A Parent's Prodding

I often get notes from parents telling me that they have passed along my columns to their adult children with financial issues. Or that they use my column to help keep their children informed about various personal finance issues.

When these parents tell me about this "column passing" I envision grown folks across the country rolling their eyes after getting a note from mama or papa saying, "You need to read this."

But I'm glad I have a troop of parents willing to take the risk of rolled eyes. Sometimes this prodding pays off. At least it did for one woman from New York. This woman's mother, who reads my column in the Bradenton Herald Tribune in Florida, passed along my column Creditors Garnishing Protected Funds (July 13).

In the column, I wrote about a new report (PDF) by the Social Security Administration's Office of the Inspector General which found that some financial institutions are apparently violating federal law by garnishing accounts that receive Social Security benefit checks or disability payments. These funds are supposed to be protected from creditors except under certain conditions.

"Millions of beneficiaries rely on Social Security benefits as their only source of income for basic needs such as housing and food," the inspector general's report says. "When a creditor's garnishment order is enforced and these federal funds withheld, the lives of a vulnerable segment of the population are placed at risk."

That's exactly what was happening to Kim, who asked that her full name not be used.

"I am a single mom of 2 kids and have a disability income. My husband has left and we have a lot of debt. There is a court order from a law firm that represents a creditor who has frozen my credit union account. This is the only money I have for food, gas, and utilities."

Kim said she pleaded with her creditor to give her a break, but said she was told they didn't want to hear her "sob story."

"I am quite embarrassed about all this," Kim said. "I was at one time a gainfully employed registered nurse before an injury. I do hope to get back to the work force one day but right now my saving grace is that disability income."

The morning Kim e-mailed me she took the column her mother passed along to her credit union in hopes of getting her funds released.

"The credit union is saying they cannot do anything," Kim wrote in an e-mail. "I will use your article to assist me."

An hour later, I heard back from her.

"Michelle, YOU ARE A BLESSING!!!!!!!!!!! It worked," Kim wrote. "I just got back from the bank with all of my money. I told the bank manager about the info you provided in the Post about the law concerning my income and she immediately released my money!!! God Bless You! I would have never known on my own."

I'm happy to have been of assistance and even happier that Kim's mom was looking out for her. So don't hog my columns. Pass them along. Who knows? You might help someone you know resolve a financial issue.

First Time Home Buyer Credit

So although Kim and her mom found my advice useful, others have not been happy about my advice concerning a new first-time home buyer credit that was part of the recently passed Housing and Economic Recovery Act of 2008.

Among other things, the law authorizes a tax credit of up to $7,500 for qualified first-time home buyers. This credit has been touted as a lifesaver for would-be first time home buyers, but it's just another debt sentence. This was sold as a credit but it's really a 15-year interest free loan that has to be repaid through your tax return. So if you take this credit it becomes a tax liability. You have to pay the IRS $500 a year for 15 years.

Here is the list of my columns about this so-called credit:

* Unwrapped, Housing Tax 'Credit' Is Really a Loan

* Think of Tax Credit as 15-Year Loan, And Rethink Whether You Need It

* Before You Take That New Housing Credit...

A number of readers have objected to my cautioning people about taking this credit/loan. I say only take it if you really need the money. But if you don't, leave it alone because frankly I wouldn't want to owe the IRS anything for 15 years. Fail or forget to pay this debt and you are subject to some stiff IRS penalties and fees.

Richard A. Mann of Indianapolis, Ind., wrote: "This advice is dead wrong. Take the credit and pay the money toward the mortgage."

Ted R. Miller in Calverton, Md., thinks people should take the money and put it in a savings account. "Pocket the interest, and say, thank you very much," he wrote.

First of all, the whole idea behind the credit was to help people get into a home and boost home sales. This credit wasn't created to allow people with no real need for the money to pocket it and collect interest.

There's also a cost to this credit. The government -- we the people -- has to lay out the money and wait 15 years to get it back with no interest. Oh, and if a buyer sell his or her home and doesn't realize a gain, the loan is forgiven. If the homeowner dies, the loan is forgiven. So we all pay for this so-called credit.

Further, it's more debt. Isn't the piling on of debt what got so many people in to trouble in the first place? Sure, people who think they are so smart say take the money and run. Invest it. Put it a savings account. Pay down your mortgage even.

William Wheaton, a professor in the Massachusetts Institute of Technology's department of economics and principal of Torto Wheaton Research isn't fond of this credit either. He wrote in a recent research paper that the no-interest feature of this loan "saves the buyer at most just a few hundred dollars a year -- the annual value of the forgone interest. This seems like a very small amount to influence the decision of anxious new buyers waiting on the market's sideline."

I know that many people will take this credit and end up not being able to pay it back. It's much like those offers retailers promote that persuade people there's no risk in taking an 18-month, no-interest deal to buy a couch or big screen television.

The retailers know that a good percentage of people won't pay off the balance before the 18-month period is up. They know human nature. People intend to pay it back, but life gets in the way. They end up using the money for something else. Or they just forget to pay the bill in time for the promotional offer. Then they get socked with 18 months worth of back interest payments at double digit interest rates.

Kenworthey Bilz, assistant professor of Law at Northwestern University School of Law, knows exactly what I'm talking about.

"Technically, by the numbers, people would be unambiguously better off taking the $7,500 credit and using it to immediately pay down their mortgage," Bilz wrote. "But it's too easy for most people to forget that they still owe that $7500 back at $500 a year, and to plan accordingly. They aren't stupid, it's just that our lives are designed in a way that makes it easy to put off/forget/ignore distant financial pressures."

Don't be a devotee to debt. Stop thinking you can outsmart the system and use debt as a tool. A lot of homeowners who have lost their homes or who are now facing foreclosure discovered that the debt tool they were using was a sledgehammer.

Pay It Off

I've written quite a few columns in support of paying off your mortgage as soon as you can.

* Don't Drag That Mortgage With You Into Old Age (June 15, 2008)

* Cheaper To Keep Her and Pay Off the Loan (Mar. 27, 2008)

* A Mortgage Is for Paying Off (Aug. 30, 2007)

Some people will tell you that a mortgage is good debt, but like I always say: there is no such thing as good debt. All debt keeps you in bondage.

If television personality Ed McMahon had paid off his mortgage when he had the money, perhaps his $4.8 million Beverly Hills mansion wouldn't have ended up in foreclosure. Luckily for him, real estate developer and business magnate Donald Trump announced that he would buy the six-bedroom, five-bathroom, 7,000-square-foot house and lease it to McMahon.

Trump said it "would be an honor."

Some honor. After years of multi-million dollar salaries, McMahon ends up with Trump as a landlord.

He should have taken cues from Real Estate columnist Elizabeth Razzi, who is putting extra money towards paying off her mortgage early. Read about why she's doing it in Searching for A Hot Investment? Try Your Mortgage. (Aug. 17).

Chat Reminder

Some e-letter subscribers say they need a regular reminder about my live online discussions. So, here it is.

Next week join me for an online discussion with my guest Carolyn Warren, who will be taking questions about her book "Mortgage Rip-Offs and Money Savers" (John Wiley & Sons). I'll also be available to answer basic personal finance questions. If you just can't wait, you can send your questions in now and I'll answer them next Thursday.

Remember, the chat is on August 28th at Noon ET.

You Asked

There were so many questions from my August 14th web chat I just couldn't get to all of them. Here are a few leftover questions:

Q: I recently inherited a pretty big chunk of money from my father who recently passed away. I am trying to figure out if it makes more sense to use the money to pare down our mortgage, or invest it in a 401(k). We are fortunate enough not to carry any other debt.

A: Without knowing more about your financial picture it's hard to give a complete answer. But be sure to read Razzi's article I referenced earlier. The thing is you don't want to end up house rich and cash poor. That means you don't want to dump all of your available cash into your home because the only way to tap it if you need it is to sell or take out a home loan.

If you don't have an emergency fund -- three to six months of living expenses -- then start one. Then put a little in what I call the "life happens" fund. That's the fund you use to pay for the things in life that happen -- car repairs, home renovations, etc. Then, if you are behind in your retirement saving, use some of the inherited money to boost that account. If you are comfortable with how much you are already investing for retirement and you think given a good return you'll have enough to retire well, then yes, definitely take the money and pay off or significantly reduce your mortgage.

Q: My fiancé and I are starting to plan our wedding. We want to be as frugal as possible and plan on being "creative" rather than "extravagant." That said, we don't have a "wedding fund" and do not want to use our savings to pay for the wedding. We'd prefer to hold on to that money for emergencies (unemployment, etc.) What suggestions do you have for financing the parts of our wedding we can't beg, borrow or make for ourselves?

A: I would suggest you develop a budget for the money you have on hand to pay for the wedding in cash. Then plan accordingly. If you only have enough to feed 10 people, invite 10 people. If you want to invite 200 people, but only have the money for 10 people, buy a cake from the grocery store and serve it with Kool-Aid.

Seriously, budget first and that spending plan will dictate what kind of wedding you can have and afford so you don't beg for money from family, or worse, your wedding guests.

Q: I have a large, fireproof floor safe, but I'm not sure what financial documents to put in it. Once I start gathering things it seems like everything is going in there.

A: Consumer Reports has a great check list of what documents to keep and where to keep them. You definitely want to use the safe for birth and death certificates, marriage license, adoption, citizenship, divorce papers, passports, social security cards, deeds, car title, and a list and photos of household property (which may be destroyed in the event of a fire) and perhaps any mortgage documents. Bank statements, investment account statements and such you can replace since much of that information is online now.

The idea is you want to use the safe for documents that would be difficult or impossible to replace.

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.

Charity Brown contributed to this e-letter.