What should my fiancé and I do with the extra $7,000 we make each month?
I am 25 years old and my fiancé and I make $120,000-$130,000 a year. Our expenses are $3,300 monthly. We save about $7,000-$8,000 a month and in total have $60,000 saved. We have no debt, no kids, and live a frugal lifestyle. We consistently invest in the stock market. We want to do more with the money we save.
We recently spoke with a financial planner who suggested we make bigger contributions to our Roth IRA. This was his only suggestion of what to do with our extra income. I was not satisfied with this advice and feel like we could be doing more than that. What other types of accounts should we consider or what else should we be doing with our extra income?
Joshua Escalante Troesh, CFP | MBA
If this was the planner's only suggestion your gut was correct, you are probably not working with the correct adviser. It sounds like the planner is an investment-only adviser who doesn't work with clients in a comprehensive way. A planner should look beyond investments and look at your whole financial picture, your long-term, and short-term goals.
Begin with Purpose
Before worrying about strategies for saving and investing start by having a discussion about the goals you and your fiancé have for your life together; such as buying a home, having children, or even taking vacations. Then focus on how you can align your finances toward those goals. This discussion on your goals is the most important financial discussion you can have as it is the only one which directly connects to the life you want to build. The goals you have would then determine the financial strategies you would use and appropriate investments to save/invest toward those goals.
Right off the bat, you have a wedding coming up (I assume by your use of fiancé). Begin by exploring if there are opportunities to spend money to make your wedding experience more meaningful for the two of you. Having some extra money in your retirement account would be great, but your life would likely be far more improved by adding an extra week to your honey moon.
While this might sound like blasphemy coming from a financial advisor, financial planning is about living for today as well as tomorrow. And you are saving an incredible amount monthly already. Much of my work with my clients is about helping them responsibly spend for their goals today without threatening their future goals.
But what about those financial strategies?
Although I don't have enough information to give you advice, below are some alternatives to consider regarding options for investing the money. These are just ideas to consider, you can schedule a call to determine which ones will be best based on your other life goals, tax situation (the Roth may not have been good tax advice depending on other factors), risk tolerances, and desired lifestyle. Keep in mind, I am focusing on how to make the money work for you as I believe that is what you are looking to learn. And these are only ideas to explore. They may not be my direct advice if you were clients and they may not be right for you and your fiancé.
INVEST MORE AGGRESSIVELY
I don't have any information about your portfolio's asset allocation, but it is usually a safe bet there is opportunity to invest some of your portfolio more aggressively (between 1% and 10%). I'm not talking about betting it all on Bitcoin. A complete financial plan would allow you to see how much you could invest in higher risk, higher return investments without threatening your goals if you lost the money. Well-diversified investments in frontier market stocks, small-cap international stocks, micro-cap stocks, distressed assets, or specific economy sectors can all yield higher returns and are appropriate for a small portion of your portfolio if your goals are funded through other investments. The key question, of course, is how much to allocate toward these higher-opportunity investments.
OPEN A HEALTH SAVINGS ACCOUNT (HSA)
If you have access to a High Deductible Health Plan (HDHP), an HSA could be a way to boost your retirement savings. HSAs allow you to take a tax deduction now and also pay no taxes later when you withdraw the money for qualified medical expenses. As a result, they really are a tax-free investment account. The trick with HSAs is to have enough money to invest the maximum while paying for all of your medical expenses from your paycheck so you don't touch the HSA money. This article explains the benefits of health savings accounts in more detail.
Understanding how the details of the health plan fit into your overall financial plan is important as you will be paying much more out of pocket for your medical expenses. And you will want to understand how a HDHP could affect you if you have a major medical expense coming up, like a pregnancy.
SAVE UP FOR A DUPLEX/TRIPLEX
Investing in Real Estate can provide a steady income from rent, capital appreciation from the value of the property, as well as providing for a nice home for you and your spouse. A duplex is a house with two living units, which is often the easiest way to enter into owning investment real estate. If you live in one of the units you know that 50% of your tenants will always pay on time. Then you only need to manage the other tenant.
Keep in mind, real estate is very time consuming and you will want to make sure you are comfortable with the lifestyle of a landlord. Collecting rent is fun, but getting a call at 2 a.m. because your tenant clogged the bathroom isn't fun. Still, if you make the purchase correctly you can have your tenants pay for a significant portion of the mortgage and enjoy the appreciation of the house value. And rental income will naturally increase over time due to inflation.
You could also explore a Triplex (three units) or Quadplex (four units) but you will have more work with managing the tenants and dealing with problems. The advantage, however, is you are less likely to be impacted significantly by a single tenant moving out. I generally do not recommend going larger than a quadplex as the laws for apartment complexes are much less landlord-friendly. Most states make the cut-off at 4 units in a building, so staying below your state's cut-off is usually advantageous for a new real estate investor.
SAVE UP TO START A BUSINESS
If you or your fiancé have ever been interested in starting a business, now would be the time to start one. You have no kids, no debt, no mortgage, and strong incomes meaning you have the ability to bounce back quickly if the business doesn't work. A business is a high risk investment, but nothing generates wealth better than business ownership. Keep in mind, being an entrepreneur takes a special kind of mindset and carries with it significant stress. So while it can be a road to wealth, it can also cause financial and marital problems. I would not recommend this unless one of you already had a desire to be a business owner and have something you are passionate about.
BUY A HOUSE
This might seem strange as I was focusing on things which make you money, but a house can provide you with the opportunity to lock in your housing costs at today's prices. While the cost of a house will actually set you back a bit financially, over a twenty year period your incomes will increase significantly while your mortgage will stay the same.