Making $100,000 USD per month, no idea what to do with it

Question

I have a few consulting jobs I do on the side, and this year I've had a lot of extra work, with several months in 2016 exceeding $100,000 USD in billing. I do this work from my home with no advertising, marketing, or appreciable expenses. This is the first time in my life with such a high income and I really have no idea what to do with it... I have the same small apartment and I still drive my 2008 Prius.

I've tried to read up on personal finance, but it's a dizzying and vast subject. The advisors I've talked to all want to sell me their favorite instruments (and if I bite, they take a healthy commission). So instead I have $500,000 in a Schwab brokerage account earning essentially nothing. I am also doing zero tax-planning.

What should I do and with whom should I speak?

Edit: To address some concerns enumerated in the comments/answers, let me add a few more facts: I'm 54, single, 2 kids (ages 11 and 13), $50k in their 529s, $1.8MM net worth ($1.1MM in pretax retirement accounts), have $1MM umbrella, estate planning done. I max my SEP IRA each year, even though I'm not sure it's a smart idea (if taxes on ordinary income rise appreciably in the next 10 years, I'm screwed). I've paid $40k per quarter in est taxes for 2016 thus far, giving me safe harbor based on last year's tax, so I should be fine. And I pay my taxes honestly (and take virtually no deductions). Thanks for all the advice guys!

Second Edit: Also, virtually all of my investing education comes from www.whitecoatinvestor.com (a smart guy who addresses high-income folks while not peddling specific instruments).

Answer 1

I know your "pain". But don't worry about investing the money right now -- leave it uninvested in the short term. You have other stuff you need to school up on. Investment will come, and it's not that hard.

Taxes and government

In the short term, focus on taxes. Do some "mock" run-throughs of your expected end-of-year taxes (use last year's forms if this year's aren't available yet).

Must you pay estimated tax periodically throughout the year? The tax authorities charge hefty penalties for "forgetting" to do it or "not knowing you have to".

Keep an eye out for any other government gotchas.

Retirement

Do not overlook this! This is the best investment you could possibly make. Max out your government sanctioned retirement funds - in the US we have employer plans like 401K or Keogh, and personal plans like the IRA. This is fairly straightforward. Avoid any "products" the financial advisors want to sell you, like annuities.

Also if you have the Roth type IRA, learn the difference between that and a normal one. There are some tricks you can do if you expect to have an "off" year in the future.

Don't forget charities

Charitable giving is worth considering at high income levels. Do not donate directly to charities. Instead, use a Donor Advised Fund. It is a charity of its own, which accepts your tax deductible donation, and holds it. You take the tax deduction that year. Then later, when the spirit moves, tell your DAF to donate to the charity of your choice.

This eliminates most of the headaches associated with giving. You don't get on the soft-hearted sucker lists, because you tell the DAF not to disclose your address, phone or email. You don't need the charity's acknowledgement letter for your taxes, since your donation was actually to the DAF. It shuts down scams and non-charities, since the DAF confirms their nonprofit status and sends the check to their official address only. (This also bypasses those evil for-profit "fundraising companies".)

How to invest: If you don't understand it, don't buy it.

It's a lot simpler than they want you to know. So-called "financial advisors" are actually salesmen working on commission. They urge you to invest, because that's what they sell. They sell financial products you can't understand because they are intentionally unduly complex, specifically to confuse you. They are trying to psych you into believing all investments are too complex to understand, so you'll give up and "just trust them".

Simple investments exist. They actually perform better since they aren't burdened down with overhead and internal complexity. Follow this rule: If you don't understand a financial product, don't buy it.

But seriously, do commit and take the time to learn investment. You are the best friend your money will have - or its worst enemy.

Learning investment

The only way to protect your money from inflation or financial salesmen is to understand investment yourself. You can have a successful understanding of how to invest from 1 or 2 books. (Certainly not everything; those ingenious salesmen keep making the financial world more complicated, but you don't need any of that junk.)

For instance how do you allocate domestic stocks, foreign stocks, bonds, etc. in an IRA if you're under 40? Well... how do smaller universities invest their endowments? They all want the same thing you do. If you look into it, you'll find they all invest about the same. And that's quite similar to the asset mix Suze Orman recommends for young people's IRAs. See? Not that complicated. Then take the time to learn why. It isn't stupid easy, but it is learnable.

For someone in your tier of income, I recommend Suze Orman's books. I know that some people don't like her, but that segues into a big problem you'll run into:

People have very strong feelings about money. Intense, irrational emotions. People get it from their parents or they get sucked into the "trust trap" I mentioned with so-called financial advisors. They bet their whole savings on whatever they're doing, and their ego is very involved. When they push you toward their salesman or his variable annuity, they want you to agree they invested well. So you kinda have to keep your head low, not listen too much to friends/family, and do your research for yourself.

John Bogle's book on mutual funds is a must-read for picking mutual funds and allocating assets.

Better advisors

Certain financial advisors are OK. They are "fee only" advisors. They deal with all their customers on a fee-only basis, and are not connected to a company which sells financial products. They will be happy for you to keep your money in your account at your discount brokerage, and do your own trading on asset types (not brands) they recommend. They don't need your password.

Here's what not to do: A good friend strongly recommended his financial advisor. In the interview, I said I wanted a fee-only advisor, and he agreed to charge me $2000 flat rate. Later, I figured out he normally works on commissions, because he was selling me the exact same products he'd sell to a commission (free advice) customer, and they were terrible products of course. I fired him fast.

Answer 2

If you are making that much, don't waste your time here. Pay a few hundred bucks for a consultation with a fee-only certified financial planner. (Not one of the "free" services, which make their money via commissions on sales and are thus motivated to direct you to whatever gets them the largest commission.) In fact, in your bracket you might want to consider hiring someone to manage your portfolio for you on an ongoing basis.

A good one will start by asking what your goals are, over what timeframe, and will help you determine how you feel about risk and volatility. From that information they will be able to suggest a strategic mix of kinds of investments which is balanced for those constraints.

Answer 3

If you already have 500k in a Schwab brokerage account, go see your Schwab financial consultant. They will assign you one, no charge, and in my experience they're sharp people. Sure, you can get a second opinion (or even report back here, maybe in chat?), but they will get you started in the right direction.

I'd expect them to recommend a lot of index funds, just a bit of bonds or blended funds, all weighted heavily toward equities. If you're young and expect the income stream to continue, you can be fairly aggressive. Ask about the fees the entire way and you'll be fine.

Answer 4

I would be more than happy to find a good use for your money. ;-)

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Well, you have a bunch of money far in excess of your regular expenses. The standard things are usually:

• Figure out how much of this you can actually lock in long-term in investment - ie. you shouldn't invest every last cent because what if your house burns down tomorrow and you need money fast?
• Figure out how much you're willing to risk for how long. In the US for instance there are some nice schemes where you can get out of paying tax, but you have to keep it invested until your 60s, so you need to think if you can wait that long.
• Buy assets you think are appropriate for your risk/reward goals. For beginners, popular options are:
  • Buy an index ETF. These are considered safe in the long term and not very complicated (don't need to know much stock analysis to see the S&P has been going up for decades). But keep in mind sometimes it's down for years and if you need to pull your money out (eg. because of emergencies) you could be forced to take a loss. The recent year or so there's also been a lot of talk of a coming market crash, so that's worth considering.
  • Buy bonds. Similar to index ETF, it's probably easiest to buy a bond ETF. Considered even safer than index, but every time I've looked lately the returns have been crap.
  • Get something like a CD, treasury bond, and so on. Even safer, even crappier returns.
  • Try to research individual companies and buy stocks. Same issue as index: with potential crash soon could set you back a bit, and it's also kind of hard to know which stocks will go up. You need to do a bit of homework (probably at least reading several books) unless you're ready to kiss your money bye bye.
  • There's the option of buying a "classic" wealth retention asset like precious metal. This protects you against possible future inflation of the dollar (right now inflation is very low, but that could change), while in theory the asset you hold is less volatile than fiat. But in practice metals can be a very volatile market. Is this because the value of, say, gold is unstable, or the dollar? You decide, and if you can't, nevermind.
  • Buy actual income generating assets. At your level a rental property or two could work very nicely (although watch out for housing prices crashing), or you could buy or start some sort of business such as retail or food. But it sounds like you already have a day job, and all of these (even rental) take a lot of work, so it may not be worth bothering.
  • Invest back in your business. Improve the office, possibly hire staff - assuming these things will have worthwhile benefits. Maybe do start advertising.
• You could also try buying into a mutual fund, but the common notion is that basically you're better off just buying the index in every case because the funds suck once you factor in the fees.
• With your half million, maybe you can fund a hedge fund - those are supposed to be a bit better than mutual fund, but lately they've been doing pretty bad too.

If you are very confused, it's probably worth spending some of your windfall to hire professional help. It beats you groping in the dark and possibly doing something stupid. But as you've seen, not all "professionals" are equal, and finding a good one is another can of worms. If you can find a good one, it's probably worth it.

Even better would be for you to take the time and thoroughly educate yourself about investment (by reading books), and then make a knowledgeable decision. Being a casual investor (ie. not full time trader) you will likely arrive, like many do, at a portfolio that is mostly a mix of S&P ETFs and high grade (eg. govt and AAA corporate) bonds, with a small part (5% or so) in individual stock and other more complicated securities. A good financial advisor will likely recommend something similar (I've had good luck with the one at my credit union), and can guide you through the details and technicalities of it all.

A word of caution: Since you remark about your car and house, be careful about upgrading your lifestyle. Business is good now and you can afford nicer things, but maybe next year it's not so good. What if you are by then too used to the high life to give it up, and end up under mountains of debt? Humans are naturally optimistic, but be wary of this tendency when making assumptions about what you will be able to afford in the future.

That said, if you really have no idea, hey, take a nice vacation, get an art tutor for the kids, spend it (well, ideally not all of it) on something you won't regret. Investments are fickle, any asset can crash tomorrow and ruin your day. But often experiences are easier to judge, and less likely to lose value over time.

Answer 5

You want CFP or CFA who is also a fiduciary, meaning that by law they have to put your interests ahead of their own. Financial planners who are not fiduciaries can, and often do, recommend investment vehicles that earn them the most commission with little regard of your financial goals.

If you already have $500,000 to invest and racking up $100,000 a month you probably qualify for most institutions private client programs. That means that the firm/advisor will look at your financial situation and come up with a custom-tailored investment plan for you which should also include tax planning.

I would start with whatever financial institutions you already work with - Schwab, your bank etc. Set up a meeting and see what they have to offer. Make sure you interrogate them about their fees, their licenses/certifications and above all if they are a fiduciary.

Answer 6

In my opinion, I would:

1. If the income is from this year, you can tax shelter $59,000 plus somewhere between $50,000 and $300,000 depending on age, in a 401(k) and defined benefit plan. This will take care of the current tax burden. Afterwards, set aside your remaining tax liability in cash.

2. The after-tax money should be split into cash and the rest into assets. The split depends on your level of risk tolerance.

3. Build a core portfolio using highly liquid and non-correlated ETFs (think SPY, TLT, QQQ, ect.). Once these core positions are locked in. Start lowering your basis by systematically selling a 1 standard deviation call in the ETF per 100 units of underlying. This will reduce your upside, extend your breakeven, and often yield steady income. Similarly, you can sell 1 standard deviation iron condors should the VIX be high enough. Point is, you have the money to deploy a professional-type, systematic strategy that is non-correlated, and income generating.

Answer 7

You already did the leg work by putting your money in a Schwab account. They have some of the lowest fees on index funds you can buy. I would keep things dead simple. Decide if you want some of it to be an IRA or not, and then plow your funds into a broad stock only index fund such as SCHB, SCHX, or SCHV (you could buy all three, but there would be no need to whatsoever). You will get around 2-2.5 % dividend yield, be diversified, and have extreme low fees. Fees are key to getting good returns in funds. Of course..set tax money aside as well.

Answer 8

What I would do, in this order:

Get your taxes in order. Don't worry about fancy tricks to screw the tax man over; you've already admitted that you're literally making more money than you know what to do with, and a lot of that is supported, one way or another, by infrastructure that's supported by tax money. Besides, your first priority is to establish basic security for yourself and your family. Making sure you won't be subjected to stressful audits is an important part of that!

Pay off any and all outstanding debts you may have. This establishes a certain baseline standard of living for you: no matter what unexpected tragedies may come up, at least you won't have to deal with them while also keeping the wolves at bay at the same time!

Max out a checking account. I believe the FDIC maximum insured value is $250,000. Fill 'er up, get a debit card, and just sit on it. This is a rainy day fund, highly liquid and immediately usable in case you lose your income.

Put at least half of it into an IRA or other safe investments. Bonds and reliable dividend-paying stocks are strongly preferred: having money is good but having income is much better, especially in retirement!

Quality of life. Splurge a little. (Emphasis on a little!) Look around your life. There are a few things that it would be nice if you just had, but you've never gotten around to getting. Pick up a few of them, but don't go overboard. Spending too much too quickly is a good way to end up with no money and no idea what happened to it. Also, note that this isn't just for you; family members deserve some love too!

Charitable giving. If you have more money than you know what to do with, there are plenty of people out there who know exactly what to do--try to go on living and build a basic life for themselves--but have no money with which to do so. Do your research. Scam charities abound, as do more-or-less legitimate ones who actually do help those in need, but also end up sucking up a surprisingly high percentage of donations for "administrative costs". Try and avoid these and send your money where it will actually do some good in the world.

Reinvest in yourself. You're running a business. Make sure you have the best tools and training you can afford, now that you can afford more!

Answer 9

Your #1 problem is the Government both in it's form as a taxation outfit and as a 'law and order' outfit. You'd be very surprised at how fast a bank seizes your bank account in response to a court order. Purchase 100 Mexican 50 Peso Gold (1.2 oz/ea). These coins are cheap (lowest cost to get into) and will not be reportable on sale to taxing authorities. That money is out of the banking system and legal system(s). Do not store them in a bank!

You need to find a tax strategist, probably a former IRS agent / CPA type.

With the rest remaining money... There's an old saying, Don't fight the Fed. As well as "The trend is your friend". So, the Fed wants all savers fully invested right now (near 0 interest rates).

When investing, I find that if you do exactly opposite what you think is the smart thing, that's the best thing. Therefore, it follows:

1) Don't fight the Fed

2) Do opposite of smart

3) Do: Fight the Fed (and stay 100% out of the market and in cash)

We're looking like Japan so could remain deflationary for decades to come. Cash is king...