Personal Finance Resources

In this post, I would like to outline a question that I received via email. Someone very close to my demographic wrote back and forth with me, and basically wanted to know how to allocate a sum of money they received from an inheritance. The basics of the request are as follows:

Hi there, was wondering if you could perhaps give me some advice.

My mother passed away in 2005, leaving me with both a 401k inheritance and life insurance. However, the passing was unexpected as I now have a lot of student loan debt that she would have helped me pay back. Regardless, I have come up with an idea that I would like to assure is not a bad move.

Me: 21
Assets: 401k ($125,000) and remaining life insurance ($80,000)
Debts: $90,000 student loans ($4,000 of it Federal), $4,500 credit card

I was looking to not even touch the 401k and begin adding to it once I began my career as a Police Officer in July. I wanted to use the life insurance to pay off the credit cards and federal loans in its entirety, and bring down the private one to $45,000, leaving me with a $15k liquid emergency fund/savings (after living expenses for the remainder of my time in college) This would then be my only debt, manageable at about $300 or so a month, maybe less once I consolidate. I just wanted some input on if this is a good idea, especially with the loan-pay down. Seeing as how the gov loans have a lower rate, I’m not sure if I should use the $4,000 directly in addition to the private pay down while keeping the gov loans open. Please let me know what you think, thank you.

Credit Card: Just one, at a rate of just under 10% (9.8), with a 5k limit (so practically maxed out)
Federal: Not completely positive since they are not due for repayment just yet, but approx. 5.6 since I last checked
Private: Has hovered between 7.6-8% (Since our economy is in shambles, it has been at the lower end for the past several months)

As of now, all student loans are on a 20 year plan. If I choose to consolidate the privates for a lower rate, I have the option of jumping to 30 year.

I would like to begin by saying that this gentlemen has a level head and some good ideas about how to allocate the funds. But I would like to elaborate on the best financial way to attack this issue. Now, if you have been following this personal finance blog, you are aware of my staunch hatred for debt of any kind. However, in some circumstances, carrying some debt can be more beneficial than paying it off. But let’s dive in and break this situation down:

Regarding the 401k Money

I believe that keeping the money in the retirement account is indeed the best use of this money. Without question, breaking into this money would have serious consequences, mainly Uncle Sam taking a gigantic bite out of the money. Plus, with being so young (age 21) and having 38.5 years to go before retirement (assuming he retires at age 59 1/2), and assuming he could average 8% per year in mutual funds, the $125,000 would grow to $2,419,494.28 without any additional payments into the account. That is a pretty solid retirement wouldn’t you say?

So bottom line, I would definitely keep the 401k money in the 401k account. Let it grow tax deferred (or tax free, if it is a Roth IRA).

Allocating the Life Insurance Money

On this point, I would have to recommend a slightly different strategy than the one he outlined in his email. Starting with the easiest decision, I would pay off in its entirety the credit card debt. Beating 10% interest on the stock market or any other kind of moderately risked asset is going to be hard to consistently do. So with regard to the credit card balance, yes, pay it off.

With regard to the federal and private students loans, I have a different suggestion. I believe that the rates you are paying on these loans are too high. I am fairly confident that you can obtain a consolidation loan to get all of your student loans condensed into a single loan, and you can probably get the interest rate down considerably. I consolidated my student loans back in 2003, and have since paid them off completely. At that time, I was able to consolidate at a rate of 3.5%. Now I understand that the market today is a little different, but let me give you a couple of approaches on how to get the best deal on a consolidation loan.

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If you are on the fence about when to refinance your home mortgage, then consider these several factors. I have done a lot of real estate investing and property management, and have a good deal of knowledge when it comes to mortgages as well. There are many things you need to be careful to consider other than just a better interest rate when it comes to refinancing your home. First, ask yourself these questions:

• How long do I plan to stay in the home?
• Do I plan to use this home for a second home or investment property after I leave?
• Am I looking to get cash out of the new loan, or am I looking for a lower payment?
• If I am looking to get cash from a refinance, what will I use it for?
• When is the best time to capture the lowest possible rate?

Length of Time in Your Home
These, among other questions are good starting points before shopping rates, etc with your local lenders. The most important question is how long you are going to be staying in the home. If your kids are graduating high school and you are planning on moving, refinancing is not a good option for you. Even if you can get your closing costs down to $2,000-$3,000, you are still having to pay for 2 sets of closing costs - 1 when you refinance, and another when you sell the house. The fees to procure a new loan are just too high if you do not plan to own the house for very long.

On the other hand, if you plan to stay in the home a long time, then look at the potential savings this new lower rate will provide. You have to consider more than just the monthly savings, because you are getting a new 30 year loan, and so your payments are going to be extended by the same number of years as you have already been paying on your home (if you have been paying on your house for five years, and you get a new 30 year loan, the total amount of time paying on the house is now 35 years).

Keeping the Home After You Move 

If you plan to keep the home after you move, you should consider refinancing for a lower rate. My philosophy in holding rental properties is to get the most amount of money possible in rental income every month. Some investors look for appreciation over time, but I want to see results right away. So to me, the risk involved with an investment property (tenants and damages, vacancy, etc) merits getting paid as soon as possible. Over time, the rental unit will gain equity, and can still be sold later for a profit. So when it comes to long term second homes and rental properties - yes, go for the lowest payment possible. The renter is paying all of the interest anyway, so interest charges don’t really matter in this case.

The Dangers of Cashing Out Your Equity 

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I was looking around online today, and found a great article on debt. This article will help you to re-align your thinking so that you can escape the snare of debt. What you have to realize is that getting out of debt is not only hard work, but it also takes a change in your mentality. So check it out and let me know what you think.

read more | digg story

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The holidays are over, but that doesn’t mean they aren’t still going to haunt you for another month or two. In fact, those credit card bills are probably going to be showing up very soon in the mail. However, don’t let the post-holiday bills get you down too much because there are a few strategies you can use to get you through the holiday bill season, such as a simple cash advance.

If you’ve been like most people and swiped the credit card through the holiday shopping season, then you’re probably going to have a hefty bill coming soon, if you haven’t received it already. There are a couple of ways you can insure you get that bill paid off and a budget and cash advance can go a long way.

Subtract your expenses from your income and see where you can pay a little more. If you have a positive number when you’ve subtracted your expenses from your bills then you can figure out how much extra you can afford to spend. If you have a zero or a negative number then you need to take a step back and figure out how you can make more money or spend less.

A cash advance is a tool that you can use to help you through those weeks when you need that extra cash to pay your holiday bills off. A cash advance has simple requirements for you to meet and you may even be able to obtain a cash advance that can pay your entire post-holiday bill off. This makes a cash advance ideal if you will have the money to pay it off, but you need to send the bill off now. Either way, a cash advance can make dealing with the post-holiday bills that much easier.

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by guest author Nicholas

This is the beginning of a multi-part series because options are generally thought of as complex transactions. Do you think options are risky? Options were originally created to reduce risk. I preface the next few days postings by saying, do not rush out to invest in options until you understand the risks involved.

What is an Option?
An option is a contract to buy or sell a specific financial product officially known as the option’s underlying instrument. The underlying instrument that I will focus on is a stock. The contract itself is very precise. It establishes a specific price, called the strike price, at which the contract may be exercised. It has an expiration date. Upon expiration, it no longer has value and no longer exists.

What does an Option Consist of?
An option is either a call or a put.
A call gives the owner the right to buy the underlying security at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a call option, the contract represents an obligation to sell the underlying stock if the option is assigned.
A put gives the owner the right to sell the underlying security at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a put option, the contract represents an obligation to buy the underlying stock if the option is assigned.

What does that Mean?
I will start today by only discussing call options from the buyers point of view. Let’s take an example. Say I want to purchase 1000 shares of XYZ stock. XYZ closed today at $26.95. I could purchase those 1000 shares, and I would pay $26,950.
Question: Why does anyone buy a stock?
Answer: Because they think it will move up.
With options, the question that I have to ask myself is when will it move?
I personally believe that XYZ stock will go up to $31.00 by the middle of December. So instead of risking my $26,950, I could buy 10 call contracts (one contract equals 100 shares of the underlying instrument) of the $30 December strike price. Each December call is currently valued at $0.65 per share. These expire on the 21st of December. So if each call is $0.65 and I want 10 contracts of 100 shares each, I will pay $0.65 x 1000 for a total of $650. So I now control, that is not to say own, 1000 shares of XYZ until the 21st of December.
Looking to the future if:
XYZ goes down to $22.00: my 10 calls will expire worthless, and I lose my $650 had I bought the options.
Had I bought the stock, it would be worth $22,000, and I would have lost $4,950.

XYZ goes up to $34.00: my 10 calls give me the right to buy those 1000 shares at $30, and I could sell them on the open market for $34. The calls are then worth at least $4 per share. So I sell them for $4 a share x 1000 shares for a total of $4,000. I subtract my $650 for a gain of $3,350 or a 515% return on my money.
Had I bought the stock, the 1000 shares would be worth $34,000 minus my initial $26,950 for a gain of $7,050 or a 26% return on my money.

XYZ stays at $26.95: my 10 calls expire worthless, and I lose my $650 had I bought the options.
Had I bought the stock, the 1000 shares would be worth $26,950, and I lose nothing other than the time value of money.

Tomorrow I will continue the discussion, but from the above example, one can see how an option will allow you control over a certain amount of shares of a stock for a specific time with a limited amount of money required, relative to buying the stock. The upside is that it is possible to execute many of these trades with the same amount of money required to purchase one stock. The downside is that the option is only valid for a specific amount of time.
Stay tuned for more. Feel free to ask questions, and I will answer them as best as possible.

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I love to interact with my readers/subscribers. So don’t hesitate to send in a question and ask me to post about it. Personal Finance Resources is all about helping you with your home finance situations. In this post, we are going to address a few questions posed by one of you, on the topic of Retirement Savings vs Paying Down Your Debt. Here is the email communication:

“I happened to stumble upon your extremely valuable info while researching methods to pay off my credit cards. Don’t know if you’ll have time to answer my question, but here goes: I’m 28, have $20,000 cc debt (@ ~15%), and approx $50,000 in a Traditional IRA and Roth IRA accounts. Do I take the penalty and pay off the CC? I no longer have any need for CC now that I’m out of school, so I’m not worried about this situation reoccurring. Problem is, that compound interest down the road is just so tasty! I figure the future money to be gained is greater than the cc debt with interest, but I need to repair my 611 credit score so i can at least think about buying a house and getting a business loan within a reasonable period of time. Any suggestions?

I’ve been thinking about this one for some time now and your help is greatly appreciated. I am working and will be in the 25%, possibly 28% tax bracket, and have been paying $400 to $500 a month in credit card payments. I’m not sure what my penalties for early withdrawal would be, but if I can invest those $400/month into my accounts instead of losing it to the credit card companies, I think I will be able to compensate for the loss. As it stands now, I have not been able to, nor will be able to put any new funds towards my investments with these current credit card payments. What would be my total withdrawal (including penalties) if I were to pay off the credit cards completely, or would it be wiser to pay off 75% of the credit card debt and continue to pay smaller credit card payments while adding small amounts to my retirement funds? I figure there is a good cost/benefit ratio, but my extreme desire to purge myself of the credit card parasites has clouded my reasonable judgment. “

Possible Solution

The first, and from what I can deduce as the most important question posed here is whether or not to take a tax penalty and pay off the credit cards. If you read my post on Credit Card Secured by Roth IRA, you will notice that in addition to paying income tax on an IRA withdrawal, you will also likely be penalized with an additional 10% tax. So in this case, the total tax on a withdrawal might be as high as 38%. So, to be able to pay off the $20,000 owed to credit cards, a withdrawal of between $30,000 - $33,000 would have to be made. That would be the better part of the IRA account held.

The positive side of this equation is that the $400-500 a month spent in credit cards could be put into the retirement fund as an investment for the future. But it would take at least 4-5 years to replenish the money withdrawn from the retirement account.

The simple fact of the matter is, we need to put our money where it will earn us the most (or cost us the least). If it were not for the serious tax implication of early retirement withdrawal, it may be better to pay off the credit cards, depending on how great your return is on your investments. If it is less than the 15% being spent on credit card interest, than it would make sense.

The Personal Finance Resources Solution(s)

If possible, I would attempt to work out a secured or unsecured loan with my bank at a lower rate of interest. Try to get it down to 10% or less. If you had a house, this would be an excellent situation to use a Home Equity Line of Credit. If you are unable to obtain a consolidation loan, then use the debt stacking method to maximize your payments over the offending credit cards. Then I would stop any contributions to my retirement account, stop going out to eat, cut the cable TV off for several months, and put the maximum amount of money possible into paying off the debt.

With regard to repairing your credit score (611 should be enough to obtain an FHA loan for a house, by the way), credit card companies are mostly interested in a continuous stream of punctual payments. So paying off the cards now would help your credit score, but long term, you will build your credit better if you make some payments. I am not saying to make minimum payments, but make several months of large (as large as you can) payments to increase your credit score while getting the balance down.

I hope this solution was helpful. Consider signing up for my RSS feed so that you don’t miss out on any of the upcoming personal finance issues and solutions.

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There are quite a few adverse effects of cheap insurance. They might be a temporary debt help, but what is the use of such help that will in turn contribute to more debt piling. This consequently contributes to public debt. Turning to such resort is a common occurrence amongst people who work at home. True, that there are edges to best work at home, but ones oft left ignorant.

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Many credit lenders (credit card companies, credit unions, banks and so on) offer “Skip-A-Payment” options for borrowers.  Every lender has its own terms and conditions (how many payments per year you can skip, what type of credit is included or excluded in the program, and the amount of fee charged for the privilege), but you typically can skip one payment per year for $10-$50.  Sounds like a great deal?  Well “Skip-a-Payment” can be good or bad – it depends.

Why They’re Bad

The way these services are sometimes marketed towards the financially foolish is disturbing.  The credit lender may send a happy sounding letter, or post on their website something like:

“Dear valued customer, It’s summertime, and X-Bank wants to say thank-you for your business by offering you a vacation from your bills!  That’s right, you can choose to skip this month’s payment on your current account listed above.   Upon receipt of your extension agreement we will waive your payment for this month and apply a $25 extension fee to next month’s invoice.   There’s no need to send any money at this time.  Just think of what you can do with the extra cash!”

 “Take a vacation from paying your bills” subtly sends the message “get out of your responsibility (because we all hate responsibility) – hey why not take a vacation with the money you save because you deserve it!”

Of course not everyone will use the money for a vacation, but many will believe they are getting a break, when really, they’re going to end up paying more than that $25 extension fee.

Meanwhile the credit lender gets a few quick bucks from the borrower that will NOT be applied to the outstanding balance.  The lender successfully extends the life of the loan by one month (at least) and earns even more interest on the money not paid that month.

Why They’re Not So Bad

Skip a payment services can also be beneficial IF they’re used for a good reason and not as an excuse not to suffer paying a bill:

1. Emergencies
There may be a month where you absolutely just CANNOT make a payment – maybe you’re in between jobs, had to take time off work for health reasons or needed emergency surgery for a loved pet.  These things happen. Skip-a-payment services can help you avoid a delinquent account.

2. Paying Off Higher Interest Debt
It makes sense if you have credit card debt (which is usually much higher interest than other loans) to take the money you would have applied to a mortgage or car loan at 5% - 10% and reduce your 18-29% credit card balance.

So next time you get that tempting offer to skip your credit card or loan payment consider the consequences against the benefits. If you don’t have any higher interest debt to which the “savings” could be applied, don’t be suckered into thinking your credit lender is doing you a favor.  If you are facing rough times, remember that you likely can actually miss a payment to avoid damaging your credit history.

Linda Bustos is an Editor for Creditorweb, where you can learn about credit cards, discuss personal finance in the credit forum, read reviews on credit card offers from multiple lenders and apply online for a credit card.

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Need free debt  problems advice? Keep reading as I will divulge to you the problems people have with regard to debt, and advice about solving the debt issue, all completely free of charge. The problem with debt boils down to 2 main issues - the first is that as children, we grow up in families that are debt ridden, spend way too much, and have no discipline with their personal finances. They expect to have it all, and have it all right now. Therefore, they spend money they do not have, in order to “keep up with the Jones’s” and fall further and further behind on their payments. This is a miserable life, as they cannot afford to lose their job at any time, or they could lose everything - house, car, and any other possessions that were purchased with debt. The second issue, is that credit cards and other debt vehicles are so easy to acquire, and loan companies are very generous in their upper limits of credit use (eg large maximum balances). So why do people keep falling into this trap?

• Attitude Toward Debt
  The first issue I mentioned was child rearing. Children, on up to adulthood, are not taught the dangers of debt, and the problems surrounding too much debt. There is an attitude of apathy, and people say things like “Aww, just file for bankruptcy, you’ll be good to go in 7 years.” There is no sense of financial responsibility, thus bankruptcy continues to increase. We need to change our mindset to one of debt avoidance at all costs. We need to ask ourselves questions like “Do I really need that new car?” and ”Why pay $1 for a soda, when I can buy a 12 pack at the grocery store for $3.65?” Asking ourselves continual questions like these will help us to become frugal spenders.
• Delay Gratification
  We need to deny our selfish impulses for the things that we want, at least for “”right now”", or early on in life when money is tight. Look to the future, invest young, and the end results will be staggering. Investing bears exponential growth over time, so just a couple of years of delay can cost hundreds of thousands of dollars later. Forget about the Jones’s, you’re likely not to catch them anyway. Stay focused, have a little patience, and you can get there.

These are the harsh truths about debt problems, and advice on how to fix them. We must re-train our minds with regard to debt, and stop following in the footsteps of our parents who know nothing about finance. When you get to a point that it stings to buy a happy meal at McDonald’s, you are on the track to financial freedom. Stay tuned for more great personal finance help and sign up for my RSS feed to get the latest updates on everything here at THE Personal Finance Blog.

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This article is dedicated to giving you a Credit Card Debt Payoff Calculator. My intention is to provide you an easy way to determine which credit card to focus your payments on, and simultaneously predicting the number of months left to pay on all your cards. Now, the spreadsheet shown below is an outlandish situation, but I wanted to show you an extreme circumstance, and how to use the spreadsheet. Ok, enough introduction, let’s get into the details of the spreadsheet.

Here are the quick and dirty directions to inputting the data:

1. Delete all the rows that you don’t need. Trim it down to just the number of cards you are running balances on.
2. Determine how much money you can devote to all of your credit cards per month, and enter that number in the cell labeled Available to Pay.
3. Update the Balance column to reflect your current balance on each credit card.
4. Update the Interest Rate column per your agreement with each credit card.
5. Enter the minimum payment for each card in the Minimum Payment column (the default method uses a calculation based on 2% of the balance, you may update this function per your card agreement, to minimize the maintenance necessary on the spreadsheet; post a comment at the end of this article if you need help).

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It is important to know how credit card interest is calculated. It is not calculated the same way that a CD or an interest bearing savings account is calculated.  The key problem for the consumer is that the credit card interest rate is calculated daily.  I’ll will explain more in a minute on this.  First let’s go over the typical balance types that credit card companies use:

• Average Daily Balance
  By far the favorite of credit cards.  Every day, your balance is recalculated with any payments, adjustments and/or additional finance charges.  With some credit cards, new purchases are also included in this calculation.  At the end of the month, these daily balances are averaged over the number of days in the billing cycle.
• Two Billing Cycle Balance
  This method is most advantageous for the credit card company.  This method is an extension of the average daily balance method, but utilizes two billing cycles to come up with the average daily balance.  The typical grace period (which is usually 28 days) is non-existent under this method.  Also, all your payments, regardless of size, do not truly reflect in the interest calculation until two fulls months later.  Definitely shy away from this kind of offer.
• Adjusted Balance
  If possible, this is the method you want to be using.  Under this method, all payments and credits are subtracted from the preceding billing period ending balance.  Therefore all interest calculations for the current month are being exacted on a lesser balance.

So when you are shopping credit card offers, take the above information into consideration.  It may not sound like it makes much of a difference, but you will see in a moment just how much of a difference it can make.  Remember above how I said that credit card interest is calculated daily?  This is how virtually all credit cards calculate interest.  This means that every day compounded interest is added to your balance.  But Jeffry, I don’t see it reflected in my balance, what are you talking about?

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