Marketplace

Questions answered on air for July 5-6

In this edition of Getting Personal, Chris and Tess talk about negotiating with collection agencies, comparing mutual fund fees, lazy investing and an offer too good to be true.

Listen to this week's segment.

Continue reading "Questions answered on air for July 5-6" »

07/01/08 by Jeffrey Long

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A Bigger Mortgage?

Question: Hi Chris! (please withhold my name if you use - thanks!)... I am 36 years old and about to marry for the first time (my fiancé is also 36). He owns a teeny home which he purchased 4 years ago (a duplex) that he will sell and we would use the equity to purchase a larger home since we feel we'll soon outgrow his place if we have a child, and it's actually quite tiny for even the two of us. I am strugging with whether or not we should buy. The mortgage payment (with taxes, etc) on the house that we are interested in purchasing would be about 30% of our combined gross incomes. I have heard that 25-30% is what you shoot for. Everyone tells us to "stretch" and buy more house that we think we can afford, assuming that our income will increase over time. Here's the catch -- I am self-employed, and so if I have a child and stay home for even just 6-8 weeks, I will lose money as I don't have any "paid time off." Plus, being self-employed, my salary can potentially vary (though it hasn 't over the last 2 years that I have been doing this full-time). Is it a mistake to take this on when we know that my income will *decrease*? My fiancé will probably get annual raises of 5-6%.... Thanks so much! Alexandria, V.

Answer: Don't do it. DON'T DO IT. Among the worst pieces of conventional financial wisdom is to "stretch" to buy a bigger home. It's a recipe for money trouble.

You have a lot going on in your life. Getting married. Starting a family. You're self-employed. What if your husband-to-be doesn't get 5% to 6% raises, but only 2% to 3% during a recession--or even no raise? Why add mortgage stress into the mix?

What's more, when you buy a bigger house you take on more than a larger mortgage. Property taxes, heating bills, air conditioning, and all the other costs that go into running and maintaining a home are higher. I'd rather that you put more money into savings--from cash to stocks and bonds--rather than into bigger mortgage payments.

No, I would stay financially conservative so that you can focus on married life and your work. If your incomes go up, you and your husband can always move to a bigger home. But by then you'll have built up the strong foundation of a healthy balance sheet.

by Chris Farrell

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A DIY MOrtgage?

Question: Dear Mr. Knows-a-lot-about-financial-stuff,

My niece and her new hubby are looking to buy a house, and are well-qualified for a mortgage. She does not like the idea, however, of all of their payments going to a bank and would rather "keep it in the family" by arranging a private mortgage with me. Are there established reliable brokers who can manage the loan as if it were an arms-length standard mortgage that just happens to use me as the lender? How much work would I personally have to do in the long run? ;-)

I can well afford the up-front loan amount and have good confidence in their financial discipline to pay. Also, I have an excellent accountant who is professionally conservative but used to goofy financial arrangements. Sincerely, Noelie. Austin, TX.

Answer: It isn't a goofy financial arrangement if you have the money and you trust your niece. However, there's the wisdom of the financial ages behind the standard caution of don't lend substantial sums of money to family members. It can lead to a lot of heartbreak.

That said, if you're still determined to go ahead with the loan, it's easy to do. There's no need to work with an outside broker. Instead, hire a knowledgeable real estate lawyer to both draw up a legally binding loan contract, and to make sure that the title and other ownership issues are dealt with properly. Charge your niece a market rate of interest on the mortgage (so you don't get into any trouble with the IRS). Have her set up automatic monthly payment from her checking account into yours. The home is your collateral if she ever stops making payments. Good luck.

07/02/08 by Chris Farrell

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Terminal Illness and Retirement Savings

Question: This is in regards to a questioner on a recent program (last weekend, I think). She was terminally ill and wanted to know the requirements for early withdrawal from her 401k. My sister is in a similar but slightly different situation, and I wanted to pose the same question for her. Her circumstances are as follows: She is over 59 and a half (just). She has cancer that is expected to be terminal in less than two years, although she is undergoing chemotherapy. She... continues to work at a limited level. She has had to quit her primary income source.... Her income is about 1/5th what it was, and her other financial resources are now all but gone. She has something like $5,000 or so scattered among a few retirement-type accounts -- 401k mostly, but I believe a SEP-IRA as well. Can she withdraw this money without penalty in a lump sum? It would sure help matters. Anonymous. Alexandria, VA.

Answer: I'm sorry that your sister is so sick. On the financial front, since she is over 59 ½ she can withdraw the retirement money at any time without penalty. She'll pay ordinary income taxes on the sums she takes out of the retirement plans, but since her earnings are down the tax hit should be relatively small.

Here's the link to the question and answer on terminal illness from an earlier show: marketplace.publicradio.org/display/web/2008/06/27/getting_personal/

07/03/08 by Chris Farrell

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Happy Fourth of July

Have a good long weekend.

07/04/08 by Chris Farrell

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The CPI and Inflation Hedges

Question: I'm interested in I-bonds and TIPS, but I don't trust our government to honestly calculate our rate of inflation (much as it uses a measure of unemployment that is highly unrealistic---if we used the French measure, our rate would look like France's). Are there any First World nations whose equivalents of the CPI are more to be trusted?

But maybe inflation-protected instruments only come into their own when the inflation rate is so high that missing a few percentage points won't matter too much, compared with having no hedge at all.

A similarly paranoid question: Why should I trust the government's promise not to tax Roth IRA or 401(k) earnings when they're cashed in? We've allowed tremendous mismanagement of our spending, taxation, and the national credibility that backs our currency, and I think the bill is already coming due. In twenty or thirty years, Roth-backed wealth may be too tempting a target for Congress to ignore. If it were an instrument popular among the rich, I'd think it safer, but by necessity they don't use Roth accounts that much. Michael. Boston, MA

Answer: By definition, the Consumer Price index (CPI) falls short at measuring changes in the overall price level. It only reflects price changes of a representative basket of goods. There are a some assumptions about housing that are quirky at best, and prices are difficult to measure in certain parts of the economy, like medical services. Our personal inflation rate and the CPI can diverge significantly.

In Bad Money, a new book by political analyst and author Kevin Phillips, he traces the current "global crisis of American capitalism" to the politics of peak oil, the rise of financial mercantilism, the triumph of market fundamentalism, and even the spread of religious conservatism. He devotes a lot of space arguing inflation is higher than we know and that the government has deliberately changed the CPI calculation in ways that keep the figure artificially low. It's basically bunk. Put it this way: Investors from the around the world have their capital at risk, and if the CPI we manipulated in such a way, the markets would see through the ploy and drive up interest rates. The message of the market seems to be that over time the CPI offers a reasonable measure for gauging inflation pressures and rates.

Treasury Inflation-Indexed securities and I-bonds are both good hedges against inflation ravaging the value of your fixed income portfolio. Both are good insurance policies against a depreciating dollar.

As for your second question, the safest forecast in politics and economics is that Congress and the White House will tinker with the tax code. Both John McCain and Barack Obama are proposing major tax initiatives.

That said, there is so much money tied up in both Roth-IRAs, 401(k)s, 403(b)s and the like that Washington will tread carefully-very carefully. My guess is if there are any major rule change involved retirement savings and taxes that it will be on the liberalizing side of the fiscal equation. Society is aging, after all.

07/07/08 by Chris Farrell

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Credit Card Debt

Question: Chris - I'm expecting an annual raise on my next paycheck of 3-4%. In the past, I've taken part of that and increased my 401k contribution. I'm currently at 6%, which is the ceiling for my employer's matching contribution. I also have about $6,000 in credit card debt. This year, because of the stock market's performance, would it be smarter to not increase the 401k contribution and use those dollars to pay off my credit card debt instead? Thanks very much for your time. Nadine. Shoreline, WA.

Answer: It's a good financial choice on your part for two reasons. First, the key to this strategy is that you're taking full advantage of your employers match. The real return kick in a 401(k), 403(b) or comparable retirement plan comes from the employer match.

What's more, paying off the debt will earn you a nice return. I don't know what interest rate you're paying on your credit card, but let's say its 14%. By getting rid of the credit card debt you'll have earned the equivalent of a 14% return on your money. That's a hefty return in any market, let alone this one.

07/08/08 by Chris Farrell

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Invest for the Long Haul

Question: I'm a 27-year old investor with about $3,000 in a $13,500 retirement portfolio in cash and probably another $1,500 in employer contributions coming in the next few weeks. I'm stumped about how to invest the money (they are all Fidelity accounts by the way) since my existing mutual funds have all lost value and I feel like I'm doing better by just sitting on the cash. Any suggestions? Anna. Oakland, CA.

Answer: Cash will always do well when the stock market is tumbling lower as corporate profits evaporate and bond investors are swept with periodic inflation panics. That's why it pays for everyone to build up their cash holding during tough times like this.

Problem is, you're young and you have a long time to invest for your retirement years.

The recent decline in the stock market is a reminder that stocks are risky--it's the nature of the beast. So should you now steer clear of domestic and international equities because they're too risky? Not at all. Rather than shun equity risk, the right approach would be to continue to include stocks in a portfolio diversified across a variety of assets. Diversification creates a margin of safety. And since no one knows which markets will soar or sink, diversifying gives investors an opportunity to catch the next big market upturn.

Going forward, if you can envision the American economy remaining a leader among major industrial nations, full of dynamic companies and bold entrepreneurs, you'll want to own stocks. If you believe the global economy will continue to expand--despite stomach-churning fits and starts--you'll probably want a slice of international equities.

Life, after all, is risky. Every time you cross the street, you take a risk. But that probably doesn't stop you from reaching your goal on the other side. Saving for retirement is risky, too. Sure, you can put all your money in Treasury bills. They're risk-free, but that doesn't mean your portfolio will be. With their low return (the trade-off for no investment risk), T-bills may not generate enough income to provide adequately for your retirement. That's why you still need to diversify. This will expose parts of your portfolio to volatility, but that's the trade-off you need to make if you want to achieve higher returns for the long haul.

I'd research putting the money in index funds. You could also look the Fidelity target funds, diversified portfolios with different shades of risk designed for retirees looking for a one-stop-shop when it comes to their core portfolio.

07/09/08 by Chris Farrell

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Co-Signing for Sister

Question: I have a sister who is currently applying for private student loans. She has no co-signer and is therefore subject to higher interest rates and is finding it more difficult to be approved for a loan. I've thought about offering to be her co-signer, but first I'd like to make sure I am fully aware of the consequences of being a co-signer. Would it affect my credit or ability to get other types of loans in the future? She needs to borrow around $16,000 for the entire year. I personally have nearly $40,000 in student loan debt myself. I'm 24 and have a stable income. I'm also very confident that she would pay the loan back herself. Thanks for your help! Any advice would be appreciated. Elizabeth. Eagan, MN.

Answer: Put it this way: When you co-sign you are taking on the responsibility to pay off the loan if your sister can't. Period. It can affect your credit score and your ability to take out another loan. My personal preference is for family members not to help each other out financially by cosigning. It's a legal document that carries a serious obligation, especially for someone like you who is just starting their career. If she does need your financial help and support, it's much better to lend her some money privately in a pinch. The two of you just need to have an understanding of what that means-as sisters--without involving legal documents, credit reporting bureaus, credit scores and the like.

07/10/08 by Chris Farrell

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Retirement and Taxes

Question: Contributing to my 401 now is lowering my tax bracket, but I will have to pay taxes on this $ later. Is there a standard tax bracket in retirement, or does it depend on how much you take from your investments? THANX! Sharon. Henderson, NC

Answer: There's no standard tax bracket when it comes to retirement. The traditional assumption has been that your tax bracket goes down. After all, you're no longer working and pulling down a regular pay check.

However, it turns out that some people earn more in retirement than they did while on a payroll. For instance, several years ago I was talking with a group of teachers and their taxes went up during retirement. The reason is that they had saved the maximum for 30-plus years in a retirement savings plan. They had good pensions. A few also made money on the side just to stay engaged and active.

This is the kind of planning question that becomes increasingly real the closer you are to retirement. You'll also be able to make an educated guess at that point whether your tax bracket will change, or stay the same.

07/11/08 by Chris Farrell

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Pay Down Debt Too Fast?

Question: Background: My wife and I are recently married. She has a good entry level job with the university in town, which pays about 30,000 dollars a year. I am finishing up my last semester of college and with some successful job hunting will be in a similar situation. My wife has some substantial student loan debt ($40,000). We are planning on paying of the debt as aggressively as possible in the next 5 years.

Question: Is it possible to pay down debt in an overly aggressive manner? Blake. Fort Collins, CO

Answer: It is possible to try to reduce debt too quickly. It's terrific to be ambitious about getting rid of a loan. And there will be a real financial and psychological relief when you make that last payment to your student loan lender. But 5 years seems like a very difficult schedule to keep unless you sacrifice other goals to getting rid of the debt.

Personal finance is always about trade-offs. You want to pay down the student loan quickly, but you also want to save for your retirement. In all markets--but especially today--it's important to build up a cash cushion. The reason is that the job you accept on graduation may not work out for you. Savings allows you to take a risk and try another employer. You could also lose your job through a downsizing or restructuring (pick your favorite euphemism). You and your wife may decide to have a child. And so on.

So, yes, attack those student loans with discipline. But don't strap some other important goals in your young married life in the meantime. I consider student loan debt to be "good" debt. It's an investment in her career and future earnings. On a more pragmatic note since there is no prepayment penalty with student loans, as you're incomes improve over time you can always pay more.

07/14/08 by Chris Farrell

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Borrowing Against 403(b)

Question: Most of my 403B money (Thrift Savings Plan) is in the government securities (G) fund. I have a mortgage on a commercial real estate investment property that has a 3 year variable interest rate currently 4% above the rate I can borrow from the TSP. Should I borrow against the TSP, moving the limit of $50,000 to a general loan against the TSP, saving on interest by applying the amount to the mortgage? No prepayment penalty, the property has a positive cash flow, and I can make both payments (TSP loan & the ongoing mortgage payment) Mark. Billings, MT

Answer: I wouldn't do it. I think there is too much risk and not enough reward to this maneuver. You have a solid retirement savings plan. You have a commercial real estate investment property with a positive cash flow. I'd leave them be.

Borrowing against a retirement savings plan is more expensive than it appears. For one thing, you repay the loan with after-tax dollars. You're also losing the benefit of compounding. If you do lose your job you have to repay the loan quickly or it's treated as an early distribution. That means you'll pay a 10% penalty (assuming your under 59 ½) plus ordinary income taxes on the money you've taken out. You're also leveraging up your investments, putting a portion of your retirement money at risk to the property.

07/15/08 by Chris Farrell

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Old Retirement Savings Plan

Question: I recently changed jobs and am wondering if I should move funds from my old 401k over to my new one. For your information my previous 401k plan does have more than $5000 in it currently. Is it much more beneficial to have one large 401k or a couple of small ones? Thanks. Tam, Van Nuys, CA

Answer: There are a couple of issues to consider. First, can you transfer the money from your previous retirement plan into your new one? Some pension plans will accept the transfer and others don't. Second, assuming you can move the money into your new plan, do you like the investment options? Third, you can always make a rollover IRA into a financial institution of your choice. I would either move the money into your new plan--if you like it--or set up a rollover IRA. Either way you'll keep better control over the long-term investment.

07/16/08 by Chris Farrell

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Save for Retirement?

Question: Chris - How much should someone save for retirement if they do not plan on retiring? I love my job and I plan on working well into my 70s as long as I have no health issues. I'm 50 now and have a modest retirement portfolio. Dave, St. Paul, MN

Answer: Don't think "retirement." Think a "margin of safety" and "flexibility." What you're trying to do by saving is maintain your current standard of living throughout your lifetime. Savings gives you a margin of safety if your job vaporizes when your older and harder to employ or if your health deteriorates.

Maybe you don't want to retire, but perhaps you'd like to change careers, try something else. A financial cushion allows you to do that easily. Perhaps you'll decide when your older that what you really desire is travel the world for three years. Well, with savings you can.

What's the right number? Realistically, most people can set aside 10% to 15% of their income with good habits and by taking advantage of savings vehicles like 401(k)s. Depending on your wealth, health, and dreams you could be more or less aggressive than that. But it's a good benchmark to start with.

07/17/08 by Chris Farrell

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Are Credit Unions Insured?

Question: With uncertainties concerning the financial soundness of some banks there has been reassuring mention in news stories of FDIC protections. I have yet to hear mention of similar reassurance to members of credit unions that belong to the National Credit Union Association. Is it in fact known that National Credit Union Share Insurance is on a par with FDIC and that invested funds are equally safe?... Roy, South Burlington, VT.

Answer: The short answer is yes. The outline of the insurance coverage is the same as FDIC, with a standard $100,000 protection that jumps to $250,000 for certain retirement accounts, such as IRAs.

You can get more information at the National Credit Union website at www.ncua.gov.

Here are highlights from their discussion of deposit insurance:

The shares in your credit union are insured by the National Credit Union Share Insurance Fund (NCUSIF), an arm of NCUA. Established by Congress in 1970 to insure member share accounts at federally insured credit unions, the NCUSIF is managed by NCUA under the direction of the three-person NCUA Board. Your share insurance is similar to the deposit insurance protection offered by the Federal Deposit Insurance Corporation (FDIC)...

Credit unions that are insured by the NCUSIF must display in their offices the official NCUA insurance sign which appears on the cover of this brochure. All federal credit unions must be insured by NCUA...

Not one penny of insured savings has ever been lost by a member of a federally insured credit union. The federal insurance fund has several programs to help insured credit unions which may be experiencing problems. Liquidations or failures are a last resort. If a federally insured credit union does fail, however, the NCUSIF will make any necessary payouts to the credit union's members. These payouts are usually done within 3 days from the time the credit union closes its doors.....

07/18/08 by Chris Farrell

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Credit Score?

Question: My husband and I are planning for our next car purchase -- a late model used car. We are able to pay cash for the car, but are wondering if it would be better for our credit score if we got a car loan and then paid it off within a couple of months. Our only other debt at the moment is our mortgage. We'd like the satisfaction of paying cash for the car, but don't want to pass up the opportunity to help our credit score. What would you recommend? Tracy. Palatine, IL

Answer: I would pay cash for the car. My guess is that you already have a good credit history and score by making your mortgage payments on time. Credit scores matter, but it shouldn't get in the way of sound money management.

07/21/08 by Chris Farrell

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Roth-IRAs

Question: I'm not quite sure I understand Roth IRAs. I know there's a limit to what you can contribute each year, but is there a limit on how many Roth IRA accounts you can have? Bridget. Sioux Falls, SD

Answer: There is no limit on the number of Roth-IRA accounts can own. But it could turn into a nightmare to manage multiple accounts, plus you'd end up paying more and more in fees. I would open up a Roth-IRA with a financial institution or mutual fund company with offerings you like, and then make new contributions into that fund every year instead of creating many accounts.

Most finance companies offer good information about the Roth on their websites. But if you want to go into more depth you could look at "Go Roth! Your guide to Roth IRA, Roth 401k and Roth 403b," by Kaye Thomas.

07/22/08 by Chris Farrell

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Budget

Question: I am looking for a good program or book to helps us with prepare and follow a budget. Thanks. Daryl. Austin, MN.

Answer: I like the approach advocated by Ruth Hayden in For Richer, Not Poorer: The Money Book for Couples.

07/23/08 by Chris Farrell

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529 Plans and Financial Aid

Question: I have read in your archives that money in 529 plans is considered a parental asset not a student asset in the college aid financial aid calculations. However, I have encountered several companies here who say that (1) 529 plans will be counted as student assets and (2) that they are a bad place to put college money as it lets the colleges know exactly how much money the child has and therefore any offer will be less. They even promote "repositioning" these assets to hide them. Any comments? Thanks. Annette. Los Angeles, CA.

Answer: My main reaction: Don't do business with these companies. First, and most importantly, I'm against the whole business of hiding assets when it comes to financial aid. Period.

Secondly, these companies are wrong when they say 529 college savings accounts will be counted as a student asset on the main financial aid form, FAFSA. (Private colleges can do what they want, but most of them follow the FAFSA model with a few tweaks.)

Third, saving for college in 529 is financially smart: The savings compounds tax free, and withdrawals are tax free when used to pay for qualified educational expenses.

Fourth, experience suggests that it's easier for parents and their students to contemplate a wide range of schools when there are savings to tap into.

07/24/08 by Chris Farrell

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Prepay Credit Card?

Question: Is there such a thing as receiving interest for pre-paying a credit card? In other words, I could send in (say) $500 to my credit card company and they would give me small interest on it while I have that balance with them. They credit my account with a small amount of interest until I need to use that balance to pay down my credit card bill. Savannah, Three Rivers, CA.

Answer: Not that I am aware of. I'd just put the money into a savings account or a money market mutual fund. And don't carry a balance on your credit card.

07/25/08 by Chris Farrell

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Questions answered on air for July 26-27

In this edition of Getting Personal, Chris and Tess talk about securing investments over $100,000, consolidation loans, options for borrowing against your home and record keeping.

Listen to this week's segment

Continue reading "Questions answered on air for July 26-27" »

by Jeffrey Long

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529 for Adults?

Question: I'm curious to hear your opinion--is a 529 plan a good idea for adults who are planning on graduate school?

I'm planning to enroll in a PhD program sometime in the next 5-10 years. Is a 529 a good idea? Bridget. Sioux Falls, ND

Answer. We don't hear enough about adults planning on college, which is why I like your question. The answer is that a 529 plan can make sense for someone like you. Students of all ages can save in a 529 and tap into it for undergraduate and graduate degrees, paying for everything from tuition to textbooks to computers. One drawback for adults is that you're giving up flexibility with the money. It has to go for your graduate degree (or you can transfer it to a family member). Otherwise, you'll pay taxes plus a penalty if you end up using the money for any reason other than education.

07/28/08 by Chris Farrell

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Debt Trouble and Reverse Mortgage

Question: My husband and I have accumulated $75K of credit card debt. Over the past five years we have suffered a few layoffs, and I now make half the salary I used to. We are not living high on the hog or spending extravagantly. We used the credit cards for lots of necessities and airline tickets to visit family.

Our combined income is now $60K per year. We are current on our bills and our mortgage, but we keep adding to the credit card balance to stay afloat.

We are considering asking our in-laws for a $75K loan to pay off the debt. They own their $900K home outright. Would a reverse mortgage be the best way for them to get the money? If they do agree to the plan, should it be a gift or a loan? We're agreeable to any plan -- we're drowning. Help! Please withhold my name. Denver, CO.

Answer: You have a lot going on. But let me get right to your question. No, your in-laws should not take out a reverse mortgage. It would be a bad financial move on their part. Yes, reverse mortgages are an option for aging homeowners. But they're expensive. The way I look at them is as a last resort, a safety net after all other options have been exhausted.

It also seems to me that they are taking on a real risk lending you money Do you really want to get financially entangled with family? And if they do loan you the money how will you pay them back and over what time period? I understand that you've head some real setbacks and are deep in debt. I'd really run the numbers to make sure you have a plan for getting out of debt. I would also think about working with a debt management company. You can check them out at the National Foundation for Credit Counseling at www.nfcc.org.

07/29/08 by Chris Farrell

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Bank Failures

Question: I know that funds (up to the limit) are safe in an FDIC insured bank, but how much of a hassle is it if the bank fails? When my S&L failed in the 1980's I sent my mortgage payments to a new address - and then another new address. I now use direct debit and on-line billpay for many of my bills and of course I have a supply of checks and maybe some in the mail. How smooth (or bumpy) is the changeover when a bank is taken over? Mary. Vista, CA.

Answer: I haven't gone through one personally, but my sense is that there is relatively little hassle in most cases. I've been reading blogs of people who have had their bank taken over and so far all the stories are positive. The one area I would be worried about is if you have an adjustable rate mortgage. And that has less to do with a FDIC takeover and more that there is evidence that when ARMs are sold-- mistakes get made at reset time.

In recent days, doing some searching on the net, I've come across a number of blogs talking about the experience and in most cases I would say the information was that it went surprisingly smoothly.

07/30/08 by Chris Farrell

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Out of Debt. Now What?

Question: I just paid off the last of all my debts! After getting into some serious spending problems in my 20s, I've poured everything extra over the last three years to pay off nearly $25,000 in personal debt. I've been so focused on that goal that I haven't considered much else. So, my question for you is: What do I do now?

A few extra pieces of information: I'm 30 years old. I'm currently putting 8% of my pre-tax income to retirement, and my job as a public school teacher includes a pension. I'm not married, have no kids, and rent my apartment in New York City, though I'd like kids and a house at some point.

I'm building an emergency fund. (Right now, it's about one paycheck. I'm working for three months' salary.) After that, what else should I be doing now that the debt is gone? Thanks for your insight, Kara. Astoria, NY

Answer: Congratulations. In the current environment I think you should continue what you're doing: Build up your cash savings in a mix of FDIC insured savings accounts and conservatively run money market mutual funds. Your savings will hold its value, although it might lag inflation a bit.

This approach also gives you time to see how you manage your money now that your out of debt. I'm sure you have some delayed purchases--clothes, vacation, maybe a bike. I would slowly buy some stuff and see how you do. You might also use this time to research the real estate market, see what you like, how buying would affect your income, and whether it makes financial sense or not.

Last, I'm a big believer in investing in long-term savings in a taxable account. That could mean regularly putting some money into a broad-based equity index fund. The advantage of this approach is that money compounds over the long haul, but if you do need it you can sell some stock and pay capital taxes on it. But unlike money held in a tax-deferred retirement savings account, you won't pay the 10% penalty if you take the money out when you're under age 59 ½.

07/31/08 by Chris Farrell

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