Balancing Liquid Cash and Investments

by Ryan Guina

It can be difficult to know the best way to allocate your liquid cash and other investments, especially when you are in a transitional stage of life. For example, you might be a young professional who earns a decent salary, you are frugal with your money and you have saved a healthy amount of cash. But you don’t know where to spend the cash because you want to balance both short and long term goals – for example, moving, buying a house, starting a family, etc. This situation describes a reader who recently sent in the following question:

Hello, I am 27 years old, married, and have a gross income of 120k. We have no debt and currently are investing around 15% of our income into tax deferred retirement accounts. We have around 100k in liquid assets. We are currently renting because we haven’t found the right house and are not sure if we will be living in the same town for very long. My question is… should we continue to keep our excess income liquid so that we can pay as much as possible down on a house when we buy, or should we start to contribute to a Roth IRA? ($500 a month for 10 months out of the year)

Thanks, J.

J. Thanks for your question, and congrats on your financial success – you two are doing very well, and being very smart with your money! I also think it’s a great idea to wait on buying a house. Buying and selling a house is very expensive and I don’t recommend anyone buy a house if they aren’t planning on living in it for several years, or if they aren’t willing to rent it out.

Determine how much cash you need

Before going further, I’ll ask a few questions only you can answer. These questions will help you prepare for possible risks and plan for your goals. These questions can help you determine your comfort level regarding how much cash you need to keep in your emergency fund, as well as how large of a down payment you will need.

For example, consider your emergency fund: will your effective income change dramatically in the next few years (is your wife planning on being a stay at home mom if/when you have children, how stable is your industry, if you move will the cost of living dramatically increase or decrease, etc.)?

Also, do you how much house do you need? The answer to this question will tell you how much money you will need for a down payment.

Invest the rest

Determine how much cash you need, then invest the rest. If you want to make money, you need to invest it, not keep it in a savings account. Even the best online savings accounts only offer a little over 1% interest. That’s fine for the money you might need quick access to (your emergency fund), but it won’t make you a millionaire.

Your question also implies that you are considering paying as large a down payment as you can afford when you purchase a house. Making a large down payment is always a good choice because it can save you a lot of money in the long run. However, mortgages are typically low interest fixed rate loans and you may be able to make more money in the long run by investing. It’s usually a good idea to have a balance between paying your mortgage early and investing.

It’s probably a good idea to invest more money right now

I don’t have full insight into your financial situation, but it seems like you can afford to invest more money right now. Opening a Roth IRA is a great way to do that, or if you don’t want to lock up your investments until retirement age, then you can invest in a taxable account through a mutual fund house or a discount brokerage firm.

At this point I recommend taking some time to discuss your financial goals with your wife and consider meeting with a financial planner who can help you make these kinds of important decisions and help you get started on the right path.

Does anyone have other suggestions for J. to consider?

Published or updated September 14, 2016.
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{ 4 comments… read them below or add one }

1 Pat S.

I’d recommend investing in the 401(k) first, then ensuring you have at least 6 months worth of expenses in your cash accounts. After that, I’d go with the Roth, followed by a 529 plan, and finally with a taxable account (I like dividend stocks for these types of accounts- provides a source of income for early retirement if applicable).

Just my 2 Cents.


2 Jon | Free Money Wisdom

Go with what PAT says. That is a strategy that I recommend to my readers also. But I would ensure that you keep at least 6 months worth of expenses in your emergency account, that is critical!


3 Tom

I believe you can always withdraw principal from Roth accounts, so it’s not any different than a taxable account, other than you don’t pay capital gains tax and you are limited to $5k per year contribution. But you want to make Roth contributions while you don’t exceed the income limits.



4 Ryan

Tom, you can withdraw your Roth IRA contributions, but you can’t put them back, so doing this will significantly hinder your investment’s growth potential. Here is more info about Roth IRA Withdrawal Rules.

That said, a Roth IRA is very different from a taxable account. Roth IRAs are made with contributions which have already been taxed, and you won’t be taxed on the qualified withdrawals you make in retirement age. This is not the case for taxable accounts, which are taxed any time you sell them, cash them in, or receive dividends or other income from them. There is a huge long term tax advantage advantage with Roth IRAs compared to taxable accounts.


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