Marketplace

Parent PLUS loans

Question: I took out a Parent Plus loan with Sallie Mae when my son started school. He's finished now. Can I get the loan changed to his name? Thanks. Mary, Breese, IL

Answer: No, Parent PLUS loans are the financial responsibility of the parents, not the student. You could ask your son to make the payments for you on the PLUS loan. But if he misses payments and falls behind you are still responsible.

07/01/09 by Chris Farrell

Permalink

Borrow to invest?

Question: My husband and I are both 50+, with two children of college age. Our house is paid off and we are without debt. He wants to take out a mortgage for 1/2 of the appraised value of our home, betting that inflation is inevitable and invest it in higher interest CDs.

Safe bet or stupid investment? Thanks Mary, Towson, MD

Answer: I get variations of this question all the time and my answer is always the same: I don't like it. I wouldn't do it. It's an extremely risky investment strategy. I don't even consider it an investment. It's a speculative bet.

Right now, millions and millions of Americans are envious of your financial situation. You have no debt. You own your house free and clear. You have a great deal of financial security. Why gamble away your security?

If you borrow half the value of your home to invest in CDs you'll have to make those interest and principal payments no matter what. The interest payments on the debt will be higher than what you can earn on a short-term CD at the moment. You'll pay a steep "fee" while you wait to profit from your strategy.

Of course, there is a school of Wall Street thought that believes high and rising inflation lies in our future. A number of economists worry we could suffer through a reprise of the 1970s inflation rates following the extraordinary actions the Federal Reserve has taken to bail out the banking system and avoid a depression. It could happen. It's a real risk. Thing is, it might not happen. Inflation could stay tame.

Instead of borrowing I would buy shelter from the potential inflation storm by investing in safe, high-quality securities that offer a hedge against inflation. Treasury bills, for example, hold their value even during inflationary times because you can reinvest the money at higher interest rates if inflation does stir. The same holds for a mix of savings accounts, short-term CDs, I-bonds and Treasury Inflation Protected Securities.

Best of all, you'll still be debt free and own your home.

07/06/09 by Chris Farrell

Permalink

Starting a business and saving

Question: I was laid off and now I'm living off my savings. No income for the time being. I've been preparing to launch my own business and I'm fortunate because I've always been a good saver, so I don't even have to look for a loan at this point. My question is - where to keep the money I've saved? Most of it is in a savings account (got a good deal on interest, but only until 2010) and some is locked into my previous employer's 401K, earning basically nothing because I'm afraid to go into stocks or bonds. I have a self-employed 401K that's also inactive - same reason: I don't want to lose any of my funds... Love the show and the blog and everything! Thanks for any advice. Rina, Bronx, NY

Answer: For the moment, I think you're doing the right thing keeping your money in a savings account. After all, you're taking a big risk starting your own business. Good luck with it, too. I hope your idea succeeds. Business history suggests that the best time for entrepreneurs to open up a new business is during a downturn. The savings is an anchor offsetting the risk you're taking as an entrepreneur. And you need the money to live on.

Don't let the stock market paralyze you. There is nothing wring with being conservative. The counsel that equities should form the foundation of a long-term investment portfolio owes a huge debt to the finance insights of Paul Samuelson, the Nobel laureate. For many people I think equities should be part of their retirement portfolio. Yet in an interview I had with Samuelson about a decade ago, he said, "there are lots of reasons to have an equity share which is significant. But it all depends on your risk tolerance. For my late mother, her level of risk tolerance called for a very small equity share. You have to always sell down to the sleeping point."

You're a good saver. I'd continue to save for your retirement when your financial circumstances improve. But I'd do it in products that are safe and secure--and allow you to sleep.

07/07/09 by Chris Farrell

Permalink

What is emergency savings

Question: My husband and I got married recently and we're having a bit of a debate about what constitutes an emergency fund. I believe it is an account (money market, CD, savings) with 4-6 months of expenses stashed away. My husband feels that it doesn't have to be a particular account; in fact he would say that I could count my 401K and IRAs as emergency funds. I completely disagree as my retirement funds are for just that, retirement. In an extreme situation, I could tap into those, but it would have to be from dire need. We'd appreciate your wise counsel on the subject & enjoy listening to your show on Yellowstone Public Radio. Thank you, Rachelle, Bozeman, MT

Answer: I don't want to get between you and your husband, but I'm going to have to take your perspective on "emergency" savings. It's your safe and secure money that you have quick and easy access to without paying a penalty. Emergency savings includes savings accounts, money market mutual funds, short-term certificates of deposit, Treasury bills and the like. Of course, there are differences between these products. You can get immediate access to a savings account attached to your checking account. If you own a 3-month T-Bill that you purchased through treasurydirect.gov you'll have to wait until matures.

The problem with tapping into 401(k)s or a traditional IRA is that you could end up paying a 10% penalty or ordinary income rates on the withdrawal.

However, your husband is right to consider the retirement plans as part of your overall savings. There are ways to get at it, too. You might be able to withdraw some of the 401(k) money as a loan and pay yourself back over time (assuming your employer lets you borrow against your 401(k).) You can take money out of the IRA and, if you return it all within 60 days, there are no penalty or tax implications. You can only do it once a year. Still, both these strategies have significant financial drawbacks, which is why I don't recommend them.

There is an exception: The Roth-IRA. The contributions into a Roth are with after-tax dollars. In a pinch you can withdraw your Roth contributions without paying a penalty or taxes to Uncle Sam. Just leave the investment returns alone, since there is a levy on earning if you do take them out. A Roth is both a retirement savings plan and an emergency pot of money.

07/08/09 by Chris Farrell

Permalink

Buy or rent

Question: My husband and I can't decide whether or not to buy our first house. We will likely be in any house we buy for at least five years -- there is some possibility we would move after that. We have $50,000 available for down payment, but we also have a 13-year-old and a 10-year-old and are worried about college. We only want to buy a house if it is beneficial to us financially in the long run -- otherwise, we are happy renting. And we hate to say goodbye to that pot of cash that could buy our boys more choices for college (though we also worry about inflation destroying it, and losing this opportunity to buy in a neighborhood we like but usually can't afford to buy in). Should we become homeowners, or not? Laura, Milwaukee, WI

Answer: I really like the way you're asking the question. The answer comes from understanding the trade-offs you'll make to own, and whether it makes sense for you. Owning can make sense. Prices are attractive. The $8,000 first-time homebuyer tax credit is an added incentive if you quality. A home is a lifestyle, too. It's a place where you live with all the benefits that come decorating and landscaping it the way you want.

That said, you want to ignore the two biggest lies in the real estate business. The first is to "buy as much home as you can." It's a recipe for financial trouble. The second is renting is "throwing your money away." That's wrong.

Here are my principle guidelines to weighing the costs and benefits of homeownership:

*Compare the cost of owning vs. renting.

*Buy only if the deal is financially conservative

*Keep the mortgage and financing simple--no piggy-backs, 80/20s, and the like

*Smaller is both smart and socially sustainable

Number crunching will help keep emotions in check. Let's say you calculate that the monthly cost of ownership, taking tax benefits into consideration, is higher than the monthly price of renting for a comparable property. If you buy a home, you're making a big bet that home prices will rise to justify the purchase. But you have a financial cushion if the cost of ownership is less than renting. There are a number of good online calculators, but I tend to gravitate toward the websites www.dinkytown.net and www.hsh.com. Time is critical. Ownership doesn't make sense unless you're confident that your time horizon is at least 5 years. You're in the ballpark from a time perspective.

After you've gone through all this, I would then decide whether ownership is sensible for you. There's nothing wrong about deciding to rent and save.

07/09/09 by Chris Farrell

Permalink

Pay off auto loan

Question: I have a car loan that I could afford to pay off. However, is the loan, which has been paid on time for about 2.5 years, helping my credit score? By paying it off, might I lower my credit score in the short term? The long term? Ardimus, Houston, TX

Answer: I don't see any reason to increase the profits of your lender by continuing to pay interest. Why drain your bank account of that money when you could put it elsewhere, say, into savings or entertainment? I'd get rid of the loan. It's a nice feeling to own your car free and clear. We shouldn't let the credit score tail wag the debt dog. It's always financially smart to pay off consumer debts as fast as possible. As for your credit score, it will reflect a history of paying bills on time. That's the key to a decent credit score short-term and long-term.

07/10/09 by Chris Farrell

Permalink

Own home free and clear

Question: I still owe about $36,000 on a 5 1/2% mortgage on a co-op. I'm wondering if I should take my savings & pay if off since my money market & CDs are only paying a bit more than 1%. (!!!) But, I get a tax deduction on the interest paid on the mortgage, although soon the $400+ monthly payment will probably soon go mostly for principal, & then there won't be a tax deduction--right? Natalee, Scarborough, NY

Answer: Assuming 1) you like the co-op and 2) you will still have savings to tap in an emergency, it can make financial sense to pay off the mortgage. That's a 5.5% return on investment which, as you say, is a lot better than 1% or so. What's more, my guess is that the value of the mortgage interest deduction is not only minimal, but it is far below what you can get by simply taking the standard deduction. Own your home free and clear.

07/13/09 by Chris Farrell

Permalink

Get a credit card

Question: Hi! I charged up a few credit cards when I was in college and used credit counseling to pay them off. This has been paid off for five years, but I haven't had any credit cards or much other credit activity since. Now, I'd like to rebuild my credit, but I recently applied for a credit card through my bank and was declined. Any suggestions for getting back in the good graces of the powers that be in the credit world? Chandra, Seattle, WA

Answer: It wasn't all that long ago that all you had to do was breath and you could get a credit card. And I'm not convinced that even breathing mattered toward the end of the credit boom. Now that the boom has gone bust it is harder to get your first card.

It's time to revive three classic techniques to get a credit card. One time technique is to apply at a major retail store where you shop. Another is to get a gasoline credit card. The last is a secured credit card. Another option is a "secured" credit card. With secured card, you open up a savings account with a bank. It issues you a card that looks like any other credit card but your credit is equal to or somewhat less than the amount you've put on deposit.

The credit with all three of these options tends to be expensive. The idea is that after showing a pattern of paying off your bills on time you switch to a traditional "unsecured" credit card with a lower interest rate and no fees.

07/14/09 by Chris Farrell

Permalink

Invest in BRICs?

Question: I am 56 years old. I got out of housing before the market fell. I sold my house. I stayed out of the stock market over the last 7 years, so I didn't make or lose money. I was content with small but safe money market accounts. But I don't know what to do now. I have in excess of 250,000 that I could invest. My banker thinks that I should get some money market linked CDs. There is 100% principle protection on FDIC Coverage to applicable limits, and "opportunity to participate in the leverage potential appreciation of equally-weighted BRIC foreign currencies. Is this a good idea? When I retire, I should receive between $2,200-$2,500 per month. I also have another $250,000 401 Ks and several stocks. I am looking at finding an investment that would be FDIC insured but still pay a reasonable investment-3-5%. I would consider something more aggressive if it still felt safe. Must be a lot of people in my age group with this problem. Any suggestions? Anne, Minneapolis, MN

Answer: Here's my basic problem. You've done a good job saving. You're conservative with your money. Why put some of your savings into one of the riskiest bets in the global capital markets, the BRICs? That's shorthand for the world's largest developing nations--Brazil, Russia, India, and China. There are powerful, compelling arguments that the future is bright for the BRICs over the long-haul. But they remain volatile markets and fragile economies. Investing in the BRICs isn't for the faint of heart. Investing in foreign currencies is "rank speculation," to quote from Jack Bogle, the legendary founder of Vanguard.

I know that your principal is safe with this kind of market-linked CD, but it just doesn't make sense to me. The way you've described what you are looking for in an investment tells me that sticking with shorter term Treasuries and CDs--and accepting the lower yield--is probably your best bet.

07/15/09 by Chris Farrell

Permalink

Variable annuity

Question: Hi, I know from searching Chris' articles in the past that he's said variable annuities are a bad idea. I recently found out that my dad is 20 years into a variable life annuity. My dad is retired, living off of social security and savings. Should he keep paying into his VLA at this point? I think he only has a few years left before payout. Or is a VLA so bad that he should just get out now? Thanks for your help! Bonnie, Fremont, CA

Answer: No, unless there is some other problem that isn't in your note I would not get out of the variable annuity. You dad has saved for more than two decades and he's about to enjoy the benefits of that savings in retirement. That's good, and he should enjoy the income. .

A variable annuity is essentially a mutual fund wrapped in a tax-deferred insurance firm account. You buy variable annuities with after-tax dollars, but earnings compound tax-deferred until retirement, when any gains are taxed as ordinary income. Variable annuities come with a death benefit. It's part of their appeal. When the owner of an annuity dies, the estate or beneficiary gets back the original investment, plus some guaranteed minimum return.

A variable annuity can be a good niche product, especially for those with lots of savings. For instance, Henry "Bud" Hebeler of Analyzenow.com says he bought low-cost very simple variable annuities for his children. He had maxxed out on other tax-deferred alternatives and he wanted another place to save tax deferred.

My problem with variable annuities comes when it is sold as a primary retirement savings vehicle, especially to younger and middle-aged folks. In too many cases the product comes with a number of drawbacks, including steep fees and limited financial flexibility. Most studies I have looked at emphasize that stocks are probably the best investment for a variable annuity. The fees eat up too much of the return on cash and bonds. The savings are taxed at ordinary income tax rates at withdrawal.

Many financial planners suggest consumers would be better off investing for retirement in a 401(k) and a Roth IRA. I agree wholeheartedly.

I would also consider putting any leftover cash into a broad-based equity index mutual fund. For one thing, withdrawals from a variable annuity are treated as ordinary income, while some of any returns from the mutual fund may be taxed at the lower capital-gains rate. For another, it's a good idea to have some long-term savings in taxable accounts that can be tapped with paying a penalty to the government or a financial institution. Several years ago, Ross Levin, president of Accredited Investors, an Edina (Minn.) financial-planning firm, told me that they "are the fifth-best option for retirement planning, behind everything else." That seems about right to me.

The variable annuity market has improved, however. The competition for customers has increased and that means consumers can get a better deal on fees, surrender charges and the like. So, if your financial circumstances say that a variable annuity makes sense, it pays to shop around. Keep the product simple. Avoid the bells and whistles. They're too expensive.

But for your dad, he should take advantage of the additional income in his Golden Years.

07/16/09 by Chris Farrell

Permalink

Cancel landline

Question: My husband and I each have a cell phone, and are thinking of cancelling our landline phone service, which we almost never use. Is there any chance that cancelling our landline could make us look like a poor credit risk? We will be in the market to buy a home in the next year or so. Susan, Hollister, CA

Answer: Getting rid of your landline should not impact your credit score. Lots of people--including me--have dropped their landline phones and rely on their cell phones. There really can't be an issue with your credit report or your credit score if you've paid everything you owe. Go ahead and cancel.

07/17/09 by Chris Farrell

Permalink

The 60 day IRA rule

Question: This past quarter, I made a series of small withdrawals from my IRA to keep the mortgage and other bills paid. I returned the first draw within the 60 day period, but when I went to return the second I was told I could only do 1 "rollover" per year! Help! How do I get my money back in without the penalty? The irony is that I am only 4 months from being 59.5 yrs. old. Chris, Gypsum, CO.

Answer: Ouch. It's a little known rule, but you can take money out of your traditional IRA penalty-free and tax-free so long as you put it back within 60 days. In essence, you're making an interest free loan to yourself for a brief period of time. The 60 day limit is strict. If you're under 59 ½ and you don't get the money back within the 60 day time period you'll owe taxes on the withdrawal and a 10% penalty. The other restriction is that you can only do this only once within any 12-month period. I don't see any way around it.

This article from Investopedia lays out some exceptions, but I doubt you qualify. Still, it offers a lot of good detail.

07/20/09 by Chris Farrell

Permalink

First home

Question: I am considering buying my first home at age 52. What would you consider as the best strategy for scoping out a wise real estate investment at this rather late date, as opposed to channeling my savings to other types of investment? Katie, Arlington, VA

Answer: You'll need to address all the classic home buying issues about affordability. You'll also need to figure out how ownership fits in with your overall savings when you enter into your retirement years.

Here are some guidelines to thinking through homeownership:

*Compare the cost of owning vs. renting.

*Buying make more sense the longer you will live there.This may be more of a consideration at your age. But you should plan on being there at least 5 years.

*Buy only if the deal is financially conservative. In other words, put down a hefty down payment, hopefully the traditional 20%. You don't want to end up stretched financially or house poor.

*Keep the mortgage and financing simple.

* Small is beautiful. It's both financially practical and environmentally friendly to own a smaller home. It's cheaper to own and to run.

Now, you're still young and retirement is far off. But when I can I like to add a twist, something else for you to think about. So, let me add an assumption: If you buy, chances are you'll live in the home for many years. If that's the case, what I'm about to add to the basic first-time home buyer questions may seem strange, but it's financially savvy over the long haul: Ask yourself, is this the kind of place I can see my self comfortably living two to three decades from now?

This suggestion builds on a conversation I had a year or two ago with Jon Pynoos. He's head of Gerontology policy, planning, and development at the University of Southern California. He recommends that homeowners in their 50s that are considering remodeling projects take advantage of the construction to add in design changes that make it easier to age comfortably over time. "People in their 50s often upgrade their homes and spend the most money in the kitchen and bathroom," say Puynoos. "If you're doing a major remodeling, it's the ideal time to make changes that will let you remain independent."

His comments made a lot of sense to me. Now, you aren't facing a remodeling project. You're buying a home. But I think for most buyers in their 50s--assuming it's a long term purchase--this is something to add to the list of things to take into consideration. As Jane Austen wrote in Emma: "Ah! There is nothing like staying at home for real comfort."

07/21/09 by Chris Farrell

Permalink

Investing with the Wizard of Omaha

Question: I'd like to buy Warrren Buffet's Berkshire Hathaway shares. I understand that there 2 kinds brk-a and brk-b. The b-share costs about 1/30 of an a-share but it isn't not convertible to a-shares. My friend advises me to buy a-share but cannot give me a reason. Is b-share really inferior to a-share other than the cost? Please help me. Chris, St. Paul MN

Answer: Billionaire Warren Buffett, the Wizard of Omaha, is perhaps the greatest stock picker of all time. He runs Berkshire Hathaway, a holding company with more than 70 businesses. The price difference between the two kinds of stock is astounding when translated into dollars and cents. As I am writing this an A-shares is worth $92,000 and a B-share $3001.50.

I can't say whether you should prefer Class A to Class B, but the key difference between the two classes of stock has to do with ownership rights.Class A shareholders have the full voting rights of stock ownership. A Class B shareholder gets 1/200th the voting rights of a Class A share. In essence, Class B shareholders have a stake in how well Buffett does as stock picker and chief executive, but they're largely disenfranchised as owners. For instance, if someone made a takeover offer for Berkshire the Class A shareholders get to decide whether the deal goes through or not. The Class B shareholders are along for the ride. Question is, does that matter to you?

The Wizard of Omaha describes the difference between the two shares here.

07/22/09 by Chris Farrell

Permalink

How to protect against inflation

Question: I hate to see this happen to the Obama administration; however, if you combine the debt created by the Bush era and the deficit spending (a.k.a. Stimulus Package and Bail Out packages) that Washington is embarking on, how can we not repeat the sky high interest rates that folded the Carter administration where cash was king accompanied by nose bleed inflation rates--especially since manufacturing has all but left these shores for cheap overseas labor? Thank you. Stephen, Cape Neddick, ME

Answer: Many people in the markets are worried that the Fed's quantitative easing will end in a bout of high and rising inflation. Still, it seems to me the fear that inflation lies around the corner is exaggerated. The economy is still weak if not in recession and unemployment is rising. Now, it's likely that inflationary pressures will emerge when the economy finally regains its footing. It's a safe forecast that at some point down the road the Fed will confront a tricky monetary policy act. I'm sure we'll go through some inflation scares. But the Fed is well aware of the risks and, while the conduct of monetary policy is as much an art as a science, Chairman Ben Bernanke thoughtfully discussed the central bank's "exit strategy" in Congressional testimony earlier this week.

But high and rising inflation or hyperinflation? Personally, I don't see it. For instance, the U.S. government's Treasury Inflation Protected Securities or TIPS are forecasting that inflation will average less than 2% over the next decade. You would think investors would demand more of an inflation hedge if the threat of hyperinflation was real. The global competition for profits and markets is intense and that competition will aid central banks around the world in keeping inflation tame. I still think the long term trend is toward minimal inflation rates in an increasingly integrated world economy. Plus, central bankers have a pretty good intellectual tool kit when it comes to bringing inflation under control. What central bankers don't really understand, what they disagree on is how to handle bubbles, market booms and market busts.

That said, the risk of high and rising inflation exists over the next 5 years or so considering the extraordinary actions the Fed has taken to bail out the banking system and avoid a depression. Even small rates of inflation, say, in the 2% to 3% range, reduce the purchasing power of savings with time.

So, since we're dealing with personal finance questions here what's a good way to protect your savings from inflation? A portfolio made up of mostly Treasury bills does an excellent job of keeping pace with inflation. However, the price for that inflation hedge is no growth or no earnings premium over inflation. Most of us would like to make some money on our money. That's why the key investment product for long-term savers is TIPS. Everything can be built on top of a foundation of TIPS. For those who want to take greater risk in the search for higher rewards should allocate a larger portion of their portfolio to stocks. For those who are more risk adverse a larger investment in Treasury bills makes sense.

07/23/09 by Chris Farrell

Permalink

29% interest rate

Question: I am rec'ing notices that my credit card rates are jumping to 29%. I owe about 35K. I tried to get a consolidation loan to pay them off and reduce my interest. Loan denied. I have no other obligations and work part time 30 hours a week as well as receive a pension of $2500 a month. I called the credit companies and asked for a reduced rate and was told I could pay off my balance and opt out of the cards but no reduction. What can I do short of declaring bankruptcy? John, Rome, NY

Answer: You're carrying a lot of credit card debt. The financial hole is only going to get deeper at a 29% rate of interest. That's a lot of vig. You need a plan.

I'd get help creating that plan. I would do is go online to the website of the National Foundation for Credit Counseling. There are a couple of consumer credit counseling service offices near you. For instance, one is in Utica and another in Syracuse. I would schedule a meeting with a financial counselor to go over your finances and get their recommendation for a budget and a debt repayment plan. Neither office charges a fee for a consultation. There are small fees to pay if you decide to create a repayment plan with one of the services.

That's task number one and, hopefully, by going over your monthly income and monthly expenses they'll see ways of freeing up cash to attack the debt. They can also negotiate on your behalf with the credit card companies. It's a practical step toward getting rid of the debt--and the 29% loan shark rate of interest. Good luck.

07/24/09 by Chris Farrell

Permalink

Changing careers

Question: I spoke to Chris about 6 years ago. My dad had died in March of 2001 and left me and my brothers and sister a little money. Chris's advice was to divide it into 3 amounts: cash, mutual funds, and equities.

Well, I'm sad to say that my mom died this past February. She had sold the farmland late last year, and so she's left us that, and next year we'll get the rest of dad's money. Which is, it turns out, quite a bit.

I want to write full-time, but I don't want to squander my mom and dad's legacy. Their memory is dear to me. I want to write their and my story. Can you recommend how I should proceed? Note: I'll be 42 years old this October. David, Birmingham, AL

Answer: I'm sorry for your loss, and understand the care you want to exercise before taking your next step. There are many issues to consider before making the kind of shift you're contemplating. Lots of people these days are intrigued by the idea of changing careers. They want to do something that makes a difference. They want to do something that offers more meaning to their lives. Like you, they have a dream. It's wonderful. It's also the case that careful research and planning can increase the odds of success.

That's where a financial plan comes in. Of course, how much freedom and flexibility you have largely depends on how much money you're inheriting. That said, here are some classic techniques to consider when making the shift. Many people find it's smart to work part-time and tap into savings (in your case inheritance) to make up for any shortfall. Another time-honored tactic is to give yourself a set period of time--perhaps 6 months to one year--to pursue your dream and pay yourself a "salary" from savings. That is what you live on, and no more.

In some cases, employers will entertain proposals for a longer period of time away from the office through a mix of vacation, furlough and sabbatical.

It's a good idea to give yourself a target date to evaluate whether this is working. It could be anywhere from 3 months to a year. An evaluation date will help prevent you from running through the inheritance.

A key question is what will you do for health insurance coverage during this period of time? You don't want to be without it, and many people find this is the main stumbling block to get over in devising a career change.
.
So, my bottom line is use this time to play with the numbers, explore your job options and come up with a practical plan. You should also get practical money advice by networking with other writers in your community. Most veterans are more than willing to share their insights and experience. Good luck.

07/27/09 by Chris Farrell

Permalink

Safe savings

Question: I am a newly divorced mom who has just sold her home as part of a divorce settlement--at a big loss. I have 60K as my share. I was unable to negotiate a mortgage because I have not worked full time since my special needs child (now teen) was born. I am seeking full time work (bank says they need 12 months work history) and have rented a small house for 1 year. (My rent will be more than my mortgage would have been if I had been able to buy the house I just sold.) Where should I put my 60K until I can purchase a home? Preferably somewhere where I earn a return, without risking the principal. Would your answer be different if I decide not to buy a home for 2 or more years? Karin, Scarborough, ME

Answer: You right to want to park the money in a safe place. I would put the money into a FDIC insured bank or a federally insured credit union. You could put some of the money into a savings account and some into short-term CDs. The other alternative is to buy short-term Treasury bills from the U.S. government at www.treasurydirect.gov. In all these examples the money will be there when you need it.

My answer would be the same whether you buy a home in two years or not. Here's why: You're going through a lot of tumultuous changes. You've gotten divorced. You're looking for full-time work. And you're raising child with special needs. So, I would avoid making any dramatic investments--and that includes a home--until you have a better sense of your new work and home life. You'll figure it out, but it takes time. Meanwhile, keep your savings safe.

07/28/09 by Chris Farrell

Permalink

Home equity line of credit

Question: I have a $50,000 mortgage on my condo and was just approved for a $150,000 equity line of credit (no processing fees). I have no emergency funds and was planning to use the LOC to pay for major dental work (not cosmetic) I have been told I need - cost approx $10,000. I am financially very conservative and very uncomfortable with the idea of a second mortgage on my home - would I be better off canceling the equity LOC (I have 3 days) and charging the dental costs on a credit card? I have an excellent FICO score and don't want to do anything to jeopardize that rating. Thank you! Annel, Norwood, MA

Answer: My strong bias is against borrowing against your home to pay for dental work. It isn't just dental work. My general rule of thumb is that any money borrowed against the equity in a home should go toward improving the value of the place and your enjoyment from living there. I think your financially conservative instincts are spot on.

Here's my overall perspective. It was commonplace during the great real estate bubble for homeowners to take out second mortgages to consolidate their debts, pay for vacations and meet tuition bills. It's cheap money, right? The interest rate on a home equity line of credit is lower than the rate on credit cards. You also get to deduct the interest on your taxes. But treating a home like an ATM backfired when the boom went bust. Fact is, too many people needlessly put their homes at risk. For instance, credit card companies can't go after your home if you miss credit card payments. But a lender can start proceedings on the home if you start skipping equity credit line payments.

Now, to be realistic you're far from needing to worry about financial trouble. After all, the lender is willing to set up a very large line of credit with you so I know that you have a lot of equity wealth. The dental payment is comparatively small. You could handle it easily.

Still, I'd prefer that you pay for it on a credit card and then focus on eliminating that debt as quickly as possible. To me, it's a better strategy and money habit. By the way, no matter what you decide to do your FICO score is fine.

07/29/09 by Chris Farrell

Permalink

CDs

Question: I am a 33 year old unemployed librarian (laid-off from part-time professional position end of March 2009) full-time doctoral student. I have about $12,000 in a CD that just came due. Rates are terrible of course, I shouldn't need the money anytime soon, and I'm trying to figure out the best, but not too risky, place to put this money, which is most of my savings. I'm leaning towards a 9-month Ally Bank CD with a 1.90% rate. Does it even matter at this point what I do with the money as long as it's safe and secure? I have a separate Roth Ira. Thanks so much. Miriam, Brooklyn, NY

Answer: Ally Bank is the old GMAC bank. The name was changed back in mid-May. I guess the GM name didn't exactly evoke warm feelings of financial security. The online bank is insured by the FDIC. You're right, the key is that your money is safe and secure. My only question is whether you want to keep some of the money easily accessible by parking it in the online savings account. This way you won't have to break the CD contract and absorb a penalty if you need some quick cash.

07/31/09 by Chris Farrell

Permalink