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Dear Money Man: I have been w/ a full service broker for a year. 2 business checking accounts, personal checking account, 2 UGMA's, 2 IRA's. I want to leave 12/31. I also am w/ MONY for 401k and am happy here. I have come up with 2 options for my investments and would like your perspective on these. 1). Go with a Banking and brokerage service/Mutual Fund Co. like Citibank Citigold 2). Go with a private investment firm that invests in stocks, charges 1% per year mgmt fee and has stock transactions done elsewhere for 8 cents a share. Please give me your thoughts on this.
As I understand your question, you are considering a mutual fund company and a full service brokerage. You noticed that at the brokerage you will be charged 1% per year plus extra for stock transactions. This means that you must subtract at least 1% from the rate of return on your investments. If you make a lot of transactions, you may lose another 1% per year. If your investments get an 8% annual return, the net return may be only 6%. And you still must pay taxes on this 6%.
If your mutual fund company offers noload stock funds, then you can get away with no "friction" in your investments. You will lose the advice of a broker, but I do not have much respect for this advice. Going with noload funds is an option that I see very often in financial advice newspaper columns.
Naturally, I want you to consider options that I discuss in www.getrichslow.com. Going with stocks and bonds for IRA and UGMA accounts makes sense, because they are long term. However, paying down high interest, non-deductible debt should come first. Also, if the UGMA account is being taxed at your rate, it may make sense to delay subsequent gifts and use that money to pay off the mortgage. After the mortgage is paid off, you can give the money plus interest equal to the mortgage interest. It is as if your kids are investing by becoming your mortgage lender. The big advantage is that you can predict the rate of return with certainty.
Dear Money Man: I enjoyed reading your get rich slow article. I agree that you are correct in stating that it is impossible to get rich quick legally. Most people are too impatient and fail to develop a long range plan to deliver themselves from debt. Another pitfall which many people fall into is the "Keeping up with the Jones's Syndrome". If individuals will investigate their own needs and not be influenced by what others think is important they will live a much more satisfied debt free life. Thanks
Thank YOU! It is very gratifying to get such positive feedback.
Dear Money Man: Your web site is amazing. It truly is one of the coolest and most informative sites I have been to in the 1 year I have been looking around. I wish I had friends like you who know what time it is when it comes to being the best, doing the best and having the best. I am in college and lately I've been having doubts about staying, 75% of the things I learn are irrelevant to the business I will open soon. I would like to make money dealing with used exotic cars. Feel free to get back to me, It would be great to hear your thoughts.
Thank you for the great compliments. I do not know anything about used exotic cars, but I wish you the best of luck.
(Editor's note: Money Man just said that he does not know about something. How often do you meet up with honesty like that?)
Dear Money Man: I came across your Get Rich Slow Homepage while in search of some free financial advice for my situation right now. I enjoyed its straight-forwardness on investing and getting out of debt. Thanks for such no-nonsense advice. I received an injury while at work, I am still not able to work and have had to go into an enormous amount of credit debt to hold on to what assets I have, a mortgage and two old vehicles that are still running, thank God. Worker's Comp. is not ideal,as you may already know. I have settled at the advice of an attorney. My credit debt is about 1/3 of the settlement, and my mortgage is 30 year and I am only 5 years into it.($125,000.00 at 7.58%). I may not be able to return to steady employment for at least another 2 years, maybe less if more healing occurs. I do have an extra average of about $6,000.00 coming into the household a year. You may have already guessed at my question, would it be wise to pay off my entire credit debt when the settlement comes in or should I pay off a few of the higher finance charges and then pay off the others at a higher than minumum payment to ensure some extra cash at hand? Thank you for any help you can give me.
I am glad you enjoy Get Rich Slow. Now let us see if I can give you any useful information about your situation. You want to know if you should apply your settlement to your debt and live off of the remainder or hold on to all of the settlement for expenses to come. I must make a few assumptions. From your mortgage information, you must have a monthly payment of $881. Including real estate tax and homeowner's insurance, this must be about $1000. I assume that you will not be bothered by income tax. If you can manage living expenses on the $6000 per year that you mentioned, then your mortgage payment must come from the settlement money until you can work again.
I see three possible scenarios. You use the settlement money to make the minimum payment on your credit card debt (mostly interest at 18%) and the mortgage payment; or you pay off the debt, then use the settlement money on the mortgage; or you get new credit cards at 10%. The settlement money gathers 5% interest in a money market fund with check writing privileges until it is used. For each of these cases, I calculate the time until the settlement money runs out. Since I do not know the amount of the settlement, I ran these numbers for $50000, $30000, and $10000. The credit card debt is 1/3 of the settlement. These results are tabulated below.
Time until settlement runs out while paying mortgage and other debt debt at 18% debt paid off debt at 10% settlement $10000 9 months 7 months 9 months $30000 22 months 21 months 24 months $50000 30 months 36 months 36 months
As you can see, for $10000 and $30000, paying off the credit card debt first (the middle column) means that you run out of money sooner than in the other scenarios. For $50000, having debt at 18% is worse, because it has 30 months to leech money from you. Remember that if you do not pay off the debt and later run out of money (columns 1 and 3), you still have the credit card debt to contend with.
Although it seems tempting to suggest that you pay off your credit card debt as soon as possible, only you have all the details and are in the position to weigh the risks.
If you are wondering how to get your interest rate down to just 10%, a recent newspaper article (Andrew Leckey, Tribune Media Services) mentions some low interest credit cards, namely:
Pulaski Bank & Trust Arkansas (800) 980-2265 7.99% $35 annual fee Huntington National Bank Ohio (800) 480-2265 8.25% $50 annual fee Wachovia Bank "Prime for Life" Card Georgia (800) 842-3262 8.25% $88 annual fee AFBA Industrial Bank Colorado (800) 776-2265 11.4% no fee Union Federal Savings Bank Indiana (800) 284-8835 11.5% no fee Pullman Bank & Trust Co. Illinois (800) 785-5626 12.25% no fee
I hope your credit rating will allow them to take your debt.
If things look tough, you may want to ask the mortgage company to accept only the interest part of the mortgage payment. The mortgage company does not want the expense and bother of foreclosure. This will save you $130 per month.
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