What should I do with 300K?
August 8, 2015 1:47 PM Subscribe
Should I put a 300K cash windfall into buying my first home, or into a Vanguard fund to generate interest? Details inside.
Due to an unexpectedly good business year, I currently have 300K (post taxes) in savings, not including my SEP IRA savings for retirement (which I max out every year I’m able to.) I am single, own no property, have no kids, have no debt, and am in my mid- thirties. My salary is unpredictable — it fluctuates from between 65K a year up to 250K a year. This year was stellar but I can't count on it continuing to be so.
I split my time between two cities in California currently as I do work in each, and I rent a small place in both cities. (Both rents add up to $3300 monthly.)
Given the above, what makes the most sense from a financial perspective?
1. I save a bit more and buy a place in cash for around $400K in the cheaper city, where I expect I’ll be able to keep working for the next seven years, in an up and coming neighborhood that is getting more gentrified every year.
2. I sock away the 300K in a taxable Vanguard fund (since I already have a SEP IRA) in order to generate approximately 8% interest, and continue to add to it while I rent in both cities for the foreseeable future. In this scenario I wouldn’t be able to buy property for a long time, but I would just continue to rent.
3. A better option? You tell me! You are not my financial advisor, but I don’t know much about this stuff.
Due to an unexpectedly good business year, I currently have 300K (post taxes) in savings, not including my SEP IRA savings for retirement (which I max out every year I’m able to.) I am single, own no property, have no kids, have no debt, and am in my mid- thirties. My salary is unpredictable — it fluctuates from between 65K a year up to 250K a year. This year was stellar but I can't count on it continuing to be so.
I split my time between two cities in California currently as I do work in each, and I rent a small place in both cities. (Both rents add up to $3300 monthly.)
Given the above, what makes the most sense from a financial perspective?
1. I save a bit more and buy a place in cash for around $400K in the cheaper city, where I expect I’ll be able to keep working for the next seven years, in an up and coming neighborhood that is getting more gentrified every year.
2. I sock away the 300K in a taxable Vanguard fund (since I already have a SEP IRA) in order to generate approximately 8% interest, and continue to add to it while I rent in both cities for the foreseeable future. In this scenario I wouldn’t be able to buy property for a long time, but I would just continue to rent.
3. A better option? You tell me! You are not my financial advisor, but I don’t know much about this stuff.
Well, the first question is: do you want to own a house? Like the day-to-day mowing the lawn, fixing the roof, etc. of owning a house?
If you do, instead of buying it in cash, I would buy a house with 20% down, finance the rest on a boring 30 year fixed-rate mortgage (interest rates are low! lock it in!), set aside some of the remaining cash as an emergency fund for house repairs, and invest the rest.
If you don't, then keep renting.
posted by Blue Jello Elf at 1:56 PM on August 8, 2015 [11 favorites]
If you do, instead of buying it in cash, I would buy a house with 20% down, finance the rest on a boring 30 year fixed-rate mortgage (interest rates are low! lock it in!), set aside some of the remaining cash as an emergency fund for house repairs, and invest the rest.
If you don't, then keep renting.
posted by Blue Jello Elf at 1:56 PM on August 8, 2015 [11 favorites]
Response by poster: DMelanogaster: my sister has been using a Vanguard Target Retirement fund for her longterm investments and has made 8%-9% returns over the past ten years. Not guaranteed by any means but she seems happy with its overall consistency.
posted by MrHalfwit at 2:04 PM on August 8, 2015 [2 favorites]
posted by MrHalfwit at 2:04 PM on August 8, 2015 [2 favorites]
What Blue Jello Elf said. DO NOT buy a house if you don't want one. Or even if you THINK you don't want one. Your money will not magically disappear otherwise.
posted by jeff-o-matic at 2:27 PM on August 8, 2015 [5 favorites]
posted by jeff-o-matic at 2:27 PM on August 8, 2015 [5 favorites]
8%-9% returns over the past ten years
Just make sure you're mentally prepared for the occasional massive stock market drop!
posted by Blue Jello Elf at 2:38 PM on August 8, 2015 [1 favorite]
Just make sure you're mentally prepared for the occasional massive stock market drop!
posted by Blue Jello Elf at 2:38 PM on August 8, 2015 [1 favorite]
Best answer: Having such unpredictable income, I would want to sock it away somehow for the lean years in a way that I couldn't touch it. Both California real estate and the stock market are looking pretty risky, in my opinion. LA home prices have gyrated wildly since about 2004, and is approaching its inflation-adjusted peak. A house has such high sale and maintenance costs, it's rarely worth buying unless you want to stay at least five years. I second the idea that you shouldn't buy a house unless you enjoy maintaining it.
The stock market has been on a tear, too, which makes me nervous. Are you the kind of person who could see your 300K turn into 200K in a matter of months and not panic and sell, therefore locking in the loss. The advantage of the house is that if you take a bath, you wouldn't immediately see a problem unless you had to sell. The Vanguard funds are the best choice for someone who doesn't have strong investment opinions, for sure.
posted by wnissen at 2:51 PM on August 8, 2015 [2 favorites]
The stock market has been on a tear, too, which makes me nervous. Are you the kind of person who could see your 300K turn into 200K in a matter of months and not panic and sell, therefore locking in the loss. The advantage of the house is that if you take a bath, you wouldn't immediately see a problem unless you had to sell. The Vanguard funds are the best choice for someone who doesn't have strong investment opinions, for sure.
posted by wnissen at 2:51 PM on August 8, 2015 [2 favorites]
Best answer: INDEX FUND
Put it in, walk away. Come back in 20 years. Retire.
posted by Cool Papa Bell at 3:03 PM on August 8, 2015 [9 favorites]
Put it in, walk away. Come back in 20 years. Retire.
posted by Cool Papa Bell at 3:03 PM on August 8, 2015 [9 favorites]
Best answer: With such an unstable income, I think it is unwise to sink that kind of money into California real estate at market rates. I would say it might make sense to pay cash for a foreclosure property or some other bargain property. But that entails a lot of research and leg work and isn't without risk either. However, if you are okay with doing that, you could do it twice and get a bargain property in both of your locations. The same provisos suggested above should apply: Ask yourself if you really want to own a home and deal with all that entails.
You should probably do a good bit more reading about investing and money management and not sink ALL of your wealth into any one thing, period. Tying up all of your money in an illiquid asset -- and real estate can be pretty darn illiquid, especially when it goes sour -- will be a problem if your income dips and you need emergency cash for some reason. What if you are disabled and need to live on savings for a few months? Do not presume that your current scenario is one you can count on continuing. Things can change dramatically in all kinds of ways.
I would absolutely pay cash for a house if I had it, but not at market rates, especially in California. Real estate in California is overinflated by various California policies. A policy change could potentially deflate it seriously and long term by removing some of the Crazy from the real estate market out here. I would hate to be one of the people left holding the bag if that happened.
posted by Michele in California at 3:06 PM on August 8, 2015 [1 favorite]
You should probably do a good bit more reading about investing and money management and not sink ALL of your wealth into any one thing, period. Tying up all of your money in an illiquid asset -- and real estate can be pretty darn illiquid, especially when it goes sour -- will be a problem if your income dips and you need emergency cash for some reason. What if you are disabled and need to live on savings for a few months? Do not presume that your current scenario is one you can count on continuing. Things can change dramatically in all kinds of ways.
I would absolutely pay cash for a house if I had it, but not at market rates, especially in California. Real estate in California is overinflated by various California policies. A policy change could potentially deflate it seriously and long term by removing some of the Crazy from the real estate market out here. I would hate to be one of the people left holding the bag if that happened.
posted by Michele in California at 3:06 PM on August 8, 2015 [1 favorite]
Be careful with your assumptions - the financial world changes quickly.
1) If a guaranteed 8% fund existed, then everyone would have their money in such a fund. If you can let the money sit there for 30 years this is probably possible, if you want to take it out, you may find it in a down year.
2) If you believe the writing on the walls, the fed is about to raise interest rates. This will start several things in motion which have not be in action over the past 10 years. It could:
a) raise the interest rates on mortgages, making houses equivalently more difficult to buy (i.e. people will not be able to borrow as much), driving down the price of real estate.
b) make the current bonds which are paying almost nothing drop in price. This means "stable" bond funds may actually see their prices go down.
c) make the price of capital go up for companies - causing them to pull back and also hitting the stock market.
clearly the idea is to do things slow enough that at least c doesn't happen - but you should factor this in.
I would cut the money in 2/3 + 1/3 . Take 100k and put it in the bank for the 65k year you expect have coming up sometime in the (hopefully distant) future. Take 200k and find a place you can afford, you would like to live for many years not over extending yourself.
posted by NoDef at 3:31 PM on August 8, 2015 [2 favorites]
1) If a guaranteed 8% fund existed, then everyone would have their money in such a fund. If you can let the money sit there for 30 years this is probably possible, if you want to take it out, you may find it in a down year.
2) If you believe the writing on the walls, the fed is about to raise interest rates. This will start several things in motion which have not be in action over the past 10 years. It could:
a) raise the interest rates on mortgages, making houses equivalently more difficult to buy (i.e. people will not be able to borrow as much), driving down the price of real estate.
b) make the current bonds which are paying almost nothing drop in price. This means "stable" bond funds may actually see their prices go down.
c) make the price of capital go up for companies - causing them to pull back and also hitting the stock market.
clearly the idea is to do things slow enough that at least c doesn't happen - but you should factor this in.
I would cut the money in 2/3 + 1/3 . Take 100k and put it in the bank for the 65k year you expect have coming up sometime in the (hopefully distant) future. Take 200k and find a place you can afford, you would like to live for many years not over extending yourself.
posted by NoDef at 3:31 PM on August 8, 2015 [2 favorites]
Certainly wait with putting into the stock market in any form.
Look at the graphs and they all are stalling or on a downward slope. From here you can only grow very slow or loose very fast big time. Hold on to your cash and wait for a Vanguard ETF to go on "Sale".. It might be a few months or years. Nothing beats by waiting and taking advantage of the next down turn where cash is king....
The same for real estate for most CA area's be patient be careful.
posted by Mac-Expert at 3:35 PM on August 8, 2015
Look at the graphs and they all are stalling or on a downward slope. From here you can only grow very slow or loose very fast big time. Hold on to your cash and wait for a Vanguard ETF to go on "Sale".. It might be a few months or years. Nothing beats by waiting and taking advantage of the next down turn where cash is king....
The same for real estate for most CA area's be patient be careful.
posted by Mac-Expert at 3:35 PM on August 8, 2015
I'm self employed and in CA as well, no kids etc. I'm in no position to buy a house or give you financial advice, but another business owner I know had an idea I thought was interesting. Instead of buying in CA, buy in a more sane housing market somewhere else in the US in a town you could see yourself retiring. Rent it out and hire a property management company.
My friend was doing this in a mid sized, growing east coast city near her family with a steady supply of college students as tenants. She bought a duplex for like $175k which as you know is pretty lol by CA standards. She realistically plans to not really ever turn a 'profit' but more as a personal safety net that will most likely appreciate in a less crazy market. She did this after a windfall year as well.
Personally I'd probably dump most of it in an index fund, plus a large liquid backup fund for a slow year or future sabbatical.
posted by bradbane at 3:44 PM on August 8, 2015 [1 favorite]
My friend was doing this in a mid sized, growing east coast city near her family with a steady supply of college students as tenants. She bought a duplex for like $175k which as you know is pretty lol by CA standards. She realistically plans to not really ever turn a 'profit' but more as a personal safety net that will most likely appreciate in a less crazy market. She did this after a windfall year as well.
Personally I'd probably dump most of it in an index fund, plus a large liquid backup fund for a slow year or future sabbatical.
posted by bradbane at 3:44 PM on August 8, 2015 [1 favorite]
You don't state how much you stay in either city currently, but if its even roughly 50% of the time, I would purchase a place, and set it up for airbnb action in the city you can afford. The only labor intensive part would just be setting up everything to be as automated as possible (ie, cleaning service, maybe even booking service, etc).
When you're not there, instead of incurring a monthly rental charge, you'll actively be making money on top of any increase in property value (or even decrease, you'll still have cash coming in…). If you only live in a place part time, there are ways to monetize the times you're not there.
posted by furnace.heart at 3:52 PM on August 8, 2015 [1 favorite]
When you're not there, instead of incurring a monthly rental charge, you'll actively be making money on top of any increase in property value (or even decrease, you'll still have cash coming in…). If you only live in a place part time, there are ways to monetize the times you're not there.
posted by furnace.heart at 3:52 PM on August 8, 2015 [1 favorite]
In addition to some of the good advice above, this would be a great question to ask over at the bogleheads forum.
There are many knowledgeable and helpful people there, who are willing to share their time and expertise with new posters who are looking for help. Just note that they can't or won't give advice in a vacuum. They need to know your full financial picture, including age, investments, savings, goals.
In my experience, it's worth the effort.
(On preview, what moonorb said.)
posted by Short Attention Sp at 3:58 PM on August 8, 2015 [2 favorites]
There are many knowledgeable and helpful people there, who are willing to share their time and expertise with new posters who are looking for help. Just note that they can't or won't give advice in a vacuum. They need to know your full financial picture, including age, investments, savings, goals.
In my experience, it's worth the effort.
(On preview, what moonorb said.)
posted by Short Attention Sp at 3:58 PM on August 8, 2015 [2 favorites]
Best answer: Warren Buffett had some good advice for the psychology of stock market investing: don't invest money into stocks if you are not prepared to see it go down by 50%.
I would put some of the money into a CD or some kind of municipal bond. That would be the rainy day fund. The rest can go into an index fund. But remember Buffett's comment so that you are mentally prepared for volatility.
As for the house, if you don't need it to live in, don't buy it. Real estate "investing" in recent years has been lucrative in some places but over the long run, real estate appreciates at the cost of living. That means that the current years of plenty will be followed by some years of terrible decline.
A good book to read on investing in general: The Four Pillars of Investing.
posted by storybored at 5:41 PM on August 8, 2015
I would put some of the money into a CD or some kind of municipal bond. That would be the rainy day fund. The rest can go into an index fund. But remember Buffett's comment so that you are mentally prepared for volatility.
As for the house, if you don't need it to live in, don't buy it. Real estate "investing" in recent years has been lucrative in some places but over the long run, real estate appreciates at the cost of living. That means that the current years of plenty will be followed by some years of terrible decline.
A good book to read on investing in general: The Four Pillars of Investing.
posted by storybored at 5:41 PM on August 8, 2015
It doesn't sound like you are settled in one location. I'm not sure why you'd buy a house. Make that decision when you're ready to make that decision, not because you got an infusion of cash. I'm no financial expert, but I would invest it and try to grow a little nest egg that can be used to buy a house when you're ready, or for retirement. What kind of investing? No clue -- it probably comes down to how much risk you're willing to take for the relative rewards.
posted by AppleTurnover at 5:45 PM on August 8, 2015
posted by AppleTurnover at 5:45 PM on August 8, 2015
1. I save a bit more and buy a place in cash for around $400K in the cheaper city, where I expect I’ll be able to keep working for the next seven years, in an up and coming neighborhood that is getting more gentrified every year.
If "buy a place" is an apartment, I think this is a good idea. (Ask tends to assume everyone not in Manhattan is buying a house. Ask is correct that houses come with special pain. And roofs.) Over 7 years, you'll save quite a bit in rent (like $125K?) and have an asset that, you know, given that it's California, is likely to appreciate.
posted by DarlingBri at 6:01 PM on August 8, 2015
If "buy a place" is an apartment, I think this is a good idea. (Ask tends to assume everyone not in Manhattan is buying a house. Ask is correct that houses come with special pain. And roofs.) Over 7 years, you'll save quite a bit in rent (like $125K?) and have an asset that, you know, given that it's California, is likely to appreciate.
posted by DarlingBri at 6:01 PM on August 8, 2015
Start looking for a home. Buy something that is a little less than you can afford. It should be newish so that you don't have to spend a lot of time worrying about repairs. Something simple and easy to maintain would be ideal. If you can't find the perfect home, then go with plan B.
posted by myselfasme at 6:25 PM on August 8, 2015
posted by myselfasme at 6:25 PM on August 8, 2015
You really need to do the math on renting versus buying. Obviously, the costs tend to stay somewhat correlated over the long term, but there is so much variation over time and from place to place that you can't really answer this without running the numbers.
Remember that you may have tax advantages to holding a mortgage.
posted by ssg at 7:30 PM on August 8, 2015
Remember that you may have tax advantages to holding a mortgage.
posted by ssg at 7:30 PM on August 8, 2015
Best answer: You're going to have to think about a bunch of different questions here.
1. What is your time horizon? Vanguard target retirement funds are a great way of investing for retirement, because they gradually shift you out of riskier investments to safer investments over time and you don't have to do any work. (You are certainly not guaranteed to make 8% per year -- I'd say over the next decade, I'd guess that returns will be much lower than that, but who knows?)
Time horizon matters because if you want to use this money for something soon, you can't just wait for "the long run", you want to make sure it doesn't shrink in the short term. So this will lead you to safer investments.
2. What is your tax situation? Since your earnings are unpredictable, you have the ability to take capital gains in years where you earn less, which means that capital gains are even more tax-efficient for you than for most people. This means that equities are better for you than fixed income investments.
3. How long do you plan to keep doing what you're doing? A home is a pretty bad investment in general but the longer you plan to stay there, the better of an investment it will be.
4. Do you want to own a home? Is this something that will give you happiness? If so, maybe you should do it.
posted by goingonit at 8:14 PM on August 8, 2015 [1 favorite]
1. What is your time horizon? Vanguard target retirement funds are a great way of investing for retirement, because they gradually shift you out of riskier investments to safer investments over time and you don't have to do any work. (You are certainly not guaranteed to make 8% per year -- I'd say over the next decade, I'd guess that returns will be much lower than that, but who knows?)
Time horizon matters because if you want to use this money for something soon, you can't just wait for "the long run", you want to make sure it doesn't shrink in the short term. So this will lead you to safer investments.
2. What is your tax situation? Since your earnings are unpredictable, you have the ability to take capital gains in years where you earn less, which means that capital gains are even more tax-efficient for you than for most people. This means that equities are better for you than fixed income investments.
3. How long do you plan to keep doing what you're doing? A home is a pretty bad investment in general but the longer you plan to stay there, the better of an investment it will be.
4. Do you want to own a home? Is this something that will give you happiness? If so, maybe you should do it.
posted by goingonit at 8:14 PM on August 8, 2015 [1 favorite]
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I am so not an expert on money, but the best financial thing I ever did was to buy a home (with rental apartments attached) in an up-and-coming neighborhood. Then again, home prices have soared in the last 20 years, and who knows what the future will bring with real estate prices?
posted by DMelanogaster at 1:52 PM on August 8, 2015 [2 favorites]