Talking stocks, trading, and investing in general

[jbarwick]

If you aren't maxing 401k I wouldn't consider taxable yet.

If we can't do any Roth, we would max 401ks with room to save. When you plug $12K into Roths and that goes away, that puts a ton into 401k.

And if you don't have a trad ira, you can just backdoor Roth... So that's not really off the table.

We have Trad IRAs. I'd have to check with my 401k to see if we can do Trad to 401k.

To give some broader perspective, to figure out what we needed for retirement, I took our 2013 salaries, increased by 2% per year until retirement, save 20%, then voila, we can retire when we hit 25X of some arbitrary amount. My generic spreadsheet uses a real return assumption which I can vary in addition to easily changing what amount we want to retire with per year.

Based on my generic 2% increase figure, we are now at a combine salary that is equal to what I assumed we would be at by age 47, age 50 if you count her bonus opportunity (we are 33 going on 34). I honestly didn't think we would have to care about this for a few more years. I mean making more is good but now there are other wrenches I have to learn about.

 

[jcman311]

Well theoretically that money is freed to go into a higher yielding vehicle than cash or paying down your mortgage.

Yeah, I think I worded it wrong. Whats the cost of liquidity? HELOC @ 7% for a couple years or holding cash @ 2% vs equities @ unknown. Of course, these are emergency funds. I would have no problem with holding very little to no emergency if our planned expenditures were covered and use something like a HELOC for emergency if the market is hot.

 

[patrickBOOTH]

What is this HELOC strategy you speak of? Is this taking out a line of credit and investing it in some vehicle that pays for itself over time? I've read this is a bad idea, or do I have it wrong?

What I don't get is if the cash is for an emergency and you lose your job or have a massive expense where you use the home equity cash you still need to pay your underlying mortgage and bills so it seems like it would put you in a worse-off situation.

 

[Omega Male]

Also, home equity isn't a very good cushion in a job-loss situation because you won't get the loan against it without proof of income/employment.

 

[jbarwick]

While not the HELOC example, it is something similar. We took out a loan for my Subaru Outback when we bought it because the rate is <2%. The cost of borrowing cash in a crunch is more than that so I count the car note interest as a form of insurance in my mind. Now we are earning more than 2% on our cash but at the time it was 0.01%.

 

[brokencycle]

While not the HELOC example, it is something similar. We took out a loan for my Subaru Outback when we bought it because the rate is <2%. The cost of borrowing cash in a crunch is more than that so I count the car note interest as a form of insurance in my mind. Now we are earning more than 2% on our cash but at the time it was 0.01%.

We borrowed at 0.9% which is less than inflation. I think our total interest paid was like $300 over 5 years

 

[otc]

Isn't the strategy there that you open the HELOC today and don't use it? Then it is there in an emergency.

 

[Piobaire]

Yes, the HELOC strategy is to obtain one and then don't use the line except for emergencies. Some people feel it's a bad strategy as they worry about HELOCs getting lowered or called if property values should drop like they did a decade ago. I think it works best on homes with a ton of equity or paid off. If you have a house worth a million plus, and it's paid off, no bank is going to freeze or call a HELOC line of 100k.

We might still layer a HELOC into our TSHTF scenario but I'm getting more risk and debt adverse and just riding that cash cushion.

 

[RedLantern]

IMO there's very little downside to opening a Heloc if you don't use it for petty expenses. It's not very much money per year to keep one open, and it affords a lot of flexibility. You never know what opportunities will present themselves.

OTOH, if you're the kind of person where that available money is going to burn a hole in your pocket, it might not be the best idea.

 

[patrickBOOTH]

Wouldn't it be wiser to just save the money that would go towards your interest and principle of the HELOC?

 

[Piobaire]

Not sure what you mean. I looked at a HELOC that would cost $50 a year to keep open. That seems like a pretty paltry sum to have a nice LOC available for emergencies.

 

[imatlas]

Exactly.

Folks seem to think the idea is to pull out the equity from the HELOC and invest it, that’s not the point at all.

 

[patrickBOOTH]

Ahh I see, I was thinking a Home Equity Loan. Stupid me didn't know there was a difference.

 

[Texasmade]

I have a HELOC and about $100k in equity in my house. I opened it around 5 years ago and never use it but it's nice to know I have it in case something major happens. I usually only keep like 2-3 months of emergency cash in my bank accounts. Everything else gets invested or spent on something.

 

[otc]

Ahh I see, I was thinking a Home Equity Loan. Stupid me didn't know there was a difference.

Yeah, basically just revolving credit facilities for consumers.

Businesses use them all of the time to smooth out liquidity problems and avoid financial distress...not unreasonable for an individual to want to use them for the same reason. If you have sufficient equity in a home and are making investment decisions that could lead to liquidity issues (like not wanting to hold a lot of cash, but being worried about having to sell assets at a bad time), it seems like a pretty good option.

Of course that's the justification for why they exist. I am sure that most of the time they get used for stupid things and are just another way for morons to rack up consumer debt. Pay off your high interest credit card debt with a low interest HELOC. Works great, except the people who rack up lots of CC debt aren't likely to stop doing so when they find a new credit source. 18 months later now they have a maxed out HELOC and a maxed out CC.