It’s a Q&A Edition of Optimal Finance Daily: Episode 1491. Today's questions cover whether you should be financially supporting a loved one through bankruptcy, and more.
And I’m your host and personal finance enthusiast, Diania Merriam. As we do about once a month, we’re going to change it up today and address some audience questions on the show. But quick disclaimer, just like all the content shared here, this is for informational and entertainment purposes only… or “infotainment” if you will. I’m not a certified financial planner, and encourage you to take my opinions with a grain of salt.
That being said, if you want to send a question in to be answered here on the show, just send a message to finance AT oldpodcast.com
But for now let’s get to today’s questions and start optimizing your life!
Personal Finance Question 1: “Where Should I Keep Short-Term Savings?”
So I want to start with a question I’ve seen come up a few times in emails and in our Facebook group called “For the FI Curious.”
QUESTION: It's about short term savings. Where do you keep your emergency fund, the money you’re saving for a house down payment, or money that you plan to use for something in the near future?
DIANIA MERRIAM: I hear that many people feel like it’s a waste to keep money in a savings account because interest rates are very low right now, so you’re not really going to be earning any money even in a high yield savings account. Now you could try to be a little fancy by setting up a CD ladder, or even looking into a short term bond fund that might be slightly better than a savings account.
But here’s how I see it.
This emergency fund or money that you are going to use in the short term has a specific job: it offers you stability, accessibility, and liquidity. I don’t look at the money I keep in cash as needing to grow, because I have other money invested for that purpose. And having a strong emergency fund or cash reserve can also provide the benefit of increasing your risk tolerance when it comes to your investments.
Because I’m young, I’m 100% invested in stocks and my strong cash position helps me tolerate the volatility of my 100% stock portfolio. I know I’m not going to need to touch the money I have invested for a long time, so I’m happy to let it ride the peaks and valleys of the stock market. So if you feel like you’re missing out on returns you could be getting with the cash you have in a savings account, consider this. That money still has an important job to do, even if it's not growing.
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Question 2: “Should I Be Financially Supporting a Bankrupt Partner?”
Our next question comes from Denise who writes:
“My boyfriend/domestic partner has a business that was affected by covid and he is going to be filing for bankruptcy. He’ll soon have no car, money, or career. I don't know if I should let him go through this and figure things out and be there for him emotionally or if I should help him financially. I have an emergency fund but if I help him get back on his feet and take on all the bills and finance a car for him to use, it will deplete my emergency fund. Even though this is an emergency, I'm hesitant to offer financial assistance in full. It took me a long time to save what I have and even though covid sealed the deal, his business was declining for a while due to some bad business decisions. So I am reluctant to offer it, but I do know if roles were reversed, he would help me financially. Where do you draw lines financially in a relationship?”
DIANIA MERRIAM: Thanks so much for writing in with this question Denise. Firstly, I can tell you really care about your boyfriend and I totally understand wanting to help under the circumstances.
I’d encourage you to listen to a recent episode, #1488, titled Financial Advice From the In-Flight Safety Handbook. This article discusses how important it is for you to put your own safety mask on before helping others.
What I got out of it is recognizing that financial assistance isn’t the only way you can help. So for example, rather than financing a car for him to use, could you experiment with sharing your car? There are many one car households out there that make this work, and I’ve actually done this in a previous relationship with much success. My boyfriend at the time would drive me to work and pick me up and then use the car during the day to run errands and drive to job interviews.
I also noticed that you didn’t mention him asking you to help out financially — your question seems to center around you wondering if you should offer. If he is filing for bankruptcy, he may have his own plans for starting over and learning from this experience.
So I might start with asking him his plans on contributing to your joint expenses and perhaps go through a budgeting exercise together. If he isn’t directly asking you for help, it might be a non-issue. I also understand the perception that you feel if the roles were reversed that he would help you. And I’m sure that he would help you if he was in the financial position to do so.
But the way you have described it, I’m not sure you really are in the financial position to help, so I’d encourage you to not use this as a way to guilt trip yourself. Especially because it doesn’t sound like he’s asking for you to help him financially. It seems to me the best path forward here is to open up some transparent discussions about his plans and brainstorm all the ways you can help without raiding your emergency fund.
Question 3: “Should I Invest or Pay Off My Mortgage?”
And our last question comes from Tom who writes:
“I am 53 and have no debt except a 30 year mortgage. I just refinanced that to 2.875%. I have $90k in an emergency fund. My question is if I know I will not be in this home for more than 10 years, is it worth putting every spare dime towards paying it off or put extra money I have into investing instead? Even if I put the money towards the house, I likely still won’t be able to pay it off in full while living here.”
DIANIA MERRIAM: Ah, the age old question, should I invest or pay off my mortgage? This continues to be an ongoing debate because the answer is going to be unique to your preferences and circumstances.
The interest rate on your mortgage is so low, you’ll likely make a higher return on interest from investments than the money you would save in interest by aggressively paying off your mortgage. However, many people feel peace of mind by owning their house outright, especially if it’s the home they plan to be in when they retire.
Since you already stated that this isn’t your forever home, I don’t see much benefit for you in throwing more money at the house. I personally have chosen not to pay off my mortgage early for a number of reasons — firstly, I don’t look at my primary residence as an investment, and I don’t want my money held up in a tangible asset. I prefer the liquidity of stocks.
The argument for the peace of mind in being mortgage free doesn’t appeal to me because my mortgage is $600 per month, so this is an expense that is easily met especially because I don’t have a car payment or any other debt. If you have a high monthly mortgage, I can see the peace of mind of not having a mortgage being more attractive.
I also don’t know how long I will live in this house, but I do plan to keep it and rent it out after I move on, so why not let the tenants pay the mortgage? I like the advice from my friend Frank Vasquez over at Risk Parity radio who recommends to have no more than 10-20% of your net worth in your residence so that you can put the bulk of your money into income producing assets.
I had a listener reach out to me recently asking if I thought she had enough money to retire early. While she had over $1M dollars, a large majority of that was in her house, so she couldn’t really live off that in retirement unless she sold the house. I hope that’s good food for thought Tom, and let us know what you decide!
Financially Supporting a Bankrupt Partner and More: Sign-Off
Well I hope you enjoyed another Q&A edition of Optimal finance daily. If you have a question you’d like addressed on the show, go ahead and send it over to finance AT oldpodcast.com
I hope you have a great rest of your day, and I’ll see you tomorrow, where I’ll be back narrating your favorite authors, and where your optimal life awaits!