Author Topic: What should I do with additional $2,000 a month?  (Read 3872 times)

Mrs.Granola

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What should I do with additional $2,000 a month?
« on: July 06, 2016, 02:25:56 PM »
Hello All! I need help! I've been slowly converting my ways and I find myself with a $2,300 a month surplus that I can't decide what to do with. Since I'm unable to make a decision I've just been letting the money accumulate in my checking account which isn't doing me any good. So, here are my options...

*Invest the money via maxing out IRA/401(k)
*Pay off Car, $11,007 left at 2.99%. Current monthly payment is $437 with 24 months left on loan.
*pay off Federal Student Loan, $22,323 left at 5.625%. Current monthly payment is $105, basically I'm just paying the interest on this loan every month.

My current financial stats:
Own a home with a mortgage at 3.625%
$70,000 in retirement
$16,678 in checking account (this also includes my healthy Emergency Fund)

Since I don't know what the best options are at this point, I've just been accumulating the excess money in my checking account. I'm focusing my energy on earning more and saving more. So, what would be your next financial goal?

lhamo

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Re: What should I do with additional $2,000 a month?
« Reply #1 on: July 06, 2016, 02:34:46 PM »
1)  Max retirement accounts -- adjust your withholding now to account for the reduction in taxes

2)  Pay off student loans by the end of the year -- use some of your cash stash (maybe keep an EF of 10k or so) + the $2300 in monthly excess + the additional money you will save in taxes.  Should be able to knock the loan out quickly if you are disciplined about it

3)  Once the student loan is paid off, redeploy those payments toward the car loan.  Continue maxing out retirement accounts in 2017 and beyond.

4)  Once the car loan is paid off, tackle the mortgage and/or start saving outside retirement so that you can eventually FIRE.

2Birds1Stone

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Re: What should I do with additional $2,000 a month?
« Reply #2 on: July 06, 2016, 02:53:20 PM »
Max our tax deferred/sheltered space.

The taxes you save on $18,000 in 401k and $5,500 in tIRA can be HUGE!!!

2.99% interest is very low, I would put any money that you have left over from maxing out tax advantaged space on the loans.

Jack

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Re: What should I do with additional $2,000 a month?
« Reply #3 on: July 06, 2016, 03:00:22 PM »
1)  Max retirement accounts -- adjust your withholding now to account for the reduction in taxes

2)  Pay off student loans by the end of the year -- use some of your cash stash (maybe keep an EF of 10k or so) + the $2300 in monthly excess + the additional money you will save in taxes.  Should be able to knock the loan out quickly if you are disciplined about it

3)  Once the student loan is paid off, redeploy those payments toward the car loan.  Continue maxing out retirement accounts in 2017 and beyond.

4)  Once the car loan is paid off, tackle the mortgage and/or start saving outside retirement so that you can eventually FIRE.

IMO, the 2.99% car loan and 3.625% mortgage rates are low enough that I'd carry those loans to term and invest more in the stock market or real estate (expecting a 7%+ average long-term return) instead. The OP should come out ~3.5% ahead (vs. paying down the loans) that way.

tonysemail

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Re: What should I do with additional $2,000 a month?
« Reply #4 on: July 06, 2016, 03:06:34 PM »
max out 401k

fixed rate, low interest loans are a beautiful thing :)

Dicey

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Re: What should I do with additional $2,000 a month?
« Reply #5 on: July 06, 2016, 03:11:17 PM »
What Jack said!

Mrs.Granola

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Re: What should I do with additional $2,000 a month?
« Reply #6 on: July 06, 2016, 03:52:39 PM »
So, I should max out tax deferred retirement accounts then put all extra toward student loan? Would it be better to do a ROTH or a traditional IRA? I'm currently in the 25% tax bracket.

2Birds1Stone

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Re: What should I do with additional $2,000 a month?
« Reply #7 on: July 06, 2016, 03:54:57 PM »
So, I should max out tax deferred retirement accounts then put all extra toward student loan? Would it be better to do a ROTH or a traditional IRA? I'm currently in the 25% tax bracket.

Traditional IMHO. That's $1375 in taxes you are saving! Another $4500 in taxes on the $18,000 you defer to your 401k.

lhamo

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Re: What should I do with additional $2,000 a month?
« Reply #8 on: July 06, 2016, 06:52:47 PM »
I would start with traditional IRA/401k for the tax benefits as paying less in tax will give you more money to put toward the loans.  Once you have paid off the student loan you might want to switch to Roth to get the long-term tax benefit.

bacchi

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Re: What should I do with additional $2,000 a month?
« Reply #9 on: July 06, 2016, 07:26:01 PM »
What to do with an additional $2000 a month? Strippers and blow, obviously.

Roots&Wings

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Re: What should I do with additional $2,000 a month?
« Reply #10 on: July 07, 2016, 05:07:28 AM »
So, I should max out tax deferred retirement accounts then put all extra toward student loan? Would it be better to do a ROTH or a traditional IRA? I'm currently in the 25% tax bracket.

Traditional IMHO. That's $1375 in taxes you are saving! Another $4500 in taxes on the $18,000 you defer to your 401k.

Confirm that you can actually deduct the traditional IRA contribution. If you're in 25% tax bracket, your income (like mine) may be above the IRS traditional IRA deduction limit: https://www.irs.gov/retirement-plans/plan-participant-employee/2016-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work

Fishindude

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Re: What should I do with additional $2,000 a month?
« Reply #11 on: July 07, 2016, 05:13:23 AM »
Some towards retirement, some towards paying down debt.

MDM

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Re: What should I do with additional $2,000 a month?
« Reply #12 on: July 07, 2016, 09:49:29 AM »
Haven't posted this in a while, so here is the "usual advice", current as of the posting date.  See the 'Investment Order' tab in the case study spreadsheet for the latest version.   
"Max..." means "contribute up to the maximum allowed for..., subject to your ability to pay day-to-day expenses."   
   
It is up to you whether to consider "saving for a house down payment" as a "day to day expense", vs. lumping the down payment savings in with "taxable investments" at the end.   
If you are renting, you may not be throwing away as much on rent as you might think.  See   
   http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/ for some thoughts.
   
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct -   
   unless your 457 fund options are significantly worse than those in the 401k/403b -
   due to penalty-free access to 457 funds at retirement, even if younger than 59 1/2.
   
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
Current 10-year Treasury note yield is ~1.4%.  See   
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   
   
The emergency fund is your "no risk" money.  You might consider one of these online banks:   
   http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"   

ShoulderThingThatGoesUp

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Re: What should I do with additional $2,000 a month?
« Reply #13 on: July 07, 2016, 09:56:37 AM »
So, I should max out tax deferred retirement accounts then put all extra toward student loan? Would it be better to do a ROTH or a traditional IRA? I'm currently in the 25% tax bracket.

tIRA gives you more money now, which you can use to kill that 5.6% student loan.

What a great problem to have! Good work.

catccc

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Re: What should I do with additional $2,000 a month?
« Reply #14 on: July 07, 2016, 09:57:27 AM »
Another vote for max out retirement options - traditional IRA if you can deduct it.   Then student loans.  Great job on the progress and creating that surplus!!

Mrs.Granola

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Re: What should I do with additional $2,000 a month?
« Reply #15 on: July 07, 2016, 01:50:26 PM »
Thanks for all the advice everyone!
@MDM, what a great summary, that's gold!

Where would a SIMPLE IRA with a 3% match fall? I assume I would just add this step with the 401(k) steps? I have access to a 401(k) while my husband has access to the SIMPLE IRA..... Maybe someday we can just max everything out!

Jack

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Re: What should I do with additional $2,000 a month?
« Reply #16 on: July 07, 2016, 01:58:39 PM »
Where would a SIMPLE IRA with a 3% match fall? I assume I would just add this step with the 401(k) steps? I have access to a 401(k) while my husband has access to the SIMPLE IRA..... Maybe someday we can just max everything out!

A SIMPLE IRA is mostly equivalent to a 401k (except with a lower contribution limit: something like 12K vs. 18K, if I recall). Between the two, you should contribute to the one with the better investment choices / lower fees first (but be sure to capture the match on both!).