Coming Across New Opportunities

Erik Basics, Financial Education, Personal Development and Lifestyle, Thoughts of a Mastermind 9 Comments

“The winner ain’t the one with the fastest car. It’s the one who refuses to lose.” – Dale Earnhardt Sr.

“Luck is what happens when Preparation meets Opportunity – Seneca


Can you believe it’s already February 20th? Time flies when you are having fun!

In this post, I want to tell you about a new opportunity I have came across, and then ask your opinion on how I can wisely invest my additional income.

“Try not to become a man of success, but rather try to become a man of value.” – Albert Einstein

The Initial Conversation

I received a text from an old co-worker last week and he asked if I was free to grab a beer and catch-up. I believe networking is extremely important given the field I am in (finance and statistics), and I also enjoy getting a drink and chatting with other like-minded and successful individuals.

When we met, we exchanged pleasantries and made small talk for a few minutes. Then, he told me that he had been doing some side consulting work for the past 10 years and is looking to bring on some more help so he can take it a little easier. He said starting off, he would give me a few hours a week and if that was manageable and there is work that needs to be done, I could take on a few more hours. He said, “Are you interested.” Without hesitation I said, “Yes, I’m always interested in work outside of my day job. I’m looking to build wealth, learn, and grow.” He was elated to have me on board and believes this will be a fantastic time for me to learn and help out his side hustle.

Wait, You are Paying Me How Much?

Since I’m a math guy, when he was going through the numbers, of course I’m sitting there doing calculations in my head 🙂 Here’s the best part: if the hours are on the lower end, I still will be able to bring in about $10k for the year as a result of the consulting work. If the hours are on the higher end, I will be able to bring in closer to $20k for the year for the consulting work.

“If everything seems under control, you’re not going fast enough.” – Mario Andretti

Now, we get to the part where I would like your suggestions. I’m looking for places to efficiently put my money to work. As I discussed in Increasing My Credit Limit 7.5k (and Other Thoughts) and by following my goals, I am able to save between $1.9k and $2.3k in cash in a given month. With the new side consulting gig, that number will increase to between $3k and $4k. With interest rates where they are today, it would be foolish to keep stockpiling cash given my age (24) and investing time horizon (50+ years).

So, here’s the deal.

Currently, I’m contributing 4% to a Roth 401k to take advantage of my company’s match. After my bonus hits later this week, I’m going to up my contributions to max out my 401k and contribute $18,000 in 2017. By increasing my 401k contributions, this should be a wash on the amount of cash I can save each month (back to about $2k in cash savings a month). Here’s where it gets tricky. I love the thoughts of investing in more real estate: I believe real estate is an amazing investment given the tax benefits, potential to appreciate over time, being able to leverage your cash, and the cash flow! At the same time, I believe I’m spreading myself a little thin and if I picked up a rental property, it could be a lot of time and work.

Investment Options

If I put my real estate aspirations on hold and consider other potential investments, I arrive at the following options:

  • Paying down debt
  • Opening an IRA
  • Opening a taxable brokerage account.

Pay Down Debt

For the first option, my only debt is on my mortgage. I have a 5/1 ARM at an interest rate of 2.625%. I have 4.5 years remaining until any potential rate adjustment. It would be foolish to pay down my mortgage given the interest rate. That being said, it would be nice to get to 20% equity to get rid of the $140 Private Mortgage Insurance (PMI) payment each month! (It take about a $30k payment towards principal)

IRA vs. Taxable Brokerage Account

For the second and third options. I’ve asked the question on a few different blog’s comment sections: “Should I open an IRA and max it out or open a taxable brokerage account?”

Most bloggers suggested opening and contributing to a  taxable brokerage account only after you max out your 401k and IRAs. This makes sense; I am someone who wants to practice sound personal finance and I should first look to take advantage of all investment vehicles which are designed to help reduce my tax liability now or in retirement.

My main focus is to find income producing assets. Then in the future, I can have passive income coming in each month! To do so, I want to invest in dividend yield funds and stocks. I can do this through various Vanguard dividend funds. As I’ve learned in various personal finance books, and something Henry talks about in his post K.I.S.S. – 8 Personal Finance Tips, it’s important to minimize the fees you pay when investing in mutual funds. Vanguard has a few dividend funds which have expense ratios of only 0.16%!

Sounds like we need a Pros and Cons list!

Below is a table of the pros and cons of each option.
Pay Down Debt Open IRAOpen Taxable Brokerage Account Pros

  • Guaranteed return of 2.625%
  • Get rid of PMI faster ($140 a month)
  • Take advantage of tax benefits in deferring or removing capital gains tax, dividend and interest income taxes
  • Liquid – can withdraw when I want
  • No contribution limits
Cons
  • 2.625% is a dirt cheap interest rate
  • The stock market has returned 7-10% on average
  • I have no plans to pre-pay the mortgage given my rental property aspirations
  • Illiquid – can’t withdraw for many years
  • Contribution limit of $5.5k
  • Not tax advantaged – any selling will result in capital gains tax and any dividends will result in dividend tax

At this point, I’m fairly certain I’m going to fund an IRA and look to buy funds focused on dividend growth. After funding this account and contributing the maximum $5.5k, I will reassess my investments and continue to build wealth! Real estate might still be on the table… though, having a large cash account is never a bad thing!!! Cash is king baby!


Has an old co-worker ever approached you with an opportunity to help them with their business? Do you max out your 401k? Do you think real estate or a taxable brokerage account is better to get into in 2017?


Two quotes before you check out more content:

Never burn bridges. Always stay hungry and be open to new opportunities. Look to provide value and make other people’s lives better.

“The question isn’t at what age I want to retire, it’s at what income.” – George Foreman

Thanks for reading and have a good day – Erik

Comments 9

  1. Hey Erik,
    Congrats on the new opportunity – definitely sounds like a win-win to me!

    One note on the Roth IRA – you can withdraw your contributions (not gains) penalty-free if needed. The main problem being that you can’t replace the withdrawn amounts (only add new money to the limit each year). Roth is a use it or lose it resource, so it can be valuable just because of that.

    I don’t max out my 401k contributions; I pay 8% and my employer pays 8% for a total of 16% of my salary and that’s sufficient for me at the moment. I prefer money in taxable but I’m a little irrational in that respect 🙂

    Best wishes and I hope the new side project is rewarding, both financially and professionally!
    -DL

    1. Post
      Author

      Thank you for your input DL, there is such a great community of bloggers with a lot of knowledge; I hope I can tap into it! 8% is a crazy company match!!

      While irrational, you are making some good investment choices in your taxable account. Having a few solid dividend stocks will go a long way and it has for you! Have a good one.

  2. Hey Erik,

    Congrats again on the new side gig, sounds like some nice icing on the cake cash wise. I would definitely consider paying down your mortgage to at least get rid of the PMI, which I think is a fairly useless component of your payments since you’re effectively insuring against yourself. You’ll have enough for the rest the first year, and even more the years after. I would also recommend you start saving some money on the side to eventually pay off your mortgage completely. Who knows what rates will look like in 5 years, and you wouldn’t want to be forced to sell your tax advantaged accounts to tap into any cash.

    1. Post
      Author

      Interesting thoughts Max. I did read on your blog you had paid off your mortgage. The thing is, I don’t know if this will be my “forever” house. That’s why I ask my readers though, everyone has a different take on what optimal personal finance is. It really is personal!

  3. Congrats on the new gig, Erik. It’s a great opportunity to make some extra money on the side, and who knows where that can lead!

    What kind of weekly hours are you expecting to be working, with the new gig included?

    1. Post
      Author

      Thanks Lars-Christian. Well, depends on what you consider working 😉 I’d guess about 60 hours between the blog, the side gig, and my day job a week. Time management and sleep will be key.

      1. Hah, absolutely. In this context, I would personally classify whatever you do in return for an hourly wage work. The rest are passion projects, no? 😉 But yeah, time management is important when you’re looking at that number of hours every week.

  4. Awesome job on the side gig!!! I would definitely max out your IRA while you can. Sounds like you are going to be moving up into the next tax bracket soon enough where you wouldn’t be able to do that in the future. Why not take advantage of it now?

    1. Post
      Author

      Thanks Rob and thanks for the recommendation. I think Roth IRA is what I’m going to go for… over time I’m going to transition towards contributing to the pre-tax contributions. So many options… it’s like a buffet.

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