Personal Finance 

What Is Your Everything Else Fund?

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After you’ve funded your 401k, your Roth, and your emergency fund… where do you put the remainder of your savings? Do you just stick it in a high yield savings account where it can earn a respectable 5%+ interest or do you feel that it’s “wasted” there? Do you open up a brokerage account and slip the extra cash into a mutual fund, either actively or passively managed, so that it can get a shot at earning the market return, which is hopefully better than 5%?

That’s the situation I’m in right now. My fiancée and I currently have our emergency fund fattened up and sitting an FNBO Direct account, both of our Roth’s are fully funded for 2006, our 401k’s contributions are at least the minimum match, and we’re currently using a Vanguard account as our wedding savings fund with the funds invested in one of Vanguard’s target retirement funds. The question is, what do we do next? Just keep putting the rest into the brokerage account until we need it?

{ 14 comments, please add your thoughts now! }

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14 Responses to “What Is Your Everything Else Fund?”

  1. Jeremy says:

    I covered this last week (link on my name goes to the post) on an option for people who have funded their retirement plans and want some additional investment action. If you are in the 25% tax bracket or above, I’d recommend at least some money in municipal bonds, which is what that post talks about.

    You could easily earn 5% or more on any savings or cash option, but that’s taxable. Or you could earn between 3.5-4.5% tax free, or effectively over 7% depending on your tax rate. I do this simply because I hate taxes.

    You can also have just a separate brokerage account as well, nothing wrong with that. Just keep in mind the tax issues. Some funds are very tax unfriendly with capital gain distributions and dividends. In a retirement account this really doesn’t matter, but you would really notice it come year end when you might receive a huge distribution.

    The other good thing about a non-retirement investment account is the ability to use losing investments to your benefit. Losses can offset gains, and losses in excess of the 3,000 per year maximum can be carried over to reduce income or gains in future years indefinitely.

    So a high yielding savings is a good starting point, but if this money is really more or less just another vehicle for long-term growth I would look at investing it, whether it is tax-free income or a collection of stocks and funds there are benefits to either option.

  2. Hazzard says:

    After we’ve funded our 401K, ROTH and paid extra on our home, we save a percentage in a standard savings (high yield) account and then end up spending some of the rest. While we could save more aggressively, we also want to be sure we are enjoying ourselves a litte too.

  3. Rich Slick says:

    You should consider capital preservation as one of your goals after funding 401k, Roth and extra on your home. Invest in gold coins/jewelry, real estate and other tangible assets that aren’t tied to “worthless” paper.

  4. Mike says:

    Perhaps you could put even more money into a Roth IRA. Yes, I know you said you’ve already maxed out your annual contribution limits.

    But if you have some 401K money you can get your hands on, such as an account left with a former employer, you can roll that money in to a Traditional IRA, and then convert it to a Roth IRA. Or if you’re planning to switch jobs soon, max out the 401K contribution, $15500 next year, and perform the two-step conversion process later on.

  5. Mase says:

    RE: Emergency Fund: Instead of Emigrant, HSBC, or ING, I put my emergency fund in Vanguard’s Tax-Exempt Money Market Fund (Federal Tax free as Texas has no income tax). For me, at my tax rate, does slightly better compared to the online savings accounts (but does have a $3000K minimum).

    RE: Other Investments: I’m a big fan of Dividend Reinvestment Plans (DRiPs). I make regular contributions (big believer in dollar-cost averaging) each month to strong, dividend paying stocks with no-fee plans (having converted all my plans that went to high-fee to my ShareBuilder account). As these are stocks (like 3M, Altria, Johnson & Johnson, Paychex) I intend on keeping for a long time horizon (10+ years), the reinvestment of dividends really adds up.

    So, for me, my order of ‘investment’ is: (1) Maxing my 401(k), (2) maxing my Roth IRA, (3) regular contributions to my emergency fund (Vanguard Tax-Exempt Money Market Fund, though do keep some in EmigrantDirect), (4) regular contributions to my DRiPs.

    Has worked out extremely well for me, for the 4+ years I’ve been contributing to DRiP.

  6. ChrisCPA says:

    Once you have kids you can fund a Coverdell or 529…

  7. Jeremy says:

    Actually you don’t even generally need to have kids to start a 529 with most plans. You can typically name anyone the beneficiary of the plan, even yourself or a spouse and then change beneficiaries in the future if needed. So technically you could start a 529 now even without kids and begin more tax-free growth. Some states also give tax credits on contributions each year as well. That could be one more avenue to consider.

  8. F20 says:

    I put my extra $ into paying down the mortgage. Usually one big lump towards the end of the year to make sure everything else is fully funded. Pritority is like this:
    401K 15% contribution rate
    Emergency fund (high yield savings) = to 4 months net take home pay
    Wedding fund
    Emergency fund 2 (municipal bonds) = to 6 months net take home pay
    Investment portfolio

    Obviously, once one is fully funded I can start funding the next. It took a while to get to this point, but now it just kind of hums along with minimal effort.

  9. Swintah says:

    It depends on your goals. I don’t know enough about you to be of any help (and I don’t yet have your “problem” 😉 ), but it seems to me that you ought to be funding your goals by order of priority. If you’ve filled your emergency fund and met your retirement goals for the year, just move down the list to the next highest goal. What you choose to do with the money will be dictated by the requirements of the goal.

    Of course, the hard part is developing a goal list. Good luck.

  10. Savvy Steward says:

    How about doing a CD Ladder. For example, with $5,000:
    1 year CD – $1,000
    2 year CD – $1,000
    3 year CD – $1,000
    4 year CD – $1,000
    5 year CD – $1,000

    Rinse, repeat. You can look for the best rates at bank deals blog.

  11. samerwriter says:

    First we max out tax-advantaged accounts (401ks). Then we pad our emergency account. That of course is in Vanguard’s Prime Money Market account (think of it as a high yield savings account, but without the ridiculous online bank gimmicks). It’s at a comfortable level, but I like to increase it a bit each month anyway. Finally we put about 1/3 of our extra money into our mortgage and the rest into Vanguard’s Target Retirement 2035 fund. Since it’s composed of index funds, it’s relatively tax efficient. And the allocation changes automatically as we age.

    I consider this a savings plan for dummies.

  12. Weekly Roundup – 12/22/06

    Here’s a quick look at some of the articles that caught my eye this past week…

    JLP talks about outrageous financial fees.
    Jim wants to know where you stash your cash once you have an emergency fund in place and have maxed out your retirem…

  13. I would max out your 401k. Of course you are saving for a wedding so perhaps that will take priority now. For me personally we max out retirement options (401k and IRA), then we moved to maxing out ESPP 15% (~$15k), our EF is already settled, then I set aside sink funds. For me that’s stuff like vacations, fixing the house, car repair, etc.

    I also am setting aside money for newer cars in the next 3-5 years. Also I started a college fund 529 for our kids (not that we’re even trying yet). BUT my goal is $10k by birth, I’ve got $1k and at least 1 more year before we even start trying.

    Depends on goals, I should be saving more probably, but I still like to go out to eat and enjoy vacations. That may all go down the toilet though with kids.

  14. tllstaco says:

    All of our accounts are held at Schwab. Our emergency fund is in a combination of CDs and money market funds. The size of the fund is 6 – 9months of my net income + 1 year of car payments. We purposely live off one income and save the money from the second income.

    As for our investments, my wife and I max-out our 401Ks. The tax benefits are nice. We use any other investment money to buy dividend paying stocks, ETFs, and CEFs. Our main account already had a good base of American Funds and a few Munis before we started buying individual stocks. It’s nice to see the dividends working for us.

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