28 and All Money in Checking / Savings - what to do?

[snafu]

Congratulations for success as a young entrepreneur. Leaving so much cash in bank accounts suggest you are very risk adverse and that is an important factor in any investment plan. You need to understand that with current paltry interest rates, you are losing buying power which is actually a negative investment plan. I'd like to caution that whatever the investment, you will see it go up and go down, that's the nature of equities [stock] and bonds as well. You will need to stay calm in downdrafts and look to the cause. Please understand that there are no dumb investment questions. Keep asking questions, here, with any investment representative, any bank, any site. You need to know and understand what you are buying and why you are buying it!

As you become more comfortable with the process and understand what you are holding you will need to review it at least twice a year and tweak annually if you believe economic conditions are changing. I add yet another voice of support for the bogelehead site.

[elessar78]

I am 28 and currently have all of my money in a checking and savings account. I know I should be investing, but I'm not sure who to look to or "sign up" with. How do I decide who to take advice from? I feel like all of the financial planners I've meet are just sales guys trying to sell their product.

I'm not sure what info you need, but I'm married with a daughter (who is 9).

The only debt I have is a $300,000 mortgage. (About a $2,200 a month payment .)

I have $400,000 in my savings & checking combined.

The last years I made $410k (2011) and $450k (2012).

So, the question is, where do I invest? I know having money in a checking account is stupid!

Yes, your instinct is correct about the financial planners. Not all, but most will be that way. Do very thorough research and see who echoes what your research has told you—that will give you the best clue who you can trust.

Keep your overhead low and you should be fine if your income will stay at that level (or go higher in the future).

[~bs]

The original poster seriously needs a good cpa/financial adviser. A lot of normal advice isn't going to apply to someone making 400k/year. Also, many times income at that level is pretty variable. Is it 100k salary + 300k bonus? Or is it solely off business income or is it all w-2 income? What are the chances of getting laid off, etc. He's talking about contributing to iras and stuff, and the contributions aren't even deductible. he can't contribute to a roth because he's over the income limits. Of course, he could do a non-deductible ira contribution, then do a backdoor conversion to roth.

If he's self employed, other options open up that allow him to contribute more than he would with normal iras/401ks, including his own pension plan. Defined benefit plan contributions max at 200k/year.

At this level, avoiding professional advice to save a few grand is pennywise, pound foolish. At least in my opinion. His income is at a level where the risk of being audited is already very high, and he's going to want qualified professionals in his corner in case the irs comes knocking and to manage the money unless he's willing to figure out how to do everything by himself.

[elessar78]

The original poster seriously needs a good cpa/financial adviser. A lot of normal advice isn't going to apply to someone making 400k/year. Also, many times income at that level is pretty variable. Is it 100k salary + 300k bonus? Or is it solely off business income or is it all w-2 income? What are the chances of getting laid off, etc. He's talking about contributing to iras and stuff, and the contributions aren't even deductible. he can't contribute to a roth because he's over the income limits. Of course, he could do a non-deductible ira contribution, then do a backdoor conversion to roth.

If he's self employed, other options open up that allow him to contribute more than he would with normal iras/401ks, including his own pension plan. Defined benefit plan contributions max at 200k/year.

At this level, avoiding professional advice to save a few grand is pennywise, pound foolish. At least in my opinion. His income is at a level where the risk of being audited is already very high, and he's going to want qualified professionals in his corner in case the irs comes knocking and to manage the money unless he's willing to figure out how to do everything by himself.

Really? Think of all the young professional athletes who are broke within 4 years of retirement. It's kind of a paradox, but he's gotta know what good advice is if he's not going to be taken (at least have a good idea).

I do think you should talk to an accountant. I don't make near as much as you but he's worth every penny for me.

Look, if you live within your means and follow sound fundamentals of personal finance you should have more than enough to live comfortably AND save for the future. Just don't get sucked in by trying to have outward symbols of wealth (cars, giant well-furnished houses, boats, clothes, etc). You make enough that even with just matching the returns of the SP500 and smart bond allocations, you should see rapid accumulation of wealth.

All the adviser will tell you is where to put surplus money, how to reduce your tax exposure, and in dire cases show you how to make a budget.

Even in another thread right now, another poster is getting cleaned out by hidden fees on mutual funds. Funds no different than most financial planners would steer you toward. The paradox about a good financial planner when it comes to one's investments is that they probably should appear to be doing very little.

IMO, the typical financial planner will talk to you about what your goals are and your risk tolerance. Then talk about how he's got funds that outperform the market (with graphs and numbers to boot).

[~bs]

^

Yes because without a bood advisor, the athlete is more likely to bow the money in 2 years rather than the 4 you mentioned. If he folows the advice of a crappy advisor, the atlete (no financial acumen) is stil better off. And assuming someone is making a de ent amount of money at their job, their energy may be bettwr spent on making more money than figuring out how to file their own tAXES and the appropriate investment vehicles. DIY is not always the best approach and cam cost you dearly if you screw. p. Sorry about the typos, doing this on my phone.


And the income source does matter big te for income avoidantechnique s
Hes already losing a lot of money in opportunity costs by sitting on cash and paying ordinary tax rates on all the income

[Gailete]

I don't think anyone here disagrees with getting some or a lot of advice from a financial advisor, BUT we do think that the OP NEEDS to educate himself about the basics of financial investing so he both understand what the advisor is saying AND so he can ask pertinent questions. If the advisor can't answer questions adequately either because he talks over the guys head or doesn't seem to know the answer to the questions, it is better to go talk with someone else than trust a person to help shepherd your funds who is either not so bright or not on your wave length and perhaps a scammer to boot (as in churning accounts to make a better commission for himself). That is really what you need to look for, a shepherd, that watches over your assets as well as you yourself would if you had the knowledge and time.

Not sure if this holds out in investment land, but we have found that female doctors sit and listen and it is much easier to question them and be able to understand them than male doctors (I'm an RN so I generally know what doctors are talking about, yet when I am a patient that doesn't mean they always makes sense, but I always understand my lady docs--no offense DisneySteve ). So don't think that just because a potential advisor is a woman, don't pass her over because of that, you may find she is a great asset to you.

[scfr]

Justin24 - Sorry I'm late joining the discussion. Hope you're still around to see this.

You are correct that many financial planners are simply salesmen out to make a commission. Whether or not you decide to consult with a planner in the future, the first step is to build your knowledge about investing. A book that is a good basic, no-nonsense primer is the "Wall Street Journal Guide to Money and Investing." Later on, you'll want to do more reading. As a business owner, you may enjoy and learn from "The Millionaire Next Door" and "The Millionaire Mind."

Much of the traditional financial advice out there is geared towards salaried folks who get a paycheck from their employer. As a business owner, you need to either create your own rules or adapt the traditional "rules of thumb" (which I have also heard referred to as "rules of dumb" ... so don't take all of them at face value) to fit your situation.

Cash in Bank: Ignore anyone who says something like "no one should have more than 6 months living expenses in a bank account." That's a blanket statement that often does not apply to entrepreneurs. You'll have to decide for yourself what is a safe buffer for you and your family. For example, if your spouse does not work, you do not keep a decent balance in your business account, and you have only 1 major client with few prospects of getting a new one if they walk away (or if you have several clients but it's a business with lots of ups & downs), then you already have already taken on a great deal of risk through your business. It would make sense for you to invest very, very conservatively. Having enough cash in the bank to cover several years' expenses is not unreasonable. It sounds like your business has given you a great return on your "investment" (in yourself) so far. Do not do anything like pull your money out of the bank to put it in stocks so if that would put a squeeze on funds needed to keep the business going. Priority number one is keeping the business solvent, even in the bad years (unless and until you decide that the best thing is to shut the business down).

Tax Savings, Retirement Plans, and Investing: I recommend a one-time consult with a smart, reputable CPA who is knowledgeable about retirement plans. Tell them your situation and ask if there is a retirement plan that they recommend. Your options will depend on your business structure, number of employees, etc. (My husband is self-employed, owns an LLC, and has a SEP IRA.) The CPA won't tell you where to invest the money, just make recommendations on what form it should take. (In other words, they won't tell you what to put in your "financial basket" .... They'll just give you recommendations on what type of "basket" is right for you.) It will definitely be money well-spent.

Where to Invest if you start a Retirement Plan: As others have suggested, Vanguard is a great option to consider. It's a great company. Solid & decent.

Option to Get a FREE or Discounted Consult with a CFP: If you decide to invest with Vanguard, they offer special services for folks with higher balances. Currently, if you have $50K or more with them you can get a discounted consult with one of their CFPs. If you have $500K or more with them, you can get a FREE consult with one of their CFPs. I'm not sure about this, but I think you can get the consult once a year. Of course they will recommend only Vanguard funds, but it never hurts to get the opinion of a professional if it doesn't cost you anything and they don't give you a hard-sell which Vanguard won't.

Time & Energy Investment: The business & your family are your top priorities. I don't recommend any financial investments (other than your business) that will take up a lot of your time. The business part is self-explanatory. As far as the family, a solid marriage is an important component of financial security. I suspect that you and your spouse are already pretty much on the same page when it comes to money. (Since you have a large bank balance, it's pretty clear that he or she is not out blowing what you earn.) Make sure you stay on the same page, keep each other informed, and work as a team.

Mortgage Payoff: Worth considering, especially you decide that your two best options are either keeping the cash in the bank (and it's not needed for the business) or paying off the mortgage, and if the cash balance would be enough to cover your non-mortgage expenses for a good long time.

Good luck. Would love to hear what you decide to do.

[kaleida]

If it were me I would...

1. Pay off the mortgage

2. Set aside something for an emergency (2-8 months of living expenses depending on how stable your job situation is)

3. Invest the rest at Vanguard in index funds (admiral shares so you get the lower fees)



450K / year ... Aren't you above the income limit for traditional IRAs and Roth IRAs? If you're self-employed you could set up an SEP-IRA. SEP-IRA is nice because it would lower your taxable income drastically. I would put your savings in a mixture of retirement accounts and non-retirement accounts (assuming you qualify for retirement accounts). That way you get the tax advantages of retirement accounts, but you can still withdraw some of it early if you need to.

Tax advisor is a nice idea too ... I wouldn't know how to minimize taxes at such a high income level.

[Justin24]

I appreciate all the comments and advice! I am meeting with my accountant on Friday to discuss options and his thoughts. Right now I'm paying around $150,000 a year in taxes (I think someone asked), so getting that down would be great!

Do you know what the limit into an IRA per year are? I believe my accountant once told me it was $5,000 for myself and $5,000 for my wife? Is that really all I can put away tax free??

[Justin24]

And regarding the mortgage, I believe I will begin to put more down, but I don't want to take my savings from $400,000 or so to $50,000 by just paying it off. That's scary! Also, as someone else mentioned, while my money isn't "invested", I do use it to run the company often or have as a security net if needed for the company.

[~bs]

I appreciate all the comments and advice! I am meeting with my accountant on Friday to discuss options and his thoughts. Right now I'm paying around $150,000 a year in taxes (I think someone asked), so getting that down would be great!

Do you know what the limit into an IRA per year are? I believe my accountant once told me it was $5,000 for myself and $5,000 for my wife? Is that really all I can put away tax free??

Talk to him first, then come back with his suggestions. Might be good to consult with a financial advisor in conjunction with the accountant. If hes a typical tax acxountant, and doesnt really provide tax consulting type of services, he may not be able to provide you with the best advice. a lot of the advice here such as tax deductible ira doesnt even apply to you. Even if it did, it wouldnt make a dent in your tax bill. You should be looking at options that may sheltwr the income, such as sep iras and running your business as an s corp.

[Justin24]

Thanks, I'll talk with him about a sep ira. Currently we are running as an S-Corp, so I know that helps in some ways. My salary is $120,000 and the other $300,000 or so usually comes from the profit.

[MonkeyMama]

I don't think OP ever answered my question about if he had employees.

Regardless, you do have opportunity to put away about $51,000 per year into retirement. You can do this vis SEP or via profit sharing/solo 401k. You would have to take more salary to take advantage. Taking a $204k salary and putting 25% into SEP would be easiest, assuming you have no employees. Some sort of 401k/profit sharing plan is probably more advisable if you have employees (Salary would be $255k for the max of $51k).

I am trying to keep an open mind that maybe there are other factors at play, but I mostly find it horrifying that your tax person has not discussed these options with you? I suppose I would bring it up and see what they say. Let us know - because I am certainly curious.

[~bs]

Might also mention the defined contribution plan. The limits are really high, like 200k, but its more complicated to setup (read: expensive)

[am23g23]

Hey man sounds like you're doing well. I am 28 as well, I own a house and have about 100k invested throughout different types of investments. With you're income and your age you have some risk that you can take that others simply can't afford to take. This puts you in a position to really take advantage of building wealth year after year. That being said, how to start establishing smart investments?

1. Retirement accounts - The earlier the better. You don't have to invest a significant amount, but at least get something going. There are different types, Roth and Traditional that offer different tax advantages. Look into the benefits of each and decide which you want, Roth you can withdrawal under certain circumstances but you get penalized.

2. Real Estate - Recently February 2013 was one of the strongest real estate earnings and/or growth within the last half decade. Real estate is still lagging in certain parts of the country, but if you know the right people (with an advertising company I'm sure you do) you can find a great deal and have that as income and financial power being that you own the house/duplex/apartment. If you think about the math, say your mortgage rates are upwards of 5% 30 year loan paying $2,200 a month on a 300k investment. If you match that 300k with cash, and you grow your money more than 5% then it is worth keeping the mortgage rather than paying it off. If you paid it off you would only have about 100k to invest.

There are other options, look around and ask some well trusted personal financial agents. You can find them from family or trusted connections.