Category Archives: Debt

The Molly Project: Episode 2

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Last week, on The Molly Project…

Now you know the facts. Let’s start tackling the problems.

When I meet with someone to help them solve financial problems, I get inside their head and swim around in it for a while. The numbers NEVER tell the whole story. Every word they speak matters. Every nervous laugh they laugh matters. Every personality trait that I can pickup on matters. Once I “read them”, then I make a series of notes about their persona. I’m not making this up. This is what I do. I need to know how to motivate an individual. The numbers would never tell you this. It kinda explains why I snapped on that emailer yesterday. There was no way that another method would have worked with him.

Anyway, here are my professional notes and observations for Molly:

1. Molly had no debt upon graduating from college. The debt came when she decided to switch careers, kicked off by going to grad school. She then decided that she didn’t want to pursue a career in the field of her advanced (expensive) degree. There’s a major underlying problem here. Debt was so foreign to Molly, that she had no idea how to deal with it. She chose to do what she always did; she strapped on her genuinely positive attitude and proceeded the way she had for the previous 27 years. She proceeded as though she didn’t have debt.

2. There is hope in every financial situation. And Molly’s situation, believe it or not, is laden with lights at the end of the proverbial tunnel. She has a tax refund check on the horizon (amount to be determined). She has nearly $500 per month to put towards debt. And she has various bonus opportunities sprinkled throughout the year.

3. We have over $450 per month to work with for Molly’s financial priorities. One of the major challenges that people face when trying to fix financial problems is they don’t know what to focus on. We only have so much focus and energy to put towards something that is currently stressing us out. All that Molly should focus on is $450. If she focuses on allocating this amount every month to the right debt, then she will succeed.

4. Molly’s positive attitude got her into trouble, but it will get her out. She can see the silver lining in a tornado cloud. The world needs more people like her. She didn’t panic as things were getting bad. She should have. I need to get her a bit panicky.

The budget haps

Here are Molly’s expenses:

  • Rent: $550 (includes utilities)
  • Car payment: $225.84
  • Cell phone: $79.99
  • Car & Renter’s Insurance: $83.99
  • Groceries:$200
  • Gas: $150
  • Personal care items: $100
  • Medical: $50
  • Personal care services: $50
Total living expenses: $1,489/monthly
Minimum debt payment: $1,392/monthly
Total expenses: $2,881/monthly
Take-home pay: $3,333/monthly
MY MONEY: $452
Molly’s first task: Pay off Gap and Loft credit cards. And then put $200 into savings. That’s it. You are done until the tax refund check comes in. That was painless, wasn’t it?
Getting out of a major financial jam is difficult, but the solution is simple. You cannot convolute the situation by just firing all sorts of financial shots at your financial problems. The only thing that Molly can do, other than reducing spending (which she already did), is focus on the $450 she has to pay down debt. This is where people get themselves in trouble. They start flailing for a solution. Don’t flail, just proceed calmly.
Be sure to listen to my radio interview with Molly. It’s the February 17th episode (part 2). Courtesy of 93 WIBC FM.

 

Should you lease a car?

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Should you hire someone to mow your lawn? This seems like an innocuous question, right? But the answer to this question can teach you a great deal about personal finance. Here are the classic answers to the “should I hire someone to mow my yard” question:
  1. Of course, your time is worth more than what you can pay someone else to mow it for you.
  2. No, it’s an absolute waste of money, and you can do it yourself.
Neither of these classic answers are actually the best answer. In my opinion, you earn the right to make this decision. If you are broke and/or are in debt, then you haven’t earned the right to make this decision. So therefore the answer is do it yourself. If you have earned the right to make the decision, then I still don’t think it’s a money decision. I think it’s a lifestyle decision. You don’t want to mow your lawn? Cool with me. Pay someone to do it. I don’t think it’s a poor financial decision at all, as long as you’ve earned the right to make the financial decision. I feel the same way about leasing a car.
I received this email the other day. Check it out:
Soooo…. I was having a vehicle discussion with my brother yesterday and I mentioned to him that I might look into leasing my next vehicle and my mom chimed in to say that was a terrible idea because in the end, you don’t own anything.  I’m not that concerned about having something of “my own.”  Should I be?
I’m 30 yrs old, not married, and the thought of a newer vehicle (aka maintenance-free vehicle) sounds pretty good to me!  Others I know lease and the idea of having something newer every couple of years for that reason of having less maintenance with a newer vehicle would be nice (I probably have to have something “major” done every year, if not every other, i.e. new brakes, electrical issues, steering column something or other, new tie rods, etc.).  I don’t necessarily need a brand new vehicle for looks or anything — I’m not concerned about that.
My current vehicle is nearly 10 years old (I’ve had it for about 5), has 137K miles on it, and I will have it paid off this year.  I plan to drive it as long as I can but want to have something in mind for when/if I have to look at a “new” vehicle (rather than be in a fire-drill situation where I have to make a fast decision if something happens to my current vehicle and in the end not knowing if I made the best financial decision for myself or not).
Can you identify some pros & cons to leasing vs buying for me please?  I’m trying to educate myself on this topic so I know what to do in my situation when the time comes.
Thanks for your help in advance!
Lauren
There is a not blanket answer for the question “Should I lease a car?” Whereas some financial experts will tell you that it’s a waste of money to rent a car, I completely disagree. That being said, I personally will never lease a car. I hate having a car payment. I don’t care whether the car I’m driving is “under warranty” or not. And I don’t care about having the latest, greatest car. I’ve earned the right to feel this way.
If you constantly want a new car, want it under warranty, and don’t mind having a car payment, then consider leasing…if of course you have earned the right to choose. If you have a ton of debt, several other monthly payment obligations, and you don’t know what the level of your financial stability will be in the near future, then you gotta stick with the car you have.
The reality is that, in a vacuum, you shouldn’t lease. The down payment plus the renting plus the constant payments equals generally not a good idea. But we don’t live in a vacuum. I don’t think that leasing makes financial sense. But having helped thousands of people over the last 14 years, I know that “it doesn’t make financial sense” isn’t always the divine directive that it should be. I can tell you that it doesn’t make financial sense, but if you value a low monthly payment, a relatively new car, and a car that’s consistently under warranty, do you really think that I’m going to convince you to not lease with a simple “it doesn’t make financial sense?”
I don’t think you should eat red meat. I don’t think you should smoke. I don’t think that you should use recreational narcotics. So what am I supposed to do, say screw you and wish you luck? No. I need to help you operate your financial life within the constraints of your lifestyle preferences. It’s the financial abstinence conversation. I’m never going to convince you that not driving a new car is better than driving a new car. It’s not going to happen. Therefore my solution is simple: earn the right to make the decision. If you don’t earn the right, via sound financial principles, then you don’t get to indulge your preferences.
So it looks like this. If I got to choose your car acquisition method, then I would choose the following in order:
1. Pay cash for a used car.
2. Pay cash for a new car.
3. Buy a used car with a loan.
4. Buy a new car with a loan.
5. Lease a new car.
6. Don’t ever lease a used car.
This list is based on what I value in a vehicle. It also happens to make the most financial sense. But if you value different things in a vehicle, then just be smart. Earn the right to indulge your preferences. Otherwise, you will be forced to drive what you are driving for much longer than you want to drive it.

Did you accomplish anything in January?

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January is over. Gone. Done.

How’d it go for you? Did you accomplish anything financially? Did you go backwards? You need to evaluate your progress towards your financial goals today. Take time to access your progress. If you failed to set goals, then you failed. If you failed to reach your January goal, then you failed. If you fail to set a goal for February, then you fail. Stop failing, and starting progressing. You start by setting a goal for February, and then you start trying to win weeks. By win weeks, I mean make wise financial decisions for an entire week. These decisions should lead you towards your February goal.

This is how I think: you need to win three weeks to win a month. You need to win two months to win a quarter. And you need to win three quarters to win the year.

What are your goals for February? Do you want to have saved another $500? Do you want to pay off $1000 more debt? Do you want to ask your boss for a raise? Whatever it is that you decide, write it down and get to work.

I’ve got a really cool partnership that I’m going to announce in February. The good news is that this announcement will help you set and achieve your goals for March. Just make sure that you take care of February, so that we can work together in March.

The CLASSIC student loan story

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When I wrote a book about student loans, I never expected the sort of backlash that has occurred. How can so many people misinterpret my message? Or worse yet, how could so many people judge a book by its cover, literally? For someone who HATES drama, I found myself in several heated debates over the last couple of weeks. My favorite was a debate with a man that chose to debate the author of a book that he hadn’t read. He accused the content of being fraudulent and undoable. Huh? Sigh.

Anyway. The book isn’t about avoiding college. It’s about avoiding student loans. I encourage you to pickup a copy for your favorite high school student. No seriously, buy the book. Why? Well, I’ll let Sally tell you. Thanks to my Google Alerts (which tells me when people mention my name in cyberspace), I found this post by a blogger named Sally. Go to her blog to read the whole thing, but here is a crucial excerpt. The post is titled A Student Loan Story: In Defense of Pete The Planner’s Stance on Student Loans.

I changed my major 4 times while in college, and it took me 5 years to finish school. Most of my peers were the same way. I worked a part-time job all through college and that money was used to supplement what student loans and credit cards didn’t cover. I graduated, and despite my best efforts, I was unable to find a job in my field. Knowing I had student loan payments coming up in 6 months, I took a job with Verizon Wireless as a customer service representative. I made $12.00 and hour and received benefits. I was in heaven with my $25,000 a year job.

I was clearing about $1600 a month after taxes. I set myself up with a nice little apartment and started assimilating into the adult world. I wasn’t making much money, but I was doing well enough to provide for myself. I thought I had it made.
“Bring on the student loan payments!”, I thought. “I can afford loan payments!”
I got my first student loan bill in the mail December 2007. I opened it expecting an affordable bill. The reality was much different…
Amount due by January 2008: $600.12

Then came the bill from SallieMae.

Amount due by January 2008: $200.34

This is why you must avoid student loans. You don’t have to put yourself in a terrible financial situation upon graduation. Read the rest of Sally’s post to get the whole story. Oh, and buy the book.

Building or repairing credit to buy a house or car

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Yesterday’s emailer, C.E., wanted to know how to rebuild/repair credit in order to afford a house. I loved his original email. He was trying to formulate a plan to help get his family into a better situation. He had admitted a history of poor financial decision-making. He was contrite. He was honest. He was ready to learn. Today we will wrap up my answer to him.

As you read yesterday, C.E. had some technical and philosophical questions that he had to deal with. His goal was to buy a house in April 2013. My contention was that he shouldn’t buy a house in 2013. Am I holding him back from achieving a dream? Yes. If my dream were to fist fight a polar bear, would you stop me? I hope so. I believe that if C.E. were to buy the house in April of 2013, he would be in real financial trouble within five years. His financial situation is not solid. You can buy a house, lease a car, go to college, and several other things on a shaky financial base, but that doesn’t mean you should. Instead, C.E. should strengthen his base, and revisit the home ownership conversation a few years later.

He also asked how he should go about repairing his credit. That’s a great question. Unfortunately, there is a tremendous amount of bad advice out there on this topic.

Here are the best tips for repairing credit.

  • Get current- If you are behind on your bills, then make sure that you make payments on time. Believe it or not, paying your bills on time really helps your credit score.
  • Address your collections- If your debts have gone to a collection agency, then your credit will get beat up until you address the problem. The quickest way to fix your credit? Payoff your collection debt. Make sure that the collection agency provides you a promise to clear your debt from your credit report in writing.
  • Time- Time heals credit damage. But this is the last thing people want to hear. If you have a bankruptcy or some other bad credit moment, it will eventually exit your credit report. But most people want it to go away faster than it will.

Short list, huh? There are more ways to improve your credit, but I think they are really bad ideas. Do you remember the Atkins diet? It was the diet that had you eat primarily fatty foods and protein, all the while avoiding carbs. It worked. Kinda. Somewhere between my 2nd and 3rd pound of bacon my fourth week in, I decided that the diet just didn’t make any sense. Many Americans came to the same conclusion, and the diet died a slow fatty death. Many of the credit repair and credit building techniques that you commonly read about are very similar to the Atkins diet. In other words, you are cheating the system for a temporary result that won’t last.

Your credit score is a measure of how good you are at borrowing money. If you have proven over a period of time that you suck at it, then take a break. Just get out of the game for a little while. I SUCK at golf. I have taken a break. I will take it back up someday when I have the patience. People that are told that they “can’t” borrow, get in such a hurry to borrow again. And those that can borrow freely, don’t really care that much about borrowing. It’s like The Gift of the Magi….kinda.

There are going to be people who read this that say “Peter, you are being unrealistic.” In fact, that was a major kerfuffle that I found myself in yesterday. If you know what I’m talking about, I’m sorry it happened. We’re better than that. To the people that are reading this and saying “Peter, you are being unrealistic,” I promise you that I’m not. If you aren’t pleased with your current debt/housing/money reality, then change your reality. If you have made poor decisions and find yourself in a pinch, then it’s going to require different thinking to get yourself out of the bind you’re in. Get angry. Don’t angry with me. Get angry and change.

To me, you shouldn’t even consider buying a house until you are out of the Survivin’ stage of the Four Stages of Your Financial Life. By God, you are SURVIVING. This means you are struggling. Firm up your foothold, collect yourself, and then put together a plan.

 

Why you need to avoid student loans

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How to Avoid Student Loans: wishtv.com

This video caused quite the ruckus today. It inspired an angry email. My point is very very simple: avoid student loans. Get your education, but avoid student loans. I give a few examples of how to do this within the above video. There are many defenders of the importance of an education. I am stepping up to defend your financial future, in relation to your education. Learn what I’m saying, and then decrease the cost of your education. There really isn’t anything to disagree with. Read the book and decide for yourself.

Repairing financial wounds at Thanksgiving dinner

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Yesterday we spent quite a bit of time discussing what’s wrong with Thanksgiving/Black Friday. Let’s get past that. Like I mentioned in that post, if you aren’t part of the solution, then you are part of the problem. My rant is over. Let’s get better.

Thanksgiving = family. And if any of your familial relationships are damaged for financial reasons, then this Thursday the healing begins. You are no longer allowed to bury your head in the sand. Especially once you’ve read this post which will pick the scab off the wound…just prior to us starting the healing process. (Okay, that was a little gross. I’m a bit squeamish. I wish I hadn’t written that, but alas I’m too lazy to delete it. I’d rather just explain it away with a digression.)

Family financial wounds are damaging for several reasons. By righting the wrong, you will begin to heal all the different types of damage that the wrong caused. For example, let’s say that you’ve borrow $500 from your favorite Uncle Rick. As you know, Rick has a mustache. Pete the Planner Bonus Fact: 90% of people named Rick have mustaches. This debt has existed for a while. And you haven’t made any real effort to pay him back. What sort of damage has this unaddressed debt caused?

  1. Non-transparent communication- It was your deep connection with Rick that allowed him to really understand your financial conundrum. It’s this same deep connection that has you clammed up as you ignore your debt to him. Things just aren’t the same. You can’t even share your career success stories with him. “If things are so good, why isn’t he/she paying me back,” he might wonder. And if things are so good, why in the hell aren’t you paying him back, I wonder.
  2. Rick lost his pension- But why would you know? It’s something that we doesn’t really share with anyone. While $500 used to not be that big of deal fro Uncle Rick, it is now. He’s secretly getting pissed about it. Oh, and he hates your new car because of this. He doesn’t care that it’s a lease.
  3. Any financial progress that you are seeing is false financial progress- Things are finally starting to turn around for you…or so you think. People conveniently forget to tell me about personal loans that they took from their family and friends. That’s why I always ask about them. Just because there isn’t a loan document, doesn’t mean that the debt doesn’t exist. Not to get all cosmic-Oprah on you here, but I don’t think you can consider yourself financially viable until you fully acknowledge that debt. And I mean really acknowledge it. Like talk about it – acknowledge it. And if your Uncle Rick has conceded in any way, shape, or form by now calling the loan “a gift”, then you REALLY need to get to work. I don’t really care if he has absolved you of your obligation to pay him. In my book, you will always owe him the money. If he has called it a gift a couple of years ago, but now he is hurting financially, then he is unlikely to tell you. Do the right thing.

Crap, now what? The good news is that it isn’t too late. And what’s better is that I’m going to now tell you the EXACT right way to fix it. Stepping up and doing the right thing in this uncomfortable situation will be the first step towards your financial rebirth. Hyperbole? Nope. It’s true. Taking ownership of your decisions is such an important step in your financial development. Good decisions are generally made by confident people. You will generally lack confidence if you are embarrassed by your financial behavior. There isn’t anything much more embarrassing than shafting your Uncle Rick out of the money you owe him. See what I’m sayin’?

Here’s the plan. You are going to bridge the gap. What? You’re concerned that you don’t have enough money to pay Slick Rick back? Don’t worry about that. Follow these steps:

  1. Be subtle- Sorry, but you don’t get to take credit for this. You don’t get to tell anyone other than your significant other or your Uncle Rick what you are doing. This isn’t one of those things that you announce right before the family prayer This is not a broadway production of your one man show “The Guy That Finally Paid His Debt.” Just settle the hell down, and focus on the execution of this thing.
  2. Get a card- Delivering a soliloquy that will change your financial life can be a little nerve wracking. Therefore, avoid the possibility of doing this wrong. Write it down. Is this the Nancy-ass way out of it? Nope. This is way too important for you to risk saying the wrong thing. You are going to write a simple note.
  3. Write a check for a nominal amount- This is an act of goodwill. This isn’t repaying the national debt. Write a check to Rick for $25-$50. Slip the check into the card. You are going to write this same check every single month until you pay back Rick. I don’t know why people feel like they can only repay family debts with one giant check, but that is a ridiculous notion. You don’t pay your bank back for your mortgage loan in one big chunk do you? Of course not.
  4. Write the following message- Uncle Rick, Enclosed you will find a check for $__. It is my first payment towards the $____ I owe you. My financial struggles should not extend to those that I love. Thank you so much for believing in my ability to repay my debts. Your confidence in me means the world to me. I won’t let you down. Happy Thanksgiving.
If you choose to go through this process on Thursday, then you need to let me know. I will send you a free book. I’m very proud of you in advance. Several of my clients have done this, and it was the beginning of their financial brilliance. Congrats on your willingness to take control of your financial life once again.

Pete the Planner’s guide to college planning

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Saving for college has become increasingly difficult for American families. There are two primary reasons for this: 1) decreasing financial sensibility 2) college price inflation. While this blog is always dedicated to helping you overcome financial sensibility deficiency, today’s post is dedicated to helping you deal with skyrocketing college price inflation. Cool?

I very much enjoy the “college is too expensive: conversation. I’m dedicating two hours of my radio show to this very topic this coming Friday. I’ll post the podcast of the show here early next week. College education has become increasingly inefficient. Whereas technology is leveraged in many industries to decrease consumer costs, colleges (for the most part) have refused to pass on the saving to consumers. Not only that, but colleges have been able to take advantage of student loan subsidization and push college costs even higher. Check out this chart from FinAid.org. If shows college inflation compared to general inflation. College inflation is almost double general inflation. That’s not cool.

Year College Inflation General Inflation Rate Ratio
1958-1996 7.24% 4.49% 1.61
1977-1986 9.85% 6.72% 1.47
1987-1996 6.68% 3.67% 1.82
1958-2001 6.98% 4.30% 1.62
1979-2001 7.37% 3.96% 1.86
1992-2001 4.77% 2.37% 2.01
1985-2001 6.39% 3.18% 2.01
1958-2005 6.89% 4.15% 1.66
1989-2005 5.94% 2.99% 1.99

What does this mean? It means since the US Government is guaranteeing student loans, that more students can borrow. Which in turn means that demand for a college education is high. And competition to attract and retain students is even higher. This leads to some pretty nutty stuff. Why does your college have a climbing wall? Why does your alma mater have dorms nicer than most three star hotels? All of these amenities cost money. And you are paying for it. Well, your student loans are paying for it.

Am I against sending your child to college? Absolutely not. However, I am against cost inefficiency. I encourage you to seek out institutions that honor their commitment to their students’ financial futures. For instance, Grace College has a four year degree that you can earn in just three years. This reduces student tuition costs by 25%. That makes sense to me. You?

So what should you do? It’s pretty simple: plan. I guess if I was Bob the Builder I would tell you to build. But since I’m Pete the Planner, the answer is to plan. The easiest way to fund college is to fund this goal over time. If you start saving right away, then time becomes your friend. If you wait until your kid is old enough to spell college, then time is your enemy. Here’s what I mean:

$200 saved per month for 18 years (started the month your child is born) at a hypothetical 8% rate of return will give you $97,071.03 by the time college rolls around.

$200 saved per month for 12 years (started on your child’s 6th birthday) at a hypothetical 8% rate of return will give you $49,188.71 by the time college rolls around.

Waiting just 6 years cuts your college savings IN HALF!!! That’s not good, but it’s math. So don’t fight math. Use math.

Where should you put your money?

There are several ways to save for college, but choosing the right one can mean the difference between needing student loans and avoiding student loans. Your method for savings should allow you to defer taxes. This means that you don’t have to pay taxes on your investment growth. Your Roth IRA works the same way. It grows tax deferred. The most popular college savings vehicle is the 529 plan. This plan allows you to invest your money into a tax deferred education fund. The money can then be used for college expenses. But here is what makes them VERY attractive in my opinion: many states will give you a tax credit for investing in one. That basically means that you will get a tax refund for a portion of your deposit. For instance, in Indiana by depositing money into the College Choice plan, you are eligible for a 20% tax credit on your deposits up to $5,000. This means that if you deposit $5,000, then you will receive a $1000 tax credit. That means that you will possibly get a $1000 check from the state (some restrictions apply). Therefore, a $5,000 deposit can become a $6,000 deposit, if you deposit the $1,000 tax credit back into the plan.

Let’s see how that would affect our original calculations:

$240 saved per month (original $200 plus 20% from tax credit) for 18 years (started the month your child is born) at a hypothetical 8% rate of return will give you $116,485.24 by the time college rolls around.

$240 saved per month (original $200 plus 20% from tax credit) for 12 years (started on your child’s 6th birthday) at a hypothetical 8% rate of return will give you $59,026.45 by the time college rolls around.

That’s a huge increase!! And all you had to do was save into the right college savings vehicle. Be sure to check on the rules in the state in which you live. Here’s a list of the different state tax rules (provided by FinAid.org).

State 529 Deduction
Alabama $5,000 per parent ($10,000 joint)
Alaska No state income tax
Arizona $750 single or head of household/$1,500 joint (any state plan)
Arkansas $5,000 per parent ($10,000 joint)
California –
Colorado Full amount of contribution
Connecticut $5,000 per parent ($10,000 joint), 5 year carryforward on excess contributions
Delaware –
Florida No state income tax
Georgia $2,000 per beneficiary
Hawaii –
Idaho $4,000 single/$8,000 joint
Illinois $10,000 single/$20,000 joint per beneficiary (25% tax credit for employers for matching contributions up to $500 per employee)
Indiana 20% tax credit on contributions up to $5,000 ($1,000 maximum credit)
Iowa $2,811 single/$5,622 joint per account
Kansas $3,000 single/$6,000 joint per beneficiary (any state plan), above the line exclusion from income
Kentucky –
Louisiana $2,400 single/$4,800 joint per beneficiary, above the line exclusion from income, unlimited carryforward of unused deduction into subsequent years
Maine $250 per beneficiary starting 2007 (any state plan), above the line exclusion from income, phaseout at $100,000 single/$200,000 joint
Maryland $2,500 per account per beneficiary, 10 year carryforward
Massachusetts –
Michigan $5,000 single/$10,000 joint, above the line exclusion from income
Minnesota –
Mississippi $10,000 single/$20,000 joint, above the line exclusion from income
Missouri $8,000 single/$16,000 joint, above the line exclusion from income
Montana $3,000 single/$6,000 joint, above the line exclusion from income
Nebraska $5,000 per tax return ($2,500 if filing separate), above the line exclusion from income
Nevada No state income tax
New Hampshire –
New Jersey –
New Mexico Full amount of contribution, above the line exclusion from income
New York $5,000 single/$10,000 joint, above the line exclusion from income
North Carolina $2,500 single/$5,000 joint, above the line exclusion from income
North Dakota $5,000 single/$10,000 joint
Ohio $2,000 per beneficiary per contributor or married couple, above the line exclusion from income, unlimited carryforward of excess contributions
Oklahoma $10,000 single/$20,000 joint per beneficiary, above the line exclusion from income, five-year carryforward of excess contributions
Oregon $2,090 single/$4,180 joint (i.e., $2,090 per contributor) per year, above the line exclusion from income, four-year carryforward of excess contributions
Pennsylvania $13,000 per contributor per beneficiary (any state plan)
Rhode Island $500 single/$1,000 joint, above the line exclusion from income, unlimited carryforward of excess contributions
South Carolina Full amount of contribution, above the line exclusion from income
South Dakota No state income tax
Tennessee –
Texas No state income tax
Utah 5% tax credit on contributions of up to $1,740 single/$3,480 joint per beneficiary (credit of $87 single/$174 joint)
Vermont 10% tax credit on up to $2,500 in contributions per beneficiary (up to $250 tax credit per taxpayer per beneficiary)
Virginia $4,000 per account per year (no limit age 70 and older), above the line exclusion from income, unlimited carryforward of excess contributions
Washington, DC $4,000 single/$8,000 joint, above the line exclusion from income
Washington No state income tax
West Virginia Full amount of contribution up to extent of income, above the line exclusion from income, five-year carryforward of excess contributions
Wisconsin $3,000 per dependent beneficiary, self or grandchild, above the line exclusion from income
Wyoming No state income tax

Some parents don’t want to pay for the cost of college. I don’t have a problem with that at all. You can always finance a college education, but you can’t finance retirement. I would just encourage you to make a decision rather than having your lack of action make your decision. I honestly think that college costs will become more efficient. I think there will be a giant student loan default crisis in the next 5 years, and this will help reset college costs. People will think twice about borrowing tons of money that they have no means of paying back. This will bring down demand, thus bringing down colleges prices. It will be exactly like what happened to the housing market in the last 4 years.

Remember, start early. It will make it much easier on you. BONUS TIP: As your child progresses through different stages of life, take advantage of expenses left behind. What does this mean? This means that when you stop spending money on diapers, increase your college contributions by the exact amount you spent on diapers. When you stop paying for daycare, make deposits into your college plan for the amount you spent on daycare. This is the absolute best way to supercharge your colleges savings plan. Good luck!! And don’t forget to listen to my podcast on this topic next week. I will post it for you.

*****Check with your investment advisor on the investment risks involved with college savings plan. Many of them are variable in nature, which means risk.******

5 signs that you bought too much house…and what to do next

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One of the most common financial problems facing Americans today is “owning too much home.” And by owning, I mean in the process of owning. In other words, securing a mortgage for a house in which you can’t afford to live. This is a very serious problem. If this happens to be your problem, then you need to address it ASAP.

What sort of problems can “too much house” cause?

Well, lots. High utility costs, high maintenance costs, and high stress levels to name a few. But low housing liquidity and high foreclosure risks are what would keep me up at night. Housing liquidity is used to describe how easy it would be for you to quickly sell your home at an “acceptable” price. The lower the liquidity, the harder it would be to get rid of your house in an “emergency” situation (job transfer, budget contraints, etc). Unfortunately as you will see below, some of the same signs that illuminate the fact that you can’t afford your house, also prevent you from selling your house in a prompt manner.

Foreclosure risk is real for those that can’t afford the home in which they live.

  1. You have no equity- How much of your house do you own? Your answer will determine whether or not you are in a “healthy” housing situation. Equity, of course, is the amount of ownership that you have in something (in this instance, your home). Do you have less than 5% ownership of your home? If so, then you are in too much home. What? The market fell and ate up your ownership? Yes, that stinks, but you still are in too much home. Low equity = home selling difficulty. Remember our brief discussion about housing liquidity? Home equity can prevent you from having housing liquidity issues. Low equity isn’t the end of the world, but fire is falling from the sky if you have low equity combined with one or two of the following signs.
  2. Your payment is 40% of your monthly income- According to Personal Finance Expert Peter Dunn, the maximum amount of your monthly income that should be dedicated to your mortgage payment is 25%. It is quite possible that if your mortgage payment ranges up to 30-35% of your income, you will still be alright. But if 40% of your household income goes to pay your mortgage, then you could be in really big trouble. This isn’t always the case, but it is often the case. The more you spend on housing, then less you can spend on…everything else! This means that you most likely can’t save money, can’t pay off debt, and can’t go on vacation. It is quite common for people that have a major debt issue to mistake a too much house problem for a debt problem. Having a high housing cost percentage leaves you very little room for error.
  3. You can’t afford to keep up with yard and house maintenance- Haven’t mulched in 2 years? Can’t afford to paint your house? That’s a sign that you can’t afford the house in which you live. If you have to go into debt in order to perform the most basic of home maintenance, then you can’t afford your home. The worst part is that neglecting upkeep will only make your too much house problem worse. Your property value will suffer from your lack of attention. This increases housing liquidity concerns.
  4. You have unfurnished rooms- What’s the point of having a room that you don’t use? Sure, guest bed rooms and other such rooms occasionally aren’t used. I’m not suggesting that you buy furniture that you can’t afford, it’s just that you might be in over your head. There is a ritzy section of the city in which I live that is famous for having gigantic homes with no furniture. You don’t have to have a perfectly decorated home, but there is something incredibly odd about buying a $750,000 and then not having enough cash flow to furnish the damn thing. Right?
  5. You struggle to afford property tax increases- I believe that it was Henry David Thoreau who once said, “no, I’m not going to pay property taxes.” Okay, he may not have said that…actually he probably did…but anyway. Sorry Hank, no one likes paying property taxes. No one. Property taxes will consistently increase either through increased tax rates or increased property values. Not being able to afford this increase is a major sign that you are in trouble.

If you are “guilty” of at least 3 of these problems, then you have a serious problem. Not being able to afford your current home should not be taken lightly. That stress you are feeling…yeah, it’s real. This problem will not solve itself. But acting in haste will only worsen your problem. I do think that you need to get some professionals involved. You should contact a licensed and trusted realtor to give you an estimate of what your home is worth. You need information. Whether you sell your home or not, you need to know where you stand. The solution very well may be that you should sell your home. This is a terribly tough decision, but it could save the rest of your financial life.

So you aren’t going to sell you home, now what? You MUST turn to your budget. Don’t know how much you should spend on stuff? Then use this ideal budget. If you can’t afford your house, then you are likely committing too much of your household income to your mortgage payment. This means that you either need to make more money or spend less money. Spoiler alert for the rest of your financial life: those are always the two options. In some cases you might want to consider getting an additional job. This should help you temporarily raise your income so that you can take another more permanent course of action (such as selling your house).

If you do sell your house, then you are unlikely to have a ton of equity for a downpayment on another house. Take this as a sign from God. Don’t buy another house. Rent. Renting is not second place. Renting is one of the smartest financial decisions that you can make. The crazy thing is that you can probably rent a house in the same neighborhood in which you currently live…for less than what you are currently paying for your mortgage.

I can’t emphasize my final point enough: time will not solve this problem. Only three things solve the too much house problem: spending less money, making more money, or selling your house. And in most instances, you need to do all three. Don’t be embarrassed. Be empowered. You are about to take control of your out-of-control financial life. And don’t forget, I’m here to help.