Question of the Day - Day 7 at Young and Broke

Check out today's question at Young and Broke - If you had $10,000, one day, and one store to spend it in, what store would you choose?

I'd hit up a place that sold a lot of gift certificates, and buy restaurant gift certificates so we could eat out whenever we pleased.. that would be awesome.

Day 6 of the Question of the Day Marathon!

Hop on over to Single Ma's Fabulous Financials and check out today's question. She's anxious to know how anxious YOU are about your savings! Today's question is:

In terms of your annual gross salary, what percentage do you save? Are you happy with that amount or do you think you could do better?

Oh boy oh boy oh boy Coupon Rebate!

I clipped out a form from last Sunday's coupons for a $10 rebate when you buy 10 of the Kellogg's products that they list. This is very exciting because a) we already buy most of this stuff and b) it was in an insert with coupons for all of those products! I know that they kind of look at these things as a loss leader because most people won't actually bother to collect all the store receipts and proof of purchase things, but I figure it's an easy way to make ten bucks on stuff we're already buying. And coupons to boot! Coupons for $1 off two! I went ahead and jumped the gun and used the coupons - and then when I got home, I got the flier saying that they would be doing the doubling-the-$1 coupons thing again this week. Oh well. We bought three boxes of Pop Tarts and four boxes of cereal, and we'll buy some more cereal later. (I really like cereal.) I am a lot more excited about this than I should be, I think.

Submit your article for the Festival of Under 30 Finances this Friday!

Just a quick reminder that the Festival of Under 30 Finances will be up at Beachgirl's Budget Blog this Friday. The deadline is Wednesday at midnight, so don't miss it! Go here to submit an article:

http://blogcarnival.com/bc/submit_398.html

It can be on any money-related topic you want, as long as it's something that you think other people under 30 would find useful.

Here's her question for this edition:

If you had to choose, would you rather have a job that pays well but little/no benefits, or have a job that might not pay great but has great benefits? Why?

Submit your article and your answer for this Friday's edition!

What interesting spam you have

Collaborator Needed
Group Finance Director
Halifax Bank of Scotland
Edinburgh EH3 9PE
Tel:+44 704 0117071
Fax:+44 870 4902369
Email:
hbos06@uku.co.uk
websit:www.hbosplc.com

Greetings,

I am Dr. Phil
Hodkinson, Group Finance Director (H.B.O.S) I have urgent and very
confidential business proposition for you. I understand that through
Internet is not the best way to link up with you because of the
confidentiality which the transaction demands. However, I have lready
sent you this same letter by post one month ago, but I am not sure if
it did get to you since I
have not heard from you, hence my resending
it again.

I discovered a dormant account in my office, as Group
finance director with Halifax Bank of Scotland. It will be in my
interest to transfer this fund worth 15,000,000 million pounds in an
account offshore. If you can be a collaborator to this please indicate
interest immediately for us to proceed.

Regards and respect,

Dr.

Phil Hodkinson

1. I don't recall receiving anything from Scotland, but I could be mistaken as to the good doctor's origin since his email ends in it (Italy).

2. 15,000,000 milliion pounds? So 15 million million? Are we using the British or American system of calculating billions here? Cause either way, that's probably more than any Scottish bank holds. And they might notice 15 million million pounds missing.

3. If you resend something again, you have sent it for the third time. Damn, maybe he also sent me a letter from Italy! I could be collecting foreign stamps!

Is it better to pay down debt or save for a down payment?

In my case, since I have a gross income of $2500 a month, this is a pertinent question even more than it is for people with higher incomes. The debt service can significantly cut into how much house you can be approved for, because a regular payment of debt service is a lot bigger chunk of $2500 than of $5,000 or $10,000.

At my income, with no debt service and no down payment, on a 7% 30 year mortgage with $1000 homeowner's insurance (I have no idea how much these things cost) and $1500 property taxes (about right for the size of house I would buy), Bankrate says I can qualify for about $103,000. That seems pretty good to me!

My question here is, should I bother saving for a down payment, or is it more important to eliminate my $6800 in credit card debt? I don't think I could do both in a short period of time unless my income rose substantially, and hell, if my income rose that much I could qualify for whatever I wanted anyway. So let's assume that I can either pay down the debt, or save up $6,000 (on account of having to pay minimums on the credit card while saving.)

My minimum payment right now is $140. So if I had an extra $140 debt service, with no down payment, I could qualify for only $62,000. If I had the $6,000, I could qualify for only $6,000 more, or $68,000.

However, if I went into my mortgage with no down payment at all, but also no credit card debt, showing only my student loans, I could qualify for $83,000.

This exercise is pretty clear to me. Paying off my debt and reducing the monthly amount of expenses significantly increases the amount that I can borrow, because I'm paying the debt service into the mortgage instead of the card.

What about my student loans? How much more house could I get if I reduced the payments as much as possible? All of my loans are consolidated with Sallie Mae, so they have a number of payment plans. The Grad Choice plan appears to lower the payment substantially for two years (presumably while you are in graduate school) - for me that would be $51 a month. I could qualify for $96,000 with that loan - but the payments would rise to $151 permanently after two years, which wouldn't be so bad since I'm already paying $150 on them now. You have loan options with the reduced payment from 2 to 5 years - the 5-year-reduced option is $62 a month for five years and $184 a month after that - ouch. In order to get the most mortgage, the best plan would probably be to take the 2-year reduced, just to get through the mortgage-acquiring process, and then switch back as soon as possible. While that would certainly get me a larger mortgage, I don't think I'd want both a larger mortgage payment and a rising student loan payment at the same time. But it might be an option to try to get a better rate and allow at least a little flexibility above what I might otherwise qualify for.

This is also a really good example of why I absoLUTELY cannot buy a car with a loan, if I want to think about buying a house. Even a tiny loan payment would really knock down the amount I could qualify for on my own. So in this case, if we move into a house that's far enough from work that I need to drive, it would make a lot more sense to buy a car in cash than to use that cash for a down payment. But what effect would having even a small downpayment make on what rates I could get?

I checked with my credit union's online calculator, and I can get a 100% LTV at 7.375% from them, although I would get a slightly better rate (7.125%) if I had $3,000 for a 97%, or $5,000 down for a 7/1 ARM at 6.5%. (Anything that is not one of those 30 year plans has to have at least 5% down.) A 20-year loan would get me 6.5%. But in order to actually get the $5,000, that might require not paying down the debt as aggressively... Ah, to have enough money to do both. =) As with everything, I think the answer is going to be, do both! So I'm going to try to get the $5,000 together, while lowering the debt as much as possible. I think in the long run I'll save more money and get a better loan if I can qualify for a regular loan, if I have 5%, than if I have no debt and also no money.

Around here, I could actually get a nice little house for $83k (because I don't intend to have children and send them to school in that area) and the mortgage payment would be only $550, which is a lot less than our current rent of $695. I'm thinking about houses because depending on how Boyfriend's career situation goes, we might be staying here for several years, in which case I'd like to buy a house, and he has agreed that it would be best if I bought it and he paid me rent, to avoid possible troubles if we break up (and also because he won't be paid much during those years anyway.) So it's something to think about for the future.

Question of the Day part 5 - at Free Money Finance

Take a look at today's question, hosted by Free Money Finance:

Which is more important to financial success: saving money (spending less than you earn through cost cutting) or making your income as high as possible (earning more money)?

FMF writes regularly on topics emphasizing both aspects, but let's see what his final answer is...

MBNA loves me when I run up the bills, evidently

So I'm logging into my various online accounts to add my new credit union bank account to the billpay sections, and as I log in to MBNA I notice that my available credit (which is what they display on the front page instead of your balance) has suddenly shot up a LOT.. to more than my credit limit.. and I think, hey! Did somebody pay all my bills for me? Then I go into the account summary and lo, MBNA has raised my credit limit $2,000 to $5,800. I guess I won't have to ask for much of an increase in order to fit the balance transfer on there. (Note that they never raised my balance while I was paying it down...)

I am a very impatient girl!

So after writing the post about how time is money and usually a lot of money, etc etc, I felt kind of guilty for not doing anything about my big credit card. I mean, three hundred bucks! That's a lot of money! And the faster I pay down the debt, the smaller the minimum payment becomes, so if I had a real emergency it wouldn't be a huge burden.

It occurred to me that, hey, I have three credit cards! And they're all always sending me crap in the mail to get me to transfer my balances! So I checked my other Chase card (the one that doesn't have the balance) and lo and behold, they have FIVE different balance transfer options, all at very nice rates (7.99 with no fees, to 0.99 until 2/07) and all done automatically online. Unfortunately I don't think they'd let me transfer one Chase balance onto another.

So I check my MBNA card. This has some charges on it, but I expect to fully pay it off with the DealBarbie & Co. money that I'll get in about three weeks. Holy crap! They have a 0% offer until JUNE 2007. And that's all without having to apply for any new cards or anything like that. And, of course, when that offer expires, I can just transfer it back to the Chase card at a very nice rate! I'll have to get a limit raise on the MBNA card, and check out what the fees are, but this could be super easy.

Of course, now I really want to do it RIGHT NOW. Unfortunately, I know that a) if I ask to have my limit raised now, I'd have to ask for a whole lot extra since I still have charges on there. Which would reduce the likelihood that they'd say yes to the higher limit. And b) you always pay off the lower-rate balance first, so it would be royally stupid to transfer a big balance on at 0% while I still have a smaller one at 9.9%, because then the small one would never get paid off and would accrue interest even faster than the big balance did at 3.9%. So I need to wait until I can pay off the whole card, and THEN ask for the limit raise, and THEN transfer the balance over.

But I wanna do it now! Now now now! I am very impatient. Having thought of such a good idea, I want to put it into practice as soon as possible.

A little bit of time creates a lot of money

It occurred to me that after selling my 8.3345 shares, I guess I can take $15 of capital loss on my taxes. I thought to myself, dang, that's not much money. But then I thought about it again and realized that that means $15 less that I have to pay taxes on - so essentially a free $3 or $4. And I spend a lot more time than that doing PineCone surveys for $5.

This is part of the reason why people often dawdle about opening 401(k)s - most of the time, we just think about how we don't want to use that 20 minutes of our life on something that boring. But if you think about how much you'd reap from using that 20 minutes for something productive, the return on your time is pretty awesome.

This even works on doing things you shouldn't be doing - if you take the time to do it in a slightly less bad way, you benefit a lot. For example, lots of people cash out their 401(k)s to buy a house. But if you roll that 401(k) into an IRA, you can take out $10,000 of it without paying the 10 percent penalty. How much time does it actually take you to do all of that crap? Probably a couple of hours, if you tally up all the individual ten-minute sessions you spend on it. So it seems like a huge hassle because you have to keep spending these ten minute chunks on it. But if you consider that you're saving $1,000 for your four hours of time, each of those ten minute chunks is worth about forty bucks. If somebody came up to you and offered you forty bucks to sit in a corner and shuffle papers for ten minutes, you'd probably do it. Why does it seem less valuable when you have to do it for your own money?

I think part of it is the issue of scale. When you're looking at cashing tens of thousands of dollars out, a thousand dollars just doesn't look as big. But you'd definitely stop and pick up a five dollar bill on the sidewalk because that's a gain of five bucks for free, whereas saving $1000 is just a potential not-loss. You figure you're already losing so much money, what does another thousand matter? Same deal with mortgages and car loans and anything else big - a few dollars just doesn't seem to matter enough to take the time to work things out, considering how much money you're dealing with in whole. Most people wouldn't bother to haggle with the car salesman over reducing the price of the car fifty dollars, but they'd probably get in a shouting match if that salesman worked at a coffee shop and wouldn't give them the rest of the change from their five. You're still losing money, but in one situation you're much more likely to fight for what you believe you deserve than in the other.

I am way guilty of this syndrome when it comes to my big credit card. I have about $6800 on it, at a nice 3.9% courtesy of some checks from Chase, but I guess I could move it to a 0% card. It accrues about $22 in interest each month, so I'd save about $300 over the life of the payoff (according to Bankrate) if I switched. Oh, but it's such a hassle, I complain to myself! I'd have to actually apply for the card (Ten minutes.) I'd have to link my new bank account to the new card. (I'm going to have to do that anyway since I switched banks. Five minutes.) I'd have to find a new card when the time was up. (Another fifteen minutes.) Oh, I'm so lazy. That's like an hour to save over $300. Very lazy. I'll write tomorrow about what I'm actually going to do (and it's even lazier, but at least it works.)