My husband recently switched jobs, and we will have a one year lapse in 401K benefits. We contributed 5% which was matched dollar for dollar by his former employer. I'd like to keep growing dollars somehow while we are without this benefit. What makes the most sense? IRA? Stocks? Paying down debt? Thanks!
Cyndi, from a purely numbers perspective, you can easily compare your options based on what is going to gain you the highest interest rate. For example, you could contribute to a low-risk retirement-oriented investment account. These are currently running at 4 -5%. Higher risk investments might or might not earn you more money. My expertise is not in high-return investment accounts, so I would start by doing a lot of research before choosing that option.
Paying down consumer debt would usually gain a higher return. Paying on a line of credit would give you something in the range of a 7-9% return. A car loan or personal unsecured loan is likely to be around that. Paying down any credit cards that are carrying a balance could earn up to 22%.
Personally, I wouldn't make the decision based on a side by side comparison of interest rates. I would use the extra money to achieve a goal I might not have had the chance to achieve before. Here are some that were or are important to us. Some we have achieved, others we are still working toward. I would welcome the chance to use an unexpected source of income to accomplish things like these:
• A continuing education account for ourselves and/or our children (such as a 539 account)
• A life insurance policy for the main breadwinner
• Classes to teach skills that would either provide additional income or greater self-sufficiency
• Acreage that could one day provide us a homestead
• Building or retrofitting with solar and other renewable sources of energy
• Building or purchasing a slightly larger home
You could work toward goals similar to the last three by contributing to the new types of CDs that allow you to make periodic deposits, but still do not come due until a certain date that you choose.
My larger money picture is a little bit off the beaten path. We funnel very little income into retirement accounts. Instead, we focus on adjusting our lifestyle to not need much money upon retirement. We intend to have a paid-for home that functions mostly on renewable energy with zero consumer debt when we retire. We also intend to have vehicles that can function on a renewable source of fuel (such as biodiesel) and the skills and health to keep things in repair by ourselves. Obviously, we can't guarantee that our health will be in the kind of shape necessary to live that lifestyle; however, we honestly can't guarantee that we (or anyone) will live to retirement age either.
I would keep this one hard, steadfast promise I would keep when using your extra income:
I will not spend that extra 5% on depreciating items of any kind.
If you stick to this one rule, I don't think you can go wrong with your decision.
Good luck, Cyndi, and thanks for writing! Every Thursday (-ish) The Tightwad Trainer will answer one of your questions. Email me at tightwad_trainer@fuse.net and I will do my best to solve your dilemma. Sign your name if it's OK for me to include it!
Annoying but necessary disclaimer: All information contained herein express my opinions only and are based on my health status & location. Each person's situation, health, and local laws & ordinances are different. By all means, use your own common sense & don't do anything you see here if someone more important than me (like your doctor, your local police, your own conscience) would disagree. If you're easily persuaded by everything you read, and you think I might cause you to hurt yourself or break the law, quit reading my site, please.
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