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What to do?

Posted by booboomoomoo (My Page) on
Sat, Aug 11, 07 at 23:29

Hi Forum :o)

I have visiting this website for several years and always found great answers....hope you can help with this one!

We are in an unusual situation, I guess. I am in my early 30s, hubby late 30s. We own our home free and clear (no mortgage). We have paid off our student and car loans and our only current outstanding debt is approx. $9,000 on CC, all at low interests. I am paying them off aggressively, and my goal is to be free of that debt in the next 2 years.

OK - I understand some of you will be screaming at me for investing our money in paying off our home, instead of into investments, but the feeling of having no mortgage just outweighs the other stuff.....

Now - my questions.....;being debt free is all well and good, but we have very little saved for our retirement, so I want to start turning my attention to that. I currenlty invest a small % of my income into the company 401K. They do not match until I have been there a year. I am allowed to invest up to something like 80% of my income (as long as I don't exceed the max allowed $$-wise). Right now my spare $$ is going on paying off the CCs. Hubby is self-emplyed, therefore no comapny 401K or matching etc.

So - considering our future retirement investments are pretty paltry......and we plan to focus on them aggressively, what/where/how should we be investing?? I really haven't a clue where to begin, what to do, anything. I will increase my contributions once the company match kicks in, but what else should I do at this point???

Thanks in advance -

BooBoo


Follow-Up Postings:

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RE: What to do?

Being clear of a mortgage in your 30's is a great starting point. Though others may counsel it is better to seed the retirement funds early, you deployed that money effectively and knocked off one critical goal. And you know the next is to lose the credit card debt.

Another priority should be your emergency fund, a cushion of accessible (but not impulsively available) moneys to turn to if the unexpected happens. 3-6 months of your expenses. Put that into laddered CD's (different maturities so you can access if needed or roll it into a new CD to remain your cushion). CD rates are very decent now.

And as soom as you are able, go ahead and fund the max that would be matched at work - even before they will match. Those moneys will go to work for you with or without that match and you will become "used to" your paycheck being minus those funds.

As for where to put it, since you are in your 30's, you should be pretty aggressive with those funds. Aim for around 70% equities (stocks) and very low management fees. Index funds like Vanguard would be a logical place to start. Maybe begin with something basic like their 500 index fund. Then as you learn more, consider other options.

Does your company have a range of options for your 401K?


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RE: What to do?

Here is a variation on celticmoon's idea.

Like celticmoon, I like Vanguard. They have a wide range of financial products and strive for very low costs.

Unlike celticmoon, I am dubious about the need for laddered CDs, mostly because of the complexity. Vanguard offers what they call their "Treasury Money Market Fund," which offers pretty nearly the same interest rates as CDs together with instant access to your money, which is a good thing for an emergency fund. It is true that this fund is not insured by FDIC. However, it invests exclusively in US Government obligations, so it is not clear to me that it is any less safe than FDIC-insured CDs. You will, of course, want to do your own research rather than trusting an unsupported claim from a stranger on the Internet, but at least you know my opinion.

Anyway, if you have a Vanguard account, there are three very convenient things you can do with it.

First, you can arrange to transfer money between Vanguard and your bank on two business days' notice. That makes it even easier to get at your money if you need it, and also makes it easier to invest money as it becomes available.

Second, you can arrange for automatic transfers, which makes investment almost painless.

Third, and perhaps most important, once you have money in a Vanguard fund, you can move that money to other Vanguard funds. It is true that you have to decide what funds you want, and without knowing a lot more than you've revealed about your goals, no one can really advise you. However, one place to start might be Paul Merriman's website. He's a Seattle-area financial advisor who has put together a website with an enormous amount of useful information, mostly in the hope of attracting business. I am not a customer of his, and it doesn't matter to me whether or not you follow his advice. However, I have learned a lot from his website, and think you may find it worth a look.

PS: He likes Vanguard too.

Here is a link that might be useful: Paul Merriman's website


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RE: What to do?

DH can do a Self Employed 401k, if he is his only employee there is a special sole proprietor one which is a great deal. Remember 401ks are great because it is income that is not included for taxes so it is like getting 1/3 free depending on your tax rate. Or you can do an IRA or Roth IRA before you file your taxes (or possibly all of the above)

I am finding that money markets are actually paying more than CDs and this way you can add to it whenever you want. This may change

What rate is the CC debt at? Is it below 6%? Anything above that really should be addressed since it is not tax deductible. If it is above 7% you may want to think about a Home Equity loan or line. A line will give you emergency funds until you have your reserves built up and costs nothng if you do not use it. The advantage over the CC is it is usually deductible. You do need discipline not to use it


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RE: What to do?

That is quite an accomplishment of being nearly debt free at your ages. I fully understand the nice feeling of not having a mortgage, which means that emergency funds a what you need to live on should be minimal. Just be careful that you don't wipe out your credit worthiness by not having any credit history for a long period of time. My step-father did this and it cost him dearly later in life when he needed to get some equity out of his home due to an illness. Credit reporting tells creditors not only your debt load but also is a way for them to judge whether or not you are capable of making a monthly payment without being late.

As for where to start, I would recommend actually working backwards. There are many tools on the Internet that can help you do this, or you can use a simple tool like Excel, but the model is not simple to create. What this means is, determine when you want to retire first and how long you think each of you you will live (I would use 85 - The higher the number the more conservative). Second, determine the lifestyle you want to have (ie how much money in future dollars you will need monthly to do the things you want) in retirement. Third determine what you think is a reasonable rate of return you can achieve over the years to retirement (At your age 10% is reasonable). Now you are ready determine exactly what you will need to save monthly to meet your retirement goals. You can play with things like the retirement date to get to a number that you can handle.

Once you know how much you need to save and what you need to earn on your money to get to retirement, you are ready to go talk to the investment people.


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RE: What to do?

Paying off your mortgage so young is a really great thing. Most importantly, it allows you greater monthly cash flow and a lot of flexibility when it comes to making future investments and potential life changes. There are financial arguments against paying off your mortgage, but they are highly sophisticated and depend on a robust real estate market...so probably not the best thing these days.

What is concerning, however, is your level of credit card debt. Carrying credit card debt is very expensive and can quickly spiral downward as you try to make interest payments and continue to make new purchases. So the first thing to do is pay this off.

You mention that your credit card costs are cheap, but no matter how cheap they are, they are expensive. Your credit card debt level is pretty high, so you might consider taking out a mortgage to pay them off. The advantage of using your house to pay off your credit card debt is that a mortgage is pretty cheap interest rate-wise and the interest is tax deductible. The disadvantage is that you move from unsecured debt to secured debt. So if you don't make your home payment, they can take your house. Your history of paying down your mortgage, however, shows you can handle the debt load. The other disadvantage of the mortgage are the transaction costs, which can be expensive depending on the state you live in.

As for investments, the recommendations of the respondents has been very good. You should definitely take advantage of your 401(k), but only after you have established your cash reserves of 3-6 months. A 401(k), with or without matching is a great, great deal since the interest will accrue without paying tax until much later, which effectively increases your savings by 30-40%, depending on tax bracket.


 o
RE: What to do?

Paying off your mortgage so young is a really great thing. Most importantly, it allows you greater monthly cash flow and a lot of flexibility when it comes to making future investments and potential life changes. There are financial arguments against paying off your mortgage, but they are highly sophisticated and depend on a robust real estate market...so probably not the best thing these days.

What is concerning, however, is your level of credit card debt. Carrying credit card debt is very expensive and can quickly spiral downward as you try to make interest payments and continue to make new purchases. So the first thing to do is pay this off.

You mention that your credit card costs are cheap, but no matter how cheap they are, they are expensive. Your credit card debt level is pretty high, so you might consider taking out a mortgage to pay them off. The advantage of using your house to pay off your credit card debt is that a mortgage is pretty cheap interest rate-wise and the interest is tax deductible. The disadvantage is that you move from unsecured debt to secured debt. So if you don't make your home payment, they can take your house. Your history of paying down your mortgage, however, shows you can handle the debt load. The other disadvantage of the mortgage are the transaction costs, which can be expensive depending on the state you live in.

As for investments, the recommendations of the respondents has been very good. You should definitely take advantage of your 401(k), but only after you have established your cash reserves of 3-6 months. A 401(k), with or without matching is a great, great deal since the interest will accrue without paying tax until much later, which effectively increases your savings by 30-40%, depending on tax bracket.


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