Color of Money Live: What to do about that new car itch

Mar 07, 2019

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Thanks for joining me today. Lots of questions so let's get started.

Hi Michelle! Just over a year ago I wrote to you about our decision to try one-car living. Since then it has been *a year*. We dealt with unexpected job loss, spouse’s decision to return to school for a career change, family illness and deaths that required expensive travel, and now, a year later, back to car issues. Here’s the testimonial part....despite all these challenges we aren’t in any new debt and are making regular payments on existing debt. We got a roommate, spouse has a side hustle to help pay for school (it’s a professional trade associates degree program at the community college) we have been focused and just yesterday when my almost *15* year old car needed an estimated $3k of work, we worked with our mechanic to identify the safety related items (~$500) and used our “life happens” money to pay in cash. We will figure out how to save up for the other things or get second opinions. We could easily have gone out and gotten an auto loan for a new car but I thought about all of your car advice over the years are we are going to keep the old car running for as long as we can reasonably pay for repairs. Thank you!! It has been hard but I feel like your advice has really inspired us to stay out of debt!

I think this testimony is a great way to start the chat today.

It really speaks to your sticking to a mission of making what you have work. 

My heart is beating faster with so much joy about your situation. 

No extra debt! Love it.

OP from a couple of weeks ago regarding my 0 allowances and owing $4000 in federal taxes this year. I do have only one (federal government) job; when I said I lost the home mortgage deduction I know it still exists, but it's more favorable to me to take the standard deduction than to itemize this year. Yes, I should have spent more time calculating how much my tax should be - but I'm not great with numbers and why should I? It should be easier to figure out. I've worked overseas before and other countries know how to take out exactly as much as is required from paychecks, so people often don't have to file anything. Why can't Americans figure that out?

I love it when folks come back with updates or clarifications. It means we really are a community!

So, you are right. This tax stuff should be easier. It's just crazy and more so when major changes come down from those folks on the Hill! But as hard as it is, try as you much as you can, to be proactive about your tax situation. Now is the time to start thinking about your 2019 tax return and what you can do to position yourself so that there is no surprise tax bill or dare I say a HUGE refund when you could get that money during the year and pay down expensive debt. 

Hi Michelle! I've been reading your chats for about a year and am excited to finally have a question to ask! My husband and I both came to our marriage with some ill conceived debt of various sorts, and have been doing our best to get out from under it. Unfortunately life keeps happening and that's not gone as quickly or as well as I would like, even though we have made a lot of progress. Right now we have about 26k left to go, mostly on credit cards. We have no savings to speak of, but inspired by your chats we have built up a 1k 'life happens' fund. My ultimate goal is to get rid of the 26k, build the life happens to 5k, and build a 6 month emergency fund (about 24k). For the longest time I've not seen the light at the end of the tunnel. But, our son turns 4 this year with an associated reduction of daycare costs when he starts going to VPK. The year after that he's in Kindergarden and we suddenly have all of those daycare costs free. I've done the math, and doing absolutely nothing else other than utilizing those formerly-dedicated-to-daycare funds, we could hit all our goals in just 3 years! I'm really excited about this plan, but my husband reminded me that I've also been after him to contribute more to our son's college fund. Right now we're only putting aside $100 a month. I'm also not contributing to my Roth retirement account as much as I would like, though I do also have a pension through my work (I turn 40 this year). My question is, would it be better to contribute more of this 'daycare windfall' to the college and retirement funds, knowing that early investing gives greater returns... and just accept that I'm not going to hit all those goals for 5 or more years? Or do we go for it? Once the debt is gone and the savings built up we'd have a lot of extra income to throw at things, but is it ok to wait three years to beef up what we're putting towards college and retirement? -Cautiously Excited

You know let me say this. Whatever you decide because you are really thinking this all through, you will be okay. 

Now, if it were me. I would spend the three years getting that $26,000 of credit card debt GONE. Yes, you could invest but I bet the interest on those cards is way higher than any return you might get in the market. And I say might because even if right now it's higher, there is no guarantee it will be that way for the next few years.

So throw all that daycare money at the credit card debt. Once you are free of that take that same money and catch up on the college and retirement savings. 

We currently have 529 plans in our name for three grandchildren. We also have a one year old grandchild who lives with his mom a half country away. How that relationship is going to shake out over the next 17 years until he graduates is anyone's guess. I'd like to do something for his future education as well, but am worried by the time he is able to use it, we could be out of touch altogether. What's the best way to approach this? Is there something that could be in his mom's name that could still only be used for education that we could fund?

Read Michelle's column: Should grandparents open a 529 savings plan to help with college costs?

I think you do for this grandchild living farther away the same for those who are close. I would keep control of the money. And if any of them don't go to college you can change beneficiaries to those who do.

Now, let's talk about your relationship, which is really the issue here. You should do everything you can to develop a relationship with the far away grandchild. If you can't visit in person there is so many ways electronically to stay in contact. FaceTime, Skype, etc. Call, text, send cards. The money will help but your presence in some kind of way throughout the years will make the gift that much more precious and meaningful. 

Just reading this question from last week's chat and feeling enraged ... "4 years ago we took a cash-out refi on our principle [sic] home to build a vacation cabin" -- and now this LW is complaining because their tax bill is too high. I don't feel the least sympathetic to this. IF we need a mortgage interest deduction at all, it should be tailored to first-time homebuyers in the lower income range, not subsidizing middle/higher-income people to build a vacation home.

 

Read Michelle's column: It’s time to pay taxes — and, boy, are people steamed about the Trump ‘tax cut’ bill

The tax code we have certainly in many cases benefits the more well off. But your rage is misplaced I believe. I don't fault people for wanting to take advantage of a tax break and bemoaning one that goes away. However, you are right that if we want a "fair" tax system we have to vote in people who share our views of what's fair. 

I'm about to receive a larger refund onto my credit card, but have a zero balance. What should I do? Was thinking I could use it for purchases and put that money into savings, or should I try and get it transferred into an account?

A refund back on a credit card is just too much temptation to spend. Me, I want my money in cash so I can save it or pay down debt, etc. 

So I am getting a refund, but my federal is about $1,000 less than last year (yeah, I go after the big refund check). I'm single and claim 0 for withholding. Between mortgage interest, real estate interest on the co-op I live in, and charitable contributions, I was able to itemize. I got about $100 extra in my paycheck each month this past year, and paid about $350 less in taxes over all.

Thanks for sharing. The rare person not unhappy about the tax changes. 

Apparently I've been reading your columns WAY TOO LONG because I can't get your voice out of my head. Scenario: 15 year old car, 90k miles. Work from home 3 days a week. Use car on weekends (fun, convertible). Have another car (2014 model, paid in full) as well. Lately have been experiencing the "new car itch" really badly. Have the $ to pay cash for a new (to me) '17 or '18 model. But just can't bring myself to pull the trigger. Not sure if I want your permission (ha!) or just your thoughts on this. Speak, oh wise one. :-)

Lol!

So seriously my husband and I have been in a battle of late about my 2006 Honda van. He wants to put it to pasture because we have been experiencing some major but not too bad repairs (Found a GREAT mobile mechanic). Me, I want to hang on to the old girl for at least another three years. 

A car with 90k miles is nothing these days. Bet you could get another 100,000 + out of the car.

I look at it this way. I don't want to put my hard earn savings into a depreciating asset until I absolutely have to. 

I vote to hang on to the cars and just go to the auto parts store and get a new car smell air freshener!

 

FYI: there's no other debt except mortgage. Contribute 14% to my 401(k); max out my ROTH IRA each month and usually save an additional $200-$400/mo from paychecks - resulting in enough savings to pay cash for car.

Extra info is good to know. My verdict still the same.

 

Last week, I saw a couple comments from people who used to itemize and this year have a big state income tax bill. If you use software, note that many programs will tell you whether you should itemize based only on your federal return without considering the effect on your state taxes. I’m a tax preparer in Virginia, and I’m finding people who’s itemized deductions are less than the the federal standard deduction, but it’s still better to itemize because the cost on the federal return is much less than the savings on the Virginia return. So if you usually itemize or thought you’d be itemizing, try telling your software that you want to itemize even though the standard deduction is higher. Then compare your total federal and state balance/refund to decide which is really better.

Thank you for this. I'm also hearing from people complaining that they if they take the federal standard deduction they have to do so for the state and that's costing on their state taxes.

Anybody else encountering this? 

"I've worked overseas before and other countries know how to take out exactly as much as is required from paychecks, so people often don't have to file anything. Why can't Americans figure that out?" Because Republicans (generally) want to make taxes painful. Additionally the IRS could send you a pre-filled out tax form; they have the information. There was even a prototype system called ReadyReturn that was tried in California. But the Tax Prep industry lobbied against it.

As much as I hated the new tax law all the blame can't be laid at the Republicans feet. Neither party has done enough to truly simplify the tax filing system. 

Hi Michelle, I bought my first home in May. I was paying extra towards my mortgage when I received notification that it had increased due to tax rates. I would like to know if it's a good idea to raise my home insurance deductible to have a lower mortgage? I have about 65K in student loan debt and I'm trying to aggressively pay it down. My current deductible is 1700, if I raise it 1% it will be 3,400. Please share your advice. (I have excellent credit, an emergency fund, and working to pay down student loan the debt. I have no credit card debt)

Couple of things. Sure you can raise your deductible if you are sure you would have the $3,400 should you need to file a claim. 

And honestly, if I were you, I wouldn't be paying down on the mortgage with so much in student loan debt. I say that because I like the debt reduction method where you pay off the debt with the lowest balance first. 

I would use every penny of any extra money to kick that student loan debt to the curb. 

Is PMI deductible as a rental expense for calendar year 2018

Just checked at irs.gov. You can deduct PMI premiums for a rental property. 

Do you have any information if Congress is going to fix the issues with the tax reform act especially SALT deduction cap? I am a fed and my wife is a nurse. All our three children are over 21 years. Our federal refund reduced to $355 in TY 2018 from $3,600 in TY 2017. Presently, we are withholding extra $500 from our pay to avoid paying to Uncle Sam come TY 2019. Our take home pay has reduced since the reform took effect. Congress needs to fix the SALT issue ASAP. Thanks.

I have heard no plans to fix SALT. It's a political battle that probably won't be settle before the 2020 elections because lots of folks in states with high state and property taxes vote Democratic and a Congress divided can't get a fix through. 

Remember that public schools don't go all day. Odds are you'll need to pay for before school or after school care. It will be a lot less than daycare, but it still costs money.

Very true. But still take all savings -- no matter how much it ends up being -- and attack the debt.

usually I end up waiting until late March, early April. I like this way better. I do it by myself on paper so I am still waiting for my fed refund (about $400) and Maryland just cashed my check ($32 and change), but knowing I can go out and enjoy the weather as it gets nicer and not still be thinking about the taxes is a pleasant change of pace. Now, if I could just organize ALL the papers. I have a binder and all sorts of plastic sleeves for the important documents and other information. I just need a long weekend with nothing else going on to tackle it.

I hear you. My husband does our taxes and he started early but stalled. Got to get him going again because I too want to have some tax peace! 

Now as far as that paperwork. With the extra time get to it! That's an order.

New one on me. I just got a letter from Amex cutting my credit limit on their card in half, $14,000 to $7,000 because I wasn't using it often enough to suit them. Now, it's not that I'm not using it at all - I have several recurring bills paid off of it, and every month I have at least $100 in charges. But I always pay it off in entirety. I guess Amex no longer wants me as a customer. I don't need to buy anything requiring a credit check at the moment, but I imagine my credit score, which is around 800, will get reduced a bit, and maybe permanently given the debt to income ratio calculation. I've heard of credit cards canceling customers who never use their cards, but not canceling those with charges every month, however minimal. I plan to move all expenditures elsewhere and will let them know that.

I have heard of this. But no worries. You have a super high score and anything over 750/760 doesn't really get you anything more. 

And yup, if you are unhappy with the policy take your credit using business to a lender who can appreciate a good customer. Although, to them a VERY good customer is one they can charge interest to. 

Once on vacation, I rented a fancier than my usual car to drive around in. The kind of car I'd never need in daily life but you imagine driving down a winding mountain road at twilight. A couple hundred bucks to have a bit of a lark and get that "fun new car" itch out of your system for a lot cheaper.

I totally LOVE this idea. Even if you don't go on vacation. Plan a local weekend get-away and rent a super nice car to get your new car fix. 

Boo! I knew deep down you'd say that. And you're right. Just needed to hear it. Thanks! :-)

I know baby. It's my job to be the dream killer!

I was there exactly a year ago, and wrote with nearly the identical question! Had $100,000 in the "New car" fund but couldn't pull the trigger, even though I wanted a newer car with improved safety and convenience features. Finally found the right car for me, a two-year old (you will love this) Audi convertible, fully equipped, all safety/convenience features I wanted. With my trade (a two -seater roadster), it took less than a third of our new car account. So I'd say - if you have the savings to pay cash, keep looking and you will know when you find the right one! GO for it. I love mine and so glad to have upgraded.

You actually make a good point. If you have all the other boxes checked: Retirement, emergency fund, life happen fund, kids' college funds if you got rugrats, etc. AND the cash for the car go for it. 

BUT . . . be sure it's not envy or an itch that can be scratched with a new car air freshener. 

Sure, I wouldn't mind getting an upgraded car/van. However, I really don't want it bad enough to part with my savings just yet. When I do, I will. 

I suspect the poster isn't there yet and that's okay too. I like my old, dented car. Now when I get a dent I'm not crazy because it fits in with the other dents. 

Be careful not to "Spend the money twice." Do you have after school or before school care covered? Many public elementary schools get out around 3 pm. This is also where field trips, scouts, swimming, etc. become more common, and while you don't have to do every activity, they do add up quickly. And, plan for summer care--I was shocked at how much camp costs. While you will certainly "see" more money once daycare is done, there's a lot of other costs looming.

You and others are absolutely right. 

I totally agree. The knee jerk reaction to most issues is to fiddle with the tax code to carve out some little niche and create some benefit. The benefit may be nice, but those things pile up and make the tax code the complicated mess it is. I'd like to make Turbo Tax extinct. I'd happily pay a bit more tax to not have to use the software and feel that I got a reasonable/fair analysis. I don't feel I can do that manually now.

Ditto!

They could fill in the W-2 income. And the 1099 income. And some of the deductions like mortgage interest and state/local income taxes. But they don't have information about your side gig. They don't have information about your medical expenses in excess of 7.5% of your AGI. There is all sorts of stuff they don't have. So, if they sent out already filled in forms you would have two huge problems. People who would use the income that isn't already filled in as proof that the IRS doesn't know (and won't find out) about it to cheat on their taxes are the first problem. The second are people who deserve more deductions and credits but won't take them because they are too scared to "correct" the IRS or won't even find out about them because they aren't that sophisticated about their taxes and don't know that they need to look for that information. Both are bad news. The IRS isn't supposed to under collect or over collect.

Good points. 

For us, the decision is always this: does it cost more to keep the old car going than it does to buy new (or new-to-us). Look at insurance (which usually favors older cars), at mileage (which can favor some new cars), and at maintenance. When you start having $1500 in repairs every couple of months, it's time to move on.

Or my rule. If I can't plan the repairs and the car strands me three times -- it's gone. 

The point is don't make this an emotional decision. Think through it all. 

Because it's not just a money collection system. It's a policy system. The tax writers, with the help of lobbyists, decide what they want to promote. Until this recent change, it was always the real estate lobby promoting home ownership. My personal opinion is with the limitation in deducting taxes, it's not just penalizing high income tax states, it also penalizes homeowners. They simply decided in 2017 that they wanted to promote rich people, I guess. It's not really that simple, of course.

I believe you are right on the money!

My spouse and I have individual checking accounts but each has signature rights so the accounts are really joint accounts. I do all of the online banking using both accounts. In the last wave of the women's movement in the 70s I worked and fought hard to help women get equal access to credit card accounts, names on utility/telephone accounts, etc. So you could imagine my surprise when I had a problem with the user name on our joint banking account and was not recognized as one of the owners. Both accounts were under my spouse's user name and I had to get him on the phone to give permission for me to talk with the help desk! The software program did not acknowledge me although the help desk did look up our accounts to see my name on both accounts. Wwhen I tried to set up an online account in the checking account with my name first the program accepted my SSN and account number but did not ask me to create a user name and password (or set up security questions) but wanted me to enter an already created user name/password presumably my spouse's. Trying to reach a human is not easy but I am still trying. The system obviously has no problem with the paper checks. I want to be allowed to access the accounts equally especially if something happens to my spouse and the online banking has a problem. Apparently software programmers never got the memo about joint accounts and users.

Read Michelle's column: Why you should keep a joint bank account. (Happy Valentine’s Day!)

Wow. Crazy!

My 2019 resolution was to save more for my kid's college funds (currently only contributing $100/month for each of the three because child care is sooo expensive). I put an envelope on my dresser and committed to putting money in it at least once a week -- change, the random $20, any time I pay for lunch and a friend pays me back in cash etc I put it in the envelop. I just checked and it's $400 over two months. Not going to make the difference between being able to pay for college vs not, but considering I haven't felt a difference in my day to day life I think it's a win. I'm excited to see what it could be at the end of the year.

Every bit makes a difference -- book money, travel funds, etc. 

I plan on retiring soon and only have $150,000 in savings. My sister and I plan to live together to save us both money. She will be working several more years as an RN. My Social Security will be $1938 a month. What is an appropriate percentage of my SS to spend on rent. I want to keep savings for the future.

Read Michelle's column: Worried about cuts to Social Security? Here’s the bible on navigating this retirement benefit.

Look at your total income, including any money you might take from your savings. But generally, I recommend people don't spend more than 36% of their net income on housing. 

Hi Michelle After reading your book and columns my wife and I decided that we needed to be more disciplined about saving, especially for an emergency fund. I am glad to say that a year and a half later, we have no debt except a small amount for my wife's student loans, and recurring credit card bills that we pay off completely every month. This was accomplished through thrift and that we do not own a car and the expenses of car ownership. We live close enough to public transportation and use Lyft or Uber that not having a car has never been an issue. I'd like to ask your advice about savings. We have about $25K in a couple of savings accounts which we religiously add to every month. I was wondering if there is a better way to keep this money growing but keep it easily accessible. I've heard about money market funds or Roth IRAs as good ways to save money and have higher interest. Do you think these are good options? My wife and I are in our 40s and we have one child.

You didn't say how much is a "small amount" for the student loans. But if small enough I would take some of that $25,000 and pay off the loans. Get that monkey off your back.

As for where to put your emergency fund, you don't want to put it at risk so you wouldn't "invest" it. That's your safety money and no investment is without some risk. 

Now, once you hit your emergency fund (3 to 6 months of living expenses) and life happens fund (at least $1,000) goals then you can invest for growth. And I recommend a low-cost index fund. 

Absolutely agreed, and I've already been doing some of what you suggested (gifts) and plan to do more now that he's a little older (FaceTime, cards, send him a picture of our family so we are somewhat familiar faces), but my son's (the father) involvement, or lack thereof, is a completely different subject and at this moment, not a reliable common denominator to keep us in touch. So it'll be up to me/my husband and grandchild's mom to keep a relationship going. I will do what I can to keep that relationship going, but have no control over what mom does and a lot of life can happen in 17 years, ya know? (That's not a swipe on her, she's been very kind toward our family and wants to foster a relationship.) Yes, this whole situation goes much MUCH beyond a financial question, but my financial question comes from a place of figuring out where to go from here and is a part of building and keeping up that relationship as much as I can from a distance.

Thanks for following up. Yes, just do what you can, which is all that you can do. 

 

But net of what? net of taxes? Net of taxes and retirement contributions? Net of retirement contributions and the flex spending account money I contribute to pay for vision, dental and medical co-pays? Always been curious.

Net of taxes only. 

Has the writer called Amex and requested the limit be put back where it was? Years ago, after the recession, credit card companies were all raising interest rates. I got a letter with new higher rates, called the company, and suggested they had sent it to me by mistake. The rep agreed, and my rate went back to the lower rate. (I never carry a balance, but it was the principle of the thing.) My point is, sometimes you just need to make a call.

True.

Get your older car detailed. (a good inside and outside cleaning with wax should be about $180) Make it look great. You'll not mind it so much once it's gleaming inside and out again.

Good suggestion. Time for me to do that too!

Michelle, I'm sure you've addressed this before, but could you give us a reminder on a goal for 6-12 months savings? Is it 6-12 months of income? Or 6-12 months of living expenses? In a dual income household, does it just need to be able to replace one person's income or share of expenses? Or both?

The savings goal is based on what it cost to run your household for a month. Then multiply that by the 3 to 6 times. So, if you cost $3,000 to run your household (rent/mortgage), utilities, food, insurance, etc.) To get to three months of living expenses you need to save $9,000 and so on.

However, if your job is secure (as secure as it can be these days) but you have a lot of debt aim for just one month of living expenses or two. Stop saving. Now direct extra money to getting out of debt. Once you are out of debt then go back to building up your emergency fund to your goal of 3 to 6 months of living expenses. 

OP here, thankfully my husband works from home, so pre-after-care is probably not going to need to be an issue (I mean, I'm not anticipating that it will need to be right now, that could change), and I also realize that there will eventually be a lot of other costs like sports or summer camp or whathaveyou. My hope though is that by buckling down for a few years, but the time he's old enough that those other expenses start adding up we'll have the cash on hand to cover them because everything else will be sorted.

Exactly. So knock that debt down!

So sorry I can't stay longer. I see all your questions and read them and all comments. Come back to ask again. I also use some questions for columns. 

If you don't already, please subscribe to my newsletters. Link is on the chat page.

Just a note. I won't have a chat next week. 

Take care and see you on the 21th. 

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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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