Summary: over the 3 years until I trade up to my family's next home, is it smarter to put my upcoming windfall (~$400K, earned over the next 3 years as I vest in stock) in a savings account (earning 0.75%), or, instead, use the windfall to pay off my mortgage (interest rate is 3.5%)?
- My employer recently went public. My equity stake (RSUs) is worth about $400K after taxes (assuming the stock price stays the same as what it is now, of course - there's no way to know).
- I'll have to stay with the company and vest in that stock to get this windfall. I'm on a 4-year vesting schedule. I've worked at the company a little over a year. Thus, it will be 3 more years until I'm fully vested. I plan to sell all of my equity stake as I vest, quarter by quarter.
- My wife's and my plan is to move to a different city 3 years from now. At that time, we'll sell our current home and use 100% of the windfall money to buy a new home in that new city.
- Other than our mortgage, my wife and I have no debt. I'm in my late 30's; she's in her late 20's.
What I'm struggling with right now is: what should I do with the windfall money I get gradually over the next 3 years? Here are the options I've considered:
- Invest in mutual funds with low risk profile.
- Put the money into an FDIC-insured savings account, e.g. ING Direct, at 0.75%
- Pay off my $395,000 mortgage (interest rate: 3.5%) on my current home
Most personal finance advice I've read says that #1 is not a good idea due to the downside risk, plus I think the stock market is probably near its peak. So let's take #1 off the table (unless you disagree? Please let me know if so.)
Both #2 and #3 are safe, and their rate of return is essentially guaranteed.
The reason I'm tempted to choose #3 is because I'd effectively see a higher return than 0.75%. (Even when considering the tax write off for mortgage interest, I'm guessing the effective return would still be something like 2.5%.)
But if I choose #3, I'd be illiquid when it comes time to go house shopping 3 years from now - the vast majority of our net worth will be tied up in our home. Maybe that's not a problem (given that we'd be selling our current home in order to buy the new one), but maybe that temporary illiquidity would cause problems? Not sure.
Which option is best? Thanks!