Suddenly rich sister suddenly popular

Dear Dave,

My sister recently received a large sum of money through an inheritance. Now, everyone seems to have a different idea about what kind of investment she should make. The last two or three people she's talked to have recommended municipal bonds. What do you think?

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Rudy

Dear Rudy,

Boy, how many times have I heard this story? You get a little money and the sharks start circling.

Municipal bonds aren't the best or the worst investments you can make. They're tax-free income and their yield can be just as good, or better than corporate bonds or T-bills. But municipal bonds can be volatile just like any other kind of bond. If a city gets into financial trouble you can easily lose money in the deal.

I don't believe in municipal bonds, and I don't own any of them. I put my money in good growth stock mutual funds and growth and income mutual funds and just pay the taxes.

And guess what? I still come out ahead.

Dave

Single guy, little debt … ready to buy a house?

Dear Dave,

I'm 24, single, and my dad is encouraging me to buy a home on a 30-year note. I've got about $6,500 in debt, but I'm using your debt snowball method to pay it off as quickly as possible. I make around $45,000 a year and have discovered I can get a good interest rate on a mortgage. Do you think this is the right time for me to buy a house?

Jeff

Dear Jeff,

The fact that you can get a good interest rate and your dad is urging you aren't the reasons to buy a house. You need to get out of debt first.

We're only talking about $6,500, so keep doing the debt snowball and you'll have that sucker paid off in no time. Also, I never recommend 30-year mortgages. If you can't afford a 15-year note, then you can't afford the house – period.

I know your dad loves you and wants good things for you, but you need to listen to me on this one. Once you get the debt out of the way, you can save money like a madman and then make a huge down payment on a 15-year mortgage.

If you'll follow this game plan, Jeff, you'll have the mortgage paid off and own your home outright by the time you're 40. Pretty cool stuff!

Dave

What to do with profit from selling house

Dear Dave,

I'm currently debt-free except for my home. If I sell my home and make profit, what should I do with the money I make until I buy another home? It will be about a year before I buy another house, and was wondering if a mutual fund would be a good place to invest the money.

Dee

Dear Dee,

If you're talking about a place to park some money for the short term, I'd go with a simple money market account. You're not going to earn much, but it will be safe and not jump around all over the place. I never recommend investing money in growth stock-type mutual funds unless you're going to let the money sit there for at least five years.

The good news is that you probably won't have any tax worries. You don't have to pay capital gains taxes on the sale of a personal residence unless you see a profit of $250,000 on the home and have held it more than two years. If you're married and filing taxes jointly this figure jumps to $500,000.

Dave

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