I'm pretty much in a good flow now of doing the basic things to save not only for a cushion, but also for retirement. (A lot of that is thanks to this forum!) I still have quite a bit of extra money leftover each paycheck, and so I want to make sure I'm making the right decisions with how I'm handling it. Below is what I currently have and am doing, and so any suggestions would be greatly appreciated.
- 6 months of emergency funds (in an Ally Bank high yield savings account).
- Max out on 401K contribution
- Max out on Roth IRA contribution
- Debt-free (outside of home mortgage)
This leaves me with about $1,500 per month still left after all bills, retirement savings and regular entertainment is factored in.
Here's what I'm currently doing with that $1,500/month:
- $250/month ($3K/year) goes to fund a taxable investment account that strictly serves as part of my retirement. I never sell anything in this account (well, at least until I'm retired), I mainly use it help adjust my asset allocation for my retirement portfolio.
- $1000/month goes to general savings. What I essentially do, is keep a general savings account with a minimum of $3,000 in it. Each pay check, I contribute $500 to it. If something like a car repair or some small, non-ordinary expense comes up, it is covered by the money in this account. Every 3 months, any funds in excess of the baseline $3,000 will be re-distributed arbitrarily to other savings accounts I hold. Every 3 months there is around $3,000 in excess there ($500/check times 6 weeks). So for instance, I have a "next car down payment" account so I might put some of that excess in there. I have a "wedding bells" account that, in the event I want to get married, I'll have at least a decent head start. I have a "near term purchase" account which is almost always zero, but if I want something like a new computer, or the next go pro camera, or some other luxury item, I'll wait until that account has enough funds in it before buying it. I have a "Home Savings" account which will be used for repairs, remodeling, or a down payment for a future rental property. I also have a travel account, and so on.
- $250/month pretty much just gets spent on excess unfortunately. You might wonder why I don't just put this in the other accounts I have, but mainly, it's because I'll literally never pull money from an account unless I need it for that specific purpose.
You might also wonder why I don't put that $1000/month I'm currently placing in savings accounts, and invest it in a taxable investment account instead. Primarily, it's because I'm assuming I'm going to need to spend that money at some point. Inevitably, I'm going to need another car some day. I will probably get married (I think?). And I wouldn't want to have to sell those invested assets at a loss, or, at a less than optimal time, which could happen since I don't know exactly when I'm going to need it. So the liquidity is appealing to me.
Anyway, net-net, once you've done the basics... emergency fund funded, 401K and Roth maxed, and you had $1,500 left over each month -- what would you do with it? I get that from a purely financial perspective, all of it should probably be invested, but, I need SOME liquidity factored in just for peace of mind. I'm pretty sure my method is far from optimal, but I'm curious as to how other people handle/manage this kind of excess.