Retirement Savings vs Paying Down Your Debt

Paying Off Debt, Retirement Investing, Credit Cards, Tax Planning No Comments »

I love to interact with my readers/subscribers. So don’t hesitate to send in a question and ask me to post about it. Personal Finance Resources is all about helping you with your home finance situations. In this post, we are going to address a few questions posed by one of you, on the topic of Retirement Savings vs Paying Down Your Debt. Here is the email communication:

“I happened to stumble upon your extremely valuable info while researching methods to pay off my credit cards. Don’t know if you’ll have time to answer my question, but here goes: I’m 28, have $20,000 cc debt (@ ~15%), and approx $50,000 in a Traditional IRA and Roth IRA accounts. Do I take the penalty and pay off the CC? I no longer have any need for CC now that I’m out of school, so I’m not worried about this situation reoccurring. Problem is, that compound interest down the road is just so tasty! I figure the future money to be gained is greater than the cc debt with interest, but I need to repair my 611 credit score so i can at least think about buying a house and getting a business loan within a reasonable period of time. Any suggestions?

I’ve been thinking about this one for some time now and your help is greatly appreciated. I am working and will be in the 25%, possibly 28% tax bracket, and have been paying $400 to $500 a month in credit card payments. I’m not sure what my penalties for early withdrawal would be, but if I can invest those $400/month into my accounts instead of losing it to the credit card companies, I think I will be able to compensate for the loss. As it stands now, I have not been able to, nor will be able to put any new funds towards my investments with these current credit card payments. What would be my total withdrawal (including penalties) if I were to pay off the credit cards completely, or would it be wiser to pay off 75% of the credit card debt and continue to pay smaller credit card payments while adding small amounts to my retirement funds? I figure there is a good cost/benefit ratio, but my extreme desire to purge myself of the credit card parasites has clouded my reasonable judgment. “

Possible Solution

The first, and from what I can deduce as the most important question posed here is whether or not to take a tax penalty and pay off the credit cards. If you read my post on Credit Card Secured by Roth IRA, you will notice that in addition to paying income tax on an IRA withdrawal, you will also likely be penalized with an additional 10% tax. So in this case, the total tax on a withdrawal might be as high as 38%. So, to be able to pay off the $20,000 owed to credit cards, a withdrawal of between $30,000 - $33,000 would have to be made. That would be the better part of the IRA account held.

The positive side of this equation is that the $400-500 a month spent in credit cards could be put into the retirement fund as an investment for the future. But it would take at least 4-5 years to replenish the money withdrawn from the retirement account.

The simple fact of the matter is, we need to put our money where it will earn us the most (or cost us the least). If it were not for the serious tax implication of early retirement withdrawal, it may be better to pay off the credit cards, depending on how great your return is on your investments. If it is less than the 15% being spent on credit card interest, than it would make sense.

The Personal Finance Resources Solution(s)

If possible, I would attempt to work out a secured or unsecured loan with my bank at a lower rate of interest. Try to get it down to 10% or less. If you had a house, this would be an excellent situation to use a Home Equity Line of Credit. If you are unable to obtain a consolidation loan, then use the debt stacking method to maximize your payments over the offending credit cards. Then I would stop any contributions to my retirement account, stop going out to eat, cut the cable TV off for several months, and put the maximum amount of money possible into paying off the debt.

With regard to repairing your credit score (611 should be enough to obtain an FHA loan for a house, by the way), credit card companies are mostly interested in a continuous stream of punctual payments. So paying off the cards now would help your credit score, but long term, you will build your credit better if you make some payments. I am not saying to make minimum payments, but make several months of large (as large as you can) payments to increase your credit score while getting the balance down.

I hope this solution was helpful. Consider signing up for my RSS feed so that you don’t miss out on any of the upcoming personal finance issues and solutions.

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There are quite a few adverse effects of cheap insurance. They might be a temporary debt help, but what is the use of such help that will in turn contribute to more debt piling. This consequently contributes to public debt. Turning to such resort is a common occurrence amongst people who work at home. True, that there are edges to best work at home, but ones oft left ignorant.


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The Decision to Retire Young

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It comes as a tragedy, I know. But I am finally going to go for my dream. I want to have time and money for the ministry of the gospel of Christ, and working a full time Just-Over-Broke will not allow me to do so. I have some steady income with rental properties, property management, a technical service contract, and a few websites, and am ready to step it up to the next level. I figure that I will have a short fall of somewhere around $500-1000 per month. I have some cash reserved, and can survive for at least a few months while trying to up my income.

I have always strove to own and operate my own business, or businesses. Multiple streams of income in different markets is a very attractive proposition. Lose one, you still have the others. I can remember as a young teen, I think I was maybe 15 or 16 years old, being introduced to the concept of your own business and the chance at financial freedom. It is time I try my hand. So on November 9th, 2007 I will end my job, and head out on my own.

I am an entrepreneur at heart, and welcome any ideas from the Personal Finance Resources user community. I know there are other real estate investors out there like me, and your ideas and opinions are invaluable. If there are any webmasters looking for a trade, a link, or any other type of deal, feel free to use the email link to the left and drop me a line.


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Renting Properties in a Buyer’s Market

Real Estate Investing, Buying a Home No Comments »

by guest author Nicholas

I have recently moved to a mid-size Arizona market. This market is rapidly starting to feel the down-turn in the housing market that Jeffry mentioned in his latest post on Smaller Texas Real Estate Markets Doing Well. The houses that are for sale are staying on the market longer and longer. I am planning on being in this area for 6-9 months before moving out of Arizona, so I will discuss two options that are available to me.

Renting

This is the easy choice. No money down, no homeowners insurance, and very few worries (other than making the monthly rent payment). Those are the benefits. You already know the downfall, throwing that cash away every month without gaining any equity. You also have to abide by any rules that the owner of the house decides to impose.

Buying

So I mention to most people that I am considering buying even though I am only going to be here for 6 months, and they are appalled. Why would you do that, especially in a slowing market for such a short time? The answer: Property Management Firms. So the situation would go like this, I would buy a house, live in it for the six months I am here, move out of state, and establish a contract with a property management firm.

These firms will show your house to perspective renters, do credit checks, ensure employment, conduct minor maintenance on the house, and collect the rent money each month. They typically charge 9% to 12% of the monthly check to manage your property. Most times, you as the owner even get to approve potential renters. Hold the property until the market goes back up and sell or just keep it as another potential source of income. This is just another possible way to invest in a buyer’s real estate market. Good luck!


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Smaller Texas Real Estate Markets Doing Well

Real Estate Investing 3 Comments »

I am in a small Texas real estate market, the cities of Belton and Temple. While some of the larger markets like Dallas, Houston, Austin and San Antonio are feeling the pain of the sub-prime mortgage market collapsing, here in Belton/Temple, it is still a seller’s market. Just last week, I wrote a lease on a small 3 bedroom, 2 bath doublewide mobile home on my terms. As I am a real estate investor though, I am being faced with difficult buy opportunities. There is only one house listed on HUD’s Bid Select website for Belton, TX. Unbelievable!

Large Real Estate Market Situation

So if you are looking to get into real estate investing, and you are in a larger market, now is the time to start buying. But I don’t recommend trying to flip properties, as these larger markets are just too much in favor of the buyer right now. Look for opportunities to buy and hold. Rent out the properties for a while and sell them later when the market gets better for the seller.

Small Real Estate Market Situation

If you are in a small market where the sub prime market hasn’t affected you much yet, be careful. This is a shaky time for selling, as I really see the next couple of years being great for buying and renting, but there just won’t be a lot of selling going on. The smaller markets will feel the effects of the sub prime collapse, we just haven’t felt them yet. If you are thinking of selling within the next couple of years, I would probably try to sell right now, before its gets bad.

Overall we have seen a shift in the market. People who really had no business buying a few years back are now on the street, trying to rent. So we have seen a sharp decline in the number of qualified buyers, with an increase in the number of renters available. When that happens, it becomes harder to sell properties and easier to buy, so the most profitable plan from a real estate investor’s point of view is going to be buy and hold. Just my humble opinion.


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Skip a Payment: Holiday, Gift, Marketing Breakdown

Paying Off Debt, Budgeting 2 Comments »

Many credit lenders (credit card companies, credit unions, banks and so on) offer “Skip-A-Payment” options for borrowers.  Every lender has its own terms and conditions (how many payments per year you can skip, what type of credit is included or excluded in the program, and the amount of fee charged for the privilege), but you typically can skip one payment per year for $10-$50.  Sounds like a great deal?  Well “Skip-a-Payment” can be good or bad – it depends.

Why They’re Bad

The way these services are sometimes marketed towards the financially foolish is disturbing.  The credit lender may send a happy sounding letter, or post on their website something like:

“Dear valued customer, It’s summertime, and X-Bank wants to say thank-you for your business by offering you a vacation from your bills!  That’s right, you can choose to skip this month’s payment on your current account listed above.   Upon receipt of your extension agreement we will waive your payment for this month and apply a $25 extension fee to next month’s invoice.   There’s no need to send any money at this time.  Just think of what you can do with the extra cash!”

 “Take a vacation from paying your bills” subtly sends the message “get out of your responsibility (because we all hate responsibility) – hey why not take a vacation with the money you save because you deserve it!”

Of course not everyone will use the money for a vacation, but many will believe they are getting a break, when really, they’re going to end up paying more than that $25 extension fee.

Meanwhile the credit lender gets a few quick bucks from the borrower that will NOT be applied to the outstanding balance.  The lender successfully extends the life of the loan by one month (at least) and earns even more interest on the money not paid that month.

Why They’re Not So Bad

Skip a payment services can also be beneficial IF they’re used for a good reason and not as an excuse not to suffer paying a bill:

1. Emergencies
There may be a month where you absolutely just CANNOT make a payment – maybe you’re in between jobs, had to take time off work for health reasons or needed emergency surgery for a loved pet.  These things happen. Skip-a-payment services can help you avoid a delinquent account.

2. Paying Off Higher Interest Debt
It makes sense if you have credit card debt (which is usually much higher interest than other loans) to take the money you would have applied to a mortgage or car loan at 5% - 10% and reduce your 18-29% credit card balance.

So next time you get that tempting offer to skip your credit card or loan payment consider the consequences against the benefits. If you don’t have any higher interest debt to which the “savings” could be applied, don’t be suckered into thinking your credit lender is doing you a favor.  If you are facing rough times, remember that you likely can actually miss a payment to avoid damaging your credit history.

Linda Bustos is an Editor for Creditorweb, where you can learn about credit cards, discuss personal finance in the credit forum, read reviews on credit card offers from multiple lenders and apply online for a credit card.


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Free Debt Problems Advice

Paying Off Debt No Comments »

Need free debt  problems advice? Keep reading as I will divulge to you the problems people have with regard to debt, and advice about solving the debt issue, all completely free of charge. The problem with debt boils down to 2 main issues - the first is that as children, we grow up in families that are debt ridden, spend way too much, and have no discipline with their personal finances. They expect to have it all, and have it all right now. Therefore, they spend money they do not have, in order to “keep up with the Jones’s” and fall further and further behind on their payments. This is a miserable life, as they cannot afford to lose their job at any time, or they could lose everything - house, car, and any other possessions that were purchased with debt. The second issue, is that credit cards and other debt vehicles are so easy to acquire, and loan companies are very generous in their upper limits of credit use (eg large maximum balances). So why do people keep falling into this trap?

  • Attitude Toward Debt
    The first issue I mentioned was child rearing. Children, on up to adulthood, are not taught the dangers of debt, and the problems surrounding too much debt. There is an attitude of apathy, and people say things like “Aww, just file for bankruptcy, you’ll be good to go in 7 years.” There is no sense of financial responsibility, thus bankruptcy continues to increase. We need to change our mindset to one of debt avoidance at all costs. We need to ask ourselves questions like “Do I really need that new car?” and ”Why pay $1 for a soda, when I can buy a 12 pack at the grocery store for $3.65?” Asking ourselves continual questions like these will help us to become frugal spenders.
  • Delay Gratification
    We need to deny our selfish impulses for the things that we want, at least for “”right now”", or early on in life when money is tight. Look to the future, invest young, and the end results will be staggering. Investing bears exponential growth over time, so just a couple of years of delay can cost hundreds of thousands of dollars later. Forget about the Jones’s, you’re likely not to catch them anyway. Stay focused, have a little patience, and you can get there.

These are the harsh truths about debt problems, and advice on how to fix them. We must re-train our minds with regard to debt, and stop following in the footsteps of our parents who know nothing about finance. When you get to a point that it stings to buy a happy meal at McDonald’s, you are on the track to financial freedom. Stay tuned for more great personal finance help and sign up for my RSS feed to get the latest updates on everything here at THE Personal Finance Blog.


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Financing Real Estate Investments

Real Estate Investing 5 Comments »

Many emerging and veteran real estate investors are looking for ways of financing real estate investments with little or no money down. The traditional cash down payment of 20% just doesn’t work for most buyers anymore, and sometimes (especially with banks shutting down the sub-prime loan market) a more creative method must be deduced to facilitate the transfer of real property. Further, even if real estate investors have the necessary cash, it is more beneficial for them to finance most of the balance than to fork over the cash, because it will allow them to buy into other properties with the left over monies. But let’s visit a few of the financing strategies used in some of today’s real estate investments:

  • Seller Carry Back
    This method incorporates a mortgage, typically 80% of the home’s value, and the seller takes back a second lien for anywhere from 5-20% of the balance, thus enabling the real estate investor to escape the death grip of PMI (private mortgage insurance) with the added bonus of not having to come up with a lot of money down.
  • Lease Option Agreement
    A lease option agreement allows a buyer to come up with a cash down payment, with a fixed term lease, and the option to buy at the end of the lease. The down payment would then be credited to the buyer at closing. If the buyer passes on the option to buy at the end of the lease agreement, they would forfeit the down payment.
  • Lease Purchase Agreement
    A lease purchase agreement is a more traditional “rent to own” concept. In this scenario, the lessee is allowed to credit a portion of the rent toward the down payment on the house. The lease has a fixed term, and at the end of the lease, the buyer has the option to buy at the agreed price. If the buyer passes, ownership and all rent is retained by the owner.
  • Loan Assumption
    This typically only works for FHA and VA loans. In today’s world, FHA and VA loan assumptions must be approved by the respective agencies. Loans that were issued before the cutoff date are still assumable without FHA or VA approval. This is a great way to get into a property with little or no money down.
  • Low Down Payment Mortgages
    With good to excellent credit, many mortgage lenders will still offer a loan for little or no money down, especially if you intend to live in the premises for awhile. If you go FHA or VA, this is a chance you can get into the property for 0-3% down. Most conventional mortgages will still require at least 5% down, but do some homework, you might find a no money down deal out there.
  • Home Equity Loan from Another House
    I was in this situation recently. There was a mobile home on a small piece of land that I was wanting to buy, and no lender was prepared to lend money on it unless I intended to occupy the property as my primary residence. I had enough equity in my current house to cover my bid amount, but alas, the seller did not agree to my price. Don’t let it discourage you though! Sometimes, it takes many offers before you land on a seller that will agree to your price (or close to it, anyways). Keep plugging!

There are other options out there for financing real estate investments. If you have any questions, feel free to leave them in the comments area below. Sign up for my RSS feed to get instant updates.


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College Kids and Credit Cards

Budgeting, Credit Cards 1 Comment »

College kids and credit cards are a dangerous mix, especially these days. Children in today’s society are more irresponsible than ever before. I wouldn’t even trust most adults in their early twenties to take $20 down to the store to get milk and bread. Kids just do not have any sense of responsibility or care in the world, and it is mostly due to bad parenting. Families today have both parents working, and typically a solid income that will allow for some extra spending money, and debt in the five digit range - yes I said five digits, as in over $10,000 in debt. What happened to our morals, where is our sense of financial management? These are core issues here at Personal Finance Resources. But let’s discuss some key points that will help your child to be aware of their spending, and have a notion of what the value of a dollar really is.

Teach Them How Debt is Like a Prison

Debt really does enslave the borrower. The Bible says in Proverbs 22:7 “The rich ruleth over the poor, and the borrower is servant to the lender.” What would happen to you if you lost your job? Would your finances crumble? Would you lose your house and car(s)? These are very important points that you can discuss with your children. Let them know how dangerous it is, and how it is like a house of cards that can fall at any moment.

Train Them in Personal Finance Management

Small amounts of debt (like a few hundred dollars on 1 or 2 credit cards) can be very beneficial to a first time borrower, like a college kid. This will help them to establish credit, and later they will be able to get approved for a loan for a house, car if necessary, and other things. Running these small balances allows the credit card company to earn a little interest, while building up the college kid’s credit rating. But be very, very cautious and monitor your credit card account, because all too often we fall into the trap that the credit card companies set, “Go ahead and buy it now, you won’t have to worry about paying for it until much later.”

Set Low Balance Maximums

This will help to curb the bliss notion of using a piece of plastic as a license to go on a shopping spree. If you as a parent are helping your child to build credit, set a balance of maybe $250-500 on your child’s credit card, thus forcing them to come to you for additional funds, and allowing you the opportunity to further teach them about financial responsibility.

Today’s lesson, in a nutshell, is focused around teaching. As a parent, we must teach our children all things, including financial responsibility. The earlier they learn, the better off they will be. Take the time to teach them, setup chores and allowances, make them work for things they want to buy. It will make them place the appropriate value on a dollar, and they will need that training later in life.


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What is Probate?

Real Estate Investing 2 Comments »

What is probate, and what does it mean to investors? Many real estate investors use the probate process to find, acquire at a discount, and sell / lease properties for a significant gain. With a little bit of money and time, you could even make this a full time career. Most investors, when they look at probate, think that it is too difficult to complete, with a low success rate. My question is, how many offers have you submitted to typical owners that have been rejected? Personally, I have submitted many, many offers, and have only acquired a handful of houses at the proper price for significant gains. But let’s get into the meat of the probate process…

Probate Defined

When a property owner dies, the property owned must go through the probate process, or the process of distributing the assets according to a will, or at the discretion of a probate court in the event that there is no will. Now, here in Texas, if a married person dies intestate (without a will), then their spouse automatically inherits the assets, except for specific cases such as children that don’t belong to the surviving spouse, etc. There are ways to avoid probate, but that is for another edition…let’s move on to the required probate steps.

Probate Process

If the deceased had a will, an executor would be named to manage the probate process after death. If the deceased did not have a will, an administrator from the court would be named to handle the distribution of the property. The executor or administrator would then have to follow these basic steps to complete the probate process:

  • Inventory and collect all property owned by the deceased.
  • Pay off any debt or taxes owed by the deceased. Often, an ad is run in the local paper to call any lien holders of the deceased to make claim against the estate, so the personal representative can handle all debt issues appropriately.
  • Once all debt is settled, then the personal representative will carry out the transfer of property to the descendants as described in the will, or per the state’s intestacy laws.

The personal representative must be careful to observe the fiduciary responsibility they are under. They must keep funds in interest bearing accounts, treat all descendants equally, and get the probate process completed in a timely manner. Failure to do so opens the door for descendants to remove the personal representative and further delay the probate process.

So What Does Probate Mean to Investors?

Often, when a deceased person leaves property behind, descendants are not interested in inheriting the property, due to having to pay taxes, and the general grief of owning a property you do not inhabit. They simply want to get cash from the property. So this opens up an opportunity for someone to come in with a low offer, and end the frustration surrounding the beneficiaries of probate process. Especially if there is more than one beneficiary, your offer might be just want they need to stop the quarrels among themselves and end the probate process quickly. Stay tuned as I will delve into how to find and acquire probate properties…


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Real Estate Investment Cash Flow

Real Estate Investing 2 Comments »

Building up real estate investment cash flow is one of the cornerstones of the business model I am working to achieve my financial goals. The basic premise of what I am trying to do is income replacement, or building up enough side income to detach myself from my J-O-B (just over broke) and focus entirely on my own business. Now, as some of you know, I live in Texas, and right now, the smaller towns such as Belton/Temple/Killeen/Fort Hood where I live and operate are still fairly strong seller’s markets. Some of the larger cities like Houston and Dallas are experiencing downturns in the market due to the sub-prime mortgage loan industry going belly up. But, as far as the buyer’s side of the equation here in Belton/Temple, it is hard to find houses at prices that will make money. However, the nice thing is, if you can find a good deal on the buy side, you can quickly turn it around and make money.

I own a house that was purchased a couple of years ago at discount, that I put up on the market for rent, ran one ad in the paper for 2 days, and put a sign in the yard. That was 2-3 weeks ago, and I am still getting a steady stream of calls coming in for people wanting to rent the house. I also have one couple that is looking to buy the house and put their Mom in it, which I will see tomorrow if we can work out a deal.

So, to get to the point, working and investing in real estate simply comes down to one thing, and one thing only. Buy Right! The one key to real estate investing is buying properties below market price, and selling or renting them at market price. Now, if you are really looking long term at holding property, you could buy at market price, and rent to try and cover your expenses until the property appreciates enough and rental rates increase enough for you to make money, but typically only people with lots of loose cash on their hands can afford to do this.

So how does one find properties at a discount, and how much of a discount do they need to be purchased at in order to produce positive cash flow? Well let’s first discuss finding the properties.

Finding Discount Properties

There are many ways to find and acquire investment properties at a discount. Probing for houses such as tax sale properties, HUD foreclosures, Bank foreclosures, probate properties, and otherwise distressed properties are the best types of properties to go after. Seller’s must be motivated, or you will not be able to get the property at a discount. My main focus has been on HUD properties, and at www.bidselect.com, you can find the current list of available properties for sale. In a later edition, I will define and give you some quick pointers on the other types of distressed properties. But HUD properties are the simplest to acquire; you just have your realtor submit a bid, and the day after the bid deadline, you get an answer. Read the full detail of how I buy HUD homes.

Investor Pricing on Properties

The typical percentage that most investors will feel comfortable with is about 75-80% of the value of the home. If they can purchase and rehab properties for about that much, they should be able to make enough from selling or renting the house, to justify the time, money and risk involved with doing the deal. In the market I’m in, I focus on houses from about $40,000 to $100,000 to invest in, and try to make somewhere around 20k for selling the property, or about $150-200 / month renting it out. The main goal is the latter, getting the monthly real estate cash flow going to help me cover enough of my expenses to justify leaving my job.

So, to sum up, acquiring cash flow properties is one of the main things I will be doing to replace my J-O-B income, so I can leave and pursue my own business. I figure it will take about 10 of these properties to allow me to quit my job. How many properties would it take you to be able to quit your job, and focus only on your investments / other enterprises? What methods do you know of to acquire properties at discount prices? Please leave some feedback, as I have only skimmed the surface as to the strategies available for building up income streams.


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