What to do with extra money?

**lorraineb** · 04-25-2013, 11:56 AM

I'm assuming you don't have any credit card debt or a car loan, correct?

Are you going to need to pay any taxes on this $155,000 gained? If so, you want to set aside that amount of money right away and this is something that a lot of people forget about.

Personally, with the interest rate on the home mortgage being a full two points higher than the interest rate on student loans, I would put money toward that to begin. Yes there are some tax advantages for the mortgage compared to the student loans, but probably not 2 percent worth.

I would also fully fund your emergency fund, will probably make that the first priority. I would also try to think five years in advance on any other major purchases that you may need to make and put aside money for those. For example, is there something in your current house that will need repair? Are you going to need a new car? Stuff like that.

**Goldy** · 04-25-2013, 05:21 PM

I wouldn't be so quick to pay off those student loans. After your interest deduction that I'm sure you get since you contribute to a 401k you only pay 40 bucks a month towards interest. At 1.6% (pre deduction) I would focus on increasing my retirement savings instead of paying off that loan.

You could max out your 401k and Roth for a couple years instead of dumping the entire balance.

**jpg7n16** · 04-25-2013, 06:19 PM

Originally posted by raiderpower View Post

I recently made $155,000 on a real estate transaction and I need help deciding where to put the money.

Agreed with lorraineb above - you'll likely need to set aside an amount of that for taxes due. (It likely wasn't a primary residence sale since you still have a mortgage, and thus would be taxable) Have you spoken with your CPA about the gain?

Paying off the school loan is a no-brainer along with fully funding an emergency fund.

It's not such a no-brainer as you make it out to be. You could make more with tax free muni bonds than your payments are costing you and pocket the difference. You could make more with all sorts of investments than either your SLs or your mortgage are costing you.

1.6% tax deductible loan in my mind is a no-brainer NOT to pay it off.

With my income only being $70,000/year, it's hard to fully maximize retirement and HSA savings, so I was thinking it may be a good idea to hold some extra cash back to ensure I can fully fund these investment options yearly.

Any advice would be appreciated.

Do you have a 401k at work? If the gain on the property is taxable, you can try to max out your 401k for the year at $17,500 to reduce the taxes for 2013 as well as put money away for retirement.

There are other places you can invest beyond a retirement account and an HSA. The easiest would be your standard taxable brokerage account. Let's you invest and make some money in the meantime.

In addition to retirement, what are your other financial goals?

**feh** · 04-26-2013, 07:25 AM

Generic advice, not knowing your budget, age, etc:

set aside amount for tax liability
fund emergency fund
max your IRA and 401K contributions
consider paying down mortgage

Something to consider: if your mortgage is 30 years, and you plan on staying in the house, I would pay down the mortgage to a point where you could refinance to a 15 year mortgage and have the same (or maybe even lower) monthly payment.

**KTP** · 04-26-2013, 10:27 AM

You can buy a $10,000 EE bond that doubles if you hold it for 20 years (a 3.56% a year rate). If your school loan was of such length you would come out well ahead by not paying it off and putting the money in the EE bond.

If you did that for the next 4 years, then in 24 years you would have $80,000. You would have paid $18,000 in interest on the school loan over that period, meaning you came out ahead by $22,000 by not paying off the loan early (if the loan can be stretched to 24 years).

Of course by doing this you would need to be able to make the minimum payments on the school loan over the next 20+ years without touching the EE bond, because if you cash it in early, it is only paying 0.2% per year.

**TBH** · 04-28-2013, 03:35 PM

I'm going to go against the grain here. Even though your student loans have a low interest rate, it would be so nice psychologically to pay them off and it would reduce your monthly expenses to eliminate that debt.

So I'd do this:

* fully fund E fund to 6 months
* pay off student loans
* look into whether you could pay down mortgage enough to refi to a 15 year fixed rate and still afford your payments
* after that I'd use any extra money for retirement, either through Roth or 401k

Then I'd use the freed-up income from not having student loan payments any more and I'd increase your ongoing retirement contributions.

**BMEPhDinCO** · 04-29-2013, 11:54 AM

My two cents:

0. Taxes - set this aside now ($40k or so probably...)

1. EF to $20k - it's a nice round number that'll probably cover you for most stuff.

2. Pay off Student loan, since it's one less thing to deal with - it's not the best "financial" move but it's good to reduce your debt load too.

3. $8k for fun - fund your travel/food/new toy account

4. $50k on the house

The reduction in the student loan payments can go towards the RothIRA. The EF will have a good amount, allowing you to put more into other savings goals or retirement as well. If you want less for the "fun" thing, you can put $5,500 into a Roth for 2013 and the other $2,500 for fun...

**johntomba** · 04-29-2013, 06:36 PM

Originally posted by feh View Post

Generic advice, not knowing your budget, age, etc:

set aside amount for tax liability
fund emergency fund
max your IRA and 401K contributions
consider paying down mortgage

Something to consider: if your mortgage is 30 years, and you plan on staying in the house, I would pay down the mortgage to a point where you could refinance to a 15 year mortgage and have the same (or maybe even lower) monthly payment.

I have to agree on getting in on a shorter term mortgage. In the long term, this will be the way to go. You're paying next to nothing on that student loan.

What to do with extra money?