Originally Posted by kestu
Hello everyone -
A couple questions that I'd be interested in hearing feedback about:
1) My company matches 100% of my 401k contributions up to 3% and while in previous years I've consistently put 7% into the 401k, starting on 1/1/08 I decided to put this additional 4% into a ROTH IRA with the assumption that I will be in a higher tax bracket during retirment than I am right now. With my wife staying home and 2 young boys - I pay an effective tax rate of around 4% for both federal and state taxes. I assume this rate will only increase for the rest of my working life. Does anyone disagree with this line of thinking?
Good for you a saving rate of 7%+3% match and 4% ROTH IS 14% a good amount to achieve Financial independence at a reasonable age.
2) Another question I'd pose to the group is whether or not I should use this 4% to pay down my HELOC quicker (currently at 8%). I debated this issue for a few months at the end of last year, but at the end of the day decided that with the tax benefit of the HELOC lowering my effective interest rate closer to 6% I'd prefer to build my nest egg.
8% is a lot even with the tax break it is far from clear going forward that you'll earn more than 8% over the long term in stock investments in your ROTH. Although historically you would have.
I'd refinance using Penfed Home Equity Loan
at 4.99%. This will give you upto 10 years to repay your balance. I don't have a major problem with borrowing against your Home equity for home remodels, even major purchases like cars, or college tuition. However, I think HELOC have the real potential to be abused. It is far to easy to treat your home like a piggy bank and think heck the interest rate is only 7 or 8% and its tax deductable lets put the vacation,motorcycle, or DW new jewelry on the HELOC. In a few years you'll think I can save money and refi... suddenly your are buying vacations on a 30 year installment plan.
If the kitchen remodel cost $60K fine take a 10 year Home Equity loan (HEL) out, since your appliance will likely last at least that long. A new car (better to buy used but...) for $30K plan on keeping it for a long time and take out a 7 year HEL. If you notice that your cash flow is really tight because of all of the payments welll case what stop buying new stuff!!
If you want to keep a HELCO fine but don't plan on keeping balances on it no matter what the rate. A HELCO is a reasonable emergency fund until you can save enough pre tax.