CJ
“Dear Steve,
I have 1 yrs worth of an Emergency Funds which includes all bills, utilities, condo obligations, food, car insurance, mortgage, taxes, projected credit card use, etc. I have accounted for 1 year of being out of work in the event I lose my position. I have NO debt other than a mortgage. I contribute the max to a Roth and TSP retirement accounts.
I have a large sum of cash ladder in CD’s at no more than 3% interest rate. I have only invested $4K in large cap stocks. I have a remaining mortgage of $230,270 at 5.75% fix for 30 yrs. My monthly mortgage obligation is $1,377.24 and I contribute an additional $125 toward the principal each month. I will be gradually investing in only 3-4 new small cap stocks this year to evenly distribute my small portfolio. I also make a yearly full principal payment of $1,377 with my tax refund. I have a steady government job at a GS 14 level. I have 20 years more to work and will have an opportunity to move in and out of DC as I chose. I would like to purchase a town home within 5 years.
Would it be better for me to not contribute an extra $125 towards principal and save the money since I would like to purchase a new townhome in 5 years? Is there any benefit to me contributing towards principal if I know I want to sell or rent my current condo in 5 years? I don’t know if it’s worth it to make additional payments towards my mortgage principal.
CJ”
Dear CJ,
What a welcome relief your question was. Thank you for submitting it.
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There are a couple of ways to look at this situation but as always, let me give you some advice from a holistic point of view.
It seems to make sense to continue to make the additional principal payment. Since the mortgage is a 5.75% debt, it is seemingly your most expensive financial obligation. You could save the cash instead, but at the end of five years, I doubt the overall return on that savings is going to be more than 5.75%.
I am assuming that in order to purchase your future town home, you will sell the place you are currently living in. The sale of your current residence will release the additional principal for you to use towards the new town home.
The only reason I can see to put the money aside in a liquid savings account would be so you would have access to cash in a flash and not have to tap any of your investment accounts for unexpected money needed.
But, the final alternative is for you to take the $125 a month and just make a plan to go do something fun with it each month. Don’t get in a position where you are so focused on saving that you become an obsessive saver. Take the money and go do something new every month or just use it to take a special friend out and share some quality time together. At some point, the quality of your life matters more than the quantity of your money.
Please let me know what you decide to do.
