Thursday, March 29, 2007

Quandry - Where to Use the Money

I've put myself into a quandry about where to stash extra money in my paycheck. To be honest, it's a nice dilemma, and I'm not complaining. I guess I am more asking for peoples advice or suggestions on what to do.

Background: Last month I received my annual bonus at work. I wanted to sock most or all of it away in my 401(k) account, so I finagled my contribution to 50% that month and it all went in, when combined with regular pay. But because such a large amount when in all at once, I needed to put in a lot less each month, otherwise I would hit the $15,000 limit for contributions this year, probably maxing out in August and thereby losing the matching contributions.

So I adjusted the monthly contributions, and this months paycheck shows that I hit it just right. I will max out the contributions in December, and receive the matching contributions. That worked out perfect.

So now I am bringing home an additional $250 a month in pay. Which kinda sucks in that the 401(k) contribution was reduced by $370, meaning I am paying $120 more in taxes each month, or another $1200 a year! Can't help that though (I think!).

So it comes down to two questions: 1) Do I have $250 or $370 a month extra to put somewhere? and 2) Where should it go?

Question one probably sounds strange to you, in that actual take home is only $250. But by my convoluted way of thinking, I used to be putting $370 aside for later, so I should maintain that level. Of course to do this, it means I would need to squeeze that $120 out of other areas (which is managable, barely). The amount also depends on the answer to question 2.

Two, where should it be go? Spend, save, or pay down debt? Most financial advisers would recommend paying down debt, but the only debt I have is a mortgage and it's already gettting many hundreds extra each month. Based on estimates from numbers I plug into this amortization calculator I use, each additional $100/month would end the mortgage approximately 4 months early.

Save is always a good choice, and I could use it to fund the Roth IRA for next year. Spend? I like the idea, especially since I don't do nearly enough shopping to be a "proper" gay man! If I do spend it, then question 1 is easily answered, it is only $250. After all, the extra $120 would come out of this category to begin with.

Am I missing anything? What would you do?


KipEsquire said...

First off, you totally lost me with the "I'll lose my matching" discussion. Pay as much as you can into your 401(k), as fast as you can -- that way it's working for you from the start. Unless you're going into stocks, in which case you might want to dollar-cost average (but even then you can max it out into a money market and slowly transfer into the stock funds over the course of the year).

As for the extra money: you're putting the cart before the horse. What are your long-term financial objectives? Do you have any? At the very least, "retirement" is an objective.

Don't forget to consider tax rates.

Without more info, I'd say S&P 500 index fund if you're not too risk-averse, muni bond funds if you are. Unless you're in an especially high or low tax bracket, in which case it gets more complicated. :-)

Michael said...

The "matching" part is my employer matching my contribution, 100% of the 1st 6% of pay each month, which is like an immediate return on contribution. Therefore if I maxed out in November, I would not get the employer matching contribution in December.

The long term is retirement, which is a big reason spending is not real high, or at least I couldn't make a good case for it. Second objective is to build the emergency reserves, as I only have 3-4 months of living expenses in easily liquidated assets.

Under those conditions, it would make best sense to put the additional money into the taxable brokerage account and build the balance until next year when I can transfer it to the Roth (already maxed out on it this year).

But there is the allure of paying off the mortgage in 4 years vs. 5, except that I can get a better return on money in stocks (and in some cases bonds such as munis) vs. the mortgage rate.

I'm seriously leaning towards putting the money into the brokerage account where I can invest it to grow, and where it is accessible if I get into a money crunch.

Thanks for the suggestions, although I really wish you had left the part about taxes out of it. :) That always complicates things.