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Thursday, April 24th 2014

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Sold the house, have some cash, now what?

Pay off debt, diversify investments, create emergency fund

By Alan Klayman

Maturing Loans
Maturing Loans, Alan Klayman
Alan Klayman is CEO of Klayman Financial LLC. He served as a vice president at Fidelity Investments, worked as a financial planner for American Express, and built fixed income strategies on Wall Street at The First Boston Corporation. At CreditCards.com, he writes Maturing Loans, a weekly feature in which he answers readers' questions about retirement and debt issues.

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Question for the CreditCards.com expert

Dear Maturing Loans,
I just sold my house and walked away with about $150,000. Other than that, my only income is Social Security -- about $1,400 a month (I'm a widow). I bought another, cheaper house and put down $65,000. I also have about $8,000 in credit card debt from medical expenses, mostly. Since the market is a mess, how should I invest the remaining $85,000? And what should I do about the credit card debt? Should I pay it all off or just keep making payments? Any guidance would be appreciated. -- Laura

Answer for the CreditCards.com expert

Dear Laura,
Congratulations for getting a handle on your situation. Many people are struggling and juggling to get their finances in order and you are well on your way.

You say you bought a cheaper house and put down $65,000, and are left after expenses $85,000. One thing you need to do is speak with your CPA and make sure that you have satisfied your tax obligation on the sale of your home. There are many factors, including the original price of the house, whether you depreciated the home over time for expenses (i.e., home office expenses), and a number of other variables that can affect whether you owe money on your sale. Since I do not know the answer, I am going to assume that you owe 15 percent on the $85,000 or $12,750. That would leave you with $72,250 to work with.

Let's start with the credit card debt.  Look for balance transfer offers that give you a 0 percent rate for a period of time.  Put $8,000 into an interest-bearing account, such as a money market, for the same period as the 0 percent introductory offer (for example, 12 months with Chase). Over the life of the 0 percent balance transfer rate, pay down the $8,000 from your interest-bearing account in increasingly larger increments. For example, the first month, you would pay one-twelfth of the $8,000 or $666; the second month, two-twelfths or $1,332 and so on. By the twelfth month, you would pay off the remaining amount. Keep the interest from your interest-bearing account when you are done paying off the card.

You have not said whether or not you need income from the remainder of your money, but you mentioned that you have had medical expenses in the past. So I think it is fair to say that, at a minimum, you should create an emergency fund and budget for the possibility of future medical expenses. Take the money (say $14,000) and put it into a fixed rate account (such as a bank CD, a Treasury 0 coupon bond or an annuity). Make sure you can access your money quickly if needed and without any penalty.  You should not pay any sales charges on this investment. Make sure the investment interest rate is fixed, which will prevent you from losing any money from the initial investment.

The roughly $50,000 that is left over ($85,000 minus taxes minus credit card debt minus emergency fund) should be invested based on your risk tolerance, experience and your goals. Everyone is different; you should seek the help of a financial professional.

When talking with a financial consultant, how you invest the money will be impacted on when you think you'll need the money. For example, you'll want:

  • Cash for the first one to two years.
  • Mostly fixed investments (little to no stocks) for years two through five.
  • A combination of fixed and variable investments (some stocks) for years seven to 10.
  • A combination of fixed and variable investments (more stocks) for 10-plus years.

Another investment method you should become more familiar with is dollar cost averaging. This is the systematic investing into accounts on a periodic basis. For example, investing $100 a month in a mutual fund. Here are the advantages of dollar cost averaging:

  • You can "get your feet wet." If you don't like the water temperature (that is, the performance of your investment), you can get out without having invested too much.
  • You buy more shares of what you are investing in when the price is down, which averages out the cost of the investment.
  • You buy less when the price is up. Who wants to pay for things when they are expensive anyway?

If the market goes down, you keep buying cheaper. When it comes back up, you make money on all of the investments you purchased when it was down.

Good luck. I'll see you back here next week with another question. 

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Alan Klayman is creator of MyIncomeStrategy.com and CEO of Klayman Financial LLC. Klayman specializes in retirement income planning, business management and planning, estate planning, tax-advantaged investing, trust investment management, professional money management, insurance and annuities, mutual funds, fixed income securities, and institutional and personal retirement plan administration.
 

Published: October 22, 2008


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