What to do with extra cash flow...

[Diavel_guy]

Everyone -

First off love this forum and I visit all the time. Thanks for all the great threads!

Secondly, I'm trying to think of what to do with extra cash flow every month.. Here is my situation:

Single, no kids, no home. Mid 30's. I don't want to own a home because I don't feel the area I live in is a long term play for me. In fact chances are my company will move me to a different location by years end. Good news is I will go from a higher cost of living area to a low cost of living area.

To my finances (I will leave out blow by blow detail and keep it at a high level).

I have net monthly income of $6,400. This is after funding an HSA with $200 a month, funding a 401k to the maximum allowed of $17,500 a year (around $680 every two weeks) and fully funding a IRA (I throw in the max at the beginning of every year, $5,500 this year in January). I have $45k in an emergency/cash fund which I contribute $2,000 a month in cash to. I do have one debt, an auto loan. I bought a $49,000 car three or four months ago and dropped $26,000 in cash on it including my trade in (which I owned for 9 years, I don't buy cars often). I pay $1,000 a month on the loan (I overpay every month). Why get a car loan? To keep my credit score sterling. I know many disagree with this notion, and I know the arguments against worrying about credit score. Nothing you can say will change my mind here. My auto loan rate is 1.49%. I know I will likely get some flak for the cost of the car and it being new. I know the arguments here too. It was my little slice of extravagance I wanted to afford. Others might wonder where the rest of my cash goes. In broad terms, I live in a high rent area which eats up a lot of that. I commute an hour to work one way which also eats up some cash. I'm fixing that issue shortly (likely with the move out of state). I really don't live beyond me means other than my car and one motorycle I own which is paid for. I only take a vacation about every 5 years. I travel enough for work. Heaven for me is either my motorycle or a good book with a cup of coffee. Also, as you can see I can pay off the car anytime I want to.

So, to the crux of my question. I have around $2,000 a month I put in my savings. Should I start putting this cash somewhere else? I just recently discovered you can contribute more than $17,500 annually to your 401k (up to $50k maybe???). Is this a smart move and what would the tax implications be? Is there somewhere else other than the stock market and real estate I should consider? If I move to the low cost area I will have up to $1500 more a month I can save on top of the $2k.

Any advice, especially on extra 401k contributions beyond $17.5 would be helpful. Thanks!

[disneysteve]

A few comments....

How much are your total monthly expenses? That will determine how much of an emergency fund you should maintain. Standard advice is 6 months worth of expenses.

There is nothing wrong with luxury purchases if you can afford them. I agree that you shouldn't take out a loan just to massage your credit score but I see nothing wrong with taking out a low interest loan in order to invest elsewhere or manage cashflow better. In your case, I would aim to pay off the car loan in a year which probably means doubling your payments to $2,000 or so. That will take are of half of your current surplus. Repaying early won't hurt your credit score.

With the other $1,000 (assuming your EF is fully funded), I'd open a taxable investment account. Go for something relatively tax-efficient like ETFs or index funds. Just make sure whatever you choose fits into your overall desired asset allocation.

Sounds like you are doing great and well on your way to wealth.

[Gailete]

I too want to say that since you are saving to the max with retirement funds, have a goodly EF, and have plenty leftover, having the luxury of a nice car that you apparently plan to keep along time and a motorcycle is fine. If you can't enjoy some of your money, what is the point? You are being fiscally responsible and that is what counts. Now it would be another story if you had nothing in your retirement account or emergency fund or were married with kids and they all needed new shoes, but that isn't the case.

I'm not the best at helping someone in your situation figure out what to do, but I figure others will.

[disneysteve]

I forgot about the 401k question.

The contribution limit is $17,500 (unless you are 50 or older). You can't contribute more. Well technically you could but you shouldn't. Excess contributions get double taxed. You can't exclude the excess from income, so you don't get the tax benefit from the contribution. Then when you withdraw the money in retirement it gets taxed again. Bad idea all around.

[Gailete]

Isn't there some clause for business owners to contribute more to their 401Ks depending on how much they contribute to their employees retirement? Seems like I have seen that before, but it wouldn't apply here, so he is stuck with the maximum.

[disneysteve]

Isn't there some clause for business owners to contribute more to their 401Ks depending on how much they contribute to their employees retirement? Seems like I have seen that before, but it wouldn't apply here, so he is stuck with the maximum.

There might be. I'm not an accountant so don't know if there is something like that.

[Diavel_guy]

A few comments....

How much are your total monthly expenses? That will determine how much of an emergency fund you should maintain. Standard advice is 6 months worth of expenses.

There is nothing wrong with luxury purchases if you can afford them. I agree that you shouldn't take out a loan just to massage your credit score but I see nothing wrong with taking out a low interest loan in order to invest elsewhere or manage cashflow better. In your case, I would aim to pay off the car loan in a year which probably means doubling your payments to $2,000 or so. That will take are of half of your current surplus. Repaying early won't hurt your credit score.

With the other $1,000 (assuming your EF is fully funded), I'd open a taxable investment account. Go for something relatively tax-efficient like ETFs or index funds. Just make sure whatever you choose fits into your overall desired asset allocation.

Sounds like you are doing great and well on your way to wealth.

Disney Steve - First off, thanks for the response.

I actually plan on paying my auto loan off in March. My annual bonus (which is in the bag already, I'm having a good year) will pay off my vehicle then with money to spare. Even if god forbid the bonus didn't get pay out (which isn't possible), I would still pay it off by then. My other monthly expenses are low aside from associated car and rental costs. I don't have cable, credit card or student loan debt, no membership fees, and no expensive hobbies. My job pays for my cell phone, so no bill there (which would obviously change if I was laid off). As for an emergency fund, I'm a disabled veteran and have $1,000 a month income from that guaranteed (I'd much rather have my normal life back vs. the money...but hey...thus is life) and my $45k would sustain me over a year.

So any thoughts on extra contributions to a 401k beyond the $17,500 a year? What is the downside tax wise there?

[scfr]

Unless you qualify for a higher contribution under some loophole that I'm not familiar with, you are already contributing the max to your 401K ... $17,500 in 2013. From the IRS: http://www.irs.gov/uac/2013-Pension-Plan-Limitations

Clearly you have an ample EF (since your EF is more than 6 times your net income, and you have a fair amount left over each month, you obviously have over 6 months expenses saved).

As far as what to do with extra savings, the first suggestion that pops in to my mind is to increase your HSA contribution. In 2013 the max is $3,250 for an individual. That takes care of $70.83/month, which leaves quite a bit left to decide about.

What are possible scenarios as far as what you'll do with the money some day? Any chance that you'll get married and/or have children? Any desire to own a home when/if you have settled in somewhere? Do you hope to own your own business some day? Any big dreams that would require lots of cash (2 year sabbatical to sail around the world, etc)?

Other than the stocks and real estate that you mentioned, other non-cash investment vehicles include: huge assortment of mutual funds & ETFs, individual bonds or Treasuries (buying directly from Treasury Direct is easy), precious metals, etc.

Another investment that isn't talked about a lot is investing in yourself. Given your age and available extra funds, give it some thought. Is there an area where you could spend a bit of money and get a huge payoff in terms of your health, well-being, or future earning potential? Not knowing your personal situation I have no specific suggestions for you, but for some people examples of investing in themselves could include: learning to cook fresh foods at home instead of taking out fast food, getting some overdue dental work taken care of, taking a class to keep job skills current, etc, etc, etc.

[Diavel_guy]

I forgot about the 401k question.

The contribution limit is $17,500 (unless you are 50 or older). You can't contribute more. Well technically you could but you shouldn't. Excess contributions get double taxed. You can't exclude the excess from income, so you don't get the tax benefit from the contribution. Then when you withdraw the money in retirement it gets taxed again. Bad idea all around.

Just saw this. Ignore my question above! Thanks.

[Diavel_guy]

Unless you qualify for a higher contribution under some loophole that I'm not familiar with, you are already contributing the max to your 401K ... $17,500 in 2013. From the IRS: http://www.irs.gov/uac/2013-Pension-Plan-Limitations

Clearly you have an ample EF (since your EF is more than 6 times your net income, and you have a fair amount left over each month, you obviously have over 6 months expenses saved).

As far as what to do with extra savings, the first suggestion that pops in to my mind is to increase your HSA contribution. In 2013 the max is $3,250 for an individual. That takes care of $70.83/month, which leaves quite a bit left to decide about.

What are possible scenarios as far as what you'll do with the money some day? Any chance that you'll get married and/or have children? Any desire to own a home when/if you have settled in somewhere? Do you hope to own your own business some day? Any big dreams that would require lots of cash (2 year sabbatical to sail around the world, etc)?

Other than the stocks and real estate that you mentioned, other non-cash investment vehicles include: huge assortment of mutual funds & ETFs, individual bonds or Treasuries (buying directly from Treasury Direct is easy), precious metals, etc.

Another investment that isn't talked about a lot is investing in yourself. Given your age and available extra funds, give it some thought. Is there an area where you could spend a bit of money and get a huge payoff in terms of your health, well-being, or future earning potential? Not knowing your personal situation I have no specific suggestions for you, but for some people examples of investing in themselves could include: learning to cook fresh foods at home instead of taking out fast food, getting some overdue dental work taken care of, taking a class to keep job skills current, etc, etc, etc.

Good questions. Marriage would be nice. I haven't found the right woman, hopefully someday. I can't force that however and that's up to fate. I nearly made the trip down the aisle once and life had other plans. I'm painfully single at the moment, ha. Owning a home would be nice, and in the back of my mind I've told myself if I keep accumulating money I will buy a home someday with cash. I have to get settled somewhere first. HSA is a possible area yes, but I already contribute $2,600 a year. I can bump my savings there but not by much given the limit.

As far as investing in myself, an MBA is in the cards. I started an MBA at a top 10 program and had to drop out because of work related travel. Long story. I still face the same issue but feel I might be able to swing that fall of 2014. My company has 100% tuition reimbursement (a novelty nowadays) which I obviously want to take advantage of if I can swing it around my crazy intense work life. I travel quite a bit for work (was just in Europe for a week) and am quite well traveled. In fact I've lived overseas 4 years of my life. No huge burning goals there. I never even had a cavity in my life so no need for dental work : ). I sound boring I know! To be honest I spend money and enjoy life, but am blessed (for now) with a huge surplus every month. I just need to figure out how best to invest that extra money. Someday I may not be so lucky, so why not plan well now while I can. My career is stable by the way in a good field (medical devices), but who knows what the future holds.

[Gailete]

One thought is that you can invest in others. You have been provided with a great surplus and perhaps you might want to take up helping to support a charity of some kind that you could feel good about and that more than just donating your spare cash (I don't mean all of it) but also investing yourself by giving time as you are available. You just might bump into a fine young lady along the way.

I realize that you asked this question in relation to ways to sock away more, but how much does any one person need? Since their are charities for just about any cause or interest, there should certainly be one out there that trips your trigger. Nothing feels better than helping out someone else. Even at this time of year 'adopting' some kids by buying them school clothes and supplies might be a blessing that you can easily provide. And that is just one of many ideas.

There are other charities that have people invest in micro businesses, about $50, to help a woman or man get a little business going that will support their family in third world countries. As you are well traveled, you may have more of a sense of what needs done than we would.

Just some thought is all.

[LivingAlmostLarge]

Go spend money and meet someone. Dating takes time and money. Yeah people says it doesn't but it does. It's not even eating out. Just doing things experiences or driving over and staying the night etc. Small things that add up to the budget. Plus you know at mid-30s it's easy to find someone and move quickly into marriage, house, kids. A lot of people I know had two kids within 4 years of meeting each other first date, engaged in 6 months, married in 15 months, pregnant on honeymoon, 2nd kid when 1st turned one. It happens fast I think the older you get.

[snafu]

Enjoy your special status of having more money than you spend. Have you explored the possibility doing an MBA on-line from a reputable university? It doesn't matter where in the world you are, jus t needs internet access. How do you feel about socking away 20% DP in case you'd like to buy a condo or house in your new location 2014.

How have you allocated your retirement plan? If you've not added an REIT you might like that flyer.

[FrugalSensei]

Have you thought about a Roth account?

[disneysteve]

fully funding a IRA (I throw in the max at the beginning of every year, $5,500 this year in January).

Have you thought about a Roth account?

FrugalSensei - OP stated in the first post that he fully funds an IRA each year. He didn't specify if it is a Roth or a traditional but it is being funded.