Gather Little by Little

This article is part of the Ask the M-Network series. Over the past few weeks I received a few more questions, and my M-Nework partners have been kind enough to answer. Here’s the questions and the answers:

Should I rent rooms or the whole house?
Providing money to college students
College student with a tax refund
Rent or Buy?

Should I rent rooms or the whole house?

We need to increase our income, I am SAHM of 2 kids and dh is out of job for 5 months and we are running out of 6 month emergency funds. we have no major debts other than mortgage.

Should we rent 1-2 rooms in the house to increase income or rent whole house to get bigger chunk of money and rent 1 bedroom apartment close by? I understand this is personal choice and both choices have pros and cons, what do you suggest and what to look out for when one rents room or rents the whole house to avoid any problems in future. we are in-experienced in this and could use some suggestions from you and other readers. thank you.

Patrick from Cash Money Life says:

I’m sorry to hear about this unfortunate situation. Thankfully you have two big things going for you: your only debt is your mortgage, and you had a nice emergency fund to help you get this far. Before deciding on whether or not to rent out your home, I would consider a few other things. The first thing I would do is cut back on everything that is not essential – cable television, dance lessons for the children, eating out, etc. Reducing your expenses will help conserve your remaining funds.

The next thing I would do is take any source of income I could find – even if it is part time income that doesn’t pay what you and your husband are used to. And I would recommend that both of you look for work. Even though you are a stay at home mom, you may be able to find a part time position that will help pay the mortgage and put food on the table. Ideally, you would both be able to find some part time work that will allow you to stagger your work schedules so you don’t need to pay someone to baby sit. Or, you may be able to find a neighbor or family member who can watch your children for a couple hours per week. *The only way I would not consider a part time job for your husband is if he is receiving unemployment benefits and taking a part time job would cost him money. Otherwise, both of you should be looking for a way to increase your income.

There are pros and cons to renting out rooms to your house or moving into an apartment to rent out your entire house. The first one is risky because you could be inviting a stranger into your home (unless you rent the room to a friend or relative), and the second one is risky because you will have the responsibility of the mortgage [i]and[/i] an apartment. If you get stuck without a renter, you may not be able to make ends meet because your commitments are larger than they were before.

I would first try cutting out everything and trying to add some part time income to help you meet your needs. If that doesn’t help you meet your mortgage payments, then I would consider renting out your house or a couple rooms.

Pinyo from Moolanomy responded with:

I am sorry about your predicament. Let’s address your direct question first. I think you should have a discussion as a family since safety and privacy would be my biggest concern. You’re a SAHM with two kids, and inviting a stranger to live with the family may not be a good idea — unless the renter is grandma or grandpa. And like Patrick said, renting an apartment so that you can rent out the entire house could be risky too. You now have two expenses and have to worry about vacancies, bad tenants, repairs, etc. To sum it up, I think I would go with renting out a room and stay at the house as long as (1) you can find someone trustworthy, and (2) perhaps make some modification to the house to offer both your family and the tenant privacy and security — e.g., separate entrance and living area.

Now let address your finances. First, let’s talk about the job. Since both of you are out of work and your husband has been looking for 5 months, I think it’s time for both of you to look for a job. And whoever doesn’t have a job can be the stay-at-home person. I think it might even be better if you get the job since it won’t interrupt your husband’s unemployment benefits.

Second, let’s look at your expenses. Like Patrick said, have you considered all your expenses? If you are down to the bare bone on your emergency fund, your expenses should be down to the bare bone as well. Here are a few steps you can take immediately.

1. If you don’t have a budget yet, start a household budget today.
2. Look at all of your expenses and cut everything you can. Here’s a big list of money saving tips and ideas. Go through it and apply whatever you can.
3. Lastly, don’t ignore income that you could make outside of a job. Take a look at these additional income ideas and see if you could use any of them.

In any case, I hope that your husband will find a job soon and your family will be able to get through this tough time.

Providing money to college students

I am struggling with how to provide money easily to my college student. The first year, we did the college account with Wells Fargo. He tended to play it too close and wound up with ridicuouls over draft fees for being over $10. I looked into prepaid debit cards, but they have a boat load of fees as well. I need to be able to transfer money in electronically ( I prefer weekly). I was also looking at an ING account for him. I am pretty disgusted with regular banks as they seem commited to overdraft fees as a funding mechanism. We even tried having it tied to his credit account and they still charged huge fees to use that as well.

I want to teach responsible use, but in the end for the first two years, I don’t expect him to work. He is on a scholarship for engineering and it is worth it to keep the scholarship money and have good grades. He is not a minor, so I can’t have a custodial account. But I could force a joint account.

Sorry for the long question. I look forward to any suggestions

From Mrs. Micah:

Like you, my parents wanted my first year at school (and part of my senior year, during my honors project) to be a time when I didn’t have to hold down a job but could focus on my studies and scholarships. I think it’s a wise choice if the family can afford it. We ended up breaking it down into a two-part system.

1) I got a monthly allowance deposited into my account. The allowance was based on a set of needs that we’d determined beforehand and reasonable estimates of how much it would take to cover them. Since he’s already done a year of college, you should be able to get a good idea of what spending needs he has and approximately how much it’ll take to cover them.

2) I received an additional amount periodically that was intended to cover my recreational spending – clothes I didn’t need, the occasional book, eating out with friends. This was given in lump sums of $150 and I was expected to report back when it was spent and include a short log of the sorts of things it was spent on. I didn’t have to do specifics, just clothes, eating out, extra groceries, misc, etc.

Beyond all that, I (of my own initiative, though I think my father would have had me do something like it if I hadn’t) kept $250 in my account that was essentially untouchable. This was intended to avoid any risk of overdraft fees. Once my account came anywhere near the $250 and it wasn’t the end of the month, I contacted my dad for another lump sum of the second type of allowance.

I think that having a buffer is extremely helpful in avoiding fees. The only issue is that one of the two of you is going to have to keep an eye on that buffer. Optimally, your son will learn to contact you any time he comes close to the buffer. It’s an important real-world skill for him to learn. At the same time, if he continues to have problems then I think a joint account might be wise, so you can keep an eye on it yourself.

Best of luck!

Patrick from Cash Money Life said:

I think it’s great that you are able to help your son with college expenses – many students don’t have that opportunity. That said, paying over draft fees because if irresponsible money management shouldn’t be part of the bargain. If teaching responsibility is your goal, then you must put an end to the chronic problem with over draft fees, otherwise his problem of overspending may turn into a huge credit card problem he maintains throughout his adult life.

There are several ways to do avoid overdraft fees, such as putting your son on a strict budget, or reducing the amount of the next money transfer by the amount of the fees he caused. It will only take one or two times before it gets his attention. Another way to avoid overdraft fees is to find a bank that offers free overdraft protection between a savings a checking account, and be sure to leave a little extra in the savings account at all times. Just be sure he sticks to that strict budget, otherwise he may start drafting more than you keep in savings, which will cause more problems.

It is extremely important that your son learn strong money management skills now because he will take those skills with him for the rest of his life. Here are some college money tips and some high school money tips that may help him get a handle on his personal finances. Best of luck.

Pinyo Moolanomy said:

Stop right there! You’re being too generous. Like your son, my parents paid for my college education and gave me money so I don’t have to work while I was in school. That’s already more than a son could ask for.

Since you gave him the money, let it be his money. This means let him deal with the overdraft fees and other fees by himself. He’s not paying any attention right now because mommy and daddy is taking care of it. Let him deal with the consequences of irresponsibility. Once he realizes how much these fees are costing him, he’ll improve. Trust me on this because that’s how I learned my lessons too.

I’d encourage you to sit down with him and put together a reasonable budget. This way he gets an idea what the money is meant for. When you’re settled on the budget, give him a little extra because he will invariably make a mistake — it’s normal. But here’s the catch, it’s up to him to manage this money. This means identifying the best savings and checking accounts for his situation, spending it wisely, and yes, dealing with all the fees and consequences.

If you don’t let him fall, how could he learn? It’s better to let him make small mistakes now than bigger ones tomorrow. Remember that you can’t help him forever. Good luck.

College student with a tax refund

I recently received my tax refund and my Interest free loan of $5,000 (homestead loan for being a first time home owner last year). Right now the money is just sitting in my savings account. I recently graduated college and have no loans to pay off. I have a roommate that pretty much pays my mortgage. I have never paid a mortgage payment on the home, the only thing I pay for are utilities. I have a full time job that pays well. I need some suggestions on what to do with this money?

1. Do I trade in my Jeep Grand Cherokee that has 75K on it?

2. Do I put the money in a 12 month CD or something like that?

3. Re-invest the money back into the house (new windows, new furnace, new bathroom, new kitchen)? I don’t plan to live in this house for more than 5 years.

Thanks for your help!

Patrick from Cash Money Life replied:

It seems like you have a great handle on your financial situation and having some extra cash is a great blessing. Before you choose one of the three options you outlined, you should first ask yourself what are your plans for the near future and in the long term. This could include saving for a down-payment for a house in the near future, or investing for retirement.

Since you don’t plan on living in your home for more than 5 years, I would probably cross number 3 off your list (though you may decide to keep the home as a rental property to generate cash flow). As for your vehicle, 75,000 miles is not that much for a new vehicle, and you probably have several good years left before you need to replace the vehicle. That leaves CDs and/or investing.

For short term investing I would recommendbuilding a CD Ladder, which is a good way to save your money and still maintain access to it. CD Ladders are good for short term investments because they don’t involve any risk. For long term investing, I would recommend investing in an IRA or 401k.

Rent or Buy?

My little cousin and her fiance just graduated from college and are moving back into the area. She already has a job lined up as a teacher and while he doesn’t have a job yet he has started his own side business.

They are talking about buying a home because of the tax credits and possible grants they could get (he has a severe disability and apparently the real estate agent told them he may be eligible for special grants).

I’m worried that they are going to get themselves in over their heads. They like the idea of being “homeowners” but I don’t think they truly understand the consequences and responsibilities. Not to mention the impact that their debt load will have on their future (they already have student loans, a loan for the wedding ring, and some other debts).

Do you have links or resources that I could point to when discussing the issue. They think that renting is “throwing away” money. I am trying to explain to them that it’s not a bad thing to rent.

Patrick from Cash Money Life says:

It is true that you don’t acquire an asset while renting, but that doesn’t mean you are throwing away money. The most important thing to consider in this situation is how much they can afford to spend for housing each month, keeping in mind they would need to maintain a separate emergency fund to pay for any unseen expenses if they decide to buy a home.

Regarding buying a house, there are many factors they should consider, such as their credit score, how much of a down payment they can afford, how much of a mortgage payment they can afford, the stability of their income, taxes, etc. Personally, I wouldn’t recommend buying a home if their income level isn’t stable.

Pinyo of Moolanomy responded with:

I think you are right to be concerned. I think it’s shortsighted to take advantage of the homebuyer credit without looking at the long-term consequences and their financial readiness. Beside the obvious like debt on the wedding ring, student loan, single income, and eventually wedding debt, let’s look at what I think is the prudent course of action.

First, I would only consider buying immediately if it significantly improves their cash flow based on a standard 30-year fixed mortgage. For example, if it costs them $1,000 to rent now, the house including taxes and insurance (and PMI if any) should cost $900 or less. Why less? Because, they’ll need money for maintenance. Not to mention they will be tempted to decorate their new house with new furnitures and accessories.

If they can’t find a house that improves their cash flow, I think they should:

1. Get rid of debt that is going to cost more than their mortgage. For example, the loan on their rings and any credit card debt are most likely costing them more than 5-6% APR.

2. Plan to pay cash for their wedding. The incentive is the less they pay for their wedding the sooner they can buy a house.

3. Start an emergency fund. They have to understand if they can’t pay the mortgage, they’ll lose the house and everything they put into it. Therefore, an emergency fund is vitally important for a homeowner to have.

4. Work on improving their credit scores. They just graduated from college and they are unproven as far as lenders are concerned. Take the time between now and when they are ready to buy to improve their credit scores. This will give them access to lower interest rates.

5. Save money for down payment. They should try to save 20% of the home price to avoid Private Mortgage Insurance (PMI). This should also help them access to better interest rate. And last but not least, the lower monthly mortgage payment will make it easier for them to stay on top of their finances.

As a side note, don’t try to invest their emergency fund or the down payment in the stock market. The best place to keep it is in a high interest savings account. You want the money to be there when you need it.

Anyway, I hope this helps and good luck with your conversation with them.

Thanks for the questions! Do you have a question you would like to Ask the M-Network?