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Contributor

I am looking to make some financial decisions.

Current situation:

My husband and I are in our early 30's.

I am the sole income for a household of 3. (and it looks to remain that way).  I make about 70k/year.

I have about 70k in my retirement account, and 65k in my husbands' account.  I currently add about $750/month to my account.  My husbands account will have no more contributions.

I will have a military pension.  I plan on retiring as a CWO3 at 20 years. (7.5 years from now).  My second career is not locked on yet.

We have 35k saved.  Most of that is in stocks, some in the savings account.  We havent added anything to it in years.

We have two houses.  One, worth about $115k, was bought in 2007 and has $8,000 left before we pay it off.  (we bought it for $127k.)  We pay an extra $1300/month towards the equity so we can pay it off early.  We currently get about $800/month in rental income for this house.

The other house was bought this year for $167k, and is worth about $200k.  We are not making extra payments on this house. We are spending quite a bit fixing it up and decorating it.  We plan on keeping this house long term, renting it out when we move again.

Cars are paid for, but one is old, I expect to have to get a different one within the next couple of years.

 

So here are my questions-

-Should I be contributing that much to retirement?  Or should I be saving more somewhere else?  I don't want to have all of my money locked away until I'm in my late 60's.  Investing this amount of money has been recommended to me, but currently I am not being able to add to my other savings, so I want to ensure I am putting my money in the right places.

-I would like to start graduate school very soon.  I have tuition assistance and a GI Bill, but I would like to not use the GI bill, so I can give it to my child.  Taking classes will cost about $1100/ month.  Once I pay off house #1, most of the money can come from those freed up funds.  Should I do that?  Should I get a school loan?  Should I invest that money somewhere else?  I am going to need to boost my income, as I have been spending more than I have been making.  I know paying off the house #1 will free up money.  So I am thinking about taking the $8k out of an account so I can be done with that, so I can have more monthly income to look at.  I need to ensure I am making choices so I know I am not moving out more money than I have coming in, right now and for the future.

 

PLEASE help.  Send advice!

 

2 REPLIES

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Seems like you have a head on your shoulders. Congrats btw own your DTI finances. We also have two houses paid for 100% and now look at maximizing financial matters. One would think that having no debt is great, well sort of, the houses aren't liquid so banks don't really like them. (They are just getting over a big housing headache). 

 

  As towards graduate school: With your large equity stake in real estate and money accounts, I'd stay away from the student loan option. Student Loans are like taxes. No matter what happens in your life, they will come get what you owe them. For students starting out, they aren't risking much because they don't have much. The government is risking that these students will get jobs. (not working out so much). So, with that in mind, move some cash assets into a 529 for your graduate school. Basically, you are going to self fund your school with tax advantaged accounts. Secondly, I've found tuition is not the most expensive part of school. Room and Board is. In your situttion, you might want to liquidate one house for a house in the college town you wish to goto. It's common these days that these houses are seperated with ensuites in each bedroom. Then you rent out the rooms to students PER room. Basically you have each tennant sign a lease for their room. We do this with our son, we get about $600 per room. Typically, they students pay for utilities, etc... and there is a great company called simplebills.com that split utilities between roomates. So if one doesn't pay the others aren't affected with utility cut offs. We however, pay for cable, internet, and give a $100 credit towards gas and electric. Mainly because our son is in one of the rooms so we earn a little and he gets free room and board. Given you circumstances tho, I'd get a good rental property with amenities maybe a 4 bedroom. Rent it out at $600 per room and since you will have lots of equity already because of a large down, the rental might pay for most of your graduate school. Your Cap Rate should be at about 10% in this scenario. Lets assume the worse, 50% occupancy, gross would be $14,000 per year to $28,000 per year at 100% occupancy. Taxes, insurance, and HOA's, and maintenace will eat that down to $7,000 to $14,000. P.S. Make sure the renters purchase rental insurance, put it into the lease. Have parents sign as co-signers. Yea, it's a headache but it's what graduate students do. :P 

  The great thing is you'll depreciate that property on your taxes to offset income. Plus get to keep any gains in value upon sale. 

 

The great thing for you is you're in a position to self finance your Graduate School without really costing you much. If your employer is helping with Graduate Shool, then you will come out ahead. You will be making money to goto school. If your husband is handy you will even save on maintenance. 

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Congrats on having a good handle on your finances. Living within your means and saving regularly are absolutely critical to achieving financial security. I can't address every aspect of your post, but I'll throw out some top suggestions.

 

  1. If your "retirement" accounts are something like a 401(k), 457, 403(b), etc. then you should absolutely be maxing these investment vehicles out before anything else. This is fantastic tax-advantaged space that you miss out on forever if you don't take full advantage of each year.
    1. Related to this, you can absolutely access your retirement money before you reach the age of 59.5. There are several different ways to do it. See this article as a start.
  2. Get that spending under control! You have to live within your means.
  3. I'd recommend looking hard at the numbers of those rental houses to make sure they make sense. Using the quick 1% rule of thumb it doesn't look like your rental is a good investment. If you can't up the rent to make it a viable investment then consider selling it and putting the proceeds into something like a total stock market index (VTSAX). If you really like the idea of being invested in real estate, you can invest that money in a REIT and get better returns with zero management work.
  4. FInally, this list is long-ish, but this is very comprehensive in answering the question of what you should do with your money, in what order, and why. I'll copy an exerpt below in case folks are too lazy to click on a link. :)

WHAT            
0. Establish an emergency fund to your satisfaction            
1. Contribute to your 401k up to any company match            
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield (~2% currently).     
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level            
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)            
6. Fund mega backdoor Roth if applicable            
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.            
8. Invest in a taxable account with any extra.            
            
WHY            
0. Give yourself at least enough buffer to avoid worries about bouncing checks            
1. Company match rates are likely the highest percent return you can get on your money            
2. When the guaranteed return is this high, take it.            
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.            
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between. See also Traditional versus Roth.
   See Credits can make Traditional better than Roth for lower incomes and other posts in that thread about some exceptions to the rule.
   The 'Calculations' tab in the Case Study Spreadsheet can show marginal rates for savings or withdrawals.
5. See #4 for choice of traditional or Roth for 401k            
6. Applicability depends on the rules for the specific 401k            
7. Again, take the risk-free return if high enough            
8. Because earnings, even if taxed, are beneficial