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. Buy or sell townhouse?
2. Collection agency debt
3. Figuring out priorities
5. Thrift store receipts
6. Repossession question
7. Steve Jobs biography
8. Rent versus buy
9. FSA question
10. Ethical question
Lately, I’ve been planning a pretty large project with a lot of different dimensions (it’s more of a personal project).
I started off planning it on several sheets of paper, which gradually grew into a three ring binder. Eventually, though, that started to get cumbersome.
So, I moved the whole thing into Microsoft OneNote using a scanner. It worked like a charm (after spending a fair amount of time making sure everything moved over correctly).
For large personal projects, OneNote really really does a good job once you get used to using it.
Q1: Buy or sell townhouse?
We bought a townhouse in 2005 for $224K. Our mortgage right now is $184K ($1400 per month). We moved out of state in 2009 (and since the market had tanked, decided to keep the property) and now rent it out with property managers. It wasn’t too bad early on as we were out only $150 per month to keep the property, hoping of course that it would go back up or at least that the rent would cover the mortgage, but it is getting worse. Now we’re out $400 per month to keep the property (something about the escrow on the property was miscalculated, making our mortgage go up this year to pay it. Don’t really understand it.) but the mortgage should go back to $1250 next year, making the loss only $250 per month. I calculated that in the amount of time we’ve had it rented out we’ve spent probably $15K on that property ($400x3yearsx12months per year). That number is shocking!
I can’t refinance, because it’s not our primary residence (to refinance I need to sink in another $50K to the property in order to qualify). I can’t sell without losing money (it’s zillowing at $192K). It peaked at the top of the market at $300K, and now we’re underwater. It’s sad, really.
We want to keep it, but really does it make sense? Seattle market is forecasted to rebound sometime in 2014. It’s tight to pay the mortgage right now, but doable. Would you keep it knowing these parameters?
Given that your monthly payments on the property are relatively small because it’s being rented and managed, I would look at it as an investment worth sitting on.
Let’s say you pay an average of $250 a month over the course of the entire mortgage. You will have paid $90,000 total for this townhouse that’s worth at least $192,000. That’s a pretty solid investment. It might not be a grand slam, of course, but if the housing market rebounds at all, it’s going to be a pretty good one.
Unless you really need that $250 a month, I’d sit tight. I’d probably only sell if I really needed the money.
Q2: Collection agency debt
I have a bill that has gone to a collection agency, from a doctor’s visit that occurred almost 4 years ago. I paid the doctor at the time of the visit – I have a bank statement that clearly shows the charge, but the collections agency insists that they purchased it from the doctor when she retired – she retired about 2 months after my visit, so she’s been out of the business awhile. She wasn’t sharing office space with anyone, and her practice completely disappeared (the building is even gone).
The collection agency tells me that my bank statement doesn’t prove anything, that I need the original receipt (which I don’t have, because credit card receipts fade after a couple of years to be illegible). It’s only $50, which I can cover easily. But it’s the principle – I already paid for that visit.
But I’m worried about what it will do to my credit score. I’ve worked hard for the last five years to improve it from the havoc I wreaked on it in college. At this point, I want to do what’s best for my credit score. I have a car loan and student loan that I’m aggressively paying off, but no credit card debt and my salary is in the $70k range. How bad of a hit would my credit take if I ignore the agency?
The first thing you should do is see what exactly appears on your credit report. Use the federal government’s tool at annualcreditreport.com to see what’s actually being reported. If nothing is being reported, I would ignore it.
If you already paid for the visit, you shouldn’t be obligated to pay for it again because of someone else’s accounting mistake.
If it is being reported and is relatively recent, the best move you could make is to pay it off immediately. This will mark it as “paid” on your credit report, but the late payments will last for seven more years with a relatively small (and shrinking over time) negative impact on your report.
Again, these statements are based on how we think FICO scores work. They don’t publicly describe how exactly scores are calculated, as it’s a trade secret. Instead, such assumptions are based on observed changes in FICO scores and what hints Fair Isaac themselves give.
Q3: Figuring out priorities
I currently have $8400 (about 7 months) Emergency Fund, and I am saving about 22% for retirement (but would like to up that because I’m 33, and got a late start). I am very frugal, and the only debt I have is a HELOC with a balance around $30,000 (bought a fixer-upper with cash, then financed the repairs/upgrades). I am really allergic to debt, so this worries me a bit. My current vehicle is a 2003 Kia Spectra with 90,000 miles on it, and at the rate I am going, I expect it will need to be replaced sometime in the next 3 years, so I feel I need to start saving for this immediately, so I won’t have to finance it.
Additionally, I have dreams to travel, or at least take a couple of vacations a year, one inexpensive (like camping in different places here in the US, and one to two weeks in another country, starting with places that have a favorable currency conversion) I haven’t had a vacation in years…
After retirement savings & living expenses, I have about $900/month to knock down the HELOC, and save for the other two goals. So far, I have put every cent towards the HELOC and haven’t saved anything for the other two. Like many people I have been devastated by economic events over the last three years, including massive portfolio losses, and a long period of unemployment, and I am only now digging out. I am ready to start saving and planning for something fun/positive, rather than saving to protect from fear/debt.
The short of it is I’m not sure how I should prioritize these goals. Should I up my Emergency fund to where I could buy a car with it if needed, then funnel the rest into the HELOC & Vacation fund? Should I put off my dreams for a few more years in order to be completely debt free including the new car? I am just worried that if I do not do something towards travel, it will never happen…there will always be important things that come up to conflict with it…
If travel is a top priority for you, then I would set up a savings account at a new bank, then set up an automatic transfer of, say, $100 or $200 a month into that account from your primary checking.
Once that’s out of the way, do everything you can to eliminate debt while that account builds. Then, when that account grows large enough, take that trip, using the money in that account to pay for everything.
That way, you can focus on what needs to be done, such as paying off debt and building an emergency fund, while still moving towards a personal goal that matters deeply to you.
My religion asks that we tithe 10% of our income, so I typically just write a check to my church. However, I’ve come to dislike some of the things that my church spends their money on. I am struggling with the idea of simply taking my 10% and spending it on my own selection of charities. What do you think?
That’s really a spiritual question you need to answer for yourself.
It sounds to me like this is more of an issue of your disagreement with your church and the moves they’re making. Perhaps the answer is not to redirect your tithe, but to examine whether or not another church might be a better place for you. Many churches do not require a tithe, but encourage the members to make up their own minds about what to give. I personally feel that 10% is a good level of giving, but it can be split among any charitable organizations that you feel right about.
If you’d like to study more on the subject, I invite you to read the Wikipedia entry on tithing.
Q5: Thrift store receipts
I’ve been donating to the thrift store for many years now, and used to get the tax receipts. However, being a renter I found that $1-2000 in donations barely budged my taxes. As a result, I stopped asking for receipts.
My wife and I now own a home and I’ve been told that because we own a home we can get big tax incentives for donating and that I should keep the thrift store receipts.
You won’t be getting a “big” tax incentive for your charitable giving receipts, but it is worth your while to hang onto receipts from charitable giving.
The reason the impact was almost nothing before is because charitable giving for people without a mortgage is usually wrapped into the standard deduction for people who don’t itemize their taxes, which is, frankly, most people. People who actually do itemize their taxes and don’t take the standard deduction are mostly people with mortgages or people with a lot of charitable donations.
In your case, your mortgage interest probably pushes you into itemizing, which means that your charitable donations will have an impact. If you’re in the 30% tax bracket and can claim $2,000 in charitable giving and donations, that’s going to be a $600 reduction in your tax bill.
Q6: Repossession question
Two years ago I took out a loan and bought a used car that seemed to be in excellent shape. However, after about six months it began to have serious problems and now it does not run at all. It would cost over $6000 for the repair, with no guarantee that it would run even then.
Unfortunately, I still owed a lot of money to the bank, so I am unable to get rid of the car. I contacted the manufacturer repeatedly but could not get help from them. I contacted the dealership, but they were unable to help. Lemon laws do not cover my situation. The expensive warranty I bought also does not cover the repair.
For the past year I have been making my monthly payments on the lump of metal sitting in my parking lot, and I have gotten the loan down to $5000. I do not make much money ($2400/month and have a partial-dependent) and it is really painful to continue with the $300/month payments when I know I am getting nothing in return. In addition to the auto loan payments, I also need to pay for full insurance since the bank owns the car, even though it is registered as a non-op. Ouch. This is a lot of money that I could be investing.
I know that you say to never let anything be repossessed if you can help it, but is it really worth $5000+ to keep my credit score up for the next seven years? My score is currently over 700, and I am curious as to how low it would drop if I allow the car to be repossessed.
Is this a special case, or does your “never let it get repossessed” rule still stand?
My general stance against walking away from loans comes from a sense of how I would like to be treated if someone borrowed money from me. If I loaned my brother several thousand dollars to buy a car, he bought a lemon, and then came back to me and tossed me the keys and called it even, I would not be happy.
To me, it’s not right to treat anyone in that fashion. Many people abstract this by saying that it’s just a faceless business, but it’s still an extremely poor way to act toward others.
From a dollars and cents standpoint, it very well might be the right move to walk away here. From a personal standpoint, I never feel that it’s right to just toss the keys back at someone when you decide you didn’t like the purchase you made on borrowed money.
Q7: Steve Jobs biography
Given your comments recently about the Steve Jobs biography by Walter Isaacson, I’ve got to guess that you’re holed up somewhere with your library copy. What do you think of it?
I’m enjoying it so far. Walter Isaacson has certainly not written a worshipful puff piece, and that’s a good thing. It gives a real picture of a person, warts and all.
It’s important that, when you read a biography like this, you’re seeing both the good and bad in a person. To me, that makes the person real. All of us have done good things and bad things in our lives, and we hope to be judged on the good or at least on the aggregate of good and bad.
I vastly prefer biographies like this that show us both the good and the bad in a person and let us make up our own minds.
Q8: Rent versus buy
My wife and I are big fans of living cheaply, but have a conundrum (or at least it seems so). We’re in our late 20’s and have no debt of any kind. We have no college debt, no mortgage, and no credit card debt (nor have we ever). We have good credit, and some amount of savings. We’re looking to move from North Carolina to Fort Collins, Colorado in a couple months for me to go to graduate school, which will be paid for with a graduate assistantship, which will also pay a monthly stipend. From looking around, it looks like Colorado has a bit higher housing cost than what we’re used to in North Carolina. Does it make since for us to finally buy, instead of renting? We’d like to stay in Fort Collins indefinitely, with me teaching at the university, so we wouldn’t be worried about selling for many years. So, should we rent for the next 5’ish years while I’m in graduate school, and then buy, or buy an inexpensive, possibly foreclosed home now?
My sense is that people who are in graduate school at an institution rarely wind up working for that institution after their studies. It does happen, but it’s a relatively rare occurrence.
Given that, I would assume that in five years, you’ll be moving to chase your career path, in which case you’ll be trying to sell the home.
The first five years of a mortgage are the worst, as the largest portion of your payment is going toward interest on the loan. The only way you’ll make money here is if the Fort Collins real estate market takes a leap in the next five years or if you find a foreclosed house with some potential for fixing it up. Otherwise, renting will probably be the most economical option.
Q9: FSA question
I have until mid-November to decide if I want an employer-sponsored FSA next year. I don’t foresee any significant out-of-pocket expenses for me or my family in 2012 – maybe a couple hundred dollars in co-pays and deductibles but nothing else. In light of that, do you think an FSA would still be worth the time and hassle? I’m thinking the tax benefits wouldn’t be that significant and I’m concerned about not being able to get over-the-counter medications reimbursed without a prescription.
FSAs work best when you’re confident that you’ll be using the money you deposit into the account. If you don’t use it, the money typically is returned to your employer.
In other words, don’t bother depositing money into an FSA that you’re not pretty certain that you’re going to use.
In your case, an FSA isn’t worth it unless you’re able to put in less than $100 or so, in which case the tax savings may not even be worth the effort.
Q10: Ethical question
I was in a store recently where I saw an item that was obviously mispriced. It was on the order of a 92% discount on the item. I was left with a moral dilemma. Should I tell the business about this issue or should I just take advantage of it, buy the item, and eBay it for a significant profit?
It would depend on whether it was a large chain business or a small independent one.
If it were a large chain business, I would honestly assume that it was an unadvertised sale and take big advantage of it. I’d buy several copies of the item and check out quickly. Large chain businesses have very tight mechanisms for pricing and stocking, so I’d think the price was intentional.
If it was a local business, I’d check with the cashier first, making sure that the price was what it was supposed to be. If it was correct, I’d buy the item. If it was not, I’d still feel like I did the right thing.
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.