Financial makeover is not done yet

Ramit Sethi · March 3rd, 2006

Carl writes:

Whatever happened to the rest of your 2006 Makeover? I see you stopped after step 3.

I know, I know. I’m not done. There’s still more to write, including Roth IRAs and other stuff. Let me try to get it up in the next few days.

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If you have specific things you want to see in Step #4, leave a comment here.

(See steps #1, #2, and #3.)

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  1. karishma

    What I’d like to specifically see your opinion on is the investment vs. repaying debt question. For those of us who recently graduated from college with a ton of student loans (relatively low interest) and possibly credit card debt (high interest), would it be better to focus on getting out of debt, or should we be aggressively investing in order to make the most of that compound interest vs time thing.

    I’ve heard various opinions, so I’m curious to know what you think.

  2. I’ve been waiting for step 3 for a while – I’d love to have a focus on setting up an investment account and suggestions for exactly what to do to start. I’m not talking about “now you buy some stocks”. I’m thinking more along the lines of “if you’ve got 1000 to start with, you could do worse than to put 500 in the Vanguard 500 and 500 in xxx”.

  3. justanotherblogger

    Karishma, I think the answer is quite obvious in your situation. OF COURSE you pay off your high interest debt (credit cards) first.

    The compound interest over time thing also works AGAINST you when you have debt (especially credit card debt). Just keep that in mind.

  4. My question is along the lines of the first poster as far as paying off student loans. But for us the alternative isn’t paying off credit cards its saving and investing. Between my husband and I we have a total of $50,000 in student loans. We are also wanting to save up for a down payment for a house. What is best… saving or getting rid of student loan debt? Currently our student loans are about the same interest rates as most online savings accounts (HSBC & ING).

  5. I’m currently in need of life insurance…is that something that could be included in Step 4? Or perhaps have it’s own post…

    One term plan I’ve looked into will return your premiums after the term is up (assuming you didn’t have to use it, of course). I’ve been wondering if it’d be better to just buy regular term and invest the difference…

  6. Currently, I have some money saved up just for investment purposes. I’m 23 years old, and having a bit of trouble finding a good place to invest the money. (It’s just sitting in a savings account right now) I don’t know where to start. Should I put 80% into index funds, and 20% into individual stocks?

    Time Horizon: the only thing I might need the money for is when i go to grad school in 2-3 years and/or when Im ready to buy a house. If I find other means for the two goals mentioned above, then I’m just looking for a good place to let my money grow.

    I have 401(K) setup depositing amount equal the company’s match. I don’t know if I should also open up a ROTH IRA as well?

    Along with those questions (amongst other confusions), would it be better focusing on paying off a car loan which is at 4.3% or just keep paying the monthly payments and put the rest into the stocks/funds mentioned above.

    I hope my question can also benefit others in a similar situation.

    Thanks and looking forward to the upcoming lessons!

  7. rtyuiopcv

    I want to see in Step #4. Please show me.

  8. I’d like to see a more detailed writeup on investing. How to evaluate (index) funds, stocks, etc. And perhaps also how to handle risk management/decide portfolio distribution.

  9. Grayden

    One thing that might be worth talking about as part of the Financial Makeover is being realistic about housing, transportation, and lifestyle. A lot of people get a bit crazy with spending when they get their first job that pays more than peanuts. For the last several years I’ve been paying far more than I’ve needed to because I felt that I needed to live in a NICE apartment. After living in a nice place for a while and even upgrading to a better place, I realized that I was throwing away half of my income on living expenses and not even earning any equity. It seemed obvious enough that is was time to buy a house and start building some real value. After all, my friends were all buying houses and they seem to be managing just fine. After a period of house hunting and analysis of both my finances and my realistic needs, I realized that owning a house would completely ruin me at this point in my life. After spending so much on rent in a full service apartment for several years, I didn’t have much money for a decent down payment so the banks would have eaten my lunch. On top of that, I’m still in grad school part time in addition to having a full time job, so I wouldn’t have time to properly maintain a house and keep other time commitments in my life as well.

    Having given my housing situation plenty of reflection and trying to find a way to make it work, I’ve realized something about myself – I really just don’t need to live alone or in a fancy place. Sure it’s nice, but I don’t need it to be happy. Everyone has different needs to satisfy their esteem. Some people need to drive a nice car but don’t care where they live. Some people need a nice home but would be perfectly happy driving a rusty old beater. Some people need to have high end home electronics or designer suits and watches. Some people just don’t know what they want and drive themselves into debt trying to have it all without the means to support it. Doing some honest self-reflection and being realistic about things you don’t really need can help you find a few big ways to get your finances in order. Cutting back on things you don’t honestly need can free up a lot of capital for the things that really do matter to you. For my situation, I’ve realized that while I do want to own a home some day, it’s not time yet. I’d rather get my debts settled and save up a nestegg in case I end up moving to another city when I’m done with grad school. This summer I’m moving out of my expensive apartment and into a room in a friend’s house and as a result I’ll be cutting my living expenses by more than 60%. That extra saved money can go into investments and savings until a time when my life is sorted out enough to do something with it.

  10. Jim Kane

    One area that was noticeably absent from steps 1-3 was emergency funds. It seems like this ought to have made it into the top 3, since having such a fund greatly increases your chance of actually doing the other stuff successfully. Anyway, bring it on in Step 4!

  11. Jenn L.

    Just new to this site here and read step #1 and a bit of #3 (2+3 are on the way). Nice blog you have here…

    Anyway for step# 4 (or in teh future article), it would be nice of all the fallacies people struggle in the past – like why couldnt they save money – of what cost us more that no americans are saving?! Also would like to see some tips of buying or investing stocks, like which stock to buy (or not).

  12. I am new to investing. Heck, I am new to savings in general. I am 30 and still have $55K in debts, that I hope to pay off in around 3 years. (I dedicate $1500/month in debt payments)

    Anyways, even though I do not have much free money to dedicate to savings and retirement now, I do alot of thinking in terms of how to maximize savings and retirement when I can finally switch from debt-payment mode to savings mode.

    My plan…
    1.) Maximize my 401K contribution.
    2.) Maximize my Roth IRA contribution.
    3.) Contribute to a taxable brokerage account.

    More importantly, I have thought about how to allocate assets within each of these 3 areas.

    I have decided to allocate almost all of my 401K contributions to a money market fund. The reason being… I wanted to take advantage of the effects of compound interest that a tax-deferred vehicle like a 401K provides.

    Taxable brokerage account:
    Here, I will purchase low-turnover index funds… probablhy index ETFs. There are a few reasons for this. Index funds tend to produce very little taxable dividends. The benefits of compounding in an index fund are low, and wasted in a tax-advantaged vehicle like a Roth IRA or 401K. But more importantly, if at the end of a year, I see that the index ETF fund has dropped in value, I can sell it, write off the loss for a tax break, and then buy a similar index ETF at the beginning of the next year. Indexes tend to rise and fall alot, but average out to 8% gains a year. That being said, when the value of an index drops, selling and rebuying a similar index fund (just not the exact same ETF) can help earn you more money in the long run, than just sit and holding. Rather than using a 401K to buy index funds (cost averaging each pay cycle), I plan on buying index fund ETFs (cost averaging each year) and declaring a negative year’s results as “losses” to get my tax break. This is something you cannot do in a tax-advantaged vehicle.

    Roth IRA:
    Here, I wanted the flexibility of picking stocks and funds not offered with my 401K plan, and take advantage of the fact that I get taxed on none of my gains.. short term, long term, or dividends. I am tossing into here stocks that give decent dividends and growth potential, as well as aggressive mutual funds focused on energy, natural resources, and so on… as well as the occasional short-term trading.

    In a nutshell, my 401K will be very stable, and grow from tax-deferred compounding. Index-funds tend to yield more on average, so I will be invested in that too, while taking advantage of writing off losses in the index on my taxes. And pursue growth and dividends in my Roth.



  13. Anonymous

    I think some people would like more detailed investing strategy, though I don’t think it’s a logical continuation of the series.

    I would like to hear your take on ETFs vs. index funds.

  14. Ryan Steckler

    A couple of things that I’d like to see in the 4th installment:
    1) Investing basics (“You don’t have to BEAT the market…just match it to make money”)
    2) Employment benefits and what to do with them (“ESPP, options, 401k”)
    3) Taxes and how to avoid them (legally) (“Tax deferred savings, capital gains, why paying taxes later is better than now, why day trading isnt as effecient as holding, rebalancing your portfolio to take advantage of capital losses”)
    4) Portfolio basics (“asset allocation, Index funds, ETFs”)

    This is a great site and you do great work. Keep it up!


  15. Ok, what about investing past ETFs, Index funds, mutual funds, stocks, etc. Something that is not over valued because everyone and their mom are doing it. What about REITs, bonds, and maybe foreign exchange, commodities, futures, and options. Granted some have steep learning curves, and not everyone will have the time or patients to dedicate to learning and investing in them. But I’m sure some would be and others might become interested after being exposed to them. (I have a feeling that most people haven’t even heard of these investments, though I do not know for sure).

    Anyway, great site and looking forward to the next instalment of the series

  16. A much later step, how to avoid being over taxed on your investments!