Invest... or save? Age/Goal-Based Ponderings...

[Trying2getAhead]

Hi everyone

I have an age & goal based question, because I am torn about what direction to (temporarily) take my financial endeavors in.

I am a 25 year old, married, with an income of approximately $37,000. Up to this point I have been investing, heavily (16% of every paycheck, coupled with 25% of every paycheck directly into savings) into my 401(k) offered by my employer, of which they match 4% of my contributions. My wife and I are dead-set on building a home in 3 years, and have already set a myriad of other actions into effect during the past 2 years to get us to that point. (We have immediate family member(s) in the building trade, who have already built homes for other family members with mind blowing results and savings vs.. hiring a regular contractor, which further exaggerates our tenacity to build within 3 years).

My question is, after seeing our situation/age/income, would it be more advantageous to continue saving at such a breakneck speed and delay building a home even further, or taking my young age into consideration the the decades I will surely have to contribute to my 401(k) on a higher level after our primary goal of construction is realized. We are already home owners, and are using that property as an investment in order to build ongoing equity and stability to use towards our future property purchase to build on. (The savings in not investing at all into the 401(k) would move us within inches of our financial benchmark we must realize before breaking ground on our new home... but will open us up to risk by missing the next 3 years of POTENTIAL stock-market/mutual-fund profit increases that COULD have grown my portfolio).

Thank you so much for your consideration and thought, I greatly appreciate it!

[1time2many]

You are in a great position, you are young and focused and you are to be commended.

Any matching funds you get in a 401 cant be beat, I would leave those contributions as they are.

You say you now own a home, and you are putting 25% in a savings account........this is a good stratagy but the downside to it is the banks are paying next to nothing on savings accounts.....If you do not own your home outright, the best thing you can do with the savings is to pound the hell out of that mortgage.

This will give you a better return on your money now and still build the liquidity you will need to build that future home.

With the economy uncertain as it is, I would not bank on any future increases as most stocks are still overvalued at this time, it is the financial sector that has propped up the market and I see weak earnings for the near future until the job market rebounds, which will take several years at this pace.

You are getting at least a 40% return on your 401K at the moment and with your age you will do great as long as you keep it going.........20 years from now you will see the complete benefits of compound interest.

I would just look at the upside of using the savings to pay the current mortgage down.

[Trying2getAhead]

Originally Posted by 1time2many

You are in a great position, you are young and focused and you are to be commended.

Any matching funds you get in a 401 cant be beat, I would leave those contributions as they are.

You say you now own a home, and you are putting 25% in a savings account........this is a good stratagy but the downside to it is the banks are paying next to nothing on savings accounts.....If you do not own your home outright, the best thing you can do with the savings is to pound the hell out of that mortgage.

This will give you a better return on your money now and still build the liquidity you will need to build that future home.

With the economy uncertain as it is, I would not bank on any future increases as most stocks are still overvalued at this time, it is the financial sector that has propped up the market and I see weak earnings for the near future until the job market rebounds, which will take several years at this pace.

You are getting at least a 40% return on your 401K at the moment and with your age you will do great as long as you keep it going.........20 years from now you will see the complete benefits of compound interest.

I would just look at the upside of using the savings to pay the current mortgage down.

Thank you SO MUCH for chiming in! I'll hit your 'rep' button after this post. I greatly appreciate some thoughtful insight, as you have provided.

I think you're 101% dead-on point with your mortgage advice, paying off our current home as much as possible is only going to get me in the right direction - fast. (Although, many out there, supposed experts, advise people not to pay off mortgages because in 15 years when they own their home, 'example-B' as their friend 'Bob' used the extra devoted mortgage payments to in stead invest heavily in his portfolio and realized a massive gain over the decade(s) opposed to the plan to pay off your home early.)

One thing I do have a question about, is your '40% interest' point in your final paragraph... did you mean 4%? The stock market and mutual funds, historically, have returned a steady (averaged) 3-6% return since the Great Depression's rebound, you cited something 10x more than that - if I could get 40% return, I'd retire tomorrow at 25 years old!

Thanks again, I'd love to hear more of your thoughts and anyone else's as well!

[1time2many]

It was based on the auto 4% match you get on a varible of 10 as that is what most put in even though you stated you are at 16%.

If you only put in 4% you would be at a 100% return as soon as your money transfered, so based on the 10% varible the extra 6% is not matched which = a 40% return just from your employer the other is just icing on the cake and will add up fast if interest rates rise as they will in the coming months.

"(Although, many out there, supposed experts, advise people not to pay off mortgages because in 15 years when they own their home, 'example-B' as their friend 'Bob' used the extra devoted mortgage payments to in stead invest heavily in his portfolio and realized a massive gain over the decade(s) opposed to the plan to pay off your home early.)"

What happened yesterday does not always hold today...........all I am saying is right now the banks are paying you bubkus on your savings, but you are paying them dearly on your mortgage interest.....kinda lopsided right now and the banks are loving this.....so why not reverse the role and kill the interest on the mortgage by paying up, at least your savings will acctualy earn some money this way by killing the mortgage interest and you would always have access to it while reducing your debt and the high cost of what a mortgage true cost are.

A person buys a 200k house at 7 % on a 30 year payoff , that same house will have cost over 470k not including all the other associated expenses, and there is no way to tell if that money will ever come back should the owner sell at the end of the 30 years, so you payed the bank over 270k to borrow 200k.

I did what you are doing, I worked for the Fed gooberment for 20 years, I maxed it all out (but in a better market) and I retired @ 38........that was 8 years ago......life is good. Just keep the debt load down unless you want to go longer....I hated my job, well not the job, but the numbnuts who wasted billions just because they could.

[unusualsuspect]

You're saving, which is a good thing...

Since the US economy has been in the dumps, I've been ultra defensive since 2007 (and probably will be until 2011).

I have a 48 month rolling CD ladder going right now because the bank rates are pathetic.... mine is 3/6/12/24/48. Most of the money is short money (60% under 12 months) and the rest is out 24 and 48 months.

[Trying2getAhead]

Originally Posted by 1time2many

It was based on the auto 4% match you get on a varible of 10 as that is what most put in even though you stated you are at 16%.

If you only put in 4% you would be at a 100% return as soon as your money transfered, so based on the 10% varible the extra 6% is not matched which = a 40% return just from your employer the other is just icing on the cake and will add up fast if interest rates rise as they will in the coming months.

"(Although, many out there, supposed experts, advise people not to pay off mortgages because in 15 years when they own their home, 'example-B' as their friend 'Bob' used the extra devoted mortgage payments to in stead invest heavily in his portfolio and realized a massive gain over the decade(s) opposed to the plan to pay off your home early.)"

What happened yesterday does not always hold today...........all I am saying is right now the banks are paying you bubkus on your savings, but you are paying them dearly on your mortgage interest.....kinda lopsided right now and the banks are loving this.....so why not reverse the role and kill the interest on the mortgage by paying up, at least your savings will acctualy earn some money this way by killing the mortgage interest and you would always have access to it while reducing your debt and the high cost of what a mortgage true cost are.

A person buys a 200k house at 7 % on a 30 year payoff , that same house will have cost over 470k not including all the other associated expenses, and there is no way to tell if that money will ever come back should the owner sell at the end of the 30 years, so you payed the bank over 270k to borrow 200k.

I did what you are doing, I worked for the Fed gooberment for 20 years, I maxed it all out (but in a better market) and I retired @ 38........that was 8 years ago......life is good. Just keep the debt load down unless you want to go longer....I hated my job, well not the job, but the numbnuts who wasted billions just because they could.

THANKS again, what an awesome post. I am glad you responded.

You're point about mortgage, especially when looking at the cold hard mathematical facts, can't be denied or ignored. Phew, I have a 5% mortgage, and I'm earning at BEST .5% on my savings - LOP SIDED INDEED!!!

*So with our specific goals, in 3 years, if we put extra amounts towards our home's principal, would that be the approach your advocating since we'd be able to draw on that equity when construction begins by taking out a HELOC, or would it be better to simply take out a second mortgage?

PS: Were you in the military? That's what I would surmise... just asking.

[Trying2getAhead]

Originally Posted by unusualsuspect

You're saving, which is a good thing...

Since the US economy has been in the dumps, I've been ultra defensive since 2007 (and probably will be until 2011).

I have a 48 month rolling CD ladder going right now because the bank rates are pathetic.... mine is 3/6/12/24/48. Most of the money is short money (60% under 12 months) and the rest is out 24 and 48 months.

CD's are better than a normal, bland, no-return savings account... but I don't like having all that money tied up for a couple years; all for 2.5% interest. I took out a CD a few months back for a couple years at the 2.5%, and I don't think I can reinvest into the CD during that time - ugh!

[jq26]

Great thread. Trying, you should be commended. Many others that are similarly situated claim they can't save a dime. Obviously you are proving them wrong in a big way. Keep it up. You're way ahead here.

My recommendation is to place 4% into the 401k to receive the 100% match. Giving that up would be counterproductive. That's where I would leave the 401k.

After that point, pay down your mortgage. Your tax bracket implies a 15% taxable income rate. Paying down your mortgage locks in a 4.25% return. You can't get a post tax return of 4.25% anywhere right now.

If you feel like you still want to save more for retirement, then I'd go with a Roth IRA for the same tax reasons. It would behoove you to tax the funds now and then let them grow tax free forever for a variety of reasons (low tax rate now, social security taxation issues, etc.)

The example 1time2many gave below about not paying off the mortgage is also true, but not in your case. You are saving for a home. Thus, you need 100% safe money. Over long periods of time (not applicable to you), paying off a mortgage isn't really a good investment strategy due to inflation and tax implications. You'd be better off slowly paying down low interest "good debt" while using the monthly delta to buy appreciating assets. Your liabilities will slowly diminish while your assets will grow at a faster rate. The spread between your assets and your liabilities is your net worth (ie "personal equity"). Over long periods of time, that's what you're shooting for and that's what 1time2many was correctly articulating. Of course, it is always prudent to hedge your bet and pay off some extra mortgage principal as well. But it shouldn't be a priority.

Keep up the good work. It is impressive! Know that all the little sacrifices you are making now to bolster your savings rate will pay off in multiples down the road.

I edited to add that the advice given is financial in nature. You also have to factor in your personal goals and situation, which only you can do. If the "lost growth" in your 401k allows you to realize a wonderful environment to raise a family, then maybe this intangible favors building the home sooner rather than later. Some things can't be measured with a financial yardstick.

[Trying2getAhead]

Originally Posted by jq26

Great thread. Trying, you should be commended. Many others that are similarly situated claim they can't save a dime. Obviously you are proving them wrong in a big way. Keep it up. You're way ahead here.

My recommendation is to place 4% into the 401k to receive the 100% match. Giving that up would be counterproductive. That's where I would leave the 401k...

*W-O-W...

Thank you, very much! Awesome, very well written and thoughtful post! *repped

I'm putting it all into motion asap! I am changing my 401(k) contributions from 16% to 4-5% tomorrow on the 3rd when the option is available to me.

BIG SAVINGS! After the home is built, Summer 2012, I am going to re-ignite my 401(k) with some INTENSE ferocity!