Real Estate Matters: Manage cash flow before you drown in late fees

Friday, June 6, 2008 at 2:59am

Q: I currently maintain checking and savings accounts in a national bank. Because of my business, I ran almost $7,000 through the account last month.

I have tried to pay my bills online (an ongoing project through the past year), but there is a five-day lag between depositing a check and having it clear the account. I usually do a pretty good job managing it, but this month I have paid almost $300 in bounced check fees through mistiming and because the payroll company did not deposit my paycheck on the usual day.

That’s on top of the $9.95 a month I’ve been paying for overdraft protection.

I am ready to make a change, perhaps to online banking, but need some impartial advice. Are there any good options here? I’m worried that I’m going to drag down my credit history and credit score, which could limit my options in the future.

A: I don’t know that a particular bank is the problem. The real problem is that cash isn’t getting into your account fast enough or you have timed to make your payments from your bank before your account can actually pay the amounts owed.

Does your employer and/or do your clients offer to pay by ACH? That’s also known as direct deposit, so the funds are deposited like cash directly into your account.

You should also figure out a way to better manage your cash flow. If you can’t count on checks clearing on a certain day, then you should have a backup plan where you charge more funds on a credit card than writing checks.

Even if you pay a month of interest on your credit card because your checks are late, it’ll likely be less than $300. I’d look into moving some of your regular expenses onto credit cards to give you more control over cash flow.

Overall, I think banking online is an excellent idea. You should pay your credit card bills electronically (you can pay the same day your credit card bill is due, which should buy you some extra time), and you should pay your other regular monthly payments (like your mortgage, car and school loans) electronically as well. Some companies will give you discounts for setting up an automatic debit each month.

You should have access to all of your bank accounts online. If your checking and savings accounts are tied together properly, you will be able to transfer cash from one account to another, and avoid being overdrawn at any time.

There are lots of ways to manage your cash flow better.

I think you should start by understanding what your bank’s fee structure is and what services they provide for each fee. Some banks charge for overdraft protection — that is, the bank will pay your check even if you don’t have funds in the account. In essence, they extend a loan to you for the amount they pay and you have to repay that loan back to the bank.

What does your overdraft protection do for you at $9.95 per month? Does your bank have better options?

It would be worthwhile for you to sit down with a banker at your bank to discuss your issues and determine if there are better alternatives for you. Above all, you should make sure that you don’t pay a bill until your online account indicates that the funds are available to you.

Q: I rent an apartment in Atlanta. I’m a technology consultant and work as a contractor for eight to 10 months each year. My credit score is 780, and I’m single, with no kids. So, my tax bracket is 33 percent.

In order to save on taxes, I want to buy a home or condo. I know that the mortgage payment is tax-deductible. But I’m not sure whether I should buy a condo or look for a townhome.

How do I know if it makes more sense to rent rather than buying my own home? I'd greatly appreciate your guidance.

A: I don't think it’s a good idea to buy a place just because you’ll save on taxes. You may save something, but you may end up spending more by owning than you'll save, it's hardly a savings.

Here are some of the best reasons I know to buy property:

1. You really want to own your own home and you’re ready to take on that responsibility. You’ve found the neighborhood you want to live in and believe that living there will be better for you and your family than living in a rental home or in an area comprised mainly of rentals. Owning real estate isn’t cheap, but if you choose wisely, you may even find you’re starting on a part-time career as a real estate investor.

2. You’ve found a great property and believe you can add value to it. You’ll either build in value by fixing it up and then living there for a while. Or, you'll maintain the property and it will appreciate in value because the neighborhood is improving.

3. You've found a deal of a lifetime, because you're buying a foreclosure or a short sale.

4. You want to control your own domain. If you buy a home, you might be able to improve it, customize it and change it to meet your needs. If you rent a home, you might be limited in what you can do to the home and might have to move in the future when the landlord decides to stop renting the home. While you might not be able to control certain expenses when you own your home, you might be able to lock in an interest rate for 30 years and fix that part of your housing bill and satisfy your desire to own your home, build equity in the home and not be subject to yearly rent increases by a landlord.

In general, single-family homes appreciate faster than townhomes and condos. But it depends on the neighborhood in which you live.

For example, there are plenty of condos for sale this summer in Atlanta. It could take years for that inventory to be absorbed. So, if you're buying a condo, make sure it's in a great, amenity-filled building that someone may want to buy or even rent from you down the line.

From a purely economic perspective, you can try the following to determine whether owning will give you greater economic benefits than renting. If you file your own tax returns with a software program like TurboTax or TaxCut, you can use that program to copy all of your information to a new file.

In that new file, you should add what you would expect to pay in real estate taxes and what you would pay in interest on your loan. Once you have input that information, compare what you paid in taxes last year with what you would have paid in taxes had you owned a home. That information will at least tell you what you might have saved in federal income taxes by owning a home.

But you need to take one additional step. You have to compare what it would cost you to own a home to what it costs you to rent a similar home. When you rent, your expenses are generally your utility expenses, renters insurance plus your rental expense. When you own, you will have the same utility expenses, if the homes are about the same size, plus you will have maintenance expenses, real estate taxes, homeowner's insurance and interest on your loan.

With all of this information, you should be able to come up with a more accurate number to compare what it costs you to live in your rental with a home that you might purchase.

But don’t forget that when you buy and sell a home, there are expenses associated with the purchase and sale of the property, including title and escrow company charges, lender closing fees, transfer taxes, municipal expenses and others. While these won’t eat up more of your monthly budget, they’ll add to the cost of buying and selling your home.

Contact Glink through her Web site, www.thinkglink.com

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

"I know that the mortgage payment is tax-deductible."This is not true and Illyce Glink failed to correct it. Mortgage INTEREST is currently deductible, not the mortgage payment.