Financial advice needed

[SmallTownGuy]

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I need some advice from someone who has done this.

I just consolidated my loans (137,000 at 3.375%). My minimum payment would be 604.00. I deferred the loans for one year, but elected to pay the interest (400.00 per month). So, basically I have a choice between investing the other 200.00 per month or putting it against my principle.

My questions are:

1. Would it be better to invest the 200/month or pay down my balance? I suspect the investing is better, as my loans are only 3.375%

2. What is a solid investment option for me? I need a vehicle that will allow me to make small monthly contributions with a good (does not have to be spectacular) return.

Thanks

 

[Methyldopa]

Your first question has been asked and answered many times (do a search and you'll get to read different opinions).

Your second question can't be answered really. It depends what you are saving your money for. If it's retirement then 401k is best, if you plan to use the money say in 5-10 years (then a bond fund), if less than that a money market fund.

And exactly what type of return do you deem good but not spectacular?

I suggest you pick up a book on investing, rather than only read our posts.

Check out these 2 books:

http://www.amazon.com/gp/product/07...f=pd_bbs_1/104-4818834-9715160?_encoding=UTF8


http://www.amazon.com/gp/product/0764571915/ref=pd_bxgy_text_b/104-4818834-9715160?_encoding=UTF8

 

[SmallTownGuy]

Thank you for the reply, methyldopa.

I have read posts on the subject of investment versus savings on this forum, so I basically know the answer to the first question, I just wanted reassurance from someone with more experience.

As for the books, I have read the first one and am not interested in the second one because I do not think mutual funds are a quality investment.

What I am basically looking for is an investment vehicle that will allow me to invest a small monthly amount and have a 8-10% return (before inflation). I am considering a DRP at this time, but want to know if anyone can recommend something else.

The money would be used for the long term, ie retirement.

 

[The JockDoc]

As for the books, I have read the first one and am not interested in the second one because I do not think mutual funds are a quality investment.

What I am basically looking for is an investment vehicle that will allow me to invest a small monthly amount and have a 8-10% return (before inflation). I am considering a DRP at this time, but want to know if anyone can recommend something else.

Mutual funds - especially index funds - are the best ever investments historically.

 

[CameronFrye]

Thank you for the reply, methyldopa.

I have read posts on the subject of investment versus savings on this forum, so I basically know the answer to the first question, I just wanted reassurance from someone with more experience.

As for the books, I have read the first one and am not interested in the second one because I do not think mutual funds are a quality investment.

What I am basically looking for is an investment vehicle that will allow me to invest a small monthly amount and have a 8-10% return (before inflation). I am considering a DRP at this time, but want to know if anyone can recommend something else.

The money would be used for the long term, ie retirement.

Why do you not like mutual funds? They offer a level of diversification that is impossible for a small time investor to achieve by buying individual stocks and bonds. Sure, there are bad mutual funds out there, but you just have to stick with no-load, low expense funds. If you are particularly conservative, you can go with index funds, which guarantee that you'll never underperform the market (of course, you will never outperform the market either, but that's hard to do anyway).

Exactly what DRPs are you looking at? In general, these aren't the greatest investments, especially for someone who doesn't have a lot of money to invest.

 

[skypilot]

I agree mutual funds and real estate are your best bet if you have a 10 year or greater horizon. Historically you can expect returns of around 10%. No other vehicle will get you close. Go with Vanguard if you want low cost funds with low fees.

One that I like for retirement outside of a 401k is their tax managed fund. That fund throws off very little income every year so there is almost no taxation and yet it keeps appreciating. It is not an index fund per se though.

 

[SmallTownGuy]

Ok, let me clarify. When I said that I did not like mutual funds, I was being too broad. I was refering to actively managed mutual funds. I did not mean to refer to index funds.

80-90% of actively managed mutual funds underperform, when you factor in fees and such. From what I have read, it is better to invest yourself or use an index fund (if short on time).

Index funds are good investments if you wish for a modest return in the long term. I do agree with this, and I intend to use an index fund when I have a larger sum to invest. I guess my main concern with index funds is that you need a large initial amount in order to invest.

I have read that DRP is good for someone in my situation. There are minimal to no fees, you can start with just one stock, and you can contribute a small amount each month. I guess, though, you lose out on diversifiation.

Obviously, I am starting out and am confused. Suppose I open an Roth IRA and put the contribution into an index fund, would this be ok??

 

[edmadison]

Actually, the 401k is only the best if your institution matches your contribution. A young person is much better to invest in a Roth IRA. At your low income level, the tax advantage of the 401k does not beat the tax exempt growth of the Roth. I agree that mutual funds are a good investment, but most of them have a 2-3000 minimum. I also like dRiPs, but that doesn't let you diversify because you don't have enough money saved yet.

Ed

 

[Methyldopa]

Actually, the 401k is only the best if your institution matches your contribution. A young person is much better to invest in a Roth IRA. At your low income level, the tax advantage of the 401k does not beat the tax exempt growth of the Roth.
Ed

You bring up an interesting point. I haven't quite made my mind up on that fact. The difference is that 401k are tax deductible and therefore part of the money going in (in essence) the goverment is providing.

For example take $4000 pre-tax. If you invest it into a 401k that $4000 is going into the plan. While if you invest into an Roth IRA (not tax deductible) you only would be investing $3000 (assuming you are taxed at the 25% federal rate). So the 401k will definitely compound more quickly; so that 30 years from now, it is worth a lot more then the roth IRA. Assuming your rate of return is 10%, then the 401k 30 years from now will be worth $70K while the Roth $50K.

But then it gets difficult to figure out when you actually start withdrawing from a 401k. You have several options when it comes to your distrubitions from a 401k: from capital gains, to a 10 year averaging, and one more which I can't remember. Capital gain tax assuming you are in the higher tax bracket would be 15%, therefore you end with $59,500 in a 401k v. 50,000 in a Roth.

Now I may have made mistakes in my calculations or reasoning, so please correct if I'm wrong.

 

[CameronFrye]

You bring up an interesting point. I haven't quite made my mind up on that fact. The difference is that 401k are tax deductible and therefore part of the money going in (in essence) the goverment is providing.

For example take $4000 pre-tax. If you invest it into a 401k that $4000 is going into the plan. While if you invest into an Roth IRA (not tax deductible) you only would be investing $3000 (assuming you are taxed at the 25% federal rate). So the 401k will definitely compound more quickly; so that 30 years from now, it is worth a lot more then the roth IRA. Assuming your rate of return is 10%, then the 401k 30 years from now will be worth $70K while the Roth $50K.

But then it gets difficult to figure out when you actually start withdrawing from a 401k. You have several options when it comes to your distrubitions from a 401k: from capital gains, to a 10 year averaging, and one more which I can't remember. Capital gain tax assuming you are in the higher tax bracket would be 15%, therefore you end with $59,500 in a 401k v. 50,000 in a Roth.

Now I may have made mistakes in my calculations or reasoning, so please correct if I'm wrong.

401k withdrawals are taxed as regular income, so you will almost certainly be taxed at a higher rate than 15%.

 

[CameronFrye]

Obviously, I am starting out and am confused. Suppose I open an Roth IRA and put the contribution into an index fund, would this be ok??

Personally, I would go with a "fund of funds" that invests in various other mutual funds. That way, you don't have to make the minimum investment to each individual fund. For example, I like the Vanguard LifeStrategy Funds. By investing in one of these funds, you are simultaneously investing in a total stock market index fund, a total international stock index fund, a total bond market index fund, and an actively managed asset allocation fund. The minimum is 3000 dollars, which is much less than if you invested in each one of these funds separately.

 

[Poety]

I need some advice from someone who has done this.

I just consolidated my loans (137,000 at 3.375%). My minimum payment would be 604.00. I deferred the loans for one year, but elected to pay the interest (400.00 per month). So, basically I have a choice between investing the other 200.00 per month or putting it against my principle.

My questions are:

1. Would it be better to invest the 200/month or pay down my balance? I suspect the investing is better, as my loans are only 3.375%

2. What is a solid investment option for me? I need a vehicle that will allow me to make small monthly contributions with a good (does not have to be spectacular) return.

Thanks

Where did you get this rate smalltown? I couldn't find one that low.

 

[CameronFrye]

Where did you get this rate smalltown? I couldn't find one that low.

He probably consolidated last year when rates were really low and then reconsolidated this year, producing a weighted interest rate of 3.3. That's what I'm going to do and I'll end up with a 3.3 rate also.

 

[Poety]

He probably consolidated last year when rates were really low and then reconsolidated this year, producing a weighted interest rate of 3.3. That's what I'm going to do and I'll end up with a 3.3 rate also.

I can't believe I missed this consolidation doing my reserach year, that just BITES ME IN TEH ARSE YA KNOW! 😡 😡 😡

 

[SmallTownGuy]

He probably consolidated last year when rates were really low and then reconsolidated this year, producing a weighted interest rate of 3.3. That's what I'm going to do and I'll end up with a 3.3 rate also.

Exactly. I used SallieMae SMARTLOANS. I consolidated my first three years loans at 2.8%. Then consolidated my fourth year loans (rate 4.7%). That came to a weighted average of 3.375.

Thank you everyone for the tips. I will take your advice, do some more research, then act!

 

[Methyldopa]

401k withdrawals are taxed as regular income, so you will almost certainly be taxed at a higher rate than 15%.

I was thinking of lump sum distributions which may be taxed at a capital gian rate (which is 20% and not 15% as I wrote earlier)

 

[CameronFrye]

I was thinking of lump sum distributions which may be taxed at a capital gian rate (which is 20% and not 15% as I wrote earlier)

I believe you can only do that if you were born before 1936 and only applies to contributions you make before 1974.

If you take a "non-periodic payment" (aka lump sum distribution) from a retirement account, the govt will withhold 20%, but you still have to claim the distribution as income.

(This is the way I read the IRS rules, but I'm certainly no expert. Perhaps someone else can chime in).

 

[angel80]

Exactly. I used SallieMae SMARTLOANS. I consolidated my first three years loans at 2.8%. Then consolidated my fourth year loans (rate 4.7%). That came to a weighted average of 3.375.

Thank you everyone for the tips. I will take your advice, do some more research, then act!

I did the same thing as you (consolidated with Sallie Mae both last year and this year). SallieMae has borrower benefits with the consolidation loan that include an immediate .25% reduction in interest rate if you sign up for automatic debit, so you can get an interest rate of 3.125%.

Check out all the borrower benefits here:
http://www.salliemae.com/manage/borrower_benefit.html

 

[yobabydoc]

What is this?

 

[CameronFrye]

What is this?

Dividend reinvestment plans (also called DRIPs). Basically, you buy stock directly from the company. They can be a useful part of a portfolio, but they should probably be added onto a portfolio that is already well-diversified.

 

[skypilot]

Obviously, I am starting out and am confused. Suppose I open an Roth IRA and put the contribution into an index fund, would this be ok??

Perfect

And as far as Roth vs Regular IRA. A Roth is better if you expect to be wealthy when you retire. A Regular IRA may be better if you expect to be middle class when you retire.

But the main thing is to begin to save. I think if you don't have a couple of thousand to sock into a Roth, you might as well just buy a CD with the few hundred bucks and keep saving till you do! A cash reserve should be your first priority. I would try to have $10,000 in cash or CDs before even starting to invest in index funds.

 

[Iwy Em Hotep]

I'm currently midway through medical school, and through a combination of state tuition and money saved from working, have that $10k currently put into a money market account for convenience. Should I:

1) Keep that $10k where it is to help defray incidental costs of medical school, such as application fees and travel costs, and potentially decrease my loans? After medical school, whatever is left would go into the down payment on a house.

2) Invest the $10k in a conservative S&P 500 index fund?

 

[The JockDoc]

I'm currently midway through medical school, and through a combination of state tuition and money saved from working, have that $10k currently put into a money market account for convenience. Should I:

1) Keep that $10k where it is to help defray incidental costs of medical school, such as application fees and travel costs, and potentially decrease my loans? After medical school, whatever is left would go into the down payment on a house.

2) Invest the $10k in a conservative S&P 500 index fund?

You can put it into an online savings account such as ING or Emigrant and get ~4.25-4.5% interest, which keeps the entire balance liquid in an FDIC insured bank should you encounter any emergencies. The S&P 500 will maybe, if you're real lucky, improve 6% per year for your last two years, which means you make an extra ~300 bucks compared to the savings account, but your money is also tied up and unavailable. You could even be losing some of your money in such a relatively short investing time window and that wouldn't help you at all.

I say keep the money and avoid having to take any private loans for applying to residency.