Debt riddled client

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Chris Hansen's picture
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I'm working with a prospect who is different from many clients. She is younger - in her mid 40's - a three time divorcee and in debt. She has at least 20K in debt and possibly another big expense on the horizon that may or maynot go away. She is recieving about 30K from her ex husbands 401K. She is concerned about socking away money for retirement but I'm convinced she needs to eliminate as much of the high interest debt as possible with the money she's recieving. I told her about the penalty as well as how she will want to withhold taxes now instead of paying later. I know in general it is a bad idea to take money out of non-taxable accounts, but in this case, this seems like the best way to go.
She also mentioned that eliminating this debt will allow her to defer up to $500 a month in savings for her employer sponsored plan.
She has zero home equity, no other savings - this is it. Not your ideal client by any means but since she is a friend of a friend and possibly a nice referall base, I decided to help.
Any ideas besides what I'm recommending? Is using this money from her ex's 401K to eliminate her debt the way to go?

troll's picture
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troll's picture
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I would advise her to get a new husband.

companyman's picture
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Your plan may free up $500/ month to save/invest, but only for a little while.  Soon it will be used to service new debt.   Keep her money invested and help her build a pay-off plan. 

troll's picture
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Let me see if I have this right.  A seasoned "financial advisor" is suggesting that not paying down on high cost credit card debt--even by accepting a one time tax penalty--is the way to go?
How much is the penalty for a premature withdrawal from the IRA?
Answer, 10%.
So on $3,000 she's going to suffer a $3,000 penalty.  How long does it take for $30,000 in credit card debt to generate $3,000 in interest, over-limit fees and so forth?
Having to declare the withdrawal in the current year is a moot point because it's a trade off with any $30,000 in generated income.  Actually she'll be better off taking the $30,000 from the IRA than from a second job because she won't have to pay FICA, etc. on the IRA withdrawal.
It is NEVER good advice to stay with an IRA instead of paying off crushing credit card debt.

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companyman wrote:
Your plan may free up $500/ month to save/invest, but only for a little while.  Soon it will be used to service new debt.   Keep her money invested and help her build a pay-off plan. 

Another embarassment.
Pay off her debt and help her build an investment plan to replace the money used to get out of debt. 

troll's picture
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As a Dutch Uncle I'd advise against.
Thrice divorced, and a bailout scheme for consumer debt... This woman needs to feel the pain of paying. Evaporate debt with some future monies and the money will stay gone while the debt will magically reappear. Just like the next husband seems to...
What you suggest is the less expensive course of action, but it's probably not the wiser in the long run.
The other side being that 30grand with 20 years to go equals a 5T retirment party (she'll retire when There's a Tag Tied To her Toe).
Speaking like a Dutch Uncle is often the very best you can do for a client. Granted, she's not going to like it, but look at it this way, if you are managing the 30K (whoopie!) then maybe she'll have something good to tell those referalees that you're hoping she'll send your way. She's not going to credit you for draining her only association with wealth to pay down credit that then reappears.

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This is why financial planning is not math.  Mathematically speaking, assuming that this is high interest debt, she is best off using the retirement money and paying the debt.
Whomit is absolutely correct.  If she doesn't feel the pain of paying the debt, it will reappear.
Before anything else is done, the first thing is that she needs to do is to negotiate with the credit card companies.   If her credit is good, she can find someone to give her money at a much lower rate.  If her credit is completely shot and she's way late on payments, she can probably negotiate a reduced payment. 

troll's picture
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Pay off the debt.

troll's picture
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anonymous wrote:
This is why financial planning is not math.  Mathematically speaking, assuming that this is high interest debt, she is best off using the retirement money and paying the debt.
Whomit is absolutely correct.  If she doesn't feel the pain of paying the debt, it will reappear.
Before anything else is done, the first thing is that she needs to do is to negotiate with the credit card companies.   If her credit is good, she can find someone to give her money at a much lower rate.  If her credit is completely shot and she's way late on payments, she can probably negotiate a reduced payment. 

The stupidity is awesome.
The lady withdraws from the IRA, does away with the debt and starts an investment that debits her checking account for an amount equal to, or greater, than her credit card payments would have been.
"Financial advisors" are not psychologists--you have no insight into what makes this woman tick and assuming that she will replace paid off debt with new debt indicates that that is what you would do.
Are you all such whores that you cannot accept that investments come AFTER elimination of debt--especially high interest debt--and AFTER proper life insurance and AFTER owning a home and AFTER establishing a year's worth of living expenses in an insured bank account?

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[quote=Devil'sAdvocate
The stupidity is awesome.
The lady withdraws from the IRA, does away with the debt and starts an investment that debits her checking account for an amount equal to, or greater, than her credit card payments would have been.
"Financial advisors" are not psychologists--you have no insight into what makes this woman tick and assuming that she will replace paid off debt with new debt indicates that that is what you would do.
Are you all such whores that you cannot accept that investments come AFTER elimination of debt--especially high interest debt--and AFTER proper life insurance and AFTER owning a home and AFTER establishing a year's worth of living expenses in an insured bank account?
I think your "awesome advice" has already been posted by others...............

companyman's picture
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Wow, got a couple of Suzie O's in the crowd, huh?   Do you also suggest investments before learning about a prospect's risk tolerance, goals, and expectations?
Get off your high horse and think about it for a minute.  The fact that she has the debt MIGHT suggest that she doesn't approach money with the same discipline that you do.  So although mathematically it makes more sense to take the hit and pay off the debt all at once, is it POSSIBLE, that just MAYBE when you take into consideration that this individual has never bothered to save anything and has run up debt that it MIGHT be beneficial to leave what little nestegg she has alone and help her build a plan to eliminate the debt?  Is it POSSIBLE that this would help to teach her the value/cost of borrowed money? 
Just a thought to consider if you can take a break from your superiority complex to consider that money isn't just math, it's also emotion?

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Putsy,
You are not a psychologist.  You have no insight into what makes this woman tick.  Why would you assume that this debt would not be replaced with new debt?
No decision on the best course of action can be made until after she attempts to negotiate with the credit card company.
New investments should certainly come after the elimination of high interest debt.   Whether investments should be liquidated really depends on the individual and whether the paying of the debt will cause her to accumulate new debt.
New investments should certainly come after proper insurance (all types) and savings.  Whether they should come before or after owning a house really depends on the individual.
 

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anonymous wrote:
Whether they should come before or after owning a house really depends on the individual.

It would be fun to hear your argument in favor of not owning a home.

troll's picture
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Devil'sAdvocate wrote:anonymous wrote:
Whether they should come before or after owning a house really depends on the individual.

It would be fun to hear your argument in favor of not owning a home.

RK, why don't you have the guts to respond to the thread about you?

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Devil'sAdvocate wrote: 
Are you all such whores that you cannot accept that investments come AFTER elimination of debt--especially high interest debt--and AFTER proper life insurance and AFTER owning a home and AFTER establishing a year's worth of living expenses in an insured bank account?

And then there's Walgreen's...
Face a fact DA, for the vast vast vast majority of Americans Investments come before all of those other things and have done so for quite some time.
Are you saying that people with debt should not make any contributions into their 401ks until their mortgage is paid off? A mortgage is debt in some cases high interest debt.
Do you really think that all the people who contribute to their 401k at your company are without credit card debt? (Wouldn't be a bad plan, btw for there to be a "Pretax debt reduction" program to be offered by one of the candidates. As a way to bail out the poor financial services industry and the sub prime lenders who agree to pay the tax to the gov't, resulting in a lowered rate of earnings to the lender, but they stay in business and the homeowner stays in the house.... Hey, I'm gonna fire this e-mail off to Hilary!)
Are you further saying that home ownership (as opposed to rent) is an absolute? So nobody should invest if they live in NYC and rent an apartment? Huh? what do you know? That'll put a crimp in the liquidity in some markets! It would loosen up some of those rent controlled apartments though, you know, the ones that cost less than what the ownership of a $150,000 home in the country would.
And then there is that nagging question of the one year's expenses... What if that same client has two years of expenses in their 401K in gics or the like? Does that count? Why not?
What if they have three years of expenses in equity in their home and an open home equity line at prime? Do they still need to have the cash at the bank?
In the real world we recognize what is and we separate it from what ought to be. Present the woman with the pros and cons of both sides and let her decide (as if we have any ability to do otherwise, when ChrisHansen goes to the client with his advice, the lady'll either accept it or go to a different advisor until she gets the advice she wanted in the first place). In a Walgreen's world it would be better for her to pay off the debt and then "go forth and sin no more" but in the real world she should kep the cash someplace where nobody can come after it (in an IRA) just in case the rest of her world goes to hell in a handbasket.
Why would you take her "year's worth of expenses" and blow it all on the paying down of old debt?

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Devil'sAdvocate wrote:anonymous wrote:
Whether they should come before or after owning a house really depends on the individual.

It would be fun to hear your argument in favor of not owning a home.

Uhhh how about they're military and they move every two years? Owning a home would be a terrible risk for the family given the vagrities of markets and the 6% sucking sound everytime they did a transaction (12% every two years for the sell/buy). Not to mention that they'd constantly be paying interest only on the mortgage.
Then there is the economics of metropolitan living versus individual home ownership. To own in a desirable location requires a massive outlay of cash. Cash that could be invested elsewhere earning returns that help pay the rent, therefore leaving monies for growth investments.
Are you now going to tell me that Real Estate has outperformed the s&p500 over the years? I could swear I saw somewhere else that you were arguing against the cost of fees on investments. What do you think taxes are? How about lawn care? Utilities? Up keep? etc etc etc?

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Whomitmayconcer wrote:
Uhhh how about they're military and they move every two years? Owning a home would be a terrible risk for the family given the vagrities of markets and the 6% sucking sound everytime they did a transaction (12% every two years for the sell/buy). Not to mention that they'd constantly be paying interest only on the mortgage.
Then there is the economics of metropolitan living versus individual home ownership. To own in a desirable location requires a massive outlay of cash. Cash that could be invested elsewhere earning returns that help pay the rent, therefore leaving monies for growth investments.
Are you now going to tell me that Real Estate has outperformed the s&p500 over the years? I could swear I saw somewhere else that you were arguing against the cost of fees on investments. What do you think taxes are? How about lawn care? Utilities? Up keep? etc etc etc?

How many investors are in the military?
I think you'll find that among the officer corps--the most likely investors--many will buy homes at their new assignment.  I understand the risk of having to sell if you're transferred in a down cycle but they're warriiors, risk takers, and many of them will take the risk.
Where do you come up with the idea that the buyer pays a commission on a real estate transaction?
 
If you're using your mutual fund income to help pay the rent, how much growth are you getting?
Isn't "massive" relative?  Are you of the opinion that homeownership is beyond the reach of the "average guy" because of the downpayment?
 
Do you really believe that a renter does not pay to maintain their rental unit?

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It would be fun to hear your argument in favor of not owning a home.
Client's townhouse is too small.  They aren't sure where they want to move.  They sell their townhouse for a handsome profit.  They happen to find a large house that is on the market for $600,000.  Owner agrees to rent instead of sell and is only charging $1,500/month. 
I don't know about you, but if I liked a $600,000 house and I could get it for $1500/month, I'd rent over buying it any day of the week.  Add in that they'll be moving within 2 years and prices are falling, renting is a complete no brainer.

troll's picture
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anonymous wrote:
It would be fun to hear your argument in favor of not owning a home.
Client's townhouse is too small.  They aren't sure where they want to move.  They sell their townhouse for a handsome profit.  They happen to find a large house that is on the market for $600,000.  Owner agrees to rent instead of sell and is only charging $1,500/month. 
I don't know about you, but if I liked a $600,000 house and I could get it for $1500/month, I'd rent over buying it any day of the week.  Add in that they'll be moving within 2 years and prices are falling, renting is a complete no brainer.

It is also a temporary solution to a temporary problem.
Proving something with the exception to the rule is faulty thinking.

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Back to the original post, my immediate question was whether her employer would be matching contributions. 
I see everyone's point about her sticking with it, and if she pays the debt she certainly needs some advice on how to not get herself in the same predicament in 2 years.  However, if she would be getting 100% match on that money, she is getting a $500/month raise (the matching funds) if she pays off the debt.  It would only take her 2 1/2 years to replace $30,000 at $1,000/month.

troll's picture
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EDJ4now wrote:
Back to the original post, my immediate question was whether her employer would be matching contributions. 
I see everyone's point about her sticking with it, and if she pays the debt she certainly needs some advice on how to not get herself in the same predicament in 2 years.  However, if she would be getting 100% match on that money, she is getting a $500/month raise (the matching funds) if she pays off the debt.  It would only take her 2 1/2 years to replace $30,000 at $1,000/month.

What a great 401(k) she must have.  It was her husband's, they divorced, she got a piece of it, and her husband's employer keeps matching her contributions.

troll's picture
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The challenge was; " It would be fun to hear your argument in favor of not owning a home."
Not ; " Should you be a homeowner before an investor?" (Mostly because this is a stupid question given the facts of the world being that most "homeowners" are living in the bank's house.)
As a result, this "How many investors are in the military?" is a rhetorical non sequitor.
And this "I think you'll find that among the officer corps--the most likely investors--many will buy homes at their new assignment.  I understand the risk of having to sell if you're transferred in a down cycle but they're warriiors, risk takers, and many of them will take the risk." is capitulation of logic to testosterone.
The genisis of this thread is economics of the deal. I injected the reality that the psychology of the investor is germanie and you went all clinical on us saying that we're not psychologists etc etc.. then when you are challenged, you go all "they're risk takers and warriors" regadless of the economic virtue of the position.
The officer would be smarter NOT to own as a practice. Occasionally it would have been better to own, from an economic standpoint.
"Where do you come up with the idea that the buyer pays a commission on a real estate transaction?"
Questions like these lead to 700 page "Annuity sales policy guides". Of course the buyer pays the commission, he just never sees it because it is built into the price. But if you bought and sold the same day, youd be 12% in the hole after the bid/ask spread and the 6% commission.
"If you're using your mutual fund income to help pay the rent, how much growth are you getting?"
Let's say that buying a $1,000,000 home on the East Side takes 200,000 down and a note for 800,000 (let's not forget that 56,000 of that is commission paid to the broker). $5,322/month plus the loss of income on 200,000.
Compare this to some nice rent controlled space at let's call it $4,000 per month (which is way high). $200,000 at 4.75% tax free is 9,500/year... 790/month. Which when deducted from the 4,000 means that the client is paying 3,210, which gives him 2100 per month to invest for growth.
"Isn't "massive" relative?  Are you of the opinion that homeownership is beyond the reach of the "average guy" because of the downpayment?"
Have you been paying attention to the mortgage companies' troubles lately? Apparently, like so many other things, you only have a slippery grasp of the headlines and can't see what is behind them.
"Do you really believe that a renter does not pay to maintain their rental unit?"
Have you ever been a landlord?

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DA,
I read your response and thought maybe I misread the initial post.  I didn't.  Chris Hansen wrote:
She also mentioned that eliminating this debt will allow her to defer up to $500 a month in savings for her employer sponsored plan.

I'm going out on a limb and saying that we are talking about her employer, not her exhusband's.

the word's picture
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How about a loan against the 401(k)?
Gets to keep her $30,000.00 and it has the ability to grow.  Consolidates high interest debt into lower rate, that she has to be responsible for paying off. 

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Assuming they have loans on the 401K then yes, but she wouldn't be able to roll it.

troll's picture
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Whomitmayconcer wrote:
"Do you really believe that a renter does not pay to maintain their rental unit?"
Have you ever been a landlord?

Yep, I currently own three single family homes as rental property.
I consider the cost of maintenance and taxes in deciding how much rent to charge--there is not a landlord who does not do that.

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But they mostly become a write off.
The cost of replacing the roof, of fixing the running toilet, of Rotorootering the pipes AGAIN, of painting the house and the common space and so many other out of pocket and capitalized costs not to mention the plowing and lawn mowing etc etc...
Talk about your costly investment! And we haven't even touched on the value of your time. yes, every landlord considers all these things, and then sets their rental price based on what the market will bear. At times the market will bear overpayment, but most of the time, it's a renters market. Why? Because any money is better than the no money that vacancy provides.
But let me ask you this then... You have three single family homes that you are (presumably) renting. How ethical is it for you to provide these homes, considering that you feel that it is best for people toown a home instead of renting? Should your renters liquidate their 401ks and all other assets so that they can buy a home?
According to what you've said, the answer is, no! it is not ethical.
 

the word's picture
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From a pure investment standpoint the purchase of a home is a bad idea of monunetal porportions.
Just an example from my market:
200k financed at 6% with 10% down requires the following payments to meet your monthly obligations.
$1079 PrinciPal and interest; $325 taxes and Insurance; $75 PMI  for a total of $1479.  Of that total roughly $150 is not an expense that can be used to build equity.  So 30 years later the house is paid off and if your lucky worth $800,000.  That is saying your are extremly lucky.
In the same market you can rent a house for $800 all in.  You then take the the remainging $679 that would have been used to pay expenses and make a monthly investment in your favorite VA.  The VA is started with an initial investment of 20k that would have been used for the down payment.  Year 30 your will have roughly 1.6 million assuming a return of 9.5%

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Whomitmayconcer wrote:
But they mostly become a write off.
The cost of replacing the roof, of fixing the running toilet, of Rotorootering the pipes AGAIN, of painting the house and the common space and so many other out of pocket and capitalized costs not to mention the plowing and lawn mowing etc etc...
Talk about your costly investment! And we haven't even touched on the value of your time. yes, every landlord considers all these things, and then sets their rental price based on what the market will bear. At times the market will bear overpayment, but most of the time, it's a renters market. Why? Because any money is better than the no money that vacancy provides.
But let me ask you this then... You have three single family homes that you are (presumably) renting. How ethical is it for you to provide these homes, considering that you feel that it is best for people toown a home instead of renting? Should your renters liquidate their 401ks and all other assets so that they can buy a home?
According to what you've said, the answer is, no! it is not ethical.

Tenants rarely have 401(k) plans that are worth enough to make a downpayment.
If they do they should consider liquidating their plan and putting the money into a downpayment on a home.
If you buy a $300,000 home for 10% down what is your return if the home appreciates only 4% per year?
I was talking with a friend who bought a house on the water in Norwalk in 1985.  4000 square feet, 4 bedrooms 4 baths.  He still had kids at home so he needed the space.
He paid roughly $500,000 at that time, with a downpayment of $100,000.
It's now 27 years later.  The house has been paid off and was recently assessed at $4,900,000.  He believes he could sell it for about to $6 million since two doors down just sold for close to $7 million but it has five bedrooms and half an acre more land.
That's better than any mutual fund you can name.

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the word wrote:
From a pure investment standpoint the purchase of a home is a bad idea of monunetal porportions.
Just an example from my market:
200k financed at 6% with 10% down requires the following payments to meet your monthly obligations.
$1079 PrinciPal and interest; $325 taxes and Insurance; $75 PMI  for a total of $1479.  Of that total roughly $150 is not an expense that can be used to build equity.  So 30 years later the house is paid off and if your lucky worth $800,000.  That is saying your are extremly lucky.
In the same market you can rent a house for $800 all in.  You then take the the remainging $679 that would have been used to pay expenses and make a monthly investment in your favorite VA.  The VA is started with an initial investment of 20k that would have been used for the down payment.  Year 30 your will have roughly 1.6 million assuming a return of 9.5%

You cannot rent a $250,000 house for $800.  Rents should be about .75% of value per month.  That will make the payment about $1,800 per month.
A "financial advisor" who does not understand the importance of homeownership--both financial and emotional benefits--should hang their head in shame.

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Is it possible that her husband ran up the debt bill that wasn't as significant in comparison to the combined family income as it is to her as a divorcee splitting all of the assets and liabilities down the middle?
Just a thought...  Also, shouldn't there be a premium placed on the quality of life improvement this lady might experience by paying off her oppressive debt?  I'm on the fence personally...

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the word wrote:From a pure investment standpoint the purchase of a home is a bad idea of monunetal porportions.
Just an example from my market:
200k financed at 6% with 10% down requires the following payments to meet your monthly obligations.
$1079 PrinciPal and interest; $325 taxes and Insurance; $75 PMI  for a total of $1479.  Of that total roughly $150 is not an expense that can be used to build equity.  So 30 years later the house is paid off and if your lucky worth $800,000.  That is saying your are extremly lucky.
In the same market you can rent a house for $800 all in.  You then take the the remainging $679 that would have been used to pay expenses and make a monthly investment in your favorite VA.  The VA is started with an initial investment of 20k that would have been used for the down payment.  Year 30 your will have roughly 1.6 million assuming a return of 9.5%You're overlooking the fact that if you use a fixed-rate mortgage you are FIXING a large portion of your cost of living for a very long term.  In that case inflation ends up working in your favor.

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It's now 27 years later
 
 
Before some kid jumps in my stuff--I know that 1985 to 2007 is 22 years.  I cannot explain why I thought it was 27 other than a brain fart.

troll's picture
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You know what they say, "where there's fart, there's sh*t"

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DAtoo wrote:I cannot explain why I thought it was 27 other than a brain fart.
The 27 is your IQ.

the word's picture
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DAtoo wrote:the word wrote:
From a pure investment standpoint the purchase of a home is a bad idea of monunetal porportions.
Just an example from my market:
200k financed at 6% with 10% down requires the following payments to meet your monthly obligations.
$1079 PrinciPal and interest; $325 taxes and Insurance; $75 PMI  for a total of $1479.  Of that total roughly $150 is not an expense that can be used to build equity.  So 30 years later the house is paid off and if your lucky worth $800,000.  That is saying your are extremly lucky.
In the same market you can rent a house for $800 all in.  You then take the the remainging $679 that would have been used to pay expenses and make a monthly investment in your favorite VA.  The VA is started with an initial investment of 20k that would have been used for the down payment.  Year 30 your will have roughly 1.6 million assuming a return of 9.5%

You cannot rent a $250,000 house for $800.  Rents should be about .75% of value per month.  That will make the payment about $1,800 per month.
A "financial advisor" who does not understand the importance of homeownership--both financial and emotional benefits--should hang their head in shame.

Well, i said a 200k home rents for $800, not 250k.  And yes in my market you can rent a 200k home for $800. 
There are emotional benefits.  Please tell me the financial benefits of owning a home in the above situation. 

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Putsy, there are plenty of times that owning a house makes sense.  There are plenty of times that renting makes sense.  Also, it is not just a financial decision.  Many people simply don't want to deal with some of the hassles of home ownership.
You cannot rent a $250,000 house for $800.  Rents should be about .75% of value per month.  That will make the payment about $1,800 per month.
I just told you that my client rented a $600,000 house for $1500/month.   You can rent one for whatever price the owner is willing to accept and you are willing to pay.
There are too many exceptions to renting being better than buying to make a blanket statement that it is better to buy.

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The Word is right about the loan.  If the plan allows it, that would bail her out of those high fees, while still keeping the pressure on her to pay.
Have her sign some kind of doc that indicates that if she even looks at another credit card app, she's fired.  While legally it really doesn't mean anything, psychologically it may be what she needs to prevent  her from blowing herself up again.
I would dig, and dig hard.  Find out what led to her charging up those cards.  Three husbands?? Yikes.
Bobby may be right:  she needs a new husband.

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Putsy, a $500,000 house growing to $5,000,000 in 22 years is an 11% return if we assume that the client never had to put a single dime into the house and never had to pay any taxes and never had to pay homeowner's insurance, etc.  What mutual funds have done better, you ask.  Answer: Lots of them.

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DAtoo wrote: 
Tenants rarely have 401(k) plans that are worth enough to make a downpayment. Are you saying that a downpayment is beyond the grasp of the "Average guy"?
If they do they should consider liquidating their plan and putting the money into a downpayment on a home. I'm sure they do, but after considering, they decide against, for a variety of good reasons.
If you buy a $300,000 home for 10% down what is your return if the home appreciates only 4% per year? Depends on what your taxes are and what your other expenses are now doesn't it? Oh wait those only matter when we're talking about the brokerage industry right?
I was talking with a friend (As IF!) who bought a house on the water in Norwalk in 1985.  4000 square feet, 4 bedrooms 4 baths.  He still had kids at home so he needed the space.
He paid roughly $500,000 at that time, with a downpayment of $100,000.
It's now 27 years later.  The house has been paid off and was recently assessed at $4,900,000.  He believes he could sell it for about to $6 million since two doors down just sold for close to $7 million but it has five bedrooms and half an acre more land.
That's better than any mutual fund you can name.
The poor dumb sonofabitch! I knew the guy who used to live next door to him in the old neighborhood. He put the 100,000 into MSFT the next year. He holds nearly 1,031,000 shares today.  He'd give your friend a call and buy his house if it were in a classier neighborhood!
I seem to remember someone saying, proving the rule by using the exception to the rule is sloppy thinking. I seem to remember that it was you. But you don't care what you said only what you're saying right now.
You are a Putz!

troll's picture
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Joined: 2004-11-29

anonymous wrote:
Putsy, a $500,000 house growing to $5,000,000 in 22 years is an 11% return if we assume that the client never had to put a single dime into the house and never had to pay any taxes and never had to pay homeowner's insurance, etc.  What mutual funds have done better, you ask.  Answer: Lots of them.

How about $100,000 growing into $5,000,000?  He didn't buy the place for cash.
Idiot.

troll's picture
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anonymous wrote:
Putsy, there are plenty of times that owning a house makes sense.  There are plenty of times that renting makes sense.  Also, it is not just a financial decision.  Many people simply don't want to deal with some of the hassles of home ownership.
You cannot rent a $250,000 house for $800.  Rents should be about .75% of value per month.  That will make the payment about $1,800 per month.
I just told you that my client rented a $600,000 house for $1500/month.   You can rent one for whatever price the owner is willing to accept and you are willing to pay.
There are too many exceptions to renting being better than buying to make a blanket statement that it is better to buy.

Every guy in the world who cannot imagine himself being able to actually get the downpayment together will swear that he's got it all figured out, and that renting is the way to go.
Meanwhile homeownership is still the single most sought after sign of stability in the country--hell, in the world.

deekay's picture
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How about $100,000 plus costs for upgrades, repairs, interest on the mortgage, taxes, insurance, lost opportunity costs on all the above that were paid.....did I leave anything out?
Math is not money and money is not math, putsy.

troll's picture
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Joined: 2004-11-29

deekay wrote:
How about $100,000 plus costs for upgrades, repairs, interest on the mortgage, taxes, insurance, lost opportunity costs on all the above that were paid.....did I leave anything out?
Math is not money and money is not math, putsy.

I agree, and that's why you'll find that every homeowner in the world will do anything they can to save their home.

shadow191's picture
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Joined: 2007-06-25

He still paid $500k total, plus interest. 
 
 
DAtoo wrote:anonymous wrote:
Putsy, a $500,000 house growing to $5,000,000 in 22 years is an 11% return if we assume that the client never had to put a single dime into the house and never had to pay any taxes and never had to pay homeowner's insurance, etc.  What mutual funds have done better, you ask.  Answer: Lots of them.

How about $100,000 growing into $5,000,000?  He didn't buy the place for cash.
Idiot.

troll's picture
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Joined: 2004-11-29

"I agree, and that's why you'll find that every homeowner in the world will do anything they can to save their home."
Yeah, that's the reason! Got nothin to do with needing a place to live and the shame that he'd feel if he was forced to sell his "American...Hell the World's dream". Whatever everybody says is the truth isn't that about what your argument boils down to there DA2?
Meanwhile the question is "what is the best use of money?" Not "how many people have hit the Lottery?"
Meanwhile you didn't respond to the MSFT $100,000 to $30,000,000  point. Why? Because you'd rather compare the exception to the standard.
No wonder you failed as a salesman, you can't even convince a group of homeowners (some with more than one) on the efficacy of homeownership! You couldn't sell chocolate bars to ten year olds if you sold them for crickets, one for one!
I love the way you won't address the "cost to carry" issue, you, the guy who is all about the elimination of carrying charges for investment councillors.
Not to mention, some "Friend" bragging about how they did in a real estate deal especially after he had to listen to you bloviate about how good the stock market has been to the man of above average intellect and ballsize who writes put options against stocks in a rising market.... I don't find any of the "facts" in your case quite compelling as you would like them to be.

anonymous's picture
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Joined: 2005-09-29

How about $100,000 growing into $5,000,000?  He didn't buy the place for cash.
If you want a fair comparison, shouldn't we then compare it to an investment where an investor put in $500,000, but $400,000 was borrowed from dad.  That way, we can pretend that it was also only a $100,000 investment.  T
 

ExPropTrader's picture
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Joined: 2006-11-19

DAtoo wrote:the word wrote:

You cannot rent a $250,000 house for $800.  Rents should be about .75% of value per month.  That will make the payment about $1,800 per month.

Beg to differ, I'm in a $500k house for $1200 which by your accounts "should" be $3600.  I'm sure every market is differnt but that seems waay to much to pay for rent to me. 

Chris Hansen's picture
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Joined: 2007-07-22

Insanity.
Thanks (I think) for all of the replies. I believe I've decided on the best course of action and will elaborate in a minute. For now let me add a few items that will shed light on the situation. FWIW, I originally posted this morning before heading to the office so I was in a hurry. Here is the additional info:
1. Client is not an irresponsible spender. Source of debt is high interest student loans, credit cards from health scare as well as emergency/mandatory home repair needs.
2. Client does own a home. She has two roommates and in all honesty, probably needs a 3rd roommate but can make do without.
3. Home is a recent purchase; 100% financed, zero equity and if I'm not mistaken, interest only at this point.
4. Client makes appx $45k/year.
5. The employer sponsored plan is a SIMPLE and the employer matches 3%. The deferral she prosposes of $500 is from her own pay and does not include an employer match. The reason she can not make such a contribution now is because she is using her income to service the existing debt.
6. In this case, there will be no loan provisions allowed on this 401K since the spouse is no longer employed and the court is seeking to split and close the participants plan
Before I offer my plan, there is one thing that is a potential conflict for me. If I advise her to eliminate her debt, I lose out on the assets. The companies SIMPLE is held with another firm. I won't even generate revenue to liquidating an account since she'll be depositing a check from the split 401K. If this business were based on good will, I'd be rich.
Decision:This was fairly easy but I wanted (and appreciated hearing) others opinions. I will recommend she eliminate the debt. Any return she would get with me would need to be extremely high to justify keeping the debt. It is not likely to generate these returns without a high risk portfolio and frankly, I don't feel like debating this with my compliance group.
I think its nice to have an investment portfolio but it doesn't make sense when you have a boat load of debt you can't afford waiting in the wings. Plus, it's possible she would nibble away on the account while not paying the debt with the distributions.
So thats that. Unless she insist otherwise, that is my rationale and recommendation.
Thoughts?

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