Pay Dirt is Slate’s money advice column. Have a question? Send it to Lillian, Athena, and Elizabeth here. (It’s anonymous!)
Dear Pay Dirt,
I am in a bind. My husband and I find ourselves in our mid-30s, our first kid on the way, and $30,000 in credit card debt. I know. There are reasons, but do they matter at this point? We’re finally in a place where we don’t have to use the credit accounts anymore, but we have $1,000 going out the door each month, and it isn’t making a dent in the balance long-term. We have a multi-thousand-dollar hospital bill, an unpaid maternity leave, at least $2,000 a month in day care expenses, and my husband’s student loans coming out of forbearance just around the corner.
Am I crazy to think about cashing out my 401(k) to eliminate the debt? I’d have just enough to set aside the (painful) penalty and income taxes and pay off the full $30,000. The extra $1,000 a month would go a long way. I’ve thought about bankruptcy as well, but I’m worried about losing our condo: We have an excellent and affordable mortgage that is far less than renting anywhere near where we are now. It’s not as if the 401(k) would ever be enough for me to actually realistically retire anyway … How dumb is this idea?
—I Know It’s Stupid, But Is It?
Dear I Know,
I’m not too fond of this idea, and neither were the folks I asked on Twitter. I appreciate that you’ve at least researched to see if you can afford the penalties. But there are likely better ways to escape your credit card debt than cashing out your 401(k). This move will deplete your long-term nest egg and kill the special status of a 401(k). (For example, a 401(k) is protected in bankruptcy.) Some alternative options would be a home equity line of credit on your condo, a 401(k) loan if you still work for the same employer, negotiating with your credit card companies, or a balance transfer to a low-interest card combined with aggressively paying off the debt. At least with a 401(k) loan, you’ll pay your future self the interest, rather than the credit card company. To determine the best option for you, you can figure out the “effective rate” on the 401(k) cashout by considering the penalty and opportunity costs of lost compound interest against the interest rate on the debt.
But if you haven’t sat down to work out a budget, I’m worried that the relief this move will buy you will only be temporary—you’ll immediately be squeezed with other costs as new parents and possibly end up back in more credit card debt. While you say you no longer rely on credit accounts, a significant lifestyle change, like having a kid, could perpetuate your cycle of using credit to cover the gaps. Prioritize creating new financial wellness habits, regardless of which move you choose, before student loan payments come back and hospital bills pile up.
Dear Pay Dirt,
My husband and I would like to buy a second home to then rent to my sister and her family. Our credit is excellent; hers is not. We are in our late 60s and 70s and have enough income to support two mortgages should that need arise, although we trust my sister completely to pay the rent. But what happens if one or both of us die? There is not enough insurance coverage to pay off the second home, and we still owe about $70,000 on our home. Good idea? Bad idea?
—Wanting to Help Our Sister
Dear Wanting to Help,
We all need to get creative in these tough economic times to help out family. But even if your plan’s finances were solid, you need to consider the emotional side. Do you want to be a landlord—especially for your family members? How will you handle plumbing emergencies? What if she wrecks the property or expects upgrades you can’t afford? Who will be responsible for the upkeep of the property? Will your sister resent handing a rent check over to her sibling, especially if she knows it is for more than the mortgage (as recommended to cover maintenance)? There are many horror stories about well-intentioned efforts to buy a house for family hurting relationships and pocketbooks. Plus, if you died with a mortgage still on the home and not enough in your estate to cover it, she runs the risk of not being able to get a mortgage on her own to buy it and losing her home.
A potentially better option is to offer to be a co-signer for your sister. Your good credit could help her access better interest rates and loan terms than she could on her own, but she would be directly responsible for the mortgage payments and upkeep rather than being your tenant. You wouldn’t have an ownership stake in the property as a co-signer and would be liable for the mortgage debt only if she didn’t pay.
A third option is co-borrowing. This is similar to co-signing, but you would have an ownership stake in the property. Co-borrowing could make inheriting the house easier for your sister (over co-signing or renting) if one of you passed, without the need for her to refinance, as long as the rights of survivorship were clear. The potential downside for each of these cases is that you would have to cover the mortgage or sell the home if she couldn’t pay. Since you’re prepared to pay double mortgages if things go awry, each of these is likely a better option to explore than becoming her landlord.
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Dear Pay Dirt,
I am looking for some guidance on how to help a senior in my community (70–80 years old, been in the U.S. for about 10 years, one adult child) who is not a citizen, so not as eligible for certain types of aid. I have sort of emotionally adopted her as a replacement grandmother; we worked a part-time job together, and I will get her some groceries or get coffee together. She was recently let go from the job and would be eligible for unemployment, but I am not sure what other aid she could be eligible for. (Can she even collect Social Security? I don’t know if she has an IRA.) As I am not family, it is not my place (or financially doable for me) to get an eldercare attorney, and I am not sure how else to be involved beyond helping her file some unemployment paperwork and giving a ride if she needs to get to an appointment. I will definitely encourage finding a social worker if it comes to that, but any other concrete suggestions on where to start that don’t include me paying her rent/becoming roommates?
—Emotionally Adopted Grandma
Dear Emotionally Adopted Grandma,
It’s very sweet you want to help out your emotionally adopted grandma. There are several benefits for which she might be eligible as a noncitizen, if she’s open to your help applying. Although she may not qualify for certain types of aid, some noncitizens (working under their own names) may be eligible for Supplemental Security Income. You can contact the Social Security Administration to find out if she is eligible. Her access to Medicare and SNAP might vary based on her state and how many quarters she’s worked in the U.S.
The most helpful thing you can do is be there for her. Continue to offer emotional support and help her with day-to-day tasks like grocery shopping or transportation. Encourage her to stay connected with friends and family, and remind her that she is not alone. If she asks for specific help, offer to research nonprofits or community organizations that provide resources for seniors, particularly cultural-specific organizations that may know more of the ins and outs of her situation.
Help! My Mom Doesn’t Think My Fiancé Is Enough.
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Dear Pay Dirt,
I’ve been living in my 1990s home for three years, and it’s been nonstop repairs—everything seems to be breaking all the time, and it’s stressing me out! I’ve been patching it up, but it is time to do some major work (gutters, roof, siding, tree removal, etc.), which I’d estimate at $50,000–$75,000. We love the house, have a low-interest rate on our mortgage, and would not be able to find anything close to a comparable-priced home in our high-growth city if we were to move, so we want to invest and stay.
But how do I pay for these repairs? I have an excellent credit score and minimal debt, and I make about $150,000 a year, but I have only about $10,000 in short-term savings, which I’m using to build up a rainy day fund. We have about $285,000 left on the mortgage, and the home is now worth about $600,000. What do I do? Take out a credit card and just put the repairs on it? Take out a home-repair loan? Get a second mortgage or refinance my existing mortgage at what is now a much, much higher interest rate? I get lost looking up all the various options and could use some help getting started.
—House Hurdles
Dear House Hurdles,
If you need to finance the repairs, a credit card will be the most expensive, especially with current high-interest rates. Only do that if you are all out of other options. If you’re looking at specific vendors for large-ticket items—e.g., roofing or gutters—they often have (relatively) low-interest vendor financing. Usually this financing will be for one to three years.
Probably the most accessible option for you would be a home equity line of credit, which allows you to borrow against the equity in your home. (On average, this is up to 85 percent of your available equity—a significant amount in your case.) The loan is typically paid over a long period—10 to 20 years—and offers a lower interest rate than a credit card. A HELOC has two significant downsides: You’re putting your home up as collateral, and the interest rate will vary based on market conditions. So you can be foreclosed on if you can’t make the payments as interest rates go up. A home-repair loan will be a shorter term with a fixed interest rate but doesn’t carry the risk of foreclosure. Given current interest rates, a refinance of your primary mortgage is unlikely to be your best option.
I’m concerned that you have only $10,000 in your rainy day fund when your income is high. Given the expenses of maintaining an older home and other non-house-related financial emergencies, $10,000 is likely insufficient. If you start regularly paying on financing for your home repairs, will you be able to continue to save? If you can put off the repairs for six to 12 months, I recommend simulating the monthly payments you’ll make on debt (e.g., $600 per month) and allocating them toward your rainy day fund instead. That will help you get used to the expense while increasing your emergency fund.
—Lillian
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