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The Simple Dollar

Retirement: Fund the 401(k) to the max – or not?

Retirement strategy says get your employer's 401(k) match, then a Roth. Retirement question is No. 1 in the reader mailbag.

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Q6: Breadmaking tip
I’ve been baking my own bread for the last few months thanks to your extremely helpful blog post. However, I’m having an issue and hope you might be able to help. When I follow your directions to use 1/4 c. milk, I find my dough doesn’t bind together and I need to add more. For example, today I added 3/4 c. of milk. Am I doing something wrong to have to add more liquid?
- Candace

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My guess would be that it has to do with the humidity in your kitchen. I’ve noticed that when the air is damp in my area, I don’t need as much liquid for any dough I make. When things are dry, I need significantly more liquid (and the dough tends to dry out more).

Another factor might be your brand and type of flour. Some flours make a dough with relatively little liquid, while other flours require a lot of liquid.

I don’t think you’re doing anything wrong here, as you’re not using what I would consider to be extraordinary amounts of milk. Just remember variations like these can cause things to work out in unexpected ways.

Q7: Avoiding Christmas
Early this year, I hit my financial bottom and since then I have paid off a lot of my debt. I’ve also moved on to a lifestyle where I don’t buy many things that I don’t need and I find this lifestyle really fulfilling.

My family, though, is moving forward with the same consumerist Christmas they’ve always had and it just doesn’t appeal to me at all. I’m trying to avoid it altogether, but it’s pretty tough to do when it’s your family. Any suggestions?
- Nelson

Remember why you’re getting together with them at Christmas. The real reason for the season has nothing to do with the stuff at all. It has to do with the people.

Many people express how they feel about each other during this season through buying gifts. It’s a convenient way to say “I care” to others without having to let your emotional guard down too much.

You can do much the same thing with a handmade gift. Make a soup mix with a handwritten note attached to it. Bake everyone something delicious, like a Dutch letter. These things won’t cost you much in ingredients, but they do require time and are made better with a bit of love for the recipient. That last ingredient is really what it’s all about.

Q8: Savings bonds and student loans
My husband and I have about $74,000 in student loan debt combined ($8,000 from my undergrad and $66,000 from his undergrad.) We make about $75,000 combined and try to save the equivalent of his income every month which is about $2000. We own a home (a duplex) with a mortgage of 76,000, about half of the assessed value and two thirds of the appraised value. We have about $12,000 in an emergency fund. The $2,000/month in saving that we try to pit aside each month first went to buy two new furnaces and water heaters for the house, the we used it to build up our emergency fund, now we are thinking of splitting it and using 3/4 of the money to snowball our student loans and the other 1/4 to build our seam vacation fund. I also have about $3500 in a mutual fund that I have had since I was a kid and pretty much forget about it as its value jump around with the market. We also have about $3,000 combined from Savings Bonds. We would like to start snow balling the student loan debt but also want to start saving about $6000 to fund a european adventure next september before we start trying to have a baby. The interest rates on the student loan’s are $8,001.49 @ 4.00%, $30,490.56 @ 4.88%, $6,144.89 @ 4.19% and $29,659.26 @ 4.86%. We haven’t really done anything with the Savings Bonds before because they had a good interest rate at 4% and we liked the idea of having that money liquid. But now that we have a health emergency fund and realizing that three of our loans are incurring more interest that we are earning on the bonds, do you think we should just go ahead and cash them in to make a dent on the loans, or would the debt be miniscule enough not to really matter? Or alternatively, should we use them to put a big dent (half of our goal) in our European adventure fund?
- Sheila

If I were you, I’d consider the bonds to be part of your emergency fund. I would use them last, meaning I’d zero out the emergency fund before using the bonds, because they’re earning such a nice rate compared to the savings account.

Then, I’d make sure that I had the right amount in an emergency fund. I would try to target four months of living expenses across all of the emergency fund money. I don’t know what your total monthly budget looks like, but it may be that the cash you have right now (the $12,000) is pretty close to that.

Once you know how much four months of living expenses actually is, I’d add together the $12,000 in savings and the $3,000 in bonds, then subtract the living expense estimate from that. I’d then withdraw that calculated amount from the savings account and throw it at the debt. Leave the bonds where they’re at, earning 4%.

Q9: Mortgage balloon payment difficulty
My wife and I purchased a home in 2010. We were able to avoid having to pay PMI each month by putting a 10% down payment and taking out two mortgages, one main mortage that is a 30-year fixed at 4.75% and a second that has 15 year term at a 6% rate but is a balloon payment of $60,000. Yes, you read that correctly. It is a 15-year balloon payment with a maturity date of 15 years, making the lump sum balance due in 2025, which by my math (and if I just pay the amounts due each month would be a total of $20,500).

My question to you is how to appropriately factor for the lump sum balloon payment. The easy answer is to say that we’d be selling the place before then at a price that will cover the balance and no need to worry about it (which was the lender’s line of thinking). We do live in a great location (suburb of D.C.) and comparable properties have retained, if not increased their value since we purchased. However, I come from a more conservative mindset and am looking at this from a long-term standpoint so I want to make the assumption that we will stay at the place for the long-haul (which would make refinancing the balloon payment an option when we become eligible in about 5 years when we’ll have 20% in equity).

The balloon payment has a daily interest rate where the amount of interest owed is the daily rate times the days that have passed since last payment. Any amount paid in excess goes towards principal. Our current method is that we pay $100 extra a month to go towards principal, plus I save $350 in an combination of Roth IRA and ING Savings accounts so that by the 2024 date, we will have enough liquid cash to pay the lump-sum payment due. Is this the right approach?. One thought I have is to pay the $350 immediately each month to lower the principal (and thus decrease the overall interest paid throughout the lifetime of the loan) but we currently keep the savings in the Roth & ING account in the event of a financial emergency and need access to that cash (even though we do have a 3 month emergency fund so I don’t know if this is overly conservative). We also keep it in the Roth because then the earnings can grow/compound year over year and I can withdraw the contributions later. Right now we have about $5k in the Roth (contributions that can be deducted) and $1500 in the ‘Balloon Payment’ ING account.

Should I continue to pay an additional $100 in principal every month and save/accrue $350 in savings accounts, or should we just put all of the $450 into the balloon payment each month to reduce our future liability? Our current method will mean we’ll have enough cash to pay off the balloon payment by 2020, making a lump sum payment of $40,000.
- Ronald

If I were in your shoes, I’d probably make sure the Roth was fully funded for the year (meaning that you’re putting in about $420 a month) and then put the rest toward additional principal on the balloon payment. This will maximize the value of your Roth, which will return better for you over the long run than a savings account.

If things go well, your income will go up as time moves forward, which means you can slowly contribute more to the balloon payment. This is the best outcome, of course.

If things do not go well, you can use your Roth contributions when the time for the balloon payment arrives. You’re still in good shape and you’ll retain the Roth earnings.

Q10: Investing in class
I am a high school accounting teacher and want to teach my students about the how the stock market works and how to invest wisely (and cautiously). I thought about having them (with their parents approval, of course) set up an account at Sharebuilders because you can invest for as low as $25 a month. The downside is four dollars each monthly contribution goes towards commissions (almost 20%). Are there any other investment options (with low entry and monthly fees) that I should consider?
- Margie

If I were you, I’d have them all sign up for and play The Stock Market Game or something similar. This is essentially a stock market simulation that enables students to invest virtual money in stocks.

In order to build interest, I would make the thing laden with extra credit for your class. If they manage to beat the S&P 500, they get some bonus points, for example.

At the end of the year, I’d have each student (or team of students) present their investment strategy and how it did to the class.

I wouldn’t mix real money into this. You want to teach them how to do this, not have them start taking on real financial losses. The students that are interested will likely move into some level of investing on their own, and it’s probably a good idea for those not interested to not have actual money involved at this point.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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