What should I do with my extra savings?
I am 30 years old and have no debt besides a mortgage and car payments. I may need money in the near future for an addition to our house that would cost around $150,000. I have a 6 month emergency fund and an extra $30,000 in cash. I also started a 529 plan for my 6 month old daughter paying $100 a month. With my career, I have a pension but also put $900 a month into my deferred compensation. Should I pay a down mortgage early, (at 3.8%) or start a Roth IRA? Should I consider putting money in a CD?
To accurately answer your question, I’d need to know a little more about your goals for the future. For example:
- When do you want to retire?
- What size pension do you have and how long do you plan on working there?
- How much do you plan on spending when you retire?
- How much do you currently earn?
- How do you plan to fund the addition?
- How much do you plan on paying towards your daughter’s education?
That being said, here are my initial thoughts:
Given that you know you have a $150,000 expense on the horizon, it would likely make sense to keep the excess cash liquid so you don’t have to dip into the emergency reserves.
A lot of high yield savings accounts are currently paying more than short-term CDs and wouldn’t require that you lock up the cash.
Paying down the 3.8% mortgage wouldn’t make sense if the financing costs of the addition are going to be higher than 3.8%.
The Roth account may be a good option if you are eligible to contribute and the funds are invested for the long term, but if your retirement goals are being covered by your other accounts, it may make sense to put the money towards nearer term goals that are underfunded.
You’re truly one of the exceptions for the public assumptions of the Millenniums, who are indebted with student loans and live in the basement of the parents’ home, so congratulations first.
You have asked a very practical question—what to do with the extra cash after you make the contributions to a work sponsored retirement plan and have the emergency fund.
Here’re some of my thoughts:
1) Contributing to a work retirement plan is different than maxing out the plan. In other words, find out what’s the maximum you can contribute to a work retirement plan. BTW, is the deferred compensation the only plan offered, or is there another plan for the retirement?
2) Starting a Roth will give you so much retirement options and flexibility. You may not see it now, but you will be glad you did when you approach the retirement age. Furthermore, any contributory Roth IRA has an additional advantage, serving as another source for an emergency. Therefore, I would not hesitate to start one soon.
3) If you want to pay down the mortgage, simply by paying extra towards the principal each month will definitely shorten the time and save the interests.
4) Lastly, just because you don’t have other personal debts, the mortgage and car loan still need to be paid off. Thus, you need to manage your risk of premature death and disability. You may want to start with inexpensive term-life insurance for the aforementioned liabilities and your daughter’s future college cost. Also, get a private long-term disability that compliments with your work sponsored disability benefit.
You’re doing the right thing. The next step is to consult with a CFP® who can guide you further in investing, college planning, and retirement planning.
You've gotten some terrific answers so far and as mentioned by another advisor, great work so far on your finances at a relatively early stage of your investing career!
If you know with certainty you're going to need the money for the house addition in the next 24 months, I'd keep it simple and stick to a high yield savings account.
If you're looking at more of a 3-5 year time horizon for the home addition, then definitely consider a Roth if you're eligible.
If you're not eligible for the Roth, then consider opening up an after-tax brokerage account.
We'd also really need to chat more about how likely this home addition project is, how much cash you need for it versus how much you'll borrow, and the potential timing of the project. This would dictate how we invest the money. Long-term money gets the standard playbook of a low-cost, well diversified portfolio of ETF's. Shorter-term money (3-5 year) gets a different approach, particularly if you can tolerate some downside risk to potentially capture larger returns.
Best of luck with this decision and with what looks like a very bright financial future!
With Kind Regards,
You need to first identify your priorities and liquidity needs. You have the first bucket filled which would be your emergency fund. You are filling your second bucket which is the savings for the house addition. Is this something that is a definite? Will you be financing the house addition? You are saving $900 a month into a deferred compensation plan. Is that a 401(k) plan? If it is a 401(k) plan, that is good as long as you are taking advantage of the full company max. I recommend that you save between 10-15% of your salary into your work retirement plan.
With your home mortgage being 3.8% (which is quite low), I would recommend saving to a Roth IRA if you are eligible. If you are married filing jointly and your combined modified Adjusted Gross Income is in excess of $194,000, then you would be ineligible to contribute.
With interest rates being this low and the expectation of an increase in the future, I would not recommend locking up your savings in a CD. If you want to keep money in cash, then a regular savings account or money market would be fine. If you want to maintain the safety of principal but getting a little more interest, then consider a short-term bond with Vanguard.
Hope that helps.
Bear in mind that any advice here is going to be very general - not specific to you or your situation. There are nowhere near enough details for anything more than generalities here.
(a) you're putting away a good deal into retirement (presumably by "deferred compensation" you mean a 401(k)?) How much is there? Have you run any kind of projections to see if that's going to be enough for your future retirement?
(b) with that mortgage rate, and at your age, there's very little reason to consider accelerating paying down that mortgage. Partial pre-payments don't help your monthly cash-flow (they shorten the life of the mortgage, but your monthly payments generally stay the same), and much of your investing should be long-term and you likely have a fairly high risk tolerance, so over the long run, you should be able to get a better return (with a lot more risk, of course) investing rather than speeding up your mortgage. Moreover, mortgage payments result in a highly illiquid asset - an increase in your home equity - rather than a liquid asset (savings, retirement account, etc).
(c) if you're eligible to put money into a Roth (mainly due to income limits) - it's almost always a good idea. Direct contributions to the Roth may also be able to be removed (though not the growth) without tax or penalty - so there's often no reason *not* to put excess cash on hand into a Roth if you have it available.
(d) the 529 is a great idea -- but, and again, this is just in general, if you're not maxing out the Roth IRA first, you should probably be doing the Roth.
As to how the Roth and the "extra" cash are invested - you need to assess your goals, time horizons and risk tolerance. If the Roth money is really going to stay invested for the very long term, for your retirement (which it should!) - it's a great place to be aggressive and look for the most long-term growth, since all that growth will eventually be tax-free.
The other $30K -- again, what's it for? How much risk can you take with it? If you need that full $30K to be intact and at least $30K in the shorter-term future (i.e., to pay for that addition to the house) - then perhaps you cannot afford to take stock market risk with it. Think about how it would affect your plans for that money if a substantial chuck wasn't actually there when you'd planned. Just making up numbers here, but suppose the stock market went down by 40% (again) right before you needed the money -- could you postpone the project or spend a lot less on it? Is that a risk you're prepared to take? If not, then you can't put all of that "extra" into stocks.
Sorry I couldn't be more specific. If you can find a CFP professional financial planner nearby who works on an hourly basis, you may really benefit from paying for an hour or two of time for a consultation.