Investing before saving or debt payoff?

Question

I know conventional wisdom says 1) Pay off debt 2) Save money 3) Emergency supply of liquid assets 4)then start investing, but is it a bad idea to "play" with investing at this stage?

I am a stay at home mom, my husband has a very secure law enforcement job (good benefits and life insurance). We try and put away 5% in his 401K and 5% into savings. We have four young children, and the debt load we have is two cars and a mortgage. We have avoided credit card debt, and have tried to buy most things with cash.
Do I take the 100 a month I want to buy "share-builder" stocks with? Or do something else with it? (Like what?). Or do I continue to do small investments as my own "401K"???

Serious answers please!

Answer 1

No, it's healthy to start investing just a little. I'd say definitely work extra hard to pay the debt off first, though...that stuff will come back to hurt you later if you're carrying it. While you're carrying debt, I'd say maybe put an extra $50 toward that, and reduce your Sharebuilder deposit to just $50. But I do think Sharebuilder is a good way to start off and try to build up just a little. At this stage, it's as much symbolic as anything else, but it will help you build a good habit, and that in itself is incredibly valuable. Those habits are what will make your future bright.

Answer 2

It is not a good idea to "play" investing at any stage, because there are real big players playing the investing game, day traders and short sellers predicting an independents (your) actions.

You do quite well already at a total savings rate of at least 10% of the family income.

In addition you are saving 10% after your husbands income tax deductions. With the remainder you pay for two cars and a mortgage, feed and clothe 4 children too!!!

Having no credit card debt is excellent too. There is no tax advantage in you owning a 401k, dont do it.
You need the cash flow now, and more importantly to have CONTROL of some cash at your own will to make use with it.

Try the following:

Work on creating more cash flow, that could be a home based part time job for you, like ebay sales. Very casual, something you like to do, and fun, and make money while play with the children.

Increase your family cash flow (in), Pay down your mortgage faster, there is a lot of interest payment to save.
Pay the mortgage bi-weekly or even weekly. On renewal your payments will be less, and you will have again even more cash flow, and more equity!.
Record you cash balance now, then in one year from now. The goal is to have cash growth period over period whether it be bi weekly, monthly or yearly. The more cash income, the more compounded growth you will acquire. Maximize your husbands 401k if it means getting more income tax back. A good way to plan next years cash growth balance. A dab of patience is good too.

Your husband's job security can mean an ability to borrow for investment income property. Not immediately but food for thought down the road.

With cash down from your accumulated ventures you would be sailing, with more cash income.
It looks like you are the designated money manager, as your husband is busy with his work/career.
Of course invest some in share builder too, for years to come. But quite often investing in stock is best done when it is absolute free cash flow, and you wont need the cash it for something else right away, in fact with an attitude of being able to kiss it goodbye in a bad investment choice.
The cash is much better used to pay down the car, or house, regardless of how small the investment appears.

You are doing so well you hardly need any advice.

Good luck to your whole family. Great protection all around.

Answer 3

I do not wish to seem like a lecturer, but for someone making 90,000 a year, 60k in credit card debt is uncalled for. You make sufficient money that you should have no credit card debt at all. You should be saving about 20k annually and investing that. By all means pay down your debt. You will get a better return doing that than investing. There are very few investments that will return 18%. Most are in the 10 to 12% range. And learn to live within your means.

Answer 4

You should consider paying off both cars with a new or second mortgage so you can gain on tax advantages. The increase in the mortgage payment should be less then the two car payments. Invest the payment savings first a liquid fund of say $5000 easily accessible for and unexpected expenses (broken water heater ect.) Then start a high yield side fund always remember three things when investing: safety, liquidity and rate of return. then the fourth consideration is tax savings. I suggest you talk to three professionals. A mortgage planner that knows how to structure your mortgage to fit your needs, a Certified Financial Planner and a reputable life insurance pro who knows about investment grade life insurance

Answer 5

Sounds like you've been wise with your debt. Hopefully you have a low rate on those car loans and the mortgage. For your husband's 401k, he should only contribute as much as his company will match. For example, my company will match 50 cents on the dollar for up to 6% of my salary. Therefore, I contribute 6% (the max they will match) to my 401k. Beyond that, you should (as I try to do myself) contribute to an IRA (I have a Roth IRA, but that is an individual preference). The benefit of having a 401k and a Roth IRA comes when I actually retire - the 401k money will be taxed when it is withdrawn, the Roth IRA will not.
Anyhow, be sure to pay a little extra on the car loans and the mortgage (and of course refinance if you can get a better rate). Then save/invest anything that is left-over each month. To be honest, the best way to save/invest is to set it up as an automatic withdrawal each month. I myself have an account with Fidelity (www.fidelity.com). They have a good and broad selection of mutual funds that you can invest in and can set-up automatic withdrawals from your bank to the mutual fund. That is what I've done and that account grows in value (from continued contributions and from dividends/appreciation), Fidelity has the ability for me to purchase stocks. Don't get me wrong - I love buying stocks and I have an account with Scottrade just for that purpose, and I've done well with that. But, from my experience, a great way to begin saving and investing is with mutual funds.

I will recommend a book all about stocks that I've read and I think everyone who wants to save and invest should read. It well written and very easy to read.
"Jim Cramer's Real Money" by James J. Cramer. Amazon and every other book store has a copy.

Good luck.
ryan

Answer 6

Based upon your comfort with your husbands job and benefits, you probably should begin getting familiar with investing. Once your saving amount is sufficient to anchor you to weather a storm or unexpected crisis, think about reallocating the 5% you save to increasing the 5% you now put away into his 401k. Check to see if his employer make in matching or contributions to his 401k, increasing the amount you're contribution could get a better return than the saving account, if the employer contributed a % of your contributions. Share-Builder is good and cheap way to accumulate shares and to take advantage of the dollar cost averaging that benefits you by making monthly deposits and consistently increasing your share holdings of companies that you like the products of. Consider accessing a free online service like www.BuySellHoldAdvice.com to learn and get familiar with the terms Wall Street speaks. You can also review their ratings, opinions, price targets, and the actual histories of what each stock actually did, and what their advise was. It doesn't cost you to watch. You can also ask questions through their FAQ feature. There are several simulated trading websites that you could also play with. Once your comfortable, you can either see what your hisbands 401k plan allows you to do, regarding directing the investments in his portfolio into ETFs versus the mutual funds typically offered. You still want to diversify your holding among a few different stocks, not everything on one. Good luck, and welcome to the equity markets.

Answer 7

IMHO, it all depends on your interest rates on the debt. if they are low fixed rates, I wouldn't pay them off. You aren't going to save much by paying them off early, and if you pay them down, it may cost you in fees to borrow against the home, and you probably couldn't borrow against the cars. In case of emergency, it seems that any other investment will be more liquid than pulling equity back out of your home.

Of course if they are high rates, the total amount of interest you pay will be much higher in the end. Look for "amortization" calculators or ask your bank what your balance is and compare that with the total of payments. Car loans may calculate early payoffs differently than amortizing them, so you'll need to read your note. On the mortgage don't forget the tax benefit offsetting part of the interest if you are able to itemize your deductions.

I am not familiar with what "share-builder" stock is. Stocks and related products are usually pretty liquid, the worst thing about stock is that its value can drop, and if it is leveraged, you may lose it. But it sounds like you aren't "betting the farm" on it, so go for it.

One thing I have always wanted to try was to join a stock club. A group of people pool their money together to buy stocks. The members are assigned stocks to research. It sounds like a fun way to learn about the market. Look for books in the library, I seem to remember a national association of such clubs, they would be able to help with making sure it is all arranged properly, for the protection of your members.

I've never had a car loan. Is it possible that if a car is wrecked, you may collect less from insurance, than the value of your loan? Cars depreciate so quickly! Paying off the car loan would give you the option of dropping your collision and comprehensive insurance, but I would only recommend that if you could afford the risk of losing the car.

You are doing so much right! (Better than I am!) I feel inspired.

I am now reading a book called "Your Money or Your Life" it is mostly about aligning your values with your financial behavior. I am finding it helpful. But it doesn't sound like that is a problem in your case.

I wish you success!

Answer 8

Consider.
If one pays $1,000.00 in mortgage interest.
That amount can be deducted from gross income. It is NOT directly deducted from tax liability, amount paid.

It reduces gross income to arrive at the adjusted income which is the amount taxed. If one were in a 20% tax bracket, the tax savings will be 20% of $1,000.00, $200.00.
The difference of $800.00 is lost to the lender.

If one could pay off the mortgage, and no longer pay interest, and not have $1,000.00 to reduce income, the additional tax liability may be $200.00.
But, one has saved $800,00. This can be saved or invested.

Can one see the benefit of paying off a mortgage or a loan? Bear in mind that most credit interest cannot be used to reduce taxes in any way at all.

Do the math.
If one paid an extra $100.00 per month on a mortgage "principle", the note will be reduced by $1,200.00 per year, thereby reducing the interest every month.

By doing that, often, a 30 year mortgage will be paid in 15-20 years. Go figure, the interest for 10 years or so.

Try to get that kind of interest on return in savings or other.

Answer 9

If you are a stay-at-home mom, I'm afraid you can't have a 401(k), but you should have your own IRA. The conventional wisdom is right, though, about debt first. Eat rice & potatoes until your debt is gone. The interest you are paying on debt is a bigger loss than any growth you'll get through investing.

Answer 10

Have you ever read any of rich dad books? I don't believe in using everydime to pay off debt and not save. next thing you know, something happens and you have you no money in the bank and then you put it back on a credit card. it's a bad circle.
Also, david bach has some good books that might help you out.

-Angela
http://www.ratraceclub.com