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?

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Over the past few weeks I’ve received a number of Ask the M-Network questions.  Normally I’d post up one of the questions and associated responses, but given the number of questions I’ve received, this edition will contain multiple questions along with their responses from the M-Network:

What happens to my pension if GM goes bankrupt?
What to do with my tax return?
Continue with Company Stock?
Money for college student?

What happens to my pension if GM goes bankrupt?

An anonymous reader asked:

I am GM retiree. What happens to my pension if GM goes bankrupt?

Plonkee responded with:

In the UK, I think it’s insured, and there is some separation between the finances of a company and of the pension scheme. There should be a trustee or something that they would be able to ask these sorts of questions and get actual real answers.

Patrick responded:

There is a national pension insurance program. I would recommend he talk to an authority on the pensions and start preparing by eliminating any debt, looking for part time work if it won’t affect his pension (and he is physically able), etc.

What to do with my tax return?

Craig wrote in and asked:

I was just told that I will be receiving $1400 from my tax return. I am 23, have no debt, and no financial responsibilities for other than myself. I have been living a more paycheck to paycheck lifestyle with my salary and costs but have no pressure right now with paying bills, and have a savings set up already from money save last year when living at home while working. The only money I currently save each month goes into a vacation fund for myself because I am planning a trip for later in the year. I do not currently have an IRA account set up for retirement. I am unsure of what to do with this money and was thinking about opening up an IRA account and putting the full refund into it. What do you think?

Patrick said:

Being debt free is a wonderful thing, but living paycheck to paycheck is not. The first thing I would consider is starting an emergency fund, which is a cash savings you keep aside for unexpected expenses. Depending on your situation, people recommend keeping 3-6 months worth of living expenses in your emergency fund.

The next thing I recommend is setting up a solid financial plan to follow. One finacial plan that is often recommended is Dave Ramsey’s Baby Steps. This is plan for getting out of debt and starting on the path to financial freedom. You are already ahead of the curve because you don’t have any debt. The next step is the step I recommended, starting an emergency fund, and the step after that is saving in an IRA or 401k. I highly recommend investing, but only after you have an emergency fund in place first.

Pinyo replied with:

You’re definitely doing well by not being in debt, although you could do better by start saving for retirement and starting an emergency fund. Overall, you’re not in a bad shape for someone your age.

First, let’s address the sizable refund that you just received. I hope you do realize that when the government gives you a refund, they are returning money that you lent them for 0% interest over the course of the year. In generally, it doesn’t make financial sense and you should adjust your W4 so that you can keep more money from each paycheck. To make sure that you continue to set money aside, you may want to start contributing to your 401(k) (if your employer offers one). Your target could be simply contributing $1,400 to 401(k) this year using the money that you would otherwise give to the government.

Secondly, let me just say that it’s good you’re saving money to go on vacation, as opposed to putting it on a credit card. But once you have this vacation out of the way, you should really looking into saving money for other purposes — i.e., emergency fund, retirement, down payment for a home, etc. Like Patrick, I recommend that you look into Dave Ramsey’s Baby Steps financial plan.

23 is not too late to start, but it’s not too early either. Anyway, enjoy your vacation and good luck.

Continue with Company Stock?

Kim wrote in and asked:

DH (Dear Husband) I are now 100% vested with a previous employers stock retirement plan. That’s $11,600 in one stock, one company. We have gotten conflicting advice on what to do with this account. should we leave it alone, roll it into our existing 401k, or roll it into a diversified retirement account. Some back ground for you…We are in our late 20’s, we contribute monthly to our 401k but not the vested retirement account. The company’s stock has dropped more then 50%, so should we get out now too buy up good low stock or wait for a better time, since we have time to wait for investments to grow?

Pinyo said:

You’ll have to check with your employer because transferring money out of your employers stock retirement plan may not be an option. That’s the case for me and all I can do is hold on to the company’s stocks. However, if you do have the option, I would certainly move that over to wherever you are allowed to — e.g., your 401(k) or other retirement account.

Personally, I don’t recommend having more than 5% of your investment in your own company’s stock. When you do this, you’re taking additional risk that other investors do not have to take, specifically, the risk of losing your job and the value of your company’s stock at the same time. There are many recent examples of this — e.g., Lehman, Enron, etc. To take it a step further, I think it’s generally not a good idea for long-term investors to invest in individual stocks, period.

Anyway, I think you’re heading in the right direction. The only thing to find out is whether or not the move is allowed.

Patrick said:

It’s generally not a good idea to own too much company stock, but as Pinyo mentioned, you should determine what your options are with the stock options you hold. My company gives us a match in our pension plan and our only option is company stock; it cannot be transferred or exchanged for anything else. Many companies have similar programs with 401k plans or other pension plans.

If you have the option to roll the stocks into a 401(k) or IRA plan, I would consider doing that. You will have many more investment options and have more control over your investment. Just keep in mind there may be fees or taxes that result from selling the stocks.

Best of luck in your decision!

Money for college student?

Dee asked the following:

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 ridiculous 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 committed 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.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 ridiculous 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 committed 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.

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!

From Patrick:

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 says:

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.

Readers, what do you think? What would you recommend? Disagree with any of the replies?

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I’m 28. I have 9% of my income going into a 401k, no credit card debt, a paid-off 9-year-old car, and 5 months expenses in savings (some of that earmarked for the next new-to-me car). I also have a student loan of $11K at 2.5% interest. I want to start aggressively paying down the student loan, but because of the low interest rate my boyfriend is urging me to put that money in savings instead to earn interest and act as a larger emergency/irregular expenses fund. Am I better off holding on to the cash, or getting rid of the debt?

Update: I received the following reply from Leah after posting this article:

I wanted to thank you and your colleagues and readers for your advice on my question regarding saving vs. paying off student loan debt. It was really helpful to get advice from people who share my financial values and who understand the psychological value of being debt-free! I’ve decided to split my efforts between saving towards my next car and aggressively paying down the student loan.

I also really wanted to express my gratitude for the change in perspective this experience has offered me. The changes that have the most effect on our lives are not events, but changes in perspective. For the last 4 years I’ve felt like I’m really struggling to accomplish my financial goals without getting very far. Putting together a summary of my financial position and hearing all of your opinions on it – I finally feel like I’m succeeding. It’s time to feel the power of my accomplishments.

Thank you!!
Leah

Patrick from Cash Money Life

Several months ago when banks were paying 3% interest or more, I might have agreed with your boyfriend. But right now you have a very solid emergency fund and savings accounts aren’t paying very high interest. You would probably need to invest in CD’s to earn a 3% interest rate (if you can find those rates). The problem with CDs is that your money is tied up longer and you won’t have quick access to it. Based on your situation, I would probably repay the loans as quickly as possible, and for two reasons:

Repaying the debt makes sense financially. Since the interest in your emergency fund is paying less than the interest on your student loans, repaying those loans becomes a more attractive option.

Repaying the debt makes sense psychologically. Getting out from under the weight of debt is a huge psychological boost. It truly is like a weight being lifted off your back. Eliminating debt is one of the main principles Dave Ramsey teaches in his Financial Peace University. He believes you shouldn’t take on any unnecessary debt, and that you should work to eliminate any debt you have. You are in a financial position to eliminate the last remaining debt you have, which will free up additional money for other uses.

Overall, your financial position is moving in the right direction and I wish you the best.

Plonkee from Plonkee Money

If you can find a savings account that pays more than 2.5% interest then you might be better off financiallly by saving the money. On the other hand, you might benefit from a slightly larger emergency fund / savings as at the moment it’s taking people typically several months to find a new job when they’ve been laid off. Added to which, it’s not clear when your car is going to bite the dust.

Failing all those scenarios, paying off the loan is a better use of the money than just dumping it in a low interest savings account where the money has no particular purpose. Personally, I choose to invest extra money rather than pay off my student loan which is about the same size and interest rate as yours. But that brings up a whole raft of other questions about risk and asset allocation.

At the end of the day, regardless of what your boyfriend thinks you should do whatever sensible thing makes you most comfortable. You have already demonstrated that are perfectly capable of managing your own finances. You can make a good choice here too.

Pinyo from Moolanomy

I think you are doing great financially. The good news is that you are deciding between two good options, and you can’t go wrong choosing either one. If you want to pay down the student loan you should definitely do it. Dave Ramsey recommended paying off your debt first to million of people and they are doing just fine.

On a personal note, I agree with your boyfriend, because long-term investing will more than likely give you a better return on investment than paying down your 2.5% student loan. For example, you can increase your 401k contribution, or start contributing to Roth IRA. However, I wouldn’t simply put the money in a savings account right now due to the low interest rate. If you’re not going to put it in tax-advantaged vehicles like 401k or Roth IRA, you’re will be better off paying the student loan.

Paidtwice from I’ve Paid For This Twice Already…

Wow! It is like my life except you’re in a way better position!

I say pay off the debt. A savings account right now earns paltry interest. As long as savings accounts are earning so low, I would be aggressively getting rid of your financial obligation. You have a good sized emergency fund already.

When savings rates are high again if you still have the debt you could reconsider. Paying off debt rocks

Readers, what do you think? What would you recommend? Disagree with any of the replies?

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I have had 2 temp jobs that said that they were temp to hire, but I had not been hired. During both times, I have had family members pass away, which left me an emotional mess. 2 out of the 3, I was not able to attend their memorial’s and since temp placements don’t give time off for bereavement, I had to work. Both of the potential employers ended up not hiring me. I did explain myself to them, but didn’t seem to care. What should I have done?

Pinyo from Moolanomy says:

I think the important thing is not to second guess or blame yourself for any of this. You went through some tough time and made the best of it. Instead, focus on what you can do now to gain full-time employment. In the mean time, don’t forget to look for additional income opportunities that you can work on your spare time — i.e., when you’re not looking for a job.

On a side note, if you worked more than 18 months at any of your two temp jobs, you many have legal leverage against them. If you do work full-time continuously more than 18 months, check with an employment lawyer to see if you have a case. The lawyer will be able to tell you right away what these employers owe you, if any.

Patrick from Cash Money Life says:

You can’t blame yourself when a temp job doesn’t turn into a full time position, and you certainly can’t blame yourself for the tough times you and your family went through. You gave it your best shot at turning your temp work into a full time position, but not all temp jobs become permanent positions. The best thing to focus on now is finding a full-time position. Utilize your network of former coworkers, former employers, other professional associations, or other people you know to find job leads.

You most likely have a few extra hours now that you aren’t working full-time, but that doesn’t mean you should send in a few resumes and relax the rest of the day. Looking for steady employment is a full-time job. In addition to job searching, you can consider improving your marketability by earning professional or certifications, or increasing your income with alternative income streams such as starting a small business, selling things on Ebay, freelancing, consulting work, etc.

You should also look into unemployment benefits to see if you qualify. Each state has slightly different unemployment benefit rules, so be sure to check with your state unemployment bureau for more information. Best of luck in finding new work.

My reply

As Patrick and Pinyo said, I think you did the best you could have done under the circumstances.  If the employers chose not to hire you, than there is nothing more you could have done.  Given the current state of the economy and hiring status of most employers, I am not sure you should assume they didn’t hire you because of your family situations.  Remember temp to hire just means the employer has the option of hiring you.  It does not mean that they have to nor even intend to.

I’d recommend just moving on and not dwelling on it.  You did the best you could under the circumstances.  Chalk it up as good experience and move on to the next opportunity.  Wish you the best in your search, and keep us posted on how things are going!  Thanks for your question.

Readers, what would you suggest?  Did Molly handle the situation the right way?  What’s your take?  Add a comment!

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Should we put our 401K into Flexible Premium Deferred Variable Annuity, Flexible Premium Deferred Variable annuity or an IRA?

Pinyo from Moolanomy responded:

IRA, period. Actually, this is a good question that deserves further explanation. Deferred annuities allow you to invest tax-deferred for retirement, similar to an IRA. But there is one important difference to recognize. Annuities are insurance products sold by insurance companies, whereas an IRA is an investment account with a special purpose (for retirement) and tax status (tax-deferred). Once you recognize this, you’ll understand why I answered “IRA, period”. Now, let’s look at this further.

The Difference in Cost

First, it will most likely costs you more to buy a deferred annuity as opposed to investing via an IRA account. Why? Because part of your money goes toward your insurance agent’s commission for selling you the product and another portion goes toward the insurance company annually to manage the money for you. There’s no transparency in term of expenses, but I can guarantee you that it’s high because insurance companies are in the business of making money and not doing the best you can to help you meet your retirement investing goal.

With an IRA, you’re paying for trade commissions and funds expenses. The total cost is easily controlled by limiting the number of trades and investing in funds with low expenses. For example, you can keep the overall cost to less than 0.20% per year plus trade commissions by investing in a Vanguard Target Retirement Fund.

The Difference in Investment Flexibility

Second, you have no flexibility to change your investment strategy down the road because the insurance company is controlling everything — all you get is a product with a promise of fixed return. The insurance agent will make the guaranteed return on investment sounds very appealing. But the cost of this guarantee (actually the return is promised, but not guaranteed)) is too high for most people.

On the other hand, you have full control over your investment strategy inside an IRA with access to almost every stocks, mutual funds, and ETFs in existence.

Difference in Investment Protection

Third, the reason I said “promised, but not guaranteed” is because your ability to get back your principal and any interest depends on the insurance company’s ability to pay you back. If your company goes out of business, your ability to recoup your money depends on the Guaranty Association of your state. Different states have different levels of protection, so you’ll have to do your research.

On the other hand, if you purchase traditional bank product (i.e., savings, money market, and cds) inside your IRA account, it’s federally insured by the FDIC.  The remaining portion of your investments are protected by Securities Investor Protection Corporation (SIPC).

But I like fixed return offered by annuity

If you still think that the fixed return on deferred annuity is such a great feature, you should consider the alternative of investing in Treasury Inflation-Protected Securities through your IRA account instead. As you become more comfortable and skilled with investing, you can invest beyond fixed income securities. With an IRA, it’s not difficult to build a globally diversified investment account customized to your situation for very little costs.

So, when should you consider deferred annuities?

In my opinion, there’s only one reason why you should consider buying a deferred annuity — that is, if you already exhausted all of your other investment options but still want to invest more in a tax-deferred account. For example, you are already contributing up to the maximum contribution limits for both 401k and IRA, but have a few thousands more to invest. Between the guaranteed return and the tax savings, deferred annuity may offer enough advantage over investing in a non tax-advantage account to overcome the costs.

Other M-Network members said:

The rest of the M-Network all agreed with Pinyo’s reply and since Pinyo covered the topic so thoroughly that had nothing significant to add. To be real honest, investing is not an area I am real knowledgeable on, but I know Pinyo is and he’s passionate about the topic. I would definitely trust his advice in this scenario.

Ok readers, what do you think? Anybody disagree with Pinyo? If you agree, do you have anything additional to ad? Share your thoughts and perspective with Helen by adding a comment!

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Hi, we recently finished our taxes and will be getting back a 13K refund (part of it is the first time home buyer’s credit which I realize is more like an interest free loan). We want to know what the smartest thing to do with the money is in these tough economic times.

My husband and I are in our early thirties. We have a mortgage, student loan debt, and credit card debt. The credit card debt is about 8K but there is no interest accruing on that card until Nov 2009. We have paid down the card a lot by putting 4K towards the card every month for the past 3-4 months.

We have a take home pay (after taxes) of about $8500 a month. Our monthly expenses total about 4K a month.

We have not contributed any money into our Roth IRA for 2008 and want to know whether we should both contribute before the April deadline. We could use the tax refund to put about 4K each into our Roths.

Our main concern is that we do not have an emergency fund at all. My husband’s company has recently had a round of layoffs, but he was spared. We would love to contribute to our retirement, but wonder if that is the smartest move in this economy.

The bottom line is: should we contribute to our Roths with our tax refund or put it away in an emergency savings fund? I’m pretty sure that if my husband were to get laid off, the firm he works for would offer a 3-4 month severance package. Also, this may be one of the last years we can contribute to the Roth
since our income may be beyond the limit in 2009.

Any advice would be greatly appreciated.

David from My Two Dollars responds:

You should pay off the credit card debt first, and anything left over I would put into an emergency fund of at least $1000 or so. If you still have money left over, then contribute to your retirement account. At your age, I would work harder paying off debt before worrying about a small amount of retirement savings Consider that $13K a gift and get rid of the debt with it first, especially the part that the government is giving you in the form of that $8K. It’s not a loan – you do not have to pay it back, it is designed to encourage people to buy homes in this economy. Good luck!

Patrick from Cash Money Life says:

I have a different approach from David – I think it might be a good idea fund Roth IRAs. Right now you and your husband are working with a $4,500/month surplus, which is a large enough amount to get ahead over the next few months, but you won’t be able to contribute to a Roth IRA beyond next month.

Since you will likely price yourself out of the Roth IRA market next year, I would try contributing to your 2008 Roth IRAs before April 15th. The 2008 and 2009 Traditional and Roth IRA Contribution Limits are the same and top out at $5,000 for each person. So you could actually contribute $10,000 for your 2008 Roth IRAs. If that is too much, then you can consider contributing a portion of your return – you don’t have to invest all of it.

The economic crisis has slaughtered the stock markets over the last few months, but that may actually work in your favor because the lower stock prices make some equities and investments more attractive. Since you have 25+ years before your retirement, now may be a good time to invest.

The key to making this work is to use your free cash flow over the next few months to take care of some very important matters – setting up an emergency fund and paying of your credit card debt. I recommend taking your extra money every month and putting it into a high yield savings account and leaving it there until your credit card debt is due – then paying it off in full so you don’t accrue interest. In the mean time, that money can serve as an emergency fund until you pay your credit cards off. After you pay them off, you can start building you emergency fund back up. Since there is the remote possibility of a layoff, I recommend saving up at least 6 months of living expenses in your emergency fund.

Pinyo from Moolanomy shares his perspective:

If you strictly follow Dave Ramsey’s Baby Steps, you should start an emergency fund with $1,000, pay down your credit card debt with $8,000, and add the remaining $4,000 into your emergency fund. This leaves you with a good $5,000 emergency fund and no more debt.

However, that’s not what I would do if it was my decision. I agree with Patrick that it might be better to fund your Roth IRAs with the money you’re getting due to your situation and the current stock market condition. If you make the maximum Roth IRA contribution for 2008 for you and your wife, the $10,000 could translate into a lot of money in the future. This still leaves you with $3,000 to get a good jump start on your debt. If you plan it right, your credit card debt will be paid off before November 2009 and you’ll have two fully funded 2008 Roths. But note that you’ll need to file an amended tax return to let the IRS know that you fund your Roth IRAs, unless you already reported that you did.

As for the emergency fund, I wouldn’t worry about it until your debt is paid off. You could always use your credit card in an emergency. Additionally, I believe you could withdraw principal amount from Roth IRA without penalty if you really need the money — however, I don’t recommend this and I would check with a tax adviser just to be sure.

Obviously, the Dave Ramsey’s method is a lot safer than the alternative discussed above. You’ll have to decide which option is best for you.

On a different note, you’re definitely withholding too much money ($5,000 refund without the home buyer tax credit). This is essentially giving the government an interest free loan. Personally, I recommend that you update your W4 so that you keep more money with each paycheck. You could use the extra money to pay down your credit card debt even faster.

I hope this helps.

Here’s my take:

If I were you, I would establish an emergency fund first. With your income, it sounds like a base $1000 emergency fund should be sufficient. If you have kids, you might want to bump that up a little.

I completely (but respectfully) disagree with Pinyo’s comment about using a credit card for emergencies.  That’s what gets people in debt and in trouble.  Establishing a cash emergency fund is done to avoid debt.  I would then recommend taking the remaining 11,000 – 12,000 and pay off the credit card and apply the rest to your student loan.

You’re in your early 30’s, and have a great income so you can should be able to build up a very comfortable retirement fund. Get rid of those debts though, as if he does get laid off and has trouble finding a job, you don’t need the extra hassle of creditors calling.

Let us know what you decide to do!

Readers, what do you think? Agree with any of us? Have your own opinion to share? Help Samantha out and share your thoughts by adding a comment!

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I have a medical bill that I want to negotiate down and just pay a lump sum. I do not think they did the testing they billed me for and the billing clerk said they did it because they have a report on it. How would you suggest I go about negotiating a one time payment and what do you think should be fair? The bill is $1580. I have no insurance. I do not have insurance and I was quoted $725 for the test, before I made the appointment. That is another reason I do not want to pay the $1580. The girl I talked to on the phone was totally not interested in what I had to say and I am not real good at confrontation.

Pinyo from Moolanomy says:

This is a tough one especially if you didn’t get the quote in writing. I had a similar situation as yours where I was quoted one price and charged another. I didn’t have it in writing either and it was not fun. Before talking about the payment, I would try to reason with them regarding the fair price — i.e., what you were quoted and what they charged — at least, see if they’ll meet you half way. One thing you can try to do is call other doctors in your area to see what they would charge for a similar test so that you can get a clear idea if this doctor is trying to rip you off or not. Unfortunately, I am really not sure what you can do against doctors that overcharge their patients.

As for payment, I think you basically have three choices:

1. Lump Sum – Leverage the fact that you’re willing to pay a lump sum and see if the doctor will take it.

2. Payment Plan – Another option is work with the doctor on a monthly payment plan that work for both of you. If they won’t budge, perhaps you could borrow — i.e., from a bank or a social lending network.

3. Don’t pay – I have never done this, because I think everyone should pay for what they used. But I have a friend who can’t afford to pay all of his medical bills. He simply didn’t pay and waited for the bills to go into collection where he settles with the collection company. He usually pays less than half of the face value of the bills. However, your credit score will take a hit if you do this.

Patrick from Cash Money Life

f you think they are charging you for a test you did not request or that was not required, you should call the doctor’s office that ran the tests and verify you are in fact being charged for tests that took place. You may even want to request a copy of the test that was done so you have proof the test occurred. If the test was not necessary, you may try the argument that you shouldn’t have to pay for it on the grounds that it was not needed and you didn’t request it. I don’t know how much luck you will have with that route.

Other than that, your best bet is to try Pinyo’s suggestions – negotiating a reduced lump sum payment, negotiating lower monthly payments, or borrowing money from your bank or a peer to peer lending service such as Lending Club.

David from My Two Dollars says:

They will agree to a payment plan – I did this a few times last year when I had over $10K in medical bills owed to various hospitals and doctors. Usually the limit is 6 months, but that would make paying that bill much easier. Verify that the tests were done and necessary, but please pay what you owe. A big reason insurance is so much for everyone else is because of people not paying their medical bills. I am with Pinyo – everyone should pay for what they have received. It took me a while, but I was finally able to pay off my own medical bills. Good luck.

I say

I agree with David, they will agree to a payment plan.  They will also agree to a reduced cost.  I would just call them and say “here is what I can pay: $725″.  I would just be honest and tell them you can’t afford anything beyond that, and that if they don’t agree, you won’t have any choice but to let the bill go into collection.  I would stress to them that you want to be fair, but that you can’t pull money out of thin air.  Normally I would recommend you pay what you were charged, but since they quoted you one price and charged another, that is their fault not yours.  Lesson learned though, always get quotes in writing.  I have a rule of thumb in my life: “if it isn’t on paper, it doesn’t exist”.

Doctor’s offices run into these types of situations frequently, and as David said they will work it out with you.  If you get someone on the phone that isn’t helpful, speak to their supervisor and just go up the chain until you get the answer you want.

As Pinyo said, you do need to pay the bill.  For me personally, receiving a service and not paying is the same as stealing.  It’s just not something I am comfortable with.  Best wishes and let us know how it turns out!

Readers, what would you recommend?  Have any of you been in a similar situation?  How did you resolve the problem?  Any tips or tricks you can share with Bobbi?  Add a comment!

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This article is part of the Ask the M-Network series.   Jason submitted a question and asked:

So, I fleased a car about 3 years ago, before I realized what a bad idea it was (I was 22), and my intent was to purchase the car at the end of the flease. I knew I was going to be commuting and putting a lot of miles on the car, so I figured I could drive it for 3 years at a cheaper monthly payment and then purchase at the end and avoid the excess mileage fees. Last night, my Wife and I decided it would be so nice to not have that $350 car payment nor the extra $100 in insurance, so basically increase our income by $450/month. Finally, my question, I am essentially 43,000 miles over the set amount, at $0.15/mile comes to about $6,500, we have the money to pay the fee and be done with the car, do you think that is a wise move? We both now work only about 10 miles away from home, so we could operate with one vehicle.

Patrick says:

I would hate to throw $6,500 at something and not have anything to show for it. Have you considered putting the $6,500 toward the car loan and then figuring out how much your payments would be? It may drop your payments by $100 a month or more, which may make the car more affordable. However, don’t let sunk costs change your mindset. Sometimes it’s just best to walk away and not throw good money after bad.

This is a tough call, and one you will need to make with your wife. If you think you can afford the car with lower payments and you will get good use out of the car, then it may be worth keeping. If you absolutely don’t need the car or the payments and insurance costs, and you can afford to pay the mileage fee, it may be best to pay it and get it out of your life for good.

Plonkee says:

It’ll take about 15 months to save up $6.5k

Can you do without the second car for that long, and do you have an emergency fund that will cover any job losses? Although if things stay the same as they are you would be better off ditching the car, you need to assess how you might cope if things don’t stay the same. Perhaps you and your wife have fairly secure incomes and live well below your means, in which case there may be no problem. On the other hand if your job is at risk in the recession and you might need to travel to get a new one, you would need a second car, and might have to rely on any emergency fund to get through in the short-term.

Whatever you decide, why not try using only one car anyway? You’ll save on fuel costs, not add any mileage to the car, and see whether you could cope with only one car.

I say

Your situation is exactly why I hate leases and car companies love them. They are going to make out like bandits on your deal. If you don’t want the car, than I would just pay the fee, attribute it as a “stupid tax” and turn it in. As you implied, keeping the car is just going to cause you to incur additional mileage cost and since there is no penalty, I’d just let it go. The only other option is to buy the car, but since you don’t really provide any info on it’s value vs. sale price I really can’t advise you one way or the other.

Do the math on buying it though, as you could purchase it and just turn around and sell it and come out better financially. So make sure you seriously consider this option. If you buy it, you won’t need to pay the excess mileage fees. You would need to pretty seriously upside down to not do better than $6500 selling it.

Update us on what you decide to do Jason and sure hope our take’s on your situation help you think through it! Readers?  How about you?  What would you recommend? Chime in and help Jason out.  Add a commnet!

Please remember that our answers are opinions and should not be considered professional advice and we assume no responsibility of any kind. Please consult a certified financial expert as needed.

Have a question you would like to have us answer? Send it to Ask The M-Network!

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Which is better: a credit card with cash back rewards or a credit card with rewards you cash in (e.g. get gift card for reward points)?

A co-worker asked me this question today. I found an MSN article that breaks it down, but it is from the perspective of “industry experts”. I was wondering what the GLBL “advisory” group thought about this question – they are more likely to actually USE a card with rewards.

Patrick says:

The credit industry is in turmoil right now, and many credit card companies are changing their reward programs left and right. As a result, your rewards points may have less buying power than they did a few years ago. Personally, I won’t use anything but a cash back rewards card. I don’t want to be locked in to buying a product through rewards points or cashing in my points on a select airline or hotel program. A cash back reward system is easier for me to know what I am receiving and when I will receive it.

That doesn’t mean I don’t recommend rewards points – I think they can be a better deal for some people, especially if they travel often or stay in the same hotel chain with great frequency. But for people who don’t have any special needs, cash back credit cards are probably the best option.

Plonkee says:

Cash back.

Cash is generally more useful than points, and most people will come out better. If you’re sure that you can use a certain reward and it pays out at a higher percentage than cash back it may be more suitable for you, but one of the things that I’ve noticed is that rewards systems get changed at short notice, and often, what you wanted is no longer available.

I have both a cash back card and a reward points card, I almost exclusively use the cash back card.

Jaimie says:

Honestly, I think it depends on the terms. Look at what the buying power of the rewards card is (how many points for gift cards and are the gift cards ones you can use?) Usually the cash back will work out better, I assume, but don’t be locked into thinking that if your cash back card pays very little in cash back. Really it all boils down to percentages. You can’t look at this in a generic way, it needs to be the specifics of the two rewards programs stacked up together.

Personally, as an aside, I use a debit card that has both cash back and gift card rewards (it is all points – but you can redeem for cash or for gift cards) and depending on how long I want to save my points, the balance shifts from cash being the best option to a gift card being the best option (to a place I regularly make purchases).

Pinyo says:

I think the answer depends on your usage. For example, if you travel a lot and like to travel, mileage card is probably better. If you buy a lot of gasoline, then a gas card is probably better. If you owe balance from month-to-month, then a low APR card is probably better.

Speaking from personal experience, I prefer cash back reward credit cards because I know for sure that I will use the reward and cash reward is more accessible than any other types of reward. For example, I had put my last plan ticket on a Citi Premier Pass Card for triple mileage reward but didn’t accumulate enough points to use the reward for anything useful and it has been two years.

My preferred cash back reward card is the Discover More Card because I can take advantage of their online shopping program to get up to 20% cash back reward. Also they generally have good double cash back offers that I can choose from.

In the end, I want to leave you with my golden rules about using credit cards: (1) never spend more than what you could afford to pay when the balance is due, and (2) always pay the balance in full.

I say:

Neither!

I am not a fan of credit card use. I think the credit card companies are worse than snake oil salesman and look for every opportunity they can to take advantage of you, thus I avoid them like the plague.  I only use them for one thing now, and that’s to transfer my high interest balance (incurred from my days of being stupid with credit cards) to zero percent interest cards.  Once I do that, I cut up the card.

Now, with that being said, many people do like to use them. So if you are really want to, I would agree with my fellow M-Network friends and say cash back is far better.  With cash, you aren’t constrained and can use it however you would like.

I’ll second what Pinyo said too: If you are going to use them, use them responsibly.  Pay them off each month and don’t use them to buy things you couldn’t buy with cash.

Thanks for the question Gina!!  Readers?  How about you?  What would you recommend? Chime in and give Gina your thoughts.

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This article is part of the Ask the M-Network series.   June submitted a question and asked:

My car lease is up in Oct 09 – I want to buy the car, but what am I entitled
too..like, warranty, etc. It will only have 36,000 miles. A Chevy Impala…4 door.
thank you

David says:

First of all, congrats on at least getting close to finishing your lease – not too many people do before getting convinced that they should “trade up” to another one for even longer! As for what you are entitled too; well, that depends on what kind of lease you signed. Leases are either closed-ended or open-ended:

Closed-ended leases mean you can turn the car in at the end of the lease and walk away, owing only mileage and damage charges. You also have the option of buying the car at the pre-determined residual amount you agreed on when you signed the lease.

Open-ended leases are ones where you bring the car back, and they determine the current value of the car and compare it to the above-mentioned residual value decided at the beginning of the lease. If the car is worth less than what they thought it would be, you pay the difference.

You probably have a closed-ended lease, which most people have. So take a look at your original lease and see if there is a residual value amount, which is what you would have to hand over in October should you want to buy the car. If it’s worth it to you, whatever that amount is, go for it. If you got a really bad lease deal to start with, you might have made huge payments for all these years and still owe a lot on the car should you want to buy it. Weigh the cost of this acquisition versus buying another car carefully (are you getting the value of whatever dollar amount you are paying?) as you may be better off leaving the car there and finding something else to buy.

I used to lease cars all the time, but never again. I wrote about why in my post “Money Mistake Monday – The I Fell For Another Car Lease Syndrome“, which might make for an interesting read as you head towards your big decision. Good luck!

I say:

David covered how ending the lease works.  You can also go ahead and call the leasing company now as well and see what kind of price they’ll give you.  Leases often have an early termination fee, but leasing companies will often waive that towards the end of the lease.  Don’t be fooled either, the price you pay for the car is negotiable.  If you turn the car in and walk away, the leasing company has to pay to have the car transported, detailed and cleaned, and then sold.  However, if you buy it they don’t have to incur those costs, thus they are highly motivated to sell it to you.  Use that to your advantage, BUT as David said don’t pay too much for it.

As for warrenty, you are fully entitled to the remainder of the warranty and since you signed the lease papers it’s already in your name anyway.

I had a Ford Escort some years back that I leased.  The leasing company started calling me about a year before the lease expired making me purpose offers.  I finally ended up looking up the car’s value on the internet and calling them and making them a low-ball offer.  Guess what?  They took it.  So don’t be afraid to make them a low offer to buy.  You just might end up getting a great deal.  Worst that can happen is they say no right?

Thanks for your question.  Readers, what do you guys think? Did David and I miss anything?  Add a comment!

Please remember that our answers are opinions and should not be considered professional advice and we assume no responsibility of any kind. Please consult a certified financial expert as needed.

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