Q: I recently got a job that will require me to move out of state, because we don’t know the area real well my wife and I have decided to rent a home for a year before deciding where we would like to buy a new home.
I have $25,000 from the sale of my old home. Should I save all of that money for the down payment on the new home next year or take $9,000 and pay off my car loan. The car loan’s interest is 6 percent and I pay $400 per month.
I’m just wondering what would be more financially sound.
A: The question you have to ask yourself is why would you put $25,000 in a savings account earning 1 percent interest when you’re paying 6 percent interest on a loan?
Not only are you losing 5 percent, you’re actually losing a little more because you have to pay federal and state income tax on the 1 percent you earn on your cash.
Here’s what financial planners have known for years: Every dollar you spend to prepay a debt (any kind of debt) actually earns you the interest rate the debt carries. So, if you spend $9,000 to pay off your car loan, you’ve earned 6 percent on that money. That’s a good deal.
To rebuild your savings, simply take the $400 per month that you would have spent, and keep tucking it away into your savings account.
Q: I own a single family home in NJ and am thinking of doing a 1031 exchange for an apartment building in California where I live. Do you think this is smart or should I hang on to a house located in an excellent neighborhood back east?
A: I think it’s very difficult to own rental property 3,000 miles from where you live. There’s no easy way for you to check on how the property is being maintained and what the tenants are doing to it. And not knowing can have disastrous financial consequences if what your tenants are doing is illegal.
I think you’re much better off taking your profit out of this property, executing a 1031 tax-free exchange and buying an apartment building near where you live.
Please consult with a real estate attorney or 1031 specialist to make sure you complete the transaction in a timely fashion.
Q: I have obtained my credit report and I noticed that an old insurance agency sent my account to collections for $120. I did not cancel my insurance policy therefore they dropped me after failing to pay by the due date.
Can my ex-insurance company send me to collections for not paying for the month in which I was covered? I would like to fight this and get it removed from my credit report. Thank you,
A: It depends on what your contract says. Please read it and see what you were supposed to have done in order to cancel the contract without a penalty. If you were supposed to give them 60 days notice and you simply stopped paying your bill, then you may indeed owe the money.
On the other hand, it could simply be a false debt. Call the collections agency and demand to see a copy of the bill or contract under which they are claiming you owe this cash. If they can’t provide you with anything, you may have grounds to force them to remove this negative information from your credit history and stop calling you.
But, consider the bigger picture. You may be ruining your credit over a $120 bill. The simple fact that this was sent to a collection agency could sink your credit score.
If fighting this bill doesn’t work, then negotiate a payoff in which you pay the bill in full but they agree (in writing) to simply report the sum is “paid in full” on your credit history.
Jan. 19, 2009.