Extra funds and wisest use
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  1. #1
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    Default Extra funds and wisest use

    I'm hoping to get some impartial advice on how to use about $30k (in addition to my rainy day fund) that is sitting in a savings account. A few of the options that I'm considering are:

    1. Pay down the principal on my mortgage. Retirement is 5 years away and if I pay down an extra $20k annually my house will be paid off at retirement age.
    2. Pay off my auto loan. Just upgraded my car in April at 2.69% interest for 6 years. $24,300 owed.
    3. Purchase an investment property. If I buy one or two per year for the next 5 years it will give us a good additional cash flow during retirement. Properties are appreciating at a minimum of 4% and up to 10% annually in my area.
    4. Financial advisor wants me to put it into an IRA but I saw what his investing did to my husband's IRA and we are still recovering after the drastic drop in oil prices.

    Thoughts? Personal experience? Other ideas...?

    Sheri

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    First of all none of the items you are proposing are bad, and really the only bad one I can think at the moment would be just simply spending it...

    Chances are you will hear different opinions from different people. I have been asking myself almost the same questions you are. However I am much further from retirement than you are, and therefore quite likely have different goals.

    Here is my evaluation of the options that you presented. For myself and probably for you as well one of my goals would be to free up money on a monthly basis. Number 1 extra payments on your house will not do that unless you have enough to actually pay it off completely. If you did that would likely be my pick.

    2. You would have enough to pay off the car...really tempting for me....but at such a low interest rate not sure if it really is the best use of your money. I would not have taken the auto loan...most of the time you can find better car deals if you are buying with cash. But once you are at this point I don't see any hurry to quickly pay a low interest loan.

    3. I already own several investment properties. When properly managed rental properties can be some of your highest returns. However you really need to ask yourself...at (60?) do I really want to become a landlord? It it almost always more headache than you expected. Also I firmly believe that your rental properties should be close to where you live so you can keep an eye on them. Are you going to be staying in the area once you retire? What does the real-estate market look like in your area. If you are buying for investing you want to get good deals on properties, something that is very hard to do in many areas, as high as the real-estate market is. Last but not least the $30k probably won't be enough to buy a property outright, I wouldn't suggest adding another monthly payment as an investment strategy. Also real-estate makes it very hard to get out of if say you decide that you really would rather have a paid for house...

    4. I would like a little more information on this financial adviser. I think all balanced portfolios should probably have some exposure to the energy segment. And the last several years surprised most analysts on how far oil dropped and how long it has been staying low. So it is nothing unusual that he "got that wrong" But is he one of those "gurus" that is trying to move your money to what he considers the next big thing. If so I would say that it is time to say goodbye to him. There is plenty of research that shows that these people do very poorly over a long time period.

    What I would suggest in this category is that you look at index mutual funds. They are not really complicated...you don't really need and investment advisor to help you. Just put the money in and leave it there. The return on the SP500 over the last 30 years has been 11.4%. last 10 years about 7%. Warren Buffett has said that many investors would be ahead using mutual funds. Jack Bogle (I think) has a book that is worth a read on the subject.


    So what are my plans...I am going to put my money into index mutual funds until I have enough to do one of the other steps....likely in this order. Pay off my residence, then invest more in real-estate.

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    I would avoid #1 & #2, I never prepay longterm, fixed rate, inexpensive money. Keep your good, under 5% loans, and put that money to work elsewhere.

    You point out that your $30k cash plus $100k of early payments will pay off the house. But it will also mean that you will have $130,000 less money. If hard times hit, you could not touch that extra $130,000 of house equity, it would be locked. But if you retained your $130k of cash, you could draw from it, make $1000/m house payments, make car payments, buy gas, buy groceries - ie, no emergency for several years.

    I would invest the $30k,, plus the $20k/yr into a SP500 Index Fund at a no-load company (Fidelity or Vanguard). As for investment properties - we had 4 rental houses for about 35 yrs, we sold them when I retired, wanted to be free to travel, etc. I would not saddle myself with more houses at retirement age, easier to invest in SP500 - and probably more profitable?

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    Thanks for the well thought out discussion! I agree with you about almost everything. I guess the one thing I have going for me in the real estate market is that I'm an agent so I have the knowledge that goes with finding the right deal. We would hold these properties until we are at least in our mid-70's so I think that our ROI would be very good at that point. I hear the horror stories about bad tenants too - even rehabbed a house last year for an out of state landlord/seller after the tenant abused the house for 7 years.

    I like the mutual fund idea with a different financial advisor. We spoke with someone last year but didn't pull the trigger. I think it's time to do it though. Thanks again!

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    I do like the idea of keeping my cash available for emergencies and investing it. My spouse has a 401k with his current employer and has it in a Fidelity mutual fund and I'm always a bit surprised that it does so much better than the IRA with a financial advisor moving the funds around. Thanks for your comments!

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