I believe I may have asked this before, and if so, my apologies. I didn’t find it in search.
Retirement contributions are taken care of. No debt other than house and student debt, neither of which do I plan to pay down. (House at 3.something%, student debt interest rate doesn’t matter as I’m on Income Based Repayment).
Will have three months of income in emergency fund very soon.
Once that happens, extra money each month is just gravy, and I need to know what it is best to do with my gravy. I don’t need immediate access to it, but neither do I want to make it inaccessible for years and years or anything like that.
What does one do with extra money? What kind of interest rate can be got for it (greater than 3.something%, as if it is less than that I should just go ahead and pay off the mortgage…)
Split it between paying down obligations like your mortgage, and putting it in a rolling series of short-term investments. CD rates are still pretty dismal but there are some online banks nudging decent return. With no mortgage and no car payments and little revolving debt and relatively substantial contributions already going into major investment and retirement funds, we used to keep a few $Ks divided among four CDs, of which one matured about every three months. Need the money for something or have a good investment opportunity? Off it went. No? Re-up the CD at the best 12-14 month rate, rolling in any new extra bux. We only had to pull a CD before maturity once in about 10 years - with other resources, a three-month interval was close enough to match it to expenses or opportunities at maturity.
Your emergency fund should be bigger. Three months is not sufficient.
After you build that up some more, I would recommend a cheap index fund. Vanguard is great. I don’t recommend CDs in the current market. The returns are terrible.
Darn, the title made me think this was someone who didn’t know what to do with too much money, so was going to suggest donating it to a worthy charity like Scooby North America.
Since it’s more of an investment question, I’m with Friedo.
I agree with friedo- make your rainy-day fund larger. 6 months is a good round amount.
But I might do it by putting half of the extra cash into the rainy-day fund, and invest half.
I’d also probably start a “fun” account, in the sense of put a few bucks per paycheck in there, and after a while, you’ll have built up enough for a trip, or a new computer or something nice, and won’t have to worry about withdrawal penalties, etc…
Do you have enough cash on hand should you have to replace a vehicle? That’s part of our plan since my husband decided to come out of retirement for a couple of years. We don’t want to deal with car payments in retirement, so we’ll make the “payments” into our savings account and when we decide to replace the car, we should be able to get one for cash.
I know nothing of investing and such. I just know this will work for us.
Would you like to adopt a 35-year-old in Ohio who desperately wants some extra cash for home improvements? I will send you cute photos each month (of my dogs).
But only a small amount of it should be in cash. There are many investments, including CDs, can be liquidated quickly and at little cost. (CD penalties are typically 3 months’ interest… negligible in most cases if you really need the funds.)
I don’t recommend CDs as any kind of investment - I recommend them, even at around the 2% max that can be found right now, as an intermediate money strategy between at-risk investments and doin’-nothin’ cash. They will appreciate a little rather than decline in real value while remaining safe and liquid. I’d say no more than 10% of net cash and investment worth in them, closer to 5% if you have any substantial pile at all.
Excellent advice. Make the emergency fund 6 months pay, and Vanguard S&P500 index fund. Set up as Roth IRA if you can.
Think about some charity, too. Lots of people in need, and if you’re feeling well off, spread the love around. Even if it’s on a small scale, every bit helps.
The usual advice is pay of your debts. Fewer payments to them is better for you, are they not? Interest rates might change at some point in the future.
It depends on the debt. High-interest credit card debt, payday loans, and Pipe Wrench Tony on the corner? Definitely. Low-interest fixed-rate mortgage? Not the best idea. The money could be put to far better use.
Paying down a 3.5% mortgage is roughly equivalent to making an investment that returns 3.5% a year, and in exchange for that you get reduced liquidity.
Not that it’s never a good idea to pay down a mortgage. Some people prefer the peace-of-mind that being totally debt-free brings, and that’s fine. But if you’re going strictly by the numbers it’s often not a great move.
The problem with investing in mutual funds and the like is that the stock market and bonds are at extraordinarily high levels these days, and could sink considerably if the Fed pulls the plug on the low interest rates. Or maybe not. But if that happens, then the 0.25% being offered by savings accounts these days won’t look nearly as bad.
The only safe (& liquid) return these days is close to 0%.
The upshot is that if you do nothing with the money and just let it sit in some account, it’s not such a terrible thing. Then if you one day happen to hear or see the news that the stock market has tanked in the past week, it would suggest a decent to buy in to something.
