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Financial Questions from Our Visitors - Page 7

The examples below are from some of the visitors to Free Financial Advice. The questions below mostly represent word for word the questions asked by the visitors (sometimes including bad punctuation and spelling), but occasionally the questions will be edited on this page. And even though these people have shared their personal finances with Free Financial Advice, we have stripped out any names or other personal information to protect their identity. If you see one of your questions on this page and it makes you uncomfortable, please contact us and we will remove it immediately. Also, please note that any advice or suggestions made from this site are only suggestions and should not be deemed as professional, legal advice. Please see our disclaimer for more information. I apologize for continually mentioning our disclaimer, but this is a very litigious world that we live in.

Question:

I am 18 years old, and about to start college. I cashed in some bonds about a month ago that were way past mature and ended up with $1500; not exactly a large amount, I know, but more money than I've ever had before. I took $400 and put it in my checking account, to help cover living expenses and emergencies while I'm away from home. Then I took 1100 and bought a 3-5 month "bond"- I think they call it a certificate- at 2.5% interest. I know that's not too great either, but it was the best I could do. In my new job I will be making $600 a week. My food and housing is paid for by my tuition (which my parents are taking care of, thank God). My question is this: how much of my monthly income should I save, and what kind of investments should I make with my savings? I'd like to start good investing habits now, while I'm young, so that I can benefit later in life. Please help!

Follow on question:

I forgot to mention a few pertinent facts... I have a credit card for emergencies only. It has a $500 limit and a 13.9% interest rate. My mom suggested that I use it to buy small things and pay it off right away, before the interest is charged, in order to establish good credit. This sounds fine to me.

Also, I own my own car and computer outright. My car is a 2000 model, bought used last year (it had been a rental car). It is in excellent condition, and should last me at least 10 years. My car insurance is part of my parents' plan, and they pay for it (man, I'm a lucky kid). My computer is also brand-new and top-of-the-line, likely to last me at least six or seven years.

I was able to buy these outright because my grandfather set up a trust for me when I was born containing $14,000. Unfortunately, no one bothered to tell me about it, and my mom spent all of the money. She didn't spend it badly, really... About half of it went to the new house she just built, and the rest of it bought my computer and my car. I thought at the time that my mom had just saved up money in order to buy me these things. My dad told me about the trust after the money was spent. I don't know if I would have spent the money that way, but there's nothing I can do about it now... You probably didn't need to know all that.

Once again, thank you so much. I realize that I'm very lucky in that my parents are willing to help support me even though I'm 18 and in school, but I'd like to take steps to ensure my future financial strength/independence/success.

Response:

I’m impressed with your motivation and drive to become financially independent, especially at such a young age. You remind me a lot of myself, as I have always been driven to get ahead by making smart financial decisions. As long as you don’t get distracted from these goals I’m sure that you’ll find it rather easy to amass a lot of net worth over the years. And judging by the information in your email, you don’t really need much financial advice. However, here is the advice I do have, most of it is college-related:

Finish school in four years. It will save you lots of money, show your commitment to future employers and give you a full year of extra earnings to save and invest (versus spending five years in school).

The best way for you to become financially independent (since it sounds like that is one of your goals) is to get a job that will pay for all of your expenses. This will help keep you out of debt during college, which will give you a HUGE advantage over many of your peers when you graduate. Instead of paying off $10,000-30,000 in student loans after you graduate, you will in effect be able to invest the money you’d be paying in loans, and thereby get a quick start to your investment portfolio. By the way, don’t ever let your job interfere with your grades.

Take a few finance and economics courses. Regardless of your major, the most important thing I ever learned in college came from these courses. Learn how the economy works, how money circulates, the time value of money, and most importantly, supply and demand and how they change everything! The intro courses should be enough to get your mind in the right gear.

Regarding the credit card comment your Mom made: I agree that it is also important for you to establish your credit as quickly as possible. It is a good idea to sporadically use your credit card and then to pay it off in full as soon as possible. Your credit will be improved in two ways: 1) As soon as you use your credit card you will begin establishing your credit – the longer period of time in which you’ve had credit (and not abused it) will help your credit. 2) The amount of money you spend at one time will also influence your credit. For example, if you spent $500 on your credit card and then paid it off, your credit report would show that you had a maximum balance of $500 (and that the current balance is $0). This helps your credit by showing creditors that you have the ability to pay off large amounts of debt. Don’t ever lose control of your credit card debt!

Have fun! Don’t worry about trying to save and invest money while you are in school. If you can, great. But if you can just get through school without being in debt, that is the same as saving money. Enjoy your time in school. One of the most important financial impacts to your life will be the extra earnings power that a college degree offers, so focus on school, spend your money on beer and fun, and when it’s time to graduate, then put together your financial budget and savings plan.

Best of luck and keep on the right track,

Question:

CASH FLOW PROBLEMS

We are in need of some financial advice. My husband (who is disabled) and I have a total monthly net income of $4,393.00. Our bills total per month $3,896.00 leaving $497.00 a month for all the other expenses (food, gas for two vehicles, co-payment for medical expenses, and any and all other incidentals that might come up.) We own our home and still have a balance of $103,000. Our payment is $1,554 per month - this includes taxes and home insurance. Our house is probably valued around $225-250k. We have vehicles that are leased and we would like to keep them when the lease is up (both in about one year) we will have to finance the remaining money due on them about $26,000 (but, this should equal out to what we are paying on the leases now). The bottom line is we need more cash flow per month. I contribute to my 401k about $75.00 per week and have about $11k. We have no other savings. My husband’s credit report is excellent and mine is good to excellent. We owe 2 credit card bills both at low percentage rates 8.9% and 9.9% a total outstanding $14k. We have an equity line of credit $40k which we do not use because the interest rate is so high approximately 20.99% (we have not closed this account out because there is a penalty – so we just keep it open and will close it next October, 2003). Is this going to hurt us if we decide to refinance – will it show that we have too much credit out. Help, how do we free up some cash?

Please email me back with your advice as soon as possible, thanking you in advance for your help.

Response:

The best ways I can think of to increase your cash flow, assuming you can’t increase your monthly income, is to lower your monthly expenses. The most effective way to do this is to refinance your mortgage at a lower interest rate or for a longer period of time. The second most effective way to do this would be to eliminate (pay off) your credit card debt. Perhaps it is possible for you to consolidate your credit card debt into a new mortgage or home equity loan. This could substantially cut the amount of your total payments.

I have several loan companies listed on my site that could help you find a low interest rate loan that would help increase your cash flow. They can be found at the following location:

http://www.free-financial-advice.net/loans.html

If this option doesn’t work for you, you should still be able to find a lower interest rate credit card, as many credit cards are offering 2.9% financing on balance transfers until they are paid in full. In addition to those techniques, you can also lower your expenses by cutting out payments on non-essential items or just by saving money in general. For example, by driving a used car that you have paid for, you no longer have to make a large car payment. Also, eliminating such mundane things as HBO and Cinemax from your cable / satellite bill can help. I have an entire page of tips on how to save money at the following location:

http://www.free-financial-advice.net/save-money.html

Best of luck,

Question:

Question for you and by the way the site is great and very helpful (wide array of questions and scenarios presented, etc).

I've seen from your site that if I have no other high interest debts it would make sense to make additional payments on my mortgage. I've been doing this but noted that if I pay an extra 1,000$ per month only ~699$ of that is actually applied as principal (is there any way to avoid this situation when obtaining a loan?). As per the loan calculator an extra payment of 1k per month would reduce my interest payments by 17,583$ for the remainder of the loan. My interest rate is 6.875%, which when reduced for tax deductions is most likely below 4%. Although, I'm a fanatic about paying of loans diligently it seems like I might do better to invest the money when all factors are considered. Second part of the question is I have two loans at the same interest rate. One loan is much larger than the other though (170k vs 50k and 30 years vs 15 years). Does it make sense to pay off each equally or would I do better to focus all efforts on the higher value loan with tax deductions, etc considered? I've heard that only two properties can be utilized as tax deductions. Would it make sense to pay off the lower loan if I plan to purchase an additional investment property in the near future (i.e. would again only have two loans both which could be used for tax deductions)?

Thanks for any advice you may be able to provide and thanks again for offering this great service.

Response:

First, the question about your mortgage provider and why they are only crediting you $699 on principal instead of the full $1,000. My guess is that they are treating your $1000 payment as next month's payment rather than applying it directly to principal. If this is the case, then you may want to change the way you pay the extra $1,000 per month. Try writing a separate check and putting a note with it saying "please apply to principal". Unless you have some type of prepayment penalty, I don't think there is anything your mortgage company could do but credit the $1,000 to principal. I could be wrong though, as I've seen some pretty weird clauses in some mortgage contracts.

Second question was whether it makes sense to invest the money rather than to pay down your debt. In my opinion, it is much better to invest the money rather than to pay down very low interest rate debt. Not only should you make more money investing than the 4% after tax interest rate you are paying, but it will also give you a liquidity fund if you run into a pinch and need money, or if you want to buy another investment property (it's always easier to buy property when you have cash - it also gives you an upperhand versus other buyers). Also, many people are backing away from investing their money right now (especially in the stock market). In my opinion, that makes it one of the best times ever to invest, especially if you invest a fixed sum each month. By investing a fixed sum each month it ensures that your investment is at an average price (rather than buying in all at once).

Your third question was rather or not you should pay off the loans equally or one faster than the other. In your case, I would look at the following factors: If there really is some kind of penalty for early payment on the loan referenced above, then it may make sense to pay the other loan off faster. Also, if one is at a higher interest rate, you should pay that loan off faster. If you want to reduce your future liabilities (payments), you could pay off the smaller loan quicker so that, when paid off, you will only have one loan payment left.

Your final question was rather or not you can get tax deductions for more than two loans. I could be wrong here, but I've never seen anything limiting the number of loans that you can use as tax deductions. As far as I know, you could own 20 investment properties and have 20 loans, all of which would be interest deductible on your tax forms. You may want to check in with your accountant on this issue.

Question:

I'm not sure if you answer detailed questions or not, if you can I appreciate it, if not, do you know who does?

Situation:

I earn 35k a year. I have 18k credit card debt at 6.99% for the life of the loan (I juggled). I have no other debts. My boyfriend and I have 100k for a house downpayment from inheritence. He earns 45k and has no debts. Houses in this area cost 250k-350k. My credit rating is 777. His is 670 (short credit history). I am making large monthly payments to pay down the credit card debt.

Questions:

Do I wait to apply for a mortgage until I've paid down some debt? Do I use some of the downpayment to pay off the debt before applying for a mortgage?

Do I apply for a mortgage first, then see how much of a downpayment I need before paying off credit cards? Do I move the credit debt into a nonrevolving loan (8.9% at my credit union)?

Response:

Here are my suggestions:

It would make sense to pay off the credit card debt instead of using it toward the house. Paying off the debt would lower your debt to loan ratio and would also save you money in interest. Currently, the 6.99% you pay is not tax deductible, but a new mortgage would be tax deductible, and at current rates would likely be at a lower interest rate.

However, you don't need to pay off your credit card debt to get a good loan. Nor do you have to wait until you pay it down further to apply for a loan. Having that much cash will make it easy for you to get a good loan. Therefore, if you do not pay off your credit card debt, and you have a fixed rate of 6.99%, I would not transfer it to a credit union loan at a higher interest rate. Credit card debt is no different than bank debt when applying for a loan.