Author Topic: How to deploy surplus of cash?  (Read 1673 times)

Swat

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How to deploy surplus of cash?
« on: August 07, 2016, 06:56:55 PM »
I could use a little help as to how best to deploy some extra cash from a recent inheritance. My current situation is as follows:
-Medical Resident with two years left in training. Current income ~55k/year. Expected salary once an attending: 350-400k/yr
-Wife currently makes ~100k/yr but will drop to part time with our first child expected in 4 months (expected salary at that time is ~50k). Upon graduation, she will likely continue to work part time wherever we end up.
-No debt (student loans recently paid off) and currently rent.
-Own two relatively new cars (2011, 2016) free and clear with no payments.
-We've already maxed out our retirement accounts for this year (two 401k, two Roth, HSA) and hope to do so every year going forward.
-All of our current investments are in tax advantaged accounts (roth, 401k, hsa) with nothing in a taxable account. Total ~200k
-Savings rate last year was ~50% of net income (43% of gross) so we're pretty good savers so far. 27% the year before.
-3k in a 529 plan for our child-to-be
-Currently have ~115k of funds sitting in our Wells Fargo account after the inheritance money.
-Plan to purchase a new home about 1-2 years after being an attending (3-4 years away from today). This assumes my first job out of residency is a good one I'll stick with.
-Disability and life insurance already locked up.
-Already have a nursery set up and plenty of used clothes from my sister-in-law. Still awaiting a baby shower to help fill out some of the other necessities.
-Annual spending the past two years was about 60k/year. Some of this money went towards loans (which we no longer have) and travel. We're anticipating some new expenses with baby #1 (Health insurance, diapers, etc...) but other expenses will decrease. Overall, probably an uptick of 10k/yr seems appropriate but we also want to be conservative.

My original thought was to hoard extra cash in anticipation for the baby which would allow us to continue to max out retirement accounts over the next couple years while still in residency (don't think we could max everything out on just our new salaries), but I think 115k is still a lot to have in cash.
-My original plan: put another 7k towards 529 account (up to the state tax deduction), keep about 70-80k in cash but convert to Ally Bank with better interest rate, and then take the balance (28-38k) and start a taxable account for retirement with more aggressive investments (VTSAX for instance). Then, at the end of residency and my first year out as an attending, continue to max out retirement accounts but all extra cash would be saved for a down payment on a house. I'm confident I could get to 100-200k for a down payment pretty quickly once an attending.
-My wife's thoughts: she agrees with 7k towards 529 but thinks the balance should be kept in cash (~108k) which will not only provide money through residency, but will also be a nice cushion for a house down payment.

Anyway, I hate the idea of leaving so much cash around without putting it to good use (1% at Ally isn't terrible but we could do better) as we both have steady jobs, but there are definitely advantages to having a large cash position...such as for a house downpayment. Any suggestions or advice are definitely appreciated. 

dilinger

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Re: How to deploy surplus of cash?
« Reply #1 on: August 07, 2016, 07:13:51 PM »
I would NOT sit on $115k for 4 years, and the "if it sticks" thing is just the icing on the cake.  I'd put it in index funds (VTSAX, VTIAX, VBTLX) in a taxable account and let it grow.  You're making $50k and your wife is making $100k for a total of $150k, but let's say it's $50k after baby; total $100k.  Even if you're only saving 35% of that, you've roughly got your $115k back in 3 years.  There's no point holding onto that money.  You expect to make $350k+ in 2-3 years?  I'd invest everything other than what's needed for your emergency fund for the next 2 years AND THEN start thinking about the house downpayment.

historienne

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Re: How to deploy surplus of cash?
« Reply #2 on: August 08, 2016, 11:28:33 AM »
We are in a somewhat similar position - just sold our house, and have about $150k in the bank.  Like you, we are facing a short period when we won't be able to max our tax-deferred savings from our regular salary (for us, it's the 16 months that we will have two kids in very expensive daycare).  We are reserving about 30k for that - it's easily the best return we are going to get on the money. 

For us, the rest is split between an emergency fund ($10k cash, another $25k in CDs) and savings for down payment on our next house (again, in CDs).  Our time horizon for all of this is less than two years, which is short enough that we are not comfortable putting it into higher-yielding investments.  You have a bit longer, plus you have the big salary increase on the horizon, so that part of the equation may look different for you.  But I would definitely make sure that you have the liquidity to max your 401ks and IRAs.



catccc

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Re: How to deploy surplus of cash?
« Reply #3 on: August 08, 2016, 01:17:12 PM »
Don't make the same mistake I did.  We hoarded cash, maybe $100-$150K worth, for years and years, wanting to make a big down payment when we found a house we wanted to buy.  I had cash sitting around from 2008-2014 that should have been working really hard in the market for me.  Instead, it was earning a sorry amount of interest.  I say invest the bulk of it.

Axecleaver

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Re: How to deploy surplus of cash?
« Reply #4 on: August 08, 2016, 02:04:34 PM »
Four years to have your house down payment in cash is a missed opportunity. How big of a house did you want to buy? Assuming you want to keep your expenses at about the level you're at now, you will be making enough as an attending to save up for a house down payment in two or three months. Max the 529 (7k), establish an emergency fund (six months of expenses is 30k), and get the rest of it working for you in a taxable account.

Your wife's idea to keep it all in cash, are probably tied to a feeling of security. Five months pregnant, she is probably feeling very emotional with a strong desire to get into a house where she can nest and raise her new family. Acknowledge her feelings and work with her to show her that you've got things under control. You might also double check the amount of house you're going to buy, to make sure you're on the same page.