Free Financial Advice

Financial Questions from Our Visitors - Page 4

The examples below are from some of the visitors to Free Financial Advice. The questions below mostly represent word for word the questions asked by the visitors (sometimes including bad punctuation and spelling), but occasionally the questions will be edited on this page. And even though these people have shared their personal finances with Free Financial Advice, we have stripped out any names or other personal information to protect their identity. If you see one of your questions on this page and it makes you uncomfortable, please contact us and we will remove it immediately. Also, please note that any advice or suggestions made from this site are only suggestions and should not be deemed as professional, legal advice. Please see our disclaimer for more information. I apologize for continually mentioning our disclaimer, but this is a very litigious world that we live in.

Question:

I am 40. I am contemplating selling an inherited property for a net of around $1MIL. As I am disabled, I work freelance from home so income I generate is not constant and very low. With the markets as they are and everything losing.......what is the best way to invest this money so that I do not risk the principal and have a livable 'wage' every year????

Response:

There is always a trade off between the return you receive on your investment and the amount of risk that the principal is in. The least risky investment that you could invest your money in would be CD's or a money market account. These types of investments pay 3-4% interest and, on a million dollars, would yield about $30,000 to $40,000 per year. However, since you are still young and have such a long time to live, if you spend the $30-$40k yield each year, your principal will not grow and the value of $30-40k will decline quite significantly over time. A balanced portfolio, that provides enough growth to fund your future requirements, but that reduces as much risk as possible, would seem more appropriate. Typically, a portfolio like this would consist of 60-70% stocks (mutual funds), 15-25% bonds (bond funds) and 10-15% cash (money markets or CDs). In your case, you'd probably want to adjust the level of stocks down and bonds and cash upward.

Unfortunately, there are too many alternatives to go over in an email. If you really need help investing your money, you may want to meet with a financial advisor. You can find one at your local bank or at financial service companies like American Express. Be careful who you pick as the full service providers charge big fees and the banks don't often have a good portfolio of investments to offer. If you are interested in investing the money yourself, you can easily do it through a low cost online investment account at etrade. They offer access to almost all publicly traded mutual funds and bond funds, as well as competitive money market accounts.

Question:

I have a question I have been trying to get an answer to with no success. Does it make sense to pay down my mortgage by making extra payments if I plan to sell the house in 5 years or less? I hope you can help. Thanks.

Response:

It definitely doesn't hurt to make extra payments on your mortgage. The key in looking at a decision like this is to make sure that you are optimizing your money. Make sure that you are paying off your highest interest rate debt. If your mortgage rate is 7% and your tax rate is 40%, then your net mortgage rate is really only 4.2%. If you have any credit card debt or other debt that is higher than this rate (auto loan, boat loan, student loan, etc) it might make sense to pay that debt off first.

Alternatively, if you thought you could invest the money and receive a return greater than your mortgage rate, that would also be a reasonable alternative to paying down your mortgage.

Getting back to your original question, it definitely makes sense to pay down your mortgage faster. Every extra payment that you make will not only reduce the amount of interest and increase the principal payment of the loan, but it will also do so for every payment made in the future (in your case, for the next five years).

Question:

We are a retired couple Given the problems with the stock market, does a savings account paying 3% sound like a good place for us to park our money? We're afraid that it's being eaten up by the bad stock market and we are probably too old to play the "stay in for the long

run" game. We have less than $100,000 in retirement savings.

Response:

If you don't have a long term investment horizon and you are worried about volatility, then leaving your money in a savings account or a CD may be your answer, and the stock market isn't for you. However, if you have at least 10 years left to invest and have other sources of income to rely on, I wouldn't suggest parking all of the money in a savings account. Throughout history, the stock market has yielded positive returns over every 10 year period and has returned 2-3 times the average savings account rate. Also, it appears that the economy is turning upward and that the market has already declined for the past 3 years, meaning that if history is any guide, the market is due for a rebound over the next several years. With that said, I'm not suggesting that you invest solely in the stock market, but you may want to diversify your portfolio to include a small percentage of lower risk mutual funds or bond funds. Here are a few guidelines about choosing investments:

NEVER invest any money that you don't feel comfortable losing at least some of

Never invest in something you aren't comfortable with or don't believe in

Try not to get caught up in the terribly negative or positive sentiment of the stock market, but understand that the sentiment's exist and that they influence stock prices and hence, interest rates

Stick to your investment strategy and don't change it unless your life dictates a change. In your case, since you are in retirement, it makes sense to remain conservative in your investments

Instead of buying individual stocks or bonds, purchase funds that contain a large number of different stocks and bonds.

Question:

I have many questions about my family's financial situation and was hoping to receive some practical advise. We are in loads of debt. We have a mortgage of 143,000 that we refinanced at 4.75% (adjustable). We consolidated our credit card debt with a home equity loan of 40,000 at 10%. My husband has grad school loans of 30,000 that we will need to repay in October. We have no savings other than his 401k plan with 7000. We stopped contributing to it because we were not able to buy food. My husband earns 54,000 a year and I am a stay at home mom with one young child. What should we do? I think we should sell the house because it's getting down to not having food. My husband thinks we should keep the house and wait till he finds a higher paying job. Please offer some good ideas!

Response:

You are indeed in a tough situation. I can't think of any immediate solution and I definitely can't tell you whether to sell your house or not, but here are some ideas that you may want to consider:

If you sell your house will it be a lot cheaper to rent an apartment? In other words, will you save a lot of money if you sell your house? Since you already have a first and second mortgage, it sounds like most of the equity has already been taken out of your house. If that is the case, and you sell it, you will have to pay a 6% fee to a real estate broker to sell it and you will have to pay capital gain taxes on any increase in value. Furthermore, the interest associated with your first and second mortgage are now tax deductible but you will lose that status if you sell your house.

If you sell your house to buy a less expensive house, make sure that you take into account all of the expenses associated with switching houses. Expenses include: a 6% broker fee to sell your house; closing costs, credit reports, appraisals, building inspections, moving costs, etc.

Also, if it is important to get ahead in the long-term, it is important to build the value of your assets and right now your house is probably your only real asset (by real I mean tangible, other assets you have are your husband's long term earnings power). Also, a

house is a great way to reduce your overall interest rates (through second mortgages and HELOCs) that are usually tax deductible. A house also offers a lot of tax deductions that will save you money at the end of each year.

You may be able to defer the payments on the student loan by filing hardship or using one of the other flexible payment options that often accompany student loans.

The best ideas I can think of are for you to find ways to save money. Can you get a lower phone rate, get rid of a car, lower your insurance, buy cheaper diapers, etc. There are thousands of creative ways to save money. I've listed some of the ones I can think of on my site at http://www.free-financial-advice.net/save-money.html. (If you think of any other good ideas, email me and I will add them to this page.) Look at every penny you spend and try to reduce or eliminate it.

If you can hold on and increase your income over time (husband gets that new job), things will get easier and you will make progress on your debt. If you are too uncomfortable living with the stress of debt, then selling the house may be the right thing to do.

Also, if you are overcome by debt, you could go through a form of bankruptcy that would protect your 401K and house but that could reduce your debt payments (especially your second mortgage). This would have a severe effect on your credit and should only be looked at in severe times.

Question:

I am 35 yrs old. I have a house I rent out that I owe about $80,000. I only have 1 credit card for about $1,200.00. Should I pay off my house or put my money into a 403B plan? Also what's the best way to pay off your mortgage? I heard if you pay an extra payment per year on the principal it will take you down 7 years is that correct?

Response:

The decision is yours to make, but here are my thoughts:

Regarding the 403b vs paying off your mortgage:

The 403b investment is tax deferred.

The 403b investment will diversify your portfolio.

You will likely, over the long-run, earn more money by investing in a 403b than by paying off your mortgage quickly.

When you need the money at retirement, it is easier to withdraw it from a 403b plan than to withdraw it from your house. However, if you need to raise money before retirement, you can usually easily access the equity in your home through a home equity loan.

By paying the loan off early, you will actually disadvantage yourself from a tax advantage standpoint (because the interest on a mortgage is tax deductible).

Regarding your question about paying off your mortgage quicker by making an extra payment each year: Yes, it's true that making an extra payment each year will vastly reduce the amount of time it takes to pay off your loan. The reason you pay it off much faster is because, at the beginning of a 30 year loan, your initial payments are 95% interest. By making the extra payment, the entire payment (instead of only 5%) gets applied to and reduces your loan balance. It's never a bad idea to make extra payments on your mortgage or to make larger payments each month on your mortgage.

Question:

I am considering selling my condo and investing the money about $200,000 and putting it in a market fund or something and living off the interest for awhile, say 3 years while I attend graduate school. How much could I earn a year? What are the tax ramifications? And am I insane?

Response:

Selling your condo may or may not be a good idea, here are some things to consider:

You will have to pay taxes on any gains from the sale (if you bought it for $100k and sold it for $200k, then $100k would be taxed at a rather high tax rate).

You will have to pay a real estate broker 6% of the net sale if you sell it

If you invest the proceeds in a market fund as you suggest, it is impossible to tell how that fund would perform over the next three years. Your earnings would depend on how you invested it. A money market account would earn about $5,000 per year with little risk while purchasing a stock mutual fund could yield anywhere from a 50% loss to a 50% gain.

Another alternative is to keep your condo and take out a home equity line of credit that would give you enough leeway to support you while you go to graduate school. That way, you wouldn't have to pay taxes on the sale, you'd keep the condo as an investment and you would get a tax benefit from the interest that you pay on the HELOC. Also, if you didn't want to live in the condo, you could rent it out and get rental income.

If you feel the need to diversify your investments, you could take 50% of the equity in your condo (thru a home equity loan) and invest it in stocks, bonds or money markets.

Investing, even in panicked days like this, is not crazy at all (you asked if you were insane). What is really crazy are the people that continue to unload their investments at all time lows. The only problem I see with you investing your money is that you need the money during the next 3 years, which means you don't have a long time to wait for the market to perform. In cases like this, you probably shouldn't take on a lot of risk.

I have links to some home equity loan providers at: http://www.free-financial-advice.net/loans.html

Follow Up Question:

If you will grant me two more questions...

First question. I was under the impression that you were allowed to sell a primary residence and not pay capital gains taxes one time in your life. Is that not so?

Also, if I pocketed $200,000. How much annual interest would that generate? Would it be enough to live on? I guess not in the money market as you indicated that would reap about $5000 a year?

Thanks so much...Why is this free?

Follow Up Response:

To answer your questions:

1 - I'm a little rusty on all of the tax laws. I know you can get out of capital gains by rolling the gains over into a new house but I don't think you would be exempt from paying the taxes if you sold outright. You should check with a tax advisor, an accountant or even your real estate broker to get better info than mine.

2 - You answered your own question about how much $200k would yield in a money market account. However, say you need $25k per year to go to school. The interest would earn about $5k per year and you would need to dip into about $20k of the principal. At the end of graduate school, you should have about $140k left. ($200k + $5.5k - $25k + $5k - $25k + $4.5k - $25k).

3 - My site is free because I like to help people and because it's mostly a hobby to me. Since I get paid small fees when visitors apply for credit cards, loans or visit other sites that my site links to, I am able to pay for the most of the hosting fees and the fees to get listed in yahoo and other directories so that people like you can find me.

Question:

I have a 403b account invested in an annuity. I do not contribute to it since my employer changed to another retirement provider. It is my understanding that if I rollover this account, it needs to be done in a way it remains a 403b. I would like to rollover this fund into a pure stock purchase and hold that stock until I retire. Can that be done and still remain under the umbrella of a 403b plan?

Response:

Good news! You should be able to roll your 403b into a Rollover IRA account. A Rollover IRA account will allow you to invest in anything you want, including money market accounts, stocks, bonds, mutual funds and bond funds. Also, by keeping it in a rollover account, you will be able to transfer the money back to a 403b plan if you ever desire. To learn more about a rollover account, check with your favorite broker. I use E*trade for my 401k rollover.