Wednesday, March 17, 2010

Between Friends

Gone are the old days when people considered finances a private matter or when women knew nothing about money. In these times the taboo of discussing money has been removed. Not that you have to discuss your business with every body but you can pick and choose who you want to and how much detail you want to include.

The following is an email discussion between two friends. It is not intended to give specific financial advice or suggest a specific approach to a problem. It’s somewhat long but as you read through it you will find many basic financial principals discussed and it may raise your own questions and thoughts. The conversation spans a two-week period and is a little long, but raises many important issues to consider so I didn’t want to shorten it.

The important part of the story and why I have included it is to show how talking to friends before we make major decisions can help us arrive at a better conclusion than we might have on our own. Most importantly is to know that professional council can either solidify our ideas or help us to make better ones. And, don’t be in a big hurry! When making financial decisions take all the time you need.

The conversation begins as one friend who faces unemployment takes a new job position that will make less than her old job and needs to find a way to manage within her new, lower salary. She has money in the bank that is a one time settlement from a medical situation and is considering selling her home and buying a cheaper mobile home closer to her new job.

Just a couple of first impression thoughts and I will think about it more.

Trying to sell a big asset in a down time you would probably lose money. Both the house and car would fall into that category. It's hard to say whether things will go up or down because this is not over yet. And, a mobile home is always a depreciating asset. I saw so many come into the real estate office and consider buying a mobile home. The only time I would recommend anyone buy one is if you are looking for a cheap place to live and are the type that never moves. They are generally depreciating assets, so you could just as easily rent something if you had to move. Even banks won't lend on them after a certain point so that tells you something. Banks specialize in knowing how to make money.

A couple things you might want to look into.

1. Since your house value is somewhat upside down have you checked into a loan modification? If your payments are current they might revalue the property and the interest and either could result in a lower payment.

2. Since your CD is your reserve and is probably not making a big interest could you put it in a regular savings where you could get at it if you really needed it instead of locking it into a specific time?

3. Can you reconsider the whole roommate thing to help recoup your housing expense? I know when the other person left you breathed a sigh of relief but if you are very picky that could work.

4. This one's really far out probably but have you considered using some of your 27K as a down payment on a small stick built that you could use as a profitable rental? This would take a lot of research and you may not even want to consider being a landlord but right now you do have far more money available than most people and therefore could be in the position of an investor but don't cut your reserve too much.

5. As far as your vehicle. How much longer do you have to pay? months or years? Does it run good? Do you WANT a new one? Or, are you just trying to cut expenses?

6. Is your job full or part time? What are your anticipated goals for the next year or two?

7. Have you done cost shopping for vehicle and house insurance in the last six months? Are you getting the non-smokers discount on both? Have you called Pemco? I have always found them to be the lowest.

I know I am raising more questions than answers but I do think that is the way to find a good direction is to consider all options.

I’ve actually considered buying a duplex and renting out one side while living in the other but I would still have to sell my current residence as my income would be too low to be able to finance both.

As for the mobile home - I know they depreciate as well as the car; I was just thinking it would be a cheaper way to live and closer to my new job (less gas $, less wear and tear on the vehicle) - doesn't matter to me if I live in a palace or not as long as it is of adequate size, clean, and in a safe neighborhood. And it would rid me of another monthly payment if I could buy one outright.

Car wise - I still have 4 years to go and the interest is 5%. I can't find any kind of interest bearing account or cd that comes any where close to that. max for short-term cd is around 1% or so and less for savings accounts. So in essence I’m paying 4% penalty by putting the money in the bank instead of paying off the car contract. And with the payment gone I wouldn't be as worried about having a large reserve. I also still have a pending car accident claim so may receive more $ at some point to replenish the reserve. The car is nearly brand new (I bought it new) and runs great. The only reason I would buy a different car would be to downsize and find a more economical car - my new job is 55 miles round trip.

I really don't want to go the roommate route again unless I have absolutely no other options.

Job-wise - it is currently part time with the option of going full time when I’m done with school but it is nearly half the wage I was making working at the old job. There is also another pharmacy that is interested in hiring me full time but it is still 55 miles round trip to that one (and I do not know what they would offer as a starting wage.)

Insurance-wise - I’ve had the same insurance company for the last 20 years and have some grand fathered advantages that I would not be able to purchase if I switch to a different company. And I checked, they don't offer non-smoker discounts.

So that's where I was coming from :) as for goals, I would just like to pay down some of this debt. The credit card should be paid off this year, which leaves the house and car as my two biggest payments each month. Everything else is small (utilities (on monthly payment plan so same payment every month), modest cable package, modest phone/internet package, low cell package - that's it besides gas and food.) oh, and I’ll have a student loan payment 6 months after I graduate.

I appreciate your perspective cuz you always have great ideas so let me know if you have any other thoughts on this. It will be May before I attempt to do anything because that's when the cd matures (I'm planning ahead)

The thing I was looking for with all the questions was the $400 either in cut expenses or increased income while not using all of your reserve.

Another question. What grade is your son in school and do you plan to stay in that area after he graduates?

Also, you forgot to mention about the loan modification.

The big thing I'm thinking is that it's not a good time to sell your home unless you really have to. Prices should go back up some if you can ride it out. Especially since you are staying in the same general community. On the other hand there are great deals for buyers with low down as the banks have so many foreclosures right now.

A strange thought pops into my mind. With money being as tight as it is especially for car dealers (is your car financed by a dealer?) I wonder if you were to ask them less than the payoff amount would they consider a lower amount?

I'm not sure if you realize what a rare person you are right now to have any cash. In whatever you decide you are in the position to maximize your buying power if you know how to be a hard negotiator. I'm not very good at this myself but I know someone who recently settled their credit cards for much less than the total amount owing..

You really are in a power position right now and I'm not sure how you would best use that power. Say for example you used part of your money to make a $10,000 down payment on your own house and were able to get lower interest rates and resulting in lower monthly payments. How much could you save in interest? But the big issue is how long do you want to live in that area? Will all the work you have done on your home I'm sure it's very nice.

I think that before you do anything do a lot of research of your options. And, then if you still want to just pay off your existing car loan you always can.
It sounds like you may want to read a Susie Orman book before you do anything.

Paying off your car is a good idea because it gets you out of debt and saves interest

But, how long until you finish school and can go full time? If it is six months or less could you just pay the six months ahead on the vehicle and then see if you could pay off the car with earned income at an accelerated pace while still keeping as much of your reserve on hand? This gives you more time to think and decide what you want to do. You could always do so in the future if necessary. 5% is a good savings but I know how hard it is to rebuild savings once it is gone.

Just hate to see you use all your cash unless you can do so on an appreciating asset that will generate a profit.

So here's what the bank proposed: pay 10,000 towards the car (will leave 10,000 owing/leaving a payment of 230/mo), pay off home equity line - 7500, pay off the remaining two credit cards - approx 3000, and putting 6000 in savings.

That eliminates about 465/month in payments and leaves me a cushion.

If I did it my way - pay 20,000 on car, 3000 on credit cards, 4000 towards home equity it eliminates about 600/month in payments but I have no cushion.

I’m mulling it over. What do you think?

The biggest issues to me are the upside down value of my house and the large amount owing on my car (although it is a Subaru and theoretically should last at least 10 years)

I think her plan sounds really good because it reduces your payments to 75% of your original goal of $600, gives you more equity in your home, keeps some reserve, and gets rid of your credit cards. You can always use your reserve to make a car payment if you need to or other unplanned expense so you won't be tempted to use the credit card again, but hopefully you can find a way to increase your income so you don't have to.

Disclaimer - This site is for informational and entertainment purposes only, the content herein should not be mistaken for professional financial advice. It is recommended that you seek advice from a professional for serious financial matters.

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