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Question:  From Debra M. 

Question #1:Together, my husband and I make at least $160,000 a year, not including bonus and car allowance. We work in corporate, I have a 401K(matching gift), that I recently starting contributing to and my husband has some type of TSA fund through his company that he recently starting contributing to. We have 3 children.  We chose to keep them in private school over the years, which caused us not to be able to save or invest. We opened a business in 1990, and had to close it down in 1995 and file bankruptcy due to the decline in retail sales. In 2001, we discharged our bankruptcy and our older son became of age and moved out.  With one less dependent and finally out of bankruptcy (except for some miscellaneous medical bills that surfaced after the bankruptcy, due to illness and some IRS penalties that didn't get discharged), we want to try and get on our feet, save and invest some money and prepare for retirement (I am 42, he is 45). But still we don't have a lot of extra income.  What would you advise we do to get back the financial freedom we once knew. Should we buy mutual funds? , money market or invest nothing? Should we simply try harder to save some cash as much as possible?

Question#2: Besides paying extra toward our principle every month, is there any other special programs that will assist us in reducing our house note and paying the house off early. We owe $314,000 on the house.

Thanks,  Debra M.

Answer: Dear Debra M:  Congratulations on discharging your bankruptcy and getting back on your feet.  You  don't indicate what your annual spending needs are, and that might be a starting point for you.  In your situation, good money management is a must. You'll need to track expenses for several months, and categorize them, to arrive at a monthly average.  With this information it will be much easier for you to begin setting priorities.  It may be tedious, but it gives rewards far beyond the time you will put in doing it.

I note you and your husband have both started up your employer sponsored retirement plan contributions.  This is a good starting point.  You should review these once or twice yearly and determine if you have additional discretionary income that you can sock away.  Plan on regularly increasing the amounts you contribute over time.

Regular savings should be a priority for you as well.  That is, an account that is not tax sheltered, and that is accessible and liquid.  You should build that account for a time until you have an adequate reserve fund (three-six months of net monthly expenses depending on your employer disability benefits).

As to investment vehicles, your reserve fund needs to be in something not subject to market fluctuations, like a money market account.  Your choices in your retirement plans will be dictated by what is offered in the plans. Normally a variety of fixed and growth mutual funds are offered.  Growth or stock funds are suitable for this type of longer term investment.

As for your mortgage, you can certainly pay down principle yourselves. However, you are in a higher tax bracket (presumably, with $160,000 of gross income) and tax reduction is one way of accumulating wealth.  For people on payroll income, there is very little tax shelter; home mortgage interest is one of the few.  You might want to consider part of what you save as a fund that you will use eventually to pay down or pay off the mortgage when you no longer work at your income level, or are retired altogether.

Your employers may also have employee workshops that they offer to help employees make investment choices.  Check into it and take advantage of whatever is available.

Good luck with your future success.


Your Expert:  Claudia Fitch, CFP, EA
                      Fitch Financial Advisors LLC   FitchCL@aol.com

Question:  From Diane: How can I determine if I should pay off my mortgage when I retire? My retirement income will be similar to my regular income. However, it would be nice to have no mortgage payment if I don't suffer tax wise.

Answer: Dear Diane: I understand your desire to stop paying mortgage payments after all those years! But, it may not be the best idea. The mortgage deduction is available if you itemize your expenses and the IRS Code requirements are followed. The deduction for mortgage interest helps "subsidize" a portion of the interest expense only to the extent of your overall marginal income tax rate.

Some of the issues you should look at are the ratio of your loan to the home's value, the ability to refinance your home after you retire if you find you need cash, and your net cash flow from Social Security and retirement funds after expenses. The goal is to determine how easily you can carry the mortgage payment. You need to keep your income growing too because inflation will continue after you retire even if it continues at a low rate. Your income needs to grow at least as fast as inflation or you will lose buying power. If you pay off your home mortgage you take funds out of other investments which may preclude income growth. If you decide to keep a mortgage, make sure you refinance it at the lowest fixed rate possible before you retire.

Your Expert: Douglas Buser, MBA. CFP  doug@buserbros.com