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Ask the expert all of your money related questions. Email your questions to alacrity@getrichslow.com and Money Man will email his reply. Questions of general interest will be posted on this web page. Your name will not be printed unless you say you want it printed. Your identity will always be protected.

Dear Money Man:

I have a question that I hope you can answer.  I have $ 1,000.00 , I wonder
if I put this money to buy zero coupon bond or buy about 10 shares of Intel
stocks, after 6 years which one will generate more money?

Thank you


Reply:

Since 5 year treasury notes have an interest rate of about 6.05%, a 6 year treasury security may provide about 6.10%. $1000 would become $1426.57 in 6 years with no risk of forfeiture. A high grade zero coupon corporate bond would provide a little more with a slight chance of forfeiture.

I have no idea how Intel stock will do in the next 6 years. I would be arrogant to suggest that I could predict this. If you check the web page "Investing" in my web site, then you will see the graph that says that the last several years have been excellent for stocks. Does this mean that the next 6 years will be good? No! It is tempting to extrapolate, but do not expect to be accurate. I suspect that stocks will do well in the long run, but I would not bet money that I will need in the near future.

You should invest in stocks only if there are no better alternatives. If you pay down your 18% credit card bill, it is like putting money in the bank at about 27%. If you pay down your 8% mortgage, it is like 8% at the bank. And you can be certain of the results!

I suspect that your question is only a test to see if I am willing to predict when I do not know. If you have read my web site, then you know that my advice will make you rich faster than conventional investments will.

                                      MM

Dear Money Man:

Hi there.  Here's my question:

In short, I have $5000 that needs to be highly-liquid (due to job
instability), but keeping it in a savings account earns a meek 2% interest
these days.  I was considering using the money towards a down payment on a
condo (I'm a first time buyer, so maybe it would be enough...?), but with
this unstable work situation, I may find myself with a mortage I can't make
payments on. Currently I rent.

Otherwise, my money is somewhat good shape.  I work full time, and put
myself through graduate school in the evenings with the help of loans.
I owe almost $30k in school loans, and about $6000 in cedit card debt
(the interest is between 7.9% and 9.9%; I transfer debt to lower interest
rates whenever I can).  I would of course like to use the $5000 I have saved
to pay off some of my debt, but I am afraid of being left with no cash
should I be jobless.  Any advice would be greatly appreciated.  Thanks.


Reply:

You want to get as much interest on your money as possible while keeping it safe and liquid. Three possible ways are certificates of deposit, money market funds, and treasury securities.

Bank certificates of deposit are FDIC insured and will provide you with 4% to 5% interest. If you want a 3 month CD, you may get the lower of those two percentages. You may want to look for a no penalty CD. You commit to a longer term, but you are allowed one penalty free withdrawal. It sounds like you do not really commit, but some banks really do have such a deal.

Money market funds are averaging about 5%, but they are not insured. You get to read a prospectus to find out if they invest the money wisely. I wish banks did that. You also get to write checks from your account.

Treasury securities provide a return of 5% and up and the money is state tax free. The catch is that you need at least $10,000 to invest in short term securities. With $5000, you would have to commit to a two year note. It would pay about 5.8%, but if you need the money, you may have to pay a broker something like $50 to sell it for you.

I discuss how to get a decent return from safe investments on the web page "Investing" in the section "Emergency Funds." I hope this advice can give you a little more return on your money while preserving your peace of mind.

                                      MM

Followup:

Dear Money Man:

Thanks for your quick response.  A money market fund sounds like what
I'm looking for, especially writing checks directly from the account (at
no penalty, I hope!).  Some follow-up questions:

1.) How can I know if they are "investing wisely," if I don't know
*anything* about investing?

2.) In broad terms, I think I understand the idea of FDIC insured vs.
not insured funds.  If I go for something that is not FDIC insured, then
is it just another part of the risk?

3.) Do money market funds usually have a minimum deposit time?

-Do you know of any sites that compile lists of money market funds
available?

Thanks again!

Reply:

Followup questions to my answers are quite appropriate. Let me take them in order:

1) When is a money market fund investing wisely?

The money market fund company will send you a prospectus. In it, there will be information about the type of investments they like to have. Investing in all United States institutions (banks, companies, government agencies) is safe. Investing in institutions from countries that are hostile to the United States is risky. Also, the shorter the average time until their loan to the institution comes due, the better. This way, if interest rates change, the value of any of these loans will not change. The money market fund can simply wait the one or two months necessary for the loan to mature. In this sense, money market funds are extremely safe. Long term bond funds are the riskiest for interest rate fluctuations.

2) FDIC

Let me clear something up. FDIC is a government agency that insures many banks. It does not insure money market funds or any type of fund. It sounds like you correctly understand that if something does not have this insurance, then it will give a higher interest rate. Despite the lack of this insurance, money market funds in general are very safe.

3) Do money market funds require a minimum deposit time?

No.

4) Do you know of any sites that compile lists of money market funds available?

In www.mfmag.com/abf, click GUESTS, then ADVERTISER FREE INFO, and you will be on a web page that links to advertisements and web sites of several mutual funds.

A more direct approach is to look at the list of money market funds in the financial section of your newspaper. Then look them up in the telephone book under "mutual funds." It would probably be the most efficient if you call them, ask them a few questions, including their web site URL, then ask them to send you a free prospectus.

I hope my answers will help you.

                                      MM
Dear Money Man:

       I loved your page! I had heard alot of the advice in your page 
before, but was never really convinced that paying off mortgages etc... was
better than good and risky investments.  I have a few questions I would like
to bounce off of you:

       I am a medical student with one more year till graduation. Then I
enter a residency (training) which will last about five years (I'll be 
making around $32,000/yr) until I finish and can start earning "good" money.
My wife currently works and makes about 37,000 before taxes. (We're in Fl so
no state tax!)  We have two used cars that we paid cash for and bought our
own home in Feb 95.  We are paying about $850/month in mortgage payments.

       However, I am getting loans that pay for my tuition which is roughly
10,000/yr, but these loans do not accrue interest until 6 months after
graduation (may 98), then the rate is 8.25%.  We currently have no debt
except for our mortgage and school loans, but when I finish I will owe over
$40,000.

       Our Emergency fund, as you called it, is in a money market and earns
about 6% but it is only at $5,000 now after we were forced to buy our second
car (my motorcycle was stolen and no insurance =(
        
       My question is this: After expenses we only have about $200 a month
to save after expenses (We give 10% to our church so not much is left).  I
don't know where this $200 should go every month.  Last year I started up
an IRA for my wife with $2000 and this year we have been putting 100 in her
IRA every month and 100 in our emergency fund.  Is this the best place for
the money???  Or should I be putting money away to pay back the 40,000 every
month or maybe prepay the mortgage? However, we will most likely be moving
in may 98.

       We would also like to start a family ASAP and my wife would want to
be a full time mom.  My plans are to move to a small house after graduation
and have my wife work at least one more year (while I am) to pay off 90% of
my loans then live off of my reduced income of 32,000/yr.  Then try to build
back up our emergency fund, and put as much as possible into an IRA (I don't
think we could ever get $4,000 extra a year though).  Or is it better to put
the extra money into the house as the rate would probably be higher than
8.25%??? We will probably only be there for 5 years or so though...  Your
"moving expenses chart" has me worried too... Is it better to try and sell
the house ourselves???

        Well I believe that does it =)  I hope this isn't too long I just
wanted you to have all the information....  I would really appreciate any
advice that you could offer!  My wife and I are both worried about my
residency years when I will be making less than she is now and when we hope
to have an extra mouth to feed.

Thank You Very Much,

   PS: Do you do financial counseling professionally???  I will definitely
need more help with investments when I actually start making money before
long.


Reply:

From your letter, it sounds like you will have a very bright future, but first you must survive some lean years. You ask how your $200 per month savings can best be used. The choices are contributing to an IRA, paying down the mortgage, and saving it to pay off the student loan. I assume that the mortgage has an interest rate of around 8.25% and it is, of course, tax deductible. This is a relatively good situation. The student loan has interest that is not tax deductible, so 8.25% is like 9.71% (15% tax bracket) or 11.5% (28% tax bracket). This is terrible. You should pay it down because paying down is like getting 9.71% or 11.5% at the bank. The IRA interest is tax deferred. Does that make it the better choice? Assuming that it is tax free, you would need an IRA return of at least 8.25% to make it worthwhile. Since it is not really tax free, you would need more than 8.25%. Take the sure thing. Save in anticipation of paying down the student loan.

Since you anticipate moving at about the time that your loan will start to accrue interest; if you move, you should try to borrow as much as possible in your mortgage. This way, a maximum amount of money will be available for paying down the student loan. You should even consider getting a zero points loan, even though it may cost you an extra 0.5% interest. You also mention that you will probably stay at the next house for only five years. You may want to consider getting a loan that has a fixed rate for only five or seven years. Then it becomes an adjustable rate mortgage. This will save you about 0.5%. I discuss this in the web page "Interest Rates" in www.getrichslow.com. Look for Table 2.

I advise against selling your house yourself. A real estate agent provides a buffer between buyer and seller that can keep them from going after each others' throats. Also, a good agent will walk the buyer and seller through some of the complications of settlement. A big advantage of having an agent is the multiple listing service. It may be possible to get on the multiple listing service without an agent. It depends on your area. Even then, you will only save the listing agent's fee, 1%. You will still have to pay the selling agent's fee, 5%.

To answer your last question, I do not do financial counseling professionally, but I have used the principles in my web site to get rich from my middle class salary. I wrote www.getrichslow.com so that others may get rich. You may email questions to me whenever you want. So far, I have found time to answer all of the questions sent.

Good luck with your medical career.

                                      MM

Check out a previous Ask Money Man column: December 1996


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