Softballfreak
New Member
Cash: $ 1.50
Posts: 7
Joined: 24 Feb 2007
Location: Seattle, Washington
|
| Need advice |
 |
|
Situation: Me-35, wife-30, no kids yet. Total income $155,000. House value: $465,000, mortgage $251,000 at 5.75%. Total life insurance is $900,000. Car loan $7,000 at 5.89%. No credit cards or other debt. Wife has Traditional IRA ($39,000 balance) and maxes out her 401k ($10,000 balance). I have a Roth IRA ($30,000 balance) and was maxing out my 401k ($147,000 balance) until the company limited my contributions because of high income (100k +). Aside from maxing out our IRAs and my wife's 401k, where should I put the extra money that I HAD been contributing to my 401k? We are talking about approx. $450/mo. My thought was to put that extra money toward a targeted retirement mutual fund that automatically rebalances the closer you get to the targeted retirement date ? Of course our "Financial Advisor" represents a Life Insurance Co. and is steering us toward more life insurance (bonds). I am leery of that and feel that we are still young enough to put a majority of what we invest in stocks. I will be getting a $20,000 bonus in a couple of weeks which will be used to pay off the car. Any advice ? How are we doing ?
|
Sat Feb 24, 2007 10:19 pm |
|
|
Kiaser
Senior Member
Cash: $ 43.05
Posts: 209
Joined: 12 Apr 2006
|
|
|
|
You guys have at least 10-15 years before you should start worrying about moving your funds into more conservative investing.
Coaster is right. There should be absolutely no money put anywhere for investing until an emergency fund is setup. Hearing your statistics, though, and I'm sure you probably do.
You have your finances pretty much in order. Your retirement planning is good and that's the majority of financial security. If you find that you have extra, put it into stocks. I don't like having a hands on approach to stock investing, I'm busy enough with my life, so I choose to put it in managed no-load funds such as you already have in mind. You'll find that most of those target funds will put you at 80% stocks and 20% bonds at your point in time, and there's definetely a reason.
My only recommendation is to immediately pay that car loan when you have the extra money (not out of your emergency funds or already invested funds). Consumer loan interest is not tax deductible and is wasteful. In your current situation you should be borrowing money from anything from now on (unless its for education or mortgages, which then it usually becomes worth it).
Also, since you already have things well taken care of, don't worry about spending a little dough and improving your lifestyle. Married, early 30s, and a stable financial outlook is great but think how much better it can be that you are still young and can really afford to have some great experiences. Vacations, more time off work, buy that "thing" you always wanted, etc.
|
|
Mon Feb 26, 2007 12:02 am |
|
|
oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
|
|
|
|
I would NOT prepay the loan, that is a low rate, your long-term investments will earn more than 5% or 6%. Retain the use of that cheap money.
Start a taxable account at Vanguard or Fidelity, invest in SP500-type indices, they grow tax deferred, historically at a bout 12%, and the tax will be cap gains only if you sell some. Use the account as your EF, for new investments, for children's college, car upgrades, etc.
Insurance. Your 'planner' is actually an insurance salesman, that is NOT going to work well for you, you are HIS income stream, you need to educate yourself about investing. It is not difficult - learn to identify and avoid the pitfalls, don't take uncompensated risk, but take reasonable risk. Some common pitfalls to avoid are varaible annuities, whole or universal life insurance, etc. Why do you have life insurance? You don't have dependants? The purpose of life insurance is to insure your income so that your dependants are cared for until they reach majority. When/if you have dependants, buy $1M term insurance for 20 years (maybe $40/m).
|
|
Mon Feb 26, 2007 4:13 pm |
|
|
rockhound
Preferred Member
Cash: $ 26.45
Posts: 132
Joined: 03 Feb 2006
Location: West Virginia
|
| in my opinion.... |
|
|
Even though he would be slightly ahead if he makes the "assumed/projected/expected" interest rate of 10%, they seem to be doing well enough that the extra $300 they make by the end of the car loan term isn't going to make or break them. Of course, making that 10% is not guaranteed, so the return could be less. Paying off the principal will at least certainly save them some interest. If it were me, and I were in such good financial shape, I would pay off the loan just to not have it hanging over me. At least it's one less check to write and put in the mail every month. He still has the other $13,000 with which to go shopping at T. Rowe Price, etc., and he will be doing it in a totally paid-for car. But as Coaster says, that's just my personal judgement call, and in this case, it isn't strictly supported "by the numbers." Of course, the numbers are based on assumptions.
|
|
Mon Feb 26, 2007 11:03 pm |
|
|
Softballfreak
New Member
Cash: $ 1.50
Posts: 7
Joined: 24 Feb 2007
Location: Seattle, Washington
|
| re: Need advice |
|
|
Thanks for all the input !!!!! I have to pay off the car loan because I really don't like carrying a loan on a 5 year old vehicle even though the vehicle is worth quite a bit more than the $7,000 that we owe at 5.89 %. Peace of mind. Next question since all of you are so helpful; I (we) already have a brokerage account with Fidelity. I recently moved my IRA from another firm to Fidelity. My IRA is made up of non-Fidelity funds which means I have to pay a fee each time I try to allocate my money within the IRA. My question is whether I should trade out these funds for Fidelity funds or just keep them/hold them and buy another additional fund from the Fidelity family to avoid the commission ? Right now my money is spread out amongst four American funds. If I decided to add a fund it would be a total of five. Is this too many for an IRA ? All of the funds seem to be performing well for me. I just want to keep the diversification that I have but I know I will have to pay some dough to sell off the American funds for similar Fidelity funds. I can list off the American funds that I own if necessary. Again, thanks for any input you can offer.
|
|
Tue Feb 27, 2007 3:14 am |
|
|
Kiaser
Senior Member
Cash: $ 43.05
Posts: 209
Joined: 12 Apr 2006
|
|
|
|
One thing to remember is that unless you can bring in more than the 6% the car loan is costing you, it may be worth to pay the car loan instead of putting the money elsewhere.
You are taxed on money earned with investing, you are NOT taxed with money saved by paying off early and saving on interest. Also, having less debt decreases your financial obligations and can free up money in other ways than you might think of besides just money for investing. Another positive is that you can improve your credit standing by doing this in case you may be thinking about a worthwhile purchase soon.
Once you are in good financial standing, such as you listed, paying interest on consumer loans is wasteful. There are only three times I can think of when paying interest is exceptable for people. The first is for education, which interest is deductible. The second is for mortgages, which interest is deductible. The third is for any other consumer loan in which the person MUST have the object of the loan to make money (such as a car for travel to work, etc) and cannot afford to buy the object out-right but will do so the money becomes available.. In the case of your car loan, it may be a car you require for such purposes, however with your statistics you presented I doubt you'd have much trouble paying it down very quickly.
|
|
Tue Feb 27, 2007 4:21 am |
|
|
oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
|
quote:
Thanks for all the input !!!!! I have to pay off the car loan because I really don't like carrying a loan on a 5 year old vehicle even though the vehicle is worth quite a bit more than the $7,000 that we owe at 5.89 %. Peace of mind.
LOL, peace of mind is good. But emotion and investing don't mix. Two or 3 decades from now you will be into 7-figure numbers and it will become obvious that leverage works. 'Debt-free' is for people with consumer debt - dept store cards, 20% CC's, a Dell CC, a Best Buy CC. yada - yes, they need to become debt-free before they can understand how to accumulate wealth. But, as you start running your personal life as a business, you will find that borrowed capital is a valuable tool. (I have a 100% 5.5% loan on a 2006 car.)
|
|
Tue Feb 27, 2007 3:31 pm |
|
|
Softballfreak
New Member
Cash: $ 1.50
Posts: 7
Joined: 24 Feb 2007
Location: Seattle, Washington
|
| re: need advice |
|
|
Ok so now you all have me thinking about using my special 3.99 % for the life of the balance credit card to pay off the car which is at 5.89%.........that is cheap money. I could then pay the minimum and invest the difference. Smart move ? It would cost me a $50 balance transfer fee and would only take up a portion of my $22,500 limit on that card.
|
|
Wed Feb 28, 2007 8:59 pm |
|
|
rockhound
Preferred Member
Cash: $ 26.45
Posts: 132
Joined: 03 Feb 2006
Location: West Virginia
|
| Re: re: need advice |
|
|
quote:
Originally posted by Softballfreak
Ok so now you all have me thinking about using my special 3.99 % for the life of the balance credit card to pay off the car which is at 5.89%.........that is cheap money. I could then pay the minimum and invest the difference. Smart move ? It would cost me a $50 balance transfer fee and would only take up a portion of my $22,500 limit on that card.
With $7,000 left on the car, how much longer would you have left if you paid the full term? Also, how much of that is interest? It is helpful to go to Excel (or some alternative) and construct the amortization schedule for the loan, and then add up how much interest you've paid, and have yet to pay. If the loan were paid off today, how much remaining interest would be wiped out? That is the first number to remember. Next, imagine putting $7,000 on your 3.99% credit card--what is the minimum payment? Do the same calculation to see how much interest you would pay, based on what the term would be if you only made the minimum. Could you still be paying this off several years down the road? Maybe it's only 3.99%, but the interest will still add up over a longer period. Also remember, by that method, you once again have a loan--a credit card is a self-authorized loan, and one of your interests was to not have a car loan any longer. The "cheap money" argument can be tempting, but I would urge a little caution. It can be very useful for highly disciplined people, and people already on very sound financial footing, and for people who are not as worried about having debts. For people trying to get on that road to a solid financial footing, it can be more like living on a shoestring or building a house of cards, and an open door to consumer debt. For instance, on the one hand, you have the chance to simply pay off the car, save some money by negating the interest yet to be paid on the loan, and you don't have a balance on this credit card (true?). Say you pay off the car with the credit card: now you still have a loan to pay off, you suddenly have some credit card debt, and you are subject to the whims of the credit card agreement (read that agreement very carefully, although they can change it at will) with this large balance. The expected benefit to that is based on the assumption that the same $7,000 you would have used to pay off the car will be earning significantly more by being invested. In the end, you'll have to decide what you're more comfortable with.
|
|
Wed Feb 28, 2007 10:41 pm |
|
|
oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
|
quote:
Ok so now you all have me thinking about using my special 3.99 % for the life of the balance credit card to pay off the car which is at 5.89%.........that is cheap money. I could then pay the minimum and invest the difference. Smart move ?
Exactly! You could even write yourself a CC check for another $10k or $15k and put the money into your SP500 Index Fund - it might double for you in 6 years - it carries risk of course, but it has never lost money over any 10 year period. (I have done that with the zero offers - I turned $14k into $22k from 2003 to 2006 using 'zero' CC money).
|
|
Wed Feb 28, 2007 10:57 pm |
|
|
Softballfreak
New Member
Cash: $ 1.50
Posts: 7
Joined: 24 Feb 2007
Location: Seattle, Washington
|
| re: need advice |
|
|
Very true.......I'll stick with the secured car loan and pay it off. Thanks everyone !!!!!!!
|
|
Thu Mar 01, 2007 4:26 am |
|
|
JCook
Full Member
Cash: $ 11.20
Posts: 56
Joined: 24 Jan 2006
|
You might think about that car loan this way - Would you go out and borrow $7,000 just to invest it and hope to earn more interest than you are paying? Then you have to remember that you owe taxes on that gain so you have to more than overcome the car loan interest with your invested interest to come out ahead.
I wouldn't!
I'd pay that thing off real fast, be out of debt and get into a situation where the interest is paying me instead of me paying the interest.
|
|
Thu Mar 08, 2007 6:17 pm |
|
|
Case-Face
Full Member
Cash: $ 0.35
Posts: 75
Joined: 21 May 2007
|
| hello |
|
|
Sounds like you really have it together! Great input everyone!
|
|
Thu Jul 19, 2007 3:58 pm |
|
|
rockhound
Preferred Member
Cash: $ 26.45
Posts: 132
Joined: 03 Feb 2006
Location: West Virginia
|
| Followed my own advice |
|
|
I followed my own advice in this post. I was prepared to buy a brand new Jeep Wrangler with $20,000 in cash that I'd saved to replace my worn-out truck. Instead, I bought a 2002 SUV at a repo auction for less than $4,000. I took the other $16,000 that I was prepared to spend, and made a max. Roth IRA contribution and used the remainder to buy mutual funds. Instead of making payments for the next five years, I'll be making money off what would have been a sunk cost on a depreciating asset.
|
|
Sun Jul 22, 2007 1:22 am |
|
|
|
