Got a bonus. What's the best way to save it?
October 2, 2014 3:20 AM   Subscribe

I'm 32. For reasons too boring to get into, I just came into about $30,000, and now I'm wondering what to do with it. I don't mean like, what kind of sports car should I buy, but rather what's the best way to save it for later?

I already have about six months' rent saved up and I'm not in any other debt, so I don't need it for anything immediate. I have some cash invested in an index fund, so I guess I could just add this to the pile. But are there other options with slightly higher risk that might yield a higher reward 30-40 years down the line?

I'm financially literate enough to know that I should be saving for retirement already at my age, but not literate enough to know what my actual options are. Any help would be much appreciated.
posted by Tenzing_Norgay to Work & Money (17 answers total) 13 users marked this as a favorite
First maximize yearly contributions to 401k, Roth IRA or any other retirement savings system you qualify.
posted by zeikka at 4:36 AM on October 2, 2014 [6 favorites]

1- Fully fund an emergency fund. It is great that you have six months of rent saved but you would want to (ideally) have about 3-6 months of *all* your expenses in case of a job loss or other emergency.

2- Are you in the US? For retirement, your best option (unless you have some kind of matched program at your workplace) is most likely a Roth IRA. The maximum contribution this year is $5500. You can do this wherever you have your index fund, or choose a low-cost provider like Vanguard or Fidelity.

3-Keep another $5500 for next year's Roth IRA contribution

4-Add any leftover to your index fund. If you want to put a small amount into something that's slightly higher risk, you could look into small-cap stock index funds or emerging markets index funds... These might do better than the US market as a whole, or they might do a lot worse.
posted by matcha action at 4:43 AM on October 2, 2014 [4 favorites]

I would ladder my investment in something like AAA tax-free muni bonds.

This puts your money to work for you, keeps it liquid at the same time, and provides a tax incentive.

While I love a Roth IRA, there are income constraints such that someone who's clearing $30,000 from a bonus may bump up against.

Of course I invest in S&P Exchange Traded Funds. S&P funds have returned about 10% annually over time, and ETF's have low management fees.

Congratulations! I'm sure a lot of hard work and committment went into earning that bonus!
posted by Ruthless Bunny at 5:19 AM on October 2, 2014 [4 favorites]

Reading between the lines, it sounds like you may currently have little to no retirement savings? If this is the case, I would suggest putting it all toward that, especially since you already have a decent emergency fund.

You can also work around the income constraints on a Roth IRA if you're over the limit.
posted by igowen at 5:46 AM on October 2, 2014 [3 favorites] has all the knowledge you seek. They even have an entire page dedicated to the question "I have $X, what should I do with it?" which is exactly your question. Heck, they even have an easy diagram.

There are just 6 steps in the answer (disregarding their step 0 which is important but not a direct answer), and you are most likely at step 1 or 2 so you may find your answer in just a couple paragraphs. Go read the second page I linked to and tell us if you still have questions. I'm not trying to brush off your question, but the fact is that the advice on those pages is exactly what you'll get here so you might as well get the advice from a well-known source that gives you the complete picture.
posted by Tehhund at 6:17 AM on October 2, 2014 [4 favorites]

Stop renting and use the money as a down payment on a home.
posted by myselfasme at 7:42 AM on October 2, 2014

If I were in your situation, I would pay off any debts, and then if the amount remaining was > 10K, I'd throw that into a Vanguard mutual fund and forget about it for ten years or so.
posted by oceanjesse at 7:55 AM on October 2, 2014 [4 favorites]

Nthing Vanguard funds, specifically dollar cost averaging into a Vanguard index fund. If you decide to ladder bonds, I also suggest taking a look at US Treasury series I bonds. They have a fixed and an adjustable interest rate, and are tax efficient.
posted by jazzbaby at 9:57 AM on October 2, 2014 [1 favorite]

I would just add it to the index fund. It's fine to plan for retirement, but once that money's locked away, you're not going to be able to get to it for several decades without paying a substantial penalty. So if there's a chance you're going to have to draw on that money within the next 20 years or so (for any variety of reasons--job loss, car totaled, wedding ring, down payment, whatever), keep it someplace where it's going to be available. Even with an emergency fund, an extra $30,000 is not that much if you are out of work for an extended period of time and need something to fall back on, and the economy and job markets are only going to get more and more precarious over the course of your working life.

As far as riskier investments, you can skew your investments towards riskier indexes (small cap, tech, etc.) and away from safer ones (large cap stocks, bonds). That's about as risky as I'd get. Vanguard or Fidelity, or whoever runs your fund, should be able to advise you on this. Don't take up daytrading thinking you're going to beat the market with smart picks.
posted by Leatherstocking at 10:13 AM on October 2, 2014

Nthing the index fund thing. It isn't a bad idea to put it into a Roth (as much as you can anyway) assuming it is post tax money, but after you get that x amount in, keep the rest somewhat liquid. And an index fund is the best way possible.

Houses are NOT a great investment for most people most of the time (and yes I own my home). Depending on your situation and location they can be a good way to save money you would be spending on rent and occasionally a great investment (assuming you are knowledgeable about the real estate market and want to be landlord)when the right opportunity comes along. However for most people at most times a stock index fund (Mine is split between S&P 500 and Wilshire2000 small cap funds) is the best investment possible, at least according to Warren Buffet and well...he would know.
posted by bartonlong at 10:44 AM on October 2, 2014 [3 favorites]

Stop renting and use the money as a down payment on a home.

Oh god do not buy a house with that money. If you couldn't afford it before you cannot afford it now. $30K is a pittance when compared to the true cost of a home anywhere in the US.

1) Your return on having an emergency fund + investing wisely will easily outstrip any returns on a home. Taxes and repairs mean a home's true cost is far more than the down payment + mortgage.

2) Your returns from having a fully-funded emergency fund + investing wisely will far outpace any gains from owning a home. Real estate was hot in the past but it's settled down, so there is no guarantee of significant returns when you sell. All that money you dump into the house could instead be earning returns elsewhere. Read up on Opportunity Cost if you want to grow that nest egg.
posted by Tehhund at 11:11 AM on October 2, 2014 [3 favorites]

Your goal for index funds isn't just to buy the one that tracks fortune 500 companies, but other ones that also track different market segments. Small caps funds (the russell 2000 I believe?), bond funds, emerging market funds, etc.
posted by Phredward at 11:21 AM on October 2, 2014

If a home is something you actually want that's a great down payment. But if you just want to invest you need to decide how liquid the investment needs to be. Because real estate isn't.

However if you really are wanting something that will be of value 40 years from now, that's long enough for a home-or property in general-not to be the worst investment you ever make. If you go that route talk to a tax professional.
posted by St. Alia of the Bunnies at 1:08 PM on October 2, 2014

Reading between the lines, it sounds like you may currently have little to no retirement savings? If this is the case, I would suggest putting it all toward that, especially since you already have a decent emergency fund.

If the OP's rent is one-third of his/her overall expenses, then s/he only has 2 months' worth of an emergency fund. I wouldn't call that "a decent emergency fund." I'd put the $30,000 in an emergency fund — unless you can get matching contributions to a 401(k), in which case contribute as much as possible to that.
posted by John Cohen at 4:37 PM on October 2, 2014 [1 favorite]

Response by poster: Thanks guys, this is incredibly useful. I think I'll go with a Roth IRA or 401k. I'm currently a freelancer, so no one's matching my contributions. Do I just talk to the same firm that I have my investment account with? or do I have to get like a separate 401k/IRA adviser? Anyone know a good one or a way to set this off without getting fleeced?

Thanks again, truly.
posted by Tenzing_Norgay at 9:21 PM on October 2, 2014

Any of the big firms (Vanguard, Fidelity, Schwab, etc) will walk you through setting up a retirement account. Just give them a call. Their phone reps are usually very helpful because they want your business. So assuming you already use one of the big firms I'd just use whoever you currently use.

Not an expert, but I believe a 401k is only through an employer. But you'll be eligible for an IRA, which in many ways is better. They'll give you the details.
posted by Tehhund at 6:27 AM on October 3, 2014

You won't be eligible for a 401(k) since it is only offered through an employer. As a self-employed person you have a couple other options, like (IIRC) a SIMPLE IRA or a Solo 401(k).

I would go with a Roth IRA and I would start it at somewhere like Vanguard. If you're worried about expenses, Vanguard's are the lowest in the business (they're client-owned). You most likely don't need an advisor; if this is for retirement you can put it in one of their Target Retirement Funds. Pick a date near your expected retirement date (they have options for every 5 years-- 2045, 2050, 2055, etc.). It never hurts to do a bit of research on stocks, bonds, asset allocation, diversification, etc., as you go along, just so you know *why* you're doing what you're doing.

In addition to Reddit's PF forum which has already been mentioned I would direct you to the bogleheads forum and wiki. The wiki in particular is a great resource for getting started.
posted by matcha action at 7:39 AM on October 3, 2014

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