$80k: travel or invest? Best use of money.
April 29, 2013 8:16 AM Subscribe
I've saved up about $80,000 over the past few years, with no debts, loans, or mortgages. It's always been my dream to travel the world, and I've been planning to take my money and run off for the next few years, hopefully figuring out how to run an independent software business in the process. However, I don't know much about investing, and for all I know there might be a better use of my savings right around the corner. (Two questions about investing inside.)
1. With $80,000, are there any investment opportunities (rental houses, etc.) that could allow me to live off my capital without having a job? (I'm thinking $20,000-$30,000 a year.) If not, what's the minimum amount of money needed to get to that point?
2. Barring the above, what can I do with my money while I travel to maximize my interest? Right now, it's just sitting in my checking account and accruing negligible interest, but I don't know what else to do with it. (Caveat: it needs to be readily available to pay off credit cards at multiple banks, especially over the internet.)
Thank you!
1. With $80,000, are there any investment opportunities (rental houses, etc.) that could allow me to live off my capital without having a job? (I'm thinking $20,000-$30,000 a year.) If not, what's the minimum amount of money needed to get to that point?
2. Barring the above, what can I do with my money while I travel to maximize my interest? Right now, it's just sitting in my checking account and accruing negligible interest, but I don't know what else to do with it. (Caveat: it needs to be readily available to pay off credit cards at multiple banks, especially over the internet.)
Thank you!
It's important to remember the relationship between risk and reward. If you are willing to take higher risk, you have the chance of making higher returns, but you also have the chance of bigger losses. In order to make the 25-37.5% annual return you mentioned, you would have to take enormous risk. For example, you could buy a single company's stock, and if their stock went up that much, you'd get the return you want, but if their stuck plummeted, all your hard earned savings would go along for that sad ride.
Re the liquidity question, how much of it do you need to be available? All of it?
posted by Dansaman at 8:26 AM on April 29, 2013
Re the liquidity question, how much of it do you need to be available? All of it?
posted by Dansaman at 8:26 AM on April 29, 2013
1. With $80,000, are there any investment opportunities (rental houses, etc.) that could allow me to live off my capital without having a job? (I'm thinking $20,000-$30,000 a year.) If not, what's the minimum amount of money needed to get to that point?
I think the answer to the question "is there some way to safely and predictably realize an annual return of 25-30% on a given investment" is decidedly "no." Anyone telling you otherwise probably has a poster of Bernie Madoff above their bed.
There are a lot of different theories about how much capital you need to realize a given annual return. One rule of thumb that you used to hear quite often (like everything else in the finance world you have strong disagreement about this) is that you should plan on realizing 4% p.a. of your invested capital--which in your case would be $3,200; not really enough to live on for a year.
posted by yoink at 8:29 AM on April 29, 2013 [4 favorites]
I think the answer to the question "is there some way to safely and predictably realize an annual return of 25-30% on a given investment" is decidedly "no." Anyone telling you otherwise probably has a poster of Bernie Madoff above their bed.
There are a lot of different theories about how much capital you need to realize a given annual return. One rule of thumb that you used to hear quite often (like everything else in the finance world you have strong disagreement about this) is that you should plan on realizing 4% p.a. of your invested capital--which in your case would be $3,200; not really enough to live on for a year.
posted by yoink at 8:29 AM on April 29, 2013 [4 favorites]
Right now, zero risk securities (hah!) yield zero. You get no return. A bit of risk (10 year government bonds) yield about 1.6%. To earn $25,000 a year at 1.6% you need 1,500,000. That seems like a stretch for this year, anyhow. Adding risk will add yield (in expectation, not necessarily in reality). You just are not going to earn that much on your money today. Sorry.
I say travel until you use up 1/3 to 1/2 of your stash, come home and see what is up then. Being older and stable and having a family is really wonderful, but being able to up-stakes and see the world is great too and my vote is get out there!
posted by shothotbot at 8:29 AM on April 29, 2013 [4 favorites]
I say travel until you use up 1/3 to 1/2 of your stash, come home and see what is up then. Being older and stable and having a family is really wonderful, but being able to up-stakes and see the world is great too and my vote is get out there!
posted by shothotbot at 8:29 AM on April 29, 2013 [4 favorites]
1. No, certainly not. You're talking about at least an annual 25% return, after taxes. If this were possible, there would be a whole hell of a lot of men and women of leisure out there. If you had $400,000, and interest rates were at the 5% mark, you could generate $20,000 in interest annually (which would be subject to tax). As you've seen, interest rates are far, far below 5% (outside HY, but I don't think that's where you want to be). You could use the $80K as a down payment on a property and leverage the rest, but then most of your cashflows would go to debt service and not to supporting you.
Saving $80,000 is a great achievement, but it is nothing in terms of supporting yourself from investments. Keep saving, though, and can get there eventually. If you want certainty, and are conservative (i.e., investing in debt rather than equities), your goal should be at least $650,000 in today's dollars--really, much more than that to keep up with inflation. If you were trying to hit $30K in after-tax dollars, you'd need $1.25 million (assuming 20% in taxes and 3% interest).
2. Interest rates suck these days, and there's no magic place to put your money. If you're averse to investing in equity, just go to bankrate.com and find the highest paying savings account (spoiler: somewhere around 1%).
You might want to take some kind of personal investing course or talk to a fee-based planner. Some listings for planners here. It sounds like you're just starting out in this long road.
Congrats on your nest egg! Keep at it.
posted by Admiral Haddock at 8:32 AM on April 29, 2013
Saving $80,000 is a great achievement, but it is nothing in terms of supporting yourself from investments. Keep saving, though, and can get there eventually. If you want certainty, and are conservative (i.e., investing in debt rather than equities), your goal should be at least $650,000 in today's dollars--really, much more than that to keep up with inflation. If you were trying to hit $30K in after-tax dollars, you'd need $1.25 million (assuming 20% in taxes and 3% interest).
2. Interest rates suck these days, and there's no magic place to put your money. If you're averse to investing in equity, just go to bankrate.com and find the highest paying savings account (spoiler: somewhere around 1%).
You might want to take some kind of personal investing course or talk to a fee-based planner. Some listings for planners here. It sounds like you're just starting out in this long road.
Congrats on your nest egg! Keep at it.
posted by Admiral Haddock at 8:32 AM on April 29, 2013
That's a tidy nest egg, but not tidy enough to only live off of the interest.
If you want to travel, then do that, but realize that you're using your capital for that.
I say split the difference. Spend half to travel for a year, and bank the rest in an Exchange Traded Fund.
That's what I would do.
posted by Ruthless Bunny at 8:32 AM on April 29, 2013 [6 favorites]
If you want to travel, then do that, but realize that you're using your capital for that.
I say split the difference. Spend half to travel for a year, and bank the rest in an Exchange Traded Fund.
That's what I would do.
posted by Ruthless Bunny at 8:32 AM on April 29, 2013 [6 favorites]
Right now, zero risk securities (hah!) yield zero.
In fact, some recent Treasuries (and some euro bonds) have actually had negative yield. Yes, negative yield--as in I am buying for $100 and I expect to receive $99 in a year.
posted by Admiral Haddock at 8:34 AM on April 29, 2013
In fact, some recent Treasuries (and some euro bonds) have actually had negative yield. Yes, negative yield--as in I am buying for $100 and I expect to receive $99 in a year.
posted by Admiral Haddock at 8:34 AM on April 29, 2013
With $80,000, are there any investment opportunities (rental houses, etc.) that could allow me to live off my capital without having a job? (I'm thinking $20,000-$30,000 a year.)
No.
If not, what's the minimum amount of money needed to get to that point?
1% on 1 million is ten thousand dollars. Scale accordingly.
The best use of your money is for you to spend it. Have a good time. Earn it back when you're older. Remember that saving for "your future" is also providing the cash-flows making investment advisors wealthy today. The way I see it, your savings are better wasted on your today than on dubious promises of the future utopia where it all works out like the money men tell us.
IMHO you shouldn't be worried about "investing" you should be thinking about "spending" and taking advantage of the rare opportunity of having time and money to travel.
posted by three blind mice at 8:42 AM on April 29, 2013 [1 favorite]
No.
If not, what's the minimum amount of money needed to get to that point?
1% on 1 million is ten thousand dollars. Scale accordingly.
The best use of your money is for you to spend it. Have a good time. Earn it back when you're older. Remember that saving for "your future" is also providing the cash-flows making investment advisors wealthy today. The way I see it, your savings are better wasted on your today than on dubious promises of the future utopia where it all works out like the money men tell us.
IMHO you shouldn't be worried about "investing" you should be thinking about "spending" and taking advantage of the rare opportunity of having time and money to travel.
posted by three blind mice at 8:42 AM on April 29, 2013 [1 favorite]
In certain areas, $80K might be enough to get you a multi-tenant home all or most of the way paid for. You live in one unit and rent the other(s) out.
That's maybe just barely possible.
posted by jsturgill at 8:54 AM on April 29, 2013
That's maybe just barely possible.
posted by jsturgill at 8:54 AM on April 29, 2013
If you were independently wealthy, would you still do the software business?
You are not in a position where you can retire and do nothing for the rest of your life, but you could easily take on unpaid internships, graduate school, startup costs, etc if there was something else you would enjoy doing for the rest of your life. Invest in yourself if you can.
If you can't think of anything, maybe if you travel for a few months you'll find some inspiration.
posted by steinwald at 8:55 AM on April 29, 2013
You are not in a position where you can retire and do nothing for the rest of your life, but you could easily take on unpaid internships, graduate school, startup costs, etc if there was something else you would enjoy doing for the rest of your life. Invest in yourself if you can.
If you can't think of anything, maybe if you travel for a few months you'll find some inspiration.
posted by steinwald at 8:55 AM on April 29, 2013
Reverse the 80/20 rule and save/invest 80% of this capital and use the remaining 20% to fund a trip someplace.
posted by KokuRyu at 9:01 AM on April 29, 2013
posted by KokuRyu at 9:01 AM on April 29, 2013
In the year or so you can spend travelling with that money, you're not going to make enough interest in any investment for it to make a noticeable difference. Pick a bank with ATM machines overseas, drop it in a savings account and go travel. Keep enough money in a separate account for a plane ticket home and three months of living expenses.
Spend your time worrying about how you're going to extend that trip by saving money. Stay at hostels, cook for yourself when you can, take public transport instead of tours, visit places during the off season, etc. If you are programming, try and figure out a way to make money on the road. Can you you design websites for a few hours a week for some extra money or something like that?
posted by empath at 9:03 AM on April 29, 2013
Spend your time worrying about how you're going to extend that trip by saving money. Stay at hostels, cook for yourself when you can, take public transport instead of tours, visit places during the off season, etc. If you are programming, try and figure out a way to make money on the road. Can you you design websites for a few hours a week for some extra money or something like that?
posted by empath at 9:03 AM on April 29, 2013
Do you have any kind of retirement accounts? 401K, IRA etc? Because if you don't, then should be putting a large chunk of that money into one right now! I don't know how old you are, but you need to look long term. Congrats on saving up that nest egg, but now you need to put it to work for you. Traveling the world is a great idea, and I think its a worthy thing to spend your time doing, but not to blow your nest egg on (assuming you have no other retirement accounts). Maybe use 1/3 of the nest egg to fund your trip, doing work along the way, and invest the rest?
posted by Joh at 9:03 AM on April 29, 2013
posted by Joh at 9:03 AM on April 29, 2013
1. With $80,000, are there any investment opportunities (rental houses, etc.) that could allow me to live off my capital without having a job? (I'm thinking $20,000-$30,000 a year.) If not, what's the minimum amount of money needed to get to that point?
No way. I have occasionally met financial geniuses who tell me that their plan is to get some large windfall of money (such as through the lottery) and then live off the interest. Well, first you need that windfall of money. While $80k is respectable, you cannot retire yet, as three blind mice's point made clear.
2. Barring the above, what can I do with my money while I travel to maximize my interest? Right now, it's just sitting in my checking account and accruing negligible interest, but I don't know what else to do with it. (Caveat: it needs to be readily available to pay off credit cards at multiple banks, especially over the internet.)
Interest rates are negligible for everyone, everywhere. It has been that way for some years now. Interest is not where the returns you want are going to come from.
The caveat that you need the funds readily available really reduces your options. Also, short-term investments will be more sensitive to market fluctuations. to that point, an investment can go up but it can also go down. You need to figure out how much risk you can tolerate. In any event, you aren't going to get the huge returns that would allow you to live off the principal.
With that said, the first rule is to pay yourself first. If you haven't started a Roth IRA, do that now. It offers the ability to withdraw funds and potentially offer a higher rate of return. But, it isn't risk free and you don't have FDIC protection. See about having the Roth IRA invest in short-term bond funds or ETFs. (I am assuming you don't make so much that you are disqualified from a Roth IRA).
Everyone has their priorities. If I were you, I would keep that nest egg and keep working as you have been. I could live very comfortably off my investments, but I do not. One reason is that it allows my money to continue to grow. However, the real benefit is the incredible peace of mind that I have knowing that I am essentially immune to the job market. You might try growing that nest egg some more for that peace of mind and perhaps early retirement.
posted by Tanizaki at 9:04 AM on April 29, 2013 [1 favorite]
No way. I have occasionally met financial geniuses who tell me that their plan is to get some large windfall of money (such as through the lottery) and then live off the interest. Well, first you need that windfall of money. While $80k is respectable, you cannot retire yet, as three blind mice's point made clear.
2. Barring the above, what can I do with my money while I travel to maximize my interest? Right now, it's just sitting in my checking account and accruing negligible interest, but I don't know what else to do with it. (Caveat: it needs to be readily available to pay off credit cards at multiple banks, especially over the internet.)
Interest rates are negligible for everyone, everywhere. It has been that way for some years now. Interest is not where the returns you want are going to come from.
The caveat that you need the funds readily available really reduces your options. Also, short-term investments will be more sensitive to market fluctuations. to that point, an investment can go up but it can also go down. You need to figure out how much risk you can tolerate. In any event, you aren't going to get the huge returns that would allow you to live off the principal.
With that said, the first rule is to pay yourself first. If you haven't started a Roth IRA, do that now. It offers the ability to withdraw funds and potentially offer a higher rate of return. But, it isn't risk free and you don't have FDIC protection. See about having the Roth IRA invest in short-term bond funds or ETFs. (I am assuming you don't make so much that you are disqualified from a Roth IRA).
Everyone has their priorities. If I were you, I would keep that nest egg and keep working as you have been. I could live very comfortably off my investments, but I do not. One reason is that it allows my money to continue to grow. However, the real benefit is the incredible peace of mind that I have knowing that I am essentially immune to the job market. You might try growing that nest egg some more for that peace of mind and perhaps early retirement.
posted by Tanizaki at 9:04 AM on April 29, 2013 [1 favorite]
I knew a guy who spent a few years roaming the earth, and the way he made it work was, he would go to a place, get a temp job there that would cover most of his expenses, and after a few weeks he'd move on to the next place.
I would be tempted to try that, if I had a decent amount of savings and no attachments keeping me in a single location. It probably wouldn't be a money-maker (depending on what kind of work you could get), but it might be enough to stretch out your $80,000 to get a good deal of earth-roaming in.
Another possibility is full time RVing, where you basically take your entire life mobile, get an RV, and move around between RV sites. If you have or can get a job that you can do over the Internet, you could probably do this indefinitely.
posted by El Sabor Asiatico at 9:06 AM on April 29, 2013 [1 favorite]
I would be tempted to try that, if I had a decent amount of savings and no attachments keeping me in a single location. It probably wouldn't be a money-maker (depending on what kind of work you could get), but it might be enough to stretch out your $80,000 to get a good deal of earth-roaming in.
Another possibility is full time RVing, where you basically take your entire life mobile, get an RV, and move around between RV sites. If you have or can get a job that you can do over the Internet, you could probably do this indefinitely.
posted by El Sabor Asiatico at 9:06 AM on April 29, 2013 [1 favorite]
1. With $80,000, are there any investment opportunities (rental houses, etc.) that could allow me to live off my capital without having a job? (I'm thinking $20,000-$30,000 a year.) If not, what's the minimum amount of money needed to get to that point?
Depending on your location, $10,000-$15,000 annual income is feasible for a rental property. A quick search in my city turns up a 7,000+ sq. ft. 8-plex, 1 block from a local college campus, listed at $240,000. With $70k down, that's a monthly payment of $1,300 ($15,600 annually; includes property tax). Rent roll is $38,000. Subtract water, garbage collection, insurance, and maintenance and then allow for 10% vacancy and you're left with ~$11,000 annually. Of course, $11,000 annually is under optimal conditions (average annual maintenance costs and limited vacancy) and it's also half of what you want.
posted by trueluk at 9:09 AM on April 29, 2013 [1 favorite]
Depending on your location, $10,000-$15,000 annual income is feasible for a rental property. A quick search in my city turns up a 7,000+ sq. ft. 8-plex, 1 block from a local college campus, listed at $240,000. With $70k down, that's a monthly payment of $1,300 ($15,600 annually; includes property tax). Rent roll is $38,000. Subtract water, garbage collection, insurance, and maintenance and then allow for 10% vacancy and you're left with ~$11,000 annually. Of course, $11,000 annually is under optimal conditions (average annual maintenance costs and limited vacancy) and it's also half of what you want.
posted by trueluk at 9:09 AM on April 29, 2013 [1 favorite]
The only plausible way for an average person to generate a decent return on capital these days is to invest in certain dividend-paying stocks, such as MLPs, that are riding the coattails of North America's shale gas boom. These stocks are of course somewhat volatile in price and are riskier than bonds and/or treasuries.
That said, some of these MLPs have yields > 10%. Whether those dividend payouts are sustainable is another question entirely. Even more pertinently, is the risk associated with stocks something you want to take on?
posted by dfriedman at 9:20 AM on April 29, 2013
That said, some of these MLPs have yields > 10%. Whether those dividend payouts are sustainable is another question entirely. Even more pertinently, is the risk associated with stocks something you want to take on?
posted by dfriedman at 9:20 AM on April 29, 2013
Let's be clear, i's not impossible to get a 25-37.5% return, rather, it would 1) require a huge tolerance for risk of losing that much and in fact much more than that, and 2) have absolutely no certainty of any particular return. Basically it would be gambling - for example, buying one stock that is thought to be volatile would be gambling. Obviously not a practical solution for the OP and hopefully the OP now fully understands that the practical options are what other people have stated here.
posted by Dansaman at 9:25 AM on April 29, 2013
posted by Dansaman at 9:25 AM on April 29, 2013
For 80k you can flat out buy a house in a developing country. Move somewhere with decent Internet and a university nearby and you can start your software business that way. I met a guy in Nicaragua who did exactly that after quitting his sales job at Walmart with a decent sized nest egg.
posted by empath at 9:27 AM on April 29, 2013
posted by empath at 9:27 AM on April 29, 2013
I left the US two years ago, travel a ton, and support myself with an online business. You mention wanting to start up a business, so I'd recommend using some of the money to get it off the ground and make it location independent. My investment in my own online business has paid waaay more than any of my investments in real estate, money market accounts, etc.
If you want to provide software development services, you could use some of your money to create a great web site or online portfolio to help sell yourself to clients. If you have any ideas for a more passive income, such as a web app that people would pay to use, set aside money to research the market, develop the product well, and pay the lawyers and such.
If I were you, I'd go directly to developing and selling a well-researched web app or something like that and skip having to interact with clients. Phone calls become a real pain when you're in, say, Thailand and they're in the US, and having to work according to a client's schedule can limit your freedom to travel.
Overall, my investment was really low. In 2007 I went independent, getting clients through my professional blog. My startup costs were nearly zip, such as $87 to form the LLC, $200 for a consultation with a CPA, and another $80 or so for a professional Wordpress theme.
In 2009, I invested $4k and three months of my time in launching a membership site, which I market through social media. When I figured my ROI for the site in 2011, it had returned my investment more than 10-fold, and now it's much more. It requires only occasional involvement from me, most of it on my own schedule, and gives me enough income now to make client work optional.
The only investment that came anywhere close to that return was when I restored and sold an old house, and that involved a huge amount of physical labor over two years and, obviously, tied me to one location. I also had rental income for awhile, but it was helpful only because I owned the rental house outright. Even in just a few months of renting there were some major emergency expenses along with the really annoying hassle of having to respond immediately to international phone calls from tenants and contractors regardless of my time zone.
I also considered buying a cheap house where I'm currently based, but keeping my money liquid makes me much more portable and makes it possible for me to grab an opportunity when I see it, such as creating a new product when the time is right. "Developing" world rents are low, and to pay my rent for a month, I just need to sell access to my site to four people.
posted by ceiba at 9:42 AM on April 29, 2013 [7 favorites]
If you want to provide software development services, you could use some of your money to create a great web site or online portfolio to help sell yourself to clients. If you have any ideas for a more passive income, such as a web app that people would pay to use, set aside money to research the market, develop the product well, and pay the lawyers and such.
If I were you, I'd go directly to developing and selling a well-researched web app or something like that and skip having to interact with clients. Phone calls become a real pain when you're in, say, Thailand and they're in the US, and having to work according to a client's schedule can limit your freedom to travel.
Overall, my investment was really low. In 2007 I went independent, getting clients through my professional blog. My startup costs were nearly zip, such as $87 to form the LLC, $200 for a consultation with a CPA, and another $80 or so for a professional Wordpress theme.
In 2009, I invested $4k and three months of my time in launching a membership site, which I market through social media. When I figured my ROI for the site in 2011, it had returned my investment more than 10-fold, and now it's much more. It requires only occasional involvement from me, most of it on my own schedule, and gives me enough income now to make client work optional.
The only investment that came anywhere close to that return was when I restored and sold an old house, and that involved a huge amount of physical labor over two years and, obviously, tied me to one location. I also had rental income for awhile, but it was helpful only because I owned the rental house outright. Even in just a few months of renting there were some major emergency expenses along with the really annoying hassle of having to respond immediately to international phone calls from tenants and contractors regardless of my time zone.
I also considered buying a cheap house where I'm currently based, but keeping my money liquid makes me much more portable and makes it possible for me to grab an opportunity when I see it, such as creating a new product when the time is right. "Developing" world rents are low, and to pay my rent for a month, I just need to sell access to my site to four people.
posted by ceiba at 9:42 AM on April 29, 2013 [7 favorites]
This thread is closed to new comments.
2. A money market account will pay slightly higher interest. Slightly.
The best use of it depends on what you want, really. Spending the money travelling is a fine thing to do, from the point of view of enhancing your life experiences. Stowing it away in investments and not touching it (i.e, pay your credit card bills with new income, not with your savings) is a very good idea from the point of view of providing for your future.
posted by thelonius at 8:24 AM on April 29, 2013 [2 favorites]