I recently stumbled upon the post on Double Income No Kids blog (via pfblogs.org) about their decision to invest in a mutual fund. As Miel put it so well, "Money, it's an issue whether you have it or not. If you don't have it you want it. If you've got it you want to figure out how best to use it." Fortunately, just like Miel, we are faced with the latter issue. We find ourselves with $5K in extra savings. By "extra" savings, I mean money saved above and beyond funding our 401Ks, paying off our prior investment commitments, and paying off mortgage and other recurring bills. Here is a look at how we narrowed down our options.
The options we started out with were -
- Home improvement project.
- Seed money for real estate property in home country.
- Extra payment towards mortgage principal.
- Stash it in the online savings account as part of the emergency fund.
- Start an investment account.
Option #1: Home improvement project
One of the features of this home that made us fall in love with it and influenced our decision to buy is an expansive bonus room. Even though it’s been over two years now since we have moved into this house, we have still not got around to furnishing that room. Our grand plans are to convert it into a mini-theater. We want to put a good quality projector with a large drop down screen and furnish the seating area with some comfortable leather sofas and recliners. (Possibly sleeper sofas, so we can convert it to a guest room in case we have a lot of guests). I want to add some built-in wall-to-wall cabinets around the screen for hiding the electronic equipment and also to provide us a display case/book shelves, so the room can be a hang-out area / library when we don’t watch movies. And finally, the room is one of the brightest rooms in our house (which is great for the hangout area, but not for the movie theater) and so we would have to get some thick drapes and curtains to convert it into a dark room.
It’s been on our to-do list for a while. However, the prohibitively large cost of such an ambitious project has prevented us from taking action. We don’t want to make do with any compromises -– it is going to be our dream room and we are willing to wait however long it takes to set it up just as we have dreamed it.
So, when we had $5K in "extra" cash, of course the question of whether it was finally time to take on this project came up. Here is how the conversation between me and the better half went –
Me: Do you think we should use the money to furnish the bonus room?
(Silence for 5 minutes. I can see he is tempted to say "yes".)
Better half: No.
(Silence for 5 minutes. He can see that I am a bit disappointed.)
Better half: We are not there yet.
(Silence for 5 more minutes. I agree, but need some time to shake off the disappointment.)
Me: Hmmm… OK. But we need to figure out what to do with that money soon. I don’t want it sitting around in the bank earning next to nothing.
Option #2: Seed money for real estate property in home country.
So, on to option #2. Our chosen investment vehicle in 2006 was real estate (in home country). We have just managed to pay off the last bit on the property (land only) we bought last year. In my goals for 2007 I had listed starting the seed fund for the next property as one of the short term goals for the year. The $5K we have is actually part of that fund. But, in the interest of diversification, we have decided that putting all the money in one type of investment vehicle is probably not a very good idea. It was a tough decision, since the real estate in the home country is climbing up in leaps and bounds. But it also means that the cost is already quite high and so is the risk that we might already be towards the peak of a wave. Also, we want to have a few assets here in the US which we can liquidate in case of emergencies. So, for now we have decided to put off the plans for buying more real estate in the home country until after we have a few assets here.
Option #3: Extra payment towards mortgage principal.
Again, from our list of goals, an intermediate goal for us is to get rid of ALL debt we have (including the mortgage) as soon as possible so we can transition to lower stress (and likely lower paying) jobs some time in the near future. We have been making aggressive payments towards our mortgage through bi-weekly payments with additional payments towards principal in each payment. We could possibly throw in this $5K into the mortgage account and reduce the time to get out of mortgage further. A quick look at the bankrate.com amortization calculator however shows that due to our already aggressive payment schedule, applying $5K to the principal will only speed up the process by another 4 months. This is not really worth it for us now, since 4 months is not that big a deal and sending the money for mortgage payments will tie up the cash and we cannot pull it out in case we have an emergency (at this point we are not interested in a HELOC).
Option #4: Stash it in the online savings account as part of emergency account.
So, should we just park it in an online account as part of our emergency fund? Currently, I have about $46,000 in my online HSBC account. Out of that $39,000 is money that belongs to credit card arbitrage. We pay the credit cards a total of $1,000 each month so that it covers a little more than the necessary minimum payments. That means each month about $1,000 out of the $39,000 becomes ours. Of the remaining $7,000 about half belongs to a retirement fund for my parents that I am putting away. The other half is our actual emergency fund (or car fund, if my 14 year old car were to bail out on me). Recently, we freed up some money (that we were putting aside for our previous investment property) and have started an additional direct deposit of $600 per month towards this account. I know that’s still not quite a whole lot, but with $39,000 available at a moments notice, with a 0% APR until early 2008, I don’t particularly see the need for putting aside more money at just 5% interest. So for now, we decided to rule out this option as well.
Option #5: Start an investment account.
That brings us to our final option – investing. Both of us are not very confident about our ability to pick the right investment option at this point, and we have been dragging our feet on this a bit. However something that a colleague remarked during lunch last week has convinced me that it was time to jump. He said "For the years and years that you spent in school, you paid the tuition without a question. Think of this money as the tuition you pay the market to teach you some of it’s secrets :)" Sage advice, huh? So, finally we decided to take the jump into the world of investment.
Now that we have decided which option to take, we seem to have a bigger problem on our hands -- narrowing down our investment options from the seemingly gazillion choices! By golly, there are enough options out there to make a beginner think this must be a conspiracy to intentionally keep the uninitiated out! We have been reading quite a bit on this topic and we have finally managed to narrow it down. Please stay tuned for the details about the thought process and the final investment choice in the next post.