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House Down Payment vs. Kid's College Fund

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House Down Payment vs. Kid's College Fund  Reply with quote  

Hello all - first-time poster here!

My father recently passed away and left me everything he had. With everything said and done (all property sold, bills paid), I have about $145k. With this money, I'd like to get a few financial goals kick-started.

To summarize my situation:

    Family: My wife and I are in our early 30's with a 1 year-old and plan to have another one.

    Income: House-hold gross income is about $80k. (Single income for now... My wife plans to start working in 3~5 years once we're done having kids and they're not infants anymore. This would add about another $40k.)

    Retirement: Pre-tax contributions total about 13% of gross income, and currently have about $40k in a combination of 401(k) and ESOP.

    House: I owe about $180k on a house currently worth about $200k.

    Debt: Other than mortgage... $0

    Cash/Savings: As mentioned above... about $145k

I know that I want to have about 4~6 months worth of expenses stashed away for an emergency fund. This takes about $20k away from the $145k, leaving me with $125k for my other goals, which are Buying a New Home and Starting a College Fund for the kids.

My dilemma is how much should I put towards each of these goals?

I know we could buy the home that we'd be very happy with for between $250k~$275k. Selling our current home would likely leave us with another $5k~$7k after closing, I estimate.

Should I put more towards a new home to improve my cash flow and perhaps allow me to save more per month for College Funds and other investments? Or should I shot for "Fully Funding" the College Fund allowing very little to no contributions made to it, and stick with a higher mortgage payment?

My current thought is to go more heavy on a down payment for a new home. I'm currently thinking about $90k down on a home, and about $30k to start off the College Fund.

I would appreciate hearing other people's thoughts on this matter. Thanks!
Post Fri Aug 09, 2013 5:57 pm
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Here's what I would do -

Keep your 13% investing - but I would stop ESOP and put it all in the 401k.

Make a minimal down payment on the new house - get the largest 30 yr fied rate loan that you qualify for. US mortgages are close to the cheapest capital in the world, no other nations, no other loan types will give the average guy a large 4% loan wit a 30 year term, fixed rate. Use that capital to your advantage - ie, put your own income stream to its highest and best use, don't squander it to prepay inexpensive longterm debt.

I would avoid both the college fund and the $20k EF (Yes, I know that all the financial planners like big EFs). We cap our EF at about $5k. And we put two kids thru college w/o having a separate college fund.
Two reasons on the college fund - you can easily borrow inexpensive capital for college - but you cannot borrow for retirement, you have no income then. (2) The retirement plans haven't been lasting for a full 18-yr-kid cycle anyway, it will have different rules by 2030.

Instead, open a taxable account at a no-load company (such as Vanguard or Fidelity). The money grows tax deferred, it is immediately available, it is not tied to age 59 1/2, it will be your Fallback EF, college fund, small businesss fund, early retirement fund, etc. This money can be placed at 8% to 11% ($20,000 at zero return is too much 'dead' money IMO).
Post Fri Aug 09, 2013 10:17 pm
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While student loans suck and it's a burden for someone young and just out of school it's not the end of the world. It's part of life. I had them and I survived. In fact mine were at a rate of 3 or 3.5% so I defered them as long as possible and paid the absolute minimum.

Don't get me wrong I'd have loved to have NOT had any loans but now that they're paid off (a little over a month ago) it feels great. Sure you can say that if I invested that money instead I would've been so much further ahead in terms of retirement/savings... but honestly in my mid-twenties I wouldn't have saved it. I'd have blown it on a car or something equally stupid.

Just my $0.02.

Although I think it's awesome that you're trying to pay for your kid's school.
Post Wed Aug 14, 2013 2:02 pm
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My wife and I have a 2 year old and we started a 529 plan when he was born and what's been nice is our families contribute to it each year for birthday's, christmas, you name it. We contribute $100 monthly ourselves. Depending on the state you live in there are tax advantages if you go with your states plan. Unfortnately Minnesota doesn't have any such tax plan so we went with the UESP in an aggressive growth type fund that we can manage.
Make note though they we don't plan to pay entirely for our children's college, we both feel it necessary they learn to manage money well while under our roof and to work hard and to save money for college. In addition while they are going to school they will be working jobs as we both did and to apply for scholarships of every shape and size. Anyone can get a scholarship if I can and I was only a B student.
As for the remainder of the money, I would use it as a huge downpayment on your mortgage. I mean why tie up all of your disposable cash paying a monthly mortgage. Get your mortgage where it's no more then 25% of your gross income and I guarantee you'll have tons of extra spending cash to invest and give with.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed Aug 14, 2013 2:54 pm
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Wow, thanks for your stories! We're going to save money for our son for college, and your stories helped us come up with a plan of action. Based on the calculations of the cost of training here https://www.prepler.com/college-loan-calculator, we have roughly presented the final amount, taking into account possible inflation and higher training costs.
Post Sat Aug 29, 2020 12:50 am
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