Reader Mailbag: Absence

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. Banking troubles
2. Getting rid of a timeshare
3. Scholarships and taxes
4. Housing money for the future
5. Loan arrangement question
6. Where should we keep savings?
7. Wanting to be a parent
8. Savings account activity fee
9. Prioritizing low interest debt
10. Closing credit card impact

My children just spent five days with their grandparents. I missed them and was thrilled to see them yesterday.

I haven’t seen my sister-in-law in months. I missed her and was thrilled to see her today.

Does absence make the heart grow fonder?

Q1: Banking troubles
I am having trouble with [large bank #1]. They posted a check twice to my account, once as an electronic transaction and second as a physical check. This was a rent check. The rental complex says that [large bank #1] needs to contact [large bank #2]. [Large bank #1] is blaming the company and I just want my money returned. Is it really possible for the same check to be cashed twice?

They told me they would reimburse the money but have failed to do so and it has been over two weeks. Is there anything you can do to help me or to point me in the right direction?
– Kwame

You need to keep hammering away at the customer service with your own bank. Call them and keep escalating until you get answers. This should be fairly straightforward, as both payments should have the same check number on them.

Once this is resolved, come up with a better way of paying your rental complex. Somewhere along the payment path, there was an error, and it’s really hard to tell where that error is. The best step you can take to avoid it in the future is to look for a direct payment method.

This right here is the reason why I focus so much on customer service when selecting a company to do business with, particularly with larger financial concerns. If the company you bank with, buy your computer from, buy your car from, buy your furnace or air conditioning unit from, or any other major purchase has poor customer service, then the “deal” they give you really isn’t a deal.

Q2: Getting rid of a timeshare
My husband came into our marriage with a time share he purchased with his girlfriend at the time. He owns it 100% as he bought his girlfriend out of it. They are on good terms and agreed that he owns it 100% (although it’s still in her name). We now pay $1000 a year towards owner dues as it’s “mortgage” is paid off.

We NEVER use it (2 weeks in Florida in August near Disney World – we live in Seattle) and both want to sell it as we feel it’s a waste of money. What is the best way to sell a timeshare? At this point I’m willing to GIVE it away as we’ve wasted enough money paying for something we never use. It’s part of a global timeshare organization so you can trade in weeks and go elsewhere (the basic timeshare stuff), but it’s just not the kind of vacations that we like to take.

Can you let me know what’s the best way to sell a timeshare (not looking to make any money) or any advise on what to do with it? That $1000 is something I’d like to put towards a vacation we’d actually go on!
– Tricia

First of all, you need to have the timeshare in your name before you can make such moves. If the timeshare is in his ex-girlfriend’s name, you need to legally obtain it from her before you sell it or else have her involved in the sale.

Unwanted timeshares are a market where there are many more sellers than buyers, so you’re going to have to sell at a pretty low price to get it off your hands in a reasonable amount of time. This article provides some advice on selling a timeshare.

If you price it low enough using such methods, you will eventually sell it.

Q3: Scholarships and taxes
I have a quick question on taxes for scholarships. A friend who comes from a really poor family (single mother, 2 children, youngest with heavy incidence of downs and ~15000 of income) went to an exclusive college on the east coast on a full ride (its a ull-need college) with the standard federal loans. Junior year, she was told that she was filling her taxes wrong and that she owed the IRS thousands.

The key problem is about 12,000 in the college bill that goes to room and board on campus. She has a “scholarship” from the college that covers that amount. However since room and board aren’t deductible expenses for tax credit purposes, the amount she would have had to pay the college if she hadn’t gotten that scholarship isn’t tax free and she owes taxes on that amount.

Since that brings her from having no income to having 12,000, and from a dependent to an independent, she’s been desperately looking for a job so that at least she can have an income stream to start paying down the back taxes she owes and the taxes she owes for this year, though she tells me that its accruing interest at the rate of about 10 a day.

I just question whether its right that she owes taxes, since her income is in essence money that the college agreed not to charge her. Isn’t that the same as say buying a computer on sale? What’s stopping an enterprising college that wants to up its tax deductions from deciding to up the room and board charge by say 1,000 and then giving all of its entering students a 1,000 deduction on that cost as a door prize?
– Marlie

A scholarship (or portion of a scholarship) that covers room and board is a taxable scholarship. It’s no different than someone working at a job, earning money, and using that money for food and rent. They don’t get a deduction for that.

She should consider negotiating with the IRS before paying anything. Often, you can state hardship and make the IRS an offer and they’ll accept the offer.

I’m not sure what you mean by that plan you describe. Are you saying that they essentially offer a room and board scholarship that also includes the tax costs on that scholarship? It’s possible, but most colleges would probably prefer to cover more students with scholarship money than worrying about the taxes of fewer students.

Q4: Housing money for the future
My wife and I are co-pastors, splitting one position. Just over a year ago we accepted the call to our current church. We moved from one part of the country to another. In our old town, we had purchased a house. We were fortunate to sell it before moving here. We had purchased the house for $199,500 and sold it for $182,500. Our equity ended up being about $32,000. My wife and I agreed not to make any substantial moves with the 32K for a year and that time is up. It’s in a low-interest savings account. As part of our call and compensation here, we live in a parsonage. We hope to be here 8-10 years. Each year we put $2,000 each into a Roth and we have a retirement plan with our denomination. For lack of a better term, the 32K is “housing money for the future.” Any thoughts about what to do with it?

– Charlie

Since you’re on the cusp of where the stock market becomes a good investment with that ten year time frame, I would probably encourage you to split it between something conservative (like your savings account) and a broad-based index fund. Index funds are basically collections of large numbers of stocks in one investment, which protects you from the failure of a single company. I buy index funds through Vanguard.

Another option to seriously consider is to use that remaining “housing money” to bump your Roth contributions up to the maximum each year for the next several years. Contribute $2,000 out of pocket as you were doing, then add enough to it to maximize your Roth contributions for the year.

The advantage of doing this is that you can always pull out the contributions later, but if you put them into the Roth IRA, they’re helping you build for retirement. If you move on to another calling that also has a parsonage, this will have been the best move, in my opinion.

Q5: Loan arrangement question
I am going to finance a loan for my “significant other”. We have been together for 10 years but are not married, so I do realize that I need to get an Attorney involved to draw up a legal agreement that would protect me. Here is the financial scoop:

He is purchasing land for $60,000.00 which will be deeded to both our names. He is putting down $20,000.00 and needs to borrow the remaining $40,000.00. He could borrow (through the bank) against my CD, which would cost him 2% more than I am receiving on the CD, which would be 4.98% as I receive 2.98% on the CD. I have funds available that are not currently invested in a CD, which I can use for the loan. I told him that I would charge him interest, somewhere between 1/2% and 1% over current CD rates, which would be in the 3.48% to 3.98% range. I’m hoping for a win-win situation here – he gets a loan for less than what he would be paying the bank and I receive more interest than what the bank would pay me.

My question is this: Is there some type of software out there (preferably free) that would calculate the interest on this loan in the same manner that the bank would be calculating interest plus also calculate what is applied the principal, what is applied to the interest and display the new principal balance due after each payment is made? It would also need to be able to apply payments to principal only as I do have him convinced that the best thing with a loan is to pay as much as you can on the principal in order to save on paying excessive (and unnecessary as far as I am concerned) interest. These calculations would be done either monthly or every two weeks (however he prefers to set up the loan) and then again when he pays on the principal. Yeah, I know that I am asking for a lot here. Any suggestions you could make would be appreciated! Thank you!
– Kelly

You can use pretty much any mortgage calculator to get the numbers you need for most of those scenarios, plus a little bit of simple calculator math. You would have to re-run the calculator after each payment, of course, to adjust things based on the extra amount he’s paid. You’ll also have to determine an initial term for the loan.

So, for example, let’s say you lend him $40,000 at 3.5% over 10 years (120 months). You’d just toss those numbers into a mortgage calculator, like the one at Bankrate, and find that he’d owe you $395.54 per month. Click on the “Show amortization table” button and you’d see that the first payment would include $116.67 in interest.

He then makes a payment that month, probably equal to at least the $395.54 amount stated. You then take that payment he gave you, subtract $116.67 from it, and then subtract that amount from the $40,000 principal. So, if he paid you $500, you’d subtract $116.67 from that, meaning he paid $383.33 toward the principal. Now, subtract $383.33 from the principal ($40,000) to see how much he still owes – $39,616.67.

The next month, you do the same calculation. He still owes $39,616.67 in principal at 3.5% over 119 months. You do the same thing again with the Bankrate calculator, tossing those numbers in, and you’d see that the interest on that month’s payment would be $115.55. Just keep going with that – subtract it from what he pays you, then subtract that principal payment from the current principal balance, then recalculate for the next month.

Since you’re describing a variable payment system, there’s no automated way to do it. You have to recalculate each month. However, it’s pretty easy to do it.

Q6: Where should we keep savings?
We live in the San Francisco bay area, so our emergency savings is fairly large ($30k with the goal to be $60k eventually). This is a huge amount of money that is not being put to much work in terms of earning interest. It’s currently in a regular savings account earning next to nothing.

My question is which scenario is better: maximizing the interest I could get in a saving by shopping around OR putting some or all of it in a CD and then just pulling it out on the off chance that I would need the cash?

It feels like I could make more interest in a CD since there is only a small chance that we’ll have to pull out the money for an emergency anyways. Is there a big penalty on pulling out money from a CD?
– Kate

I would not put all of it in a CD. I would at least keep a couple months’ worth of living expenses in cash before doing anything else with the rest, because the penalties for cracking a CD make it not worth the benefit you’d get.

Now, for the excess: there’s no reason not to do something with it that would earn more money. A CD is one route – it’s very stable and safe, but it doesn’t earn potentially as much as other options.

If CDs are the choice for you, then I would suggest staggering them, even if it minimizes your return. Put 25% of your money in a 6 month CD, another 25% in a 12 month CD, another 25% in an 18 month CD, and the rest in a 24 month CD. This way, you have a CD maturing every six months, helping you with changes in your life as they come along. If a CD matures and you don’t need it, just buy a 24 month CD as soon as it matures to keep the “every six months” cycle going.

Q7: Wanting to be a parent
My husband and I have no non-mortgage debt except for ~5k in student loans whose interest rates are around 4%. We aren’t too concerned about paying those off immediately. We have 250k in a mortgage (1700 monthly payment), 26k in a savings account, and about 8k in a 401k that we just started last year. I am 25, he is 29. He makes about 70k and I make about 65k.

In October we found out that we can’t have children without using IVF (in vitro fertilization). Our (completely out of pocket) costs will be $12,000 for the procedure and ~$2,000 for medications. This will leave us with 12k in the bank. My question for you is do you think we should take out a loan to finance our medical expenses? I know we can pay for everything in cash but it would mean our emergency fund would dip pretty low. We have specifically been saving up for this since October but now that push comes to shove, I feel really loathe to part with so much cash! On the other hand, we are pretty good at saving quickly (the only reason our emergency fund is only 26k is because we used about 20k to fix up a home in our dream neighborhood. My husband felt very strongly that we needed to have a place to bring a child to).

I know that one alternative would be adoption, however, it is just as expensive, takes longer, and since I was adopted I have some strong feelings about having children that are genetically related to me. We aren’t opposed to adoption but want to try getting pregnant before we move on to that.
– Emily

I would wait. You do not want to have a child in a situation where your finances are less stable than you would like, and it sounds like both a loan and spending your emergency savings would do that. Focus on living cheap and saving more for the time being. Whenever you choose not to eat out, view that as the first gift you’re giving to that future child.

You are 25, which means that you do have some time left on the biological clock. I would give it one year of intense saving before making the leap into doing this.

I’m not going to dig into the morality of adoption versus in vitro fertilization, as that’s a personal choice that is clearly influenced by some personal life experiences here, and I would ask that the readers do the same.

Q8: Savings account activity fee
I have an interest bearing savings account and was just ‘dinged’ for $15 for ‘excessive activity’ — having more than 6 transactions in the account during one month. I was shocked. I had never had this happen before, and so was very surprised. I called the bank to ask about it, asking if they could waive the fee since this is my first time, and they said it was a Federal law and they couldn’t waive the fee.

You might want to warn people to be careful of hidden fees if they’re using their savings as a back-up to their checking account (I had no clue about this one). I had been moving money from savings to checking as I went through the month. And, when I got extra income, I put it back into the savings account. Little did I know…
– Carol

This isn’t a standard fee across all banks. There are federal restrictions with regards to the maximum number of withdrawals from a savings account in a month (six). Some banks just handle that internally, issuing a warning to the customer. Other banks charge fees. Your bank’s policy may be something different.

However, there are restrictions that require banks to close accounts that repeatedly cross the “six withdrawals a month” limit.

Every bank has different policies with regard to fees of all kinds. The best thing you can do is carefully research various banks and find comments online about them. Remember, of course, that the comments you read online will be strongly bent toward the negative, as people tend to complain about bad service and rarely talk about good service.

Q9: Prioritizing low interest debt
I am 24 years old and currently employed by the college I graduated from two years ago. I make a decent salary (over $30,000) and have been socking away payments to my HUGE student loans (~$40,000 in student loan debt at various interest rates between 2.5-6%). I’ve paid over $6000 off in 1.5 years, in addition to being VERY close to paying off my only credit card with a balance of $800 (previously at over $3,000) via a modified snowball method. My credit card has an AMAZING 1.25% APR with a $4,500 limit. It’s been like that for a few years, and I’m not about to ask any questions about why my rate is so low just in case it is a mistake by the company – I only pay $2 a month in interest! I have a big tax return coming, which could wipe out my credit card debt OR be directed to other debt or savings.

I also have: a $3000 car loan at 6% interest, $1,000 in an emergency savings fund, and no retirement. I really want to buy a laptop after I pay down my credit card, to help me in my side job as a graphic designer for small businesses. The graphic design supplements my snowball funds for debt repayment and building savings. I pull in $200 a month from this side job and I think with a new computer, I could make even more!

My questions are: With an interest rate so low on my credit card, should I just pay my minimum payments and direct my focus on building savings? Also, if I DO pay off my credit card and have a ZERO balance, how likely is it that the credit card company notice it and hike up my interest rate? If I want to buy a computer on credit (I KNOW I should save, but I think I can pay it off on credit rather quickly!) should I put it on my 1.25% card even though the rate may someday go up, or get an 18 month 0% card?
– Megan

My experience has showed me to never, ever trust a credit card interest rate. All it takes is a slight change in corporate policy at a credit card company for your 1.25% APR to go to 19.9% APR and your $2 a month in interest quickly becoming $50. There are some debts that are stable and reliable, like a fixed rate mortgage – this is not one of them.

Saying, “I want a computer now so I’ll buy it on credit because my APR is low” means that your balance and payment history just became more tempting for the credit card company to lift your interest rate. Yes, it might push you to seek out a balance transfer or something, but they’re likely going to make more money in the short term than they would have in the long term leaving your rate alone.

Simply put, I don’t trust credit card companies in terms of interest rates and fees. Credit cards are useful tools for convenient buying, but if you’re carrying a balance, you’re asking for rate hikes and annual fees.

Q10: Closing credit card impact
I recently heard that you can hurt your credit score by opening and/or closing a credit card? Is this true?

– Steve

Each credit card you obtain or close has some impact on your credit score. It’s usually a small impact, though, and it’s not always negative.

MyFico notes that credit scores are made up of five components: 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit, and 10% types of credit used. Generally, opening or closing a credit card has no impact at all on 65% of your credit score.

A new credit card will affect the “new credit” part of your report, generating a slight negative that goes away. It does not impact the length of your credit history. It does alter the types of credit used a bit, but the impact is minimal.

Closing a credit card won’t affect the “new credit” part of your report. It alters the types of credit used a bit, but that impact is minimal. It might impact the length of your credit history if you’re cancelling your oldest card; otherwise, it will have no impact.

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.