loads and no kids to pay for at this time...but we will have to look into term insurance if we have kids.

Retirement...in our discussion, DH and I decided the next order business is to max out my Roth and open him one. This would be $11,000/year and add a good chunk to our retirement savings. We are both wary of the market and that was one of the reasons we decided to go ahead and pay the mortgage instead of putting more in retirement. However, I'm still on the fence about should we do the 403b instead for the tax savings...but I guess it is probably good to have some in each bucket. And I also like some of the provisions in the 457...so maybe we would do that instead of more in the 403b. This is where my head starts to spin.

Also, our pension is not free...7.5% gross goes to that each month...its not optional, which is fine with me. If we stay in our jobs 25 years at the current salary in today's dollars we would get combined $5,021/mo from the pension. Who knows if that will last? But, I feel like it would be more than enough to support us not even counting the Roth or 403b. So, including the pension contributions, right now we are contributing 12.5% of our gross income to retirement. The Roth contributions will get that over 20% which is a number I feel comfortable with right now.

House...I don't think we would rent this house out. Emotionally it would be too hard for me to have tenants in it if they trash it, since it has been our home for 7 years. I think we would just sell and roll that money into another house. Also, we are pretty much at our rental limit with everything going on in our lives...this property is too high maintenance for me to want to keep it as a rental...big yard, plus it will need a roof in a few years, and with the area its something I would rather not gamble on the quality of tenants years down the road. I am quite pleased no one was particularly behind DHs plan...which I think involves sinking in waaaaay too much money into this house for what it is worth.

So, regarding the house issue I think we should put the extra money in savings for right now and have it available. That can go towards a down payment on a new house and doing some small things to make life easier here if we stay for a 2-3 more years, like repainting the cabinets, putting in a dishwasher but not changing the kitchen layout, etc. Like some said, I also think about how low prices and interest rates are and think it might be a good time to buy somewhere and get where we want to be for the long term. Also, houses don't come up too often in the area I want to buy. Right now there are about 4 on the market and none meet what I want in a house...so I kind of feel we might have to wait a while for the right one and then be prepared to jump on it.

Ok, I'm done rambling...lots to think about!!!!!!!

[Zoebird]

If you want to have a family, you'll need to consider *diverse* child care options. Not just day cares around you (which are a good place to start), but things like various formations of nanny care.

There is the traditional nanny, who is the primary caregiver of your child in your home. There are two options -- live-in au pair styled and also live-out nannies. Price them out, see what might work.

There are then also part-time nanny options. Here you can have live-in part time nannies and nanny shares (two families share the nanny on alternating schedules).

Finally, there are also small, in-home child cares. You might know of people who are friends who are starting small, in-home care facilities. they might have 3 or less children in the care facility, and if you know them, they could be friends of yours even.

All of these are generally more expensive than "typical" day care, but the quality of care is generally higher (imo), and you have more sense of what is going on with your child and that care-giver.

Our expenses really haven't gone up that much with DS. His grandparents clothe him and buy him toys/books. We actually don't. It's very rare that I buy anything for DS that isn't an experience or food. Most of our activities are free (ie, hiking, parks, beach). Some cost money, but are worth it to us (pool membership; we go 2-4x a week and it comes out to $5/trip; archery lessons because DS loves it; $10/lesson). And then our food costs increased only modestly, really. Until he's a teenager. LOL We are planning for that.

The biggest expense is education/childcare, but you can start planning/budgeting for it up front.

And you might discover that you want to work only part time, staying home with the kid the rest of the time, or some such. It's pretty precious time, honestly. I need to work for my own edification, but the schedule allows me a lot of time with DS which is precious.

[RosieTR]

I think your thoughts on funding a Roth are good. Then you'd have basically 4 buckets if you continue to be a landlord: pension, Roth (not taxed in retirement), 403 (taxed in retirement) and the rental income. Also maybe social security, which would make 5. Not bad at all! But I agree with the other posters on the EF. If it were me, I'd take next month and just whatever extra goes into the EF to start, then subsequent months split the extra $ 50/50 between an EF and Roth. Alternatively if it would make the difference between fully funding and not, you could put more in the Roth for FY 2012 (can add til tax day 2013). One nice thing about the Roth is that it can somewhat function as a backup EF in that you can withdraw contributions without penalty under some cases-maybe all cases but I don't remember. So that second option might actually be even better, because if something really bad did happen, you could probably get the $ out of the Roth minus earnings. If you sign up with a major investment house like Vanguard, you will be able to choose which funds you want to put the $ in, so you're not beholden to equities if the market freaks you out.

[jennipurrr]

Zoebird, thanks for the post about child care. I think I will probably have to start thinking outside the box a bit if it if we decide to have children. I have always wondered if kids get so much stuff (clothes, toys, etc) from relatives if that was really not a cost for the parents...I'm pretty sure we'd be pretty similar there, not having to buy much since they get it other places. I am always amazed at the number of toys I see kids having, its overwhelming to me...but these aren't from particularly minimalist parents. I think childcare and health insurance will be our two main increases. Our insurance will nearly triple if we get on the family plan.

Thanks Rosie, for your perspective on the Roth. I hadn't really considered that an EF, but it does function like one since the contributions can be withdrawn tax free. I think that will lend me towards funding it first before anything else.

Almost time for another mortgage payment...counting down the months here.

[Zoebird]

I am also overwhelmed in other people's homes. The typical american home -- imo -- has way too many toys for their kids. Even many of our american families here have WAY more toys than their child can actually use. When we visit these families for play dates, it's pretty overwhelming for me and for DS.

When we go to kiwi families, there is sometimes less (sometimes not), but since they are steiner families, they are at least natural, open-ended toys rather than branded toys that make a lot of noise. I find those second kinds really overwhelming.

I also have to tell family to NOT send things. DS has too much clothing. I need to tell them to stop. I'm overwhelmed. And then toys. He has too many as far as I'm concerned, so I've told them not to send any. DH talks to his parents, and we make sure they send within our parameters as well. Mine are more likely to "rebel" and send him something anyway. I've gotten to the point now where we open them away from DS, and if we don't want it, we deliver it to the kindy for their fundraising (rummage sales).

I thank my mother for sending the items, though, and remind her that we don't need so much stuff and that it's overwhelming.