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I just sold some real estate and have $100k to invest. Where would you put it? I am in my early 30's with a house and a small child. Here are some options that I have considered:

  • Re-cast my mortgage
  • Re-finance my mortgage (currently upside-down)
  • Invest in a college fund for my children (possibly w/ a brokerage)

I know a little bit about stocks and options, but don't really have time to manage my own fund right now. I have considered talking to some sort of financial planner, but typically find them selling their services rather than showing genuine concern for my financial well-being. How would I find someone without some hidden agenda that can help me?

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    How far upside-down at what rate? – James Roth Aug 30 '10 at 14:16
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    What are your goals for that money (retirement/College/etc.) and how soon will you need it? – JohnFx Aug 30 '10 at 14:32
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    Look for "fee only financial planner". Their fees may be high, but they have no hidden agenda because they aren't selling you anything except their advice. Ask people you know for local referrals. – bstpierre Aug 30 '10 at 14:54
  • You may mean this when you talk about re-casting, but what about a principal readjustment via putting down a lump sum against your mortgage? Depending on how far underwater you are, this could get you out from being underwater as well as reducing your monthly bills so you can continue saving. – justkt Aug 30 '10 at 15:36
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    Kudos for trying to do something smart with it, rather than blow it all on candy and booze. – samoz Sep 6 '10 at 0:21
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How to spend the money is up to you. That includes spending money on your house. (This is a safer way to look at it than an "investment". Not that it can't ever be treated as such, but that doing so often makes it easy to justify bad decisions and overspending on the house.) So with regards to the mortgage:

  • Walking away from the underwater mortgage will ding your credit rating.
  • Moving is a pain.
  • Buying a house again in N years will incur transaction costs again.
  • Paying off the mortgage seriously reduces the financial risk you face if you lose a job or something
  • You lose one tax shelter, but you can always take the money you're not paying into the mortgage and invest that (possibly in another tax-sheltered account). If you have discipline.

So if it's not a monstrously huge deal, you might prefer to avoid default. Now, how to invest the rest while waiting to spend it, now...

  • Put a few tens of thousands in a good savings account (paying at least 1% in today's market) as an emergency fund, if you don't have one of those already. It should cover a years' expenses.
  • Put the rest in a fund from Vanguard ("Get a professionally managed portfolio in a single, low-cost investment"). Or use someone else, but they're unlikely to be cheaper.
    • If you're saving for education or retirement, and know that you won't need the money for something else, make it a tax-sheltered account like an IRA or an ESA.
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    You can't walk away from a mortgage with significant assets and expect the bank to leave you alone. You have a mortgage contract with the bank and they have legal recourse to take your money. If the bank is paying attention, they can and will sue you for the inheritance (not guaranteed in the near term, but quite likely down the road). This will probably take place after they auction off the house below market value and you will be on the hook for the difference between auction price and mortgage principle, plus interest. – SpecKK Aug 30 '10 at 21:47
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Your question is listed as "How to invest 100k", not how would I find someone without a hidden agenda - so I'll answer that:

It depends. I believe the best choices available are essentially as follows:

  • If you are looking to pay for your childrens' college, it might be nice just to put the money in a Roth IRA and have that done right off the bat.

  • If you disciplined enough to keep the money invested in some type of stock indexed fund, that might be good - the stock market has often outperformed almost every other form of investment over the very long haul. But if you could see yourself tapping it for things, then you might not want this.

  • Another option is to put the money against your house. If that doesn't pay it off, refinance the remaining portion into a lower rate for less years. Obviously this knocks down a huge portion of the interest (duh) and gives you a nice cash flow you can use for investing. Also, the money you've put into a primary residence is pretty safe. I believe in some cases, safe even from bankruptcy. But as you've noted, being underwater on the home you are essentially throwing that money away in some way or fashion. And really, all in all, houses are terrible investments. You never really get your money out of your primary home, unless you downsize. The money is essentially "saved" without an equity line. This is a good choice if you're not disciplined.

Your choice depends on:

  1. How safe you want to be
  2. How disciplined you are
  3. Whether you are staying in your home
  4. How important it is to you to pay off your children's education relative to all these other things

Of course, you can do any combination of these things and as Dave Ramsey is apt to remind his listeners and callers: you ought to have your emergency fund set before you do any of these things.

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    Under the new rules, you would need to put the money into an IRA, then re-characterize the IRA as a Roth IRA. 529 plans are a better place to stick college money though, since they are designed for it and the interest can be used for college, whereas only the principle can be removed from a Roth without penalty. – SpecKK Aug 30 '10 at 21:54
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The best way to invest in college for your kid is to buy an investment property and rent it out. You might think I am really crazy to ask you to you to buy a real estate property when everyone is running from real estate.

Go where others are running away from it. Look where others are not looking. Find out the need for a decent rental property in your city or county and start following the real estate market to understand the real activities including the rental market. I would say follow it for 6 months before jumping in with any investment.

And manage your property with good tenants until your kid is ready to go to college. By the time your kid is ready for college, the property would have been paid off by the rents and you can sell the property to send your kid to college.

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