Where To Put Excess Income

Where To Put Excess Income

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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?

About The Author

Edwin is a marketer, social media influencer and head writer here at I Am 1 Percent. He manages a large network of high quality finance blogs and social media accounts. You can connect with him via email here.


18 Comments

  1. JT

    Curious – you list real estate below stocks. I’d agree with that order, personally, but it doesn’t seem to be so common. Is real estate down the list for risk, or just for the fact that it’s more “hands-on?”

    Reply
  2. iam1percent

    I think its a close tie with stocks. With enough research, you can land a really good real estate deal, much like you can with stocks. If you don’t do adequate research or are dealt a bad hand as it relates to tenants or maintenance, then I think it is riskier than stocks.

    Reply
  3. [email protected]&More

    Honestly sounds like the same options I would have! Glad to see we aren’t that different after all.

    Reply
    1. iam1percent

      Lance, good to hear I didn’t miss anything big! The best decisions are made when there are a variety of options

      Reply
  4. mochiandmacarons

    I’m at #4 (mutual funds) as well. I tried stocks, but I am not cut out for that kind of investing. I’m too lazy.

    Reply
  5. Mark

    Unlike many of the people who commented on your net worth, I think you’re in great financial shape. I’d use Vanguard ETFs (and some individual stocks if you are willing to do the research) to keep building your taxable investment portfolio. With your low mortgage rates, I don’t see any reason to aggressively put money into illiquid assets.

    I’d be interested to hear more about your rental properties in a future post. I’m interested in acquiring some rental properties (currently just use REITs for real estate exposure), but unfortunately I live in the NYC area where it is nearly impossible to find a property where someone’s rent can cover your PITI costs. I know this is possible in many areas of the country (Southwest, Midwest & Southeast) and I’d be willing to pay a property manager, but I don’t know how to go about doing so. Are your properties in the NJ area (if so are you taking a cash flow loss to your PITI costs) or are they in other parts of the country?

    Reply
    1. iam1percent

      Thanks for your note. Yes, I have 2 properties…1 in Philly and 1 in NJ. I invested in these because the rent covers my PITI costs. Although my plans aren’t to buy another rental for a while, my brother lives in NJ and owns a rental in Atlanta. He did it by going there 1-2 times to visit friends and search for a rental. When he found one, he purchased it and hired a property manager. This makes me a little uncomfortable to have a property so far away, but its doable if you can muster the thought of a large asset being physically far away.

      Reply
  6. JimL

    I decided to just go ahead and pay off the mortgage (will be complete by the end of this month). I have my emergency funds and swan (sleep well at night) money in various laddered CD’s and a money market account and now will take all excess cash and put it in a Vanguard Target Retirement account as it gives me the allocation I want, low expenses and an “autopilot” way of handling the money.

    Reply
  7. Edward Antrobus

    This is why I’m just not that interested in making a lot of money. 6 figures would just be too much for us. All of your answers on what to do with excess income are to put it in methods to make more income… so that you have even more of the same problem next year.

    Reply
  8. Financial Samurai

    Oh crap, is there really going to be a 3.8% TAX INCREASE on rental income now?

    If so, I guess I’ll hold off on paying down my rental property mortgages yeah?

    This 3.8% tax isn’t a guarantee is it??

    Thx,

    Sam

    Reply
  9. Financial Independence

    It does not look like you are any different from the rest. We all doing it ; -)

    On a different scale of course.

    Reply
  10. [email protected]

    Whilst investing excess income is great, I think it is important to have an emergency fund which covers for any unexpected circumstances such as a broken down car or household appliances going wrong- boring, I know!

    Reply
  11. BeatingTheIndex

    Goign the ETF way makes sense, just pick a diversified dividend paying ETF in order to mitigate market volatility with a steady stream of income!

    Reply
  12. Evan

    have you given any thought to a Whole Life Policy? The dividends are going to be exempt from the 3.8% and considering your assets it may be needed for estate taxes down the road.

    Just an outside the box idea

    Reply
    1. iam1percent

      I’ve always heard bad things about whole life, but it sort of intrigues me. I need to learn more and do more research on the topic.

      Reply
      1. Evan

        After 10 or so years the IRR is usually about 4% on the non-guaranteed side. Plus you can use it as a pension-substitute with tax free distributions (you take out up to your basis and then switch to loans). Any experienced agent at a mutual company should be able to help you out.

        Reply
  13. RichUncle EL

    When I get to that point where I have excess funds over and beyond my financial goals, I will be using it to pay down my parents mortgage debt, and after that is paid off I will probably donate a percentage to charities.

    Reply
  14. Amy Turner

    I think if it’s a strategic investment, you can put some of the excess money into stocks. Without moving any of it, in ten years time, it will show better income than if you had put it into a savings account. If you are entrepreneurial in spirit, why not go into a brick and mortar business, particularly food? The returns are great, but only if you are industrious and hardworking enough.

    Reply

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