Financial advice for my Mom

[Oh Haha]

Short version. Just looking for some help in trying to explain WHY she should pay off her car and a large credit card debt.



My Mom has a credit card with 5 figures owed and a car loan that, if paid each month, will be done in February 2010.

She has 3x the amount needed to pay these 2 debts in the bank but she won;t pay them off now to free up some cash for monthly bills. She gets SS and has a part-time job. From what I understand, she keeps taking out of the savings account to make her bills each month.

If she paid off these 2 debts, she would save $750.00 per month.

When I showed her this last weekend, she told me she would think about it. I found out that she didn't do anything this week.

My Mom is old school in that she is afraid to take the money out of the bank because "once it's gone, it's gone."

Any new approaches we might try with her?


oh, she thinks that once her car is paid off, it will break down. No, I'm not joking.

I swear, sometimes I think my Dad is looking down from heaven and speaking through her.

[Zeke]

Do a spread sheet. I'll bet the CC is pretty high interest and you can show her the net "gain" on her dwindling savings. Wouldn't be the end of the world if she kept the car payment for the year left. Credit, FICO, etc.

[Moses]

Originally Posted by Oh Haha

...she thinks that once her car is paid off, it will break down.

She's right about this.

[fingpilot]

If the car is from the 'big 3' they will be bankrupt and out of business in a year, so tell her they won't be there to help anyway. Pay it all off ASAP.

[red911sc]

Get out her statements show her how much the interest is costing her then explain that she can still make the payments to herself (at least the income portion not the portion she is pulling from savings). Calculate how long it will take here to replace what she pulled. Use this link to calculate how long it will take her to pay off the credit card like she is. http://cgi.money.cnn.com/tools/debtplanner/debtplanner.jsp The idea is to prove to her how long it will take to pay off the credit card under current conditions versus how long it would take to replace her savings if she makes the payments to herself. Through these calcs you should also be able to show her how much the debt is/will cost her.

[LeRoux Strydom]

Does your mother fully understand the concept of interest? Explain to her that interest payable on borrowed money is ALWAYS higher than interest earned on money in the bank.

This is a no brainer: pay off the debt.

[pwd72s]

Money NOT paid in interst is money in the bank, in her pocket...try that.

[911Rob]

Do what I do; tell her you're going to have to put her in a home.

[PorscheGAL]

Would she listen to a stranger before family? If so, have her either watch Dave Ramsey on Fox Business channel or listen to his radio show. His website has live feed of the radio show. He suggests exactly what you are suggesting. Pay everything off. Use no credit cards.

[berettafan]

your moms attitudes have some reasonable basis. cash is king right now and new credit is tough to get. people that lived through the depression are very familiar with this thought process.

i would suggest the following as an aggressive course of action (if possible):
-Get her switched to a -0- interest cc and set up automatic pmts such that her cc is paid off in a few years
-if the car note is a relatively low interest rate, say 5% or less, i'd let it ride. a large part of her pmts now are principle anyways so she's really paid most of the interest already. iow you aren't necessarily saving that much by paying it off early.

sometimes financial decisions aren't black and white. sometimes we fail to assign the appropriate value to the risk of letting our cash go.

of course as long as we have debt we are all working for 'the man'

[Laneco]

Beretta's advice is very good in my humble opinion because it takes into account the thought pattern that is leading her to this behavior. Her actions are not entirely foolish, they are a product of her life history.

I would add this - when she pays the car off, arrange to keep making a partial payment toward a maintenance account. She's used to the payment, let's say it's $300. Pay it off and have a payroll or similar deduction or monthly bill that will go into an interest bearing maintenance account - maybe $150 a month. That way she is "banking" on future repairs.

The car is paid off and repairs are being saved for. If it doesn't spontaneously explode, well, then she has a nice down payment for her next car or a bit of mad money saved up.

angela

[lukeh]

Some people are beyond hope. That's not a knock on them, just a fact. My Aunt has $50,000 sitting in a savings account at .4%. She won't even take $10,000 and put it in a 6 month CD at 3%. Her fear is what if an emergency pops up. In her 67 years her worst emergency was a $1,000 car repair yet she feels nervous if her savings drops below $50,000. She won't even money the cash into an FDIC insured money market account because she can only write 3 checks a month out of it. I countered with the fact she can't write any checks out of her savings account.

Some people have been doing the same thing for 60 years and will just never change. I work in banking and some of the stuff I see will just blow your mind. People come in and pay us $3 for a $20 gift card. I asked a person I knew why they didn't just give the person a $20 bill and save the $3. They had no answer. Then I watch people take out 30 year EE bonds at a fixed 1.3% while turning down I bonds paying over 5%. The tellers will ask the customer why they'd want to lock in a rate of 1.3% for 30 years especially when I bonds are currently over 5%. 9 times out of 10 the answer is because my dad bought EE bonds for 40 years and they've been buying them for 20 years and they don't want to change what they are doing. We'll explain a CD at 3% would make them more than twice as much money and then they think we're just trying to scam them. If people can't figure out 3 is greater than 1.3 then they are beyond hope.

[LeeH]

I agree that you have to show her how much MORE money she'll have once everything is paid off.

When you say she'd save $750/month... is the really saving that much in interest expense or will her cash flow increase by that amount once it's paid off?

Hulu has Dave Ramsey in large quantity...
http://www.hulu.com/videos/search?query=dave+ramsey

[Hard-Deck]

I hope you can get things worked out.

However, I'm sure this thinking is a product of the years your mom has faced in life. My dad is 84, so he lived through the depression and served in WWII, saw Korea, Vietnam, Oil Embargo in the early 70s and all the other financial market swings during the decades. He now is retired with an income of twice what he needs monthly, everything he owns, he owns, no payment for ANYTHING. And he doesn't invest one nickle, every dime is in bank C.D.s. I shudder to think what he could have accumulated in the stock market or real-estate or whatever, but he cares not. The thing important to him has always been that he controls cash.

[Oh Haha]

Lee,

By paying off both debts, she will not have to spend $750.00 per month. That savings would translate inher not having to touch the savings except for an emergency or spending money.

She has some medical bills that she accumulated over the last couple of years. I haven't asked too many questions as it isn't really my business. All indications were that she was doing just fine. What i found out was that the credit card was being used gas, groceries, and shopping. Not crazy spending but over a couple of years it has added up.

When we were visiting last weekend she had the eletric oven on to heat her apartment. WTH?!!!!!

That's when I decided I had better ask some questions. My Mom is a smart person but my Dad handled all of the finances for their 47 years of marriage until he passed away 5 years ago.

Thaks for your help, guys. I was on the phone last night when some of you were posting so I read the replies to her. As the eldest son,she trusts me so I think I can convince her to see the benefit of paying at least the CC debt off.

I also told her we would see about trading her car in for something a little newer.

Hers is a 2005 Hyundai Sonata with only 72,000 miles. One of the big problems is that the only dealer that was within 80 miles closed last summer. I have done most of the big maintenance jobs on it.

[LeeH]

So the $750/month is a calculation of cash flow... not savings. The monthly savings would be figured on the interest... not the principal. You might get her to play around with a credit card interest calculator:
http://www.consumercredit.com/CC-interestCalc.htm
It will give her a real picture of what it costs to carry a balance on a credit card.
I keyed in a $10,000 balance at 24% APR with a 4% or $75 minimum payment and the results showed that it would take 9.8 years to pay off with an interest expense of around $8900!!! $10,000 worth of retail purchases ends up costing almost $19,000! If the rate is 29% then it would take 12 years with an interest expense of almost $13,500!!! Meanwhile her money sits in the bank earning 2%. The smart thing to do is to write the big check and cut up the cards - then bank what she was sending to the credit card company. Assuming the interest rate is 24% with a savings interest rate of 2%, she's getting a 22% return by paying off the balance. Now if you offered her a guaranteed investment return of 22% I bet she'd take it!

The biggest thing to watch out for right now is that credit card companies are jacking up everyone's interest rates for no reason. You can be a perfect payer and get a notice that your rate has doubled. Send her this:

http://ezinearticles.com/?Default-Credit-Card-Interest-Rates-to-Increase-Across-US-By-Mid-May-2009&id=1988524

[jorian]

Oh Haha

My Mom is old school in that she is afraid to take the money out of the bank because "once it's gone, it's gone."

If your Mom was truly "Old School" she wouldn't have run up a credit card in the first place.

[Oh Haha]

Good point, Jorian. I thought about that as I was typing it.


She and my Dad had some hard times and apparently used credit cards to pay for things.
Although the ones in my Dad's name were wiped out when he passed, my Mom didn't have a lot of money and needed to use credit to get by.

Like most of that generation, they were too proud to ask for help although once us kids found out, we did do what we could to help.

[911Rob]

put together a plan then and pay it off for your mom. Best of both worlds for her then.

Amazing what can happen when we set our minds to something!