Self-employed, where do you put your money?

[graygables]

We are going to be paying off our CCs this year and I'm now looking into where we should start retirement savings. Since we don't have an employer, where should we look? DH wants no risk and would be happy to plop it in a savings account, but I'd like to see if we could get a better return than that since we are starting late.

Also, where do you keep your emergency fund? Regular savings account?

TIA for any tips!

 

[disneysteve]

First, congrats on paying off your CC debt.
Second, congrats on starting to think about retirement savings with the money you will free up.

Now, on to your questions. Tell your husband there is no such thing as "no risk." Putting your money in a plain old savings account incurs the risk that you will not build enough savings to live on and thus never be able to retire. You also run the risk that inflation will erode to almost nothing what meager earnings you get from that account.

The stock market has historically averaged 12% total return/year. That doesn't mean 12% every year, just on average. Some years are less, some years are more. But no other investment category outperforms stocks over the long haul.

You mention that you are "starting late." Don't know how old you are but it really doesn't matter. Go to the library and pick up "Start Late, Finish Rich" by David Bach. It is an excellent book for this topic.

Being self-employed, you can open a SEP-IRA or a 401(k) plan. Speak to your accountant about those.

As for the emergency fund, that should be somewhere safe and accessible. I recommend a money-market mutual fund. If you pick up any issue of Money magazine or Kiplinger Personal Finance, they list the top-yielding accounts in the country each month. The current top interest rate is from the PayPal money market account. They are paying 4.25%.

Keep the questions coming. Lots of helpful folks here in this area.

 

[bdb7607]

Steve nailed it, based on your sig I'd guess you're mid 30's, which in my opinion is way too early to be limiting risk, you're at the age where you should be in all stocks. As Steve mentioned, historically the stock market has done very well, the best thing to do is to continue to put money in a plan and forget about it until your 50! Easier said than done as I watch mine almost every day

If you're like my DW, who wants to limit risk as much as possible but STILL wants to be in stocks, buy an index fund (Vanguard has a low cost fund).

As for emergency fund, yes a higher yielding money market fund will work the best (we have an ING account for that purpose).

Good luck and congrats on what you've accomplished thus far!

 

[NCRedding]

My Dh and I are self-employed. We have set up a simple plan that we contribute to, and match each year. Our employees are not yet contributing.

I belong to a credit union, so I have a small savings account, and have two money market accounts--one for our estimated taxes, and one for the rest--in that account I have our emergency funds, and our sub-accounts for things like vacations, a new car, clothing, gifts, hazard insurance, real property taxes. If you read Mary Hunt, this is where my "freedom accounts" are kept. Then we have the money we inherited from family in mutual funds/stocks/and annutities, based upon a financial planning method that takes into account our ages and our risk-taking levels.

 

[bdcp]

I recommend hiring a professional financial planner and not asking just anyone what to do with your money. A planner will look at your situation and work a plan for you and your family. But, be prepared to be told you need to take higher risks at your age to build enough wealth to retire comfortably. The difference between wealthy people and less than wealthy is the ability to look to the future and take the necessary risks involved. Wealthy people aren't luckier, they're financially smarter and take more risks.

 

[LoveWDW]

I recommend a professional, also. In fact, two professionals. I don't believe in having all of my eggs in the same investment.

 

[dcfromva]

graygables,
Investing is not one size fits all--when picking an investment, you should be comfortable with the level of risk that you assume. If you only feel comfortable with investing in the stock market when the market is doing well, but then constantly worry about the safety of your investment and then panic and sell when the market takes a dip (basically buying high and selling low), your rate of return may end up being lower than safer investments which don't require you taking as much risk.
Of course, if you pick something that is 100% guaranteed, you will have to invest more and work longer (and your objectives may be out of reach).

I attended a retirement seminar last year-- one thing they suggested was to write down all of your goals for retirement (travel, second home in FL, whatever it is).
Then, they recommended figuring your retirement income--their guideline was use current income minus what is contributed to savings because that is what you are currently spending (their audience was folks who could retire in 5 years--so, it might be a different formula for someone 15-20 years from retirement).

Then, they had some tables to come up with how much money was needed to be saved in order to generate the income needed in retirement as well as the rate of return that was required to reach that saving goal (and the mixture of savings instruments that would achieve the required rate of return). In some cases, folks did not need to assume as much risk as they thought they did to achieve their savings goal. (They also illustrated a case or two where folks had to work longer than planned --sometimes only a year or two more made a huge difference).

This is only a thumbnail of what was covered in a 2 day course-- A good financial planner should be able to help you with this sort of stuff and help you find the most comfortable fit with your investment portfolio.

-DC

 

[Steamboat Bill]

Roth IRA or SIMPLE and invest in index funds (Spiders)

 

[disneysteve]

I recommend a professional, also. In fact, two professionals. I don't believe in having all of my eggs in the same investment.

I'm not quite sure what you meant by this. Having one good fee-only certified financial planner is fine. Don't hire someone who is in business to sell you stuff as that creates an immediate conflict of interest in the advice he/she will give you. I can't think of any reason to hire more than one financial planner. It will just confuse the picture and rack up unnecessary expenses.

 

[luckofthedraw]

If you are asking where I put my money, personally, it is in a self-directed Roth IRA, which I invest in real estate and options on the XEO market. I'm a real estate investor, so it's logical to use my money doing what I know best. And I like being in control of my own assets, but that's just me.

And though mine averages 4-6% gain per month, a great (conservative) options trader is hard to find. You can lose it all if you are not careful with options.

Where should you put your money? Well that depends on your age and your propensity for risk. Tell us more.

 

[graygables]

Thank you, everyone, for your replies so far. We are both 41, I do homebased type things, "pin money" as DH calls it (I call it WDW money!), DH is a masonry conractor, so works very seasonally. His father was a TERRIBLE money manager which is why he is still laying brick and block at 71 years old. I do not want my DH to have to do that.

We will pay off our home in five years and have very few expenditures. We don't go out, eat out, or vacation on our nickel very much (although I would like to start doing an annual vacation before we get too old!) We live fairly simply. We have children still at home, the youngest is 7, but we are not funding their college (personal choice).

DH is terrified to put money anywhere that isn't FDIC insured, I think that comes from the insecurity of his dad's finances. We are USAA members, so I've looked into some of their money market funds, but most of the conservative risk aren't that much better than an ING savings account. I'm going to put in a call to them later in the month to start having some things to look at. We won't be ready to start anything until October anyway (if DH has a good work year)

DH would like to make sure we have an emergency fund first, then apply the rest to pay off the mortgage sooner. We are to the point where the standard deduction is higher than itemizing, so he doesn't see the tax benefit in carrying the mortgage. After that, he wants to just pump it all into savings/retirement. BTW, this is a family house, so no chance of us ever selling/moving, either.

Thanks again for all the good advice...lots to think about!

 

[disneysteve]

We will pay off our home in five years

DH would like to make sure we have an emergency fund first, then apply the rest to pay off the mortgage sooner. We are to the point where the standard deduction is higher than itemizing, so he doesn't see the tax benefit in carrying the mortgage.

Since you are 41 and only 5 years from paying off the house, I'm assuming you have been making extra principal payments. While this isn't a bad thing, and many would agree with you, I'm not one of them. Having a paid off house and no savings isn't a good situation to be in. Come retirement, you can't pay the bills with your house unless you sell it or borrow against its value. You are setting yourself up to be 'house poor.'

Rather than making extra house payments, put that extra money into your savings accounts. Even in relatively low risk investments, you should be able to match the return you are now getting by prepaying the mortgage. Plus, if you are that close to the end of your mortgage, you aren't paying that much interest at this point anyway.

I understand where your husband's line of thinking comes from, but the fact that he has seen his father have to work forever is exactly the reason that you guys need to do more than just stick your money in a low yielding savings account for the next 20 years. If that's all you do, you'll be in the same situation down the road. But at 41, you still have plenty of time to correct things so that you can retire and have money to enjoy life. Good luck.

 

[salmoneous]

TIA for any tips!

Funny you should mention tips (we'll get to that in a second.) First, let me just say the stock market isn't for everybody.While it is certainlly something you should give a lot of thought to (and probably at least some of your retirement savings) don't let anybody pressure you into thinking you have to do it. In particular, if your goal is to be certain you have enough money for retirement, and you can reach that goal without taking on stock-market risk, the market might not be right for you.

If you husband really wants ROCK stable investments, check out inflation-indexed goverment bonds. They come in two basic flavors - ibonds and TIPS (see, I told you we'd get back to tips). Both pay better rates that you are going to see from a bank, have good tax advantages and are simple. They are also fairly liquid - you can always get your money, but with the possibility of a small cost.

Also, especially if you aren't deducting your mortgage interest, paying off your mortgage sounds like a good way to go to me, just make sure you have some liquid assets.

 

[disneysteve]

if your goal is to be certain you have enough money for retirement, and you can reach that goal without taking on stock-market risk, the market might not be right for you.

Wow. I would love to be sure I had enough for retirement without taking on stock market risk. I don't even think about the possibility that folks can do that. If we were only earning 4 or 5% on our savings, there is no way we could retire at the age we want with the lifestyle we have, and we are pretty thrifty. We are aggressive savers, currently putting away 28% of our gross income. At that rate, I hope to be able to retire by age 62 but I'll work a few years past that if needed.

So if you can retire comfortably without putting money in the stock market, that's great. No need to take on more risk than needed. I just don't see that as a realistic possibility for most people.

 

[graygables]

Since you are 41 and only 5 years from paying off the house, I'm assuming you have been making extra principal payments.

Actually, no, we don't pay extra. We had a 15 year mortgage and it will be up in 5 years.

 

[disneysteve]

Actually, no, we don't pay extra. We had a 15 year mortgage and it will be up in 5 years.

My mistake. Thanks for clarifying that.

 

[dvcgirl]

We are going to be paying off our CCs this year and I'm now looking into where we should start retirement savings. Since we don't have an employer, where should we look? DH wants no risk and would be happy to plop it in a savings account, but I'd like to see if we could get a better return than that since we are starting late.

Also, where do you keep your emergency fund? Regular savings account?

TIA for any tips!

Hi graygables....

I am a small business owner and so I think I can answer some of your questions.

First of all, if you do speak to a professional, like others have said here, speak to a Certified Financial Planner. Those are the only three words that you are looking for in the title. That's it.

We have someone who we use to bounce ideas off of, but to be honest, it's not all that difficult to do some of this on your own with a little reading.

For one, what you should set up is a Solo 401K if you are a sole propietor. This works just like a regular 401K and the money you invest goes in right off the top, tax deferred, thus reducing your taxes. A *great* thing. In 2006 you can contribute 15,000. On top of that, a huge perk is that you can invest the first 25% of your profits up to a certain amount. I think the total limit you can put in is 46,000 dollars in 2006. Now, I know that's a whole lot of money, but my point is if you have a great year (as contractors often have), you can put a whole lot away when times are good.

Now, my solo 401K is with Fidelity. We have a lot of our other money in Vanguard. Why did we choose these companies. Two words....low fees. We're not looking for "expert advice" where the "financial specialist" is trying to push us into a certain fund that he or she is receiving kick-backs for to sell. No thanks.

If I was in your shoes, and still a good number of years away from retirement I'd look into Fidelity's Freedom Funds (inside that 401K account). These are basically "targeted retirement funds". They will factor in your age and your expected date of retirement and adjust your money from more aggressive early on to more conservative investment vehicles as you reach your retirement date. The fees are quite low, and you are far too young to be buying bonds.

As for books, there's lots of good ones out there. But one I just read would be *right* up your alley. It's easy to read and condenses a lot of financial gobbly-gook into a very concise book. The author is Jane Bryant Quinn, and the book is Smart and Simple Financial Strategies for Busy People.

Best of luck to you!