Author Topic: What to do with $50k in checking account?  (Read 1244 times)

gray037

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What to do with $50k in checking account?
« on: April 26, 2021, 11:10:52 AM »
***UPDATE at bottom of OP***

I had written a decently long introductory post and an explanation of how I amassed over $50k in my checking account.  Yeah, that was all deleted when I hit the refresh verification.  So instead of typing all of it again, I'll just get straight to the point...

During the past 5 years my lurking here has given me the knowledge to be able to pay off $52,000 in student loans.  I paid them off about a year and a half ago and still living within my means they way I did when I had loan debt, my checking account has accumulated over $50,000.  I know the money just sitting there is losing value due to inflation so I would like to use this for investing/retirement.  Doing a little reading, I learned that maybe I should be looking at opening a Roth IRA and investing in index funds?  Please help as I am a total newb to this portion of finance.

Some answers to likely questions:
-The $50k is not all of my money.  That is just what I would put elsewhere while still having a decent savings/emergency fund.
-I do not have any 401k currently as my main goal was to pay off student loans.  I will begin contributing to 401k as soon as my company starts matching again (stopped due to covid economy) or I get a new job.
-I am 38 yrs old, single and focused on getting financially independent, but not retiring early.  I don't know if I ever plan to truly retire, I need to keep busy.


***UPDATE***

Thanks to all the advice here, I opened up a ROTH IRA with Vangard and contributed $12000 (6K for 2020, 6K for 2021), and I have increased my 401k contribution to 60% of my salary (this was the max contribution, I should have the maximum $19500 in the account for 2021 by September. ) 

My remaining balance of the $50K I need to place will be $18500.  After the investment order, where do I go from here?  My only debt is an auto loan that I owe $19800 @ 2.4%.  Just took it out a month ago, and it was my goal to have this paid off in 2-3 yrs max.

Also, one question for the 401k and Roth IRA...is it in my best interest to invest 100% in index funds right now? 

« Last Edit: May 04, 2021, 04:10:19 PM by gray037 »

NotJen

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Re: What to do with $50k in checking account?
« Reply #1 on: April 26, 2021, 11:33:53 AM »

youngwildandfree

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Re: What to do with $50k in checking account?
« Reply #2 on: April 26, 2021, 11:38:04 AM »
I had written a decently long introductory post and an explanation of how I amassed over $50k in my checking account.  Yeah, that was all deleted when I hit the refresh verification.  So instead of typing all of it again, I'll just get straight to the point...


This has happened to me before as well, so I feel for you. Very annoying.

Have you considered doing a full Case Study? If that is too much, the investment order is a great place to start.

terran

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Re: What to do with $50k in checking account?
« Reply #3 on: April 26, 2021, 11:38:47 AM »
I would second the investment order suggestion. That should answer most of your questions.

If you decide to contribute to either traditional or Roth IRA (which you probably should) remember that you can still contribute for 2020 until May 17th since the IRS pushed the tax filing deadline to then.

gray037

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Re: What to do with $50k in checking account?
« Reply #4 on: April 26, 2021, 12:11:40 PM »
I had looked into the investment order.  It seems most of those didn't apply to me with my scenario, with the exception of a Roth IRA, since most of those accounts are for pre-taxed income.  So, the 401k and HSA stuff is out ( I have PPO insurance currently).  I can send $5k for this year to a Roth, but what do I do with the other $45k?

The only debt I have is an auto loan I just took out with a balance of $21k and 2.4% interest.  I have a 2-3 year plan to tackle that one. 

That seems to leave the remaining for investing, but I don't know where to start.  I have heard something about Vanguard and index funds.  Would that be where to look next or is there something better?

cool7hand

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Re: What to do with $50k in checking account?
« Reply #5 on: April 26, 2021, 12:19:05 PM »
You have to select a Portfolio that works for you. Most people here use a 100% equity portfolio, something like SCHB. Others use 60/40, Golden Butterfly, or All Seasons. https://portfoliocharts.com/ There's no one size fits all approach. You have to pick an approach that fits your situation/goals.

As for where, you definitely want to use a low-fee platform. Most people here use Vanguard, Fidelity, or Schwab.

We like Schwab. The fees are low. They offer their own low-fee index funds, plus those from other vendors including Vanguard. We found a local branch office advisor who is pretty sophisticated and gets our goals. He helped us kick the tires on whether to use insurance products to max out my wife's pension. As I recall, you get three wire transfers a quarter, which is nice if the need ever arrives. We also linked our credit cards and my wife's 457, which we can't transfer, so we can see our complete financial picture in one place. Their 800 number is generally quick to answer and reliable.

Decide which portfolio and platform work for you, and get those soldiers (your dollars) in the market and working for you asap.

gray037

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Re: What to do with $50k in checking account?
« Reply #6 on: April 26, 2021, 01:53:57 PM »
You have to select a Portfolio that works for you. Most people here use a 100% equity portfolio, something like SCHB. Others use 60/40, Golden Butterfly, or All Seasons. https://portfoliocharts.com/ There's no one size fits all approach. You have to pick an approach that fits your situation/goals.

As for where, you definitely want to use a low-fee platform. Most people here use Vanguard, Fidelity, or Schwab.

We like Schwab. The fees are low. They offer their own low-fee index funds, plus those from other vendors including Vanguard. We found a local branch office advisor who is pretty sophisticated and gets our goals. He helped us kick the tires on whether to use insurance products to max out my wife's pension. As I recall, you get three wire transfers a quarter, which is nice if the need ever arrives. We also linked our credit cards and my wife's 457, which we can't transfer, so we can see our complete financial picture in one place. Their 800 number is generally quick to answer and reliable.

Decide which portfolio and platform work for you, and get those soldiers (your dollars) in the market and working for you asap.

A lot of that is Greek to me, lol.  What would you do with the money in a similar situation being 38, single, no kids, minimal debt?

EvenSteven

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Re: What to do with $50k in checking account?
« Reply #7 on: April 26, 2021, 01:59:04 PM »
I had looked into the investment order.  It seems most of those didn't apply to me with my scenario, with the exception of a Roth IRA, since most of those accounts are for pre-taxed income.  So, the 401k and HSA stuff is out ( I have PPO insurance currently).  I can send $5k for this year to a Roth, but what do I do with the other $45k?

The only debt I have is an auto loan I just took out with a balance of $21k and 2.4% interest.  I have a 2-3 year plan to tackle that one. 

That seems to leave the remaining for investing, but I don't know where to start.  I have heard something about Vanguard and index funds.  Would that be where to look next or is there something better?

If your employer offers a 401k, then the 401k part applies to you. From your first post it seemed like your employer offered a 401K, but you have chosen not to contribute. When people suggest to put $19k of that $50k into a 401k, you can up your contributions at work to max out your 401k, and then use $19k from your checking to cover expenses.

Index funds are the way to go. As mentioned, Vanguard, Schwab, or Fidelity are all fine choices for where to keep your IRA or taxable brokerage. You will want to settle on an asset allocation, of what mix of stocks and bonds you want, then use low cost, broadly diversified index funds to get you to that asset allocation.

A couple links to get you started:

https://www.bogleheads.org/wiki/Getting_started

https://jlcollinsnh.com/stock-series/


NotJen

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Re: What to do with $50k in checking account?
« Reply #8 on: April 26, 2021, 02:02:51 PM »
What would you do with the money in a similar situation being 38, single, no kids, minimal debt?

That's the same as my situation.

I would contribute $12k to a Roth IRA ($6k in 2020 contributions if still allowed due to the moved tax filing date, $6k in 2021 contributions).  Keep contributing to your Roth IRA each year.

I would put $19.5k into a 401k.  I did this even though my company did not match my contributions.  The tax-deferred space was valuable to me.  You can skip this step if your work 401k has large fees or bad fund options.  Keep contributing to your 401k each year (if it's a decent one).

Remaining cash goes into a taxable brokerage account.  Extra cash in the future goes here.

I like the 3-fund portfolio.  Very easy to manage: https://www.bogleheads.org/wiki/Three-fund_portfolio


yachi

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Re: What to do with $50k in checking account?
« Reply #9 on: April 26, 2021, 02:16:28 PM »
I had looked into the investment order.  It seems most of those didn't apply to me with my scenario, with the exception of a Roth IRA, since most of those accounts are for pre-taxed income.  So, the 401k and HSA stuff is out ( I have PPO insurance currently).  I can send $5k for this year to a Roth, but what do I do with the other $45k?

The only debt I have is an auto loan I just took out with a balance of $21k and 2.4% interest.  I have a 2-3 year plan to tackle that one. 

That seems to leave the remaining for investing, but I don't know where to start.  I have heard something about Vanguard and index funds.  Would that be where to look next or is there something better?

Yes, open a Roth IRA if your income is below $140,000.  You can put in money for tax year 2020 until May 17.  You can put in $6,000 for 2020, and another $6,000 for 2021.  There's really no way to go wrong with this step.  If you regret that the money is in a Roth IRA, the contributions can be withdrawn at any time, for any reason without penalty.  Do it now, and worry about what to actually invest the money in later (S&P 500 or Total Stock Market fund is my recommendation, but you don't have to decide when you open the account)

If you keep following the investment order, you would be maxing out your 401(k) in step 5.  2021's 401(k) limit is $19,500.  The way you get extra money in there is you max out your contribution from your paycheck, living on your savings if you can't manage on the lower paycheck.

If I understand correctly, you amassed this sum over 3.5 years, so you're saving at a rate of just under 15k per year.  If that's the case, the entirety of the 50k, and what you're saving can be put into tax advantaged accounts over the next 4 years:

2021: $31,500 into accounts, 15k saved,  33.5K balance
2022: $25,500 into accounts, 15k saved,  23k balance
2023: $25,500 into accounts, 15k saved, 12.5k balance
2024: $25,500 into accounts, 15k saved, 2k balance
2025: $17,000 into accounts, 15k saved, 0k balance

This pace seems reasonable to me given the time it took to accumulate these savings.  If that isn't quick enough, check out 529 plans.  They can provide a state tax incentive, and are valuable if you think you'll ever provide for someone to go to college (you, wife, kids, grandkids, or a niece/nephew).  You can put in 15K per person in most states, and you can do it in your name if you don't have the person nailed down.  If that's still not quick enough, or if you don't want to tie the money to being used for education, maybe you want to open a trading account.  I'd suggest something E*TRADE or Fidelity.  In there you can put all of your savings, but you don't get  tax benefit.  All your selling & dividends will be subject to tax the minute it happens in your account.

gray037

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Re: What to do with $50k in checking account?
« Reply #10 on: April 26, 2021, 08:28:36 PM »
Thanks for all the replies so far.  It looks like I have a lot of reading and learning ahead of me, but thatís fine because Iíve become very interested in this stuff.
A couple of things from what everyone has said stands out to me.

1.    I didnít know about being able to contribute to a Roth for 2020 and 2021 until May 17th.  That is what I am going to do with the first $12k.  I think our 401k at work is through Fidelity.  So maybe I should do the Roth and index funds through them?

2.   Several people are advising to max out the 401k for the year.  Correct me if I am wrong but I thought 401k was the best option for pre-taxed income and you pay taxes on it when withdrawing during retirement.  So if I have already been taxed on this money in my account, wouldnít I get taxed again on the same money by putting it into a 401K?

@yachi Ė Thanks for laying out the calculation.  It didnít take me 3.5 years to save this money, it only took me 1.5 years.  Iím a good saver.  Although Iíll probably saving a little less moving forward  because I want to ďpayĒ myself a percentage and use that money for a little traveling and other wants.

EvenSteven

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Re: What to do with $50k in checking account?
« Reply #11 on: April 26, 2021, 09:12:43 PM »
Thanks for all the replies so far.  It looks like I have a lot of reading and learning ahead of me, but thatís fine because Iíve become very interested in this stuff.
A couple of things from what everyone has said stands out to me.

1.    I didnít know about being able to contribute to a Roth for 2020 and 2021 until May 17th.  That is what I am going to do with the first $12k.  I think our 401k at work is through Fidelity.  So maybe I should do the Roth and index funds through them?

2.   Several people are advising to max out the 401k for the year.  Correct me if I am wrong but I thought 401k was the best option for pre-taxed income and you pay taxes on it when withdrawing during retirement.  So if I have already been taxed on this money in my account, wouldnít I get taxed again on the same money by putting it into a 401K?

@yachi Ė Thanks for laying out the calculation.  It didnít take me 3.5 years to save this money, it only took me 1.5 years.  Iím a good saver.  Although Iíll probably saving a little less moving forward  because I want to ďpayĒ myself a percentage and use that money for a little traveling and other wants.

1. Fidelity would be a good choice. There is something to be said for the simplicity of having things in one place.

2. You would not be taxed twice. The amount that you contribute to the 401k is taken away from your AGI, so you are not taxed on it going in. On the way out you will be taxed at your marginal rate for ordinary income. The vast majority of people will have a lower tax rate in retirement when they are taking the money out than when they are working and putting money in. If that is the case for you you should be making traditional 401k contributions. If you think it is likely that your tax rate in retirement will be higher than it is now, you should look into if there is a Roth option for your 401k.

314159

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Re: What to do with $50k in checking account?
« Reply #12 on: April 26, 2021, 09:19:55 PM »
1. It doesn't really matter if your 401k and Roth IRA are on the same platform (mine aren't; my 401k is with Fidelity and my Roth IRA and non-tax advantaged accounts are with Vanguard). If it is easier for you that way, go for it.

2. You are slightly mistaken. You are right that 401k is the best option for pretax income and you pay taxes on it when withdrawing during retirement. But you would not be moving $19.5k from your checking account to your 401k. Instead, you will have your employer withhold a certain amount from each remaining paycheck this year, such that the total amount withheld is $19.5k by the end of the year, and put that money into the 401k. (E.g. if you get paid weekly, there are about 35 weeks left in the year, so you'll have about $19.5k/35 weeks = $560/week withheld.) That money is pretax. Meanwhile, you can spend the money in your checking account on your daily living expenses.

In practice though, if your salary is bigger than the sum of your expenses and 401k withholding, your checking account will continue to increase, even after that withholding. So you will want to invest the remaining money somewhere else. Look at the next steps in the investment order for that.

draco44

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Re: What to do with $50k in checking account?
« Reply #13 on: April 26, 2021, 09:28:41 PM »
That's great it sounds like you are now planning to both open a Roth IRA and contribute to your work's 401k plan.

It's not important that your 401k from work and your personal Roth IRA are operated by the same firm, though Fidelity is a fine option. Would you be accessing your 401k through Fidelity directly, or through a website specific to your workplace? If the latter, you'd have to visit a different site anyway for your Roth IRA so I wouldn't feel pressured to stick with Fidelity out of a desire for convenience. Like many on this forum I'm a Vanguard booster myself. I like the rock-bottom expense ratios (fees) and the unique client-owned structure that means that Vanguard ultimate answers to people who buy its funds rather than corporate shareholders Read the JL Collins Stock series that was already suggested for more on why there are so many Vanguard fans around here.

Re. question 2 from your last post, there is actually such a thing as both Roth 401ks and "traditional" 401ks, so you'll have to check what your workplace offers, but they many only offer a traditional 401k. Traditional IRAs take in pre-tax contributions and are taxed later when you make withdrawals. With Roth accounts, whether Roth 401k or Roth IRA, it's the opposite. You put in after-tax dollars, meaning there's no upfront tax benefit but later withdrawals of both contributions and earnings are tax-free. If you are fortunate enough to be able to contribute to both a traditional 401k through work and a Roth IRA you set up yourself, that's great.

« Last Edit: April 26, 2021, 09:31:36 PM by draco44 »

gray037

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Re: What to do with $50k in checking account?
« Reply #14 on: May 04, 2021, 04:09:04 PM »
Thanks everyone!  Bump for update.

yachi

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Re: What to do with $50k in checking account?
« Reply #15 on: May 05, 2021, 07:57:58 AM »
Awesome quick progress.  One option is a 529 plan, your states plan(s) can be found here: https://plans.collegesavings.org/viewState.aspx
Some states let you write off any contributions from income taxes, so that can be beneficial.  You can open an account in your name, and transfer it to a future child.

Another option is a regular brokerage account.  Etrade, Fidelity, Vanguard, TD Ameritrade.  You can move money in and out of such accounts without penalty, so they can be useful.  All dividends and capital gains within these accounts are taxable events the year they occur, so it's best to not move in and out of things.

terran

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Re: What to do with $50k in checking account?
« Reply #16 on: May 05, 2021, 08:59:01 AM »
Sounds like you've made some great adjustments! There really isn't any "after the investment order" since the final step is just "put everything else in a taxable brokerage account."

It's absolutely not the mathematically correct thing to do (for that, follow the investment order), but I'd pay off the car loan because I'm debt averse and like to keep my required expenses low. Again, this is just a behavioral tick of mine, so if you're more comfortable with debt than I am then keeping the low interest debt and investing is the "right" decision.

And yes, the best time to invest in index funds is 20 years ago, the next best time to invest in index funds is today.

cool7hand

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Re: What to do with $50k in checking account?
« Reply #17 on: May 06, 2021, 04:51:16 AM »
Thanks for all the replies so far.  It looks like I have a lot of reading and learning ahead of me, but thatís fine because Iíve become very interested in this stuff.


Congratulations on developing an interest! Investing works better the more understanding you have of why you are doing what based on your own situation/needs/goals. And never confuse the outcome with the decision.