If they manage their money correctly, 1 percenters should not have many money issues. So what do one percenters do with excess income if all retirement accounts are fully funded, emergency account is fully funded, and all available tax deductions are taken? There are several options, each involving their own level of risk.
I have listed the options in their order of risk from least risky to most risky:
- Pay off Debts – We currently have a significant amount of debt, but all of it is a tax-deductible expense (mortgages). We have relatively low rates and with the tax deduction, the actual interest rate is even lower. I see no need to pay off this debt anytime soon and would rather take some risk for a better return. Additionally, with Obamacare, there is a 3.8% tax on rental income (net), so I need the mortgage expense to reduce my tax liability.
- Federally Insured Savings Account or Certificate of Deposit – very safe, but very low returns. We have our emergency fund in a savings account, but with rates so low, the purchasing power of that money diminishes with inflation.
- Money Market Account – these accounts earn a bit higher return, but they are not federally insured so there is a risk, albeit small, that you can lose your investment.
- Mutual Funds/ETFs – more risky than a money market account, these are a basket of stocks tied to an index or sector of the economy. Most of my investment portfolio is in mutual funds and ETFs and have returned decent gains over the years.
- Stocks – more risky than mutual funds, individual stocks can perform very well or very poorly. If you spread your investment around a broad range of stocks, you mitigate that risk, though it does take a savvy investor to know where to invest as well as time to research each company.
- Rental Property – I believe this is more risky that stocks at this point. I have 2 rental properties myself and have dealt with a variety of issues including diminished real estate values, evictions, leaking water, new furnace, new roof, etc.
- Loan money for new business or start your own business – some may say this is not as risky as stocks because you control the fate of your own company. However, unless you have the next Facebook, statistics are against you. We don’t have any ideas for a new business at this point and don’t know anyone starting a viable business.
We’ll likely take a middle of the road approach and invest our excess income in mutual funds and ETFs for the time being. Anything less risky doesn’t return what we want and anything riskier is more than we can handle. We don’t have the time research individual stocks nor the time to manage another rental property. Additionally, because of the tax code, we are unable to take all the deductions available to invest in a rental property.
Am I missing anything from the list? What would you do?