Tough Choices by rumman999


									Tough Choices
It can be hard to make a financial decision when you're faced with two options that each look good. We take five common dilemmas and show you how to choose the most financially sound path. Some financial decisions are easy. You know, for example, that you should pay your rent instead of blowing the money on an impulse trip to Cancun. But some financial choices are a tougher call. For example, you know you should build up your savings, and you should pay off your debt. But which one trumps the other? When you're faced with a choice between two worthy options, how do you know which path makes the most financial sense? We've put together a cheat sheet of answers to five common dilemmas, and we arm you with the tools to help you make the best choices for your situation. Q. Should I save/invest or pay off debt? A. Evaluate which option will give you a bigger return on your money. For example, if you have a balance on a credit card charging 18% interest, paying it off is like receiving an 18% return on your investment. It's pretty hard to find that kind of payoff in the stock market (especially lately). On average, stocks have historically returned about 10% annually.

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Of course, despite all the number crunching, there's something to be said for the feeling of being debt-free. If investing makes more sense on paper for your situation, but paying off your obligations will bring you greater peace of mind, go for it. A good financial decision is one that helps you feel in control of your money, not the other way around. You will, however, want to make sure you have some emergency cash set aside so you won’t have to lean on your credit card when the unexpected happens. It’s a good idea to stash at least $1,000 in a high-yield savings account for that purpose before you start kicking in extra money to pay down debt. Q. Should I invest in a 401(k) or Roth IRA? A. Generally, it's best to invest in a 401(k) up to the employer's match -- otherwise you'd be passing up free money. But if your employer doesn't offer a matching contribution, go with a Roth IRA first. You can invest up to $5,000 in a Roth IRA this year. If you want to save more, you can contribute to your 401(k) after you fully fund your Roth. You contribute after-tax dollars to a Roth, so it won't

reduce your taxable income like 401(k) contributions will, but you can withdraw the earnings taxfree once you turn 59½. This is important if you expect to be in a higher tax bracket when you retire. And there are other benefits with a Roth that you won't get in your 401(k), such as no mandatory withdrawals and no penalties if you need to withdraw your principal early. But, as we mentioned above, before you invest in any retirement plan, make sure you have your emergency fund underway and your high-interest debt under control. Q. Should I rent or buy a house? A. There's no one-size-fits-all answer to this quandary. To come to an answer that fits your situation, ask yourself these four questions: Can I afford the monthly payment? Do I have enough savings for a sizable down payment? You generally need at least 20% of the purchase price to avoid paying private mortgage insurance. It’ll also increase your odds of getting a loan in the current economy. Low-down financing can help, but you'll still need enough for closing costs, origination fees, and other expenses -- and you'll probably pay a higher interest rate. Can I afford the extra costs that come with owning a home, such as insurance, taxes, maintenance, repairs and furniture? Do I plan to stay put for at least five to seven years to recoup my initial costs? Many younger people find that renting is quite a bargain. But that doesn't mean you should resign yourself to a lifetime of renting. Home prices have dropped recently, but that doesn’t matter -- it’s your personal budget that should dictate whether you’re ready to buy. Rather than overextend your finances, you may be better off renting comfortably within your means and save your money for the perfect opportunity when it comes along. Q. Should I save my emergency cash in a bank account, CD, money-market fund or under my mattress? A. Nix the mattress. The rule of thumb is to save three to six months' worth of living expenses in case of a financial emergency, such as job loss, unexpected medical bill or car repair. You'll want to put the money someplace safe and accessible, but you don't want it to sit in a standard bank account earning next to nothing. Go with a high-yield online savings account or money market account. These FDIC-insured offerings link to your checking account at your bank, and you simply transfer the money online. CDs are also safe, and they earn good yields, but they don't satisfy the accessibility requirement. Your money is tied up for the term of the CD, and you'll have to pay a penalty to cash out early. By definition, an emergency is something you do not anticipate, so it's best to keep your money unshackled. Q. Should I take job A or job B?

A. When choosing a career path, your first instinct may be to go with the one that pays the highest salary. After all, you've got bills to pay. While certainly important, your paycheck isn't everything. To evaluate two viable job offers, you need to look at the entire picture. Areas you should evaluate include benefits packages, commute times, opportunities for advancement, the work environments, levels of responsibility and job security. And it sounds cliché, but envision where you want to be in ten years. Would one job take you down a different career path than the other? The same evaluation process works for deciding whether to stay at your current job or try something new. The idea of stepping outside your comfort zone can be daunting, especially if you're leaving your first real job out of college. Breaking the decision down into objective categories helps take some of the emotion out of the process. Take an honest look at the criteria above, and include job satisfaction, stress level and office politics into your equation.

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