UW Tacoma Grad, Author and Finance Expert Dan Wickens responds to your Money Matters questions

Money Matters - Ask Dan Anything

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Responses to questions do not represent professional financial advice and do not relate to a service engagement of any kind.

Mayra Asks Dan - What should I know before refinancing my home?
Hey Mayra, thanks for the question!
A refinance can be a great option for some situations, but not for all. When considering a refinance the two most important factors are: time until breakeven, and the minimum time you expect to live in the home.
By time until breakeven, I mean the time that it takes for the savings from refinancing to equal the cost of the refinance. If a refi costs $3,600 and lowers your payment $300/month, it would start saving you money after 12 months / 1 year. If it costs $6,000 and lowers your payment $100/month, you’d break even after 60 months / 5 years. Have the lender calculate breakeven for you and make sure you understand the math. 
Once you know the breakeven timeline, you can compare that to what you think is realistic for your time in the home, and remember that major life events can change things in a hurry. If you think you’re in your “forever home” or would use it as a rental if you ever moved again, then you’d be more likely to experience a longer period of benefit from a refinance. However, if it would take 5 years to break even and you aren’t certain you’re staying that long, a refi may end up costing you more than you save.
Some other factors to consider:
Are interest rates at their lowest, or are they expected to fall even more? In the early 2020’s, it was a very obvious time for lots of people to refinance, because rates were historically low and approaching 0%. Right now in March 2025, it’s anyone’s guess what will happen with rates, so its hard to say how interest rate environment should affect your plan.
There could be opportunity cost for the money spent on a refinance as well. For example, if the cash used for the refinance would save you $50,000 over the life of the loan, how would that compare to investing the refinance cost (say, in a Roth IRA) for the life of the loan?
You may be given the option to pay the refinance cost up front, or add it to the new loan balance. Remember that if you add to the loan, it will bear compounding interest for the life of the loan. 
Closing and opening accounts dings your credit score a little, but likely nothing too prohibitive. 
Thanks again for the question, and hope that helps!
Kelsy asks Dan about using a Pledge Loan when buying a car

I am looking to purchase a vehicle. There's an alternative method to finance through a savings-secured loan (Pledge Loan) through Navy Federal. Can you explain the pros/cons of this option and if its worth considering given the high auto interest rates.

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Thanks Kelsy! This is an excellent question.

I looked up the savings-secured loan through Navy Federal, and if I found the right product, I can see why you’re intrigued (link and snip below to confirm). I haven't previously done much research on this specific type of product, so it was fun to learn and think it through.

Quick disclaimer: my reply does not represent professional financial advice, and we are not engaged in a service agreement of any kind. Simply put, I’m here as a friend 😊

 

Savings-secured loan vs. traditional auto loan

Without more specific details of the product, based on Navy Federal's site I generally expect the pledge loan would be both cheaper and more flexible for you compared to a traditional auto loan. Some folks even use pledge loans as a preferred credit building tool. For example, I read about people taking a pledge loan, immediately paying most of it back, and adjusting their installment payment amount to pay tiny amounts for the rest of the term. While any loan will likely decrease credit scores initially (the inquiry and the increase in total debt amount are both negatives) the users mitigated this by paying back most of the debt immediately and then expanded their positive credit history by paying their installment loan timely. That may not be an option with all products, but sharing in case it's helpful to consider.

I think the risks are likely similar between savings-secured and a traditional auto loan, since both are collateralized (pledge loan secured by your cash, auto loan secured by your car). As a conceptual note, I think the reason they can offer a lower rate for a pledge loan is because the cash collateral is better compared to a vehicle, which depreciates with time and usage. However, it would be good to make sure you understand what would happen in the event of missed payment or default, and if there are any penalties for early repayment if you decide to do so. Then you can compare that to what you know about traditional auto loans.

As long as there's nothing too sinister in the savings-secured loan fine print, it seems like a valid alternative to a traditional auto loan and may be cheaper and/or more flexible. 

Savings-secured loan vs. cash

It sounds like you already have cash that you'd be using to secure/collateralize the loan, so that leads to the question – why not just use the cash for your purchase? Why pay interest if you don’t have to? Really, that comes down to personal preference and opportunity costs. Full transparency - I've never used a pledge loan, so I don't want to assume I know every nuance, but I think I understand it enough to form a general opinion. 

For any given person, I suspect the material opportunity costs of using your existing cash to pay for the vehicle up front instead of using it to secure a loan are:

1.      Lost flexibility. You'd save on the interest costs of the loan, but your cash would be gone-gone. However, make sure you understand when/how your cash would become available to you again as the pledge loan is repaid. Some folks may decide that the cost of the interest is worth the flexibility, compared to the finality of sending all the cash out the door at once. This comes down to personal preference, as well as reasonably projecting other life/cash needs over the term of the loan. Again though - most important is to understand when/how cash becomes available under the savings-secured loan, so that you can reasonably compare your liquidity. 

2.      Lost credit-building opportunity. Using a loan of some kind provides credit-building if needed/desired; however, depending on severity of the need or desire to build installment credit, this may not be worthwhile.

Hope that helps, and thanks again! 

 

P.S. this is the product I found and was reviewing. 

Thanks!

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Divine asks about starting a business without savings or income
Hey Divine, thanks for the question!
Licensing and costs
The first step in answering your question is to determine if you need a business license for the business you’re interested in starting. Do some research with the Washington Department of Revenue and Washington Secretary of State to see if your business would need a license to legally operate, or if it would meet one of the exemptions. If you can operate without registering and/or obtaining a license, you’ll avoid lots of paperwork as well as start-up and maintenance costs. Here is a link to help start your research.
https://dor.wa.gov/open-business/apply-business-license
If you do need a license to operate legally, that may be a challenge at the moment. Beginning a registered business may not be feasible without current savings or income. There are setup, filing, and maintenance costs that are a barrier to formation, and depending on the business you may also need supplies, equipment etc. To qualify for a small business loan you’d likely need to show personal income of the owner to assure the bank of repayment.
That said, you could also seek alternative funding to cover startup costs, such as the following:
  • Crowdfunding
  • Person to person loan (i.e. borrow from an individual)
  • Bringing in a partner who can finance
What to do in the meantime
No need to give up the business idea forever! You can still draw it up, refine it, define customer base, develop market strategies, and enjoy the dream while you save up.
Minimizing startup costs
There are quite a few businesses out there who will make your business set up as easy as possible. They’ll also ask for lots of money to do so. When I set up my LLC I was very thankful I explored alternatives on some of the services offered, because it probably saved me several hundred dollars. Even still, I wish I’d gone cheaper on certain items, such as selecting a registered agent or choosing a physical mailing address.
Final thoughts
If you’re able to operate without all the paperwork and costs, now might be a good time to get rolling. If you need to register, now may not be feasible. Hope that helps! Whenever you’re able to start the business, I hope you have fun and it does well. Thank you!
Coty asks: What’s the best use of off-schedule cash?

Defense first

First, make sure you have no credit card debt or other high interest debt. If you currently carry high interest debt, the best thing for your financial position is likely to put the funds toward paying those down. If high interest debt isn’t a concern, the next step is to check your emergency savings – do you have a minimum of 1 month of living expenses saved, or more preferably, at least 3 months worth? The reason this is also a priority prior to investing is because if disaster strikes – car trouble, medical bills, income loss – having the emergency savings serves as defense against toxic credit card debt, which often charges 24% or more in interest. Don’t count on any investment performing better than that consistently. And, even if invested funds are in a highly accessible account, you risk having to withdraw them in a market downturn. If you decide to save some or all of your bonus in an emergency savings, it would look pretty in a high yield money market account, earning decent interest without compromising access to funds.

Ok, now that I’ve nagged about proven defensive strategies, let’s look at the fun stuff.

Now build your lead!

You’ve made some money, you’ve set up your defense against disaster, and now you’re ready to go build on what you’ve started. Assuming you’re hoping to invest for long-term purposes (i.e. retirement) my preference is to use a tax-advantaged account and index funds. If you are eligible (and most people are), putting your money in a Roth IRA could be a great choice. I personally prefer this over a brokerage, since it will grow tax free forever while remaining reasonably accessible. If you stuck your bonus into a Roth IRA and earned 8% for 40 years, it would grow tax-free to over 24x its original value. If it earned 10% for the same period, it would be worth nearly 54x. Woohoo!

With long-term investing in a Roth IRA, I prefer to focus on proven equity index funds rather than trying to hit it big with more speculative investing. If you invest early and often enough, you don’t need to hit the jackpot. A lot of folks like choosing a combination of large cap, mid cap, small cap, and international index funds. Or, some just go with large cap, such as a fund built to track the S&P 500.

Here are some links to a reputable site that describes more about index funds and Roth IRAs.

https://www.investopedia.com/terms/i/indexfund.asp

https://www.investopedia.com/roth-ira-4771236

Wrapping up

I’m happy to hear you’re getting a bonus! Well-earned I’m sure. I hope that whatever you decide to do, it feels like a win. And if you carve out some of your funds to treat yourself to something fun, I think that’s great too. Thanks again for the question, and good luck!

When to Refinance a Mortgage Pledge Loans vs Traditional Starting a Business https://youtube.com/shorts/64tU4T59BwM?feature=share

Dan Wickens - Ask Dan Anything

When to Refinance

Pledge Loans vs Trad Loans to Buy a Car

Starting a Business Without Savings/Income