Investing – Where Your Extra Money Should Go

So, you’ve gotten out of debt (hurray!) and, in doing so, created a budget.  Now what do you do with all of this extra money that is no longer going to things like a car payment (or two!), student loans, credit card repayment and cable TV?  Save, invest, repeat.


  1. Revisit your budget.  Determine how much of each paycheck is discretionary.
  2. Create a savings account with Ally (there are other online-only banks that offer a worthwhile rate, but I have no experience with them).  You probably want to move your checking to Ally as well.
    • Most banks give you next-to-nothing for keeping your money with them these days (some even charge you enough fees to make up for the measly interest they give you).  Ally’s current rate on Savings accounts is 1%.
  3. Update your Direct Deposit to drop all of your “Savings” money into your Ally Savings.


  1. If your employer offers a 401(k) or 403(b), you’ll want to ratchet this up as much as possible.  Your minimum should be whatever percentage of your gross income will get the full company match (assuming one is offered), your maximum (and goal) should be the IRS maximum annual contribution ($18K in 2016 ($24K if you’re 50+)).
    • This will reduce the “extra” that gets dumped into your Ally Savings in each paycheck; that’s okay – your 401(k)/403(b) should be a much better way to invest than just about anything else.
    • Same will apply x 2 if your spouse has a 401(k)/403(b) with their employer.
    • If your employer offers a Roth option for your 401(k)/403(b), you’ll want to look at your tax bracket / marginal tax rate and decide if you’re better off paying taxes now or after retirement.  If you’re in the 28% tax bracket or above (over $91,150 single, $151,900 married), more than likely you’ll want to contribute pre-tax and not want to go with the Roth option.  If you’re in the 25% bracket, you’ll need to run some numbers and figure out what’s right for you.
  2. Evaluate your Savings account on a quarterly basis.  Your next investment avenue should be a Roth IRA (and one for your spouse, if you have one).
    • If you are single and have a Modified Adjusted Gross Income (MAGI) less than $117K (2016), invest up to $5500/year ($6500/year if you’re 50+) directly into a Roth IRA (
    • If you are married filing jointly and have a combined MAGI less than $184K, you can each invest up to $5500/year ($6500/year if you’re 50+).
    • If you are single with a MAGI over $117K or married filing jointly with a MAGI over $184K, the Roth IRA is still your next investing port-of-call… there is just a more complicated process: The Backdoor Roth IRA.  This is one of those well-known (and publicized) IRS loopholes that allow high-income folks to get around the phase-out.  Here’s the process:
      1. Make sure you do not have any existing SEP-IRA, SIMPLE IRA, traditional IRA, or rollover IRA funds anywhere!  The tax-man will hit you hard if you skip this step.
      2. Save the full $5500 ($6500 if 50+) for singles, $11K ($13K if 50+) or as much as you’ll be able to in the year.  It is much easier go through this process once per year.
      3. Open a Traditional IRA (non-deductible – again, and one for your spouse.  Deposit your funds – stick with the money market account.
      4. As soon as you’re permitted by the site (usually 2 to 10 days in my experience), covert the full amount to a Roth IRA.  This is so common, Vanguard has a button for it.
      5. Come tax time, file a 8606 to stay right with the IRS.  You’ll show that you took a pre-retirement “distribution” from your IRA, then made an IRA contribution with the money.  Your tax software (I use should help you with this.
  3. If you’ve maxed your 401(k) / 403(b) and Roth IRA (and your spouses), your next investment stop should probably be a Health Savings Account (HSA), if you’re eligible.
    • The major downside of a HSA is that you have to have a high-deductible health insurance plan to be eligible (note that your employer does not have to offer a HSA, you can open your own if you meet eligibility).
    • A HSA is very similar to a non-Roth 401(k)/403(b) in that the money is taken out of your check pre-tax and it grows tax free.
    • Here’s the big plus to a HSA – you can withdraw the money at any time for healthcare related expenses and you still don’t pay any tax on it.
    • Contribution limits for 2016 are $3350 for singles, $6760 for married, plus an extra $1000 to each of these numbers of you’re over 55.
    • If you’re thinking “Yeah, but unlike a 401(k), I’ll get hit with a penalty if I want to use this for something other than healthcare!” — that’s true, there is a 20% penalty PLUS income tax (so if you’re at a 28% marginal tax bracket, you’ll have to give up almost half of what you withdraw) to be paid if you use your HSA money for non-healthcare expenses…
      • EXCEPT – After 65, this 20% penalty just goes away.  So, if you use your HSA funds to buy a boat at 65, you just pay standard income taxes on the withdraw.
  4. STILL have more money???!!!  You are blessed with both a high income and the ability to control your spending.  While the first three steps are, almost assuredly, your best investment options up until now, things open up quite a bit at this point.  There aren’t any more tax-protected / tax-deferred options left (if you know of something I’ve missed, please share!).  So, since you are now paying taxes on your gains, you have a lot of flexibility in how you invest.  Here are some suggestions (not at all a definitive list!) on where to send them money left in your Savings account each quarter:
    1. Brokerage Account with Vanguard.
      • This is probably the “easiest” direction to go as you are probably already familiar with Vanguard Funds.  They offer some good choices to limit your tax-drag.
    2. Reality Investing.  Reality is a good way to diversify your portfolio.  There is a number of ways you can do this depending on your interest level, what percentage of your portfolio you want to allocate and how much money that percentage gives you to throw around.
      • Real-Estate Investment Trusts (REIT) Funds.  Vanguard (yes, them again!) has their VGSLX fund that is an index of REIT funds.  Its got a 0.12% expense ratio and a minimum $10K investiment (the VGSIX is the non-Admiral flavor of the same fund, which drops the minimum to $3K but ups the expense ratio to 0.26% (ouch)).
      • Become a landlord directly – buy a house / apartment / condo / bungalow / shack-on-the-beach and rent it out.  You can rent it out directly, sign-up with a management firm (for a price) or AirBNB it.  Any way you go, there is likely to be some headaches to being a landlord, but a lot of folks see excellent profits as more people are renting these days.
      • Flip a house.  A lot of work and a lot of headaches for my taste.
      • Crowdfunded Real Estate.  This is sites such as RealityShares and RealtyMogul.  The concept is REITs, house flipping and being a landlord meet somewhere near the middle.  Essentially, the site funds individual projects with small-ish ($5k to $25k is typical) investments from lots of individual investors.  An example might be building an apartment complex, renting the apartments for a number of years then selling the ownership stake.  Advantages of Crowdfunded Real Estate over other options:
        • None of the landlord headaches.
        • None of the house flipping headaches.
        • High expected returns.  9%+ i s typical.
        • Invest in individual projects outside of your home area.
    3. Peer-to-Peer Lending.  This is sites like LendingClub and Prosper – Crowdfunded loans.  Instead of going to a bank (’cause who likes banks after 2008?), people go to a P2PL site to get their loan.  You can invest (lend) as little as $25 on hundreds of different loans (which, honestly sounds like a like of time invested to me).  This certainly seems like a good way to diversify your portfolio and investors have reported double-digit annual returns… but it is something I haven’t personally had the available funds (or time) to foray into yet, so I can’t recommend it myself.
    4. Pay down / pay off your mortgage.  I’m a big fan of this option, as it is about your only truly guaranteed investment.  There are a lot of folks out there that will tell you that you’re better off investing your money elsewhere because you can make more than what you are losing in interest… but you can also lose money on any investment.  Also, once your mortgage is paid off, you’re cash flow improves and your insurance needs drop.  There are is a lot of upside to paying off your mortgage early (for me, better sleep!)
    5. 529s – If you have kids, 529s are a savings fund for their college costs.  Depending on your priorities, income and whether or not you can get a State tax-deduction, this may move up your priority list.  If you can’t get a tax deduction from your State (or you’re in Nevada), I’d recommend you open your 529s with Vanguard as well.


As your position improves (a raise at work, perhaps you finally pay off that mortgage) or windfalls come in (maybe you get a bonus at work or your great aunt Gertrude passes (God rest her soul) and leaves you $10,000), continue to invest in your future.  More money coming in should increase your Financial Security — it should not convince you to stop being Middle Class!

Your Portfolio / Asset Allocation / What Funds should you invest in??

Throughout the above, whether your money is going into a 401(k), a Roth IRA, a HSA or a brokerage account, you are investing your money in “Funds.”  But which funds should you invest your money in?  This is a very personal choice based off a number of factors specific to your situation… and will be the subject of a follow-up post. =D

Do you have a better investment plan?  Have suggestion that should be added to the list in Step 4?  Please comment below.

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