Comments on: Make Sure The Left Hand Knows What The Right Hand Is Doing: The Simple Dollar’s Guide To Assigning Priorities http://www.thesimpledollar.com/2007/07/11/make-sure-the-left-hand-knows-what-the-right-hand-is-doing-the-simple-dollars-guide-to-assigning-priorities/ Simple, applicable personal finance advice for the modern world Fri, 10 Feb 2012 08:34:37 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: Dan M. http://www.thesimpledollar.com/2007/07/11/make-sure-the-left-hand-knows-what-the-right-hand-is-doing-the-simple-dollars-guide-to-assigning-priorities/comment-page-1/#comment-45846 Dan M. Thu, 12 Jul 2007 23:33:45 +0000 http://www.thesimpledollar.com/2007/07/11/make-sure-the-left-hand-knows-what-the-right-hand-is-doing-the-simple-dollars-guide-to-assigning-priorities/#comment-45846 Two questions jump out at me. If the 5/1 ARM triggered a big payment increase, most companies allow you to reduce your 401(k) witholdings within a month to a quarter. It seems like cutting back on the 401(k) contributions could have happened at nearly the same time as the payment increased. The other item is that this situation illustrates the importance of having an emergency fund in a liquid vehicle like a savings account (or even CDs since you don't intend to access the money and can afford the penalty if you need it quickly). An emergency fund is critical in the event you lose your job or have any unforseen expense (including an ARM reset). Both of these options should have given James enough time to sell or refinance the house. BTW, I went with a 7/1 ARM because at the time it was $100 cheaper on monthly payments than a 30 year fixed. Rather than spend the difference, I've made the same payment as the 30 year would have been which has meant I've been paying 33% more towards principal each month. If I hadn't already had an emergency fund, then this extra cash could have been used to establish one. Now, an ARM was not the best call if there was a very high chance I would be in the home more than about 9 years or simply could not have afforded any increase. Two questions jump out at me.

If the 5/1 ARM triggered a big payment increase, most companies allow you to reduce your 401(k) witholdings within a month to a quarter. It seems like cutting back on the 401(k) contributions could have happened at nearly the same time as the payment increased.

The other item is that this situation illustrates the importance of having an emergency fund in a liquid vehicle like a savings account (or even CDs since you don’t intend to access the money and can afford the penalty if you need it quickly). An emergency fund is critical in the event you lose your job or have any unforseen expense (including an ARM reset).

Both of these options should have given James enough time to sell or refinance the house.

BTW, I went with a 7/1 ARM because at the time it was $100 cheaper on monthly payments than a 30 year fixed. Rather than spend the difference, I’ve made the same payment as the 30 year would have been which has meant I’ve been paying 33% more towards principal each month. If I hadn’t already had an emergency fund, then this extra cash could have been used to establish one.

Now, an ARM was not the best call if there was a very high chance I would be in the home more than about 9 years or simply could not have afforded any increase.

]]> By: Dan http://www.thesimpledollar.com/2007/07/11/make-sure-the-left-hand-knows-what-the-right-hand-is-doing-the-simple-dollars-guide-to-assigning-priorities/comment-page-1/#comment-45789 Dan Thu, 12 Jul 2007 20:35:05 +0000 http://www.thesimpledollar.com/2007/07/11/make-sure-the-left-hand-knows-what-the-right-hand-is-doing-the-simple-dollars-guide-to-assigning-priorities/#comment-45789 As hard as I try I can't seem to be sympathetic to people who bought too much house on ARM mortgages...ARM mortgages have always been a poor idea unless you are a pretty sophisticated buyer. For the rest of us amateurs, 30 year, fixed, no prepayment penalty is the way to go. Sure, you might save some money there initially, but you do it at the expense of your future if you don't time your refinance or sale exactly right. Without a crystal ball who can predict their circumstance 5 years down the road? @Jimbo - Don't take money advice from a therapist (I don't even think it is professional/ethical for them to offer it) - take it from me instead ;-) If you build up a emergency fund (maybe $1000)then you can pay for emergencies from your fund instead of running your credit card debts back up. You don't pay interest on money you take from savings. Arguably, you are paying interest on the credit card balance that you have not paid off, but it feels better to not undo your progress on the credit card front and you can off-set this to a degree by putting your savings into a intrest bearing account like the ones Trent always mentions (ING, HSBC, etc). I ended up with substancial credit card debt by not having an emergency fund, I'd pay for each emergency with credit cards then never pay off the cards, now I have "seen the light" and it was really cool to be able to buy a new furnace last month without putting it back onto credit cards. My credit card balances are still where they were, and I know my emergency fund will build itself back up in time (pay yourself first, automatically). As hard as I try I can’t seem to be sympathetic to people who bought too much house on ARM mortgages…ARM mortgages have always been a poor idea unless you are a pretty sophisticated buyer. For the rest of us amateurs, 30 year, fixed, no prepayment penalty is the way to go.

Sure, you might save some money there initially, but you do it at the expense of your future if you don’t time your refinance or sale exactly right. Without a crystal ball who can predict their circumstance 5 years down the road?

@Jimbo – Don’t take money advice from a therapist (I don’t even think it is professional/ethical for them to offer it) – take it from me instead
;-)

If you build up a emergency fund (maybe $1000)then you can pay for emergencies from your fund instead of running your credit card debts back up. You don’t pay interest on money you take from savings. Arguably, you are paying interest on the credit card balance that you have not paid off, but it feels better to not undo your progress on the credit card front and you can off-set this to a degree by putting your savings into a intrest bearing account like the ones Trent always mentions (ING, HSBC, etc).

I ended up with substancial credit card debt by not having an emergency fund, I’d pay for each emergency with credit cards then never pay off the cards, now I have “seen the light” and it was really cool to be able to buy a new furnace last month without putting it back onto credit cards. My credit card balances are still where they were, and I know my emergency fund will build itself back up in time (pay yourself first, automatically).

]]> By: plonkee http://www.thesimpledollar.com/2007/07/11/make-sure-the-left-hand-knows-what-the-right-hand-is-doing-the-simple-dollars-guide-to-assigning-priorities/comment-page-1/#comment-45655 plonkee Thu, 12 Jul 2007 09:55:57 +0000 http://www.thesimpledollar.com/2007/07/11/make-sure-the-left-hand-knows-what-the-right-hand-is-doing-the-simple-dollars-guide-to-assigning-priorities/#comment-45655 @Jimbo I think it depends on how needing to use credit in an emergency would affect your debt repayment psychologically. If you feel that it would be like taking many steps back and/or would make you feel that you might never pay off your debts then have a small emergency fund. If on the other hand, you can focus your attention on your networth then you from a numbers / financial point of view its better not to have savings and to pay off debt. @Jimbo
I think it depends on how needing to use credit in an emergency would affect your debt repayment psychologically.

If you feel that it would be like taking many steps back and/or would make you feel that you might never pay off your debts then have a small emergency fund.

If on the other hand, you can focus your attention on your networth then you from a numbers / financial point of view its better not to have savings and to pay off debt.

]]> By: Jimbo the Great http://www.thesimpledollar.com/2007/07/11/make-sure-the-left-hand-knows-what-the-right-hand-is-doing-the-simple-dollars-guide-to-assigning-priorities/comment-page-1/#comment-45607 Jimbo the Great Thu, 12 Jul 2007 06:56:04 +0000 http://www.thesimpledollar.com/2007/07/11/make-sure-the-left-hand-knows-what-the-right-hand-is-doing-the-simple-dollars-guide-to-assigning-priorities/#comment-45607 I've just begun my own personal journey to financial health and am trying to sort out all of the new info (I promise, this is mostly on topic). My wife and I have been seeing a therapist for post-partum issues and she says that a lot of our problems are from money (you don't need a degree to figure that one out). We have about $850 saved and about $12,000 in credit card debt. She's told us that we need absolutly no savings and that we need to pay off our debt. What does everyone else think? Should you have a little bit of money to get you over the rough points or should you just assume you'll use your plastic for emergencies should they arise. That's how we got in this boat in the first place. Jimbo the Great I’ve just begun my own personal journey to financial health and am trying to sort out all of the new info (I promise, this is mostly on topic). My wife and I have been seeing a therapist for post-partum issues and she says that a lot of our problems are from money (you don’t need a degree to figure that one out). We have about $850 saved and about $12,000 in credit card debt. She’s told us that we need absolutly no savings and that we need to pay off our debt. What does everyone else think? Should you have a little bit of money to get you over the rough points or should you just assume you’ll use your plastic for emergencies should they arise. That’s how we got in this boat in the first place.

Jimbo the Great

]]> By: Brip Blap http://www.thesimpledollar.com/2007/07/11/make-sure-the-left-hand-knows-what-the-right-hand-is-doing-the-simple-dollars-guide-to-assigning-priorities/comment-page-1/#comment-45535 Brip Blap Thu, 12 Jul 2007 01:43:11 +0000 http://www.thesimpledollar.com/2007/07/11/make-sure-the-left-hand-knows-what-the-right-hand-is-doing-the-simple-dollars-guide-to-assigning-priorities/#comment-45535 It's a frightening concept to think how many people are trying to do their best to save while managing horrific debt. I think paying down debt (unless it's student loan debt OR a mortgage) is always first priority, then save. To some extent that's just my own opinion, but I really think that letting someone else have "true" ownership of your assets is crazy. I wish I could pay off my mortgage and then I would be literally debt-free, but I've chosen to keep that debt and invest my money elsewhere. I do sometimes wonder, though, if I should plow all of my savings into making myself COMPLETELY debt-free. Tough story. It’s a frightening concept to think how many people are trying to do their best to save while managing horrific debt. I think paying down debt (unless it’s student loan debt OR a mortgage) is always first priority, then save. To some extent that’s just my own opinion, but I really think that letting someone else have “true” ownership of your assets is crazy. I wish I could pay off my mortgage and then I would be literally debt-free, but I’ve chosen to keep that debt and invest my money elsewhere. I do sometimes wonder, though, if I should plow all of my savings into making myself COMPLETELY debt-free. Tough story.

]]> By: MossySF http://www.thesimpledollar.com/2007/07/11/make-sure-the-left-hand-knows-what-the-right-hand-is-doing-the-simple-dollars-guide-to-assigning-priorities/comment-page-1/#comment-45517 MossySF Thu, 12 Jul 2007 00:28:05 +0000 http://www.thesimpledollar.com/2007/07/11/make-sure-the-left-hand-knows-what-the-right-hand-is-doing-the-simple-dollars-guide-to-assigning-priorities/#comment-45517 I don't want do judge with details but two phrases stand out as red flags "5/1 ARM" and "pay down debts". The only debt that can put your house at risk is a mortgage or a HELOC. You decide to not pay your credit cards -- all they can do is call you nonstop and then get a judgement against you. Except your retirement and house is still protected -- you declare BK and laugh at them from the living room of your house while monitoring your 401K balance. So just those two phrases say borrower qualified at the ARM's initial rate but the house in reality not affordable to the borrower after reset. The problem is not 15% 401K contributions but buying the house in the first place. Otherwise, what would have been the big deal about stopping the 401K contributions and then redirecting the money to the mortgage? The non-ethical solution -- since credit is shot anyways, stuff as much money into protected assets like the 401K and let the bank take the house back while you live in it for rent-free for 6 months or more. I don’t want do judge with details but two phrases stand out as red flags “5/1 ARM” and “pay down debts”. The only debt that can put your house at risk is a mortgage or a HELOC. You decide to not pay your credit cards — all they can do is call you nonstop and then get a judgement against you. Except your retirement and house is still protected — you declare BK and laugh at them from the living room of your house while monitoring your 401K balance.

So just those two phrases say borrower qualified at the ARM’s initial rate but the house in reality not affordable to the borrower after reset. The problem is not 15% 401K contributions but buying the house in the first place. Otherwise, what would have been the big deal about stopping the 401K contributions and then redirecting the money to the mortgage? The non-ethical solution — since credit is shot anyways, stuff as much money into protected assets like the 401K and let the bank take the house back while you live in it for rent-free for 6 months or more.

]]> By: kingking http://www.thesimpledollar.com/2007/07/11/make-sure-the-left-hand-knows-what-the-right-hand-is-doing-the-simple-dollars-guide-to-assigning-priorities/comment-page-1/#comment-45442 kingking Wed, 11 Jul 2007 21:09:31 +0000 http://www.thesimpledollar.com/2007/07/11/make-sure-the-left-hand-knows-what-the-right-hand-is-doing-the-simple-dollars-guide-to-assigning-priorities/#comment-45442 It should be noted that most 401k and some 403b plans will allow a participant to borrow 1/2 of the vested balance (up to $50K), without paying a penalty. However, you must remain with your present employer long enough to repay the loan, or you owe the penalty and taxes on the money. Some plans also place restrictions on the usage of the money such as education or medical expenses. James should check with Human Resources or his plan administrator to see if he qualifies for a loan, rather than just coughing up the 10% penalty from the start. It should be noted that most 401k and some 403b plans will allow a participant to borrow 1/2 of the vested balance (up to $50K), without paying a penalty. However, you must remain with your present employer long enough to repay the loan, or you owe the penalty and taxes on the money. Some plans also place restrictions on the usage of the money such as education or medical expenses. James should check with Human Resources or his plan administrator to see if he qualifies for a loan, rather than just coughing up the 10% penalty from the start.

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