Author Topic: What is the Best Way to Use This Extra Money?  (Read 3184 times)

ladycygnus

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What is the Best Way to Use This Extra Money?
« on: March 25, 2014, 07:07:50 PM »
hehe - I almost wrote "spend" and imagined the choking that would happen among MMM readers.

But seriously - I have a surplus problem and, not being a financial professional, find the multitude of options for "saving"  highly confusing and stressful. I have a great fear/hatred of debt and thus, for the past few years, threw everything into getting rid of all debt as soon as possible. Having emerged blinking into the debt-free sunlight, I am now wondering what the next "goal" is.

Some background. I'm a single woman in my early 30's. My risk tolerance is VERY low and tend to avoid anything that has significant (or perceived) risk. My long-term plans are uncertain, but tend to stability. In 10 years I'll either be married with kids, a nun, or single and at risk of being eaten by my cat. My "dream" is to buy a plot of land and build a super-efficient house with a great yard (thus being able to finally get a pit bull puppy) with potentially rentable separate units.

I make about 50K/year (40K take home). Apart from the nunnery I don't foresee any change in career or significant change in income. I love my job and will NOT slave away at a job I hate for more money (my mom keeps trying to convince me to move to the MeTrocity). Lord knows when I'll be called home and I'd rather be working in a job I love now than earning lots of money for the "benefit" of retiring early that I might not get to enjoy.

Last year my "extra" income went to paying off my student loans and buying a "new" car (a total of about $10,000). In June I will be downgrading my rent and freeing up about an extra $1,000 a month (long story). Thus, at the end of this year, with no other reduction in spending, I will have $16,000 extra. Next year it will be closer to $22,000.

I have a 401K plan through my company into which I've been putting rather minimal amounts (last year was about $6,000 total (me + co). It's not a match - no matter how much I put in the company puts in 5%. I have my contrabutions split 5% pre-tax and 1% post-tax in a Roth (seemed to hedge bets on future tax situation). Having seen my parents' 401K get gutted in the crash this gives me the heebie jeebies.

I'm looking for suggestions for proportions to save for retirement -vs- save for down payment, tax reducing options, or in general.
« Last Edit: March 25, 2014, 07:15:59 PM by ladycygnus »

Zamboni

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Re: What is the Best Way to Use This Extra Money?
« Reply #1 on: March 25, 2014, 07:24:05 PM »
Did you parents leave their money in after the crash?  Because if they did, their accounts would be well up by now.

If you have the heebie jeebies about investing, you should try educating yourself until you feel comfortable.  One book that is easy to read for a start is called Millionaire Teacher.  My local library had it.  Good luck.

Jack

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Re: What is the Best Way to Use This Extra Money?
« Reply #2 on: March 25, 2014, 07:26:48 PM »
Having seen my parents' 401K get gutted in the crash this gives me the heebie jeebies.

Did it get gutted, though? I challenge you to go look up the funds your parents were invested in during 2008 and see what the value would be today if they left everything alone. I'll bet your heebie jeebies about investing will turn into heebie jeebies about failing to invest.

ladycygnus

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Re: What is the Best Way to Use This Extra Money?
« Reply #3 on: March 25, 2014, 07:37:21 PM »
Did you parents leave their money in after the crash?  Because if they did, their accounts would be well up by now.

Nope - they pulled out a chunk and invested in a house...I'm not looking to "invest" in real estate either ;-)

I understand the concept of waiting out the lows and that the money is diversified into many different pots (probably funding things I strongly disagree with), but it still makes me nervous.

The book you suggested is not at any of my local libraries - I may be able to request it though.

ch12

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Re: What is the Best Way to Use This Extra Money?
« Reply #4 on: March 25, 2014, 08:29:14 PM »
Did you parents leave their money in after the crash?  Because if they did, their accounts would be well up by now.

Nope - they pulled out a chunk and invested in a house...I'm not looking to "invest" in real estate either ;-)

I understand the concept of waiting out the lows and that the money is diversified into many different pots (probably funding things I strongly disagree with), but it still makes me nervous.

Bond funds outperformed the stock market between Oct 2007 and Oct 2012.
http://www.forbes.com/sites/rickferri/2013/01/28/a-balanced-portfolio-for-a-balanced-life/

Your parents did the worst possible thing, only slightly mitigated by the fact that the housing market has come roaring back in some places. I hope that your parents' house is in a good market.

I'm extraordinarily risk averse myself. Do the MMM thing and go VBIAX for stability and growth. http://www.nytimes.com/2011/11/27/your-money/half-stocks-half-bonds-a-solution-for-turbulent-times.html?_r=0

It's linked there - Vanguard did a study about the return of a 50/50 stock and bond fund. It returned about ~5% outside of inflation in recessions and expansions alike - thinking of inflation as about 3%-4% a  year, that's a 8% to 9% return, which isn't shabby. If you went with the allocation of VBIAX, 60 stocks/40 bonds, then you get 6.8% after inflation during expansions and 4.9% after inflation in recessions.

YMMV, but that's where I'd put the money in your shoes. There are so many things that could happen in the next few years that it's nice to have something that 1) can be liquidated quickly unlike a house and 2) will grow but not drop horribly.

Eric

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Re: What is the Best Way to Use This Extra Money?
« Reply #5 on: March 25, 2014, 08:31:55 PM »
Maybe it's counter-intuitive, but I'd argue you're taking more risk by not investing in the stock market.  That money that you keep under your mattress (or in your savings account for about the same yield) is actually losing value daily to inflation.  Every single day you're losing money.  Money in the stock market may go up or down in the short term, but in the long term it's the best way to protect and grow your money.

I'd figure out a way to change your focus on the volatility and re-focus on the long term strategy.

Read this, especially the first few:

http://jlcollinsnh.com/stock-series/