What would you do with 80k cash flow over 2 years?
Pay down/off student loan?
Buy your first home?
Buy a second home?
Pay off credit cards?
Max out ROTH space?
Max out pre-tax retirement savings?
Buy term life insurance?
Buy disability insurance?
Pay off car loans?
We are deciding whether to buy a home for my parents (in addition to our current home) or save for retirement/kid’s college.
Please share if you have great ideas on how to make the most with this cash flow.
We want to know what we are missing (ie. the opportunity costs) for purchasing a 2nd home.
Thank you!
What to do with 80k?
Build an emergency fund first. Because you have a child, you need term life insurance. That should the next priority. When you get towards the end of your training, buy as much “same occupation” disability insurance as possible. Then, if you have money:
1. 401k to maximum employer match (free money).
2. Max out Roth IRA (limited yearly contributions so don’t want to miss out, plus you are probably in a low tax bracket currently so now is the best time).
3. Pay off high-interest loans (credit card, car, etc).
4. Max out 401k.
5. Other tax-sheltered accounts (529, HSA if available, iBonds).
If you have money left over, then consider saving in a taxable retirement account or overpaying your mortgage. Or simply start squirreling some money away for a nice vacation after residency.
A second home is a brick/anchor/dead weight. Appreciation is not assured. Mortgage interest/repairs/property taxes/insurance are guaranteed. And if it’s for your parents to live in, it is strictly a financial liability that detracts from retirement savings (i.e., early retirement or part-time work which will allow you to spend more time with your child). Unless your parents are currently homeless, do not even consider this, especially if you are in training and your future after training is not set in stone.
dear jim, thanks so much for your advice.
i do need to work on a more robust emergency fund.
1. no match from my employer yet, but hospital/residency privatization may lead to a 4% match in 1-2 years
2. ROTH IRA and ROTH 403b are on tract to be maxed out for 2015.
3. highest interest loan is 3.375% mortgage and 2.99% car
4. have not gotten to 401 pre-tax yet, considering HSA or 529 beyond ROTH accounts
5. why do you prefer 401 pre tax contribution more than HSA triple tax protection and 529 post tax contribution? (i’m going for the same idea that the taxes i get to pay now will be the lowest in my lifetime going forward and really prefer to max out all post-tax accounts before contributing to pre-tax ones)
6. term life policy via residency is 250k, additional term life is 1 mil. may buy a larger policy when i can afford more.
thanks for stopping by DFD.
Did not realize you had a Roth 403b. Much better than a traditional 403b or traditional 401k for residents. A bit confused, as you mention you are maxing out a Roth 403b but then you also bring up a pre-tax 401k. You are limited to 18k in total elective deferrals (401k, 403b or combination of the two). Putting all of it in a tax exempt Roth 403b is preferable to a tax deferred pre-tax 401k.
HSAs work well if you are already enrolled in a high deductible health plan. If you aren’t, you’ll have to ask yourself if it’s worth switching your family’s health plan for the tax benefits.
I prefer maxing out retirement contributions before contributing to a 529 plan. In my opinion, the greatest financial gift you can give your child is not a paid-for education, but to never burden them with your care when you get old and retire.
Furthermore, 401k/403b are ERISA accounts with federal laws conferring asset protection. This may not seem so important now, but asset protection is critical once you’re out of training and become a malpractice target. IRAs, 529s and HSAs may not have the same protections (varies by state).
this is super awesome, thank you so much!!!!
i’m learning as i go. glad to learn that 18k total applies to all 401k/403b, etc.
btw, you sound so much like WCI to me… are you WCI? or do we know each other from somewhere else?
When you say “cash flow,” Do you mean you just got $80k in additional income? I’d say all of the options you listed are good choices – it all just depend on the numbers – which of your debts is costing you the most right now? As far as buying a 2nd house, if you plan on letting your parents live in it without rent, then it becomes a liability/debt. But if you buy a 2nd house and rent it out, then it becomes an asset and will generate you equity over time.
thanks so much for the comment!
it will be about 40-60k of true cash flow from additional income; the other 20k is 0% credit card deals that i’m comfortable transferring around for 1-1.5% later every 15-18 months.
our most expensive debt is our first home @ 3.375% and his car @ 2.99%. other than that all debt are at 0% currently, which are usually paid off before it turns into 1-2%.