For the past few weeks, I’ve been taking you through my family’s process of reestablishing a monthly budget. When my husband and I sat down and calculated the numbers, we realized we’d done a pretty good job of living below our means. In fact, when all our monthly bills were paid – even after factoring in the expense of annual and semi-annual costs – we were left with $1250 every month, totaling $15,000 a year in extra money.
We’ve never had this type of financial cushion before. Sure, we’ve never racked up big credit card bills or found ourselves making late payments on our mortgage or vehicles, but we also never found ourselves with excess money in our monthly budget – and definitely not this much.
Now, we’re wondering what to do with the extra money. Our emergency fund is already fully-funded, so we know we won’t be putting it there. We’ve also paid off all our debts, except our mortgage – and, since we’ll be moving back to my hometown in the next 5-7 months, there’s really no need to at this point. Our family budget also takes into account fully-funding my Roth IRA, and my husband’s retirement account is funded with pre-tax dollars. In many ways, this extra money is really free money.
Establishing a Self-Employed 401(k)
Both my husband and I have Roth IRAs; his is through his employer, mine is a spousal account. I also have a traditional IRA, which was rolled over from my work-sponsored 401(k) when I left my full-time job a few years ago. I’ve never put more money into it since then, instead focusing on funding my Roth account.
In addition to the different tax benefits of each type of retirement account, the other main difference between a Roth and a 401(k) is the amount of money you can put into it. The IRS caps the amount you can put into a Roth or traditional IRA at $5,500 per person for the 2013 tax year; however, you can contribute up to $17,500 into your 401(k). If you have a self-employed 401(k) – also called an “individual,” “solo,” or “one-participant” 401(k) – you can be eligible to contribute even more. Because I am both the employer and employee in my freelance work, I can contribute another 20% of my earnings to this type of investment.
Putting our extra $15,000 into an account like this would help us in another way. Because this money would be pre-tax, it would reduce my overall taxable income, and probably eliminate my need to pay quarterly income taxes on my earnings.
Putting It Toward a Mortgage
When we move back to my hometown later this year, we’ll be buying a new house. The real estate markets in my current location and my hometown are fairly similar, and we could probably buy a house of the same size and condition for roughly the same price.
But I don’t really want to.
We had our house on the market for several months last year, with the goal of moving into a larger home. (This was before we decided to relocate to a different state.) Because I work from home, I really need a better office space. I’d also like my kids to have a dedicated play room. Adding both those spaces to our wish list would also add about $50,000 to the price tag. On top of that, property taxes are markedly higher there compared to here, so we’ll be paying more to the local government whether we upgrade to a bigger floor plan or not. Property taxes on a house like mine would run about $3000 a year more in my hometown than I’m currently paying, while a mortgage that’s $50,000 more than what we have now would add about $230-$250 to our monthly payments – that’s an addition of roughly $3,000 a year.
Furnishing our New Home
A lot of the furniture we have in our current home is old. Many of our rooms are decorated with mis-matched pieces begged and borrowed from other family members, or purchased at consignment shops. My vision was shabby-chic; the reality is far more shabby than chic.
Ideally, I’d like to leave a lot of this furniture behind – why pay to move something you don’t want to keep? – and start afresh in our new house. I’d also like to bring in a designer to help us come up with a cohesive decorating plan. This would only account for the expenditure of the additional $15,000 this year; it wouldn’t be a recurring expense.
Going on Vacation!
My husband and I have caught the travel bug recently, and would love to be able to put a lot of this money into an annual trip for our family. And I’m not talking about our yearly weekend at the beach. This would be money we’d use to not just visit our favorite places, but to explore the nation and the world. Paris! Rome! Tokyo! My parents and I traveled extensively across the U.S. when I was a kid; I’d like to give my kids the same experiences, and then some.
Another thing we
What would you do if you found a significant amount of extra money in your monthly budget?