What to do with the Money from the Tax cuts.

Last week (on Friday) I blew my cool (whats new) at some of the things a self described financial planner said, and I shouldn't have. But what blew my cool was that this professional couldn't come up with a good suggestion for what his clients should do with the money saved from the tax cuts..so....here I offer my humble non expert suggestions at what you might do with the money that the government will not confiscate from you due to the cuts. (Im sure if I did this stuff for a living I would have even more suggestions)

Average family of 4 supposed to see $1200-$1600 in reduced federal income taxes (if you combine the previous cut and this cut. I will base the figure on the lower of these two, $1200 this gives us a nice even $100 a month to play with.

IF you invest your $100 a month into an investment vehicle that will average over the long run a 10% interest rate for you. (not exceedingly hard to do) this is what you can expect to see.

100mo at 10% for 5 years = $7,743.70
100mo at 10% for 10 years = $20,484.49
100mo at 10% for 20 years = $75,936.88
100mo at 10% for 30 years = $226,048.79

As you can see consistancey is required so you don't want to see congress take this money back away from you. A great idea is to put this into a 401k or a 403b plan, lacking that an IRA with a whole market mutual fund will do.

If you are a concerned parent you can also take this money and put it into CD's each year untill you have amassed $5,000 and then invest that into a

RIC-E Trust Account

for your child...this investment of $5,000 will net you kid some $2.4million after 65 years.....with $2.4 million in his retirement account, imagine how much more relaxed your child can be during his life...wish my folks had thought of this...but then they didn't have RIC-E trusts back then either.

Or of course, you can believe the guy in the other thread who told you that there was nothng you could do with the money you will get from the tax cut but I wouldn't.

Now for paragraph 2 of this,
I had originally planned on countering some claims with threads from the net about the positive impacts of the newest Bush tax cuts....and I found many many articles on these benefits. What I found out however is that if I altered my search parameters a bit, I found that there are two nearly evenly divided camps, 1. is the rabbid anti-bush dem. person who slams the cuts for every reason under the sun and
2. is the apparently repugnican accountant who tends to overlook some very real issues.....

My conclusion is that you can't trust either side and should be skeptical and conservative..the prudent thing to do in this case is to save what you can when you ca....perhaps following the strategies I laid out above or some that are even better that I haven't thought of.

In the end all I can actually tell you is, be conservative with your money, don't listen to anyone who tells you there is nothing you can do and realize, there are no get rich quick schemes. If it looks too good to be true, it most likely is.

[ 06-02-2003, 02:14 PM: Message edited by: MagiK ]

[Bungleau]

Only thing I'd add... before investing, check your bills. IF you have outstanding debts, pay them off as much as possible. You will earn far more by not having debt (and not paying monthly finance charges, which are around 12 to 24% annually) than by investing.

Note I'm not saying don't invest; I believe that you should. But investing at 10% when you could pay off debt that costs you 20% is still backwards, just slower. If you have no debt, then invest... happily...

[harleyquinn]

Magik,
Nice post. I like your point about investing the money. I'm already planning to up my contribution to my 401K to match the amount of extra money from the tax cut.
Just to add to what you said, it's always a good idea to get information about how/where to invest money from as many as sources as possible (at least 3). Just like Magik found that by looking around more, there was different views and by incorporating them all, got a better view of the overall pic, the same applies to deciding how/where to invest.
For example, I was following what the 401K advisor was telling me to invest in and was making -3.24% each month (if it wasn't for the employer match, I'd have been losing money). By doing some investigating on my own and redistributing where I was invested, I'm not making +6.45% per month.

ps -- that second paragraph wasn't aimed at you, Magik, was a general service annoucement for the public.

Originally posted by Bungleau: Only thing I'd add... before investing, check your bills. IF you have outstanding debts, pay them off as much as possible. You will earn far more by not having debt (and not paying monthly finance charges, which are around 12 to 24% annually) than by investing. Note I'm not saying don't invest; I believe that you should. But investing at 10% when you could pay off debt that costs you 20% is still backwards, just slower. If you have no debt, then invest... happily...

See I knew there were much smarter money people out there than me [img]smile.gif[/img] but errr... yeah I wasn't thinking along the lines of debt .....those should obviously be paid off first since their rate of interest will be hard to beat.

[ 06-02-2003, 02:33 PM: Message edited by: MagiK ]

No probs Harley, I was quite sincere about not being a professional [img]smile.gif[/img] I know I do not know everything about investing and money, but I do know, never listen to anyone who tells you, theres nothing you can do with little bits of money...it all adds up.

I also know that over the long run (10 - 30 years), you will probably not find it hard to find a mutual fund that can net an average of 10%..or you can take a more hands on approach like you did....the key is dollar cost averaging...ie...putting money in over a long period.

[Timber Loftis]

I'm in the group struggling to pay off debt before I up my monthly 401k investment. Too bad so sad.

But, the example I want to make is the converse of Bungleau's. I have one student loan at 1% interest, received for being an "appalaicha student." I pay this off as slowly as possible. Since 1% is usually less than the inflation rate, this loan actually shrinks every year in terms of real debt value.

I also have student loans at 6-7%. Those I pay off timely, but if I have a chance to pay extra I usually put it toward 10%-18% credit card debts instead. Again, the message is the same: hit the highest number debts first.

Now, MagiK figured 10% into his table. I want to point out that 10% is extremely aggressive and risky in today's market, what with the Fed T-bill rate at an all-time low. On the save side I would base my math on 7%, no more. The days of 10% mutual funds being everywhere are gone, at least for now. Some still exist, I assume Janus is likely still doing well. But, to eek out 10%, you need to be doing your own day-trading or simply have a lot of money to invest and/or a long time committment. The incentive is still there to invest, of course, I'm just saying today's market is a bit of a different reality.

Final message, also a result of the same theorem: Get your money out of a savings account. I don't even have a savings account these days. Less that 1.8% is worthless. I have a 1% sweep-style checking account and the rest goes in mutual funds and money markets. Except for the "emergency fund" you have in your savings, put your money in a smarter place. Plus, in the modern day, the "savings emergency fund" many of us remember our parents keeping for broken appliances, etc, is just as well taken care of by having an extra $5K or so available on any one of your credit cards in case of emergency.

[ 06-02-2003, 02:55 PM: Message edited by: Timber Loftis ]

T.L. If you talk short term yeah 10% is tough to see, however...did I not specify over a 10-20-30 year period? 10% over that time period is NOT all that aggressive or risky..at least not historicly [img]smile.gif[/img] however as they say in the money biz..."Past performance does not gaurentee future returns" or whatever.

Another note on credit cards....once you pay a card off, call them and tell them you want a better rate or you wish to cancel the card...I have one (1 out of 3) that is at 8.9% annual interest rate with no annual fee...the banks are pretty good about offering good fixed rates if you are in a position to take your business elsewhere. This gives you options of doing balance transfers from other higher rated cards.


[ 06-02-2003, 03:03 PM: Message edited by: MagiK ]

[Timber Loftis]

Further note: When the card company calls up wanting you to transfer debt to that new temporary cheaper rate, make sure to inquire about the transfer fee -- and then ask them to waive it. If they won't waive the typically $50/3% transfer fee, just don't accept the offer unless you must. I've been keeping my debt down by playing the transfer game while I pay off the cards. I just transferred $2K from a 10% card to a 1.9% temporary spot this weekend, and I'll pay it off by the time November rolls around.

Wish I wasn't so lazy and had the patience to do the transfer rate switcherooo but hopefully in the near future Ill be in a position to get a reletively low rate loan and get rid of some pesky debts that have been doggin me since my divorce [img]smile.gif[/img] ...of course...any money saved will immediatly be going back into our house....but hey...I spend a lot of time in the house

[Timber Loftis]

A man's home is his castle. Except when the significant other is around. Of course, this is what drives most of us to be happy and content if we can just find one little throne room to claim as our own. [img]graemlins/biglaugh.gif[/img]