Extra/Future Use Money — Invest v HYSA

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Topic Author
Jd4travels
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Joined: Sun Aug 07, 2022 11:09 pm

Extra/Future Use Money — Invest v HYSA

Post by Jd4travels »

Background: My girlfriend and I bought a condo in 2022. After paying all the loans (car+house), IRA, Fixed and Variable expenses, we save more than 3k a month.
Plan: Our plan is buy our second house in 2029 (roughly 7 years from now).
Question: What is the best path forward?
Option 1: Pay 1500 in extra mortgage (The mortgage interest rate is 3%) or
Option 2: Invest in 3 fund portfolio (VTI, VXUS, and BND) for 7 years and then split half in downpayment and half in lump sum mortgage payment
Option 3: Keep depositing 3k each month in a HYSA (1.8% with SoFi)
We are not big into investing (that is we dont understand and can’t handle the pressure).
We also have nominal 401k (4% and 8%) and IRA contributions. We are holding off on maxing out 401k as we want to get one more property.
Thank you…!! PS: We are very thankful to this community.
wetgear
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Re: Extra/Future Use Money — Invest v HYSA

Post by wetgear »

Seems like you might be under saving for retirement but you haven’t provided enough information. Check out the “asking portfolio questions” sticky for the suggested format and details. Without that though it’s probably best to max out your 401k and IRA before doing anything else.
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nisiprius
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Re: Extra/Future Use Money — Invest v HYSA

Post by nisiprius »

According to an economist, bobcat2, who posts fairly regularly here, "savings" means "money you didn't spend," and "investment" means "what you do with the money you saved." By those definitions, a bank account is an investment.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Topic Author
Jd4travels
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Re: Extra/Future Use Money — Invest v HYSA

Post by Jd4travels »

wetgear wrote: Mon Aug 08, 2022 8:33 am Seems like you might be under saving for retirement but you haven’t provided enough information. Check out the “asking portfolio questions” sticky for the suggested format and details. Without that though it’s probably best to max out your 401k and IRA before doing anything else.
Hello,

I reviewed the sticky and couldn’t understand how it is applicable to my post. I am just confused about which option to choose:
1. Use the extra money to split into two — Pay down Mortgage and save for second house (which we are planning to buy in 7 to 9 years) or
2. Use the extra money and invest the whole amount every month for next 7 years (using 3 fund portfolio) and then use the earnings from investment for down payment on the second house.

Our goals are:
1. To buy a second house after 7 years and
2. To pay down the current mortgage sooner (preferably in 15 years)
Currently we have around 3k in extra money per month. We are trying to figure out which makes the most financial sense to achieve our goals.
wetgear
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Re: Extra/Future Use Money — Invest v HYSA

Post by wetgear »

On a long enough timeline there’s a very good chance (historically) you’ll have more money by investing but 7 years is too short a term for much confidence in that. There is a very real chance you’ll be down after 7 years so you’d have to ask yourself if you feel lucky and what you’d do in the situation where you were down when you wanted to purchase your next house. It does seem in general that your strategy isn’t quite hashed out thoroughly and you should be focusing on your retirement instead of your next house though.
tashnewbie
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Re: Extra/Future Use Money — Invest v HYSA

Post by tashnewbie »

It's unclear what your total portfolio and net worth looks like, and that would be helpful in offering advice, which is why I think @wetgear directed you to the "Asking Portfolio Questions" sticky post.

It may be completely untrue, but it sounds like you're very focused on accumulating rental property, perhaps at the expense of saving for retirement. But it's impossible to know for sure without further details such as your ages, total amount saved for retirement, etc.

I agree that 7 years may be too short to take on stock market risks for planned spending in 7 years. You'll have to figure out your risk tolerance and how you would handle either not having enough for the down payment or waiting longer to make the purchase. You should probably plan as if you could lose 50% of the value of your stock holdings at any given time. Therefore, if you have 100% of the extra money invested in stock funds, you may only have 50% of the value when you need it. How would you handle that? You shouldn't have more in stock than you can afford to lose in your 7-year time horizon.

At least for the short term, I bonds have a very juicy interest rate due to the inflation component. No telling how long that really good deal will last. Might be worth considering maxing them for 2022 and 2023 ($10k per person, but there are other details). Check out the I Bonds Mega thread for more information.
Topic Author
Jd4travels
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Re: Extra/Future Use Money — Invest v HYSA

Post by Jd4travels »

wetgear wrote: Tue Aug 09, 2022 7:30 pm On a long enough timeline there’s a very good chance (historically) you’ll have more money by investing but 7 years is too short a term for much confidence in that. There is a very real chance you’ll be down after 7 years so you’d have to ask yourself if you feel lucky and what you’d do in the situation where you were down when you wanted to purchase your next house. It does seem in general that your strategy isn’t quite hashed out thoroughly and you should be focusing on your retirement instead of your next house though.
I agree with what you said - “my strategy is not hashed out”. We will give more information in my post based on sticky.
Topic Author
Jd4travels
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Re: Extra/Future Use Money — Invest v HYSA

Post by Jd4travels »

tashnewbie wrote: Wed Aug 10, 2022 8:52 am It's unclear what your total portfolio and net worth looks like, and that would be helpful in offering advice, which is why I think @wetgear directed you to the "Asking Portfolio Questions" sticky post.

It may be completely untrue, but it sounds like you're very focused on accumulating rental property, perhaps at the expense of saving for retirement. But it's impossible to know for sure without further details such as your ages, total amount saved for retirement, etc.

I agree that 7 years may be too short to take on stock market risks for planned spending in 7 years. You'll have to figure out your risk tolerance and how you would handle either not having enough for the down payment or waiting longer to make the purchase. You should probably plan as if you could lose 50% of the value of your stock holdings at any given time. Therefore, if you have 100% of the extra money invested in stock funds, you may only have 50% of the value when you need it. How would you handle that? You shouldn't have more in stock than you can afford to lose in your 7-year time horizon.

At least for the short term, I bonds have a very juicy interest rate due to the inflation component. No telling how long that really good deal will last. Might be worth considering maxing them for 2022 and 2023 ($10k per person, but there are other details). Check out the I Bonds Mega thread for more information.
We are not planning on accumulating rental properties. We have a townhouse; we really like our community so we want to keep this in the long run. However, as we grow, we would like to buy a stand alone house as well. Also, giving up on retirement to buy a house, we agree but the reason behind that is we are on work visa and it seems like it will take us atleast 10~15 years to get GC but we can’t keep postpone the planning so we will start reading that section on bogleheads wiki. But for now we will work on updating the post with the information in the sticky.
professor_americus
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Re: Extra/Future Use Money — Invest v HYSA

Post by professor_americus »

You are going to need liquidity for the hypothetical future property purchase. I'd advise against aggressively paying down current townhome at 3% loan rate. Where/how to invest the extra funds is a different topic.
sailaway
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Re: Extra/Future Use Money — Invest v HYSA

Post by sailaway »

This is right on the edge of a long term investment. Personally, I would buy according to my AA and make a new decision 7 years from now when I see how those investments have done and how my own priorities have adjusted.
tashnewbie
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Re: Extra/Future Use Money — Invest v HYSA

Post by tashnewbie »

sailaway wrote: Wed Aug 10, 2022 12:37 pm This is right on the edge of a long term investment. Personally, I would buy according to my AA and make a new decision 7 years from now when I see how those investments have done and how my own priorities have adjusted.
I think this is probably what I'd do, too, and would just accept the possibility that I might have to extend my purchase timeline.

OP: It may not make sense to hold onto the townhouse when you decide to buy another house. If you don't sell it, you either would leave it vacant (probably not a great idea) or would have to rent it (you would be a landlord). A lot of people seem to sell their current houses and use that equity to make the down payment on a new house. I would be planning to do that and would invest the extra monthly money according to my regular asset allocation (AA).
wetgear
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Re: Extra/Future Use Money — Invest v HYSA

Post by wetgear »

tashnewbie wrote: Wed Aug 10, 2022 1:17 pm
sailaway wrote: Wed Aug 10, 2022 12:37 pm This is right on the edge of a long term investment. Personally, I would buy according to my AA and make a new decision 7 years from now when I see how those investments have done and how my own priorities have adjusted.
I think this is probably what I'd do, too, and would just accept the possibility that I might have to extend my purchase timeline.

OP: It may not make sense to hold onto the townhouse when you decide to buy another house. If you don't sell it, you either would leave it vacant (probably not a great idea) or would have to rent it (you would be a landlord). A lot of people seem to sell their current houses and use that equity to make the down payment on a new house. I would be planning to do that and would invest the extra monthly money according to my regular asset allocation (AA).
You also lose the great tax break if you ever do decide to sell the townhouse.
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