Updated on 02.09.11

Reader Mailbag: Disastrous Day

Trent Hamm

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. Student loans or savings?
2. Best use for tax refund
3. Jumping into entrepreneurship
4. Replacing a car after accident
5. On radio or television?
6. Are FHA loans dangerous?
7. Future Simple Dollar plans
8. Love, marriage, and credit cards
9. How to start selling stuff
10. 529s for textbooks

Ever had one of those days where nothing goes right?

Yesterday, I woke up to find that the faucet on one of the bathroom sinks had broken bad enough that it was leaking water all over the place – under the sink, on the floor, out of the bathroom, and onto the carpet.

As I’m trying to figure out why that’s broken, our life insurance company called to tell us that we had failed to pay our life insurance bill on time. Of course, we had paid it, but it took a long time to get that straightened out.

During all this, I forgot to take the trash out to the curb.

While trying to fix the sink, I smashed my head onto a metal pipe, giving myself a pretty significant bruise and bump just above the hairline.

One of those days…

Q1: Student loans or savings?
My husband and I take home about $8000/month after contributing 10-15% in our 403b accounts. We have approx $7500 in savings and no credit card debit. We are also already contributing $5500/year in a Roth IRA account with Vanguard. We are also saving approx $100/month for each of our two children (ages 3 1/2 and 16 months). Our only debt besides our mortgage is my husbands’ student loan debt which is at a below 4% interest rate but at a balance of about $35,000. I am thinking we should use all of our excess monthly cash ($3000 a month if we are good) and pay down that last debt so we can be free to further invest in other areas in the future. He thinks we should take that money and invest in other areas (while paying a little extra on his loans each month) since the interest rate on his loan is so low. I just feel like the balance is barely going anywhere despite him presently paying $350/month. So basically should we use our extra monthly income to pay off low interest student loan debt or invest it elsewhere?

– Angie

To me, the answer depends on whether that 3.5% rate is locked in or whether it’s variable.

If that rate is locked in and can never be adjusted upwards, the rate is so low that you’re probably going to get a better return investing in other things. If that rate isn’t locked in and can adjust upwards, then extra payments right now are a great way to eliminate balance that might start costing you more interest if not paid off early.

Basically, look at the student loans as, at worst, an investment that earns a 3.5% annual return guaranteed. If the rate adjusts, then it’s an investment that earns a 3.5% return right now but might go up in the future if you lock in today by making extra payments.

The question really is what else would you be doing with that money? Is it better than a guaranteed 3.5% return on your money (or better)?

Q2: Best use for tax refund
What is the best move for me to make with my tax refund of $985. A little background, I’ll be 26 in about a month, work as a critical care RN, no children, and not currently married, but in a steady relationship for 8 years.

I have only $1,200 in savings, $14,500 in my 401k, and unfortunately since my mother’s passing the past month and moving, I have racked up a credit card bill to $1100. I never carry a balance, pay it in full each month, so for me, this is a huge amount of debt. I am also in a Yoga teacher training program that I pay monthly on and I have $660 left on that.

I feel nervous about having such a low amount of savings at my disposal. I thought at this point in my career (2 years), I would have an 8 month emergency fund, but it’s been difficult with life getting in the way. But having any credit card debt also terrifies me.

What should i do with the $985?? Put half in savings and the other half towards credit? all towards credit? all towards yoga? all in savings???
– Niyah

I would pay off the credit card debt, as high interest debt will have a huge negative impact if left unpaid. You really don’t want to start accruing 20% interest on that credit card debt.

You do have a $1,200 emergency fund, which is good enough for the time being. I would focus on raising that level once you’ve eliminated the debt.

As for the yoga teaching certification, if you ever reach a point where you can’t pay for it, that’s what the emergency fund is for.

Q3: Jumping into entrepreneurship
I am a young entrepreneur (29). I currently am an medical office clerk and make about 38k. I own two duplex rentals and recently opened a bridal boutique. I am still at the point where my personal income greatly subsidizes my business ventures. My goal is to one day quit my job, but I want to be realistic about it. I know that the businesses should be standing on their own, but I am wondering how much I need to save. Should I have a different savings account for each entity (personal, rental property, and store)?? And how much should be in them before I take the big leap??

– Althea

What you need to do is sit down and come up with a genuine business plan for your businesses.

Visit your local library and check out some basic books on small business plans. Read them, then invest the time and care it takes to come up with a plan for your business that includes contingencies, worst case scenarios, and real planning for the future.

It is only through such a process that you can reveal whether or not you’re going to be able to make these businesses provide a lasting income for yourself. It will also help you figure out how much capital you need for those businesses to keep them secure.

Q4: Replacing a car after accident
My wife and I were in a recent car wreck and our vehicle was totaled. It was a luxury vehicle that we could afford and still maintain a nice savings account as well as do other things but I hated writing that car note check every month. Now that the the person that hit us insurance is paying off the vehicle my spouse and I are at a cross roads. I want to downgrade to a normal sedan(i.e. a cash car or something off craigslist) and my wife would like to try and find the same year make and model of the vehicle we owned but at a lower price or maybe even putting a larger down payment and therefore having a significantly lower car note payment than before. I always reference your name and say things like “What would Trent think” (I am a long time reader so sue me) but she feels like we should be able to enjoy our money if we are still able to aggressively save for retirement and other areas. What are your thoughts?

– Marvin

With two exceptions (mortgages and student loans), I’m opposed to going into debt for personal purchases, and a car that goes beyond the bare minimum needed to go from point A to point B is a personal purchase.

Your best approach here is to buy a sedan that you can pay cash for, then start banking the amount you were using for payments each month. Put them in a separate savings account and then wait until you have enough cash in that account to just write a check for the car you want.

That way, interest works for you (by accruing in your savings account) rather than against you (the interest portion of your car payments).

Marvin actually sent a pretty long email with lots of different questions and thoughts in it, so I broke off a few of his additional questions and statements below.

Q5: On radio or TV?
I have been subscribed to your blog for years now and you have an “everyman” air about yourself. Very relate-able without sounding disingenuous. Have you been asked to be involved in television/radio in any aspect. MSNBC, Dave Ramsey,Suze Orman,Etc. Because I feel people need to hear what you have to say.

– Marvin

I have appeared on a handful of local radio and television programs. For a while, I did a podcast, but I didn’t enjoy the “back end” work of keeping a podcast going (the technical issues with recording audio). For one, my hearing was bad enough that I couldn’t hear background noises that others were complaining about.

I have no objection to appearing in such forums. I just don’t actively seek them out.

Typically, people talking about personal finance is not a big ratings grabber. That’s why very few wholly personal finance programs appear anywhere at all, particularly outside of CNBC.

Q6: Are FHA loans dangerous?
I was watching the Suze Orman show last week and she stated that she feels FHA loans are going to put America back in the same mess it was in a few years ago as far as the housing market crash. I agree that a person should not get more home than they can afford but she feels like FHA is in and of itself not evil but that people should be able to put 20% down on a home or not buy one at all. I feel like most moderate income people will never be able to get into a home using that reasoning. What are your thoughts?

– Marvin

Your feeling is right, in my opinion: current home prices mean that if people wait until they have 20% of the house value saved for a down payment, many people will never own a house of their own.

The big reason for that, in my opinion, is that home prices continue to be ridiculously overinflated. Except for the recent downturn, the price of a home has grown faster than inflation for decades – and recently, it grew far faster than inflation for a while. Meanwhile, the average American’s wages haven’t even grown as fast as inflation.

What that means is that housing prices are going up at a much faster rate than people’s paychecks are, and thus housing is eating a bigger and bigger portion of people’s incomes.

There is no good solution for that, unfortunately. For historical rates of home ownership to continue, the FHA is going to have to continue to push a lot of people into homes that they couldn’t otherwise afford. If rates of home ownership go down, then more and more houses will sit on the market unowned and that means everyone will see the value of their home drop. This will convince more people to walk away from their mortgages, for one. It’s a huge mess without an easy resolution.

Q7: Future Simple Dollar plans
What are your business plans for the site for 2011 and beyond?

– Marvin

I don’t have any big plans.

I’ve been working on a site redesign for a while. It’s more of a subtle change – nothing too drastic. The site will still look green and white, the logo will still basically look the same, and email subscribers won’t see any change at all.

I’ve been working with banks in order to come up with ways for me to link to their savings accounts, CDs, and other such offerings in a way that’s mutually beneficial. Rarely does a day go by when I don’t talk about such things, so I’d like to find a way to build a relationship with some banks that I trust. This is still a work in progress.

I’m working on an independent project that involves internet publishing that might be of interest to some of you. Basically, I’m writing a book/multimedia project solely for internet release that’s really targeting people who aren’t really what I would call Simple Dollar readers, though many readers of the site may get some value from it.

Q8: Love, marriage, and credit cards
I am getting married in November. My fiance and I have very good credit (both in the 7s), modest paying jobs, and a healthy outlook on our spending goals. As we continue to plan for the future and discussing what accounts will merge, remain seperate, disappear, etc, one of the decisions to make is what credit cards we will keep/use.

We are both disciplined credit card users, no balance carryovers, and take advantage of rewards programs. In the interest of keeping our oldest accounts open for credit purposes, and maximizing rewards values and other cost benefits, we decided that I would be added to her airline rewards card account, and she to my hotel rewards card account. My guess is that there are no “bonus” rewards for adding an additional cardholder like there are for opening the account new.

While the easiest thing to do would be to wait until we get married and then contact each of our cards to authorize the additional cardholder, I’m wondering if we can take advantage by each opening a new account with the bank we are going to be added to now. In other words, I’ll open a card with the same bank she uses for airline milage and then we can just figure out how to consolidate after the wedding.

Why? Well, I figure at the end of the day, everything is the same, but we have the extra bonus “startup” points on each card. Am I overthinking? Is there any other risk? I don’t see much of a credit issue here as we’re both just opening new cards and we both have only a couple to begin with. Since the accounts would be merged after the wedding (or after the wait period for the rewards to post), I believe we can avid annual fees on both cards because of the “first year free” offer…
– Dave

This plan seems okay, though I’m not entirely sure you’re getting positive value for your effort and thought. If you feel that you are, go for it.

My concern more comes with your desire to add each other to all of your credit cards. I would actually avoid doing that. If you end up in a situation where you fail to make a credit card payment, a missed payment will negatively affect both of your credit ratings. I would encourage you to keep those separate if at all possible.

Now, for things like checking accounts and the like, co-ownership is a great idea. I just would avoid it for things like credit cards that can have negative impact on your credit but give no real positive benefit from co-ownership.

Q9: How to start selling stuff?
Ok, we are leaving our house, job and everything to relocate, and we are taking the opportunity to get rid of all this stuff that has been sneaking up on us. How do we start? We just opened an EBay acct to sell stuff and I already use the consignment shop. There is always a garage sale this spring or summer, but what about the 11 foot high gilded mirror? The books that are academic not recreational? I’m trying to avoid the “give it all away” desire that is building!

The most difficult is getting rid of items family members gave to us, but we cannot take it all with us! We have enough of what we do want to take with us.

Also, any ideas on how to decide what necessities are worth taking and what are not? For instance, we have nice beds I plan on taking, but am planning on leaving the inherited and somewhat fragile dressers at our family camp. Should we plan to repurchase run-of-the mill glasses, but bring the dishes we like? I want to be frugal, but not financially stupid. We are not hiring a moving company, but are doing things on our own. The move is about 2000 miles.

This will be a sever drop in income, but a great rise in contentment. We are not happy with the corporate life and have had some serious set-backs that have changed all our viewpoints – even the teenagers. We have very few bills, but used our emergency fund for the emergency. We can build some of it back in the next 6 months – just not as much as we would like. My husband will stay in his nice job until the house is sold, so he might be here for a bit. Praying it is not so, and painting furiously. We have built a nice equity, live in a great neighborhood, have made continual improvements to the house, and could sell our house at a reduced rate if needed. That would not, however, provide the necessary funds for getting another house!

Might I just say that having all your bills gone (excepting a mortgage), your cars owned and an emergency fund in place is an awesome way to survive an actual emergency. Good insurance and a well stocked pantry is a help, too. Without all of that, we would not be contemplating a move for contentment, but a move because we would have lost everything. Good decisions last forever!
– Greg

I’d get rid of everything that doesn’t have personal value for you. If it has significant personal value, take it; otherwise, sell it and bank that cash. You can get cheap glasses anywhere – it’s probably cheaper to get a small amount out of the ones you have at a sale than to ship them across the country.

For items like your mirror, I’d take pictures of them and go to a consignment shop, asking them if they’re willing to take the items into their store to sell.

For niche items like the academic books, a yard sale might work. You might also want to use eBay or something that will offer your goods to a broader audience.

Things like glasses and such are perfect for selling at a yard sale.

Q10: 529s for textbooks
I just started working for the State of Indiana today. During benefits orientation, they were explaining the benefits of 529 plans–specifically one through Sallie Mae that puts my contributions into a high yield savings account with no exposure to market risk. I’m planning to go back to graduate school to work on a Ph.D. (in my field, Ph.D.s are funded) within the next year and a half, hopefully even this fall, so it seemed like it might be a good idea to open the 529 and contribute whatever money I’m going to need for textbooks to it.

Is there something I’m missing that keeps this from being a great idea? Granted, the “high yield savings account” only earns 0.94% interest, but I’m not paying taxes on that money, so isn’t it really like getting a ~20% return?

This idea seems way too good for nobody to have thought of it before, which makes me suspicious that I’m missing something.
– Will

I’m not sure how you see this as getting a ~20% return. It will be better than what you’re getting from a savings account, but it won’t suddenly be a mountain of cash.

If you contribute money to a 529 account, you’ll essentially be investing it, likely in some sort of diversified index fund. I would never assume an investment like that would return more than 7 or 8% in a year. Some years, it might. Other years, like 2008, it’ll give you a negative return.

In a normal savings account or investment account, you’ll have to pay taxes on what you earn. So, if you’re in the 15% income tax bracket, you’ll be paying 15% of what you earn in interest to Uncle Sam. A 529’s advantage is that if you use the earnings in the account for educational purposes, you won’t have to pay those taxes.

Still, don’t go into this expecting a 20% return. A 7% annual return is much more realistic – but that’s still pretty good.

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.

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  1. kjc says:

    Your idea of what constitutes “disastrous” is quite different from mine.

  2. Brittany says:

    $8000/month take home working for non-profits? (judging from the 403b accounts) Sweet.

    “As for the yoga teaching certification, if you ever reach a point where you can’t pay for it, that’s what the emergency fund is for.”

    What?! No. Your car you need to get to work breaking down is an emergency. You ending up in the ER. You losing your job unexpectedly. But yoga instruction? No. That’s what other savings are for. It’s a good goal and great personal development, but only if you can afford it. Drawing from your emergency fund is not “affording it.”

  3. Andrea says:

    Welcome to working for the State of Indiana, Will! You don’t HAVE to be crazy to work here, but it helps!

  4. Jon says:

    Will, if your employer is putting you money into the 529 before taxes it would be like a 20% return. If you are in the 20% bracket you would have to earn 1200 to put 1000 after tax dollars in svgs. So if they are allowing you to contribute before tax dollars it is a great deal. We do the same here with health care and dependent care FSAs.

  5. Jonathan says:

    Unless I’m missing something in Q1, Angie and her husband are spending ~$5000 per month and only have $7500 in savings. Unless there is another emergency fund that wasn’t mentioned, it concerns me that they only have a 1.5 month emergency fund. I would suggest they use some of the extra monthly cash flow to increase the emergency fund before looking into more investing (by investing I mean higher risk/yield investing than a savings account). I realize that by cutting back on the 403b and investments for their children they can reduce their monthly spending, but the $7500 still seems low to me for a family of 4 that is use to this standard of living.

  6. Patty says:

    Q1 doesn’t imply that they have more than a month or two savings/emergency fund. That combined with paying down loans should be a bigger priority than any risky investing.
    Q8 If proceeding with your idea and the sole purpose of adding accounts is to get bonus points, make sure that you can ‘merge’ two accounts before you sign up.
    Q9 Academic textbooks will be hard to sell at a yard sale. Ebay’s Half.com lets you list those for free and get an audience of people looking for textbooks (Amazon and other sites may also have similar programs). Also, if you don’t want to wait for that and live near a college the university or private textbook stores will possibly buy back the books. Not the best return but a reasonable exchange.

  7. AnnJo says:

    Q1 doesn’t mention what their interest rate is on their mortgage, but chances are it is higher than 3.5% on their student loan. It also matters a great deal whether they are fixed rate or variable rate.

    Faster pay-down of a fixed rate mortgage or fixed rate student loan is like investing in a long-term bond (10-year term for the student loan, 20-30 year term for the mortgage depending on how long they’ve had it). At their ages (I’m assuming based on the children’s ages they’re in their late 20s or early 30s), only a relatively small amount of their investing should be in bonds or bond-like instruments, and obviously, they’d do better picking the one with the higher interest rate.

    So if they are going to be investing $3000 a month, maybe apply $300-450 of that to paying extra against the higher interest rate debt. With the student loan, this would cut the life of the loan from 10 years to five or less. But I also agree with @Brittany that their emergency fund is way too low for their expenditure levels, and needs to be built up before investing too much in other things.

    If the student loan is at a variable rate, I’d probably be a little more aggressive about paying it off faster.

  8. Courtney20 says:

    Student loan interest is tax deductible even if you don’t itemize, so paying down the loans is really only about a 2.6-2.9% return.

  9. Jane says:

    Like Patty mentioned, I would try half.com to sell your academic books. I have had great success on there, but of course I don’t have a pending move to consider. Sometimes you have to wait a while before these books sell on there, but I doubt you will have any luck on ebay. Books sell for very little on there. I tend to sell the most academic books at the beginning of the semester, presumably because students are buying them for their courses.

  10. Kevin says:

    “Current home prices mean that if people wait until they have 20% of the house value saved for a down payment, many people will never own a house of their own.”

    But doesn’t the fundamental economic principle of “supply and demand” address this? If people were required to have a 20% down payment, then suddenly the pool of buyers (demand) would shrink, but the pool of sellers (supply) would remain the same. Basic economics tells us that this would result in the price dropping, until equilibrium is once again achieved.

    Basically, home prices would drop until the inventory is balanced by the pool of buyers. The end result would be that the rate of home ownership would be unchanged.

    Prices do not vary independently of demand. Prices are DIRECTLY influenced by demand. If you constrain the demand, prices will respond by moving downward.

  11. Jonathan says:

    I think Trent misunderstood Q10’s question about the return on his 529 investment, and/or I think Will of Q10 misunderstands taxation.

    I just did 10 seconds of research on 529 plans, and contributions to them are not federal-tax deductible, but in many states they are deductible for state tax purposes. Given that, a contribution would automatically save you the percent of your contribution equal to your state tax rate (i.e. around 10% in California), so in that way, you’d essentially be paying 90 cents on the dollar, before any investment gains from within the 529. And those investment gains would not be taxed as income, so long as the funds are spent on qualified educational expenses.

    I believe Will may be thinking that taxes would apply to both his principal and investment interest, were the 529 accounts taxed upon withdrawal.

    Either way, it sounds to me like putting the money into the 529 account is a way to use cheaper money (i.e., less-taxed money) to pay for textbooks, especially if he’s in a state that allows a deduction on the contributions.

  12. Josh says:

    The best site for selling academic books is bigwords.com. You can enter the ISBN and it will give you a list of site where you can sell them, and how much they are worth. The trouble is, they are often worthless even 3-4 months after they are purchased.

  13. Jonathan says:

    Regarding the 20% down payment for a home purchase. Trent is right in saying that if everyone had to pay 20% down then many would not be able to afford a home purchase. On the other hand, the ability to purchase a home without a 20% downpayment is one of the reasons that home prices increased so much prior to the crash. As Trent mentioned, going back to a required 20% down payment would have serious consequences to the housing market, so may not be feasible at this time. I think it would be great for the long term, however, if we saw a move back to 20% down. Less people would be able to afford ridiculously priced homes, which would drive prices down as well as encourage home builders to build more reasonable homes. I think we would eventually see much more affordable housing. The process to get there is probably too difficult, so I doubt we’ll ever see that change.

  14. Jonathan says:

    Also, with regard to home prices increasing, another factor is likely the fact that home sizes have increased, on average. People don’t want 2-bed, 1-bath, 1,200 sf houses today. Larger houses cost more in materials, time, and labor to build, in addition to costing more in utilities and maintenance. Combine that with the fact that desirable land is a finite resource, and it’s unsurprising that real estate prices have outpaced inflation.

    Currently, homes in many places are being sold for less than it would cost to build the same house new. That is a big reason that fewer new homes are being built these days, which reduces supply, which will help bolster or even boost prices again eventually.

  15. Kevin says:

    Re: Dave, Q8

    I’m not sure you can “merge” two credit card accounts. I’m pretty sure that what will happen is that the bank will make you choose which card you want to keep, then will add the other spouse as a co-signer on that card, and close the other card.

    Closing the card could have an impact on your credit score (as could opening a new one), but I think you’re giving banks too much credit (ha!) if you assume they’ll just merge two unique accounts for you. At best, they could end up opening a brand new account, adding you both as co-signers, closing your 2 exising cards, and painting it as a “merged” account. But you’d lose your credit history on the cards you’re “merging” into the single account (though they might not warn you about that).

    Remember, you’re dealing with a cubicle drone in India. Do not assume they know what they’re doing, or even what’s best for you.

  16. Charlotte says:

    @Courtney20: Student loan interest is only tax deductible if you earn less than $75k as a single filer. Based on their income, I expect they exceed the married filer limit.

  17. valleycat1 says:

    Q8 – Each of you could keep the long-held cards separate, & open a new joint card after the wedding if you really feel the need to have a jointly owned CC.

  18. MegB says:

    Trent, I’m reminded of the last part of the children’s book Alexander and the Terrible, Horrible, No Good, Very Bad Day. He says, “Some days are like that. Even in Australia.” Thank goodness you get to start over again today!

  19. Alice says:

    Re Q8: My fiance and I had similar questions about merging credit cards. I’m the CFO of the relationship and find it much easier to track our money if we don’t have a ton of cards in play, so I wanted to reduce the active cards being used. What we ended up doing was adding me to his Discover (for the rewards) and keeping the rest of our cards (3 for me, 1 more for him) around for credit purposes. We didn’t add me as a co-owner of the Discover account because they would have made me close my account, and I didn’t want that ding on my credit, for now.

    Re Q9: Are you selling textbooks or academic books? The difference is big. Textbooks come out with new editions frequently, so are often hard to resell more than 6 months to a year later. Academic books, on the other hand, can often keep their value. For academic books, if you’re in Portland or Chicago, try selling to Powell’s. In Berkeley, I think Moe’s buys academic books. Any big university town is likely to have a bookstore that buys that sort of non-textbook academic book. Best of luck!

  20. Tracy says:

    I agree that unless we’re missing something, Q1 probably needs to beef up their emergency fund significantly.

    Also, a quick search shows that in Indiana, a 529 plan “Indiana taxpayers are eligible for a state income tax credit of 20% of contributions to their CollegeChoice 529 account, up to $1,000 credit per year. This credit may be subject to recapture from the account owner (not the contributor) in certain circumstances, such as rollover to another state’s 529 plan or non-qualified withdrawal.”

  21. Telephus44 says:

    Q10 – I think Johnathan answered this correctly. I am guessing that the Will thinks he can put in the money pre-tax and withdraw it tax free, and that’s where his 20% number comes in (assuming he pays about 20% in taxes). 529 contributions are subject to federal taxes, but are exempt in most states for using an in-state plan. So he will only save state taxes. But it still seems like a reasonable option.

  22. Doug says:

    I was puzzled by Trent’s answer to Will (Q10). Will states that his contributions in the 529 will be going into a high yield savings account with no exposure to market risk, with an interest rate of 0.94%. Why Trent discusses the returns from a diversified index fund is beyond me. Or am I missing something?

  23. Jim says:

    Q9 – Keep nothing in your house unless you know it to be useful or believe it to be beautiful. Someone said that.

  24. Cindy says:

    Check the rules carefully, the beneficiary in 529 plans must be under age 19 at the time it is established. No contributions are allowed to the plan after age 18 and funds must be used by age 30.

  25. jim says:

    Q1: You take home $8000 and have savings of $7500. I say you should increase your liquid savings cause it sounds like you don’t even have one month income liquid.

    Q4 Marvin: Hard to answer without knowing useful details about your finances. If you make $400k a year and bank half of it then go buy that luxury car. If you skimp by on $50k and save 10% then you really should not be driving expensive cars.

    Q6 : First I think higher down payment is just smarter and safer. I think aiming for 20% downpayment is best and we all shouldn’t be in a rush to buy homes we can’t afford.

    Trent said: “For historical rates of home ownership to continue, the FHA is going to have to continue to push a lot of people into homes that they couldn’t otherwise afford.”

    Well ‘historically’ back in the pre 1950 era home ownership rates were down in the 45% range for many decades. Only post 1960’s have the rates hit >60% levels. Home ownership rates are now down to about 1% higher than they were in the 70’s.

    So theres really no big changes over the recent decades. Obviously many people had homes they couldn’t afford and that was a problem that is fixing itself quite painfully. I don’t think we need to push ourselves into that problem and the resulting painful crash and foreclosures again just so that 1-2% more people can have the pride of a home they can’t really afford.

    Q10: Tracey is correct, Indiana has a 20% state tax credit for their 529. Thats free money from Indiana and a great deal. Go for it.

  26. jim says:

    Cindy said: “the beneficiary in 529 plans must be under age 19 at the time it is established. No contributions are allowed to the plan after age 18 and funds must be used by age 30.”

    Where did you get that from? I don’t think thats true in general. Its certainly not true for my state. As far as I know theres really no age requirements for 529’s and definitely no requirement that funds be used by 30. I don’t see anything like that the details for Indiana’s plan.

  27. Steve says:

    Q10 – I would double check that it wouldn’t count as some kind of early withdrawal. Many states have laws that you can’t put money in a plan and take it back out the same year, and still get the state income tax deduction. I don’t know if this applies to Indiana, just something to check on before you contribute.

  28. Cindy says:

    Federal tax rules. The goal of 529 plans in general is to let it grown tax deferred and to spend the proceeds in qualified expenses and not pay tax on it even then. I’m an enrolled agent (not from Indiana) and state rules and federal do not always match. My comments are about federal rules.

  29. Karen says:

    @ Cindy
    The rules you mention are for Coverdell ESAs. 529s do not have age restrictions.

  30. jim says:

    Yeah Karen is right. Those age rules apply to ESA’s. 529’s are not ESAs.

  31. KC says:

    To Marvin and his car – I would argue that you can’t afford the luxury car if you are making payments. A luxury car is just that…a luxury. It’s better than a regular sedan (like an Accord) and it’s better than a beater (like a 15 year old Kia). But you do need a car and yours is wrecked.

    I thoroughly agree with you – buy a regular sedan with cash. You can get a lot of car with say $10k. In fact you can get a lot of car with $5k. If your wife insists on a luxury car then get an older luxury car. I have a 10 year old Acura with over 120k miles on it – it’s still a nice car and I feel it classifies as luxury. If you were to buy my exact car it would cost you less than $5k. But, personally if it were me, I’d want a little more car and a little less old luxury.

    If you do go the luxury route then stay on the low end – think Lexus ES instead of GS or LS (or maybe even a Toyota Avalon, which is a Lexus lite), Acura TSX instead of TL or RL, etc. And the savings of buying a used entry level luxury car are pretty good because the prices are so high on new ones. But with the recession there are fewer luxury cars on the used market because of a decrease in leases.

    So do your homework for the best deal and stick to your guns. There is nothing wrong with driving a clean Accord that you keep looking and running in nice shape.

  32. Lisa says:

    Greg should do some research into local auction houses; small regional auction houses traditionally will take pretty much anything in decent shape, which they’ll lot together and sell off for you. The fees are lower than what a consignment shop would take, and you can dispose of stuff en masse. Many of them do what they call “broom sweeps”, where you take what you want out and leave the rest for them, some stuff winds up in the trash or at a thrift, but you no longer have to worry about it, they do. You just wait for the check.

  33. Joan says:

    Trent: Q5 My take on this is you have much more to talk about than just financial problems. You are a success in your marriage, raising children, starting your own business, writing books, being frugal, changing to a healthier diet, and helping your community. There are so many topics on which you could be interviewed. I expect to see you on national TV someday.

  34. littlepitcher says:

    @Greg–Check with decorator firms on the good items. Failing that, you might try getting an estate agent to take them on consignment–often they can get a better price than other consignment firms.

    Better to do 20% of a cheaper house than 5% of a more expensive place. I’ve done 2 br 1 ba houses of 650 and 950 sf respectively, back in the day, and both sold well to first-time homebuyers.

  35. colleen c says:

    Hi all. We live in Indiana and I have a 529 for my kids. Mine is not invested in a savings account, but I agree with the poster’s “20%” claim. Indiana is a state that gives you REBATE money on your state taxes based on your 529, and it is 20%. I invested about $3000 last year for our kids and I saw a $600 extra rebate on my state taxes… not a credit to lower our rate but an actual REBATE. Not all states do this but Indiana does, and I am thrilled because we can turn around and put that money right back into the 529.

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