What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Ratios and your money
2. Dealing with reality of debt
3. The “merging money” conversation
4. Credit cards or student loans
5. Long-term care now or later?
6. Long term investing books
7. Cooking brown rice
8. Retirement matching or debt repayment
9. Money principles in retirement
10. Low-cost audiobooks
After a recent mailbag in which I mentioned my most listened-to songs on my computer, several readers wrote in with musical suggestions. Two really caught my ears (and the links go to YouTube, so you can hear them): Dog Days Are Over by Florence + the Machine and Cold Shoulder by Adele.
It’s funny. When I was younger, I vastly preferred songs with male vocalists. Now, if anything, my preference has swung the other way.
In the book All Your Worth, the authors advocate that we should divide our net income as follows: 50% for must-have expenses, 30% for wants, and 20% for savings. I’m wondering: do you have a general ratio for your must-haves, wants, and savings? If yes, what is it?
- Rebekah
I really look at such strict ratios and guidelines as being much like training wheels. They teach you how to keep your money in balance, but eventually you outgrow them in a way.
In what way are they “outgrown”? Well, the reality of everyone’s life is somewhat different. We live in different places with different housing costs. We have different housing needs. We have different medical needs. Some of us have less expensive “wants.”
I like Warren’s ratio as a starting point. It encourages people to take a hard look at their “needs” and their “wants,” which is a core principle of good personal finance management. However, simply saying that 50% of your money goes towards “needs” while 30% goes towards “wants” is a bit of a stretch. Not everyone is going to be spending 50% of their money on “needs” (some may spend less, some may even spend more).
I am a 26 year old college graduate from State University. I have terrible debt because of my families inability to help with college or secure loans, they fall in that middle ground of making too much to receive federal aid and too little to put their children through college. They would have if they could. They tried to help with everything they could but nonetheless were unable to. Also I should note I refused to drop out when I could no longer afford it. I willingly entered into this and to this day I don’t think I would skip college if able to go back and keep my job at the local dealership. Definitely do some things differently, but such is life right.
So here I am barely getting by, and I am one of the lucky ones who was able to secure a good job. My student loan payment is more than my car, rent, insurance, and all utilities combined. I can’t even think about starting a family, owning a home, or supporting the family that raised me. I work all day long every week just to be able to make my payments and only charge a little each month to my credit.I have tried to consolidate and am still trying to but it has proved difficult with all my debt being private Sallie Mae loans. I believe that everyone has a war to wage on something in their life. But I can tell you I never thought mine would be student debt. Of all the things to dictate my life choices and development. Funny.
- Danny
Danny, you express the very reasons why college isn’t always the right choice for everyone. Yes, you have the experience. Yes, you have the degree. But you also have paralysis of choice and, as you said, the “war” you’re fighting with your energy is against student loans, not against anything else. I encourage people who are even considering a trade school or another alternative to college to read Danny’s story and trust their heart.
So, what can you do? The first step, I’d say, is to minimize as much as possible. Do you have a roommate? Can you move back in with your parents for a year or two to eliminate your housing cost, utility costs, and some of your food bill? Do you need a car?
These years are your “salad years.” You need to live lean so that you have a stable foundation to build something on later in your life.
This is the sad, painful truth of student loans for a lot of students. They get their degree, but they’ve sacrificed a lot of their youth for that piece of paper.
I am about to go back to school full-time for a two-year nursing program. The programs I’m applying to are at community college so financial aid will cover tuition/fees but won’t be enough to cover living expenses. Once I leave my current full-time job, I will also need to get health insurance (no school plans available at community colleges). There is a lot of financial upheaval about to happen, and I don’t know how to ask my live-in boyfriend for help. We have talked about marriage and have been together nearly three years (two of them living together). But we aren’t engaged and we keep our finances 100% separate at the moment. I’d ideally like to ask for his help covering a little more of the rent, paying a portion of my car insurance (the car is paid off and we share it’s use), and possibly helping with car maintenance costs should serious repairs be needed in the next two years.
I think he would be okay with the car costs, but the rent is a different story. In general, I hate feeling like I’m asking for “his” money to pay for “my” problems, but the reality is that my loans/debt will be his if we get married. Can you recommend some resources (online preferred) that talk about initiating this type of conversation and ways to make sure no one feels taken advantage of or hurt?
- Joanna
The first thing I would point at is an earlier article of my own, The First Money Talk: The When and How of a Conversation Every Couple Needs to Have. It covers a lot of the material you need to get straight with your partner if you’re envisioning a long-term future together.
However, the real key here is deciding whether or not this really is a long-term thing, or whether it’s just a comfortable thing for the moment that’s not permanent. If you’re not going to be together in a year, everything needs to remain separate. If you’re together for the long term, there are many advantages to merging things. That’s going to take some soul searching.
If you’ve decided that you’re in this together, I really recommend that you both read David Bach’s Smart Couples Finish Rich, which I consider to be his best book. It does a great job of addressing the very concerns you’re talking about and will do a lot to get you on the same page financially.
I just graduated from school with about 50k debt. My loans are still in grace period, to kick in within year. Anyway, I got a temp job for 4 months… and it pays enough to enable me to get some good money which I can use to:
1. pay my credit cards totally or
2. save for student loan payments (about 8 months worth)
I’m thinking to just kill the CC’s and hope that I get a job within the next few months to overlap with this one and pick up the student loans then. what do you think? Or…should I save up the money, paying only minimums on the CC’s and pay my student loans while I look for a job? My APR is nuts, like 24% on 5k…the student loan is like 6.5% on 49k. That’s really all the debt I have besides school loans.
- Nathan
Given the painful interest rates of those cards, I’d pay them off first, without question.
From what I understand, your student loans do not enter repayment for a year, at which point you’re concerned about unemployment. Many student loans allow you to place loans in forebearance for longer periods if you’re unemployed. Check with your student loans to see if this is a possibility.
If you can place your loans in forbearance during a period of unemployment, then the choice becomes simple: whack those credit cards and get rid of that monkey on your back.
My in-laws are in a position where they both need assisted living. The rent is steep, but all-inclusive (food, rent, util, etc.). They can afford the room and board from the proceeds from their pensions, and the contract ensures that the rate will not increase over time.
But, they have a long-term care policy which will pay for all of this care (daily allowed benefit is greater than the daily rent) up to a certain lifetime cap. This long-term care policy is not the best that I’ve seen. It has complicated filing and reimbursement procedures, and does not include an inflation clause so the daily benefit is exactly what it will be whether claimed now or 15 years from now.
So, the question is, use the LTC benefit now or save it in the event that one or both have to move into skilled nursing care, which would more than certainly exceed pension income. On the one hand, this is a benefit which has been purchased, so why not use it now, and save the income in an interest bearing account for future emergencies (as opposed to saving the benefit where the real value actually decreases over time due to inflation). But, again, that puts some burden on the future self, and who knows what lurks ahead.
We are so thankful that they are in a financial position to be able to afford this, and that they thought ahead enough to purchase the policy for themselves. I’m just curious to hear your thoughts on this one.
- Amy
Your entire question is a hedge on the future. Will they need skilled nursing care or won’t they? Unfortunately, you can’t predict the future when it comes to things like this.
My advice is to not put too many burdens on your future self if you can shoulder some of that burden right now. If it’s possible to pay for at least some of their care today without painfully altering your financial future, do it. That way, you spare your future self the strong possibility of having to bear the overwhelming burden of paying for skilled care.
If you can bear some of the burden today, you prevent yourself from potentially breaking your back tomorrow.
My situation: I am a 25 year old PhD student studying Aerospace Engineering. I have always valued money, and have been saving up for as long as I can remember. I make $25k a year, which although doesn’t sound like much, is nice since my education is also paid for through research fellowships. I live in a college town, so rent is relatively cheap ($450 including utilities). I don’t have any debts. I’m pretty frugal … I don’t go out to eat much (I like to cook) and I like doing free stuff (running, working out, playing ultimate frisbee).
Well, I’ve been saving up for quite a while and now have a substantial amount of money that I would like to invest. I’m not saying that I’m going to invest it all at once, but I would like to know what my options are. I know that if I keep it in my bank’s savings or CD, I just won’t get as much out of it as I can if I invest properly.
If there is one thing I’ve learned over the past 10 years, it’s that the more knowledgeable you are, the better decisions you are going to make. I also know that the most efficient way to get the best knowledge is to ask someone who is an expert in that specific area. With this in mind, I’m not asking you to give me all of the information I need via a long email. I would just like a book or two that you recommend that would greatly benefit me in my situation. I understand that there are thousands of books out there on finance and that you have not read them all, but from my understanding you have read quite a bit. :) I have heard a lot of people talk about Dave Ramsey, but from what I have heard, his books are more about getting out of debt. So, I don’t really need a book on managing my spending habits … I need a book on how to invest. I would hate to be 10/20/30 years down the line and think: “I wish I would have known how to invest 10/20/30 years ago!”.
- Miguel
My first piece of advice is to not rely heavily on the advice given in retirement planning books. Quite often, people turn to retirement planning books for long-term investing advice. However, most retirement planning advice ignores taxes, since retirement accounts are tax-sheltered. Follow the advice in those books and a lot of your profit will be eaten in short term capital gains taxes.
Instead, I’d read a good all-around investment book, like The Bogleheads’ Guide to Investing, that explains the whys as much as the hows.
After all, investing makes a lot more sense if you understand why you’re doing certain things rather than just blindly following the advice of your investment planner. (Knowing why also makes you more confident to just do it yourself.)
That brown rice in your summer meal series looks delicious! How do you prepare it to get it so light and fluffy, with the grains separate like that? When I fix brown rice it clumps together and is a gummy mess. I can hardly stand to eat it. But it looks delicious your way. Can you enlighten me?
- Tina
There are several things you could be doing wrong. Here are some pointers for cooking brown rice.
First, wash the rice thoroughly before you cook it. I recommend using a strainer. Rinse the rice thoroughly several times so that all of the starchy material on the outside of the rice is washed away. Rinse, shift the uncooked rice around, rinse again, and repeat several times before you even start.
Second, spread the rice out on a cookie sheet and bake it first. Seriously. Take the rice, spread it out on a cookie sheet, and toast it in the oven for twenty minutes at about 300 F (150 C). Use that time to get other elements of your meal ready.
Once it’s done toasting, cook according to the package directions. If you can, use filtered water. Leave the lid on while cooking – don’t check it.
That’s really all you need to do. The big thing, I think, is removing the surface starch with the initial rinse, then toasting the rice to get rid of the surface moisture before you cook it.
My wife and I are 26 and 25 respectively. I have almost $12,000 saved in four low-cost index funds in my 401k, which we absolutely will not touch until retirement. My employer matches 50% of my contributions up to 6% of my income and I’m contributing that amount regularly. We owe $15,000 on a car loan at 5.49%, scheduled to be paid off in four years (payment is $355/month). We intend to keep this car until it is no longer drivable – it’s a Toyota so that should be awhile. Our only other debt is low-interest student loans; we have no credit card debt or mortgage. We’re also happy with our emergency fund.
Here’s our dilemma. For obvious reasons, we want that car loan gone and have been paying extra towards the principal every month. Given our young age and the amount I currently have saved toward retirement, we are wondering if we should halt my contributions to the 401k temporarily and use that extra principal to pay off the car faster. I’m torn. On the one hand I understand that it’s an automatic 50% return on my money regardless of what the market does, and that the money has lots of time to compound and grow. On the other hand, for being 25 I feel that I’m already well on my way and with that much more cash flow, we could probably invest even more further down the road. Again, we don’t want to withdraw anything from the 401k or get a loan from it – just wondering whether it makes sense to halt contributions temporarily.
- Justin
Don’t sacrifice retirement savings out of a lack of patience.
It’s tempting to channel your money into debt once you begin to see the advantages of debt freedom and a better cash flow. However, in this case, your losses will be much greater if you give up that match.
Ignoring tax issues for the moment, every dollar you save in retirement is getting an extra $0.50 added to it. On top of that, at your age, you have a long time for compound interest to build both that initial dollar and that $0.50. If you put in $1,000 right now (and got $500 in matching) and invested it at a paltry 6% annualized return, you’d have $15,429 at retirement. Yes, every $1,000 you put away today adds up to that much in 40 years.
Unless you’re going to be able to invest that money into the next Google – and your car loan isn’t the next Google – you’re better off leaving that money in retirement.
I recognize that the main emphasis for your site is on money management during the working years. But I’d be very interested in your thoughts on how your principle of Spend Less Than You Earn applies to people in retirement, when pensions and social security count as part of income but also some use needs to be made of retirement savings. It doesn’t seem right that one should only spend the interest on those savings (unless one’s goal is to maximize the amount left to one’s heirs), but how do you decide how much of the savings you should access?
- Michael
The general principle I’ve seen for withdrawing money from one’s retirement account is that a person should note the balance of the account at retirement – say it’s $1,000,000 – and withdraw some percentage of that balance every year for their own use. So, if you used 4% as your rate, you’d take out $40,000 each year. Assuming your investment doesn’t earn anything – but doesn’t lose anything, either – your investment would last 25 years. If your investment earns just 2% a year, the retirement will last for 34 years. At 4%, the retirement fund lasts forever.
So how do you know what percentage to take out? Since we’re not psychic, we don’t know how long we’ll live, so it’s impossible to say how many years we’ll need. My suggestion would be to estimate the longest amount of time you think you’ll possibly live (based on family history and life expectancy calculators), then subtract your current age from that number. Take that difference and divide 100 by it, and you’ll have the percentage you should strongly consider using.
So, if I’m 65 and I think the longest I could possibly live is to age 90, I take 90 – 65, giving me 25, then I divide 100 by 25, giving me 4. I can take out 4% of my balance each year and the money should last me for the rest of my life.
I know you’re a huge book lover, so I thought you might know where one can get free downloadable audio books. I am changing careers soon, and my commute will be lengthening (public transportation is not readily available -boo!), so I want to spend my time doing something productive or enjoyable instead of listening to a mindless radio station.
- Jessica
My immediate answer to this question is LibriVox, which provides audiobooks of works already in the public domain. Some of them are very, very good.
However, I’d also strongly encourage you to take a look at some of the better podcasts out there. There are a lot of great podcasts out there that are well worth listening to. I particularly enjoy RadioLab, as well as many different NPR programs. They’re deeply informative and thought provoking.
The easiest way I’ve found to download podcasts, subscribe to ones you like, and manage the subscriptions is iTunes.
Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.
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