An Education In Investing

Linda Paul has set out to learn All the right lessons about establishing A financial plan for her future

Cumberbatch. With the income that once went toward her monthly credit card payments, she should open a money market account and save three months of her salary for emergency needs (e.g., losing her job).

BUY A MORE RELIABLE CAR
Since car repairs are eating up Paul’s disposable income, she should buy another car. Cumberbatch recommends that she put the remaining $500 from her Financial Fitness Contest winnings toward a down payment on a more reliable car. Paul showed an interest in the Honda Civic. If she bought a new one, it would cost about $18,000. Instead, she should opt for a Civic that is 2 to 3 years old, which should cost about $12,000. She can get pre-approved for a car loan from her credit union (at a rate between 7% and 8%). Cumberbatch says Paul should run a “for sale” ad in the local paper for four weeks and try to sell her current car for about $3,500. If she’s unable to sell it, she should try negotiating with a dealer on a trade-in, and get the lowest-priced car possible. Her car payments could be about $287 (after sale/trade-in). This is more or less in line with the $250 a month she pays on the present car loan.

CONTINUE PAYING STUDENT LOANS
Paul should stay the course in terms of her student loan repayment schedule. Her priorities ought to be paying off the credit card, the car note, and the student loans, in that order. Student loans generally have the lowest interest rates, and you’d want to pay off debts with the highest interest rates first. Also, she may be able to deduct the interest paid on her student loans. She would have to itemize deductions on her tax returns and there are income limitations. Paul should contact a CPA to see if she can take the write-off.

MAX OUT HER 401(K) PLAN
Paul should gradually increase the 13% she currently contributes to her 401(k) to the maximum 20% that her employer allows. Cumberbatch also says, “She needs to be invested in aggressive growth equities because, with the length of time she has to retire, she can tolerate greater market risk.” The idea is for her to save now before life changes, such as marriage, dictate more spending. Once she gets her CPA license, Paul can look for a higher paying job. She can then balance her new salary with the ability to contribute more heavily into her 401(k) plan.

OPEN A 529 PLAN TO SAVE FOR HIGHER EDUCATION
Paul should place any additional income she has into an Education IRA or 529 college savings plan, which will help pay the cost of her M.B.A. Although she can’t receive a tax deduction on contributions to the 529 Plan, the earnings and capital gains it earns can’t be taxed.

Winner #24 Linda Paul
Financial Snapshot:

HOUSEHOLD INCOME
Gross Income $44,000

ASSETS

401(k) $8,071
IRA 1,001
Total $9,071

LIABILITIES

Student loan $15,000
Credit card 1,500
Auto loan 2,000
Total $18,500
NET WORTH  -$9,429

 

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