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Listener questions on saving, spending, and managing debt

Host Tess Vigeland answers listener questions about retirement, savings, students loans, and money management. She's joined by Jill Schlesinger, editor at large for CBS's Moneywatch.com.


Managing Debt

Last week, Marketplace's Jeff Tyler looked into the seven-year car loan and why consumers find it easier than ever to buy a car that would otherwise be out of their budget. This week, Tess talks to someone who's purchased a car and is now re-thinking the expense. Courtney from Lansing, Mich. bought a new car that they love, but they want to spend less on monthly bills. Should they sell the new car and take a loss to get rid of the monthly payment?

Sometimes it's necessary to incur a little debt. Tess and Jill also talk about one formula prospective students can use when figuring out the appropriate amount of money to borrow for college.

Smart Saving

Joanna from Hammond, Ind. has three young children and wants to know the best way to start saving for their future needs. She knows she'll have to start paying for their extra-curricular activities soon, and college will be close behind. Tess and Jill have tips for finding the right kind of savings account, but they want to make sure Joanna is saving for retirement too.

One listener in Arlington, Va. has a question about prioritizing her debt. Kelly has some student loan debt but also wants to start saving for a house. She wants to know if she should focus on paying down her student debt, saving for a new house, or building up her retirement account.

Tess and Jill also have tips about developing a budget for expenses and savings.

Smart Investing

Joanne from Carmel, Calif. has a good problem to have. She's saved $180,000 that she'd now like to invest. But she's having trouble finding a money manager that will take her as a client because she has less than a million dollars to manage. Jill and Tess suggest she contact the National Association of Personal Finance Advisors, or NAPFA, to find the right person to manage her wealth.

Andy from Carlsbad, Calif. is underwater on his condo. It was supposed to be an investment property and now his family is looking to expand into a larger space. He wants to know what his options are. Should they try renting their condo to help re-coop the lost value? Or would it be better in the long run to do a short sale?

Using your 401(k) wisely

When is it a good idea to cash out your 401(k) ahead of retirement? Jill says only in a life or death situation — and you must pay yourself back! Two listeners have ideas of ways to use their retirement savings for other purposes.

Sonja in Birmingham, Ala. has just relocated. She's thinking of using the small amount saved with her previous employer to help defray costs while she looks for a new job. Sally from Columbus, Ohio has an investment idea she thinks is brilliant -- or crazy. Should she use her 401(k) to purchase a home? Tess and Jill give some tips on the best way to use your retirement funds.

About the author

Tess Vigeland is the host of Marketplace Money, where she takes a deep dive into why we do what we do with our money.
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Tell Jill, that Woody Allen was quoting Groucho Marx:

"I don’t care to belong to any club that will have me as a member."

Tess,
You forgot, in my opinion, to ask the caller who was considering reducing ther outflow on a second new car what alternatives they have with respect to walking, biking, or public transit. It would be appreciated in the futue.

Maybe this is uncommon, but I was able to refinance through the HARP program and at the same time reduce the number of years I owed on my loan. So instead of owing 23 years of a 30 year mortgage, I was able to do a 15 year mortgage at $100 more per month. Maybe the condo owner should look into this possibility. Shaving those years off of a mortgage will help getting him out from underwater.

I was amazed at a piece of the response Jill Schlesinger gave to the woman with 180k to invest. She quickly blurted out that an annuity is a bad idea. And that’s why radio personalities usually make lousy advisors, i.e. Suzy Orman. How can you, Jill, make such a blanket statement? You know very little, if anything, about this woman’s situation, her income needs, her risk tolerances, etc. For someone looking for a guaranteed rate or income stream that they can’t outlive and won’t lose their principal, annuities may be the ideal solution. You tell me what else can do everything I just listed? And let’s not forget Jill, the average investor still has a negative return over the last 10 years from buying equities. How did your portfolio hold up during 2007-2008? That’s what I thought.

The condo owner should definitely refinance. If he and his wife can commit to staying in the condo until their child reaches kindergarten or first grade, many things could change in their favor: With the money from the new loan they could pay down as much principal as their old loan and possibly even have additional money to save towards a new downpayment on their future home in their chosen school district. By then their condo value may have risen some and their equity will have risen some--that equity/loan gap may no longer exist. It's uncomfortable being underwater, but with some patience and commitment, they could come out with their checkbooks, their credit rating, AND their integrity intact. Win, win, win.

This was your worst show ever. Not only were there dumb questions, but also careless answers. How can a woman refi at a much lower rate and eliminate credit cards, but have less cash flow? Ask! Lesson for others there somewhere. Then, not being able to pay her utilities and having no reserve savings, you suggest a 529 savings plan! Eh gads! As stated in prior posts below, suggesting the last guy walk away without addressing the recourse issue, and not picking up on his statement that a new mortgage would delay reducing his negative equity, is unconscionable and malpractice. Eh gads!! Not all mortgages are 30 yrs, and regardless, as michelesal posted, even if it is for 30 (and he should take the longest term unless there is rate advantage), just pay extra to amortize it quicker. You guys should give up or have a coach on the sidelines to pick up on gross errors so they can be corrected as you go along.

True, there are negative fiscal consequences for walking away from a home loan, but Tess and Jill should have corrected Andy's mistake about the "karma aspect". Andy falsely stated, "I did make the commitment to pay off the loan." In reality his contract says that he committed to EITHER (a) pay off the loan OR (b) forfeit the property as collateral.

Saying that "businesses do [it] all the time" certainly gets you halfway to the truth, but why not go all the way by simply pointing to the loan document directly?

I cannot believe that Tess so cavalierly suggested that the caller who is under water on his condo mortgage simply walk away from his obligation to pay his mortgage. There was no mention of the fact that in most states the owners of the loan can sue to collect the balance due. Or that stating in 2013 (less than four months from now) the IRS will go back to charging tax on the implied income that the balance due represents. Not to mention the harm walking away (a selfish and irresponsible act) has on neighbors’ property values, community tax base, etc. There was no need for the caller to walk, and doing so would raise a wide range of problems for the caller if he were to follow Tess’ irresponsible advice. Tess think before you talk, real people will have to deal with the consequences of your advice.

for the guy underwater with his house: refinance the house. then pay at least as much as you're paying now by paying the new rate, then in the two weeks between due dates, pay as much more as you can to pay into equity.

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