401(k) savings: Huge plus, even when retiring at 45
401(k) savings defer taxes and can fund second retirement phase for high earner who wants to retire at 45. See question No. 2 in the reader mailbag for 401(k) discussion.
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Q6: Pay off house or invest?
My husband and I owe about $150,000 on a home. We have no other debt. We want to start investing in real estate and we have about $60,000 in savings (we have another $20,000 set aside for an emergency fund). What is your advice on how to proceed: do we pay off the house and rent that out or use that money to put a down payment on an investment property? Thank you for your time!
The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.
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If you want to start investing in investment properties, you seem to be in the right place for doing so – assuming you’ve done the homework, of course.
My concern would be that if you take out a loan on an investment property and that property doesn’t immediately start earning returns, would you be able to handle the payments on two separate loans for an extended period?
If the answer there is no, then I wouldn’t jump into the investment property just yet. Instead, I’d pay down my current mortgage.
Q7: Right age for financial lessons?
At what age should I start teaching my kids about money? I have a ten year old that seems to constantly want things and I think he could really stand to start learning some money lessons. My wife says that kids need to be kids. What do you think?
I would absolutely start teaching money lessons to my ten year old.
Money lessons don’t have to be drudgery about the minutiae of tax laws. Often, it can be a lot of fun and for many children it can feel like something of an initiation into the world of adults.
My suggestion is to start with an allowance that’s not tied to any sort of work. The only requirement is that they budget it and explain why they’re budgeting it. Make the child give a small portion of the allowance to charity and another portion to a very long term goal, like a car when they’re 16 or college savings. The rest should be split up between free spending and saving for whatever goal they have in mind.
All they have to do is explain how much they’re spending and saving in various categories and why to earn the allowance, and they have to stick to this plan to keep earning it.
I already do this with my six year old and four year old and, for the most part, they understand it and enjoy it.
Q8: Time to buy a house?
My husband and I are 27. We own a tiny 2-bedroom condo purchased in 2007 (at the height of the market; it’s now worth about 60% of what we bought it for). I finished grad school several years ago with about $54,000 in student loans. My monthly payment on a 10-year repayment plan is $627/month. I’ve overpaid some and currently owe $37,000 2 years into repayment, though the monthly payment of course remains the same. Our problem is housing – we are just fine right now with the two of us but are planning to start a family soon, and we’ll be extremely cramped in our current living situation. We’re both pretty frugal and minimalist, so I know that we could do it, but it would be a struggle. The even bigger struggle is that, due to the housing market and increased rentals in our neighborhood, the area has declined significantly since we bought. Our neighbors are now pretty transient, and we’d like to be in a safer, more stable place when we have kids. With our condo so far underwater, we’ll have to rent rather than sell if we leave. So the question is this – should I extend the repayment plan on my student loans (I could get my payment down to around $250/month on a 25 year repayment plan) so that I can contribute the extra cash flow to savings for a down payment and take advantage of the current buyers’ market and low interest rates, hopefully making up for the extra interest in student loans by getting a better deal on a house? Or should I continue to make the large payments on the debt and risk that the market will have turned around by the time I pay off my student loans and we will have missed the opportunity to get in a larger house for an affordable price? My student loans are at 6.55%, and our current mortgage is at 4.2%. I’d expect we’d get a similar or slightly better rate on a new mortgage. We have an emergency fund and are both contributing to retirement accounts, so those issues aren’t really big factors in the decision.
My concern is that if we wait a few more years to buy, interest rates will have gone up and housing prices will have improved to the extent that our larger down payment would be negated.
This is a tough one, with benefits and drawbacks either way you go.
Given that you have a history of being responsible with your money and aggressively paying down debts, I would probably suggest that you go for the plan that gets you into a house sooner. The reason for that is that you’re showing financial responsibility and will likely not use this change in plans to dig yourself into a hole that you can’t get out of.
The safest financial route, of course, is to stay where you’re at, get your current mortgage paid off, and then see what the market can bear. However, given the changing situation in your family and in your neighborhood, life may be trumping the safest route.
Q9: Is Netflix streaming cost effective?
My wife and I don’t have cable television, but we do have high speed internet at home. We rent a movie about three times a week to watch at home, but most of the movies we watch are older ones that are very cheap at the local video rental store. We usually spend $0.50 or $1 per rental. We have been thinking about getting Netflix streaming since our Blu-Ray player has it built in. Do you think it’s a cost effective option in our situation?
The movie selection on Netflix streaming is highly eclectic. There aren’t a lot of big-ticket new releases on there, but there are huge catalogs of older movies and more obscure films on there. Our “to be watched” list is full of stuff.
Where it really shines, though, is television series without commercial interruption. There’s a lot of really well-made series on there, like Breaking Bad and Mad Men, that can be watched a full season at a time without commercials. It doesn’t always have the most current season of shows, but it’s a great way to watch a slightly older show in its entirety. In fact, I’d say it’s the preferred way to watch a show with dense storylines, like Lost.
If you’re looking at a dollar-for-dollar comparison, you’re going to be about the same with streaming versus renting at the rate you describe. You’re probably spending about $10 a month on renting given the numbers you describe.
My suggestion? Try it for a month or so and see if you like it. If you do, stick with it. If you don’t, cancel it and go back to renting discs.
Q10: Is our house worth it?
My husband and I bought an old liveable fixer-upper about 4 years ago. At the time we did not have children and figured we would slowly fix up the house ourselves. Now, 2 kids later, we have neither the time or the money to fix this house and are in dire need of some kind of life change so we don’t dig ourselves deeper into an already deep hole.. We have about $35K in credit card debt, on top of that my husband is paying off his student loan $242/month, a monthly car payment of about $340/month and our house payment which is about $1300/month (we have a 5 year arm set at 2.9%). We do not have any emergency savings, but we do put away for retirement through our employer. We are fully aware we need to make a BIG change but do not know where to start. We need to choose between keeping the house and fixing it which could be anywhere from $50K-80K in renovations in hopes that in the future this house will be a great investment and will increase in value since our neighborhood is really booming right now, or sell the house, and get something newer and more affordable with no renovations needed and work on just paying off the existing debt that we have created. In the meantime we would live with nearby family during renovations and possibly rent our house out for a certain amount of time to pay off the expenses from renovations and then move back in at a later time – or until our family kicks us out!
Is it a smart move to invest in a house that more than likely will be a good profit for us down the line, even if it means putting us further in debt and possibly causing stress on our family while having to shack up with more family for an uncertain amount of time? We are established here and love our neighborhood, but is this house really worth it?
I am leaning towards starting fresh – but easier said than done. I don’t want to kick myself later for letting go of a house that could potentially be a solid investment..Any advice would be appreciated!!
This is another question that comes down to pros and cons on each side of the equation.
To me, it comes down to this: do you like where you live? A neighborhood where you know lots of people, are familiar with the services, and have many good relationships is worth a lot. In fact, it’s one of the big reasons why Sarah and I aren’t rushing too fast to move into the country: we love the people near where we live right now.
If I were you, I’d stick with it and try to improve your current home. Here’s an idea: instead of stressing out about doing it yourself, why don’t you take advantage of what you like about your area? Simply have a home improvement party. Get a bunch of food, a bunch of beverages, and invite a bunch of people to spend a day kicking out a major project or two in your home? I know several people who have done this, including a circle of friends who made a series of weekends out of it in which all the familes got together at one house, worked on a big project, let their kids all play together, and everyone ended up with nicer homes.
There are lots of options for making this work if you think outside the box a bit.
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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