Monthly Archives: January 2010

Divorced Woman’s Husband is Broke – Now What?

Posted on by  at  6:00 am
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The following post is from Neal of WealthPilgrim.com. After reading the article, be sure to sign up for free at Wealth Pilgrim to receive more from Neal.

It seems like divorced couples still have problems even after the divorce.

That’s something I’m going to have to deal with next week. Here’s the story:

Mary & Harvey have been divorced for more than 15 years. Their split was amicable. Harvey was the principle support provider. Truth be told, Harvey was the only provider and Mary was grateful and lucky. In fact, they were both pretty lucky – that is until this morning.

Harvey is a high-priced advertising executive who was pulling down over $500,000 a year. Somehow he and his firm continued making the big bucks in 2008 and 2009 despite the economy. But reality finally caught up with them recently.

In late 2009, his firm cut Harvey’s salary by 50% and then by another 50% this morning. Harvey is still pulling in about $125,000 – and that is certainly a very nice check. But it’s a far cry from $500,000. And Harvey isn’t used to the reduced wage. He’s having difficulty making the support payments to Mary. And it gets worse.

He called asking her to sign off on the documents so he could take a loan against his 401(k) to pay taxes and credit card bills.

I’m not sharing this story because I think we should all go on a hunger strike in solidarity with the pain and suffering of all those who used to earn a half a million clams.

But I do have a great deal of empathy for this couple. Even though they make a lot more money than most of us, they face problems we all do.

Both Harvey and Mary made a number of mistakes for many years. Of course that doesn’t matter now and it won’t help them or anybody else.

Here are the steps I’m going to recommend when I meet with them:

1. Track expenses.

There is nothing more important than knowing what it costs you to live – especially if you are forced to make drastic cuts. I believe they have to write down everything they spend money on to make sure they know where to make those cuts.

2. Mary is going to have to find work.

If Harvey’s company had to make these kinds of cuts, the firm he works for might be on the ropes. That means there is the real possibility that Harvey is going to be out on the streets before long. At that point, Harvey won’t be able to give Mary any support. What is she going to do then? Loans and advances only go so far.

3. Don’t sign off on Harvey’s request to take a loan against the 401(K)

If Harvey doesn’t have the cash to pay the IRS and the credit card companies, that means he is still living way beyond his means. It also indicates that he’s not a great planner.

Theoretically, half of that 401(k) belongs to Mary but those IRS and credit card bills are 100% Harvey’s.

Finally, I don’t know what tax liability Mary takes on if Harvey is unable to repay those loans.

I’m more a fan of the couple finding a way to drastically cut their spending and find a payment plan for the IRS and credit card companies.

What have I missed? What other advice would you give Mary? If you were in her place, would you allow Harvey to borrow against the 401(k)?

Upside Down Car Loans: Eight Simple Steps To Get Out Fast

Posted on by  at  6:00 am
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Let’s face it; most Americans love cars. Unfortunately, most Americans also have way too much car debt.

In an article from Auto Blog posted just a few months ago, they cited increases in new car pricing, and the effect those prices are having on family finances.

A study by Comerica Bank shows that the average purchase price of a new vehicle went up $300 in the second quarter versus the Q1, bringing the average transaction price to $26,300. The upward swing in prices came at a time when the average household income remained stagnant. The average family needs 22.1 weeks of median family income to pay for their new vehicle purchase…

upside down car

It’s true; cars typically represent one of the largest expenses in a household budget. Only housing costs the average family more each month. Factor in gas, maintenance, taxes, repairs and car insurance, and the cost of owning a car pushes even higher.

The most significant expense most people neglect to factor is depreciation.  New cars go down in value like a rock. Some new cars can lose as much as 20% of their original value when you drive it off the car lot. This quick depreciation, and the accelerated depreciation that often follows, leaves people owing much more in car loans than their car is worth.

If you find yourself in an upside down car loan, it is a safe bet your situation could be improved if you sell that “new” car and buy a much cheaper used one for your work commute. You may still owe money, but you’ll owe much less money, and that is almost always a good thing.

How to Get Out of An Upside Down Car Loan

1. The very first step to getting rid of an upside down car is to evaluate how much your current car is worth. Using sites like Kelley Blue Book and Edmunds, try to determine the amount of your current car’s private sale value (not trade-in, which is often much lower). Be sure to be honest about the condition of your car, and enter the exact mileage to get a good valuation.

2. Save $2,000 to buy a “beater” to get back and forth to work. If you really want to get out of your upside down car loan, now is the time to swallow your pride, and put aside your love of shiny cars. Over the next couple months, try to scrape up a couple thousand dollars to buy an old, ugly (but mechanically reliable) car to get you to work. That’s the only requirements. No sex appeal; no bells and whistles (and no car payment!).

3. Get an updated loan balance on upside down car. Contact your bank or auto finance company and get the current “pay off” balance on your car. Compare this figure to the estimated sale price from step one. Often times car owners discover that they are not really upside down after all. However, if you bought new with nothing down, and/or rolled the balance of your previous car loan into your new one, chances are you are in fact in an upside down car.

4. Contact local bank or credit union to pre-qualify loan for the difference. Let’s assume you owe $22,000 on a car estimated to be worth $17,000. Unless you have $5,000 sitting around, you are going to need help paying off the car loan when you sell the car (this is a required step to clear the title for the new owner).  Discuss options for a personal loan in the upside down amount. This step is a lot easier if your loan is already financed at a local bank or credit union. Simply explain to the loan officer that they are already exposed to $5,000 in unsecured liability based on the figures you’ve obtained.

5. Consider alternate sources of funding. If your bank or credit union won’t budge, or your car is financed through the manufacturer, you will have to look for other ways to fund the difference. If you have good credit, Lending Club is a potential source of financing. Tell your story as part of the borrower profile and ask for help in dumping your upside down car loan.

6. Get your car detailed, inside and out. Back when I was in the market for a car I was amazed to find so many dirty cars for sale. It doesn’t take a lot of money or time to give a car a thorough cleaning, and clean cars bring more cash, so there is definitely a return on your investment.

7. Advertise your car is for sale in every legal place you can think of – and include pictures. Pick up a “For Sale” sign at an office supply store and stick it in the windshield with your cell phone number. Place a flyer with color pics (take a couple good photos, design your own flyer in Microsoft Word or Photoshop, and get a few color copies made) on your gym’s bulletin board, at work (where allowable), and post on Craigslist, community classified sites, etc. Tell your Twitter followers, friends on Facebook, email distribution…everyone you know that you are trying to sell your car.

8. Create a bill of sale to provide buyer, and immediately drop your insurance coverage on old car. Since it might take a while to deposit the money from the buyer, and close out the financing on your loan for the difference owed to pay off your car, prepare a bill of sale for the new owner to show proof of transfer of ownership. Bill of Sale forms for your state can be found online at places like LegalZoom.com. Be sure to also get new owner’s mailing address (if different than listed on the bill of sale) so you can forward the title to them when the finance company returns it to you after loan is paid in full. Also, be sure to contact your car insurance company immediately following the sale to update your policy.

With your upside down car gone, and the huge car payment replaced by a smaller loan payment, start a car replacement fund to prepare to buy your next car with cash. Over time, you will eventually be able to trade up in car, but only do so when you are able to pay cash for a car. Who knows; you might even find yourself driving a million mile car one day and skipping car payments forever.

Photo by ozjimbob

Handling Two Financial Houses

Posted on by  at  6:00 am
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This article is by Adam from Money Relationship. You should really check out his 2010 financial resolutions.

If you’ve read my blog lately, you may have seen that I don’t live with my wife during the week. My current job is approximately 2 hours away. Because of the distance, I have to stay there during the week and then head home on the weekends.

There are many disadvantages of living away from my wife, both emotionally and financially. I won’t really get into the emotional stuff seeing that this is a financial blog. However, I can shed some light on how we handle our finances on a day-to-day basis.

First, let me give you a little insight into the added expenses. In order to stay in PA during the week, I have to pay for housing, groceries, parking, and fuel. All of those together add about $600 to our budget. Those are all in addition to what we already spend in MD. It’s definitely straining, but it’s better than me not working at all. My wife and I have been apart for long periods of time before (I went to TX for grad school) so we are used to being apart. However, it’s not something I want to do for more than a year.

Even though we are apart, we still need to make financial decisions as a team. Marriage is commitment and both partners need to have an equal say. Here is how we do it:

Communication Is Key

Just as the title says, communication is a key part in our financial decision making. We communicate daily about our finances on the phone and via Skype. We are constantly talking about our budget and how much we will have left over to pay down debt. We actually think budgeting is fun and are always looking for ways to save a buck just so we can pay off more debt at the end of the month.

Financial communication is a necessity is every marriage. If one partner is spending away while the other one is committed to getting out of debt, they’re not going to get far. You just need to sit down and talk about your finances. Heck, if my wife and I can do it every night when we are 2 hours away from each other, so can you!

Long Distance Budgeting

Almost all of my adult life, I have been a Quicken kind of guy. It was always easy for me to use and made my finances come together in one simple platform. Well, when we got married, I noticed one major flaw. It was only on my computer and it was really hard for my wife to understand how to use it. So, we made an executive decision to give something else a try. A written budget wasn’t really an option for us as we are more technical people. It would also be a little harder to keep track of being apart. Then came Mvelopes.

Mvelopes is an online based budgeting program that can be accessed anywhere (with an internet connection). Mvelopes is based on the envelope system which we thought was the best budgeting technique for us (and still do). It allows us to check our budget at the same time and discuss the different envelopes and what we spent during the week. It just keeps us on the top of our game. It also keeps us accountable.

Keep a Positive Attitude

It’s easy to get a little depressed when you are away from your spouse for extended periods of time. It’s especially hard for us since we were married only six months ago. However, we continue to be positive about our situation and are trying to get things straightened out. Currently, I have an interview next week for a job in MD working for the same company. If all goes well and I get the job, my income will increase about 10%. It will also eliminate our need for addition expenses such as the rent.

Well, hopefully you will never have to find yourself in my position. It’s tough,  but we are making it work. If you do find yourself in this predicament, hopefully these tips can help you out. These are actually good tips for couples who are living together too. You need all of these to manage your marriage and finances.

Have a great weekend!

Weekly Roundup: BCS Championship Edition

Posted on by  at  5:00 am
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Tonight Alabama and Texas play for the BCS Championship. As an Auburn man, I don’t have a favorite, but I’ll be a homer and pull for the Crimson Tide since they are from the same conference. I’ve enjoyed the bowl season this year, and look forward to tonight’s game. Feel free to share your predictions in the comments below.

The Frugal Roundup

Customer Service: Enthusiastic Phrases I Would Love to Hear. I would love to go back in time to when companies actually cared about their paying customers. (@My Super-Charged Life)

Debt Update: December 2009. Adam updated his debt totals for the end of December. (@Money Relationship)

Six Financial Steps for Each Life Stage. Check out this great little post on financial things you should be doing during different stages of life. (@Wisdom Journal)

6 Important Tasks After a New Baby’s Birth. Having a baby soon? Check out these simple, yet ofter overlooked, tasks for when the little one arrives. (@Fiscal Fizzle)

Want Better Results for 2010? Commit to Fewer Things. Fresh off my New Year’s post declaring this year’s handful of goals, I came upon this post which makes the case for committing to even less. (@Scott H Young)

Best of the Rest

I’m equal parts excited and disappointed as the game marks the end of the college football season. But I do think it will be a good contest. Enjoy the game!

Delaying Roth IRA Contributions One Year Could Cost You $74,000

Posted on by  at  5:00 am
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Last year was the first year I have been able to make the maximum contribution to my Roth IRA, thanks in large part to becoming debt free. I was also able to fund a spousal IRA for my wife, who stays home with our kids.

Now that it is 2010 I am psyched to make even more contributions to our Roth, but wondered if I should wait until the end of the tax year, make monthly contributions, or try to plunk down all the money up front. Turns out this is a costly decision.

Putting aside thoughts on market timing, and market predictions for 2010, it seemed like socking away the maximum contribution early in the year was the way to go. Of course, this meant trying to come up with $5,000 after already depleting some savings to fund last year’s Roth.

Just as I was feeling nervous about moving another $5,000 from my cash reserves, I was reminded of my own advice:  max out because Roth IRA withdrawal rules allow for withdrawal of contributions at any time without penalty. That’s right! Assuming I had not lost my entire investment in the Roth account, I could simply withdraw a portion of the $5,000 contribution later in the year in an emergency.

The Impact of Delaying Roth IRA Contributions One Year

So what’s the advantage of tying up my savings so early in the year? Using the financial calculators at Dinkytown.net, I ran a couple calculations with the following assumptions:

Let’s assume I turn 30 years-old On January 1, 2010, and according to the 2010 Roth IRA income limits I can invest the full $5,000 in a Roth IRA earning an 8% return. I continue to invest $5,000 on my birthday (January 1st) for the next 35 years. My original $175,000 in Roth IRA contributions would grow to $930,511.

If I delayed that first contribution until my 31st birthday, I’d only have $856,584. This is essentially the same result you’d get by waiting to contribute until the end of the year. And while it is nothing to sneeze at, you would lose about $74,000 in compounding growth by waiting a year to get started.

This certainly underscores the important of starting early. It also reinforces my plan to encourage our kids to open Roth IRAs as teenagers when they begin earning an income – even if we have to help them fund the account up to their income. Imagine what the numbers would look like if you started saving at 17 years old!

If you are concerned about earning too much money, contribute now and adjust later. It is possible to avoid penalties if you take corrective action by the due date for making Roth IRA contributions for that particular tax year (typically April 15th or the day you file your return, whichever occurs earlier, but not counting extensions, etc.).

I Have No Savings – Should I Borrow To Make Roth Contributions?

After being in debt for so long, I am very reluctant to borrow again. However, borrowing $5,000 at a very low interest rate (or even free if you can catch a zero-percent balance transfer) might make sense considering the amount of compounding growth you give up over an investing lifetime. Personally, I would not borrow the money, and look for another way to fund the contribution – a side hustle, selling something valuable, but not sentimental, etc.

Whatever you decide to do, do it quickly, as hundreds of dollars are sliding by for every day you put off funding a Roth IRA.