Reader Mailbag: Project Planning

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. Buy or sell townhouse?
2. Collection agency debt
3. Figuring out priorities
4. Tithing
5. Thrift store receipts
6. Repossession question
7. Steve Jobs biography
8. Rent versus buy
9. FSA question
10. Ethical question

Lately, I’ve been planning a pretty large project with a lot of different dimensions (it’s more of a personal project).

I started off planning it on several sheets of paper, which gradually grew into a three ring binder. Eventually, though, that started to get cumbersome.

So, I moved the whole thing into Microsoft OneNote using a scanner. It worked like a charm (after spending a fair amount of time making sure everything moved over correctly).

For large personal projects, OneNote really really does a good job once you get used to using it.

Q1: Buy or sell townhouse?
We bought a townhouse in 2005 for $224K. Our mortgage right now is $184K ($1400 per month). We moved out of state in 2009 (and since the market had tanked, decided to keep the property) and now rent it out with property managers. It wasn’t too bad early on as we were out only $150 per month to keep the property, hoping of course that it would go back up or at least that the rent would cover the mortgage, but it is getting worse. Now we’re out $400 per month to keep the property (something about the escrow on the property was miscalculated, making our mortgage go up this year to pay it. Don’t really understand it.) but the mortgage should go back to $1250 next year, making the loss only $250 per month. I calculated that in the amount of time we’ve had it rented out we’ve spent probably $15K on that property ($400x3yearsx12months per year). That number is shocking!

I can’t refinance, because it’s not our primary residence (to refinance I need to sink in another $50K to the property in order to qualify). I can’t sell without losing money (it’s zillowing at $192K). It peaked at the top of the market at $300K, and now we’re underwater. It’s sad, really.

We want to keep it, but really does it make sense? Seattle market is forecasted to rebound sometime in 2014. It’s tight to pay the mortgage right now, but doable. Would you keep it knowing these parameters?
- Kelly

Given that your monthly payments on the property are relatively small because it’s being rented and managed, I would look at it as an investment worth sitting on.

Let’s say you pay an average of $250 a month over the course of the entire mortgage. You will have paid $90,000 total for this townhouse that’s worth at least $192,000. That’s a pretty solid investment. It might not be a grand slam, of course, but if the housing market rebounds at all, it’s going to be a pretty good one.

Unless you really need that $250 a month, I’d sit tight. I’d probably only sell if I really needed the money.

Q2: Collection agency debt
I have a bill that has gone to a collection agency, from a doctor’s visit that occurred almost 4 years ago. I paid the doctor at the time of the visit – I have a bank statement that clearly shows the charge, but the collections agency insists that they purchased it from the doctor when she retired – she retired about 2 months after my visit, so she’s been out of the business awhile. She wasn’t sharing office space with anyone, and her practice completely disappeared (the building is even gone).

The collection agency tells me that my bank statement doesn’t prove anything, that I need the original receipt (which I don’t have, because credit card receipts fade after a couple of years to be illegible). It’s only $50, which I can cover easily. But it’s the principle – I already paid for that visit.

But I’m worried about what it will do to my credit score. I’ve worked hard for the last five years to improve it from the havoc I wreaked on it in college. At this point, I want to do what’s best for my credit score. I have a car loan and student loan that I’m aggressively paying off, but no credit card debt and my salary is in the $70k range. How bad of a hit would my credit take if I ignore the agency?
- Delores

The first thing you should do is see what exactly appears on your credit report. Use the federal government’s tool at annualcreditreport.com to see what’s actually being reported. If nothing is being reported, I would ignore it.

If you already paid for the visit, you shouldn’t be obligated to pay for it again because of someone else’s accounting mistake.

If it is being reported and is relatively recent, the best move you could make is to pay it off immediately. This will mark it as “paid” on your credit report, but the late payments will last for seven more years with a relatively small (and shrinking over time) negative impact on your report.

Again, these statements are based on how we think FICO scores work. They don’t publicly describe how exactly scores are calculated, as it’s a trade secret. Instead, such assumptions are based on observed changes in FICO scores and what hints Fair Isaac themselves give.

Q3: Figuring out priorities
I currently have $8400 (about 7 months) Emergency Fund, and I am saving about 22% for retirement (but would like to up that because I’m 33, and got a late start). I am very frugal, and the only debt I have is a HELOC with a balance around $30,000 (bought a fixer-upper with cash, then financed the repairs/upgrades). I am really allergic to debt, so this worries me a bit. My current vehicle is a 2003 Kia Spectra with 90,000 miles on it, and at the rate I am going, I expect it will need to be replaced sometime in the next 3 years, so I feel I need to start saving for this immediately, so I won’t have to finance it.

Additionally, I have dreams to travel, or at least take a couple of vacations a year, one inexpensive (like camping in different places here in the US, and one to two weeks in another country, starting with places that have a favorable currency conversion) I haven’t had a vacation in years…

After retirement savings & living expenses, I have about $900/month to knock down the HELOC, and save for the other two goals. So far, I have put every cent towards the HELOC and haven’t saved anything for the other two. Like many people I have been devastated by economic events over the last three years, including massive portfolio losses, and a long period of unemployment, and I am only now digging out. I am ready to start saving and planning for something fun/positive, rather than saving to protect from fear/debt.

The short of it is I’m not sure how I should prioritize these goals. Should I up my Emergency fund to where I could buy a car with it if needed, then funnel the rest into the HELOC & Vacation fund? Should I put off my dreams for a few more years in order to be completely debt free including the new car? I am just worried that if I do not do something towards travel, it will never happen…there will always be important things that come up to conflict with it…
- Tina

If travel is a top priority for you, then I would set up a savings account at a new bank, then set up an automatic transfer of, say, $100 or $200 a month into that account from your primary checking.

Once that’s out of the way, do everything you can to eliminate debt while that account builds. Then, when that account grows large enough, take that trip, using the money in that account to pay for everything.

That way, you can focus on what needs to be done, such as paying off debt and building an emergency fund, while still moving towards a personal goal that matters deeply to you.

Q4: Tithing
My religion asks that we tithe 10% of our income, so I typically just write a check to my church. However, I’ve come to dislike some of the things that my church spends their money on. I am struggling with the idea of simply taking my 10% and spending it on my own selection of charities. What do you think?
- Ronald

That’s really a spiritual question you need to answer for yourself.

It sounds to me like this is more of an issue of your disagreement with your church and the moves they’re making. Perhaps the answer is not to redirect your tithe, but to examine whether or not another church might be a better place for you. Many churches do not require a tithe, but encourage the members to make up their own minds about what to give. I personally feel that 10% is a good level of giving, but it can be split among any charitable organizations that you feel right about.

If you’d like to study more on the subject, I invite you to read the Wikipedia entry on tithing.

Q5: Thrift store receipts
I’ve been donating to the thrift store for many years now, and used to get the tax receipts. However, being a renter I found that $1-2000 in donations barely budged my taxes. As a result, I stopped asking for receipts.

My wife and I now own a home and I’ve been told that because we own a home we can get big tax incentives for donating and that I should keep the thrift store receipts.
- Richard

You won’t be getting a “big” tax incentive for your charitable giving receipts, but it is worth your while to hang onto receipts from charitable giving.

The reason the impact was almost nothing before is because charitable giving for people without a mortgage is usually wrapped into the standard deduction for people who don’t itemize their taxes, which is, frankly, most people. People who actually do itemize their taxes and don’t take the standard deduction are mostly people with mortgages or people with a lot of charitable donations.

In your case, your mortgage interest probably pushes you into itemizing, which means that your charitable donations will have an impact. If you’re in the 30% tax bracket and can claim $2,000 in charitable giving and donations, that’s going to be a $600 reduction in your tax bill.

Q6: Repossession question
Two years ago I took out a loan and bought a used car that seemed to be in excellent shape. However, after about six months it began to have serious problems and now it does not run at all. It would cost over $6000 for the repair, with no guarantee that it would run even then.

Unfortunately, I still owed a lot of money to the bank, so I am unable to get rid of the car. I contacted the manufacturer repeatedly but could not get help from them. I contacted the dealership, but they were unable to help. Lemon laws do not cover my situation. The expensive warranty I bought also does not cover the repair.

For the past year I have been making my monthly payments on the lump of metal sitting in my parking lot, and I have gotten the loan down to $5000. I do not make much money ($2400/month and have a partial-dependent) and it is really painful to continue with the $300/month payments when I know I am getting nothing in return. In addition to the auto loan payments, I also need to pay for full insurance since the bank owns the car, even though it is registered as a non-op. Ouch. This is a lot of money that I could be investing.

I know that you say to never let anything be repossessed if you can help it, but is it really worth $5000+ to keep my credit score up for the next seven years? My score is currently over 700, and I am curious as to how low it would drop if I allow the car to be repossessed.

Is this a special case, or does your “never let it get repossessed” rule still stand?
- Joe

My general stance against walking away from loans comes from a sense of how I would like to be treated if someone borrowed money from me. If I loaned my brother several thousand dollars to buy a car, he bought a lemon, and then came back to me and tossed me the keys and called it even, I would not be happy.

To me, it’s not right to treat anyone in that fashion. Many people abstract this by saying that it’s just a faceless business, but it’s still an extremely poor way to act toward others.

From a dollars and cents standpoint, it very well might be the right move to walk away here. From a personal standpoint, I never feel that it’s right to just toss the keys back at someone when you decide you didn’t like the purchase you made on borrowed money.

Q7: Steve Jobs biography
Given your comments recently about the Steve Jobs biography by Walter Isaacson, I’ve got to guess that you’re holed up somewhere with your library copy. What do you think of it?
- Reggie

I’m enjoying it so far. Walter Isaacson has certainly not written a worshipful puff piece, and that’s a good thing. It gives a real picture of a person, warts and all.

It’s important that, when you read a biography like this, you’re seeing both the good and bad in a person. To me, that makes the person real. All of us have done good things and bad things in our lives, and we hope to be judged on the good or at least on the aggregate of good and bad.

I vastly prefer biographies like this that show us both the good and the bad in a person and let us make up our own minds.

Q8: Rent versus buy
My wife and I are big fans of living cheaply, but have a conundrum (or at least it seems so). We’re in our late 20's and have no debt of any kind. We have no college debt, no mortgage, and no credit card debt (nor have we ever). We have good credit, and some amount of savings. We’re looking to move from North Carolina to Fort Collins, Colorado in a couple months for me to go to graduate school, which will be paid for with a graduate assistantship, which will also pay a monthly stipend. From looking around, it looks like Colorado has a bit higher housing cost than what we’re used to in North Carolina. Does it make since for us to finally buy, instead of renting? We’d like to stay in Fort Collins indefinitely, with me teaching at the university, so we wouldn’t be worried about selling for many years. So, should we rent for the next 5'ish years while I’m in graduate school, and then buy, or buy an inexpensive, possibly foreclosed home now?
- Alan

My sense is that people who are in graduate school at an institution rarely wind up working for that institution after their studies. It does happen, but it’s a relatively rare occurrence.

Given that, I would assume that in five years, you’ll be moving to chase your career path, in which case you’ll be trying to sell the home.

The first five years of a mortgage are the worst, as the largest portion of your payment is going toward interest on the loan. The only way you’ll make money here is if the Fort Collins real estate market takes a leap in the next five years or if you find a foreclosed house with some potential for fixing it up. Otherwise, renting will probably be the most economical option.

Q9: FSA question
I have until mid-November to decide if I want an employer-sponsored FSA next year. I don’t foresee any significant out-of-pocket expenses for me or my family in 2012 – maybe a couple hundred dollars in co-pays and deductibles but nothing else. In light of that, do you think an FSA would still be worth the time and hassle? I’m thinking the tax benefits wouldn’t be that significant and I’m concerned about not being able to get over-the-counter medications reimbursed without a prescription.
- Walter

FSAs work best when you’re confident that you’ll be using the money you deposit into the account. If you don’t use it, the money typically is returned to your employer.

In other words, don’t bother depositing money into an FSA that you’re not pretty certain that you’re going to use.

In your case, an FSA isn’t worth it unless you’re able to put in less than $100 or so, in which case the tax savings may not even be worth the effort.

Q10: Ethical question
I was in a store recently where I saw an item that was obviously mispriced. It was on the order of a 92% discount on the item. I was left with a moral dilemma. Should I tell the business about this issue or should I just take advantage of it, buy the item, and eBay it for a significant profit?
- Arnold

It would depend on whether it was a large chain business or a small independent one.

If it were a large chain business, I would honestly assume that it was an unadvertised sale and take big advantage of it. I’d buy several copies of the item and check out quickly. Large chain businesses have very tight mechanisms for pricing and stocking, so I’d think the price was intentional.

If it was a local business, I’d check with the cashier first, making sure that the price was what it was supposed to be. If it was correct, I’d buy the item. If it was not, I’d still feel like I did the right thing.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

View the original article here

Reader Mailbag: Reader Music Recommendations

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.

View the original article here

Reader Mailbag: Qatar World Cup

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. Saving for education
2. Consolidating private student loans
3. Gift exchange ideas
4. Buying a minivan
5. Credit report questions
6. Splitting mortgage payments
7. Walking away
8. Finding a credit union
9. Leaving an underwater condo
10. Tax breaks for window coverings?

I was extremely disappointed that the 2022 World Cup was given to Qatar instead of the United States.

For many years in college and afterwards, I worked with a group of people from all over the world – some from Europe, some from Africa, some from Asia. The one thing that they all had in common was a passion for soccer, and that passion was infectious. Before long, I found myself watching the World Cup and paying attention to several different international leagues.

During the World Cup this past year, my son got into watching it. He has been playing soccer recently and enjoyed watching the games and rooting for the United States.

I was deeply hoping that the 2022 World Cup would come to the United States so that I could attend some of the games with him and the rest of our family.

Alas. Perhaps it will come another year.

Q1: Saving for education
Currently I am 26, my husband is 27. We both work but he is in the construction industry so is laid off usually every winter. He does a paper route and collects unemployment, so he still brings in about $35,000 a year, often more. I make $30,000 a year, plus I have a weekend job (tipped) where I bring in maybe $500 a month. I have ten percent going in a Roth, by husband has 6 percent going into a Simple IRA. His retirement balance is about $6,000 while mine is $12,000. Because I am somewhat unimpressed with our retirement account provider through my work, I have a seperate Roth with Vanguard that is holding steady at $7,000. We have $130,000 yet to pay on our mortgage. We have no children but would like to start trying in a year or two. My question is this: I have $12,000 in a savings account (ING) that I’m saving for tuition. I am in a Master’s program for Public Relations – it is a two year program that will cost me about $50,000 when all is said and done. I’ve already paid the first semester ($7,000). I’ve received one $3,000 scholarship but my work is not contributing at all. I believe my job prospects will improve vastly when I have my masters, however I have never taken out a student loan and don’t want to. It may be a possibility to borrow money from my mom to pay tuition. Should I knock down our retirement contributions so I can pay for tuition as it comes, or just keep saving and hope we can scrimp enough to pay tuition each semester? I hate to stop contribution to retirement at the pace I’m at – I am so proud of our retirement savings. I am fine paying our minimum mortgage as we started at $150,000 just five years ago and have paid an extra thousand or more each year up until now.
- Jill

It seems as though you have a clear goal and your only real concern is whether or not you should redirect your retirement savings into additional savings for this goal.

The first thing I would suggest is to figure out whether you’re on par with regards to your retirement savings at this point. I would use a retirement planner and make sure that you’re at least somewhere in the ballpark of where you need to be for retirement.

If you’re doing well for retirement, I would cut back on the retirement savings and redirect the money into educational savings. If you’re not doing well, I would take the slow route, maintaining your retirement and looking for other ways (more earnings, perhaps?) to bolster your education savings. Either that, or bite the bullet and use an educational loan.

You may also want to consider a 529 savings plan for your college savings. If you use the earnings in that account for educational purposes, you don’t have to pay taxes on the accrued interest.

Q2: Consolidating private student loans
I currently owe approximately $120,000 in private student loans from college and graduate school. I am looking to consolidate them to get control of the monthly payments (right now, it’s around $1500 a month). I also two small government loans, but I do not want to consolidate them with these. The only information I’ve found is Chase and Wells Fargo are possibilities, but I will never go with them, they’ve been a nightmare to work within the past. I’m considering a loan from my credit union, but my credit score is not good. I do not own a house and I am single. I make a little over $50,000 a year between my main job and a part-time job. Are there any other options out there to consolidate other than Wells Fargo and Chase, and are they safe? Or does the credit union have a potential option?
- Pam

I’m afraid that if you have a poor credit score, you haven’t got a very good chance of reducing your interest rates lowered via a private student loan consolidation.

When you’re consolidating a set of private student loans, you’re essentially just trading one student loan for another one. You’ll go through many of the same evaluations as a person would when applying for a normal student loan and will get an offer that reflects upon your current credit standing and your income.

My suggestion to you would be to focus on repairing your credit above all else. If you are earning $50,000 a year, your monthly student loan payments are manageable if you keep your personal life under control and live lean. Keep current on all of your debts for a while.

When you do consider consolidating, I would look to the banks that you’re already borrowing from (and thus have established a solid payment history with) and inquire with them about a consolidation. If you wish to seek other banks, Chase and Wells Fargo are certainly options, as is your local credit union.

Much of this hinges on having a solid credit rating, however. If your rating is poor, you’re not going to get the best rates on a loan consolidation.

Q3: Gift exchange ideas
My extended family is getting together the week after Christmas. We always do a gift exchange, but every year it seems like everyone gets something they don’t want. We don’t want to abandon the gift exchange, but we don’t want to just tell each other what we want, either. Do you have any ideas?
- Carrie

My suggestion is that you shouldn’t worry so much about the gift, but instead focus on the exchange. How can you make the exchange itself more fun?

One way to do that is to put some huge restrictions on the gift. This year, everyone in the exchange is giving their favorite movie as a gift. Next year, everyone is giving their favorite book as a gift. What this does is it encourages both givers and recipients to talk about the things they’re passionate about with people they care about.

Another way to do that is to make the exchange into a bit of a game. Try a “yankee swap,” for example. A “yankee swap” happens when everyone opens their gifts in a certain order (usually going around the room). When you open your item, you show it to everyone, then you can “swap” your newly-opened item for an item someone else has already opened. The first person to open doesn’t get to swap when they open, of course, but they instead get the chance to be the last person to swap, choosing from among everything.

Liven it up and make it fun. Remember that it’s about the exchange, not about the gift. It’s about the time spent with loved ones and the shared experience.

Q4: Buying a minivan
I have a 2001 Lincoln Town Car with 150k+ miles on it. I love it, it’s paid for and I budget for its expense throughout the year fairly comfortably.

My wife and I own three dogs and we travel around the country to basset hound rescue events. (I write a mystery series that features a basset hound and I give the proceeds of the book sales to the rescues.

I’m interested in buying minivan for the dogs to travel in on long trips and to be able to hold boxes of books, luggage etc. I’ve even bought some books on how to convert a minivan into a makeshift RV.

I plan on keeping my Lincoln and using the minivan on other than long trips to prolong its life. I know you did lots of research before purchasing your car. I want a functional and comfortable used minivan and want to know your suggestions for thing s like how much mileage, year, model etc that you might recommend considering the way I intend to use it….that is, hauling dogs, long trips and some around town use.
- Tom

Given that you’re going to be driving on long trips with a number of animals on board, my reaction would be that your utmost priority with a minivan purchase would be reliability.

Typically, if you’re looking at a late model used (covering model years from roughly 2004 to 2008), the Honda Odyssey and Toyota Sienna are on top of the pile with regards to reliability, so I would steer you in their direction.

We looked at several Odysseys and Siennas before settling on a great deal on a Honda Pilot (a SUV).

Q5: Credit report questions
I just got a copy of me and my husband’s (of 2 years now) annual free credit reports and have a couple questions for you. I had excellent 25 years of credit and was able to buy a house a little above my means a year before we were married (2007). Despite the slight loss in value, we are managing the payment just fine. Now, with all the credit regulation changes, my credit card limits have all been reduced and my debt/credit ratio is 93% because of my mortgage. My husband’s credit was not that great because he had some late payments on some bills. When we got married, in 2008, we paid off his bills and canceled most of his credit accounts and are using mine as one joint account and several authorized user accounts. We pay them off every month except the mortgage. Now, with our one joint account, his debt/credit ratio is 7%.

My question is, in about 5 years, we want to sell this house and buy farm type property to retire. I don’t think we will have much of a problem but want to ensure we have good enough credit to get a good deal. To improve my husband’s debt/credit ratio further, should we make all our accounts joint rather than authorized user?

How can I reduce my debt/credit ratio other than continuing to pay down the mortgage that is all in my name? Does it really matter, based on our goals to eventually sell the house and purchase something else of equitable value? Between this house and another rental house, I have about $300,000 equity.

Also, the end of the credit report lists about 8 credit report requests that may harm our credit and another list that will not harm credit. I do not recognize any of the names on the list that may harm our credit and we only applied for one, Sears, credit card this year. Do you know why we would have so many names on the list of credit report request that may harm our credit and how we would correct it and prevent these requests in the future? We have already opted out of the permission to allow promotional requests for our credit report.
- Laura

Your best bet for improving your debt-to-credit ratio, short of applying for more cards (which has its own set of problems), is to simply focus on lowering that mortgage. Not only will it improve your credit, it’s also one of the better places to put your money in terms of a secure return right now.

Your husband’s ratio is fine – I wouldn’t worry about a 7% ratio one bit.

As for the credit requests, most of them only have a very short and small negative impact on your score. If you’re seriously worried about them, I would spend some time tracking down where exactly the requests came from. Usually, you’ll find that in some way, you initiated the “hard pulls” (the ones that can have a negative impact).

Q6: Splitting mortgage payments
My current house payment (with escrow for insurance, tax, and FHA insurance) is just over $1000/mo with an actual rate of 5.25%. The loan portion of the payment is around $700. I have been paying $1200/mo to pay down additional principle because I calculated that the small amount each month will shorten the life of the loan significantly. I am wondering if splitting my payment over the 1st and 15th of the month would speed up the payment significantly? My additional payments total to around $2200/year, which is nearly 3 additional payments on the loan. Is there an easy way to calculate the difference that bi-weekly payments would make?
- Alex

The amount you would save by splitting your payment is roughly what you would earn on $600 at 5.25% interest over 15 days. This adds up to $1.31 per payment – in other words, not too much to worry about.

Over a long period, that extra $1.31 will add up, but it will at most add up to a partial single payment at the end of your loan.

My suggestion to you is that if you can automate all of this, go ahead and do it. It will amount to a small bit of savings along the way, particularly if that early payment causes no cash flow issues for you right now.

Q7: Walking away
I am 53 years old. I was married for 34 years and have two grown children, both gainfully employed with retirement plans in place and health insurance coverage. For the most part, my work is done. Just as my husband i were looking toward the future, he was diagnosed with terminal cancer on January 1, 2009 and died in March of this year. Prior to his death, he worked for the same company for 31+ years with good benefits. I work, but it was more to keep me busy than a need for the income. Prior to his death, Jerry and I managed to get out of debt with the exception of our house and start saving. Fast forward 8 months later. When Jerry died, I believed I had life insurance benefits and did not worry overly much. Most of our “emergency” funds were used up during his illness. I took FMLA leave the last four months of his life and took care of him full time. While he had life insurance benefits through his job, I didn’t realize until he was on disability that once you’re on disability, those benefits are substantially reduced. Also, while you’re on disability because of a terminal illness, it’s impossible to get life insurance. It’s like chasing your tail.

Now the situation has changed. Upon his passing, I learned that I have a huge mortgage payment and very little insurance to cover it. I make about $50,000.00 per year. I have collectively $110,000.00 in a 401(k); I have $70,000.00 in savings and except for the house, no debt. I have two cars, both free and clear. That’s it. In a perfect world, I make enough to pay my expenses and to save something every month and enjoy my life; however, the mortgage payment of $1,300.00 on the first and $300.00 on the second is killing me. I have to take money out of savings every month to make ends meet. While the house is (was) in both our names, the mortgage was in his name only. I have not told the mortgage company about Jerry’s passing, I simply make the payments every month and they leave me alone. I could and will put the house on the market, but I owe approximately $170,000.00 on the house and cannot hope to cover that in this market, but I will try. With winter fast approaching in northeast Ohio, it is not the optimal time to list your house. Not only do I need to sell the house because I cannot afford it, but it’s a large, 5-bedroom, 4 bathroom house and I’m the only occupant. The energy bills alone are monumental. Also, my commute is approximately one hour each way to work. I need to live closer to my work and in a smaller house.

Here’s my question and it’s twofold. I would like to stay in the house over the winter because now is not the time to list it. I would like to put the house on the market in the spring when everything looks better. If, after a reasonable period of time, I cannot sell the house, I would like to call the bank and tell them they can have it. How badly will this hurt my credit? I never worried about it before because everything was in his name but now that I’m on my own, my credit score is (obviously) more important to me. Secondly, if I do manage to sell the house, it will be, I’m sure, at a shortfall. Will I be responsible for any leftover debt? I feel like I’ve been merely existing these last 8 months but I’m ready to at least start looking ahead so any information you can provide me would be sincerely appreciated. While I do not want to “beat” anybody out of money, I’m not so naive as to believe that a lending company will care overly much about my future. If, after reading this, you have other ideas that I haven’t thought about, by all means, please tell me. Any advice you can give me is appreciated. Thank you.
- Jo

Essentially, you’re asking what kind of impact walking away from your home and your mortgage will have on your credit. It will have a very serious negative impact on your credit, as the mortgage will be marked as being in default.

What does that mean? Negative items on your credit report have the greatest impact right when they appear, and that impact slowly shrinks over time, eventually disappearing after seven years (for most things). In your case, your credit will be completely shot for a year or two and will slowly begin to recover after that.

My suggestion is that you have a conversation with your lender before considering this move. Obviously, they are not going to want you to walk away from this, either – they don’t really want the deed to your home. Many banks are working with the people who own these homes to come up with better lending arrangements for both parties.

Q8: Finding a credit union
I’m looking to refinance my condo. Unfortunately, I own two companies and my W2 situation is a mess because one was started less than 2 years ago. That means despite having a 800+ credit score and over $100k in savings, my local banks computers just bounces back my application. I was told to try a credit union that doesn’t do automatic processing and I would probably have better luck. My question is how do I pick / research a credit union? There’s a lot in my state ( Illinois ) and city ( Chicago ). While there are a few reviews on yelp, they are few and far between.

Is there any place that rates / reviews credit unions?
- Griffin

There is no central clearinghouse for credit union reviews that I’m aware of. As you mentioned, yelp has some reviews, as do other services like Angie’s List.

My suggestion is that you simply ask around your social network. Ask your business associates what credit unions they use and recommend. What shops do good work and which ones have a bad reputation?

I tend not to trust online review aggregations from anonymous people because so often there are employees and owners putting up bogus positive reviews and competitors putting up bogus negative reviews.

Q9: Leaving an underwater condo
My wife and I each have identical condos, same lay out, same neighborhood. She bought hers for $200K, and I bought mine for $250K each with a 5/1 ARM loan. Her ARM came to term last year and is paying 3 points on top of the LIBOR index (luckily the LIBOR is very very low for now). My ARM comes to term next August with the same terms, 3 points on top of the LIBOR index. Refinancing is tough right now because we are underwater on both condos. But we are making our payments on time with no problems and don’t neccesarily have hardship. We don’t fall for any government funded help through Freddie Mac or Fannie Mae, so it seems we are out of luck there. We are currently renting her condo and living on mine. Our ultimate goal is to buy a single family, or townhome. My question is how should we go about this? Short sale both condos? Pay off her condo as much as possible to build equity, then sell it, or just continue to rent it and try to pay off the smaller loan then refinance? Short sale my condo, and live in hers? or Vice Versa? Try to talk with our lenders to get a better rate? The condos are small and not practical for two people but we are adjusting? Or do we just have to wait it out a couple of years? How many paths are there to this problem?
- Henry

If you have a good payment history, the first thing I suggest that you do is talk to your lender. Discuss the options with them and let them know that a short sale is something that you are considering. See what kind of packages they can come up with for you.

You can also take the same story to other banks who may be interested in picking you up as a customer, though they won’t have as much incentive as your current lenders.

I think most of this comes down to how underwater you are on these loans and whether or not your bank actually will refinance them in some sensible way. I can’t predict that – you’ll have to find out for yourself.

Q10: Tax breaks for window coverings?
I have looked high and low, both online and in stores, for information on the tax credit for energy efficient window coverings. I keep coming up with the same thing – “consult your tax professional to verify you qualify for the savings.” Well, guess what. I am the tax professional in this family – I do our taxes on TurboTax every year (splitting the cost of the software with family members.) Anyway, what information can the tax professional can read and understand that I can’t? Do you know the details of this credit? Thanks in advance for considering this question.
- Janelle

What’s actually happening here is that window covering manufacturers and salesmen are using some ambiguities in the tax code to promote something that isn’t really there.

Yes, there are a lot of tax breaks for energy efficient home improvements right now, as you can see here. The catch is that such tax breaks only apply for items that are “specifically and primarily designed to reduce heat loss or gain,” according to the IRS.

The problem is that the burden is on the homeowner to prove this, not on the manufacturer. The manufacturer can claim all they want that there are tax credits available for window coverings, but they only apply if the window coverings are highly efficient and are made primarily to reduce heat, like a rectangle that blocks all light and heat coming through the window.

Get window coverings that look good and are maybe a little efficient. Don’t waste your time trying to chase tax benefits through a vaguely written law unless you want to spend time proving to the IRS that your new window coverings actually provide a .30 solar heat gain coefficient in your home. If you want to save tax dollars with your windows, improve the windows themselves.

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.

View the original article here

Reader Mailbag: Parenting

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. Life insurance question
2. Where do I begin?
3. Paying bills with reward cards
4. Waiting for an internship
5. Settling credit card debt
6. Ignoring debt
7. Podcast basics
8. Turning your life around
9. Handling unexpected medical expenses
10. Kickstarter ideas

One of the biggest things parenting has taught me is the appreciation for my own parents, who had to handle all of this stuff for me when I was little.

Sometimes, I can’t imagine what I did with the abundance of time I had before children came along.

Q1: Life insurance question
Recently, my mom has decided to get life insurance from [a well known insurance company] for me. She says I can use the money later for my children (I’m only 21, and I don’t plan on having any children in the near future) and its tax deductible (which I don’t think is true). I don’t know what goes on in her mind to make her think this is something she should do. I tried to convince her not to do this and that there are probably better ways to invest her money even if I don’t know what exactly would be a better alternative, but she keeps insisting. And although I am pretty sure she can’t apply for this without my consent, she won’t let this go. Would you have any advice of what I can say to explain to her that this is a relatively bad financial investment and that she should just save money for her own retirement. I know I am incredibly lucky to have parents who can afford to make the payments for life insurance or whatever they think I need (even when I really don’t need it), but I rather they retire earlier and enjoy their lives and let me save for myself (I can’t help but think I’m going to end up horribly spoiled and not be able to appreciate the value of a dollar if they keep this up).
- Evelyn

The big question I would have is who exactly this life insurance will benefit. If the reason for buying it is solely as an investment, then you’re better off putting it in a savings account because then the insurance company won’t get a cut. If there’s another reason involving beneficiaries, then it’s going to be more tricky.

The issue here isn’t the facts for or against the type of policy that your mother is looking at. The facts against that type of policy are abundant and easy to find.

The issue is whether or not your mother will even listen to you at all on this issue. This is particularly true if she’s listened to a persuasive salesperson who has tugged strongly on her heartstrings.

You’ve got to figure out why she wants to buy this insurance. There’s an emotional reason behind it.

Q2: Where do I begin?
I’m 25, single, and a few months away from graduating with a master’s in public health. I have finished paying for school and have no debt of any kind as I worked throughout my undergrad and master’s. In fact, I have more money than I know what to do with.

For safe keeping, and because I didn’t know what else to do and was too busy with school and my two jobs to have time to think, I have put the majority of this money (approx. $75,000 Cdn) in short term GIC’s, the terms of which are ending at the end of this year so I’ll be able to move this money. I have recently received an additional $40,000 from a grandparent. This money is now just sitting in my saving’s account.

I don’t require any of this money to live off of, since I am still working, and will be making even more once I start working full time in January when I am done with school. I have a lot of work experience in my field, and there are many jobs in this area, so I expect to find a job where I expect to make at least $55,000/year, and likely more within a couple years. Currently my living expenses are minimal. I rent a very, very cheap apartment and my only other expense is my cell phone bill, and the regular stuff (food, clothing, etc.) (max $1,500/month which all comes out of my employment earnings with some to spare).

The point being that I have over $100,000 that I don’t currently need, and don’t expect to need in the near future, which I know I should be investing, but I don’t know where to begin. Should I buy investment property? What kinds of investments should I be considering??? I don’t have any specific retirement savings plan set up. I know I am fortunate to be in this position, but I am completely overwhelmed. I have been trying to educate myself about investing, but I find myself quickly tossing the books aside because there are too many options.

My only goal is that within the next 5 years I hope to buy some property outside of the city (currently live in downtown Toronto). I anticipate that anything else I want to pay for (travel) can come out of money that I am earning/will be earning.
- Judy

Your goal with this money is short term, so I would keep it in cash. Most other investments with a high potential return also have a high potential risk, so if you were to try to tap that investment in, say, three years, you could very well have a lower balance than when you started.

Sometimes, it’s hard to shake the feeling that money in a savings account isn’t invested. It is. Savings accounts are an investment that’s extremely low risk and very liquid, two features that are hard to find together in an investment. For those benefits, you generally get a low return.

These features make savings accounts a great place to keep money in the short term – less than five years or so. This is particularly true when you’re not absolutely sure when you’re going to need that cash.

Q3: Paying bills with reward cards
Does it make sense to make all your purchases and bill payments (minus the mortgage) with a credit card with a rewards program, as long as you can pay off your balance each month? My husband and I finally paid off our credit cards earlier this summer and started talking about how we want to handle payment for everything. We decided that our credit card, Chase Freedom, has a pretty good rewards system. There’s options for travel stuff and gift cards, but you can also get the money back on a cash card. Because our monthly spending is more than 1/3 of our card limit (it’s a really low limit), we actually make multiple payments a month to keep the ratio from getting too high, although we expect our limit to go up in a few months after we’ve shown we’re making the full monthly payments. Does this help at all in terms of the ratio idea on your credit score (I have no need to worry about mine right now, but my husband wants to buy a new car by next summer)? And is there something we’re not realizing in our plan of taking full advantage of our credit card’s reward program? Paying it off every month has really improved our picture of just how much we’re spending and what we’re spending it on, so that’s a bonus in my mind. And so far, at least, we haven’t seemed to revert to the mind set that we can spend more because it’s credit (we’re fairly frugal people, although we admit we eat out too much.) But I still have this feeling that we’re trying to cheat the system, and it’s going to bite us in the butt. Thanks!
- Teresa

While it’s tempting to jump on board with a plan like this, there are a few things to watch out for.

One, you need to be extremely vigilant with due dates. If you miss a due date, you’re going to be quickly accumulating interest that will very rapidly cost you more than the rewards are worth.

Two, you need to never be fooled by the balance in your checking account. If you go this route, your credit card will be coughing up a large bill every month that you will have to cover. Your checking account balance is a mirage at this point.

Three, you need to still have a pretty good sized emergency fund in cash. Credit cards do not work as an emergency fund because banks constantly tinker with credit limits and often cancel cards at inopportune moments.

I don’t really recommend or not recommend this path. It offers some rewards, but also offers some risks.

Q4: Waiting for an internship
I am a graduate student who just needs to complete my thesis to graduate so I decided to take a job while I finish so I wasn’t twiddling my thumbs. I took a position as a year long intern or volunteer which offers a $5500 bonus toward my $60,000 of student loans if I complete the year. It pays $375 every 2 weeks and I have food stamps at $176/month. I have some savings, and my loan is in deferment until June. Unfortunately the money I recieve from VISTA barely covers my rent and utility bills with practically nothing left over for gas or incidentals. I have been working here for 2 months at a position that I moved from GA to OH for which cost more than I expected, partially for the items I needed to buy since it was my first time living alone I had some gaps in my possessions. I do not have time to take a second job until I complete my thesis defense in November but I have already realized I’m not happy with this position or the organization I’m working for. Is it worth the money for me to finish out the year just for the bonus toward my loans or a leg up on getting federal jobs?

However, until I can line up a solid job or internship opportunity or a city I would like living in I don’t want to just quit and have to find a job that pays enough in a poor county and I am unattached and a recent graduate I’d prefer to move to a city I like and find a position or hunt for the perfect position while I can over just settling again for something that I find monotonous.
- Kristie

If you have a good paying job while you’re waiting for another one, I encourage you to keep the good paying job. However, you should spend your time at that job recognizing that this is not where your heart is and save your energy and focus for the next step in your career path.

Look at your current job for what it is: an exchange of some time for some money. It is not your career path. It is not life-ending when you leave this job. It’s just a way to make money.

Your focus should be on establishing a career path, and if your current job keeps you in a good place to do that, keep at it.

Q5: Settling credit card debt
I was just curious–I’m kind of new to the PF blog world (just started following the major ones [including yours!] on a daily basis a few months ago), and I’m finding it surprising how little coverage settling credit card debt receives. I see a lot of questions submitted by individuals who have (what I consider) extremely high amounts of cc debt (20k, 30k, 40k…) and I feel that I never see any advisement about the settling process. Instead, it seems that most everyone is advised to suck it up and strap themselves in to snowballing through the debt and insane amounts of interest for the next 5+ years (or more!).

My question is…why? Of course there are negatives to settling–the hit to the credit score, right?–but I have a friend who recently settled her 25k+ cc debt for 25% of its original amount and their score is still “good” (around 650). And this was a calculated move on her part. Although she could have kept up her monthly minimum payments (even though they took up 50% of her take-home pay and she would have been stuck in her hand to mouth existence), she purposely defaulted in order to settle. And she now is cc debt-free. It seems almost logical to me–she stopped paying her monthly minimum payments, defaulted, spent a few months getting badgered by collectors while she stockpiled the money that would have gone straight out the window to make the tiniest of dents in the debt, and then she settled and paid off those amounts in full with cash. Altogether, it was an 8 month process as opposed to a several years’ long torturous journey.

Is it an ethical issue? Is that why settling seems to be considered a last ditch effort (as in, only an option if you’ve already defaulted and have no other choices)? Or are there other negatives I’m not seeing?
- Jeff

For one, it is an ethical issue. Planning ahead to take someone else’s money then defaulting on that debt is just simply dishonest. It’s theft. There’s no other way to paint it.

Another factor is that it does drop a bomb on your credit report, even if you negotiate it away. It has a pretty big negative impact, one that doesn’t just affect the debts you might take on, but also affects job applications and insurance rates.

Yet another factor is that you’re hoping that the negotiation process goes the way you want it to. You’re betting on the company being willing to negotiate with you and doing it in a smooth and expedient process, which does not always happen. If it doesn’t, you’re going to have a giant wound on your credit report for many years.

Not only that, you’re also running a chance of being blacklisted from future transactions involving that bank. I have a friend who simply cannot get a card from Chase, even though he’s had strong credit for years, because of his previous default on a card from them.

No one offering reputable personal finance advice would suggest borrowing a bunch of money with the intent of defaulting and negotiating it away.

Q6: Ignoring debt
She is 24, has a degree in nursing, works full-time (three 12s = 26hours) at a hospital for $21/hr and is a whopping $130,000 in student debt (private school, no scholarships, and some bad decisions). Her monthly minimum payments are about $1050 a month, for the next 20 years. The way I see it, she has two options 1) pick up extra shifts, live extremely frugally, continue livinig with her parents, and hopefully pay it off in 8-10 years, or 2) pay the minimums, live her life, finally move out on her own, and just ignore that $1000 a month for the next 20 years. I am ALWAYS an advocate of getting out of debt as soon as possible, but in this case, is it worth giving up your life and your independence for 10 years? I’m just not sure!
- Brittany

It depends on whether she is willing to trade ten difficult years and ten great ones for ten mediocre years in terms of her finances.

Almost always, I would choose the ten difficult years and ten great ones. I would far rather live in a challenging situation for a while right now to have a great life sooner rather than later. I’d always choose that over a middle-of-the-road situation both now and later.

Part of the reason is that I’ve found that challenging situations always bring out the best in me. I rise to the occasion. I figure out ways to make it work. Then, because of that experience, I have the foundation in place for something great.

Q7: Podcast basics
You mention all the time how you listen to podcasts during the day. I get that podcasts are like free radio programs you can get on the computer, but how do you get them and how do you listen to them?
- Bob

Podcasts are pretty much exactly what you describe. They’re free radio programs that you can download on your computer. There are a lot of them and you can thus use them to essentially program your own radio network to listen to while working.

I use iTunes to listen to and manage podcasts. It has a great interface for finding thousands of different podcasts. Once you’ve found one you like, you just click on the “subscribe” button and whenever a new episode of that podcast comes out, it downloads to your computer for your listening convenience.

I could list dozens of podcasts to start with, but I really just suggest going to iTunes, visiting the iTunes Store within the program, go to the Podcast section, choose a category that interests you, and check out some of the top podcasts in that category.

Q8: Turning your life around
I have a question for you. My sister was very rebellious in high school and dropped out and had 2 kids before she was 18. She is now almost 30 and through some difficult experiences has hit rock bottom and is ready to turn things around. Our family is going to support her getting her college degree. We were curious though about what degrees would be best to pursue if your not going to get into the field until your 34 or 35. My wife is a CPA and in that world it seems extremely difficult to get into at this age with no experience. Others seem like that would be a little easier. Don’t know if any of your readers would have any other advice on going back to college at 30+ as well.
- Emily

Passion trumps age, every time. What is she interested in? What does she like to do?

It doesn’t matter what the field is. If you’re going there because you love the topic and you’re willing (and happy to) throw tons of time into learning from the classes, meeting people who are also into that topic, building relationships with professors, participating in organizations related to that topic, seeking out internships, and working on your own projects, you’re going to succeed.

Most of the tales you hear about people getting degrees and not finding work are from people who got into the field because they thought it would make them some money or got into the field because they kind of liked the topic but weren’t really passionate or don’t have a work ethic. If you have passion and a work ethic, you’ll succeed.

Q9: Handling unexpected medical expenses
I am really trying to be more aware of my spending habits, but due to health difficulties, I am finding additional expenditures that I normally don’t incur. I had purchased a product (aloe vera for the stomach) that was fairly expensive that I needed to take to treat the extreme pain th I’ve am experincing from a flareup of an ulcer (to nip this one in the bud at this point – the most recent research indicates that ulcers are not caused by stress). Anyway, my physical therapist ( I’m also dealing with a rather severe form of spinal stenosis) told me that he purchased aloe vera juice for $7.99 per gallon which is about a third of what I had paid. Unfortunately, it doesn’t work like the other did, and since, unlike Henry’s, I don’t think Trader Joes takes merchandise that has already been opened.

So, my effort to save kind of blew up in my face. Anyway, if you have any suggestions on how to deal with unexpected medical expenses, it would be greatly appreciated.
- Sharon

Sharon, you pretty much described why it’s useful to have a big emergency fund.

Life happens. One day, you wake up with a severe ulcer and find that the best way to treat it is with aloe vera. You try a sample of a kind and it works well, but buying more costs a lot of money. Where does that money come from? An emergency fund.

There are tons of things that happen in life that can really be supported with an emergency fund. It’s simply the best solution to the challenges life throws at you, in a general sense.

Q10: Kickstarter ideas
Have you ever considered using Kickstarter for any of your ideas? I would absolutely contribute to a Kickstarter campaign if you were to finally get off your [rear end] and write that fantasy novel you’ve mentioned several times.
- Jim

I’ve actually thought about doing this for my fantasy novel that I’ve been working on.

For an example of what this would be like, here’s a kickstarter project for a book. In essence, people would “pledge” a certain amount to “kickstart” me to write the book. In return, they would get various things – a signed copy of the book, perhaps, or a PDF copy of the book as soon as it’s done, or a thank you in the acknowledgements of the book. I had some ideas for other perks, too.

The thing that’s held me back is the thing that’s held me back from doing it anyway – time. The content produced for The Simple Dollar, plus all of the other management, eats a lot of my time. Add on top of that family time, basic life management, and a bit of time for other hobbies and my time is pretty much eaten up.

I have considered slowing down the pace of The Simple Dollar for a while to give something like this a go, but it’s really going to be a personal decision whether I do it or not. In other words, the decision to jump on board with this has more to do with whether I think I could do a good job of this than whether a bunch of people would be willing to “kickstart” it.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

View the original article here

Reader Mailbag: Thanksgiving Week

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. A scary future
2. Effects of Kindle giveaway
3. Hiding savings from spouse
4. College accounts for grandchildren
5. Too much retirement, too young?
6. Snowblower?
7. Helping a financially distressed friend
8. Improving my wife’s credit
9. Reducing family stress
10. Winter exercise

Just a quick note about the week of Thanksgiving (next week). I’ll be running a lighter schedule that week, with just one post per day on Wednesday through Sunday (with the Thursday one being particularly short), and I’ll be skipping next Thursday’s Reader Mailbag. The same will be true during Christmas week next month. These are two holidays during which I spend a lot of time with my family and my wife’s family and I know many of you do as well – quite a lot of you will be taking those five days off of work and traveling to be with family for at least some of it.

Enjoy the holidays!

Q1: A scary future
There have been a few articles on [various websites] regarding inflation, astronomical food prices, and projected food shortages. What do you think about these? I find them scary and reactionary, but I trust your take on the subject. Any information you would share might help ease my mind
- William

There has never been a point at any time in history where you couldn’t have made some extremely negative projections about the future. Projections about the future are just that – guesses based on only some of what we know now that attempts to state exactly what the future will be like. Remember, in the 1890s, they wanted to close down the US Patent Office because everything that can be invented had already been invented. Since then – the airplane, the computer, plastics, and a nearly infinite flood of other such things.

I don’t put stock into global projections like this. Nearly every day, something happens that will alter it. A catastrophe. Political upheaval. An invention. A discovery of new resources. An idea.

Projections don’t include such things because they cannot include such things. We simply don’t know what the future holds, good or bad.

There are very few things I’m certain of with regards to the future. One of them is human ingenuity. There are more people living now than ever before, which means more ideas are being generated now than ever before, and it’s easier to communicate and share them than ever before.

I think I’ll bet on that.

Q2: Effects of Kindle giveaway
I bought a hard copy of your book and enjoyed that as well. Thanks so much for releasing it for free on the Kindle which is my preferred method of reading. I would be interested to hear how that affected your book sales. It seems like a good idea to do what you did for the sake of promotion. Has the giveaway had a positive effect as a whole? Any thoughts?
- Matt

It certainly had a positive effect – one only needed to watch the Amazon sales rank for the print version of the book in the days during and after the Kindle giveaway to see that. Not only that, now the “free” Kindle version is floating around out there. More people are reading it than ever before and some of them are probably thinking, “Hey, this book would make a good Christmas gift for person X.”

I will say that as more and more book companies try doing this, it will get diminishing returns. If every book had a free week on the Kindle, then it would be very hard for a single book to get any sort of sales spike from it. The more books doing this, the less effective it will be.

For me, I’m just glad more people read it. That’s enough for me, since that’s the real reason I wrote a book and sold it to a major publisher in the first place.

Q3: Hiding savings from spouse
My husband and I have always had joint accounts for everything. After squeaking by with a child for the past 5 years, we’ve been aggressively paying off debt (specifically student loan debt) for the past 18 months and also aggressively setting aside for retirement (for us this means about 12% of income). Whenever we get a little push of money (a raise, etc), it seems to fall in the bill abyss. Our budget is very tight. We set aside $200/month for savings but this seems to evaporate every few months from some emergency. For this reason, when we stopped paying for preschool when my daughter started kindergarten, I decided to open a new savings account through work that is deductible from my paycheck ($50/biweekly paycheck)….the rest of that money has already fallen into the bill abyss. I plan to increase this to $150 per paycheck after my payraise and once my child care FSA is reduced in the new year. I’m hoping to use this for much needed house repairs once it accumulates and as emergency savings.

The catch is, I haven’t told my spouse about the account, as I feel as though it could become part of the bill abyss if he knew. While we don’t dine out and are fairly frugally, my husband insists on a fancy phone plan and fancy satellite (which I feel is acceptable given our other sacrifices—about $100 more than I would like to spend. How do you feel about keeping funds secret from your spouse (which I feel will be mutually benefical)?
- Heidi

First thing: hiding anything beyond a present from your spouse is a bad idea that will pay some sort of negative consequence in the long run. Hiding things erodes trust, which is what relationships are built on. You need to have this conversation with him now rather than later.

Having said that, if I were you, I would explain it just as you did above: you are taking the money from your raise and directly putting it aside for emergencies. I think that’s completely reasonable, and if you’re calm about it and explain it in that way, he likely will, too.

If he doesn’t, then you’ll need to sit down together and have a long talk about what your financial goals are together and how you’ll get there. It sounds like you’re already doing this, but if you’re not, it might be a good idea to do this anyway.

Q4: College accounts for grandchildren
My mother, who is not rich by any stretch of the imagination, wants to put away some money for each of her four grandchildren to help with their college expenses. (The grandchildren are 18, 16, 9 and 9 respectively.) My sisters are both financially irresponsible married to men who are even more so. What kind of account do you suggest that my mother open for the grandchildren? The 18-year-old is currently going to community college. My mother’s biggest fear is that the other children will want to go to college (the 16-year-old is very bright and does well in school) but will not be able to afford to because their parents will not have the money.
- Sharon

I would suggest she open a 529 for each child. They can immediately use the money in that count for educational purposes, as well as any financial gains made by the account. If they end up not ever having educational expenses in their life, they can withdraw the balance without penalty, but will have to pay an extra 10% tax on the gains.

There are lots of 529 plans available – most states offer one. Search “529? and your state in Google to see what you get. You’re going to want a 529 plan that allows you to choose any school – some 529s lock you into certain schools by prepaying tuition there, and that’s usually a bad idea.

If your state doesn’t offer such a plan, you can use the one here in Iowa – College Savings Iowa. I use it for my own children.

Q5: Too much retirement, too young?
I am a 23 year old recent graduate making $67k in my second year as a software designer in California. I have no debts at all (yay for scholarships/grants and a 15 year old car). I have funded both my Roth IRA and 401k (no match) fully for this year and am just shy of 10k in my emergency fund. I feel like I could be saving too much for retirement (possible?) and not putting enough priority on a down payment for a house, or car, or just a higher emergency cushion. Right now I pay ~$1200 for rent. I feel that a decent mortgage payment isn’t that far away from my current rent and could possibly be a better choice. My net worth goes up every month, due to retirement savings, but the numbers in my savings accounts doesn’t really increase. I don’t feel like I’m “penny pinching” too much, but of course it’d be nice to get a new car sometime soon or have a house sooner than later. What do you think some possible routes I can take? Lower retirement savings and redirect that money into a down payment? Not change my retirement savings plan and slowly build that down payment?
- Joseph

Given your great start financially, I think your best move would be to simply shoot for 10% of your annual income in retirement savings for the next few years and channel the rest into saving for a down payment.

Since you’ve hit the limit on the Roth and the 401(k), that means you’ve contributed $21,500 to retirement this year – about 30% of your income. That’s plenty. Slow down a bit.

If you contribute just $6,700 next year – $5,000 to your Roth and $1,700 to your 401(k) – you’ll have $14,800 to save for your down payment. That’s an excellent start.

Q6: Snowblower?
This is our first winter in a home of our own. We live in an area with significant snow many times during the winter. Do you suggest buying a snowblower? If so, which one do you recommend?
- Kevin

It depends on how much area you have to clear. Does your home have a double-width driveway or a single-width driveway? Is it very long? Are you responsible for clearing any sidewalk? What exactly does “significant snow” mean?

If you don’t have much to clear and you get 6? of snow over the course of a winter, then use the shovel. If you have a long double-wide driveway with some sidewalks and you have storms that get 15? of snow, like we do… get a snowblower.

We purchased a Troy-Bilt that was on an end-of-season sale a while ago. It has been very much worth it, as we’ve been able to turn four hours of shoveling into fifteen minutes of snowblowing several times a winter. Last winter, we had a very rough winter with lots of snow and the snowblower saved us approximately 40 hours of hard labor last winter. If it lasts for ten winters, that’s 400 hours of hard labor saved, making it worth it for us.

Q7: Helping a financially distressed friend
My close friend is currently in (since May 2010) chapter 13 bankruptcy in order to keep her home from being foreclosed. She has unpaid medical bills dating back several years from a stroke at age 40. She has a neck injury that has kept her from working since June 2010. It looks like she will have to convert to a chapter 7 in January 2011 and lose her home. How would you help someone in this situation? What do you say to them?

Some things we’ve done so far: gone over her budget with an eye to cutting expenses – got rid of cable, etc; sold some collectibles at garage sale and online – brought in about $400; gifted money solely to pay insurance premium and medical copays (about $100 for 6 months)…
- Vicki

That person needs you to be positive and helpful, and that person needs strongly to focus on getting themselves into a position to recover financially from this. That means healing up, building whatever skills she can during her recovery, and being as ready as she can to return to the workforce when this all finishes up.

It sounds also like your friend has a powerful story to tell. She should spend some of her energy getting her story out there, as it may make a strong case for why we need a better healthcare system. Contact politicians in her area that are involved with healthcare legislation. Doing this may be incredibly empowering to her.

Most of all, she needs you to be a constant and loyal friend right now. She might be moody and upset and depressed – but can you blame her? Cut her some slack and be there for her. People always remember who stood by them when the chips were down.

Q8: Improving my wife’s credit
Im 26 years old, I just got married, (my wife is 25). Im wondering how to build her credit so in the future if we want to buy a house we will get a better rate. She just finished paying off her car, so her credit score is good, however not better because she does not have that much history. She has a checking account she opened 3 years ago and a car loan which she opened in 2009 and we just paid it off. Other than that no credit cards or anything. I opened up an american express blue cash credit card and added her on and got her a card, however the account is still in my name. Will her having a card (even under my account) increase her credit? Should she apply for her own credit card? Also we have a joint checking account now, so i guess i was wondering now that we are married, if something increases my credit, will it also increase hers since we are married?
- Tip

Even though you’re married, your credit histories are still distinct and your credit score is calculated individually. Marriage means that you’re more likely to have co-ownership of debt, but it doesn’t combine your credit histories.

As for whether the card in her name will help her credit, it depends on how that specific contract is set up. Your first step is to get a copy of her credit report using the federal government’s website and see what’s on there.

If she needs to build a credit history, the easiest way is to get a credit card, pay off the balance each and every month, and just sit on it. Use it for only ordinary charges, like gas, and pay the balance in full each month. This will slowly build up her credit.

Q9: Reducing family stress
I read one of your articles (Low cost methods for Stress Relief) about choosing who you spend your time with and got me thinking. You said the following:

“Spending time with people who care about me The ongoing process of eliminating negative people from my life and keeping positive people in place has been a major positive influence in reducing stress. I simply ask myself regularly if there are people in my life that are causing me to stress out because of their behavior (not because of my own worries reflected on them). If they are, then I strive to reduce the role that they have in my life, plain and simple.”

What if the people who cause stress due to their unhappiness is your Mother in Law ? It brings constant stress into our lives to the point where I don’t want to be around her but have to because of my husband. Also, it is very likely that once she gets her permanent residency she might stay with us during her old age and I do not want to put my children through an unhealthy environment at home. Though she is healthy she refuses to do anything at home or even watch my daughter when she is sick if we cannot take time off from work. I am almost sure that if I choose to keep away from the husband’s family and do not do what’s expected of me that we could end up in divorce. How do you reduce this kind of stress ? Currently I feel suffocated, confused and angry with a lot of situations that I have faced in the couple years of marriage.
- Sunny

Your first step is to sit down and express these feelings clearly to your husband. If you won’t or can’t do that, then you don’t have any recourse here. Your husband has to know exactly how you feel.

You also do need to understand that your husband will feel torn by this. He’s being put between two women he likely cares very deeply about – his wife and his mother. Making him “choose” is deeply unfair to him and is likely to cause resentment.

You mention “permanent residency.” This sounds as though there’s a cultural barrier here – your mother-in-law is from some distinctly different culture than you’re from. Try to understand that culture as much as you can. Is your mother-in-law’s behavior normal for that culture? Or is there something else at work here?

In the end, all three of you are going to have to recognize that your mutual presence is irritating each other (you’re likely irritating her as much as she’s irritating you). Your husband will have to be an integral part in this solution, so the discussions start with him. The next step is up to you.

Q10: Winter exercise
I know you walk a lot for exercise. What do you do during the winter months when it’s too cold out there to walk? I started walking daily this summer, but I live in Minnesota and it’s getting awful cold out there!
- Eli

I do a lot of different things to keep up my walking during the winter. I often volunteer to do the grocery shopping and make an effort to maximize my walking doing it. I’ll focus on home exercise and do things like pushups and situps and light weight training. I’ve even mallwalked.

These aren’t perfect solutions for everyone, though. Quite often, keeping in great all-around shape in a cold winter environment requires use of a gym, simply because the ability to exercise outdoors is so limited.

It all depends on what your needs are. If you’re an intense trainer and live in a very cold winter environment, a gym may be your best option.

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.

View the original article here