What to do with 70K

[tshank]

First off I truly enjoy reading all posts on financial advice, now I could use some.....I'm Married with a stay at home wife with 2 young boys, Annual salary of @80K in my mid 30s. I have @250K in 401, 20K in Roth (mostly CD's around 5.25%) and 15K in saving account for Emergency Fund. I also have 72K in a high yield at only 2.35%!!!! I have no CC bal. just a mortgage and car payment. I was thinking of keeping only 5K in the EF and transferring @80K into something?? ?? I have no need for the 80K in the near future... What would you do??? Thanks in advance for any replies

[humandraydel]

Well, the natural answer for this is to invest it (not save it)! Have you already maxed your Roth for the two of you for 2007? If not, I'd do that first. After that I'd open a taxable account and invest in some low cost, tax efficient mutual funds. Vanguard Total Stock Market Index (VTSMX) comes to mind.

I guess another option is to buy a rental property or something, but I don't like that option as much - too much work!

BTW, what is the interest rate on your car and mortgage?

[tshank]

I have $150 withdrawal from my paycheck for my Roth. Your saying just put in 4k in one lump sum? Also I thought my wife wasn’t able to have a Roth since she had no income. If that’s not the fact then yes I will start one for her. My car is 5.75% w/6k bal, my home is 5.375% w/230K bal.

[LivingAlmostLarge]

Yes, do the Roth for 2006 for you and your wife. And then do the 2007 contribution a few days later. I'd keep the mortgage, rate but I would personally pay off the car because I'm lazy. You can beat that rate, but for me it would be the hassle of dealing with the loan. I would leave alone 6 months of cash in an EF and invest the rest. Especially since you have a SAHW I'd be inclined to 6 solid months in cash in case you lost your job or were disabled.

[Ima saver]

Your wife can have a roth, you can put in 4K a year for you as long as you have earned income. First, i would put the balance of your money into a money market account paying at least 5%. There are many listed on here. I have my money locally put in appalachian bank, earning 5.25. Then I would start investing in a mutual fund, a little every month. My money is in Vanguard index 500, which earned about 16% last year. (that is not always the fact, it varies)
I goofed about the roth for your wife, I meant to say you can put in 4K a year for Her, as long as You have earned income.

[Ima saver]

Oh yes, put it in to a two roths ( one for each of you) for the year 2006. You can do this if you do it before April 17, 2007. Then put the max in the same two roths for 2007.

[creditcardfree]

As you know you are not getting a very good return on that money. First, get the Roth started for your wife...$4K for 2006 and $4K for 2007 in one lump sum. Do the same for yourself if you have not already done so.

I'd also pay off your car, but that's just me...I'm debt adverse. If it were me, I'd probably pay down my mortgage...but investing it is an excellent idea, too!

Think about your kids college funds...look into 529 plans where you might invest a lump sum for each child and then let it grow tax free until they need it for college. Money in 529's can then be withdrawn tax free when used for qualified expenses.

Then...invest the rest into one or more mutual funds...joint account with your wife. All dividends and capital gains will be taxable in this type of account. Only do this if your time frame for the money is more than 5 years.

[Scanner]

All great suggestions - it does depend on your goals overall. My goals are fairly low - a million dollars + house paid off by 55 y.o. I also have 3 travel destinations - Scotland, Iceland, and Hawaii before I die. I realize that spending while I am younger, in my 40's, does mean I will work part-time into retirement. But I rather be hobbling 10 hours week at my job or teaching with a bum knee vs. hobbling around Scotland with a bum knee when I am 65.

So. . .I say. . .it's time to revisit your goals.

Maybe spending some of that money is not a bad idea.

I think the forum would be good to know there is a difference between saving and hoarding.

However, I would say the tax man is your only worrieth.

While you are deciding, move it into a tax-free municipal bond fund and let the money earn interest tax free. Find one for your state - T. Rowe Price has many different no-loads for states (New Jersey I live in).

Then, decide how much you will invest and how much you will spend.

Good luck.

[Aleta]

I agree with so many ideas above. The only thing that I would suggest is that you make sure that since you are the bread winner now that you have some disability insurance. First, as everyone says you need to max our your retirement plans and one for your wife as well, fund your emergency fund at 3- 6 months. If you're making $80,000, you should fund about $6,700. a month to your emergency fund and 6 months would definitely be better. You're paying $345. a year in interest for your car and you can't take that off of your taxes. If you're making 2.35% on 72,000., you're making in $1692.00 in interest that becomes taxable on your taxes. Also, you might be able to drop some coverage from your car insurance once it is paid off. Right now you are up-side-down in paying interest and earning it. It would be a good idea to start a car fund too because you may need to replace that car in the future, or you may put some money to the side for car maintenance. And like people say here, investing a little at a time in a tax efficient mutual fund is a good idea. With so many articles being written now about cash being King, many are taking advantage of the higher rates. Over 5.25% is a pretty good return for a safe investment vehicle right now until you know what you want to do.

[disneysteve]

I also agree with much of what has already been said. Let me start by clarifying a couple of earlier posts.

You can have a ROTH for each of you. You can fund it as a lump sum (in fact, there are advantages to doing it that way). You can fund it all at once - no need to separate your 2006 and 2007 contributions by a few days. The deadline for funding for 2006 is April 16, not April 17.

I would also pay off the car.

I would also stop referring to your 2.35% account as high yield as it is most certainly not.

Aleta suggested 6 months of EF at $6,700/month, but keep in mind that your EF should be 6 months of expenses, not necessarily 6 months of income, so you EF can probably be a fair amount less than $40,000 when you actually sit down and figure out your true needs.

My final thought at the moment is to review your desired asset allocation and make sure you are sticking to it. You don't say how your 401K money is invested, but assuming it is 100% stock, you are about 70% stock/30% cash. Is that where you want to be? And is that accurate or is some of your 401K money also in cash instruments or bonds? Everyone's risk tolerance is different. Personally, if I were in my mid-30's, I'd want to be more aggressive than that (though you may feel differently). My point is to keep your eye on the big picture. Chasing higher yields is important, but keeping to some set overall allocation is even more important.

[katwoman]

Originally Posted by Scanner

However, I would say the tax man is your only worrieth.

While you are deciding, move it into a tax-free municipal bond fund and let the money earn interest tax free. Find one for your state - T. Rowe Price has many different no-loads for states (New Jersey I live in).

This is spot on!

You remember the old saying "you can't be too rich or too thin". Well to that I would add "you can never have too many tax free vehicles". The Roth's are most definately something I would do!

BTW, how are you set up for life insurance?

[Aleta]

Disney Steve: Thank you for that correction about the expenses. Even if there was a time where you were unemployed; I'm sure that you wouldn't be spending the same amount on holiday gifts or clothing. I was just using the monthly amount as a starting point. Also, you probably wouldn't be saving money as well. It's what it is: Emergency Money

[tshank]

Thank you all for the info.... first thing is first paying off vehicle and getting no less then 60k either ING or Hsbc for starters.

[TBH]

Did I misread you or did you say you have your ROTH invested in CD's? Mid 30s is young. Definitely revisit your asset allocation. If you're nervous about picking stock funds, choose a good target-date retirement fund. That will serve you much better than CDs with the kind of time frame you're talking about.

I agree that paying off the car is a priority, and I agree that it's good to have 6 mo of living expenses easily accessible. If it were me I'd fully fund Roths for 2006 and 2007 and then put the excess toward college funds.

[jIM_Ohio]

Originally Posted by TBH

Did I misread you or did you say you have your ROTH invested in CD's? Mid 30s is young. Definitely revisit your asset allocation. If you're nervous about picking stock funds, choose a good target-date retirement fund. That will serve you much better than CDs with the kind of time frame you're talking about.

I agree that paying off the car is a priority, and I agree that it's good to have 6 mo of living expenses easily accessible. If it were me I'd fully fund Roths for 2006 and 2007 and then put the excess toward college funds.

This was my initial reaction as well. A Roth is "denser" and should be the core of the investment portfolio. Denser in that it has already been taxed, so you want the value of the Roth to be as high as possible (relative to 401k balances).

If you need a conservative allocation, look for something conservative in the 401k.

Conventional wisdom is 100-age in bonds/ cash.
My alternative is no bonds/cash until you are less than 20 years to retirement, then it's only 1% per year (so 1% 19 years away, 2% 18 years away... 20% the year you retire). You are in your 30's... if you are 35 and retiring at 55, I could see maybe a 1-5% bond/cash allocation

5.25% is an OK return... but inflation at 2% makes this only a 3% return, and you should be trying to beat inflation by 4-6% while accumulating (is my advice). If you are risk averse, then their are some alternatives to just stocks.

As far as the emergency fund, My suggestion would be ladder some CDs. Take 1 months worth of expenses and open a 3 month CD. Do the same the next month, And then again the third month. Each month you will have a 3 month CD maturing and keep rolling this over.

Leave one more month's expenses in a savings account. I would invest the rest. Suggestions would include

1) individual stocks (if you have more than 20k to invest, buying ~1k of 15 individual stocks would be cheaper than owning a mutual fund from an expense point of view). The taxes paid will be controlled by you if you choose to sell a stock. If you wait a year to sell, you pay long term capital gains (15%) on any gain.

2) index mutual funds
3) municipal (tax free) bonds

If you choose 3), consider keeping the 401k and Roth in equity/ real estate/ commodity type investments and away from CD's and Bonds.

FYI, I am 34 and am nearly 100% invested in stocks. I owe slightly more on my house and don't have as much cash set aside as you... so I am suggesting a route similar to what I already am doing.