Author Topic: A newbie has too much cash. What do I do?  (Read 6478 times)

asytsma

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A newbie has too much cash. What do I do?
« on: May 12, 2014, 09:34:59 AM »
Iím really really new at this, and I have way too much cash. Like $30,000 sitting in cash. I already own a rental property, so what do I do with it? I see these as my only options. Which do I choose? Do I have other options?

1. Buy a ton of Vanguard index fund shares all at once today.
2. I havenít contributed to my 401K plan yet this year (I know. What an idiot.). So I could make one lump 401K purchase to max out my 2014 contributions. My employer contributes whether or not I do, so Iím not missing out on any matching funds.
3. Do a combination of the two above regularly over the next handful of months to capture a variety of the highs and lows of the market.
4. Use it as a down payment for a 2nd rental property.
5. Pay off my husbandís $40,000 in student loans. Itís locked in at a 3.5% interest rate.

We have no other debt. Weíre already maxing out our Roth IRAs. Weíll have an additional $1500 or so a month available to save/ invest moving forward.

Thanks for your help!

Winston

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Re: A newbie has too much cash. What do I do?
« Reply #1 on: May 12, 2014, 09:55:26 AM »
Absolutely you need to contribute $17,500 to your 401(k). That's a guaranteed return = your tax bracket (so somewhere between crazy good and ludicrously awesome).

Can you handle the burden of another rental property? If not, then either the index fund or paydown of student loan debt with the rest of it. (But make sure you have some accessible money in case of a true emergency. Index funds in taxable accounts are good for this IMO.)
« Last Edit: May 12, 2014, 09:59:41 AM by Winston »

matchewed

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Re: A newbie has too much cash. What do I do?
« Reply #2 on: May 12, 2014, 10:13:42 AM »
No one will be able to tell you exactly what to do. Your circumstances and your risk tolerance should be guiding you on coming up with a plan for your finances. What are the goals you want to accomplish? How will your investments and income streams help you attain these goals? Then you can start getting into the nitty gritty with an investment policy statement which outlines some of these things.

So it really boils down to what is the goal and how do you get there? That should narrow down your options.

I'm of the opinion you should be maxing out your 401k through your payroll deductions rather than an after tax contribution. I'm also of the opinion that a 3.5% rate on a loan is really low and not worth paying off especially if it's a locked rate. But these are only opinions and have no bearing on how you and your husband feel about debt or the advantages of tax advantaged investment vehicles.

Hubbard521

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Re: A newbie has too much cash. What do I do?
« Reply #3 on: May 12, 2014, 12:05:20 PM »
Iím curious how you came up with return on 401k = tax bracket.  If anything you could consider it the difference between current and future tax bracket.

Hubbard521

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Re: A newbie has too much cash. What do I do?
« Reply #4 on: May 12, 2014, 12:16:35 PM »
To acknowledge the original question, Iím in a near identical situation oddly enough.  I have a 5-plex I already find time consuming and I have just over $30k sitting in cash that I was planning on putting into a second rental property.  Because I donít enjoy the hassles of dealing with my current property Iím looking to find a building to purchase that will return over what I can expect from the market after I outsource property management.  Statically, the stock market will more than likely return under 4% over the next 10 years Ė based off of historical Shiller PE trends.  In my real estate market I can very reliably return over 9% in that time period after outsourcing property management.

matchewed

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Re: A newbie has too much cash. What do I do?
« Reply #5 on: May 12, 2014, 12:18:28 PM »
To acknowledge the original question, Iím in a near identical situation oddly enough.  I have a 5-plex I already find time consuming and I have just over $30k sitting in cash that I was planning on putting into a second rental property.  Because I donít enjoy the hassles of dealing with my current property Iím looking to find a building to purchase that will return over what I can expect from the market after I outsource property management.  Statically, the stock market will more than likely return under 4% over the next 10 years Ė based off of historical Shiller PE trends.  In my real estate market I can very reliably return over 9% in that time period after outsourcing property management.

Citation needed.

matchewed

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Re: A newbie has too much cash. What do I do?
« Reply #6 on: May 12, 2014, 12:26:39 PM »
Also it's why I talk about investment policy statements that work off goals and not arbitrary 10 year periods. You're investing for life not for the next ten years. Base your decision off of your goal.

hs

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Re: A newbie has too much cash. What do I do?
« Reply #7 on: May 12, 2014, 12:43:08 PM »
How are you doing with the rental? At what percent interest is your mortgage on it? Is the rental your only investment? I would second the advice that you pay the 401k out of your pay checks, simply because retirement contributions must be made every year until you retire - start the good habit now. It would be tempting with a "windfall" to contribute this year, and then forget again next year. Learning to budget that expense in is necessary over the long haul. Do you have an emergency fund set aside for the rental?

seattlecyclone

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Re: A newbie has too much cash. What do I do?
« Reply #8 on: May 12, 2014, 12:54:36 PM »
Iím curious how you came up with return on 401k = tax bracket.  If anything you could consider it the difference between current and future tax bracket.

The "return = tax bracket" is a simplification based on the assumption that most Mustachians will have an extremely low (if not zero) tax rate in retirement. This year the standard deduction plus personal exemptions for a married couple is $20,300. So if you have a mix of tax-deferred and taxable investments during retirement, you can withdraw $20,300 from your 401(k) and have $73,800 of dividend/long-term-capital-gain income, without paying any federal income tax at all.

timmoney

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Re: A newbie has too much cash. What do I do?
« Reply #9 on: May 12, 2014, 01:10:09 PM »
  Why not sit down and figure what each option is and try to think how comfortable you're going to be with each choice? For instance if you buy some vanguard funds and the market dips are you going to hate yourself? If you pay down debt are you going to feel that you wasted the advantage of borrowing money cheaply?
 The good news is you have choices. If it was me... I'm loving lending club lately. I'd start an account there and take my interest payments and apply it to my debts so I pay them down a little faster and reinvest my principal for some compounding action. But that's me. You need to think about you

foobar

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Re: A newbie has too much cash. What do I do?
« Reply #10 on: May 12, 2014, 01:11:56 PM »
You can google around. That 4% is at the low end (I am wondering if the source was 4% real) but lets ignore that because at the end of the day it is a guess where the error bars are like +-10%. If you can very reliably earn 9%, doing that is a no brainer. Borrow a couple million at 6%, earn 9% and watch the money roll in. 


To acknowledge the original question, Iím in a near identical situation oddly enough.  I have a 5-plex I already find time consuming and I have just over $30k sitting in cash that I was planning on putting into a second rental property.  Because I donít enjoy the hassles of dealing with my current property Iím looking to find a building to purchase that will return over what I can expect from the market after I outsource property management.  Statically, the stock market will more than likely return under 4% over the next 10 years Ė based off of historical Shiller PE trends.  In my real estate market I can very reliably return over 9% in that time period after outsourcing property management.

Citation needed.

matchewed

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Re: A newbie has too much cash. What do I do?
« Reply #11 on: May 12, 2014, 01:30:31 PM »
To acknowledge the original question, Iím in a near identical situation oddly enough.  I have a 5-plex I already find time consuming and I have just over $30k sitting in cash that I was planning on putting into a second rental property.  Because I donít enjoy the hassles of dealing with my current property Iím looking to find a building to purchase that will return over what I can expect from the market after I outsource property management.  Statically, the stock market will more than likely return under 4% over the next 10 years Ė based off of historical Shiller PE trends.  In my real estate market I can very reliably return over 9% in that time period after outsourcing property management.

Citation needed.
You can google around. That 4% is at the low end (I am wondering if the source was 4% real) but lets ignore that because at the end of the day it is a guess where the error bars are like +-10%. If you can very reliably earn 9%, doing that is a no brainer. Borrow a couple million at 6%, earn 9% and watch the money roll in. 

Voilŗ.

And just a gentle suggestion. Most people read English up to down. Try putting your response in the bottom of the text box. It would help a great deal for reading comprehension. :)

Hubbard521

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Re: A newbie has too much cash. What do I do?
« Reply #12 on: May 12, 2014, 01:45:21 PM »
To acknowledge the original question, Iím in a near identical situation oddly enough.  I have a 5-plex I already find time consuming and I have just over $30k sitting in cash that I was planning on putting into a second rental property.  Because I donít enjoy the hassles of dealing with my current property Iím looking to find a building to purchase that will return over what I can expect from the market after I outsource property management.  Statically, the stock market will more than likely return under 4% over the next 10 years Ė based off of historical Shiller PE trends.  In my real estate market I can very reliably return over 9% in that time period after outsourcing property management.

Citation needed.

http://www.aqr.com/Portals/1/ResearchPapers/ShillerPECommentary_AQRCliffAsness.pdf

Itís a statistical property of the Shiller PE index which currently 25.6.  There is plenty of support for this is any security analysis book.

Hubbard521

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Re: A newbie has too much cash. What do I do?
« Reply #13 on: May 12, 2014, 01:48:30 PM »
Also it's why I talk about investment policy statements that work off goals and not arbitrary 10 year periods. You're investing for life not for the next ten years. Base your decision off of your goal.

If you're an active investor and you know that one opportunity stands a strong statistical chance to return significantly more than another over a shorter time frame, thatís clearly the smarter road to take.  I like to balance my investments with the ebbs and flows of the individual markets I invest in.

matchewed

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Re: A newbie has too much cash. What do I do?
« Reply #14 on: May 12, 2014, 01:58:15 PM »
Also it's why I talk about investment policy statements that work off goals and not arbitrary 10 year periods. You're investing for life not for the next ten years. Base your decision off of your goal.

If you're an active investor and you know that one opportunity stands a strong statistical chance to return significantly more than another over a shorter time frame, thatís clearly the smarter road to take.  I like to balance my investments with the ebbs and flows of the individual markets I invest in.

Cool and I don't necessarily disagree. But let's go back to the original post. -

Iím really really new at this, and I have way too much cash. Like $30,000 sitting in cash. I already own a rental property, so what do I do with it? I see these as my only options. Which do I choose? Do I have other options?

1. Buy a ton of Vanguard index fund shares all at once today.
2. I havenít contributed to my 401K plan yet this year (I know. What an idiot.). So I could make one lump 401K purchase to max out my 2014 contributions. My employer contributes whether or not I do, so Iím not missing out on any matching funds.
3. Do a combination of the two above regularly over the next handful of months to capture a variety of the highs and lows of the market.
4. Use it as a down payment for a 2nd rental property.
5. Pay off my husbandís $40,000 in student loans. Itís locked in at a 3.5% interest rate.

We have no other debt. Weíre already maxing out our Roth IRAs. Weíll have an additional $1500 or so a month available to save/ invest moving forward.

Thanks for your help!

Does this sound like an active investor to you? I get that we attract a great deal of active investors here. I get that you feel confident that you can pick and choose the right investment for you. Remember that when you're giving advice to people who are not you that they are not you. They are not active investors, they're asking what to do with 30k for their financial health. Keeping it focused on their goals and what will help them attain those goals in a manner consistent with their comfort level and knowledge, not yours. :)

Eric

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Re: A newbie has too much cash. What do I do?
« Reply #15 on: May 12, 2014, 02:09:17 PM »
To acknowledge the original question, Iím in a near identical situation oddly enough.  I have a 5-plex I already find time consuming and I have just over $30k sitting in cash that I was planning on putting into a second rental property.  Because I donít enjoy the hassles of dealing with my current property Iím looking to find a building to purchase that will return over what I can expect from the market after I outsource property management.  Statically, the stock market will more than likely return under 4% over the next 10 years Ė based off of historical Shiller PE trends.  In my real estate market I can very reliably return over 9% in that time period after outsourcing property management.

Citation needed.

http://www.aqr.com/Portals/1/ResearchPapers/ShillerPECommentary_AQRCliffAsness.pdf

Itís a statistical property of the Shiller PE index which currently 25.6.  There is plenty of support for this is any security analysis book.

You may be interested in this.  The argument, which makes sense to me, is that the Shiller CAPE uses inconsistent data measurements and is therefore inaccurate in its comparison over time to our current time.

http://philosophicaleconomics.wordpress.com/2013/12/13/shiller/

Hat tip to hodedofome

asytsma

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Re: A newbie has too much cash. What do I do?
« Reply #16 on: May 12, 2014, 03:23:31 PM »
I think the big lesson here is to never let myself accumulate so much cash in the first place. Am I right? Coming up with an investment policy statement that reflects long term goals (ours is to be retired Mustachian-style in five-ten years) and sticking to it week-after-week is the best way to capture the benefits of the market.

Once youíre sitting on a ton of cash, there doesnít seem to be a consensus on a perfect next step. 

Davids

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Re: A newbie has too much cash. What do I do?
« Reply #17 on: May 12, 2014, 04:46:09 PM »
Good problem to have. First question I have is do you have an emergency fund established? If so then I suggest maxing out your 401K, the remaining cash then put in vanguard funds. If you do not have an emergency fund then figure out what you need for a 6 month period (or 12 month period if you want to be extra conservative) and put it in a high yield savings account with the rest then going towards 401K.

SDREMNGR

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Re: A newbie has too much cash. What do I do?
« Reply #18 on: May 12, 2014, 07:53:15 PM »
I would do lump sum 401K investing (easy decision, always max out tax sheltered investing) then with the rest, put it in pay down the student loans.  The most conservative route and not a bad one.

The front loading investing is the better decision to dollar cost averaging.  Benefits of dollar cost averaging are only present in a bear market.  And if we are investing in the stock market with an expectation that it will be positive, then it's better to invest now rather than later.  Dollar cost averaging should really be used only when out of need (as in you only save $400 each month and you have to wait until next month to invest).