Question: Does it make more financial sense to sell a car we own outright and apply the entire sale price towards a new car in order to keep the payments low, or to sell the car that still has 25 monthly payments left and have less of a down payment for the new car?
It makes most sense to buy a used or new car with cash.
So, if you sell the car you own outright use that money to pay in full for another car.
But why do you need to sell the car you own outright?
Why not aggressively paid off the car you already have.
In the end, I vote for no car payments at all.
We finally bought a house after years of saving, stayed in our budget, still have all our accounts (rainy day, emergency, 401(k)s) minus the down payment fund, and are still saving each month. Here's the problem, we've been in the house nearly a year and we'd love to buy some furniture now that we finally feel permanently housed. But we can't bring ourselves to do it. We've always been pretty frugal on furniture, so everything but our mattress is second-hand and a little frayed at edges. This time we'd like to have something that's not just new to us, but new new. We're researching and budgeting, but how do get ourselves to let go and take the (bit by bit) plunge?
This is a great problem to have! But you know it is funny, sometime it is hard to let yourself enjoy the rewards of years of discipline. I have found it super helpful to have a real conversation with your spouse or partner (I assume since you use the word "we") and identify the one or two things that you most need/want.
Remind yourself that you have taking care of the other priorities (saving etc...) and spend the money.
But remember, enjoy it!
Michelle, How much should I have in my emergency fund? I have $1,000 in my life happens fund but not sure how many months I should plan for my emergency fund. I have three months in there now, provided I skip healthcare.
In this economy, I encourage people to have at least six months of living expenses. So when you say you have three months to start, which by the way is great, do you mean you have three months worth of ALL your expenses, ie. mortgage/rent, car payments if any, debt payments, utiltites, etc.
So just keep building up to six months. Then try for one year. A year's worth will ensure you are in really good shape.
Michelle, I keep writing in every week to ask if the Washington Post can include a link to your current column in the chat intro so that we may easily find your latest article before the chat begins. Every week I get no response and no link. Is it really that difficult to implement this or is there another reason why we can't get a link?
Michelle, My wife and I currently have one joint credit card account that gives rewards for something we thought we would use but after a few years we have realized we likely won't. We would like to get a new credit card that gets us something more practical like hotel points but we don't want to get a new credit card without closing the one impractical one. What is the best way to do this to avoid negatively impacting our credit rating? For what it is worth we don't carry a balance on any of our credit cards and the account we want to close is a relatively small percentage of our overall available credit. Thanks!
Since you don't carry a balance on any of your cards, you can close the account without much if any hit to your credit scores. Unlike what most believe, the history on the account you want to close is likely to remain on your credit files for years to come. You don't want to close an account if you have debt on it or debt on other cards.
So close away and enjoy rewards you would actually use.
I was raised to believe borrowing against one's 401 (k) (or in my case TSP as a govt employee) should almost never be considered an option. Recently, a co-worker told me that she had borrowed against her TSP in order to pay off her credit card debt noting that the TSP interest rate right now is 1.5 percent versus her higher credit card rates. She also pointed out that the TSP loan has put her on a fixed five year plan to pay off the TSP loan whereas she hadn't had an enforceable schedule for her credit cards. Acknowledging that this plan only works as long as she doesn't create new credit card debt. I am seriously thinking about doing the same thing to pay off my debt. We currently have several thousand in credit card debt on two cards at 9.9 percent APR each. Taking out a TSP loan would reduce our monthly payments by almost $200 and put us on a schedule for having all of the debt paid off. My question to you is whether this is a good idea or is there some catch with my plan that I can't see?
Based on the facts you have laid out, this might be one of those rare exceptions to rule IF (as you identified) you stick to the plan you laid out!
The risk of course is that you don't. You end up with a loan AND new credit card debt, so be really honest with yourself about what behavior got you here and make sure you put guardrails in place to avoid it.
Maybe find someone you trust to help keep you accountable.
We have a life happens fund and emergency six month fund. But now I am thinking of a disaster fund or boosting our emergency fund. We have money to pay the mortgage and other bills. But the contingency is that only one of us would be out of work. Now I think I need a larger amount of money. Realistically, I am looking at funeral costs for some relatives so I guess it shouldn't be called a disaster fund. I don't want to dip in our emergency fund for a known event like death. Life insurance maybe the way to go and how is AARP life insurance options? Thank you.
I know exactly what you mean. My husband and I often set aside money for helping relatives. But no need for insurance. Just put the money in your life happens fund. This way if the person lives a long time or ends up having money for to bury him or herself, you still have your money and you haven't had to make insurance payments.
Can I change my regular job into an investment partnership and then charge my clients a "management fee" so I can call my wages "carried interest" to get taxed at 15 percent like Romney even though we are both service providers? And can I still get this 15 percent carried interest rate even though I am no longer working at the firm? What's good for the goose is good for the gander...
I recently went to an one income household which I'm hoping is going to be only temporary although it's been two months already. We're able to mke the ends meet and pay the mortgage (with maybe $150 left after bills, groceries etc.) I have one auto loan remaining with $1,000 until payoff and about $20,000 in credit card debt (medical bills, etc). I have five months of living expenses saved up which I don't want to touch. My next paycheck will be about $800 extra than normal (a small award that had been owed to me). Would you take that $800 and put it in savings, or pay off the car? The car payment is 450 normally and the minimum on my credit cards is $300. My thought was to pay off the car and take that extra money to put towards the debt but my husbands thinks we should save that money and keep going as we have been. What are your thoughts?
I would take the $800 and $200 from savings and just be done with that car loan.
Then, as you thought, put the $450 you were making toward the car toward the credit card debt.
And since you are doing okay with the one income, I might even consider pulling some money out of the emergency fund and making a signficant dent in that credit card debt.
Think about it, with no debt other than your mortgage you might not be so worried about going back to a two-income household.
Hi Michelle, We are looking to purchase a house this spring. We're looking at all the different types of loans and I'm a little confused as to whether there better loans than others. We've been saving for years so we're definitely be putting more than 20 percent down so I'm thinking a loan through our credit union will probably be best. But I'm not sure why that is? Could an FHA loan possibly be better? Or are they generally only useful for people who do not have as large of a down payment? We also have very good credit so maybe a loan through a "regular" bank would be better? Are there any general guidelines on which loans would be best for what people? I know we're strong candidates for a loan I just don't know who to shop first. Thank you!
I wish I had more time to go through everything you should do. But do a chart with the various loan and on that chart look at ALL the costs for the various loans: closing costs, points, fees and most importantly mortgage insurance.
If you are putting down more than 20 percent, which is GREAT, you shouldn't pay mortgage insurance.
You might also look at a 15 year mortgage rather than 30 with such a large downpayment.
To help, go to Bankrate.com, which has a free mortgage loan comparison calculaor.
I'm usually one to stay the course and have used dollar cost averaging to get into the market - both in my personal investments and my 401(k). Previous 401(k)s were in a diversified rollover IRA that wasn't performing too well. So last March my financial advisior (at the bank) recommended a managed fund - one requirement was that you have at least $100,000 to invest. I had about 1.5 times that . I aslked if this wouldn't be like putting all eggs in one basket and was told no - that the managers made sure the fund was diversified. It lost 20percent between March and December due to a strategy that hinges on interest rates going up. This experiencw was one of the reasons I was drawn to this book. My question: Should I hold or cut losses? Hard to say which is the knowledge based and which is the emotional decision in this case?
Chances are you would be better off with a low cost index fund like an S&P 500 fund that you can buy just about anywhere, like the Vanguard S&P 500 Index Fund.
When someone is making bets on interest rates it is hard to stick with it because you are not sure they will be right next time.
Buy an index fund. Forget it. Dollar cost average.
Recently I decided I needed to get more proactive on my outstanding bills. To do this I needed more money coming in. Instead of getting an extra job (tired enough at the end of the day), I decided to get extra money by forgoing my cable and home internet for three months and not getting that afternoon coffee every day. I knocked off $600 (or 2.2 years) off the bill payment and read a lot of books and watched some shows at the library. Yes, I am relieved to have cable back at home, but it was totally doable for three months when I was doing a lot of traveling anyway.
It sure does!
Good for you to focus on cutting spending! That is a great first step. I would also encourage you to look for ways for earn a little bit on the side. I know it hard, but don't forget there are two ways to make improvements:
 Spend less
 Earm more
Try to spend a bit of energy on both!
I frequently read that housing costs should be no more than 25 to 30 percent of your net income. When you say "net" income, is that take-home pay? What about the $17,000 I have taken out of my check each year to invest in my 401(k), my husband and I both full-fund our 401(k) each year, or the $8-10,000 for flex spend (dependent care and health care expenses). In other words, is my take-home pay our salary and investment income minus taxes or salary + investment income minus taxes, 401(k) and FSA expenses? Thanks for clearing this up!
When I say take-home or net, it's net of taxes.
That's because the tax is what it is. But you can always pull back or change what you are investing.
If you tithe, I would say taxes and tithe.
Now if you really want to be conservative you could include savings and investments if you are very committed to that saving.
When we (me and hubby) figured out how much home we could afford, we include expenses that we value such at tithes, savings for retirement and kids college fund. That way, we aren't stretching ourselves putting our savings at risk.
Investors are generally advised to have a "balanced" portfolio, stocks, bonds etc. that becomes more weighted towards bonds as they get older. With bond interest rates at record lows, what incentive is there to hold much, if any, of one's investments in bonds?
Bonds main purpose in life it to provide safety and stability and that hasn't changed even in rates are pitifully low.
Think of them as the ballast that allows you to have the rest of the portfolio in diversified stocks that grow. The idea behind increasing the amount on bonds as you get older is you simply have less time to recover from a large loss.
I just got skimmed with my check card, theives overseas had my card and PIN. My bank tells me it happened when I withdrew cash. I understand that skimming can happen anywhere, but do I have more protection if I use my credit card to make purchases than with my check card?
What you are asking is what are the protections for credit card and a debit card. They are not the same. You do get more protections with a credit card. For example, as the FTC, points out your libablity under federal law for an unauthorized use of your debit card depends on when you report the loss.
Here's a link from the FTC that lays out your rights
Hi Michelle. My husband and I both save for retirement and have life insurance policies through our employers (one state government and the other federal government). But that's it. One of our goals this year was to assess what we have and fill in the blanks. But I'm at a loss on how to start and what things we need to consider. It probably makes a difference that we have two small sons. Thanks!
Good for you for committing to make a plan.
Start with a long conversation, or series of them, about what is important about money to you.
What are you goals? Is education for your sons a priority for example. This process is hard because we are always trying to balance a set of changing resources and goals. But start by getting clear about them.
Once you identify goals, like education savings.
How much will it cost (plenty of info online about specific cost for specific schools)?
Then break it down to specific actions you need to take to get there and automate the behavior. If you need to save $100 a month, don't make that decision ever month. Set up an auto deduction from your checking account to the educations savings account (for example)
Carl covered a lot. Also you might want to pay to sit down with an adviser to help you figure out where there are gaps. For example, you might want to consider getting some life insurance not connected to your jobs. Should you lose your jobs (and we know gov't jobs are as secure as they used to be) you would lose the insurance.
But as Carl said good for you for recognizing you need an overall plan.
Hi Michelle, love the chats! thanks! About 10 years ago my boyfriend declared bankruptcy. It's off his record now becausse he's been paying bills on time and using a credit card. Now his score is 762. Yay! He has one credit card that is in his name but a work card. Big credit limit. Work is starting to have some problems and I'm worried about a payment being missed. Would one missed payment greatly impact his score? I think he's waiting for that to happen before trying to change the card....
I would think he's on the work card as just an authorized user, meaning he would not be obligated to make the payment nor should the credit issuer put any negative information about any miss payments on your husband's credit report. Just have him ask whether he's an authorized user. If he took out the card or co-signed than a missed payment or nonpayment overall would go into his credit files.
Hi Michelle, I have been faithfully trying to budget, but don't know when my budget is reasonable, when it's excessive and when it's stingy. My radar is sometimes off. (I actually cried the other day because I found out I payed more for a plane ticket than I should have!) Is there someplace that gives guidelines on what a two-person household should reasonably spend on things like food and transportation? I want to know because if I don't want to waste time trying to cut spending in areas where I'm already doing just about the best I can.
One of the reasons personal finance is so hard, is that we are mostly left to ourselves to figure it out….I have not found any real useful guideline on average spending, mainly because on average we spend too much. Sounds like you are doing the right thing be being focused and disciplined. Stick with it…and don't worry about the airline ticket!
In my last book, "The Power to Prosper," I attempted to list suggested percentages you should spend for certain expenses. I've also posted some budget sheets with the suggested percentages on the Post website. Just search for "The Power to Prosper."
As Carl said such percentages are just suggested and will vary based on your own circumstances. But I do think they are a useful guideline that you can tailor.
When my husband and I were planning on buying a home, we did our budget based upon one salary, in case one of us lost a job. It seemed awfully conservative at the time, but I'm glad we did. About six months after closing on the home, we had a sudden change of leadership at my job. I mean, *no one* saw it coming. While I didn't get fired or laid off, working there was untenable and I quit. I was able to do this because of planning. It's been two years and I haven't made as much each year as I did in my last job, but at least we're not worried about the house. We still make an extra 1 1/2 mortgage payments each year and are putting money towards retirement each month.
It is so smart to take the time to ask that one extra question before making large decisions like buying a house: What happens if something changes?
Just asking the question helps us be more careful in our planning and leads to being a place where even if things change like they did for you, you might be prepared.
So, so proud of you. Being conservative does pay off!
Is now the right time to buy a home for individual with $1,600.00 net monthly income to buy a $60,000 town home? I'm approved for $120,000 and I know thats more than what I need. I'm planning to put 20 percent down. I do have the emergency funds saved up in case of anything such as of unemployment. What shall I look for? I've good credit score is in 800s. Please advise. Thank you.
Sounds like you are in a great position to buy a home, the questions is should you?
Don't think about it as an investment. Think of it as a place to live. It would be very easy to answer your questions about the timing of buying a home, if you could tell me where housing values are going over the next few years…and no one really knows.
Unless you get lucky housing has not been a great investment, BUT there are lots of other reason to own, so focus on those.
I have two mortages on my primary home in D.C. and two mortgages on a secondary home in Atlanta. In addition to being upside down in ATL, the 1st mortgage is interest only until July 2012. I have the funds to pay off the second mortgages on each property reducing my overall debt while still maintaining significant savings and investments. My question is should I?
My question to you: Why not?
Why not put yourself on the path to being as debt-free as possible?
Why not get those debt monkeys off your back?
Yes, yup, absolutely.
Hi Michelle. My husband and I make too much money for the free-filing options. We are both good with math (and relatively frugal) and so we just do our taxes ourselves and mail it via old-fashioned mail. But do you think we're missing out on things that could save us money? Do you think TurboTax (or something like it) could really help us? Thanks.
Never hurts to have a second opinion. If you invest in software and it comes to the same results you have, then you still haven't wasted money. You've confirmed that you are good at doing your own taxes.
If you are going to buy new furniture, why not get a few nice pieces? I have good stuff from my grandmother and her parents - nice wood pieces that last. A good dining table, desk or display case may be money but can be passed down through generations and serve as a link through families.
I love this! I think it is much better to wait, save up, and buy things of enduring quality that we will enjoy and maybe even pass down instead of plastic stuff that breaks.
Funny things is it often is less expensive in the long run. I remember when we were shopping for a bike for our first kid. I could believe how expensive a well built bike was. I was tempted to buy something much cheaper at Walmart. I went with the more expensive well built bike thinking we could pass it down to other kids.
We had that bike for 12 years and 4 kids!
I almost wanted it to break because I got sick of it, but it turned out to be far less expensive then buying multiple bikes every time because they were poor quality and broke.
Taking responsibility for your investments was the theme of Michelle's column. Might that idea apply to all (or most) financial transactions? Like buying a car, getting a mortgage, credit card purchases, opening a bank account, etc.
Hi Michelle, Can you suggest good resources to help me determine whether I'm financially ready to buy a home? I'd also love to hear your thoughts.
There are a number of home-buying classes in many communities. Got to www.hud.gov and look for HUD-approved housing counseling agencies. You and find one in your area and then call and ask if they offer classes for folks thinking about buying a home.
I have close to $400,000 saved, $9,000 in credit card bills, $18,000 in mortgage on family home and split my time betwen house and apartment for work. I have the option to retire at 60 year old and offer of another job when I do. I would love to take a trip as I'm not getting any younger and have gone to several funerals lately, but am afraid to spend the money - should I forgo trip and pay off cards or take the plunge?
That is a question only you can answer, but on a spreadsheet it make no sense to have savings earned very little while carrying a credit card balance that you are certainly paying a lot on.
Maybe pay off the credit cards, and take the trip?
I agree. I wouldn't take the trip if you still have debt.
Hi Michelle, just read your column about debt collectors collecting old debt. It was a great column that made some things clear, but if consumers do have old debt on their credit and want to do the right thing to pay it, how do we find the information? Do we try to go back to the original creditor or the collector who bought the debt? Sometimes it is so difficult to read my credit report that I can't tell who I owe. Thanks!
I love that you want to do the right thing. But waking this monster could be hard and more expensive than you think.
If you can't find the owner of the debt on your credit file, just wait to see if you are contacted. Then be very careful about what you do and say. FTC has some good tips on time-barred or old debt. Read that and then I would just wait.