Financial adviser Dana Levit of Paragon Financial Advisors in Newton took readers' personal finance questions. She recently helped a local geologist made some decisions about his future. Here's a transcript of her chat.
Dana_Levit: Good morning everyone! Let's get started talking about your financial questions!! We have until 12 today so please feel free to start asking and I'll answer as many questions as possibly during the hour.
Dana_Levit: I'm a fee-only financial planner, which means that I don't get paid for recommending any products, mutual funds, mortgages etc. I only give advice. So let's get started!
trouble__Guest_: I'm young, make 87K a year, and am 54K in credit card debt -- I'm a bipolar person whose spending is fueled by mania :( I'm getting medical attention, I've read the Boston.com series on getting debt-free, and am trying to stick to it (paying more than the minimums, etc.) However, I don't know how to find a safe debt consolidation place. The process scares me, but it would help me budget better if I had just one payment to make a month, not my current 5. I have a great credit score, by the way, because I haven't missed payments for the past several years. Thanks kindly.
Dana_Levit: Hi Trouble,
Dana_Levit: Good for you on keeping up with your payments and working on reducing your debt.
Dana_Levit: As you have probably discovered, there are a number of consolidation services, and many are for-profit, which is not necessarily good for you. My favorite organization is a non-profit consumer credit counseling service that is part of the National Foundation of Credit Counseling. Their name is CCCS Credit Advisor and their number is 800-208-2227. Their website is www.moneymanagement.org. They can do a “debt consolidation†program where they take your 5 payments and bundle them into 1 monthly payment. Depending on your interest rates, they may be able to save you some money by lowering your rates. The monthly fee for their service is $0 to $99 depending on your income and level of debt. The first step is to talk to a counselor at CCCS and they’ll be able to tell you more about your options.
Dana_Levit: Keep up the good work!
Jenn__Guest_: Good morning Dana. I want to buy a home in the next 6 months but I worry whether I will qualify for a large enough loan for the home I want to buy. I have excellent credit and only a car loan ($5K) and student loans ($23K). With inheritance money, should I pay off my car loan and some of my student loans, or save for a larger down payment on the home? Thanks.
Dana_Levit: Hi Jenn,
Dana_Levit: Good question. I’m not a mortgage specialist, so I’m not entirely sure of the right answer to your question but you’re definitely on the right track. My advice is to run this question by a mortgage broker since they’ll know more about the weighting of the different factors that you’re asking about.
Dana_Levit: My understanding of lending is that they’ll look at your income first since this is the primary means that you’ll use to pay back the loan. They’ll definitely be interested in your other debts since your income is also going to be used to pay back these obligations.
Dana_Levit: However, if your income is low and you thus won’t qualify for a loan based on income alone, lenders can use your assets to qualify you. My understanding is that the rates tend to be higher for loans where you qualify based on assets.
Dana_Levit: Another thought is that if your student loans are at a low rate, you may want to hang onto them for a few reasons:
Dana_Levit: 1. If your interest rates are only 4% and you can get 5% by having your money in a CD, then you should keep the money in the bank and use it to earn interest.
Dana_Levit: The interest on the auto loan is not going to be deductible for taxes, so that's a less favorable loan to hold onto for the long term.
Dana_Levit: hope that helps some!
Dana_Levit: 3. Depending on your income, your interest on your student loans may be tax-deductible.
Dana_Levit: 2. You may want to have the flexibility to use the cash for expenses related to buying a home.
Dana_Levit: I find that credit unions are a good place to start looking for mortgages.
walthamjj__Guest_: Hi Dana - My 403b offer fildeity (all) and TIAA-CREF. What do you think of each family? Can you offer an asset allocation for 40 year old - with a relatively high risk tolerance? How much should be in fixed/bonds at this point?
Dana_Levit: Hi WalthamJJ,
Dana_Levit: I'll answer your mortgage question in a moment.
Dana_Levit: Fidelity, TIAA CREF, and Vanguard are my three favorite 403b providers. They all offer very inexpensive mutual funds (I like index funds, which are a very cheap way of accessing the stock market).
Dana_Levit: The one downside about TIAA-CREF's 403b plans is that they don't usually have the US small company option available. Of the three companies (Vanguard, Fidelity, and TIAA), Vanguard is probably my favorite because they have a good small cap index, Fidelity is probably my next favorite because their website is very user friendly, and TIAA is probably my third favorite only because of the small cap issue.
Dana_Levit: As far as allocation - I take a look at what your net worth is relative to your income versus age. My concern about age is that while you may be relatively young, if the double whammy hits (an economic downturn results in you losing your job and not being able to find another one), you'd be putting yourself at risk by having too much money in the stock market.
Dana_Levit: My first line of advice is to have at least 10% of your gross income in a FDIC insured high interest savings account like ingdirect.com.
Dana_Levit: You'll also want to have an additional 20% of your gross income in cash in your retirement plan. this total of 30% basically provides the conventional 3-6 months of living expenses without leaving you with a ton of cash sitting around in your bank account where it is subject to taxes.
Dana_Levit: So -back to your allocation question:
Dana_Levit: For someone whose net worth is 1-3x their annual income, I would likely start with an allocation of 50% in stocks and 50% in bonds. If you have low risk in the rest of your life (e.g. you're a tenured professor with a spouse who also has extreme job security), then you could consider increasing your exposure to the stock market.
Dana_Levit: Once your net worth gets to 3-7 times your annual income, then I usually make the allocation 60% in stocks and 40% in CDs, long term bonds etc.
Frugal__Guest_: When I left my previous 2 employers, I kept my 401(k)s intact with Fidelity. Should I roll those accnts over to a Roth or IRA, and if yes, why?
Dana_Levit: Hi Frugal,
Dana_Levit: I generally do roll old 401ks into regular (rollover) IRAs because usually the 401k has limited fund choices (e.g. you can't usually buy CDs in a 401k). However, if your 401k is with Fidelity, you're likely to have a good selection of funds to start with, so that's less of a concern.
Dana_Levit: The other reason I used to roll 401ks into IRAs is that non-spousal heirs were more likely to have better options if they inherited an IRA rather than a 401k. THere has been some recent legislation that has made this issue moot, which is great.
Dana_Levit: So the main concerns now are:
Dana_Levit: 1. If you've got a trail of old 401ks, it just may make your life easier to consolidate them all in one place
Dana_Levit: 2. Do you like your choices in your 401k? If you do, then I'm much less concerned about moving to an IRA.
Dana_Levit: As far as the Roth IRA question -
Dana_Levit: Roth's are great -just know that you'll pay ordinary income taxes (just like you pay on your salary now) if you take the 401k and convert it to a Roth IRA. In essence, what you're doing is pulling the money out of your 401k, paying taxes on it, and then putting it back into a Roth IRA. This may be a great strategy if you're in a low tax bracket, but I'd definitely use caution.
mkd12__Guest_: I constantly struggle between paying off debt and adding money to my savings. Any suggestions?
Dana_Levit: Hi MKD,
Dana_Levit: Good for you for thinking about this. Many people are stuck in this place and it's a hard one to get out of.
Dana_Levit: Even when folks have high interest rates on their credit cards, I still like the idea of starting to save money while working on the debt. I think there's a real psychological advantage of having some savings even if it means that you're paying down debt more slowly.
Dana_Levit: The key is to make saving doable. Try starting with saving just $5/month to your savings account. I love ingdirect.com because you can set up a high interest savings account without a minimum balance. So your $5 earns high interest from day one. (Unlike many banks where you have to have a minimum of $20,000 or more to get the good interest rates).
Dana_Levit: You can set up your INGdirect account to automatically withdraw $5 each month. Chances are you won't even notice it. Yes, it's only $60/year but I find that it's important to start with something that's achievable and sustainable. eventually, many people will increase their savings to $10/month...it just gets built into the budget and there's a real pride in going from a non-saver to having a savings account.
SoxGrrl__Guest_: In the worst case scenario for the economy = depression, what is the safest thing to do with cash? Good mornign Dana, I am wondering what the best vehicle might be for appx. $20,000 to secure a decent return cinsidering the low interest rate on CD's, savings and the volatile stock market? Thanks in advance.
Dana_Levit: Hi SoxGrrl and Dingo -
Dana_Levit: Your questions are somewhat similar so I'm combining them here.
Dana_Levit: I'm a big fan of having some of your money in very very very safe investments (e.g. FDIC insured CDs, money markets, and US Treasury products) and taking the risk in your stock holdings.
Dana_Levit: There's an absolute relationship between how much risk you take and how much return you're going to get, and unfortunately we're seeing that blow up with the subprime mortgage issue.
Dana_Levit: CDs, FDIC insured bank accounts (e.g. Bank of America, ingdirect.com etc.) are all paying very low interest rates because they're very safe. Anything that is yielding a higher interest rate has something else going on. I don't know of anywhere that you can guarantee that you'll get your money back but also get more than 3-4% interest right now.
Dana_Levit: I'm recommending that my clients keep 10% of their gross income in a FDIC insured savings account and the rest of their non-stock money in 50% short term CDs (1 year or less) and 50% in intermediate high-credit bond funds. It's not worth chasing returns for your "safety" money. Fidelity and Vanguard both have relatively high interest money market accounts.
401k_er__Guest_: In 2007 I was aggressively contributing to my company 401k. Though it has dropped from 79k last October to 71k now. Should I limit my contributions until the market recovers or should I continue to think long term? I feel like my current contributions are going for naught!
Dana_Levit: Hi 401k-er.
Dana_Levit: I completely understand what you mean - it's horribly frustrating to be saving just to have the value decline!! Clients have been asking me "why don't I just put it in a savings account where I know it's not going anywhere instead of watching my money lose value every month?"
Dana_Levit: Here's my answer -
Dana_Levit: I looked at what would happen if someone put $100,000 into a 75% stock/25% bond portfolio right before the market crashed in 2000. In 2000, the portfolio lost ~5%. The portfolio is now at $95,000. In 2001, the portfolio lost another 1%. The $100,000 is now worth $94,000. In 2002, the portfolio lost an additional 11%. (OW!). The portfolio is now worth $83,000.
Dana_Levit: During this time, US large had lost 10%, 12%, and 22%. International had lost 14%, 21%, and 16%
Dana_Levit: (Sound familiar???)
Dana_Levit: But - then in 2003, the sun shone again, and the portfolio gained 32% in that one year alone. The portfolio went from being worth $83,000 to being worth $111,000 just in that one year.
Dana_Levit: In 2004, the return of the portfolio was 13%, in 2005, the portfolio returned 6%, in 2006, the portfolio returned 16%, and in 2007, the portfolio returned 5%.
Dana_Levit: So - even though they started with $100,000 and then lost $20,000 in the first 3 years, they ended up with $162,000 8 years later.
Dana_Levit: The moral is - yes, it's horribly and scary when the stock market is down, but if they had pulled out after the third year, they would have missed the sudden (and completely unexpected) upturn where they got all their losses back and then some.
Dana_Levit: I know it's really hard to throw money into what feels like a sinking ship. One thing to think about is "how long will it be until you need that dollar back?" Even if you're 50 years old, you're unlikely to need that exact dollar for spending until your 80 years old. Do you think the market will be higher in 30 years than it is now? If you do, then you might want to hold your breath and buy at what hopefully is a low point (relative to 30 years from now!)
Dana_Levit: That said, I'm only advocating being in the stock market if you have a long enough time horizon (10 years is a pretty good horizon) AND if you already have an emergency fund (30% of your gross income - see above!) funded.
Dana_Levit: That will allow you to wait for that dollar to come back up to it's value and hopefully earn much more than that over the next 30 (or more!) years.
Dana_Levit: Hi all,
Dana_Levit: Unfortunately we've run out of time and I know that there are many questions that I didn't have a chance to address. Thanks so much for your interest. I hope you found this helpful.
Dana_Levit: If you'd like to follow up with me, feel free to send me an email at dana@paragonfeeonly.com. I'm in the middle of tax season so it may take me a week or two to get back to you but I'll get back to you as soon as I can.
Dana_Levit: All the best,
Dana_Levit: Dana
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