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I have been saving for a home but TBC on if I will buy one so wanted to ask for advice on what other ideas there may be.
I have $20k in cash savings and $50k in stocks. I have 401k currently at $55k I earn $195k a year. I have no debts.

I haven't yet opened a Roth account but would be good to get thoughts on that.

Dave
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  • Comments are not for extended discussion; this conversation has been moved to chat. – JohnFx Jul 08 '20 at 12:29
  • For non-native English speakers and others who are not up on the latest text-speak, can someone [edit] the question to replace "TBC on" with whatever makes sense in the context? – shoover Jan 01 '21 at 00:33

3 Answers3

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First things first:

  1. Pay of your debt: check
  2. Makes sure you have 3-6 months living expenses as an high liquidity emergency cushion: don't know, depends what your living expenses are. Given your 195k income, $70k may just be your emergency cushion.
  3. Fund anything tax protected to the max: max out your 401k, if possible get a high deductible health insurance account and max out your HSA contribution. If you have kids, consider a 529 plan

Once these are taken care off, we can look at more options. That depends a lot on what your financial goals and the timeline for these goals are. General advice is

  1. Diversify, a little of everything is better than a lot of one thing
  2. Keep your fees low. ETFs are a typically a good choice.
  3. Don't try to "time" the market, pick a diversified strategy and (mostly) stick with it
  4. Buying a house should first and foremost be a lifestyle decision not a financially motivated one. But in general real estate is a good long term investment and more inflation proof than many others
  5. We live in weird times and the future is unpredictable. At the moment it would be safer to stay with short term investments with lower volatility (even if the returns are abysmal)
Hilmar
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  • I fully agree. I may only add that in real estate one should look for a decent, managed property that brings solid rent. Not the top one, as these are often far more expensive and may bring losses in bad times, nor the cheap one where nobody wants to live / open business. – Pawel Debski Nov 30 '20 at 20:44
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    "Fund anything tax protected to the max". I totally disagree; there's more to life than saving for retirement. – RonJohn Dec 31 '20 at 02:15
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This is always a controversial question on this site.

(Notice the balanced up and downvotes on this answer.)

Sophisticated investors will explain that (basically) you can make more money on other investments - and that's correct ........

BUT.

100.000% of people who tell you that ... already own a house (or many).

I believe that you should >>> first <<< buy a house.

(By "buy", I mean including merely having a mortgage on a house.)

The specific actual reasons are straightforward:

  1. In almost all jurisdictions there are massive, totally overwhelming, tax advantages to an investment in a house you live in.

  2. There are tremendous structural, societal, business and legal advantages to simply owning a house. (Vastly improved access to credit, etc etc.)

  3. In the current socio-historic milieu, the one and only way "ordinary civilians" can get massive investment leverage in any category, is ownership of the house they live in.

  4. It's absolutely true that owning a house† has a few maintenance expenses. But the fact is in the overwhelming majority of cases it's just cheaper than renting. (I just mean on a month to month basis - obviously if the market goes up you're ahead by zillions over long periods of time - due to point 3.)

You will, in fact, be keeping your house (or swapping to another: same) until you die. That's a fact. When folks explain that your house is "only a good investment long term" it's really missing the central point that it's the very definition of long term. Nothing is longer.

Because of the four points above, each of which on its own is a knockout, my belief on this common question is indeed first buy a house. Once that is established then consider other investment ideas.

† Eg: one of my AC in a house just blew up - 5 grand. Marvelous. :/

Fattie
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    #1 has lost a lot of weight in the US since tax cuts and jobs act, far fewer people itemize deductions now. There's still the capital gains exemption which is significant, but it's kind of moot in most cases unless you can downsize significantly. – Hart CO Jul 08 '20 at 04:30
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    I don't want to write a full answer, so tacking on to this. I'm a big fan of property ownership, so agree with the spirit of this answer. However, if you aren't set on living in the region for at least 3-5 years then it might not be worth buying. Also, check out rent vs buy calculators for your area, in some cities renting is considerably cheaper than owning (but likely won't remain that way in perpetuity). – Hart CO Jul 08 '20 at 04:38
  • @HartCO "buy a house!" also ignores that OP might not want all the responsibilities involved with owning a house. – RonJohn Nov 30 '20 at 20:28
  • @RonJohn , you know, my thought on that aspect is: sure, some folks don't want the responsibility of saving, or for that matter of working! I usually suggest to young people that if they have that feeling ("oh, I can't be bothered with the 3 pieces of paperwork for a house") all the more reason they should do it. of course, this delves in to life choices - sure, some folks "can't be bothered" having kids, etc. – Fattie Dec 01 '20 at 12:25
  • "I can't be bothered with the 3 pieces of paperwork for a house". Is that really what you really think is the sole responsibility involved in owning a house? – RonJohn Dec 01 '20 at 14:11
  • Well when I buy or sell a house I have an agent / lawyer (/ whatever's relevant in the jurisdiction) do everything; and then there's (as mentioned!) the inevitable repairs. – Fattie Dec 01 '20 at 14:19
  • I am not sure which jurisdictions you are talking about. In Germany, living in your own house is one of the worst things you can do tax wise. You pay all the costs but you can hardly deduct anything. It would be way better to swap houses with your neighbour and rent each other out because for a rental house you can deduct a lot of costs. – Manziel Dec 01 '20 at 14:37
  • And yet .. https://tradingeconomics.com/germany/housing-index clicking on 10 or 25 yrs button – Fattie Dec 01 '20 at 14:40
  • The past is not guaranteed to continue into the future. I have spent the last months trying to buy something. There is two categories on the market: "expensive" and "junk and expensive". Most of the houses are from the 70s and they are unlikely to continue increasing their value like that. If politics is going to crush down on CO2 emissions, owning those houses is going to be quite expensive very soon. We are now going to build one, which might not be the cheapest option but at least it is a new one with modern technology and it is ours ;) – Manziel Dec 01 '20 at 15:04
  • @Manziel - nothing in the universe is guaranteed. If you look at all the world's stock pickers (including .. help me off the floor from laughing) "funds", the overwhelming simply summary is they all lose money, and are comic failures. If you look at real estate markets worldwide over four hundred years, the overwhelming simple summary is "many, if not most, if not 'almost all', show spectacular growth". – Fattie Dec 31 '20 at 02:14
  • regarding "building a house". houses are utter trash and worth nothing. you might as well have a car or boat ("lol"). the only value is land. in general, they're not making any more. – Fattie Dec 31 '20 at 02:15
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First, if you are filing single and are making $195k in gross income that you can't contribute to a Roth IRA unless you use back door Roth IRA. If your filing jointly (married), anything above 196k together would make you not able to contribute to Roth IRA.

20k in cash savings is a lot so unless you are looking to buy a house then I would put it in stocks. Depending on how passive you want your investment, your location... You can put the 20k towards a downpayment for a house.

Assuming you want the house to be passive, I would do some research on a house that is undervalued in an area you believe will go up (look for minor cosmetic issue, no ain't issues like foundation or something like that). A lot of people are looking for turn key houses but if you just put in some money into an undervalued house it can boost it up. I would do some research before going to this avenue.

Regarding home loans for investment, it is 20% of property value and for living there downpayment can be as low as 3.5% (0% downpayment with VA loan). I would not buy the house in cash, the rent can cover the mortgage.

If you really want the property to be passive you can hire a property manager but they take 6-10% of the rent so I wouldn't recommend it unless you really don't want to deal with it. Also before putting a tenant into a property make sure you screen the tenants well so you don't end up with a bad tenant.

Owning properties have a lot of pros, but regarding your 55k in your 401k, I would like to know your initial investment. Because if you are currently losing money in the 401k, so down from original investment. You might want to consider moving the investments in a back-door Roth IRA if you know the investments will go back up. If you are in profit you probably shouldn't do this. You can talk with your CPA about this and they can give you some more insight on the best way to do this.

I would also recommend a good CPA because if you are an independent making that much, you are probably paying a lot of tax and a CPA can help you lower that amount of tax with putting investments with the 20k in savings.

Regarding the 50k in stocks if you are at a profit and you want to invest in a property at a higher value so as to make it a 70k down payment that is fine. But if you are down with stocks I would wait until they go up.

This is just some insight, I would recommend taking with a good CPA. And also if you need more guidance you can hire a financial advisor. Or look on YouTube and google searches for research on these topics.

Monk
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    I don't agree that 20k in cash savings is too much... it depends a LOT on the cost of living where he is; what sort of bills and other spending he has; etc... but 20k could easily be about 6 months of expenses, which is a reasonable/safe amount to keep liquid for an emergency fund. – GendoIkari Jul 07 '20 at 19:14
  • I know I mentioned how the location changes things. But I think 10,000 at the most to be in a savings account and not in investments of some sort in the area I live in. I'm sure if you live in a place like California or New York where the cost of livings is much higher then 20,000 in savings is a reasonable amount. – Monk Jul 07 '20 at 20:53
  • Unfortunately, if you're making 200k a year, 20k in savings is almost literally nothing. – Fattie Jul 07 '20 at 22:23
  • But your forgetting about his 401k contributions, and investments. – Monk Jul 07 '20 at 22:48
  • CPAs are fantastic for accounting advice. But unfortunately I think a CPA, or anyone's, advice on what will go up, is worthless :/ – Fattie Jul 08 '20 at 00:25
  • I meant more of what type of investments will save you most on tax. And when making investments on how to make smart tax decisions with the investments. Obviously most of them won't have insight on stocks or the real estate market. – Monk Jul 08 '20 at 01:40