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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: kudy on April 08, 2012, 09:35:38 AM

Title: New Job, More Money, Too Many Possibilites!
Post by: kudy on April 08, 2012, 09:35:38 AM
I have a new job that will afford me about $1,000/month above my expenses.

I am overwhelmed by all of the different options I have with this extra money, and I just can't decide what's best or what I should focus on - here are my options as I see them:

I guess I am leaning towards first splitting the money between my IRA (tax deduction plays a role here) and building that emergency fund.

Once I have what feels like a good number in the emergency fund, I might allocate a small bit to micro-lending, and use the rest to pay down the mortgage until it's at least 20% paid.

After the mortgage is in a safe place, I could then crank as much into the 401k as possible - the only thing that worries me is the possibility of the 72t/5 years IRA loopholes somehow being "fixed" so that my money won't be accessible in 10-15 years when I have enough to soft-retire.

I have considered only contributing up to the employer match on the 401k (once it's available), and then doing other things with the excess.

Also, I am tempted to get into the rental game, but I feel that I am quite a few years from actually being able to jump into it - maybe this is what I would save the excess for after I've gotten my employer match on the 401k?

Any sage advice is very heartily appreciated!
Title: Re: New Job, More Money, Too Many Possibilites!
Post by: menorman on April 08, 2012, 06:07:20 PM
Sounds like you're faced with the problem of too many options. I'd recommend going at them one at a time because trying to go piece-by-piece on all of them will leave you feeling like you're not making much progress. I'd say max at the emergency fund first, so that it is there if necessary. Then when the 401k becomes available, add money there up to at least whatever will get the maximum employer match while using the rest to finish the emergency fund if necessary. After that, the options are really up to you. By then, the market might have dropped a decent amount, so traditional brokerage would be fine. Or, houses might (still) be ridiculously cheap, so you could pick one up to rent without having the put out too much. Alternatively, house values might go the other direction and so your equity could rise enough to magically put you over the 20% mark. No one can know for sure, but I would say that in your case, maxing out one thing at a time would be best for you.
Title: Re: New Job, More Money, Too Many Possibilites!
Post by: Jason G. on April 08, 2012, 06:45:01 PM
I agree with menorman. Your best bet would be to build up a decent emergency fund first. I know a lot of people around here (including MMM himself) like to use home equity loans or other semi-liquid assets instead of emergency funds, but that's not really an option for you if you don't even have 20% equity in your house yet.

After that, definitely put at least some of that extra money in tax-advantaged retirement accounts. Get the employer match on the 401k and then put the rest in some combination of the 401k and IRAs. If you're worried about getting the money back out, you could put $5000 a year into a Roth IRA. You can take your principal out of that whenever you want without penalty, though you pay a penalty for withdrawing the investment gains early.

If you're really nervous about not being able to get money out of the retirement accounts early, you could put some of it in a taxable investment account. You're basically paying a premium (ie, taxes) for a little more peace of mind about accessibility. Either way, it's probably a good idea to start out with a fairly passive index investing approach and just use a small set percentage of your portfolio to try out more active investments like p2p lending or the Facebook IPO and such. That way the stakes are lower if you make some beginner's mistakes while you're learning how things work.

Between your low interest rate on the mortgage and the mortgage interest tax deduction, paying off your mortgage early is probably not going to be the best option for maximizing return on investment. The only real reason to pursue this one is if the idea of being debt free is more appealing than maximizing your net worth.

After you have a significant amount of money in a taxable account (or a Roth IRA or whatever), you'll be in a good position to get into real estate when a good opportunity comes up.
Title: Re: New Job, More Money, Too Many Possibilites!
Post by: James on April 09, 2012, 09:54:22 AM
You don't say what kind of emergency fund you have now, but I'd at least get it to 2-4 months.  If you are in a job that would be very hard to replace and would be unable or unwilling to make radical lifestyle changes to save money, then maybe lean toward 6-8 months, but for the average person in your position I can't see a need for more than 2-4, depending on the overall picture.

Second I would definitely pay down the mortgage to under 20%, and then use a LOC for emergency fund allowing you to stay down at or under 2 months in actual cash.

After that I like option #3 the best, maximize IRA contributions (and then switch to 401k when it becomes available in 5 months).
Title: Re: New Job, More Money, Too Many Possibilites!
Post by: kudy on April 09, 2012, 09:35:47 PM
Currently I have about 1 month worth of emergency fund - I could probably get a job quickly if I lost my current one, but it'd be hard to match the income and benefits I am now getting without moving. I can't really make radical life changes, as I live pretty frugally already, but I could squeeze a little if things were tight.