| Messy Financial Picture - Advise Welcome |
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Nishima
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Cash: $ 3.00
Posts: 14
Joined: 28 Nov 2006
Location: North Carolina
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| Messy Financial Picture - Advise Welcome |
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Hello folks. I just found this forum today and have done some reading. I apologize in advance for the novel.
I am looking for a little advise on investments and priorities. My wife and I are saving for an international adoption which will cost between $15,000 and $20,000 and we have 2 years so save up the money. (China requires a minimum age of 30 for both parents to adopt.)
Our financial picture is getting a little messy and I'm not sure we're making the most of our potential investment income. I'll try to summerize:
Current Debt:
1) Mortgage: $161,000 @5.25% fixed 30 years ($1134/mo)
(home value ~$180,000 so we have some equity)
2) Student Loan: $7000 @ 6% fixed 10 year ($125/mo)
3) Vehicle: $15,000 @ 6.2% fixed 5 years ($282/mo)
Current Investments:
1) 401k: Contributing 10%/mo - returns have been good
2) "Systematic Saver CD" - $6000 - contributing $500/mo @ 3.5%
The saver CD was started since we wanted a low risk investment for the adoption fund and is up for renewal in 03/07. It should be worth about $8000. Now just renewing that for 2 more years would get us the $20,000 for the adoption plus a little interest. If we renew it next year, I'm hoping the interest will be better...rates have gone up since we started it.
My question for you folks is there another type of short-term (1 or 2 year) nvestment that is low risk that could earn a little more interest? My wife is more adverse to risk than I am, but neither of us want to reach the age we can adopt finally and find we lost some of the money!
Also, in addition to the saver CD and 401k contribution we have about $400 or $500/mo that we're just putting into a savings account for emergencies. (My '89 blazer died which is why I now have a car payment listed above.) The savings is pretty low at the moment so we're working on building that up again. The interest rate on it is horrible though...should we get something else? Are there fees with money market accounts?
Should I decrease my 401k contribution to pay down some of the loan debt, or car debt? My wifes student loan interest will no longer be tax deductible after this coming tax season. The returns on the 401k have been very good (~10 - 15% each year) but of course none of the money is accessible until retirement. (Without big penalties.)
Should I take out a home equity loan to pay off the car and student loan since the interest would then be tax deductible?
I feel like our money is not really working for us except for the 401k, and at the same time we have $20k of debt that bugs me. Zero credit card debt however, I am quite proud of that.
Thanks in advance for any advice and again...sorry for the long post.
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Tue Nov 28, 2006 4:39 pm |
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oldguy
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IMO, you have money in the right places. The short-term money has to be stored where the principal is protected, ie, it can't be invested. And your long-term money needs to be invested in moderate-risk investments where you can earn 10% or 12%.
It is a priority (for your future Net Worth) that you fund the retirement accounts as early and as much as you can. Example: A $7k loan at 6% will cost you about $9500. But that $7K invested will grow to about $23,000 in 10 years, $70k in 20 years - so it important to KEEP good loans (6% & lower). (Why are you paying $125/m on the SL? Isn't that prepaying principal?)
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Tue Nov 28, 2006 5:21 pm |
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Nishima
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Cash: $ 3.00
Posts: 14
Joined: 28 Nov 2006
Location: North Carolina
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Interesting.
oldguy: I'm sure you're right about keeping the low interest loan so that other money can be invested if it earns higher than the loan interest. It's hard for me to think like that.  I tend to think of any loan like high interest credit card debt...I'll work on it.
The student loan payment is actually only $75/mo right now but it's on a schedule that increases periodically (when I met my wife it was $60/mo). I'm pretty sure it increases to $125/mo within the next year...she's had it for several years now.
I agree with your advise too coaster. I am hesistant to put our house up as collateral for those loans, but wanted to make sure that was the right thing.
The biggest thing is that our only "liquid" savings, the savings account, earns less than 2%. The 401k earns well, but it's not available if needed. The CD should get a better interest when we renew it next year, but again...it will be locked in.
Would a money market account be a better place than the savings account for our emergency/liquid savings? Is my savings account just terrible and other banks have better? (I bank with Wachovia.)
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Tue Nov 28, 2006 7:55 pm |
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oldguy
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Cash: $ 751.85
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The biggest thing is that our only "liquid" savings, the savings account, earns less than 2%. The 401k earns well, but it's not available if needed. The CD should get a better interest when we renew it next year, but again...it will be locked in.
nish, the rate really doesn't matter. Your EF is where you store a small amount of available cash - maybe $5000 max. At 2%, you net $80/y, at 5% you net $200/y - neither really has an effect on your life - it is the cost of keeping the money liquid.
Conversely, for your investing, rate IS important. $5000 at 6% for 30 years is $28,700. But at 12% it is $150,000, ie way more than double the $28k.
Personally, I don't keep a liquid EF (maybe planners weren't invented back then, or I simply didn't know any better). Our money is in SP500 Index account. So when we have an emergency, it could be a double whammy, we could be forced to sell SP500 at a loss to raise the cash. But after many many years at 12%, the account is sizable - ie, the growth has outweighed the risk of having to sell low.
I'm sure you're right about keeping the low interest loan so that other money can be invested if it earns higher than the loan interest. It's hard for me to think like that.
Here's a more graphic example - say one of my rentals is paid-for. Then I put a $100k 30-yr, 6% loan on it and put the $100k into the SP500. The loan will cost me $216,000 over 30 yr. But the $100k will grow to $3M. That is the power of retaining the use of someone else's money (at 6%) and growing it at 12%.
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Tue Nov 28, 2006 8:59 pm |
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sam1000
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move the money to Eloan savings. It's FDIC insured and they are offering 5.5% APY (5.36% APR compounded daily). They need $5000 minimum balance but you have that.
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Tue Nov 28, 2006 10:28 pm |
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rockhound
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I think you're right for building up your savings. Like Coaster mentioned, get 6 months worth of living expenses saved up, and even start saving for expected expenses like a new furnace or roof on the house. Then if any more emergencies come up like the Blazer dropping in its tracks, you won't be having to get another loan. This emergency fund money could either sit in a money market where you can get at it fast, or you could put it in a series of CD's that have staggered term dates, so you'll never be more than say three months from having a few thousand dollars become available.
I would not reduce my 401 (k) contribution because the more you put in and the sooner you start, the better you will be down the road as the money compounds. The purpose of that money is to build up over time, out of sight. That money lives in a whole different time frame than the present.
This was touched on by someone else, but you are better off putting extra money into an investment if it pays higher interest (or return), rather than paying off a lower interest loan. Like a mortgage: if you were able to make double payments for example, you'll be much farther ahead 30 years down the road if you put that money into a 10% APR investment than if you paid off your 5% mortgage 20 years early. You might save $100,000 in interest on the mortgage by paying it off early, but you would stand to make far more than that by adding it every month to the investment fund.
These are all relatively long term issues, and I'm not sure how they will affect the short term goal of saving up $20,000 in two years. I don't know if that is really for an investment strategy, because you would either need such a large block of principal to earn $20,000 in interest in only two years that you wouldn't really be worried about money right now anyway, or you would have to be willing to incur a lot of risk in some investment to make $20,000 in two years without much to start with. For such short term, you may have to just save, save, save like crazy from your paychecks and slash expenses to the bone to have this adoption fund in addition to the other advice. It might even have been cheaper to have fixed the old Blazer rather than buy the new car, but that's all water under the bridge now.
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Wed Nov 29, 2006 4:00 am |
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