Dealing with Your Finances in the Event You Are Unexpectedly Laid Off

It is the worst day of your day. Your boss has just informed you that your entire department is being downsized, meaning that you are now out of a job. Leaving an office you will never return to in a daze, you walk out to your leased vehicle. You return home, pulling into the garage of the home you had bought in 2008 at the height of the real estate bubble.

The next morning, fortified by a strong cup of coffee, you fire up your laptop computer to see what your options are. As you see it, improving your financial situation is the most important thing you can do right now.

As you see it, there are three different areas in which you might be able to immediately address your finances: your underwater mortgage, your leased car and having lost your job.

State Unemployment and Other Unemployment Benefits

Assuming you were not terminated for cause, your first stop should be the website for whichever state agency deals with unemployment benefits in your particular state. State unemployment benefits provides cash payments for a fixed term to eligible workers who are unemployed through no fault of their own (keep in mind that whether a worker has become unemployed through his or her own fault is determined under the particular state’s law), and meet any other eligibility requirements set forth in that particular state’s laws. You discover that in your home state, Maryland, one of the requirements to receive unemployment benefits is that you must be able, available, and actively looking for work.

In most states, the amount of unemployment benefits you are entitled to is tied directly to whatever your salary and/or wages at the job from which you were separated from. However, be the maximum amount of unemployment compensation to which an unemployed individual is entitled under state law often is much less than whatever your wages were at your previous job. You also discover that there are time limits imposed by the various states on how long you can receive unemployment benefits.

You discover that in your home state, Maryland, you can file for unemployment benefits completely online and fill out an application right away. Based on the information you enter, you discover that, if your application is approved, you can expect to receive the maximum amount of $430 weekly for a maximum of 26 weeks.

You also discover that other programs may be out there as well to help you. For instance, if you are a former federal employee or ex-service member, then there are programs that provide unemployment benefits to you independent of the state unemployment benefits to which you likely are entitled.

Your Car Lease

You next turn to considering the issue of the vehicle you are currently leasing. Your concern is that the required monthly payments for the lease are more than you can afford without any wages coming in the door every two weeks. Because your lease is a contract, your first step is to obtain and open a copy of your lease. This will assist you in determining your options. Some leases will allow you to transfer the contract and liability for all future payments to someone else. Websites like leasetrade.com, leasetrading.com, or swapalease.com allow you to advertise your lease to prospective buyers. Keep in mind, however, that you lease may not allow lease assumptions and it also may provide that any prospective individual interested in assuming your lease must meet certain eligibility criteria. After looking at the copy you have saved on your computer, you see that your lease, unlike many, permits lease assumption, so you can place an ad advertising your lease on leasetrade.com.

Your Underwater Mortgage

You next decide to research whether there are any steps you can take to deal with your underwater mortgage. Although you quickly realize that you could walk away from your mortgage, that is, give the keys to the house to the bank and move out, you do not want to take this drastic option because it would destroy your credit for up to 7 years. You do discover, however, that the state and federal government have set up programs to help many homeowners who find themselves in exactly your situation-unexpectedly unemployed while trapped in an underwater mortgage. In your home state of Maryland, you discover that the state offers several programs for borrowers which borrowers can take advantage of. Under the Lifeline program program, homeowners who are unemployed through no fault of their own can apply for assistance for adjustable rate or other mortgages. There are also federal programs available in Maryland which provide up to $50,000 in zero interest loans to homeowners to assist them in staying current on their mortgage if the person suffers a reduction in income or unemployment. In addition, you see that your own mortgage servicer, Bank of America, offers a mortgage modification program to underwater homeowners. You download information regarding the required documentation for both programs and immediately begin to fill the required forms to free up some additional cashflow for groceries and other necessities while you look for another job.

More Immediate Steps to Improve Your Finances

While conducting your research, you also come across some other suggestions to ways to improve your finances in the short term. First, you decide to cancel your cable and Netflix subscriptions in order to save on some of your monthly recurring expenses. Next, you also call your cellphone company to see if they are offering any promotions because you are currently off-contract.

After an entire morning spent performing research on the Internet, you are exhausted but feel exhilarated by the progress you made in learning some ways to reduce your expenses and lessen the impact of your unexpected unemployment on your finances.

Pros and Cons of Investing in REITs

Real estate investment trusts, or REITs as they are more commonly known, are investment vehicles that allow investors to purchase an interest in a portfolio of properties.  At its most simple, think of a REIT as a pool of money consisting of the contributions of many small individual and institutional investors which then uses the proceeds of those contributions to invest in a portfolio of properties.  The proceeds from the rents from the properties owned by the REITs are then paid out to the REIT’s investors as dividends.  There are multiple types of REITs dependent on what type of properties the particular REIT invests in, but the most common include retail REITs, which invest in shopping malls and freestanding stores, residential REITs, which invest in multifamily housing like apartment communities or condominium complexes, office REITs, which purchase office buildings, and healthcare REITs, which invest in the real estate upon which hospitals, nursing homes, and medical centers are located.  There are also mutual funds and exchange traded funds that invest solely in REITs that allow investors to gain access to this asset class without necessarily having to do their homework to pick a specific REIT in which to invest.  Instead, the investor can just buy shares in the fund and let the fund managers choose the REITs for the investors.  

Many investors are attracted to REITs due to their relatively high yields compared to other income-producing products in the marketplace.  These investment vehicles typically often offer much more attractive dividend yields than safer, more plain vanilla financial products like a savings account or a certificate of deposit.  That is perhaps their greatest benefit, particularly in today’s era of ultra-low interest rates.  They also offer the opportunity for capital appreciation, as they can rise in price between when an investor buys shares in a REIT and ultimately sells those shares.  

REITs are also typically highly liquid in that they are traded on most exchanges and can easily be bought and sold at will by investors through brokerage accounts.  They can also be bought and sold in a variety of formats, from the direct purchase of shares in the actual REIT itself to the purchase of shares in exchange traded funds or mutual funds which invest solely in REITs, resulting in indirect ownership of REITs for fund investors.

However, REITs are also not without their drawbacks.  Unlike bank accounts, the contents of which are guaranteed up to $250,000 by the Federal Deposit Insurance Corporation, a REIT’s returns are not guaranteed.  The REIT’s ability to make payments to its investors relies upon its receipt of money from the tenants of the properties of it owns; therefore, if those properties are vacant or the tenants are not paying their rent in a timely manner, then the REIT’s dividends likely are not being paid as expected.  Accordingly, there is a chance that an investor will not receive the payments he or she was anticipating when he or she bought an interest in a REIT.  REITs also are not guaranteed not to drop in price.  During a period during which the value of the underlying real estate assets held by the trust is plummeting, a REIT can plummet in price or become highly illiquid, meaning that it can be difficult to offload in a market in which its prices are dropping.   

However, on balance, REITs can be a good investment class to have in your portfolio.  For instance, in a study conducted by the website Investopedia, they were found to be the second best performing asset class behind mid-cap stocks for the period 1990-2010, returning an average of 9.9%.  Accordingly, consider investing in this asset class either directly if you have a brokerage account or indirectly by purchasing shares in a mutual fund or exchange traded fund dedicated to this asset class.  

New Crowdfunding Rules Allow Ordinary Investors to Invest in Start-Ups

It recently because much easier for the average investor to invest in startups and for startups to raise money via crowdfunding efforts based upon rules promulgated by the U.S. Securities and Exchange Commission (SEC) that went into effect on May 16, 2016.  These changes were part of the JOBS Act, which was passed by Congress in 2012 to both assist startups in raising capital and allow ordinary investors access to investing in startups, which was previously not allowed under federal securities laws.  

Pursuant to what is known as Regulation Crowdfunding, a much broader class of investors can now invest in startups via a crowdfunding platform.  (Keep in mind any crowdfunding platform on which a startup intends to offer shares must be registered with the SEC in order to offer a platform upon which securities are offered for sale to the public.)  

Pursuant to Regulation Crowdfunding, there are limits on the amount that can be invested by an individual investor.  These limits are tied to the investor’s net worth and annual income.  Pursuant to the legislation, an investor’s net worth is calculated by subtracting any and all liabilities from the investor’s assets.  With respect to the actual concrete limits, if an investor’s annual income or net worth is less than $100,000, the investor can invest $2,000 or five percent of his or her net worth in a 12 month period, whichever is less.  If an investor’s annual income AND net worth are both greater than $100,000, then the investor is permitted to invest up to a maximum of ten percent of his or her income or net worth, whichever is less.  

There is also a limit of $1,000,000 that can be raised by any startup through crowdfunding in any 12 month period.  Each startup must disclose certain information in connection with any crowdfunding, including the price pursuant to which it is offering its securities to the public, the method of determining that price, a discussion of its financial condition, a description of its business, information about its officers and directors, as well as financial statements.

These recent changes to the federal securities laws permitted by Regulation Crowdfunding should prove beneficial for both ordinary investors, who now have access to an asset class they previously lacked the ability to invest in, while also making it easier for startups to raise money to fund and/or expand their businesses or to use for other purposes.

Utilizing Assets in an IRA for College Expenses

Families or individuals will sometimes wish to tap retirement assets in an Individual Retirement Account (or IRA) to pay for educational expenses.  This has become an even more attractive option recently, as the rules governing both traditional IRAs and Roth IRAs have been amended in the past several years to allow withdrawals for qualified higher education expenses. The tax treatment of the funds used to pay for college varies based upon whether the assets being used for college expenses are located in a Roth IRA vs. a traditional IRA, however.  

With a Roth IRA, the principal portion (the amount you put in) can be withdrawn tax-free and penalty-free at any time for any purpose.  A key benefit of Roth IRAs is that distributions are not taxed as earnings until the entire principal balance is withdrawn. That means you can take out as much as you put in, tax-free, to pay for college and withdraw the earnings portion tax-free when you turn 59 1/2.  

By way of example, imagine that you have $100,000 in a Roth IRA on your child’s first day of college, $65,000 of which is principal and $35,000 of which represents earnings over the period that you have been contributing to the Roth IRA.  You would be free to use that entire $65,000 towards college expenses before needing to worry about any tax consequences and then you would still have $35,000 remaining that could be used for retirement purposes.  Note, however, that any withdrawals that exceed the total contributions are attributable to earnings and will be taxable for those under age 59½.  Therefore, if you withdraw $75,000 of the $100,000 from the example above to pay for college expenses and you are under the age of 59 ½, then the $10,000 of earnings withdrawn would be taxed as ordinary income on the following year’s tax return.

In the event you choose to withdraw moneys from a traditional IRA to pay expenses associated with college, the full amount of the withdrawal will be taxed as ordinary income, assuming both that you are under 59 ½ and that all your contributions to the traditional IRA were made on a pre-tax basis.  To use the same example from above, imagine you have contributed $100,000 to a traditional IRA.  Whatever amount you take out of the IRA to pay for college expenses is taxable, no matter whether you take out $10 or the full $100,000 in the IRA.  Therefore, whatever amount you withdraw will be taxed as ordinary income on the following year’s tax return.

When it’s time to prepare your taxes, any amounts that you withdraw from a Roth or traditional IRA are required to be reported on Form 5329.

Tapping retirement assets to pay for college expenses can provide an alternative to taking out costly student loans or paying college expenses in cash.  Ensure, however, that you understand up front what the tax implications of making any distributions will be in order to avoid an unexpected, and most likely hefty, tax bill.  If you do intend to withdraw assets from a traditional IRA or amounts in excess of your contributions to a Roth IRA, then consider either making quarterly estimated tax payments or adjusting your withholding to account for these distributions.

Another consideration from a planning perspective is that the $5,500 (for those under 50) or $6,500 (for those over 50) IRA contribution limits apply, no matter whether you plan to use moneys in an IRA for retirement purposes or to pay for college expenses.  Therefore, if you decide you like the thought of using an IRA to save for college, make sure to factor the IRA contribution limits into your planning.  

Are you having problems repaying debt, with student or other loans or do you need help coming up with a savings or investment plan? I offer assistance in debt management, student loan and general personal finance issues, including advising on debt management, resolving student loan problems and saving and investing strategies.

 Are you having problems repaying debt, with student or other loans or do you need help coming up with a savings or investment plan?  I offer assistance in debt management, student loan and general personal finance issues, including advising on debt management, resolving student loan problems and saving and investing strategies.  Initial consultation is always free and then I can provide you with a detailed written proposal.  If interested please email me at insideconsumerfinance@gmail.com. 

Are you really saving money by buying things on sale?

Are we always saving when we buy things on sale?  This question occurred to me as I was walking through the grocery store the other day, when I found myself getting excited and grabbing things that were not on my list but were on sale.  

My wife had given me a fairly short list of items we truly needed: milk, bananas, veggies, apples, etc.  But as I was waking through the store I noticed my favorite cereal was buy one get one free, so I grabbed four of them even though I had two already at home. 

I also have done this in the past with clothes-I went to the mall or store needing to get a couple dress shirts for work and ended up walking out with dress shirts, a couple ties, some casual shorts, etc.  The dress shirts I absolutely needed because I had worn out or gotten irreversible stains on several of my older dress shirts.  The other clothes, although I have worn most of them multiple times, were not strictly necessary.  

From my experience, whether you are really saving money by buying something on sale completely depends on both the time value of money and whether you actually would have bought whatever was on sale at some point in the future anyway, i.e. whether it is a want or a need.  So in the case of me buying my favorite cereal, I had two boxes left when I bought the boxes so I did not need them at that point.  However, I saved $8.00 by buying them now versus me paying the regular $4.00 price if they had not been on sale.  I go through a box every 7-10 days so I would have gotten little to no return on that $8.00 if I had not bought the cereal.  

The clothes I bought probably don't fit the same analysis. Yes I have more clothes as a result of my purchases of those on sale products and I do use them, but the extra $100 or whatever I spent on them might have been better invested, where it could have grown at whatever percent per year you consider the liky growth rate over the  near and long term future. 

So, at the end of the day, whether you are really saving money probably depends on whether what you are buying on sale is a want versus a need.   

Have you had a similar experience where you tend to buy things on sale just because they are on sale?  Do you ever wonder if you are really saving saving money by buying things on sale?

Guest Post on My Personal Finance Journey Blog

I did a guest post on the My Personal Finance Journey Blog on resources for resolving issues with your student loans when you are having problems with your servicer.

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