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How to deploy surplus of cash?

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  • How to deploy surplus of cash?

    I could use a little help as to how best to deploy some extra cash from a recent inheritance. My current situation is as follows:
    -Medical Resident with two years left in training. Current income ~55k/year. Expected salary once an attending: 350-400k/yr
    -Wife currently makes ~100k/yr but will drop to part time with our first child expected in 4 months (expected salary at that time is ~50k). Upon graduation, she will likely continue to work part time wherever we end up.
    -No debt (student loans recently paid off) and currently rent.
    -Own two relatively new cars (2011, 2016) free and clear with no payments.
    -We've already maxed out our retirement accounts for this year (two 401k, two Roth, HSA) and hope to do so every year going forward.
    -All of our current investments are in tax advantaged accounts (roth, 401k, hsa) with nothing in a taxable account. Total ~200k
    -Savings rate last year was ~50% of net income (43% of gross) so we're pretty good savers so far. 27% the year before.
    -3k in a 529 plan for our child-to-be
    -Currently have ~115k of funds sitting in our Wells Fargo account after the inheritance money.
    -Plan to purchase a new home about 1-2 years after being an attending (3-4 years away from today). This assumes my first job out of residency is a good one I'll stick with.
    -Disability and life insurance already locked up.
    -Already have a nursery set up and plenty of used clothes from my sister-in-law. Still awaiting a baby shower to help fill out some of the other necessities.
    -Annual spending the past two years was about 60k/year. Some of this money went towards loans (which we no longer have) and travel. We're anticipating some new expenses with baby #1 (Health insurance, diapers, etc...) but other expenses will decrease. Overall, probably an uptick of 10k/yr seems appropriate but we also want to be conservative.

    My original thought was to hoard extra cash in anticipation for the baby which would allow us to continue to max out retirement accounts over the next couple years while still in residency (don't think we could max everything out on just our new salaries), but I think 115k is still a lot to have in cash.
    -My original plan: put another 7k towards 529 account (up to the state tax deduction), keep about 70-80k in cash but convert to Ally Bank with better interest rate, and then take the balance (28-38k) and start a taxable account for retirement with more aggressive investments (VTSAX for instance). Then, at the end of residency and my first year out as an attending, continue to max out retirement accounts but all extra cash would be saved for a down payment on a house. I'm confident I could get to 100-200k for a down payment pretty quickly once an attending.
    -My wife's thoughts: she agrees with 7k towards 529 but thinks the balance should be kept in cash (~108k) which will not only provide money through residency, but will also be a nice cushion for a house down payment.

    Anyway, I hate the idea of leaving so much cash around without putting it to good use (1% at Ally isn't terrible but we could do better) as we both have steady jobs, but there are definitely advantages to having a large cash position...such as for a house downpayment. Any suggestions or advice are definitely appreciated.

  • #2
    Other than the loss of your relative, what good problems to have.  No debt, new-ish cars paid off, maxing retirement...

    I'd vote to use the inheritance for down payment on a house (that would be a good down payment and closing costs for around a $500k house) and front-load a 529 (I thought the child actually had to be born to start one...?).  Math aside, that's a pretty à propos use of an inheritance, to have had a departed relative enable your home or child's education, isn't it?

    You could make an argument for keeping 3-6 months' expenses reserve as an emergency fund, but there are several reasons for NOT having a emergency cash on hand as well - such as withdrawal of Roth contributions with neither penalty nor tax and obtaining emergency credit - so ultimately the choice is up to you.

    If you're not buying a house for a little while - 3-4 years from now, as you said - holding it in cash at 1% in an Ally savings account (or similar institution) seems imperfect.  If you're up to the risk, I would *consider* a taxable investment with a good mix of risk, reliability, and tax-efficiency, like VTSAX as you mentioned.  If your income is $450k, then your LTGC tax (holding it over a year) would be 15%.  The index funds have low turnover: VTSAX's tax-adjusted return over 3 years are 9.83% and, if you like the 500 vs total stock, VFIAX is 10.37%.  Of course, that risks the inheritance, and hopefully the market won't be down when you need to draw it - it's just a consideration.

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    • #3
      I'll give some unsolicited (and maybe unwanted advice).  When ready, buy a very modest house or continue to rent indefinitely.  Even for us supersavers, the pull to buy the "attending house" is very strong but often the worst financial mistake we will make in our lifetime.  This decision will dwarf whatever you decide to do with this cash.

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      • #4
        Really the decision is whether to put all the money away for a short term financial goal or take some out for investment.  To answer that you would have to define your short term goal ie have X dollars for the down payment at such and such a time.

         

        In your case, I think you have to answer do you want to take some money out for investment but in return have to work a little longer to accumulate the down payment?  I don't think there is a right or wrong answer from a financial standpoint since only you can know that.

         

        I will say that what my wife and I have done in decisions like this is to compromise, which is really what your original plan sounds like - putting a large chunk away for the house but investing some as well.

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