Promotion will leave me with a spare $25k. What should I put this towards?

Question

I'm 20, about to graduate college, and have accepted a promotion at my current job that after taxes will leave me with about $25,000 not allocated to anything.

• I am already putting aside 15% of my income towards retirement.
• I have no consumer debt, as I use my credit card as a debit card with money set aside for the float.
• I have no student loans, as I have paid out of pocket for everything (and have been reimbursed tuition this year because I ended up with more scholarship money than I needed).
• I have been building up an emergency fund, and am currently at ~30% of my goal.
• I'm living with a roommate in a fairly low CoL area.

What is the best thing to put this money towards? I've considered saving up for a down payment on a house, as well as putting aside money to eventually replace my car from 2008, but I'm not sure if there are better options at this stage.

Answer 1

Congratulations on your good habits and good fortune.

I have been building up an emergency fund, and am currently at ~30% of my goal.

First, use the income to accelerate your emergency fund until it reaches the level you want.

If you see the potential for wanting to buy a house, then it's never too early to start saving for that.

You will eventually need to replace your car, but with any luck that will be a fairly minor expense given your savings ability.

The real opportunity you have is to save more for retirement. You are saving 15%, but:

• Are you leaving any matches or tax benefits on the table? Are you maxing out your Roth IRA?
• The more you save (especially now when you're young), the earlier you can retire and/or the more security you can have when you do. The future effects are dramatic when starting at age 20.

Consider saving significantly more than 15% for retirement while you can. Life can change and you may be in different circumstances in the future. If some of the savings is in ordinary taxable accounts, you can always redirect it to expenses (like a house) if needed in the meantime, but ideally it can continue to grow for decades. Your future self will thank you!

Answer 2

Both of those options are great. Houses are a great wealth-builder, and replacing a car with cash instead of a car loan is a great option as well.

My first thought would be to complete your emergency fund.

After that, it depends on how long you think your car can last, and how long before you plan to buy a house. It generally isn't recommended to "invest" money if you need it in a year or two unless you're willing to risk 10-20% downside in that period for the chance of 30-40% upside. If you plan to spend it in a year or two, then a high-yield savings account or money-market fund would be a reasonable choice. Past that, look at tax-advantaged accounts like IRAs, or even HSAs if your company offers it. HSAs are tax-free, and they can be used before you retire on qualified expenses. It requires a high-deductible insurance plan, but the lower premium of these usually more than makes up for the difference in deductible. Plus if you have an HSA and a good emergency fund, paying that deductible (if you even need to) should not be a catastrophic event.

Answer 3

You don't need to put it towards anything in particular. There's no requirement that a pot of money has to have a label on it saying what you're going to use it for.

If you invest it in a diversified investment fund, it can sit there until you decide what you need it for. That could be a car, a deposit on a house, or it could stay there until you retire.