Any Financial or Savings Advice?

[statnerds]

very situation specific here. here are some details.

lost my job in November but had 12 weeks severance and unemployment compensation. the UC is 83% of what i used to make cause i had one real high quarter. my wife and i are looking to sell our house within the year.

a buddy called and offered me a job, not charity. our income would go by more than $1K/month. so my question is this:

am i better off throwing the extra in a savings account or putting it toward the principal on my mortgage. on the surface it looks like an extra $600 or $700 monthly on my mortgage would be like earning 5.875% on it. and after a year it would be more than 10% of my current mortgage paid off.

any thoughts?

[Boner_18]

Yeah so long as the mortgage rate is higher than the interest rate you would obtain from the savings you are better off putting it toward principal on the mortgage. Make sure you state in the payment "excess applied to principal."

If you suspect that you would have the mortgage for the life of it (which you don't since you are selling) you might want to save instead as the mortgage interest is likely deductible and under the right investment guidelines you could slightly outpace the 5.875% (which I assume is a standard 30/Fixed). This is what people call "good debt."

Also, if you have held the home for less than 2 years and think you will be selling for a gain I recommend staying in the home until the 2 year mark (must use it as you primary residence for at least 2 of the last 5 years) because then you can exempt gains up to 500k (married filing jointly) or 250k (married filing separately).

Good luck.

[Boner_18]

Oh and if you have credit card balances that is priority #1.

[rm18]

If you would of posted this yesterday you could of took Undertaker on the ML, but at this point don't know what to do

[statnerds]

thanks Boner

and you too rm, i guess.

been here 6 years now and priority #1 is paying off my Amex. figure that will take 4 or 5 months. after that will be able to put between $500 and $1000 toward the principle per month. owe just over $76K on it and figure i get minimum $110K based on recent home sales in our community. would really like to be able to have $40K+ for out r next down payment.

is it worth giving up the liquidity of having $5K in a savings acct to earn the 5.875% for 6 months?

[Boner_18]

Well if you don't have any savings then no, it's not worth it.

You should:
1. pay off CC balances (highest APR first)
2. build a savings that could carry you at a bare minimum 6mo., online savings accounts typically have the best rates, most even meet cd rates.
3. pay the principal down on the mortgage.

Again these aren't hard and fast rules. If your job market is more or less volatile you can build that liquidity cushion more or less... I tend to err on the side of risk and make it less. Another thing that could change the decision is how hard it would be for you to access a home equity line of credit... If you could do it really quickly then that makes paying off the mortgage NOT illiquid...

Just thinking about these things shows you are on the right track though.

[RageWizard]

I have to pipe in hear and say that Boner's advice is pretty spot on. The savings vs. paying more on the mortgage thing is a risk assessment in my view and can only be answered by how comfortable you are with your amounts of liquid or easily liquidated assets you have on hand, but absolutely pay the credit cards off first.

[mrmarket]

Getting advice is alright when your dealing with your finances but what you should be really doing is educating yourself. As the old saying goes nobody cares about your money as much as you do.

Here are two beginner books to get you started on the right foot.

1)The Wealthy Barber by David Chilton

2)Total Money Makeover by Dave Ramsey

They are both good but I would recommend Chilton. Ramsey has a religious bent but once you get passed that his advice on debt is straightforward and generally good (although not ideal as he advocates paying small debts off first vs. highest APR's due to the alleged psychological benefits).

You can't go wrong reading both though.

Long term paying the mortgage is probably best but it really depends on where you live and the conditions of the real estate market/economy there.

[statnerds]

thanks guys. solid, solid stuff from everyone.

will check out those books, if i can get one cheap on amazon or check my library.

as for personal risk/savings, we are slowly building our way toward a nice cushion. right now it is about 4 months if we both had no other source of income. and i am in total agreement that step one is getting this CC paid off. fortunately we only have the one. i am a staunch believer in avoiding car payments if i can and we both have our used cars paid off. paid our auto insurance for the year because it saved us $61 for the year. which is only $5 a month, but it is money.

thanks again for the advice. think as it is now i will concentrate on getting the CC down, and come up with an extra principal payment amount that will get us down to about $70K left on the house next May. thinking gonna list it for $124,900 and shoot for at least $115K. want at least $30K toward the next down payment.