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Posted by joetaxpayer on May 28, 2008, 9:33 pm
rick++ wrote:
> You are weak on emergency money.
> Thats money to obtain with minor penalty in a week or two
> and last you for several months.
> Retirement and college accounts arent emergency funds
> beacuse they have penalties, taxes, and may time to extract funds.
> Loans and credit cards arent emergency funds due to interest costs.
>
> Consider an after-tax investment fund - maybe a balanced fund.
> You should conisder it as a n investment with an intermediate
> term horizon. If you are expecting an "emergency" every year,
> then that expense should really be part of the annual budget.
I think knowing what one's 401(k) match is, if any is most important. A
dollar for dollar match (or even 50/100 match) should take priority.
That 50 cents will pay the tax and penalty on the deposit should one
lose their job.
The other often ignored opportunity is to put the emergency money into a
Roth account (in MM or CDs). This meets your quick, cheap criteria, and
allows that if the OP is lucky for a time, his funds are growing tax
free (only the deposits are tax free withdrawals any time).
Joe
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Posted by jIM on May 29, 2008, 11:11 am
On May 28, 11:57 am, hh_onl...@mindspring.com wrote:
> After a job change and required company stock sale, I am going to have
> around $75K after taxes. My question is, what's the best thing to do
> with this money?
>
> Our current situation:
> 1) ages 35 and 33.
> 2) 120K family income.
> 3) 5K monthly expenses
> 4) 3 children ages 2 to 16 years.
> 5) no debt besides our 170K 30-year fixed rate mortgage.
> 6) 13% of our income goes into retirement accounts (150K total in
> various accounts)
> 7) funding college accounts for the kiddos.
> 8) only 2K in our emergency fund
I did not see what type of health plan you have (is it an HDHP/HSA?).
Consider using some of the funds to
a) increase Emergency fund to 6 months expenses
b) then fund 401k/HSA pre tax vehicles for 2008
c) consider a Roth IRA for 2008
d) consider a taxable account for retirement
b-c-d are really the same goal (retirement savings), with different
pros and cons for each. If HSA is available, I like that option the
best.
I would not pay down the mortgage if your rate is under 6%. If the
mortgage is over 7%, I would consider paying it off early as opposed
to some of the b-c-d options above.
I might consider a taxable investment as a mortgage paydown fund-
meaning if you have a 5.5% mortgage, look for a mutual fund which
typically returns around 6-7% per year before taxes, and invest any
money to pay down mortgage into that account. This improves your
liquidity for an emergency (beyond the emergency fund), and also helps
cash flow once you accumulate enough in this fund to pay down the
mortgage. This account could double as college savings for kids if
needed.
I have a taxable investment account, in addition to my IRAs, 401k and
HSA. I use the taxable account for any intermediate term (less than
15 year) expenses.
1) college for kids
2) new cars
3) early mortgage payoff payments
4) other less frequent expenses
If you think about less frequent expenses (new hot water heater, HVAC,
landscaping, home improvements) and look at what you would spend each
year on these, those could be monthly deposits to a liquid (taxable)
account which could help 1-3 above if the expenses do not occur when
expected.
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Posted by on May 29, 2008, 4:45 pm
> I did not see what type of health plan you have (is it an HDHP/HSA?).
> Consider using some of the funds to
>
> a) increase Emergency fund to 6 months expenses
> b) then fund 401k/HSA pre tax vehicles for 2008
> c) consider a Roth IRA for 2008
> d) consider a taxable account for retirement
>
> b-c-d are really the same goal (retirement savings), with different
> pros and cons for each. If HSA is available, I like that option the
> best.
All,
Thank you for the input. I have found this newsgroup to be very
informative for the last few years. This thread is no exception.
Your time in responding is much appreciated.
Based on what has been said, I think I am going to bump up our
retiremnt savings (roth, 401K) to go from 13% of our income to 18%. I
will place 35K as an ermgency fund and use some of the rest to fund
2008s retirement accounts. I think the rest of will go into a taxable
account to cover intermediate expenses (future weddings for my young
daughters, future cars, paying down mortgage and home improvements).
I use vanguard for our roth accounts, and will probably use them for
my taxable account. Someone suggested a single mutual fund. What
about the "couch potato portfolio" style where there are 10 funds each
one accounting for 10% of the portfoilio. (ex
http://assetbuilder.com/Investing/inv_potato.aspx). What are your
thoughts on this?
BTW: Our home's mortgage rate is 7% and I have a medical spending
account through my employer.
Many thanks!
HH
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Posted by joetaxpayer on May 29, 2008, 7:05 pm
hh_online@mindspring.com wrote:
> BTW: Our home's mortgage rate is 7% and I have a medical spending
> account through my employer.
Well, if you don't mind my jumping on this point, here's my view.
$170K, 7%, 30 yrs, the payment is about $1131
Don't know how far in you are, but if you paid it down to a $140,000
principal, a 5.75%, 15yr mortgage would be about $1163.
At 7%, I'd be looking to either refinance to something lower, or to make
extra principal payments regularly. In the last cycle, (March 04 to be
exact) I refinanced to 5.24%, 15 yr, with no points, no closing. Do your
research, if you find nothing, it just cost a bit of time, but if you
get a good deal, you can save $2K+ per yr in interest cost.
Joe
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Posted by jIM on May 30, 2008, 9:35 am
> > BTW: Our home's mortgage rate is 7% and I have a medical spending
> > account through my employer.
>
> Well, if you don't mind my jumping on this point, here's my view.
> $170K, 7%, 30 yrs, the payment is about $1131
> Don't know how far in you are, but if you paid it down to a $140,000
> principal, a 5.75%, 15yr mortgage would be about $1163.
>
> At 7%, I'd be looking to either refinance to something lower, or to make
> extra principal payments regularly. In the last cycle, (March 04 to be
> exact) I refinanced to 5.24%, 15 yr, with no points, no closing. Do your
> research, if you find nothing, it just cost a bit of time, but if you
> get a good deal, you can save $2K+ per yr in interest cost.
>
Two points-
1) I agree with Joe- at 7% mortgage rate, you have much savings to
your own bottom line by either paying this off early or refinancing.
There are real good rates right now on 15 yr fixed which are
significantly lower than the 7% rate you have now.
2) a Healthcare account (Flexible spending account) is not an HSA.
There is a huge difference. Flexible spending is a use it or lose it
proposition, meaning you only put in what you spend that given year.
An HSA carries money over year to year and also can grow like a 401k
with investments, interest and similar (all tax free).
The key point about an HSA is that money goes in tax free, the
interest and capital gains compound tax free, and health care expenses
from it are with drawn tax free. That triple threat (tax free
contributions, tax free growth, tax free withdraws) is not something
found in too many places.
Add to that when comparing an HSA to a 401k, you can access HSA money
at any time tax free for health care spending (there is no age to
start withdraws). You can contribute now and spend later, contribute
now and spend now and some employers even will contribute to this
account for you too (mine does).
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