Where to put extra money?

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Triple digit golfer
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Where to put extra money?

Post by Triple digit golfer »

I am hoping for some guidance here. I wasn't sure whether to put this in the investing section or this one. I'm sorry if this is long-winded, but I don't want to leave out any details.

I am 28, almost 29, and single, but probably will be engaged in the near future.

My girlfriend has no debt and about $7k to her name. She is a teacher and has a stable job.

I'm wondering what to do with extra money I have in savings.

Salary is $105k.

I have no debt other than my mortgage ($131k, 30 years, 3.375% fixed) and car loan, which has $15k remaining at 0.50% interest (less than I'm earning in savings, so I opted for the loan).

I'm making one extra monthly mortgage payment per year already.

Right now, my retirement accounts total about $130k and I'm contributing about $20k a year. $5,500 to Roth IRA, rest to 401(k). So I have a few thousand more I could add to the 401(k) before it is maxed out.

I have $80k in liquid savings (CDs, savings, and checking).

I have a spreadsheet showing where that $80k will go, and it's broken down approximately as follows:

$24k emergency fund
$15k car payments (I don't like to consider these regular monthly expenses). Interest rate is only 0.50% which is less than my savings
$20k maintenance/home repairs/improvements
$10k savings for future "big stuff" like furniture, new TV, laptop, vacations, etc. I "accrue" amounts for each of these each month.
$6k engagement ring, when the time comes
$5k remaining for whatever.

Now, most people would say that having $80k in savings is probably overkill. However, when I break it down like above, it doesn't feel like I have that much extra money. I feel comfortable that I won't have to worry about having to get new windows, appliances, carpeting, or whatever else because I have it covered. I am comfortable with my emergency savings. I have money set aside for my car payments. I have future furniture and other big purchases covered.

I have a few options I'm considering:

1. Put more toward mortgage. I'm earning 0.90% in savings and paying 3.375% on my mortgage, so this seems reasonable. However, I'd be paying it down quicker and foregoing some tax deductions on the interest.

2. Put more in 401(k).

3. Keep it right where it is and enjoy feeling "comfortable."

4. Put less in 401(k), add more to savings, because I might need some down payment money on my next house, which I assume will be in the next five years if I'm married and planning on having kids.

On that note, does it make more sense to pay down the mortgage more so I owe less at the time I sell? Or keep the money and have more to bring to the closing? Six in one, half dozen in the other? I would assume the former, paying it down, makes more sense because I'm paying more in interest than I'm earning in savings. However, that does not factor in the tax deduction.

As you could see, I'm all over the place. The good thing is that I have money. The bad thing is that I'm confused on where to put it.

Thanks.
livesoft
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Re: Where to put extra money?

Post by livesoft »

Have you entertained the idea of a taxable account invested tax-efficiently in index funds like the Total US Market index fund and the Total International Market index fund?

The money could be used for anything and over the long term should be expected to do much better than 3.375%.
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Triple digit golfer
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Re: Where to put extra money?

Post by Triple digit golfer »

livesoft wrote:Have you entertained the idea of a taxable account invested tax-efficiently in index funds like the Total US Market index fund and the Total International Market index fund?

The money could be used for anything and over the long term should be expected to do much better than 3.375%.
I've thought about it, but I may need some of the money in the not so distant future. I wouldn't want to use stock funds and I don't want to consider this part of my retirement portfolio.

How about a Vanguard bond fund? Are bond funds bad choices for taxable investments compared to CDs or savings?
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Re: Where to put extra money?

Post by livesoft »

Triple digit golfer wrote:How about a Vanguard bond fund? Are bond funds bad choices for taxable investments compared to CDs or savings?
Not nowadays since the yield on bond funds are so low plus they may lose money, so there is the possibility of tax-loss harvesting. Some folks get excited about a 2% to 3% CD, but I do not. I'd rather take my chances in equities when it comes to extra money.
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Triple digit golfer
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Re: Where to put extra money?

Post by Triple digit golfer »

livesoft wrote:
Triple digit golfer wrote:How about a Vanguard bond fund? Are bond funds bad choices for taxable investments compared to CDs or savings?
Not nowadays since the yield on bond funds are so low plus they may lose money, so there is the possibility of tax-loss harvesting. Some folks get excited about a 2% to 3% CD, but I do not. I'd rather take my chances in equities when it comes to extra money.
So say I'll need money in five years - what's my best bet? Just leave it where it is, in CDs and savings?
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Re: Where to put extra money?

Post by livesoft »

If you absolutely, definitely, must need the money in 5 years, then many people would argue that CDs are best.

if you have a squishy need or it is not really a need, but you could do with missing some of the money in 5 years or wouldn't mind waiting 6 years, then I would not be using CDs.

For example, suppose you invested in equities and within 3 years, they had returned 20%. You could shift to CDs then. Or you could have a mixture. Or if equities had lost money, you could tighten your belt and save more to make up for the loss. Or … something else.
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Triple digit golfer
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Re: Where to put extra money?

Post by Triple digit golfer »

Thanks for your input. I don't definitely need the money in five years. I have $80k and I anticipate needing a few thousand at a time for my larger purchases, but I won't be needing $50k in five years or anything.

If I put $40k in a taxable investment to save for a house and it performs poorly, I'd simply stay put in my current place until it came back.

That said, I'm not really comfortable with equity funds. Maybe 20/80 or even 40/60, but nowhere near 100% equity.

I've read some of the Boglehead wiki, but I'm struggling to understand why bond funds are worse for taxable investing than stock funds.

Say I put $40k in a bond fund and it returns 4%. I earn $1,600 and report it as ordinary income, right?

Now say I put $40k in a stock fund and it also returns 4%. Aren't the tax consequences the same, $1,600 in earnings as ordinary income?

Side question: Assuming I want the money in the near future (5-10 years, long before retirement) it makes sense to do taxable investing before maxing out tax-deferred retirement accounts, right?
livesoft
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Re: Where to put extra money?

Post by livesoft »

Non-qualified ordinary dividend income is taxed differently and at a higher rate than qualified ordinary dividend income and at a higher rate than long-term capital gains income. Pluse unrealized capital gains are not taxed.

So the bond dividend income would be taxed at a higher rate than the stock fund gains.
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Triple digit golfer
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Re: Where to put extra money?

Post by Triple digit golfer »

Help me out here. What does all that mean?

I'm in the 25% tax bracket. How would equal earnings from the following funds be taxed?

$1,000 on Total Stock Market fund
$1,000 on Total Bond Market fund
$1,000 on LifeStrategy Income fund

In the meantime I'll be Googling...
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Triple digit golfer
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Re: Where to put extra money?

Post by Triple digit golfer »

Also, my goal is to not lose money, while taking a mild to moderate risk in the short to intermediate term (about 5 years) with the hopes of beating savings/CD returns.

To me, this screams bonds. But in a taxable account, I'm trying to determine if it's even worth it, or if savings/CDs earning 1-1.5% makes more sense.
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Rainier
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Re: Where to put extra money?

Post by Rainier »

I probably wouldn't do anything. Most of your savings is earmarked for something. Maybe work your efund into I bonds over a few years and just forget about them.

I'd consider paying off the car loan. The interest spread isn't that big, and it's one less thing to worry about.
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Triple digit golfer
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Re: Where to put extra money?

Post by Triple digit golfer »

How about Vanguard Limited Term Tax Exempt bond fund (VMLTX)?

Seems to be a pretty safe investment and exempt from income taxes.

Or Vanguard Short-Term Investment Grade (VFXTX)?

Or any of the other bond funds that are low-risk?
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Kevin M
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Re: Where to put extra money?

Post by Kevin M »

You have until tomorrow to put some of it in a PenFed 5-year CD earning 3%. If you are not already a member, you may not be able to do it that fast. If you are, you can open the CD online and fund it with ACH transfer from your checking/savings account. I bet the CD gives you a higher after-tax yield than limited-term tax exempt. Once that deal is gone, you can still get a 5-year CD earning a little more than 2%, which still will beat limited-term tax-exempt after tax if you go by SEC yield.

You can invest in stocks in taxable and balance your AA with more bond funds or CDs in tax-advantaged, but factor in possibility of 50% or more loss when considering possible expenditures. At today's low rates, it's less clear-cut that stocks in taxable is best. Some argue that muni bond funds in taxable and stocks in tax-advantaged makes more sense, but I think we're in the zone where either could be better.

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Re: Where to put extra money?

Post by Kevin M »

Triple digit golfer wrote:Also, my goal is to not lose money, while taking a mild to moderate risk in the short to intermediate term (about 5 years) with the hopes of beating savings/CD returns.

To me, this screams bonds. But in a taxable account, I'm trying to determine if it's even worth it, or if savings/CDs earning 1-1.5% makes more sense.
If you don't want to lose money, that rules out stocks. And no, it doesn't scream bonds. You get a comparable or higher expected return from good CDs than from bond funds, and with less risk. You can easily beat 1-1.5% with 5-year CDs with reasonable early withdrawal terms. Look at the SEC yields and durations for various bond funds and you'll see what I mean.

Kevin
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Triple digit golfer
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Re: Where to put extra money?

Post by Triple digit golfer »

Kevin,

Thanks a lot for your posts.

I am not eligible to join PenFed. It looks like I could join National Military Family Association or Voices for America's Troops and pay a one-time fee of $15 or $20.

That's it? No catch? No recurring fees or anything?
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Re: Where to put extra money?

Post by marc in merrimack »

Triple digit golfer wrote:Kevin,

Thanks a lot for your posts.

I am not eligible to join PenFed. It looks like I could join National Military Family Association or Voices for America's Troops and pay a one-time fee of $15 or $20.

That's it? No catch? No recurring fees or anything?

No catch. The small one-time fee required to join an associated organization is it.
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Re: Where to put extra money?

Post by Kevin M »

^Correct. PenFed is one of those CUs that make it easy for anyone to join.

Kevin
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Twins Fan
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Re: Where to put extra money?

Post by Twins Fan »

With a screen name like "triple digit golfer" (high scores?), you may want to put extra money towards golf lessons. :D

Sorry, couldn't resist.

With all the potential expenses coming up within 5 years, I would just keep adding to savings... CDs work also, if you want.
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Triple digit golfer
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Re: Where to put extra money?

Post by Triple digit golfer »

I opened up a 5-year PenFed CD at 3%. Seems like a heck of a deal in this environment. Thanks for the suggestions, all!
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Re: Where to put extra money?

Post by Kevin M »

Glad you got in under the wire. PenFed rates dropped back to typical competitive levels yesterday.

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Watty
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Re: Where to put extra money?

Post by Watty »

Rainier wrote:I probably wouldn't do anything. Most of your savings is earmarked for something. Maybe work your efund into I bonds over a few years and just forget about them.

I'd consider paying off the car loan. The interest spread isn't that big, and it's one less thing to worry about.
+1

The PenFed you got will still be usable for some of the emergency money so that works good.

Paying off the car loan as you have the funds available will free up some cash flow each month which you can use to start saving up to pay cash for your next car.
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Triple digit golfer
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Re: Where to put extra money?

Post by Triple digit golfer »

I don't see the reason for paying off the car loan. I am only paying 0.50% and I'm earning more than that in my savings account.

Paying off the car loan to save extra money would be worse than I'm doing now, which is earning 0.85% and paying 0.50% on the current loan.

If I could borrow for less than I earn in savings, why pay off the loan?
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Re: Where to put extra money?

Post by Jack FFR1846 »

You sound like me at your age (I'm 57 now).

Here's what I did and I feel it worked out very well.

Max the 401k
Start buying US Savings Bonds. Once they hit 1 year, you can cash them out if needed. I use them as my emergency fund now.
Pay down the mortgage. If you buy a new, bigger house, it doesn't matter if you have the money in cash or the money in the house.
Pay off the car loan.

For the mortgage and car loan, figure out what your highest net interest is and pay that one down first. Since the bonds will take a year to be liquid, start small and just buy periodically. Once you're built up to a 6 month emergency fund, you can dump more into them. They are great in that you don't pay yearly interest and when you sell, there's no state income tax.
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Re: Where to put extra money?

Post by sdrone »

If you've got your financial house in order, there's no real reason not to consider dialing up the risk a bit with cash beyond your emergency funds.

Consider the fact that you don't have a lot of debt, and you DO have your emergency savings ($24k) taken care of. What that means is that, yes, it's possible you might need this money in the nearish future (new car? house down payment? I dunno) but the odds that you would HAVE to use it in the next year or low.

What I've done it that situation is using bond funds that give a higher return with a bit more risk (LQD - corporate bonds, for example) or a Swedroe portfolio,

So, for instance, you could take some of the cash beyond the emergency funds and funds needed in a relatively short time frame (as an example, property taxes paid twice a year in my case) and create an 80% bond/20% equity portfolio. The bonds are BND or a mix of funds, and the equity portion could be split among domestic and international smallcap.
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Re: Where to put extra money?

Post by Kevin M »

Triple digit golfer wrote:I don't see the reason for paying off the car loan. I am only paying 0.50% and I'm earning more than that in my savings account.

Paying off the car loan to save extra money would be worse than I'm doing now, which is earning 0.85% and paying 0.50% on the current loan.

If I could borrow for less than I earn in savings, why pay off the loan?
Good thinking, and I would be in no great rush to pay down a 0.5% loan especially when you can earn more than that in a CD with a comparable term.

However, you are paying income tax on the 0.85% and not getting a tax deduction on the 0.5%. Assuming 25% marginal tax rate, you are earning about 0.65% after-tax on savings, so a smidge more than you're paying on the loan. If you pay state income tax, factor that in too. At any rate, it's not much to pay to maintain more liquidity.

Kevin
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