I am saving $50,000 a year and have $175,000 in a money market savings account; what should I be doing with this money?
I have about $175,000 saved in a money market savings account and continue to save about $50,000 a year. I also maximize contributions annually to my 401(k) at a total of $18,000. Does it make sense to keep saving? I have an investment property that has about $80,000 left in the mortgage. I am considering buying another investment property or investing in other ways. I am not familiar with trading, so I wouldn't know where to start with that option. What are my investment options?
Before you do anything more understand that what you "should" do is determined by "what" you are trying to accomplish.
The "what" for most people include things like retirement, getting married, raising kids, buying a home/second home, starting or maintaining a business, and setting up funds to be left behind for your heirs (or heirs to be).
These things must be defined before any advisor can tell you what you should do. If you do not yet have defined goals then the default investment options are short-term cash equivalents like money markets and CDs.
Once you define your goal(s), then the "should" becomes more apparent. Time frame is critical, followed by your risk tolerance or risk aversion.
If you are saving for retirement, then thngs like IRAs, annuities, and cash-accumulating life insurance can be considered. These and other products designed for retirement savings are tax-deferred. This means the earnings in the accounts are deferred until withdrawn. However, the IRS penalizes you if you withdraw the money before you reach age 59 1/2. This restriction means that money being saved for a goal like a second home purchase, something to be gained sooner rather than later, should not be invested in any tax-defrred investments unless you will turn 59 1/2 bfore the money is needed.
Similarly if you are saving for something that is to be accomplished sooner rather than later you'd have to consider the time-frame related restrictions of the investment or the account type but also the amount of risk the investment presents (you do this with all investments and goals but the shorter time frame makes it even more critical). For example, if you were targeting a second home purchase in five years you'd want to minimize exposure to risky investments by looking at investments that will perform well and safely over five-year periods. This is because investments like equity mutual funds can do very well over time but they are unpredictable and can lose money over the mid-term and short-term. You wouldn't want to invest today for a home in five years but end up with less money than you started with for that goal.
However, some investors are willing to take extra and unnecessary risk. But that is an indiviual decision. My advice is to segment your savings by identifying your specific goals. Start with short-, mid-, and long-term goals. Then consider the amount of savings you are willing to commit currently and progressivley to each goal, appropriate for each goal's time horizon, until the time at which you anticipate reaching the goal.
Finally, look at the investments that are likely to get you the returns you need to achieve your goals and that are appropriate for the time horizon. I always try to take the least amount of risk necessary to achieve each goal. But take as much risk as you are comfortable with. Just remember that although you could end up with more money than you need you might end up with less.
Your situation resembles that of one of my clients. The $175,000 cash balance is higher than what you require as household working capital. Typically 6 to 12 months expenses should suffice. You can use some of that cash. Paying off mortgage is a good first step.
The mortgage rate on your current investment property is much higher than the rate you are earning on the money market savings account. I'll assume that your mortgage rate is 4.0% and the money market savings pays you 1.5%. Remember ... every dollar you invest in the mortgage SAVES you 4.0%. That's a good risk free return on investment.
After paying off the mortgage, you'll still have $95.000 in the bank. At your current rate of saving, your cash reserves should be built up to the point where you can put a down payment on another property within 6 to 9 months.
I would advise that you evaluate your situation- job security, expected expenses in the future etc to come up with the amount of money you can invest for the long term. Make sure you also keep enough money for emergencies, usually 6-12 months of expenses depending on your situation. The rest you can invest in a portfolio of stocks and bonds depending on your age, risk tolerance etc. If you invest for the long term and you are able to ignore/tolerate the volatility of stocks then you will do well over time. In addition, if you plan to add money to the account periodically, then over time, you will also be dollar cost averaging.
You will also have to decide how you invest in stocks - i.e. what vehicles, market capitalization, geography, value, growth etc. Some areas of the market are quite expensive while others are cheap, and your portfolio will have to take that into account.
You mentioned 'trading' in your question, I would recommend that you avoid trading and instead invest your money. In general, invest in stocks and bonds as you would in real estate- for the long term, without looking at the account balance often and adding more money over time (As you would if you had a mortgage).
This exercise needs a lot of initial and ongoing work and if you are not able to do it or devote the time, you should hire a financial advisor.
Your question is completely open-ended and doesn't speak to any goal you are trying to acheive. I feel like you need a goal. Your goal should be something along the lines of "I want to be financiall independent by age ??" Financially independent would mean that you could work if you wanted to, but wouldn't need to. You could draw enough monthly income from your investments, and perhaps social security, to meet your expenses and give you adequate disposable income. So the first thing to do is determine what that monthly income would need to be and by what age. Is it $4,000? $5,000? Only then can you answer the questions of whether you should keep saving and where you should put the money. You do need to keep saving. You do need investment advice. You do need investment products, besides that money market account, if you're going to meet the goal.
For starters, congrats on saving at such a nice clip. Certainly putting all of those funds in a money market or high yield savings account earning 1-2% isn't doing anything for your long term goals. I would look into opening a non qualified brokerage account and start funding that. Where to start depends on your comfort or want to engage with a professional or do it yourself. Perhaps I am biased but I certainly think working with a financial planner will substantially outweigh any costs. They can help you figure out risk tolerance, build a plan, and stick to that plan. Your other option is to open up an etrade type of account and go it alone by systematically investing in some mix of liquid funds/etfs. As for the investment property would have to know a lot more about you and the opportunity before I could fully comment. In general I lean towards liquid market investments over real estate but then again that is why they make chocolate and vanilla!