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Ok, I've been trolling these boards for a few days and have seen some very good advice, but want to ask about my situation anyway.
I will be debt free in about 6 months and will have an excess of about $3-4K a month and don't know exactly what to do with it.
Ive seen investment folks preach about mutual funds, but not sure I want to just hand money over to be managed. At least not all of it.
Then I see the Real Estate folks argue how rental properties are not making tons of money because of taxes/fees and how the pool of tenants is drying up even as prices are dropping. Also, without a ton of cash to put down, I'm not sure being a slum lord is for me. I live in Long Island, NY so most local property is way too much money to buy into to get back the rent, so it would be more of a long distance rental.
So sage posters, I ask what do you think I should do with this money? I understand I need to put money away for retirement, but isnt there some other way to increase that cash flow?
All the investment books talk about making your money work for you, but none really explain how to increase cash flow.
Compare those 2 I mentioned to like the Dow. Dow was flat, they made money.
What I do is set my brokerage's fund screener to filter to fee-free funds. Then I find ones that perform over 5% for 5, 10 year spans. Then I screen out "strategy" or gimmick funds (like gold, or the country of the month), and look at "flagship" funds.
Well, if it was my $3-4K per month, my absolute first priority would be to max out all tax-free vehicles first, 401k, IRA, HSA. Tax savings gives an immediate first year annual return of 25% and these funds grow tax-free thereafter.
At the same time I would be sure to have AT LEAST one year's living expenses, better it should be two, in an emergency fund should you lose your source of income. Before the Great Recession, an emergency fund of 6 months living expenses was considered adequate. I've now heard some advisors says two-five years. Depends on your circumstances.
Real estate/rental property is very management intensive. I owned investment property for decades until the tenant quality and overall behavior of people changed. I sold them all and got out of the tenant business. Wouldn't do it today unless I could find a very inexpensive property in a good neighborhood that would cash flow. Problem is tenant quality, with this unemployment, is lousy. Not worth the headache unless you buy when the market bottoms and get out five years later with a profit. The buying opportunity might occur in the next two years. Hard to tell, though, if values will go up. If interest rates rise, that will hold prices down. If unemployment doesn't improve, that will also keep prices low.
Both the above posts are great advice. Assuming you no longer have a mortgage you are losing a tax break. I would maximize my 401K or IRA contribution first. Definitely consider a HSA and 529 plan if applicable. Then build a balanced portfolio of low expense, no load mutual funds. In addition to the above funds, take a look at T Rowe Price and Fidelity. I would start with index funds and bond funds and work my way into small caps, mid caps and specialty funds depending on your risk tolerance and time horizon.
If you feel the need to partake in real estate consider REITs and mutual funds that specialize in those markets. When the SHTF you can bail out immediately!
Well, if it was my $3-4K per month, my absolute first priority would be to max out all tax-free vehicles first, 401k, IRA, HSA. Tax savings gives an immediate first year annual return of 25% and these funds grow tax-free thereafter.
At the same time I would be sure to have AT LEAST one year's living expenses, better it should be two, in an emergency fund should you lose your source of income. Before the Great Recession, an emergency fund of 6 months living expenses was considered adequate. I've now heard some advisors says two-five years. Depends on your circumstances.
Real estate/rental property is very management intensive. I owned investment property for decades until the tenant quality and overall behavior of people changed. I sold them all and got out of the tenant business. Wouldn't do it today unless I could find a very inexpensive property in a good neighborhood that would cash flow. Problem is tenant quality, with this unemployment, is lousy. Not worth the headache unless you buy when the market bottoms and get out five years later with a profit. The buying opportunity might occur in the next two years. Hard to tell, though, if values will go up. If interest rates rise, that will hold prices down. If unemployment doesn't improve, that will also keep prices low.
i couldnt agree more , after decades of being a landlord we are done too. as soon as the last of the properties are sold thats it...
to many other ways to earn money passively with alot less grief.
one correction though , your a little confused, its not tax free,its tax deferred. taxes are all due at withdrawl. only a roth would be tax free and really not even,as your paying the taxes up front instead of at the end. .
assuming around a 20-25% tax rate 5,000 in pretax income. would leave you with 4,000 or so in a roth , a traditional deductable ira would cost the same 5,000 of pretax income and leave you with 5,000 in the ira, more initially to invest but you pay taxes later on.
as far as what to do with the money its all about your own tolarance of pain when things drop,.. no one can tell you what to do with your money. even if someone is 20 years old and committing to much money to risky investments then they can stand they will fail when the bail each time in the drops and loose money.
its all about what lets you ride things out and sleep at night and until you lived thru it with your money on the line you cant even predict how you will react as folks found out in 2008.
Last edited by mathjak107; 10-12-2010 at 03:42 AM..
Thank you all for great advice. I will definitely stay away from the rental property and look into the max 401K and no load funds mentioned above. If I still feel like actively managing money, maybe I will save up and start a small business.
The beauty of real estate is you let others buy the asset for you. I have some friends who buy lower income housing for cheap, $15k-$100k (depending on units). They put very little $$ down and their tenants buy the place for them.
You can leverage yourself fairly easily, and that over time produces wealth. Plus low income housing is a gate way to bigger and better, I know a guy who started buying stuff 2 years ago, all low income housing. A few months ago he sold it all off (making a decent chunk of change) and bought a commercial building with his new found cash. Flipped it in a month and made something like $250k-$300k on it. This was all possible without a DIME of his own money, he got loans for every one of the properties he bought initially.
That being said he worked hard for that, did a lot of the remodeling on the low income houses himself. Collected his own rent. It was a pain. He got out but he made a lot of money for not having to put any money of his own down. Other peoples money or OPM as they call it.
Also real estate varies locality by locality. I wouldn't be buying homes/units in an area that looks to only be going downhill. Detroit. California (anywhere). Las Vegas. Etc. I would be buying in places that have a large military presence (lots of renters), large natural resources base like natural gas, large government presence (DC), or a large higher education base (schools). Where I live there are several name brand universities in the area (Duke, NC State, UNC) and several smaller ones and along with tech and medical companies really help to keep my city growing and expanding, even in these crappy times.
Keep in mind investing in the stock market is a gamble, the only reason prices go up is because others buy in. There is no true intrinsic value in it aside from a paltry few % (if that) of dividends for the few stocks that pay them.
Thanks Wheelsup, those are all very valid points as well. When thinking of real estate, I was thinking about buying lower cost/lower income units just to get my feet wet. My issue is I don't think I can be a landlord, so I would need to hire a management company to do all that stuff for me, and definitely cant do it locally, as prices in NYC/LI area are outrageous. I was looking into Pennsylvania, but a lot of affordable areas seem to be on a downturn with more unemployment, etc.
I agree with the OPM, as that was my initial plan. I guess if i took a small chunk, say 10-20K and put it down on a 50-75K condo or cheap duplex and break even monthly, that wouldn't be a bad idea.
As much as I agree with the mutual fund/401K investing, I don't think i can put it all in there. I do want to have some control and try something more exciting.
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