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No. of Recommendations: 1
Since that other thread went off-kilter...

You've already maxed out your 401K and Roth, and have a 6 month efund. I assume that efund is in some sort of interest bearing savings/money market account (INGDirect or similar). This gives you a lot of flexibility as to what to put your excess funds into.

I don't know what your tax bracket is and/or how your home state handles mortgage interest, but for the sake of simplicity let's assume you are in the 25% tax bracket (from your other posts you are likely in at least that federal tax bracket) and that all the interest from your mortgage would be itemized, thus reducing the effective rate on the mortgage to just under 3.5%.

I don't know how accepting or averse you are to volatility in your investments, and obviously don't know what your 401K and Roth are invested in. As you likely know, equities have historically returned far north of 3.5% per year, although with lots of volatility and they can underperform that amount for years at a time (just look at the last decade for some examples). Historical averages have been ~10%/yr, but many people believe they will be lower going forward. I'd use something closer to 8% if you forced me to guess at a number, but again, lots of volatility regardless and there are no guarantees.

Bonds have returned lower amounts than stocks, but with less volatility. One drawback to bonds is that one is always paying taxes on bond interest. If you have a low expense equity index fund (like one of Vanguard's), they kick out relatively little dividends or cap gains, so most of the gain in the fund remains untaxed until you start selling some of your holdings, and those will be taxed at lower long term cap gains rates (assuming they've been held for over a year).

If it were me in your situation, I'd likely put most of my excess savings into low expense equity index funds such as Vanguard's Total Stock Market Index Fund (VTSMX, switching to the even lower expense VTSAX as soon as possible), which essentially tracks all US stocks, and Vanguard's Total International Stock Index Fund (VGTSX), which basically tracks the rest of the world outside of the US. I would also put some percentage of those excess funds into paying down the mortgage early. I'd be disinclined right now to put much in either purchasing bonds directly or a low expense bond fund (VBMFX, Vanguard Total Bond Market Index), but you might consider that. Again, you already have 6 months of emergency funds saved up and probably don't need much more bonds/savings type of stuff right now.

But again, Your Mileage May Vary. If you are less risk tolerant, then dump more money into paying down the mortgage and/or into bonds or a bond fund (you can also buy US Treasuries directly thru Treasury Direct if you are so inclined).

That's a really quick summary. Also, the rest of your life could change (don't know if you are ever thinking of marrying/having kids, etc., which obviously would change things considerably). For additional short term savings I'd look towards either short term (2 years or less to maturity) bonds, maybe a shorter term bond fund but I'm a bit concerned about bond prices these days.

Hope that helps a little.


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