The "Let's Talk Money" Thread

[Vilandil Tasardur]

Good morning guys.

 

I am starting this thread, both to ask a question I've been wrestling with, and in the hopes that this can become a place for other people to do so as well, as with our "Ask a Mechanic" thread. 

 

So here's my question:

 

My wife and I are still relatively young (mid twenties). We are actively saving for retirement. We have both a Roth IRA and a traditional IRA, and we contribute to both of them as much and as often as we can. We are happy with the way we are handling out retirement savings.

 

We also pay extra on our mortgage as much as possible. I am allergic to interest, so we have made this a huge priority. We've cut 15 years off of our 30 year mortgage in less than 3. 

 

What we have no idea what to do with, however, is our regular savings. Our dream, eventually, is to buy a new house without selling the old one. Of course, that likely means amassing enough savings for a 20% downpayment on what could be our dream house. 

 

We're not worried about how to save. We do a decent job of saving and putting money away. But we're worried about what that money should be doing in the meantime. Where do rich people keep their money? 

 

I do not think that it is best sitting in a savings count collecting pennies worth of interest. However, we don't want to commit the money to retirement accounts, because we don't want the money for be locked away for 40 years. We are looking for the best way to grow our money (even if only modestly) for perhaps ten years. Surely this is a common thing, right?

 

Is this where things like ETF or mutual fund accounts come in to play? My bank has offered me a "medium" term investment account managed by them. Honestly, it sounds great. They take care of managing the funds and the investments based on my specified levels of risk, etc. They charge 1.2% annually. Is this awful? Is this pretty good? Industry average? Is it pretty safe to do something like this with a bank, or should I really be going down to someone like Charles Schwab or Franklin Templeton? 

 

 

Sorry for the long post.

 

TL/DR: Where do rich people keep their money when they want it to be safe/grow some but not lock it away until retirement?

[Elessar78]

Short-term savings should be kept in cash (in a bank, maybe in your home). It's really for emergencies. 

 

So you wouldn't need more than a few months' worth of living expenses. It's based on what you have out there. For example we carry high deductibles on our home owners and car insurance. So I'd like to make sure there's enough there to cover that if the need arose. But even then I can access more cash in like 3 days from online accounts. Quicker I'm sure if it was an actual emergency. 

 

For the sake of discussion, keep 3 months worth of expenses in a liquid, cash account. Just eat the pain of low interest rates—what you are getting is peace of mind. 

 

Anything above that put in semi-accessible things like CDs for example. You can tier the maturity dates on the CDs so you'd have access to the money in any given CD quarterly. So you could have four CDs that mature quarterly, so you'd always have 90 days to accessible cash. 

 

*of course the CDs would be at least one year, so initially you couldn't access the initial deposits for one year. 

 

So that addresses short term (less than 90 days) and medium term (90 days or more). Then really the question is long-term—I'd call that 20+ years (non retirement) because your day to day needs should be taken care of from your budget. Stick this long-term/non-retirement in an index mutual fund (SP500 or Total Market index). You'll have access to it, but not have to wait for it until you are 59 years old if you really do need to access the money. 

 

Then there's other types of investments like real estate. Become a land lord. Hold it and flip it when the market increases. 

 

tl/dr:

short-term: 3 months* cash in bank/mattress

mid-term:90 days or more, in tiered certificates of deposit (CDs)

long-term: 20+years or more/non retirement in an index based mutual fund

other: real estate

[chipwhich]

 

We also pay extra on our mortgage as much as possible. I am allergic to interest, so we have made this a huge priority. We've cut 15 years off of our 30 year mortgage in less than 3. 

 

Can you clarify this with some real numbers.  This doesn't sound correct.

[dfitzo53]

If "cut 15 years" assumes that they keep paying at the accelerated rate that's totally possible.

[chipwhich]

If "cut 15 years" assumes that they keep paying at the accelerated rate that's totally possible.

 

Agree it is totally possible if he keeps paying at the accelerated rate, just trying to clarify his statement.  Paying his mortgage so that his loan is really a 15 year loan versus cutting 15 years off the loan is an important distinction in understanding his financial position.

[Vilandil Tasardur]

Agree it is totally possible if he keeps paying at the accelerated rate, just trying to clarify his statement.  Paying his mortgage so that his loan is really a 15 year loan versus cutting 15 years off the loan is an important distinction in understanding his financial position.

 

Good questions guys. I definitely wasn't as clear as it could have been.

 

By overall dollar value of the loan, I have paid 40K of a 115K loan (35%). However, on my amortization schedule, I am "halfway" through my loan in the sense that I have reached the balance at which the loan was "scheduled" at the halfway point of the 30 year loan.

 

I hope that made sense...lol

[PleaseBlitz]

This is personal preference from someone who is not "allergic to interest" and views debt as basically the same as any other financial tool:  I would never pay my mortgage down ahead of funding my retirement accounts.  Mortgage interest (for a first or second home, but not a vacation home) is tax deductible so, depending on your bracket, you are hurting yourself from a tax-management perspective.  

 

 

TL/DR:  Cash management is step one, tax management is next-level. 

[RonJeremy]

 

So here's my question:

 

My wife and I are still relatively young (mid twenties). We are actively saving for retirement. We have both a Roth IRA and a traditional IRA, and we contribute to both of them as much and as often as we can. We are happy with the way we are handling out retirement savings.

 

We also pay extra on our mortgage as much as possible. I am allergic to interest, so we have made this a huge priority. We've cut 15 years off of our 30 year mortgage in less than 3. 

 

What we have no idea what to do with, however, is our regular savings. Our dream, eventually, is to buy a new house without selling the old one. Of course, that likely means amassing enough savings for a 20% downpayment on what could be our dream house. 

 

We're not worried about how to save. We do a decent job of saving and putting money away. But we're worried about what that money should be doing in the meantime. Where do rich people keep their money? 

 

I do not think that it is best sitting in a savings count collecting pennies worth of interest. However, we don't want to commit the money to retirement accounts, because we don't want the money for be locked away for 40 years. We are looking for the best way to grow our money (even if only modestly) for perhaps ten years. Surely this is a common thing, right?

 

Is this where things like ETF or mutual fund accounts come in to play? My bank has offered me a "medium" term investment account managed by them. Honestly, it sounds great. They take care of managing the funds and the investments based on my specified levels of risk, etc. They charge 1.2% annually. Is this awful? Is this pretty good? Industry average? Is it pretty safe to do something like this with a bank, or should I really be going down to someone like Charles Schwab or Franklin Templeton? 

 

 

Sorry for the long post.

 

TL/DR: Where do rich people keep their money when they want it to be safe/grow some but not lock it away until retirement?

 

My quick opinion on complicated questions, Try to maximize your ROTH IRA contributions each year ($5,500 for you and your wife).  Don't bother with the Traditional IRA right now  (I am assuming you both have a 401(k) plan with your employers).  Your 401(k) plan with your employer will have the same tax treatment as a Traditional IRA in retirement, contribute to the 401(k) and take advantage of any match they provide.  As a married couple once your household income reaches $184.000 modified adjusted gross income, you CAN NOT contribute to a ROTH IRA anymore.  For retirement and tax purposes you want two different sources of income (taxable and non-taxable).  The ROTH IRA is non-taxable income for you once you are at least 59 1/2.  The 401(k) and Traditional IRA are taxed at your income tax bracket once you start drawing it at 50 1/2  In order to maximize the amount of non-table income you are building through making the $5,500/annual contributions to your ROTH,  you need to do it when you are younger and are typically a lower income earner in your 20's as opposed to 30's, 40' and 50's.  I personally I wish I had put more into a ROTH when I was younger....I am in my mid 40's and can't contribute.

 

Rich people keep their money in a variety of different investments....depends on what the purpose of the money is:

 

Income 

Growth

Wealth Preservation

Transfer of Wealth to Future Generations

Charitable Giving

 

They mostly have in income:

 

Investment in short term treasuries

Tax Advantaged Municipal Bond ladders

Blue Chip and Divdend paying stock portfolios

Insurance contracts (such as annuities)

MLP's and REIT's

 

This is going to sound crass, but your Investment Advisor at a Bank most likely flunked out of a large Financial Company that is more specialized in Financial Planning and Wealth Management.  The Bank guy is going to offer you some investment model based upon your risk questionnaire and it will be one size fits all....he will have done very little work and put forth little effort to collect 1.2%  They don't specialize in coming up with solutions that meet your personal goals, your goals can be totally different than someone who has the same tolerance for risk and is the same age as you...it is not typically a one size fits all scenario.  Does that make sense?

 

Anyway, 1.2% is average but could be high if you have a larger account.  They system for management/wrap fees is usually tiered by the amount of assets you have....the higher the amount held, the lower the fee.

 

I hope this helps a little.

[Vilandil Tasardur]

Super helpful. That makes a lot of sense and is very informative. Definitely helps me think about what I ought to be doing. We definitely prioritize the Roth as much as possible. The way I see it, anything less than the 5500 is just leaving money on the table.

[chipwhich]

Super helpful. That makes a lot of sense and is very informative. Definitely helps me think about what I ought to be doing. We definitely prioritize the Roth as much as possible. The way I see it, anything less than the 5500 is just leaving money on the table.

 

There are two schools of thought on your primary residence.  Arguments can be made against, but  I would never criticize a person for paying off their primary home.

 

I would not use your banks money manager to manage your funds BTW.

[RonJeremy]

Keep prioritizing the ROTH.  If you can maximize do so, starting in your 20's will make you happy when it is time to retire.  You have a powerful part of investing that a lot of people don't....TIME.  I can't help someone a whole lot who is 50 years old and comes to me to start retirement savings and asks for a Retirement plan.....that plan is a FAIL.  I can't help a 50 year old a whole lot who hasn't started saving unless they have something of value to sell such as a business.  A lifetime of income in retirement takes a lifetime to accumulate.  

[PleaseBlitz]

Re:  Bank Financial Advisors.  I can see both sides because my brother is one and knows his ****.  He used to work for a big financial management company, but got tired of a] living in NYC and b] dealing with the constant pressure to sell **** to people that didn't need it.  

 

My father also worked for MorganStanley for most of his life, so I certainly have no problem with that side of the business either.  Those guys probably won't talk to you unless you have six figures to invest right off the bat though.  (Or else they will because they are just starting and trying to build a book of business, and you don't want that guy either).

 

I also worked for a (different) very large bank when I was younger, and the FA there was garbage and knew less than I did when I was 22 and he was 42.  So it's hit or miss.  

[RonJeremy]

Re:  Bank Financial Advisors.  I can see both sides because my brother is one and knows his ****.  He used to work for a big financial management company, but got tired of a] living in NYC and b] dealing with the constant pressure to sell **** to people that didn't need it.  

 

My father also worked for MorganStanley for most of his life, so I certainly have no problem with that side of the business either.  Those guys probably won't talk to you unless you have six figures to invest right off the bat though.  (Or else they will because they are just starting and trying to build a book of business, and you don't want that guy either).

 

I also worked for a (different) very large bank when I was younger, and the FA there was garbage and knew less than I did when I was 22 and he was 42.  So it's hit or miss.  

 

You are right, I shouldn't generalize.  I am sure there are people that are skilled that voluntarily left a big Wirehouse and went to a bank.  There could be some skilled Advisors at a Bank.  But it is hit or miss.  

 

Your Father worked for a good firm. 

[Vilandil Tasardur]

Thanks for all the feedback guys. The person at the bank (PNC) actually was very upfront about the fact that they couldn't give me advice. They kicked me to a phone call with someone from PNC's investment department. Overall, I definitely came away feeling like the guy really knew his stuff. I didn't get any pressure from him, nor the inclination that he wasn't competent. Since I'm realistically only looking to invest maybe 10 grand, I'm definitely worried about not getting the time of day at a "real" firm.

[chipwhich]

Financial advisors are a mixed bag.  Anyone can become an "advisor" by passing the series 7 exam.  A friend of mine became a Morgan Stanley advisor (he had never purchased a stock in his life and worked for DC Metro).  Another friend of his wanted him to "find a better career".  My friend has bounced between jobs (and is no longer at Morgan Stanley).

 

Point is, you have no idea if your advisor has a clue.

 

Additionally a lot of "financial planners" you meet are peddling life insurance.  Others charge high fees.  It's a tough place for uninformed to be.  You don't know any better, end up with a whole life policy and a high fee mutual fund.

[abdcskins]

Redskins are 22/1 odds to win the NFC Championship. Put $30,000 on them in Vegas. Problem solved.

[Vilandil Tasardur]

Financial advisors are a mixed bag.  Anyone can become an "advisor" by passing the series 7 exam.  A friend of mine became a Morgan Stanley advisor (he had never purchased a stock in his life and worked for DC Metro).  Another friend of his wanted him to "find a better career".  My friend has bounced between jobs (and is no longer at Morgan Stanley).

 

Point is, you have no idea if your advisor has a clue.

 

Additionally a lot of "financial planners" you meet are peddling life insurance.  Others charge high fees.  It's a tough place for uninformed to be.  You don't know any better, end up with a whole life policy and a high fee mutual fund.

 

Yikes. Thanks man. This is why I come to the board   .

 

 

On a totally separate note. When I was in the bank today they were talking to me about Home Equity Lines of credit. I thought this was a way of borrowing against the value of home for extra cash for things like repairs. But they were trying to tell me that this kind of thing could also be a way to lower the total cost of my mortgage. I am very skeptical. They tried to tell me the following:

 

My current mortgage has a 75K balance at 4.75% interest. They were saying that I could open a HELOC for the 75K, and transfer the balance there. They are saying that the interest rate on the HELOC would be around 2.65%, thus saving me lots of money over the remaining life of the loan. I am very skeptical. I expressed concern about this being a variable rate, and they said I could "lock" the rate in at 2.65 until I paid the balance off.

 

Needless to say, it just doesn't pass the smell test. What am I missing?

[Sacks 'n' Stuff]

Redskins are 22/1 odds to win the NFC Championship. Put $30,000 on them in Vegas. Problem solved.

Thats right baby. Bet the farm. Come February, you'll have 22 farms.

[PleaseBlitz]

Yikes. Thanks man. This is why I come to the board   .

 

 

On a totally separate note. When I was in the bank today they were talking to me about Home Equity Lines of credit. I thought this was a way of borrowing against the value of home for extra cash for things like repairs. But they were trying to tell me that this kind of thing could also be a way to lower the total cost of my mortgage. I am very skeptical. They tried to tell me the following:

 

My current mortgage has a 75K balance at 4.75% interest. They were saying that I could open a HELOC for the 75K, and transfer the balance there. They are saying that the interest rate on the HELOC would be around 2.65%, thus saving me lots of money over the remaining life of the loan. I am very skeptical. I expressed concern about this being a variable rate, and they said I could "lock" the rate in at 2.65 until I paid the balance off.

 

Needless to say, it just doesn't pass the smell test. What am I missing?

 

 

You are missing that the rate on a HELOC is not fixed and that we are in a rising-interest-rate market right now.  So a few years down the line, your HELOC will probably have a rate higher than 4.75%.

 

 

Edit:  This isn't necessarily a deal-breaker if you think you are going to pay off the mortgage before the HELOC rate gets above 4.75%.  For instance, I just refinanced my student loans from a fixed rate of around 7% to an adjustable rate at around 3.125%.  That rate has already gone up twice in the six months since i refinanced, but I intend to pay off the entirety of my balance within 3 years, so my projections still have me saving about $40k.

[Vilandil Tasardur]

You are missing that the rate on a HELOC is not fixed and that we are in a rising-interest-rate market right now.  So a few years down the line, your HELOC will probably have a rate higher than 4.75%.

 

 

Edit:  This isn't necessarily a deal-breaker if you think you are going to pay off the mortgage before the HELOC rate gets above 4.75%.  For instance, I just refinanced by student loans from a fixed rate of around 7% to an adjustable rate at around 3.125%.  That rate has already gone up twice in the six months since i refinanced, but I intend to pay off the entirety of my balance within 3 years, so my projections still have me saving about $40k.

 

That's what I was afraid of. I thought that HELOC rates were not fixed. The woman at the bank kept insisting that I could "lock in" the 2.65% rate, but that isn't my understanding of how HELOC rates work.

[PleaseBlitz]

That's what I was afraid of. I thought that HELOC rates were not fixed. The woman at the bank kept insisting that I could "lock in" the 2.65% rate, but that isn't my understanding of how HELOC rates work.

 

I'd have to see the specifics of this program, but it sounds pretty suspicious as you describe it.  

[TD_washingtonredskins]

That's what I was afraid of. I thought that HELOC rates were not fixed. The woman at the bank kept insisting that I could "lock in" the 2.65% rate, but that isn't my understanding of how HELOC rates work.

 

I think "lock in" in that context means that you can get that initial rate. That way, even if the rate adjusts up while you're being approved, etc. you still start at 2.65. That doesn't mean that it can't adjust at a later date. 

[Vilandil Tasardur]

I'd have to see the specifics of this program, but it sounds pretty suspicious as you describe it.  

 

I'm guessing the woman working just didn't quite understand it. I suspect they have two different options variable rate, or fixed rate, but I suspect the fixed rate is much higher (and thus likely not worth it). She just sucked at explaining it would be my guess. I don't see how they could possibly do a fixed rate at 2.65.

[PleaseBlitz]

I'm guessing the woman working just didn't quite understand it. I suspect they have two different options variable rate, or fixed rate, but I suspect the fixed rate is much higher (and thus likely not worth it). She just sucked at explaining it would be my guess. I don't see how they could possibly do a fixed rate at 2.65.

 

What branch?  I worked as an FA at PNC while i was in law school, I may know the person.

[RonJeremy]

Financial advisors are a mixed bag.  Anyone can become an "advisor" by passing the series 7 exam.  A friend of mine became a Morgan Stanley advisor (he had never purchased a stock in his life and worked for DC Metro).  Another friend of his wanted him to "find a better career".  My friend has bounced between jobs (and is no longer at Morgan Stanley).

 

Point is, you have no idea if your advisor has a clue.

 

Additionally a lot of "financial planners" you meet are peddling life insurance.  Others charge high fees.  It's a tough place for uninformed to be.  You don't know any better, end up with a whole life policy and a high fee mutual fund.

 

That is why you should check the experience and history of the person that you are considering working with....if the person is "registered" they should carry a Series 7 and 66 (or older Advisors Series 63 and Series 65).  It is public information and can be found on BrokerCheck.finra.org .  If the person is legit all of the licences will be posted there along with the dates they received those licenses and if there has been any complaints filed by past clients against the person it will be listed there.  Also, on the report is a listing of everywhere the person has worked.  You can see licenses held, how long in the industry, complaints and how long they have been with their current employer and who they worked for previously.  If you look at the person's webpage you should be able to see if they carry any professional designations (CFP, CRPC, FPS, etc.).  

 

That is a good way for you to weed out the type of people mentioned above.