[OT] Personal Finances: Was The perfect MP3 player

Dave Smith DavidSmith at byu.net
Sun Sep 18 19:14:58 MDT 2005


Grant Shipley wrote:

> The goal for all people should be to have no debt other than a "modest
> home" and a car.  Seems like I heard that somewhere before. :)

I agree with your sentence up until "other than". My goal is to have no 
debt. Period. Right now, I have no debt except a modest home (more 
modest in fact than the 180k number cited earlier). Though I do believe 
that it is wise to take on debt to purchase a home, I don't plan on 
staying in debt for my home forever.

>>Amass an "emergency fund" of a year of cash.
> 
> I suggest two years.

Why? Just out of curiosity, what would an extra year get you? Have you 
heard of an experience where the extra year saved someone?

>>Save 15-20% of gross income for retirement and children's education in a
>>mix of Roth IRAs and 401(k) plans. 
> 
> The financial planners suggest 10% but I try to sock away 30%.

Wow. That's excellent. Good for you. At that rate, you can expect an 
early and plentiful retirement.

>>Pay off house as fast as possible.
> 
> I believe the money is better saved outside of the home until you have
> enough to pay the balance off in full. 

This sounds good, except for one problem. Every month you delay paying 
down your mortgage costs you more. Consider Person A and Person B who 
both pay off their houses in 10 years. Person A does it by regularly and 
consistently paying extra from day 1. Person B pays one lump sum on the 
last month of year 10. On a 30 year loan at 5.5% for a $150,000 home, 
Person B would have spent $76K on interest. Person A: $42K. Feel free to 
correct my numbers.

> If a disaster happened (read
> depression), the banks like to go after the homes that have a ton of
> equity in them versus someone who still have 20 years on their
> mortgage.

Not if you don't have a loan. That doesn't make sense to me. Why would 
the bank try to call the notes that are worth less to them?

> This would be great and is what we should all go for.  However, you
> mentioned savings in a ROTH IRA and 401k plans.  If this is the case,
> you will not be able to take your money out of these plans at this
> time.  You will need to have enough money in cash account to last
> until you are at least 62 1/2.

You can take the principal out of a Roth IRA at any time with no 
penalty. You can also take interest earned from a Roth to fund education 
expenses at any time (restrictions apply). Can't do either of these with 
401(k), but you can get a loan from it, which I don't recommend. I agree 
with you though, that if you want to retire earlier, you had better find 
another vehicle.

> Very sound ---- on the surface.  However, it could all blow up in our
> faces if the market crashes.  We would lose everything we have saved. 
> This is a very REAL possibility.  My parents lost hundreds of
> thousands of dollars during the last crash.  However, it is suggested
> you have at least 10% of your savings in gold and silver cions to
> offset such a crash.

If the economy is crashing that hard, why would gold investments be exempt?

Sounds like our financial strategies are pretty well aligned, but you 
are an even more aggressive saver than I. That's rare, and I laud your 
will power and planning. Kudos to you. What I don't understand is how 
you are able to spend so extravagantly on electronic goodies and still 
follow such aggressive savings and insurance plans.

Anyway, thanks for taking the time to respond. This has been instructive 
for me.

--Dave



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