In about a month or two, I will receive $20,000. The problem is, I’m not sure how to invest $20,000. It may seem like $20,000 is a lot of money, but in actuality, it isn’t. Part of me wants to invest the full $20k but I’m not sure that’s the best thing to do. There are all these competing interests. I definitely don’t want to waste this opportunity. I won’t have another windfall like this for another couple of years. In any case, before I delve into what my plans are, let me give you a snap shot of my financial situation.
I have two student loans. The first student loan has a remaining balance of $2700 at a fixed interest rate of 5.2%. I was hoping to bring this debt down to zero with my regular income, but ran into difficulty. First, I had unexpected damages on a rental car and had to take care of it with my credit card. Then, I went on vacation without proper planning and spent way too much money. So, I don’t really have the money to pay this down. I really wanted to get rid of it by next month, and I still might make a significant dent into this with my next pay check, but it won’t be zero.
The other student loan I have has a balance of about $21,700 at an interest rate of 2.625%. The monthly payment is $97 and will rise to $129 in 2018. It will remain at $129 for the remainder of the loan, which, at minimum payments, will take me another 25 years or so to pay off. But, that’s it for all of my student loans. I’ve been paying on these loans for a while now, and would like to get rid of them, but also want to make the best financial decision I can.
In addition to the student loans, I have credit card debt. It was zero for the longest. But, because of my overspending, I’m back to using my credit card again. It’s funny, but when my balance is zero, I don’t want to use the credit card, but as soon as the balance is high enough, I rationalize its constant use. Just last night, I took a cab to the bar, bought drinks, and took a cab back home and put it all on my credit card. I can’t wait to bring the balance down to zero again. Current balance is about $1600. And it’s moving in the wrong direction.
That’s it for debts. I do have a mortgage, but I’m excluding that for now. Although I plan on renting out my house, I have no intention of using any portion of this $20k to set aside for vacancies, emergency repairs or anything like that. Let’s just say that I’m comfortable where I am with the real estate side of my financial life.
How To Invest $20000?
So here is my current plan. I will set aside $5000 in a bank account for taxes. My tax rate is about 25%. And, it might even be higher than that since I now have to add $20000 to my income for the year. But, I don’t want to have a huge tax bill next year that I can’t pay for. So, I’ll keep $5000 in some account that I won’t touch until I’m ready to do my taxes. If I actually have money left over from that $5000 next year, I’ll invest it.
So, with $5000 set aside, that leaves me with $15000 to invest. But, before I invest any of that, I’m going to payoff my student loan that has a balance of $2700. I will then payoff my credit card that has a balance of $1600. That will leave me with $10700.
My emergency funds are a bit lacking because I had to dip into them recently. I know it’s kind of silly, but I have 2 accounts for my emergency funds: Digit and Qapital. One is a back up to the other. I try to take money from one account if I need it before going to the second. I’m thinking about having a third back up, which will be Capital One 360. Actually, Capital One 360 was always a backup, but I have about $4 in that account right now. Just never had the means to replenish it.
So, if I take $1700 and disperse it amongst all three accounts, I’ll have $3000 in emergency funds, with each account having $1000 balance. I could put all $3000 into one account, but I rather them separated. $3000 might be too much of an emergency fund for me, but that’s a topic for another day. Anyway, once I take the $1700 to replenish my emergency funds, that will leave me with a whopping $9000 to invest.
I’ve been giving a lot of thought to trying out peer-to-peer lending. Lending Club and Prosper are the two biggest ones. However, since Prosper is not a partner with Turbo Tax, I would start out with Lending Club. Because I’m just getting started, I’m thinking about moving $1000 to Lending Club to give it a try. It would probably have been best to start off with $2500, but that’s a huge amount out of the $9000 to devote to Lending Club. I don’t want to say the $1000 is play money, but I can always increase my contributions if I think it’s worth it. If it doesn’t work for me, then I can pull my money out and even if it’s a loss, $1000 is not an overwhelming amount of money to lose.
Stock options is something I’ve always wanted to get into. The strategy that I’m most interested in is the covered call strategy. I think it’s conservative and a good starting point for a beginner. However, I think investing in stock options is a little bit more involved than I have the time for right now, so I don’t think I’ll be investing in that strategy at all this year. I’ll think about this for next year.
With the remaining $8000, my plan is to dump it into my Dividend Portfolio. Because I invest using the Sharebuilder plan with Capital One Investing, I get to invest 12 times in stocks, indexes, ETFs, mutual funds, etc. for $12 a month. Because I have a total of 7 stocks with Capital One Investing, I have to log in twice a month and change which stocks I invest in, to get the full benefits of investing 12 times. It’s ok if you don’t understand what I’m talking about, but sufficed to say, it’s very annoying. Had I only had 6 stocks, well, I could set up the automatic investing to invest twice a month in the 6 stocks. That would equate to 12 times/trades. But I have 7 stocks, and not 6. So I have to manually set the amounts each month to utilize my trade credits.
I say all that because my plan is to increase the number of stocks I own from 7 to 12. That way, I can set the automatic feature to invest once per month which would equate to 12 trades because I would own 12 stocks. So, my plan is to find 5 more stocks, add them to my dividend portfolio. Then I would use the $8000 to fund the investment of those 5 stocks as well as the contributions to the remaining 7 stocks in my dividend portfolio.
What do you think about my plan? If it helps, I’m already maxing out my 401k at work and my IRA. Given all the above, what would you do differently? I’m really looking forward to your comments.