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February 2008 - Posts - The Dollar Stretcher
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The Dollar Stretcher blog will explore people and money.

February 2008 - Posts

  • What? Me Worry?

    Back when I was growing up Mad magazine was a favorite of kids. (maybe it still is). They had many regular features, but the best known was a character named Alfred E. Neuman. He wandered through life ignoring danger. And he introduced a whole generation of kids to the phrase "What, Me worry?"

    Fast forward to 2008. I recently received the following email:  

    I am trying to help my nephew, who wants to buy his first house at the age of 51.  He wants a $300,000 house, mortgaged for 20 years.  But he and his wife declared bankruptcy (credit card debt) a few years ago, and though he is at the end of paying off his debit, he finds it hard to get a good mortgage deal.  His best bet, I think, is to pay at least 20% down.  But he has only $29,000 (an interest-free loan from me).  Shouldn't he borrow from his 401K the rest of the 20% needed (they do have $31,000 in their 401K accounts)?  Suppose he saves one-half a percent?  Would that be worth it?  (I do not know the details of the 401Ks, but let us assume some "typical" case.)
    Thank you,
    Edward

    Edward was responding to an article I had written about how to evaluate 401k loans. Let me first compliment him on his generosity and willingness to help his nephew. But, if we step back and look at the situation we might find Mr. Neuman's handiwork.

    Let's begin with the facts that Edward includes in his email. His nephew is 51 and got in enough credit card debt to declare bankruptcy. We don't know whether it was a job loss or medical issue that caused the credit card debt. But, it could be possible that Nephew is a little too quick to pull out the plastic when he sees something he wants. Edward needs to make sure that's not the case. If that is what caused the problem Nephew will probably not be able to keep the house even with his uncle's help. Sooner or later the credit card bills will begin to conflict with the mortgage. And some of the bills just won't get paid.

    Ed is right. Finding a good deal on a mortgage will be hard. That's because lenders know that people who have had debt problems before are more likely than average to have them again. And, yes, a larger down payment will tend to keep the interest rate down But, look at where that down payment comes from. $29,000 comes from an interest free loan from Uncle Ed. (for the record, most mortgage loan agreements require you to disclose if you've borrowed or been given any part of the down payment. It could be illegal to fail to disclose the interest free loan)

    The other portion would come from borrowing money from Newphew and his wife's 401k plans. Ed is concerned with the amount of interest that his nephew could save through the lower rate available in his 401k plan. Normally, I'd encourage that type of thinking. But, there are a couple of risks in using a 401k loan that could be much bigger than saving some interest.

    Most 401k loans require a fairly short payback period. Nothing like the 20 or 30 years for most mortgages. So if you combine the mortgage payment and 401k loan payment, the earliest years of the mortgage will have the highest payments. That could be a problem.

    Also, many 401k loans require that you pay them back completely if you leave your job. Even if it's not your choice to leave your job (read lay off or fired). That would put Nephew in a real bind. No income and a need to pay back up to $31,000 right now. Unless he has some other assets available (unlikely), he'll probably try to take a second mortgage against the house to repay the 401k loan. Finding a 2nd mortgage on his home could prove difficult. If not impossible. The only other options? Go to Uncle Ed for a second loan or let the 401k loan default. I have no way of knowing how a second Uncle Ed loan would work out. But, failure to repay the 401k loan means paying a penalty and income taxes on the unpaid balance of the loan. All of it. And, it also means that a bunch of Nephew's retirement money is gone forever.

    So maybe buying this house isn't such a good idea. There might be a better option. Rent for a few years. Soon they'll be through repaying debt. Once that happens they can take the money that had been going to debt and begin saving up a down payment for the home. In a few years their credit score will improve. That will lower the interest rate on their mortgage (which will save them even more money). And, they'll also have some time to consider what they really need in a home. $300,000 buys a lot of house in most parts of the country. Something a little more modest might be in order.

    Is it possible for Nephew to borrow money from his uncle, his 401k, buy this house and live happily ever after? Of course! But, with sub-prime mortgages defaulting all over the place you'd have to be Alfred E. Neuman to say "What, me worry?"  

    Keep on stretching those dollars!

    Gary

  • Real Simple

    I think that those of us who are into frugal living are blessed with a lot of fine resources. Among them is a magazine and website called "Real Simple." Their main focus is on simple living (with a modern interpretation). They had contacted me about an article they were working on awhile back. Just published it the other day. You can find it here 

    The concept of simple living seems a little strange. Especially when we discuss it in a blog wired to the net. I'm sure that it doesn't mean the same thing that it did years ago. Back then living simply meant a return to a less mechanized, more rural life. Supporters tended to be self-reliant. The live off of the land types.

    But like so many things you don't have to go all the way to benefit from the concept. You don't have to leave civilization behind to simplify your life. Depending on your lifestyle it could be something as simple as getting rid of some of the clutter in your home. I suspect that if we did more of that there would be fewer people looking for bigger homes (did you know that the average home is about 50% bigger than it was 30 years ago?).

    It might be time for you to simplify your finances. I don't know the statistics, but I bet a lot of people have more than one IRA. That's ok if there's a specific investment reason for each one. But if they're both doing the same thing it would be simpler to only have to monitor one of them.

    I remember watching westerns on TV. Occasionally you'd see one that included a wagon train heading west. Often, if they ran into trouble, they'd leave behind the things that they felt that they could live without. Sometimes those things had traveled with them for many, many difficult miles. It must have been hard to do that. 

    It could be that our lives are a little like that wagon train. Look around your world and see if there aren't some things that are not adding anything to your life. If you find something like that it's time to give serious consideration to leaving it behind. Even if it's been part of your life for years.

    In case you'd like to find out more about the simple living lifestyle you might like to check out an email newsletter called Simple Times A good friend of ours, Debi Taylor-Hough, has been sharing great ideas with her readers for years. Might be a good way to get a start on a simple, more fulfilling life.

    Keep on stretching those dollars (and other resources!)

    Gary

  • The Refrigerator Test

    I was invited to a friend's surprise birthday party this weekend. Had a great time. Good friends and good food. Can't ask for much more than that! But I noticed something during the afternoon/evening. This friend often hosts an 'open house'. They'll throw on a big batch of food, people will bring more and everyone has a great time.  It's the kind of place where you just know it's ok to head for the refrigerator if you need something. No need to ask first. 

    It occurred to me that demonstrated a lot of financial freedom. To paraphrase past wisdom - "you can measure how rich a person is by how little he needs" - i.e. the richest person isn't the person who HAS everything - it's the person who NEEDS nothing.

    Refrigerators are an interesting thing. If you come over to my house you can be pretty sure that I'll ask if you'd like something to drink. But I'll be the one to get it for you. Refrigerators are kind of a private thing. You don't need to know that I've got some cheese curds tucked away in a corner that I'm reluctant to share with anyone. And, that's the problem. At that point I don't really own the cheese curds, they own me. (ouch!) 

    Guess I still have some growing to do. But that's ok. At least I know what direction I'm headed and have some idea on how to get there!

    Keep on stretchin' those dollars!

    Gary 

     

  • On the Road Again (with apologies to Willie Nelson)

     Just finished an overnight road trip with a friend of mine. Saw something that I'm still not sure what to make of it. Somewhere along I-75 just south of the Florida/Georgia border is a truck stop with an amazing store attached to it. I doubt that it's unique. I just don't get on the interstate for long drives that often. Unfortunately I don't even remember the name or what exit (I was just waking up from a 2am snooze when my partner pulled in). 

    The truck stops I remember were glorified convenience stores. But this was like a small shopping center rolled into one store. Along with the regular items, they had everything from 'Betty Boop' pieces to a case with a variety of hunting and ornamental knives. Oh, and the case with blown glass items. And then there were all the native American Indian rugs. Not to mention the junk metal artwork. Truly a unique store.

    I'm used to looking at things through the eyes of a consumer. But, even 6 hours (and a lot of black coffee) later, I still don't know what the store represents. I really would have liked to see it in the middle of the day when the roads were jammed with tourists. Now that I think about it, it probably looks a lot like any shopping center or mall in the country. Some folks buying necessities (food, clothing). Some buying things that they forgot to buy earlier (a present for Aunt Mary, a pair of sunglasses). Others are buying because something caught their eye (stained glass cowboy anyone?). And, still others aren't buying at all, just looking out of curiosity.

    One thing is certain. We sure do have a variety of stuff available to us. No matter where we might be. Truly amazing. And, while that's good in a lot of different ways, it's also dangerous. Let's face it. When we're buying something at a truck stop we're buying it because we need it right now. Convenience is more important than selection, quality or price. (just for the record, the shop we found appeared to be stocked with quality items at a reasonable price, but I bet that's not true in every similar store) We all know that buying in a hurry is a good way to set ourselves up for regret later. 

    Keep on stretching those dollars!

    Gary 

     

  • Am I a Victim?

    Just the other day I was reading an article about politics. Part of the article talked about how some people more easily accept victim status. I don't know how true it is in the political world. But, I do know that it's true in the financial world. Some people look at themselves as financial victims. They feel that they have no control over their financial future. That it's all under someone else's control. And, that there's nothing they can do to change it. Fortunately, most Dollar Stretchers know that they don't have to play the victim. They can take control of their circumstances and put themselves in a position where they'll control their financial destiny.

    It hurts to see people victimized. Take, for instance, our friends who have a variable mortgage that just jumped. They can't afford the payment and the current market makes it very hard to sell the house. Right now they're victims. Certainly it's not their fault that the housing market is down for the first time in recent memory. They assumed that they could refinance when they got to this point. At least that's what they were told when they bought the house.

    It could have been different if they had been regular Dollar Stretcher readers. They would have read the warnings from Greg McBride of Bankrate www.bankrate.com/dls about interest only and variable mortgages. They would have known exactly the dangers they faced. They would have read numerous articles on how to calculate how much house you can afford. It could have been different.

    Please understand that this is not a backhanded way of saying "I told you so". It is a way of saying that in many cases you don't have to be a victim unless you choose to be. You have the right to know what could happen with a mortgage. Or a car payment. Or a credit card payment. You have the information available to you to help you make an informed decision (we publish much of it right here). You have the ability to understand the information. You have the ability to make decisions that will keep you from being a victim later. And, that's the key. You can take steps now to prevent you from being a victim later.

    Are there some situations that are outside of your control? Sure! Some things happen to us that there's no way to predict or protect ourselves from. In those cases we are indeed victims. But, we encourage you to take control of as many financial situations as you can. Some will require a little effort on your part. Others will require you to put off a purchase or buy something less expensive that what you originally planned.

    So refuse to be a victim. Don't let anyone take control of your financial life. Even if you can't control everything that could happen in the future, Choose to take control of the events that you can. You'll find that it pays big dividends in the future!

    Keep on stretching those dollars!

    Gary

     

     

     

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Gary is a former financial planner and purchasing manager who edits The Dollar Stretcher website <www.stretcher.com> and newsletters. You can follow Gary on Twitter.com/gary_foreman
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