Smart Money: 'Coffee can economics' works well for some individuals

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Dear Bruce: I was raised at the poverty level. We had enough to eat, but that was about it. I was never told how my mother, who had such little money coming in, handled the finances. Now I'm in the same boat. My husband was partially disabled by a drunk driver, and I am the primary breadwinner. I am doing well, but I do have to put monies aside to pay the contribution for our health plan. I can't bring myself to take it out of my savings, so I opened a special savings account. Every time I go to the doctor, I put $8 or $10 into that account. I just can't bear the idea of taking the money out of regular savings in one lump sum. Is there a better way? Z.G., via e-mail|ret||ret||tab|

Dear Z.G.: A century ago, what you are doing might have been called "coffee can economics." People had a bunch of coffee cans on the shelf, and they would put a quarter in for the heating bill, 50 cents in for the rent, etc. When the bill came due, the amount of money would be in the coffee can. In today's more complex world, I'm not sure what you are doing is really necessary, but if it works for you, then what difference does it make? It sounds to me like you have a good handle on things and if "coffee can" economics makes you comfortable, go for it.|ret||ret||tab|

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Dear Bruce: My 21-year-old son recently came to me with a tale of financial woe. He is upside-down with his car and wants to sell it. He wants me to put up some money. I have constantly pampered and funded this kid, but now he is married and has a child, and I feel it's time for him to grow up and stand on his own hind legs. Can you please explain what "upside-down" means? D.K., Grays Lake, Ill.|ret||ret||tab|

Dear D.K.: If your son is old enough to be married and have a kid, he is old enough to get himself out of his own messes. As to the "upside-down" question, it simply means that the purchaser owes more on the car at a given point in time than the car would bring on the open market. For example, if you owe $10,000 on a car that won't sell for more than $8,000, that means an "upside-down" number of $2,000. People generally become "upside-down" for two reasons: They either borrow the entire amount of money, or they borrow for too long a period of time. In my opinion, if you can't afford to pay for a car in 36 months, then you can't afford it.|ret||ret||tab|

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Dear Bruce: I need a new car, but I just don't have the cash. I recently refinanced my house at 5.75 percent for $55,000. The house is worth about $280,000. I could get a home-equity loan or a car loan or sell off some stock, but I prefer to hang on to it as it is undervalued. I could also refinance the house, but I would have to pay closing costs again. Is there anything that I should take into account, other than comparing interest rates? Some car ads say 0 percent interest rates for the first six months or so, but I can't be sure that I could pay off the loan in that short period of time. K.C., via e-mail|ret||ret||tab|

Dear K.C.: The majority of people who apply for a 0 percent interest loan walk out having done it a different way. If you do pay cash for a car, you may get a rebate of up to as much as $4,000, which essentially is the amount of money that they have forgiven in interest in a 0 percent deal. In other words, there is no free lunch. If you feel that the interest deductibility is significant in your case, consider a home-equity loan, since that is a loan on the property, and it is still deductible. You will have to arrive at the best way for the least amount of money to leave your pocket. That could be a cash sale of securities, direct loan from a finance company, a home equity loan or perhaps a loan against the stock. You have to do the arithmetic. There are no short cuts that I know of.|ret||ret||tab|

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Dear Bruce: I landed a substantial order for my company and I will receive the largest check I ever have had, $45,000. I'm not complaining, but I'm worried about the taxes. I bet I won't even get half. My W-4 is set up with no dependents, so we get a large refund at the end of the year. If I start to claim dependents, will I owe money at the end of the year? Everyone I've talked to suggested I stay with zero so I get that refund. I believe I'm better off investing the money rather than letting the government play with it then return it. G.J. e-mail|ret||ret||tab|

Dear G.J.: You've taken the words right out of my mouth. I can't imagine why anyone would claim no dependents to get a large refund. What you are doing is making a no-interest loan to our government. Nice for the government, not so good for you. What you should do is sit down with an accountant who can tell you taking into account the amount of legitimate deductions you have, itemizing vs. standard deductions etc. how much you should have deducted from your pay on average, so that you'll have enough money credited to pay your taxes, but not produce a refund. If you get a decent size refund, you are clearly making a huge mistake loaning the money to the government.|ret||ret||tab|

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Dear Bruce: My college sophomore son, who has more than enough money saved to pay for the state college that he's attending, is still borrowing money. He claims that there is nothing improper about borrowing the money and investing it. Since there is no interest being charged, whatever he earns is gravy. I think this is wrong. Is he breaking any laws? B.R., Phoenix, Ariz.|ret||ret||tab|

Dear B.R.: Unless the loan specifically addresses the issue of where the money is being spent, I don't see where he's doing anything wrong. As a matter of fact, I think he's a very smart young man. If there's interest-free money around that he can borrow legally, why shouldn't he? The other part of the equation is to pay it back before the interest meter starts to run.|ret||ret||tab|

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Dear Bruce: I'm a 48-year-old single bachelor making $50,000 a year and just inherited $135,000. I have a home worth $60,000 with an 8.5 percent $47,000 mortgage. My car loan is $22,000 at 8 percent. From a tax standpoint, I don't have enough deductions to itemize. Where do I go from here? Jerry, via e-mail|ret||ret||tab|

Dear Jerry: Why don't you refinance the $47,000? You're paying 8.5 percent when you could probably get it down to 6 percent. The vehicle loan is another matter. If you choose to pay that off you will essentially, receive an 8 percent return on your investment. While these low interest rates can be put off, these rates will go up. That cash could be invested in many areas to give you a far higher return. I urge you to refinance your mortgage.|ret||ret||tab|

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