Return to the Household Finances Forum | Post a Follow-Up

 o
Young family investing: where to start?

Posted by lillyg73 (My Page) on
Sat, Jun 9, 07 at 1:47

My husband and I are in our early 30's and know that we need help investing but don't know where to start! I guess my main fear is getting on with a finacial professional who is more interested in making commissions than looking out for our best interest. How do we go about choosing a finacial planner that is not married to one set of funds but can advise us objectively in all areas? How do we determine what are reasonable fees? What vehicles should we consider to put our money in? We have about $400/mo that we'd like to start investing. Plus $100/mo to put towards our baby's education fund (need to start that, too.)

To give some background, we have about 10K in an IRA, (just sitting in the bank making some pitiful rate.) I am a SAHM and DH works for a small business (with no 401k avail.) We generally keep 4-5K in savings. Should we put that to work and just keep a HELOC for emergencies?

As for debt, we have an 80/20 mortgage (at 5.25% and 9%) and one car payment (at 5.75% which will be paid off in 6 months freeing up $500/mo.) When we have a big expense we use the zero-interest-on-transfered-balance-credit-card game (and make damn sure to pay it off on time.) Our credit is spotless.

We also have about 10K in home improvements on the horizon. Besides the zero interest credit card and HELOC are there other options worth considering to finance this?

I know I am posing SO many questions with not much info to work with. Thanks for reading; your advice is appreciated.


Follow-Up Postings:

 o
RE: Young family investing: where to start?

The best education savings vehicle are the 529 plans. Every state offers them, and you can invest in your own state plan (some tax advantages to this) or any other state. Each state manages their 529 plan or plans (they may use more than one fund company) individually.

They are much better than the old UTMA accounts. UTMA accounts are counted in school aid formulas because the child owns the money; they receive it at age 18 whether you think they can handle money or not.

529 plans are owned by the person(s) who set them up. You can change the beneficiary at any time, and therefore they are not usually counted in the financial aid formula.

There are different types of 529 plans; I'd recommend just the basic savings type, unless you're good at predicting the future and can tell in 17 years exactly which college your baby is going to want to attend!

There is USUALLY a minimum to start investing, either in a 529 plan or a mutual fund portfolio. However, these minimums are often lowered if you sign up for monthly deductions from your checking account, which is a sensible way to invest anyway.

I would NOT recommend you eliminate your savings. Keeping 4-6 months worth of expenses is the very minimum you should have in cash. You should establish a HELOC but do not use it unless it is a real, bona fide emergency - this is particularly important because you're a one-salary family. Anything happens to your DH, you would not be able to get a dime's worth of credit on your own. Take the checkbook and credit on the HELOC and lock them in your safety deposit box (and if you don't have one, GET ONE NOW).

You should seriously investigate how much in taxes it will cost you to convert the IRA to a Roth IRA. You have the 20-yr plus timeline where compounding to a Roth is worth the tax bite. You can convert the IRA over a period of a few years to spread out the tax hurt.

Of your $400/mo, I would recommend you establish a Roth IRA in each of your names, and direct your money into the two accounts equally. Converting the IRA to Roth should enable one of you to at least make the minimum initial investment (it's usually $2500 but can be as low as $1K, depending on brokerage and fund selected).

Use a low-cost reputable brokerage such as Vanguard or T. Rowe Price. Both of them have Target Retirement funds (A multifund portfolio that automatically becomes more conservative as you approach and enter retirement) that are a moderate but well-balanced approach to a diversified portfolio that you can later change, if you begin to feel comfortable becoming more involved in mutual fund selection.

But for a "set and forget" approach that will work for 85% of folks, that's what I'd recommend. Most people don't have the interest in business and finance to be fiddling with their portfolios, and then they fall into the "buy high, sell low" herd mentality that kills their return on investments.

Also, do not depend on employer life insurance for your DH. With a SAHM and a baby, he needs level term life insurance through a policy that is portable; e.g., you buy it from a reputable low-cost carrier like Transamerica or West Coast Life. If you're in your 30's the cost of $500K of insurance is so low it's laughable these days. Believe it or not, I'd also recommend you buy $250K of insurance for yourself. Your DH would have sizable costs to replace you if you died unexpectedly.

Pay the premiums annually; it's the lowest cost. You want at least a 25-year Level Term, preferably a 30-yr Level Term.

Please make wills, durable healthcare power of attorney docs, and HIPAA releases. Not doing so hurts the people you love when you leave a mess behind.

Just my advice, based on: working for an independent Certified Financial Planner; being in the insurance industry for 13 years and banking for 7; and depending on employer group insurance then suddenly losing my job and having to scramble to get level term insurance on my own!

Good luck! You're doing a very wise thing by getting started now. My DH and I didn't start until we were in our late 40's and it's an uphill struggle when you start saving so late.


 o
RE: Young family investing: where to start?

Lilly - we started saving in our late 20's/early 30's and I'm glad we did. We didn't save much at first, but now a decade or so later it has started to add up.

Jkom51 - 529 plans do seem like great deals. But I do have some questions about them:
1) What happens to the money if a child decides not to go to college?
2) Do 529s still require college attendance in a particular state? It seems to me that they used to.
3) What are the advantages of a 529 vs. say a Coverdell?

Most really good financial planners insist on term life in addition to the life insurance carried at work. At least for families with young kids. At what point (if ever) does this additional life insurance become unnecessary? The premiums may be fairly low for people in their 30's but they aren't free. I guess I don't really understand why all of this life insurance is considered so necessary. Why not save that money instead? Especially when you have decent job security (and health) and are already paying for life insurance (for both spouses) through work. It just feels like overkill to me.


 o
RE: Young family investing: where to start?

answers on 529 plans:
1. if the child doesn't go to college, the money can be transferred to another child, niece, nephew, grandchild or even to yourself (should you want to take that art history class you've been dreaming about..). If your child ends up getting a full scholarship then you can take the money out after paying taxes on the earnings. If you don't want to transfer the money to someone else and your kid doesn't go to college, then you pay taxes on the earnings and a 10 percent penalty.
2. you can use the 529 funds in any state
3. the advantages of the 529 over the coverdell is that you can deposit more than in the coverdell and you can deposit no matter how high your income. But the advantage of the Coverdell is that you can use those funds for any level of schooling, including high school.

take a look at the link below for more info.

Here is a link that might be useful: Motley Fool's info on college savings


 o
RE: Young family investing: where to start?

Thanks Chloe! Great website.


 o
RE: Young family investing: where to start?

I'm certainly no financial planner, analyst, etc., but my wife and I are 26, and we carry 500K of life insurance on me and 200K on my wife. We have a 2yr old, with another one on the way. I view the life insurance as necessary for a number of reasons...My wife does work, though she's a teacher in a parochial school, so the income is not much. I want to make sure that if something happens to me, she can pay off the house, and have plenty of cash left to invest, or just invest it all and keep making house payments, etc.

If something were to happen to her, there's not a lot of income to replace, but it sure would be great to be able to pay off the house and have one less thing to worry about at that time.

The way I see it, by allowing us to pay off the house if something were to happen, it leaves a lot of income free to put towards college, and other things to ensure the kids have a good life.

If nothing happens to us and we both live to be 80, our kids will get the benefit of the life insurance. It's like a guaranteed inheritance for them to help them out in their lives.

So, for me, it's all about the kids...


 o
RE: Young family investing: where to start?

I noticed the OP asked about the best way to do the $10K home improvement bill - I'd recommend the zero-interest credit card. The OP might also want to pull their credit card report since you can get a free one annually from each of the 3 major credit companies. It's wonderful to save money and manage your credit tightly, but it's also a sad truth that the more you owe (up to a certain point as % of income) the better you "look" to the credit bureaus!

And habiem, you are extremely wise to carry life insurance. I always tell my younger friends and co-workers that if they marry, they don't necessarily need insurance. But once they buy a house and/or have children, it's an absolute necessity. So many people treat it as, "I'm gambling against my death, and I don't think I'm going to die young." Instead, they should be thinking of it as protection for the spouse and children -- thinking of others instead of just thinking about yourself.


 o
RE: Young family investing: where to start?

I totally agree - it is an absolute must to have adequate life insurance when you have a family. In fact, as soon as I announced my first pregnancy at work I went to HR and upped the life insurance on myself. I wanted my husband and unborn child to have something to fall back on in the event that something happened to me during childbirth, etc.

After my first child was born, I became a SAHM. And we obtained life insurance through dh's work. About what habiem now carries. The insurance was dirt cheap and we lived fairly modestly so I felt adequately insured. We were in our 30's and healthy so it kind of went in one ear and out the other when a CFP told us to get additional term life policies. Why pay extra when we already had insurance?

Now we're in our early 40's. Older, but still pretty healthy. And a bit more aware that bad things can really happen in life - we've seen some real heartbreakers. We're still insured through dh's work but now I'm wondering if we should get term life also. Our kids are still pretty young.

I know term life is more expensive now than it would have been for us a decade ago. Are we still young enough to get good rates or did we miss the boat? How difficult is it to qualify for healthwise?


 o
RE: Young family investing: where to start?

Actually, now is the best time to apply for term life insurance, while conversely it's a very difficult time to apply for long term care and individual medical insurance.

Life insurance companies are finding that modern medicine has greatly improved mortality on diseases such as cancer, heart attacks, and diabetes - thus, term rates have dropped dramatically.

I bought a $250K level term policy in 2003, standard rating (I'm overweight). In 2006 I bought a $500K level term policy, standard rating (still overweight and now I take lovostatin for high cholesterol)...for a lower premium than the 2003 policy cost me for half as much insurance!

Go for it.


 o
RE: Young family investing: where to start?

jkom51 - That is great news about term life. Any suggestions as to which companies provide the best policies? Also, what should I look for in a policy?


 o
RE: Young family investing: where to start?

When I used to pull quotes for clients at the CFP office I worked at, we stuck to the better quality, established carriers for all the different insurance lines.

Generally, for level term you want 20, 25 or 30 year, depending on your age. Figure out what your need is: mortgage coverage? college expenses? giving the surviving spouse a retirement nest egg in case you die early? Pick the length of term that works best for you.

I found the consistently low quotes came from Transamerica Life, AIG, and West Coast Life. WCL is a long-established company and has always been extremely competitive on term policies even though they're not a household name.

There are other good companies, those are just the ones my boss was licensed with, that we used consistently. Good luck!


 o
RE: Young family investing: where to start?

Thanks for the info!


 o
RE: Young family investing: where to start?

No one here mentioned disability insurance. if one of you becomes disabled and not able to work, there may not be any income for a duration, and you may be taking care of a sick spouse. Not only that, the expense may go up due to increased medical costs. Disability insurance is just as important as you life insurance if you are being financially prudent.

You did not say what percentage of income you are saving/investing. General rule of thumb is 10 to 20% of your income. The actual dollar is less important. For example, if you are making 100k then saving 5k per year will not maintain the life style you are accustomed to when you retire. If you are making 20k a year, saving 5k is amazing! Because you are a SAHM, your Social Security benefit will be very little unless you go back to work later. You will have to compensate for that by saving more....

Accepted word of wisdom about funding your children's college education is that you MUST fund your retirement first. If you have a good income, then your family will not quality for a signicant amount of financial aid and it may help you to set up tax deferred money, ie 529 plans. Otherwise, you really need to pay yourself first, ie retirement, then if money left, fund college education. Again, this really depends on your income.

By the way, if you are paying PMI, I would work on paying off 9% on 80/20 as fast as possible, meaning every extra dollar. Unless you make a huge return on your investment, you won't do better than 9% interest you are giving the bank right now. When you pay off 20 at 9%, you will free up PMI and the mortgage.

My back ground has nothing to do with finance, and these are few things that I quickly noticed. These are the type of things that a good financial planner should discuss with you, not what stocks to buy.

PS if you are serious about budgeting and saving, I would put money aside for the next car when you pay off your current car now. Then when the time comes, you can pay for the new car with cash. That money is not really free. This is a part of your auto budget. $500 per month, in 4 years you will have more than 24k for a car. The reason buying a car with cash is powerful is because it makes you live within your means. When you got 24k for a car, that's what you got. Not 30k car with interest and payments. It forces you to sacrifice to save, ie a cheaper smaller car not a big fancy one with payments. This type of thinking/living is really hard for most Americans. We were lucky in that my husband and I have parents that always paid cash for cars and saved hard to fund their retirement and their kids education. They taught us to be not frivolous with our money. That was the best financial education we had. The best financial education you can give your children is to save first then spend later.


 o
RE: Young family investing: where to start?

The trouble with disability insurance is two-fold: 1) for an average non-exempt worker it covers only 40% of your salary, and 2) standards for disability insurance are really strict. I, for instance, did not quality even for my small employer's disability insurance coverage and was declined.

Self-employed folks can get a higher limit on disability salary coverage, higher than individuals can. I can't remember if the max was 60% or 80%. Again, underwriting is very tight right now.

The State of CA covers short-term disability. Your state of residence may differ.

In our considerable experience with HMO's (Kaiser), they were extremely reluctant to give any permission to remain off-work for more than 2 months, which is what the State covers anyway. This included a major stroke, an incident with compound leg fractures and a second with compound arm fracture.

We decided it wasn't worth the money and preferred to spend it on a long term care policy instead, which we bought before age 50 to get a sizable break on premiums.

This difference of opinion illustrates again there is NO one-size-fits-all blueprint for investing and financial security. You, and you alone, must weigh the pros and cons and decide how much risk you are willing to live with. You cannot eliminate all risk, so it's up to you to decide what seems sensible. As your income grows, remember to adjust your various insurance coverages accordingly. Like a retirement plan portfolio, it is a fluid situation that requires you pay periodic attention to it, particularly after life-changing situations.


 o
RE: Young family investing: where to start?

Lilly,

I have to agree with the advice about 529 college savings plans. They are a wonderful savings vehicle. We are part of Connecticut's plan (CHET) and find it a great way to save.

I also found a site that is a great way to go directly to many informative 529 articles out there on the web. See below and best of luck to you!

Dawn

Here is a link that might be useful: 529saver.com


 o
RE: Young family investing: where to start?

Wouldn't it be wise for our SAHM to establish some credit in her own name? The couple could divide their regular bills and have her pay some with her credit card.

When my parents divorced my mother had no credit until she took out a Marshall Field's card -- now you KNOW I'm old!

RE: College savings accounts. Do not assume your kid(s) will attend college. Our DS (an only child) didn't decide to get further education until his late 20's. He's a paramedic now, with wife, child, home.

One of the best gifts you can give your children is to be financially independent yourselves so that you will never be a burden to them, regardless how long you live. (I am leary of long-term care insurance though. It's better -- for us, at least -- to self-insure.)


 o
RE: Young family investing: where to start?

It's great that you two are thinking of saving/planning for your future.

I work hard and enjoy my 'toys' but I always, always pay myself 1st. Maxing out a 401(k) is a great place to start. Sorry if this has already been addressed in prior posts. Also consider a ROTH IRA.

A good financial planner would be the place to start. Don't think that you have to stick w/ the 1st one you meet. I'm lucky that I like the planner my mom had and I've been using him for 15 years (1st meeting w/ him I was 21 and took out a life insurance policy).

Good luck!


 o
RE: Young family investing: where to start?

Hi lillyg73,

You've received quite a variety of worthwhile advice/suggestions here.

I'm wondering what results that they may have produced/are producing in your mind.

Come back - if you wish - to let us know how you react to the various ideas, or some of them, and we can carry on from there.

ole joyful


 o
RE: Young family investing: where to start?

To your investing question, the best vehicle for typical investors are Exchange Traded Funds or ETF's. They look and function like mutual funds but are bought and sold like stocks. Expenses are lower than those of funds. The major issuer of ETF's is Barclays thru their IShares division. Another major manager is Vanguard. Most investors are better off sticking with index funds/ETF's. At your ages, you should put all your money into stocks through ETF's. You have a long risk horizon and can afford risk. Many will tell you to diversify your portfolio and include bonds and even CD's. Bonds are not a riskless class of investments. Look at a few bond charts to confirm this. Risk takes many forms and one of them if not covering inflation, hence a shortcoming of CD's. It is vital to remember that stock brokers are salesman first and asset managers second. Research various firms and learn which have the best returns for their recommend stocks each year. Then seek a broker with whom you have good rapport. If you are investing $400 monthly dollar cost average into ETF's.


 o
RE: Young family investing: where to start?

I found that, though I can have certificates issued for mutual fund ownership (no fee), or stocks (about $35. each), I cannot have a stock certificAte issued for an Exchange-Traded Fund (ETF) in Canada.

Which means that I cannot use the evidence of ownership of an ETF as security to arrange a line of credit or loan with my bank/credit union, at low rate of interest.

I can use it as collateral with the stockbroker who holds the fund, as well as others of my assets, in his electronic data base ... but my experience has usually been that the stockbroker usually charges at least 1% higher rate than at the bank, which is an appreciable difference, when compounded over time.

Sometimes I have little asset easily available as ready cash, or that I choose to liquidate now to make available as money in case of an emergency, as I may not like the price available, or the sales commission required.

As I sometimes lack available ready-cash, I have a fully-secured Line of Credit, backed by certificates of stocks and mutual funds, to obtain a low rate of interest - currently about 6.25%, but unused at the moment.

Then I can use a credit card in an emergency, then use my line of credit to pay off that amount in full before it starts accruing interest, unless the credit card carries 0% rate, which is not the case, as I have had my card for several years.

The trouble is that the interest paid on a loan used for an emergency or consumption is almost always not deductible and I prefer to use loans for investment, thus making them deductible.

So when I use an emergency loan for emergency, which is seldom deductible, I stop investing for a while and use that part of current income to pay off that non-deductible-interest loan as quickly as possible.

Then I start using that regular saving to begin investing again, plus may borrow to invest, if I feel that the situation justifies it.

Also, in my Canadian situation most of the time, I can borrow for investing at almost no net cost.

Are you familiar with the Rule of 72?

Divide 72 by the rate of gain/growth that you are getting and the result will show you the number of years that it will take for your investment to double.

Thus, investment return of 6% will double in 12 years ... at 9% will double in 8 years.

But it's not the raw figure that counts.

If your bond pays 5% and you are in 20% tax bracket, that means that 1% is lost to tax, so your after-tax rate of return is actually 4%.

But when your bond matures, you'll get back only the number of dollars invested originally, so those equal-value dollars suffer annual erosion of value due to inflation. If you assume inflation to be 3%, that leaves your effective rate of return at only 1%.

Which means that it'll take 72 years for my $1.00 current return on invested asset to become $2.00.

I bought a long-term quality Canadian stock 40 years ago for $4.20, that paid me about a dime or so a year in dividend, which is tax-advantaged here. Over the years, it's paid about 3% or so, or about 2.5% after taxes.

A few months ago I could have sold that stock for $107.+ per share, and a few months later for about $89.50, and since it recovered to about $101.00, then last Friday dropped to about $96.50. Did I choose ot sell it? Not on your life! It has grown well for me over the years, and is currently a high quality stock.

As the stock has grown well over the years, you can see my reasoning when I say that I do not feel the need to make any calculated deduction from current dividend rate to allow for the erosion of value of the basic investment due to inflation.

Current after-tax income of 2.5%, divided into 72, shows that those dividends reinvested will double in about 30 years ... to my mind, a lot better than taking 72 years to do it.

When I calculated the rate of growth of the stock a while ago, I think that I calculated that to be about 7% compounded.

So you can see my reasons for being happy with that investment.

That's one of my better ones - one of my equity-based mutual funds has taken over 20 years to slightly more than double. I'm not very pleased with the folks who have managed it over the years - and they've changed several times.

Good wishes as you pursue your savings and investment program.

ole joyful


 o
RE: Young family investing: where to start?

Stick to investing in the s&p 500 index etf and a few quality mutual funds. A good financial planner will make money on you, but you just need to find a good one. My dad was a financial planner for years and really helped a lotof people so i got investing early.

In my opinion your savings is much to low to put that all into investments but I would start buying diversified mutual funds and adding to them each month. If you have spare time read a book by Jim Cramer, i know i know some might say just read benjamin graham but that how many people will?
My golden rules.
start small
be consistent
No more than 5% of your money in one investment
Until you habe maxed out all available pre and post tax deferred vehicles (401, ira, etc) dont get whole life insurance.
Small term policy to get u through your younger years.
Focus on minimizing your spending until your savings are on the right track. Like whats up with 2 mortgages? Get that taken care of stat. No wayyou can make 9% so pay that bad boy off.


 o
RE: Young family investing: where to start?

I think the OP decided what to do already, as the post is five years old.


 o Post a Follow-Up

Please Note: Only registered members are able to post messages to this forum.

    If you are a member, please log in.

    If you aren't yet a member, join now!


Return to the Household Finances Forum

Information about Posting

  • You must be logged in to post a message. Once you are logged in, a posting window will appear at the bottom of the messages. If you are not a member, please register for an account.
  • Posting is a two-step process. Once you have composed your message, you will be taken to the preview page. You will then have a chance to review your post, make changes and upload photos.
  • After posting your message, you may need to refresh the forum page in order to see it.
  • Before posting copyrighted material, please read about Copyright and Fair Use.
  • We have a strict no-advertising policy!
  • If you would like to practice posting or uploading photos, please visit our Test forum.
  • If you need assistance, please Contact Us and we will be happy to help.


Learn more about in-text links on this page here