33, new house, kids soon - please review my options

[OEP1990]

Personal details

Age: 33
Spouse’s/Partner's age: 33

Number and age of children: None yet, but hope to have 1 this time next year and probably a second


Income and expenditure
Annual gross income from employment or profession: 100,000
Annual gross income of spouse: 50,000

Monthly take-home pay: 3800 me, 2900 spouse

Type of employment: Me Private, spouse civil servant

In general are you:
(a) spending more than you earn, or
(b) saving?
Saving, having just emptied a lot of our savings on the new house


Summary of Assets and Liabilities
Family home worth €450k with a €405k mortgage
Cash of €20k
Defined Contribution pension fund: €90k
Company shares : €36k
Other stocks: €20K


Family home mortgage information
Lender: PTSB
Interest rate: 3.1%
If fixed, what is the term remaining of the fixed rate? 5 years

Other borrowings – car loans/personal loans etc

None - but need to see if we can buy another car with cash or need some finance

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card?


Other savings and investments:

Do you have a pension scheme? Yes, I pay 20% + 12% from employer with current fund value of 90K

I get a 12% bonus each year, not guaranteed but have always gotten it so far. I can use that bonus to buy approx 7K in company shares, that if I hold for 3 years, I don't pay income tax only USC and PRSI. I also forgo salary to buy company shares under the same conditions i.e. hold for 3 years for no income tax. Revenue sets a total limit on this of, 12K (total - bonus + forgone salary) or thereabouts. This year is the first year I will be able to start selling shares, and I intend to sell the maximum amount every year from here on in. These shares also get a dividend of about 4%.

My other stocks of 20k - I was interested in investing and trading so started buying stocks when I started working. These stocks are mostly high risk and tech orientated - so got decimated in the latest correction. I know, and have learned, all the caveats about stock picking and don't do this anymore but I would like to hold onto them as there are some stocks in there that I believe will recover strongly - I like having a couple of bets that could turn into 3x+ investments. As I don't need this money, I want to keep them to see what happens.

What specific question do you have or what issues are of concern to you?

I want to overpay on the mortgage and can afford to overpay by about max 500 per month - while still being able to save some money. Is this a good idea?

I'm trying to think what's the best thing to do when I sell my company shares each month, assuming it's not needed for emergency or big purchase. I was thinking either use it to pay a lump sum off the mortgage (depending on breakage fees / end of fixed term) or investing it in some fund or ETF (I'm aware of tax implications here so don't need to go into that). Any thoughts here?

Is income protection a good idea? My pension provides disability benefit of 53k p.a. and 390k death in service, I do not know the Ts&Cs associated with that.

Any other thoughts? Long term goal (dream) is early retirement (isn't it everyone's!)

 

[Pinoy adventure]

Maybe off load the company shares and reduce the mortgage by the same amount.

 

[_OkGo_]

We are a couple of years ahead of you, 1 child in and expecting the second with joint income ~€190k. So from my perspective, the most important thing for you over the next 5-10 years is cash flow!

Ahead of our first child, we aggressively paid down our mortgage (keeping the term) while maxing pension contributions.

We also made the decision to prioritize as much unpaid maternity leave as possible so we are currently building a reserve for that for when #2 arrives. Luckily my spouse's salary is fully topped up for the initial paid 26 weeks

When you finally hit unpaid maternity leave and then return to work with a mortgage and creche fees, it can put a lot of pressure on monthly finances. Luckily the NCS has increased so the childcare fees are less painful this year.

I can use that bonus to buy approx 7K in company shares, that if I hold for 3 years, I don't pay income tax only USC and PRSI. I also forgo salary to buy company shares under the same conditions

This is good, you've done the hard bit by investing for 3 years and now it will be a sizable net sum every year as you sell. Don't be tempted to risk them by holding longer. Sell and use all proceeds to reduce the mortgage

My other stocks of 20k - I was interested in investing and trading so started buying stocks when I started working..............I like having a couple of bets that could turn into 3x+ investments. As I don't need this money, I want to keep them to see what happens.

This is bad and really poor logic. It is literally a gamble that you can't afford. Because you are borrowing at 3.1% , these share are costing you this (net) every year you hold them. And worse if you borrow for a car, they will be costing you >6%. Even if you are lucky and those shares double, after cgt, your net profit is eroded by the net cost of borrowing leaving you back at square one.

It would be a far better use of that €20k to either reduce the mortgage, buy the car outright, fund maternity leave or just max pension contributions. It means your monthly outgoings are much lower without a car loan on the slim hope that you've picked a winner. You can also carry forward any loss for cgt if they are currently below what you purchased them for.

Any other thoughts? Long term goal (dream) is early retirement (isn't it everyone's!)

Use your pension to fund retirement and use everything else to make life a bit easier for what is typically the most expensive stage of your life... mortgage and kids

 

[noelÓm]

Hi OEP,

You have a great income and that's allowing you to carry a moderately high level of debt. If you can maintain your current level of income and you keep spending grounded, then you'll be absolutely fine. It's worth thinking though about what you would do if the economy took a turn and you got a pay cut or lost your job. Also, a 10% decline in house prices would put you in negative equity [(405/(450*0.9))=100% LTV]. And if you or your partner took a career break when Babies 1 and 2 arrive or if you suffered a pay cut, then your finances would start to look a lot less rosy.

I think it is wise to cut your mortgage balance now while your income is so good and you don't have the added expense of kids just yet. You could consider keeping the loan term the same and letting the monthly repayments fall. I would also consider getting income protection insurance to cover a situation where you in particular were unable to work due to illness.

I want to overpay on the mortgage and can afford to overpay by about max 500 per month - while still being able to save some money. Is this a good idea?

It might be just the way you've phrased it, but it's important that you don't think of your mortgage repayment solely as a bill. Overpaying your mortgage is also a form of saving: you're converting cash into housing equity (which you still own) and in doing so you're cutting the amount of interest you'll pay over the course of your mortgage. Borrowing money from the bank at 3.1% only to put it in a current or deposit account at <1% is not a great business model. Keep an emergency cash pile and perhaps build up a little more if Baby 1 is on the way. Otherwise, strongly consider overpaying the mortgage with whatever extra cash you have each month.

Your net income is €6,700 and your mortgage repayment is probably €1,600 or thereabouts. €500 is on the low end of what you can afford to save, but it sounds like might have a higher total target in mind.

My other stocks of 20k - I was interested in investing and trading so started buying stocks when I started working. These stocks are mostly high risk and tech orientated - so got decimated in the latest correction. I know, and have learned, all the caveats about stock picking and don't do this anymore but I would like to hold onto them as there are some stocks in there that I believe will recover strongly - I like having a couple of bets that could turn into 3x+ investments. As I don't need this money, I want to keep them to see what happens.

It's tempting to think of the €20k of stocks are a kind of 'play' account on the margins of your finances, but you really shouldn't. Economists would call this 'mental accounting'. In your case, you are essentially placing bets using money that you've borrowed from the bank. Sell the lot and put the proceeds towards cutting the mortgage balance.

I get a 12% bonus each year, not guaranteed but have always gotten it so far. I can use that bonus to buy approx 7K in company shares, that if I hold for 3 years, I don't pay income tax only USC and PRSI. I also forgo salary to buy company shares under the same conditions i.e. hold for 3 years for no income tax. Revenue sets a total limit on this of, 12K (total - bonus + forgone salary) or thereabouts. This year is the first year I will be able to start selling shares, and I intend to sell the maximum amount every year from here on in. These shares also get a dividend of about 4%.

I agree with the strategy of selling these shares as soon as it becomes tax efficient to do so. If your company does poorly and your job comes under threat, then your shares are probably going to be performing badly too. That's the worst of both worlds. Sell the shares and put the €36k towards paying off the mortgage.

 

[OEP1990]

We also made the decision to prioritize as much unpaid maternity leave as possible so we are currently building a reserve for that for when #2 arrives. Luckily my spouse's salary is fully topped up for the initial paid 26 weeks

When you finally hit unpaid maternity leave and then return to work with a mortgage and creche fees, it can put a lot of pressure on monthly finances. Luckily the NCS has increased so the childcare fees are less painful this year.

My company has very generous parental leave so we shouldn't have to take much unpaid maternity leave - maybe a couple of months, but good point about cashflow. I want to balance that with trying to overpay on the mortgage as much as possible - whilst also maintaining a good standard of living. I have some expensive hobbies that I would like to keep up.

This is bad and really poor logic. It is literally a gamble that you can't afford. Because you are borrowing at 3.1% , these share are costing you this (net) every year you hold them. And worse if you borrow for a car, they will be costing you >6%. Even if you are lucky and those shares double, after cgt, your net profit is eroded by the net cost of borrowing leaving you back at square one.

It's tempting to think of the €20k of stocks are a kind of 'play' account on the margins of your finances, but you really shouldn't. Economists would call this 'mental accounting'. In your case, you are essentially placing bets using money that you've borrowed from the bank. Sell the lot and put the proceeds towards cutting the mortgage balance.

The borrowing from the bank bit makes it hit home a bit more - something for me to think about, thanks.

You have a great income and that's allowing you to carry a moderately high level of debt. If you can maintain your current level of income and you keep spending grounded, then you'll be absolutely fine. It's worth thinking though about what you would do if the economy took a turn and you got a pay cut or lost your job. Also, a 10% decline in house prices would put you in negative equity [(405/(450*0.9))=100% LTV]. And if you or your partner took a career break when Babies 1 and 2 arrive or if you suffered a pay cut, then your finances would start to look a lot less rosy.

My company did a round of layoffs so this is something that's always at the back of my mind. While I think I'd be fine to get another job quickly, I am paid well for my industry and getting this salary + benefits wouldn't be that easy.

It might be just the way you've phrased it, but it's important that you don't think of your mortgage repayment solely as a bill. Overpaying your mortgage is also a form of saving: you're converting cash into housing equity (which you still own) and in doing so you're cutting the amount of interest you'll pay over the course of your mortgage. Borrowing money from the bank at 3.1% only to put it in a current or deposit account at <1% is not a great business model. Keep an emergency cash pile and perhaps build up a little more if Baby 1 is on the way. Otherwise, strongly consider overpaying the mortgage with whatever extra cash you have each month.

Your net income is €6,700 and your mortgage repayment is probably €1,600 or thereabouts. €500 is on the low end of what you can afford to save, but it sounds like might have a higher total target in mind.

I don't think about a mortgage like that. At the moment, we spend quite a lot but I don't consider it on stupid stuff. We take lots of trips, I have some pricey hobbies and generally just enjoying ourselves before we have kids at which point a lot of that won't be possible anymore. I haven't really thought properly about what the max I can pay off the mortgage per month is while having an emergency fund, but you're right, I can probably afford more than 500.

I agree with the strategy of selling these shares as soon as it becomes tax efficient to do so. If your company does poorly and your job comes under threat, then your shares are probably going to be performing badly too. That's the worst of both worlds. Sell the shares and put the €36k towards paying off the mortgage.

That 36k is the total shares I own, as opposed to shares that are available to be sold with the tax benefits. From this March I will be able to sell some shares (~6k) every March and December, which I intend on doing. And every March and December approx 6k (before tax) will be bought in shares through bonus and forgone salary, which I will then hold for 3 years.

Thanks for both of your input. I think of myself as financially savvy but there are always blind spots and different ways of looking at things - so this is very useful.

 

[NoRegretsCoyote]

When you finally hit unpaid maternity leave and then return to work with a mortgage and creche fees, it can put a lot of pressure on monthly finances.

I've been there agree with this.

Kids aged 1-5 (especially more than one at the same time) are very expensive either via childcare or foregone income of one spouse.

A cash buffer is wise as young kids can be very expensive. You don't want to be living on beans on toast at age 38 with a €250k pension fund and a 50% LTV.

 

[noelÓm]

At the moment, we spend quite a lot but I don't consider it on stupid stuff. We take lots of trips, I have some pricey hobbies and generally just enjoying ourselves before we have kids at which point a lot of that won't be possible anymore. I haven't really thought properly about what the max I can pay off the mortgage per month is while having an emergency fund, but you're right, I can probably afford more than 500.

There's nothing wrong with living well and enjoying life. But, like everything, it's a balancing act. You're about to spend a fortune on raising young children and are going to find your budget being stretched. One way to try to give yourself some extra slack in a few years time is to overpay your mortgage now and thus reduce your required monthly repayments. Items like childcare are so expensive that you aren't going to have nearly as much room for trips/hobbies and you might even find that it makes more sense financially for your partner to stay off work on a career break. Having kids is no joke financially. So, it's worth thinking about whether you have the balance right in your current spending. I'd argue that you can save a decent amount at your salary level and still enjoy plenty of luxuries.

A cash buffer is wise as young kids can be very expensive. You don't want to be living on beans on toast at age 38 with a €250k pension fund and a 50% LTV.

I also agree with the above that it's possible to overdo the mortgage overpayments. Live your life, maintain a healthy cash buffer, and keep cutting the mortgage within reason to give yourself some breathing room in 1-5 years time.

 

[OEP1990]

It'll be a case of figuring it out when kids arrive, and adjusting accordingly. Just wanted to check if I was missing out on anything obvious that would set me up better.