How to distribute monthly savings

Amgrc84

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I'm 37yo, salary of 125k year + 50k yearly bonus for the next couple of years. After bonus runs, I'll get compensated similarly in stocks (major tech company in US)

Wife 35yo, 65k year.

Both in very stable positions
Both are adding 5% to our pensions with company matching 5% (maximum they match).

One son, 1yo, chances of having another one in a year or two.

Current debt is just mortgage. 630k house value, 345k left to pay, 2.3% rate ending in September, when we will probably move to a lower one.

Our future expenses in the next few years would be to move to a bigger house or to extend ours (~100k ) and to buy a bigger car (~30k).

Our biggest expenses right now are mortgage (1470€/month), creche (1200€/month) and bills. After all expenses are paid we are left with 6k to save. We both live very easy lives.

Currently we have 80k in the bank, 20k in all-world Etf and 15k in crypto. I'm about to send 20k to an s&p ETF and 5k to a bond etf (following 3 fund portfolio strategy with 40/40/20 split). I don't count crypto as proper investment due to volatily, I just happened to buy some coins many years ago.

We'd be happy to retire early, but honestly our main goal right now is to not have so much money in the bank doing nothing. We'd also be happy with the psychological relief of having a very low mortgage or pay this or next house early.

We both like the idea of an emergency fund for peace of mind, of around 50k.

What would be the best to do with the 6k a month we are saving until the bonus runs out, and 4k a month + 2k in stocks when my bonus runs?

I was thinking monthly maybe 2k into the ETF portfolio, 2k extra for the mortgage, and the rest or a fund for holidays/house repairs/next house etc.

What do you think?
 
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RedOnion

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5,990
5k to a bond etf
It makes absolutely no sense to invest in bonds, while carrying a mortgage (effectively a negative bond). Any returns (if any!) are taxed. Just pay off your mortgage instead.

Clarified, 5% of our monthly salary with company matching that 5%
You can get tax relief on 20%, at your current ages, on salary up to 115k. It makes no sense in Ireland to invest outside a pension wrapper if not maximising pension contributions first. The tax treatment is giving you a free lunch.

Our future expenses in the next few years would be to move to a bigger house or to extend ours (~100k )
This is the bit you need to come up with a plan for first; which are you going to do, what timeline, and how much will it cost?

I've made an assumption that you're in Dublin. In the current environment, 100k will not get you much of an extension if you want an extra bedroom and larger living area for example. I was shocked at the costs when I looked at it, and they've only gone up since.
If you plan to move instead, realistically to stay in a similar area a house that's 'worthwhile' moving for will be more than 100k more than your current home is worth.

If you move, you'll need a 20% deposit as you're 2nd time buyers. With a young family, I'd suggest having this saved so that you might be able to draw down mortgage and move before selling your current home. It'll give you a lot of flexibility.

After that, I'd keep it really simple:
Max pension contributions, all in equities.
Pay down mortgage agressively.
Look at it again when your mortgage is less than 1 years salary.
Be ready to adapt to life changes.

I'd also recommend reviewing life insurance, especially income protection, as you've started a family.
 
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RedOnion

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5,990
following 3 fund portfolio strategy with 40/40/20 split
Just as a side comment: stop looking at investment strategies that make sense in the US. The tax treatments here are completely different, so you need a different strategy.
 

Amgrc84

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It makes absolutely no sense to I vest in bonds, while carrying a mortgage (effectively a negative bond). Any returns (if any!) are taxed. Just pay off your mortgage instead.


You can get tax relief on 20%, at your current ages, on salary up to 115k. It makes no sense in Ireland to invest outside a pension wrapper if not maximising pension contributions first. The tax treatment is giving you a free lunch.


This is the bit you need to come up with a plan for first; which are you going to do, what timeline, and how much will it cost?

I've made an assumption that you're in Dublin. In the current environment, 100k will not get you much of an extension if you want an extra bedroom and larger living area for example. I was shocked at the costs when I looked at it, and they've only gone up since.
If you plan to move instead, realistically to stay in a similar area a house that's 'worthwhile' moving for will be more than 100k more than your current home is worth.

If you move, you'll need a 20% deposit as you're 2nd time buyers. With a young family, I'd suggest having this saved so that you might be able to draw down mortgage and move before selling your current home. It'll give you a lot of flexibility.

After that, I'd keep it really simple:
Max pension contributions, all in equities.
Pay down mortgage agressively.
Look at it again when your mortgage is less than 1 years salary.
Be ready to adapt to life changes.

I'd also recommend reviewing life insurance, especially income protection, as you've started a family.
Yes, Dublin.

Thanks for the advice about bonds, you are right it makes more sense to just put it down in the mortgage.

In our heads we always thought we would sell the house and then buy a new one. Following your suggestion to first buy and then sell ours, does it make sense then to pay the mortgage aggresively? Wouldn't it be better to save that money for the 20% deposit?

Also we have life insurance, income protection and all of that sorted, thanks.

The only thing I don't like about pension is to have to wait until who knows when to draw it out. We were thinking on retiring early (maybe 55-60) if possible. We both live very simple lifes.
 

RedOnion

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5,990
The only thing I don't like about pension is to have to wait until who knows when to draw it out. We were thinking on retiring early (maybe 55-60)
Once you've left the employment that the pension relates to, you can access it early. As early as 50
 

RedOnion

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5,990
In our heads we always thought we would sell the house and then buy a new one. Following your suggestion to first buy and then sell ours, does it make sense then to pay the mortgage aggresively? Wouldn't it be better to save that money for the 20% deposit?
Firstly, re selling first and then buying, it's possible to close both same day but the process here isn't as streamlined as in other countries. People don't like selling in a 'chain', so it takes a lot of work to close sale & purchase on same day. Lots of things can go wrong, so you need alternative accommodation if there's a gap between dates.
My view (having been through it) is moving is stressful, especially with young children. You can afford to reduce that stress, so my personal view is I think you should.

I'd suggest to come up with a plan first. It wasn't clear if you're going to extend or move.

For example, say you plan to move, in 3 years, and you expect to spend 800k on a house. You need 160k deposit. You've already got 80k, so you need to save another 80 over 3 years. I'd set up a regular savings account to save 2,300 per month to save that.
Then I'd pay another 2k per month overpayment on mortgage. If excess funds build up in current account, sweep them to mortgage every 6 months.

By reducing the balance on mortgage will make it easier for you to get a 2nd mortgage if you want to.
You've capacity to save 6k per month, so if you need to save the deposit quicker, you can.

But forget about making investments outside of a pension for the moment.
 

Blackrock1

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how feasible is it that you wull be able to get a full mortgage for a new property before you have sold the existing one?
 

RedOnion

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5,990
maybe, but it depends on the value of the new home, existing mortgage repayments (which will be factored into your affordability) etc etc
Yes, I factored all of that in before suggesting it. It's entirely possible, but the first thing is to decide whether moving or not, and when, and then decide a strategy. The OP suggested ~100k additional for new home.

If they overpay current mortgage by 2k per month, in additional to normal repayments, they should reduce balance by 100k over 3 years.
So they'll have 245k mortgage on a home worth 630k.
Using the example of buying a house for 800k, they'll need a mortgage of 640k. That's all perfectly affordable and within normal criteria even just using base salary only. They will be 40 & 38 years old, so a 25 year mortgage won't be an issue.
You tell the bank you intend to rent out old home. Some of them will consider 75% of the achievable rent as income, which will more than cover existing mortgage - even at a 6% yield, they should get 3k per month rent. Mortgage payment on the remaining 245k balance should be ~1300 per month. After tax it's cashflow positive.
Then once you move, you sell the house, take the equity (400k), and pay it against the new mortgage, reducing it to 230k.
 

Blackrock1

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fair enough! i would suggest two things,

one 100k probably wont go as far as the OP might imagine and two be wary of being left holding both properties!
 

RedOnion

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5,990
I agree 100k isn't a realistic budget, which is what I already pointed out to the OP earlier.

two be wary of being left holding both properties!
Absolutely. The single biggest risk with the strategy is the short window of time between buying and selling, that the market changes quickly and you can't sell the house. Or there's an issue with your house that prevents anyone buying it (planning, structural, etc).

There is another poster who followed this strategy just before Covid hit, and hasn't been able to sell their house yet due to restrictions. There is a risk to it.

But the advantages include:
- You've complete independence with timeline. If the 'perfect' house comes up for sale, you can bid on it, without being forced to get your own home on the market quickly. Or missing out on the perfect house because they won't sell to someone in a chain. Or you're not forced into buying a 'good but not perfect' house, because you've already sold yours and you have to buy.
- You can look at houses that need small renovations, and get this and decoration work done before you move in.
- You avoid having to move in with family / friends for a short period between homes (an under estimated advantage!)
- Moving out / in can be better planned, and the whole thing is more leisurely.
- You avoid an incredible amount of stress!


We've gone down a bit of a rabbit hole on a specific point, where the OP doesn't actually say if they want to extend or move.
 

Amgrc84

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Thanks for all the replies, I see that we got into a rabbit hole but this was actually good because it gave us some visibility on what were our options and what to do when moving houses.

One thing I'd like to say is that I'm not 100% happy putting all my invesments into the pension and having 20% of my salary there, I know it's efficient from the taxes point of view but it's not the same as putting all the eggs in one basket? I don't know how all that money is going to be handle. If I put part of it on ETFs at least I'm the one controlling it.


Another thing about expanding vs buying a new house is that if I understood correctly, I can top-up my mortgage to get the extension but for a new house I'd need a whole new mortgage with a 20% deposit, what makes it less attractive, is this correct?
 

RedOnion

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5,990
One thing I'd like to say is that I'm not 100% happy putting all my invesments into the pension and having 20% of my salary there, I know it's efficient from the taxes point of view but it's not the same as putting all the eggs in one basket? I don't know how all that money is going to be handle. If I put part of it on ETFs at least I'm the one controlling it
Your pension scheme should be able to tell you what it's actually invested in, and there should be some options to choose from if it's a large employer.

There are other options as well if you want control.

For example. Keep putting the 5% into your company pension to get the matched funds. Then put 15% into an AVC PRSA, and you can decide what you want that invested in. The only downside is a bit of extra paperwork because you'll have to claim the tax back yourself.

Other posters might have other ideas.

In my personal view, the difference in tax treatment is so significant you shouldn't be looking at investments outside a pension wrapper until you've maximised your pension contributions (except for funds you need access to in the short term).
 

RedOnion

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5,990
Another thing about expanding vs buying a new house is that if I understood correctly, I can top-up my mortgage to get the extension but for a new house I'd need a whole new mortgage with a 20% deposit, what makes it less attractive, is this correct?
I'd suggest to look at what the total borrowings will be, rather than if it's a new mortgage or not.

Just, be realistic about the cost of extending in Dublin at the moment. A 200k budget for build and renovation wouldn't be in any way excessive.
 

Amgrc84

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I'd suggest to look at what the total borrowings will be, rather than if it's a new mortgage or not.

Just, be realistic about the cost of extending in Dublin at the moment. A 200k budget for build and renovation wouldn't be in any way excessive.
I understand about the cost, thanks, I realise now that it'd be more expensive but still affordable for us.

Regarding if it's a new mortgage or not, it makes a big difference to us, we'll have to save for a deposit (and that means maybe 3y with cash in the bank doing nothing) vs just asking for a top up whenever we feel like it.

Is there an option where you can agree to buy a house if yours get sold first? Like a chain.
 

RedOnion

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Is there an option where you can agree to buy a house if yours get sold first? Like a chain.
Understood. Yes, it's actually what most people do, so apologies if I caused confusion. I was just suggesting that on your income level you have the option of not doing it (but as you point out it requires a 20% deposit).

The way the market is in Dublin at the moment you're at a disadvantage vs other bidders who don't have to sell a house. For example if I was selling a house and had 2 offers: one for 800k subject to buyers selling a house, or 790k from someone not in a chain, I'd be accepting the 790k offer. Especially if I myself needed the money to buy another house (I might even accept less).

If a house you want to buy is in demand, a lot of estate agents wouldn't entertain an offer unless your house is on the market, and in some cases as far as sale agreed. You have no control over the timeline.

When it comes to legals, each transaction is actually separate, and things can go wrong. The system is different in the UK for example where they're all daisy chained together. It's possible to close the same & purchase on the same day, but involves a lot of effort and stress.

You'll find lots of threads in the topic from people who've been through the process. Here's a recent example: https://www.askaboutmoney.com/threa...and-top-up-mortgage-to-release-equity.221999/
 
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