Comments on: Advice For a Reader – What Would You Do In This Situation? http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/ A personal finance blog dedicated to discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance. Sat, 11 Feb 2012 20:32:19 +0000 hourly 1 http://wordpress.org/?v= By: EMF http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/comment-page-1/#comment-260494 EMF Fri, 28 Mar 2008 17:19:17 +0000 http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/#comment-260494 I would be sure to document whatever you've spent on your mother's house as a loan. Receipts for sure, a loan document with your mother would be better. Maybe you'll not be paid until you inherit, but having that documentation could reduce your tax bill. I would be sure to document whatever you’ve spent on your mother’s house as a loan. Receipts for sure, a loan document with your mother would be better. Maybe you’ll not be paid until you inherit, but having that documentation could reduce your tax bill.

]]> By: Mark http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/comment-page-1/#comment-260349 Mark Fri, 28 Mar 2008 11:51:06 +0000 http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/#comment-260349 Ya'll are incredible! The cc is 8% and the amount is right at $12k. The balance transfer option is a great idea...but I only keep two cards and the other is paid off monthly. My goal was to keep the house repairs separated so that there wouldn't be any confusion later on as to who paid for what. Mom only has her SS for income and the current plan is for her to live in her own house until old age or medical factors intervene. I make sure she stays well above water, just it is not from the deck of the Big Red Boat! :) After reading through the advice - I definitely need to find out about the Medicare and estate impact. I will also consider purchasing the house - but have some concerns about taking on the additional debt load. Sometimes renters do bad things....like not pay the rent. My healthy dose of paranoia starts with: If everything went to hell in a handbasket... Ya’ll are incredible!
The cc is 8% and the amount is right at $12k. The balance transfer option is a great idea…but I only keep two cards and the other is paid off monthly. My goal was to keep the house repairs separated so that there wouldn’t be any confusion later on as to who paid for what. Mom only has her SS for income and the current plan is for her to live in her own house until old age or medical factors intervene. I make sure she stays well above water, just it is not from the deck of the Big Red Boat! :)

After reading through the advice – I definitely need to find out about the Medicare and estate impact. I will also consider purchasing the house – but have some concerns about taking on the additional debt load. Sometimes renters do bad things….like not pay the rent.

My healthy dose of paranoia starts with: If everything went to hell in a handbasket…

]]> By: Moneymonk http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/comment-page-1/#comment-259987 Moneymonk Thu, 27 Mar 2008 18:14:29 +0000 http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/#comment-259987 Just pay off the credit cards regardless of the interest. All this borrowing from Peter to pay Paul is crazy Just pay off the credit cards regardless of the interest.
All this borrowing from Peter to pay Paul is crazy

]]> By: TXAG03 http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/comment-page-1/#comment-259904 TXAG03 Thu, 27 Mar 2008 14:09:51 +0000 http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/#comment-259904 While we don't have enough information to fully answer the gentleman's questions, I think it is important to look at how to analyze this situation. First, the fact that the investments in the 401(k) (important: a 401(k) itself does not have a return, only the investments inside of it) returned -8% does not factor into our decision. It's in the past, and there are no guarantee's which way the market is headed. Second, JLP would be better at determining the tax implications of you using the proceeds from your MOTHER'S house for your catch up contributions. Here are the assumptions i draw from that statement. 1) 10% maxes out your $15k 401k allowance, otherwise we wouldn't be talking about catch-up contributions so you make around $150k+ 2) Mom is elderly and money is tight, since you are selling her house and she is not paying for repairs, be careful you're not violating some Medicare provisions or messing up estate tax and basis step up provisions. Why do you have to pay the credit card off right now??? Make at least the minimums, look for balance transfer offers, or even a HELOC and knock it out after the house sells. Otherwise you are giving up the tax benefits now, tax deferral, and potential growth by reducing your contributions. Here's the formula you should use: Principle on loan * interest rate = interest payment (you loose this per year keeping the card) Salary * (10%-4%) * marginal tax rate = tax refund given up tax refund given up + interest on loan while you pay it down = you loose paying off the card. Whichever is lower will give you your answer on what to do. I assume you were going to make the catchup contributions without the house sell anyway, so it gets tossed out. While we don’t have enough information to fully answer the gentleman’s questions, I think it is important to look at how to analyze this situation.
First, the fact that the investments in the 401(k) (important: a 401(k) itself does not have a return, only the investments inside of it) returned -8% does not factor into our decision. It’s in the past, and there are no guarantee’s which way the market is headed. Second, JLP would be better at determining the tax implications of you using the proceeds from your MOTHER’S house for your catch up contributions. Here are the assumptions i draw from that statement. 1) 10% maxes out your $15k 401k allowance, otherwise we wouldn’t be talking about catch-up contributions so you make around $150k+ 2) Mom is elderly and money is tight, since you are selling her house and she is not paying for repairs, be careful you’re not violating some Medicare provisions or messing up estate tax and basis step up provisions.
Why do you have to pay the credit card off right now??? Make at least the minimums, look for balance transfer offers, or even a HELOC and knock it out after the house sells. Otherwise you are giving up the tax benefits now, tax deferral, and potential growth by reducing your contributions. Here’s the formula you should use:
Principle on loan * interest rate = interest payment (you loose this per year keeping the card)
Salary * (10%-4%) * marginal tax rate = tax refund given up
tax refund given up + interest on loan while you pay it down = you loose paying off the card.
Whichever is lower will give you your answer on what to do. I assume you were going to make the catchup contributions without the house sell anyway, so it gets tossed out.

]]> By: Jeremy http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/comment-page-1/#comment-259613 Jeremy Thu, 27 Mar 2008 00:53:46 +0000 http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/#comment-259613 This reader is at least on the right track, and I meet with people almost every week with very similar questions. Reducing it by 6% while still getting a full match on the first 4% is a great start. Since he isn't even considering going below the match, I see nothing wrong with that aspect of it. The real question is, like you pointed out, is how much the debt is, and at what interest rate. This could affect how beneficial this strategy is. Also, how much would that extra 6% be to apply towards the debt? Enough to pay it off in 5 years? 3 years? 1 year? But the way I see it, since he's still contributing 4% and it is getting matched, he's getting a 100% return on that money while it is still being invested, keeping his DCA alive and buying in at these low prices. Then if the credit cards are anything over about 15% and the 401k contribution reduction could knock this out in about 2 years or less, this is pretty much a solid solution. But again, without every detail, it is hard to say for certain, but his plan is a lot better than what I see a lot of people come in with. This reader is at least on the right track, and I meet with people almost every week with very similar questions. Reducing it by 6% while still getting a full match on the first 4% is a great start. Since he isn’t even considering going below the match, I see nothing wrong with that aspect of it.

The real question is, like you pointed out, is how much the debt is, and at what interest rate. This could affect how beneficial this strategy is. Also, how much would that extra 6% be to apply towards the debt? Enough to pay it off in 5 years? 3 years? 1 year?

But the way I see it, since he’s still contributing 4% and it is getting matched, he’s getting a 100% return on that money while it is still being invested, keeping his DCA alive and buying in at these low prices. Then if the credit cards are anything over about 15% and the 401k contribution reduction could knock this out in about 2 years or less, this is pretty much a solid solution.

But again, without every detail, it is hard to say for certain, but his plan is a lot better than what I see a lot of people come in with.

]]> By: Independent George http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/comment-page-1/#comment-259543 Independent George Wed, 26 Mar 2008 20:20:27 +0000 http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/#comment-259543 Depending on the size of the CC balance and his credit history, I'd start with the 0% balance transfer game before reducing the 401k contribution, then pay off the remaining balance, then put the extra income into a dedicated savings account to cover the debt. Depending on the size of the CC balance and his credit history, I’d start with the 0% balance transfer game before reducing the 401k contribution, then pay off the remaining balance, then put the extra income into a dedicated savings account to cover the debt.

]]> By: No Debt Plan http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/comment-page-1/#comment-259536 No Debt Plan Wed, 26 Mar 2008 19:55:10 +0000 http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/#comment-259536 Agree that there aren't enough details, but sounds like a decent plan. I do wonder how fast an extra 6% of that income (minus taxes) is going to increase the credit card repayment. I would look into other methods as well -- earning extra income, or cutting expenses. Agree that there aren’t enough details, but sounds like a decent plan. I do wonder how fast an extra 6% of that income (minus taxes) is going to increase the credit card repayment. I would look into other methods as well — earning extra income, or cutting expenses.

]]> By: AJC @ 7million7years http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/comment-page-1/#comment-259531 AJC @ 7million7years Wed, 26 Mar 2008 19:19:46 +0000 http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/#comment-259531 If he has 10+ years left until retirement (65? I just retired at 49) then I am not a fan of investing inside a 401k - other than for company match. By all means pay off c/card, although I would be much more tempted to buy the house from Mom ... will she carry-back financing? If not, roll in the c/card and refinance the whole shebang and lock in until your expected death-date. Rent out, cover any shortfall with the other 6% of your contributions and whatever else you can scrape up and you just may end up with a nice source of retirement income, in addition to your 401k. If he has 10+ years left until retirement (65? I just retired at 49) then I am not a fan of investing inside a 401k – other than for company match.

By all means pay off c/card, although I would be much more tempted to buy the house from Mom … will she carry-back financing? If not, roll in the c/card and refinance the whole shebang and lock in until your expected death-date.

Rent out, cover any shortfall with the other 6% of your contributions and whatever else you can scrape up and you just may end up with a nice source of retirement income, in addition to your 401k.

]]> By: Roman http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/comment-page-1/#comment-259524 Roman Wed, 26 Mar 2008 19:08:05 +0000 http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/#comment-259524 It makes sense to a point. But will 2% be enough to over the cc? Will he also be missing a opportunity to invest in a lower price and watching his 401k rise? Will the house be sold? There are too many unknown factors that can make or break everything. It makes sense to a point. But will 2% be enough to over the cc? Will he also be missing a opportunity to invest in a lower price and watching his 401k rise? Will the house be sold? There are too many unknown factors that can make or break everything.

]]> By: Zulu http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/comment-page-1/#comment-259522 Zulu Wed, 26 Mar 2008 19:05:35 +0000 http://allfinancialmatters.com/2008/03/26/advice-for-a-reader-what-would-you-do-in-this-situation/#comment-259522 The balance and rate of the CC would be nice to know, but unless incredibly awful wouldn't change my approach. His new plan sounds pretty good to me. Further, I can't really see a compelling argument for the 401k loan approach. I'd use that as a last resort. The very fact that he can consider just reducing his 401k contributions tells me he is not likely in dire straits. The balance and rate of the CC would be nice to know, but unless incredibly awful wouldn’t change my approach.

His new plan sounds pretty good to me. Further, I can’t really see a compelling argument for the 401k loan approach. I’d use that as a last resort. The very fact that he can consider just reducing his 401k contributions tells me he is not likely in dire straits.

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