What to do with extra money?

[optimist]

I am a female in my late 30s and I'm finally getting to the point where I have extra money to invest. The question is - how and where?

Here's the big picture:
39 years old, one 12-year old child
Income - $135K/yr + $12K/yr in child support
Expenses - about $5K/mo
401K value - $300K
Emergency Fund - $40K
Prepaid college fund for kid (4 years at state school)
Rental condo - $100K equity, $150K left on mortgage, $200/mo profit
No debts except mortgage on primary residence and rental condo

Right now I save 10% in 401K and another $1K for miscellaneous trips, repairs, remodel, emergencies, etc. My emergency fund is where I want it - 8 months of living expenses. Pretty soon I expect that I will have close to $2K a month to invest. Where should I put it? I can see two main options: investing in low-cost mutual funds, such as Vanguard, or paying off my condo. Frankly, I would looove to pay off the condo and potentially buy another one in the same development (I know it well and sit on the Board), but I'm concerned about the resultant lack of liquidity, which I may need to carry a mortgage if I have no tenant or make repairs, etc. Investing in mutual funds seems safer, but also a lot less exciting for me, since I don't really get much satisfaction from watching the digits on computer screen. A condo, on the other hand, appeals to me due to its very tangible nature. At the same time, I don't handle stress very well, so not having a lot of liquidity can really dampen my spirits.

Any insights would be greatly appreciated.

[feh]

Max out your retirement accounts. After 401K and IRA have been filled, then start a taxable account.

You should be saving at least 15% of your gross for retirement.

[optimist]

Max out your retirement accounts. After 401K and IRA have been filled, then start a taxable account.

You should be saving at least 15% of your gross for retirement.

I am contributing 10%, my employer - another 5%, plus I have a defined-benefit pension into which I'm paying as well. I think my retirement is covered at this point.

[Petunia 100]

In your situation with your preferences, I'd max a Roth IRA (5.5k) then throw the rest at mortgage debt. What are the particulars of the mortgage on your primary home?

The Roth IRA is very flexible in that your contributions (not the earnings) are available to you at any time for any reason, no tax or penalty. You can get around the income limits by contributing to a traditional IRA, then immediately converting to a Roth. Since you have no existing traditional, Sep, or Simple IRAs, there are no tax consequences to funding your "back door" Roth IRA.

ETA: Amounts converted are subject to the 5 year rule in order for withdrawals to be penalty free. Just something to keep in mind.

[optimist]

In your situation with your preferences, I'd max a Roth IRA (5.5k) then throw the rest at mortgage debt. What are the particulars of the mortgage on your primary home?

The Roth IRA is very flexible in that your contributions (not the earnings) are available to you at any time for any reason, no tax or penalty. You can get around the income limits by contributing to a traditional IRA, then immediately converting to a Roth. Since you have no existing traditional, Sep, or Simple IRAs, there are no tax consequences to funding your "back door" Roth IRA.

ETA: Amounts converted are subject to the 5 year rule in order for withdrawals to be tax free. Just something to keep in mind.

My home mortgage is at 4%, condo mortgage - at 4.5%. More importantly, the condo mortgage is 3 times smaller, so it is much more realistic to aim to pay it off soon. I like to set realistic goals.

[Jluke]

My home mortgage is at 4%, condo mortgage - at 4.5%. More importantly, the condo mortgage is 3 times smaller, so it is much more realistic to aim to pay it off soon. I like to set realistic goals.

Check your amortization schedule for each mortgage.

You will probably save a lot more in interest if you pay extra on your primary mortgage. Those savings might be more enticing than having a paid off investment property (condo).

If you invest, do it in the [IRA to ROTH IRA] backdoor account.

[97guns]

Also interest paid on the investment property is tax deductable

[LivingAlmostLarge]

How much do you owe on your primary residence?

[optimist]

how much do you owe on your primary residence?

$470k

[optimist]

Check your amortization schedule for each mortgage.

You will probably save a lot more in interest if you pay extra on your primary mortgage. Those savings might be more enticing than having a paid off investment property (condo).

If you invest, do it in the [IRA to ROTH IRA] backdoor account.

How is it possible if the interest is half a percent higher on the investment property and the interest on both is tax-deductible?

[Petunia 100]

How is it possible if the interest is half a percent higher on the investment property and the interest on both is tax-deductible?

I agree that the interest saved by prepaying a dollar borrowed at 4.5% is greater than a dollar borrowed at 4%.

However, with the primary home mortgage interest deduction one needs to remember that only itemized deductions exceeding the standard deduction result in any tax savings.

Since your mortgage is large and you probably file HoH, your itemized deductions likely far exceed the standard deduction so this really isn't a concern for you at this point.

Mortgage interest on a rental home is always deductible, whether one itemizes or takes the standard deduction.

[feh]

I am contributing 10%, my employer - another 5%, plus I have a defined-benefit pension into which I'm paying as well. I think my retirement is covered at this point.

Assumptions can be dangerous. You don't know if you'll always have a good paying job. You don't know if that pension is safe.

Best to save as much as you can when things are good. 15% really is the minimum you should be saving; disregard whatever your employer contributes.

If everything works out great, you may be able to retire early.

[Jluke]

150k vs 470k.... Assuming similar timeframe remains on each loan?

correct me if I'm wrong, but I imagine the higher principal loan will generate more interest despite the 0.5% difference in interest. So, that would mean more opportunity to save on mortgage interest with extra payments early on with the primary residence.

At your salary, % of income saved is irrelevant. Try to get your contributions as close to 18k in your 401k - whatever that percent is.

[Petunia 100]

150k vs 470k.... Assuming similar timeframe remains on each loan?

correct me if I'm wrong, but I imagine the higher principal loan will generate more interest despite the 0.5% difference in interest. So, that would mean more opportunity to save on mortgage interest with extra payments early on with the primary residence.

The primary home loan accrues more interest because the balance is larger. You have to compare apples to apples.

$100 of extra principal on the primary home mortgage will save $4.00 of interest in a year. $100 of extra principal on the rental mortgage will save $4.50 of interest in a year. Since $4.50 is more than $4.00, you will save more interest on your $100 by prepaying the rental mortgage than you will prepaying the primary home mortgage.

[Jluke]

The primary home loan accrues more interest because the balance is larger. You have to compare apples to apples.

Since $4.50 is more than $4.00, you will save more interest on your $100 by prepaying the rental mortgage than you will prepaying the primary home mortgage.

Thanks for explaining. I wasn't looking at it correctly.

I figured there would be more "power" of a trickle down effect with extra payments on the larger mortgage. When I ran the amortization, an extra $100 on each mortgage saved around 30k or so over the life of a 30-year mortgage in each case.

So were these 2 mortgages both 30-year and how far into them are you?

Do you have the opportunity/desire to switch to a 10-, 15-, or 20-year mortgage for one of them if the numbers make sense to do so?