David, are you up for a question about estate planning?
Alright, here's one from Brigitte.
@Brigitte: We recommend putting money into investments as the fastest way to get out of student loan debt for X reasons:
(1) If you have savings and lose your job you can continue to live and pay the minimum
(2) The interest rates for student loans are less than the average market returns
So pay the minimum and aggressively save and invest.
Brigitte, Harvard, Yale??? That is a ton of debt for both of them to be starting their marriage with. The President signed a college loan forgiveness program that they can look into. It caps payback amounts at 10% of earned income. The interest is capped at 3.4%. I would look into this option. Once you have set up a payment plan (agree on the minimum) begin to save at least 6 months of expenses plus adding some for lump sum payments in the future.
Thanks, Debbie. I'm actually in a similar situation as KD1984, and have been following a pretty similar plan to the one you just recommended.
I should add that it's been working well!
Great, it makes lots of sense and is a pretty easy to get a plan going.
Did you see the news today that the average student debt burden rose again -- to $26,600?
Yes, saw that this morning, jobs for graduates of college at 50%, very tough out there for our young people
Absolutely, Debbie. While we're on the topic, here's another question relating to student loans from a young reader.
Thanks for the question KD1984, it is not an exact science where to spend discretionary income. I think starting with a budget of fixed and variable expenses to find out how much is left over for these three items. Pay the minimum for student loans, that is the easy part. You should make sure that you have a robust emergency funds savings, such as 6 months of your take home pay. Certainly invest the minimum in your employer plan to take advantage of any match plans they may offer. The best gift the government has given us is the ROTH IRA. If you are within the income limits I recommend starting one up. Your income may go up over time and you will lose the ability to contribute.
@KD1984: I recommend putting the *minimum* toward your student loans and saving at least 10% of your pay in a Roth and 5% in a taxable account. If you need the money for an emergency they will NOT loan it to you again! So until you are wealthy, don't bother paying those student loans off. They are probably at a low interest rate and you should make more in the markets. If you still have them at age 45 but you a millionaire by then with your aggressive saving and investing you won't care. If you can save more than 15%, then save even more. Saving 50% and living like you are still in school is not uncommon.
@KD1984: Agreeing with Deborah Frazier, Our priority for investment funding would be:
1. Money in your 401k/403b only up to what is required to get any employer match.
2. Roth IRA up to the $5,000 maximum ($6,000 for those 50 years and older).
3. Taxable investment account.
4. You could fund your 401k/403b even if there isn’t a match.
Here's a question from Steve about Social Security.
@Steve: There is/was a provision for repaying everything and refiling. In essence you could get a tax free loan from the Social Security Administration. We don't recommend pushing the amounts you can get in Social Security benefits. If you die, your heirs can't take advantage of refiling and are stuck at the lower rate. And the use you could make of the money is limited in this low interest rate environment. Finally there is legislative risk that they will take the option of repayment away. We don't think the headache of the paperwork and finding someone who works at the Social security Administration who understands this legislation well enough to process the request is worth the time and effort.
Alright, while we let David answer Steve's Social Security question, here's one for you from Linda.
Linda, I would first question the need for life insurance at all. Usually life insurance is for your dependents should you die prematurely. Having said that, many people like to leave money to their children as sort of a "gift" If this is your goal, term is what we would recommend. the shorter the term years, the lower the premium. Even at 27 years, that only takes you to age 87, then the term policy would lapse. Since I am not a fan of spending money on life insurance at your age, maybe start a joint account for you and each of your children, deposit the amount the insurance premiums would have cost and let that be left to them.
An important distinction to make, David. All NAPFA planners are fee-only.
Alright, let's move on to our next question from Haleywood
Haleywood, first I am so sorry to hear of your struggles. Sadly, many people are struggling with the same situation. Some self evaluation is in order before starting a financial road map. Do you need to be retrained or to obtain more education? If so, part time programs are available at community colleges, online universities, and tech schools. I am not sure what you mean about "paying down" but I will assume that you mean using savings for living expenses. While your investments need to grow, you can't afford to lose money either. For taxable accounts (brokerage, savings) keep the estimated money you will need in cash and short term bonds. If you believe that your retirement accounts will not be needed to live on now, you can invest that in keeping with your age and risk tolerance.
Thanks, Debbie. Certainly a difficult time for a lot of folks out there. That's part of the reason we do these chats.
@Haleywood: The definition of capital is "deferred consumption" hence the best way to build capital again is to defer consuming it. Keeping your expenses extremely low allows you to save and invest. Becoming a millionaire (at any age) is dependent mostly on living very very frugally. our typical millionaire is the millionaire next door who doesn't make a lot, but saves and invests a lot.
Alright, moving on to our next question from Christine Miller
@Christine Miller: One aspect of financial advisors is that we often know we don't know the answer. I am not familiar with the consequences of a short sale. I would ask a Real Estate expert. Hopefully Debbie Frazier knows more.
Christine, Have you attempted to refinance under the HARP plan. This is a government plan that allows individuals to refinance even if their house is underwater. In using a short sale, you have to get your bank's cooperation and any money the bank "loses" is taxable income to you, so it could be quite expensive. If you think your will be in your home for a long time, I recommend refinancing and staying put. You said "something I will never own" Never is a long time and I truly believe housing prices will rise again AND it is your home, not an investment.
Here's another question from Trice.
David answered Trice first question, I do not recommend the HELOC for home improvements, etc. This is how many people got into trouble in the first place. Lines of credit are variable loans and in a few years rates will rise again. It is so tempting, but the equity in your home is an investment and spending that could be expensive in the long haul. Hope this helps
Thanks, David and Debbie.
Alright, here are a few more.
David, you can take this one from Felix
And Debbie, here's one from Melanie
Melanie, thank you for your question. At age 5 and 2, we parents have no idea what type of educational needs and wants our children will have at age 18. You want to start saving but if you have NO savings, this is the first place you should put money. You can think of it as saving for college, but if you need money for emergency, it is there. 529 plans, state educational plans as well as Unified gifts to minor accounts are all ways to save. You want to be very flexible at this stage of your children's lives, so I probably would open a brokerage account (after you put money into savings) and invest in a good index fund. Good luck
Our friends over at NAPFA recently put together an infographic on Why Financial Planning Is Important. Here are a few of the highlights:
@Jay: While you *can* pay the taxes on the Roth conversion from the withdrawal it loses much of its benefit. It also makes a Roth recharacterization impossible. www.marottaonmoney.com Here is an article on determining if you are a good candiate for a Roth conversion: www.marottaonmoney.com
Brigitte, Harvard, Yale??? That is a ton of debt for both of them to be starting their marriage with. The President signed a college loan forgiveness program that they can look into. It caps payback amounts at 10% of earned income. The interest is capped at 3.4%. I would look into this option. Once you have set up a payment plan (agree on the minimum) begin to save at least 6 months of expenses plus adding some for lump sum payments in the future.
re: from Social Security Handbook "1515.2 Can you withdraw your application after SSA makes a decision on your claim? You may withdraw your application after we make a decision on your claim if the conditions in the
