Investing 102

[sik68]

On a car, just remember to add the depreciation + finance rate to see what your money will really be worth in the future. That's how I talk myself out of buying a car every time I get tempted by EZ financing.


Anyone down to talk about student loans for a minute? What a crock that government student loans never adjusted with QE and rate-cutting, and banks won't refinance the loans either probably because the Fed won't let them. Fortunately, there are a few private companies popping up that will refinance debts. We are applying to SoFi.com which will cut our average rate from about 7.5% down to hopefully 4%-ish.

I only bring this up because a 4% refi gives us 2 options instead of just 1 at 7.5% (which has been to pay down like banshees):
1) Keep the monthly payments the same to pay down the loan more quickly.
2) Invest the difference in monthly payment into the market.

If you already own a home with equity, I have also read (but have no first hand knowledge) that refinancing your house and using the home equity to pay off BIG student loans (JD, MD, MBA) can also be a smart decision too. Just planting some seeds for the 102'ers to look into.

[GregWeld]

Glad you other guys are beginning to chime in -- and your responses tell me that you've been good students -- more importantly - the responses show me you're all THINKING and understanding that there's no one particular answer. Once you get there... you've got the fire power to actually be independent! That's fantastic!



CapitanofIron...

Mutual funds are generally the "milk toast" of investing. They're the dumbed down version of one size fits all mentality. While I absolutely agree that they are the BEGINNING for many people - as they allow you to just put in 20 or 50 bucks a week... without thinking. SOME savings is better than NO savings... and if the company will match some percentage of yours -- then it's easy and painless... and done automatically.

Here's the ISSUE I have with Mutual Funds once you have enough to do any kind of investing on your own. As stated above -- when you look at what makes up a Mutual Fund... the top ten stocks are usually pulling the wagon - and then there's the other 100 that are the lamest of of the lame.. and they are what drag you down... AND when you add to that - the fund must earn something as they have management costs... then that further cuts into your return.

The entire point of this last 400+ pages is to teach people to think - and to be able to MIMIC a mutual fund on their own. Mutual Funds aren't the magic bullet -- they're the dumb bullet. The go up when the market is going up and they go down when the market goes down. Some of their investments pay a dividend - and most do not. So you own "everything" in their portfolio and when you look at the returns... most are super mediocre.

If you simply take your 20K and buy 10 good names or even 7 good names and have the dividends reinvested... You own your own mutual fund - but your performance will begin to really compound. You'll still go up with the market and down with the market. But as explained here many times. When the market is DOWN the dividends buy MORE shares at lower prices... THAT IS GOOD!! Every share you own pays you a dividend - the more shares you have the more dividends you collect and pretty soon you're on a roll.

Keep reading and keep posting.

[Vegas69]

Originally Posted by 68ZClone

We've often discussed the Dave Ramsey approach at work. We're a bunch of engineers that take joy in maximizing everything, including approaching debt (it's a disease). I think most on this site are like minded.

Our conclusion, the Ramsey approach is geared towards people who are inherently not good with money and is a psychological approach to paying off debt. It is not the most effective (in terms of least amount paid) to pay off debt. However, it's a great motivator for people to see the payment go away.

Conclusion (in my mind), you have to make a decision. Are you the kind of person that will benefit from the psychological approach of eliminating individual payments? If so, the Ramsey approach is the one for you.

However, if you understand the principals of debt and that attacking higher interest (after taxes) debts first is more beneficial to your pocketbook, a modified approach is probably a better option. This allows you to take into account that earning 8% in the market on funds that would only offset debt at 3% is an okay thing.

Again, what motivates you as the individual. For me, it's optimizing. Others (like Greg has pointed out), it's the ability to sleep at night being debt free.

Just my $0.02!

I'm a Dave Ramsey endorsed local provider and get toe to toe with many of his listeners. There is a wide range that employ his philosophy. Many that are very well off.

To me, it's a simple, workable approach to becoming debt free and financially independent. Most need a simple approach to stick with it and be successful.

I agree that a one size doesn't fit all. I do employ many of Dave's philosophies. Like with any philosophy, you use what makes sense to you and create your own.

[Vortech404]

Anybody have any thoughts on cutting down on my retirement to fund
a million dollar life insurance policy on one of my parents?

A life insurance policy is tax free? Anybody do this as part of a retirement
investment?

later
John

[GregWeld]

Originally Posted by Vortech404

Anybody have any thoughts on cutting down on my retirement to fund
a million dollar life insurance policy on one of my parents?

A life insurance policy is tax free? Anybody do this as part of a retirement
investment?

later
John

You'd have to do a lot of math and guessing to see if that would pay off. Yes Life Insurance is tax free... But what it costs per month and for how many years etc is the issue.

[Flash68]

Originally Posted by sik68

Anyone down to talk about student loans for a minute? What a crock that government student loans never adjusted with QE and rate-cutting, and banks won't refinance the loans either probably because the Fed won't let them. Fortunately, there are a few private companies popping up that will refinance debts. We are applying to SoFi.com which will cut our average rate from about 7.5% down to hopefully 4%-ish.

I only bring this up because a 4% refi gives us 2 options instead of just 1 at 7.5% (which has been to pay down like banshees):
1) Keep the monthly payments the same to pay down the loan more quickly.
2) Invest the difference in monthly payment into the market.

If you already own a home with equity, I have also read (but have no first hand knowledge) that refinancing your house and using the home equity to pay off BIG student loans (JD, MD, MBA) can also be a smart decision too. Just planting some seeds for the 102'ers to look into.

Been working through this with my wife recently and her law school loans. They vary from 3 to 7.9%. I just closed a bigger/better 2nd on my home and was considering that option of paying down the higher loans, but I think I'd rather employ that money elsewhere.

Just for scorekeeping both student loan interest and primary residence mortgage interest are tax deductible, so even though they are a wash in this instance, it is always something to consider when doing your own analysis.

We will also check out SoFi.com as well -- thanks for the link.

[Flash68]

Originally Posted by Vortech404

Anybody have any thoughts on cutting down on my retirement to fund
a million dollar life insurance policy on one of my parents?

A life insurance policy is tax free? Anybody do this as part of a retirement
investment?

later
John

Just upped my life insurance recently and did look at the cash value vs term option. Ended up just going with term as I felt the restrictions in the investment options/vehicles were just not wide enough for my liking.

[GregWeld]

Originally Posted by Flash68

Just upped my life insurance recently and did look at the cash value vs term option. Ended up just going with term as I felt the restrictions in the investment options/vehicles were just not wide enough for my liking.

Smart.

Your lovely bride has earnings power... so life insurance should be sufficient to pay off the house (people can also buy a MORTGAGE life insurance that pays off the mortgage upon death), bury your sorry butt, set up college fund for children.

Life insurance is a bet - they're betting you'll not collect - and you don't really want to collect. It's not about leaving your spouse rich. It's about taking the heat off should you meet an untimely demise. And number 1 - it's NEVER a good investment. You'll do far better to invest the "premiums" in dividend paying stocks over the long run.

[Payton King]

I think a level term or a return of premium policy is better to cover a mortgage than "motgage life," which is a decreasing term policy.

There are times when a perment life insurance policy (whole life, universal life, etc) makes perfect sense.

John, not to sound morbid, but I would not want to be sitting around waiting for someone to die so I could collect money. Depending on the age and health, a permanent policy can get pretty expensive.

On the other hand, if you are in an inheritance situation where the estate is cash poor (family land or farm) or large estate where estate taxes are going to be a probem (estate over $5 million), then a permanent policy would work. Normally you would set both of those situations up in an irrevocable insurance trust.

For discussion's sake in this thread, I would be more than happy to run some numbers and post them up here so other people might understand how different types of life insurance works, pros and cons of different policies and how they might fit into a person's financial plan.

Not trying to sell anything here, just trying to educate like our Jedi Master.

[SSLance]

The cash value policy I bought on myself when I turned 21 is to this day the best investment I've ever made. My financial Advisor back then talked me into it as a "Reverse IRA". Basically taking after tax dollars and investing them into a vehicle that grows tax free while protecting my family at the same time. The last premium payment I made took $2,000 and instantly turned it into a little over $8,000...tax free. I took one out on my wife when she was 30 years old and I believe it's $1500 premium eeks out about $4500 worth of cash value right now. I've tried to go back and buy more of the same many times and due to my age, I just can't make the numbers work to my advantage anymore. I'm 47 years old now and it takes right at 10 years just for the cash value to catch back up to premiums paid. My policy passed that limit between years 6 and 7. The trick is to buy these young from good companies, the only one I trust is Northwestern Mutual Life.