What should a single guy do with a budget surplus?

By Stew

I am not a financial or investment advisor. The extent of my training is “seat of the pants” or through reading on my own. However, over the past five years, I have probably quadrupled my financial knowledge. Yet there are still many times when people who know about my hobby (blogging about personal finance) ask me finance questions for which I do not really have an answer.

I have a mentoring relationship with a man in his early twenties. The majority of our discussions center around spiritual issues or just life in general, but last week, he asked me to help him set up a budget. Obviously this is an area in which I am quite comfortable so I prepared an Excel spreadsheet that mirrored our own family budget and saved it to my computer. The spreadsheet I have has been revised extensively, I like tinkering with the formulas and links and all the rest. There are a lot of different programs and software for budgeting on the market – I have tried a few, but always seem to gravitate back to good old Excel.

“Mark” and I sat down to discuss his financial picture. We talked through his financial priorities and plugged his numbers into my spreadsheet to see what the big picture looked like.

Here is a brief summary of Mark’s situation: He is 24 or 25 years old, no spouse or dependents. He has little debt and because he is attending college under the GI bill, his expenses are lower than most. While he is in school the military takes care of his housing and medical care. He was active duty prior to last year and plans to go back into the service as an officer when he graduates. A couple of weeks ago, Mark decided that attending school was not quite enough “action” for him, so he took on a full-time job that worked with his school schedule. Now it looks like his gross income might be over $100,000 this year. His new job also provides him with a mobile phone and a company car.

After working through his budget, there were a couple of numbers that jumped out at me. First, we estimated Mark’s federal income tax liability at over $30,000 for the year. Secondly, after budgeting for all of his living expenses, paying off all of his debt, and maximizing his retirement contributions, Mark is likely to have $35,000 in surplus cash. That is a lot of cabbage for a young man . . .

I have two questions for which I would like to hear your ideas:

1. What can Mark do to reduce his tax liability?

2. What is the wisest thing that he could do with the remaining $35,000?

Of course, I recommended that Mark seek the counsel of a a trained financial professional as soon as possible, but I gave him a few of my own thoughts about what to do, but I certainly was not all that confident. My financial experiences lies mainly in the area of solving deficit problems. I have never had the “problem” of a budget surplus.

What do you think?

Article by Stew

Photo by pizzodisevo

10 Responses (including trackbacks) to “What should a single guy do with a budget surplus?”

  1. dramon Says:

    Certainly if his job allows a 401k, I would max out on that, it will reduce tax liability and provide savings. Consider an IRA as well. Money saved while young has a great chance to compound over time.

  2. Mike D. Says:

    My guess is he probably doesn’t really want to focus on reducing his tax liability. In order to do that he needs to make less money, or give it away. You should give because you want to, not to reduce your tax bill.

    Otherwise the best for him to do with his $35k is contribute to his 401(k), max out a Roth IRA (start one if needed) and set up any other retirement contributions up to 15% of his salary, and pay off the debt. After that, get an emergency fund in place.

    After that the best thing would be to take an honest assessment of his life. He probably doesn’t need to save for a house if he’ll be in the military, but what about a car. I’m assuming he doesn’t own one if his company provides him with one. He should think about what he wants for a car and put that money aside, there’s no reason to have a car payment, he should save for one. A reasonable car at that, not a 35k car. He can be set for life if he starts to live by paying cash for everything, especially a car. Make car payments to himself every month instead of the bank.

  3. Marcy Says:

    Would he be interested in marrying my daughter? She has just bought her first house with her nest egg.

  4. Christine Says:

    I would save for a house. He will want to buy a house eventually, and to have a substantial down payment when the time comes would be a great help to him. If his job lasts for a few years, he could even save enough and pay cash. :)
    I know you don’t like gold, but if I’d rather have some in case of societal collapse, so if I were him I’d buy some, but not a lot.
    I would also give more than the standard 10% away. The new testament especially never mentions a number, just “give generously.” Could his parents use some help? Does he have a sibling in college?
    Just my two cents. I’m much closer to your spectrum than his.

  5. Stew Says:

    dramon, I did advise him to max out his IRA contributions this year – both Roth and Traditional.

    Mike D, some good thoughts – would you keep this money in a traditional savings account?

    Marcy – ha!

    Christine – it is difficult for me to put myself in his place . . . I think that gold is way over-priced, but if he wanted to get into precious metals, silver might be the way to go. I think he is planning to give a decent amount away.

  6. Christine Says:

    I agree with you that silver is a better buy than gold in this market. I do not own either however. (Well, excluding my wedding ring and a few other pieces of jewelry.)

  7. Miss Tish Says:

    First thing should be tithe. This man is blessed!

    Then Mark should pay off all debt – loans, car, whatever it may be. All of it. Then he should save up an emergency fund should anything come up. Six months of expenses in cash. After that, contribute fully to his 401K and Roth IRA. If there’s money left over he can set some goals and start saving toward them: home ownership, vacations, etc.

    I agree – do not buy gold. This goes against the most basic of investment principles: Buy Low, Sell High.

  8. Gina Says:

    I like Mike D’s advice but in a different order: (1) emerg fund (6-9 months) then (2) max out 401k – max out Roth. I maxed out my retirement contributions in my 20’s and now (in my 40s) I don’t have to add anything to it as long as it earns 8-12% annually – I will but I don’t HAVE to.

    Once he gets those ideas set up, he needs to focus on school, his job and living within his income. Slow and steady will win the race.

  9. Ben Says:

    I think I would set money aside into accounts for specific purposes. For example:

    – Eventually he will probably need a car. Why not save up now so he can pay cash later when he needs one since he doesn’t need one now.

    – Emergency fund.

    – Housing expenses for the future. Be that that buying a house or renting, it sure would be nice to be able to pay off a years rent all at once and then not worry about it. He may even be able to get a discount. Also, there is always the thought of saving for a down payment on a house.

    – Fun account. Put money in that you may want to use for trips and whatnot.

    All of these of course would go in interest bearing accounts.

    The idea is to save for the future when he may not have this level of finances. Use this time to build. In the car example, if he uses the money he saves now to pay for a car, he can continue to make payments to himself later for the following car.

    Use the opportunity to set your life in the right order.

    Another thing that I might do is cap your available income. Estimate how much he is going to be paid as an officer and start paying himself that now. Base his budget on that with the rest going to things like above. If you only take a piece of your paycheck and get used to living on that amount, it’s easier to save money. Every time you get a raise, give yourself just a little bit more and keep the rest hidden from yourself. I knew someone who did just this. She only gave herself 2/3 of a paycheck. The rest was automatically stashed away. She got used to living on 2/3. As she got raises, she still maintained about the same income. Really though, this only works for someone just starting out. Before they develop their bad habits.

    Just some thoughts.

  10. Editor @ Double My Net Worth Says:

    That’s a pretty good problem to have. I wish I had that problem. :)

    Bottom line, he should invest it after making sure he has enough cash reserves to survive any downturn in the economy, military or not. After that, depending on where he lives, he might want to consider a rental property to augment his income or if he wants to increase his income stream, he could always invest in mutual funds that provides the best tax liability reduction (such as federal bonds, etc…)

    If it was me, an extra 35,000 a year means I can generate additional income. We all pay taxes no matter what and with the uncertainty of taxes in the near future, I would want to increase my monthly income so I can invest it further. Eventually he would reach a threshold where he no longer have to rely on an employment income somewhere.