Financial help

[dontlook]

What would you do? H is getting a significant raise and we are redoing the budget.

We are maxing out 401k and our HSA. Emergency fund is fully funded for a year. 529 is getting funded enough to qualify for tax deduction. What would you do with “extra” money? Should we do a Roth? Maintain a brokerage account? Save in a regular account? Put more away for college?

Thanks!

[sandandsea]

What are your goals? I’d put more towards college as the amount to get a benefit won’t pay for all of it. I’d also build other accounts like saving for a new car, new computer, house projects, roof, other wear and tear type items. And put any extra into a brokerage account.

[dragon's breath]

If you do not have an existing traditional IRA, and make too much to do a direct Roth IRA contribution, I'd do a backdoor Roth for both of you. Then I'd decide where to put the rest based on goals and other factors (or, if something was really pressing, I'd even do that before doing the Roth IRA).

I've cut back on my own contributions in the last couple years to focus on building a house (paid off the acreage last year). That's my last big financial goal, so I'll go back to maxing everything I can after that.

[k3am]

I think it depends on your priorities.

One thing that I do that’s worked well is we live off our old salaries, and anything in excess gets moved into our savings (for home improvements) or brokerage account. It is REALLY easy to have your lifestyle expenses creep up as your salary does.

[dontlook]

The biggest goal is to make sure the money is working for us. We have our emergency fund in a regular savings account and it’s made under $300 for the year which is ok but not great. We could stick more in there, I’m just not sure that’s the wisest thing. I suppose that was my unasked question, where should we put it to get the best returns? We could do more in 529s as well as we aren’t close to being able to fully pay for college, but again will we get the best returns there? Could we put the money in the market and pull it when/if we need it for college, cars, emergencies? I feel like we have been good with money and now we want to be savvy. I hope that makes sense. Thanks!

[goldengirlz]

So if you’ve taken advantage of all your available tax breaks, then for maximum growth plus flexibility, I think a regular brokerage account makes the most sense, with one big caveat.

Investing in the stock market is best for people who are interested in long-term growth and don’t have any immediate need for the money. For instance, I don’t trust the current market; there’s a good chance there will be another downturn before it recovers.

But if you want a place to park cash for at least the next few years, and are willing to ride out some short-term volatility, then opening a brokerage account and investing in a few ETFs or mutual funds is probably your best bet.

[tcu2003]

Oct 25, 2020 16:38:33 GMT -5 dontlook said:

The biggest goal is to make sure the money is working for us. We have our emergency fund in a regular savings account and it’s made under $300 for the year which is ok but not great. We could stick more in there, I’m just not sure that’s the wisest thing. I suppose that was my unasked question, where should we put it to get the best returns? We could do more in 529s as well as we aren’t close to being able to fully pay for college, but again will we get the best returns there? Could we put the money in the market and pull it when/if we need it for college, cars, emergencies? I feel like we have been good with money and now we want to be savvy. I hope that makes sense. Thanks!

I would add at least some part of it to 529s. You should have your 529 accounts invested in the market (and if you don’t, change it), so you should see reruns on par with what the market is going, depending on the investment choices you have made.

[dontlook]

Oct 25, 2020 15:23:29 GMT -5 k3am said:

I think it depends on your priorities.

One thing that I do that’s worked well is we live off our old salaries, and anything in excess gets moved into our savings (for home improvements) or brokerage account. It is REALLY easy to have your lifestyle expenses creep up as your salary does.

I really want to make sure this doesn’t happen. I don’t want to add this salary increase into our regular lives. We allocate enough for fun so this money doesn’t need to go to that.

Thanks for all of the ideas.

[gt7301b]

Oct 25, 2020 16:38:33 GMT -5 dontlook said:

The biggest goal is to make sure the money is working for us. We have our emergency fund in a regular savings account and it’s made under $300 for the year which is ok but not great. We could stick more in there, I’m just not sure that’s the wisest thing. I suppose that was my unasked question, where should we put it to get the best returns? We could do more in 529s as well as we aren’t close to being able to fully pay for college, but again will we get the best returns there? Could we put the money in the market and pull it when/if we need it for college, cars, emergencies? I feel like we have been good with money and now we want to be savvy. I hope that makes sense. Thanks!

The standard advice in this case would be that over time the stock market does better than a regular savings account.  If you are trying to decide between long term savings goals of 529/emergency/cars I would suggest determine which one is a higher priority and choose the investment vehicle accordingly.   I would imagine that the actual returns in all of these vehicles will be similar as long as they have relatively low fees.  The big difference comes in the tax advantages, which is why I like Roth IRAs  and why I would lean towards starting one, so that you have both taxable and non-taxable money available in retirement.   It seems to me like you have plenty of liquid assets.

In traditional times I tends to be less conservative when it comes to having large amounts of cash on hand, but right now I side with goldengirlz and see volatility coming in the market. That that being said it is difficult to time the market and we know that over time staying in the market leads to the best performance.  So I realize this statement probably isn't helpful in helping you decide what to do

[dontlook]

Oct 27, 2020 10:49:41 GMT -5 gt7301b said:

Oct 25, 2020 16:38:33 GMT -5 dontlook said:

The biggest goal is to make sure the money is working for us. We have our emergency fund in a regular savings account and it’s made under $300 for the year which is ok but not great. We could stick more in there, I’m just not sure that’s the wisest thing. I suppose that was my unasked question, where should we put it to get the best returns? We could do more in 529s as well as we aren’t close to being able to fully pay for college, but again will we get the best returns there? Could we put the money in the market and pull it when/if we need it for college, cars, emergencies? I feel like we have been good with money and now we want to be savvy. I hope that makes sense. Thanks!

The standard advice in this case would be that over time the stock market does better than a regular savings account.  If you are trying to decide between long term savings goals of 529/emergency/cars I would suggest determine which one is a higher priority and choose the investment vehicle accordingly.   I would imagine that the actual returns in all of these vehicles will be similar as long as they have relatively low fees.  The big difference comes in the tax advantages, which is why I like Roth IRAs  and why I would lean towards starting one, so that you have both taxable and non-taxable money available in retirement.   It seems to me like you have plenty of liquid assets.

In traditional times I tends to be less conservative when it comes to having large amounts of cash on hand, but right now I side with goldengirlz and see volatility coming in the market. That that being said it is difficult to time the market and we know that over time staying in the market leads to the best performance.  So I realize this statement probably isn't helpful in helping you decide what to do

It gives me a lot to look into.

We are closing on a new home in a few months so we shouldn’t have house expenses quickly (fingers crossed). We have newish cars. Mine is 5 years old and H has 2 years left on a 3 year lease that he will likely buy out when done (we are slowly setting money aside for this).

I might go on the safe side and split it up 4 ways between 529, Roth, regular savings, brokerage. Try a little of everything and hope for the best

[dr.girlfriend]

I don't see a downside to doing the Roth if you're eligible. It grows tax-free, you can withdraw your contribution at any time, and you can invest in very safe vehicles within the Roth if you want to -- it doesn't have to be in stocks. You can use that to pay for the kids' college, even, or for other emergencies in the future. I would have at least a couple of months' in the efund but then move the rest to low-risk stuff in a brokerage account, and then add to that account with the new income.

[keweenawlove]

Totally agree on Roth. You (presumably) know you'll need money in retirement but college costs can be so variable depending on scholarships, etc. We consider ours a backup e-fund since we can pull out what we put in at any time.

[awkwardpenguin]

I think a year is plenty of cash, and definitely on the conservative side. I wouldn't add to your cash savings.

I would make sure you are doing regular or backdoor Roths, and then put the rest into a taxable brokerage account. I'd also make sure your asset allocation matches your risk tolerance, as it's easy to be bullish when the stock market is at an all time high and harder when it pulls back 20% or 50%. I like the book "The Intelligent Asset Allocator" by William J. Bernstein for this - it helped me to become a more confident investor.

I think roughly, people should do the following:

1. 401k up to the employer match
2. Pay off high interest debt
3. Roth IRA
4. Max HSA
5. Max 401k
6. Pay off any remaining debt above 3 or 4%.
7. 529s up to what you are comfortable with (we do up to the state tax break, others do all the way up to the gift tax exclusion for both spouses)
8. Taxable investment accounts invested in index funds
9. Other more complicated investments, as your knowledge/interest/risk tolerance allows (real estate, anything that's not an index fund)

There are some additional details if you have a 457 plan or deferred compensation arrangement, but the above should work for 80% of people.

[dontlook]

Nov 2, 2020 10:42:01 GMT -5 awkwardpenguin said:

I think a year is plenty of cash, and definitely on the conservative side. I wouldn't add to your cash savings.

I would make sure you are doing regular or backdoor Roths, and then put the rest into a taxable brokerage account. I'd also make sure your asset allocation matches your risk tolerance, as it's easy to be bullish when the stock market is at an all time high and harder when it pulls back 20% or 50%. I like the book "The Intelligent Asset Allocator" by William J. Bernstein for this - it helped me to become a more confident investor.

I think roughly, people should do the following:

1. 401k up to the employer match
2. Pay off high interest debt
3. Roth IRA
4. Max HSA
5. Max 401k
6. Pay off any remaining debt above 3 or 4%.
7. 529s up to what you are comfortable with (we do up to the state tax break, others do all the way up to the gift tax exclusion for both spouses)
8. Taxable investment accounts invested in index funds
9. Other more complicated investments, as your knowledge/interest/risk tolerance allows (real estate, anything that's not an index fund)

There are some additional details if you have a 457 plan or deferred compensation arrangement, but the above should work for 80% of people.

Thank you for this!