Sometimes personal finance problems have clear solutions: There’s a right answer and there’s a wrong answer. When you’re new to money management, these answers might not seem clear, but they become clear with time. But my favorite personal finance dilemmas are those to which there are no wrong answers, only good solutions.
For example, an anonymous GRS reader recently wrote wondering what to do with a large chunk of money. Here’s her story:
This has been a good year. In fact, it’s been a great one. I’m 48, self-employed and thanks to a variety of circumstances, I’m going to pull in four times my usual annual income. I’ve paid off my car and student loans, have no credit card debt, and my emergency fund is fully stocked. I’ve refinanced my underwater house and, with insurance and taxes, my monthly housing cost is $750.
So here’s the question: Should we put our house up for rent (the rent would cover the mortgage and all the property management fees) and use this year’s windfall as a major down payment on a country property we’ve always dreamed of having? Or should we just invest the money?
Paying off the current underwater mortgage doesn’t seem to make sense, especially if a renter will do it for us. Buying another house seems a little wild, but interest rates and prices have never been lower, and it’s a property we’d always planned to buy when we retired. Is it crazy to think of buying it now, as long as the new mortgage and the old still fit within a more normal year’s income?
Our anonymous friend is in a great position, and each of these choices is good. The questions is: Which choice is best? Unfortunately, there’s no way to know.
One problem we face when making any sort of investment is that we can’t see the future. If we could, investing would be easy. Sure, we can look at the past and make some educated guesses about what’s likely to happen. But these guesses — even when made with the best information available — are still nothing more than guesses. In the end, we have no way to be sure which investment will provide the best return on our money in the future.
I’ve actually been wrestling with a dilemma similar to the one faced by this anonymous reader.
For the past six months, I’ve been renting an apartment. My lease goes through the end of January. But mortgage rates are very low right now. Home prices seemed to have stopped falling. In fact, I’ve heard tales that the real estate market in Portland has begun to sizzle again. (It’s not uncommon to hear tales of houses selling after just a few days on the market.) It seems to me that now might be a great time to buy.
On Monday, I had lunch with a GRS reader who rents the top floor of a home near me. She told me her landlord plans to put the place on the market. She says it’s a lovely building and her landlord has put a lot of effort into making the place shine. I could afford to buy the place with a good rate, thanks to my good credit score and could then rent out the top floor to offset part of the mortgage.
But should I buy a home just because interest rates are low and prices are good? And should our anonymous friend by her dream home just because it’s now within the realm of possibility? These are tough questions. And they’re big questions. Buying a home is usually the biggest financial decision any of us make in our lives!
I’m not sure what I’ll do in my case. (I know I won’t make any sort of serious moves until mid October, after I’ve returned from my trip to Turkey.) But what about the reader who asked this question? What’s her best option?
If you were in this position — your only debt was your mortgage, you had ample emergency savings, and you had an extra chunk of cash — what would you do? Would you consider buying your dream property while renting out your existing home? Would you invest the money in some other way? Would you pay off your current mortgage and save even more before buying a new home? Is there any one right answer?