INVESTING WITH A FIXED INCOME
Meet Lynn Dalton, a thirty-six year old woman from Stony Point, New York. Lynn recently wrote to THAT MONEY SHOW questioning how she could invest and plan for the future, while continuing to live on a fixed income.
Lynn receives disability and worker's compensation benefits totaling about $2,700 a month, with living expenses of about $1,500 a month. Additionally, she has a cash value life insurance plan worth $12,000, an IRA worth $8,000, and mutual funds worth about $2,000. Her car loan has a balance of $19,000. With about $25,000 in investment money, and total debts of $19,000, Lynne has about $1,200 a month to play with.
THAT MONEY SHOW asked Hank Hanau, a certified financial planner, and President of HFH Planning, to take a look at Lynn's finances and make some suggestions concerning her long-term strategy. Hank analyzed the situation, and reported several steps Lynn could take to strengthen her plan.
First, Hank suggested that Lynn cash in her life insurance plan and put the money toward paying-off her car loan. His reasoning was that life insurance is most useful when you have someone to protect; either children or a spouse you'd leave behind if you died. Since Lynn has neither, she can use that money to pay down her car loan and eliminate the burden of interest.
Second, Hank suggested that Lynn save her money until she has a reserve of about $10,000 to put toward investments. Then, with the help of a good advisor, she can allocate that money into various stock; those of some very big companies, smaller companies, and some foreign companies.
Third, Hank stressed that people on fixed incomes may not need to allocate any of their investment capital toward bonds. Since they have a guaranteed income, it may be more valuable to focus on investments that yield greater returns. If done properly, this investment strategy could guarantee a very bright future.
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