Another "what would you do" Thread

[jeninejessica]

I always love seeing these, and how many responses they get, so it's time for one of my own.

DH and I are in a really good place financially, but we're trying to make sure it stays this way (and keeps getting better), especially since we're hoping that we'll be pregnant within the next year, and I'll go going on mat leave, and then not returning to work full time.

So here's our details... I'm working full time, I bring home on average about $1300 a month, this month it's about $2000, since we've got that extra payday in there DH just graduated, and is working both in his field, and at a part time job he's kept up. From now until the end of September, he will probably average about 100+ hours a paycheque, and then it will likely drop closer to 'normal'. We haven't figured out exactly what he'll be bringing home after taxes, but these next three months it'll be about $1400 probably, so $2800 monthly.

Brings us to a monthly average income of about $4000, since we'll round it down. Our fixed expenses (mortgage, phone/tv/internet, electricity, water, natural gas, house insurance) run us $1050 a month. Our variables are also running us about $1000, but easily should be lower than that (gas, groceries, house repairs, misc shopping). So we have expenses of about $2050.

So basically... in short, we've got an extra $2000 a month coming our way for at least the next few months. More if we can get our variable expenses down. We're trying to figure out what the best thing to do with it is. We have no outstanding bills, no credit card debt, we own our car outright, and we pay for our car and home insurance yearly. The house one will be due in September, for about $500, the car won't be until next May.

Our only 'payments' are a/ our home, which we have a silly 30 year mortgage on, and owe $107,000. We've also increased the equity in the home by about $30,000 since we bought it though. We pay $288 biweekly. And then b/ my husbands student loans, which are in two separate banks, but are about $6000, in at prime +1.5%, and we don't technically have to start paying back until November, and then next June for the second half, even though obviously we have been making payments.

We built our savings back up to $2000, and I feel comfortable with that, but my husband would like to keep increasing it. I'd rather throw money at the student loans. We're also trying to weight out the possibility of me being pregnant as early as next month, and taking mat leave in April. In my province, I'm paid out 55% of my wages for a year. Then I will essentially be without income, as I'll be staying home/doulaing for spare cash.

What do we do? What's the best balance between money in savings/ paying off loans/ putting money onto the house? I'm trying to think realistically that our overage won't likely actually be $2000, but it does have the potential to be. I just want to make sure we're using the money the wisest way possible, especially since we probably won't ever be in this position again.

Thanks in advance and sorry for being so longwinded!

[CrunchyChristianMama]

I would do the following...

1- Pay off the student loans ASAP. There's no sense having debt when you have the extra income that you have. Also, once you aren't working and the extra isn't there, it will be very nice to have one less bill each month.

2- Save up about 3-6 months worth of expenses in a savings account. This way when you are no longer working, you have something to fall back on should anything happen to your DH's ability to work. Especially with a baby potentially on the way, I would want that much cash to fall back on.

[jeninejessica]

So theoretically, you would put 50% of the 'overage' into each area? That's been the hardest decision. I would prefer to put almost 100% of it onto the loan, and DH wants to put more into savings, maybe 75% to savings, 25% to loan. I just always feel so silly looking at the bank and going Wohoo, we've got $2000 in there... but we owe $6000 that we're paying interest on.

[confustication]

Even if you split the 'overage' 50/50, the $6000 in loans will be gone in six months, and you will have about 3 months bare minimum living expenses saved. I am currently kicking myself for throwing my overage all at debt instead of into an emergency fund, as right now, the EF would be better than a low balance on the debt.

[annethcz]

I'd prefer to have a bigger emergency fund, personally. Once you've got 3-6 months worth of expenses, I'd start paying down the student loans aggressively.

[zinemama]

Your husband is right. You should put the whole thing into savings. $2000 is nowhere near enough as an emergency fund. One minor "emergency" could wipe that right out. You want to have 10K there, at the least.

Those student loans aren't very much, and it sounds as if you will be able to pay them off steadily and easily. Your savings should be top priority.

(Also curious why you refer to your 30-year mortgage as "silly")

[crunchy_mommy]

I would build up a bigger emergency fund -- based on your expenses, I'd say between $5K-10K, leaning toward $10K. In theory that would only take a few months to build up, then once you reach the agreed-upon amount, you can start paying extra on your loans.

I know techincally it "costs" more to put money in savings vs. paying off a loan with interest but if you have a real emergency & have to put it on credit, the interest would likely be much higher than the school loan. What if the boiler goes? What if the car needs a major repair at the same time, and your DH's hours get cut or he gets laid off, and you also need to start buying maternity clothes & baby gear? (Somehow things do often all happen at once like that!) Plus, I don't know how things work in Canada but in the US you can defer your student loans if you have a good reason.

Our income/expenses run very similar to yours, we have a slightly higher mortgage & school loans, but our savings/emergency fund is more than 10x yours... Of course in the US we don't get paid maternity so part of that is fallback because I'm hoping to quit my job once we have DC#2 (not yet pg but hoping to be soon!) All of your debt is "good" debt so while paying extra on it is great I would amp up those savings quite a bit before putting the extra to loans.

Originally Posted by zinemama

(Also curious why you refer to your 30-year mortgage as "silly")

This too -- I also HATE having debt & it's so tempting to pay everything off (and live with minimal/no savings) -- but if you think of your home as an investment, and the interest as an "investment fee" maybe that will help your perspective a bit (not that I'd advocate never paying any extra...)

[jeninejessica]

I just wish it weren't a 30 year mortgage. We should have gone with the 20, or even 25 year, but at the time we justified that we'd just take the extra money, and put it in one lump sum payment once a year or so. But of course you know how that goes! We're thankful that our payments are so low, but it sucks knowing that we've got yo uknow, 28 years left of paying on it. Yikes! It feels like we're not really getting any equity through our payments (though our home eval went up, thus we DO have equity, but not through our payments)

Thanks for the advice guys. That's what DH keeps advocating, I'm just having a hard time wrapping my head around it. I guess for the next few months we'll put $300 or so into the loan, and then dump the rest into savings.

Would any of your answers changed if we got a line of credit? Our student 'loan' is technically a line of credit, that stopped being usable once DH graduated. But we're very interested in going back to the bank and setting up a 'regular' line of credit for some extra security.

crunchy mommy-- I think we can defer half of our loans (government) but probably not the ones through the bank. But I mean, they're still not due until at least November anyways though...

[crunchy_mommy]

Originally Posted by jeninejessica

I just wish it weren't a 30 year mortgage. We should have gone with the 20, or even 25 year, but at the time we justified that we'd just take the extra money, and put it in one lump sum payment once a year or so. But of course you know how that goes! We're thankful that our payments are so low, but it sucks knowing that we've got yo uknow, 28 years left of paying on it. Yikes! It feels like we're not really getting any equity through our payments (though our home eval went up, thus we DO have equity, but not through our payments)

I do understand -- really -- but go easy on yourselves, you're just starting out! 28 years sounds like a long time but so would 23 years or 18 years if you'd gone with a shorter-term mortgage. If you make it a priority (not necessarily this month but this year, or next year, after you've built up savings) then you will have the chance to pay extra on it. In the meantime, lower payments buy you some security if something unforeseeable happens.

Originally Posted by jeninejessica

Would any of your answers changed if we got a line of credit? Our student 'loan' is technically a line of credit, that stopped being usable once DH graduated. But we're very interested in going back to the bank and setting up a 'regular' line of credit for some extra security.

Well then you'd just be setting yourselves up for another cycle of debt. Yes, it would give you some liquidity but you would pay interest on that should you need to use it... money in savings could gain interest (though the rates are so low right now)... I don't know, a line of credit is not for me, but yes, I suppose if you were guaranteed at least $10-20K then you could technically hold off on building the savings (though I'd still want to get the savings up at least to $5K, to at least cover little things like minor car repairs, baby expenses, etc. that you wouldn't necessarily want to tap into the credit for...

Originally Posted by jeninejessica

crunchy mommy-- I think we can defer half of our loans (government) but probably not the ones through the bank. But I mean, they're still not due until at least November anyways though...

So what about paying off the bank loans only for now? And hold off on the gov't loans?

ETA: I find that having substantial savings saves us a ton of money in the long run. If I see an amazing deal on non-perishable groceries, I can really stock up. I can buy lots of clearance clothes for DS that he won't wear for a couple years. I can buy a car in cash should either of our cars go kaput. I can make home repairs & improvements without paying interest. etc etc...

[jeninejessica]

We've been paying off just the bank loans, and essentially "ignoring" the government ones until November. Our plan was in November (once they entered repayment) so transfer those over to our line of credit, and keep paying both of them together... but then we got the letter in the mail that the line of credit is 'done' since he's graduated. We thought we had another year. I suppose now we'll continue paying off the bank ones until November... and then in November we'll have to switch and make the payments onto the government one, with any extras going towards the bank one. So confusing! I wish we'd had a chance to transfer the government one to the loc before it closed. The line of credit is interest only until next April (so less than $10 a month), and then will go into repayment in April. I was hoping to have that one completely paid off by then, but we'll see!

Theoretically, we could put $1500 a month into the savings, so have about $6500 in savings by the time DH's work slows down. At that point we'd probably switch to about 50% to savings/loan and then in Nov have to switch them the other way, and pay more onto the loan than the savings.

I honestly do feel better about this now. I even put $300 on the loan this morning, and told myself the extra money for the rest of the month will go into savings. I'm excited to see how much we can build.

[CarrieMF]

And then b/ my husbands student loans, which are in two separate banks, but are about $6000, in at prime +1.5%, and we don't technically have to start paying back until November, and then next June for the second half, even though obviously we have been making payments.

Because these are at prime + 1.5% I'd pay these off first as this interest rate will go up. It already would have gone up about a month ago.

[VisionaryMom]

Originally Posted by jeninejessica

I just wish it weren't a 30 year mortgage. We should have gone with the 20, or even 25 year, but at the time we justified that we'd just take the extra money, and put it in one lump sum payment once a year or so. But of course you know how that goes! We're thankful that our payments are so low, but it sucks knowing that we've got yo uknow, 28 years left of paying on it. Yikes! It feels like we're not really getting any equity through our payments (though our home eval went up, thus we DO have equity, but not through our payments)

You're getting a place to live out of your payments. That's really what you get in a normal market for the first few years. I think people get warped with the idea of a primary home as an "investment" vehicle. You have to live somewhere. Your mortgage apparently is really low, so you're doing fine with it.

[jeninejessica]

Oh no, I mean I am VERY glad that we bought instead of rented. Hands down, it was the right choice. I just feel like we could have taken the jump to a 25 year mortgage, and still been ok. But hey- can't changes things now. And at least we're 'earning' equity on it through increasing home value anyways.

[GuildJenn]

Originally Posted by jeninejessica

Oh no, I mean I am VERY glad that we bought instead of rented. Hands down, it was the right choice. I just feel like we could have taken the jump to a 25 year mortgage, and still been ok. But hey- can't changes things now. And at least we're 'earning' equity on it through increasing home value anyways.

We took out a 25 yr mortgage for 5 years fixed on our second home, but we pay accelerated bi-weekly payments + 10% so the principal went down faster. But here's what I really wanted to mention: When we went in to renegotiate at the 5 year mark we ended up with a 12 year mortgage. This was Scotiabank so... it's possible. I see you're in Canada so I'm assuming you have a 5 or 10 yr fixed term or similar.

For your original question I personally would do half and half but I can see the wisdom in more savings. I might consider, depending on the rest of your life, delaying getting pregnant a few months longer and have everything hunky-dory before you do, but there's likely no actual need to.

I was wondering why transfer the gov't loans to a LOC - I freely admit I don't know a lot about them but I thought they were below-prime rates?

[jeninejessica]

I'm hoping we can do just that, and renegotiate our term when our 5 years is up. We'll see. I mean I don't stress about it or anything, it's just one of those things that if I could go back and redo, I would you know?

The remaining goverment loan and our line of credit are actually both at the same interest rate. The half that is in the loc, we actually trasnfered there from a higher interest rate government student loan (half was federal, half was provincial, different interest rates). The portion that was at interest rate equal to the line of credit we left. Mostly, the idea of transfering them both was just because I have ocd and wanted the streamlined effect of having them all in the same place Also, the line of credit was easier for us to access for payments, information, statements etc, since it's bank based, I could just call them at any time and within a minute have someone on the phone who knew my account. In contrast, the govt loan, it was often 10 minutes on hold, and then they couldn't really tell you anything (or didn't know, because it was a call center), and there was no internet access to it either.

[VisionaryMom]

Originally Posted by jeninejessica

Oh no, I mean I am VERY glad that we bought instead of rented. Hands down, it was the right choice. I just feel like we could have taken the jump to a 25 year mortgage, and still been ok. But hey- can't changes things now. And at least we're 'earning' equity on it through increasing home value anyways.

Yeah, I get that. We also later thought we really could've pushed and gotten a 15-year mortgage. OTOH, we are having some major medical issues right now, and I'm glad the mortgage isn't higher. I just wanted to point out that you do have a place to live, which you'd be paying for no matter what. I think many people buy into the idea of investing with their home, and it's fueling some of the general frustration with the housing market right now.

We bought just before the bubble burst. The previous owners had our house 2 years, added a small deck, and walked away with $15K. Apparently they couldn't do math well because they thought they'd get $20K after realtor fees. They were upset that they "only" got $15k, but you know, they did nothing for that money. It was just this expectation that "I bought a house, so I should make something out of it."

[jeninejessica]

Oh I know. It's very interesting to watch people from afar. Our home was bought in 2000 for $62,000. The owners did NOTHING, I mean no paint, no flooring, nothing other than a new furnace and dishwasher, both were bottom of the line, we replaced the dishwasher last week, and the furnance probably within the next 5. But when they sold it to us in 2007 (with half-peeled wallpaper, stained flooring, and a basement from the 70's) they were disappointed with the $115,000 they got (private, so no realtors fees either), because they thought they could have gotten an extra $15000 easily if they'd put a coat of paint on and steamcleaned the carpets. They had almost doubled their money in 7 years, doing nothing-- and they were still complaining.

That said, our 'property value' when we bought at $115,000 was $86,000 and this year it was reassessed at $155,000. So I'm ok with that! The increase in taxes sucks, but c'est le vie! The bottom line is, if we sold for $155 tomorrow, we'd still get almost $45,000 in equity, even though we'd only paid about $3000 on the principal mortgage, and $5000 down. Can't argue with those numbers...