Q: We recently rehabbed our old farmhouse. We took out a line of credit from our bank and now owe $58,000, at 5 percent interest. We make monthly payments of $234, and every few months pay about $500 extra. Meanwhile, we have $166,000 left from an inheritance and I'm wondering how wise it would be to use this money to help pay down our debt. I figure that if the portfolio is earning money, why not pay down debt? On the other hand, if we're paying only 5 percent, and if the market is doing better than that, maybe we should let our "retirement" dollars grow.
- M.V.E., via e-mail
A: There are a couple of ways you could go, depending on how soon you'll want to get at that retirement money, says Rick Fingerman, a certified financial planner in Medford, Mass.
If you have sufficient cash flow to send the bank $500 extra every month, he calculates that you'll pay off the loan in 13 years. At $650 a month, that debt would be gone in about nine years.
You could get that extra money by tapping your portfolio gradually. Or, Mr. Fingerman says that you could take a lump sum of $58,000 from the investments and pay this loan off now.
By doing so, it would be like getting a 5 percent return on your money. That would leave you with $108,000 for retirement. If this money was invested properly and you received a 6 percent rate of return, it would be worth about $190,000 in 10 years.
Q: I am a 35-year-old single woman who manages her own money and doesn't wish to pay a financial adviser. I make $110,000 a year and have no real debts. My monthly expenses, including rent, are $2,000. I have $50,000 in a 401(k), $5,500 in an IRA, $100,000 in a money-market account, and $24,000 in stocks. I know I have too much in my money market. Can you give me some strategies on investing my cash at my age or do you think I am losing a lot of money by not having a financial adviser? My goal is long-term retirement, but I would also like to buy a home in the next few years.
J.T., via e-mail
A: Why the wait on buying a home?, asks Patricia Brennan, a certified financial planner in West Chester, Pa.
Mortgage rates remain low, and chances are you could use the tax deduction, she says. It's obvious that you have sufficient assets in your money market for a down payment and closing costs. "I think this [step] would be a much better approach than leaving [money] in a taxable account earning less than 1 percent, and a wonderful way to reinforce your good savings habits," says Ms. Brennan.
Now, about that financial adviser: The purpose of having one, notes Brennan, is to have a go-to person for important financial questions or decisions. A planners acts like a coach, she says, and sometimes can point out things that you may not see yourself.