Pay Down Credit Debt with HELOC
Author: Polonius
Posted: Sat Jul 23, 2005 6:20 pm
Post subject: Pay Down Credit Debt with HELOC
She's written a number of books. I think she means well and she's certainly knowledgeable, but some ofher suggestions make very little sense to me.
For example, she's adamantly against using a home equity line of credit to reduce credit card debt. Her notion is that you're risking losing your home by converting an unsecured debt to a secured debt. My notion is that it will reduce the interest you pay on your debt substantially and has tax advantages as well, so the advantages far outweigh the disadvantages providing, of course, you don't use the HELOC as an excuse to get even deeper into debt.
That said, I think her books are worth reading. Just don't follow what she says blindly.
Author: PFfrank
Posted: Mon Jul 25, 2005 7:50 pm
Post subject: Suze Orman
I've read quite a few of her books, and I have to say this is by far her best (The Money Book for the Young, Fabulous, and Broke). I read many books on pf, and this is one of the best I've come across. It's full of a lot of little details...I find myself using it like a "reference book" if I have questions. If you haven't picked it up yet, I'd highly recommend it.
I'd have to say, I agree with Suze on this point. I completely understand your reasoning, Polonius, and it makes complete sense. But, you have to think about the person who has gotten themself into credit card debt so bad that they need to use a HELOC to pay it off. Those who have run up 10, 15, and 20-thousand in credit card debt are for the most part living beyond their means (I'm not talking about those that have medical issue, hard-luck circumstances, etc.). I truly feel that the best way to never again get into credit card debt is to feel the pain of paying that money back. I like to think of it as part of the "therapy" on their way to recovery . For someone who has overspent enough to get into trouble, suddenly turning that unsecured debt into a loan on their house is VERY dangerous. More often than not, those same people will find themselves back in credit card debt.
Remember, if one defaults on their CC debt, they get a bad FICO score...if one defaults on their home loan, the lose the house they live in.
Author: polonious
Posted: Mon Jul 25, 2005 8:50 pm
Post subject: Suze Orman
Well, failing to repay a credit card debt can produce a judgment which in turn produces a lien on your house and/or car and/or garnishment of your salary anyway, in most states. Unsecured debt can turn easily into secured debt in this way. If you're in credit card debt and want to get out, reducing the interest you pay is the first step in my opinion--and a HELOC is a fine way to do that. Do I agree that those who abuse credit will continue to abuse it? Sure--most likely--but they'll get a HELOC and use it for a luxury car or an expensive vacation rather than use it to pay off other debts. It's sort of irrelevant what those people will do; they'll wind up homeless and in bankruptcy anyway if they are in a hole because of immaturity and frivolous spending.
Orman said something recently that I'm still pondering. She basically said it is a mistake to keep pouring money into a 401(k) or similar retirement fund (if there's no employer contribution). Her point is that it's better to put the funds into a regular investment account, forego the tax deductions today, and just handle the account properly from now on. She says that taxes today are extremely low, and that by acting this way you can still take advantage of reduced capital gains taxes. If you take out the money in your retirement instead, it will all be taxed at the usual income tax rates--and those might be much higher in your retirement years than they are today. Interesting, eh?
Author: rain
Posted: Mon Jul 25, 2005 11:47 pm
Post subject: Suze Orman
Quote:
Orman said something recently that I'm still pondering. She basically said it is a mistake to keep pouring money into a 401(k) or similar retirement fund (if there's no employer contribution). Her point is that it's better to put the funds into a regular investment account, forego the tax deductions today, and just handle the account properly from now on. She says that taxes today are extremely low, and that by acting this way you can still take advantage of reduced capital gains taxes. If you take out the money in your retirement instead, it will all be taxed at the usual income tax rates--and those might be much higher in your retirement years than they are today. Interesting, eh
Unless the regular investment a/c is a roth-IRA, you will still be taxed again when you withdraw this money in the years to come, albeit at the capital gains tax rate. So you're hit once now, with your regular income tax rate, and once later, with the cap gain tax.
If you defer taxation by putting your money in 401K or SEP, you'll be taxed at regular income taxes later.
So what you have to compare are
a) income tax now + opportunity cost (ie, after cap gains tax potential returns) + cap gain tax
versus
b) income taxes later
Therefore I don't think her statement "act this way to take advantage of reduced cap gains tax" is accurate. She's really comparing the wrong things.
Wasn't she advertising some cars late last year/early this year? I think I remember her saying authoritatively that cars are a good investment. That statement alone would cause me to lump her into the category of generic personal finance adviser who has sold out. Its just difficult to trust someone again once that element of doubt is induced.
Of course, her ads and her books serve different purposes, and you might argue that she was merely doing what anyone would do, sort of like a 3 michelin star chef promoting cusinenet or something. But what if it was a lifelong advocate for healthy eating (can't think of any right now!) suddenly promoting xyz diet pills?
Author: Polonius
Posted: Tue Jul 26, 2005 10:25 am
Post subject: suze orman
I was just paraphrasing Orman, so don't assume what I said was accurate. Her main point was that income taxes today are unnaturally low and that's unlikely to last. The assumption is always that in your retirement your income taxes will be lower than they are today because of reduced income that puts you in a lower tax bracket. But that may NOT be a good assumption these days. The withdrawals from your tax-deferred retirement accounts are always at your ordinary income rates. Capital gains rates are very likely to always be less than those rates, so I think she has a point. I know that as a self-employed person I can put large amounts into my 401(k) and reduce my apparent taxable income today easily--but that has its downside: banks look at the bottom line I report as business income, conclude I'm making virtually no income, and tell me I don't qualify for a mortgage or credit card because I make too little. That number I report is also used for future Social Security calculations. I'll have to do the math fairly carefully, but my guess is that for my situation I'd be better off NOT socking my money away tax-deferred but reporting it, paying taxes on it now, and doing what she says...
As for the car buying business, yes--Orman shilled for purchasing NEW GM cars last year, even though her books recommend people buy USED cars (uh, sorry, they're no longer used cars--they're certified pre-owned vehicles...I keep making that mistake). For some comments on that, see
http://www.mdmproofing.com/iym/articles/2004-11-20.html
and
http://www.mdmproofing.com/iym/articles/2005-02-15.html
Posted: Sat Jul 23, 2005 6:20 pm
Post subject: Pay Down Credit Debt with HELOC
She's written a number of books. I think she means well and she's certainly knowledgeable, but some ofher suggestions make very little sense to me.
For example, she's adamantly against using a home equity line of credit to reduce credit card debt. Her notion is that you're risking losing your home by converting an unsecured debt to a secured debt. My notion is that it will reduce the interest you pay on your debt substantially and has tax advantages as well, so the advantages far outweigh the disadvantages providing, of course, you don't use the HELOC as an excuse to get even deeper into debt.
That said, I think her books are worth reading. Just don't follow what she says blindly.
Author: PFfrank
Posted: Mon Jul 25, 2005 7:50 pm
Post subject: Suze Orman
I've read quite a few of her books, and I have to say this is by far her best (The Money Book for the Young, Fabulous, and Broke). I read many books on pf, and this is one of the best I've come across. It's full of a lot of little details...I find myself using it like a "reference book" if I have questions. If you haven't picked it up yet, I'd highly recommend it.
I'd have to say, I agree with Suze on this point. I completely understand your reasoning, Polonius, and it makes complete sense. But, you have to think about the person who has gotten themself into credit card debt so bad that they need to use a HELOC to pay it off. Those who have run up 10, 15, and 20-thousand in credit card debt are for the most part living beyond their means (I'm not talking about those that have medical issue, hard-luck circumstances, etc.). I truly feel that the best way to never again get into credit card debt is to feel the pain of paying that money back. I like to think of it as part of the "therapy" on their way to recovery . For someone who has overspent enough to get into trouble, suddenly turning that unsecured debt into a loan on their house is VERY dangerous. More often than not, those same people will find themselves back in credit card debt.
Remember, if one defaults on their CC debt, they get a bad FICO score...if one defaults on their home loan, the lose the house they live in.
Author: polonious
Posted: Mon Jul 25, 2005 8:50 pm
Post subject: Suze Orman
Well, failing to repay a credit card debt can produce a judgment which in turn produces a lien on your house and/or car and/or garnishment of your salary anyway, in most states. Unsecured debt can turn easily into secured debt in this way. If you're in credit card debt and want to get out, reducing the interest you pay is the first step in my opinion--and a HELOC is a fine way to do that. Do I agree that those who abuse credit will continue to abuse it? Sure--most likely--but they'll get a HELOC and use it for a luxury car or an expensive vacation rather than use it to pay off other debts. It's sort of irrelevant what those people will do; they'll wind up homeless and in bankruptcy anyway if they are in a hole because of immaturity and frivolous spending.
Orman said something recently that I'm still pondering. She basically said it is a mistake to keep pouring money into a 401(k) or similar retirement fund (if there's no employer contribution). Her point is that it's better to put the funds into a regular investment account, forego the tax deductions today, and just handle the account properly from now on. She says that taxes today are extremely low, and that by acting this way you can still take advantage of reduced capital gains taxes. If you take out the money in your retirement instead, it will all be taxed at the usual income tax rates--and those might be much higher in your retirement years than they are today. Interesting, eh?
Author: rain
Posted: Mon Jul 25, 2005 11:47 pm
Post subject: Suze Orman
Quote:
Orman said something recently that I'm still pondering. She basically said it is a mistake to keep pouring money into a 401(k) or similar retirement fund (if there's no employer contribution). Her point is that it's better to put the funds into a regular investment account, forego the tax deductions today, and just handle the account properly from now on. She says that taxes today are extremely low, and that by acting this way you can still take advantage of reduced capital gains taxes. If you take out the money in your retirement instead, it will all be taxed at the usual income tax rates--and those might be much higher in your retirement years than they are today. Interesting, eh
Unless the regular investment a/c is a roth-IRA, you will still be taxed again when you withdraw this money in the years to come, albeit at the capital gains tax rate. So you're hit once now, with your regular income tax rate, and once later, with the cap gain tax.
If you defer taxation by putting your money in 401K or SEP, you'll be taxed at regular income taxes later.
So what you have to compare are
a) income tax now + opportunity cost (ie, after cap gains tax potential returns) + cap gain tax
versus
b) income taxes later
Therefore I don't think her statement "act this way to take advantage of reduced cap gains tax" is accurate. She's really comparing the wrong things.
Wasn't she advertising some cars late last year/early this year? I think I remember her saying authoritatively that cars are a good investment. That statement alone would cause me to lump her into the category of generic personal finance adviser who has sold out. Its just difficult to trust someone again once that element of doubt is induced.
Of course, her ads and her books serve different purposes, and you might argue that she was merely doing what anyone would do, sort of like a 3 michelin star chef promoting cusinenet or something. But what if it was a lifelong advocate for healthy eating (can't think of any right now!) suddenly promoting xyz diet pills?
Author: Polonius
Posted: Tue Jul 26, 2005 10:25 am
Post subject: suze orman
I was just paraphrasing Orman, so don't assume what I said was accurate. Her main point was that income taxes today are unnaturally low and that's unlikely to last. The assumption is always that in your retirement your income taxes will be lower than they are today because of reduced income that puts you in a lower tax bracket. But that may NOT be a good assumption these days. The withdrawals from your tax-deferred retirement accounts are always at your ordinary income rates. Capital gains rates are very likely to always be less than those rates, so I think she has a point. I know that as a self-employed person I can put large amounts into my 401(k) and reduce my apparent taxable income today easily--but that has its downside: banks look at the bottom line I report as business income, conclude I'm making virtually no income, and tell me I don't qualify for a mortgage or credit card because I make too little. That number I report is also used for future Social Security calculations. I'll have to do the math fairly carefully, but my guess is that for my situation I'd be better off NOT socking my money away tax-deferred but reporting it, paying taxes on it now, and doing what she says...
As for the car buying business, yes--Orman shilled for purchasing NEW GM cars last year, even though her books recommend people buy USED cars (uh, sorry, they're no longer used cars--they're certified pre-owned vehicles...I keep making that mistake). For some comments on that, see
http://www.mdmproofing.com/iym/articles/2004-11-20.html
and
http://www.mdmproofing.com/iym/articles/2005-02-15.html
posted by CardRatings.com at 1:45 PM
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