Dear Rick:
I was in my 20’s and really had no interest in my finances. I have an IRA, some money in the bank and I own my house. My house is worth about $250,000 and I have a $230,000 mortgage at four percent. I also have over $13,000 in credit card debt. The average interest rate on credit cards is 20½ percent.
My grandparents are planning to give me $15,000, and they told me they want me to use this money to improve my financial situation. My grandfather is a big fan of you and he showed me several columns and I hope you can help me with what to do with the money. I’ve narrowed it down to three main options:
- Complete the Roth conversion. I can convert most of my IRAs without moving to a higher tax bracket and between state and federal taxes, the conversion costs less than $10,000.
- Use money outside of my IRA
- Pay off my credit card debt.
What options do you recommend?
Steve
Dear Steve:
You obviously have generous grandparents and it’s great that they want to help you out financially.
In analyzing your options, I believe the best thing you can do is use the money to pay off your credit card debt. Since you are paying 20½ percent interest, paying off that debt is like getting a 20½ percent return on your money. Also, since charge card interest is non-deductible, your actual return is 20½ percent after tax. I assure you that no investment will give you a 20½ percent tax-free guarantee. On a purely financial basis, I will pay off your credit card debt.
I like the idea of someone your age taking advantage of a Roth IRA. The benefit of letting money grow freely for decades is a huge plus for you; however, this does not offset the 20½ percent you pay on your credit card. However, you may find that there is an opportunity to continue the Roth conversion in the future. You may be able to use the money set aside to pay off your credit card interest to do a Roth conversion.
I can’t stress enough how important it is for adults to take an interest in their finances. I know managing personal finances can be boring; however, it is critical. Mistakes made in childhood can have lasting effects. Many people think that if they don’t have a lot of money, they don’t need to get involved in their management; that is not the case. Regardless of the size of the account, you must take an active role in your personal financial affairs.
Having trouble with your personal finances affects more than your pocketbook; it also damages your mood. In other words, financial problems are not good for your mental health or your physical health. That’s why it’s so important to take an active role in your personal finances, no matter what stage you’re in.
Personal finance is the only hobby I know where you can make money without spending money on yourself. Therefore, as 2022 draws to a close, everyone’s 2023 New Year’s resolution should be to improve the management of their personal finances. By being proactive, not only will you have more money in your pocket, where it belongs, but it will also help you sleep at night.
Good luck!
Rick Bloom is a freelance financial advisor. His website is www.bloomadvisors.com. If you would like him to answer your questions, please email him at [email protected]
