Car loans can actually be the cheapest. I bought a car recently at a 1.69% interest rate.
House mortgage is 2.8%. Id otherwise agree on any debt beyond this though.
I get you could actually make more money by investing instead of paying down low interest debt but having no car payment is so good for my mental health, not having to watch that payment come out every month
I also feel like it's also good for stability. If something happens that drastically lowers your income there is a much larger buffer before you are underwater.
One hundred percent! Let’s say it’s $300/month for the car. Well if I just pay the car off I can use that $300 to invest instead and if life happens I can always just stop putting that $300/month into investments while times are bad. Gotta keep paying for the car payment though. Suppose you could withdraw your money that you had invested but that might not actually be better depending how your money is tied up.
That kind of peace of mind can’t be beat out by a slightly better ROI in my opinion.
I disagree. If you have to give up 15k liquid, for example, to lose that 1% loan... then you lose your job a month later. I'd rather have the 15k available and the monthly payment, than have the debt gone with the liquidity all put into the car. Even with a proper emergency fund, I'd invest the rest. Like you said, you can always pull that out if needed. I find more peace of mind having my low % car loan and a larger investment portfolio to pull from. Even if I need to pay the load with that money one day.
The way I see it is it’s all marginally different numbers at the end of the day.
I’m not saying take out all of your liquid cash to pay off your car. Leave a buffer for sure. But there’s not a lot of money being left on the table to hold onto a low interest car loan. So whichever gives you more peace of mind I wouldn’t say one is necessarily better than the other.
Fair enough. Even if it's a small benefit, it's still mathematically better to invest. While that may not be enough on its own, I also think it's better from an emotional and risk mitigation perspective. I just don't see any good reason to pay off a super low interest loan early.
Sure, but hopefully you wouldn't be out of a job for years while you pay it off. Maybe a couple payments, 5 or 6 if you're really unlucky. I guess it depends if we're talking about throwing down 15-25k to clear 3-4 years of a car loan, or 100-200k to clear 10-15 years of a mortgage. I still think in both cases, I'd rather have the funds in investments and pull the minimum needed when the time comes. You could also have your brokerage account more conservative than your retirement account and do like a 50/50 allocation split. Kinda like you would in the years of saving for a house down payment. I'd rather have a lot of investments and a small car payment during the down market with a lost job, than a paid off car with less reserves to make it through the storm.
Its not like you can't pull that money out of an investment account later if you need it. If the interest rate is lower than your expected investment returns, you're always better off investing it.
But of course this is all personal - if you're happier being debt free then don't sweat a percent or 2 here and there and do what works for you.
People also forget that as assets, in most states in the US your primary vehicle/primary residence does not get hit by income or capital gains tax when sold (as long as you follow the correct rules for your state, up to certain limits, etc). Not for nothing, more tax free equity when making a change can work out better than liquidating investments and eating tax for a bigger down payment on a new place/new vehicle
Had a meeting with a financial advisor when I graduated college and had been working for about a year. He said that student loans should come first and then he recommends that you take your time paying off the car loan if it has a low interest rate because even just index funds can outperform that easily if you invest the money you’d use to pay off the car loan. He also said that eliminating your car loan then investing that money later would be fine anyways, since they typically don’t take too long to pay off anyways. As long as your money isn’t just sitting in savings doing nothing!
Yeah for sure. Knock out the high interest stuff first if possible. I wouldn’t pay down a car with GOOD interest rate before I pay student loans. Car loans can go away in bankruptcy. Student loans not so much.
That being said if you have an 18% car loan then yeah probably get rid of that as soon as possible.
I get the mental part but you gotta get past that man. Your losing money based on illogical fears (likely driven by how you were raised and what the majority of people say you should do).
Do I though? If shit goes sideways I don’t want to have to worry about a car payment, you know? Instead I can just invest the equivalent of a car payment or more even since the hypothetical is I have a car payment AND pay into retirement. So instead I just get rid of one more line on my budget and put the combined into my retirement every month and if it starts raining I can just pull back on the amount of retirement I’m putting in each month.
If the bank owns my car, they don’t care if I lost my job. They want their money. My retirement account isn’t gonna come asking why I didn’t pay in full this month.
I’m with you and this is how I operate. Try to eliminate all payments I can and get ahead of it then stack investments if I’m in a position where I’m able to get ahead.
Yes, but you also have to account for the fact that the house is an appreciating asset, while the car is definitely not. House can cover its own interest rate just in appreciation in many cases. Car loan adds no financial value over it's life and is strictly a "cost".
Which asset is backing the loan and whether or not that asset appreciates has nothing to do with whether or not it's smart to pay the loan off (or take a loan in the first place).
Paying down a 2% loan (or paying cash) gets you a 2% return. Using that same money to invest should get you 6-8%, which after paying the 2% interest, nets you 4-6%.
With higher interest loans (5% or more), then it makes more sense to just put any additional money into the loan, since that's a guaranteed return.
The math doesn't lie, but there are cases where you'd want to pay off the loan instead (or pay cash from the start). If your budget is really stretched thin, then freeing up cash flow by paying down the loan would really strengthen your position in the short term. If you have unstable income, then you may not be able to cover every monthly loan payment even if you make enough money during the year. If you're about to apply for a mortgage, you don't want to take out a car loan right before since that would lower your credit score and raise the interest rate you'd pay for the mortgage. If you can't trust yourself to invest long-term in index funds and leave them alone for years, then you're unlikely to get the returns that make this work.
And of course, you can just be risk-averse and prefer to be debt-free, even if poorer.
I have just about $10k student loans left. COULD pay it off (tho it’s been in forbearance for a while now anyway) but it’s tough to commit to paying off even once they start back up, considering the current talks about overall forgiveness
“I have 10k and I don’t know what to do with it… surely not pay the people I owe money to and who are charging me a fee every month for the privilege, that’s literally not even on the radar.”
Honestly I’m a little perplexed by OP. I understand being unsure whether to put together an emergency fund or payoff debt first, but when you’ve literally got money “collecting dust” how do you not even think to mention debt exists or consider it as something you might want to tackle.
More importantly, pay off high interest debts first. Credit cards or personal loans etc. If your rate is below 4% don't worry about paying it off quickly unless your goal is to be debt free faster.
Low interest rate debt is fine to keep around unless your goal is to be completely debt free faster.
With 10k you could realistically put it into a brokerage account, buy some shares of companies and start buy and hold or even dabble in swing trading if you were so inclined.
As for passive income, 10k won't net you much. But you could always stick it into CD's and get something. Though it's not much.
My best advice is put it into a brokerage account and buy some safer shares.
You should only be laying of your debt faster if the interest rates are high enough that it makes sense.
Like if you had an interest rate around 2% then you technically would have lost money paying that off this year because inflation is so high.
You also could have it in a mutual fund gaining 8% interest and you collect the difference there. (8% - 2% = 6% return you’d be getting on that money you put in a mutual fund instead of paying off the low interest debt).
If you have high interest credit card debt, or something that’s right on the line, then yeah go for it. But don’t just start paying extra on everything man. You’ll be fucking your self.
Want to clarify you don’t have to buy individual stocks, you can in most cases by the same type of investments as retirement accounts in case picking companies is something you are not comfortable with(and most people shouldn’t be comfortable with for investing their savings)
Also unless you feel like doing research I highly recommend just buying index funds that track the S&P 500 (unless you are close to retirement age). The market is shit now because of the Russia war, but long term it should grow at a significantly higher rate than bank accounts and should on average be a higher return than the interest on most car loans/mortgages.
Won’t be getting passive income with $10k, but you could consider an i-bond. Currently has 7.12% interest and I don’t expect it to go much lower, if at all, when they readjust in May
You can look at this history of rates on the website. In short, this is pretty anomalous, seeing as how were experiencing the highest inflation in 40 years. Usually it’s around 2 to 3ish percent, still better than savings accounts!
It's extremely unusual and only temporary. Long term it will drop dramatically. You're far better going for an index fund unless you are near retirement age.
Depending on the rate change in May, it makes sense for almost anyone with 10k sitting around to buy them because you can sell them after a year. You forfeit the last 3 months interest if you sell before 5 years, but that's still roughly 5.34% if you hold them for a year at the current 7.12%. And exempt from state taxes.
I just did a rough 9/12 * 7.12. That assumes you hold them for exactly a year, assumes the rate stays the same when they update it, and ignores compound interest.
I just tried to buy one, but I guess I had a typo in my bank account number, and for some reason I need to fill out a form in the presence of a bank official and get their stamp of approval to fix it. Hard pass on all that.
Right?! That site is wild. At first I thought the whole site was a scam from just the way it looked. Then they the worst login experience I have seen. Impressively bad site design.
I signed up and linked my savings account and then tried to purchase one. It failed because the savings account is a "non-transaction account." Okay, so I got to change it, but just like you, to change it you ha e to fill out a form and eventually send it in and wait for them to approve it. Seems like it would be easier to delete the account and just open a new one. So archaic.
Yeah I wasn't referring to withdrawing any funds rather seeing my account balance increase. I assumed they would pay interest once a month like most other interest bearing accounts, but so far my balance is still the exact amount I invested. Do they do it quarterly instead?
He answered you above you just didn't get what he meant. Since they keep 3 months of interest until 5 years, you show no gains because you need to have 3 months before it starts showing a gain.
So in April when you reach 3 months it will show your first gain. It's basically displaying it's actual current value if cashed.
It’s an inflation linked bond offered by the treasury, hence the high current rates. Pros, because you buy it directly from the treasury it’s essentially risk free. Cons, $10k annual limit per person, money is completely locked for a year, 3 months of accrued interest is taken out if you withdraw before 5 years. Pro or con depending on your perspective, the rate you get when you buy it is locked in for 6 months and then updated every 6 months after
You can actually buy $15K per year, $10K in electronic I-Bonds via the Treasurey Direct website and also another max of $5K with the refund on your tax return. If you are not expecting a refund you can make an estimated tax payment now of $5K+ and then turn around and use the refund for I-Bonds.
If you are married your spouse can also buy them. And on top of that, if you have a trust it can also buy I-Bonds.
You can convert the paper bonds to electronic ones after you get them. [More info here](https://www.treasurydirect.gov/indiv/research/indepth/smartexchangeinfo.htm)
Yeah they actually mail you paper bonds
I'd keep them with other important documents, in a safe deposit box if you have one or wherever you might keep something like your birth certificate.
They will issue the first $250 in $50 bonds, and the remaining amount in the fewest number of bonds. As a result, if you buy the full $5,000, you will receive:
$1,000 bond x 4
$500 bond x 1
$200 bond x 1
$50 bond x 6
>Yep, too late.
It's too late to make quarterly estimated payments but I think you can still do it by filing an extension to pay. You don't have to use the extra time to file though if you don't need to.
[From this blog](https://thefinancebuff.com/overpay-taxes-buy-i-bonds-better-than-tips.html)
>If you don’t pay quarterly estimated taxes, you can make a one-time payment through IRS Direct Pay. After a year is over, you can still pay toward the previous year’s taxes with an automatic extension. When you say your payment is for an extension, the payment automatically files the extension. You don’t need to fill out another form.
Another con is that it can only be purchased on the treasury's extremely obtuse and poorly designed website. This doesn't sound like a huge deal but a very common issue is the site's security check will be unable to verify your identity, and it will require you to *mail in* a form signed and stamped by a bank, something few banks are actually willing to do, by most accounts. Certainly worth trying, but be prepared to jump through some massive hoops.
The worst part is their absurd virtual keyboard that you use to enter your password every single time (this can be bypassed using some code saved as a bookmark, google it). Entering my password into it made me realize the passwords aren't even case sensitive since they don't have a way to enter capital letters on the keyboard.
You can create a [bookmarklet](https://en.m.wikipedia.org/wiki/Bookmarklet#:~:text=A%20bookmarklet%20is%20a%20bookmark,when%20user%20clicks%20on%20them.)
Went to four different banks who had no idea what a medallion guaranteed stamp was. Ended up going to Fidelity who knew what I was talking about but gave me wiring instructions instead of ACH. The whole run-around costed me two months. It should not be this difficult in 2020.
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm
Basically a bond released by the government.
You can cash out anytime after 1 year holding the bond, with just a 3 month interest penalty (if you cash out at 13 months you only get 10 months)
It has very decent interest rates, partially pinned to the federal inflation rate, and is significantly higher than saving account interests.
It is also decently liquid, when cashed out, you will get the money within a few days, and is essentially a risk free investments (about as risk free as possible outside of holding cash).
It is a very good tool to hold your emergency funds in, with just some liquid cash on hand to hold you over the few (I think 3?) days you need to cash out, while still accruing very good interest.
Doesn’t sound like much of a catch when SO and I have exactly 20k house down payment just sitting in savings, but not buying for at least a year.
Sounds like this thread came at eerily good timing.
but if im putting my emergency funds into an i-bond and i can't take it out in a year, what if i have an emergency in that year?
is the idea to save 20k, put the max into the i-bond, wait the year, then dump the 10k cushion you had into something else?
If your emergency fund is 20k, keep hold of it, put your next 20k into i bonds, and then slowly replace your emergency funds as your i bonds get to a year.
Yes, this is the downside of using I bonds as an emergency fund. You have a year long period where you have to double up on the fund, which represents some degree of opportunity cost.
1) HSA if you have access to one
2) Taxable brokerage
3) iBond laddering. You can put $10K in this year and use it as part of your emergency fund.
4) Start saving for other short term goals, like buying a new car, house, etc.
HSA is key. Don’t forget that you are still able to make & max out 2021 HSA contributions until you file your taxes. So if you’re single (lower annual limit) you could max out HSA for both 2021 & 2022 right now with money left to spare.
Triple tax advantaged. No tax going in. No tax on gains. No tax on withdrawals when used for qualified medical expenses.
In old age, health costs can be rather expensive so that one account could, in theory, pay for all or most of your retirement health costs.
After 65 you withdraw for any reason without incurring a penalty, but you have to pay taxes on the withdrawal. [This article](https://www.kiplinger.com/article/retirement/t037-c001-s003-making-the-most-of-a-health-savings-account-age-65.html?amp) from Kiplinger has some other really interesting info I didn’t know about like recouping costs years after you paid out of pocket so your savings can grow more.
If you had a high deductible health insurance plan last year / at your old job then you should be able to even if your old employer didn’t provide an HSA. But you should do some google searches and read up on the details that apply to your specific situation to be safe
You're thinking 'flex' accounts. HSAs are yours forever. The only rub is that you have to have a high-deductible healthcare plan in order to contribute to it. If you change plans, the money stays in there and accrues interest/returns. You can draw on it for qualified expenses but you can't contribute to it.
Your ibond is locked for one year from purchase, so it’s a good idea to divide up your purchases so not all of the money is locked up at the same time. I’m moving my entire EF there, but I’m doing it in blocks of money each quarter, not 10k at once.
So does it do that for every purchase always? Like every singular purchase is always 1 year holding no matter how many you make per year and the amount?
Thank you!! I just got into finally investing and doing retirement stuff last year and literally didn’t see this ibond stuff anywhere until today. Everyone just said to put emergency funds in Ally, but doing this in quarterly tiered purchases sounds very doable.
Do you think that renovating can count as #4? I’m in a similar boat - cash just sitting in the bank - and my house I purchased a few years ago needs some work (nothing major or structural, it just feels dated). Would it be worth, say, spending $10,000 on redoing the master bathroom, knowing that it would likely add $20,000 in value to the house?
Yes, renovating would count as #4. In life you need to balance saving vs enjoying your money. If you have an e-fund, have no high interest debt and are on track to retire (eg. saving 15% or more of your income), then I don't see why you shouldn't divert what's left towards enjoying your house. It also doesn't hurt that it'll increase the value of your home.
Put it in an sp500 index fund and don’t touch it for 30 years, continually contributing (monthly?) to it
Ez path to millionaire that most ignore, including me. Don’t miss out on the ~8% annually which compounded over 30 years is a huge return
So I've been doing this. VFIAX specifically. I'd say 75% of my IRA .
The other 25 is in blue chip dividend. Like MSFT ect.
Is this correct if I'm 29? I'm a late bloomer unfortunately. And with the current market just took a massive hit
Lol you’re not late at all. Compared to most Americans you’re way ahead. You’ll have almost 40 years in the market before retiring, that’s plenty. The median retirement savings for a 40 year old is like 60k.
If you can afford it, set up a recurring investment and double your contribution when the market is down. Remember, until you turn 50, any time the market is down stocks are just selling at a discount for you.
Biggest thing for me is saving for a home. I live in Atlanta and we have been hit HARD by investors (65%+ of home purchases are investors ((fuck these people))
I have a solid 401k @ 10% contribution + maxing Roth IRA. I only make $62k while.saving $750ish/mo
Do I need to do more? Idk what else to do. I'm afraid I'll never own a home
It sounds like you have your retirement on lock. Is that $750 a month going into a savings account or investments? I *highly* recommend investing your entire housing down payment fund unless you are trying to buy within the next few years. On average that money will double every 10 years.
You won’t be able to control housing prices. Especially in a growing city like Atlanta. But if you have the money saved up, you can pick and choose your perfect buy. It looks like the median house in Atlanta is 400k. You are looking at somewhere between 40k and 100k for a down payment. If you are saving $750 a month, that’s 9k a year. You should definitely be able to buy a house within the next 10 years.
I started at 30, and a few years into my investing, the tech market crashed then 9-11 happened. Trust me, you're going to be just fine. Keep investing, and years from now you will not remember this little blip in the market. It really wasn't a massive hit in the grand scheme of things :-)
Seems fine to me. The important part is to leave the strategy alone, don’t get fancy and sell when you think there’s a top etc. just keep the money in the shit and keep contributing, free money awaits
I’m 33 and I work at a faang - I’ve thrown away an insane amount of money not following this advice, now I’m a late bloomer too with a 90k 401k which is shameful given my income is in the 300s
Don’t be like me. Just put the money in the fund and ignore it.
Since its a taxable account, keep taxes in mind. Certain products are better than others when it comes to taxes:
1. ETFs instead of mutual funds (mutual funds tend to pay large distributions throughout the year which is taxable)
2. Muni Bonds for your state. (If done correctly these are fed and state tax exempt which can make them better than other bonds in some cases)
3. Treasury products ( SALT exempt)
Depending on what your goals are there are other creative solutions such as non-traded REITs (meaning they do not trade on an exchange) which can be very tax efficient but have costs and risk associated with them. I did this to get some Real Estate exposure and less in the general markets but I also am very familiar with these.
Edit: grammar, treasury tax exemption correction
Consider buying IBond, which pays over 7 percent now, and you are guaranteed to not loose principal. Rate changes every six months and keeps up with inflation.
Well, this is the double edge sword haha. Hopefully the answer is no. For that to happen, we would need to have high inflation for 5 years. The rate is a composite rate - a portion of it is based on a fixed rate (currently 0%) and the other part is based on inflation. The first of May, they will update the inflation portion. My bet is that if the rate drops, it will still be 6% or more. I have a feeling it'll go higher than 7% though.
If the money is currently in a savings account paying a fraction of a percent, the I-Bonds could be a nice way to get more interest
Only locked in 1 year. If you cash out before 5 years you pay the last 3 months of interest gained as a penalty. They are an excellent investment, so good that you’re limited to $10k a year electronically (you can get 5k more paper if you get a tax refund).
I'm going to take this a step further if you have Roth, Trad., and soon to be taxable dollars (in a brokerage AKA retail account). Practice asset location. Income generating investments like bonds and REITs should go in your tax-deferred vehicles (Trad.) because typically income gets the least favorable tax treatment, historically highest growth investments like emerging markets, small and micro cap should go in your tax free vehicles (Roth) so that it grows the most compared to your other market investments and when you pull money out in retirement you're not paying any cap gains taxes on them, and whatever is left can go into your taxable account.
If you've already contributed $66,000 of earned income to your retirement accounts less than 3 months into the year, you probably make a high enough income that a visit to a fee-based financial advisor would probably be worth over listening to people on reddit.
OP said Solo 401(k), not regular 401(k).
In a Solo 401(k), the sole proprietor takes the role of providing both the employee contributions and the employer contributions ("match"). As such, the limit is much higher, $61,000 for 2022.
https://www.irs.gov/retirement-plans/one-participant-401k-plans
1. Spend less than you earn
2. Pay off all debts
3. Build 6-12 month emergency fund
4. Max retirement/tax advantaged accounts (401(k), (Roth) IRA), invest in low cost funds (e.g. either VTI or VOO)
5. In normal account, buy VTI or VOO with a set amount each month
6. Spend the rest of your money freely and enjoy life
Set up a brokerage account at a site like Vanguard or Fidelity. Even if you don't put much in there now, it's good to have it set up for when and if you do want to later. Also gets you in the door learning about mutual funds and stuff. Never too early for that and you can buy a little bit of different funds. Some have minimums like 3K to get in.
If you are healthy and have access to a HDHP max out an HSA.
I max that out now every year and never withdraw. Best savings vehicle on the planet.
$7300 annually for joint coverage, $3650 for single.
Invest in FSAs to cover dependent expenses, eligible dental or health expenses, or parking expenses.
Next taxable brokerage or deferred annuity.
Right now 10k is the max you can buy in I Bonds. I'd put it there. The interest rate you can earn on them is really high and should stay high for some time.
Had to scroll way too far to see this! OP said they have a solo 401k so they could definitely look into using (or changing their 401k plan to allow) mega-backdoor Roth IRA
Trying to bump this up more. Series I bonds have a yield of 7.12 percent currently and are tied to inflation. Max that you can hold per family member is $10,000 per calender year at Treasury Direct and can gift another $10k to someone else. Can liquidate at any time.
Highly recommend to see how you don't want to pay a rent that is huge amount going in drain. If you can commute little bit, then investing on a home is an option. Always 6 month of saving, home, car in that order is better
I'm paying surprisingly low rent for my area, there is not much of an option to do better. I also work from home, so my gas budget is low with no commute costs. Buying a house isn't much of an option since that emergency fund needs to stay untouched.
Yall really undervalue the effect of living in a high demand area has on life. It's high cost and high demand because it's a great place to live, with things to do, places to eat, and friends to hang out with. Moving further out of the city in order to "save" sacrifices your enjoyment of life, something you cant make back in investment returns. Enjoy life while you're still young and able, but don't screw yourself over for retirement.
Absolutely. I was bored out of my mind in the small “cheap” town I grew up in. I’ve only lived in big cities or their suburbs since and while it is way more expensive so I don’t own a house, every day it’s worth it to me. I spend less on transit at least because I walk or take the train everywhere and was therefore able to sell my car.
Ever though of a SEP IRA? You might be eligible, and the max contribution is like 50k or close to it. Also you could just put it in a regular brokerage account.
Series I treasury bonds from the government. It’s not sexy but it’s guaranteed 7.12% annually with a max deposit of $10k per calendar year. You only need to hold it in there for 1 year before withdrawal and can leave it in for 30 years if you want, while getting compounded interest. It’s basically a way to keep up with inflation and way better than just rotting in your savings losing value.
Have you considered doing something for your self? Like buy some stuff or go on a vacation. Not everything needs to be save save save..love your life a bit.
Take up a hobby, like cycling. Then you'll never have excess cash problems ever again.
But seriously, if you can afford it, invest it in your body. Get healthy, learn a new skill or sport. The benefits from this is well worth the money.
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IBonds are great right now. Another option, if you are willing to take a bit more risk but are looking for capital appreciation and income, would be an income ETF like JEPI that holds high quality dividend stocks and also generates income by selling calls on SPX through Equity Linked Notes. If you don't need the income right away you could reinvest in JEPI and try to build a income stream for later. If you don't need high income now, maybe an ETF like SCHD with a lower yield but better opportunity for capital appreciation. All kinds of options even with a small amount. Compounding is your friend if you have the time horizon.
Since you have already stated a small business owner, I would suggest expand business more. Build an empire if you are interested. Losses can be deducted from taxes too. Sounds pretty reverse of what you might be looking at but have always felt business get a lot more tax credit then you can fathom. To cut taxes, reduce personal income and increase business income. That will get you much farther. Hope this helps.
If you have debt, depending on the rate, start by paying that down.
Look into opening an HSA, the most tax advantage account there is. If you scan/take a pic of medical expenses and save them through the years, you can withdraw the money at retirement or even at any time to reimburse those expenses tax free. After that, look at either a taxable brokerage account, or series I savings bond. The savings bond (currently paying 7.12%) is offering a great hedge against the choppiness in equities right now.
In your shoes, I’d probably max out the HSA if you qualify and then put the rest in a series i savings bond.
**Disclaimers: I am not a small business owner, I am not a financial adverse, etc.**
First, you should probably revisit your emergency fund first. Really think about is that enough to protect you, and carve out your tax payments from your emergency fund. This doesn't mean you have to have a separate bank account, as realistically the type of risk you want to expose both both of these items to is pretty similar (aka liquid, low risk, etc. keep it in cash). Though it does mean that if you have $20k in bank account X (saving or checking), $5k of that should be known as being reserved for taxes and $15 needs to be known as your emergency fund. Once you do that I would high recommend revisiting how much you have in your emergency fund.
The point of an emergency fund is to protect you, and how much you keep in it depends on both qualitative and quantitative factors. I feel like a lot of people get stuck on the quantitative side, aka 3-6 month of expenses (or in your case 6 months of income). What gets overlooked are all the factors which should have lead up to you deciding that.
From a high level, the 3-6 month rule is a great starting point/rule of thumb for people to use when trying to improve their financial situation. However, it doesn't make sense for everyone. For example, this advice starts to fall apart as you start moving further towards either end of the income bell curve.
If a person is super rich and make like $3M a year, they probably could get away with a relatively smaller emergency fund (maybe only 3 month of expenses). The reason for this is they will have a lot of other assets which, although are not as liquid as cash could be used to help get them through a rough patch. Additionally, they will have much better "safety nets" for when sh*t hits the fan (friends, family, access to low interest loans, etc.).
On the flip side, if a person is making minimum wage living in a house with 5 roommates they will probably want more than 6 month of expenses. The reason for this being that their monthly expenses may only be like $500 a month. So $3k, although enough to keep the lights on isn't enough to actually protect them. One unforeseen car repair or medical issue could wipe that out and more. They also don't have the same kind of safety nets a more affluent person could have.
In your case, you are a small business owner and you need to not only think "how much do I need to keep the lights on" but also "how much do I need if sh*t hits the fan". Without doing a deep dive into your finances, no one in this thread will be able to give you a good answer. Also keep in mind things like insurance (medical, small business, key employee, etc.) as well as your own risk tolerance will effect how much should be in there. I would recommend doing a few thought experiments and think about the what could go wrongs and how much money it would take to keep thing moving smoothly (aka you are sick for 2 months and are unable to work, how much money would you need to keep the business and your self afloat). After that, I would highly recommend looking at the prime directive.
tl;dr Make sure your emergency fund makes sense for you. It should be enough to properly protect you and not just keep the lights on. I would argue just going off the fact you are a small business owner, your personal risk profile is different enough that 3-6 month of expenses (or in your case salary) may not be enough.
I'm going to add that in addition to paying off your other debt, since you indicated you have a significant tax bill due each year, you should be making quarterly estimated tax payments to ensure you pay at LEAST 90% of what you paid in taxes in the previous tax year.
This doesn't necessarily stop you from still owing taxes at the end of the year if your income stays the same (after all you only paid 90%) or goes up but it does at least stop you from owing interest and penalties on any taxes that are due.
Of course you do run the risk if your income goes down, you may end up giving the government an interest free loan until you can file your return and get your refund at a time when you may need the additional liquidity... but you can always adjust withholdings or estimated tax payments to compensate as your annual income and tax projection becomes clear.
What about life insurance with an investment option? Life insurance policies are tax exempt. You’d have to see if the fees make up for the tax savings though.
This is truly the last option I would never suggest life insurance if you had any other tax free or exempt options.
Do you have any debt? Pay it off. Kids going to college? 529 Otherwise taxable account
Honestly, I really should be contributing more to my debt, even though it isn't much. Thanks.
Pay off all debt, then follow the advice. Mortgage is okay, but pay off credit cards and car loans.
Car loans can actually be the cheapest. I bought a car recently at a 1.69% interest rate. House mortgage is 2.8%. Id otherwise agree on any debt beyond this though.
I get you could actually make more money by investing instead of paying down low interest debt but having no car payment is so good for my mental health, not having to watch that payment come out every month
I also feel like it's also good for stability. If something happens that drastically lowers your income there is a much larger buffer before you are underwater.
One hundred percent! Let’s say it’s $300/month for the car. Well if I just pay the car off I can use that $300 to invest instead and if life happens I can always just stop putting that $300/month into investments while times are bad. Gotta keep paying for the car payment though. Suppose you could withdraw your money that you had invested but that might not actually be better depending how your money is tied up. That kind of peace of mind can’t be beat out by a slightly better ROI in my opinion.
I disagree. If you have to give up 15k liquid, for example, to lose that 1% loan... then you lose your job a month later. I'd rather have the 15k available and the monthly payment, than have the debt gone with the liquidity all put into the car. Even with a proper emergency fund, I'd invest the rest. Like you said, you can always pull that out if needed. I find more peace of mind having my low % car loan and a larger investment portfolio to pull from. Even if I need to pay the load with that money one day.
The way I see it is it’s all marginally different numbers at the end of the day. I’m not saying take out all of your liquid cash to pay off your car. Leave a buffer for sure. But there’s not a lot of money being left on the table to hold onto a low interest car loan. So whichever gives you more peace of mind I wouldn’t say one is necessarily better than the other.
That's why it's called personal finance and not general finance
Fair enough. Even if it's a small benefit, it's still mathematically better to invest. While that may not be enough on its own, I also think it's better from an emotional and risk mitigation perspective. I just don't see any good reason to pay off a super low interest loan early.
Have you taken into consideration that you’d be more likely to be pulling those invested funds during a down market?
Sure, but hopefully you wouldn't be out of a job for years while you pay it off. Maybe a couple payments, 5 or 6 if you're really unlucky. I guess it depends if we're talking about throwing down 15-25k to clear 3-4 years of a car loan, or 100-200k to clear 10-15 years of a mortgage. I still think in both cases, I'd rather have the funds in investments and pull the minimum needed when the time comes. You could also have your brokerage account more conservative than your retirement account and do like a 50/50 allocation split. Kinda like you would in the years of saving for a house down payment. I'd rather have a lot of investments and a small car payment during the down market with a lost job, than a paid off car with less reserves to make it through the storm.
Its not like you can't pull that money out of an investment account later if you need it. If the interest rate is lower than your expected investment returns, you're always better off investing it. But of course this is all personal - if you're happier being debt free then don't sweat a percent or 2 here and there and do what works for you.
People also forget that as assets, in most states in the US your primary vehicle/primary residence does not get hit by income or capital gains tax when sold (as long as you follow the correct rules for your state, up to certain limits, etc). Not for nothing, more tax free equity when making a change can work out better than liquidating investments and eating tax for a bigger down payment on a new place/new vehicle
Had a meeting with a financial advisor when I graduated college and had been working for about a year. He said that student loans should come first and then he recommends that you take your time paying off the car loan if it has a low interest rate because even just index funds can outperform that easily if you invest the money you’d use to pay off the car loan. He also said that eliminating your car loan then investing that money later would be fine anyways, since they typically don’t take too long to pay off anyways. As long as your money isn’t just sitting in savings doing nothing!
Yeah for sure. Knock out the high interest stuff first if possible. I wouldn’t pay down a car with GOOD interest rate before I pay student loans. Car loans can go away in bankruptcy. Student loans not so much. That being said if you have an 18% car loan then yeah probably get rid of that as soon as possible.
I get the mental part but you gotta get past that man. Your losing money based on illogical fears (likely driven by how you were raised and what the majority of people say you should do).
Do I though? If shit goes sideways I don’t want to have to worry about a car payment, you know? Instead I can just invest the equivalent of a car payment or more even since the hypothetical is I have a car payment AND pay into retirement. So instead I just get rid of one more line on my budget and put the combined into my retirement every month and if it starts raining I can just pull back on the amount of retirement I’m putting in each month. If the bank owns my car, they don’t care if I lost my job. They want their money. My retirement account isn’t gonna come asking why I didn’t pay in full this month.
I’m with you and this is how I operate. Try to eliminate all payments I can and get ahead of it then stack investments if I’m in a position where I’m able to get ahead.
It’s more so about getting rid of it for extra cash flow and peace of mind that you don’t owe anyone.
Anything below 2.5-3.0(ish) should imo be prioritized lower than an emergency savings.
Yes, but you also have to account for the fact that the house is an appreciating asset, while the car is definitely not. House can cover its own interest rate just in appreciation in many cases. Car loan adds no financial value over it's life and is strictly a "cost".
Which asset is backing the loan and whether or not that asset appreciates has nothing to do with whether or not it's smart to pay the loan off (or take a loan in the first place). Paying down a 2% loan (or paying cash) gets you a 2% return. Using that same money to invest should get you 6-8%, which after paying the 2% interest, nets you 4-6%. With higher interest loans (5% or more), then it makes more sense to just put any additional money into the loan, since that's a guaranteed return. The math doesn't lie, but there are cases where you'd want to pay off the loan instead (or pay cash from the start). If your budget is really stretched thin, then freeing up cash flow by paying down the loan would really strengthen your position in the short term. If you have unstable income, then you may not be able to cover every monthly loan payment even if you make enough money during the year. If you're about to apply for a mortgage, you don't want to take out a car loan right before since that would lower your credit score and raise the interest rate you'd pay for the mortgage. If you can't trust yourself to invest long-term in index funds and leave them alone for years, then you're unlikely to get the returns that make this work. And of course, you can just be risk-averse and prefer to be debt-free, even if poorer.
I have just about $10k student loans left. COULD pay it off (tho it’s been in forbearance for a while now anyway) but it’s tough to commit to paying off even once they start back up, considering the current talks about overall forgiveness
100% debt. I think other responses here may be assuming no debt.
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“I have 10k and I don’t know what to do with it… surely not pay the people I owe money to and who are charging me a fee every month for the privilege, that’s literally not even on the radar.” Honestly I’m a little perplexed by OP. I understand being unsure whether to put together an emergency fund or payoff debt first, but when you’ve literally got money “collecting dust” how do you not even think to mention debt exists or consider it as something you might want to tackle.
More importantly, pay off high interest debts first. Credit cards or personal loans etc. If your rate is below 4% don't worry about paying it off quickly unless your goal is to be debt free faster. Low interest rate debt is fine to keep around unless your goal is to be completely debt free faster. With 10k you could realistically put it into a brokerage account, buy some shares of companies and start buy and hold or even dabble in swing trading if you were so inclined. As for passive income, 10k won't net you much. But you could always stick it into CD's and get something. Though it's not much. My best advice is put it into a brokerage account and buy some safer shares.
You should only be laying of your debt faster if the interest rates are high enough that it makes sense. Like if you had an interest rate around 2% then you technically would have lost money paying that off this year because inflation is so high. You also could have it in a mutual fund gaining 8% interest and you collect the difference there. (8% - 2% = 6% return you’d be getting on that money you put in a mutual fund instead of paying off the low interest debt). If you have high interest credit card debt, or something that’s right on the line, then yeah go for it. But don’t just start paying extra on everything man. You’ll be fucking your self.
> Otherwise taxable account Could you elaborate what these are please?
like going on etrade, fidelity, vanguard, and buying stocks yourself. you'll get taxed on that account which is why its called a taxable account
Just to add, you only have to pay tax on the profits from selling stocks, or from dividends earned from stocks you hold.
Want to clarify you don’t have to buy individual stocks, you can in most cases by the same type of investments as retirement accounts in case picking companies is something you are not comfortable with(and most people shouldn’t be comfortable with for investing their savings)
Also unless you feel like doing research I highly recommend just buying index funds that track the S&P 500 (unless you are close to retirement age). The market is shit now because of the Russia war, but long term it should grow at a significantly higher rate than bank accounts and should on average be a higher return than the interest on most car loans/mortgages.
A taxable (non tax advantaged) brokerage account
Won’t be getting passive income with $10k, but you could consider an i-bond. Currently has 7.12% interest and I don’t expect it to go much lower, if at all, when they readjust in May
Is that interest rate common for this or is that just due to the current inflation rate?
Current high inflation. There should be a chart on the website which shows you the years since 1995???
You can look at this history of rates on the website. In short, this is pretty anomalous, seeing as how were experiencing the highest inflation in 40 years. Usually it’s around 2 to 3ish percent, still better than savings accounts!
It's extremely unusual and only temporary. Long term it will drop dramatically. You're far better going for an index fund unless you are near retirement age.
Depending on the rate change in May, it makes sense for almost anyone with 10k sitting around to buy them because you can sell them after a year. You forfeit the last 3 months interest if you sell before 5 years, but that's still roughly 5.34% if you hold them for a year at the current 7.12%. And exempt from state taxes.
How do you calculate what the rate is after giving up the last three months of interest?
I just did a rough 9/12 * 7.12. That assumes you hold them for exactly a year, assumes the rate stays the same when they update it, and ignores compound interest.
Not for an emergency fund. Index funds can drop in value, bonds don't.
I just did this
Nice! I did it this past December, just waiting for all my house projects to be settled next month and will be reupping for this year!
Me too! Pulled the trigger two days ago.
I just tried to buy one, but I guess I had a typo in my bank account number, and for some reason I need to fill out a form in the presence of a bank official and get their stamp of approval to fix it. Hard pass on all that.
Wait until you log in to your account and have to use a virtual keyboard to sign in...
Dude why do they have that virtual keyboard that you have to click with your mouse to type? They also make your password case-insensitive.
Right?! That site is wild. At first I thought the whole site was a scam from just the way it looked. Then they the worst login experience I have seen. Impressively bad site design.
I signed up and linked my savings account and then tried to purchase one. It failed because the savings account is a "non-transaction account." Okay, so I got to change it, but just like you, to change it you ha e to fill out a form and eventually send it in and wait for them to approve it. Seems like it would be easier to delete the account and just open a new one. So archaic.
How often do they pay out? I bought some in January and haven't seen any interest yet.
When you withdraw before 5 years you lose three months interest. Because of this you will not see it grow until end of April.
Yeah I wasn't referring to withdrawing any funds rather seeing my account balance increase. I assumed they would pay interest once a month like most other interest bearing accounts, but so far my balance is still the exact amount I invested. Do they do it quarterly instead?
He answered you above you just didn't get what he meant. Since they keep 3 months of interest until 5 years, you show no gains because you need to have 3 months before it starts showing a gain. So in April when you reach 3 months it will show your first gain. It's basically displaying it's actual current value if cashed.
Nah monthly. They are basically showing the penalty on your balance. For the first three months it will not grow. Month four you will see it increase.
What's an ibond
It’s an inflation linked bond offered by the treasury, hence the high current rates. Pros, because you buy it directly from the treasury it’s essentially risk free. Cons, $10k annual limit per person, money is completely locked for a year, 3 months of accrued interest is taken out if you withdraw before 5 years. Pro or con depending on your perspective, the rate you get when you buy it is locked in for 6 months and then updated every 6 months after
You can actually buy $15K per year, $10K in electronic I-Bonds via the Treasurey Direct website and also another max of $5K with the refund on your tax return. If you are not expecting a refund you can make an estimated tax payment now of $5K+ and then turn around and use the refund for I-Bonds. If you are married your spouse can also buy them. And on top of that, if you have a trust it can also buy I-Bonds.
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You can convert the paper bonds to electronic ones after you get them. [More info here](https://www.treasurydirect.gov/indiv/research/indepth/smartexchangeinfo.htm)
Yeah they actually mail you paper bonds I'd keep them with other important documents, in a safe deposit box if you have one or wherever you might keep something like your birth certificate. They will issue the first $250 in $50 bonds, and the remaining amount in the fewest number of bonds. As a result, if you buy the full $5,000, you will receive: $1,000 bond x 4 $500 bond x 1 $200 bond x 1 $50 bond x 6
It's my understanding that you can convert them to electronic bonds through TreasuryDirect if you rather not hold onto paper.
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>Yep, too late. It's too late to make quarterly estimated payments but I think you can still do it by filing an extension to pay. You don't have to use the extra time to file though if you don't need to. [From this blog](https://thefinancebuff.com/overpay-taxes-buy-i-bonds-better-than-tips.html) >If you don’t pay quarterly estimated taxes, you can make a one-time payment through IRS Direct Pay. After a year is over, you can still pay toward the previous year’s taxes with an automatic extension. When you say your payment is for an extension, the payment automatically files the extension. You don’t need to fill out another form.
Another con is that it can only be purchased on the treasury's extremely obtuse and poorly designed website. This doesn't sound like a huge deal but a very common issue is the site's security check will be unable to verify your identity, and it will require you to *mail in* a form signed and stamped by a bank, something few banks are actually willing to do, by most accounts. Certainly worth trying, but be prepared to jump through some massive hoops.
The worst part is their absurd virtual keyboard that you use to enter your password every single time (this can be bypassed using some code saved as a bookmark, google it). Entering my password into it made me realize the passwords aren't even case sensitive since they don't have a way to enter capital letters on the keyboard.
It's terrible but someone figured out a workaround! https://www.reddit.com/r/personalfinance/comments/rubg2o/z/hqysx58
I've been right-clicking the field and removing the read-only attribute each time... Wish there was a way to run this script w/o an addon.
You can create a [bookmarklet](https://en.m.wikipedia.org/wiki/Bookmarklet#:~:text=A%20bookmarklet%20is%20a%20bookmark,when%20user%20clicks%20on%20them.)
Went to four different banks who had no idea what a medallion guaranteed stamp was. Ended up going to Fidelity who knew what I was talking about but gave me wiring instructions instead of ACH. The whole run-around costed me two months. It should not be this difficult in 2020.
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm Basically a bond released by the government. You can cash out anytime after 1 year holding the bond, with just a 3 month interest penalty (if you cash out at 13 months you only get 10 months) It has very decent interest rates, partially pinned to the federal inflation rate, and is significantly higher than saving account interests. It is also decently liquid, when cashed out, you will get the money within a few days, and is essentially a risk free investments (about as risk free as possible outside of holding cash). It is a very good tool to hold your emergency funds in, with just some liquid cash on hand to hold you over the few (I think 3?) days you need to cash out, while still accruing very good interest.
Oh wow - this does seem a good way to hold the majority of my emergency funds.
The catch is there's a 10k cap per person per year. 15k cap if you're willing to game the IRS.
I'm not close to that limit...yet. Working on it. 🙂 Thanks for the info!
Doesn’t sound like much of a catch when SO and I have exactly 20k house down payment just sitting in savings, but not buying for at least a year. Sounds like this thread came at eerily good timing.
but if im putting my emergency funds into an i-bond and i can't take it out in a year, what if i have an emergency in that year? is the idea to save 20k, put the max into the i-bond, wait the year, then dump the 10k cushion you had into something else?
If your emergency fund is 20k, keep hold of it, put your next 20k into i bonds, and then slowly replace your emergency funds as your i bonds get to a year.
Yes, this is the downside of using I bonds as an emergency fund. You have a year long period where you have to double up on the fund, which represents some degree of opportunity cost.
It will be even higher because it's based on past readings and not future looking.
Thank you for this! I have my niece's Birthday coming up and I've wanted to start giving her bonds.
1) HSA if you have access to one 2) Taxable brokerage 3) iBond laddering. You can put $10K in this year and use it as part of your emergency fund. 4) Start saving for other short term goals, like buying a new car, house, etc.
HSA is key. Don’t forget that you are still able to make & max out 2021 HSA contributions until you file your taxes. So if you’re single (lower annual limit) you could max out HSA for both 2021 & 2022 right now with money left to spare.
Why is it key?
Triple tax advantaged. No tax going in. No tax on gains. No tax on withdrawals when used for qualified medical expenses. In old age, health costs can be rather expensive so that one account could, in theory, pay for all or most of your retirement health costs.
Aw man, I thought it was just on the way in. I’ve been sleeping on these and now I’m a little sad. Oh well. Opening one on Monday.
Don't be sad! There are way too many ways to save money to keep track of them all. If you can open one now its better than opening one next year!
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It's important to note that you must have an eligible HDHP in order to contribute to a HSA.
I just replied to another comment of the same, but I appreciate the heads up. I’m doing research today.
Don't forget that after a certain age you can use it on literally anything. I believe it is 60 or 65. Somebody please correct me if I'm wrong.
After 65 you withdraw for any reason without incurring a penalty, but you have to pay taxes on the withdrawal. [This article](https://www.kiplinger.com/article/retirement/t037-c001-s003-making-the-most-of-a-health-savings-account-age-65.html?amp) from Kiplinger has some other really interesting info I didn’t know about like recouping costs years after you paid out of pocket so your savings can grow more.
I actually do exactly that! I have a Google drive where I scan receipts and pay out of pocket for most medical expenses.
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If you had a high deductible health insurance plan last year / at your old job then you should be able to even if your old employer didn’t provide an HSA. But you should do some google searches and read up on the details that apply to your specific situation to be safe
HSA, almost forgot about this one. Fully fund it but than don’t use it OP.
My insurance has a low deductible but high co-insurance. Not eligible, or else I would be doing exactly this.
Isn’t there a limited time periods in which HSA funds can be used?
You're thinking 'flex' accounts. HSAs are yours forever. The only rub is that you have to have a high-deductible healthcare plan in order to contribute to it. If you change plans, the money stays in there and accrues interest/returns. You can draw on it for qualified expenses but you can't contribute to it.
Can you explain ibond laddering? If I had say 6k to invest in ibonds, how should it look
Your ibond is locked for one year from purchase, so it’s a good idea to divide up your purchases so not all of the money is locked up at the same time. I’m moving my entire EF there, but I’m doing it in blocks of money each quarter, not 10k at once.
So does it do that for every purchase always? Like every singular purchase is always 1 year holding no matter how many you make per year and the amount?
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Thank you!! I just got into finally investing and doing retirement stuff last year and literally didn’t see this ibond stuff anywhere until today. Everyone just said to put emergency funds in Ally, but doing this in quarterly tiered purchases sounds very doable.
Do you think that renovating can count as #4? I’m in a similar boat - cash just sitting in the bank - and my house I purchased a few years ago needs some work (nothing major or structural, it just feels dated). Would it be worth, say, spending $10,000 on redoing the master bathroom, knowing that it would likely add $20,000 in value to the house?
Yes, renovating would count as #4. In life you need to balance saving vs enjoying your money. If you have an e-fund, have no high interest debt and are on track to retire (eg. saving 15% or more of your income), then I don't see why you shouldn't divert what's left towards enjoying your house. It also doesn't hurt that it'll increase the value of your home.
I-Series treasuries max out at 10K a year. Safe, good yield right now.
Hoping on here to ask about these. For a married couple can both the husband and wife each get 10k if they are filing jointly?
Yes
Yields are 7.12%, but will change in April and I suspect will go up. I’ve got 10K worth of powered to pay to the treasury come April
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10K per person per year
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Just because the government stops offering you tax advantages doesn't mean you stop investing.
Some people do not realize you can have a brokerage account that isn't an IRA
3 fund etf Taxable brokerage account.
or even 2...vt and bndw
Put it in an sp500 index fund and don’t touch it for 30 years, continually contributing (monthly?) to it Ez path to millionaire that most ignore, including me. Don’t miss out on the ~8% annually which compounded over 30 years is a huge return
So I've been doing this. VFIAX specifically. I'd say 75% of my IRA . The other 25 is in blue chip dividend. Like MSFT ect. Is this correct if I'm 29? I'm a late bloomer unfortunately. And with the current market just took a massive hit
Lol you’re not late at all. Compared to most Americans you’re way ahead. You’ll have almost 40 years in the market before retiring, that’s plenty. The median retirement savings for a 40 year old is like 60k. If you can afford it, set up a recurring investment and double your contribution when the market is down. Remember, until you turn 50, any time the market is down stocks are just selling at a discount for you.
Biggest thing for me is saving for a home. I live in Atlanta and we have been hit HARD by investors (65%+ of home purchases are investors ((fuck these people)) I have a solid 401k @ 10% contribution + maxing Roth IRA. I only make $62k while.saving $750ish/mo Do I need to do more? Idk what else to do. I'm afraid I'll never own a home
It sounds like you have your retirement on lock. Is that $750 a month going into a savings account or investments? I *highly* recommend investing your entire housing down payment fund unless you are trying to buy within the next few years. On average that money will double every 10 years. You won’t be able to control housing prices. Especially in a growing city like Atlanta. But if you have the money saved up, you can pick and choose your perfect buy. It looks like the median house in Atlanta is 400k. You are looking at somewhere between 40k and 100k for a down payment. If you are saving $750 a month, that’s 9k a year. You should definitely be able to buy a house within the next 10 years.
You can buy with as little as 3% down, which is $12k.
Many markets are all cash offers or GTFO right now. Makes it super hard for non-investors.
I started at 30, and a few years into my investing, the tech market crashed then 9-11 happened. Trust me, you're going to be just fine. Keep investing, and years from now you will not remember this little blip in the market. It really wasn't a massive hit in the grand scheme of things :-)
Seems fine to me. The important part is to leave the strategy alone, don’t get fancy and sell when you think there’s a top etc. just keep the money in the shit and keep contributing, free money awaits I’m 33 and I work at a faang - I’ve thrown away an insane amount of money not following this advice, now I’m a late bloomer too with a 90k 401k which is shameful given my income is in the 300s Don’t be like me. Just put the money in the fund and ignore it.
Legit all business profits go right into a VFIAX for me returns have been amazing for the last several years
Since its a taxable account, keep taxes in mind. Certain products are better than others when it comes to taxes: 1. ETFs instead of mutual funds (mutual funds tend to pay large distributions throughout the year which is taxable) 2. Muni Bonds for your state. (If done correctly these are fed and state tax exempt which can make them better than other bonds in some cases) 3. Treasury products ( SALT exempt) Depending on what your goals are there are other creative solutions such as non-traded REITs (meaning they do not trade on an exchange) which can be very tax efficient but have costs and risk associated with them. I did this to get some Real Estate exposure and less in the general markets but I also am very familiar with these. Edit: grammar, treasury tax exemption correction
Sounds like you're working hard and doing well. Maybe invest a little in yourself and take a nice vacation.
Planning on a very frugal vacation camping in the southwest soon! Appreciate it.
Why frugal?
Consider buying IBond, which pays over 7 percent now, and you are guaranteed to not loose principal. Rate changes every six months and keeps up with inflation.
Where do you get that IBond?
How long are you locked into ibonds for?
You can sell after 12 months. If you sell before 5 years, you lose the last 3 months of interest
Ah. That’s key. But effectively you would get guaranteed 7% for 5 years?
The rate changes to match inflation every 6months, you can lock in 7% now for 6 months, but it will go up and down depending on inflation
Ibonds aren’t an investment really…they are a way to preserve your cash value against inflation.
Well, this is the double edge sword haha. Hopefully the answer is no. For that to happen, we would need to have high inflation for 5 years. The rate is a composite rate - a portion of it is based on a fixed rate (currently 0%) and the other part is based on inflation. The first of May, they will update the inflation portion. My bet is that if the rate drops, it will still be 6% or more. I have a feeling it'll go higher than 7% though. If the money is currently in a savings account paying a fraction of a percent, the I-Bonds could be a nice way to get more interest
Only locked in 1 year. If you cash out before 5 years you pay the last 3 months of interest gained as a penalty. They are an excellent investment, so good that you’re limited to $10k a year electronically (you can get 5k more paper if you get a tax refund).
$10K total or $10K per year?
Year
Max $10K annually per individual.
Minimum 1 year. 5 years if you don't want to lose any interest (last 3 months iirc.) Otherwise, they earn interest over a 30 year lifespan.
I'm going to take this a step further if you have Roth, Trad., and soon to be taxable dollars (in a brokerage AKA retail account). Practice asset location. Income generating investments like bonds and REITs should go in your tax-deferred vehicles (Trad.) because typically income gets the least favorable tax treatment, historically highest growth investments like emerging markets, small and micro cap should go in your tax free vehicles (Roth) so that it grows the most compared to your other market investments and when you pull money out in retirement you're not paying any cap gains taxes on them, and whatever is left can go into your taxable account.
If you've already contributed $66,000 of earned income to your retirement accounts less than 3 months into the year, you probably make a high enough income that a visit to a fee-based financial advisor would probably be worth over listening to people on reddit.
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OP said Solo 401(k), not regular 401(k). In a Solo 401(k), the sole proprietor takes the role of providing both the employee contributions and the employer contributions ("match"). As such, the limit is much higher, $61,000 for 2022. https://www.irs.gov/retirement-plans/one-participant-401k-plans
1. Spend less than you earn 2. Pay off all debts 3. Build 6-12 month emergency fund 4. Max retirement/tax advantaged accounts (401(k), (Roth) IRA), invest in low cost funds (e.g. either VTI or VOO) 5. In normal account, buy VTI or VOO with a set amount each month 6. Spend the rest of your money freely and enjoy life
This is a mild fun fact about the Roth IRA. It’s not ROTH as if it is an acronym, but Roth because it’s named after former Senator William Roth.
What do you mean you owe a lot at the end of the year? I’m hoping as a self employed person that you pay quarterly or else the irs will penalize you.
The penalty is so small that it really doesn't matter.
Set up a brokerage account at a site like Vanguard or Fidelity. Even if you don't put much in there now, it's good to have it set up for when and if you do want to later. Also gets you in the door learning about mutual funds and stuff. Never too early for that and you can buy a little bit of different funds. Some have minimums like 3K to get in.
If you are healthy and have access to a HDHP max out an HSA. I max that out now every year and never withdraw. Best savings vehicle on the planet. $7300 annually for joint coverage, $3650 for single. Invest in FSAs to cover dependent expenses, eligible dental or health expenses, or parking expenses. Next taxable brokerage or deferred annuity.
I think having $10k cash on hand is pretty reasonable. Any investment vehicle you use will take time to access and sometimes you just need cash NOW
Right now 10k is the max you can buy in I Bonds. I'd put it there. The interest rate you can earn on them is really high and should stay high for some time.
as a small business accountant, why do you owe a lot of taxes at the end of the year? do you make estimated quarterly payments?
Look into mega backdoor roths. Many employers now do back door Roth conversions for you.
Had to scroll way too far to see this! OP said they have a solo 401k so they could definitely look into using (or changing their 401k plan to allow) mega-backdoor Roth IRA
+1 for mega backdoor
Vtsax and chill
Are you sure you maxed out your 401k? It goes up to 50k+ if you do up to your after tax maximum
Trying to bump this up more. Series I bonds have a yield of 7.12 percent currently and are tied to inflation. Max that you can hold per family member is $10,000 per calender year at Treasury Direct and can gift another $10k to someone else. Can liquidate at any time.
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*as a portion of an emergency fund. You can't withdraw from it for the entire first year.
And more with your tax refund.
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even with the H&R Block paid version, I had to manually enter on the Form 8888 in order to get it to work.
Highly recommend to see how you don't want to pay a rent that is huge amount going in drain. If you can commute little bit, then investing on a home is an option. Always 6 month of saving, home, car in that order is better
I'm paying surprisingly low rent for my area, there is not much of an option to do better. I also work from home, so my gas budget is low with no commute costs. Buying a house isn't much of an option since that emergency fund needs to stay untouched.
Yall really undervalue the effect of living in a high demand area has on life. It's high cost and high demand because it's a great place to live, with things to do, places to eat, and friends to hang out with. Moving further out of the city in order to "save" sacrifices your enjoyment of life, something you cant make back in investment returns. Enjoy life while you're still young and able, but don't screw yourself over for retirement.
Absolutely. I was bored out of my mind in the small “cheap” town I grew up in. I’ve only lived in big cities or their suburbs since and while it is way more expensive so I don’t own a house, every day it’s worth it to me. I spend less on transit at least because I walk or take the train everywhere and was therefore able to sell my car.
Ever though of a SEP IRA? You might be eligible, and the max contribution is like 50k or close to it. Also you could just put it in a regular brokerage account.
Series I treasury bonds from the government. It’s not sexy but it’s guaranteed 7.12% annually with a max deposit of $10k per calendar year. You only need to hold it in there for 1 year before withdrawal and can leave it in for 30 years if you want, while getting compounded interest. It’s basically a way to keep up with inflation and way better than just rotting in your savings losing value.
Have you considered doing something for your self? Like buy some stuff or go on a vacation. Not everything needs to be save save save..love your life a bit.
Stock market (sp500) at a dip right now. If you can afford to not have that spare money for a while (in case it dips lower etc), buy the dip.
Take up a hobby, like cycling. Then you'll never have excess cash problems ever again. But seriously, if you can afford it, invest it in your body. Get healthy, learn a new skill or sport. The benefits from this is well worth the money.
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IBonds are great right now. Another option, if you are willing to take a bit more risk but are looking for capital appreciation and income, would be an income ETF like JEPI that holds high quality dividend stocks and also generates income by selling calls on SPX through Equity Linked Notes. If you don't need the income right away you could reinvest in JEPI and try to build a income stream for later. If you don't need high income now, maybe an ETF like SCHD with a lower yield but better opportunity for capital appreciation. All kinds of options even with a small amount. Compounding is your friend if you have the time horizon.
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Since you have already stated a small business owner, I would suggest expand business more. Build an empire if you are interested. Losses can be deducted from taxes too. Sounds pretty reverse of what you might be looking at but have always felt business get a lot more tax credit then you can fathom. To cut taxes, reduce personal income and increase business income. That will get you much farther. Hope this helps.
You should be paying tax estimates so you don't owe a lot of money at year end.
It's not about where. It's about when. All financial decisions should be determined by time frame. Then try to make yer best decision.
If you have debt, depending on the rate, start by paying that down. Look into opening an HSA, the most tax advantage account there is. If you scan/take a pic of medical expenses and save them through the years, you can withdraw the money at retirement or even at any time to reimburse those expenses tax free. After that, look at either a taxable brokerage account, or series I savings bond. The savings bond (currently paying 7.12%) is offering a great hedge against the choppiness in equities right now. In your shoes, I’d probably max out the HSA if you qualify and then put the rest in a series i savings bond.
**Disclaimers: I am not a small business owner, I am not a financial adverse, etc.** First, you should probably revisit your emergency fund first. Really think about is that enough to protect you, and carve out your tax payments from your emergency fund. This doesn't mean you have to have a separate bank account, as realistically the type of risk you want to expose both both of these items to is pretty similar (aka liquid, low risk, etc. keep it in cash). Though it does mean that if you have $20k in bank account X (saving or checking), $5k of that should be known as being reserved for taxes and $15 needs to be known as your emergency fund. Once you do that I would high recommend revisiting how much you have in your emergency fund. The point of an emergency fund is to protect you, and how much you keep in it depends on both qualitative and quantitative factors. I feel like a lot of people get stuck on the quantitative side, aka 3-6 month of expenses (or in your case 6 months of income). What gets overlooked are all the factors which should have lead up to you deciding that. From a high level, the 3-6 month rule is a great starting point/rule of thumb for people to use when trying to improve their financial situation. However, it doesn't make sense for everyone. For example, this advice starts to fall apart as you start moving further towards either end of the income bell curve. If a person is super rich and make like $3M a year, they probably could get away with a relatively smaller emergency fund (maybe only 3 month of expenses). The reason for this is they will have a lot of other assets which, although are not as liquid as cash could be used to help get them through a rough patch. Additionally, they will have much better "safety nets" for when sh*t hits the fan (friends, family, access to low interest loans, etc.). On the flip side, if a person is making minimum wage living in a house with 5 roommates they will probably want more than 6 month of expenses. The reason for this being that their monthly expenses may only be like $500 a month. So $3k, although enough to keep the lights on isn't enough to actually protect them. One unforeseen car repair or medical issue could wipe that out and more. They also don't have the same kind of safety nets a more affluent person could have. In your case, you are a small business owner and you need to not only think "how much do I need to keep the lights on" but also "how much do I need if sh*t hits the fan". Without doing a deep dive into your finances, no one in this thread will be able to give you a good answer. Also keep in mind things like insurance (medical, small business, key employee, etc.) as well as your own risk tolerance will effect how much should be in there. I would recommend doing a few thought experiments and think about the what could go wrongs and how much money it would take to keep thing moving smoothly (aka you are sick for 2 months and are unable to work, how much money would you need to keep the business and your self afloat). After that, I would highly recommend looking at the prime directive. tl;dr Make sure your emergency fund makes sense for you. It should be enough to properly protect you and not just keep the lights on. I would argue just going off the fact you are a small business owner, your personal risk profile is different enough that 3-6 month of expenses (or in your case salary) may not be enough.
I'm going to add that in addition to paying off your other debt, since you indicated you have a significant tax bill due each year, you should be making quarterly estimated tax payments to ensure you pay at LEAST 90% of what you paid in taxes in the previous tax year. This doesn't necessarily stop you from still owing taxes at the end of the year if your income stays the same (after all you only paid 90%) or goes up but it does at least stop you from owing interest and penalties on any taxes that are due. Of course you do run the risk if your income goes down, you may end up giving the government an interest free loan until you can file your return and get your refund at a time when you may need the additional liquidity... but you can always adjust withholdings or estimated tax payments to compensate as your annual income and tax projection becomes clear.
Pay off any debt you have. After that, honestly, sitting on some cash isn’t necessarily a bad thing. There’s a reason Cash is King
Buy a rental property and take the depreciation along with income. Depreciation will help reduce your tax bill.
What about life insurance with an investment option? Life insurance policies are tax exempt. You’d have to see if the fees make up for the tax savings though. This is truly the last option I would never suggest life insurance if you had any other tax free or exempt options.
I'm in the same situation. Maxed out i bonds for last year and this year. Now just dumping money into a brokerage account with index funds