How would you do the division?

I was recently reading the comments section of an advice column (linked from that bad advice) and read this:

I figured this out after doing an activity in a personality styles class where I got people into groups of 10 and handed out a bag with 8 mini candy bars. I told them that the store didn’t have enough so that they’ll need to figure out how to divide them up.

It was fascinating to me as I watched class after class do the following: Group A (the group that was more people-focused in their preferences) would often try to solve this problem by first trying to figure out if anyone cannot eat candy (medical reasons or diet); then when a few dropped out that way, the others would often dither about and defer to others before they would take their own. I observed this type of personality continually considering individual circumstances in their quest for fairly dividing up the candy.

Group B, on the other hand (and these were the people that identified more as task-focused individuals), almost always used math or some really black and white tool to equally divide up the candy. There was no discussion about individual preferences, individual circumstances – they just figured everyone got the same side sliver as everyone else. End of story. It was amazing to watch.

I definitely fit into Group B here.  I think of the candy as an endowment, and they should be allowed to exchange their piece for goodwill or money or whatever it is they want, even if they don’t want to eat the candy themselves.  I’m not sure you get the same goodwill for saying in advance that you can’t have the candy because you’re diabetic as you do for giving someone else your piece.

Plus I’m not scared of doing things like figuring out how much 8/10 is (though cutting into fifths is a PITA).  All we need to make sure we have is a good clean knife and something to cut on.  I figure chocolate probably isn’t worth doing the extended fair division problem with.  (The one where one person cuts and the other person chooses the piece.  Actually, I think the process might be that 9 of the people make cuts, then the 1oth person chooses, then the 9th, and so on until the last person gets the dregs.  But that still sounds like too much hassle.)

Of course, it is possible that the person who drops the number from 9 to 8 gets everyone’s gratitude for not actually having to do the math or the cutting, even if the person who brings the number down from 10 to 9 isn’t worth much.

#2 notes:  I guess it would depend on context.  Are these people strangers? [So cultural expectations regarding first meetings are important!]  Are they going to have to work together again?  [So this is a repeated game!]

#1 agrees: I just assumed it was a class that was going to meet all semester.  And maybe you don’t want to be the person who pretends not to like chocolate when you really do because then you’re going to be a doormat the rest of the semester.  People take advantage of easy-going folks.  Better to show you’re giving a sacrifice, or a one-time sacrifice.

So, which type are you?

Why I rent instead of buying

One of us owns a house and one of us doesn’t.  The one who doesn’t (me) is in a location where I *could* afford to buy, but I’m not.

Linda wanted a post on why I rent instead of buy, so here it is!  (Because Grumpy Rumblings aims to please!  Also, we needed a Monday Money post, so this seemed like a good idea.)

My first answer is, “Because I always planned on leaving this shit-hole of a state.”  I would like to own a house, but not here.

#2, however, points out that once I was more optimistic.  A little.  I thought that if my partner moved here we could buy a big house (instead of renting a tiny apartment) and we could try to be happy here.  After all I’ve always wanted to own my own house and paint my own walls and just own it.  (#2 thinks homeownership is over-rated, but #2 also doesn’t mind vertical blinds or wallpaper.)  It’s been so long since those days that I can’t remember them, but #2 swears we had those discussions.  [She may even have gchat proof that she's too lazy to search for, but totally could if she cared enough which she doesn't.]

At first I wasn’t living with my partner so there was no reason to buy.  Then I was saving up money.  Then, I never bought one because I didn’t want to have to sell it later, when I left.  By the time I had partner and down-payment, I wasn’t ready to commit to living in the house for at least 5 years.  And selling it later can be really obnoxious.  Who wants the hassle and the risk?

My friend did the buy-now-and-sell-when-you-leave route, and they took a bath on the finances because they had to unload it or else be long-distance landlords (NOOOOoooooo).  Personally, I would not have made the decision to buy when hir partner didn’t have a job here despite 2 years of looking, but oh well.  Now they are both employed and homeowners in a different state!

So, there you have it.

How did you make the rent vs. buy decision?

Ask the grumpies: How to deal with 9 month salaries?

Kaycookie asks:

My husband is new TT science faculty and I am also working part time teaching in a different department. Okay, very part time because we have 3 little kids. Anyways, any suggestions on dealing with a 9 month salary over 12 months, but then also getting summer support (he is guaranteed this for at least 4 years)? We budget just fine during the year, but not much left to save (about $300/month on top of mandatory retirement at about 13% salary with their match). Is it a bad time to just plan on saving mostly in the summer since we get almost half or our income then?

Hm, here’s another one we should have made an effort to answer earlier.

I’m assuming here that you’re saying that you can save $300/month during the school year but are expecting a deficit during the summer, not that you’re saving $300 on top of saving for the summer during your regular 9 months.

I was in a similar situation for two years (I had 9-months only, DH had summer salary for two years).
1. I sat down and figured out our actual expenses (these include the $1K “emergency” or forgotten fixed expense that we seem to get almost every single month) and our required expenses (mortgage, insurance, etc).
2. From that information, I figured out how much we spend each month and multiplied that by 3 to account for the summer months.
3. Then I subtracted DH’s salary for those three months.
4. Then I added a one month buffer for an emergency fund, just in case the university screwed something up with the summer salary or we had an emergency.  (They never screwed up his, but recently they totally screwed up mine two years in a row after they moved from decentralized grant administration to centralized.)
5. You could then divide that number by 9 to see how much you’d need to save each month not to feel a pinch during the summer. I didn’t do that, but instead looked at the whole number and put away the full amount– as soon as I got that amount I stopped putting money towards summer savings.

However, in my case we were making more than we were spending, which gave us an automatic buffer.  My calculations only told me how much money we could put away in extra retirement or (later) towards the mortgage.  You’re already spending almost exactly what you’re earning.  That doesn’t give you much room.  On top of that, it’s going to make cutting expenses in the summer especially difficult.  Instead of making little cuts throughout the school year, you risk being forced to eat rice and beans or carry a credit card balance (wasting money on interest) come August or September.  That’s not going to be pleasant, especially if you have to do any kind of back to school shopping.

So, what can you do?  One thing you can do is see if the university will prorate your salary to 12 months for free.  When they do that, they pay your 9 month salary as if it was a 12 month salary so you get the same amount each month.  That way you know exactly how much money you’re getting and it’s easier to force yourself to make those little cuts (so you don’t have to make big cuts later).  I think most places will do this if you ask.

You can also increase your earnings.  Even a temporary increase in earnings will allow you to put away extra money for summer.  You don’t have to put away the same amount each month so long as you have the full amount in May (or June or April, depending on when the last set of full paychecks comes).  You probably know better than we do how bringing in more income works in your situation.  Work more part-time hours, for example.  Your DH is probably submitting grants.  Perhaps you could babysit.  Etc.

And, of course, you can try cutting expenses.  A good place to start is to call up all your providers (cellphone, insurance, internet, etc.) and ask for discounts.  It’s amazing what just asking can cut off your monthly bills.  After that you may have to think about bigger cuts– where does your money go?  Setting up Mint.com for a few months may help if you don’t know.  For us when we need to cut, it’s eating out that’s the first big variable expense.  For others it may be clothing or wasting food or vacations etc.  You’ll need to look and see what you’re able to cut and what you’re willing to cut.  If you’re still having trouble you may need to think about larger cuts– housing, transportation, etc.

To make sure you aren’t tempted to touch the summer money before summer, you may want to put it in a separate (possibly online) saving account or put it into laddered CDs that mature and deposit in your checking right when you need them.  Back when interest rates were higher, this was a way to make a little extra money, but now it would just be mainly of use as a commitment device.

Longer-term you’ll have better information about raises, your part-time hours, grants, and so on.  It’s difficult to think about what life will be like without the summer money four years from now if there’s a chance for you to replace it.  Still, you really should think about the worst case scenario– what happens if you lose the summer money but don’t make it up another way?  What will you do to increase income, cut expenses, or save now so you can spend down later?  The less you spend now, the smaller the change to your lifestyle will be if that happens.

Sidenote:  Once the kids are older, you’ll want to up that retirement savings.  13% is fine for now, but you probably have some catch-up savings to do from graduate school.  Think about IRAs once your income goes up.

#2 has never gotten summer salary (boo) but I have my university spread the 9 month salary over 12 months.  I figured it out once, and it cost me literally less than $12 in interest that I could theoretically have earned.  I’m willing to pay $12 in order to get the same amount every month.  Maybe one day I’ll hit the big-time on a grant.  No luck yet.

Gumpeteers, have you been in this situation before?  What do you do with 9 month salaries?  What do you do when you’ve gotten used to summer money?

We (satisficed and) bought a digital piano

We finally got around to signing DC1 up for piano lessons this past fall, about a year after we meant to.

Ze really really likes it.  The first things ze does when ze gets home is hir piano practicing, and sometimes if ze gets up early enough, ze’ll practice piano before going to school.

Unfortunately, the $100 keyboard hir grandparents got hir doesn’t have weighted keys, so you can’t do piano or forte, just one volume.  And there’s no pedals for sustained sound.  Since it seems like DC1 is going to stick with it, we really need to get hir a real piano to practice on.

Well, almost a real piano.

Looking up how to buy a used piano online is terrifying.  Page after page talking about how you need to have a trusted professional with you at point of purchase or you may end up with something that’s only good for hauling to the dump (something you will, of course, have to pay for yourself).  New pianos are confusing as well, though the only terrifying thing about them is the price point.

So… on the advice of one our readers (I think chacha, but maybe it was Ms. PoP), we looked into digital pianos.  They’re new and under warranty.  They don’t have to be tuned every year.  They cost a fraction of what a low grade real piano costs.  And… they don’t sound too bad.

After reading tons of reviews and scouring the piano forum, we decided to get a low-mid-level Casio for $1099. Specifically the Casio PX850 BK 88-Key Touch Sensitive Privia Digital Piano. This piano is on all of the top 10 digital piano lists that I found.  Although it was only #1 on one of those lists, the #1s on the other lists weren’t even listed on many of the lists (if that makes sense).  The only detracting thing on the Amazon reviews is that some people find that after several weeks of intense playing, the keys start to clack a little because the pads wear thin (they should be wool, complains one reviewer), but that seems to be a potential problem across our price range, and probably isn’t one our 7 year old will encounter for a few years.    The piano forums recommend this one as a good learning piano, and while some people have preferred digital pianos, nobody really says anything bad about this piano (while those “preferred” pianos all have detractors).  Everyone seems to agree that this piano is pretty good and is a good value.

We tried to find a place in town that carried it that we could listen and then buy from, but the place in town that said they had it turned out to be out of stock.  They did have the $1699 Yamaha that some people prefer to the Casio (and many people do not), and we weren’t that impressed with it.  We talked about trying to find a place in the city that has a bunch of pianos we could listen to, but it seems like all the shops in the city have a monopoly of one brand– they just carry Yamaha or just Roland etc.  And we didn’t really want to go into the city this weekend anyway.

So we ended up getting it without listening to it from Amazon.  I splurged and got the recommended bench for $44 instead of a slightly less expensive one because someone in the reviews said that one of the settings fit hir 4 year old.

The Casio came in less than a week.  DH spent the evening putting it together, mostly after DC1 slept.  At 10-something, he got DC2 and me to look at and listen to the finished product.  It’s beautiful.  It looks like a real piano, but it’s slimmer.  It feels like a real piano.  It sounds like a real piano.  Plus, unlike that $1700 Yamaha, it didn’t have tons of confusing controls.  Its controls are even more intuitive than the controls on DC1′s old $100 keyboard.  It probably has fewer features, but we don’t need a keyboard that can bark like a dog, we need a keyboard that mimics a regular piano.

We congratulated ourselves on doing a good job picking a piano out (and thanked our lucky stars), even if we weren’t able to check out the piano in person first.  It’s exactly what we need and it’s much nicer than the ones we saw at the local store, even the equally and more expensive ones.  So we’re very happy with our purchase.  DC1 loves it too.  It’s scary spending $1000+ on something you’re not sure about.  Getting it wrong is an expensive and/or annoying proposition (depending on if you return the purchase or not).

So yay for top 10 lists and yay for piano forums and amazon and satisficing.

Have you ever made a big purchase partly-blind like this?  How did it work out?  How do you decide on big purchases?

April Mortgage update: And more musings on where to put extra money

Last month (March):
Balance: $61,508.58
Years left:4.75
P =$962.48, I =$251.92, Escrow = 613.58

This month (April):
Balance: $58,365.65
Years left:4.5
P =$970.93, I =$243.47, Escrow = 613.58

One month’s prepayment savings: $8.60

So we still haven’t really adjusted to DH going from 0 salary to 2 times his previous salary (this is a great problem to have).  I’m (mostly) not letting those $200/week grocery bills get to me (though to be honest, grocery spending was still down at the beginning of March– oddly, spending money on cheap stuff last month meant our pantry was stuffed by the time the challenge finished… and we’ve got prepared leftover soups in the freezer and plenty more lentils), but as was noted last month, I still feel a twinge of guilt for a $73 restaurant bill.

On top of that, now that DH has an industry job instead of a state government job, his ability to save for retirement in a tax-advantaged fashion has been dramatically reduced.  He no longer has access to a 457, and his 401(k) access is only worth contributing to up to the employer match (and the match is only 50% instead of 100%).  Still, with my 457 and 403(b) and mandatory retirement, we’re socking quite a bit away.  And the 529 plans are growing at a nice clip.

What these two factors together mean is that our savings account is starting to accumulate.  Before DH got his job, we had to have a big emergency fund for emergencies and we had to have enough money to cover the unpaid summer.  We didn’t spend that lump down before DH’s new revenue source started coming in.  In fact, there is now enough in savings to almost exactly cover the mortgage.  Now, if we paid off the mortgage, there would be no emergency money left or extra summer money and we wouldn’t be able to pay DC1′s tuition for next year, so obviously we’re not going to do that (plus, what would we post on the first of every month if the mortgage suddenly disappeared?).

But, that is a ridiculous amount of money to have just sitting in savings.  In fact, if DH lost his job tomorrow (which we hope he doesn’t!) we’d still have more money than we needed to get us through the unpaid summer + tuition + emergency fund.  (Though I’d have to go back to being mindful about expenditures again.)

I have opted not to put 11K away in the IRA this year.  We’d have to do a back-door Roth and even though it wouldn’t cost extra for us to convert it (we only have ~$33.00 in our traditional IRAs because something spit out a cash dividend into the traditional account instead of DRIPping into the new Roths during the conversion process and I didn’t bother to ask them to fix it).  It is true that we could draw contributions out of the Roth whenever, so maybe I should reconsider (in the remaining 15 days), I dunno.

DH is leaning towards putting more into the mortgage.  I’m not ready to commit yet to putting 10s of Ks in there, but I did up the pre-payment this month another 1K.  We’ll see what happens going forward.

I think we should make some of those expenditures we’ve been putting off.  We’re going to replace the a/c for $5K [update:  3.5K], and buy DC1 a digital piano for something under $1.5K.  But calling the a/c people takes time and effort, and shopping even more so.  DH wants to get a yard person to take care of mowing and mulching and weeding and bush trimming.  I agree.  Also I really want to take a sabbatical, something that will cut into my pay and increase our expenses because I’ll want to sabbatical in a different state.

Of course, DH might not keep this job forever.   It’s not an enormous company and it may someday go out of business or be bought and changed or they may give up on the telecommuting aspect.  That means we may not have his big income forever.  I haven’t been getting even cost of living raises every year that I’ve been here, and although the current administration seems committed to trying to get my salary up to that of our assistant professor hires, that doesn’t mean that future administrators will feel the same way.  We’ve tried living on just my income with the two kids and it kind of sucks.  It’ll suck more when my income is worth even less.  Tenure is nice, but it doesn’t guarantee even keeping the same real income over time, much less increasing income over time.

When thinking about what to do with extra income, it is important to think about the long term consequences of those decisions.  Some decisions are really obvious.  Putting money towards debt is going to make life much better off later even if something terrible happens.  Having a smaller required bill makes life easier down the road if inflation erodes your earning power or you suffer a job loss.

Similarly, putting money into investments, while more risky, also has the potential to ease things down the road.  Either you won’t have to save as much for your retirement, or you may even be able to turn those investments into an income stream, such as with dividends.

Spending money can go three ways.

There’s spending that decreases your expenses down the road. We’re hoping that replacing the a/c will decrease our needs for a/c repairs, and lower our monthly energy costs in the long term.

There’s spending that increases it.  Switching to smart phones (something we haven’t done yet) would potentially increase our spending over time, unless we found Ting or a similar company to be a good match for us.  It would be difficult to go back to flip phone plans after getting used to having a smart phone.  Our colleagues, faced with similar situations post-tenure, have opted to buy new houses and fancier cars– when these are financed, they can trap you into needing your higher income (and higher insurance and/or tax expenses even if not financed).  Some of our colleagues who have done this complain about not being able to afford to pay college tuition for their kids, or say that their kids have to go to state schools.  Different priorities.

There’s also one-time spending that isn’t going to make much of a difference (except, of course, through lost opportunity costs).  For example, one-time spending on things like vacations or the piano is unlikely to either increase or decrease our future expenses.  They just happen.  And you can always stop paying for housecleaning or yard-work if times get tough.

A goal then for the risk averse is to turn the kinds of expenditures that will be liabilities if your income drops into the kinds where your future expenditures aren’t increased.  Paying in-full helps reduce future monthly drag, but it doesn’t work completely because there’s usually still higher operating costs –you might have to buy more expensive insurance or your property taxes might increase.  That’s where that first kind of money placement comes in–putting as much as feasible into debt pay-down and investments can make those lifestyle inflation increases less risky because it offers a cushion in case of a job loss or other emergency.

So you can’t do too much of the liability increasing spending without a bunch of the liability decreasing kind to off-set.  If you’re going to do some of column B, you really ought to do some of column A too.  And if there’s money leftover, maybe some column C.

How do you decide if you can put money into something that’s going to cost you more later?  How do you allocate between investment expenditures, extra-cost expenditures, and ephemeral expenditures?  Do you think about the future costs of a purchase?

Ask the grumpies: Financial advice starting out?

Norwegian Forest Cat asks:

I’m a late-stage Ph.D. student, and as a result of a lack of funds I haven’t been saving/investing at all beyond a small cushion in a plain old savings account during my early adulthood. I am about to hit the job market though, and I really want to get myself on track financially in the near future so I have my ducks in a row when I need to find health insurance, pay off loans, start investing/saving for retirement, prepare for the eventual death of my car, etc. My SO is a finance nut (as a hobby, not a job), so he has his own suggestions (which are USAA and Vanguard-heavy based on his own experience), but I think a visit to a financial planner would be a really wise one, especially when I have some indication of how said future job will compensate me. But, there are a million certified financial planners out there–how do you get started? And do I need to meet with one in the first place? I’m pretty overwhelmed with options and acronyms but am eager to learn and be involved with it, so just handing over the money to my SO or some bank is not going to cut it. :)

This is a great set of thoughts.  So… like we said in the last Ask the Grumpies, there are a lot of really bad financial planners out there whose incentives are aligned with separating you from  your money, not helping you to make more money.  The buzz words that your SO is throwing out are the right ones (does he also say things like, “low cost index funds” etc.?).  You definitely don’t want to just hand your money over to your SO, but it sounds like ze is making good decisions and would be a handy person around to help you take control of your own finances.

For you I’m going to recommend J.D. Roth’s book, Your Money: The Missing Manual.  He does a good job talking about the basics in a way that allows someone intelligent like you to understand what the different options are and what the pros and cons of these options are.   You can start talking about the things you read about with your SO, which will also help lead you to greater intimacy.  It is really good to be on the same page financially if you ever decide you want to combine finances or lives in a more permanent fashion.

I don’t think you need to meet with a financial planner, but if you do think you do, as with the last Ask the Grumpies post, I’m going to recommend Walter Updegrave’s suggestions on how to go about finding a good one.

If you find YMtMM helpful, then you can find some more personal finance book recommendation from this link here.  The post is about debt advice, but most of the books cover other things too.  In addition to the books in that link, you may find the Bogleheads Guide to Investing to be helpful for getting started with your investing.

What recommendations does the Grumpy Nation have for Norwegian Forest Cat?

More from the financial education does not work literature

Ironically, you can force people to make “good” financial decisions by allowing them to skip getting financial education if they make the “good” decision instead of the “bad” one!

The Effectiveness of Mandatory Mortgage Counseling: Can One Dissuade Borrowers from Choosing Risky Mortgages?

by

Sumit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, Douglas Evanoff

We explore the effects of mandatory third-party review of mortgage contracts on consumer choice—including the terms and demand for mortgage credit. Our study is based on a legislative pilot carried out by the State of Illinois in a selected set of zip codes in 2006. Mortgage applicants with low FICO scores were required to attend loan reviews by financial counselors. Applicants with high FICO scores had to attend counseling only if they chose “risky mortgages.” We find that low-FICO applicants for whom counselor review was mandatory did not materially change their contract choice. Conversely, applicants who could avoid counseling by choosing less risky mortgages did so. Ironically, the ultimate goals of the legislation (e.g., better loan terms for borrowers) were only achieved among the population that was not counseled. We also find significant adjustments in lender behavior as a result of the counseling program.

Citation here.

Would being forced to take credit counseling cause you to change what kind of loan you took out?  How onerous would the course have to be for you to change your behavior?

Escheatment

Escheatment is another fun (not really) term that I learned this tax season.  #2 didn’t even know this term!

Did you know that if you have a stock that is on a dividend reinvestment program and you don’t login to the webpage or call them or write to them (because it’s changed companies so you need to re-register and they send you a nice quarterly report and tax forms so there’s no reason to login), that after “some amount of time” the company has to, by law (depending on your state), declare your account dormant (even if you have ANOTHER stock from the exact same company with the exact same contact info that isn’t dormant because its dividends are going to your bank account, even if the reinvested dividends from the dormant account are buying shares in the non-dormant account).  Then they have to notify you 3 times to contact them.  The third time requires signatures from everyone on the account and you can no longer just login or call them to stop the dormancy.  The first two times can apparently be a one line suggestion that you login to their webpage to avoid dormancy hidden in the middle of a statement full of words and numbers.  So the third time with the signatures comes as a surprise.

What happens if you don’t get the signatures to the PO box across the country in time?  (Supposedly 30 days, but for some reason it takes a lot longer for the letter to get to you and then you don’t really pay attention to it until you start doing your taxes and go what is this OMG, I have 2 days.)  According to the internet, your entire dormant account is given to the state.  Then the state sells it (and you can’t sell it before that happens because your account is dormant so you can look but you can’t touch online).  If you want the money back, you have to go through the state’s lost money thing.

Of course, it isn’t clear from that third notice which state is going to get your money.  So good luck with that.

Update:  Escheatement averted.  And a reminder that I have to contact them at least once every 3 years in order to avoid escheatment, which can include logging into the account.  Maybe something to do at tax time.

So more fun with investing.  Seriously guys, Vanguard index funds.  Or target-date funds.  Maybe TIAA-Cref if that’s what your employer uses.

Ask the grumpies: Next stage financial advice

Good saver asks:

My husband and I have done a recent financial checkup and in the process realized it’s time to do more interesting things with our money than build up savings in a savings account. The question is what.

We are both gainfully employed and spend an obscene amount on childcare for our toddler. We hope there might be a second little one running around wrecking havoc in the next year…. (Well maybe not running yet… but you know…). My husband is in his early 40′s. I’m in my mid 30′s. We both have highly stable jobs.

We own a house in a good neighborhood. The loan was taken out at a good interest rate (4.5%) with a good solid downpayment (25%). It’s a 30 year mortgage and we plan to be here for the next 5-15 years. We have 6 mos emergency fund.  We contribute to our employer’s 403(b) programs and take the match. With this combo we contribute about 15% of our salaries to retirement automatically. We can’t drop below that contribution rate and redistribute the money elsewhere.  This acct currently totals around $160,000. We also have been contributing to my husband’s Roth for the last 4 years at the max allowable contribution.  We’ve been aggressively saving and have had a couple relatives die and now have significant cash sitting around ($120,000).

Now that we’ve met the obvious goals, we’re not sure what to do next — How do we find people to help us think about this in a smart way? Who (broker, financial planner, bank trust dept.?) do we interview? And what are the right questions to be asking at the interviews?Do we pay off the house first and foremost (a friend strongly advocates this)? Others argue that between the mortgage deduction and the low interest rate it’s not the best way to spend our next dollar.  Do we put more into retirement savings specifically for the tax break or do we just invest and not set the money aside so particularly?  Do we try to rebalance the retirement portfolios into different investment devices (and if so, how much into what devices?) Do we seek to do different things with the different pots of money we have? College savings or retirement?

I can’t tell whether or not 160K is enough saved for retirement at your ages.  Play with online retirement calculators to see if you’ve saved “enough” or need to up that savings amount.  15% a year is the recommended amount, but it also assumes that you’ve been saving 15% a year the entire time.  If you did graduate school of any kind, or didn’t max out, or started making much less money than you are now, or had really lousy investment timing, you might be behind.  That would be the first thing to check, because it’s an easy answer.  If you don’t have enough saved for retirement, put more in your tax-advantaged savings vehicles.  You don’t need a financial planner to help you with that, just some internet calculators.  (Though, of course, you shouldn’t just take advice from strangers on the internet– our standard disclaimer applies.)

4.5% isn’t low enough to make it obvious that you shouldn’t pre-pay the mortgage, but it’s not high enough to make it obvious that you should.  So there’s no clear answer there either.  One thing to note is that, unlike most other forms of debt, a dollar spent early in your mortgage is worth more than one later.  You can play around with the GRS mortgage amortization spreadsheet to see how much different principal payments save you– that will put a dollar value on the benefit of mortgage pre-payment.  Remember also that you can unlock some of that prepayment in the case of an emergency by re-amortizing your mortgage and lowering your required monthly payment.  You can do this even in situations in which the stock market has crashed (so selling stocks is a bad idea) or the housing market has crashed (so refinancing or selling the house is out of the question).

We’ve never actually dealt with financial planners.  #2′s significant other recently had a windfall and will be getting a recommendation for a financial planner from a trusted wealthy friend.  Most of us don’t have trusted wealthy friends, however.  I point people to Walter Updgrave’s advice whenever I’m asked this question.   However, I add my own caution.  Many financial planners are terrible people who just want to separate you from your money by recommending high cost mutual funds and other terrible investment vehicles.  DO NOT stop by your local Edward Jones office to get advice.  You really do want a fee-only certified financial planner who does not get any kick-backs from recommending you high-cost funds.  Personally, I’d rather figure things out myself, possibly with the help of the Bogleheads forum (or their book), but I also have a PhD in economics and like dealing with money.

In general, we can’t tell you which saving/investment things to do first or in what order.  That is going to depend a lot on your own goals and your own situation.  How much of your children’s education do you plan on funding?  How much financial aid are you thinking you’re going to get?  How much do you like your jobs?  Do you want to retire earlier or later?  Do you want an upper-middle-class retirement or do you want to live a simpler life?  Will you have a short-term need for funds outside of your emergency fund (ex. IVF, new cars, private school, sabbatical etc.)?  Do you want to leave your own (monetary) legacy?

I can tell you what we’re doing.  We’re prepaying the mortgage, but not just prepaying the mortgage (and we stopped doing this so much when DH was unemployed).  We’re maxing out our tax-advantaged savings (we dropped this down to the required 12% when DH was unemployed), but I’m not sure we’re going to put money in the IRAs this year.  We’re hoping that we’ll be in the income bracket that keeps us paying full-tuition at private colleges or universities for our kids, and we’re planning on covering the entire bill, so we’re putting $500/month away for each kid in their respective 529 plans.  As I’ll talk about next month, we still have trouble figuring out what to do with extra money… it’s a nice problem to have, but not one with an obvious answer.

In terms of where to put your retirement savings– if you have access to Vanguard, then you have one stop shopping with their Target-Date funds.  Pick a date, set, and forget.  If you don’t have access to Vanguard, then the Boglehead forums are a good place to look for asset balance heuristics for your particular situation.  You should be looking for a combination of low fees and the right diversification of risk for your planned retirement date and risk tolerance.

Don’t worry so much about the “best place” for the next dollar.  The best place in hindsight is not going to necessarily be the place you think it is because none of us can predict the future.  The best you can do is to make a lot of good choices.  For us those good choices are never going to be best or worst because we’re doing a number of different things with our money.  That’s the essence of diversification.  We’re not going to win as big on the stock market as we could because we are pre-paying the mortgage.  But we’re also not going to lose as much as we could for precisely the same reason.  Are we getting the percentages “right”?  Well, there’s really no wrong answers.  We have enough places to tap short-term that we’ll be ok in a number of scenarios, but we’re also taking advantage of many of the tax-advantages to saving for retirement.

The bottom line though, is that an extra 120K in cash on top of your 6 month emergency fund is way too much.  Put that somewhere soon!  Each month you delay making a decision, you’re potentially losing more money than you would if you just randomly chose any one of your good suggestions for potential vehicles*.  If it were me, I’d max out the retirement for this year (there’s still time to fund your 2013 Roth!), put some in a 529, maybe put some in taxable (Vanguard Index fund) stocks (because it sounds like you don’t have any, and taxable stocks are a nice secondary emergency fund), then put the remainder into the mortgage. If you don’t need a secondary emergency fund, then skip the taxable stocks in favor of the other options. Remember that the Roth can function as a secondary emergency fund just like taxable stocks can because you can withdraw the principal.  That gives it a slight advantage over just taxable funds.  But anything you choose from that list you gave is going to be better than sitting in savings.

*exception:  120K is probably too much to put into one kid’s 529 plan, depending on where you think they’ll go and if they’ll be eligible for financial aid.

Grumpy Readers, What advice do you have for Good Saver?

Mutual fund taxes: Lessons learned

Every year I learn a little bit more about investing that I often wish I didn’t know.

Why?  Well, back in the day, my father took care of my investments and he’s really into complicated stuff.  Each year I can generally only handle untangling one crazy thing.  (I think I’m going to have one share of AOL for ETERNITY.  How?  I had AOL, then it became TWC, then it split off again, so now I have a bunch of TWC, some other Turner/Time Warner company, and one lonely AOL share.  Figuring out the cost-basis on that share is a really low priority.  Update:  And now Comcast is buying TWC… that’ll be fun.)

This year I learned that mutual funds can generate capital gains without your knowledge, and they don’t give you the money but instead they reinvest it, buying more shares of the fund.  This particular capital gain hasn’t done any such thing since like 1994 (before I was paying attention), so the $4K capital gain was a surprise.  I immediately groaned and wished I’d given these funds to the school instead of cash back when my dad was donating money to the school, but I was worried about dealing with that paperwork then too.  Or that I’d taken leave from the school when DH was unemployed so that I could claim a 15% marginal tax rate and sell every single one of those tangled up funds.  (Or better yet, taken a capital loss on all of them when the markets were down during the recession!)  If only I were more organized and not still learning in the past.

But, it turns out that paying capital gains taxes now on mutual funds isn’t such a horrible thing.  The tax I pay now will reduce my tax bill in the future when I actually sell the whole thing.  So it may be best not to donate these shares to charity.  (I probably have some QQQQ with a higher capital gain anyway.  QQQQ has been good to me.)

Still, this mutual fund has a 1% expense ratio, and I think it’s just a large cap fund, so I should get rid of it one of these days anyway since I can get large cap from Vanguard much less expensively.

So anyway.  None of our readers probably cares about this, but hey.  Stick with Vanguard index funds or Target date funds and you’ll be fine.  Stay away from needless and expensive complications!

And so say I.

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