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Author: benhancockjr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35339  
Subject: What to do? Date: 8/16/2004 12:04 PM
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Hello all,

I'm looking for some advice wrt to saving/investing.

Here's my situation:

I am in year 2 of a 5/1 ARM @4.5%.
I have a 60mo car loan @ 3.9%
Retirement accounts are fully funded
I have a 6 mo emergency fund (ING and I-bonds)

What would you do in my situation?

Payoff car loan?
Prepay mortgage?
Start CD ladder?
Continue buying US Savings bonds?
DCA into equity and/or bond index funds in a taxable account?

I feel like my wife and I have worked hard to put ourselves in a strong position financially, but now that we're there, we don't know what to do next? A dilemma I'm happing to be in, but a dilemma nonetheless.

Thanks!

Ben
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Author: nmckay Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10678 of 35339
Subject: Re: What to do? Date: 8/16/2004 12:14 PM
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Provided you can maintain your mortgage, car and CC payments, you should DCA into a diversified portfolio of mutual funds. Get a copy of the Coffee House Investor and also google Ken Burns "Couch Potato Portfolio" for two simple approaches. You may want to open a MM account until you have enough saved for the minimum purchase amounts.

That's my opinion.

nmckay

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10681 of 35339
Subject: Re: What to do? Date: 8/16/2004 12:25 PM
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I'd vote to DCA into funds. You didn't mention it, but I'd also think about refinancing the ARM into a fixed-rate loan, and maybe packaging the car loan with it, to make that interest tax-deductible (if that qualifies). There may never be a better time, and if there is, you can do it then, too.

-Bill

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Author: benhancockjr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10683 of 35339
Subject: Re: What to do? Date: 8/16/2004 12:55 PM
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Get a copy of the Coffee House Investor and also google Ken Burns "Couch Potato Portfolio" for two simple approaches.

I haven't read Coffee House Investor, but I'm pretty familiar with the approach. Sounds very similar to what Bernstein recommends in 4 Pillars. The problem I have with the slice and dice approach in a taxable account is rebalancing and taxes. It seems like a TSM fund, a balanced fund, or perhaps one of the Target Retirement funds would be easier to manage in a taxable account.

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Author: benhancockjr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10684 of 35339
Subject: Re: What to do? Date: 8/16/2004 1:00 PM
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You didn't mention it, but I'd also think about refinancing the ARM into a fixed-rate loan, and maybe packaging the car loan with it, to make that interest tax-deductible (if that qualifies). There may never be a better time, and if there is, you can do it then, too.

It may indeed prove to be the best time in history to get a fixed-rate loan; however, in my case, I would be paying for something I don't need. My wife and I live in a townhouse, and we don't plan on living in the townhouse for more than 5 years. I wish like heck that we were ready to buy the house we're planning to live in for the next 20-30 years, but we're just not at that point.

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Author: jbking Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10685 of 35339
Subject: Re: What to do? Date: 8/16/2004 1:19 PM
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Greetings Ben,

I wish like heck that we were ready to buy the house we're planning to live in for the next 20-30 years, but we're just not at that point.

May I inquire as to why you aren't? If it is the down payment then saving for this is a goal that should have been stated in the initial post and depending on the time frame for it, CDs, savings bonds or money markets may make sense for it. Would you try to buy in 2 years, 5 years, 10 years?

Just a thought from the peanut gallery,
JB

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Author: benhancockjr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10686 of 35339
Subject: Re: What to do? Date: 8/16/2004 1:30 PM
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May I inquire as to why you aren't? If it is the down payment then saving for this is a goal that should have been stated in the initial post and depending on the time frame for it, CDs, savings bonds or money markets may make sense for it. Would you try to buy in 2 years, 5 years, 10 years?

JB,

A downpayment is not the problem. We have almost 40% equity in our townhouse that could be used as a downpayment on a new house. However, we do not plan to live in the Northern Virginia area for more than 5 years. Our long-term plan is to move to the Virginia Beach area to be closer to family. With our time horizon, a fixed-rate mortgage just doesn't seem to make sense.

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Author: jbking Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10687 of 35339
Subject: Re: What to do? Date: 8/16/2004 1:43 PM
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Greetings Ben,

This couldn't be a simple dilemma now could it? :)

I think I'd be tempted to add to the retirement accounts unless there are other expenditures that will come up that you could also add to, e.g. a vacation fund, a next car fund, college for kids if applicable...

Regards,
JB

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Author: benhancockjr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10688 of 35339
Subject: Re: What to do? Date: 8/16/2004 2:32 PM
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I think I'd be tempted to add to the retirement accounts unless there are other expenditures that will come up that you could also add to, e.g. a vacation fund, a next car fund, college for kids if applicable...

Any recommendations for a taxable account? Vacations, next car, and college all have different time horizons. I'm comfortable being aggressive in a retirment account since for me, that's 30+ years away; however, with short-term goals like the ones you've mentioned it's tougher to strike the right risk/reward balance. That's why I asked whether I would be better off prepaying my mortgage at 4.5% or paying off the car loan at 3.9%.


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Author: mjcalab Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10689 of 35339
Subject: Re: What to do? Date: 8/16/2004 2:40 PM
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What would you do in my situation?

Payoff car loan?
Prepay mortgage?
Start CD ladder?
Continue buying US Savings bonds?
DCA into equity and/or bond index funds in a taxable account?


I would do exactly as you suggest and in the same order. You don't need any advice other then to maybe believe in what you know and follow your own advice.


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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10690 of 35339
Subject: Re: What to do? Date: 8/16/2004 4:00 PM
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I guess if it was me, I would look into converting the ARM into a 15 or 30 yr home loan as interest rates are expected to rise. If you wait until the ARM expires, you might have to pay a very large interest rate.

brucedoe

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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10691 of 35339
Subject: Re: What to do? Date: 8/16/2004 4:02 PM
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It doesn't cost anything to rebalance Vanguard funds. I've done it. They were very helpful.

brucedoe

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Author: nmckay Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10692 of 35339
Subject: Re: What to do? Date: 8/16/2004 4:13 PM
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I don't see paying off loans with those low rates. That's very cheap money. It would seem to me that you could get much better returns elsewhere.

Also, if you pay more on your car loan and find yourself short of cash, they won't give you the money back.

nmckay

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Author: benhancockjr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10693 of 35339
Subject: Re: What to do? Date: 8/16/2004 4:30 PM
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It doesn't cost anything to rebalance Vanguard funds. I've done it. They were very helpful.

Vanguard might not charge anything, but Uncle Sam sure would since we're talking about a taxable account. I suppose I could just add new money to rebalance, but that might prove more difficult. If it were a tax-deferred account, I'd agree, no problem. From my perspective, I'd rather keep things simple in a taxable account.


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Author: benhancockjr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10694 of 35339
Subject: Re: What to do? Date: 8/16/2004 4:32 PM
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I guess if it was me, I would look into converting the ARM into a 15 or 30 yr home loan as interest rates are expected to rise. If you wait until the ARM expires, you might have to pay a very large interest rate.

I failed to mention in my previous post that my wife and I do not plan to liver in our townhouse for more than 5 years, hence the 5/1 ARM. A 30-year fixed-rate is great, just not applicable for my situation.

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Author: tedhimself Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10695 of 35339
Subject: Re: What to do? Date: 8/16/2004 4:47 PM
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I have a 60mo car loan @ 3.9%

Car loans come in a couple of flavors depending on whether your loan is from a bank or from the dealer or other finance company. Those from the dealer, GMAC, finance company frequently have a payment method using something called the "rule of 78." The bottom line of this is that you pay more of the interest early in the loan and less later in the loan than you would with a standard bank loan. In other words, that 3.9% may not be the same across the life of the loan. Higher when the car is new and lower when the car is older. Dealers and finance companies like this method because they get their profit faster. This could have a bearing on what to pay off first. Your loan contract should tell you what kind of a loan you have. So far as I know, banks, savings & loans and credit unions do not use the rule of 78, they just charge simple interest.
Ted


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Author: benhancockjr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10696 of 35339
Subject: Re: What to do? Date: 8/16/2004 7:06 PM
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it's a simple interest loan.

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Author: Lokicious 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: 10697 of 35339
Subject: Re: What to do? Date: 8/16/2004 7:19 PM
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"You don't need any advice other then to maybe believe in what you know and follow your own advice."

Agree. Ben gets it, including that slice and dice and rebalancing is not likely to work in a taxable account, thanks to the added cut for Uncle Sam.

I do think, with the low rates you have on both loans, chances are you'll do better with something like a balanced fund or a Target fund. No guarantees, of course, but unless you're worried about a cash flow problem (like losing jobs), over a few years, unless you're as gloomy as Splotto (and remember, I'm gloomy), a balanced portfolio should beat your loan rates.

Sadly, my own optimization plan requires avoiding new stock allocation, even though all I'd need is for the Total Market to average around 3% annual gain, including dividends, to do as well in a taxable account as current CD rates. But I can't take the risk with my time horizon. You probably can.


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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10699 of 35339
Subject: Re: What to do? Date: 8/17/2004 3:20 PM
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Payoff car loan?
Prepay mortgage?
Start CD ladder?
Continue buying US Savings bonds?
DCA into equity and/or bond index funds in a taxable account?


IMHO, cheap money, 3.9% on the car loan, is still money that is flying out the window for nothing. When you also consider that it's after-tax money, the true cost is higher, and possibly much higher depending on your incremental tax rate. Compare the 3.9% to the interest rate you could currently get on a EE bond. If the car loan rate is higher, it should be paid off.

I would also buy more bonds to build the e-fund to a 12 month cushion. With a 12 month cushion, if you need to, you can use a portion of it in the future for unexpected expenses. (You might want to build it even more if you expect to buy a new/additional car within the next 5 years, or would like to buy some new furniture and/or do some improvements when you do get that new house.) I don't know why you would be considering CD's over savings bonds unless you're in a low tax bracket.

If you expect to be moving up to a larger house in the next five years, it doesn't make sense to me to pay down the mortgage.

After I paid off the car loan and increased the e-fund to at least 12 months, then I would DCA into equity funds in a taxable account.

my 2 cents (and worth only what you paid for it)
2old




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Author: Smufty2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10701 of 35339
Subject: Re: What to do? Date: 8/17/2004 5:19 PM
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The type of home loan you choose is relative to your situation and a fixed rate is not always the best deal. I have a 10 year interest only mortgage that is the Libor rate + 1.375% and is currently a tad over 3%. Any and all prepayments go directly to principal. If my collections are held up for any period, I can pay the interest only payment (which decreases with every prepayment) and for me, with my prepayment capacity, the Libor would have to go up 400 basis points in 3-4 years for me to lose over having started with a fixed rate mortgage from the beginning despite the record low rates. Personally, I don't see interest rates doing much after 2004, and am betting on deflation and a falling dollar.
That said I would get rid of the 3.9% drain on your wallet first.
--Smufty

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10702 of 35339
Subject: Re: What to do? Date: 8/19/2004 1:01 AM
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I am in year 2 of a 5/1 ARM @4.5%.
I have a 60mo car loan @ 3.9%
Retirement accounts are fully funded
I have a 6 mo emergency fund (ING and I-bonds)

What would you do in my situation?


Are you benefitting by itemizing tax deductions? If so, I would suggest paying down the car loan--paying down the car loan is like getting a guaranteed, tax free "return" on the balance of the loan of 3.9%, the "return" actually being in the form of saved interest. If you are in the 25% federal marginal tax rate, you would have to have an investment or savings earning at least 5.2% to break even with the car loan, and in today's environment one would have to take on risk to get that type of return, which isn't good for a 5-year investment horizon.

If you are not benefitting from itemizing tax deductions, I would be inclined to suggest paying down on the mortgage, which, while it won't help your cash flow, it would in the long run still save you money in less money going to the mortgage company in the form of interest and more towards principal, so you would have more equity (cash) for when you do sell.

Now having said all that, I am benefitting from itemizing my tax deductions and, instead of paying down my mortgage (15-year 5.25% FRM), I am investing in predominantly equities (Vanguard Total Stock Market Fund, Vanguard Tax-Managed International, and also some Vanguard Total Bond Market), my thinking being that by following a reasonable Asset Allocation plan, I will probably do better investing than by paying down my mortgage, but I am indeed taking a risk doing this, hopefully taking prudent risk, but also my investment horizon is for more than 5 years. But I wouldn't be doing this if I was planning on another major purchase in 5 years or less--there is just too much short-term volatility in equities to be worth the risk.

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Author: ngcpa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10714 of 35339
Subject: Re: What to do? Date: 8/21/2004 5:35 PM
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Assuming you are in a fairly high tax bracket, I would buy some VA municiple bonds. I would try to find some that don't go too far out. Since you are planning on relocating within VA, it would be worthwhile even when you move.
Norm

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