Money advice:

[blonndee]

I have a very small amount invested in mutual funds (a Christmas gift from 2006). After all the declines, I'm barely ahead. I've been reprimanded (not here) when I voiced the idea that it might be better to take that money and pay off my high-interest debt (credit cards) and then start over once I get that paid. I have NO idea how investments work, or taxes, or anything like that. If I cash in my stocks, say, tomorrow, what kind of tax penalty will I have to pay, and will it be worth paying off very high credit card debt?

This might seem like small potatoes, but it's killing me right now. I can hardly buy groceries and gas, and I know I'm not the only one.

Any advice is greatly appreciated.

[Elspeth]

1. I'd pay off credit cards FIRST before investing anything

An investment might pay you 2-6% over the long haul. Your credit cards are charging you 15-30%. You come out more ahead by paying off the debt.

[blonndee]

2. See, that's what I think...

I'm just really concerned about penalties/taxes, etc. Surely they couldn't be worse than credit cards, though.

[dkf]

5. Is it in an IRA?

[blonndee]

12. I don't think so, it's a typical mutual fund

if there is such a thing.

[Dorian Gray]

25. If it's a typical IRA

then there are different classes of IRAs. Some have a front load, which means that you pay a certain amount up front to get into it. Some have a back end load, where you pay a certain percentage to get out. Some have a back end diminishing load. Each year, the percentage to get out gets less and less.

I'd call the investment company and see what type of penalty you will incur to get the money out. If it IS in an IRA, it is not worth taking out. If it isn't in an IRA, then I'd consider paying off your high credit card bills first. That's the most important debt to get rid of.

[A HERETIC I AM]

26. Your terminology is incorrect.

If it's a typical IRA then there are different classes of IRAs

There are different "types" of IRA's, not "classes". (Traditional, Simple, Roth, etc.)

Some have a front load, which means that you pay a certain amount up front to get into it. Some have a back end load, where you pay a certain percentage to get out. Some have a back end diminishing load. Each year, the percentage to get out gets less and less.

What you are referring to here are "Share classes" of Mutual Funds. "A" shares" which commonly (but not always - depends on the Mutual Fund Company) have a sales charge or "front load" to purchase, lower operating expenses and no charge to sell. "B Shares" which have no sales charge to purchase, higher operating expenses (known as the "expense ratio") and a "CDSC Schedule" or Contingent Deferred Sales Charge" that can be as long as 6 years in which a declining percentage is charged if an investor wants to sell, to the point of the charge being zero when the period ends. A typical CDSC fee structure for B share Mutual Funds looks like this;

Year sold            Percentage charged
1                            5%
2                            4%
3                            4%
4                            3%
5                            2%
6                            1%

Many Mutual Fund companies convert B shares to A shares after a period of time, commonly 8 years. And there are "C" Shares" which also have no sales charge but have the highest expense ratio and a CDSC for only one year. There are other share classes as well such as 529 classes, "F" shares, "R" Shares and others that are used in employer sponsored retirement plans and/or are institutional shares.



All of the above applies whether the Mutual Funds are held inside an IRA account or not.

An IRA is an account inside which investments can be made. An IRA is NOT a particular investment.

[Dorian Gray]

29. I know...

it was the morning, I was tired, and I meant to say that if it (the mutual fund that she referenced) was in an IRA (Whether Roth or Traditional), I wouldn't sell. If it wasn't in any type of IRA, but rather in a regular old account, I would consider selling. Front Loads, Back End Loads, etc... are all very complicated to someone who has no experience. I would call a representative at the company to see what type of penalty the seller would incur in selling the mutual fund.

I wrote the response quickly and didn't edit.

The poster should read your better explanation of the different loads and share classes. It will be helpful to her.

[A HERETIC I AM]

30. No worries!

I would hate to try and count the number of silly mistakes I've while posting here over the last few years.

One thing to remember (and this is for anyone reading, not directed at you, Dorian) is that even though there are Mutual Fund companies out there that offer "No-Load" funds (Fidelity and Vanguard are probably 2 of the most well known) you often get what you pay for. No-Load fund families must cut corners somewhere because they have they same expenses anyone else does when it comes to buying and selling securities in their funds. What most often suffers is customer service. The other thing to bear in mind is that Mutual Funds are most certainly something to be considered as a long term investment. You are unlikely to achieve anything near the historical, anticipated or expected returns if such investments are held for less than 5 years.

[SoCalDem]

16. and then do NOT use those cards except in a dire emergency

If you have anything left over, buy a 3 month CD or even a savings account, so you don't spend the rest..


pay off your car (if you have a loan)..

get OUT of debt ASAP.. It won't be easy even without debt, but if you have a downturn and you OWE , it's even worse..

If your income is small, the taxes won't be a biggie, and usually the penalty is a forfeiture on the interest.. If it's not a large amount, the penalty amount should not be either..

[Yupster]

23. Here's the scoop

If it's a mutual fund, check the share class.

If it's A share (most likely) then there isn't any penalty to sell it.

If it's C share there was probably a 1 % penalty but it just lasted one year.

If it's a B class, there is a penalty that goes down each year -- usually something like this 5-4-4-3-2-1-0.

That's the penalty part.

To the taxes. You pay tax when you sell it on the unrealized capital gains. It sounds like that would be very minor if any.

How's about paying off the credit cards and then using the monthly payment you were making on the credit cards to start investing again instead?

Just a thought.

I hate debt. I don't owe a penny to anyone, so my general view is to pay off debbts.

[Warpy]

15. That's what I think, too

and anything left over should be put into an INSURED CD or money market account, the operative word being "insured." If all you have a small amount, you'll want to keep it as safe as possible. You might pay a fee for cashing out, check to make sure it's not a steep one.

Paying off that debt is like giving yourself an 18% raise. Stocks that are doing well are paying maybe 2-5% in dividends. That's quite a difference.

Getting out of debt is going to be key to riding this mess out. Get out of high interest debt first and then work on the rest.

On edit: don't forget to cut that card up and mail it in. You won't miss it as much as you think you will, trust me.

I've done without one since 1991.

[Emillereid]

3. I think it's important to get out of the stock market and out of debt!

Cut way back on your spending. Bad times ahead!

[selador]

4. in brief

assuming the mutual funds are worth more now than they were when you bought them, you would be responsible for cap gains. since you've held them since 2006, all the cap gains would be long term cap gains.

you are also responsible each year for certain distributions, and i assume you have been putting those on your tax returns.

i am not an investment advisor, but the GENERAL rule is it is GENERALLY better to pay down debt since debt accumulates at a higher rate (interest rate on credit cards etc.) than you are likely ot make in your investments... at least for a retail investor.

if you are "barely ahead", then you would "barely" have any cap gains to pay.

[blonndee]

13. Yes, I put them on my tax returns last year

but they were small enough that it didn't make much of a difference. Good point about being "barely ahead" = not much capital gains. But my CC debt is accruing at 21.something %, which is making me sick.

I think I know what to do now. Thanks.

[selador]

27. IMO

if you have CC debt accumulating at 21%, then selling your mutual funds to pay off debt is a no brainer

however

don't then use it as anexcuse to build up more CC debt.

that's the problem some have psychologically with paying down debt is that nature hates a vacuum

they then fill back up on debt.

[Wcross]

31. +1 on that EXCELLENT advice. An attitude change is neccesary.

If you pay off the card it is more than likely to be run up again.

[better tomorrow]

6. you might want to mention your approx. age...

and whether or not starting over gives you enough time to resave.....I'm no pro and I feel for you young 'uns. We are just ready to start collecting my hubby's pension which has been in an annuity and I can get a portion...those were the good old days. Tomorrow is a different story for our youth, I'm afraid. Good luck and hope someone on here can help you better....we plan to put our pension into life insurance for our young 'uns.....and sign over our "worthless" real estate to them, too.....so much for the American dream.

[SoCalDemGrrl]

7. I second that - pay off HIGH INTEREST credit cards!! Then try not to run

them up again.

It's better to be debt free then build up your nest egg again.

At least you have options which makes it easier!

Good luck....

[spag68]

8. pay off the credit cards.

fast as you can then do a little dance and burn them in a fire.

[spag68]

9. pay off the credit cards.

fast as you can then do a little dance and burn them in a fire.

[JerryP]

10. Pay off the credit cards

Sometime soon the credit crunch will be experienced by consumers. You won't want a credit card when this happens. Credit card rates will go to 30-40%, if you can find a credit card. Banks will get margin calls and they will be desperate for cash. Expect deflation so you if you have cash, it will increase in value so you can simply keep the cash as an investment strategy. Get rid of the credit card debt and invest in gold or silver if you can.

[Greyhound]

11. If it's a straight investment (i.e. not an IRA or other tax deferred instrument)

there is no penalty and the gains will be taxed @ 15%, but those may be offset by other losses.

Check with an accountant (after the tax season) to be sure, but I think you're safe.

[trof]

28. There ya go. Spot on!

[El Pinko]

14. Damn the tax hit - you should DEFINITELY pay off ALL CC debt NOW

The CC companies are getting SLAMMED by defaulting customers - they extended WAY too much credit to WAY too many unqualified and overextended people. They banked on the Bankruptcy legislation forcing people to keep paying them minimums forever, but instead, cardholders are throwing up their hands and walking away, deciding that they can live without credit rather than be enslaved to it.

As a result of this, most of the major CC companies are going to be raising rates this year, even on good customers. And the few that don't will be coming up with ever-more insidious ways of hitting you with hidden fees. If you have more than X balance on multiple cards, they can do a "credit review" and raise your rate to the default rate (usually 28 or 29%).

You'll save a more on interest and fees by paying them off, and when you get ahead again, you can see about investing in something sound. Since we are in a period of severe turmoil, it might be a good idea to wait it out before investing in anything other than maybe gold, at this point (and who knows, that may be a bubble that's peaking already).

[better tomorrow]

17. maybe you can pay them off and then take the government....

rebate check that comes in the summer and invest again. At least it will be a start and sure money coming your way....

[blonndee]

18. **Thanks to everyone.**

I do want to say that my credit card debt is not due to wasteful spending, first of all. I started a new job and moved and many of those expenses are STILL on that card; also, I thought that I would be taking home a great deal more from my paycheck than what I am, so I've had to put groceries and vet bills on my card over the last few months, simply because I DIDN'T HAVE THE MONEY. I've been trying to pay it down aggressively and have cut down in other areas equally aggressively.

But anyway, thanks for the advice. I'm going to call tomorrow and I should just about be able to pay off my biggest credit card, which will help immensely. Someone above asked about my age. I'm 32, and I hope that I have time to start saving again. In the meantime, I want to be closer to being debt-free. I can't stand owing anybody anything. My student loans are bad enough.

Thanks again for the advice. You guys gave me the courage to do what's right for me. :)

[El Pinko]

19. Don't feel the need to defend your finances...

The vast majority of Americans have too much debt at this point - and it's a big part of the reason for our economic woes.

I fell into the credit-card trap too, and I'm not a free-spender at all.

Even if somebody had been a profligate spender, the point is not to look back and waste time on feeling regretful - it's getting yourself on solid ground

because it's going to be a rough few years coming up - good luck.

If you haven't refi'd your student loans yet, it may be a good time to see about doing that, too.

[Deja Q]

32. Not entirely true?

http://articles.moneycentral.msn.com/Banking/CreditCardSmarts/TheBigLieAboutCreditCardDebt.aspx

The claim being, it's a lie about some of the credit card statistics we're given.

[El Pinko]

35. That was an interesting report on how averages work...

...but the fact that most people don't have high CC balances doesn't change the fact that a lot do.

Nor does it invalidate what I was saying about not wasting time beting oneself up for mistakes in the past.

This is not the time for embarrassment or handwringing. Things are bad and getting worse. people in hock need to do what it takes to get out of hock, whether that means bankruptcy, walking away, using investment $ to pay off CC debt. The route is different for different people depending on the circumstances, but for those of us who lived in bubble areas, the circumstances over the last decade were exceptional because the cost of keeping a roof over one's head, whether rented or "bought" soared while incomes stayed flat. Many people had no choice but to lean on CC's to get by. The fact that foreclosure and bankruptcy no longer carry as big a stigma is a good thing, IMO because it gives people a chance at a fresh start.

If gov't and corporations were doing their jobs properly, not sending jobs overseas and starting pointless expensive wars, inflation and speculation wouldn't have been rampant, and wages might not have been so shitty for so long, and individuals might not have gotten so overextended in the first place.

[better tomorrow]

22. remember....save that rebate check

[Speck Tater]

20. Even in GOOD stock market conditions...

high interest credit cards are losing more in interest cost that the stock market can return to you on an equivalent amount of money invested.

Paying off debt is always worth more net cash to you than investing the same amount, because interest paid on debt by the average consumer/investor is higher than return on investment. Think of your investment as earning you, say, 10 drops of water an hour into your net worth bucket. If your debts are costing you interest at a rate of 15 drops of water an hour leaking out of the bucket, you are far better off plugging the leaks in the bucket first, because until you do, you are in a net-losing position.

Disclaimer: I don't know what I'm talking about, so whatever you do, don't follow my advice.

[Hobarticus]

21. See, I did that once and really regret it now...

I cashed my old IRA about ten years ago out to pay off debt. If I'd hung on to that, even just let it sit without contributing...ugh, it makes me sick to think about it.

Contribute the minimum to your funds, if money's tight. But keep it alive. Mutual funds will bounce back. Your small investment will disappear after taxes, fees, etc. Honestly, leave it alone. Forget it exists, for now.

Cut up all your cards, save one for emergencies, and maybe another one for long-term things, like appliances. NOT clothes, NOT eating out, but emergencies. Be tough.

Pay down your credit card debt as quick as possible. To do that, you'll have to change your spending habits. You will find out quickly that half the stuff you think you need is just luxury. It took me being unemployed for a few months to discover just how much money I threw away.

Save cashing out that fund for emergencies. Paying off long-term credit card is not an emergency, just yet. If you need to, call your credit card companies and tell them you intend to pay off your cards, you just need better terms. If you've been up-to-date with your payments, they may cut you a better rate. Shop around; those balance transfers can help a lot. BUT, once you move a debt once, keep it there until you've paid it off. Too many credit inquiries ( which happens every time you open a card) can hurt your credit..

If you absolutely insist on cashing out your fund, then at least first make a serious, dedicated, and life-changing effort to change your spending habits. Otherwise, a year from now you'll find yourself right back where you are now, with even less to show for it.

It worked for me. Good luck!

[VermeerLives]

24. Hi Blondee

Excellent advice from the others below! I've never heard a good money manager advise anyone to keep their credit card debt. Besides you are still young, and you have many years ahead to invest. All the best to you! It's not fun having that kind of debt hanging over your head.

[Wcross]

33. Dave Ramsey.

http://www.daveramsey.com/

Don't buy any of his programs or materials- just listen to his radio show. He is a religious man & probably voted for Bush but his basic plan is something you ought to try. He would have you pay off the credit card debt with the fund. He would then have you build a three to six month emergency fund to replace the credit card. Look at it this way. Would you borrow on a 21% credit card to invest in a mutual fund?

Credit cards are financial crack, just say no!

[Matariki]

34. Some contrary advice

I would keep the mutual fund. It's a crappy time to sell and in the long term it will be worth more than it originally was.

Also, I've personally noticed a psychological benefit to having some money in the bank. I find that when I have no reserves some part of me perversely just wants to spend money on 'things' - usually on credit - almost as a reaction to my financial insecurity, as if I were trying to assert some sort of control in a round about way. When I have some money in the bank I feel more relaxed and less likely to spend irrationally.

I would focus my energy on paying off the debt - starting with the highest interest cards first. Even if it means being exceptionally frugal or temporarily finding some extra work.

[bluedawg12]

36. Generally, pay of the credit cards because you are paying for that loan

over and over agin, at high interest rates.

For example: $100 at 22% ASPR will run you $122 when you finally pay it off. So, in effect it's like thrwoing $22 dollars out the window.


Watch Suze Orman if you ever get a chance. She goes through stuff like this all of the time.

Good luck.