A frugal solution. . . .

I hope you all enjoyed a wonderful holiday! I certainly did, although my frugal tendencies went right out the window when faced with fabulous food, lots of opportunities (and time) for socializing, and, alas, the dreaded spending.

As has been the case since I began my frugal journey several years ago, the Christmas season seems to trigger the 'shopping gene' and I end up not only spending more than I intended to on others, but also on myself! For some reason, the act of purchasing gifts for others seems to get the juices flowing and I end up buying things for myself as well. It's as if all of my self-control, which I wield so successfully during the rest of the year, simply flies out the window for a two-week period.

Although I did score a wonderful new jacket and a pair of boots (70% off!), the upshot is that I had to send my last paycheck not to my second mortgage-holder or to my student loan balance, but instead to my credit card! Aaaarrrrrrgggghhhh! It's frustrating, to say the least.

Although I am kicking myself (even while wearing my fabulous new duds) the silver lining is that I have come up with a plan to help myself avoid this next year. My solution is this: for the first time ever, I'm going to set up a savings account just for Christmas costs, to include travel (airfare to visit the family) and gifts. I had intended to nix my savings (except for the savings that goes towards paying my water and auto insurance costs, of course) so that I could concentrate on sending every extra penny to my debt. However, in the long run, I think sending $50 a month to the Christmas savings account will benefit me by helping me avoid the frenzy of spending that I experienced this year.

Student loan shenanigans. . . .

A few weeks ago, I mentioned that there might be a change in my student loan balance due to an inheritance (of sorts) that a close relative received. Actually, the 'close relative' is my father. Many (many) years ago when I was making some bad decisions in high school, my dad said, quote: "you get into college, and we'll find a way to pay for it". What I didn't realize at the time was that this meant students loans - for me.

After my first graduate degree was finished, my dad commented that when he received an expected inheritance, he would help me with my student loan balance (which was around $50,000 at that time). Over the years since then, I've not counted on that happening, for various reasons. One of those reasons is that I consider these loans to be 'mine', and therefore my responsibility to pay off.

However, just recently, my dad started the conversation again about how he could help me with my student loan balance. The scheme he's come up with has its merits and its downsides. Basically, he will transfer some stock to me equal to about half the balance of my current student loans. Then it will be my decision whether to sell that stock immediately (taking a capital gains tax hit), or to hold the stock with the assumption that the shares will 'split' as they've done in the past (this is stock from a major U.S. company) and will eventually - in who knows how many years - be worth much more.

The merits of this plan are that at a minimum, I'll have about $25,000 to pay down my student loan balance if I'm willing to sell the stock immediately and take the tax hit. The downside? Knowing whether to sell right away or wait and see what happens with this stock. If I wait for the stock to split (and there's no guarantee that this will happen soon, though it looks like a possibility given the direction the stock is heading) and ultimately gain value again, I could have more of my balance paid off than if I were to sell right away.

What a conundrum! Looks like I've got some thinking (and learning) to do! In the meantime, I'm going to continue working on my second mortgage debt while paying at least the interest (but probably a little more than that) on my student loan balance.

Tax savings? Not so much. . . .

I'm obsessed with my second mortgage these days (as you might have guessed if you've read the past few blog entries. . . .). A couple of weeks ago, I discovered that I had only paid about $1,500 in principle on my high interest (8.9%) second mortgage in the last four years! Last week I decided to torture myself further by adding up all of the interest that I've sent to my second mortgage holder; money that I'll never see again.

During the past four years, I've paid CitiMortgage over $10,000 in interest! Granted, I would not be quite so upset about this if my house were actually gaining equity - unfortunately, it isn't, which is just adding to my feeling that each month for the past four years I've been flushing money down the toilet.

"But wait", I thought, "what about that tax deduction that is saving me so much money on my taxes each year? Isn't THAT a benefit to home ownership? Certainly, it's on every real estate agent's blog as being one of the best reasons to purchase a home".

"THIS will make me feel better," I thought to myself. So I booted up my 2009 tax return, and learned that I saved a whopping $1,700 last year as a result of my mortgage interest payments.

And guess what? Since I paid $2700 to CitiMortgage last year in interest payments, only about 20% of my total tax deduction was a result of my second mortgage payments. Which, by my math, means that of the $1700 I "saved" on my taxes, about $330 of it was due to my second mortgage interest. I paid $2700 in (mostly) interest in order to save $330? Sigh. Doesn't really seem worth it, does it?

Again, if my home were gaining equity (aside from the artificial equity I'm creating by throwing money at my principle balance) I wouldn't be quite so perturbed by the falseness of this ridiculous tax deduction argument. I guess the silver lining is that realizing this will help me in two ways as I go forward: first, I will think twice before purchasing another home based even partially on the argument that it will "save" me money on my taxes; and second, it makes me even more committed to getting myself out from under my second mortgage at this point (and eventually, out from under my first mortgage as well!)

Much as I love my cozy house, it's just not sustainable given my income and future goals. I would rather rent an apartment for $500 less than my mortgage payments and pay that additional $150 or so per month in taxes.