One of the most memorable letters I’ve received in my writing career came from a reader reporting on how she and her husband took a financial leap of faith with their daughter—a move that paid off big.
Dear Mary: I wanted to tell you the secret of sticking to a budget on our family vacation—something we’ve had a hard time achieving in the past. This year, we let our teenage daughter plan the vacation. Seems too simple, I know.
We told her the amount we had to spend beyond the cost of overnight accommodations. We told her she could spend the money any way she wanted. We could eat out every night or cook dinner in our kitchenette. She could spend it all on the Boardwalk.
Our spendthrift daughter became Ms. Frugality. She wanted to parasail. So she had us eat every single meal in the room and spent fewer than twenty bucks at the Boardwalk. We parasailed and had the best time ever. We came home with cash in our pockets. Best of all, we are enjoying the priceless accomplishment of teaching our child the value of money. Madeline
Dear Madeline: Wow, way to go! What a great idea. I am so proud of your daughter for accepting that huge challenge. I’m going to predict that this event will stay with her for a lifetime and will begin to shape her money life.
Never again will she think you have unlimited sources of money. She’s experienced how making good choices with a limited amount of money can result in positive outcomes. You allowed her to make independent financial decisions, and she scored.
Please give her my heartfelt congratulations and a big frugal high five!
Dear Mary: Living on a fixed income and given the nature of the economy, we are thinking about switching to pre-paid cell phones to cut expenses even further. If I terminate my current cell phone service, will I still be able to use the camera feature on my phone? I take pictures and download them to my computer to share with family and friends, though I do not have a data plan on my phone. B.J.
Dear B.J. I don’t know which phone you have, but generally, the camera will still work even if you cancel your phone service. If you have an iPhone, it will continue to function except for connecting to the internet, making calls, or texting.
Please confirm this information with your phone’s manufacturer before pulling the plug on your service, just to be certain. Then you’ll know that your decision is fully informed.
Dear Mary: How can I stop buying stuff I can’t afford? Honestly, I can go to Target determined to buy only a few things I need, and end up with $200 of stuff in my cart.
I am disgusted with myself, like I need to turn myself in to the shopping police. Thanks. Jennifer
Dear Jennifer: Well, you have a friend in me. I know exactly what you’re talking about because I have that same “gene.” Here’s how I keep that little monster under control.
- Cash only. Do not go to Target (or any store) with any plastic in tow. Unless you plan to rob the place, you can’t spend more than you have allocated.
- Don’t wander. Plan your route so you go directly to the location of the items you need. If in a mall, don’t park near the main entrance. Instead figure out a secondary entry/exit that will put you nearest your determined destination. Then keep eyes straight ahead. Get in, find what you need, then get out through the same door you entered.
- Wear sunglasses. Seriously. Indoors nothing looks that great through sunglasses.
- Make-a-wish. Take along a small notepad. If despite items 1-3 above, you happen to see things that are not your list—things that you really want, need, or must have—put them on the list. When you get home, you can plan how to save for those items.
Funny, once you’ve saved for the things on your make-a-wish list, you may discover you can live without them. That’s cool. You’ll have a little cash stashed for something more important.
Dear Mary: I have a Dodge Durango gas guzzler and I owe way too much money on it. Foolishly I financed it for 72 months, and now I owe a lot more on it than I could possibly sell it for.
If I sell the vehicle outright, I could probably squeak by just $5,000 in the hole. If I trade it in, I would be about $9,000 in the hole. What should I do to get out of this mess?
I could put the shortfall on a credit card, but I know that is a bad idea for so many reasons. We have an old pick-up truck and an older Subaru that will be okay for now, but how do I get out of the upside down loan and the Durango?
And how can I sell it to someone without a clear title? What should I do to pay the difference to get out of this mess?
Any help will be appreciated. Linda
Dear Linda: There’s no perfect solution here, but here’s a plan that might work:
Before you do anything, go to your bank or credit union and see if they will pre-approve you for a fixed-rate, short-term loan to cover the shortfall. Explain your situation. Now you can feel comfortable advertising the car for sale.
Once you locate a willing and able buyer, call the bank and have them prepare the papers for the exact amount that you need to pay off the vehicle.
Ask the buyer to bring his funds and accompany you to the lender’s office to pay off the vehicle and to transfer the title to the new buyer. You will walk away with a new loan, but shorter in term than the auto loan you have now and with a smaller payment, too.
Dear Mary: In light of the surge in identify thefts, how can parents protect their children’s identities? More importantly, how can they detect a breach of confidential information, such as the use of their child’s Social Security number?
Since it is illegal for someone (a parent) to obtain personal credit information on an individual (a child) other than themselves, how are parents ever to know if their child’s identity has been stolen? Shane
Dear Shane: It is not illegal for parents to obtain any legal information on their child. However, to order your minor child’s credit report, you must prove your relationship. You will need to fax the credit bureau your child’s complete name, address, date of birth, and a copy of the minor child’s birth certificate and social security card.
Additionally, include a copy of your driver’s license or other government-issued proof of your identity, which includes your current address, and a current utility bill containing your current address.
Generally, the response you want when requesting a child’s credit report is that no file exists. Keep in mind, however, that your child could have a credit file if you have added him or her as an “authorized user” on a credit-card account.
My colleagues at LifeLock take a more proactive approach and say that kids and students are some of the most vulnerable to identity theft. That’s because thieves realize if they steal a child’s identity no one will know until the child turns 18 and is eligible to apply for credit. Students and other young people can be denied jobs, college loans, homes and apartments, and even face imprisonment.
LifeLock offers identity theft protection for children. As I write, children under age 16 are $5.99 a month, with any adult enrollment. If you are interested, we have negotiated a handsome discount for my EC family on the cost of LifeLock Memberships.
Dear Mary: I recently received what appeared to be junk mail discussing U.S. 801(k) plans. It sounds too good to be true. I didn’t find anything on the IRS website about this, but they are supposedly better than 401(k)s and IRAs, just not publicized by the government. I would like to know if this is legitimate. Grace
Dear Grace: You were wise to see this as junk mail. Someone has found a way to make money selling people something they can do for themselves and by themselves. These so-called 801(k) plans are simply Dividend Reinvestment Programs (DRIPs)—not a secret IRS-approved Deferred Retirement Account.
Many corporations—usually big, stable ones—sell their stock directly to shareholders (bypassing brokerage fees) with an agreement for regular, ongoing investment and the reinvestment of all dividends. You invest a set amount, usually every month, not unlike with a mutual fund investment program, and the share price doesn’t matter because they’ll issue partial shares.
If you are interested in DRIPs investing, you can do this on your own. You don’t need someone to call it 801(k) investing and charge you big fees to be the middleman.
There is plenty of good basic info on DRIPs out there—including from The Moneypaper, The Motley Fool, and others. Most companies require you to be an owner of at least one share listed in your name already; some don’t or will help you to get that share.
Dear Mary: In 2001, my wife made an agreement with her bank to pay off the balance of an account she owed at about half the face value. The amount she did not pay the bank wound up on a 1099-C and we ended up owing taxes and penalties on it to the IRS.
The IRS notice read, “If a federal government agency, financial institution, credit union, or other lender cancels or forgives a debt you owe, you must include the canceled amount in your income on page one of your tax return.”
The debt was written off by the bank in 2002, who reported it to the IRS three years later in 2005 (we never got the 1099-C). This triggered an audit and after going back and forth for three months, we ended up adding almost $5,000 to our taxable income. This pushed us into another tax bracket, and left us with a $1,600 bill for back taxes (including penalties and interest).
Is this right? Shouldn’t we have known about this first, before the bank reported it to the IRS? David
Dear David: Banks and lenders are required by law to report loan forgiveness to the IRS. It is not a choice, nor are they required to notify you because it’s just part of the lending practice.
For years I have been warning my readers about this law. Even if the bank were to miss reporting loan forgiveness, taxpayers are required by law to report the event whether they receive a 1099-C or not. When it comes to the IRS, ignorance of the law is no excuse.
Your wife borrowed money. She spent it freely. But when she negotiated with the bank not to pay it back, it became ordinary taxable income. That’s the law and something every responsible borrower needs to know.
Dear Mary: I am recently married and my husband owes the IRS $23,000 in back taxes for tax year 2020. He agreed to an installment plan of $320 per month with the IRS.
His divorce decree states that each is responsible for paying half of the any taxes owed, but the ex says she cannot pay anything. He has been paying $400 per month, trying to pay his half off faster, but it’s hard on our finances and the interest continues to accrue each month.
Is it possible for an accountant or tax attorney to deal with the IRS to get the total amount owed reduced? Rhonda
Dear Rhonda: Here’s what you need to know about divorce decrees: Creditors and the IRS are not bound by them. In fact, they could not care less about what the divorce judge decreed.
The IRS is going to hold your husband responsible for 100 percent of the taxes owed for 2020 and any other tax years prior to the find decree. And the IRS will hold the ex-wife 100 percent responsible as well. They don’t care which of them actually pays as long as the taxes get paid. And if it goes to collection and they start filing liens, the last thing the IRS will be concerned about is a divorce decree!
If the ex-wife doesn’t abide by the decree, the divorce judge pt the IRS or other creditors, will deal with her. If your husband pays the taxes in their entirety, he can go after his ex for half based upon the terms of the decree and probably get the court to help him.
My advice is for your husband to stop trusting the ex to do anything, let alone pay taxes for which he is legally obligated. The IRS is the last entity he or anyone on earth wants to owe.
That being said, there is a way to get an amount owed reduced and that is through a process known as An Offer in Compromise. You will need to get a tax attorney or CPA who is an “enrolled agent” with the IRS to craft an offer to the IRS. If they accept it your husband must be prepared to write a check for the full amount agreed upon. Since he has been making payments faithfully, his offer is likely to be received positively.
Dear Mary: What is the right thing to do when you honestly cannot afford to put your kids in sports, like Little League baseball, but you know it is such a good thing for them both physically and socially? Bonnie
Dear Bonnie: The right thing is to live within your means and not go into debt. If this is a high priority as you look at your total financial picture, decide what you will sacrifice to free up the money for childhood enrichment activities. Then consider all reasonable alternatives. Does your Parks and Recreation Dept. offer organized sports? What about the YMCA or a local church?
If your kids really want to play, get them into a serious savings program now so they can help pay the fees next season.
Dear Mary: I need help cleaning several suede jackets that have stains on the collars from normal body oil and make-up. How can I remove the stains and make the jackets wearable again without spending a fortune sending them to a professional leather cleaner? Levada
Dear Levada: This is one time I suggest you not attempt a do-it-yourself shortcut. Suede, because of its nap and finish, can be tricky. Any DIY suggestions I might have for you could easily backfire because there are just so many unknowns. The stain might come out, but leave a much worse situation if the color is harmed. If you care about your fine suede leather items, take them to a pro.
Dear Mary: My husband and I have two kids and rent a two-bedroom apartment. We want to buy a house. We have about $42,500 in credit-card debt, two car loans that total $12,000, and school loans of about $38,000.
I want to pay off the debts first, but he wants to buy now because he says it’s the same as renting, except we will be building equity which is a valuable asset. What do you think? Tirzah
Dear Tirzah: I think your husband has never been a homeowner, or he would know the costs and responsibilities associated with owning a home are far greater than renting. I agree with you that you need to pay off those debts first before you buy a home.
You don’t mention a down payment, which makes me nervous. I hope you are not looking at any kind of zero-down or interest-only programs (yes, they’re back). You need at least 20% of the purchase price in cash to make sure you have a mortgage you can afford, comfortably.
Given what you’ve told me, I see homeownership to be out of your reach right now. But if you really buckle down and live more frugally than ever before—you’ll be able to get your debt paid and your down payment saved much sooner than you may have imagined. But it’s going to take both of you working toward the same goal and with all the determination and creativity you can muster—together as a team running a race, determined to win,
I’ll leave you with this: A bad rental situation is better than being over your heads in a house you can’t afford. I’m certain that many of your fellow readers are nodding in agreement.
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