Maximise return for spare cash

[nest egg]

Age: 35
Spouse’s/Partner's age: 35

Annual gross income from employment or profession: 125k (incl bonus)
Annual gross income of spouse: 44k

Monthly take-home pay: 8k

Type of employment: Private (both)

In general are you: saving approx 3k p/m

Rough estimate of value of home: 730k
Amount outstanding on your mortgage: 450k
What interest rate are you paying?: 3% (30 yrs remaining) overpaying by 10% (provider limit)

Other borrowings – car loans/personal loans etc: None

Do you pay off your full credit card balance each month?: Yes

Savings and investments: 75k

Do you have a pension scheme? Yes, me a company DC scheme (approx 175k) / Her, a company sponsored PRSA (unsure balance but it's small, charges are high but kept as her company contributes)

Do you own any investment or other property?: No

Ages of children: 2

Life insurance: I have, through work

----

Recent house move consumed most of our savings, but now that all the bills have been settled, would like to start putting spare cash to the best possible use.

Simple question, given our circumstance, how should we maximise the return for what we have left over each month?

 

[RedOnion]

Pay down your mortgage. You'd need to get 6% return before tax to end up with same result.
Are you on a fixed rate mortgage? Ask how much break fee is to pay off a lump sum early.

 

[Steven Barrett]

What's the long term goal for your money? When do you want to spend it? Do you need an education fund for your kids for example?

Keep some money on deposit for spending if the car breaks down etc. Look at investing the balance so you can use it and the profit at a later date.

You're probably light on protection cover too. The bank are protected if your wife dies but you are not. No income protection either. If you can't work, you're income will go from €125,000 to €10,000.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[nest egg]

Pay down your mortgage. You'd need to get 6% return before tax to end up with same result.
Are you on a fixed rate mortgage? Ask how much break fee is to pay off a lump sum early.

Fixed for a year (10 months remaining), would need to enquire but based on what I've read here, would not expect a large fee.

 

[nest egg]

What's the long term goal for your money? When do you want to spend it? Do you need an education fund for your kids for example? Keep some money on deposit for spending if the car breaks down etc. Look at investing the balance so you can use it and the profit at a later date

Next 1.5-2 yrs, our main car will need to be changed (budget 20-25k). I expect we'll need a fund for university, but what priority to give this, over say paying off our mortgage early?

You're probably light on protection cover too. The bank are protected if your wife dies but you are not. No income protection either. If you can't work, you're income will go from €125,000 to €10,000.

My company provides a disability benefit plan (approx 55k p/a). Would you recommend anything further?

Thinking about it, an extra 1250 a month would have our mortgage repaid by the time we're 50, which is also around the same time our child would go to university. I think that's a worthwhile use of the additional cash. For the remaining 1750, I'm open to ideas...

 

[gnf_ireland]

Firstly OP, congrats on being in such a strong position by 35.
Looking at this initially, my gut tells me you would be very advisable to seriously consider paying the extra 1250 against the mortgage while you are in that position and derisk your financial situation while interest rates are low. Having your mortgage paid by the time you are 50 is massive and makes things so much easier going forward for you all. The first piece of advise I would give you is that - focus on the mortgage and give it a good hammering over the next few years. At 42, we are effectively mortgage free (payments are 200 euro a month) and it opens up lots more options to us in general.

Thinking about it, an extra 1250 a month would have our mortgage repaid by the time we're 50, which is also around the same time our child would go to university.

So yes, I 100% endorse this approach, and you will also save around 125k in mortgage interest by doing this as well.

The other thing I would say is at 35 you are on the crest of a wave and you seem invincible in terms of salary growth and opportunity. But the higher you go up that ladder, the tighter it becomes and less opportunities exist further up with more competition for them. All it takes is for a company to be taken over or some other major event and things are not as rosey in the garden. I know a fair few people who were 'sorted' in their late 30's and by 50 they were 'struggling' comparatively. Just keep this in mind - which is why reducing debt is always a good thing in this regard.

The other thing that jumped out at me is you appear to be living off 3k a month/36k a year based on your numbers. Net salary = 8k less Mortgage (2k) and saving (3k) = 3k. This seems light for me, especially when you say your kids will be starting college in 15 years time, meaning they are still in creche/pre-school. The childcare bill for 2 children alone would be a massive hole in a 3k monthly budget?
Maybe I am missing something here, but the numbers don't align to what I would consider the spending patterns/standard of living of a couple earning 170k a year. I assume things like annual holidays etc are included in this budget which again seem a bit off for me. We everything including personal expenditure is factored in, 3k seems light.

I will accept there was a thread on here a year or so ago from someone in relatively similar earning bracket (175-250k), and I said the opposite that they should reduce expenditure. I am guessing there is a balance between the two
https://www.askaboutmoney.com/threads/review-of-our-financial-status.201532/
I would be interested in seeing your monthly/annual budget breakdown

Next 1.5-2 yrs, our main car will need to be changed (budget 20-25k).

This is something you need to keep in mind in terms of cash reserves, and of course the car you decide to go for. Remember as children get older, the requirements for a car change as well- especially if they are sporty kids.

The final thing I would say to you is you have 2 young kids, which will probably be on the payroll for the next 20 years. There is a large income disparity between yourself and your spouse. If you pass away, your company probably cover 3.5 or 4 times your salary in Death in Service benefit. This is around 500k, but over 20 years it is only 25k a year. How realistic would it be for your family to live on this, even with the mortgage paid. Personally, I have a separate life assurance policy covering me to the age of 65, to ensure the impacts of the income disparity are minimised.


Other than that, enjoy it and go take a holiday this summer with the rewards of your labour !


Finally, I assume you have no interest at the moment in considering a place in the sun or holiday home etc here in Ireland and all of that good stuff that comes with being a high earner !

 

[gnf_ireland]

Thinking about it, an extra 1250 a month would have our mortgage repaid by the time we're 50, which is also around the same time our child would go to university. I think that's a worthwhile use of the additional cash. For the remaining 1750, I'm open to ideas..

but to answer the direct question you asked

4 steps
- do the household budget to ensure your numbers are correct
- overpay the mortgage by as much as you can with the target repayment age of 50
- considering increasing pension contributions towards the maximum as it is the most tax efficient means of investing
- save the rest in cash for a while until you buy the new car etc

Wait before using the money to invest in equities/funds etc outside a pension fund, as the tax considerations are very high here. Ireland could really do with an ISA type structure for stuff like this.

You may want to consider engaging a financial planner at some stage before your 40th birthday, as you may find the exercise beneficial and get you thinking about stuff you may not normally consider

 

[nest egg]

Firstly OP, congrats on being in such a strong position by 35.
Looking at this initially, my gut tells me you would be very advisable to seriously consider paying the extra 1250 against the mortgage while you are in that position and derisk your financial situation while interest rates are low. Having your mortgage paid by the time you are 50 is massive and makes things so much easier going forward for you all. The first piece of advise I would give you is that - focus on the mortgage and give it a good hammering over the next few years. At 42, we are effectively mortgage free (payments are 200 euro a month) and it opens up lots more options to us in general.

So yes, I 100% endorse this approach, and you will also save around 125k in mortgage interest by doing this as well.

The other thing I would say is at 35 you are on the crest of a wave and you seem invincible in terms of salary growth and opportunity. But the higher you go up that ladder, the tighter it becomes and less opportunities exist further up with more competition for them. All it takes is for a company to be taken over or some other major event and things are not as rosey in the garden. I know a fair few people who were 'sorted' in their late 30's and by 50 they were 'struggling' comparatively. Just keep this in mind - which is why reducing debt is always a good thing in this regard.

Thanks for your response, and congratulations yourself for being close to mortgage free at 42! Look we're very fortunate, we're acutely aware of this, and I hope this keeps us grounded. I've been reading a lot about paying off your mortgage early, and there's one line of thought which basically says, take your time, inflation will help erode the value of the debt etc etc. However, as you rightly point out, you never know how long the crest will last, and for that very reason we want to make the most of what we have now, so that we have some protection in the good-so-good times.

Mortgage wise, we can't do much until year 1 is over, unless we move provider. UB's 4 year fixed rate looks appealing, as they also allow over-payments in the order we would like to make. KBC's rates over 10 years may also be a good bet given ECB policy, but their over-payment terms wouldn't allow us to make the additional contribution we would like to make. We could look at a split mortgage with them, though would need to look into this a little further. If anyone has any experience, I'm all ears.

The other thing that jumped out at me is you appear to be living off 3k a month/36k a year based on your numbers. Net salary = 8k less Mortgage (2k) and saving (3k) = 3k. This seems light for me, especially when you say your kids will be starting college in 15 years time, meaning they are still in creche/pre-school. The childcare bill for 2 children alone would be a massive hole in a 3k monthly budget? Maybe I am missing something here, but the numbers don't align to what I would consider the spending patterns/standard of living of a couple earning 170k a year. I assume things like annual holidays etc are included in this budget which again seem a bit off for me. We everything including personal expenditure is factored in, 3k seems light.

I will accept there was a thread on here a year or so ago from someone in relatively similar earning bracket (175-250k), and I said the opposite that they should reduce expenditure. I am guessing there is a balance between the two
https://www.askaboutmoney.com/threads/review-of-our-financial-status.201532/
I would be interested in seeing your monthly/annual budget breakdown

This is something you need to keep in mind in terms of cash reserves, and of course the car you decide to go for. Remember as children get older, the requirements for a car change as well- especially if they are sporty kids.

Neither of us comes from particularly wealthy backgrounds, so spending is something we are naturally prudent about. We could easily drive newer cars, or go on more expensive holidays, or buy designer clothes, that's just not us. Obviously our house was expensive, but it's also perfect for our needs, avoids either of us needing a long commute which is very valuable these days.

Budget wise, I've run some numbers last night, and you're right, I think our savings rate is going to be closer to 2-2.5k. As we've recently moved there are a lot of additionals right now, so it will take a few months before we'll be able to test the theory.

The final thing I would say to you is you have 2 young kids, which will probably be on the payroll for the next 20 years. There is a large income disparity between yourself and your spouse. If you pass away, your company probably cover 3.5 or 4 times your salary in Death in Service benefit. This is around 500k, but over 20 years it is only 25k a year. How realistic would it be for your family to live on this, even with the mortgage paid. Personally, I have a separate life assurance policy covering me to the age of 65, to ensure the impacts of the income disparity are minimised.

We've just the one so far, but we hope there will be another one in the next couple of years. I've always been dubious about income protection, but a separate life policy may not be a bad idea. I will look into it.

Other than that, enjoy it and go take a holiday this summer with the rewards of your labour !
Finally, I assume you have no interest at the moment in considering a place in the sun or holiday home etc here in Ireland and all of that good stuff that comes with being a high earner !

We've been fortunate enough to live abroad and see some of the world, so believe it or not, a holiday at home more than meets our needs, and is pretty handy with all of the baggage a toddler brings!

 

[nest egg]

but to answer the direct question you asked

4 steps
- do the household budget to ensure your numbers are correct
- overpay the mortgage by as much as you can with the target repayment age of 50
- considering increasing pension contributions towards the maximum as it is the most tax efficient means of investing
- save the rest in cash for a while until you buy the new car etc

Wait before using the money to invest in equities/funds etc outside a pension fund, as the tax considerations are very high here. Ireland could really do with an ISA type structure for stuff like this.

You may want to consider engaging a financial planner at some stage before your 40th birthday, as you may find the exercise beneficial and get you thinking about stuff you may not normally consider

Thanks for the clear advice. Last year I put 11% of gross into my pension (before employer contributions). This year I could up the amount, or use the after-tax earnings for the mortgage. Neither are bad choices, but I need to run the numbers and weigh it against the priorities.

Regarding independent advice, I'll consider it. For the next few years however the mortgage / pension / cash strategy is appealing as it's something I understand. There are probably better ways to get a return, but this needs to be weighed against the risk, and the amount of time needed to invest to understand and make decisions on such things, and manage them thereafter.

 

[gnf_ireland]

I've been reading a lot about paying off your mortgage early, and there's one line of thought which basically says, take your time, inflation will help erode the value of the debt etc etc.

Yes this is a school of thought. But this school of thought also assumes that the real value of the debt will drop by inflation being higher than the relative interest rate. We are in a period of low inflation (generally in Europe) and this is keeping interest rates low. Once inflation starts to rise, its likely interest rates will rise too to match it.
Maybe between 1980 and 1990, 100k mortgage sounded much smaller in 1990 due to inflation. I am not sure we would say the same between 2008 and 2018 ???

Mortgage wise, we can't do much until year 1 is over, unless we move provider. UB's 4 year fixed rate looks appealing, as they also allow over-payments in the order we would like to make. KBC's rates over 10 years may also be a good bet given ECB policy, but their over-payment terms wouldn't allow us to make the additional contribution we would like to make. We could look at a split mortgage with them, though would need to look into this a little further. If anyone has any experience, I'm all ears.

I would debate that anyone who is seriously looking at mortgage overpayments of the scale you are need to
(a) remain variable
(b) worst case split, having the target overpayment amount in variable
(c) shorten the term
We kept variable and shortened the term during our very aggressive over-payment period, but have decently put the small balance onto a KBC 10 year fixed. I have a redraw facility on the mortgage, so this is why we are keeping it 'active' so to speak so its not comparable in that regard

Personally, wait the year until you are out of fixed and then either go variable for a while or go split !

Neither of us comes from particularly wealthy backgrounds, so spending is something we are naturally prudent about.

Completely understand this and as a child of rural Ireland in the 1980's lots of people fall into this bracket. However, I would say to do let yourself live a little and the holiday thing is something I would recommend as it does allow you spend exceptional quality time with the kids. They are relatively young so you guys need a break too !

We've just the one so far, but we hope there will be another one in the next couple of years.

Remember the younger you buy the policy the cheaper it will be ! The price of the extra policy I bought at 37 when my eldest was born I can only dream of ~5 years later. No health issues - just age !

We've been fortunate enough to live abroad and see some of the world, so believe it or not, a holiday at home more than meets our needs, and is pretty handy with all of the baggage a toddler brings!

I understand that - especially as I have 2 less than 20 months apart. But there are fantastic places abroad that do cater for young kids and they are amazing. The difference between holidays with kids and before kids is massive !!! I spent a decade living abroad so I know where you are coming from. But the days of hiking in Myanmar/Namibia are gone for a short while

 

[gnf_ireland]

Last year I put 11% of gross into my pension (before employer contributions). This year I could up the amount, or use the after-tax earnings for the mortgage. Neither are bad choices, but I need to run the numbers and weigh it against the priorities.

11% is not bad and better than most. I remember reading somewhere to get a Public Sector type pension you would need to be paying 25% of your salary for your 40 years to get the same benefits. 25% is hard to do, but maybe bridge the gap if you can.


Of course you can always do a mix and split the excess 3 ways once you have your emergency cash reserves sorted
- cash
- pension
- mortgage

For the next few years however the mortgage / pension / cash strategy is appealing as it's something I understand. There are probably better ways to get a return, but this needs to be weighed against the risk, and the amount of time needed to invest to understand and make decisions on such things, and manage them thereafter.

Absolutely and to be honest I think most would say get the basics right before being creative.
The only advantage a financial planner now gives you is a longer lead time towards your goals
But do it at 40 and you still have ~25 years once the basics are stable

I filled in the forms for a financial planner and realised I had all the answers I needed right in front of me !

 

[nest egg]

11% is not bad and better than most. I remember reading somewhere to get a Public Sector type pension you would need to be paying 25% of your salary for your 40 years to get the same benefits. 25% is hard to do, but maybe bridge the gap if you can.

25%, excluding employer contributions? That's something else!
There's no tax advantage after €23k's worth of contributions (20% of €115k). It's an additional €10k in gross contributions compared to last year, or €500 a month in after tax earnings.

I think I've got the basis for a plan here, taking €2250 as the working assumption for spare funds:

• €1250 for the mortgage = Goal: pay it off by 50
• €500 for the pension = Goal: maximise contribution (until I'm 40)
• €500 for a savings a/c = Goal: key expenditure (cars, home maintenance, university fund etc)

 

[nest egg]

The difference between holidays with kids and before kids is massive !!! I spent a decade living abroad so I know where you are coming from. But the days of hiking in Myanmar/Namibia are gone for a short while

We went to France last year for a friend's wedding and holiday with our then 1 year old, and that memory is still fresh enough that we'll stay put this year

 

[gnf_ireland]

25%, excluding employer contributions? That's something else!

No, it was 25% in total, but it was for 40 years to give you a lump sum payment of 1.5 times your salary and a pension worth 50% of your final salary.
Remember a pension pot of say 1.5m would give you a lump sum of around 300k and a pension of around 50,000 (using the 4% rule)
It takes serious contributions to get a pension pot of 1.5m

There's no tax advantage after €23k's worth of contributions (20% of €115k).

Yes there is no point in going about your tax amounts, but you also have to consider your partners pension also and should divide this out as best you can, especially given the income difference between the two of you

I think I've got the basis for a plan here, taking €2250 as the working assumption for spare funds:

• €1250 for the mortgage = Goal: pay it off by 50
• €500 for the pension = Goal: maximise contribution (until I'm 40)
• €500 for a savings a/c = Goal: key expenditure (cars, home maintenance, university fund etc)

This is the good basis of looking at what to do over the next few years. Obviously look at spending as well and the "live a little" scenario. Also consider the extra life cover etc.
Might be worth looking at things like health insurance etc etc

Good luck with it all.

 

[gnf_ireland]

We went to France last year for a friend's wedding and holiday with our then 1 year old, and that memory is still fresh enough that we'll stay put this year

we have been mad enough to head off twice a year with our two.. including city breaks and beach holidays. Were in Iceland just after Christmas and they absolutely loved it. They are 5.5 and nearly 4 ....

 

[nest egg]

Thought I'd post an update for those who might be interested.
I did intend making this an annual event, and then promptly forgot... so here's a 13 month catch up.

Highlights from 2018

• Pension: Maxed out contributions (23k)
• Mortgage: maintained 10% overpayment until fixed term completed, moved to avail of UB's lower rate & better overpayment facility
• Income: Mrs got a promotion (+13% increase)
• Income: Increased personal income (+8%, largely bonus driven, company & personal performance, and so no guarantees...)
• Expenditure: Bought new(ish) car for cash (30k)
• Expenditure: Home improvements (5k)

Updates below:

Spouse’s/Partner's age: 36

Annual gross income from employment or profession: 130-135k (incl bonus)
Annual gross income of spouse: 50k

Monthly take-home pay: 8.2k

Type of employment: Private (both)

In general are you: saving 2.25k p/m

Rough estimate of value of home: 800k
Amount outstanding on your mortgage: 440k
What interest rate are you paying?: 2.6% (29 yrs remaining)

Other borrowings – car loans/personal loans etc: None

Do you pay off your full credit card balance each month?: Yes

Savings and investments: 80k
Restricted Stock Units: 35k (vested)

Do you have a pension scheme? Yes, me a company DC scheme (approx 210k) / Her, a company sponsored PRSA (minimal amount, kept due to employer match)

Do you own any investment or other property?: No

Ages of children: 3, and a new one soon...

Insurance: DIB x4 base salary, Income protection (€55k pa)

Age: 35
Spouse’s/Partner's age: 35

Annual gross income from employment or profession: 125k (incl bonus)
Annual gross income of spouse: 44k

Monthly take-home pay: 8k

Type of employment: Private (both)

In general are you: saving approx 3k p/m

Rough estimate of value of home: 730k
Amount outstanding on your mortgage: 450k
What interest rate are you paying?: 3% (30 yrs remaining) overpaying by 10% (provider limit)

Other borrowings – car loans/personal loans etc: None

Do you pay off your full credit card balance each month?: Yes

Savings and investments: 75k

Do you have a pension scheme? Yes, me a company DC scheme (approx 175k) / Her, a company sponsored PRSA (unsure balance but it's small, charges are high but kept as her company contributes)

Do you own any investment or other property?: No

Ages of children: 2

Life insurance: I have, through work

----

Recent house move consumed most of our savings, but now that all the bills have been settled, would like to start putting spare cash to the best possible use.

Simple question, given our circumstance, how should we maximise the return for what we have left over each month?

 

[nest egg]

My annual update, for anyone who may be interested. Going to try to remember to do this every January, even if it's just for an audience of 1

2019 Highlights:

• Family: Baby #2 arrived during the summer, all well so far
• Pension: Maxed out contributions, coupled with market performance & company contributions up 75k. Mrs maintained her 4% contribution (found out pot size, ~15k).
• Mortgage: Overpaid by ~15%, now 430k (was 440k)
• Income: Mrs income down 10k, due to maternity leave (3 months paid / 3 months state benefit)
• Income: My income static (moderate increase in base salary, bonus lower than 2018)
• Expenditure: Replaced Mrs car (18.7k cost to change)
• Savings & investments: Static

Thought I'd share the plan for 2020, let's see how I do...

2020 Plan:

• Family: Cover the 6 months unpaid maternity leave my Mrs will take this year (via pausing mortgage overpayment, efficient sharing of tax credits / bands, reductions in day to day spending where feasible, savings as a last resort)
• Pension: As for 2019, max my contributions / Maintain Mrs 4% contribution (for employer match)
• Mortgage: Resume overpayment once Mrs returns to work (may do this more aggressively than in the past)
• Income: Mrs income will be significantly down due to unpaid maternity (a further 10k on 2019 / 20k on a normal year)
• Income: Mine expect to be ahead of 2019 due to moderate increase / bonus + RSU vest
• Expenditure: No major expenditure planned
• Savings & investments: Expect some hit due to maternity leave, hopefully will remain static

Thought I'd post an update for those who might be interested.
I did intend making this an annual event, and then promptly forgot... so here's a 13 month catch up.

Highlights from 2018

• Pension: Maxed out contributions (23k)
• Mortgage: maintained 10% overpayment until fixed term completed, moved to avail of UB's lower rate & better overpayment facility
• Income: Mrs got a promotion (+13% increase)
• Income: Increased personal income (+8%, largely bonus driven, company & personal performance, and so no guarantees...)
• Expenditure: Bought new(ish) car for cash (30k)
• Expenditure: Home improvements (5k)

Updates below:

Spouse’s/Partner's age: 36

Annual gross income from employment or profession: 130-135k (incl bonus)
Annual gross income of spouse: 50k

Monthly take-home pay: 8.2k

Type of employment: Private (both)

In general are you: saving 2.25k p/m

Rough estimate of value of home: 800k
Amount outstanding on your mortgage: 440k
What interest rate are you paying?: 2.6% (29 yrs remaining)

Other borrowings – car loans/personal loans etc: None

Do you pay off your full credit card balance each month?: Yes

Savings and investments: 80k
Restricted Stock Units: 35k (vested)

Do you have a pension scheme? Yes, me a company DC scheme (approx 210k) / Her, a company sponsored PRSA (minimal amount, kept due to employer match)

Do you own any investment or other property?: No

Ages of children: 3, and a new one soon...

Insurance: DIB x4 base salary, Income protection (€55k pa)

 

[Clamball]

Will your expenses go up significantly with 2 childcare once your wife returns to work? I think you are doing great overall, everything seems to be well planned, I am not sure about the reduction in the day to day spending while on Mat Leave, you should be easily able to maintain the same level of spending from your own income?

 

[nest egg]

Thanks, the plan fits into a very simple strategy; over the next 12-13 years: 1) to grow my pension pot to €1m &, 2) have the house repaid, which also hopefully is worth €1m by then. Anything left over would go into my wife's PRSA. No doubt there are other more lucrative ways of making money, but with young kids, and full time careers, the ROI Vs time needed for this approach is hard to beat for us.

Re: creche. It's a good point, "baby" #1 will go to primary school not long after #2 starts crèche, so costs will be broadly neutral. After-school will need to be accounted for, that may involve some grandparent / family support, but we'll see closer to the time. Re: day to day spending while on 1 income, you're right it can be covered by my salary, we also know there's a collective reduction in earnings right now, so we're consciously being more mindful about our spending right now, where we can. We know we're very fortunate, and life is still good!

 

[SPC100]

Are you maximise the higher rate tax relief on your partner's pension contributions. I know you said you were doing 4% match. Given earnings level and 1M pension goal, imo you should capture full tax relief for your wife's pension.

Given your pension might have value of about 300k now, have you looked at what funds you are invested in and what are the charges?