Author Topic: what would you do with $50,000  (Read 3549 times)

doneby35

  • Bristles
  • ***
  • Posts: 280
what would you do with $50,000
« on: October 24, 2016, 07:51:47 PM »
If you had $50,000 in your savings account, how would you put that to good use, knowing that some of it needs to stay as an emergency fund in case you get laid off.
Just today enrolled in employer 401k and HSA with max contributions and I have no other debt other than $110,000 mortgage with 3% interest rate so I was thinking I could apply a good chunk towards the mortgage, unless there is a better way.
What would you do?

cincystache

  • Stubble
  • **
  • Posts: 204
Re: what would you do with $50,000
« Reply #1 on: October 24, 2016, 07:59:10 PM »
-Max out an IRA for yourself and your spouse (if married)
-Put the rest in a taxable investment account and buy index funds
-possibly set aside a few thousand for medium term (<5 years away) home/car maintenance depending on the age and condition

ender

  • Magnum Stache
  • ******
  • Posts: 4864
Re: what would you do with $50,000
« Reply #2 on: October 24, 2016, 08:00:06 PM »
What would you do?

Instantly max out 2016 IRAs ($11k). Probably save another $5k for a future vehicle purchase, pad our emergency fund with another $10k, save $11k for 2017 IRAs, and put the rest ($14k) against our mortgage.

zolotiyeruki

  • Magnum Stache
  • ******
  • Posts: 3262
  • Location: State: Denial
Re: what would you do with $50,000
« Reply #3 on: October 24, 2016, 09:25:23 PM »
For me, I'd stick it in a taxable index fund account in Vanguard.  It's better than a Roth if you're expecting to be in the 15% bracket or lower in retirement, and we're in the 10% marginal bracket now, so we don't need to put it in a tax-deferred account.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10844
  • Age: 61
  • Location: NorCal
Re: what would you do with $50,000
« Reply #4 on: October 25, 2016, 07:38:35 AM »
A 3% fixed rate mortgage?  No way would I prepay that sucker. Your wealthy future self will thank you.
After filling up all tax deferred options available to you,  I'd go with taxable equities all the way, baby!

lthenderson

  • Handlebar Stache
  • *****
  • Posts: 1360
Re: what would you do with $50,000
« Reply #5 on: October 25, 2016, 07:42:34 AM »
You said it is an emergency fund. Sticking it in a taxable account would be the worst thing to do. Many layoffs are times with economic depressions, not the time to have all your emergency fund invested in stocks.

I have my emergency fund in a savings account drawing <1% interest. Not exciting but it is 100% gonna be there when I have an emergency.

ender

  • Magnum Stache
  • ******
  • Posts: 4864
Re: what would you do with $50,000
« Reply #6 on: October 25, 2016, 07:45:29 AM »
You said it is an emergency fund. Sticking it in a taxable account would be the worst thing to do. Many layoffs are times with economic depressions, not the time to have all your emergency fund invested in stocks.

I have my emergency fund in a savings account drawing <1% interest. Not exciting but it is 100% gonna be there when I have an emergency.

100% stocks is not the only investment option for a taxable account.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10760
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: what would you do with $50,000
« Reply #7 on: October 25, 2016, 08:00:32 AM »
What would you do?
1) Finish maxing out my tIRAs (roughly $3k left for 2016)
2) set aside $11k to max out IRAs on Jan 1st, 2017
3) put the remainder  (~$36k) into my index funds as determined by my AA (80% domestic, 20% foreign).

We already have an e-fund to our satisfaction and carry no debt >3.5%.

it may be boring, but we made a plan, and unless there's good reason to change the plan we just stick to it.

MichaelB

  • Stubble
  • **
  • Posts: 128
  • Age: 32
  • Location: Charlotte, NC
  • FIRE goal: April 2032
Re: what would you do with $50,000
« Reply #8 on: October 25, 2016, 08:53:25 AM »
Re: paying off the mortgage--not sure. On the one hand, 3% is a damn good rate. And the markets are, over the long term, HIGHLY likely to do a LOT better than that. That math says invest, in which case you max out those IRAs like everyone has said.

On the other hand, paying off the mortgage is a guaranteed 3% return, in the form of reduced future outflows. You can't find a guaranteed 3% these days. And while investing the funds should produce enough income to more than offset the interest, we Mustachians also know that it's often more important to reduce expenses than to increase income, right? If you invest the funds, retire before you pay off the mortgage, and then the markets take a dive, having a mortgage payment for a few years of retirement could take a much bigger bite out of your assets than you bargained for.

So personally, my thought is that it depends if anticipate living and staying at your current place when FIRE rolls around. If you plan on something else--downsizing, moving, etc.--pay the minimum and invest the difference. For my situation, I think there's a good chance I could be in my house for the long haul, so I want to have the thing paid off by the time I retire. Reduced future expenses means reduced uncertainty of being able to pay those future expenses.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10844
  • Age: 61
  • Location: NorCal
Re: what would you do with $50,000
« Reply #9 on: October 25, 2016, 09:37:55 AM »
IMO, "guaranteed" is overrated.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10760
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: what would you do with $50,000
« Reply #10 on: October 25, 2016, 09:42:07 AM »
IMO, "guaranteed" is overrated.
...and inaccurate.  Your 'return' on paying down a fixed mortgage is the interest rate minus inflation over the relevant period.
It's very possible that the 'guaranteed return of 3%' could in fact be a real return of 0%.
Something that gets missed all too often...

doneby35

  • Bristles
  • ***
  • Posts: 280
Re: what would you do with $50,000
« Reply #11 on: October 25, 2016, 09:58:37 AM »
I do however see the benefits of not having mortgage/rent, in case someone gets laid off.
I'm probably going to leave 20,000 as emergency fund, open a tIRA and max it out with 5500 since i'm not married and apply the rest towards the mortgage.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10760
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: what would you do with $50,000
« Reply #12 on: October 25, 2016, 10:01:51 AM »
I do however see the benefits of not having mortgage/rent, in case someone gets laid off.

...improved monthyl cash flow from not having a mortgage can be great... once you get there.  In the meantime, having cash (or investments) is far more useful in case someone gets laid off.  The bank won't care if you've been paying extra and early for years; you'll still have to pay each month until its gone.

Heroes821

  • Pencil Stache
  • ****
  • Posts: 566
Re: what would you do with $50,000
« Reply #13 on: October 26, 2016, 07:29:05 AM »
Another thing to look at is credit cards and equity loans. For example if you put most of it into a taxable investment account it will grow rather than sitting in your savings account and then if an emergency happens you use the CCs or w/e while you take the 7 days or less to retrieve the funds you need from the investment account and pay off the debt you used in the emergency before you get interest on it. I think this idea was present in a very early MMM article.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10844
  • Age: 61
  • Location: NorCal
Re: what would you do with $50,000
« Reply #14 on: October 26, 2016, 07:47:29 AM »
I do however see the benefits of not having mortgage/rent, in case someone gets laid off.
I'm probably going to leave 20,000 as emergency fund, open a tIRA and max it out with 5500 since i'm not married and apply the rest towards the mortgage.
Just curious, how much do you have saved for retirement in taxable and tax deferred accounts? Prepaying the mortgage is very likely not your best option, especially if you want to do as your name says. Also, please re-read nereo's excellent comments. There is high-level advice there for those who are willing to take the time to think it through and understand. For those who do not, meh, you'll get there. It will just take you longer and cost you more.

doneby35

  • Bristles
  • ***
  • Posts: 280
Re: what would you do with $50,000
« Reply #15 on: October 26, 2016, 08:40:04 AM »
Quote
Just curious, how much do you have saved for retirement in taxable and tax deferred accounts? Prepaying the mortgage is very likely not your best option, especially if you want to do as your name says. Also, please re-read nereo's excellent comments. There is high-level advice there for those who are willing to take the time to think it through and understand. For those who do not, meh, you'll get there. It will just take you longer and cost you more.
I really don't have any savings in taxable or taxable deferred accounts currently. I just recently enrolled (2 days ago) in company 401k and HSA with max contributions. Can't really do as my name says, it would be more like 45 since I have to support my parents financially. Other than that, I have $50,000 in regular savings and $50,000 asset in my house with $110,000 left on the mortgage and no other debt. Part of my reasoning is if i pay off the mortgage earlier, I would have more money to be able to support my parents when they run out of their savings in 5 years.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10844
  • Age: 61
  • Location: NorCal
Re: what would you do with $50,000
« Reply #16 on: October 26, 2016, 11:33:04 AM »
Noooooooo! First of all, it's what the airlines say: Put on your own oxygen mask first. Your parents are responsible for their own oxygen masks! Further, anticipating a need to "take care of" your parents makes it even more imperative that you invest first.

It's a huge mistake to pay off a mortgage at the expense of saving for retirement. You are losing out on the magic of compound interest. Literally hobbling your future self is the consequence of such a mis-step.

Do not make any decisions until you understand inflation and compound interest. Run your numbers through a few calculators. Look at what your mortgage payment will actually cost you in ten and twenty years, adjusted for inflation. Estimate the value of the amount of money you're considering prepaying if you invested it for ten or twenty or more years in low-cost index funds.

Paying down the mortgage is easier to understand, but it's not your best option by any means. As for the way it "feels" to be mortgage-free, having more money than you ever imagined (thanks to compound interest) feels exponentially better. A house always costs money, even if it's paid off. You need funds to be able to cover those costs. Compound interest is essentially "free" money with which you will be able to do so. The big gains come the longer your money has to compound, so don't blow this opportunity to set yourself firmly on the path to financial freedom.

The earlier you save for retirement, the fewer actual dollars you will have to save. Once that's locked and loaded, you can spend your money on other things, like making your miniscule mortgage payments and helping your parents.

Now, all of that may sound harsh, but it's the advice that I wish had been given to me when I was your age. I'd have hit FIRE at least a decade sooner had I learned these concepts. Alas, there was no such thing as a financial blog, much less forum, back then.