By Adrienne Grimes
Question I am a married man with two children. I am about to buy a house and am wondering which is the most important thing to do: invest in an IRA or a mutual fund, take out life insurance, or start a college fund. I have been told that having a college fund will only result in my children being eligible for less grant aid, and I have been told that while mutual funds are good, the fees are on the increase. And will paying money into an insurance policy, mutual fund, IRA, or college fund affect my eligibility for a mortgage?
– E.M., Glastonbury, Conn.
Answer It depends. There are so many variables in each person’s life. For instance, How old are you? How old is your wife? How many years have you got before the children need the money for college? What is your salary? Does your wife work outside the home? What do you pay in child care? Does your outgo exceed your income each month (if so, then your upkeep will be your downfall)? What are your most important goals for you and your family? Do you have any current investments? Are these investments getting you closer to those goals? What is the greatest risk you and your family face over the remainder of your lives? Are your current investments protecting you from or exposing you to this risk? Why do you want the IRA? Do you need the tax deduction? Have you got a 401k at your job? Have you got a pension? How do you wish to use the mutual fund? Which type of investment suits your personality? Are you a risk taker or more conservative? If you were to be disabled in the morning, who would pay your bills?
As you can see from the above, every person has a complex set of variables to be sculpted into shape before anyone could start to give real and lasting value in advice that will help you through the whole of your life. Financial planning is a long-term project.
Now let me try to answer your many questions.
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1. If you do get the mortgage on the house you will need at least that amount of life insurance so that your family can stay in their own home if anything happens to you.You might want to consider term insurance for now, so that the low premium will not affect your ability to repay the mortgage.
2. Invest in an IRA if you qualify and need the tax deduction, a Roth IRA if you need tax-free income in retirement.
3. If you still have money left over, start some mutual funds and hold onto them. It’s not timing the market that counts, it’s being in the market.
4. “A life insurance policy is just a time-yellowed piece of paper comprising columns of figures and legal phrases – until it is baptized by a survivor’s tears – then it becomes a miracle, a modern Alladin’s lamp. It is food, clothing, shelter, education, peace of mind, comfort, undying love and affection. It is new hope, fresh courage, and strength for a parent who must pick up the broken threads of life and carry on. It is a college education for sons and daughters, opportunity for careers instead of the need for jobs.”
5. College costs have soared. It is critical to start saving but the numbers are so high that most families cannot make the commitment. For instance, if your child is now 7 years old, you must save between $425 and $915 every month for the next 10 years and earn at least five percent interest to afford college at the projected costs.
6. Financial aid formulas are usually driven by income. As usual, middle class families carry the load. Grants and financial aid are more available to those earning $35 and less. A good rule of thumb is to save the money in the parents name until the child is 14, then if a test shows that the parents qualify for aid based on their income and assets, it should be left in the parents name.
7. Mutual fund fees, everybody frets about them. You may get happily involved with a no-load fund. However, all funds have 12 b1 fees, which usually run 1 or 2 percent. You may also get happily involved in B shares, which generally have a decreasing back-end load. For instance, 5 percent in the first, 4 percent, 3 percent, 2 percent, 1 percent, 0 percent in subsequent years. Effectively erasing the load for those with a longer time frame.
8. And finally, having money in a risk-protection plan, or in any of the savings vehicles you mentioned, should surely have enhanced your eligibility for a mortgage. Some of them could have been assigned as collateral. Having all of them in place would have shown you to be a man of sound principles and sterling character, the salt of the earth kind of guy who is loved by all lenders.
Adrienne Grimes CLU is a life underwriter with Metropolitan Life. She helps her clients to create wealth, then to keep it, and much, much later shows them how to pass it on. She holds seminars on ‘how to find your way through the financial jungle’ at the Metlife location in The Bulova Corporate Centerin Astoria. She specializes in 401k plans, and deferred compensation plans for highly paid individuals. She may be reached at 1 (718) 334-7421.