There will come a day when there is extra cash left over after you’ve maxed out the 401k, Roth IRA, and saved up an emergency fund. What should you do with the left over cash? Spend it on a nice new shiny iGadget? Go out and celebrate at The French Laundry? click below…
Wrong Answer! I love The French Laundry, but if we go celebrate every month there is no way I can retire early. (Plus we’d have to fly down there.)
Maxing out on 401k and Roth IRA is not enough for me to retire by 40. It took us a long time to get to this point, but every month we have a little bit left over and we send it to our online Brokerage Account.
Many of my friends are leery of investing in the stock market because of the last big correction. IMO, this is a mistake because stock investment historically has been one of the best way to grow your net worth. We kept up our 401k contribution and also invest in the joint account through the downturn. After a big 2010, we have recovered and surpassed our previous high. The most important thing is to figure out an asset allocation that you will be comfortable with and stick with it through thick and thin.
Asset Allocation is a very personal thing. You need to figure out your risk tolerance and then sit down and make an asset allocation sheet. After two bear markets (internet and housing bubbles), I finally figured out an allocation that I am comfortable with. I rebalance once or twice a year to keep the portfolio in line with the allocation. You can follow the link and read about how I rebalance the portfolio in 2010. I think you need to go through the up and down of the stock market a few times before you can really figure out your risk tolerance. It’s important to take the whole portfolio into account when you check the asset allocation and that’s where the non retirement account shines.
The problem with 401k is the limited choice of investments. In my plan, there are only a few mutual funds that I like. The Roth IRA and the brokerage account make a nice counter balance to the staid 401k account. At the broker, I can invest in anything I want. This is the place where you can invest in Apple, Netflix, and Sina. I also invest in emerging market ETF (VWO) with the discount broker since there are no good choices in my 401k plan. I plan to move some of my account to dividend stocks once I execute my exit strategy. This way I will have a bit of extra income and do not have to touch the retirement accounts until later.
- If you have extra money at the end of the month invest it.
- Use Roth IRA and joint account at a brokerage to balance your 401k account.
- Figure out your risk tolerance and make an asset allocation plan. This is one of the most important thing you need to do when investing in stock and bond.
What do you do with extra cash at the end of the month? Do you go out and reward yourself or do you invest it? I’m not saying you shouldn’t travel or quit going out. Those things should be in the budget and I’m just talking about extra money.
disclosure: I am invested in Netflix and VWO. This post is not an endorsement.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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