Dave Says

Wednesday, December 19, 2007 at 1:15am

Dear Dave,

We’re in the process of building a house. There’s no need to take out a mortgage, because we’re in the top tax bracket. We could pay for it all out of pocket, plus we have no debt. But our financial advisor says we should get a mortgage anyway, invest the money into mutual funds and get a great tax deduction. Does this make sense?

— Alvin

Dear Alvin,

No, it doesn’t make sense. And neither does your financial advisor. You need to get rid of him today.

Let’s say you take out a $200,000 mortgage at six percent. Twelve thousand dollars would go to the bank in interest payments alone. Since you’re in the top tax bracket, you’d be able to write off $4,200 of that $12,000.

So in layman’s terms, your “advisor” told you to take out a mortgage and pay the bank $12,000 in interest so that you can avoid sending $4,200 to Uncle Sam. Now do you see why I’m saying this guy needs to take a hike?

Very few people are blessed enough to be in your situation, Alvin. Pay cash for the house. Then you’ll be debt-free, and you can invest like a crazy man and retire Mega-wealthy.

— Dave

Dear Dave,

My husband passed away unexpectedly five months ago at age 30. He had life insurance, so I was able to pay off all our debt and have about $110,000 left.

I’m drawing enough Social Security to pay the bills and have a little left over for me and our two children, ages five and two. People are telling me I need to go back to work. What do you think?

— Sharon

Dear Sharon,

I am so sorry you have to go through this. Thirty is way too young for anyone to leave his life.

You don’t need additional money right now. Your husband was smart enough to make sure he provided for you guys. Now, there’s nothing wrong with going back to work if you feel the need to do something to occupy your time and your mind.

That’s between you and God. You’re dealing with a terrible loss right now, and sometimes we all need a distraction when life gets hard.

But I’m guessing those little ones really need their mommy right now. I’d hug and love on them a lot, and be there for them every second I could. Plus, all those hugs will help YOU get through this bad time, too.

If I were you, I’d invest the $110,000 in good mutual funds and just let it grow. It can give you enough to retire on comfortably, and send your kids to college when the time is right.

Just think and pray a lot on what’s right for you, Sharon. If you want to go back to work later on, that’s fine. But you don’t need to do it for the extra money right now.

— Dave

Dave Says

Dear Dave,

My girlfriend lives in Massachusetts, and I’m planning to move there when we get married. I know I love her, but I’m worried because she not very responsible with money. Lots of times she’ll do things like get her nails or hair done instead of paying bills. What can I do?

— Langston

Dear Langston,

You mentioned marriage, so that tells me that you’re not talking about just dating for fun. This is the process of finding out if you want to spend the rest of your life with this girl.

If I were you, I’d move slowly until she gets her spending under control and see if she gets past this immaturity. Sometimes when things like this happen it’s just a situation where a person needs to grow up and learn how to do things the right way.

If this is the case, you could talk to her about it gently and help her make out a monthly budget. That way, once she understands the process and value of having a plan and spending her money on paper before the month begins, it will be easier for her to stick to it.

But if it doesn’t work, and this turns out being a character flaw, then it will cause issues later on — and in other areas — of your relationship. And someone like that just isn’t good marriage material.

— Dave

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By: WickedTribe on 12/31/69 at 6:00

Dave doesn't make any sense at all. In another article, he said the normal ROI was 10-15% of your income. So if your mortgage is only 6% interest, doesn't that mean getting a mortgage would increase your income exponentially?First off, in his example, if $4,200 of that $12,000 was written off via taxes, that means the "real" interest expense in that first year is $7800. Now let's say his total mortgage payments for the year are $18,700 (should be a good average for the $200k price). That means he has $200,000 - $18,700 left over to invest that year (really more because it's monthly not annually, but to keep it simplified). Even at 10% ROI, that's $18,130 interest gain - $7,800 interest loss = $10,300 profit.On the other hand, if you pay the full $200,000 up front, you're left with... $0 to invest, $0 profit.Now I don't think people can really get a 10-15% ROI on a regular basis any more than I think Dave's advise here is remotely correct, but I'm just showing his hypocrisy.

By: Blanketnazi2 on 12/31/69 at 6:00

That's what I was thinking, Wicked. I don't think was Dave suggested was sound advice at all.

By: jwk6179 on 12/31/69 at 6:00

It sounds like Dave is back to his old tricks of giving vague, generic answers to his staffs vague, generic questions. The "writer" never stated how big a house or what the value of the house he was building. Dave also told him to pay cash for the house, invest the money in a mutual fund and then he would be able to retire MEGA-RICH. Since the "writer" stated in the first sentence that he was already in the Top Tax Bracket and could easily pay cash for the house, it sounds like he is ALREADY MEGA-RICH!!!

By: coupe on 12/31/69 at 6:00

You sure WickedTribe? $200,000 has about $1200 mortgage payment per month. Instead having a payment, invest that same money instead of sending it to the bank. At 0% ROI you end up with $14400 and at 10% you end up with over $15k per year. That sound a little better then the $10,300 you stated. You also do not include the risk factor. If life takes a bad turn on you, it is a lot easier to to make a $0 payment vs. $1200 one.You don't have to like it, but I wouldn't say it is bad advice.

By: mccullochd on 12/31/69 at 6:00

I like the fake authors of these letters. I can't believe that Dave got a TV gig. I hope he tones down his preaching and screaming, otherwise he'll be headed straight to BBN.

By: WickedTribe on 12/31/69 at 6:00

Coupe, what you're saying makes less sense than Dave. The 10% profit on $14,400 is $1,440. THAT'S the number you'd compare to the $10,300. The $14,400 itself is lost and not profit whether you paid for the house up front or year by year (you don't get the house for free). So $10,300 is a lot more than $1,440.And yes, it's still bad advice.

By: idgaf on 12/31/69 at 6:00

Im with dave on the house deal. Where are you guys getting 10% in this market and don't forget the taxes on the income.1200 on a 200K mortgage? I don't think so.

By: WickedTribe on 12/31/69 at 6:00

I'm not getting the 10% in the market. That's what DAVE HIMSELF said a few issues ago to another person. I can't remember the details of the question but DAVE said the person could get 10-15% per year interest on his investments. He apparently doesn't think so now.