Suggestions for year-end bonus

[Basil05]

Hi all,

I'm a reader of the WCI blog but this is my first time to the forum!

Are there recommendations for general investment strategies and more specifically for what to do with a ~$20k year end bonus? My spouse and I are both physicians -- one is a young attending, the other still in training -- but we are happily "living like residents". Within the first 3 years of attending life we have managed to 1) save a ~$150k emergency fund which we keep in an Ally No Penalty CD, 2) pay off undergraduate and medical school loans, 3) fund backdoor Roth IRAs, 4) max out both of our 403b plans, 5) start a 529 plan which we fund to the maximum tax deductible amount ($10k/yr), and 5) recently open a Vanguard taxable investment account where we have started investing ~$3-5k per month in S&P500 index funds.

We do have a mortgage (~$100k remaining) on a rental property, but we will mostly likely sell that property in the next year or two. We haven't started specifically saving for a down payment on a "real" house yet (other than our ?large? emergency fund), as we might use earnings from the rental property sale for that (estimated equity ~$100k).

Does anyone have general investment suggestions for us, and in particular what to do with a one time $20k bonus? Should we keep investing in our taxable account despite concerns that the market may be overpriced? Do people ever save additional cash to deploy in case of a dip in the market? Do we start dedicated savings for a future down payment? Are there other investment vehicles that we aren't using?

Thank you!

[Donnie]

I would invest in your taxable account.  You can either collar cost average (DCA) over several months or lump sum it.  DCA is worse mathematically.  Despite your overall concerns about the market valuation, keep in mind that at every market price there is both a buyer and a seller, so "smart" money is also putting capital into the markets at these valuations.  If you are lose averse (i.e. if investing the $20k now and having it go down 50% in the next year would make you hate yourself), then DCA may be the way to go to partially alleviate that concern.

$150k is already sufficient cash that you can dip into if there is a market downturn, assuming you don't otherwise need the cash at the same moment there is a market downturn.

[q-school]

If you are buying a house soon it sounds like you should just save the money. Congrats on paying off Loans and getting a good foundation started.

It sounds like you are the kind of couple that would prefer no mortgage. If that's the case you should consider just putting the money on the bank.

If you don't feel the need to hurry and pay mortgage down, depending on size of house you may have enough for down payment in emergency fund and as long as you can cash flow furniture and expenses you may consider investing money.

[jhwkr542]

The best thing you can do is make an IPS.  Figure out what your goals and objectives are for the short, intermediate, and long term, so you'll have your answer to questions like this.  For example, if I were in your shoes, I'd see I had $20k to do whatever I want, look at my own IPS that I came up with, and see that I've already funded my backdoor roth for this year but am still needing to contribute extra to our kids' 529s to meet our goals.

Having said that, from the scenario you've described, I'm guessing you'll want access to this money possibly on a short-term basis for purchasing a house.  You'll need to keep it in something liquid and conservative, so probably just dump it in with your EF/Ally CD.  And besides, you already have $150k saved up, so if you're looking for something else to do with the $20k, wouldn't you also be looking for something else to do with that large EF?  Keep it liquid until you have a plan.  Then you can earmark for whatever you've set as a goal.  If it's for retirement, then taxable account and you can invest it in riskier assets (like S&P fund).

[Hatton]

I vote for the taxable account. Vtsax.

[jfoxcpacfp]

Nice job! Taxable investment account might be a good option to aid in meeting a goal of, say, early retirement. I know you didn't ask, but $150k in an emergency fund seems to be way overkill for a dual-physician couple, even when one is in residency. Other ideas are to make sure you have adequate disability coverage and term life coverage, add more to the 529, and, as you've mentioned, save for your down payment. If rates continue to remain low, I'd recommend only enough down payment to keep you from paying mortgage insurance, however. A financial plan would be beneficial.

[Basil05]

Thanks for the suggestions so far! I think jhwkr makes a good point that we need to define our goals. For the past several years we have been focused on building a foundation for the long-term (getting out of debt, filling retirement accounts, starting a 529, obtaining proper insurance coverage, etc), but we have been ignoring the short and intermediate-term. No wonder we feel unsure what to do next -- we haven't made/updated our plan!

One challenge has been that we do not know where we will live after completing training. But that shouldn't stop us from doing the best we can to write out our goals. If we want to buy a house more quickly than we are probably admitting to ourselves, then we should probably start focusing on a downpayment. If we agree to keep renting for a while as we get comfortable in our new jobs, then investing in the taxable account probably makes sense.

Thanks again! Talking through our thought process here is clarifying how to approach this decision.

[AnotherSecondOpinion]

May I suggest keeping it in some conservative, liquid assets until you know how taxes are going to go?  I've seen it many times as new attendings start making more money, their withholdings fall behind and they get that terrible surprise during tax season that they owe more money.