Q. My daughter is getting married and I want to encourage her to spend their wedding gifts the smart way, or at least to save them. They don’t have a house and I think there will be credit card debt from the wedding. Can you give me some tips?
A. Congrats on the wedding, and for wanting to give them the gift of smart money management.
The first step is to sit down with the newlyweds to understand and help prioritize their future financial objectives.
Some couples do not feel the need to buy a home right away and rather save for travel or another goal, said Frani Feit, a certified financial planner with Tradition Capital Management in Summit.
“If the couple has their hearts set on buying a home, I strongly suggest paying off the debt first even if it means delaying the purchase,” Feit said. “Carrying a debt balance can hurt their FICO scores which in turn may complicate their mortgage approval or result in a higher mortgage rate.”
Feit also recommends putting at least 20 percent down on the purchase to avoid paying Private Mortgage Insurance (PMI), which adds additional cost to the mortgage payment for buyers who put less than 20 percent down on a home purchase.
“If they are close to having the full 20 percent after the wedding, I would keep those funds in cash,” Feit said. “If their time horizon for a home purchase is five-plus years, then I would invest the funds in a diversified portfolio.”
Feit said statistics show that for a five-year time horizon at any point during 1950 to 2015, stock returns ranged from -3 percent to 28 percent, bonds returned -2 to 23 percent and a 50-50 portfolio returned 1 to 21 percent.
The longer the investment time frame, the less negative the bottom return, she said.
To address their debt and not use the wedding gifts to pay it off, Feit suggests they look online for a zero percent credit card that allows them to transfer their current balance.
“It is very difficult to pay down debt with a 20-plus percent interest rate typical on many credit cards,” she said. “The zero percent offer should include both transfers from existing cards and new purchases or at the minimum, zero percent on transfers and an interest rate much lower than their existing card.”
Then, she said, they can set up a payment plan by dividing the outstanding debt by the number of months on the new zero percent card.
But be warned: If they don’t make the monthly payments are made on time, the credit card company may cancel the zero percent offer and they would be back to paying a higher rate, Feit said. Plus, late payments can hurt a FICO score. They could set up monthly automatic payments to avoid any potential late payment issues.
If the zero percent card is not an available option, they may also want to explore a few peer-to peer lending websites, Feit said.
“Peer-to-peer lending involves matching lenders with borrowers. Since everything is done online, there is less overhead than at traditional `brick and mortar’ institutions,” she said. “Lenders can earn higher returns while offering borrowers money at lower interest rates.”
Feit said her firm invests in this alternative lending asset class as a substitute for traditional bonds.
Finally, if the couple does not qualify for a lower rate credit card, then use the wedding gifts to pay off the debt.
“They are giving themselves the gift of beginning their marriage debt-free and can now begin to plan for the rest of their lives,” she said.
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