It’s time to open the mailbag. Here are a few of the questions we tackle in today’s episode:
Q1: Should I pay off student loans? Or should I invest for retirement?
Q2: Should I buy stocks? Or should I dollar-cost average into the market?
Q3: I want to build an online business. How do I get my voice heard?
Q4: I’m debt-free and maxing out my retirement contributions. What else can we do?
Q5: How should we spend our tax refund?
Enjoy!
Scott Sherman
Hey Paula and Jay, enjoying the show. There are two things you didn’t really address on the first question that I feel are important for this listener. First, if they’re paying 16% of their after-tax money, they ABSOLUTELY should take advantage of the new REPAYE student loan program (more at http://time.com/money/4089638/student-loans-income-based/). That should open up bunch of money to really look at these other things. The other thing they need to consider is whether a 10% tithe is appropriate for their current family situation. By giving that 10%, they are paying an extraordinary amount in interest over the mid-term while they’re paying that interest on the student loans. Either cut down that amount while you’re paying off that debt (and truly put the excess toward the loans!) or create an IOU tithing fund with the idea that as soon as you pay off those loans, you’ll redirect more money toward catching up with the tithe. For many people, this can be a mentally difficult thing to put aside. If that’s the case, I would suggest talking with their clergy member about the situation. I can’t imagine a reputable church leader suggesting this family continue to struggle financially so the church can get its 10 percent along the way. There is breathing room in their current situation!
J. Money
I think we need you on the show to catch everything we miss 🙂 Thx for sharing!
Paula
@Scott — I noticed how much that 10 percent is affecting their lives, but I felt uncomfortable suggesting that they tithe a different amount (less/IOU), since tithing is a values/religious decision. I wanted to stick to focusing on the rest of their finances.
I’m not sure what their church leader would say. Some clergy might encourage the reduction/IOU, while others might say that they should keep giving 10 percent because doing the right thing isn’t always easy. As I see it, that’s really a religious question, not a financial one — at least in my view.
Thanks for listening and thanks for the comment!! 🙂
Scott Sherman
Agreed. I tend to think anyone tithing 10 percent probably finds church to be an important part of their life and therefore is less likely to consider that an optional budget item. But I’ve heard people suggest that a portion of that money is intended to assist people in financial need, and if your debt is causing you to eat rice and beans more meals than you’d like, that’s certainly an indicator of financial need. You’re right, that conversation with the clergy could go either way. But if it goes the way of “God’s house can take care of itself while you take care of yours for now,” that opens a whole new world of options.
Jonathan
I once again enjoyed the dialog between J and Paula and really like the dynamic. I also appreciate that you’re either avoiding bad words or bleeping them — it lets me listen to the podcast when my kids are in the car.
I agree with Scott’s advice above, but I would suggest prioritizing the debt. Student loans cannot be discharged in a bankruptcy. Federal loans have programs where the government may help you out (like the one Scott pointed out.) Therefore, maximize the payoff rate on any private student loans or high interest student loans.
Definitely contribute to retirement accounts at a level to get the employer match.
Both paying off loans and investing will increase first listener’s net worth. Money going towards loan payoff is not being wasted. However, they may want to consider putting a small amount towards the traditional 401K retirement accounts. The reason is that the listener is risk adverse and is unused to investing in the stock market. Starting small and letting it grow over the 5 years or so that it will take to pay off the debts allows the listener to expand their comfort zone and get used to the market fluctuations. If the market tanks by 50% but you only put in (say) $100 a month, you may be alarmed, but you won’t panic.
After their debt is paid off and they’re dumping $2,000 a month into the savings program, it’s better that they have their risk tolerance already nailed down.
J. Money
Thanks for chiming in, man! Glad you were able to enjoy the episode around kids 🙂
Jonathan
For Question #4, the psychology of getting into the market trumps the need to do it as efficiently as possible. I suggest dollar cost averaging into the market (if it will get them in). Divide the initial investment by 3, and add one third each month. If you need longer, try 6 investments over a 6 month period. The longer the period, the more likely you’re just investing higher.
Risk adverse people will feel the pain of losing money more than the benefits of getting higher returns. In that case, dollar cost averaging is the better choice because it overcomes the likelihood of direct loss. (Lower return doesn’t feel as painful.)
I’d also suggest picking a single target date or all-in-one mutual fund for this person. If you mix stocks and bonds, people tend to freak out when the equity side fluctuates, and may move everything to bonds (losing in the long term to inflation.) A better approach is to buy a fund that has the stock/bond mix built in, so rebalancing occurs automatically, and the volatility is masked or not as visible.
A suggestion would be the Vanguard Life Strategy Moderate Growth, which is 60% stock, 40% bonds. For someone with early retirement aspirations, this could probably be held forever. An alternate is a target date retirement fund (where the asset allocation self adjusts over time.)
Any funds in the retirement accounts should use whatever target date fund is available in that account (they’re standard in retirement accounts now.)
Josh
Congrats on the new podcast! I’ve really enjoyed it thus far and feel both J and Paula give it out pretty solid advice.
That being said, I disagree with one or two things that Paula said in regard to the second question (the person that wants to move to Portugal and invest in dividend-paying stocks). I feel her response was misleading.
By investing in Vanguard funds (essentially the holy grail of the FIRE community) you’re not paying “no fees”. You’re still very much paying a fee. In this case, it’s called an “expense ratio”. It’s still a “fee” a SOME kind. “A rose by any other name…”
Also, Vanguard has MANY funds that pay a dividend. Heck, VTSMX/VTSAX pays a dividend. But there are three that are oriented towards dividends: the dividend appreciation index fund, the dividend growth fund (actively managed), and the high dividend yield index fund. And all of these have a fee (“expense ratio”) to pay, albeit a very slim one, as Vanguard is known for.
Lastly, I have one more point to take up, and admittedly, I might be taking a shot in the dark here. I feel the person in question was referring to buying individual stocks. If this is the case (and it may not be) the total amount that you pay in fees will most likely depend on how often you buy stocks, as most online brokerages charge a commission fee. $7/trade is fairly common. In other words, you’ll save money in the long wrong by purchasing in larger but less-frequent increments. Assuming a $7 commission, if you put in $1400 at a time for a single stock purchase, your effective expense ratio becomes .5% (7/1400). But as Paula alluded to, Vanguard has expense ratios that are even better than that.
P.S. One other thing that this fellow should look out for, assuming he reads this, is the fluctuating foreign exchange rates (assuming he’s living off of American money while in Portugal). Portugal is on the Euro, and the exchange rate between the USD and the Euro can fluctuate pretty decently. So this is certainly something to keep in mind while there when assuming that the $200K savings will last ~10 years.
I hope this helps. Have fun in Portugal! And best of luck to J and Paula on the new podcast!
J. Money
Thanks Josh! Glad you’re enjoying the show so far! Thanks for taking the time to share your own thoughts here – this is exactly why we love this community so much 🙂
Dan Villarreal
Vanguard (and others out there) won’t let an expat with no US address invest due to some hokey reasons having to do with–I think–terrorism or something like that. When I first inquired, I was told that the SEC didn’t allow it but when I wrote to the SEC, I was told there was no such SEC regulation! Liar, liar pants on fire, Vanguard!
Meanwhile, back at the ranch: due to FATCA, foreign banks are reluctant to let Americans invest. I had a great set of investments over here in Taiwan & the lady at the bank called me in and told me I had to cash them in because of pressure from the US government to reveal their US investors’ identities, etc.
It’s tough! Can’t invest in the US or outside of the US either.
A lesson: if you plan to be an expat, set up as many investments as you can while you’re still Stateside, as the US Gummint–bless’em!–will do all it can to stifle your wealth-building efforts once you’re an overseas resident.
FYI about Vanguard & others!
If anybody knows of a good Gummint-proof and FATCA-proof investment for a US expat with no US address, I’d love to hear about it. Thanks!
Gero1369
To the subject of the guy that is risk averse in his investments:
You guys recommended that he look into TIPS. I’d also add in to look into I-Bonds. Here is some info comparing both:
http://news.morningstar.com/articlenet/article.aspx?id=446942
http://www.obliviousinvestor.com/why-use-i-bonds-instead-of-tips/
Thanks!
J. Money
Thanks for the heads up! Hadn’t heard of I-Bonds personally, but I’m sure Miss Paula P has… Going over there now to read up on them, thx.
Jason
As far as commission free ETF index funds go, Schwab is actually as good or better than Vanguard. They have dozens of commission free ETF’s with lower expense ratio and higher yields. They have a great trading platform where you can manage your orders and positions etc. The guy trying to retire in Portugal was asking about this.