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How To Allocate A Second Income?

September 28, 2010 · 52 comments

in Personal Finance, Work

So, it looks like I MAY be headed back to work.  My former employer contacted me about returning to my old group to help out with a project.  It will part-time, and I will be working from home.  Sweet!

Assuming everything works out and I start making money again, it poses interesting questions to me.  My number one concern is protecting my income.  I am contemplating just investing all the income into a 401k plan to protect it from taxes.  If I do that, I won’t have to worry about possibly getting hit with owing a lot of taxes in April.  Of course, I know the government wants me to run around and spend all of my income.  Unfortunately for the government, the opposite will probably happen.  Fear of taxation may force me to hoard all my earnings instead.

I will then have to figure out how to invest in my 401k.  Stocks?  Bonds?  Mixture of both?  International?  Domestic?  What I need to do is look at our current retirement funds and see what areas are under-represented.  (Meaning, do I have enough in bond funds?  Have I put some money in small, mid and large cap funds?  etc.)  I know I should know that already, but I have not rebalanced in awhile.  Probably because the stock market was depressing me…

Next, I need to keep in mind that this will be ‘extra money’.  Meaning, I will not even consider it as income since I will be a contractor and I will only be hired in 6 month increments.  (My last contracting stint with this group lasted 3.5 years.)  I do not want to be one of those people that makes financial commitments based on 2 salaries and then are is desperate straights when they are reduced to 1.  Each paycheck will be considered a gift!

Assuming it all works out and I am re-employed, I still fully intend on working on my blog.  Please be patient if I am late to replying to comments and what-not though!

So, what would you do if you suddenly earned a second income?  In your answer, assume it could be a short term (less than a year) assignment.

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{ 42 comments… read them below or add one }

beth September 28, 2010 at 8:38 am

Just some thoughts….most employers have a max percentage that you can contribute to their 401k program. I’m sure you have already considered this, but there is a max that will be considered tax free per household by the IRS. You may have to divide it between IRA and 401k. Congrats on the job! :)

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Everyday Tips September 28, 2010 at 8:59 am

Beth – Since I would be part time (20 hours/week) and wouldn’t start until Mid-October, I am not sure I would max out the 401k anyway. When I had this job before, I contributed 50 percent of my income to the 401k without any issue, so I don’t think percentage would be a problem.

It is the temptation to use some of that money for fun that I struggle with. Well, not fun, but new fireplace screen, new front door, etc. None of that is fun at all now that I think about it. :)

Thanks for commenting!
Everyday Tips recently posted..Thoughts For Thursday- I Need A Bailout!

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beth September 28, 2010 at 9:14 am

BTW – the max you can contribute to a traditional 401k in 2010 pre-tax is $16,500. If it is another type of 401k, the limits are less. See you on Saturday?

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Beth September 28, 2010 at 9:18 am

Oh, and I would sock it all away also! Lord knows that we won’t have SS by the time we retire. :)

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Nicole September 28, 2010 at 8:50 am

Trust me, the government wants you to max out your 401(K) and IRAs more than it wants you to spend it all. The government wants you to be happy and spending when you’re old and voting and they want you to not need any social services. The government is currently working on ways of nudging you and everyone else into making good 401(K) choices (specifically, they’re working on nudging people into making the 401(K) choices that people say they wish they were making but never get around to).

Congrats on the job!

Um… when DH wasn’t working last year and got some contract income, we maxed out his IRA Roth (finally added a foreign index) and he decided to put the rest (except taxes) towards the mortgage.

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Kris September 28, 2010 at 9:06 am

Nicole – I don’t know, I think the current administration would love if I ran around and spent any unexpected income. The politicians seem to care way more about the here and now than 20 years down the road because they want a beautiful economic picture for reelection. Sure, they want me to be secure in my old age, but they also want the country to be secure now. (Hey, maybe this second income will save the country! :) )

I know at least half will go to retirement. The other half, still open for suggestion! :)

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Nicole September 28, 2010 at 12:10 pm

The current administration gives out grants to researchers on how to get people to save more for retirement.
Nicole recently posted..I really can’t handle normal people

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Roshawn @ Watson Inc September 28, 2010 at 9:36 am

We save or invest temporal secondary income. Like you, it generally doesn’t get spent and we “refuse” to adjust our budgets accordingly. I don’t why that sounds so rebellious though! :)
Roshawn @ Watson Inc recently posted..Huge Average Net Worth Round Up with Uncommon Money News

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Kris September 28, 2010 at 9:42 am

Roshawn – it does sound rebellious, doesn’t it. I never really rebelled at all growing up, so I am just going crazy now! :)

Glad to see you are saving so well!

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Roshawn @ Watson Inc September 28, 2010 at 11:45 am

Thanks, we are both pretty conservative, so having a strong base does increase our peace. Thus, we actually feel more comfortable spending on things we enjoy… very weird logic but somehow it makes sense in our heads.
Roshawn @ Watson Inc recently posted..Huge Average Net Worth Round Up with Uncommon Money News

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Khaleef @ KNS Financial September 28, 2010 at 11:29 am

All of the extra income would go toward finishing up our emergency fund and then to paying off debt! We wouldn’t consider it in our budgets either. Actually, I think all 2-income homes would do well to just live off of one income and sure up their finances with the other.
Khaleef @ KNS Financial recently posted..Manage and Tackle Your Debts

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Kris September 28, 2010 at 7:52 pm

Khaleef – I totally agree. It would be great if everyone tried to live off of one income, especially when it comes to a mortgage.

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Sandy L September 28, 2010 at 12:10 pm

I am in a similar situation where my monthly expenses are going down (thanks kindergarden) and am still questioning where to put it.

So far, its been mortgage, mortgage, mortgage.

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Kris September 28, 2010 at 7:52 pm

Hey Sandy – that is great that you are getting your mortgage paid down. How much longer until you are done?

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Vitaeus September 28, 2010 at 12:33 pm

1st pay down any debt( if I remember correctly, this is done in your case)
2nd Pay cash or short term credit card use to fix up the house
3rd Look at any energy saving, upgrade any single pane windows or poor insulation areas
4th Stock up the pantry with long term stuff
5th Fill up your rainy day fund to 3month/6month/1 year of expenses

The stock market is just a giant casino, with the house having an even higher cut than a real one

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Kris September 28, 2010 at 7:55 pm

Hi Vitaeus!
That is very good advice. The only debt we have remaining is mortgage, you are right. We already replaced all our windows and our appliances. The front door should probably be a priority because I can always feel a breeze through it in winter. Looks nice from a distance, but it is the cruddiest door. Attic insulation might be another option too. Hmm…..

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Sandy L September 30, 2010 at 9:33 am

We opted to fix up our house before paying down the mortgage. Yeah, it cost us more in interest, but it’s a nicer place to live in. We got a lot of energy effeciency in the process. We did insulation first,furnace second, doors third, windows last. Furnace would have been last if it weren’t on it’s last leg.

Our first year in our house we used 5 tanks of heating oil. Last year, we used 1.5. (and I live in a cold climate)
Sandy L recently posted..Creative Inspiration – Left Brain vs Right Brain

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Suba @ Wealth Informatics September 28, 2010 at 2:53 pm

We cannot afford to live in one income… yet. But if I can and if I get another source of income, everything is going in that 401k. I think there are other “types” of retirement plan for small business owners (if you are a contractor you can easily register a company and bill through the company?) which will let you put more than $16500 a year. I might allot some to mortgage and vacations too.
Suba @ Wealth Informatics recently posted..How much does it cost to raise a child

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Kris September 28, 2010 at 7:56 pm

Hey Suba,
When I contracted before, I was able to put away the 16,500. I loved when I hit the max and started getting real money in my check!

Looks like I am leaning toward some smaller home improvements. The front door needs to go, especially with the cold weather coming.

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Sandy L September 28, 2010 at 5:33 pm

Congrats on the job. I would love to hear your take on being a SAHM vs Working mom. I’ve only worked as a mom and I wonder if it’ll ever get easier as the kids get older. It feels very much like an elaborate juggling act on most days.

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Kris September 28, 2010 at 8:01 pm

Hey Sandy- I could write a book about working my vs SAHM vs Working SAHM (working from home).

My personal favorite: SAHM, hands down. But that is probably because my kids have so many sports, so being available at 2:30 without any worry is great. Working from home will be ok because I should be able to schedule any meetings before 2:00.

I must say, it depends on what all your kid(s) are involved in when determining the ease of it all. If your kid(s) are like mine, it may get harder as they get older. Keep in mind though, I have 3, so it is hard to cover everything.

Planning becomes your best friend. Have your child(ren) get involved with helping out more as they get older. I love that my kids can basically pack a cooler and help load up the car. You can do it for sure, just have some organization.

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Money Reasons September 28, 2010 at 6:43 pm

I think 401K sounds good… I think I would put a little in a Roth IRA to though… and then invest in dividend stocks with in and outside of the Roth (depending on the taxes).

I need to get a side gig to bring in extra money too! Although I have to admin, blogging keeps me pretty busy (now if only the money would come in :) )…
Money Reasons recently posted..Dividend Stocks- Lunch Experiment Update 4

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Kris September 28, 2010 at 8:03 pm

MR – you can get some blog cash going, I know it! (At least you have page rank – use it to your advantage!)

It will be great to see what my investing options are for the 401k. I would actually like to get some dividend-focus funds into my portfolio.

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Mandy June September 28, 2010 at 7:09 pm

First of all, Congrats! That’s a really great thing to happen during hard times like these. I would first build up a very abundant emergency fund and then invest in 401 K. That’s a pretty safe bet.
Mandy June recently posted..Reverse Robin Hood- Do Credit Card Rewards Give to the Rich by Taking from the Poor

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Kris September 28, 2010 at 8:04 pm

Hi Mandy Jane!
It looks like the 401k is the resounding vote! (The emergency find is pretty set. Well, at a level we are comfortable with. Others would probably be neurotic if they lived with our emergency fund.)

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The Biz of Life September 28, 2010 at 7:45 pm

Congratulations.

First I’d prepare for the next raining day and make sure my emergency fund was replenished, then I’d go for the 401K…. I’m a balanced, well diversified investor so I’d recommend 40% bonds and 60% stocks, both domestic and international in even portions.
The Biz of Life recently posted..Tweety has an Epiphany While the UK Moves Closer to Full Blown Statism

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Kris September 28, 2010 at 8:07 pm

Hey Biz!
I need to break down all of our investments and see how things are allocated at this moment. My husband has had several jobs, I have a few IRAs, so I am not sure I have things balanced like I should. Plus, I am older since I opened a new 401k, so I need to properly go with some more bonds too.

Thanks for the thoughts!

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Andrew September 28, 2010 at 9:03 pm

With a Roth IRA you will be able to invest in higher-dividend equities like energy trusts or REITS, and then reinvest the dividends. The principals and dividends then grow tax-free. Just another thought.
Andrew recently posted..Oklahoma Food Coop

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Squirrelers September 28, 2010 at 11:02 pm

I vote for putting it all to paying down debt. If you were living without the income, maybe you can continue to live without it. Pretend it isn’t there, and squirrel it away:) For the mortgage, that is.
Squirrelers recently posted..Let’s Talk About Deflation

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Crystal @ BFS September 29, 2010 at 4:07 pm

I know I already threw in my 2 cents in one of our emails, but I still think you should divide it up in some way that gives you a little extra fun – even 90% retirement and 10% towards a Florida vacation would at least give you a little happy. :-)

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The Wealth Artisan September 30, 2010 at 11:16 am

Hi Kris,

Currently my wife and I live off of my income very comfortably, but if she were to get a job, we’ve already discussed that her income would go to pay down the mortgage, fund savings, fund investments, or possibly a mixture of both.

I’d probably prefer a more linear approach and hit the mortgage full force, then once that is done, meet all of our savings goals, then go for investments, but it would require more discussion. Good luck, and enjoy :)

Thanks,
Timothy
The Wealth Artisan recently posted..Use What You Can Lose

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Joe Plemon September 30, 2010 at 12:07 pm

Congratulations on the stay at home job.

Because you already have a solid emergency fund, I would make sure that my family is investing enough (15%)toward retirement and use everything above that to pay extra on the mortgage. This being said, I don’t see any problem with using some of the money for fun stuff too.
Joe Plemon recently posted..Interview with Doug Warshauer

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eemusings October 2, 2010 at 7:31 pm

A second household income, or a second personal income?

I would probably allocate a little for personal spending, and the rest to various savings, depending on your situation.

My side income is usually split between travel/longterm savings, and occasionally some of it is directed toward our ‘irregulars’ account or just little splurges.
eemusings recently posted..October challenge

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The Financial Blogger October 4, 2010 at 9:19 pm

I would pay off more debts with any additional income.

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Financial Samurai October 8, 2010 at 9:07 pm

What’s the latest on this?
Financial Samurai recently posted..Blink And Blink Again

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Kris October 9, 2010 at 3:49 pm

Hey Sam,
Interesting question… what was a firm offer (verbal) went back to the drawing board because of bureaucracy. So, I am back in employment limbo. I will post an update when I am definitely employed!

Thanks for asking!

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Financial Samurai November 21, 2010 at 6:33 am

Gotcha. Hope it all works out. Your blog has really rocketed in Alexa and in the amount of comments! Fantastic stuff!
Financial Samurai recently posted..Living Vicariously Through You

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Kris November 22, 2010 at 4:28 pm

Thanks Sam! You have helped a ton with all our traffic rankings.

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FB @ FabulouslyBroke.com October 8, 2010 at 9:40 pm

As a contractor who gets 3 months – 1 year contracts, I can relate.

Each paycheque is a bonus, and I just siphon off $1000 – $2000 (depending on business expenses) to cover my expenses and I save the rest.
FB @ FabulouslyBroke.com recently posted..What I’ve Really Liked This Week

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Kris October 9, 2010 at 3:51 pm

FB – do you find it hard to plan with 3-12 month contracts? I imagine that would be quite stressful. However, you are planning appropriately, which I imagine you have to do.

Thanks for commenting.

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Mike Ramsey October 19, 2010 at 7:55 am

Same here! Whenever I get additional work loads, I don’t usually consider that earning as a recurring income for the month specially that I work at home. Well, as we all know that earning online is very unstable at times. What I did with some of my additional earnings? I was able to settle some stuffs, though not totally! Next, I invested in some offline bussiness together with my family. I’m proud to say that all earnings were distributed wisely this year.
Mike Ramsey recently posted..Tips On How To Stop Excessive Sweating

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Kris October 19, 2010 at 1:47 pm

Mike – that must be a good feeling that you know you used your money wisely. Not many people can say that these days.

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