Advanced Personal Finance

Free Money Finance recently had a post about a reader who was trying to balance salary with his commute. Briefly, the reader was weighing whether to take a job that offered a 21% higher salary and long (one hour) commute or a lower salary and short (15 minute) commute.

There were a lot of comments (22 at last count), almost all of which focused on the trade-off between money and time spent commuting. Many commenters did some calculation that boils down to hourly rate, more or less.

I think there is a serious omission in this thinking. Besides the time spent on commuting, there is a very real physical and psychological cost to long commutes.

Few of us think about it this way, but commutes harm us physically. Studies have shown a positive correlation between long commutes and increased blood pressure, increased incidence of lung cancer, and elevated cholesterol levels. There’s also evidence that heavy commutes reduce productivity immediately after arrival at work and result in behavioral deficits when returning home.

Then consider the fact that long commutes increase your chance of dying or being injured in an accident simply by virtue of being in the car longer.

Long commutes have been equated with exposure to loud, intermittent noise. Such an environment causes extreme stress.

Then there are the practical considerations of a longer commute. The fact is, you never know when you’ll arrive at work or home. Accidents and other traffic interruptions make determining your arrival time with accuracy impossible. Employee effectiveness is reduced because of long commutes.

You could also throw in the effects of long commutes on the environment and your wallet.

My point in all of this is that you can’t always boil these decisions down to dollars and cents. Sure, you could do the calculation and determine that, from an hourly wage stand-point that includes your commute time, you’d be better off taking the high-paying job with a long commute. But unless you truly consider all the ramifications, your carefully calculated decision may be very wrong.

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You can roll over EE and I U.S. savings bonds into a 529 college savings plan. I had no idea. I knew that, if you meet all the IRS requirements, you can use certain bonds tax-free to pay for college. But a savings bond rollover is news to me.

Using savings bonds for college

EE and I series savings bonds sold after December 1989 can be used tax-free to pay for qualified college expenses. Normally, when you redeem a savings bond, they’re state and local tax-free. In this case, though, they’re also exempt from federal tax.

There are, of course, plenty of restrictions.

• There are income restrictions. In 2006, the phase-out started at $63,100 for single filers and $94,700 for married filers. Those are adjusted annually for inflation. Also, you can’t claim the exemption if you’re married filing separately.

• You have to redeem the bond in the year tuition is paid.

• The bond owner must have been 24 years old on the first day of the month in which the bond was purchased.

• The funds must be used for qualified postsecondary education expenses. For these purposes, qualified expenses are tuition and fees but not room, board, books, and supplies.

To exclude the interest from your income, you fill out IRS form 8815. You need pretty detailed information for the form, so check it before you actually sell the bonds.

Rolling over to a 529

I kind of had to get all that out of the way because to qualify for a rollover into a 529 plan, you must meet all of the above restrictions. Beyond that, it’s as simple as selling the bonds and sending the money to your 529 administrator. Come tax time, you fill out form 8815.

I wish I’d know about this a couple of years ago when my wife wasn’t working outside the home. Our income was solidly below the phase-out limit and we’d just started our daughter’s 529. Oh, well. As it stands now, we’d still get a decent percentage of the benefit. I think I’ll look at it again next spring when I do the taxes.

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The personal savings rate is one of those topics that comes up occasionally in the media that always stokes discussion. The U.S. personal savings rate has hovered around 0% for several years now. There’s a lot of argument about what, exactly, that means.

Some people argue that the calculation of the savings rate is flawed. It doesn’t count the capital gain on assets, for example. So someone who sells shares in their mutual fund and spends the money has a ‘negative savings rate.’ Others say the number actually understates the lack of saving in the U.S.

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I’ll leave those arguments to others. Frankly, I don’t much care about the details. The plain fact is, Americans are selling assets and taking on debt to finance their lifestyle. We just don’t save enough as individuals or a nation.

Americans’ attitudes about saving are markedly different than that of people in other countries. Check out this quote from the Christian Science Monitor:

Mr. Xu, who pulls in $266 a month – below Beijing’s $400 average – is typical. He socks away one-fourth of his pay packet, as does Chen Ping, his girlfriend, who makes a similar wage as a store assistant. Asked if he isn’t tempted to save less and spend more, he shakes his head.

“If we enjoy life now, what about the future? We need to think of our future,” he says.

The rising cost of living is one reason why many here are reluctant to splurge in fancy malls. Unlike US consumers, many of whom use credit liberally, Chinese workers opt to save, knowing that a feeble welfare system is unlikely to provide for them.

This guy, a mechanic, saves 25% of his salary. Twenty-five percent! Can you imagine what an American would say to the suggestion that he or she save 25% of his or her income?

I also thought the last part of the quote was telling. Chinese workers, assuming their welfare system won’t be in place when they need it, are saving like crazy. U.S. workers, who also widely believe Social Security will not be there for them, seem to be crossing their fingers and hoping for the best while they go about their consumerist ways.

I’m not saying the Chinese have it all figured out. But it seems clear to me that America is facing trouble ahead if it doesn’t start saving and investing more.

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New babies get people thinking in a lot of different ways. Some anticipate with nervous excitement; some with flat-out fear, some anticipate the arrival of their baby with utter exuberance. Personal finance issues probably aren’t among the first thoughts.

Since we’ve gone through this, I can honestly give some personal advice. Some of these things we learned the hard way. Some we actually did right. It’s always helpful to learn from someone else’s mistakes, so if you’re in the market for a new person, have a look.

Pre-baby

• Check your medical insurance. Just polling friends, it’s amazing the range of coverage different plans provide. For our daughter’s birth by planned C-section, insurance paid for everything. Well, there was the $10 charge to have a phone in the room (Huh?). Look for what’s covered prenatal, for the actual delivery, and for post-delivery well baby visits - copays, deductibles, the usual stuff.

• Visit hospitals. The nearest hospital isn’t necessarily the one where you want to have a baby. Do some research and go on tours.

• Buy life insurance. You’ll now have a true dependent - somebody who must count on you for everything. Everything costs money these days. Even if you’re not around, it still needs to get paid for.

• Check your benefits. If you’re adopting, lots of bigger companies (and some small ones) offer adoption assistance, sometimes a significant amount of money. If you’re doing it the old fashioned way, check with HR about FSAs, paid/unpaid time off, and short term disability.

• Tell your boss. This is a sensitive subject for women, and I’m not a woman so I’ll just say at some point, your boss needs to know what’s going on. For me, I needed to tell my boss and coworkers because of unpaid time off to help after the birth.

• Start saving for college. Think I’m joking? I’m not. The cost of college has been far exceeding inflation. We started saving only a few months into the pregnancy in a 529 plan. You name yourself as the beneficiary and when the little bundle gets a name, it’s a simple paperwork change.

• Start researching child care, if appropriate. If you both plan on going back to work, you need to have arrangements for baby care. Daycare slots for newborns/infants are notoriously difficult to find.

• Save money. Lots of it. If this is your first, you have no idea how many diapers you’ll go through. No idea.

• Buy baby stuff. I’m not going to lie - you’ll want to buy baby stuff. Try to restraint yourself, though. I’m chagrined to say we have one child and, at last count, five strollers. We have a stroller for all occasions. Honestly, though, we didn’t know what to look for in a stroller. You’ll find out, too.

Post-baby

• Tell the medical insurance company. You’ll want to put your new baby on your plan right away. Depending on the plan, you’ll have a certain amount of time to do this, but don’t put it off. The doctor visits for shots start at one month.

• Get (or update) a will. Even if you have little in the way of assets, you’ll want to do this. That life insurance you bought needs a place to go if you die.

• Decide on a guardian. Should you and your spouse both die, you need to have someone set up to raise your child in your place. Oh, yeah, and don’t forget to tell the person you select. Very important.

• Get a Social Security Card. A lot of hospitals will start this process automatically and/or give you the paperwork to take home. Just make sure it gets done. The turn-around on the actual card was surprisingly fast for us, by the way.

• Finalize child care.

• If returning to work, make contact and arrange for return. Your boss will need to know your plans as far as date of return, new hours, limited schedule, or other restrictions. Some workplaces are definitely not parent friendly. Those places suck. If your boss is not helpful on this now, you’ll likely run into issues later when you have to stay home with a sick child or leave early because their school is closing early because of snow.

Oh, yeah, enjoy your new baby. That’s important, too.

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There’s a way for a person feeling ‘borrower’s remorse’ to back out of certain home loans. It’s called the right of rescission and you can exercise it on home equity loans, HELOCs, some home refinancings.

The right of rescission gives you three business days to reconsider whether or not you want to take delivery of the money from a loan. If you change your mind in that time, you’re off the hook for loan. You also are entitled to the return of any fees you paid to originate the loan.

Not surprisingly, there are lots of details on exercising the right of rescission. There are timing rules, rules on which types of loans it applies to, and rules on exactly how to do it.

What’s a ‘business day?’

The three day clock starts the day after you ‘close’ the loan. Three stipulations must be met for the clock to start:

• You sign all the loan papers

• You receive all the loan disclosures

• You get a copy of the notice of right of rescission

Usually, all the stipulations are met at loan closing. The clock starts, then, the next business day. Importantly, a ‘business day’ is any day that’s not a Sunday or federal holiday. Saturday counts as a business day, even if the lender isn’t open for business that day.

For example, you sign and receive all the papers Thursday August 30, 2007. The clock starts Friday morning, goes through Saturday, stops for Sunday and Labor Day, and resumes Monday.

Only applies to certain loans

The right of rescission only applies to home equity loans, lines of credit, and refinances with a different lender. You can’t use it on non-primary houses, refinances with your current lender, or when you first take out a mortgage to buy the house.

Things get complicated when you do construction loans and piggyback loans. I’m not a loan officer, so I’m not going to get into those situations.

When you do a ‘cash-out’ refinance, even with your current lender, you can always exercise your right of rescission for the cash out piece. Of course, if the refinance is with a different lender, you can back out of the whole thing.

Exactly how to do it

You have to notify the lender in writing - a phone call won’t do. Interestingly, you only have to get the letter in the mail by the three day cut-off. It doesn’t have to be postmarked by that day. I wouldn’t try backing out of a loan based on that technicality though. If you’re going to do this, I’d make sure the letter got a postmark.

Since this letter must get to the right place, make sure you have a good address for the lender and the right department at closing. If multiple parties took out the loan (e.g. husband and wife), they all must sign the rescission letter.

So the next time you take out a home equity loan for that new car and then realize you’ll be paying on it for ten years and reconsider, keep this post on hand. Seriously, though, if you sign for a loan and later read some evil clause in the inch-thick packet of papers you got at closing, this might come in handy.

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