What should I do with an extra $2,500 monthly cash?
I need some advice on what to do with some extra monthly cash flow. I currently have two car payments and a house payment. At this time I have roughly $2,500 extra cash flow per month. I am currently putting the extra on one of the vehicle loans. One should be paid off in about eight months and then I plan to put all of the extra on the other. Both should be done it about one and a half years. My employer 401(k) is currently funded and my wife is contributing around $6,000 per year. I will still have a home mortgage after that which is 3.7 percent interest. What would you suggest to do after the vehicles are paid off? Pay on the mortgage? Fully fund my wife’s 401(k)? What other investment options should I consider?
I suggest you consider opening and funding a nonqualified investment account at a reputable online broker. Charles Schwab, Interactive Brokers, and TD Ameritrade are good choices. Also, consider engaging an independent advisor at one of these brokers.
At 3.7%, assuming that's a fixed rate mortgage, I think it makes sense to pay off your mortgage as scheduled and not prepay. Also, from a diversification perspective, I believe it's a good idea to not put all your eggs in one basket, i.e., qualified retirement accounts. The future is uncertain regarding tax rates and your need for pre-retirement liquidity.
Great idea to plan ahead. First, you're doing the right thing by applying the extra $2,500 per month to the auto loans. Continue to execute your plan until both are paid in full. I'm assuming you have no other debt, besides the mortgage that you mentioned.
Once that step is complete, I'd first recommend that you build an emergency fund of three to six months of expenses (here's a post to help decide the right amount for you). Once that is complete, make sure you and your wife are saving 15% of your income into accounts for your retirements. This may be a 401k, traditional or Roth IRA, brokerage account(s), etc. Should you reach that goal, then focus on saving for your children's (if any) college costs. If you have that covered as well, then look toward paying extra principal payments on your mortgage. Note: these are general recommendations and, at times, a different plan would be appropriate for some people. I'd need to know more about your situation to determine the proper steps for you.
Thanks for our questions and please contact me if I can be of assistance.
John Madison, CPA
It’s a great idea to plan ahead. After paying off your car loans, and so long as you’re making your mortgage payments regularly, it’s a good idea to max out contributions to both your and your wife’s 401k plans. Remember that while you can take out a loan for a car or mortgage if need be, you can’t take out a loan for retirement, so allocating this extra cash is a good long-term investment.
You didn’t mention your age or financial goals, but we always recommend that before you allocate your funds to an investment, you have enough cash to cover 3-6 months of living expenses. This emergency fund will help make sure you’re covered in case of an unexpected event, such as a costly medical expense or a job loss.