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Author: stusmiles Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308642  
Subject: Newbie question - debt/investment priorities Date: 6/16/2008 1:23 AM
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Hi everyone,

I am an enthusiastic future Foolish investor but although my income is high and tax-free (yes, I live in Dubai), I am 37 years old and am still in debt (not good I know!).

I have the following financial profile and would love the advice of you all to help me prioritize:

Income
1) Spare to invest (after ongoing debt payments) each month of $4,000 from two months time (currently needed to pay for wedding in august!)
2) Bonus of $25,000 in December

Debts
1) Car loan of $25,000 at 9.8% interest, 1 year's payments to run, early redemption penalty of 2.5%, currently paying $2100 per month
2) Student loan of $35,000 at 6.25% interest, 4 year's payments to run, no early redemption penalties, currently paying $680 per month

Investment options I am considering
1) Build savings of 6 months worth of living expenses in an account earning 3% (about the best I can find here)
2) Invest in property market putting $50,000 deposit down on a great property with high possibility of strong capitsl gains when released in 2012 (The World, Dubai) BUT would require short-term 6 month loan at 10% interest as property will be sold out within next two weeks
3) Start buying stocks with a monthly investment (I already have a retirement product where I invest $2000 per month into a managed municipal fund which currently is doing quite well at c.20% growth this yr)
4) Paying down the mortgage on my fiancee's apartment in Spain ($180,000 debt remaining, being paid at $1200 per month, interest rate of 5.5%). She is currently earning $1000 rent per month hence she is losing $200 each month and with maybe a payment of $40,000 we coudl turn that into a small positive each month.

At the moment I know I should probably prioritize paying off the car loan but I am strongly tempted to invest in the property market here, which is very hot right now, even though it means taking some short-term debt.

I welcome all contributions due to my confused (and possibly delusional!) state right now.

Thanks in advance to everyone,

Stu
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Author: TheNewD Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 274152 of 308642
Subject: Re: Newbie question - debt/investment priorities Date: 6/16/2008 2:15 AM
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"I am strongly tempted to invest in the property market here, which is very hot right now...

The real estate market in the U.S. was very hot two years ago. Today many, many homes are worth less than what the owners owe on their mortgages. Know what you're getting into, and do not assume that real estate is a good investment in and of itself.

TND
Who will purchase a home when she can afford it, but not before.

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Author: stusmiles Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 274154 of 308642
Subject: Re: Newbie question - debt/investment priorities Date: 6/16/2008 5:47 AM
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Thanks for the advice, sounds very sensible. I will put that one on hold and only look for property investments once I have at least 20% saved up as a safety margin (I guess patience is a virtue in this game!)

If I take that option out of the equation, what do most other people advise?

Clear all debt as fast as possible then start investing with a clear conscience OR clear the high interest debt and then allocate proportions to each of savings, investment, and clearing low interest debt?

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Author: Minxie Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 274155 of 308642
Subject: Re: Newbie question - debt/investment priorities Date: 6/16/2008 5:53 AM
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First and foremost, do you have an emergency fund set up? This should ideally cover 3-6 months of expenses, unless you have people dependent on you. If that is the case, you might want it to be higher. There are no guarantees, even with your job, and you need to be prepared for the future.

What about retirement? Do you have a 401k? A Roth IRA? Are they both fully funded?

Where will you live once you leave Dubai? Do you have a down payment for a house saved (since you seem interested in real estate)? If you are planning to buy a house in the US, you are going to need some kind of down payment; lenders are tightening up and the easy money is not so easy.

Until you have these things resolved, I wouldn't invest in any "hot" property market. Additionally, do you have any experience with real estate investing? A market that seems "hot" to you may just be hype; of course, it may truly be "hot" but you could be the buyer who gets bit as prices spiral out of control. For reference, look at the mess in CA and FL; the end buyers there are the ones dealing with the drop in property values in what were "hot" markets that could never drop.

Minxie

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 274159 of 308642
Subject: Re: Newbie question - debt/investment priorities Date: 6/16/2008 8:25 AM
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1) Spare to invest (after ongoing debt payments) each month of $4,000 from two months time (currently needed to pay for wedding in august!)

Is the wedding going to add to your debt? Or will you be able to pay it off with the spare cash flow between now and August?

1) Car loan of $25,000 at 9.8% interest, 1 year's payments to run, early redemption penalty of 2.5%, currently paying $2100 per month
2) Student loan of $35,000 at 6.25% interest, 4 year's payments to run, no early redemption penalties, currently paying $680 per month


Both of these debts are at a high enough rate that I would recommend paying them off prior to doing any investing, although because of the additional 2.5% penalty, I would not recommend paying the car loan off early. Since you are in a tax-free situation, there aren't even tax advantaged retirement accounts

Between your $25k bonus and your $4k per month 'investment' cash after September (assuming that pays for the wedding), you should be able to pay these debts off in just about a year.

1) Build savings of 6 months worth of living expenses in an account earning 3% (about the best I can find here)

This would be the next thing that I would start 'investing' in, after the debt was paid off.

2) Invest in property market putting $50,000 deposit down on a great property with high possibility of strong capitsl gains when released in 2012 (The World, Dubai) BUT would require short-term 6 month loan at 10% interest as property will be sold out within next two weeks

Lots of people have purchased real estate thinking that it was going to go up. It doesn't always. And even though the property market in Dubai might be 'hot' now - doesn't mean it will be in 4 years.

3) Start buying stocks with a monthly investment (I already have a retirement product where I invest $2000 per month into a managed municipal fund which currently is doing quite well at c.20% growth this yr)

Is that 20% guaranteed?

4) Paying down the mortgage on my fiancee's apartment in Spain ($180,000 debt remaining, being paid at $1200 per month, interest rate of 5.5%). She is currently earning $1000 rent per month hence she is losing $200 each month and with maybe a payment of $40,000 we coudl turn that into a small positive each month.

Would her payment decrease if you paid down the loan, without paying the loan off completely? If so, how much would it take to pay the loan down to where the property is cash-flow positive? This might be the thing I would concentrate on after paying down other debt and building up an e-fund. (Or she could sell the apartment, and get rid of the cash-flow drag completely.)

At the moment I know I should probably prioritize paying off the car loan but I am strongly tempted to invest in the property market here, which is very hot right now, even though it means taking some short-term debt.

Very hot often turns to very cold. And the turning can be even more brutal if you are highly leveraged.

AJ

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Author: stusmiles Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 274160 of 308642
Subject: Re: Newbie question - debt/investment priorities Date: 6/16/2008 8:28 AM
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Thanks Minxie,

Am I right in thinking that the safe approach of paying off the debts, then establishing an emergency fund, then saving for a house deposit should be done before anything with more risk attached?

To answer your questions, I am planning to return to Europe (Spain or UK) after Dubai and will probably buy property there. As they are going through the early stages of what has happened in the US regarding property prices, it may be that there are better deals to be had there in the next year or so than in Dubai where prices have been increasing at around 50-100% for the last three years.

I have an offshore retirement fund which has a reasonable weight in it but I am reluctant to put more due to the high fee managed fund scenario. I would rather complement it with some direct stock investment (taxes not being an issue to me right now) although I guess I will start getting hit with capital gains once I move bakc to Europe.

There were I guess too many topics to treat fully in my question but thanks to all for the help and wise advice on the property front!

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Author: AcmeFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 274162 of 308642
Subject: Re: Newbie question - debt/investment priorities Date: 6/16/2008 8:35 AM
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4) Paying down the mortgage on my fiancee's apartment in Spain ($180,000 debt remaining, being paid at $1200 per month, interest rate of 5.5%). She is currently earning $1000 rent per month hence she is losing $200 each month and with maybe a payment of $40,000 we coudl turn that into a small positive each month.

Until fiancee becomes wife, I think this would be a horrible idea. You will probably get married, but sometimes things happen. People that are in love have events conspire to prevent them ever getting married.



1) Build savings of 6 months worth of living expenses in an account earning 3% (about the best I can find here)

IMO, this has to be your first step. And if you build it bigger than this, you can use the excess to make a major payment against your fiancee's loan once you are married.

Acme

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Author: stusmiles Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 274163 of 308642
Subject: Re: Newbie question - debt/investment priorities Date: 6/16/2008 9:06 AM
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Thanks AcmeFool, forgot to mention we are getting married in 4 weeks and much as I trust her with my life, I will not be making any payments before we are married and then only if we sign a clear document stating who owns what share!

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Author: Fuskie Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 274165 of 308642
Subject: Re: Newbie question - debt/investment priorities Date: 6/16/2008 9:38 AM
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2) Bonus of $25,000 in December

General rule of thumb, never count on a bonus when calculating expected income. That way if it does not materialize, you will not be adversely impacted.

Debts
1) Car loan of $25,000 at 9.8% interest, 1 year's payments to run, early redemption penalty of 2.5%, currently paying $2100 per month
2) Student loan of $35,000 at 6.25% interest, 4 year's payments to run, no early redemption penalties, currently paying $680 per month


The prepayment penalty is an ouch, but neither of these debts are "bad" debts. You have no consumer or credit card debt, only what I call Critical Life Investment debt. CLI is money you invested in critical elements to building your live, such as transportation and education. These have long term payoffs as you build your career and family. If refinancing is an option you might want to explore it on the car loan, but with only a year to go on the car, just bite the bullet.

2) Invest in property market putting $50,000 deposit down on a great property with high possibility of strong capital gains when released in 2012 (The World, Dubai) BUT would require short-term 6 month loan at 10% interest as property will be sold out within next two weeks

I do not know about the real estate market in Dubai but unless you have the time to maintain the property, I would not spend the money. If the market is that great, how good could the property really be for just $50K?

Don't expect stocks to continue to grow at 20%, although I can see it if you are investing in Dubai Oil. But remember, everything in the Middle East belongs to the oil guys. You are just fleas riding on their coat tails. Enjoy the ride while you can but prepare for when you get flicked off.

4) Paying down the mortgage on my fiancee's apartment in Spain ($180,000 debt remaining, being paid at $1200 per month, interest rate of 5.5%). She is currently earning $1000 rent per month hence she is losing $200 each month and with maybe a payment of $40,000 we could turn that into a small positive each month.

Reducing the mortgage on the Spain apartment will shorten the term of the loan but will not reduce her monthly payments unless Europe has a different kind of mortgage system that I do not know about (which is certainly possible). Instead, DW to be should focus on raising her rent by $200/month so that she breaks even on the property.

If this apartment is not where you two are planning to return after you are through in Dubai, you may want to go ahead and unload it, stop the bleeding, and shelter the cash until you are ready to buy another place.

Fuskie
Who congratulates you on your upcoming nuptials...

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Author: DBAVelvet74 Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 274183 of 308642
Subject: Re: Newbie question - debt/investment priorities Date: 6/16/2008 5:00 PM
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Both of these debts are at a high enough rate that I would recommend paying them off prior to doing any investing, although because of the additional 2.5% penalty, I would not recommend paying the car loan off early.

Question for my own education since I've never dealt with an early payment penalty, but is it just a flat 2.5% of the remainder that gets paid off in one big chunk?

And if that is the case, isn't that better than paying 9.8% for that? At least assuming that there is almost a year to go till it is paid off? (I can see not doing that in the last couple of months because there probably isn't that much interest left to pay.)

Or is it 2.5% of the whole starting amount?

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Author: Minxie Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 274190 of 308642
Subject: Re: Newbie question - debt/investment priorities Date: 6/16/2008 7:10 PM
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Am I right in thinking that the safe approach of paying off the debts, then establishing an emergency fund, then saving for a house deposit should be done before anything with more risk attached?


That's what I would recommend. Paying off your debts is a guaranteed return on your money; investing while you carry debt is like borrowing to invest. It's not a good idea, particularly now.

An e-fund is crucial, as is life insurance if you don't already have any. Who knows but you all may unintentionally conceive on your honeymoon? If something happens to you during your remaining time in Dubai, you want your DW and potential DCs to be covered.

I am not sure if you can open a Roth since you are not paying taxes but wouldn't that be super if you could? You might ask on the Tax Strategies board. If you are able, you're basically setting up an account for which you will never pay taxes (unless, of course, the rules change.) You should also be able to do this for DW, if you can do it for you.

Presumably you are young; every penny you put away now, whether in debt payoff or savings, will grow and grow for you. Real estate can be a good investment but it's time-consuming and a pain in the keister. Additionally you have to find a seller when you are ready to reap your reward and then negotiate a price, etc. Stocks are MUCH easier to own, provided you keep up with your due diligence.

So to answer your question: yes, do the boring stuff like paying off debt and saving money before you take on the exciting world of real estate. While you work on the boring stuff, keep your mind sharp by educating yourself WRT stocks, real estate and the like. When you are ready financially to invest, you will also be mentally prepared.

Minxie

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Author: stusmiles Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 274219 of 308642
Subject: Re: Newbie question - debt/investment priorities Date: 6/17/2008 12:33 PM
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In this case I need to check but I believe it will be 2.5% of the outstanding balance, in which case if I can pay it off reasonably soon I will gain, but the closer it gets to maturity the less sense it makes.

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Author: eyecolts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 274241 of 308642
Subject: Re: Newbie question - debt/investment priorities Date: 6/17/2008 10:00 PM
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Well, if I were you, and I'm not, I wouldn't be investing in ANYTHING while carrying a car loan and other debt.

If you have a decent emergency fund (2 months expenses?) I would stop funding the efund and get the debt paid off. Then resume funding the efund if you're more comfortable with a larger fund. Once your efund is where you want it, then start investing. Investing now is tantamount to borrowing money to invest, and I personally think that that is always risky.

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