What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Refinancing decision
2. Maintaining good credit
3. Toning down our wedding
4. Handling a windfall
5. Handling a changing 401(k)
6. Handling unpayable medical bills
7. Repossession and marriage
8. Muffins instead of bread
9. Recovering from early identity theft
10. Caucus plans
This past Saturday, I (finally) got to go with my children to the museum at the Art Institute of Chicago. I wasn’t really sure whether or not my two older children would really get into the experience, but they were completely into the experience.
The one real problem is that they wanted to touch some of the paintings, particularly the Van Goghs. We had talked a lot about how some of the effects in oil paintings comes from the layering and texture of the paint, so they wanted to experience it with their hands.
It was a great experience. If you ever have a chance to take a child to a great art museum, take it.
Q1: Refinancing decision
My husband and I currently have a 10-year fixed mortgage at 3.875%. We are 6-months into the mortgage and have a balance of $695,000 left on it. We have the opportunity to refinance into a 30-year fixed loan at 4.15%. My question is this: would it make more sense to refinance and have more cash to put into savings now (assuming we can make more than 4.15% with our invenstments, which I know is no guarantee with this ecomomy!), or should we stick it out with the 10-year loan at the lower rate, pay off the house sooner, and put more into savings at that point?
You should stick with the lower interest mortgage over a shorter term, for two reasons.
First, the total amount of interest you’re going to pay over the ten year mortgage versus the thirty year mortgage is drastically lower. You’ll save hundreds of dollars in interest by sticking with the lower interest loan. It’s not just about the interest rate or the term – it’s about both in combination. The longer mortgage is worse on both counts.
The second reason is flexibility. When you reach the ten year point, you’ll have the debt albatross of that thirty year loan still hanging around your neck for the next twenty years if you go that route. On the other hand, you could be debt free. This means a lot in terms of how you’ll be able to live your life for those twenty years. You’ll have the freedom to make career choices and other things that you just wouldn’t be able to do with a large debt that you’re still struggling with.
Yes, both of these points are moot if you have a great run with your investments. However, if you have some investment that you know will return a great positive, you’re in better shape than Warren Buffett, especially over a relatively short term. I would always take the 4-5% return guaranteed than hoping for a better return at this point.
Q2: Maintaining good credit
I’m 26, single and have been aggressively paying my student loans to get them off my chest. I should be finished paying my loans by next summer. My next set of big goals include saving for a new car, saving for a 20% down payment on a house that’s worth 2.5 times my salary (at most), and contributing more to my 401k. Upon running my credit check, my landlord disclosed I have a great credit score (800+). And before you ask, I have been checking my credit report annually but never knew my score.
Here’s my conundrum: how do I maintain a good credit score after I pay off my student loans in order to get the best interest rate for a mortgage? I’ve read that once people pay off installment loans, like a mortgage or student loans, their credit score drops. I have two credit cards and never carry a balance. I planned to save until my current car dies and buy a used car with the cash I saved. I have no other debts.
Should I finance a new vehicle to start a new installment loan?
Should I open a few more credit cards and pay the balance each month?
Should I even worry about my credit score if I save 20% for a down payment?
Your credit score might drop a bit while you don’t have an installment loan on your credit report, but the drop will be minor if you also have an outstanding line of credit or two.
You already have two credit cards. Those will stay on your credit report. If you keep them in good standing, the lack of an installment loan on your credit report won’t have much of an impact on your credit score.
It’s important to remember that credit scores are not an exact science. The exact method for calculating them is a trade secret and is not available to the public. Any comments about credit scores are based on the small amounts of information that the company who creates the credit score formula (Fair Isaac) has made public.
Q3: Toning down our wedding
My fiance and I have set a wedding date for next summer. A few years ago when my sister got married, it was a huge elaborate affair and really expensive. I don’t want to put us or my parents through this expense. What can I do to have a smaller wedding? How can I convince everyone to go along with it?
Simple. This is your wedding. It is not their wedding.
This wedding should reflect who you (and your partner) are, not who other people in your family are. If you let their opinions and desires for a wedding dictate the choices you make for your wedding, then it’s no longer your wedding. You’re letting them run the show.
Simply tell them that this is your wedding and you’ll be doing it your way. If they choose to participate, that’s up to them. Leave it at that.
Q4: Handling a windfall
The quick breakdown on my savings/personal detail is – 30 years old, Pay – (Gross) 35K a year, 401K/Roth 401K (my employer recently offered the Roth option and I have moved my future contributions to that) – 30.5K @ 10% contribution (employer match is 50% of the first 1000$ and a 3% Gross Pay inclusion), Roth IRA – 13K @ 300$ a month contribution, Emergency Fund – 6K
I will be receiving a 10k windfall from the buyout of the company I work for. This will money will be from stock so there are some tax implications that I need to nail down; however my napkin math gives me a low-ball figure of 8k into my pocket.
My first question is after fixing up my used car (I want to put a limit of 3k into it to get it to last that much longer), a digital camera purchase (I’ve been shopping around for about a month), maxing out on my Roth IRA, and putting aside some vacation money; I should have about 3k left over. I’ve been thinking of using that money in some personal investing into the stock market. Probably a broad based index fund for the S&P 500. I see that Vanguard has a fund that seems to be just right for my needs since they have very low fees as long as the aspects of the investment are handled online.
Rereading that paragraph I guess I’m just trying to confirm that this is a good idea. I’ve always felt safe in my retirement vehicles that branching out seems a bit intimidating.
The idea of investing the remaining $3,000 is a good idea. However, you should always have a goal before you invest. Without a goal with your investing, it’s kind of like walking out your front door, picking a random direction, and heading that way. You might end up in a place you’re happy with, but you’re just as likely to wind up running into a wall without making a whole lot of progress.
Figure out what you’re shooting for, whether or not you’re okay with sustaining some losses along the way, and what the timeframe for that goal is. Is this the start of a house down payment? Are you hoping to retire a bit early? Is this seed money for a side business?
Think about that goal for a while before you invest. Stick it in a savings account until you’re ready. If it’s a short term goal or one where you don’t want to sustain any loss, leave it in that savings account.
Matt has a follow-up question.
Q5: Handling a changing 401(k)
Part two which I could use an outside perspective on is that my 401k is going to change w/ the buyout. Our match will increase to 9% of Gross Pay with no need for the employee to contribute. This is obviously an incredible plan that I have no choice but to take advantage of and frankly am quite excited about. Is it a good idea to reduce my contributions to my Roth 401k to max out my Roth IRA?
I am toying with the concept of “retiring” early (around 55). I put that in quotations because I don’t intend to leave the job market; just work less. Considering that, would a reduction of my contributions to my 401k only to put them in the same Vanguard index fund I mentioned above be a wise decision? What sort of tax implications would this have, or where could I go to find more information?
If it makes no impact at all on the amount of employer match you’ll be getting, then I would make sure my Roth IRA was maxed out before contributing any more to my 401(k).
For one, a Roth IRA gives you more control and flexibility over how you invest. You can choose your investment house and choose from a much wider variety of investments.
For another, a Roth IRA lets you use post-tax money and allows you to make tax-free withdrawals when you’re in retirement. If this is a part of your retirement “income,” you can use this in balance with your 401(k) to make for small tax bills in retirement. With everything in your 401(k), you’re quite likely to slip into a higher tax bracket. Overall, you’re likely going to be better off with a balance between the two, both now and later.
Q6: Handling unpayable medical bills
Last year (my junior year in college) a portion of my vision suddenly disappeared while I was at work. (I’m telling you this because I don’t want you to think that I was trashed and needed my stomach pumped.) I am very conscience of how much things cost so I called my father to ask if I should go to the hospital, to which he responded that I should go and that he would cover any expenses I incurred. I was treated and released within a few hours.
When the bills began arriving (three of them totaling about $3,000) I forwarded all of them to my father because I was carried on his insurance plan. In June I realized that he had not taken any action on the bills so I began pestering him to take action. It’s now the end of August and he’s done nothing. Subsequently, two of the bills have been sent to collections and my father has implied that he can’t afford to pay the bills. I’ve also talked to the insurance company and am 90% sure that they are not liable to pay the bills because we didn’t meet the deductible.
I’m in college and have absolutely no experience with insurance or the future implications of being sent to collections and owing nearly $3,000. My naivete is partly to blame for the situation- I had to good faith that my Dad was going to take care of everything because he said he would. But I’ve wised up in that arena I’ve been very proactive about talking to everyone I owe money to trying to figure out what I should do. But in all honesty I’ve extremely overwhelmed since I’ve never dealt with something like this before.
Two bills (accounting for about $600 total) were sent to collections and another one costing about $2,400 is about to be. My question is very broad- what is this going to mean for my financial future and how should I handle it.
The answer to this is negotiation. If the hospital still has control of the bill, you need to negotiate with them immediately for some sort of payoff plan that works for you (and for them). If they’ve already passed the bill onto collections, you need to negotiate with the debt collector.
In either case, you need to negotiate the amount down to a level you can pay as well as asking for them to strike the debt from your credit history. They have the power to do this through reporting, though they may be hesitant to do so.
You have to do this soon, however. The hospital is much more likely to work with you than the bank is.
Q7: Repossession and marriage
I have just been foreclosed on and am awaiting the scheduling of the sheriff’s sale of the property. I do not have a sense of the timing of this, but I do know that I will more than likely face a deficiency judgment. As I understand it, the Mortgage Forgiveness Act of 2007 will potentially allow me tax relief from the forgiven debt, but in the event that there is a deficiency judgment, how could that impact my future spouse’s credit and assets? I’m currently in a serious relationship that will be moving along to marriage; the entire financial process of the house has all been before this relationship. If the lender pursued payment on the judgment and we were married, could they look to either his income, accounts, or even joint assets (of which we currently have none)? If the lender forgives the debt, is it possible that I could not have the relief of the MFA since it could perhaps no longer be considered the primary residence?
It won’t directly affect him. However, it will indirectly affect him in many ways.
Your credit will be very poor. This means that any loans you take out will have to either be under his name or be facing a high interest rate due to your poor credit. You’ll probably also be exposed to higher insurance rates and the like.
His credit will be impacted indirectly due to having to carry many or all of the debts of your household. He’ll also have to deal with the higher rates, which will affect him because they will affect household finances. However, his credit report shouldn’t be directly affected by this.
Q8: Muffins instead of bread
Living in the southwest – with it’s high heat – I have found that instead of baking bread for 45 – 50 minutes, make muffins with the same recipe, only cook for about 15 – 20 minutes. Then you have some nice individual servings, in half the time. Less baking = less cooling off of the house = less $ on electricity. Works for me.
This is a very good solution for many different kinds of baked goods, from cupcakes instead of cake to cornbread muffins instead of loaves of cornbread.
For most purposes, this works very well, too. A small roll of bread can work perfectly as an accompaniment to dinner or for a small sandwich. As you mention, it’s also cheaper for baking, too.
We do this with many of our bread items with the exception of occasional loaves that we’ll eat as sandwiches.
Q9: Recovering from early identity theft
Individuals in any, but especially, younger generations may face identity theft due to increased online exchange of personal information. The younger generation generally uses the internet for many transactions, one including applying to jobs where vast amount of personal data is submitted, including personality tests. These days, an individual may send out 100s of applications fishing for that first job. Compounded with the increased use of social media (though I’ve been very cautious on these sites), an identity theft easily can take your information and run with it.
I have been a victim of this and am still fighting it. It is a chase, where the victim seem one step behind the theft trying to stop them from ruining their financial and personal life. I am wary of getting married because of the effects that this may have on my spouse’s or children’s life. I am afraid some jobs may not even take me if I have been a victim of identity theft due to liability.
This e-mail is a disclosure of this problem in addition to the question: How does one recover financially and emotionally from identity theft and move forward without fear and paranoia?
This is much more of an issue of psychology than that of personal finance. I do absolutely agree that identity theft is a real problem that needs a new solution. I think the solution involves biometrics, but that opens up other challenging issues.
As for your specific concern, I think the solution involves simply being very careful with your personal information. You may also want to move forward with some action regarding reclaiming your identity, such as a legal name change. You may also want to contact the Social Security Administration for help, too.
Another step might be talking to a psychotherapist who can help you work through some of the trust issues. While I don’t think you’re in a situation where you need psychopharmacology, it might be good to talk with someone who can help you work through these issues.
As I mentioned a week or so ago, I tend to switch my party registration regularly so I can participate in both the Democratic and Republican caucuses that I’m interested in. Iowa makes this very easy to do.
As for who I’m going to caucus for, I’m really unsure up to this point. I will say that I don’t think anyone gets to the point of being a serious candidate for President without having some genuine qualifications and I don’t think any of the major candidates would be a bad nominee.
The problem that many people who are interested in politics have is that they brand people who don’t agree with them as “evil” or “bad.” That is rarely (if ever) true. This is not the Red Team versus the Blue Team. This is America. We’re all in this together. Let’s try to solve some problems.
From that perspective, the only candidates I tend to eliminate are the ones who seem to be saying that they’re going to be purely combative if they win the office. If you’re just going to plant your feet firmly and not bother trying to solve any problems in any realistic way, I’m not going to vote for you.
You can probably draw some conclusions from that as to which candidates I’m leaning toward and leaning against.
Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.