when homebuyers are offered 100% (or even 105%) financing to buy a home, they’re lured into paying a sky-high mortgage rate. But that’s not the case with a VA loan. “Cynthia can easily afford to put 20% of her income into housing,” Dunagan says. Her mortgage payments will be $632 a month.
BUILD A STASH OF CASH
Dunagan advises Hines to put the $2,000 cash prize from BE into her money market fund, which has only a few hundred
Cynthia Hines arms herself with strong financial weaponry as she transitions from military to civilian life dollars. “She should keep putting money into the money market fund until she has $3,600 there,” he says. “That’s equal to three months living expenses, which will give her some reserves to tap into in case of an emergency.”
BUDGET FOR ENTERTAINMENT
Hines has been saving about $900 per month, putting the money into an IRA ($3,000 this year), stocks, and stock funds. “That’s a lot of saving for someone with a moderate income,” says Dunagan. “Saving is fine but it can be overdone. By saving too much, you cut out everything you like to do. Eat cabbage every night and you get tired of it.”
Dunagan says that Hines should budget $200 a month for fun and games so she’ll be able to enjoy her new life in the bigger city. Hines’ ongoing saving, Dunagan says, should be done through her new employer’s 401(k) plan where she can — and should — contribute up to 7% of her income, deferring the income tax while she builds her retirement. “After Cynthia has built up her cash reserves to $3,600, she should devote her other savings to paying down her credit card debt. That will earn her nearly 15% per year after taxes with no risk, so she should do that before she invests elsewhere,” he says.
CONVERT TO A ROTH IRA
Meeting the above goals of building up cash reserves and paying down debt may take a year and a half, Dunagan estimates. At that point, he advises Hines to convert her IRA to a Roth IRA. Such a conversion would add the amount of her IRA (now nearly $5,000) to her taxable income that year. “She’ll owe tax,” Dunagan says, “but her tax burden shouldn’t be as great considering her income and the tax deductions she’ll have from mortgage interest.”
Once Hines does the conversion, she should hold on to the account. After she reaches age 591/2, all Roth IRA withdrawals will be tax free, no matter how large the account has grown.
KEEP THE COLLEGE FUND
Hines has set up 529 College Savings Plans for her niece and nephews, accumulating about $700 in Wisconsin’s program. “She might as well keep it there,” says Dunagan. “If she has children eventually, she can transfer the accounts to new beneficiaries, maintaining the tax free treatment. In the meantime, she has access to the money in case of an emergency.” She would, however, be subject to penalties.
Once she has her bachelor’s degree, Hines can determine how an expertise