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Most financial advice is meant for those starting out in life, or for those who have made mistakes and are looking to recover. But what if you’re already on top of things? The Saint recently wrote for advice:
I read The Wealthy Barber years ago and was floored with the simple concepts and much-needed advise. I have read the Rich Dad, Poor Dad books, and listen to Dave Ramsey from time-to-time, but as with Dave and a lot of money sites, they seem to be speaking to the same people but not to me. Maybe I don’t need it. Or maybe the advice was written for the masses and not for me? If so, then what is for me?
I am 40, married with kids, have a good job with a 401K that I have done for almost fifteen years. My wife also does 401k, and we have a separate mutual fund that we have been dollar cost averaging at $200 per month for more than five years. I pay off credit card debt monthly, and currently have a car payment and house payment and that is all. I am looking to do more, so I increased my 401k last year to 8% and will increase it this year to 12% if all goes well.
My question is: I want to “have money work for me”, and not just the usual increase your 401k and do a Roth answers. What books or sites look to maximizing my money/potential? I have considered buying a rental once my house is paid off (or sooner if I can talk my wife into it). Are there others that feel the same as I do?
This article is about Ask the Readers Wednesday, 10th January 2007 (by J.D. Roth)
January 10th, 2007 at 5:55 am
Investing your money can be a bit of a tricky deal. For most people who are not willing to spend any (or much) resources, picking your own investments can be a huge hassle. For those people, index investing is the way to go.
If you do want to pick your own investments, there’s a few very good primers on each asset class. For stocks, the best introduction is probably One Up on Wall Street by the legendary Peter Lynch.
January 10th, 2007 at 6:01 am
Yeah, it really sounds like investing is your next step. I’ve been hearing good things about “The Little Book that Beat the Market” (it’s been discussed a bit recently on Andrew Tobias’s site), and taking those Morningstar courses that were mentioned here yesterday might be worth your while. Start with a reasonable sum of money, something you could risk losing entirely, and build from there.
Personally I’d rather invest in the stock market than deal with the hassles of rental property, but that’s just me.
January 10th, 2007 at 6:04 am
My biggest advice is that you should lose the car payment. Unless you’re in a job that requires you to drive a new car every few years, there’s no reason to make car payments or to lease. At age 40, you should have enough of an income to be able to save up and pay cash for a reliable late-model car instead of getting something brand new and sucking up all of the depreciation.
The money from your car payment can then be shuffled toward your retirement accounts and/or other savings.
Also, you don’t mention whether you have any money set aside for educating savings for your children. If you haven’t put aside money for this purpose, you should start doing so right away.
January 10th, 2007 at 6:45 am
In my experience, I find that when most people reach the point where they feel they should be doing “more” or begin doing something “different”, that is exactly when they need to re-focus on the basics and keep things simple as the Wealthy Barber advocates.
For example, getting into rental properties a la “Rich Dad, Poor Dad” will take a lot of time and will add complexity to your life that you might not have to deal with currently.
Maybe you’ll make a better return on you money (or maybe you won’t) by trying some “new” things, but also consider the return on your time, which is a far more precious asset than most people realize.
You can always make more money. You can never make more time.
I vote to keep it simple, keep doing what you’re doing, and simply crank up the dollar amounts. Pay off car loan, increase dollar cost averaging amount into mutual fund, and get your 401k to 12% or higher ASAP.
January 10th, 2007 at 6:59 am
I agree w/ TMT…I’d keep it simple. Rental properties are a PAIN! And if you contract out the maintenance, then there isn’t much margin left to make it worth your time.
I’m in a similar situation, but I’ve taken care of the cars.
Wouldn’t it be cool if you had enough saved so that the interest alone covered your monthly expenses? I know that’s quite a large sum, but if you need a new goal, take care of the car and home first, then work toward a nest egg and enjoy the payoff for all the hard work you’ve done for so many years. If you don’t have a high yield savings yet, take a look at bankrate.com for some info on what’s available.
January 10th, 2007 at 7:30 am
I’m going to be a bit of a contrarian here and suggest that he look seriously into real estate investing. Wesley says that contracting out the maintenance reduces your margin.
This is true, but The Saint isn’t looking for margins right now. He’s looking for investments. His family’s needs are met, with room to spare; there’s no need to cash flow even $100 a month from any rental property. The benefits of rental property are long-term, not short-term (although the short-term tax benefits — depreciation and mortgage interest deductions — are worth noting).
Say he buys a property with a $1200 mortgage payment that receives $1500 in rent. A management company will eat up most of that $300 profit, so say that it just clears $50 a month to his bottom line, right now. But think 10 years down the line. With 3% average rent increases each year, in 2017 he’ll still have the $1200 mortgage, but receive $2015 in rent. By that time, there should also be a good amount of equity in the property as well, both from appreciation and paying down the principal on the mortgage.
Lastly, I will agree with the others and say that he should pay off the car ASAP, before putting any more money into any type of account.
January 10th, 2007 at 7:44 am
From what I’ve heard, the number one factor in making your money work for you–in getting those retirement accounts to grow faster–is to put more money in.
The number two factor is to have a proper mix of investments. You need more stocks than bonds and you need to be in more than one market sector, not just the current hot one.
My goal is to have several mutual funds that are not correlated and rebalance them (sell off shares in ones that have skyrocketed to buy more shares in ones that have plummeted). For example you might want to keep about the same percentage of your funds in each of the following: a large growth fund, a large value fund, a small-cap fund, an international fund, a REIT, and a bond fund.
The third (or maybe the second?) most important factor is to keep your fees low. If you use mutual funds, index funds tend to have the lowest fees. If you are buying and selling stocks and bonds directly, use a discount stockbroker.
I don’t know which money sites you’ve been reading, but it sounds like ones that help you reduce debt, reduce spending, maximize your income, and select valuable goals are all still relevant to you. Good luck.
January 10th, 2007 at 7:51 am
Real estate is undergoing a correction as we speak (write). Markets are over-priced: it’s hard to buy a rental in most places that will cash-flow positive, a clear sign of overly speculative buying.
No offense, but the peak has been passed and only ‘dumb money’ is buying RE now.
January 10th, 2007 at 8:03 am
Our situations are similar. I am 37 and my wife is 35. We have substantial retirement savings relative to our age. The only debt we have is our mortgage. We have a 4 year old and an 4 month old. We have a net worth of 350k right now.
I think it’s important to set specific and measurable goals that have a time limit. Our goals in past years were things like - save 15% of income for retirement, Save $30k in an emergency fund and pay off line of credit on our house. We have done all of those things.
Our goals look like this now:
1. Pay off our mortgage before my 55th birthday. This requires an extra $346 per month towards principle. This extra money was easy to find. I just drive an old paid-for Corolla instead of a financed $30,000 car.
2. Pay cash for both of our children’s education (college). My youngest will head to college when I turn 55. Perfect timing
We’re aggressively saving in a 529 plan for them. I will not allow my children to take student loans. As it is, they with both probably marry someone who financed their education by going $100,000 into debt (that seems to be the trend these days). There is no reason to double the problem by letting them rack up their own mountain of debt.
3. Never borrow money again - from anyone, for any reason. It’s been almost 4 years since we borrowed any money. We save money ahead of time to buy stuff.
4. “Retire” when I am 55. With no mortgage and all the $ we need for college, a large retirement fund, and substantial investments we can do this.
5. Build wealth so we are less dependent on paychecks to live. This is where we are really trying to invest wisely so that we have another source of income. We have specific goals in this area: Increase investments from $x to $x this year, for example.
It’s impossible to achieve goals if you don’t set any
By the way, in 1998 my wife and I had a combined net worth of less than $0. Things can change pretty quickly if you work hard.
January 10th, 2007 at 9:09 am
I’ve been recommended Marshall Reddick to learn more about Real Estate Investing. He offers seminars and classes. I’ve also been investigating passive forms of income (Rich Dad, Poor Dad) strategies and one that has always stuck out to me is Coin Laundry. I’ve investigated and in So. Cal way to expensive to get into, but know someone who did and made a nice little profit. You have to be up for maintenance and customer complaints. I think Divorce to Financial Freedom owns a laundry based on her posts.
January 10th, 2007 at 9:28 am
Making money grow does take time and effort- it can be a pain- because it’s a learning process- that being said- it is well worth the time and effort to learn how to make your money work for you in order to become not just financially stable but financially free.
The key is in finding what interests you, business, real estate, paper, etc. and then learn more about that area of investing.
I met all my financially free friends through Rich Dad Poor Dad- just happens to be a more investing and growth minded set over there.
At 40, I would set aside a safety net for the family, and then put together the money or credit you want to invest with and start moving forward and looking for opportunities in the areas of investing your feel more comfortable with. Read about those areas, meet other people who invest in those areas, start small, but take action.
I you have credit, look to leverage it in real estate. Learn from those who make their living doing REI and understand the market cycles. I you have money perhaps look for a business to invest it in for a monthly cash flow return, or part ownership.
There are many opportunities to make your money work for you, create passive income that can set up your family today and in the future.
January 10th, 2007 at 10:02 am
I’m happy to be in the same situation as the writer: generally financially stable and looking to get educated about the smartest way to handle things from here on out.
One of our financial resolutions for this year is to work with a good financial planner to help “tune up” our finances and make sure we’re headed in the right direction. I’ve already interviewed one person and felt pretty good about her, though I would like to interview a few others just to have done “due diligence”.
While my husband and I have no intention of letting someone else totally “drive” our finances, the fact is that we are working parents with a lot on our plates. We know a lot about personal finance but someone whose professional life is devoted to strategizing about benefits/investments/taxes/real estate/etc. will have a lot broader perspective than we do.
Good luck to you, and wish us luck too!
January 10th, 2007 at 10:17 am
Regarding comment #6 above by “Gaming the Credit System,” Your advice makes sense for a normal real estate market, but in most of the US right now real estate is anything but normal. Whether “The Saint” can be successful in real estate investing through rental properties probably depends largely upon what part of the country he/she lives in.
Unless you’re putting like 50% down, I don’t know of any major coastal metro area right now where you can find a house with a $1,200 mortgage payment that will rent for $1,500. And of course with a large down payment you’re tying up a good sum of money that could be earning 5, 10, 15% or more in other accounts.
January 10th, 2007 at 10:30 am
Data Addendum: $1,200 would be the monthly mortgage payment on a 30-year fixed loan at 7% for a $225,000 house, assuming 20% down. In King County (Seattle area, my area of expertise) sales of single-family homes under $250,000 made up just 3.7% of closed sales in November.
Granted, there are significantly more condos available in that price range (I don’t have the specific data on that), but good luck renting a
January 10th, 2007 at 10:32 am
…hey where’d the rest of my comment go? It should read:
“…but good luck renting a <$250,000 condo for $1,500 a month, especially considering association dues tend to be $200+ per month.”
January 10th, 2007 at 11:16 am
My 2 cents:
1) Max out contributions to both 401ks.
2) Pay off the car loan.
3) Regardless of what part of the country you live in, there are always opportunities in rental real estate–you just have to take the time to find them. Metro Atlanta remains a terrific market for buying up single family homes to rent, but it’s not all about cashing
rent checks.
4) Consider DRIP investing. NovaStar Financial is my
favorite, currently throwing off a 23%+ dividend.
January 10th, 2007 at 12:28 pm
The Tim:
You are right that the RE investing will depend largely on where The Saint is in the US. In my area (Texas) the run-up in values was not nearly as dramatic as in other areas. I am looking right now at a 4-plex in a college town priced at $200k that is currently renting for $2600/month combined. Putting 10% down and carrying a $180k mortgage will put me at $1200 a month for the mortgage, say $1500/month with taxes and insurance.
While that particular case might be a bit exceptional, it is not difficult to buy a brand new 1200sf 3-2-2 for $90k… they are dime a dozen around here (and not just in my part of Texas). Buy two of those and your monthly rents should be around $1400-$1500, and your total payments (mortgage+tax+insurance) will be around $1200-1300. Stepping it up to a duplex, triplex, or quad will bump up the cash flow pretty easily.
There are still plenty of places in the US where housing prices are just fine and it is possible to cash-flow immediately. IMO a good market is in the making at the moment even in over-priced areas, as lots of people are going to be facing foreclosure in the next year or two; these same people will re-enter the rental market. A glut of houses to buy + lots of renters = good investment opportunity.
January 10th, 2007 at 12:35 pm
I’m just surprised that Simon Templar wrote and asked you for financial advice. Shouldn’t he be living in Monaco, spending his ill gotten gains earned as the Robin Hood of Crime?
January 10th, 2007 at 1:07 pm
My suggestion is a bit counter to the DIY culture of the finance blogs. You may be well served in the years to come working with a financial advisor, be they compensated by the hour or as a percent of managed assets.
January 10th, 2007 at 1:46 pm
I’d echo what dorky dad says.
Get that 401k annually maxed out first. Pay off your cars second. Yes, these are the usual answers, but that is because they work. It sounds like you have been contributing for a long time, but not contributing the maximum amount allowed.
The great part about real estate for you would be that you have the time to learn and choose before you buy because you have an interest, but aren’t under time pressure to act immediately. Do lots of hoemwork and view lots of properties.
January 10th, 2007 at 1:55 pm
1. Pay off your debt as soon as you can and maximize as much money toward it.
2. If your 401K is being matched at 100%, try to contribute the maximum for that year.
3. After debt is paid off invest and diversify in stocks and bonds.
4. Save more, use cash, get more frugal.
5. Set a mission for the year for your family and have your goals clear and defined
6. Join a credit union, they offer free financial advice from experienced financial advisors
January 10th, 2007 at 2:03 pm
GtCS,
Ah hah, Texas! I haven’t spent a lot of time looking at the situation down there, but the little that I have seen indicates that the Texas market escaped the insane price run-ups of the last few years. In fact, as home affordability has been plumetting in many cities since 2000, it has actually increased in parts of Texas.
http://seattlebubble.blogspot.com/2006/11/question-of-affordability.html
I realize there are other parts of the US where this is also true, but I believe it is the exception, not the rule.
The “The Saint” I’d say this: If you’re in Texas or a place like it, definitely consider rental properties as an investment. If you’re in a place like Seattle, Boston, Phoenix, LA, San Diego, etc., I’d think long and hard before jumping into the market right now. Your money will almost certainly give you better returns elsewhere.
Check back in a few years.
January 10th, 2007 at 3:03 pm
On the topic of books, I would suggest used economics text books. They may be more boring, but I don’t really trust any self help financial books as I feel they are mostly marketing hype with little substance. Understanding economics isn’t going to guarantee super returns (neither are self help books even if they claim otherwise,) but it will help you understand what your investments are doing.
January 10th, 2007 at 6:54 pm
Ditto on what Dorkydad said. Rental Houses are not like owning stock. They have to constantly maintained– structure and tenants. Landlords that just cash the check and do nothing else are SLUMLORDS. Good landlords are well educated on the subject and also know how to deal with people. If you are not willing to rehab a property and deal with tenants as human beings I would discourage investing in RE. But if you are willing to do it right and not half-ass it the rewards can be great.
I suggest these books for a buy and hold investor:
Rental Houses for the Successful Small Investor by Suzanne P. Thomas
Every Landlord’s Legal Guide
What Every Real Estate Investor Needs to Know about Cash Flow by Frank Gallinelli
January 10th, 2007 at 8:50 pm
I’ve been thinking a bit about replying to this post, and have also read some of the replies already posted. Most of the advice already given is sound; some of it isn’t so sound, but most of it’s pretty good.
Here’s the part I don’t understand. You want to maximize your potential and have your money work for you. And at the same time, you don’t want to hear about increasing your 401(k) and doing a Roth. What the hell is wrong with making your gains tax deferred or even tax free? Are you aware of any other investment that allows that? If you haven’t at least done the Roth yet, I’m not sure you’re ready for advice beyond that. It seems to me that you’re already rejected out of hand two of the best ways to “get rich slowly”.
As for myself, we do have holdings outside of the IRAs and 401(k) (both of which my wife and I max out each year). Besides owning our own house we also hold stocks, mutual funds and have a house that we rent out. The house we rent we’ve had for a number of years and being in California, it’s turned out to be a good investment. But let me tell you, we bought it in 1992 at the top of the real estate market and we were downside up for a decade (bottoming out in 1997, then slowly recovering the loss).
We do pretty well in our stock and mutual fund holdings (our gain in 2006 exceeded the income from my job that year) but we only invest in securities outside of our 401(k) and IRA accounts after we’ve maxed them first. The only reason I can think of for not maxing your 401(k) first is if your employer’s 401(k) plan has lousy investment options. That’s a possibility, although it’s somewhat unlikely.
As for the mutual fund that you’re throwing $200/month into, why not diversify? With only 1 fund, you may not have enough international exposure. Vanguard’s Total Market Stock Index fund did 15.5% in 2006, which was a pretty good year. But Vanguard’s Total International Stock Market Index did 26.6% during the same period. The best performing fund I owned in 2006 was the T Rowe Price Latin America fund, which returned 51.2% last year. But bear in mind that it’s an extremely risky fund. In the middle of the year, I’d given up all my early gains that year and was thinking I’d be lucky not to lose money. If you want the growth, you need to be prepared for the risk. I only have a tiny fraction of my portfolio in that fund.
Bottom line, you need to a little homework and even more, you have to know yourself well enough to determine how risk tolerant you are. That’s not something anyone here, can tell you.
January 10th, 2007 at 9:07 pm
i would drop any rental real estate plans - they aren’t worth the effort. if you REALLY want to get into real estate, then i’d suggest a vacation home purchase near a lake that you can use for FUN and memory creation with your family! you can try out rentals by attempting to get your relatives to pay to visit while you are not there. if that thought turns your stomach, then don’t go into rentals.
however, you mention that only are able to invest $200 a month into your private mutual funds. i’d say you couldn’t handle a rental or 2nd piece of property. when you can do a $800- $1000 a month, then you are ready for property number 2. until then, max out the Roth, then 401k, and then your personal mutual fund. at about $300k, they begin “working” for you in what most would call a tangible sense, which means $30k in yearly investment growth/income.
until then, i think all you need is a pat on the back and to keep doing what you’re doing. you’re in the 4th inning, not quite time for the 7th inning strech, but we all need a bit of motivation/recognition to keep going.
January 10th, 2007 at 10:01 pm
I’ve read that Warren Buffett — the only student ever to receive an A+ given by Benjamin Graham to a student in his investment seminar — regards Graham’s Security Analysis as something of a Bible. The book has gone through several editions, and apparently Buffett keeps copies of every edition; he has studied and compared them and knows the differences between each. That’s the sort of tip I look for, when I feel like stepping beyond Investing 101.
Personally, I’d never consider buying a rental property. There are a lot of ways to make money and becoming a landlord is a headache that I don’t need; but it’s a necessary role and somebody’s got to do it, so if you feel that you’re cut out for that work, then good luck. I figure that, if I’m at the level where I’ve covered the bases and I’m looking to put together some extra wealth, then I’ll either buy stocks and let my money do the work, or else I’ll put my hobby to work and labor over something that I love — and that ain’t bein’ nobody’s landlord.
January 10th, 2007 at 10:11 pm
Advice…start an on-line stock trading account (i.e. eTrade.com). Transfer money, a small amount to the account you creat. Go to AAII.com, join for one year and then access the Member page. Go to stocks, stock screener, and run the top performing screeners. I recommend Graham Defensive. Download the list in Excel or preferred format. Go back your on-line broker and use some investment tools to see which of the companies appeals to you. Create a book mark for Investipedia.com and look up every term you do not understand. Pick a stock, execute a trade. Rinse and repeat.
January 13th, 2007 at 10:49 am
Let me begin by saying Thank You to all who replied and a special thank you to JD for posting my email. WOW! I did not expect it to be posted and I am amazed by the responses again thank you all.
Let me clarify some of the questions that have been posted.
I live in Rock Hill, SC just a few mins. south of Charlotte, NC…A great place to live!
I have two great girls who are 2 and 6…their education is being taken care of although I do not beleieve in a free (dad) ride to college. I did not go to college.
The car purchase was dumb (which I never do but did) Don’t do it.
I am not against more 401K investing or a Roth..I just wanted ideas out of the norm.
What will I do:
Up the 401K and look into another mutual fund and/or small (very small)online trading.
Pay off the car and work towards paying off the house in less than 5yrs.
After 5yrs. look into a rental near my current house.
I hope the advise helps others as it has helped me. I hope the future is bright and wish you all well.
The Saint
January 19th, 2008 at 10:39 am
No one mentioned the mechanism in the tax code to upgrade properties without realizing capital gains; like-kind non-taxable exchanges or something like that. Or how about rental income being a tax category (topic 414)?
I thought alot of the 62+ aged landlords were not necessarily in an avocation but that they were working through the tax code like a gamer that has studied his games’ rules; besides it’s a form of diversification distinctly separate from Wall St.
July 28th, 2008 at 1:20 pm
Um, yeah. If you are older and “already on top of it” then what do you need advice for?
Most financial advice on places like GRS are for people in their early 20s. Great for them, they’re not likely to listen anyway.
The people that really need advice are the 30- and 40-somethings who don’t have 10-20 years of a Roth IRA built up and don’t own a house with lots of equity and didn’t spend the past few years buying SUVs and other yuppie candy they can now sell or stop doing or don’t have dozens of idle hours a week to do something financially beneficial — but still don’t have much saved.
Hook us up.