Capital Allocation

In my quarterly review that was published recently on Seeking Alpha, I mentioned that I would be temporarily suspending new capital investment during the second quarter and allocating my savings for the next few months to my emergency cash reserve. I wanted to take a moment to elaborate on the reasons for that decision.

As discussed in a previous post, I have managed to get a new job that starts in the second half of 2013 and will involve moving to a different state. Even though my employer will cover selected moving expenses, I still expect to incur some one-time costs related to the move, so my expenses will be higher than normal. I will also have a temporary reduction in income because my current job contract is over at the end of June, but my new job contract does not begin until August (to coincide with the start of the academic year), so I will have no job income for July. Thus, with higher expenses and lower income this summer, it seemed prudent to be more conservative with my capital allocation policy.

My savings from April, May, and June will go toward increasing my emergency cash reserve, which I will use to cover any moving-related and July expenses. I will also be receiving payments from Seeking Alpha in April and July that will partly compensate for the lack of July income. My savings in June will be helped by the fact that I won't have to pay rent for that month (when I signed my lease I had to pay first and last months' rent) and I should get my security deposit back after I move out. The rent-related savings and security deposit will be more than enough to cover my July rent and utilities at my new place. Thus, I might make little use of my cash reserve in July, but I decided to be as conservative as possible, considering that I don't yet know how much all my expenses during that time will be.

If things work out as anticipated, then in August/September I will trim the excess from my cash reserve and reallocate it toward investing. In addition, in July I should be able to roll over the two retirement plans I have with my current employer into a traditional IRA, which would make a large chunk of money immediately available for investing. I have decided not to do a subsequent conversion into a Roth IRA because I crunched the numbers and it seemed too disadvantageous to incur the considerable tax burden that would arise from the conversion (which I estimated to be at least $6K). Edit: I reran some numbers using different online calculators and it looks like converting to a Roth IRA and paying the taxes might be more advantageous in the long run. I will need to think more about this issue. Collectively, the excess from my cash reserve, the rollover IRA, and the higher income from my new job should give me quite a bit of new capital to invest in the second half of the year, which will make up for the temporary suspension of new capital investment during the second quarter.