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Friday, August 31, 2012

The Most Importnat Investment Advice For The Newlywed

I have repeatedly discussed stocks, bonds, annuities and 401 (k) as my favorite investment topics. Unfortunately however, for the newlyweds, the most important investing topic is none of those – it is debt.
Debt is the exact opposite of investment. Investment involves passing over your hard earned cash to someone else to use it for their own business and hope for some return. But when you borrow money, someone is investing in you.
That, however, does not mean that all debt is bad. Once in a while you will find yourself in need of cash and the only viable option will be to borrow. Nevertheless, mixing debt and investment is the worst blunder you can do (with a few exceptions), especially if you are newlywed.
It is, therefore, not surprising that most financial advisers for newlyweds argue that debt and bad spending habits can ruin your new marriage. Let’s assume you or your bride/bridegroom to be has a student loan that charges 6.8 percent interest, which is the current rate for unsubsidized Federal Stafford Loan. Servicing this loan is the almost equivalent to earning 6.8% on risk free investment (the effective rate is slightly lower due to tax deduction on the interest).
Now, what’s the most you can earn on a risk-free-investment? Roughly 2.25% on a five-year CD (Certificate of Deposit) rate. The same goes for car loans and credit card debts. It is not logical to start investing in bonds and stocks when you can get a guaranteed risk-free return by simply paying the debt.
Most couples find it stressful to discuss their debts, partly because it is always printed out in black and white and is clearly visible for anyone who has eyes. It is also painful but obvious whose debt is bigger and (for peace in the house) that’s not a contest you would want to participate.
Probably, by now, you and your fiancé already know your debt situation, but if not, now is the perfect time to discuss how you will conspire to wipe it out.
Oh, and put aside some emergency fund, too.
A few Exceptions to the “Pay off Debt First” Rule
Having coughed out the unpleasantness of debts, let’s now discuss a couple of reasons why you may still want to proceed and start investing - even before you clear your debts.
To get the 401(k) Match: If your employer is offering you a 401(k), take it without looking back. Even if you have high interest debts, turning down a 401(k) match would be akin to turning down raise. I plead with you not to do that.
Consider Your Mortgage Attitude: This one is now one for debate. If you want to buy a house some people (me included) would contend that should first embark on paying off your mortgage loan and neglect investing – at least for some time. Others will also give you an exact opposite advice: Mortgage rates keep going low, you can therefore refinance when they go even lower and you will likely earn higher return on your investment (RIO) than the interest you pay on mortgage.
You should sit down with your fiancĂ© and come up with a plan which suits you. If you settle on the “pay it down” option then you may consider a 15 year fixed-rate mortgage plan. You will get a low interest rate and compel yourself to pay down the loan quick.
Look out for my next post on Advance move for newlyweds. 

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