What's the best thing to do with excess wealth at age 30?
I have excess funds and am unsure what to do with them I'm 30 years old with a stable job and single. I've already contributed to reach my company match on my 401(k) and maxed out my Roth IRA contributions. I have already set aside 1 year of emergency funds. Now I still have excess savings, and I'm unsure of what to do with the money. First world problem (I know), but what do you recommend to help grow my wealth?
First, I want to congratulate you on contributing as much as possible to your retirement plans at a relatively young age. This is something we always recommend, but many lack the discipline to do. One year of emergency funds is a great cushion! We typically recommend at least 6 months, but this should be based on a number of factors including the cost of living in your area, your expenses and comfort level.
As you mention, excess savings is a great problem to have. Now that you have hit all the basics, you need to figure out your objectives for this excess money. Will you need to access this cash to buy a house with in a few years, or are you looking for longer-term growth and may not need this money for 20 to 30 years? Basically, the most important piece to determine how to invest is your timeframe. If you have a long-term time horizon, you may want to take on more risk with the potential for stronger average returns, but if you have a shorter horizon, you should consider having less risk, which generally means giving up some of those potentially better returns.
Figuring out your time frame is easiest by sitting down with a fee-based wealth advisor, but there is, of course, a fee associated with having access to more personalized advice. If you want to figure out an asset allocation on your own, the general rule of thumb is that longer-term means you can take more risk, which means more equities and less bonds in your portfolio. If your time frame is shorter, then you would want more bonds and less equities. You should also consider the fees associated with any investments you want to make. To have a better understanding of the investment fees you are paying, read: Mutual Fund Fees: How To Know What You’re Paying For.
After you determine your allocation, open an individual or joint account at a custodian of your choice. Schwab, Fidelity, TD Ameritrade all have strong reputations, and you can invest in many options there. If you are doing this yourself, it is likely easiest to buy a few index funds that will give you the desired level of equity and bond exposure. If you would rather not navigate this yourself, a financial advisor can coordinate all of this for you!
No, please wait! Just kidding!!!!
My words of advice are this: Avoid any insurance product that is pitched for "tax deferral". May sound good now but such products are ridiculously overpriced, destroy liquidity and just push you into higher tax brackets when you do want your money. Let me broaden that to say, don't invest in anything that does not stand on its own investment merits without any alleged tax benefits. Never invest in anything where you need to borrow back your own money to spend it. Other than municipal bonds, in 30 years I can't think of a tax advantaged investment that I didn't regret using for my clients.
What to do: Start building a very solid boring portfolio of high quality large company stocks. Stocks are tax deferred until sold. Unlike annuities and insurance products, when cashed in you pay lower capital gains taxes instead of higher ordinary income rates. Individual stocks have no insurance or management fees. In 30+ years every single account of substantial size that a client has inherited looks nearly the same - filled with bellweather stocks (yes many pay dividends that are taxable, but like capital gains at a lower tax rate). Reinvest dividends when paid and take advantage of compounding.
Read about investing - not the BS "How To..." books, but focus on books about or that interview real successful investors. Read about Warren Buffett. Read the series of books by Schwager - The Market Wizards, The New Market Wizards... Also "Just One Thing" by John Mauldin. Anything by Michael Lewis. By 40 you will be your own market "guru"!...and pretty darn wealthy!
First of all - congratulations! You're doing great taking care of your money and saving for your future.
Since you've already taken care of the "big three" initial steps - matching contributions to 401(k), Roth IRA, and emergency funds - the next step is really up to you.
If you want to save extra money tax-deferred, work towards maxing out your 401(k) contributions. For 2018, that max will be $18,500/year.
If you want to save for "life events" - kids, house, vacations - consider opening up a non-qualified investment account. (If you're comfortable investing just use Vanguard or Fidelity. If you want a little help look into Personal Capital or Betterment. If you want more detailed help, consider looking up a financial advisor.)
If you want to invest in real estate, work towards understanding that market and build up your cash position to be ready to deploy.
If you want to invest in start-ups, consider looking into angel investor groups in your area.
At this point you have great flexibility and a wonderful opportunity to build your wealth for the future. It's a first world problem for sure - but one that is very important to come up with a solution that works for you!
Here's an idea for you: use a First World problem to solve a Third World problem. Talk to a good estate planning attorney and set up a charitable giving program to help people in need. There are many people suffering in this world, and some of them probably live on your block. Structured properly, this program could alleviate hardship for years to come.
And you know what the best part of this commitment would be? It could make you a better person. When you dedicate a portion of your resources to helping others, you become more of a giving person. Not only that: when you give more, you get more.
A charitable giving program with your extra money would be a win-win all around.
Congrats, that's a great situation to be in. First of all, you should consider what the purpose of the excess money will be for. Do you want to start saving for a home? A business? Accumulate wealth? etc.
You mentioned growing your wealth, so I'll assume that you plan on investing it. Maxing our your 401(k) would be the next tax-advantageous move, in addition to contributing to an HSA (health savings account) if you're a part of a high-deductible health plan. Maxing out the 401(k) (18k limit) for 2017) and HSA (3,400 limit for 2017) would reduce your taxable income. The HSA is can be used for qualified medical expenses, however if you have excess cash to use outside of the HSA for medical expenses up to your deductible you may consider doing so. The reason being is HSA's can invest the tax-deferred funds. ANOTHER bonus of the HSA is it essentially turns into an additional retirement account at age 65, when funds can be used for any expense without penalty.
Lastly, you could consider opening a taxable account to invest the money. You won't receive any tax benefits but it's more accessible and liquid than say your 401(k).