How much should I invest in stock? prepay mortgage? emergency fund?

[ny ny]

Age: 32

Income: $180,000 before bonus and expected to rise steadily. 

Bonues: $10,000 to 15,000 per year.

Cash in the bank - $85,000

401k - $20,000 (will be contributing the maximum amount here on out).

Real Estate estimated worth - $650,000

Mortgage still on the property- about 190k at 3.5% (25 years remaining)

Maintenance - $900 per month

Other than the 401k I own no stocks.  Obviously, that much cash does me no good.  I figure I should put about 40-50k in an S&P 500 index fund and just let it ride?  Then maybe use my bonuses to prepay my mortgage? 

Should I be looking into any other retirement-type accounts like IRAs?  I'm not too well versed on those.

I think I'd like to keep at least 30k in cash for emergencies, then put the rest of my monthly income in excess of my living expenses into the index fund going forward.  I know that's a bigger cash-cushion than most would advise on this site, but I'd feel a bit worried having less than that in the bank. 

Is there anything I'm missing?  I'm still new here and learning so any advice would be great.

I'm not looking to FIRE any time soon.  I just want to maximize everything I have, cut my spending, and be as efficient as possible.

[nereo]

You have a tall ask, from optimizing your spending, understanding investing and putting yourself on a better path.

First, for "where do I put my money" it's good to read and understand the Investment Order

To that, I would not prepay your mortgage right now, as you already have the vast majority nof your net worth in your home.

For investing you might want to read at least the first 12 posts of JL Collins stock series.' 
Once you have read over those you will likely have more targeted questions

Yes, find a more productive place for that $85k in cash (hint: Investment Order!)

Finally, the biggest bang for oyur buck will be getting your expenses under control.  Your income is very high, and with a little focus you can lead an amazing upper-middle class lifestyle and still save >50% of your pay, allowing you to become financially independent by age 40 (quick back-of-the-envelop calculation using Shockingly Simple Math).

g'luck

[waltworks]

Why would you prepay a 3.5% loan? There's no time period in the history of the stock market where that would win over just dumping money into stocks.

It looks like you haven't tracked your spending. Do that. You could be set to retire in 5 years, or you could be working until you fall into the grave - it depends on what you are spending. Without that information, this is all just hand waving.

As Nereo says, read the investment order post.

Come back when you have more information for us.

-W

 

[Tyson]

I make $120k in Denver so I think comparable to $180k in NY.  Here's the thing, if you're in a career that you want to be upwardly mobile, you have to look the part (sometimes).  Here's one thing I do.  Buy any luxury or branded stuff, used.  Car, clothes, watches, phones, etc... all used.  It'll save you a ton of money and still let you project and image of success. 

Now, if you don't have a job/career where that's necessary, you can skip my advice ;p

The beauty of the MMM approach is a large part of it is figuring out how to hack the system so you still live a nice life, but you're smart about it and end up with a ton of savings.  One thing I recommend is shopping around for better deals on a regular basis, especially for recurring costs. 

Also, don't do stupid things like go out with friends and "drinks are on me!" type stuff or "hey, let me pick up the tab".  You might feel you could do those things because of how much you make, but DON'T, those are huge money sucks. 

Re: the cash you already have and the money from the future, I strongly recommend the S&P 500, low cost index fund and let it ride.  And just keep piling on the cash, year after year after year.  You'll be surprised how quickly it turns into a big ball of money that soon becomes self-generating.  Understand your risk level and pick anywhere from 60/40 stock/bond split, or 100/0 stock/bond split.  Personally I'm 90/10 and pretty happy with that.  But I also know myself and that I'll never, ever, ever pull that money out during a market crash.  Even when every financial site in the world is screaming it's the end of the world!!!  Haha. 

[ny ny]

Finally, the biggest bang for oyur buck will be getting your expenses under control.  Your income is very high, and with a little focus you can lead an amazing upper-middle class lifestyle and still save >50% of your pay, allowing you to become financially independent by age 40 (quick back-of-the-envelop calculation using Shockingly Simple Math).

g'luck

It looks like you haven't tracked your spending. Do that. You could be set to retire in 5 years, or you could be working until you fall into the grave - it depends on what you are spending. Without that information, this is all just hand waving.

As Nereo says, read the investment order post.

Come back when you have more information for us.

-W

 

Yep... Since discovering this place a week or two ago, I canceled my cable bill, lowered my internet package, started making my own lunches and dinners instead of ordering, and am looking to try and save even more somehow.

But yea, you two are correct.  Until now, I haven't been tracking my spending at all (I know, shame on me).  That's going to change. But I also want to point out, I haven't been making 180 very long.  I was fortunate enough to experience some very big jumps in salary over the past few years.  I now make $100k more than what I was making 3 years ago.  Still... I could easily save way WAY more. 

And I'm honestly excited to make it happen.

I will read that post.

[ny ny]

Why would you prepay a 3.5% loan? There's no time period in the history of the stock market where that would win over just dumping money into stocks.

I suppose that's true.  So I should just continue making minimum payments?

[ny ny]

Re: the cash you already have and the money from the future, I strongly recommend the S&P 500, low cost index fund and let it ride.  And just keep piling on the cash, year after year after year.  You'll be surprised how quickly it turns into a big ball of money that soon becomes self-generating.  Understand your risk level and pick anywhere from 60/40 stock/bond split, or 100/0 stock/bond split.  Personally I'm 90/10 and pretty happy with that.  But I also know myself and that I'll never, ever, ever pull that money out during a market crash.  Even when every financial site in the world is screaming it's the end of the world!!!  Haha.

I don't see why I'd allocate any money to bonds at all when I have a mortgage I could pre-pay instead. I'd probably opt for 100/0 and not have any bonds... unless I'm missing something about bonds.

[TexasRunner]

Why would you prepay a 3.5% loan? There's no time period in the history of the stock market where that would win over just dumping money into stocks.

I suppose that's true.  So I should just continue making minimum payments?

Yes, make the minimum payments AT LEAST UNTIL you have maxed out 401k, IRAs for both of you (assuming you are married), and probably 529 plans.  Then you might consider pre-paying and even in that case the mortgage would lose out to index funds.  But absolutely not before maxing out any tax-advantaged accounts you have.

Also, I would say 100% stocks (or 95% stocks and 5% bonds, re-balancing annually with something like betterment as this can return *slightly* higher than straight equities.)

Long retirements need more stocks and since the 4% rule applies to 100% stocks, its not dangerous to go that route even in retirement.


As has been said before, calculate your expenses.  That is the first step.  A copy of Your Money or Your Life would also be a wise investment.  Once you have done that, calculate six months of your actual expenses and keep that in a High-Yeild savings account or in CD's.

Once that is done start investing in taxable.  As has been noted before, follow the investment order post.  It'll get you there.

[nereo]

Re: the cash you already have and the money from the future, I strongly recommend the S&P 500, low cost index fund and let it ride.  And just keep piling on the cash, year after year after year.  You'll be surprised how quickly it turns into a big ball of money that soon becomes self-generating.  Understand your risk level and pick anywhere from 60/40 stock/bond split, or 100/0 stock/bond split.  Personally I'm 90/10 and pretty happy with that.  But I also know myself and that I'll never, ever, ever pull that money out during a market crash.  Even when every financial site in the world is screaming it's the end of the world!!!  Haha.

I don't see why I'd allocate any money to bonds at all when I have a mortgage I could pre-pay instead. I'd probably opt for 100/0 and not have any bonds... unless I'm missing something about bonds.

The main reason is that it's easier to rebalance.  What percentage of your portfolio in bonds depends on your risk tolerance, goals, job security, savings rate and other such things.  For someone your age the recommendation can be anywhere from 60/40 (pretty darn conservative) to 100% in equities (e.g. everything in an SP500 fund)  Ultimately it's up to you.

[ysette9]

Just a quick correction here: yes, a high stock percentage is important in accumulions phase as well as in retirement to outlast inflation. That said, the original Trinity Study which gave rise to the 4% “rule” looked at a 50/50 stock/bond allocation. It also only looked at a 30-year retirement. For those of us looking at 50+ year retirements you do need more stocks. Personally I like the reverse equity glide path to hedge against sequence of returns risk in early retirement.

But that is really getting ahead of ourselves. Focus on maxing out your tax-advantaged space and save as much as you can. Pick an asset allocation with plenty of stock and make them broad, low-fee passive index funds. The exact allocation doesn’t matter that much. Your discipline and savings rate will matter much more. Good luck.

[BostonBrit]

Age: 32

Income: $180,000 before bonus and expected to rise steadily. 

Bonues: $10,000 to 15,000 per year.

Cash in the bank - $85,000

401k - $20,000 (will be contributing the maximum amount here on out).

Real Estate estimated worth - $650,000

Mortgage still on the property- about 190k at 3.5% (25 years remaining)

Maintenance - $900 per month

Other than the 401k I own no stocks.  Obviously, that much cash does me no good.  I figure I should put about 40-50k in an S&P 500 index fund and just let it ride?  Then maybe use my bonuses to prepay my mortgage? 

Should I be looking into any other retirement-type accounts like IRAs?  I'm not too well versed on those.

I think I'd like to keep at least 30k in cash for emergencies, then put the rest of my monthly income in excess of my living expenses into the index fund going forward.  I know that's a bigger cash-cushion than most would advise on this site, but I'd feel a bit worried having less than that in the bank. 

Is there anything I'm missing?  I'm still new here and learning so any advice would be great.

I'm not looking to FIRE any time soon.  I just want to maximize everything I have, cut my spending, and be as efficient as possible.

As everyone else has said just take a look at your investment order.
 
Given your other post ( https://forum.mrmoneymustache.com/case-studies/girlfriend-is-in-med-school-with-$500k-in-student-loans-how-bad-is-it/ ), there's no need to make any big decisions in locking money away and there's a benefit to maintaining a liquid balance whilst you are in a state of flux. 6 months isn't going to make that much of a difference to you. This doesn't mean you shouldn't be amending your spending habits and hitting the basics like 401ks.
 
At 32, and in light of your post, it sounds like the biggest impact on your financial priorities will center around what you decide to do with your relationship.
 
If you split (possibly because of her debt), then you've probably got a window to absolutely smash your savings rate. You'll be paying ~$12k in mortgage, say another $12k on maintenance and utilities, you could potentially reduce this with a roommate (depending on your property) if you spent a further a further $2k a month on "living" after coming out of a relationship, that leaves your spending at $48k net. You'd have no ties so you could bring your cash balance right down to say $10-15k and then bang the rest into investments. You'd then be investing the balance ($100k post tax) for a couple of years banking any raises or bonuses.
 
I say $10-15k cash balance as in this scenario you'd have no commitments and equally remember that you would receive severance pay and worst case can draw on equity investments given a good chunk would be in post-tax accounts.
 
If you go the other route, of staying with and marrying your girlfriend then you need to make a bit more of a medium term plan around kids, her student debt, where you are going to live (the place you bought at 27 is probably not suitable for a couple of kids) before making investment decisions. You're going to also have the joys of wedding planning... which will cost more than you think! On the bright side, on this route in 3 years, you have a significant other who is chipping in $200k+ to the household income.
 
I know that you're concerned about her debt but let say you take that $48k net spend I mention above (which could be trimmed down), add on another $20k for her (which is aggressive) so you're at a joint net spend of $70k. Assuming a household income of $425,000 in 3 years and max 401k contributions, that leaves you $270k post tax. You spend $70k, leaving you $200k of post tax income to invest. Between you, you can literally sort her debt out in just over 2 years and then you're left with a massive household income with low unemployment risk (on her income) allowing you to amend your risk profile (like running a lower cash buffer). Personally, given the investment order I would get your girlfriend to put everything in a PSLF and then invest the balance in equity investments which on balance should generate a better RoI.
 
Key takeaways:
 
1) Sort out your relationship status - this will have the biggest impact on your 20 year net worth.
2) Make a budget
3) Drop your costs
4) Make a plan around GF debt (if you go with that scenario)
5) Invest everything that's outstanding.