AboutGina Boykin Expertise Financial planning, debt management & credit cards, and money-saving tips for adults and teens. Saving vehicles such as CDs, treasuries, bonds, and money-market funds. I provide honest, objective and relevant information to help you made the best decision for your money.
Experience Over 10 years of combined experience in accounting, audit, investing, entrepreneurship, real estate.
I am the CEO of Atlanta Y.E.S., a nonprofit organization dedicated to financial literacy for youth.
Education/Credentials B.S. Accounting, 10 years of experience in accounting, audit, and investing
Question My daughter is 31, single and very responsible with money. She purchased her first home 4/25/08 on her own and a new vehicle 2 months later. Two months after that, she went to work and the doors were locked, company bankrupt...out of a job. She had the money to pay her bills till she started another job...smart gal. When having her 2008 tax forms prepared, she mistakenly told the preparer the wrong date...March 08, which disqualified her for the first home buyer 7500. credit (basically, interest free loan which must be repaid...) I will file 1040X for her to claim the credit. Her home has a very old, inefficient heating and cooling system which is the last big ticket repair for the home. She has 500. in her savings acct, no credit card debt, and excellent credit. My advice to her regarding this 7500. is to take all her info... W2, tax return, car and home loan, checking and savings to someone who can offer the best advice based on her loan interest rates, tax bracket...etc. Who is that person? A financial planner? CPA? Would this be her best plan of action for that money to accomplish her goals for her home?
Answer It depends on what her goals are on whether or not she needs to pay for the advice of a financial planner or CPA. I know she plans to use part of the money toward fixing up the home, but what about the rest? With only $500 in savings, it looks like she does not have an emergency fund to make sure she will be able to pay her bills in the event of another unfortunate circumstance (such as another layoff, unforeseen car problems, or unexpected medical expenses, or even another home appliance breakdown)? This is priority. For an emergency fund, the money should be set aside in something easily accessible, such as a savings account or money market account. A good emergency fund can cover at least 6 months of living expenses. To figure this amount, she should have or create a budget - which is a good habit to ensure that money is being used in the best possible manner. A budget is also something that will be helpful if she does see a financial planner or CPA, because seeing exactly what she makes and where it goes is necessary to determine what it will take to reach her goals.
Once the emergency fund is in place, if she wants to invest for future goals (and has money to do so), that is the time to possibly seek a financial planner. Keep in mind that there is no certification to become a financial planner - anyone can call themselves one - so the best planners are going to be the ones that have gotten certified as a CPA.
Here is a little information, though, to get her started for some common goals:
1. Retirement - If she has the ability to set aside money in a pre-tax retirement account (401K, 403B, etc), that's a good place to start. If her company provides any matching contributions, i.e. for every $1.00 she puts in, the company puts in $0.50, that is the best return you can find (in that example, that's a 50 percent return already!). There is no need for a financial planner to take this step. She can talk directly to her HR department. Invest as much as possible up to the maximum company match.
The other popular retirement account is the Roth IRA. Money goes in after tax, but when the take it out in retirement, she pays no taxes on the earnings. She can invest in a Roth through a discount brokerage firm such as Fidelity, Vanguard, and Charles Schwabb, without paying a financial planner, and do the simple route of selecting low-cost index funds - a type of mutual fund that invests in all stocks in an index, like the S&P 500 These companies' websites also have numerous calculators and tools to help you figure out how much you need to invest now to reach a certain goal. However, if she is very uncomfortable doing that, she can either go to full-service broker (one that offers investment advice) or a financial planner.
2. Any other goal that is at least 10 years out - This can either be done through a Roth IRA (because you can take out your deposits anytime after 5 years without penalty) or in a regular taxable account. Again, this step would either be through a broker or a financial planner.
3. Any goal that is less than 10 years - This amount should be set aside in something basic (savings, CDs, money markets, government bonds, and possibly high-rated corporate bonds). She doesn't want her short-term goals to not be met because of fluctuations in the market, so they need to be in relatively safe accounts.
On a side note, you mentioned that she has a car loan. Depending on what the interest rate is on the loan, it may make sense to pay this down before doing any investing. For example, if she has any short-term goals where the money would be placed in savings, this money will not earn much more than 2 percent at today's rates. Paying down a car loan of 7 percent would make more sense. Then once the car is paid off, she can begin setting aside money, and will be able to set aside even more because she'll have no car payment.
