No BS Finance

CNN Money explores 6 money dilemmas and attempts to solve them. Let’s take a look and see…

1. Pay off a credit card OR fund your 401(k)

CNN Money: pay down the credit card

Me: pay down the credit card

2. Save in a Roth 401(k) OR a regular 401(k)

CNN Money: Roth 401(k)

Me: Does anybody really have this as an option? CNN says about 25% do. Until more do, I don’t have an opinion on them.

3. Lease a car OR buy a car

CNN Money: buy

Me: Want a car payment forever? Then lease. Otherwise, buying is the way to go.

4. Prepay your mortgage OR invest

CNN Money: Invest

Me: Prepay your mortgage if you have a variable-rate mortgage, but don’t dump all your money into the house. CNN Money hits the nail on the head that you need some flexibility to cover unanticipated needs and problems.

5. Buy a home OR rent a home

CNN Money: Buy

Me: Buy, if you can realistically afford it

6. Take Social Security early OR late

CNN Money: Late

Me: Late - wait as long as possible to maximize your monthly check

Overall the full answers from CNN Money are great.

For further looks, see the posts over at Free Money Finance breaking these down in more detail.

I’m not in the market for a financial advisor. If I were, I would hope I would be able to tell the difference between a good one and a bad one. Here’s one situation that would cause me to find another candidate…

The husband of one of my wife’s friends is a financial advisor. Seeing as though sales is a part of the job, I didn’t mind when she asked if her husband could call. I talked to him for a few minutes and politely let him know I didn’t require any additional help in managing my savings and investments. He understood. So far, so good.

It turns out that knowing what I know now, I wouldn’t let him anywhere near my money anyway. I’m a firm believer that the way you run your personal life is indicative of how you are in professional situations. In this case, his personal finances are handled much more riskily that I would want.

How? An Option ARM.  That is where you get to choose how much to pay on your mortgage each month.  You could make a payment like it was a 15-year mortgage (great!), a 30-year mortgage (fine), interest only (uh-oh), or a minimal payment that causes the amount owed on the loan to actually increase (yikes!).

These loans may have some usefulness, although I’m not a believer. Some situations where income is seasonal or otherwise unpredictable may call for this type of mortgage. The problem comes in when the lower payment options are used to buy a house you can’t afford.

Anyhow, those situations aren’t in play here. They are paying a premium interest rate since you don’t get this Option “flexibility” for free. They could afford a regular mortgage. Instead he is investing the difference between his “minimum” payment and a regular payment trying to beat the mortgage rate.

In effect, he is betting his home that he is somehow smart enough to pocket some extra money.  Given the track record of professional money managers (being unable to beat the market consistently over time), this is a bet I would never be willing to take, given the stakes.

And that is how you can prove to me that you shouldn’t be handling my money.

I moved to the Twin Cities last year for a temporary assignment. Since the job was scheduled to last three years before I would return to our corporate office, we decided to minimize the interest rate on the mortgage for our new home. Given that housing is significantly more expensive here, it made perfect sense. I’ve never been a fan of adjustable-rate mortgages (ARMs), but it seemed like a no-brainer for our situation. So, we took a mortgage that adjusted annually after three years.

All is well…until I accepted a permanent placement at this location. Now the ARM doesn’t look like such a great deal, given the rise in interest rates this past year.

Of course, a lot can happen in the next two years. Interest rates could fall again and the impact wouldn’t be so great. However, fixed rates in 2 years may be significantly higher than a year ago. That will sting if we decide to refinance.

The moral of the story: sometimes you can get too cute trying to maximize every dollar in the short-term and have it cost you down the road. Things change, so stick with what’s simple and comparitively safe, given your level of risk aversion, of course.

Why do I get to be on a high horse and “tell” people how to handle their financial lives? What makes me qualified?

It would be disingenuous to say I’m smarter or an expert. What I really want is to share my experiences, so you can either not make the same mistakes I made, or fix them quicker and with less stress.

Eight years ago I was wrapping up grad school (MBA) with $15,000 of credit card debt, $30,000 in student loans from grad school, and still owed $5,000 for my undergrad loans. I needed a car so took on a $12,000 loan for a Plymouth Neon that my dad had to cosign for me. I did have a job…one that paid significantly less than average for an MBA student. I was freshly divorced and spent money for solace - money I obviously didn’t have. My last quarter of school started with the Financial Aid office contacting me to let me know that they had overloaned me money and I had to pay $1,500 back immediately, plus not receive any money for the final quarter. I had to borrow money from my parents. Bleak, all things considered.

Now the good news - I loved my job-to-be. I took it, not for the money (obviously), but for the people I met while interviewing. They were all so genuinely excited about coming to work everyday that it was contagious. Enjoy what you do and enjoy the people you do it with - the money will take care of itself. I still work for the same company and still love being here.

More good news - I righted myself from my self-destructive behavior. I put a solid budget in place, including some for “fun” each month. Since this was going to be a long-haul fix, I didn’t want to jeopardize everything by being too strict and falling jumping off the wagon because of it. I maxed out my employer’s match on our 401(k) plan. Every extra penny went straight to the credit cards or paying back my parents for the loan. After a couple of years, things were looking up - the credit card balances were almost eradicated and my habits had been changed for the better.

I got lucky and met Mo, whom I ended up marrying. She showed me I was still a babe as far as being frugal. I still am, compared to her. She helped me squeeze even more out of each paycheck.

I borrowed money from my brother at a lower rate than I was paying for the undergrad loan and credit cards. His $8,000 got paid back in less than a year. Despite the old maxim not to lend or borrow money from family and friends, I’ve had good experiences borrowing from family twice. I believe it’s okay as long as it’s undertaken seriously (i.e. it isn’t free money), you treat them as good or better than you would other creditors, and you pay them back on as accelerated a schedule as possible.

I kept the car loan for five full years since the interest rate was 1.9% and we had an emergency fund earning more than that in mutual funds. The graduate school loan that initially had a 25-year payment schedule was paid off in seven. Now the only debt we carry is our mortgage.

It’s been a slow, long process - one I never care to repeat. That’s why I exhort people to not take on the debt in the first place, or, if they have it, to discharge it as quickly as possible.