Comments on Help a Reader: What to Do with $42k in Cash?TypePad2007-05-25T12:45:00ZNAhttps://www.freemoneyfinance.com/tag:typepad.com,2003:https://www.freemoneyfinance.com/2007/05/help_a_reader_w/comments/atom.xml/Tim commented on 'Help a Reader: What to Do with $42k in Cash?'tag:typepad.com,2003:6a00d83451bcbd69e200d8357e373a69e22007-05-26T18:58:45Z2008-08-30T07:30:55ZTimpaying off mortgage is only good if you are seeing appreciation in the real estate market in your area. otherwise,...<p>paying off mortgage is only good if you are seeing appreciation in the real estate market in your area. otherwise, you have a house worth x that will continually lose value in terms of opportunity cost. with that said, you need a vehicle that is going to exceed the ARM rate plus tax rate for any investments. perhaps t-bills if you are in a high state tax area. the worst you can do is break even in terms of your ARM rate, which isn't bad.</p>Julie commented on 'Help a Reader: What to Do with $42k in Cash?'tag:typepad.com,2003:6a00d83451bcbd69e200d8357decb369e22007-05-25T22:47:27Z2007-05-25T22:47:38ZJulieI'd pay off the mortgage. I hate being in mortgage serfdom and having a bank as my landlord. A large...<p>I'd pay off the mortgage. I hate being in mortgage serfdom and having a bank as my landlord. A large chunk of our earnings go towards servicing the interest on the mortgage which is basically wasted earnings. But we couldn't buy a house outright (prices of real estate in Alberta are bubble like and inflated) so we had to indenture ourselves as slaves to the bank. I know some people would invest the money and never pay off their mortgages but these people must know how to gamble on the stock market and never lose. I'm not one of them so I do what I do best - which is pay off the debts I owe, stick money into RRSPs (combination of CDs and mutual funds) and bank the rest for life.</p>segfault commented on 'Help a Reader: What to Do with $42k in Cash?'tag:typepad.com,2003:6a00d83451bcbd69e200d835487e0b53ef2007-05-25T21:41:46Z2008-08-30T16:29:04ZsegfaultSplit the difference. Put half in taxable equity investments and keep half in a high-yield savings account (or CD or...<p>Split the difference. Put half in taxable equity investments and keep half in a high-yield savings account (or CD or Vanguard Prime Money Market account) and use that half to pay down the mortgage in 2010. Continue saving money, and split the contributions between the savings account and Vanguard funds. </p>
<p>In 2010, when your mortgage re-adjusts, you'll have at least $21,000 to use to pay it down. At that point, depending on what interest rate it adjusts to, you can divert all of your future taxable savings to make extra payments on the mortgage. </p>Edmund commented on 'Help a Reader: What to Do with $42k in Cash?'tag:typepad.com,2003:6a00d83451bcbd69e200d8357dd5dd69e22007-05-25T19:31:16Z2007-05-25T19:31:30ZEdmundhttp://www.othellogateway.com/blog/I'm generally in the camp that says you should pay off your mortgage instead of investing money. My argument was...<p>I'm generally in the camp that says you should pay off your mortgage instead of investing money.</p>
<p>My argument was that, if you are borrowing money at a rate higher than the risk-free rate, then you should be paying off your mortgage. Even though stock market is going to be returning at a higher rate than the rate your borrow, there is risk involved. The market risk premium is based on the risk-free rate. If you are borrowing at a rate higher than that, then you are not being compensated enough for the risk you are taking to justify it.</p>
<p>However, in this case it seems like he is locked into a rate lower than the risk-free rate for 2 years. Looks like there is a way to lock in a profit for that, and perhaps even make a little extra profit on top of that.</p>Lazy Man and Money commented on 'Help a Reader: What to Do with $42k in Cash?'tag:typepad.com,2003:6a00d83451bcbd69e200d8357dd0e169e22007-05-25T18:50:05Z2007-05-25T18:50:13ZLazy Man and Moneyhttp://www.lazymanandmoney.comI'd look at what that ARM could adjust to. Sometimes it has a clause preventing it from adjust too much...<p>I'd look at what that ARM could adjust to. Sometimes it has a clause preventing it from adjust too much within a year. Maybe it escalates to nearly 6% - that's still not bad. I'd probably take 80% and put it in a 100% safe vehicle (the best high interest savings account I could find) as that will do better than the 4.75% (especially if you can write off the mortgage interest). I'd then take the 20% left and put it in Vanguard's Total Market Index ETF (VTI).</p>
<p>Another option would be to refinance to a 30-year mortgage and then put all the left over in the stock market. Yes you'll still be making payments for 30 years, but they should be fairly small. At the same time the money in the market should compound better if history is any indicator. Look at it this option this way, you would be resigning yourself to paying 6% interest (of which you may be able to deduct something), but you could be making 12% (if Vanguard's historical S&P 500 return since 1976 continues).</p>
<p>If you haven't been able to tell, I'm a bit of risk taker. Not making the best return keeps me up at night, but I'm weird like that. Depending on your personality, you might just want to pay off the mortgage and sleep at night.</p>Andrew commented on 'Help a Reader: What to Do with $42k in Cash?'tag:typepad.com,2003:6a00d83451bcbd69e200d835485a7653ef2007-05-25T17:18:37Z2008-08-29T06:33:16ZAndrewTreasury bonds? No state taxes; same return as many CDs.<p>Treasury bonds? No state taxes; same return as many CDs.</p>Edmund commented on 'Help a Reader: What to Do with $42k in Cash?'tag:typepad.com,2003:6a00d83451bcbd69e200d8357dc0e669e22007-05-25T16:55:44Z2007-05-25T16:55:49ZEdmundhttp://www.othellogateway.com/blog/It's true that you will have to pay taxes on your CD. You also get a tax deduction on the...<p>It's true that you will have to pay taxes on your CD. You also get a tax deduction on the mortgage.</p>
<p>As long as your mortgage interest rate is below your CD rate, you should still come out ahead. (Just not by as much due to taxes)</p>
<p>If you invest in stocks and pay long term capital gains instead, you can come out ahead more. (Beware of the higher risk and AMT)</p>Dy commented on 'Help a Reader: What to Do with $42k in Cash?'tag:typepad.com,2003:6a00d83451bcbd69e200d8354852b453ef2007-05-25T16:43:29Z2008-08-27T11:51:29ZDyhttp://www.dyphan.comHere's a thought that doesn't really involve how much money the reader will return. Clobber that mortgage. It might not...<p>Here's a thought that doesn't really involve how much money the reader will return. Clobber that mortgage. It might not net you the most money in the end, but the psychological effect of not having a house payment will be great.</p>Kevin commented on 'Help a Reader: What to Do with $42k in Cash?'tag:typepad.com,2003:6a00d83451bcbd69e200d8354847c053ef2007-05-25T15:10:30Z2007-05-25T15:10:47ZKevinhttp://money.kevingunn.org/Hmmmm... I'd be tempted to go ahead now and clobber that mortgage. You might do a LITTLE better with a...<p>Hmmmm...</p>
<p>I'd be tempted to go ahead now and clobber that mortgage. You might do a LITTLE better with a CD, but after taxes on your CD's interest I'm not so sure. If the mortgage was fixed I'd just sit on it and go for stocks, but his need to protect himself against interest rate increases on the ARM changes the game. It might be worthwhile to consider paying it down as much as possible and then refi the rest to a fifteen year fixed mortgage. I'm a BIG FAN of the 15-year fixed as you can see on my site. Of course, we don't know how much principal remains on the mortgage, and that is a consideration as well. If there isn't much, then the increasing ARM rates may not matter to him as much. If there is a lot of principal left the increases could bite hard.</p>
<p>Once the mortgage is under firm control, I'd look to invest in stocks for the long term and to diversify. I'm a bit bearish on the dollar, so I like ETF's that track European markets since that puts you in stocks in an index fund that is valued in Euros. Yeah, I might see more growth in Asia, but Europe *will* grow -- just more slowly and without the big risks associated with places like China.</p>Jonathan commented on 'Help a Reader: What to Do with $42k in Cash?'tag:typepad.com,2003:6a00d83451bcbd69e200d8354845cd53ef2007-05-25T14:48:18Z2007-05-25T14:48:30ZJonathanhttp://thefullquiver.blogspot.comGiven an exact, short period of time (<7 years) before which the funds will be used, I'd definately go with...<p>Given an exact, short period of time (<7 years) before which the funds will be used, I'd definately go with a "preservation of capital" approach and tuck it away into a savings account at 5%. Or put it into a Roth, earn the interest tax free, and withdraw your initial capital (not investment returns!) in 2.5 years.</p>
<p>Two and a half years is definately not enough time to invest it in a stock fund. Especially after several years of very good returns, it would be unwise to rule out the possibility of some mediocre return in the short term.</p>Luke commented on 'Help a Reader: What to Do with $42k in Cash?'tag:typepad.com,2003:6a00d83451bcbd69e200d8354842ff53ef2007-05-25T14:29:49Z2008-08-30T07:31:14ZLukeI like Chris' idea. The first idea would be a high yield CD account. 5+ percent at last check and...<p>I like Chris' idea. The first idea would be a high yield CD account. 5+ percent at last check and I just locked in a good rate for some of my money. </p>
<p>Second would be a Vanguard Retirement account, but I was thinking instead of a 2045 or what have you, taking like a 2010 or 2015 version over the course of 2.5 years.</p>
<p>It might be wise to take a third into a Vanguard 500 index, a third into a 2010 retirement account and a third into 5% CD. Seems pretty balanced to me and you get the best of three worlds. The tax smack won't be bad with these three and trading would be minimal. I would also get into the Vanguard 500 over the course of a few buying periods, maybe a few months. </p>Edmund commented on 'Help a Reader: What to Do with $42k in Cash?'tag:typepad.com,2003:6a00d83451bcbd69e200d8357da87869e22007-05-25T13:46:13Z2008-08-30T05:24:03ZEdmundhttp://www.othellogateway.com/blog/My first guess was a savings account. My second thought was, why don't you look at Vanguard's retirement funds. See...<p>My first guess was a savings account.</p>
<p>My second thought was, why don't you look at Vanguard's retirement funds. See what their asset allocation is for someone who is going to retire in 5 years.</p>
<p>I know it's not the same thing. You don't cash out all your money as soon as your retire. You also will be paying taxes on your investments, unlike a tax sheltered retirement account.</p>
<p>I just thought it may be a good starting point.</p>Chris commented on 'Help a Reader: What to Do with $42k in Cash?'tag:typepad.com,2003:6a00d83451bcbd69e200d8357da66c69e22007-05-25T13:22:43Z2007-05-25T13:22:59ZChrishttp://beyondtheconsumer.blogspot.comIs 2 1/2 years enough time to realize any real gains in any kind of stock/fund, etc? In such a...<p>Is 2 1/2 years enough time to realize any real gains in any kind of stock/fund, etc? In such a short time I would think he would run a large risk of losing principle, especially since he has a specific time & need to withdrawal the funds.</p>
<p>Personally, I would put it in a safe savings account or CD if I could find one, wait out the 2 years and then pay off the mortgage. He must be saving a lot of cash to reach 102k in 2 years.</p>