What should I be doing with all this money I have laying around? (long)

In My Humble Opinion
1

Okay, well it’s not like it’s that much I just want to farm out some opinions to make sure I’m doing everything right and see if there’s any thing better I could be doing.
First off, my situation…

I have no credit card debt. I use my credit cards every month and pay them off (usually once a week, more or less as things post)
I have the usual bills. Utilities, house, car etc
I have a few savings accounts, one for me, one for my daughter’s eventual college tuition and an employer funded HSA account.
I have a small investment account.
Now some of the details of how I’m handling these accounts and what I’m looking for advice on.

The savings accounts: They’re all at ING Direct except the HSA. I originally moved over there when my regular savings account was paying .25% and they were at, I think, 5%. Now they’re at .8% or so. I have maybe 3 or so months worth of living expenses in my savings account (FTR losing my job isn’t really an option unless the my place of employment were to close up shop, so I’m safe there). As for my daughter’s account, as long as nothing huge changes I should have about $15K in that account by the time she’s 18. She’s 6 right now and there’s about $5700 in it. I foresee deposits into that account getting bigger not smaller, but who knows.
Is ING still the place to be? I’ve been there for probably 10 years and really like it. Also, my investments are mainly at Share Builder so it’s nice to have everything at one place.

Now, my house. I have a mortgage and a HELOC. I pay the minimum on the mortgage (sometimes I toss an extra hundred or so at it) and I pay a much larger amount towards the HELOC and here’s why…First of all, the mortgage is locked for 30 years at 4.95%. Doesn’t matter what happens, it’s going to sit there at 4.95%. The LOC is currently at 3.99%. It’s based on the prime rate. It’s hovered around 4% for quite a while though every few months it fluctuates a bit. I’m well aware that as the interest rate starts creeping up, the interest will rise as well so as long as I can put so much principle towards it and make such a big dent each month, I figure that’s what I should be doing. The minimum due each month is about $45 (it’s just the interest). Each month I pay at least $200 and then later on in the month I usually pay another $100-$300 depending on what my finances look like.
The other reason for doing this is that if I’m ever in trouble. If I ever need money right now and don’t have anywhere to turn, I’ve got that money. I can just go to the bank and take it out by writing a check against it. If I had been putting all that extra principle towards the mortgage, I’d have to refi to get it back if I needed it. That would result in a several hundred-thousand dollars in fees and a new interest rate as well as probably 1-2 weeks.
Once the HELOC is paid off, assuming everything else is more or less the same, the money earmarked for the HELOC will go towards the mortgage each month. So that would mean at least $2400 extra each year, but probably something closer to $3500+ each year (I’d also raise the amount I put into savings). So I do have a plan for increasing the mortgage payment, just not yet, but it will be paid off early.
Lastly, the investment. I’m very, very new to investing. I know next to nothing about it. I did as much reading as I could, I asked here a few times and finally decided the best thing I could do was just to jump in. I took about as much money as I felt I’d be comfortable losing if I completely screwed it up. I spent some on an index fund and some on a single stock (I know, but I still wanted to). If I had sold the next day I would have been up $70. As of right now, about two months later, I’m down about $400. But I’m the patient type so I’m waiting to see if it swings back up again to decide if I’m going to toss more money at it or just pull out and know that I gave it a shot.
I get the feeling everything is just sort of down right now and it’s not that I just picked a crappy stock AND a crappy index fund. BTW I picked the only index fund that had a small minimum investment and no fees. Maybe that was the wrong way to do it.

So…
Is ING still the right place to be? I get the feeling .8ish% is still more or less par for the course when it comes to basic savings accounts. Now that I think about it, I wonder if I should combine mine and my daughters and see what’s out there for +$10,000 accounts? I’ve been trying to keep them separate, but if I can get a considerably better rate, maybe I should do that.

Mortgage/HELOC payment theory. I think it’s a good idea, does it seem like one to you? At this rate it should be paid off in about 3 or 4 years so it’s not that this is going to drag out for that much longer.

Investing…???

As for any type of retirement account. My employer doesn’t match that and unless it’s incredibly adventurous I’ve always liked the idea of just paying the tax on the interest now and being able to own my money and not have to worry about fees and penalties if I take money out early or having to worry about this or that. So for the time being I’m just socking everything I can into my savings account. Same goes for my daughter’s college savings account. There’s so many ins and outs to all the different types of accounts that it always seems like it might just be best to just keep it at ING and not have to worry about when it gets pulled out and what it gets spent on etc etc etc.

2

Some of the best advice I have received is that it’s a bad idea to borrow money in order to invest. If you have debt, pay it off before trying a growth strategy. If you are trying to grow capital, the most sure return on your investment for now is to pay off the line of credit.

Every dollar you put toward paying it down is equal to a dollar you could have spent on an asset which returned 4.99% (last year, probably even higher in the future.) But, unlike stocks or corporate bonds, paying off the line of credit is a GUARANTEED “return.” The return isn’t in the form of growth or dividends, but rather saved interest you don’t have to pay. Guaranteed 5% return with the strong possibility of a higher future return is better than any other risk-free deal you can possibly make right now. My non-professional advice is to pay off the home equity line of credit as quickly as you safely can, before deciding what to do next.

3

I would agree with this, with one caveat: make sure you have a fully-funded “emergency fund” before you commit a lot of capital to paying down debt. You should be able to cover at least six months (preferably a year) of expenses with cash on hand. So I would focus on building up that savings account a bit more before you attack the debt aggressively. (But definitely pay more than just interest on the HELOC. Interest-only payments can ruin you quickly.)

ING is fine for a savings account. Interest rates are sucky everywhere.

I’d recommend sticking with just index funds for now if you don’t have the knowledge to look at individual equities. It also sounds like you don’t have enough cash to spread amongst a good number of companies. Remember that the market as a whole has excellent long-term returns, but those are long term. Index funds are a great way to invest, especially with dollar cost averaging, but you’ll need to be able to stomach short-term fluctuations. If that sort of thing keeps you up at night, stick to your savings account.

Most importantly: never invest in anything you don’t understand, and don’t do anything that makes you uncomfortable.

4

Everything makes sense so far and these are the responses I expected. I should quickly mention that not that long ago I was looking at $2000-$7000 in credit card debt. While I was paying off that my HELOC and savings account were each getting about $200 a month and investing wasn’t even a thought. Once that was paid off I got a little more aggressive with the other stuff. As for investing, I’m not putting any more into it at the moment. It was sort of a one time expenditure unless I see it actually showing a real ROI. Basically, after basic monthly living expenses my money is split between savings and HELOC and like I said earlier I’m expecting the LOC to be paid off in a few years. Off the top of my head I think I have about 12 or 13K left to pay off on it.

5

Myself, I’d put a higher priority on killing the HELOC and less on 6-12 months of reserve funds. Set aside a few thousand in savings, of course, but if you were suddenly disabled or unemployed for that long you could draw from the HELOC if need be. After you’re down to no debt other than the mortgage you should grow your 6-12 months living expenses and then pay off the mortgage while investing 15-20% of your income for retirement.

That’s what I would do anyway.

6

You should look into refinancing the mortgage. 4.95% is a high rate (actually, 4.95% is generally not a rate that a mortgage can be. Is that the actual rate?). If your credit is good and you have some equity in the house you should be able to get a rate under 4%. You should be able to refinance with little money out of your pocket. Don’t pay points, origination fees, or closing costs.

I’d recommend that you open a Roth IRA account and max it out every year. You didn’t mention a spouse, but if you have one she should max out a Roth IRA too.

You sound like the sort of person who would benefit from reading a few basic books on personal finance. I don’t have specific recommendations but I’m talking about the “Finance for Dummies” type of book, the sort that Suze Orman writes (I’m not specifically recommending her books, but I know she writes the sort of books you should read).

7

In today’s economy, I would have at least six months of emergency funds and really it’s bad enough to have a year. I would honestly say, for every ten thousand dollars you make a year you need to have that much saved up.

So let’s say you make $70,000. You need to have seven months minimum saved to cover your costs while you look for another job. Maybe even a bit more.

8

This is a good point. It isn’t so much that you should get a Roth in addition to what you are doing, but that since you are thinking about going the index fund route, you might as well do your index fund experiment within a Roth IRA. If you win, then the gains will be tax free. If you lose, then you will be exactly where you were if you weren’t in a Roth.*

And you really shouldn’t be able to pick a sucky index fund because of the low fee. Index Funds are index funds for a reason. They match the market index (SP500, Dow, or whatever it is you use to index) because they intentionally buy the exact same stocks in that index. So if you are in an SP500 index, then pretty much ALL SP500 index funds behave the same. The low fee part is what makes that particular index “less sucky” not more.

I also think you should consider dollar cost averaging. It can lower stress about these things. When the market goes down, you can shift your attention to the point of view that your next buy will be “on sale.” That point of view can save yourself from panic selling.

  • Gah! I’m an idiot. Of COURSE a Roth IRA is different! Be sure to read and understand the restrictions. Money goes in but can’t come out until you retire. This is, of course, important!
9

Not exactly. With a Roth, the money that you put in can come out at any time tax-free without penalty. The investment gains can only be withdrawn without penalty after age 59 1/2.

I agree that 1) You should have a larger emergency fund (Suze Orman says 8 months, but YMMV – 6 months to a year is probably best) and 2) You should be contributing to a Roth IRA.

I went through an overhaul of my personal finances in 2010 and read many books on the subject. One of my personal favorites was Elizabeth Warren’s All Your Worth. I think it provides just the level of information that you’re looking for.

10

Four points I’d like to make:
(1) Do you really want to make your financial situation this public? (Not necessarily knocking you … I just know that I avoid telling even my close friends and family how much money I have in savings, and I’d definitely feel uncomfortable posting that in a public forum.)

(2) I recently switched to ING Direct after looking at the interest rates that a bunch of banks were offering, and concluding that ING Direct offered the best deal.

(3) My father has received some degree of recognition for being exceptionally savvy about spending money (I think he won an award through his company or something). I asked him about investing, and what he essentially said to me was that investing, at least so far as the stock market goes, is high risk. It is only when you have enough money to form a comfortable safety net that you should consider investing, because it is very possible for you to lose whatever you invest. How much you consider to be a comfortable safety net would be for you to decide, because it’s your comfort, not mine, but I just wanted to remind you that not all types of investing will result in a net increase.

(4) I looked into opening a Roth IRA – I did not know that you could withdraw your funds without penalty after the age of 59 and a half, are you sure on that? I thought my grandfather (who is well into his eighties) mentioned having to pay taxes on funds he withdrew from an IRA a few years back, but I may have confused the details.

Anyways, presuming this is true and you will only have to pay a penalty if you withdraw funds early: Three things to keep in mind. One is that right now, the interest rates on IRAs don’t tend to be much better than the interest rates on an ordinary savings account. Since you can withdraw from a savings account without penalty, the savings account is clearly the better option.

Another is that if you get a Roth IRA right now, I believe you will be locked into whatever interest rate they set. As you acknowledged in your OP, interest rates are pretty low right now. Do you really want to get locked in with that interest rate?

Lastly, keep in mind that if you deposit funds in an IRA now, they will not count as taxable income, but when you withdraw them, they will count. So if you put away the money, you are not avoiding taxes, you are deferring them. It is anyone’s gamble as to whether the tax rates will be higher or lower by the time you withdraw funds. Personally, considering the state of social security and the way we’re damaging the environment and consuming all our oil, I’d rather pay the taxes now. But now I’m devolving into a political discussion, so I’ll shut up and post this.

Oh no wait! Just one more thing! You mentioned that you have a savings fund set up with your work. Do they have a program where the employer matches the funds you put in? If so, I’d definitely recommend to put in the maximum amount to which they’ll match. After all, it’s free money!

11

I’ll recommend a book: The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk. If you plan to invest in individual stocks, this will be very helpful, but even if you are just trying to just understand whether you should invest in bonds, mutual funds comprised of stocks in various categories, or a savings account - or how/when to split your money between all three - the early chapters in this book do a lot to explain how you can arrange things to suit your own preferred level of risk and return. Investing in stocks - directly, or indirectly via mutual funds - is psychologically difficult for many people. A lot of folks have a short “risk horizon,” and they get freaked out if the market is down for a year or two (or three, or four); they want to pull their money out when the market declines, which is exactly the wrong thing to do. Stay in it for the long haul, and things generally get better. The early chapters in the book explain how a lot of this works, and back it up with the real performance of the stock market for the past 100 years.

$15,000 will not get your daughter much education 12 years from now (for cost estimates, visit college websites now and search for tuition/cost/expense descriptions; expect these values to be considerably higher when your daughter is ready to go). She’s 6 right now, so you’ve got a 12-year time horizon; if I were you, I would invest this money in something other than a savings account. At 0.8%, interest in the savings account, if you continue to deposit $700 per year until she’s 18, you’ll end up with roughly $15,000. If instead you put that $5700 and all those deposits into an index fund (example: Vanguard S&P 500 index fund, VFINX), you’ll end up with about $27,000 when she’s 18 (this assumes an annualized rate of return of 7%, which is pretty reasonable over the long haul). If you’re concerned about risk, then I’d suggest investing in mutual funds until she’s about 12 or 13, then gradually moving money over to bonds or bond funds. You can protect the returns on a college fund from taxation; see here for some explanation.

For maximum nest egg, you should make large deposits earlier instead of later.

12

The wind of my soul, you have confused an IRA with a Roth IRA. The names do sound alike. :wink:

An IRA = The money you put in now is tax free (you do not have to count it in your income tax), but you have to pay taxes on it when you take it out. Also, there are required mandatory distributions at retirement age.

A Roth IRA = You have to pay income taxes on money before you put it in, but when you take it out, there are no taxes. As I mentioned in my previous post, money that you put it can be withdrawn tax free and without penalty at any time; investment gains can be withdrawn tax free and without penalty after age 59 1/2. There are no mandatory distributions required. (This may not mean anything now, but is very important to my 80-year-old father who is still working, but is required withdraw all sorts of money from his retirement accounts.)

Also, neither an IRA nor a Roth IRA has an interest rate. Both of these retirement accounts are investment vehicles. You can use the money you put in to purchase a wide variety of investments, including stocks, bonds and mutual funds. The investments may go up or go down, but the key is that you do not have to pay taxes on any investment gains in the funds.

13

Well I stand corrected. Thanks for being gentle on calling me out on not knowing what I was talking about. You’re exactly right.

14

Pay off the HELOC, but hang onto it for emergencies

Put aside money for emergencies. Companies do shut down. Or they get sold. A friend of mine was LOVED by his very stable employer, then the guy had health problems and decided to sell out to a competitor. They didn’t need two of him, and although he had great skills, the “other him” was the new owner’s daughter. Also, you could find yourself fighting illness or recovering from an accident. It should be safe (a savings account won’t return much interest, but will be safe).

The ROTH sounds perfect for you since you pay those taxes now, but you do get tax benefits at retirement. Put money there. NOW. As much as you can.

Then finance your daughter’s education - probably using the Virginia or Utah 529 plan. As Machine Elf says $15k isn’t going to buy much. We’ve started in the past several years to attend high school graduations for friends’ kids and the universal feeling is that they expected much more aid than they got. Even a state school can run $100k pretty easily right now, and it doesn’t look like its going to get cheaper over the next dozen years.

And, if after all that you still have money left over, you can think about mutual funds or playing the stock market.

Congrats on reducing all that debt!

15

Just a reminder that you can think about mutual funds or playing the stock market in your Roth IRA, where the gains will not be taxed. My Roth contains stock funds, bond funds, index funds, and individual stocks. As long as you are putting money in the market, you might as well avoid being taxed. If you are under 50, you can put up to $5000 per year into a Roth (single filers can contribute the full amount if they make under $110,000 per year; joint filers can make up to $173,000).

16

Consider a Roth account for some of your money. Either a Roth 401(k) (through the employer - though if they don’t match, I doubt they’ve taken that extra plunge), or a Roth IRA. While the money is “locked up” to some extent, you can withdraw your contributions early without penalty if need be. I believe there are rules about having to have the money in there for 5ish years before you can take it out - so if you put 5K in right now, in 2017 you could take that out (but leave its earnings in until retirement age).

The nice thing about the Roth is: your contribution is taxed now. But you never pay another dime of taxes on the money, no matter how it grows (excepting if you take out the income prior to age 59 or something, obviously).

.8% is pretty standard for savings accounts these days. In fact it’s pretty good; to beat that at my credit union, I’d have to take out a CD for 4 years.

I do like the idea of paying down the HELOC in preference to the mortgage; we’re in a similar boat and while I’m throwing a bit extra at both, that’s mainly to make the primary mortgage pay off when it would have otherwise if we hadn’t refinanced (i.e. bring it down to 30 years from when we bought the house, vs. when we last refinanced). Check to see what the HELOC terms are regarding withdrawals; ours has a 15 year drawdown term after which we can’t take any more money out of it.

As far as other ways to boost your return: obviously, any of them carry higher risk. There are a number of folks on the board who are putting money in at Lending Club; I’ve been luckier than some of them (still have a rate of return of 9%) because I haven’t had many defaults, but it is not a risk-free option. General advice, I’ve read, is to put some money in an index fund, as those carry lower fees.

And college for the daughter: 15,000 by the time she turns 18 won’t even pay for a year at a state school, so you definitely need to bump that up a bit. Even if you plan to pay some of the expenses as you go while she’s in college, or planning for her to take out student loans, a college education is going to cost 100K and the more you have now, the less you have to find later.

17

[QUOTE=SpoilerVirgin;15143711…
An IRA = The money you put in now is tax free (you do not have to count it in your income tax), but you have to pay taxes on it when you take it out. Also, there are required mandatory distributions at retirement age…
Also, neither an IRA nor a Roth IRA has an interest rate. Both of these retirement accounts are investment vehicles. You can use the money you put in to purchase a wide variety of investments, including stocks, bonds and mutual funds. The investments may go up or go down, but the key is that you do not have to pay taxes on any investment gains in the funds.[/QUOTE]

A couple of nitpicks: With a regular (non-Roth), you can put your money in pretax or post-tax. There are rules regarding how much you can put in pre-tax, if your employer offers a retirement plan of any kind and your income exceeds certain levels. You can still contribute post-tax regardless of income.

The mix of pre and post-tax contributions poses an annoyance at retirement time, in that every time you make a withdrawal you have to calculate how much is taxable based on the ratio of pre/post contributions. I haven’t looked into that much.

You may also be able to withdraw your post-tax contributions early without penalty, but don’t quite me on that.

There was some noise a while back about people putting money into a regular IRA post-tax, then immediately doing a conversion to a Roth. This was because there are no income limits for regular IRAs (post-tax), but there are for Roth… and at one point there was a loophole that meant there were no income limits on the conversions. You just had to pay taxes on any income that had accrued - which if you did it quickly enough would be minimal. I don’t know if they’ve closed that loophole yet.

Gains: Yeah, you don’t pay capital gains, so if you’re doing a lot of stock churning in the account that could be a useful vehicle (vs. a regular brokerage account where you have to account for every sale on April 15th). HOWEVER, an article I read pointed out that you run the risk of turning long-term capital gains, which are taxed at a lower rate, into regular income - which might be higher.

Say you have 100,000 in stock, that’s now worth 200,000. If you sell it from a regular account, you pay a max of, I think, 15,000 in that 100,000 of gain. If you sell it in your IRA and take the full 200,000, that’ll be taxed at, say, 30% - so you’re paying 60,000 in tax. Of course the tax savings on the 100,000 you put IN the account offsets some of that - if the rates are the same, you saved 30,000 total during the years when you put the 100,000 in.

So: regular brokerage, you pay 30% of 100,000 when you get the income, and 15,000 when you sell for a net of 45,000. IRA, you pay no tax when you get the income, and 60,000 when you sell and withdraw, so a net of 60,000.

Oooh - more college/investment concerns (we’ve got a kid going in the fall, and there’s been a LOT of discussion of this among my friends): if you liquidate money from a brokerage account to cover tuition etc., the gains count as income - which can impact your eligibility for financial aid. A friend took out money from a retirement plan to pay down some major bills - and that counted as income as well.

And, regular investments count as assets for financial aid purposes, while retirement investments do not. Your income used to generate the retirement savings is counted, but money you saved in previous years is ignored. So if you have 500,000 in your IRA, earn 100,000 a year, and put 10,000 in your IRA last year, your income is considered 100,000 (even though your taxable income is 90,000).

So my general advice is load up the retirement accounts before her junior year, in favor of non-retirement investments.

18

Joey P–You know what I think? I think you need an investment advisor. I know that sounds like I’m being snarky, but I’m totally sincere. It sounds like you’re a little disorganized/uninformed about where your money is going/should be going. It’s time for a plan, man. And Internet advice don’t count. :wink: You need someone who can see the whole scope of your money and will work with you to create a plan that accomplishes your goals. My advice is to think of a friend who doesn’t have debt, isn’t an extravagant spender, and provides well for his or her family; then, ask who his or her IA is and get a referral.

P.S. Not all IAs are good, so make sure you feel comfortable and never be persuaded to do anything you don’t understand. If your advisor can’t explain it to you, he should NOT be suggesting it.

P.P.S. IAs are not only for very wealthy people. It sounds like you’re in the perfect spot to begin a relationship with one.

19

No, he doesn’t. He doesn’t have enough assets at this point for an advisor, and while he’s paying interest on the HELOC and advisor isn’t going to tell him anything he hasn’t heard here, but will either charge him for common sense advice, or sell him something he’d be ill advised to buy at this time (or probably ever through an advisor).

In a while, when the priorities aren’t as clear cut and he wants to pay $75 an hour for advice, and advisor might be a good deal. For now, there isn’t $75 in gain in it.

20

I realized afterward that I probably used the wrong term. I think he needs a financial planner (who can also act as an investment advisor). A financial planner can educate him, help him come up with a plan (with a full picture of his finances, not just what we’re seeing in this thread), and assist in executing that plan over the course of the next several years (or his lifetime, if the relationship is good and mutually beneficial).

The hourly fee you referenced is just one of many ways of compensating your FP. I agree with you that ** Joey P.** shouldn’t engage someone who uses this fee structure (at least not right now). But there are other ways; I’ve never written out a check to my FP. It doesn’t have to cost the OP anything up front if he, (like me) finds an independent FP who works on commission he gets from the insurance or funds in which Joey P. buys or invests (thus the importance of finding an “independent” FP, so you’re not funneled to a limited–and possibly crummy–set of companies).

I should mention that my FP charges a flat fee to set up the initial, comprehensive plan, but this is optional. I already had a plan, so I didn’t pay this fee. But for Joey P., this fee would likely be well worth it, considering how thorough it is, and the fact that it can take place over as many meetings as is necessary to come up with a plan that everyone feels great about.

But then, I am of the mindset that more people need professional advice than seek it. Most people are scared off from financial planning because they assume that you have to be rich to do it. I think that’s self-defeating, since most people get rich because they have a plan. I also think that most people are suspicious of financial planners, not always undeservedly so. But not everyone has the savvy or acumen to educate themselves, and I think a smart, honest, helpful financial planner can be a huge boon to someone like Joey P., and well worth the fee/commission. Assuming, as I have, that you find a good one.

That’s all I was saying. :slight_smile: