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Dear Money Man: I'm graduating in one week with a mechanical engineering degree. I think your website is exciting and very informative. It's 4:20 A.M. and I'm still reading it! I have three questions. 1. I own a truck which my parents heve been paying up to this point. It's $303 a month over 5.5 years. I'll be taking over the payments in February or March with 3 years to go. Should I keep it and refinance? Or can I trade it in for a used car that can carry more passengers? 2. I think I can pay off my student loans in 3 years. I owe around 25000. Is it wise to attempt it? Would I be be spread out too thin? 3. How about purchasing a small home? Should I wait? Thanks for everything. Please keep the webpage going. It is excellent. Hopefully I can follow your advice to pay off a mortgage the way you did and be truly rich.
Reply:
First, thanks for the great compliments.
About your truck: I do not know if you require more passenger space than what you have in your truck, but do not get rid of a vehicle that runs well unless you have a good reason.
About a home purchase: As a graduating engineer, do not expect to have the same job in three years that you are now starting. Often, an engineer changes jobs a couple of times in the first few years, then settles down. If a job change moves you out of the area, then you will regret buying a home.
As long as you are not buying a home for a while, use your spare money for an emergency fund, paying down the car loan if there no penalty, paying down the student loan (which I assume is deductible, and or has a lower rate), and saving for a home.
A Roth IRA is an excellent vehicle for saving for a first time home purchase. You cannot cash it in until five years have elapsed, but you can take out the principal at any time.
Good luck with your career.
MM
Dear Money Man: My mother passed away this May. She had a sizable number of series E savings bonds that she never paid the interest on that were titled to me as payable on death. The lawyer handling the estate told us that since we paid a state estate tax on the bonds the interest was not taxable on the Federal level. If it is these bonds would be taxed twice,this sounds almost too good to be true. Do you know anything about this ?? We are planning on investing the money in mutual funds. Since we also have company stock, and a 401k savings plan that includes a company match also in their stock, I feel we have too many eggs in the company basket, and probably should sell the stock before the merger they are applying for go into effect. How do you know how much taxes will be owed on the sale of the stock ?? I don't wish to take on any additional tax, if we are going to have to pay all of the interest on the inherited savings bonds that were cashed. Any help will be appreciated.
Reply:
Your savings bond problem is very interesting. Series E bonds were issued from 1941 to 1980. They have a maturity of 40 years if issued in 1965 or earlier, or 30 years if issued after 1965. This means that you will collect at least 6% interest until they are 30 or 40 years old. Specifically, bonds issued before 1959 or between 1966 and 1968 no longer give interest, so you should sell them now. You will pay federal tax, but no state tax, on the interest. To compute the interest, use http://www.ny.frb.org/pihome/svg_bnds/sb_val.html.
If you like getting 6% interest, or 7.5% for some of these, then keep the rest of the bonds until they mature. It is safe, liquid, and the interest is tax deferred.
As for inheriting the bonds, as a co-owner you avoid probate, but must pay estate taxes. This sounds consistent with what your lawyer told you.
You also mentioned selling some company stock. Your capital gain tax rate will be somewhere between 10% and 28%. Try to sell the stock that was bought for the highest price (to minimize the gains), but will give you the 10% rate. In general, this means older stock that was higher priced, but be certain before you sell. This is complicated! Compared to this, savings bonds are a picnic. Good luck.
MM
Dear Money Man: Skimmed your article, and was intrigued by the chart on Which college subjects lead to the most lucrative professions (within the pros and cons of College). While I agree with the table, I am surprised to see that neither Medical doctor or computer professional are included, both which to me assume high paying careers. I would think a doctor could be equal or higher to a dentist and even the low end computer scientists make good money, often starting right out of college, with no experience, in the low 30's. Do you have any input on this? Thanks
Reply:
In my table "Salary Ratios for Various Occupations in Order from Highest to Lowest," I use the reference Bert D. Anderson, "Introduction to College," Holt, Rinehart and Winston, New York, 1969, Table 11.4. If I had included the entries of interest to you, it would have said:
Starting High Salary Education
Salary over over /Degree
Occupation Elementary Elementary Needed to
School Teacher School Teacher Start
Starting Salary Starting Salary Work
Physician 0.68 6.31 M.D.
Programer 1.11 3.16 on the job
training or M.S.
For the physician, although the 6.31 shows it to be a very good
choice, the 0.68 deceives people. The number is low, because they
must start out as interns. I chose to exclude it, to avoid the
deception.
The programer entry also looks deceptive. This shows that my reference does not fully stand the test of time. I would expect computer scientists to do about as well as mathematicians and physicists.
Perhaps I should have found a more recent reference, but I have never seen one as comprehensive as this one in terms of breadth of profession.
MM
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