Get smart with your money
Every day we hear from people who are diligently paying down their student loans — and ignoring their retirement funds. This has got to stop.
In my latest for NerdWallet, why debt can be costly, but failing to save for retirement ultimately will cost far more.
Today’s top story: Finding the best student loan repayment plan. Also in the news: How student loans affect your taxes, calculating monthly car costs, and tax payment options for when you owe the IRS.
Find the Best Student Loan Repayment Plan for You
It’s going to take a while.
3 ways student loans affect your taxes
Don’t forget to deduct your interest.
Calculate a monthly car cost when buying outright to better weigh your options
A different way of thinking.
Tax payment options for when you owe the IRS
Rule #1: Don’t ignore it.
Dear Liz: I own a car that I can no longer afford. Unfortunately, buying it was a poor decision and came with terrible interest rates and terms. I’ve been 30 to 60 days late on the payments for close to a year and have other debts that I haven’t been able to pay. Because of this, my credit is already in the basement. I’m underwater on the car (by about $7,000) and am feeling like the only option is to have it “voluntarily” repossessed. I really feel that if I didn’t have this $400 payment and another $200 a month in car-related costs, I could get my other debts squashed, build some savings and get in a much better place financially. I should mention that I have another (free!) car available to me when I need it and live in an area with reliable public transit, plus I have carpooling options that can get me to and from work at little to no cost. I have no major plans for anything that would require amazing credit scores. I have a stable job and rent an apartment with my boyfriend, who has strong credit but not a huge capacity to help financially. Am I insane? How would I even begin to recover from a repossession?
Answer: Having your car repossessed won’t relieve you of the debt. In fact, your debt is likely to increase.
Repossession costs such as storage, preparation for sale and attorney fees can be added to your loan balance. You’ll owe the difference between that amount and the price the creditor gets for the vehicle when it’s resold, often at auction.
If you don’t pay what you owe, your creditor can sue you — and probably will, given that nice steady job with reliable wages that can be garnished.
So yes, you probably would be insane to think repossession is the answer to your situation.
Usually the best solution when you owe more than a car is worth is to “drive out of the loan” — in other words, to own the car at least until the loan is paid off. In your case, the best solution may be to park the car while you pay it off. A parked car doesn’t need much gas or maintenance (as long as you start it occasionally). You may be able to get discounts on insurance and registration if you don’t operate it.
If you still can’t make ends meet, then get a second job that will bring in some extra cash. Pay off the loan as quickly as possible and then start saving to pay cash for your next car. Also work on repairing your credit so that if you want loans in the future you’ll be able to get decent rates and terms.
Dear Liz: When applying for credit or at other times when one must state gross income, how should virtual income be computed and treated? My wife and I have annual tax-free income of about $96,000, not subject to offset of any kind, plus our $8,000 annual property taxes are waived in their entirety, as are our vehicle license fees and many other smaller fees. We have free health insurance through the military and the Department of Veterans Affairs that far exceeds the best plan out there. To state our household income as the money that goes into our bank accounts annually is a serious understatement of our financial position. We do not want to lie on a credit application, but we feel we are not being totally honest no matter how we answer questions asking for gross income.
Answer: Creditors are far more worried about people inflating their incomes than they are about people who understate their financial situations. In short: Don’t worry about it.
Dear Liz: I worked enough in private industry to qualify for Social Security benefits, but then worked for the state and did not contribute to Social Security for another 20 years. So, I will have a state pension at my current salary as well as Social Security representing my former salary, which was about one-third of what I’m making now. My question is, would it be of value to retire early and return to private industry for a few years?
Answer: Your Social Security benefit is likely to be reduced because you’re getting a pension from a job that didn’t pay into Social Security. This is known as the windfall elimination provision, and you can learn more about it on the Social Security website.
You can avoid the provision if you had 30 years or more of “substantial earnings” (which varies by year but was at least $22,050 in 2015) from jobs that paid into Social Security.
It probably wouldn’t make much sense to quit a well-paying job with a presumably generous pension to try to boost a much smaller Social Security payout. But a fee-only financial planner could run the numbers for you and explain your various options.
Today’s top story: How to save money without disrupting your lifestyle. Also in the news: What you can learn from your tax return, discovering your FI number, and why millennials should consider a robo-advisor.
How to Save Money Without Disrupting Your Lifestyle
Saving doesn’t have to be painful.
5 things you can learn from your tax return
Things worth paying attention to.
Use the FI Formula to Find Out How Much You Need to Be Financially Independent
Finding your FI number.
3 Reasons Millennials Should Consider a Robo-Advisor
Smaller fees make robo-advisors more attractive to new investors.