How to invest 40-50k. 26. Self employed.

How to invest 40-50k. 26. Self employed.
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#1

Hi all. 26-27 mid this year. Just graduated college. Current income is/has been self employed (average 35k/yr)

Currently Have around 67k cash/easily liquitable assets

allocation is as follows:
btc 700 (if I sell and take that l)
stocks random 700
google pay 600 (consider bank)
bank 14k between checkings/savings
assets around 10k
41k cash in the safe

other:
23,000 in vanguard Roth IRA target date 2060.

Debt:

13,200 in student loans. 3.8% average rate. Do not start collecting interest until mid this year. Was going to churn credit cards to kick back around 3k off them.

Mortgage: 115k/equity estimated 80k. Variable rate which I’m attempting to refinance this year.

I’m pretty frugal. Drive a pos car. Cook fairly cheap, healthy meals. The issue is I’ve obviously been loosing money stashing cash away. I was hoping to secure a job with benefits/a 401k match this year but that may take a bit (my degree is in MIS and everyone wants devs with comp sci. degrees). I need to keep 10k liquid for business inventory pretty much all the time and a 6 month expense emergency fund of like 8k. Aside from that I want to start making this money work for me if possible. I was checking out vanguard money mutual funds which seem easy liquid-able and high yield savings accounts-but really have no idea if there’s a gold standard or steps I should be looking to. I do know being a llc owner/self employed I could qualify for other sorts of retirement accounts as well. Any advice is appreciated.


#2

Lots of great questions here, @zjmoore2! It’s great that you’re squared away with your emergency fund, and you realize this money shouldn’t be at risk. An FDIC-insured savings account will ensure that the money is there for you when you need it. Online banks offer a better rate on savings right now than brick-and-mortar banks.

Self-employed people have lots of great options for retirement accounts, including SEP IRAs and solo 401(k)s. That’s where I’d focus first, since retirement funds allows allow you to reduce your taxable income. Plus, the better start on retirement savings you get now, the more options you’ll have for the future. The self-employed can put aside up to $56,000 in 2019. A tax pro can take a look at your business, recommend best fit and help you get this set up.

On the mortgage, you’re smart to lock in a fixed rate if you going to be there for awhile. I’m not sure about your plan for student loans, though. My understanding is that many lenders don’t accept credit cards, so you’d have to pay an intermediary a fee which would offset if not eliminate any rewards transaction would generate. Or did you have something else in mind?


#3

Right so i was between a high yeild savings and a money market vanguard fund. From my understandings the vanguard fund is not fdic insured but is pretty safe with a 2.54 or so return. Savings accounts are insured.

Regarding the mortgage-it’s a bit tricky to qualify as it looks at income after write offs such as milage. The issue here is i drive around 30k/yr for work-so despite my 1000$ car not being worth 16k-it is worth that in write offs. Was wondering if there’s write offs the mortgage companies don’t consider pre income.

Student loans you can pay with plastiq. Yes it eats a 2.5% fee but you get 1% cash back and $1000 back on 5k spent. Worse case scenario on 3 cards my fees come out to 225 for 3k return (1.5% of 15k).


#4

Money market funds are certainly safer than they were before the 2008-2009 crash, but they don’t pay enough more than an online savings account to entice me to put my emergency fund there. And outside my emergency fund, I’m looking for a much better return. I’ve got a long enough time horizon (the time between now and when I need my money) that investing in the stock market makes more sense. Since you’ve got 4 decades or so ahead of you before retirement, I’d encourage you to really putting that money to work for you somewhere that it can earn a decent return long term. You mentioned retirement accounts, so I suggested a few options, but you also could just open a taxable brokerage account and invest through that. You probably don’t need the tax deductions right now, but it might be something to consider for the future.

Is paying down student loans is the only way you could spend enough to earn the $1,000 bonus? Because given those low rates and the Plastiq fee, I’d be tempted to leave that debt alone and use the cards for other spending. You said you live frugally, though, and $8,000 is enough to cover 6 months’ expenses, so maybe not. Plus, paying down that debt might help you with your mortgage application (as long as you paid off the cards. Obviously.)

As you said, the mortgage refi will be tricky. Mortgage brokers actually encourage their self-employed clients to limit their write-offs in the two years before applying, for exactly the reason you’ve identified. I don’t have any work-arounds to offer, but it might be worth sitting down with an experienced loan pro who can take a look at your financials and give you personalized advice.


#5

https://forum.mrmoneymustache.com/investor-alley/investment-order/

I’ve been using the above as a investing plan

Alright tentative plan so far:
working with say 65k
14K (roughly 1 year expenses) in emergency funds (cd/savings/etc)
10k in business checking/assets for work
5500 going into Roth this year still
so it leaves me 35k to allocate between 401k/Backdoor Roth/debt pay down.

Right so step 0: check. Have it cash. Need to redistribute in money market/high yield/cds/treasury bonds. It mentioned the most common need for it was unemployment. Being self employed in the market I’m in should mitigate that risk considerably which allows for less cash allocation more cds/bonds.
1: I can match as my own employer and employee but it’s all coming out of my pocket regardless so…skip?
2: my current mortgage is really my only interest debt-it’s variable with the federal prime rate so skip (5.25%<8%)
3: I don’t have a HSA-this is my last year under fathers insurance
4: First real step of work-max my Roth for 2018 ($5500 remaining after my initial $500 payment)
5:I don’t have a 401k and the fees are not less than my vanguard-although they might be just as low. I suppose this could be step 2 as I have the means to max my 14k contribution.
6: Reading into this backdoor Ira
7:my 5.25% is still under the 5.75% (treasury yield +3%) although it is pretty close (start paying down)

So my student loans of 13k start accumulating interest this July at 3.8/9%. My house is around 120k is 5.25%. Both of these numbers are less than the pay down suggestions in the steps. Does this mean I should open the 401k/full match/backdoor ira/529 and if any is left over make extra payments to debt?

I was also thinking if there was a tax deferred sole 401k or such that would allow me to contribute to that and it would work as a write off/not affect my income shown. I may have to see how I’m paying myself this year and use w2s or possibly make a larger down payment on the principal to get it down.


#6

Here’s how we suggest people prioritize:

  1. Create a starter emergency fund ($500 to $1,000).
  2. Contribute enough to a workplace retirement plan (if you have one) to get the full company match (if it has one). No plan or no match? Consider contributing 3-5% of your income to an IRA or Roth IRA.
  3. Pay off toxic debt (credit cards, payday loans and other high-rate debt).
  4. Boost retirement savings to at least 15 percent of income.
  5. Build emergency fund to equal at least three months’ worth of expenses.
  6. Tackle other priorities: saving for college or home down payment, paying off other debt

We think retirement savings needs to be a top priority. Even if you think you’re going to want to work forever, it’s important to start saving for retirement early and continuing no matter what, to give your future self the option to quit.

That said, I’m not sure how contributions to a SEP-IRA or solo 401(k) would affect your refi application, since they reduce your taxable income much like other write-offs. That’s a good question for your loan officer or a mortgage broker.

You don’t have to worry about the backdoor Roth option, since your income allows you to make direct contributions to a Roth. You didn’t mention a kid or the desire to go back to school, so a 529 college savings plan probably isn’t a priority.

As for emergency funds…it’s a rare person, self-employed or otherwise, who is completely immune to changes in the economy or who won’t face financial setbacks at some point, and you can’t insure for everything. (You do have health, disability and liability insurance, though, right?) Many financial planners would say a self-employed person might need a bigger emergency fund than average.

We don’t generally recommend rushing to pay off low-rate debt such as student loans or mortgages until all your other financial priorities are covered.

Hope that helps!