P.S. I am happy to hear any critiques about my own plan, in case someone thinks I'm totally messing up :)
sure!
I had 85K in the bank. I make around 200k a year. However, since I am self-employed I may or may not make that amount every year/month. I am approximately your age (29). I also have a family: wife, 2 kids and one more on the way (last one, I promise). We are also single income.
So, I decided to dollar cost average into the market. I increased my automatic monthly contributions to $4,000 in stocks [Vanguard index funds].
That still left me with the cash. My home mortgage rate is 4.375% for 30 years on $165,000. I also had an option of investing in a "fixed account" option through a life insurance policy I purchased years prior.... with a guaranteed 3% return (tax free growth because of the investment vehicle) and the ability to withdraw the money any time.
Anyway, I decided to put $24,000 in the 3% account and pay another $20,000 on my home loan. My thoughts are exactly as you expressed: those are better returns than bonds will provide.
That left me with $40,000 cash on hand. That is a lot, but given that I could make $1,000 next month or $50,000 and that I have a family I keep an unusually large cushion. As well, the $4,000 a month is coming from that money.
If I continue to produce monthly surpluses of cash (likely) then I'll have to decide between continued increases in my monthly contribution or paying off my home mortgage faster. I'm still undecided about that. I can't justify holding more than $40,000 in cash.
I don't see any red flags there. By investing $4k/month and paying down the mortgage faster you're doing better than the vast majority of Americans, and probably 99% of people under 30. So bravo there. However, given your stated "200k a year" earnings I suspect you're also spending a lot - cutting your spending further (and putting it towards savings/debt reduction) will have the biggest impact on your FI at your young age.
A few thoughts; I realize and sympathize with having drastically different incomes month-to-month. You may have already figured this out, but a good way of mitigating this is to determine your monthly expenditures, and then consider what time span you do see some stability and keep that long a time-span in cash reserves. For example, you said on any given month you could earn $1k or $50k. But over a 6 month time span do the down months average out with the up months? 9 months? Whatever that time frame is, that's the amount of monthly expenditures I'd keep on hand.
As for where to invest when your cash reserves exceed a certain point (eg > $40k) - that's largely your choice. Paying down a 4.375% mortgage is a fine and safe choice. Putting more money into your investment funds doesn't break the 'rules' of DCA. To avoid fretting about it, i'd write down an investing plan for yourself that goes something like this:
"At the end of every month, I will look at my bank account(s) and invest anything over $40k into my index funds and the mortgage, spitting it 50/50". Since you aren't making your decision based on the market it's not market timing. YOu shuold adjust the plan to whatever makes you most comfortable - putting all of it into the mortgage, or maybe reducing your cash-on-hand number to $30k, etc.
Also, you didn't mention tax-advantaged accounts (t-IRA, 401(k), HSAs, etc) but definitely make sure you are taking advantage of those. You might be over the income limits for some of those.