Author Topic: Reader Case Study- Too much of net worth in cash  (Read 6611 times)

rampagefc

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Reader Case Study- Too much of net worth in cash
« on: January 28, 2015, 12:40:48 PM »
Hi all! Long time lurker making my first post. To cut to the chase for those who might not want to read through all of the details, my wife and I have too much cash in a bank account earning 1% interest (90K) and need some advice on how best to put this money to work for us based on our goals. My wife and I are both in our late 20s (27/28) and are 2.5 years removed from our grad school. Following graduation we did not give our retirement accounts the attention they deserved, and instead paid off all student debt and saved for a down payment on our anticipated 30+ year home. This past year we started getting serious about retirement savings and now put close to the max in my 401K and her 403B, and both fully fund roths. She also has a pension that she puts a mandatory % of her salary towards.

Even with increasing our retirement contributions, we are still able to save "cash" at a decent rate- about 50-60K per year (this will undoubtedly change in the upcoming years when we start a family and put children through daycare). We are fairly conservative and plan to keep around 40K in the account as our emergency fund. We have some purchases in the future to consider that this money may used for...
- SUV/van: within 5 years when we have a family
- finish basement: 5-10 years from now
- others that are not coming to mind currently

So after looking at the info below, where would be a smart place to put this money? We are relatively conservative with this because we plan to use part of it, along with our ongoing savings, for some larger purchases in the futures listed above. We also know that our savings rate outside of our retirement accounts will decrease significantly once we have kids in the not-to-distant future.
-- 1% in a bank account clearly isn't a smart long term solution
-- CD rates are quite low unless you want your money tied up for a long period of time
-- Perhaps some combination of index funds/bonds through Vanguard? If there was a market correction I know I'd be kicking myself since we plan to use this money in the intermediate future as opposed to 30+ years from now. But I'd also hate to miss out of the potential for compounding interest.

Your advice/suggestions/words of wisdom will be greatly appreciated. :)


Income: Gross is around 200K give or take

Current expenses: Basic expenses come out to around 4100 monthly. We are past many of the "big" expenses (wedding, house down payment, new deck, etc.) but still make the occasional purchase to furnish our home/travel.

Current monthly income: This varies slightly but last year was around 10K/month averaged over the year, so we save approximately 5-6k/month. After expenses/contributions to retirement vehicles.

Assets:
-- Bank: 90K at 1% interest
-- 401K/403B: about 35K combined (primarily index funds and some bonds, roughly 90:10)
-- Roths: 11K with Vanguard (same as above)
-- Pension: worth mentioning and probably has a cash value of around 15K currently, but don't include it in any calculations
**In hindsight if we were smarter from the start these numbers could have been greatly improved... live and learn I guess**

Liabilities:
--Mortgage: 360K @ 4% x 30 years (we pay extra each year with tax return plus some of our cash and plan to pay off in around 20 years). This is new construction and has low maintenance costs thus far. It is more home than we need right now (4 bedroom + loft, 3000 sf, with an unfinished basement with another 900ish sf), but we will grow into it and the price of new construction has significantly increased since we bought. We currently owe around 330K after living here for 1.5 years.

-- car 1: owe approximately 2K on her car at 0% interest
-- car 2: owe approximately 10K on my car at 0.9% interest
**haven't pushed to pay these off because of the low rates**








Yankuba

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Re: Reader Case Study- Too much of net worth in cash
« Reply #1 on: January 28, 2015, 12:54:35 PM »
Hello - we are similar to you in income, expenses and cash. I decided to use half of my cash to pay down the mortgage because I prefer a guaranteed four percent return to the markets right now. You are saving enough money each month that you don't have to worry about depleting your cash reserves or tying your money up in debt repayment. Just my thoughts...

mxt0133

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Re: Reader Case Study- Too much of net worth in cash
« Reply #2 on: January 28, 2015, 01:27:44 PM »
In your income tax bracket you will be saving 28% plus any state taxes on every dollar you contribute to your tax deferred accounts.  That will beat most investments especially 1% you are earning by keeping in the bank.  Also at your income you are disqualified from contributing to a Roth IRA.

Do not worry about the short term volatility of the market you have 20+ years to ride out the downturns.  With the extra you have after maxing out your retirement accounts and possibly HSA, you can pay down your house or invest which ever you are most comfortable with.

divsnowball

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Re: Reader Case Study- Too much of net worth in cash
« Reply #3 on: January 28, 2015, 01:33:17 PM »
Open a Vanguard account.  Buy an index fund (either S&P or Total market).  VTI comes to mind, but do your own research first.  Vanguard has rock bottom fees and are tops in the industry.  I would put... at least 50k into that.  If not 75k

iris lily

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Re: Reader Case Study- Too much of net worth in cash
« Reply #4 on: January 28, 2015, 01:45:22 PM »
Open a Vanguard account.  Buy an index fund (either S&P or Total market).  VTI comes to mind, but do your own research first.  Vanguard has rock bottom fees and are tops in the industry.  I would put... at least 50k into that.  If not 75k

Yes, only I would divide up that $50,000 over a year or two, tossing in equal amounts. And somewhere in there start putting regular contributions coming from your income stream into those index funds.

divsnowball

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Re: Reader Case Study- Too much of net worth in cash
« Reply #5 on: January 28, 2015, 01:47:16 PM »
I couldnt find you the article off hand- but MMM writes that there was a study done showing that throwing one large hunk into the market, on average, produces higher returns that dollar cost averaging. 

marty998

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Re: Reader Case Study- Too much of net worth in cash
« Reply #6 on: January 28, 2015, 02:02:50 PM »
You could throw the 90k at the mortgage and then pay it off in 3 years....

Then you can throw everything at investments without the hassle of the monthly mortgage payment to worry about.

morning owl

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Re: Reader Case Study- Too much of net worth in cash
« Reply #7 on: January 28, 2015, 02:07:29 PM »
I couldnt find you the article off hand- but MMM writes that there was a study done showing that throwing one large hunk into the market, on average, produces higher returns that dollar cost averaging.

Not the study itself, but an article about the study:

http://www.theglobeandmail.com/globe-investor/investment-ideas/lump-sum-investing-vs-dollar-cost-averaging-the-nitty-gritty/article20707395/

ohana

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Re: Reader Case Study- Too much of net worth in cash
« Reply #8 on: January 28, 2015, 02:14:22 PM »
Hi Stubble --

The things you say you need the money for, buying a car and finishing a basement, aren't really things you need.  I think they're things that will be nice to have, but really, you don't need to finish a basement or have a nice new van if you have kids.  Lots and lots of kids have survived just fine in the large house you describe already having, and lots of kids get from point a to b without a minivan. 

So I would treat this money differently from an emergency fund.  If it were emergency money, sure, I'd keep it in cash.  Not much return but no risk other than inflation.  But what would happen if you did invest this, and the stock market tanked?  Well, for a short period of time, you would seem like you had less cash.  But in reality, what you bought would be exactly the same thing, unless you needed to sell it (1000 shares of X is still 1000 shares of X, even if its value changes).  Let's say another 2008 happened.  The market is back, only 6 years later, with a vengeance.  So if you can hold the stock (ie, live without a mancave in the basement or 7 seat minivan for awhile), you'd be fine in the long run, right?  Given a market that behaves as it has historically. 

I like the idea of paying down your mortgage as well.  If you have more equity, you could always take a home improvement loan when the time came for the basement, if needed.  Until then, you'd have less, or no, debt.

Good luck!

rmendpara

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Re: Reader Case Study- Too much of net worth in cash
« Reply #9 on: January 28, 2015, 02:29:41 PM »
If nothing else, pay 50k toward your mortgage. You will make 2k (a little less given mortgage interest deduction lost) this year and continue saving.

Although not mathematically the most optimal decision, I may consider putting more toward mortgage repayment since 4% > 1% cash interest... I would not pay off the cars since both cost less than your cash interest rate.

You will need to build some more assets though, and learning about investing and setting a risk tolerance will be important.

"If there was a market correction I know I'd be kicking myself since we plan to use this money in the intermediate future as opposed to 30+ years from now. But I'd also hate to miss out of the potential for compounding interest. "

Since you need the money soon, don't invest it. Keep it in cash. Just invest all new money and additional money you won't need in <5 years for long term savings. Short term needs should not be gambled.

Ccube19

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Re: Reader Case Study- Too much of net worth in cash
« Reply #10 on: January 28, 2015, 02:55:03 PM »
Throw like 75,000 in an index fun. You make an acces 5,000+ a month so when you want the car or the basement start diverting money like 3 months out from those purchases. I know you said the kids might cut into that but you should still have plenty of time to save for those things when the purchases are closer.

UnleashHell

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Re: Reader Case Study- Too much of net worth in cash
« Reply #11 on: January 28, 2015, 03:01:33 PM »
3,000 sqft
plus a basement


for 2 people?


sell the stupid house. buy something sensible with lower taxes and running costs.

you'll reduce your mortgage and probably your interest rate.

throw everythign left into funds.

keep a few k aside for emergencies.

Don;t even think about an suv or van for YEARS!!

you'll be in a position that one of you can give up work in a few years when kids come along - or possibly even both of you.


The size of house you have now is insane.



one other option - try to get a low interest rate on the house then rent it to some other sucker for an amount that covers the mortgage and then some.

rampagefc

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Re: Reader Case Study- Too much of net worth in cash
« Reply #12 on: January 29, 2015, 05:23:58 AM »
I appreciate all of the responses thus far, I knew I'd be able to count on this group for some quality advice.

In your income tax bracket you will be saving 28% plus any state taxes on every dollar you contribute to your tax deferred accounts.  That will beat most investments especially 1% you are earning by keeping in the bank.  Also at your income you are disqualified from contributing to a Roth IRA.

Do not worry about the short term volatility of the market you have 20+ years to ride out the downturns.  With the extra you have after maxing out your retirement accounts and possibly HSA, you can pay down your house or invest which ever you are most comfortable with.

We started maxing out retirement accounts last year so that doesn't necessarily apply. We plan a backdoor Roth IRA this year, probably sooner rather than later once I am comfortable with the logistics of it. Our AGI this year was just under the 181K limit for a roth.

Open a Vanguard account.  Buy an index fund (either S&P or Total market).  VTI comes to mind, but do your own research first.  Vanguard has rock bottom fees and are tops in the industry.  I would put... at least 50k into that.  If not 75k

I like Vanguard and have the luxury of using them in my employer-sponsored 401K, and we also use them for our roths. If I were to open a taxable account, I would no doubt use them again. Despite everything I've read about dollar-cost averaging being worse in the long run roughly 80% of the time, it still makes me warm and fuzzy knowing I didn't throw that large of a chunk into a fairly volatile market. That is something I'll have to consider, even if it goes against the available data.

I couldnt find you the article off hand- but MMM writes that there was a study done showing that throwing one large hunk into the market, on average, produces higher returns that dollar cost averaging. 
I have read this in the past and it makes sense.


3,000 sqft
plus a basement

for 2 people?

sell the stupid house. buy something sensible with lower taxes and running costs.

you'll reduce your mortgage and probably your interest rate.

throw everythign left into funds.

keep a few k aside for emergencies.

Don;t even think about an suv or van for YEARS!!

you'll be in a position that one of you can give up work in a few years when kids come along - or possibly even both of you.

The size of house you have now is insane.

one other option - try to get a low interest rate on the house then rent it to some other sucker for an amount that covers the mortgage and then some.

I realize it sounds excessive, and to many it would be. I could try to justify it, and I feel that I have some very good reasons for doing so, but it's unlikely to change anyone's opinion. The numbers fit comfortably into our budget and because we plan to start trying to start a family in the upcoming months, it will be filled soon enough :)


It sounds like the two places to strongly consider would be to pay down the mortgage moreso than we currently are (which is roughly an additional 5K/year) vs. opening a taxable account. I like the idea of the taxable account because I would have the ability to pull money from this investment in the future, along with the ability for this money to compound if left untouched for a long enough period of time. We plan on living in the house for a long period of time so we don't plan on moving and cashing in on the equity we build.

rampagefc

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Re: Reader Case Study- Too much of net worth in cash
« Reply #13 on: January 29, 2015, 05:26:59 AM »
There is a concept with these index funds that I'm looking into that I find confusing and maybe someone would be able to shed some light on it for me. Index funds will report their average return per period of time, but then there is the concept of dividends. Are dividends somehow tied to the % return listed? Or is this additional? And is it stock market performance that determines the dividends?

Yankuba

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Re: Reader Case Study- Too much of net worth in cash
« Reply #14 on: January 29, 2015, 06:24:43 AM »
There is a concept with these index funds that I'm looking into that I find confusing and maybe someone would be able to shed some light on it for me. Index funds will report their average return per period of time, but then there is the concept of dividends. Are dividends somehow tied to the % return listed? Or is this additional? And is it stock market performance that determines the dividends?

I believe Vanguard and Morningstar include dividends in their historical return figures. Dividends are not really tied to stock market performance - dividends are determined by each company within the index on a case by case basis. The recent trend is to replace dividends with share buybacks.

divsnowball

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Re: Reader Case Study- Too much of net worth in cash
« Reply #15 on: January 29, 2015, 07:05:12 AM »
Be sure to have your dividends reinvested.

Check out this article on the difference between returns without dividends... with dividends, and with dividends reinvested

jms493

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Re: Reader Case Study- Too much of net worth in cash
« Reply #16 on: January 29, 2015, 07:31:29 AM »
I would pay off those cars  fuck car payments and car debt no matter the interest rates. I would have an emergency fund of ~20K.

Then you decide whether to put the money in a Vanguard account to invest or pay your mortgage down.  I would be looking to simplify your life and reduce the amount of debt you have.

waltworks

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Re: Reader Case Study- Too much of net worth in cash
« Reply #17 on: January 29, 2015, 09:35:24 AM »
You can finish the basement in style on 6 months salary even if you contract it all out. Stick all but $10-20k into whatever your favorite index stock/bond fund is and forget about it.

Seriously, you have a money firehose and lots of ways to cut costs if I'm reading between the lines correctly. In 20 years, will your future self wish you had stuck the money in the market?

-W

RelaxedGal

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Re: Reader Case Study- Too much of net worth in cash
« Reply #18 on: January 29, 2015, 10:02:01 AM »
What I have done in the past in your situation: CD Ladder.  Rates are crap right now, but the expenses you mention are years out.  Buy a 5 year CD (rates at my credit union are 1.86% on a 5 year jumbo right now).  In a year buy another 5 year CD.  In 5 years they start maturing and you've (hopefully) beaten inflation.

That's the conservative, risk-averse choice.  In the intervening 10 years I've had a kid and decided we don't need the minivan.  Our financial advisor has talked us out of the CDs in favor of taxable investment accounts as divsnowball suggested.  More likely to beat inflation, and I'm at a point in my life that I'm saving more for FIRE than minivan/renovation/trip of a lifetime.

Just wanted to put the CD ladder out there because it sounds like you're pretty risk averse (FDIC Insured!) but only go that route if it will give you peace of mind.  Taxable investments are the better choice.

(Or possibly paying down your mortgage, though I'll admit we haven't gone that route.)

rampagefc

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Re: Reader Case Study- Too much of net worth in cash
« Reply #19 on: January 29, 2015, 02:47:48 PM »
Appreciate all of the new input and suggestions, many of which I hadn't previously considered. I'll do some more research into it, but as of now I'm leaning towards the following...

-- I haven't yet contributed to our Roths this year (2015), mainly because this is the first year we will have to do the backdoor conversion, but after discussing with a Vanguard rep/reading a tutorial by the white coat investor, this is actually quite easy and these will be done ASAP for the wife and I.
-- We will continue to put an additional 5-10K extra towards principle/year on the mortgage for now. We will re-evaluate yearly. Much to the dismay of some, we will stay in the house :)
-- We will open an account through Vanguard and invest in index funds, to mimic our retirement funds. Though it goes against historical data, we will probably put 50% of the total sum that we would like to invest, and then divide the rest (+ additional incoming income) over 12 months.
-- We will plan to keep approximately 40K (for now) in our bank account for an emergency fund. We will, in all likelihood, lower that amount in the future, but for some reason we like having a decent amount of liquid cash available. Baby steps for us I guess :).

I'm still open to suggestions and alternatives if other ideas are presented.


UnleashHell

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Re: Reader Case Study- Too much of net worth in cash
« Reply #20 on: January 29, 2015, 03:22:48 PM »
-- We will continue to put an additional 5-10K extra towards principle/year on the mortgage for now. We will re-evaluate yearly. Much to the dismay of some, we will stay in the house :)
.

zing!! :D

not dismay - you clearly have the income to pull it off -especially now you are actually planning!
question everything though - for me I'd change house because it would get me to FIRE faster.. If you are ok with delaying it for the big house and you've planned for it then good luck to you!!

firebeard

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Re: Reader Case Study- Too much of net worth in cash
« Reply #21 on: January 30, 2015, 09:37:42 AM »
We started maxing out retirement accounts last year so that doesn't necessarily apply. We plan a backdoor Roth IRA this year, probably sooner rather than later once I am comfortable with the logistics of it. Our AGI this year was just under the 181K limit for a roth.

I'm not a tax expert, but I'm pretty sure that to be eligible for Roth IRA contributions, it is the mAGI (modified Adjusted Gross Income) and not AGI that must be lower than the various thresholds (phaseout and cutoff).  The computation for mAGI is different from that for AGI; I think some things are added back into AGI to get the mAGI, but I don't know the specifics offhand.
« Last Edit: January 30, 2015, 09:39:31 AM by firebeard »