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The Shadow
Guest
cranny said:
Exactly.....put in the max they will match - then look for a roth to do other investments from
How much do you contribute to your 401(K) and how much are you earning?
- Thread starter RottenWillow
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Exactly.....put in the max they will match - then look for a roth to do other investments from
bran987
New member
I'm sorry if I go into a long diatribe and I don't want to insult anyone who already knows most of this stuff.
Goes without saying on the credit card debt. Every penny you save should go towards the CC debt (AFTER you have your 3-6 month emergency fund saved up in a savings/money market account, that's where your first pennies go until that's funded).
About the student loans, the interest is tax deductible and generally considered "good" debt, as is a home mortgage as that interest is also deductible. The only caveat about the student loans is that gov't. loans usually have very low rates and you're better off keeping them instead of paying them off; however, if you have private student loans take a real close look at what rate they are at, it is sometimes 8-9% and you want to think real hard about paying those off. Sometimes people "consolidate" their govt. student loans with their private student loans and the high interest rate on the private debt gets lost in the shuffle.
On the stock market front, historical S&P returns are upwards of 12%/year, but some very smart people i.e. Buffett have been saying for some time now not to expect more than 10%/year from here on out (especially on dollars going in right now with the market at an all time high). That 2% from 10-12% is enormous, I'm sure UA Iron understands that. But even if your 401K only returned 5% you ABSOLUTELY are better off putting money into it up to the point where your company MATCHES your investment. If your company matches dollar for dollar that is an immediate instant 100% return and you can't get that anywhere. It's free money. Once you get past the point where they match you have to look at the tax implications GL was talking about and decide whether you like what your company offers in the 401K or not.
That being said, if your 401K offers investment in index funds rather than mutual funds, you should go with the index funds. Studies show time after time that managed mutual funds lose to index funds in the long run because of the fees mutual funds charge & the higher transactions costs (fund managers buy & sell more than an index would, the only time an index buys & sells is for example when a company drops out of the S&P 500 or a new one is added, which is much less frequent).
What you are speaking of is a Mortgage Constant, but that really isn't what you should be looking at when comparing the return on paying off your mortgage to the return on a competing investment because of this reason:
$100,000 loan 6% interest as you said:
Your monthly payment would be $600, which is $7,200/year. On your $100,000 loan that is 7.2%/year in payment, yes, but out of hte $7,200 you paid, $6,000 is interest and $1,200 is principal reduction, i.e. your loan is then only $98,800 at the end of your first year. That is a RETURN to you, it should not be thought of as interest expense.
Now, the $6,000 of interest is tax deductible, the $1,200 principal reduction is not.
In other words, if you are in the 25% tax bracket, the $6,000 in interest you paid will reduce your taxable income by $6,000, so you'll pay $1,500 less in taxes that year ($6,000 x 25%). So you're EFFECTIVE interest rate is only 4.5%.
So when you're paying down your mortgage, what you should be considering is that you're using your money to receive a 4.5% return with 100% certainty. If you feel you can do better than that elsewhere, you should invest elsewhere. If you feel comfortable with a 4.5% return, then pay down the mortgage.
Mortgages are mostly interest in the first 5 (really 10) years, after that more and more of your money goes toward paying down principal.
I actually invest somewhat similarly to The Shadow apparently, but it's a big part of my life and has taken considerable years of learning and trial (AND ERROR). In general, investing in a variety index funds regularly (i.e. some in Vanguard S&P 500, some in Vanguard REIT index, some in a Russell 2000 basket, you can find information on diversification lots of places, what you are doing is reducing the correlation between investments in your portfolio, attempting to reduce volatility while keeping the same level of return).
Of course active investment where you spend lots of time and learn a market (whether it be stocks/real estate/teddy bears) will always yield the highest return but if not the stock market is still your best vehicle for long term capital appreciation (10 year or longer outlook).
One interesting note I'd like to share is that a study was done on investing regularly each month versus investing on a 10% decline in the overall market, and then a 20% decline in the overall market. If you save your money and invest it when the market falls 10% from its peak, and then invest again if it falls even further to 20% from its peak, you will really juice your returns in the long run. Downside? Again it takes discipline and time.
UA Iron & GL are both right, investing while you're young & paying yourself first are essential.
Take 2 people investing. One starts at age 20, the other at 30. They each invest $5,000/year earning 10%.
Joe starts at age 20. He invests $5,000/year for 10 years and stops investing at age 30. Total investment = $50,000.
Fred starts at age 30. He invests $5,000/year for 20 years all the way up to age 50. Total investment = $100,000 (double what Joe invested)
At age 50, Joe ends up with $600,000.
At age 50, Fred ends up with $300,000.
Joe only invested half of what Fred invested, but because he had time on his side, he ended up with double the money. Even though he invested twice as much as Joe, Joe's headstart (time) was too much to overcome.
Cool huh?
Goes without saying on the credit card debt. Every penny you save should go towards the CC debt (AFTER you have your 3-6 month emergency fund saved up in a savings/money market account, that's where your first pennies go until that's funded).
About the student loans, the interest is tax deductible and generally considered "good" debt, as is a home mortgage as that interest is also deductible. The only caveat about the student loans is that gov't. loans usually have very low rates and you're better off keeping them instead of paying them off; however, if you have private student loans take a real close look at what rate they are at, it is sometimes 8-9% and you want to think real hard about paying those off. Sometimes people "consolidate" their govt. student loans with their private student loans and the high interest rate on the private debt gets lost in the shuffle.
On the stock market front, historical S&P returns are upwards of 12%/year, but some very smart people i.e. Buffett have been saying for some time now not to expect more than 10%/year from here on out (especially on dollars going in right now with the market at an all time high). That 2% from 10-12% is enormous, I'm sure UA Iron understands that. But even if your 401K only returned 5% you ABSOLUTELY are better off putting money into it up to the point where your company MATCHES your investment. If your company matches dollar for dollar that is an immediate instant 100% return and you can't get that anywhere. It's free money. Once you get past the point where they match you have to look at the tax implications GL was talking about and decide whether you like what your company offers in the 401K or not.
That being said, if your 401K offers investment in index funds rather than mutual funds, you should go with the index funds. Studies show time after time that managed mutual funds lose to index funds in the long run because of the fees mutual funds charge & the higher transactions costs (fund managers buy & sell more than an index would, the only time an index buys & sells is for example when a company drops out of the S&P 500 or a new one is added, which is much less frequent).
lao tzu said:
What you are speaking of is a Mortgage Constant, but that really isn't what you should be looking at when comparing the return on paying off your mortgage to the return on a competing investment because of this reason:
$100,000 loan 6% interest as you said:
Your monthly payment would be $600, which is $7,200/year. On your $100,000 loan that is 7.2%/year in payment, yes, but out of hte $7,200 you paid, $6,000 is interest and $1,200 is principal reduction, i.e. your loan is then only $98,800 at the end of your first year. That is a RETURN to you, it should not be thought of as interest expense.
Now, the $6,000 of interest is tax deductible, the $1,200 principal reduction is not.
In other words, if you are in the 25% tax bracket, the $6,000 in interest you paid will reduce your taxable income by $6,000, so you'll pay $1,500 less in taxes that year ($6,000 x 25%). So you're EFFECTIVE interest rate is only 4.5%.
So when you're paying down your mortgage, what you should be considering is that you're using your money to receive a 4.5% return with 100% certainty. If you feel you can do better than that elsewhere, you should invest elsewhere. If you feel comfortable with a 4.5% return, then pay down the mortgage.
Mortgages are mostly interest in the first 5 (really 10) years, after that more and more of your money goes toward paying down principal.
I actually invest somewhat similarly to The Shadow apparently, but it's a big part of my life and has taken considerable years of learning and trial (AND ERROR). In general, investing in a variety index funds regularly (i.e. some in Vanguard S&P 500, some in Vanguard REIT index, some in a Russell 2000 basket, you can find information on diversification lots of places, what you are doing is reducing the correlation between investments in your portfolio, attempting to reduce volatility while keeping the same level of return).
Of course active investment where you spend lots of time and learn a market (whether it be stocks/real estate/teddy bears) will always yield the highest return but if not the stock market is still your best vehicle for long term capital appreciation (10 year or longer outlook).
One interesting note I'd like to share is that a study was done on investing regularly each month versus investing on a 10% decline in the overall market, and then a 20% decline in the overall market. If you save your money and invest it when the market falls 10% from its peak, and then invest again if it falls even further to 20% from its peak, you will really juice your returns in the long run. Downside? Again it takes discipline and time.
UA Iron & GL are both right, investing while you're young & paying yourself first are essential.
Take 2 people investing. One starts at age 20, the other at 30. They each invest $5,000/year earning 10%.
Joe starts at age 20. He invests $5,000/year for 10 years and stops investing at age 30. Total investment = $50,000.
Fred starts at age 30. He invests $5,000/year for 20 years all the way up to age 50. Total investment = $100,000 (double what Joe invested)
At age 50, Joe ends up with $600,000.
At age 50, Fred ends up with $300,000.
Joe only invested half of what Fred invested, but because he had time on his side, he ended up with double the money. Even though he invested twice as much as Joe, Joe's headstart (time) was too much to overcome.
Cool huh?
T
The Shadow
Guest
Bran is smart.
If you plan to invest like us - you HAVE TO WATCH YOUR MONEY.
Believe me - 99% of brokers do a shitty job because they are moving SO much money thatthey cant stay ahead of whatthe market research is telling them to do - either on the up side and especially on the down side. A small investor can manuver more efficiently than a "broker"
If you plan to invest like us - you HAVE TO WATCH YOUR MONEY.
Believe me - 99% of brokers do a shitty job because they are moving SO much money thatthey cant stay ahead of whatthe market research is telling them to do - either on the up side and especially on the down side. A small investor can manuver more efficiently than a "broker"
SC4EVA
New member
Bran - As always thanks for the excellent posts!!!!! I see my game plan needs to save up that 3-6 months reserve so say around $10,000 to be safe (There goes this year's bonus) then work on CC's then everything after that is towards some type on investment (yet to be decided)
Have you have of this ROTH 401K that my employer is now offering? Matching 6% seems pretty good although after tax sucks and decreases the free cash. So to benefit from my company my ideal contribution to this ADDITIONAL plan would be 6% no?
Have you have of this ROTH 401K that my employer is now offering? Matching 6% seems pretty good although after tax sucks and decreases the free cash. So to benefit from my company my ideal contribution to this ADDITIONAL plan would be 6% no?
Scurvy, pay off a little of that cc bill, dude. Foprget about 10,000 in cash before you start paying down a 20% loan.
Also,
Also,
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