Jewish World Review August 22, 2000 /21 Menachem-Av, 5760
Paying for private school
DEAR BRUCE: I'm a carpenter and I send my child to a private school, which is very expensive. Is there any way that I can use pre-tax dollars to pay for her education? -- D.S., via e-mail
DEAR D.S.: I really sympathize with your situation. Many folks are just not comfortable with the public education offered in their area. This is not to say that there is anything wrong with public education, but it does vary dramatically from place to place. I know of no way to pay for this with pre-tax dollars. There have been charades set up in the past where a donation, which is tax deductible to certain charities, is used for tuition. But the IRS will see through that very quickly, and I would discourage it.
DEAR BRUCE: There is a lot that I don't understand about stocks and bonds, but how can you consistently say that people can earn between 9 percent and 14 percent on safe investments? -- N.T., Lexington, Ky.
DEAR N.T.: Please do not get hung up on percentages. We use the percentages because they are common terms that allow one investment to be easily compared to another. Let's assume that you purchased one share of a stock for $100. One year later, that security was trading for $111. Not an unusual circumstance.
Further, let us assume that they declared a $2 dividend per share. That would be $11 dollars growth or 11 percent on the growth side, and 2 percent on the dividend side, giving us a total return of 13 percent. Now admittedly, you can't go out and spend that 11 percent unless the stock is sold (and also it would be prudent to hold on to your investments, if possible, for at least 18 months so they would be taxed as capital gains as opposed to ordinary income).
If you look at the tables in your local paper showing the amount of growth on stocks per year, you will see that it is not an unreasonable expectation to get a 10 percent growth factor. Historically, the index funds have grown at the rate of 10 percent a year for the last 40 years.
Yes, you can lose, and that's a risk that you must take. I believe the risks over the long period of time are prudent and will give you decent results.
DEAR BRUCE: I recently inherited a small amount of money that was invested by my departed relative in a major software company. The amount of money is almost enough to pay off all of my credit card bills. I was thinking, though, that if I held on to the stock and waited for it to grow, I might be better off. I used my credit cards to get me through child support and alimony payments, but now I can pay them off. What should I choose, pay now or hold on to the stock? -- R.C., via e-mail
DEAR R.C.: No one can tell you whether or not this is the time to sell a specific security. You have to make the decision whether or not you would be better advised to get the credit card bills paid off and get away from that high interest that you are paying, or whether this stock will outperform those high bills.
On balance, there is a lot to recommend getting rid of the credit card debt. If I were in your position I probably would go that route. But understand that the stock could go through the roof, and you will be very sorry that you sold it.
That's what investing is all about. Deciding when to hold and when to
Send your questions to JWR contributor Bruce Williams by clicking here. (Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.) Interested in buying or selling a house? Let Bruce Williams' "House Smart" be your guide. (Sales of the book help fund JWR).
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03/22/00: Old cars as hobby, not investment
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03/08/00: Real-estate lawyers are essential
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