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Happy holidays all,

I'm toying with some creative investing so please forgive the long post. I'd like to gather comment, if you're willing to share.

I have been saving my maximum IRA contribution in a taxable savings account (with Vanguard) such that I save enough so that right after 1 Jan I can transfer it into our IRA for 2008. I have that savings in a money market fund, so it's basically risk free but with VERY LOW interest. Considering how the market is jittery, I don't want the money to be worth less on 1 January than what I've actually put into it, so that's why I have the MMF.

I also owe, coincidentally, about my max IRA contribution for wife and me what we owe on our car. We financed with 6.65 APR.

My idea: Pull the money from the IRA savings account and pay our car note and save so that I can make the IRA contribution later in 2008 tax year.

Why? I am sure I earn pay more in interest on the car note than I earn in the MMF. I think I'm losing money to interest on note by keeping the IRA savings in the MMF. I will of course have the discipline to pay off the IRA contribution for 2008 with the money previously going to the car note. Besides, I think that will feel much better when I'm paying all that money into retirement, rather than to Toyota!!

Thanks and enjoy the season!
g
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I also owe, coincidentally, about my max IRA contribution for wife and me what we owe on our car. We financed with 6.65 APR.

I personally would pay off the car loan. The 6.65% would be a risk-free return, which is pretty good as risk-free returns go these days. Even a 30-year Treasury bond is only yielding about 4.38%.
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My bias would be to dollar cost average money for stock purchases, rather than dumping your annual amount all at once.

Also, my personal bias is not to use money designated as savings to pay for consumer junk or consumer debt. Part of the cost of using credit to buy consumer junk is that you should expect to pay the interest charges that go along with it.


That may not be completely rational, since money is fungible, but that's the way I aim to operate. The end result is that I buy less consumer junk and usually pay nothing in interest charges to buy it ---so in the end it makes sense, at least for me.


I do give a measure of credit to such arbitrary rules to helping me achieve financial independence at age 49....




Seattle Pioneer
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My bias would be to dollar cost average money for stock purchases, rather than dumping your annual amount all at once.

Also, my personal bias is not to use money designated as savings to pay for consumer junk or consumer debt. Part of the cost of using credit to buy consumer junk is that you should expect to pay the interest charges that go along with it.

That may not be completely rational, since money is fungible, but that's the way I aim to operate. The end result is that I buy less consumer junk and usually pay nothing in interest charges to buy it ---so in the end it makes sense, at least for me.

I do give a measure of credit to such arbitrary rules to helping me achieve financial independence at age 49....

Seattle Pioneer


Such rules aren't completely arbitrary if they are effective in controlling your behavior towards achieving your goals. It is rational to behave "irrationally" if the "rational" choice would be short-circuited by your emotions down the road. For example, many people use home equity loans to pay off their credit cards. This might be a "rational" choice in that the interest rate is likely to much lower, but people who do this generally just max out their credit cards again. So now they have a home equity loan *and* credit card debt. The rational choice would have been to stick with the credit card debt even though the interest rate is higher.

The rational choice obviously is different for every person. Some people could use the home equity loan and not get in credit card trouble again. This is why I hate when people argue vehemently for absolute rules that are supposed to apply to everyone, every time, and everywhere. I think that too many people are looking for shortcuts so that they can avoid thinking. It is important to have self-awareness and understand what works for *you*.
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Regarding Seattle Pioneer's reply, "My bias would be to dollar cost average money for stock purchases, rather than dumping your annual amount all at once." I don't really have that option if I save throughout the year to make the deposit at the very beginning of the tax year. I cannot save the money each month and put it into my IRA, unless I start putting it into the IRA after 1 January. I have, the last four or five years, saved the money for the year in a taxable account for transfer into the IRA on 1 Jan.

I put it in a very low risk MMF account because I get very nervous when I see the amount lose value. I don't want 1 January to roll around such that I have less in the account than I've put into it, less due to the market falling a bit. I don't need to be a great deal more than I have saved, but I absolutely don't want it to be less.

Dollar cost averaging in a MMF seems illogical as it really doesn't go up or down in price. Shares are each a dollar and remain a dollar.

I guess the risk I'm taking by paying the car note rather than shifting the money into our normal IRA mutual funds is that those funds might go up in price between now and when I can deposit my max IRA contribution.

Thanks for the replies, SP and MadCap,
G
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g - go for it.

just put the car payment into the "IRA" savings you will probably then fund the 08 IRAs in july or august (still months earlier than most) instead of Jan, 09 gets back close to your early funding schedule.

Keven
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