Category: Personal Finance

Pay Dirt is Slate’s money advice column. Have a question? Send it to Lillian, Athena, and Elizabeth here. (It’s anonymous!)

Dear Pay Dirt,

I recently married and my husband and I planned to sell our homes to purchase “our home.” My husband sold his home, and we used the proceeds toward a new home down payment. I needed to renovate my home before we put it on the market. My aunt, a fan of flipper/renovation projects on TV, came to me with the desire to renovate my old home. Despite having no construction experience I agreed to put her in charge of the renovation. She is a capable person and the only work the house needed was cosmetic. I also made the fatal mistake of agreeing to this without a contract. She insisted on handling all the upfront costs.

After four months of renovation, the house is ready for market. It sells for $350,000. It’s a tidy sum and will go a long way toward paying off the new home. My aunt then hands me a bill that reflects more than 20 percent of the selling price of the home. I had expected a bill for labor, materials, overhead, and profit. We are both guilty of poor communication, but there is no way I can hand over this much money for so little effort. This seems like a no-win situation. I either cough up the cash and resent her for the rest of my life, or counter with a number more in line with reality and risk being cut off from the only meaningful family I have left. What in the world should I do?

—Flip Done Flopped My Family

Dear Flip Done Flopped,

As Chris Kattan once said in A Night at the Roxbury, “Are you seeing planes? Is your name Tattoo? Because swear to God, you’re living on fantasy island.” Right now, that’s your aunt slapping you with a bill for $70,000. But before I go off on a tangent, let’s discuss how much a general contractor can make when remodeling a home. Because maybe she’s not aware.

General contractors will most likely quote you a price by charging you 10–20 percent of the total price they spent on supplies plus labor, otherwise known as a cost-plus contract. I know you don’t have a contract but let’s pretend you did for the following example. If your aunt purchased $3,000 of materials for your bathroom and then spent 20 hours remodeling it (valuing her labor at $50 an hour), this one project would have cost her $4,000 upfront (materials plus labor). If she used cost-plus, she would give you a bill for anywhere between $4,400–$4,800, depending on the rate you agreed upon. You can see how easy it is to get stuck with a bill you weren’t expecting.

I don’t think your aunt is trying to pull a fast one on you, but I do think she got her estimate a different way.  It’s hard to say how much you should offer her because you don’t have a contract. You also didn’t share in your letter how much she spent on supplies and labor over the past four months. Moving forward, the best thing you can do is aim for clear communication by first asking her how she got her estimate.

Over the phone, you can say, “Hey, Aunt X, I wanted to touch base with you about the bill for remodeling my home. I’m a little confused about the bill and was wondering if you could help me understand how you got this amount. I had originally assumed that you would use a cost-plus contract for pricing as other contractors in our area use. I appreciate your hard work and want to ensure you’re compensated just as much. Would you mind walking me through the bill, please?”

This doesn’t sound accusatory and can allow her to walk you through how she got her figure. If it’s just a general number based on your home’s selling price, ask her for a more itemized bill that includes receipts for materials purchased and the amount of labor charged. It’s not unreasonable for her to value her labor anywhere between $50-100. If the total amount plus the additional 10-20 percent adds up, then yes, you should cough up the money and pay her.

If she’s still on fantasy island, gently explain how the cost-plus contract pricing works and how you feel this is the right way to approach compensation. Since this is her first project, I think it will be a learning experience for her, and she’ll agree. You’ll both know in the future that contracts are needed—even with family members—and that it’s important to communicate the pricing you agree on.

Dear Pay Dirt,

A successful family member recently died and left me about $50,000 in individual stock with a company that we don’t support, so I plan to sell it. I know I’ll have to pay capital gains to access the money, but I’m not sure how to prioritize what to do with what remains. Our family (two early-40s adults working at nonprofits, and two young kids) is comfortable, compared to many, but we don’t have robust retirement savings or investments to grow wealth for the future. We have $20,000 in a cash emergency fund, $20,000 in Roth IRAs, less than $100,000 in employer retirement accounts, no credit card debt, recently forgiven student loans, and a really big mortgage. Should we recast the mortgage to free up a few hundred dollars extra every month in our tight budget? Invest it all? Use it for some house upgrades that would “spark joy?” Set up 529s for the kids? Start a CD ladder? We also think we might want to move within five or six years if housing market conditions improve, and wonder if we should keep the money more liquid for a downpayment. So many options… please help!

—A Good Problem to Have

Dear Good Problem To Have,

This is a good problem. You’re being smart about what to do with the money so you can make it work for you and your family. You’re doing great with your emergency fund, but there’s room for  improvement in your retirement savings. I’m also worried that your budget is tight every month. It’s important to have some wiggle room so you don’t have to dip into your emergency fund for expenses that casually come up but don’t constitute an emergency. You should be able to pay for something like a car registration or a health insurance copay.

I would take $12,000 from the amount and max out a Roth IRA account for both of you ($6,000 each). Since you’re not entirely sure you want to move in a certain time frame and your budget is currently tight, I would look into recasting your mortgage with some of that money. Most people’s largest expense is housing, food, and transportation. A lower monthly payment will free up room for the expenses mentioned above and will allow you to save more for retirement. Recasting your mortgage will allow you to apply money to your principal, lowering your monthly payment. It’s important to know that it doesn’t lower your interest rate and some loans are not eligible. Check with your lender to see your options before moving forward.

If recasting your mortgage requires less money than you think, spend money on a home improvement that will bring you joy. I firmly believe that giving yourself some fun money helps keep you on track to follow through on the rest of your priorities. Your home is your sanctuary, and you deserve to enjoy it.

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Dear Pay Dirt,

I’ve been with my wonderful boyfriend for just over a year and a half—he’s loving and anticipates what will make my day easier. But he’s just kind of awful at gift-giving. I admit I’m the person who keeps a running Notes app list of what my loved ones mention they want so I can surprise them with the perfect present, so this does boil down to love languages in a way. But I’m nervous about repeating last Christmas. I gave him thoughtful gifts and he gave me something that felt like it was picked up at a Walgreens on the way to the $25 limit work Secret Santa. I was hurt but trying to hide it, and he awkwardly picked up on our discrepancies. His salary is significantly more than mine, so money is not the issue! I just want to feel seen and loved, and that gesture felt like a slap in the face to how I thought he felt about me. Going forward, I want to open a conversation about gift expectations this year so we can share what we both want to avoid any disappointment…Do you have any conversation starters that won’t make him feel awful or me awkward?

—Secret Santa

Dear Secret Santa,

The frustration is coming through in your letter, and I get it. Gift-giving is also how I show love—I pride myself on being known for giving the best gifts in my friend circle. You’re right that he may show his love in different ways. But sometimes we just want something to open, too.

First, make sure your expectations are realistic. Since he isn’t naturally inclined toward gift-giving, don’t expect him to be at your level when he buys you something. Sure, it would be nice for him to get you a framed picture inscribed with a lyric from your favorite song, but it’s probably not going to happen. It could happen if you’re direct about what you want and make it easy for him to purchase.

Create a list of items you’d like from different stores and share it with him in a Google doc. Title it “Gift Ideas For The Most Awesome Person You Know,” or some other inside joke between the two of you. Then the next time you’re eating dinner, explain to him that you wanted to make holiday shopping easy for him this year, so you created a list of gift ideas to share. He’ll most likely look at you and nod, then be thankful that he can utilize his Amazon Prime account to make sure you have a gift you’re excited to open instead of Christmas towels. Unless towels are your thing, then carry on. If he doesn’t, please report back so we can make another plan.

Dear Pay Dirt,

A few years ago I got a credit card to build my credit score, which was surprisingly low despite the fact that I have no debt because I had little credit history into my 30s—I’d been a signer on a credit card held and paid by my mother, which we thought was building my score but in fact, wasn’t. I am very lucky to have never had any student loans or other debt. I was successful in building up a good credit score by putting minimal charges (just Hulu and the occasional Amazon purchase) on the card for about two years. At that time all of my normal larger purchases (like groceries, travel, home needs, etc) were processed on my debit card. My good score enabled me to get a second, higher-limit card with excellent rewards to continue building my credit and to have more credit in case of emergency.

Today I have great credit, no significant debt other than a car payment I make every month, and I pay off my credit cards every month. But I stopped using my debit card and now use my credit card for basically all of my purchases, and I’ve developed a bad habit of spending my next paycheck ahead of time. This locks me in a cycle where I find it difficult to save much (outside of contributing to my 401(k) and auto-withdraw services like Digit and Qapital, which I do use or contribute meaningfully to the joint account my partner and I set up to have all of our joint living expenses (utilities, groceries, etc.) come out of. Despite my best efforts to keep spending at a minimum, I find I spend pretty much exactly what I can afford to pay each month, often having to dip into the little pots of those auto-withdrawn savings to pay off the bill. I feel impoverished in the last week or so of the statement period trying to keep the amount I’ll have to pay down, and I wait eagerly for the first day of the new billing cycle to shop—for things we/I need, but also for things that are definitely unnecessary pleasure purchases like new shoes, books, and makeup I’ve been eyeing.

This feels unhealthy to me, even if I’m not going into debt, but I can’t figure out how to stop the cycle. I’ve tried basically stopping spending on anything nonessential for a solid month and failed to do it despite my best attempts. I just had a baby and need to have more liquidity for emergencies and child care. I’m a 38-year-old academic who made very little money in contingent positions until I was 35 and while this is the best-compensated job I’ve ever had, my husband and I are definitely low earners in our city and field. We’re renters and good at living relatively cheaply but don’t have the recommended six months of living expenses in an emergency fund. Can you help me make a plan?

—Not in Debt, But Not Great Either

Dear Not In Debt,

I’ve learned quite a bit about the “pain of paying” concept while writing my upcoming book. As human beings, we’re generally loss averse, especially regarding resources like money. That’s why paying for something with cash subconsciously hurts you more than when paying with a credit card. One is automatically a loss when the latter isn’t because it’s future you’s responsibility. The issue is that you’re taking advantage of future you by spending your paycheck on unnecessary items ahead of time, leaving you strapped to pay your living expenses. Sorry to be the bearer of bad news, but you are in debt, and this debt is a problem.

I suggest going over your spending habits for the past three months. You need to figure out how much you are spending on necessities such as groceries versus what you spend on wants such as clothes and books. You’ll also need to sit with your significant other to go over how much you are responsible for regarding your joint expenses. The next step is to set up an automatic transfer to make sure this money is being deposited in that account before you can spend it.

With the amount you have left over in your checking account, you need to budget for your minimum monthly credit card payment and any bills you are solely responsible for, as well as expenses you have, like gas. After this has been accounted for, distribute the remaining cash by putting aside 20 percent of it toward fun and then put the remaining 80 percent toward an emergency fund. So if you had $1,000 left over, it would be $200 you could use for fun, then $800 toward your emergency fund. Once your emergency fund hits $1,000, then you can allocate your cash to 20 percent fun, 40 percent credit card debt repayment, and 40 percent toward savings, either for your emergency fund or another financial priority you need to take care of.

People may disagree with giving yourself money to spend however you’d like, but it’s needed to ensure you stay on track. Going from spending all your money to nothing is unrealistic and will have you back to swiping your credit card instantly. Small steps are what will make a change in your spending habits sustainable. Good luck.

—Athena

Classic Prudie

My niece, “Sabrina,” is in college and close to graduation. She is going to be entering the workforce and has asked me for a recommendation at my place of work. My niece is a bright, hard worker but has a few horrible verbal tics she has picked up from her peers.