On May 13, 6:31 am, Ram Samudrala <r...[at]sp1.compbio.washington.eduwrote:
- quote -

The basics of a financial plan would be

1) pay down debt
2) set aside money for retirement
3) have disposable income

You are at step 3... and the ways to do 1 and 2 vary somewhat, and
arguments could be made strongly for making sure a person "sells out"
to accomplish #1.

Once a person hits step 3, there is much to be gained from
diversification. 1/3, 1/3, 1/3 like another poster suggested.
Creating a business where others generate income for you is another.
Maximizing life experiences is possibly a another way.

Most financial plans are broad and time time to implement. It is OK
to use a multipronged approach to solving complex financial matters.

On May 13, 5:31 am, Ram Samudrala <r...[at]sp1.compbio.washington.eduwrote:

- quote -

Its great that you enjoy work and have a plan, but keep in mind that
some things are out of your control.

http://www.prnewswire.com/cgi-bin/st...4578090&EDATE=

On May 13, 11:54 pm, Ram Samudrala <r...[at]sp1.compbio.washington.eduwrote:

- quote -

Ram

One of the most important life strategies is to 'minimise regret'.
Again this has been shown in the lab.

I would do this as follows in this case. Split your excess earnings
in 3. Spend 1/3 reducing the mortgage (risk free return, security for
the future). 1/3 investing in stocks (long term capital gains,
security for the future). 1/3 in special consumption.

I would earmark the special consumption as 'special' ie don't just
spend it on a nicer TV or a nicer car. For my own purposes, that
would be a trip to Rajasthan to see the tigers, or to Assam (barring
guerilla kidnapping ;-) or to Xian to see the Terracotta Warriors, or
Madagascar to see the Lemurs. Your mileage may vary ;-).

Tilting the table would be if your mortgage were in its' early stages
(first 10 years or so) because paying down early has a massive impact
on your total payments (roughly speaking, for every $ you borrow, you
pay back $2.50 I believe, but for the dollars in the first 10 years of
the mortgage, it is more like about 5 times-- I'd have to run the
numbers, but I think those are about right). This is because in the
early life of an amortising mortgage, you don't pay off much (if any)
capital, you just pay interest. So $1k paid off now gives you $5k of
future consumption. A heck of a discount rate!

No one, not even respected academics, has a perfectly stable job
future. Universities change, tenure is eroded, research priorities
shift. The day you pay off your mortgage, is the day you are in a
position to tell whoever holds you paycheque 'take this job and shove
it'. Even if you never do do that, the self confidence it gives you
is wonderful.

Similarly 401ks or other tax deferred savings vehicles can grant you
similar levels of return, on a 30 year horizon.

By splitting it 3 ways, you can't really be sorry what you did or
didn't do, because you were prudent, but you didn't cheat yourself.

On May 13, 3:31 am, Ram Samudrala <r...[at]sp1.compbio.washington.eduwrote:
- quote -

I think it really depends on what you want to do. There's
no guaranteed no-brainer for choosing between one or more
of the above options.

Personally, I would go in the order 2, 1 and 3. I would max out
on retirement plans (because you can't catch up and the tax
break is great). If you aren't maximizing on that, I don't think
the money could be considered "disposable". As you get
older if you think you have over contributed, you can just
sit back and relax.

Next I would pay of the mortgage. I don't like debt...not even
"good debt". (Again, that's just a personal thing, not necessarily
the best business choice. For example, I'm the type that
wouldn't bother with taking advantage of a 0% cash advance
and trying to make a little money off keep it in a savings
account.)

My last choice would be to invest in a normal account.
Aside from a regular savings account, this option has the
most risk (and I'm very risk averse). Plus, there is no tax
shelter...you end up paying tax in the good years and
are limited in what you can claim as a loss in bad years
(assuming you need to sell every now and then).

Anoop

"Deferral of the disposable income" means that let's say we paid down
the principal $1000 per month and so the loan matures in say, 15
years, instead of 20. Then for 15 years, we don't have access to the
$1000/month of disposable income to spend as we wished.

"Excessive retirement" is simply having more disposable income than we
do now at the time of "retirement", if I ever do. While I can't
predict the future there's a high probability that this will happen to
me and my family.

A "normal plan" is something that is not tax advantageous and just
generates an income stream based on the principal.

Darkness also had a right perspective which I appreciate: 1). work
where I want to work and on my own terms 2). contribute to my
community 3). pursue projects and knowledge which extend my sense of
competency. I agree these are worthy goals and I can say I've achieved
these goals (see
http://www.ram.org/ramblings/philoso...cial_plan.html where my
argument is that achieving 1-3 is based on choice, and that excessive
disposable income is actually a CONSEQUENCE of those choices, but then
I've also realised (quite recently) that money can be used to further
bolster 1-3.

I'm now struggling with a simpler issue: what to do with more
money. I've led a simple life and continue to do so due to 1-3 above,
but at least my wife is ready to enjoy the disposable income. <-:

--Ram

PeterL <po.ning[at]gmail.com> wrote:
- quote -


- quote -


- quote -


- quote -


- quote -


- quote -


- quote -


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.

On May 13, 3:31 am, Ram Samudrala <r...[at]sp1.compbio.washington.eduwrote:
- quote -


But it'll get to zero sooner. What do you mean by "deferral of the
disposable income"?


- quote -


Excessive funds during retirement? How do you know how much you'll
need when you retire? Can you predict inflation or expenses (such as
medical) in 30 to 40 years time? And how much is excessive?


- quote -


What is a "normal" plan? And what is "excess" cash?


- quote -

Ram Samudrala wrote:

- quote -

Your list runs from most illiquid to readily available. My view on
paying the mortgage down would change based on a number of variables.
What are your long term plans? If one plans to stay in the house long
term, retiring with a paid in full mortgage is likely the right thing to
do. If you're planning to move in the next 3-7 years, well, this is like
buying a 6% CD, can't argue with that.

Where do you stand now on your retirement savings? At 35, you should
have between 3 and 4 times your gross current income saved, if your goal
is to replace 80% of your final income with money from savings.
See my page http://www.joetaxpayer.com/retirement.html where I discuss
this and offer a spreadsheet where the 3-4x becomes clear.
If your company offers a 401(k) with matching deposits, it's important
to save at least enough to capture the full match.

The regular account, invested in stocks is the more liquid investment,
but in general, you only want money in stocks that you are comfortable
tying up for 5-7 years or longer. Long term capital gains and dividends
are taxed at a favorable rate. You should seek the funds or ETF which
have the lowest expenses.

More details from you will likely return some better specifics in any
replies.
JOE

On May 13, 11:31 am, Ram Samudrala <r...[at]sp1.compbio.washington.eduwrote:
- quote -


Can I make an alternate suggestion?

http://www.efficientfrontier.com/ef/0adhoc/excel.htm

"Three things provide long-lasting satisfaction, as quantitatively
measured by academic psychologists: autonomy, meaningful contact with
others, and the development and exercise of competence. Cognitive
researchers loosely refer to fame, fortune, and power as "external
rewards," and autonomy, connectedness, and competence as "internal
rewards.""

William Bernstein, besides writing some excellent books on investing,
was (is?) a practicing physician for 25 years.

My own view is you should spend or invest your money so as to maximse
the first 3.

The way I achieve that is by increasing personal financial security,
so I feel more free to 1). work where I want to work and on my own
terms 2). contribute to my community 3). pursue projects and knowledge
which extend my sense of competency.

This to me says:

- paying off debts is number one priority

*however* in the long run it may be better to invest. To the extent
that this is tax sheltered, I do that first

when I do spend money, it is on experiences that are time-sensitive
and that I might never do again: travelling to exotic places, for
example.

Let's say one has a lot of disposable income per month and the age is
35. The options are given below and the goal is to maximise lifestyle
(i.e., spend money on things we don't need) with some respect for age
(i.e., lead a good life now).

1. Paying down a 30 year fixed mortgage (at a rate of 6%, say). This
would be good but since it won't get to zero right away and the
payments will be the same, this is essentially a deferral of the
disposable income.

2. Investing that extra cash in a retirement plan. This is another
defferal since it will lead to excessive funds during retirement
(which I never plan to).

3. Investing that extra cash in a normal plan (where the principal can
raise to adjust for inflation, but excess cash can be used to lead
a better lifestyle).

I know it is very situation dependent. In writing this e-mail
down, I figured out an option that is actually what I'll do: all three
of them.

--Ram