Financial Advice Line

Financial FAQ

Q. How much short-term savings do I need?

Q. Should I refinance my house?

Q. Should I buy a new or used car?

Q. What type of mortgage should I get?

Q How do I save for my child's future education?

Q. How much short-term savings do I need?

A. Although the amount of money you desire to keep readily available is a personal decision, there are a few criteria that can help you decide just how much to sock away. (1) The amount of risk you can handle. Some people people are comfortable with just a few months of planned expenses available as reserves in their savings accounts, while others want up to five years worth of expenses on hand. (2) Forseeable expenses. Are you planning to use your savings for any major purposes in the coming months or years. If so, you should make sure you account for these purchases when deciding how long you want your short-term savings to last. (3) Your situation. Do you have kids? Is your job stable? Are there any big ticket expenses on the horizon -- property taxes, insurance, etc. All of these factors are important when decided how much to save. Nevertheless, it should be a given that you should save and have on hand at all times at least enough reserves for three to six months worth of major livings expenses. Learn more.

Q. Should I refinance my house?

As a rule of thumb, it pays to refinance if you can get an interest rate at least two percentage points lower than what you are currently paying. However, every situation is different. Some lenders are offering reduced fees or no points (typically, if you take a slightly higher interest rate the best rate available). Asking yourself a few questions may help you determine if you can save money:

    How much can I lower my current monthly payment?
    How long do I plan to stay in the house after I refinance?
    How much will I pay in refinancing costs?

Next, figure out what you still owe on the house, how much you're paying each month, and how much you initially paid for the house. Itemize all the expenses of the refinance and estimate your new monthly payments. With this, you can figure out where you break even and when you begin saving money. Learn more.

Q. Should I buy a new or used car?

A. New cars depreciate, sometimes drastically, as soon as you drive them off the dealership lot. Indeed, some cars can depreciate as much as 20% in the first 6 months. For this reason, you can typically pick up a used car for far less than the same car new, and because the original buyer took the brunt of the immediate depreciation, your used will depreciate at a much slower rate.

However, there are some drawbacks. Notably, maintenance costs can be higher for used cars due to their age, mileage and the fact that by the time you purchase the car, it may no longer be under warranty. In addition, some banks charge higher interests rates to finance new cars.

Nevertheless, you can mitigate these issues by purchasing cars that are one to two years old with low mileage. (The immergence of used car "super stores" is making it easier and easier to find used cars in this range.). Low mileage cars in this range are typically still under warranty and, best of all, the immediate depreciation will have reduced the sale price, leaving you, hopefully, with a good deal . Finally, because the car is only a one or two years old, you are more likely to find a competitive interest rate, often very close if not identical to a new car.

Q. What type of mortgage should I get?

A. The primary consideration comes down to long you plan to hold on to the property and whether your risk taker. There are essentially two types of mortgages:

Fixed Rate Mortgage -- The basic mortgage. You owe the money to the lender payable over a fixed period of time at an interest rate that is "locked" in at the time of purchase and will never change (unless you refinance, of course). The typical term for this type of mortgage is 15 or 30 years.

ARM (Adjustable Rate Mortgage) -- With an ARM, your interest rate will fluctuate to reflect changes in the credit market. The first year rate is always the lowest as an enticement for you to take the loan. The loan is also capped at a maximum interest rate that may be achieved over the life of the loan. This cap is expressed in terms of points. For example, if you entered into an arm with a "teaser" rate of 5% with a four point cap, the highest your interest rate could go would be 9%.

There are also several variations on the ARM loan, where a fixed rate is locked in for the first few years of the loan, typically 1, 3, 5, or 7 years, and, after that period, the loan will convert to an ARM. The initial interest rate on the fixed loan will be lower than a conventional 30-year fixed mortgage rate, substantially lower for a one year fixed period, increasing incrementally the longer the fixed period.

ARM loans in general and, especially, ARMS with initial lock-in periods favor persons who plan to own their homes for a short period of time and wish to save money by locking in a low interest rate. This is especially the case in today's market where the rates are at historic lows. Conversely, a 30 year fixed mortgage would favor persons who plan to own their homes for a very long time or the life of the mortgage. With the rates where they are today, these persons could lock in a lower rate (though not as low as an ARM) and save thousands over the life of the loan.

Q How do I save for my child's future education?

A. Essentially, you have two major options in deciding how to save for your child's education: Prepaid Tuition and College Savings Plans and/or traditional market investments.

Prepaid Tuition and College Savings Plans are basically government-endorsed college education savings programs. These programs offer partial or tax-free distributions and steady, though unspectacular growth. Prepaid Tuition plans differ somewhat from Savings Plans.

With a Prepaid Tuition Plan you are actually purchasing credits toward attendance at a state school. The credits are purchased at "today's" prices and are guaranteed to buy the same number of credits when your child attends the state school. College Savings Plans vary greatly among states and are essentially lower-risk college investment accounts

Typically, Prepaid Tuition and College Savings Plans make sense if you have waited and your child is relatively close to graduation because traditional market investments usually yield a greater return, especially when invested over longer periods. Nevertheless, these Plans have their place, especially for risk-adverse investors and those who, for whatever reason, may be assured their child will attend a certain school.