Financial Advice

[EyeKhan]

In the stock market, I ended last year down about a percent, but this year almost everything I have has been shooting up. So, going pretty well, I think.

Yeah, I could pay off my mortgage but I have my money in the market instead. While housing and employment have been sputtering along, the market's been doing great. Back in '09 I lost over 50% of my net worth but since then it's roared back and I'm way ahead of where I was when the dow hit 14k. Interestingly in that same time my house has lost 1/3 of it's value. I bought in 2007 - if I had drained my investment accounts and paid cash, that would have been a catastrophe.

Edit: hey, it went through! Anyway, all I was saying regarding VR is that

A. if I'm offering advice, as the thread title asks, then first and foremost I advise him to find a good fee-only financial planner - interview as many as needed to get comfortable - explain the situation, get some sound advice.

B. Given his age (he seems way risk averse given a typical retirement horizon), the current borrowing conditions, the stock market conditions, the apparent budding recovery at least in the labor market, it seems that putting his windfall into paying down a mortgage is about the least good option. Seems.... clearly VR may have goals and circumstances beyond merely his age, but that's what a good planner will work with.

[wiggin]

VR: I do not know your financial situation or risk tolerance, but generally good advice would be thus:

First of all, it seems like your emergency fund is not large enough (you have talked about needing to beef up your 6 month reserve, and some people are suggesting that a 9 month reserve is even better). If this is the case, then your absolute first priority - before mortgage, CDs, or investing - should be to maintain an adequate cash cushion. I wouldn't tie it up in something like a CD; instead just dump it into an internet savings account and deal with the fact you'll only earn ~1%. I don't know your job security and current cash savings, but make sure that is in good shape before worrying about anything else.

Secondly, as I understand it you and your SO have recently adopted. I would consult with a financial planner (fee-only is a good idea here, as someone already suggested) to hash out making sure your son is appropriately provided for in the event of a family catastrophe. Most people do NOT have adequate life insurance set up, so you should make sure you have enough insurance, as well as an appropriate will (with a trust, appointed guardians, etc.) to take care of your son if something happens to both of you. This is extremely important. You might already have done this, but if you haven't this should be a top priority.

Thirdly, I'd suggest you run the numbers carefully about what to do with the rest of your inheritance. It's probably a complicated financial decision - for example, your mortgage interest may factor into your taxes (I don't know if you itemize), and you may not have certain tax protections available for retirement. If you factor inflation and tax deductions into things, it may actually be beneficial to keep your mortgage for a longer period (though not into retirement) in order to capitalize on erosion of the value of your principle. On the other hand, it might be better for your risk tolerance to reduce debt as much as possible.

Assuming that your calculations end up with you having some money left over after dealing with the previous three issues (cash cushion, insurance/planning for the son, and mortgage), I would recommend you decide carefully based on a likely risk adjusted return. I personally agree with Buffett that stocks are the best long term investment, and they are priced relatively fairly right now. But I understand that others don't appreciate that logic as much, so you can focus on bonds or safer assets (e.g. CDs), though currently those are generally not keeping pace with inflation.

At the end of the day, even if your SO says it's 'your' money to spend as you wish, I think you should plan out your choices jointly in order to have a clear plan for the future.

[Veldan Rath]

Thanks Wiggin.

The 6 month cushion for us is approx 17k. So, I am thinking to get that covered first.

I'm socking aside 9% per pay period into savings, but the costs of a bouncing boy was a bit more startling so we have only begun recovering.

I'm doing 7% into 401K (and I'm really thinking of jumping that up when our fed tax return comes in) for quite some time that is doing pretty well that my employer matches, a small ROTH IRA (100 a month) and my life insurance at work is maxed out.

But ya'll are right, a CFP does sound the way to go first. Thanks gang!

[Wraith]

What's a CFP usually cost?

[wiggin]

What's a CFP usually cost?

I believe that fee-only CFPs will run to a few hundred dollars an hour (as little as $100-200 to as much as $400, maybe). I wouldn't say it's worth it for $40k alone, but it sounds like a financial check-up would be a good idea in general given VR's age, recent adoption, etc. IMO most intelligent people don't need to spend regular money at a CFP anymore than they need to with a lawyer, but it's useful to use them to set up an investing strategy right around major life milestones. Serious, regular use of a CFP is probably only useful for people with quite a lot of wealth.

Commission-based CFPs can cost on the order of 0.5-1 percent of invested assets, which IMO is unacceptably steep.

[RandBlade]

I agree with the gist of what (I think) EyeKhan is saying. I think debt reduction could be good. But borrowing is also quite cheap (I'm refinancing my 30 year at 3.75 just this month). But I don't think putting the money into CDs is a good idea. I'm not sure what bank promised you a 3% CD rate, but I'm candidly a bit skeptical there.

If you don't want to put all the money into reducing your debt, there are conservative stock choices that would be better places for that money. Even putting a chunk of that into a cheap Vanguard dividend fund will likely bring you more value over time if you just plop it there and forget about it.

Warren Buffet wrote something interesting about this just this week.It's a bit long, but I actually think it does add something to your particular question about what to do with cash.

Off Topic: While I like and agree with that logic by Buffett, the one thing he doesn't cover is land [although VR has already bought that]. Off Topic: While gold in itself isn't productive, Buffett doesn't exactly cover the use of land (besides as a business for farming etc) and that somewhat is in that it is a finite resource with increasing demand. Population growth plus the breakdown of large families into smaller ones leads to an increase in demand. New gold gets mined every year, but that isn't true with land.

On Topic: Seems like you've got some good advice here VR. Personally I would like to pay down the debt I would suspect, but I don't know about 401K's etc so can't give too much special US advice