Color of Money Live (February 28)

Feb 28, 2019

Send in your questions to Washington Post nationally syndicated personal finance columnist Michelle Singletary.

“Knowledge isn’t power. The right knowledge is power.”

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Thank you for joining me today. 

And as always, I welcome your Thursday Testimonies. 

Let's get started. 

As of today, I'm totally free of debt. I paid thé last bit of my mortgage today. Thé 165€ I put on my creditcard this month will be paid by direct debit, as always. I'm happy and there's a bottle of bubbles chilling in the fridge.

Congrats! So happy for you. Can't wait when I can celebrate getting rid of my mortgage too.

Hi Michelle, My husband and I just paid off all of our student loans (almost $200k!). We’d been paying about $1000 extra each month and used our year-end bonuses (after making sure our tax obligations were in order) to pay off the last of the principal earlier this month. After years of intense law firm hours, we are celebrating with my husband taking a lower paying job with MUCH better hours so we can have more time together with our sweet baby. We’ve got our emergency fund in order and are making regular contributions to our son’s 529 Plan. Thank you so much for all of the consistent, affirming messages to stay the course and get the monkey off our backs. I don’t think we would be at this milestone so soon without you!

Wow! What a wonderful testimony. And I love, just love, that you freed yourself from this debt to make more time for what's really important -- your family. 

Just wow!

Hi Michelle, I was forced to sell my house last year after my divorce. We were underwater, even after 11 years of on-time payments, and had to short sale. Unfortunately, the Mortgage Forgiveness Debt Relief act was not extended for 2018, so I'm looking at having to pay taxes on about $72,000 of "income". I want to cry. This is such a huge tax hit for me - how do I even start to dig out of this hole? (Note: I don't qualify for insolvency because I've been aggressively paying off my debt for 2 years and have a sizable TSP savings that I have to list as an asset. Generally a good thing, except in this case)

I'm so sorry you have been hit with this bill. But at least it's a lot less than being responsible for the whole $72,000.

Once you finish your tax return and see how much you owe talk to the IRS about a payment plan if you don't have the money to pay the bill. It's going to be okay. It may take some time but you'll get to that debt-free status. And yes, it's good that you're saving for retirement.

Try if you can to look at the upside. You no longer are burden with the house. Yes, there's a cost for the debt forgiveness but it could be worse. 

My wife and I both claim zero exemptions from payroll -- we pay the amount the government wants, automatically, each month. We also have a fairly average set of 401ks, IRAs, and mutual funds, and a house (which nets us a deduction). And yet, every year, when we do our taxes, we end up OWING. I hate that. I hate writing a check. Do you know of any online tools that can help us figure out where the taxable income is coming from so that we can, in turn, figure out the correct amount of additional withholding from our monthly payroll checks?

Sounds like you may have to pay in more taxes through payroll or make estimated tax payments. This would be a good year, if you don't already, to sit down with a tax professional and look at your overall tax situation.  Perhaps there is something you can do. Or, it may just me that you make good money and the result is you pay taxes on that income. Certainly take advantage of any and all credits and deductions but there may not be anything more you can do. 

Hi Michelle, I know you've said that you always tithed, and maxed out your retirement accounts, and saved for college starting when your kids were born. But if we can't afford to do it all (and we can't - 4 kids under 6), what would you prioritize? Our only debt outside the mortgage will be cleared by our tax return (next year will try for $0 but crazy circumstances this year). Currently we do 3% to the church and max a 401(k) and do a little for each kid's college fund, but though we have a 3 month emergency fund, there is no life happens fund anymore (emergency vet visit). Lately each month feels very tight on cash even though we no longer eat out, vacation, buy new clothes or do much of anything that isn't free. I know that it will be easier when we are no longer paying for preschool, but that's a ways away. Where should our priorities be? Thanks for all your advice over the years!

So, in an ideal world yes you have an 

-- Emergency fund (3 to 6 months of living expenses)

-- Life happens fund (for when your car breaks down or your pet needs a vet)

-- Save for retirement (10% to 15%) if you can

-- Save for your children's college eduction (529 plan)

BUT...please don't stress or stroke yourself out trying to do it all when you just can't. So do what you can do. 

I would never, ever fault you for not having enough to meet everything on that list if you are doing your best with the income you have and keeping your expenses in check.

So make sure you have a decent start on the emergency fund, which you have. No need to add it it now. In fact, you could take a little out and transfer some money to the life happens fund until you are in the possible to fill that back up. 

Tithing is a personal thing so you will have to decide if that is a top priority. And tithing would be 10% not 3%. But you are still giving more than most. And that's a good thing.

With kids so little you could maybe pull back on the maxing out of the 401k if you mean you are putting in now $19,000 a year) until they are in grade school and you can free up the daycare expenses. If by max, you mean you are putting in enough to get an employer match, that's great. 

Also know the earlier you save for the kids college education the less you have to save every month because you have time on your side. 

So..

-- You've got the emergency fund set. Leave it be. 

-- If you have stable employment -- take a little from the emergency fund and build up the life happens fund.

-- Keep saving for retirement but perhaps pull back a bit until you can reduce the childcare costs. Then push up the savings.

-- Do what you can to save for the kids college but if there just isn't enough right now just know that's okay too. The kids can go in-state, commute or go to community college for two years and then transfer to 4-year university.

Really, I think you will be okay. 

Are there any benefits to selling a home to the "we pay cash" buyers? The home needs a lot of cosmetic TLC (my husband's dad and brother lived there for a few years before we met and married, it wouldn't have been a house I would have picked). We'd rather put the "repair" money toward a newer townhome. There's about $50,000 in equity, so if we don't get market value, we'd still walk away ahead.

Cash buyers mean the settlement should be quick because no surprised with them qualifying for a bank loan. Just make sure they have the cash and everything is on the up and up. Make sure they know they are buying "As is." 

Dear Michelle, I read your weekly chats, and subscribe to your newsletter. You have made my life so much better through your wisdom, thank you! My 19 year old Honda CRV finally expired. I bought a used car that I can easily afford (Subaru, not a luxury model). Last night, after bringing it home, I had nightmares about using the money I've saved up to buy it, and all sorts of unlikely scenarios that would occur that I couldn't cover since I spent the money. I think I just miss the old car, too. I should be excited, but am not at all. Am I nuts? Thank you (and glad this chat is anonymous).

If you are nuts, so am I. I always have buyer's remorse. It's a tick we savers have. We save and then regret when we have to spend the savings. I think we just like to see the money in the bank as a security even though I'm sure you have an emergency fund. 

Right after this chat say goodbye to the old car. Thank it for all the years of use and hanging in there for 19 years. Then praise the new vehicle. Make it jealous by saying you hope it can last 19 years like your other love.

Then thank yourself for doing what you had to do to save to be in the position to buy a car when the old one died. 

You did good. No more grieving! That's an order!

Hey Michelle, a couple a weeks ago (in the chat) you shared the best financial choices that you ever made. Do you have anything that you financially regret?

I have a lot of regrets. I overspend sometimes. When I'm traveling a lot and get back home I can be so tired that I eat out too much.

But my biggest regret is being WAY too conservative when I started investing for my retirement in my 20s. It's ridiculous how much in returns I gave up being too share of stocks. 

Fortunately, a good financial planner set me straight and I made some changes that has helped me boost my retirement. 

The longer horizon you have, the more risk you can take. I was mostly in bonds. BONDS! That was crazy. I wasn't diversified enough for my age. And why? Because I listened to a co-worker who was nearing retirement and he was scared of losing money in stocks. He meant well but his investment strategy was not appropriate for me in my late 20s. 

Biggest regret. 

Although, had I been more aggressive I might not be in this chat because boy oh boy would I have had way more money and might have taken an early retirement.

So, you guys are welcome :) 

Check both your W-4s and make sure you both chose "married, but withhold at higher single rate." Two-income couples can get burned if the withholding assumes that each of the incomes will get the whole MFJ deduction.

Thanks for sharing.

I'd like to add, if this is calling the number from a sign on the side of the road, you could be getting much less for the house than you would if you list it with a broker. If this your broker has brought you an offer from a buyer who has the cash and therefore no loan issues, you probably are getting a fair price. Here's an article by a listing agent - https://listwithclever.com/real-estate-blog/how-does-we-buy-houses-for-cash-work-and-why-to-avoid-it/

Thanks. To my point. Be careful. 

Michelle, the "we pay cash" buyers are not the same thing as "cash buyers." The first group are people who are basically scavengers: they are in business to buy homes quickly and perhaps will flip them. They are notorious for not paying anything close to fair market value. You see their posters taped to streetlights and the like. "Cash buyers" are just normal people who happen to have enough money to pay cash rather than take out a mortgage, but they usually intend to live in the home. They might offer a bit less than market value since it will be an easy sale, but they are a different group than the "buy 'em quick and low" and often fly-by-night outfits screaming "We Pay Cash for Your Home!!" guys.

Yes, thanks. I was assuming the person just meant a buyer who wants to pay cash. Thanks to all you eagle eye folks with this caution. 

When we put up our condo we looked at several We Pay Cash buyers. The condo tax assessment was $209,000. We figured basic repairs would be roughly $15,000. Comps were in the $220,000 range.The Pay Cash companies were only offering $100,000. We found a nice young couple that was willing to buy "as is" going with Redfin as the relator for $189,000. They were happy to get a fixer upper they could afford and we were happy to sell it to them. The unit was on the market for 18 days. So beware of the cash buyer offers and know what your house is worth.

Good story. Thanks. 

I think the chatter asking about cash buyers is referring to those "We Buy Houses" advertisement. Those people are flippers. They will offer you WAY below the market value of the house, then do some cosmetic work and resell it. The only people who would typically sell to them are desperate people. The chatter can still sell the house "As is".

Another caution. Appreciate you guys looking out for each other. 

Think of all the improved safety features that your new car has!

This is a good point!

I rec'd an inherited ira in 2017. It is worth a little more than twice what IO on my one BR condo mortgage. If I were to take money out of the ira, I would incur taxes. Mortgage is 4.6%. Would you use the money that way?

I would need to know more before telling you what to do with the money. I'd want to know if you have other debts. I would want to know if you are on track for saving for retirement, etc.

I'm definitely an advocate for getting rid of a mortgage as soon as you can but with a lot of caveats. I don't want you to be house rich and cash poor. I don't want you to be carrying consumer debt, even a car loan. 

 

We were shocked by how much our Federal and State taxes increased this year. 4 years ago we took a cash-out refi on our principle home to build a vacation cabin. Is it true that we cannot deduct this mortgage interest anymore? TurboTax won't let me deduct it. How can the tax laws be changed like this without grandfathering it in? Is there any way we can get another deductible loan at this point since the cabin is already built? Also because of the SALT limit and the fact that we cannot deduct the mortgage interest, we will take the Federal standard deduction. Now comes the second nasty surprise. Virginia requires that we also take their standard deduction since we took the Fed. standard deduction. Combined tax increase for us is over $12,000!

 

Read Michelle's column: Want to cash in on your home equity? Read this first.

Please read the link. A number of people are surprised about the new limitations on the mortgage deduction. You can't use the money from one home -- your primary residence -- to build home (the cabin) and take the interest deduction. If you used the money to improved the home upon which the money is secured then yes you could deduct the interest. 

So sorry. 

Hi Michelle, so grateful for what you do here. My testimony is that, after decades of following your advice, we had a number of years where our expenses were high and our income was low. We took a major hit when my husband was "restructured" out of the big consulting partnership he was part of, and then another huge hit several years later when the partnership declared bankruptcy ... and all the obligations that the active partners had taken on were written off, resulting in almost $50K of increased federal taxes because debt forgiveness counts as income for tax purposes. At the same time we had one in college and another on her way there. Did I mention that this all began in 2009, so the investments that were supposed to pay for college were under water? And that we were working hard, but had little to show for it as we built a business? So we began borrowing, first a little, then a lot. A year ago we had a massive amount of debt. But our business turned around as a result of that hard work, and I began throwing every penny I could at the debt. I'm thrilled to be able to say that the credit card debt has been kicked to the curb, and I have a plan for what remains. I didn't follow your advice to pay the smallest balance first, went instead with the highest interest rate first, and that has worked to free up more and more to throw at the outstanding amounts. So though we're not all the way there, I feel like our progress is worth celebrating. Thanks again for the encouragement.

Thank you for sharing your story and your kind comments. Good for you for attacking the debt (and I don't mind at all you didn't follow my "debt dash.")

The important thing is you had a plan and you executed it. Congrats!

LOL, thanks for being here Michelle! :)

Got to make you smile. This money stuff is tough!

Michelle, I've used two online tax software packages and they both give me the same answer - that I owe a bunch to federal and state. BUT we sold some stock in 2018 and I'm not sure I'm handling this properly. I've tried calling the IRS to go over what I did, but after multiple attempts have not been able to get a hold of a human being. Every time I get a person, they transfer me and then I get a recorded message saying that this extension is not taking calls. I'd like to meet with a tax professional to have them review my taxes - how should I go about finding someone who hopefully will charge less since I'm just asking for tax advice on one subject and then I will file myself.

Finding good professionals is always tough. But ask around. See who your friends or co-workers use. Or just call around and get quotes from professionals telling them you want advice only. Although to be fair to the professional, they would have to do some work or prepare your return to give you the best advice. I know we all want to get advice for a fair price but sometimes we have to pay market rate to get first rate advice.

Whatever you decide, look for someone soon and make an apt. soon. The closer you get to tax day the harder it may be to get an appointment. 

Thank you for saying this! I understand that tax returns are frustrating, but you can't expect that your withholding is what you "owe" the government. My spouse and I have disparate incomes so the government's withholding estimate for me will always be incorrect. We know this and adjust accordingly through extra payments. This doesn't mean we owe more taxes than we would have otherwise.

Exactly. But I get it. You work hard and you want to keep as much of your money as you can. I just have to keep telling myself that my taxes -- for the most part- is the price I have to pay for the roads, schools, public services, etc. The money goes to help other folks who aren't as fortunate as I am. 

Yes, the government can and should handle our money better but for now I do what I can to put myself in the best tax situation and try not to cuss when I owe more than I think I should. 

Hi Michelle, I am 25 in a great job with the federal government in DC. I contribute to my TSP every month and get the match so it comes out to be 11% of my pay. I know I will have quite a hefty sum when I retire, but sometimes I get so overwhelmed when I think about ever buying a car or a home, or having a kid, or paying off my student loans (I have about $38,000 left). I feel that I never have anything left to save at the end of the month after every bill is taken care of and I feel hopeless about ever really *belonging* in DC-- I am completely priced out of the real estate market and don't see a way forward. Do you have any advice for people like me who want to be stable but still find they are basically living paycheck to paycheck? Do I just need to change my perspective and wait to move up the ladder? Right now I can't see any way forward other than marrying someone for that sweet double income, moving out of DC, and never having children.

I love you. I love that you are asking this question at such a young age. I love that you are thinking about your future and how to be better financially.

First, you are NOT living paycheck to paycheck if you are saving this much of your income. You are saving and for something very important -- your retirement. And the fact that you are doing so at such a young age is great.

Now as for your other goals, if you find that you don't have enough after essentials, you might be able to pull back from retirement savings a bit to meet other goals. Just a bit. For example, get rid of that monkey on your back (the $38,000 student loan). Even if it means say shaving some off retirement. 

Be sure you have an emergency fund even working for the government. Remember the shutdown!

Start putting a little away for that car you might want one day. Or even the home.

But I will say this. You are NOT a financial failure if you don't have a home now or say by the time you are 30 or 35 or whatever. You can build wealth other ways outside your retirement plan, like through a low-cost growth index fund. This I say because people keep telling young folks the only way to build wealth is to own a home. Not true.

You are not a hopeful millennial. You are doing just fine from what I can tell. 

A field report: Our 2018 income is 7% higher than 2017's. But our Federal and DC income taxes are each 11% lower. Had our income been unchanged, our Federal and DC taxes would each have been 21% lower. Ironically, we believe taxes in the US are too low. Infrastructure and especially public transport aren't as good as many other countries', and public servants (teachers, first responders, and, yes, folks like Michelle's husband) aren't as well compensated--particularly regarding retirement provision. Since we're DC residents, we pay taxes but of course have no voting Members of Congress to whom we can write!

Thanks for this reality check!

Hi Michelle, looking for your blessing to do a home renovation to the tune of $65k. We have a mortgage and car loans (about 15k) but no CC debt or student loans. We have 6-7 months cash in emergency funds, I max out 401k and my partner contributes to get employer match, we have $2k in a life happens, contribute to our child's 529, and have a healthy investment portfolio. I got a windfall last year that'd easily cover the renovation (and now that I think of it, the car loans, too) with money leftover. My biggest reservation is I'm not sure that my job is stable, and I was unemployed a few years back for an extended period and have developed a hoard cash mentality just in case that happens again. Are we okay to get that reno, or should we hold onto it just in case?

With that much in emergency fund you could probably afford the renovation. Just make sure it's six to seven months of living expenses not just the big stuff -- housing, food etc. 

Definitely pay off the car. Also see if you can scale back the renovation plans if you want to maybe boost your emergency fund to 12 months. Otherwise, I think you can do it.

Assuming this is a traditional IRA and not a ROTH, consider the tax that would need to be paid all at once. It will be paid at your highest tax rate. It may be better to take smaller amounts over several years.

Good point. But if you can cash, pay the taxes and get that mortgage gone - YEAH!

As someone who rents an apartment because I can't afford to buy a house, I have no sympathy for people who cry that their taxes have gone up because they can't deduct the mortgage on their vacation cabin. The mortgage interest deduction introduces a major distortion into the housing and financial markets for numerous, well-understood reasons. True tax reform would abolish it completely. At a personal level, I contend that my taxes pay for your deductions. There is no reason for it.

All points of view welcome. 

So sorry if I didn't get to your question. I read everything however. 

Thanks for all the comments, testimonies and help. 

See you next week. 

In This Chat
Michelle Singletary
Michelle Singletary writes the nationally syndicated personal finance column, "The Color of Money," which appears in The Post on Wednesday and Sunday and is carried in more than 120 newspapers.

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