5 Questions: Spending A Raise, Investing, Inheritance, Engagement Rings, and Weed

Last Updated on July 30, 2019 Last Updated on July 30, 2019
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We get dozens of emails from listeners each week asking really insightful financial questions. When a question needs a detailed answer or is of interest to a lot of people, we turn it into part of a 5 questions episode. Today we have 5 questions about spending a raise wisely, investing in a bull market, what to do with an inheritance, how to pay for an engagement ring, investing in weed stocks, and a bonus question about gold.

5 Questions From You

Question One: What to Do With a Raise?

I’m getting a $700 a month raise. I have $13,000 in credit card debt and a $20,000 car loan.  I did a balance transfer for the credit card with 0% interest for 18months. The loan is 4% interest. I have a three-month emergency fund and no other savings. How should I use this raise?

Thanks,

Nic

Credit card debt is always an emergency because the interest rates are so high. Set up an autopayment for $723 to go to the credit card debt. By doing so, you’ll have it paid off before the 18 months is out.

Because the interest rate on the car loan is less than you can expect over time investing (7% annually), take the $723 you were paying on the credit card debt and start investing it. Great job on the emergency fund!

Question Two: Investing in a Bull Market

I’m a cash hoarder, and after listening to your show, I realized I need to invest more. I invest in my 401k, and I will receive a pension when I retire. My investments in stocks are through Robinhood, and I am investing with Betterment monthly. I also have an emergency fund in a high yield savings account. And have invested some cash in a rental property.

And I still have $29,000 to invest. Since we’re at the peak of a bull market, where should I invest my cash? Should I keep this in cash as opportunity fund until the market correction or should I put it in Fundrise and Vanguard? I am 33 and want to retire early.

Thanks,

Melly 

No one can predict the future, but this is Andrew’s current strategy for new investments; 2/3 goes into the Golden Butterfly portfolio, and the remaining 1/3 is going to Fundrise, an eREIT. He and Laura already own three rental properties and the home they live in so they don’t want to be too heavily weighted in real estate.

It's easier to look back than to look into the future.

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If you don’t want to add another rental property but want some more real estate in your portfolio, Fundrise is a good option. It’s sort of the middle point between owning rental property and investing in a large scale REIT.

REIT shares represent private and public equity stock in companies that are structured as trusts that invest in real estate, mortgages or other real estate collateralized investments.

Fundrise chooses projects much the same way good investors choose a rental property. Specific criteria must be met, and if a deal doesn’t meet them, they pass on the deal.

Currently, about 5.5% of Andrew and Laura’s net worth is in cash, much higher than in the past. Because they don’t see any deals that appeal to them right now, they’re holding extra money back as an opportunity fund. 

Check out our Toolbox. It will show you the tools we use to invest, and there are detailed reviews of each of them that will help you make a decision.

Question 3: What to do with Inheritance?

I’m in my early 30’s, married, have a mortgage, but no credit card, car, or student loan debt. I am self-employed, so my income is unpredictable. There is $12,000 in a Roth IRA and about $12,000 in a regular IRA from previous employers and $20,000 in savings at CIT bank (2.4% APY).

I will be inheriting approximately $120,000 soon and want to know what you’d do in my position. I want to save a lot more for retirement, but also am thinking we will need a new house soon. I’m interested in trying some of the products that you’ve mentioned. Vanguard? Betterment? Fundrise? How would you go about dividing up the money?

I have a financial advisor for my IRAs, but as far as the inheritance, do I need him? 

Any advice you have would be greatly appreciated!

You’re listening to LMM and reading Ramit’s books, so you don’t need a financial advisor. You certainly don’t need the advisor you’re currently using. The fees are outrageous! Dump him and avoid any advisor that charges on a fee schedule. betterment

Roll the IRAs over to Betterment. Betterment will do most of the heavy lifting in this process for you. Set up automatic deposits and max out the IRAs. Leave the $20,000 right where it is. That’s your emergency fund, and a high-yield savings account is a good place for it.

where to invest ira

Use our Investible tool to see if your current home is worth keeping as a rental property. If the numbers say no, you can use the money you make in the sale of the house as a downpayment for a new one.

$120,000 is too much money to dump into the market in a lump sum. Instead, use dollar-cost averaging to drip it in over time. Consider setting up auto deposits into a Betterment account set at 40/60 stocks and bonds.

Betterment invests in Vanguard funds and has a website that is much easier to navigate. The important thing is committing to monthly investing, which is what automation allows you to do without a thought.

Question 4: Time Value of Money Help

I recently ordered an engagement ring for $3,000. I opened a Capital One card with a sign-up bonus and cashback offer that takes the price down to $2,800.

After listening to your TVM episode, I am thinking about paying off the balance over 15 months ( 0% interest for 15 months on the card). My concern is that my credit score may drop from using too much of my available credit. 

I want to buy a house in the next 2 years. I’m concerned if my credit drops I will get a higher interest rate on the mortgage.

So should I just pay off the ring right away (I have the cash saved up currently) or slowly pay it off and put the rest in a high yield savings account or something like Betterment?

Thanks in advance!
Luke

You’re right. This is a math question, as many financial questions are. We can use the time value of money formula to answer many of them, including this one. With your stated strategy, you’ll save about 6.5% on the ring. Could you make more in the market? Maybe, maybe not. But a 15 month time horizon is too short even to consider investing that money.

A better strategy is to ask the seller if you can get a better deal if you pay cash. Retailers have to pay credit card processing fees so they will sometimes offer a discount if you’re willing to pay cash. If not, put the ring on the card and set up automated payments to ensure you have the ring paid off before the 0% APR period ends.

Utilization is a day to day calculation. What utilization you had two years ago won’t matter now or two years from now.

Question 5: Weed Stocks

What is your view on Cannabis stocks? Full legalization seems inevitable at which time prices will soar, so now is the time to get in while they’re low. No brainer, right? Or no?

Adam

We’re not convinced weed will be fully legal in the U.S. soon. Bible belt states run by right-wing fundy politicians are not going to be as eager to legalize it as more progressive blue-state politicians have been and will be.

If you’re going to invest, consider investing in the industries that service weed growers. People use grow lights for other things than growing weed. And as always, if you’re going to invest in an individual stock, do your research. There is a sucker’s tier for “the next big thing” investments, and the suckers are the ones that invest after they hear some pundit crowing about it on CNBC.

Show Notes

Boont Barl: An amber ale.

Dogfish Head SeaQuench: A sour ale.

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