Second Guessing Finance Advice

I'm used to readers disagreeing with my advice. So was the case when a recent chat participant wanted to know what to do with a $21,000 bonus. The following are the choices that were presented to me for using the extra money:

-- Put half the bonus in a 401(k) (that's all that would be allowed).

-- Pay off $13,000 in car loans (at 5.25 percent).

-- Pay off the $10,000 remaining on their mortgage.

For background: The person already had saved $370,000 in a 401 (k), had no credit card debt and had eight months worth of living expenses saved. "We make the final payment for college for our oldest child in two weeks and our youngest child has free tuition for all four years," the person added.

Here was my advice: Pay off the mortgage, and finish paying off the car with the rest of the bonus money and $2,000 from savings. Then stand in front of your house and yell, "We are debt free!" Inspire others!

Well, faithful reader James J. Angel, associate professor of finance at McDonough School of Business at Georgetown University, disagreed.

He wrote: "Your column is usually right on, but I differ on your advice to the person with the $21,000 bonus. I would suggest putting the max into the 401 (k). First, the tax break is too good to pass up, and the person's retirement savings, although not bad, could use the additional contribution. At 5.25 percent, the car loan interest rate is really low, so I would be in no hurry to pay that off. The person could get 5 percent easily in CDs right now. In terms of paying off the mortgage, the article does not state the interest rate. If it is an old mortgage with a low rate, say 6 percent, then the after tax rate (assuming a 25 percent tax bracket) is closer to 4.5 percent. If the income stream is unstable, then it may be better to keep a lot in savings and not pay off the old low-interest rate debt. Also, paying off the car loan and mortgage could tempt them to go out and get another new car because now they can 'afford' the payments. Putting the money into the 401 (k) turns the car/mortgage payments into a de facto forced retirement savings."

While I respect the professor's opinion, I still think I'm right.

The fact is, far too many people hold on to debt like it's a pet. Americans have been drummed beat into believing that being debt free is somehow not playing the game right. Look, this couple has the chance to be free from mortgage payments. They can get rid of their car loans. So why not do it?

With just $10,000 left on their mortgage, they aren't paying much interest, and therefore not getting much of a tax write-off anyway. If they want a tax break, they could give what they would have paid in final interest payments to a charity instead. This way, the money goes to a good cause, and not a lending institution.

It is clear that these people know how to manage their money. They are good savers. If they paid off the little bit of debt they have, they still have the opportunity to contribute extra to the 401(k) with all the money that would have gone to service the debt.

But hey, you may still disagree with me. If so, join me today on at noon ET to discuss your thoughts. I'll also chat about today's column on debit cards and answer any of your basic personal finance questions. You can submit a question or comment now or read the transcript after the discussion.

Efforts to Prevent Foreclosures

After the subprime market collapsed, it was only a matter of time until the number of foreclosures would escalate. Here in the Washington region, affluent counties like Montgomery County are seeing a large increase in the number of homes on the market because its owners couldn't make their monthly payments.

A recent Post report found that more than 700 homes in Montgomery were foreclosed upon between April and June of this year. This is startling considering during the same time period last year, there were only 49 foreclosures in the county.

States and local counties are finally stepping in to help educate new homebuyers and those refinancing about different kinds of loans before they sign on the dotted line.

My colleague, Courtland Milloy also looked at this effort in his column yesterday, "Foreclosures Bloom at Corner Of Prosperity and Gullibility," where he emphasized the importance of education. "The need for financial education goes much deeper, and ought to start long before people try to buy a house," he wrote.

Before you choose a home loan, check your county or state government offices to see if they've set up any assistance programs. And if you are facing foreclosure, read the following columns:

* In Times of Trouble, Ask for Help (Dec. 11, 2005)

* Can't Pay The Loan but Won't Pick Up the Phone (April 22, 2007)

* IRS Kicks Homeowners While They Are Down (By Kenneth R. Harney, May 5, 2007)

* Mortgage Mod Squad (By Kenneth R. Harney, April 14, 2007)

Crazy Bosses Continued

And I thought I once worked for a crazy boss. The letters about crazy bosses keep rolling in. Here are some more stories:

Kay M. DuBois, a customer relations representative from Harrisburg, Pa., wrote: "I had a boss who described herself as 'Hitler in heels.' It was no use complaining to her superior because she was exactly the same way. I used to sit in the parking lot for about 10 minutes crying everyday before I entered the building. After suffering an anxiety attack (I thought it was a heart attack at the time), I learned all the other employees in my department were doing the same thing. When I finally left she asked me who my new employer was and I refused to divulge the name."

An anonymous reader wrote: "My boss wrote me up for not putting paper in the fax machine. I couldn't believe he put that in my written evaluation."

There are enough lawyer shows on television that the next entry should come as no surprise: "Well, in 25 years of working as a lawyer, I've had more than my fair share of crazy bosses. When I was a young associate and pregnant, there was the partner who told me it would be in my best interest to resign from the firm, because a mother should not practice law and my expanding belly made the other lawyers uncomfortable."

I had to chuckle at the following tale from a Knoxville, Tenn., reader: "I had a boss that wanted to know every single detail about why an employee was sick. I was a manager. When one of my staff (all female) would call in sick, he would want to know why. If I said they have the flu, he would say 'What are their symptoms? Fever, throwing up or diarrhea?' If I said personal, he would ask, 'Marital problems? Depression? Kids acting up? Someone sick?' Once I said 'female problems' to ward him off. But it did not work. He said, 'Yeast infection? Cramps?'

The reader said her boss felt that by asking specific details about a worker's sick time, although allowable, it would deter people from abusing the system.

Finally how about this: "My former supervisor and I once lived in adjacent communities. Whenever I had car problems, I would ride with her into work. The last time we rode together I received a two page reprimand from [her] about the merits of being at work on time. She demanded that I submit an annual leave slip for being late. We both were due at work at the same time on the same day."

I'm still interested to hear more about the lunatics you slave for. I promise anonymity, unless you want to go public with your tale. So, write to me about your crazy bosses. I would especially love to hear from the bosses out there who have to deal with crazy employees. Please send your comments to colorofmoney@washpost.com and in the subject line put either "Crazy Boss" or "Crazy Employee."

Don't forget I will be discussing "Crazy Bosses" by Stanley Bing, the July selection for the Color of Money Book Club choice on Thursday, Aug. 2 at noon ET. Bing will be my guest.

Calling All Penny Pinchers

Don't forget to submit your entries to my annual Penny Pincher of the Year contest. (If you missed the announcement read last Sunday's column or last week's e-letter.)

This year, I'm looking for your best environmentally-friendly penny-pinching story that helps to conserve water, energy or waste.

Please note that edited versions of entries may be published whether you win or not. Send your tips to colorofmoney@washpost.com by Aug. 20 and put "2007 Penny Pincher of the Year Contest" in the subject line. Make sure to also include your full name, address and daytime and evening phone numbers.

For examples of previous winners, read my columns from 2006, 2005 and 2004.

You are welcome to e-mail comments and questions to singletarym@washpost.com. Please include your name and hometown; your comments may be used in a future column or newsletter unless otherwise requested.