Hugh's Common Sense Financial Guide

DISCLAIMER: I am really a computer geek; why am I qualified to write this stuff??? :-)

I am amazed and frightened at the number of people who e-mail, FAX, write and even call me for financial advice about their mortgages, loans and even investment and such! It really just takes some common sense to make sound financial decisions and to keep yourself from being dragged into the huge money sucking abyss of debt! (Wouldn't Ross Perot be proud?)

Here are Hugh's 6 simple ideas to keeping oneself sane and solvent...

1. Borrowing for something that loses value is bad!

Don't borrow for a car unless you have to since they go down in value. It is much wiser to borrow for a house or other appreciating item. (Student loans are another "appreciating" loan -- you appreciate yourself!) And when you borrow, do so at the lowest rate possible for the shortest period possible. A good bet is a home equity loan. It's deductible!

2. Borrow the cheapest money you can!

That is often a home loan. The rates are low; the interest deductible. When you buy your house, don't pay down the loan below 80% unless you are otherwise debt free or need to for credit reasons. Use the money to pay off other higher interest non-deductible debt. A mortgage or home equity loan is almost always the cheapest money you will ever borrow unless you have a kind, rich relative :-)

Robert Sills ( also reminded me of another great source of money to borrow if you can, money from your 401(k) or 403(b) plan. Many plans allow you to borrow from your account balance and pay the interest back to yourself. This first assumes you have a large enough balance in your account (as the home equity loan assumes you have enough equity in your home) and then you must switch sufficient investment balance over to the fixed rate account and you borrow from that fund!

Please note, however, that a 401(k)/403(b) loan should be a short-term loan since you are borrowing against your retirement. Plus if you cease employment the balance of the loan is due at that time which could be very painful indeed. If you don't have other funds to cover it you must pay it out of the 401(k) proceeds themselves which get taxed as ordinary income PLUS a 10% penalty! So much for any savings there. Plus any borrowed funds must be locked into a fixed interest rate investment (your loan!) which isn't the best long term investment.

3. Don't let low monthly payments tempt you on bad ideas!

Wow, those monthly payments on that 60 month car loan sure look low don't they? If you can afford a 36 or 24 month car loan, do so; I can't imagine paying for a CAR for 5 or 6 YEARS! And leasing is for businesses and those folks who just have to drive a Lexus. If you can write it off is one thing; when it comes straight out of your pocket is another.

4. Save, save, save.. tax deferred if possible!

The younger you start the better! Put money away in a good money making investment. If you have 5 or more years, put most of it in some stock funds of some sort, tax deferred if possible. You can take emergency withdrawals from TSA's for medical, college or house purchasing needs. So put all you can into those IRA's, 401k and 403b plans! And if you're young, be aggressive with your investments!

Another nice new reduced tax investment program now is the Roth IRA for qualified individuals. And for college savings use a state 529 plan or perhaps an Education IRA.

BUT if you have high interest car loans or credit card balances PAY THEM OFF before you squeeze your last penny into your tax deferred plans. It's hard for even those 12% yields on stocks to compete with an 18% credit card! Yes, the power of compounding is great, but the credit card companies think so too!! This gets to point 5 which I tell people...

5. Don't prepay your mortgage when you have that monster car loan!

I get lots of questions about prepaying mortgages. What I can't believe is some people have $600 in car payments and credit card payments and ask me how much they should pay each month to reduce their mortgages. The simple answer is NOTHING! If they have extra money to pay down their mortgages they should use it pay down or pay off their car loans, furniture/appliance loans and credit cards! I'm amazed how many people think it is normal and expected to carry around big credit card balances all the time. Heck, *I* will lend people money at 18% interest!! Really! I don't mind! Generous, aren't I?

6. All those junk mail loan deals are from shylocks!

I am getting sick to death on being "congratulated" by junk mail that I have been pre-approved to give away my money to some greedy bank. Wow, what a deal. Firstly, anyone who actually wants a platinum card with a $100,000 line of credit must either have an ego bigger that the Gate$ man himself, or simply no sense. Secondly, these wonderful introductory 4.9% rates can be great if you keep up with all the fine print, but lenders only offer them because they know the majority of people will forget 6 months down the line and end up paying the standard 18.9% rate and not even realize until it's too late.

What we must all do is when you get two such mailings on the same day, you stuff the refuse from one envelope (without incriminating identifying material) into the business reply envelope of the other lender, and vice versa. Then you mail the junk back to the crooks. At least we are helping out the U.S. Mail Service.