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Author: ret2004 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76394  
Subject: What would you do with $260k Date: 5/3/2006 2:18 PM
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need your input – a friend is receiving $260,000 soon. He's in his early 30's, no kids, never been married, doesn't own a house, and has a new vehicle (pd). He isn't interested in taking a lot of risk with this money. His monthly salary provides for his living expenses and wants to buy a house, get married, etc. in the future. The average price of a home is $150,000 in our area. What type of investments do you recommend? Thank you.
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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51535 of 76394
Subject: Re: What would you do with $260k Date: 5/3/2006 2:32 PM
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Well first I'd make sure he understand the tax implications of this money he received - if any - and put into a savings account whatever he'll need to pay his taxes. And make sure to make estimated payments to not end up with penalties.

Next, if he wants to own a house soon, its not a bad idea to put away whatever $30K for a 20% downpayment or so. Put it in that same high yield savings accounts with the tax money (Emigrant Direct, HSBC Direct, GMAC, ING, etc).

With the remaining money, he should use $4K to fund an IRA for this year, if he's not already doing so (and if its not considered income which would disqualify him from a Roth). And use the rest and put it in a Vanguard Targeted Retirement fund (or the similar funds from Fidelity or T Rowe Price). These are funds that have a year on them and they automatically adjust your balance as you go for what's appropriate for your age.

If he wants to be more involved with creating his portfolio, then there's plenty of ways to do that too. But that's not worth getting into unless he wants to be a more active investor.

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Author: theHedgehog Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51536 of 76394
Subject: Re: What would you do with $260k Date: 5/3/2006 3:06 PM
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Next, if he wants to own a house soon, its not a bad idea to put away whatever $30K for a 20% downpayment or so.

Wouldn't it be better to just pay cash for a house, and then make a "mortgage" payment to yourself? Even at a 6.25% fixed interest mortgage, that's a lot of money going to someone else over time, when it could be going to you.

Hedge

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51537 of 76394
Subject: Re: What would you do with $260k Date: 5/3/2006 3:15 PM
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Wouldn't it be better to just pay cash for a house, and then make a "mortgage" payment to yourself? Even at a 6.25% fixed interest mortgage, that's a lot of money going to someone else over time, when it could be going to you.

I could go either way on that one. With the tax break, we're probably talking 4.5 to 5.5% (better if in a much higher tax bracket). And that same money in the market can probably average 7 to 8% after taxes.

Long term you're probably better off taking the loan, for a real return of 4 to 5% while you're only paying the bank a real return of a couple percent.

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Author: ptheland 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: 51539 of 76394
Subject: Re: What would you do with $260k Date: 5/3/2006 3:44 PM
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With the tax break, we're probably talking 4.5 to 5.5%

Remember that often that tax break is an illusion. To get a benefit for the mortgage interest and property taxes, you need to itemize deductions. And to itemize deductions, you need more deductions than the standard deduction - currently $5150 for singles and $10,300 for married couples. And that goes up if your over 65 or blind.

Until you get over the standard deduction, your mortgage interest provides no tax benefit at all. Given the figures we're talking about here, it is possible that the mortgage interest would provide no tax break. On a $100k interest only loan at even 7%, the interest for a year is $7k, well under the standard deduction for a married couple. Even adding in property taxes of $3k doesn't add enough to itemize.

--Peter

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51540 of 76394
Subject: Re: What would you do with $260k Date: 5/3/2006 3:50 PM
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Yes, I'm well aware. I almost put "especially if you're in a state with an income tax". But yes.

Myself, I'm single, rent, and don't have many deductible expenses. But between state income tax and charitible contributions, I get within $500 to $1000 of the standard deduction anyway.

I gave a range to show that it depends, but perhaps the range should have gone up to 6.5% instead of stopping at 5.5% :)

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Author: ret2004 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51541 of 76394
Subject: Re: What would you do with $260k Date: 5/3/2006 4:39 PM
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our state is one without a state income tax.

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Author: Howie52 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51542 of 76394
Subject: Re: What would you do with $260k Date: 5/3/2006 5:35 PM
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"a friend is receiving $260,000 soon. He's in his early 30's, no kids, never been married, doesn't own a house, and has a new vehicle (pd). He isn't interested in taking a lot of risk with this money. His monthly salary provides for his living expenses and wants to buy a house, get married, etc. in the future. The average price of a home is $150,000 in our area. What type of investments do you recommend?"

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Well, he needs to think about the future. Does he think he wants
to remain in the area? What does he view as risky? What if any debt
load might he be carrying? Where and what is he interested in? ----

Some folks tend to feel more comfortable with investments in items
or industries or stuff they know something about or have an interest
in.
Traditionally, you figure that you need to have something on the
order of $50000 to diversify reasonably well in individual stocks.
TMF tends to lean toward mutual funds. Bonds and treasuries tend to
be appealing to folks with low risk tolerance.
So, all options are open to the guy ---- but where one person
goes another would fear to tread.
One person's needs are another's fluff.

So, what does he want to do with $260000?

Howie52
My introduction to investing was through DRIP and DSP plans ---- took
a small amount and went into 5 to 8 companies ---- like local
utilities, major oil cos, local banks, consumer products ---- anything that had no fee was fair game --- and learned how the market seemed
to work till I was more comfortable.

Then I did more of the same.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51543 of 76394
Subject: Re: What would you do with $260k Date: 5/3/2006 5:51 PM
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If he does not pay cash for the house he may have more taxable income depending on how he invests the money. For example if he just puts $150K into a CD at 5%, he would have and extra $7500 in dividends to pay taxes on which would wipe out any mortgage interest deduction. The standard deduction make the tax numbers behave funky, depending on the rest of his tax situation he might actually end up paying more in taxes each year if he gets a mortgage and has the additional income.

Even if he does not have it himself, then he should borrow a copy of last years tax software like Turbo Tax and run his numbers with and without a mortgage to see how much difference it would make. In looking at this he should also remember that there are lots of other fees associated with getting a mortgage that he would not have to pay if he pays cash.

If he has a 401k at work he can likely contribute more to it than an IRA. One plan to look at would be to pay cash for the house, then to make his "mortgage payment" into the 401K. This would give about the same tax deduction as if he had a mortgage. This would also give him the advantage of dollar cost averaging his money into investments.

I was single and around his age when I bought my first house. As odd as it sounds having a house was real attractive to a lot of women, not because they were good diggers, but because(in semi-psycho-babble) it seemed to project an air of stability and safety at some level. I've actually talked about this with plutonic female friends and they agree that this was true, generally speaking. I ended up meeting and marrying my wife within a year of the house purchase so as it turns out I didn't get to do a long term test of its affect on the ladies :)

For most people owning a house free and clear by the time they retire is a good plan, to me this makes it more of a questions WHEN to pay off the mortgage, not IF you should.

From what I know, if I was in his situation and looking at buying a house for $150K, I would pay cash for it and make hefty retirement savings each year instead of the mortgage payment. This would still leave around $100K in cash to invest. Reading between the lines it might fit your friends personality to just put most of that into a CD for a year while he gets throught he stress of buying a house. After the year though, he will need to make long term plans for the investment, at his age a CD is not a good long term choice.

Greg


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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51544 of 76394
Subject: Re: What would you do with $260k Date: 5/3/2006 6:34 PM
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Watty56: "I was single and around his age when I bought my first house. As odd as it sounds having a house was real attractive to a lot of women, not because they were good diggers, but because(in semi-psycho-babble) it seemed to project an air of stability and safety at some level. I've actually talked about this with plutonic female friends and they agree that this was true, generally speaking."

What did you mercurian, venusian and/or klingon female friends think? <grin>

Regards, JAFO
(I simply could not resist a nice, fat, slow straght-line pitched over the middle of the plate like that - sorry)




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Author: theHedgehog Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51545 of 76394
Subject: Re: What would you do with $260k Date: 5/3/2006 6:49 PM
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Watty56: plutonic female friends

JAFO: What did you mercurian, venusian and/or klingon female friends think? <grin>

I dunno Jafo. I thought he was telling us about some Mickey Mouse relationships. :o)

Hedge

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Author: PKnudsen 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: 51548 of 76394
Subject: Re: What would you do with $260k Date: 5/3/2006 7:55 PM
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Wouldn't it be better to just pay cash for a house, and then make a "mortgage" payment to yourself? Even at a 6.25% fixed interest mortgage, that's a lot of money going to someone else over time, when it could be going to you.

It's the leverage you can get. You only put down 20%, but when you sell in 10 years, you get to keep the whole profit.

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Author: JLC Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51549 of 76394
Subject: Re: What would you do with $260k Date: 5/3/2006 8:07 PM
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This sounds like a "windfall" for him. Put it in a money market fund and take about a year to decide what to do. Would give him time to prioritize what is important and more time to study/shop around.

JLC

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51553 of 76394
Subject: Re: What would you do with $260k Date: 5/4/2006 11:01 AM
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A low risk investment is a reasonable priced home. Not having a mortgage or rent payment is priceless. Our jobs have been unstable, it has been much easier to handle with no mortgage payment. I have seen co-workers lose their home and in one case their life over unemployment.

As others have already stated, the value of the mortgage interest deduction especially on small mortgages is not as great as most believe and have no interest in risking the value of my home by leveraging investments.

Debra

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Author: DAVE9778 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51942 of 76394
Subject: Re: What would you do with $260k Date: 5/19/2006 2:19 PM
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need your input – a friend is receiving $260,000 soon. He's in his early 30's, no kids, never been married, doesn't own a house, and has a new vehicle (pd). He isn't interested in taking a lot of risk with this money. His monthly salary provides for his living expenses and wants to buy a house, get married, etc. in the future. The average price of a home is $150,000 in our area. What type of investments do you recommend? Thank you.


1) Pay any taxes. Get an accountant if it isn't easy to figure out. Don't wait and possibly pay penalties.

2) Buy a house, cash, paid in full. It is always better to own your house. Any investment that you make that could earn you more than the interest you are paying on a mortgage could also lose principal. Own your house and invest money that you wouldn't have to spend on a mortgage. Don't buy a big house, buy smaller but comfortably meeting his needs. It's cheaper to buy, maintain, lower taxes etc. etc. etc. People have become "house poor" because they spend so much on their home. They buy because it's an "investment", then they either become attached and won't sell for sentimental reasons (because that's just the way people are) or the market goes down and the house ends up running them into the poor house. No pun intended. I view my house as a cost of living. It might make me some money some day, but there are no guarantees. It's better than renting in any case.

3) Invest the rest, first in tax deferred plans (as much as possible), then in after tax plans like a roth, and finally in a regular brokerage account of your choosing.

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51946 of 76394
Subject: Re: What would you do with $260k Date: 5/19/2006 2:46 PM
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2) Buy a house, cash, paid in full. It is always better to own your house. Any investment that you make that could earn you more than the interest you are paying on a mortgage could also lose principal.

I'm not saying you're wrong, in fact I'm 100% sure that there is no right and wrong answer. But over the 15 year term of even the shortest loan, the changes of the market losing principal is virtually nothing. In fact in the worst 15 year history the S&P500 did not lose money (and there's more to the market than the S&P). True, the annual return in that period was a a paltry 1%.

For a 30 year mortgage, the worst ever S&P 30 year return was 4.1%

While there are absolutely no guarantees... when are there ever in equities... you have a pretty significant chance of beating a mortgage over those kind of time periods. So it entirely depends on your risk adversion.

There's nothing wrong with buying a house for cash, but there's nothing wrong with putting down enough to make a comfortable 15-year payment (and certainly more than 20% to avoid PMI or a 2nd mortgage) and investing the rest either.

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Author: jrr7 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: 51947 of 76394
Subject: Re: What would you do with $260k Date: 5/19/2006 3:24 PM
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In fact in the worst 15 year history the S&P500 did not lose money
...
For a 30 year mortgage, the worst ever S&P 30 year return was 4.1%


Are you factoring inflation and dividends into these calculations?

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51948 of 76394
Subject: Re: What would you do with $260k Date: 5/19/2006 3:29 PM
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Inflation is not factored because it is not relevant when comparing investing to a mortgage, as it effects both equally. So you could remove it from both or from neither, and the comparison would be the same.

I'm not sure if it includes dividends, this is the site I'm using:
http://politicalcalculations.blogspot.com/2006/05/sp-500-best-average-and-worst-returns.html

Personally I would be happy if those numbers didn't as it would make my point 1.5% to 2% stronger :)

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51949 of 76394
Subject: Re: What would you do with $260k Date: 5/19/2006 3:35 PM
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DeltaOne81 "I'm not sure if it includes dividends, this is the site I'm using:
http://politicalcalculations.blogspot.com/2006/05/sp-500-best-average-and-worst-returns.html "<?i>

If you go to the Mapping Site linked in that URL, then you will find:

"The rates of return presented above are annualized, and include full dividend re-investment that does not include commissions, fees, taxes or inflation."

Regards, JAFO

PS - Thanks for the URL


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Author: jrr7 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: 51950 of 76394
Subject: Re: What would you do with $260k Date: 5/19/2006 3:43 PM
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But over the 15 year term of even the shortest loan, the changes of the market losing principal is virtually nothing.

That's been the case in the past (when you ignore fees). There's no guarantee that will be the case in the future.

And of course it depends on what you define as "the market", and how well your investments behave as the market does.

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