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Examples of Financial Help

These Were Real Financial Questions Asked by Real People

The examples below are from some of our visitors that needed financial help. 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.

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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.

Question:

I have just received a totally unexpected bequest of $100,000. Sixty thousand dollars of the bequest will be in cash; $40,000 is currently in 1,200 shares of stock of a large banking corporation. I have been given the option to take the stock or convert the it to cash.

I am sole caretaker of my handicapped mother, and have been for 14 years. I have no taxable income and no longer have any significant savings or investments. I am fearful of speculating with this windfall.

Should I accept the stock or convert it to cash? And what are the tax considerations? (FYI-the stock has been losing slightly over the past year although it is judged to be relatively stable and low risk.)

Response:

To answer your question, having 40% of your portfolio in any single stock is too much. I would recommend selling all or at least most of the stock and investing in several different types of non-risky mutual funds. If you don't need the money to grow to fund your retirement, you may be more comfortable putting some of it into money market accounts that will basically keep up with inflation (since it sounds like you are very nervous about investing).

Regarding the tax consequences, I believe you'll have to pay taxes on the full $100,000 this year (you may get a tax break because of the gift tax law), even though some of it was stock. You'll probably want to verify this with a tax professional. Also, to reduce your tax liabilities and maximize your investments, you should take advantage of any retirement accounts you can contribute to, including an IRA or a Roth IRA.

Question:

My husband and I would like some good advice about a money matter: we would like to build a house on a lot that we are now purchasing. The mortgage interest rate is great right now,(5.75% 30 yr) so we would like to take advantage of it. We currently own a home and have 27,000 left on loan at 7.5% for 15 years--we have approx. 5 years left on loan. A banker suggests we refinance our house at 5.75% for 70,000 for 30 years - this lowers our payment 100.00 a month, we would pay off the current 27,000 and have 40,000 to put toward a new house. We would sell or rent our current home when we build a new house. Is that the best thing to do? Should we keep it like it is and in 4 years our house would be paid for? What benefit is there in refinancing?

Response:

Refinancing could indeed be a good idea for you. And remember, you don't need to refinance the full $70k. You could also refinance just the $27k into a 5 year loan which would still save you money and you would still pay off the house in the same time. You have unlimited options, but here are some of the items you should weigh before making your decision:

- If you refinance the full $70k and then rent the house out, will you be able to afford both the payment on your new house and the payment on the refinanced loan, as well as keep a reserve in case of a lawsuit or catastrophe?

- Do you want to manage your current home as a rental property? If not, you could still refinance now to get the $70k out and then pay off the refinance loan when you sell the house.

- Whether or not you refinance $27k or the full $70k, you will still save 1.75% on the current balance of $27k. This will amount to about $950 over the remainder of the current loan. Make sure you don't pay refinance fees or points that are higher than this amount.

- If you refinanced the $27k in a five year adjustable rate mortgage, you could probably get your rate down to 4%. This would actually save you closer to 3.5%, or about $1900 over the life of the loan (4-5 years).

- If you don't have the money for a down payment on your new house, then refinancing (and using the $40k from the refinance as a downpayment) could allow you to avoid PMI insurance on your new house, or to be able to get a lower interest rate on your loan.

Question:

I know so little about investing! I did get a financial advisor, but am concerned about the 5% commission. Have heard pro and con about fee based only vs. commissions. Any advice??

Response:

Regarding your advisor, be leery of the 5% commissions. Don't let him or her talk you into making extra trades to add to their pocketbook. Also, watch everything they do closely and try to understand it yourself. If it doesn't make sense to you then insist that it not be done. Also, keep doing your research on investing and money management. If you feel comfortable with investing after several months, feel free to transfer your account to a low cost brokerage like etrade.com or schwab.com and save yourself money.

Question:

I hope this is the correct place to ask a question? If so, you might try adding the statement, Ask a Question! in the sidebar so that people can readily find it. Also, I'd like to see the questions organized under keywords or subjects on a searchable database.

Now, background for my question is as follows: I receive Social Security Disability each month in the amount of $857.70 with no other income. I am covered by Medicare and a Medicaid spenddown program costing $210.90 monthly. I recently moved to subsidized housing where I pay $206 per month for rent and utilities. I am wheelchair bound and need numerous, costly prescriptions each month.

I own a dilapidated, 100 yr old house in a small, rural town. Each month, it costs me $200 plus for property insurance, propane & electric (for heat for pipes) & security lights. Taxes run just over $300 annually. I think the house is beyond repair and should be razed. It sits on approx. 5 acres of city land with 850 ft of frontage on a popular hiking and biking trail. It has a standing barn and summer kitchen. I thought the property was worth about $25-$30K based on an appraisal of the house some 6-8 years ago. But, I checked an internet site who contacted a realtor from the area for a guestimate based on the above facts and was told a better figure would be $50-$70K without including the house and allowing only $5,000 for the barn.

My question is this. Given the income and savings limits imposed by Social Security, Medicaid & my housing program, what would be the best way to sell the property and then handle the resulting money? Should I sell it outright or carry the loan myself and make the monthly payments less than the monthly allowable income? Would this income count as earned income?

If you can't give me any suggestions, can you tell me what is the best expert to go to for help with this...a lawyer, realtor or financial advisor? I don't have any extra money as you can see my my expenses and income. In fact, I only make it by choosing between food and medicine. I need to get this property off my back.

I would be grateful for whatever ideas you have. Thank you.

Response:

Thanks for your feedback! The reason I don't place an "Ask a Question" link on the site is because I don't have enough time to answer all of the questions I receive. By making it more difficult to contact me, I can keep up with the questions more readily. Also, regarding your comment about having a searchable database, that sounds like a good idea but I don't really know how to set it up.

Anyway, I've looked at your question and would love to offer some useful advice. However, I really don't know enough about the Social Security, Medicaid and other housing limits to give you quality advice. Here's the free advice I can give you:

The first thing I would do is talk to someone at your local social security office. This advice should be free and they may be able to help you find a way to take advantage of the real estate without losing any of your benefits.

The second thing I would try would be to call a tax professional and ask whether the income from selling the house would be earned income or not. And, if so, if there is any workaround to avoid the penalties. If you don't have anyone to call, you can use the following link to talk to somebody (it costs $20).

http://www.hrblock.com/taxes/doing_my_taxes/products/advisor.html

One other suggestion that I can think of would be to convert your property into an income producing property and then to recognize just as much income as you can (without losing benefits). It gets a little complicated, but by using various methods of depreciation, you somewhat control how much money you report as taxable. A tax professional and real estate agent could help, but here are some techniques that you may be able to use:

- Sell your property and use a tax-free 1031 exchange to roll the money into another property that would provide you with income (for example, a single family home that you can rent out for monthly income). You can always find expenses that you can write off against the income so that your reported income could remain small.

- You could sell the property using seller financing (like you mentioned). This won't give you many write offs to reduce your income, but you also wouldn't have to deal with any tenants.

- You could take out a loan against the property and build a new house or townhouse on the land, which you could rent out for monthly income.

- You could hire someone else to renovate the house (if it is salvageable). Because it is 100 years old, check with your city and state to see if you can classify it as an historic building. If you can, you can probably get free money or interest free loans to pay for some of the renovations.

- Using any of the methods above, you could also find ways to invest the money you receive so that your income doesn't go beyond your benefit limits. These may include contributing to IRAs or even transferring the entire property into a retirement account (can sometimes be done with a SEP IRA).

- A good tax advisor could give you lots more ideas, and a real estate agent could help you execute the real estate transactions (if you decide to sell).

I know this isn't a comprehensive solution, but hopefully it will give you some ideas to proceed with. Best of luck.

Question:

I am a retired bank CEO (35 yrs), car dealer (3 yrs), and stockbroker (1 yr). I have been thinking of establishing a website on how to deal with your banker for small businesses and consumers. Income is not a must, but a few fees would be nice. I would appreciate your candid advice.

Response:

Not sure what your question is, but I'm assuming that you want to know if creating a website is "worth it", both financially and as a hobby. Here's what I have to say on that:

First of all, it takes a lot of time and energy to create a website. You have to learn how to design, host and market your site. And of course you have to think of and write all of the content yourself. Furthermore, if the content you write is not unique, it is very hard to get your site listed in the major search engines and directories (unless you pay for the traffic). There is a lot of trial and error and because search engines update so slowly, it takes months and months before you get much traffic. And even then, there are always setbacks that will be sure to frustrate you. In order to make money, you can either add affiliate links to useful sites whereby you can get paid for the business referrals, or you can charge a fee for your services. The fee can easily be set up for free by opening a PayPal account. Also, the more people with similar websites, the more difficult it is to get people to visit yours. You should surf the directory of Yahoo and ODP (dmoz.org) to look at similar sites before you start. Basically, it is a lot of work and often frustrating.

However, with that said, it is also rewarding because you learn a lot, make a little money (hopefully enough to keep you interested enough to write more content) and get a chance to help other people. It makes a good hobby and you can do it at your own pace. It is also very challenging because you can never reach perfection.

Question:

My wife and I currently own a home in Pennsylvania. I will be retiring in about 2 years. At that time we would like to move to Florida and buy a home there. My question to you is would it make sense to refinance our home and use the equity to purchase a home now to take advantage of the low interest rates now available and to avoid the possible increase in Florida real-estate? We would appreciate any advice you may have or if you could suggest a better option. We have enough equity in our home to pay cash for the retirement home.

Response:

I couldn't tell from your email whether you are planning to keep your home in Pennsylvania or sell it when you move to Florida. If you are planning to sell your PA home, then it doesn't make that much sense to take any money out for the Florida home yet, as you will receive the money you need for Florida when you sell the property. And you would be paying interest on the loan for an additional two years. However, if you wanted to own both properties for the next two years, then it may indeed make sense to take money out of your primary home rather than to get a new loan on a second home (because interest rates on a primary residence are typically lower than second homes). You could compare interest rates of a PA home equity loan to a FL rate for a second home to see which one is lower.

If you are planning to keep the PA home, then it could definitely make sense to take out a home equity loan now, even if you don't buy the Florida house for another two years. Although interest rates could change a lot over the next two years, they likely won't go much lower. Also, by locking in a rate now, you take further risk out of your future, by ensuring a relatively low interest rate and by knowing what your future mortgage obligations will be (which makes it easier to become comfortable with and plan for your retirement). One option could be to take out a home equity loan now for a lesser loan amount than what you expect to spend on the Florida home. The loan should be lower than the expected purchase price by the amount of money you expect to 1) earn on the home equity loan, plus 2) the amount of money you can save during the next two years and apply to the new home.

Regarding finding other options, I can't think of any other innovative or unique ways to accomplish your goal. Luckily, you are in a great position by having lots of equity in your current home.

Best of luck,

Question:

Some advice please..

Which is the better option for me? To sell my house to pay off debts (3 CCJ's) (enough equity to do so plus have £30,000 profit), or to borrow on the strength of the equity to pay off debts and incrase mortgage payments.

House valued at £100,000. Purchase price 5 yrs ago £40,000.

Confused as to what to do .

Response:

It's really a matter of preference as to whether you sell your home or take out a home equity loan to pay off your debt. I would almost always choose the home equity option. If you can afford the higher mortgage payment, it's probably worth it in the long run. I'm not exactly sure of the tax laws where you live (noticed you measure in pounds, not dollars), but in most countries there are significant tax breaks for mortgage loans. Also, since interest rates are so low, the money that you'll borrow should be at a very reasonable rate. Furthermore, it costs a lot of money to sell a house (typically a 6% fee paid to a broker, and that's on the whole 100k price). Chances are the interest rate on your equity loan will be close to 6%, and you'll only pay it on the 30k. Also, if you sold your home, you'd still have to pay rent somewhere else.

Question:

We have a house paid for (small). We found a larger house we really want, however our house that is paid for has been on the market for 1 year with no one even looking at it, we have gone through 3 realtors., and still no interested parties. We have a lot of $ in Savings, but don't want to spend it all on a house. We are debt free and do not want to make a mistake by going into debt by taking a loan out for this bigger house, We thought about renting our current house, but there are a ton of rentals in our area for cheaper than we could rent ours out. Do we really want 2 houses, with taxes, insurance, maintenance. etc... Thank you so much for any advice.

Response:

It's a tough call as to what your best choice is, and it is really up to you to decide what you really want. It sounds to me like you really want to get rid of the house (and not turn it into a rental). Here are some points to consider when making your decision:

- The housing market is doing pretty well right now. If you haven't been able to sell your house for the last year then there's probably a good reason. Either the area or the house is probably worth less than you think. If you really want to sell it, you'll probably have to drop the price further or find a creative way to get rid of it. Unless you know of something changing in your neighborhood to make the house more attractive, there's no reason to think the house would sell much better in a few years.

- Creative ways to sell your house include: Offer seller financing, whereby you give someone a loan or partial loan so that they can more easily buy the house. Offer the property for trade. An example would be to offer the sellers of the house you want to buy your current house plus more money. Sometimes, especially when you build a house, you can coax the builder into buying your house (it's incentive for you to buy from them versus an existing house). Another creative way to sell a house is to create a rent-to-own contract (I forgot the technical term for this) with the buyer, whereby the buyer will rent the property with the option to buy at a fixed price in x number of years. There are lots of other creative ways to sell a house that your real estate broker will never tell you about.

- Regarding turning the house into a rental. This could be a very good idea if you were interested in dealing with tenants, two mortgages, more complicated tax laws, and most importantly, if you thought you could get enough money from the rental to offset a decent part of your new mortgage. The upside to this is that owning investment property is more times than not a good investment. The downside is that you do take on more debt (than selling it and buying a new house) and more risk.

- To make your final decision, weigh the risk of keeping the house as a rental against the discomfort of continuing to live there, against the cost of having to sell it for less than you think it's worth. Whichever option is most comfortable (or least painful) to you is likely your best.

Question:

Are there any penalties/taxes for a full loan against your 401k savings if it's for a down payment for a home?

Response:

There are two types of 401k withdrawals to buy a house. The first is to borrow the money as a loan, in which you pay the money back to your 401K account. This type of transaction has no 10% early withdrawal penalty associated with it. And the interest you pay on the loan will actually be credited to your 401K account, so you will not lose any of your retirement savings by taking this route. If you can afford to make the additional loan payments, and if your employer allows this type of transaction (many do not), then this is almost always the best route to take. One thing to consider when using this option is that your 401K loan typically has to be repaid as soon as you leave your employer. Check with your employer to see if this is the case.

The other option would be to take an early withdrawal on your 401K to "buy, build or rebuild a first home" (according to IRS rules). This type of transaction would also be exempt from the 10% penalty, however, you would have to pay regular income taxes on the entire amount of money withdrawn (at your marginal interest rate). For example, if you withdrew $20,000 to purchase a house and your income tax rate is 28%, you'd have to pay $5,600 in taxes (either at the time of withdrawal or when you pay your taxes) and would be left with only $14,400 to contribute to your house. This option is also a useful way to purchase a home, but is inferior to taking out a 401K loan. It is inferior because of the taxes paid, plus the fact that you are really only reinvesting $14,400 of the withdrawal amount into the house rather than the $20,000 amount that was invested in the 401K. In the earlier option, the full amount of the 401K remains invested and the additional interest payments flow into the 401K.

Question:

I have used your expertise in the past and really need your help.  I am soon to be 47 and like every middle aged man am thinking about retirement someday. I need your advice and help on my financial situation.

Here is what I have so far. I have two debts, my house nine years left at $803.00 per month and 2002 Chevrolet Tahoe, four years left at $522.00 per month. I make approx $35,000 per year with my wife bringing home about the same. Together we dump about $310.00 per month into our 401K plans at work, plus another $150.00 into our Janus fund. We have about $5,000 into the stock market, another $50,000 in my 401K and about $1,000 in my wife's 401K at work. An insurance policy worth about $700.00, $500 in a Roth IRA., and $4,100 in our Janus fund. and about $8,000 in CD's.

Here lies the problem. I am sick and tired of getting a return on our CD's of a whopping 2%. But on the other hand, I am way! to scared to invest in a mutual fund or the stock market, it seems like every time I invest in a stock it plunges to the bottom of the ocean. I want to do something with this hard earned money, invest it somewhere, but I want and need it to be safe..............help!........what do I do with it, some of it, all of it.............please help.......

Response:

Depending on when you retire, you have quite a few years left to invest your money, which means that time should work to your advantage. For example, if you plan to retire at age 60, then you have 13 years left to invest your money. Because you have 13 years left, it is safer for you to invest money in the stock market than if you only had a few years left to invest. And if history is any kind of an indicator, the stock market is by far the best way to invest money for that amount of time. During the past 100 years, the stock market has outperformed every other asset class over ANY 10 year period. And if that holds for the next ten years, then it means that your best choice is probably to invest it again in the stock market. And in reality, even if you retire in 10 years, you will still need to have most of that money invested for the next 30-40 years of your remaining life (which means that you really have quite a long time horizon to invest). I hope that answers one of your questions, the second question really relates to how to invest in the stock market but not take on too much risk. Here are my thoughts on that:

The best portfolio is always a well diversified portfolio. By spreading out your investments across many different funds, you will have less overall risk. If one of your investments falls, hopefully some of your other investments rise. Anyway, assuming that you have about 10-15 years until retirement, and that you want to take on as little risk as possible, I would recommend a portfolio that includes the following types of investments: Growth oriented mutual funds (20-40% of your portfolio, invest some in the small caps and some in large caps), Income stock funds (10-30%, these focus on providing stable income while investing in stocks), Bond funds (10-25%, increase this percentage as you get closer to retirement, may want to find a blended term fund that invests in long term bonds and short term bonds), individual stocks (0-10%, invest in stocks that make you feel good and that you think will provide long term growth), Cash (5-10%, keep this in short term CDs or a savings account for emergencies). As you get closer to retirement, you'll want to move more money into the stable accounts (bond funds and CDs). There is really no hard and fast rule as to how much to invest in each type of asset, but you should always make decisions that you agree with and that you are comfortable with. And remember, the more risk you take (as long as you are diversified), the higher your return should be.

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