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. Higher salary or better benefits?
2. Cheap land lines
3. Moving in with parents
4. Prepaying student loans in forbearance
5. The Hindenburg Omen
6. Post-graduation financial independence
7. Mid-college personal finance advice
8. Cherry picking the past
9. Tracking passwords
10. Replacing cable with Netflix

As many of you know, a month or two ago, I changed the format of the reader mailbags so people could just click on the number next to the shortcut above to hop down to the question. On the “back end,” I simply named the questions 1 through 10 (or 11 or whatever), so that when you click on the shortcut for question 1, it hopped down to question 1.

There was a pretty nifty little problem, though. If you had two reader mailbags on the same page, there would be two questions and answers named “1″ on the same page. Thus, depending on your browser, clicking on the “1″ could send you to the right question – or to the “1″ question in a completely different mailbag!

I solved this problem by simply changing how I numbered the questions on the “back end.” Today, if you click on the “1″ above, you’ll actually be jumping down to “1826.” What’s that number? 1 (for the first question) followed by 826 (today’s date).

If I number all future mailbags in the same way, the problem won’t occur. In other words, if you happen to see a bunch of mailbags on the same page in a few months and click on a question, you’ll go to the right question.

I am 24 years old. I was recently laid off from a local government job (with all the benefits that come along with that) making around 60K due to a reduction in force. I was offered a job in the private sector making the same, but with all the lack of benefits and the longer hours that come along with that. I have also been looking around and have been able to go on interviews for several government jobs in which I would be making anywhere from 40K to 55K, but with good benefits. My main concern is the pension and the fact that I could potentially retire at 55 because I’m a veteran if I stick with the government.

Note: I have about 16K in student loans from my master’s, which will probably end up around 24K. My yearly expenses are around 21K. And have a modest emergency fund of around 9K.
- Joan

It depends specifically on what benefits you’re gaining, but likely the benefit-rich job will be superior.

For starters, the salary difference isn’t as big as you think considering that the difference in salary will be taxed at your top rate – 25% or 30% or so will go to Uncle Sam, with some additional amount likely going to your state.

Another reason the benefit rich job will likely work better is that you’ll likely receive some form of compensation into your retirement savings. Many government jobs will match 5% of your pay and some will match 10%. So, if you have a 10% match job and make $50K, you can get $5K more just by investing properly in retirement – and that investment is tax-deferred, so you don’t have to worry about taxes right now.

Add on top of that the health insurance, life insurance, flexible savings accounts, and other benefits and you’ll likely get much more value out of a job with good benefits at $45K than you would out of a job with awful benefits at $60K.

We’ve been trying to cut down on our utilities, especially phones and internet. We have pay-as-you-go cell phones, but we still pay $50/month for our landline and our internet. I’m trying to figure out how to reduce this cost, because $50 a month seems like a lot to me. We currently have internet and phone through AT&T, our local phone company. I’m thinking if we switch the internet to something like DSL Xtreme, we could reduce the internet cost by about $10/month. But what about the landline? I’d like to still keep a land line, because this is the number I give out to anyone who’s not a friend, so I use it to field phone calls from businesses and potential telemarketers, etc. Is there a cheaper way to keep a land line than for $25/month?
- Mylinh

For your use, I would suggest just using a DSL and Skype (I use Skype). You can use your cell phone for 911 purposes.

To have a phone number with Skype costs you about $3 a month, which also gets you unlimited calls in the U.S. All you have to have is a computer with a broadband connection, speakers and a mic or a headset and you’re good to go.

This would save you about $22 a month overall, based on the numbers you provided.

I was just curious about your opinion on moving in with parents. I’m not talking about newly graduated kids, I mean established couples that live with one of their parents “to save money.” Is this something new that couples like to do now? I’ve seen this happen with friends a couple times now (I’m 30, they are about the same age); each was saving for a house or wedding (good things to save for, for sure), and one had a child already. The thing is, neither of these couples are anywhere close to thrifty, to put it nicely. We see a lot of unneccessary spenditure, which if they controlled they could save a lot. So moving in with the parents just seems like a cop-out to me. I’m saving for a wedding that I have to minimalize just to afford, and can hardly save any more, and perhaps it’s only pride, but there is no way I would want to live at someone else’s house. The stress of dealing with in-laws in a less-than-ideal situation doesn’t seem worth it.

Any thoughts? Or is it just that I’m at an age where stuff like this happens?
- Alexandra

I think you’re looking at someone else’s life through the lens of some things you value (thrift, financial independence) and seeing others come up short.

If I’ve learned one thing from The Simple Dollar, it’s that not everyone values financial success. People find success in a lot of ways in their own life depending on their own definitions, and certain kinds of success dominate other kinds. Financial success and material success often oppose each other. Family success and career success often oppose each other.

I’m of the belief – like you are – that financial success creates the foundation for a better life. It doesn’t matter how deeply I believe it or how many times I say it, though, some people won’t buy into it. Or, they don’t buy into it now and will only come around when they fall over a financial cliff and see how scary it can be.

You can’t live other’s lives for them. However, you can pick and choose who your friends are and who you spend time with, so it’s usually worth your while to be selective with your friends if you are having a difficult time accepting their values.

I have placed all of my student loans on forbearance while I seek a full-time teaching position. I have 14 student loans with balances that range from $250 to $20,000 and total $76,000. I plan on taking a Ramsey approach, ranking them according to their balances and paying the smallest first until they are gone. However, since they are in deferment should I pay a small amount on each loan, like $25 which is all I can afford, and whatever remains on the smallest balance. Or, should I use all of my income after mandatory expenses for the smallest loan and make one large payment on the that loan? Thereby, taking full advantage of the forbearance on the larger loans. Basically, is it worth it to pay such a small amount on loans while they are in forbearance or am I just throwing that money away?
- Darren

Your best bet would be to pay against whatever loan has the highest interest rate, because those payments will save you the most interest over the long haul.

You also need to make sure that none of your loans have put their interest into forbearance as well. Most loans continue to apply interest to the balance while in forbearance, but some loan arrangements do not. If you have a loan that is not accruing interest, it still might be worthwhile to pay ahead on it, but only if it’s of a significantly higher interest rate than other loans.

Your best bet, though, is to consolidate that mess. 14 student loans? Just by sheer human nature, you’re bound to run into some sort of issue with one of them. With interest rates as low as they are right now, you should really consider consolidation.

I’ve recently been seeing a lot of references to the Hindenburn Omen on various financial and pf blogs and websites, along with many panicked questions about whether the market is going to crash in September. When I look at the many requirements that go into detecting the Omen, it seems quite technical with a lot of jargon that most regular American (including myself) wouldn’t understand. My questions to you:

* Can you simplify this concept at all so normal people like myself can wrap their minds around it?
* Does the Omen have actual technical merit or is it just an ominous-sounding, overly-complex financial Ouija board?
* Should I be worried and looking into moving my investments into more conservative choices? I understand that this is the kind of thinking that could turn the Omen into a self-fulfilling prophecy, but a crash is a crash regardless of what caused it. The effect of such a drop will be the same on my 401(k) regardless of whether the Omen actually caused it or if the thought of it just got a bunch of idiots panicked and in the mood to dump all their investments.
- Jessie

The Hindenburg Omen refers to a pattern in stock prices that is said to show up in advance of some stock market crashes based on historical data. To put it simply, the Hindenburg Omen occurs when a lot of stocks are reaching 52 week highs and another significantly sized batch of stocks reach 52 week lows on the same day.

If someone goes and looks at the historical data of the New York Stock Exchange, the exact parameters of the Hindenburg Omen usually pop up a few times before a stock market crash (a drop of 5% or more). However, the Hindenburg Omen sometimes pops up nowhere near a stock market crash and at other times a stock market crash occurs without a Hindenburg Omen.

What does that mean for you? If you have investments that are improperly balanced and weighted too heavy towards stocks, you should probably not have as much money in stocks as you do right now. However, that’s true no matter whether there’s an “omen” or not. You should always spend time figuring out how much you’re comfortable with in stocks, invest that much, and put the rest somewhere safer.

Do I believe in the “omen”? I think any time you have a pile of data, you’re going to see patterns in it. Some of those patterns actually mean something. A lot of them do not. I’m not sure which side of the line the Hindenburg Omen lies. I think it’s something that some stock speculators and doomsayers are hyping right now because, frankly, it gets them an audience.

I am a 10′ grad of a high school from my home of Phoenix, Arizona and will be going to Wellesley College (small, all-women’s liberal arts college in Boston, Massachusetts) this fall. My parents will be paying for all my school and basic living costs (room, board, food, books, basic clothes, etc.) for all four years. I will also be receiving an allowance of $250 per month for “fun” stuff (eating out, clothes, etc). I have about $2,500 saved up in an account from various things in high school.

I recently read an article in the New York Times (http://www.nytimes.com/2010/08/22/magazine/22Adulthood-t.html) about kids who are moving back home after school. I don’t want that to me be! My goal is to be financially independent by graduation. For me, this means having enough money to have my own place to live and pay all my own expenses. Basically, after graduation day, I don’t want my parents to be supporting me. What is the best thing I can do in my college years to achieve that goal?
- Erica

The best thing you can do is minimize every possible dime you spend while in college. If it’s an optional expense of any size, think carefully about it before spending it. Try to go “under” the $250 a month as much as you possibly can.

Whenever you can, sock money away in a savings account somewhere. Then, when you graduate, you’ll have some money with which to support yourself during your efforts to find post-graduate work or further schooling.

Kids that move back home after school often don’t have the opportunities you do (everything paid for with a $250 a month “fun” stipend) and often spend everything they have during their college career, coming out the other side with debt and no money saved up to deal with the immediate post-college expense. Don’t let that be you.

I’m 19 years old and will be graduating in two years. What should I be doing right now to prepare for my financial future? What personal finance info should I know?
- Kate

Read my answer to Erica, above.

Beyond that, I would strongly recommend educating yourself about personal finance. Hit your local library, take a look at these four books (all linked to my reviews of them), and check out the ones that seem to match your interests.

You’re So Money by Farnoosh Torabi
Please Send Money by Dara Duguay
Automatic Wealth for Grads by Michael Masterson
Your Money or Your Life by Joe Dominguez and Vicki Robin

All of these are excellent books that will get you on the right path.

10-12 years ago, conventional wisdom said to buy index funds for your investing. And conventional wisdom was right! The stock markets for the preceding years had marched in “lockstep” and indexes could outperform almost any actively managed funds. However, over the last 10-12 years, that wisdom had not been correct. For example, the bellwether S&P500 Index has lost somewhere around a 1% over the the last 10 years, where I can find many managed funds–load and no load–and many diversified portfolios–load and no load that far exceeded the S&P500, even after any loads or other management costs are calculated in. That being said, I humbly advise you to take a look at the statistics a little more carefully, as you tend to advise (and seemingly blindly?) investing in index funds without other thoughts.
- Marvin

Of course you can find funds that earned more over the past ten years than an index fund. Hindsight is 20/20.

The point of an index fund is not to be the best fund out there. It’s to have average returns with very low costs, which means it’ll beat about 60% of the funds out there.

“Well, I want the top fund!” If you can tell me with 100% certainty which managed fund will earn me a better return after costs than a marketwide index fund over the next ten years, I’d love to hear it. You can’t, though. Why? Because you can’t read the future. No one can.

It’s easy to look back and identify funds that beat the market. It’s impossible to look forward and do the same thing. Managed funds with a great record tank all the time. Awful funds start hitting hot streaks.

Index funds are just the average of all of these things, except that they have very low costs, something that managed funds can’t match. As a result, they’re at about the 60th percentile – but they’re always at that percentile, while other funds soar above and crash below.

If I wanted to take on more risk than that, I’d invest in individual stocks of companies I trusted.

Do you have any tools for keeping track of internet passwords and login information? Do you keep it in a safe? I realize this is probably not a question you’d want to answer very specifically (for safety and privacy reasons!). I’m also interested in your tips for constructing a safe password and login name that is secure but still easy to remember. I often get overwhelmed by the amount of internet passwords I need to keep up with.
- Emily

The best solution for most people is probably a program like KeePass. KeePass is a free open source software solution that stores all of your passwords together in a single heavily encrypted file. All you need to remember is one master password (and make it a very strong one).

Another great solution – and the one I use – is to have a “password system” rather than a single password. A “password system” is a way of coming up with and then remembering a unique password for any service that you might use.

It’s pretty easy to do. First, come up with a short, complicated password that you’ll remember – a sequence of five or so characters. I usually encourage people to have an uppercase letter, a lowercase letter, and a number in there. Maybe it could be three consecutive characters on a keyboard, the capitalized first letter in your name, and the number 9 – so for me, it would be sdfT9. That string, whatever it is, would be the start of all of your passwords.

After that, just have a method of including more characters that makes it unique based on the site that you’re at. So, for example, you might just tag on the first four letters of the domain name, but in reverse. Thus, at google.com, with this system, my password would be sdfT9goog. At yahoo.com, my password would be sdfT9ohay. At amazon.com, my password would be sdfT9zama.

I suggest that you come up with your own patterns, but it should use the same system – five letters or so of prefix that you’ll memorize, plus four letters or so of suffix that can be obtained from the website you’re at. If you’re required to use longer passwords for some of your essential services, make the prefix longer – use sdfT9wer or something like that. My own patterns are quite a bit different than these, but this gives you the idea.

That way, you have a tricky password that’s different for each site you use.

I love your blog and appreciate the honesty and thoroughness of your posts. My husband and I have taken a month off from television to re-prioritize, and in doing so, have become more interested in cutting the cable altogether in favor of Netflix and the streaming television option. (Of course- we don’t mind saving about 90.00 a month either- we recently killed our “debt snowball” with the Ramsey plan!) I can’t seem to find any type of listing of the television shows available on Netflix to watch- would you mind expanding on this? I know you’ve mentioned it before. Thanks!
- Elizabeth

It’s pretty hard to get a full list. You can get a bit of a preview by going to Netflix, clicking on “Browse Selection,” then clicking on “Television” in the Instant Streaming box.

Shows we’ve watched using it include Weeds, Arrested Development, Firefly, Doctor Who, Bones, and The Office. There are a ton of other series on there as well. Just use the search box to search for ones you’re interested in.

Given that we don’t watch all that much television to begin with, streaming is a great choice for us.

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.

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. Debt snowball questions
2. Cost-effectiveness and breast pumping
3. How much life insurance?
4. Which debt to pay off?
5. Choosing 401(k) investments
6. Saving for nieces and nephews
7. DirecTV arbitrage
8. How websites make income
9. Carpooling stress
10. Challenges of single motherhood

Right now, I have so many projects in the queue that it feels like I’ll have something to do almost around the clock for the next, say, fifteen years.

Whew.

I have a few quick questions in relation to setting up a debt snowball plan (I know this is a Dave Ramsey thing, but you’ve talked about it before and I like you a lot more than Ramsey!)

I also want to note I’m current on all these bills.
- Sarah

The reason for the small-ish emergency fund early on is that a $1,000 emergency fund will handle a lot of the smaller emergencies life sends at you, like a forgotten bill or a small car repair. A lot of the emergencies that send people over the edge into debt aren’t the big apocalyptic emergencies, but the little ones that stretch a wallet just a bit too far.

On the other hand, shooting for a big emergency fund right off the bat will help you handle almost every emergency, but while you’re doing that, you’re compounding debt.

At some point, you have to turn the corner from an emergency fund to tackling the debt. $1,000 is a reasonable number for doing that. If you’d like to aim higher than that, go for it, but the sooner you get on your debt, the sooner your monthly cash flow problems will clear up.

As for the smaller debts, they should all be included in your debt snowball because they’re all debts that interfere with your monthly cash flow. Get rid of them quickly so repayments aren’t clogging up your plans.

Sarah also had a follow-up question about cost-effective breast pump choices.

I read your article on the cost benefits of breastfeeding. I’m having my first child in six weeks (give or take!), and I’m going to be working part-time and supplementing by working at home. Even my part-time job will only involve about 10-12 hours a week outside the home (all my work is writing, which is wonderful because you can do it from home, as you know!). I’ve looked at breast pumps, but I’m wondering if since I’m only going to be out of the house for 10-12 hours a week for work, do I really need a fancy expensive electric model? Can I get by with a manual pump? This may be a question for your wife :-)
- Sarah

I asked my wife what she thought in this case (after having pumped for three kids and working full time while doing so) and she suggested that, in your case, you shouldn’t buy a pump. Instead, you should check with your hospital about the cost of renting a pump for a few months.

She says that at first, you’ll need to pump much more frequently than later on, so at first, you’ll probably need to pump when you’re outside the home. Later on, your child will go longer between feedings and you’ll be able to go longer between pumpings, so you won’t need the pump then.

Of course, this depends on how your twelve hours outside the home are spread out. If it’s all in one day, you’ll need the pump for much longer than if it’s in two or three hour blocks.

My question is how much life insurance should my husband and I have now that we have a newborn? Is there some formula for figuring this out?
- Anastasia

There’s no exact formula. Different people say very different things when it comes to how much life insurance to have.

I would, at the very least, make sure that you’re replacing five years’ worth of salary if you have a young child at home. So, for example, if you make $30,000 a year, I would have a $150,000 term policy at the very minimum.

I’d encourage you to get a 20 year policy if this is going to be your only child or a 30 year policy if you intend to have more. After all, the biggest result of the policy will be to protect the children.

If you want to use a more specific calculator, try the one at Bankrate.com.

I have the opportunity to pay off my wife’s school loans (130k) or the mortgage (about 160k).

I’m at odds with which to pay off. Any guidance would be appreciated.
- Jason

With the interest rates so close, I’d pay off the one that has the largest monthly payments.

Why? It’s all about the cash flow. If you have fewer/smaller required payments each month, you’re much more likely to just roll through problems that occur in life. Your emergency fund will last longer. You’re more able to put massive payments toward the other debt.

I’d pay off the school loan, in other words.

I have a question regarding my 401k. I promised myself that I would start contributing towards my retirement when I turn 27. I turn 27 in two weeks, so it is time to start planning for the future

My question to you is, I want to start contributing to my 401k. My company will match up to 5%. All of this is straightforward and I will be able to start investing at 5%. However, there is a list of 19 companies that I can invest my money into. I have to chose the companies I want. I have no idea where to start. I am not sure if I should pick one company over another. I know i don’t want to put all my money into one company, as that would just spell disaster. Should I spread the 100% equally over all 19? The 401k is through ADP Retirement.
- Barb

If your 401(k) offers 19 separate companies to invest in, I would diversify, diversify, diversify. I would put a small amount into each of the companies, if that’s possible. $5 to each company each paycheck, perhaps?

Here’s the reason. Each of those companies has some chance to fail and some chance to greatly succeed. If you put all of your money into one or two companies, you’re taking a giant risk with your retirement money.

Instead, you should be focusing on minimizing risk. The best way to do that is to simply spread out your money as evenly as possible.

Frankly, I don’t like retirement plans that require investment in specific companies. A good retirement plan offers the ability to invest in a broad-based index fund which essentially lets you spread the risk over thousands of companies at once.

My brother and sister-in-law are horrible with money. In tons of credit card debt, one has a shaky job, the other is unemployed and complains about not finding work without actually trying to find anything, they have two children which they put in daycare (which also goes on the credit card), etc. etc. It drives me nuts, especially as they are always buying new stuff they don’t need – a new tv, designer shoes and purses, exercise equipment. My question is in regards to how much we should help them for the future. While I would never give them or loan them money as I don’t want to encourage their behavior, I do feel that it shouldn’t negatively impact our niece and nephew. My husband and I make a very good salary (over 150K combined) and our only debt is our mortgage. I feel like we should set up some sort of college fund for our niece and nephew so they have something when the time comes around (15 years from now for the oldest), but at the same time I don’t want their parents to know as they’ll then count on it and I feel they’d be less likely do anything for the kids on their own. I also would like to have access to the money in the event my husband and I ever fell on hard times, which I know probably negates setting up a 529 plan (and I’d like to keep it if the kids choose not to pursue college, hopefully that doesn’t sound mean). Do you have any suggestions? My current thought is to set up a savings account in our names that we transfer money into with the intent of giving it to the kids at the appropriate time, though I know it won’t earn too much in interest.
- Danielle

Given your requirements, a savings account is probably the simplest choice. You likely won’t have enough in the account to invest in other things for a while without brokerage fees that would eat any extra gains.

However, I’m not sure that you actually want to give this money to your nieces and nephews. I get the feeling that you’re annoyed by your siblings’ poor buying habits and you see this negatively affecting your niece and nephew and you want to help, but you don’t want to be on the hook for their future. That’s completely fine.

The end result, though, is that you’re going to end up with poor results with your saved money than if you either fully committed to a college savings plan for them or you just didn’t save for them at all and invested yourself. I would suggest really looking at those two options instead of the savings account route. Honestly, I’d probably lean towards getting yourself into the best shape. If you build a strong foundation now, you may be able to help those kids a lot later on.

My wife and I are both Canadian, and live in Michigan about 30 miles from the border, with many relatives in Canada. We are currently subscribers to DirecTV (a conscious choice on our part as we do not go out to see movies, or eat out that often)… this is our entertainment spend and we enjoy it. Because Canadian broadcast rules preclude DirecTV being sold in Canada, we “supply” the service to some of our relatives by providing them with a receiver, which is added to our subscription (it’s all legal). In this way they can access programming that otherwise wouldn’t be available to them (i.e. MLB, NFL, NHL games, Big10 Network, Top Chef, etc.). My wife and I thought it was fair to divide our monthly bill equally, in addition to passing along the cost of the receiver, so that everyone who shared the benefit, also shared the cost. Some of our relatives are upset with paying for the ongoing programming as they view that as a sunk cost (i.e. we were going to be paying for it anyway), whereas we view it differently. These relatives are using the service as a replacement, or enhancement to their current cable/satellite choices. On a monthly basis we’re talking about everyone’s share being about $12, so it’s not a great deal of money, but more about the principle. Your thoughts on how to handle this?
- Jeff

It’s your account, right? You choose the channels. You’re essentially letting them have boxes from your account for $12 a month. If they don’t want to do that, they don’t have to participate.

Obviously, if someone wants a particular channel, you should work out an arrangement with them and probably add the channel to your plan, but you should be able to choose the channels you want and not have to remove them because of someone else’s desires.

If I were you, I’d just have a meeting with everyone at the next family reunion. Let everyone pick the channels they want to have and then get a plan with all of those channels and split the cost. If someone doesn’t want to participate, they don’t have to.

I have gathered from your blog/newsletter that you work at home, and that (with the exception of any income from your wife), The Simple Dollar is your primary source of income. If not, then I guess this e-mail is rather moot! But if it, my question is how? Basically, how do you make money from The Simple Dollar? I have seen some ads on the site, and I see some downloads available for $2 each. Are these the only methods?

The reason I ask is because I have an idea for a website that I think could be helpful and useful to many people, and I would love to work at home as you do. I’m just not sure if this is a practical way of doing so, because I’m not sure how much money I could make off doing such a thing. My website would be an informational site, as yours is, but its focus would be much broader. Basically, my intent is to offer a series of articles on several topics that bridge the gap between school and life – topics such as basic financial info (balancing a checkbook, credit cards 101, 401ks, etc), career (how to get a job, resume building, interviewing, etc), home (basic upkeep and maintenance, basic cooking info, etc) and many, many more. My goal is to help people who would like to learn, or have never learned, basic life skills. Hence, the name: Life Skills Simplified. My thought is that a lot of the people who are in a mess financially or socially are in that mess because they were never taught the skills needed to be successful and productive in life. If they have a resource to learn these skills, maybe less people would be in that mess. I’m not expecting my site to be the greatest thing since Google, but if I can help a few people, I would consider myself successful.
- Vanessa

Writing is my primary source of income. The Simple Dollar helped to launch that and forms a significant part of my income. I also make income from the books I’ve written, selling ebooks, and freelance writing (like my pieces for OPEN Forum covering frugality and small businesses), as well as occasional freelance web development.

It takes a lot of work to launch a successful website. You have to write a ton of content – specifically, content that people will want to read. You have to write it with a machinelike regularity, because if you stop writing, people stop reading. You have to be willing to promote it, too.

It takes a long time to build an audience large enough that you’ll be making much with advertising. Most advertisements that starting bloggers can get pay you $2-3 per thousand page views, which basically means if you manage to build to 1,000 people reading a page on your site each day, you’ll make a whopping $2-3.

It is a long slog, but it’s a rewarding slog if you love to write. If you don’t and are just seeing this as a cash-in… well, good luck with that.

I have recently started a sewing course, about a 20 minute drive from my house. At the end of the first class (there are 9 students in the group), we were talking, and it transpired that two other women in the group live quite near to me. Additionally, they don’t have car access at that time of day, and had arrived by bus, and when they discovered I was going their way, asked if I would mind taking them home. I did this happily, and even provided one of them with my mobile number so that I could perhaps help out in coming weeks instead of them traipsing on 2 buses each way (this was my idea). The second week I didn’t take them because I came straight from a show with my children, so I wasn’t sure I’d even be on time, but the third week (yesterday), I picked them both up on my way, having arranged for them to wait for me in a convenient place.

I’d be interested to hear your thoughts – am I being oversensitive? Should I say something? If so, what?
- Valerie

This is one of those things where no one is at fault, really. Put yourself in their shoes – would you feel more comfortable talking to your friend or to someone that you don’t know well that’s focusing on driving in the other seat? There’s probably a small social wall – built by all of you – between the front and back seat.

Want to break it? As soon as they get into the car, start a conversation yourself with a question to them. Focus on what you have in common – probably the class, for now. Yes, the conversation will probably eventually fold into the two of them talking to each other, but don’t sweat it. You don’t have the established relationship yet.

If it’s all frustrating you, vent. Venting can be very therapeutic for situations like this where there’s really no fault.

So I sit here writing this at a very challenging job that I enjoy the bulk of, but zaps the life right out of me, and leaves little of me for my 2 young children, ages 6 and 2. (I am a paralegal.) I enjoy the majority of what I do, but there is so much of me invested in this, and I feel over-worked. I am currently the only paralegal for 2 very busy attorneys, and I only have a helper to answer the phones for about 20 hours per week. This all leads to my question.

I already pay approximately 25% of my income on nursery school and after-school care. I just can’t face taking on a second job. I am exhausted already, the babysitting fees would be sky-high, and I already feel as though my children don’t get enough of my time.
- Callie

Do not be ashamed to receive food stamps. You’re the person that system was designed for – a single mom with children who’s working very hard to be a good mom and to make ends meet. The negative stigma from food stamps comes from people that abuse the system – you’re the very person the system is designed for. You’re the person I’m happy to have receive assistance from my tax dollars.

You should be using every possible service out there to help you keep your head above water. Use the food pantry in your community. Use WIC. Ask the people running these services for other suggestions.

As for chasing the money you are owed – and yes, you are owed that money – that’s your prerogative. Use whatever channels you have to keep the pressure on him. This is money that you are entitled to and that your children need. I have zero tolerance for people who try to hide money like this, which literally takes food out of the mouth of children.

You’re doing great. Be proud. Take advantage of the helping hands that are out there for you.

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.

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. Handling house sale proceeds
2. Helping a declining parent
3. Chasing a dream
4. Moving forward with bad policy
5. Spending choices on children
6. Cashing out stock options
7. Who is Trent politically?
8. Soda
9. Handling a small windfall
10. Creepy emails

Remember my complaint about soda about a month ago? It turns out that there was a labeling error. Apparently some bottles that contained “lemon soda” were mislabeled “lemon sour.” I’ve yet to receive a written response from the company, which may contain vouchers or some similar material. I’ll keep you posted.

After following your thoughts and advice, I am proud to say that I have eliminated my personal debt. My partner has made great strides in her debt, and now has about $50,000 worth of debt (car loan, consolidation loan, and credit cards).

It’s a nice problem to have but we really are not sure where to go with this. Thanks for your reply and help.
- Kate

I’m not entirely sure I agree wholly with either idea.

The big question I would have is whether or not you have a cash emergency fund sitting there so that if something bad happens, you’re able to just deal with it. If you don’t, then go for the first option.

Now, another key question: how high interest is that debt she has? It seems like it would be fairly high interest. If it’s above even a few percent, I would put paying off that debt as a higher priority than flipping properties.

I like option one much better, with the caveat of an emergency fund.

I’m my mother’s health care proxy and executor of her estate. I finally was able to nail her feet to the ground and talk about what her wishes were, but also what her estate entails. Right now she is 56 years old, with an ok paying job. I figure she makes about $40,000 a year, give or take, and has health care through her job. My dad is passed, so it is just her. She told me she has about $20,000 in cash, about $5,000 (yeah, that’s five thousand) split between three retirement accounts, and her house. She has a small home improvement loan on the house, I believe it is $10,000. The house is not in good condition. Looking at other real estate in her area, I am guessing that it would sell for $70-$90k. That is it.

Do you know of anything that I can do to help my mother not have to move in with us? Taking on an extra job or doing more is beyond her. Do you think it is wise to plan that she is going to be moving in with us? How can I convince my husband of this, if it does indeed come to pass – which I give a much higher possibility to, after talking to her.
- Susan

This is the tough spot that parents put their children in if they don’t adequately save for retirement. I see people in my own life following this path – and what’s going to happen in fifteen or twenty years is that they’re going to become burdens on their children whether they want to be or not. Save for retirement, folks, so this doesn’t happen to you.

Right now, your mother needs to budget starkly regardless of what she winds up doing. She needs to shore up every dime she can for retirement coming down the road, period.

Most likely, one of two things will happen anyway. Either she’ll keep working until she starts sliding downhill with her health (in which case, you’ll probably have to jump in to care for her) or she’ll retire before that and need a place to live.

It really, really depends on your mother’s character. Is she going to continually hint that she should take care of you? Or will she have a stiff upper lip and attempt to find her own solutions (low income housing, etc.)? If it’s the former, you’re going to have to make a tough call.

I’m a 25 year old IT consultant living in Chicago. I’m a computer science graduate, and I have a job where I make great money, live frugally (as much as you can in a high-cost city), save heavily and invest smart (automated, low-cost index funds). I’ve maxed out my Roth IRA for the last 3 years since being in the work force, and have maxed out my Simple IRA contributions last year and this year. I’ve already got about $50k in retirement accounts, and about $25k in more liquid savings. So, financially, I’m doing very well, and I’d like to thank you for getting me off on the right foot.

My question for you and your readers is this — am I crazy for doing this? My close friends and family are concerned about my safety and the impact this could have on my career, whereas I think that it will give me enough experiences to be a much better person and employee in the future.
- Stephen

You are absolutely not crazy for doing this. If this is a dream you have and you have the financial ability to do this for a while without any other life responsibilities, go for it.

It sounds like you know what you need to do to prepare so I’ll trust your preparations for the trip.

As for whether you’ll regret it later, my guess is that you won’t. This is the type of thing that will cause you to grow as a person. It will lead you down a completely different path in life.

What do you think you’ll regret more in twenty years: not doing this motorcycle journey or not working at an IT job that you hate? If you have the financial means right now to choose either path, the choice is probably pretty clear.

I’m 28, my husband is 33 and we’re expecting our first child. I’m trying to figure out how to invest our money, so would like your input on this.

Also, what do we do with the $33K in savings? It’s in a savings account – really really small APR – but it is our emergency fund. Is there a better way to keep it liquid but in a higher investment?
- Kris

I would get out of that policy. You shouldn’t be putting $500 a month into a policy that’s only returning 2%. Replace it with a term policy (because you’re going to be parents), take what you get from cashing the policy in, and invest it.

Where should you invest it? In that mortgage, if nothing else. That’s going to be earning you a lot more than 2%.

I have more to say on where you could invest it, but Kris had a second question that focused more generally on parenting issues.

As an addendum, the biggest thing we are saving for is private school tuition for our unborn child. We’re approximating $20K per year for tuition alone, not including if we have another one. We’d stop at two kids, which would be $40K per year. Private school is not an option for us – we need to figure out how to save for that. We managed to save $20K last year, which would be tuition for one, but two? Yikes.

What other advice do you have for impending parenthood?
- Kris

Something else to consider: why not just keep the money from the insurance as cash in a savings account and then sock it away in your child’s 529 when he/she is born, as a great way to start the child’s college savings? That way, you’d have a heads-up on the private school expenses right away, if that’s the route you’re choosing.

I’m not sure what you mean by saying that private school is not an option for you – I’m guessing you meant that public is not an option. I would suggest that you research that very carefully before you make a $20,000 a year decision. Depending on the region of the country where you live, the gap between educational results in public and private schools isn’t very large at all (virtually nil in some areas). Public school quality varies incredibly from state to state and municipality to municipality in the United States. There are many public schools that are far better than private schools (particularly some magnet and charter schools). Of course, you may be making that choice for religious or cultural reasons, which is a different story entirely.

The best thing you can do for your child is encourage them to have a strong work ethic and give them enough of a mix of independence and guidance so that they have a sense that they can do anything for themselves. They’ll make something of themselves if they have that.

My fiance has some stock options with his company that we will likely be cashing out soon, in two installments. The first, which we’ll have in a couple of months, will be about $250k (about $150k in pocket after the cost of the stocks and taxes). The second installment is a bit of a mystery at the moment, and could range from $162k to $480k (and we won’t really know where on that spectrum it will be for probably a year, maybe longer). I have $100k in student loans, as well as a $20k car loan, and about $10k in credit card debt. He has about $6k in credit cards, $37k on his two cars, and a $170k mortgage. Altogether we’ve got about $343k in debt (YIKES!). Our household income is around $200k, and our savings is virtually nonexistent ($16k in his 401k but that’s about it). We’re youngish (late twenties, early thirties).

My question is, keeping in mind that we’re not sure what the total amount will end up being, what’s the smartest thing to do with that money? I think we should put it all towards debts, and invest whatever is left over from the second payment, if any, as part of our retirement fund/nest egg. Being debt free would put about $4500 extra in our pockets each month, most of which would go straight into savings. My fiance thinks we should pay off just the credit card debt and one or two of the cars, and then invest everything else, with the intention of paying off our debt in 10 years with the interest we accrue on the investments.
- Stacy

I agree with your plan. If you don’t have any burning goals in the near-term future, shoot for complete debt freedom.

The reason is simple: cash flow. With no debt, you don’t have the payments hanging around your neck. If one of you lost your job, you wouldn’t have to make bone-crushing choices. If one of you chose a different career path, it wouldn’t be devastating to your life. If you had a child and one of you decided to be a stay at home parent, you wouldn’t be gripped by debt.

Investing that money (probably in stocks) wouldn’t help your monthly cash flow and would put that balance at risk in whatever investment you chose. If you chose a very low risk one (like cash or bonds), it’d earn a much lower rate than it would if you paid off debts.

Get rid of the debt. Enjoy the freedom.

I know you don’t like to talk about politics, but I can’t figure out for the life of me where you stand politically.
- Carmen

I don’t care much for national politics. Rather than solving problems, both sides are mostly focused on grabbing pork for their constituencies and blaming everyone else for everything in a nonstop rush to re-election. You can’t even try to do something different because the tide is completely against you. Raise an issue no one wants to talk about (because it might scare some voters) and you get ignored with the idea never getting out of committee. Points are scored and ratings are grabbed not by making good points, but in painting the “other guy” as some sort of demon. Until there is serious electoral reform and very strong term limits, this will never change, and good luck to the politician who stands up for term limits in Congress.

I vastly prefer local politics, where people actually sit down and discuss things. Real problems are solved. Roads are built. Schools are built. Fire and police protection is organized and provided.

I care about solving people’s problems. I care about respecting other viewpoints than my own. I care about spending serious time thinking about the best way to solve a given problem. I don’t care for having to be in lockstep with someone’s philosophy. I don’t care for insulting people you don’t agree with when they’re merely trying to solve problems in a different way than you are.

Those things only happen on a local – and sometimes a state – stage these days. That’s where my heart lies. Sometimes I like solutions that would brand me a “conservative.” Sometimes I like solutions that would brand me a “liberal.” To be honest, I could care less about either one of those labels as long as people are sitting down together and honestly trying to solve people’s problems and are willing to listen to one another.

What are your thoughts on Soda? I know that in addition to personal finance you are also a fan of eating well, and healthy. I was wondering if you own or have considered a Sodastream type device to make your own carbonated beverages? The cost justification seems like it could work out over a period of time. I am wondering if it is worth the initial investment or if I should forgo this type of device altogether. Your insight is greatly appreciated.
- Del

I enjoy an occasional soda – and sometimes use it as an ingredient in a mixed drink. I don’t drink it daily or even weekly, however.

I think if you drink a significant amount of soda, you might be able to save money with a SodaStream type of machine. The best way to do that is with a simple cost analysis – what would the annual cost of each option be based on your soda habits? Will you continue that habit in the future?

There is potential there to save money. There’s also potential in saving money by simply drinking less soda and keeping it in the “treat” area rather than the “major expense” area.

My husband and I bought our first house back in 2009 and recently received our $8,000 check, which has been sitting in savings while we debate what the wisest way is to spend it. We’re both fairly conservative with our money so our first instinct is to use it to either pay off his student loans (~$16K at 8%) or pay off my car loan ($12K at 5%). We’re leaning towards paying my car loan because it wouldn’t take as long to pay it off entirely and, despite having a lower interest rate, it’s the higher monthly payment (I believe this would be the snowball method). However the other consideration is we really only have a couple thousand in savings, which is less than the emergency 6 month supply everyone advises. Is it better to pay off debt then build up savings, or should we keep it in savings and just pay our loans as normal? Is there a wiser course of action we haven’t considered? We both work very good jobs and otherwise have a modest amount more income than needed to cover our needs, so we’re hoping to knock down our debt quickly and build savings before working towards more fun goals of improving the new house.
- Amanda

I usually encourage people to have about two months’ worth of living expenses in savings for every dependent in their household. I’m assuming you don’t have kids, so I would keep four months’ worth of living expenses (your family’s take home minus whatever you save each month) in a savings account.

Compared to the importance of having that, your interest rates are fairly low. I would put the priority on the emergency fund. I know that it can be tempting to put it towards debt rather than having it sit there, but it’s that very moment when you use it for something else that you find you really need it.

As for which debt to pay off first, you’re really fine going either way. There are good reasons for paying off each of them first, so go with the one that feels right to you.

You’ve said that you’ve received some really creepy emails in the past. What’s the creepiest thing ever sent to you by a reader?
- Carl

Photoshopped pictures of my children and my wife take the cake.

I have also received a very sincere invitation for an affair from a woman that I believe lived pretty close to where I do. I didn’t follow up, so I don’t know specifically.

I receive all sorts of crazy on a daily basis, though. Those are the ones that stand out in my mind.

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.

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. Borrowing against life insurance
2. Splitting a property
3. Bankruptcy and loan modification
4. Tracking weight loss
5. How much down payment?
6. Helping someone drowning in debt
7. Spousal disharmony and debt repayment
8. Extra payments or not?
9. Is Dave Ramsey worth it?
10. Swimsuits and culture

One of the traditions we have at bedtime at our house is that I sit and sing a few songs to my children as they go to sleep. I usually let them each choose a song, then I choose a song or two.

In the past, they would each pick a child’s song – like “The ABC Song” or “Baa Baa Black Sheep,” then I would sing some song I knew, usually an old folk song or a song that was popular fifteen years ago.

Lately, it’s been fun to watch as my children’s tastes have grown. My son almost always requests one of the old folk songs. My daughter, interestingly, seems to be gravitating to a lot of what I would call the “alternative” hits of the mid-1990s (don’t worry, I’m pretty selective on what songs I choose to sing).

It’s quite fun. I can’t sing well, but I muddle through with light percussion, and if my children know the song well (as my son does with a few of the folk songs), they’ll sing along, too.

I recently graduated college and was fortunate enough to land myself a very well-paying job in a location that I like doing what I want (in the IT field). I have not been so lucky (smart) in the past, however, and during my college career accrued about $4500 in credit card debt that I’m working to pay off now. I’ve stuck to using cash and debit only for now and have been going strong at not accruing more debt for a few months, though I can’t admit I’ve been able to pay my cards off as quickly as I hope because I wasn’t earning income for over a month and before that I was still earning just enough to get by.

As part of my transition from college life to the ‘real world’, my parents have turned everything over to me – including a life insurance policy that they started when I was very young. I have no intention of getting rid of this policy despite the fact that I have free life insurance from my employer for an equal amount. I did however find out that I can take a loan of up to about $6000 from my policy at a 5.5% interest rate. Right now my weighted average of my debts is hovering just shy of 18%..to me, it seems to make sense to take out a loan against the policy and pay off my credit cards, then work on repaying the loan. I already have a plan in place to pay off my debts, but in the meantime it would save me money and would only require one (albeit automatic) payment each month. I also am planning on paying off my cards within four or five months as of right now, but if I can take out a loan at 5.5% it would help me sleep better to build up an emergency fund first and repay the loan at a slightly lower pace until I get a few months of living expenses saved up. What are your thoughts on what I should do with this? Would this have any impact on my credit??
- Dave

Really, all you’re talking about here is refinancing. Instead of carrying unsecured debt at 18%, you’re thinking of converting that to secured (by your life insurance policy) debt at 5.5%.

Reducing $6,000 from 18% to 5.5% would save you $750 over the course of a year. Given the “four or five month” timeframe you’re talking about for becoming debt free, your net savings would be about $200 to $250, depending on how you paid it down.

I would do this move, but not change a thing about my debt repayment plans once I had a small emergency fund – say, $1,000 or so – in place. Get that small emergency fund, get rid of the debt, and move on down the road. You’re in pretty good shape, after all.

I live in Brooklyn where what you get for $300k is almost nonexistent (or a shoebox and shoddily made) and have been talking to friends to see what we can get for $600k instead (sometimes small 2-family homes will still go for that but 3-family homes are going for $850-900k still). I’ve only found some stories that it’s been done and some of the agreements made between the homeowners, but not how to go about it (working with getting 2 mortgages finalized at one time, what to look for in a realtor that can handle both, what the timeline should look like). I recall meeting someone who did this with a 3-family house and then the split the property legally into 3 separate units after the sale.

Do you have any information on it? I know the risks re buying with friends but I do know we’ll both be interested in having a fair agreement contract and working through that stuff. We have about the same amount of money to put in as a down payment ($10k each).
- Jesse

It depends on the type of arrangement you’re considering, which isn’t clear from the question.

If you’re just wanting to buy the house, have everyone live there, and share the mortgage as one unit with the payments “split” among you, that’s a private contract between all involved parties. A lawyer could easily draw this up. However, I really, really would not recommend this because it’s going to be fraught with problems if one of the people involved decides to pull out.

I think, though, what you’re looking for is a way to effectively turn this one house with one mortgage into three properties with three mortgages. That can be done, but it requires that each of the separate properties have certain elements – their own exit, for one. What exactly is required for this depends on the specific zoning rules in your area and you’d want to talk to a real estate lawyer about it.

If you can get the property treated as three distinct properties, then it’s likely that a bank would help you refinance the single mortgage into three separate mortgages. However, if this is your long term plan, I would make sure the agreement for all of this is in place before signing anything at all. In other words, the first step is to talk to a property lawyer – and getting the bank involved would be another part of the equation before you even start looking at the property.

My husband has been disabled for the past ten years. Due to numerous medical bills and loss of income, we were forced to apply for a loan modification with our mortgage lender. I am currently in negotiations with my mortgage lender to modify my mortgage. I was approved for a trial Home Affordable Modification. I have to make adjusted payments for 4 months and then hopefully they will permently adjust my mortgage. My question is: Can I claim bankruptcy during this trial period? Will it effect my loan modification?

Our attorney says that we should wait and see what happens with the credit card companies. Do you have any thoughts?
- Brianna

Borrowes in bankruptcy are not automatically eliminated from the Home Affordable Modification program, so I wouldn’t worry about that.

What I would worry about is filing bankruptcy proceedings in the middle of this would cause some significant additional effort on behalf of the bankruptcy court, which would increase your legal costs (perhaps significantly).

I wouldn’t worry too much about the unpaid credit card debt, either. If you’re up to date at the start of all of this, you’re probably just going to be 90-120 days late at the time your modification finishes up.

The place to look is the contract you agreed to with the credit card company when you opened the card. Most likely, your debt will just be turned over to a collection agency eventually if you don’t pay because, honestly, unless you have a huge amount of debt, it’s not worth it to them.

If you’re filing bankruptcy, you’re going to have severe credit problems in the short term anyway, so that’s not a concern.

In the end, I’d trust your lawyer on this one.

I recently saw a post on your progress for your 2010 goals and saw that one of your goals is to lose 40 pounds. I was wondering if you use any software or systems to track what you are eating, how much you weigh, etc. to keep you motivated and informed as you are improving your diet and losing weight?
- Jenelle

I keep track of my weight in Excel. Not only do I keep track of my daily weight, I also have columns that automatically calculate my average weight over the last 10 days and the last 30 days.

I do this because I’ve learned it’s a bad idea to panic if your daily weight fluctuates a bit, even if it goes up. Food digestion, water retention, and many other things can cause your weight to go up on a day-over-day basis even if you’re eating well and exercising.

So, my focus is generally on making sure that my longer-term average weight is going down.

I’m 24, single and currently employed with a salary in the mid $40k’s. I’m living at home and plan to until I buy a house/condo. I have $10,000 in a savings account and another $13,000 in a money market. Most of my income goes into the MM and I’m planning to use it as the downpayment for my house/condo and let the savings become my emergency fund when I am on my own. I’m wondering what you think is a good amount (%) to put down when I do buy something and if I should use a part of the emergency fund for the downpayment. The only other debt I have is $5k in student loans at 4.5% and currently, my fixed expenses (student loan included) are ~$150/month.
- Nate

You should be shooting to put 20% down and you shouldn’t deplete your emergency fund to do it because when you move in, there will be lots of things right off the bat that you’ll need to do to fix up the house. I would keep an emergency fund equal to two months’ of expenses after your move, so probably somewhere in the $4,000 range.

20% seems like a lot, but if you’re earning $40K a year and you have only $150 a month in fixed expenses, you should be able to save a lot each month toward that goal.

My estimate is that you should be socking away about $1,500 to $2,000 a month, depending on how much you’re spending on other stuff. That will get you to your number surprisingly quickly.

What would your suggestion be for a good friend who’s going through a divorce, is having a hard time with money, but does everything frugally already? My friend cooks his own meals, even builds his own furniture, drives a small car, doesn’t drink/eat out, etc. I hate seeing credit cards and banks eat up 10-30% interest on his debt and late fees, and his credit situation doesn’t warrant him being approved for better credit card or bank offers. I’m torn with what to do, other than help him pay off his debt to improve his credit history and get him back on track.
- Matt

Help him, but not by loaning him money. Instead, do what you can to help him with his burdens as a friend.

Invite him over for meals. Listen to him when he’s frustrated. Offer solutions if you can find them. Offer him some short term living space if he needs it.

There are countless small things a friend can do to slightly relieve someone’s financial or emotional burden in their time of need without just lending them money.

I am working very hard to pay off an auto loan so my husband and I can be 100% debt free. We have money leftover every month, but I always worry about commiting so much money to debt repayment so soon before our next paycheck. What usually happens is that I wait until our next paycheck to pay off any extra toward our loan, and my husband winds up spending our leftover money.

I hate this. I want to be out from under this. My husband and I have $1,000 in an emergency fund and contribute to this fund monthly. What should I do, bite the bullet and pay it off immediately, or put half in our emergency fund and half toward debt repayment? Any advice would be appreciated!
- Rachel

If you’re just looking for a quick fix, the best solution would be to zip off an extra payment as soon as there’s money in the account to spend. In other words, spend it first.

However, doing that just hides the fact that there’s a real problem crouching underneath the surface here. There are some trust and responsibility issues going on with money in your marriage, and if you don’t nip it in the bud right now, you’re going to end up with much deeper problems.

Sit down together and have a serious conversation about what your goals are and what your specific tactics will be for reaching those goals. Quite often, things like this happen because people don’t have goals – or they have goals that are out of alignment with one another.

My husband and I are probably going to buy a house. It’s small, and there’s a chance we’ll only be there 3-4 years, and at most we’ll probably only be there 6-7 years (it’s 2 bedrooms, which if we start a family we’ll likely outgrow). We’re willing to take the buying chance because we’ll be paying much less for the mortgage than equivalent rentals in the area (mortgage plus property taxes will be about $1200 per month, whereas equivalent rentals are around $1500-$1600 per month, and the rent is not a tax write-off), and after a string of bad landlords (including on foreclosed on) we just would really like to own instead of rent.

My question is this: does it make sense to make extra mortgage payments if we aren’t staying there long term? We have good jobs and save a lot, and after funding our retirement accounts we have about $3,000 a month extra to save. Should we put part of that toward paying off more mortgage? It seems to me the real boon of extra mortgage payments is that you save on interest and reduce the length of the loan, but we won’t be there for the length of the loan, so I don’t really see how we’d benefit from extra payments. Your thoughts?
- Valerie

If you get a 5% mortgage, then every drop of extra payment you make is essentially netting you a 5% return on your money for as long as the mortgage exists.

Here’s what I mean. If you owe $100,000 on your 5% mortgage, you are paying $5,000 a year in interest. If you pay off $10,000 of that 5% mortgage, you now owe $90,000 on that mortgage and will only pay $4,500 a year in interest – a $500 savings per year for your $10,000 investment.

Now, you’ll probably put your money to better use by ensuring that your retirement plans are taken care of. After that, though, putting your money into something that returns 5% to you like clockwork until you sell the house is a pretty good choice.

what’s your opinion on Dave Ramsey’s programs? I saw the book review (I read it – borrowed from library) and have seen your arguments/opinions about his ideas toward debt (Snowball, 15%) and some of my friends are doing FPU and/or thinking about it. It got me thinking about it too, but I’m not sure I agree with spending $100 to learn how to manage money when there are a lot of free resources available on the web. Basically — is the program worth it? Have you heard really good or really bad comments about it?

In general, my spending/financial situation is mediocre. I have a 401k, IRA, and E-fund. I’m not bouncing checks but I’m not paying down debts (CC, school loans, car) with the speed that Dave wants me to. Who really benefits from the course? Dave or the attendee?
- Meg

I think Dave Ramsey’s material is just fine. What he provides for people is cheerleading and motivation built on top of a set of very simple but financially sound principles.

Those principles, as you said, are freely available on the web. What you’re paying for is the cheerleading and motivation, in other words.

For some people, that cheerleading and motivation is worth it. For other people, particularly people who are good self-starters, that money is better off being channeled into debt repayment.

Another department where men are able to cheap out over women and then preach like they know something – swimsuits! [...] [I]t’s easy for a man to get cheap decent swimsuits— not so much for women. Once a woman has a good suit that wears well, it will be kept until it either no longer fits (for many reasons) or is falling apart.
- Jean

Here’s the thing, though, with items like swimsuits. I go to the beach or the pool in a pair of swim trunks and a t-shirt and I toss of the t-shirt when I want to swim. A pair of swim trunks costs about $2-3 and lasts me for years.

When someone – male or female – pays more than a few bucks for a swimsuit, they’re not paying for clothing to cover their bodies while swimming. They’re paying for a fashion accessory – a completely nonessential item. $70 spent on a swimsuit that shows off a woman’s figure might be a fun expense, but it’s certainly not required to swimm.

If you think you must spend that kind of money to have the perfect swimsuit to keep up appearances, you’re spending too much time (read: more than zero) and too much money (read: more than zero) worrying about what other people think of you. Think of it this way: if you were going to a completely private beach to swim, would you need that $70 swimsuit?

Update Several readers were upset by this response. My point was that if you’re spending more than $3 on a swimsuit because of vanity, it’s wasted money. What came across is that spending more than $3 on a swimsuit is vanity, which is not what I was trying to say at all. Spending more than $3 for a comfortable suit if you value swimming is a very worthwhile expense. I apologize for my ineloquence and my thick head.

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.

What’s inside? Here are summaries of the included questions in five words or less.
1. Downgrading a car for e-fund
2. Handling an increase in income
3. Dealing with financially unsound parents
4. Starting out with a Roth IRA
5. Quicken or GnuCash?
6. Preparing for a second baby
7. Buy CD or pay debt?
8. Minimizing impact of car payment
9. Getting a detailed insurance policy
10. Retirement or student loan repayment?
11. PS3 games

Seemingly endless rain. What I wouldn’t give for a nice, dry day. The only problem? After all this rain, the first couple warm days without rain are going to be insanely humid.

I have about $4000 in credit card debt and I’m about to lose my job due to the owner’s decision to sell the business. I’m currently a student living with my parents so I’m not too worried about the job situation but I would really like to wipe out most of the debt in one fell swoop. I’ve been considering selling my fully paid for Honda and replacing it with a sturdy volvo I’ve seen for sale. The net cash gain would probably be about $2500-$3000. Now here’s the rub. I really love that Honda(her name is Lola). But I understand that a bit of sacrifice now for the sake of my sanity and financial security probably wouldn’t kill me. I know the numbers sound like small potatoes but without any source of income for the time being, it could make my emergency fund go a long way.
- Matty

The first thing I would do is get a vehicle history report on that Volvo and make sure there’s nothing fishy going on with it. I’d also test drive it and take it to a dealer to make sure it’s not got anything hidden that will blow up in your face.

If both of those things pan out, then it’s probably a good move in your situation to downgrade. It’ll gain you some cash and likely also help with your insurance a bit, too (since the car value has dropped).

The other option, of course, would be to just get a job anywhere, even a minimum wage one, which would allow you to keep the Honda at least, but might restrict your free time.

My husband recently graduated with a masters degree in teaching and, in an incredibly lucky turn of events, got a job right out of school. We’re thrilled not only for getting his career off to a good start but also at the prospect of having two salaries. Throughout our marriage we’ve always survived on my single salary (currently $54,000/year) and his part-time work while he was touring as a musician. He will start out at around $40,000/year which will increase with experience. We’re facing student loans (we will owe about $32,000 at 6.8% interest rate) and we have a 30 year fixed mortgage towards which we pay about $1500/month. We still owe about $230,000 on the mortgage. Other than that we have no debt. We do use credit cards for the rewards/convenience but always pay them off each month and never carry a balance. We own one car which we bought used and paid for in cash so we have no car payments. Mortgage payment plus other expenses of insurance, utilities, food, etc come to approximately $2200/month. In terms of retirement savings I contribute 8% to a 401k through my job (current balance $48,000) and we each contribute $100/month per person to Roth IRAs. We are 31 and 33 years old so have a long way to go before retirement. We have about $13,000 in the checking/savings and $17,000 invested in a money market fund. We are not very savvy with investing – we mostly put money somewhere and just let it do its thing. We live a fairly frugal lifestyle but are comfortable with occasional spending.

What would you do in our situation?
- Penny

The first thing I would do is just sit down and have a long talk about what you both really want over the next five years or so. Do you really want children? Sooner? Later? Is the camper bus really a big dream or is it just a whim? What about the shed rebuilding? What about the idea of a new home?

Be honest with each other. There’s likely things that one of you is really into that the other one is kind of “meh” about. The best thing you can do for each other and for your relationship is be honest about how you feel about future goals. Don’t feel bad about saying that you don’t feel too hot about saving for the next year for some project you’re not all that interested in.

What you’ll find is that – if you give it time and careful thought and mature discussion – one or two strong mutual goals will emerge that you both believe in and are passionate about. That’s where your planning should be focused.

Give it time. Give it honesty. And don’t be upset with each other if something you want doesn’t completely match what your partner wants. You might just find that there are things you both hold dear, and the rewards of those far outweigh the individual things you each want.

About me: Come from a family perpetually in debt. My father is the only income earner, and he supports my mother and two younger sisters. I left home at 18 and racked up a whole bunch of my own debt while in university. I smartened up just before graduating, opened an RRSP, started an emergency fund, started saving etc. 3 years later, I’m pretty comfortable – have a small mortgage in Vancouver, paid off $10 000 of my consumer debts and only student loans left to go! I was even able to go back to school with some of the money I saved while working.

I’ve suggested renting out the extra bedroom they have, but they are resistant. My mother has health problems and is unable to work long periods of time. She used to do some babysitting, but hasn’t in a while. To make things worse, my sister is starting university in the fall (though living at home while in classes). She has enough scholarships to pay for one semester of classes. I’ve encouraged her to get a part time job during the summer to save up money for future tuition but she has not wanted to. My parents are encouraging her to take out student loans instead. They’ve even asked ME to take out student loans and “lend” them the money – I refused.
- Michelle

You made a good move there, refusing to lend money to your family members. One of the worst things you can do with a family relationship is turn it into a lender-borrower relationship. Think about it: who loves their lender and invites them to dinners and parties? If I were you, I’d assume that any money you’ve already given them won’t be paid back. Think of it as a gift and just forget about it.

The question is what you should do going forward from here. I don’t think you have any sort of responsibility to begin supporting your family. You absolutely should not lend them any money at all for the reason mentioned above. You also absolutely should not do anything that puts you even in a slightly more challenging place.

If you still feel an obligation to help, help via one-time gift, like you did with the single check you already gave them. Whether or not you do that, of course, is up to you.

I am looking to start my own IRA but I have heard some stuff that makes it seems a little more complicated. I was under the impression that a Roth IRA was kind of just a set it and forget it type of account. I’ve been reading into it more lately and found that this isn’t really the case. I don’t know if I’m the only person who was thinking this but I thought it may be beneficial to your readers. What I’m asking I guess is how exactly do I setup a Roth IRA and what should I be investing in? Are there suggestions for investments when you get all of your stuff setup?
- Brandon

The Roth IRA certainly can be a set it and forget it kind of account if you choose it to be. My own Roth IRA through Vanguard, once I had it set up, has needed no changes in years. I just selected an appropriate Target Retirement fund, set it to withdraw $100 each week, and sat back and forgot about it.

Assuming you’re using it for retirement and not some sort of gamesmanship (there are some somewhat kooky plans out there that try to exploit specific loopholes in the Roth laws which rely on those tiny loopholes remaining open for years – don’t bother), the best thing to do is to simply open up a Roth IRA account at an investment house you trust, select a Target Retirement Fund from their investment offerings, and then set up an automatic investment plan to put money into that target retirement fund.

That’s really all you need to do. It is pretty automatic once you get it into place. Just pick a company, sign up, select an appropriate Target Retirement Fund, and set up automatic contributions. Done.

In a recent Reader Mailbag, you recommended Quicken in response to a list of criteria for personal accounting tools. I was wondering whether you had any experience with GnuCash (www.gnucash.org). I’ve not got enough experience with it to know whether it meets the criteria, but it is free (and Free Software – meaning those with programming skills have the ability to make changes), and does seem to do a lot. If you are familiar, where do you see it lacking (as compared to Quicken or more generally)?
- David

GnuCash is a solid accounting program – and it’s free – but it doesn’t match what Quicken does.

The big thing that Quicken does that GnuCash does not – and this is huge for new users – is that it automatically downloads your financial data for you from your banks, credit cards, and so forth. Transaction data is often included in this. This drastically reduces your bookkeeping time once you’re used to the procedure.

GnuCash does several things well, but the sheer accounting work that has to go into it drives away a lot of users. And for me, who did all of this by hand for many years? I used Excel, quite honestly.

On your blog, you’ve mentioned that you did a lot of little projects to prepare for baby #3, and — being in a similar situation myself, although for me it’s baby #2 — I’m curious to know what they were. I’m also curious about which ones were the most useful in retrospect. I am getting hit with that serious 3rd trimester nesting urge, and I’d like to put it to good use. Last pregnancy, I was doing things like dusting the window blinds — something that wasn’t especially useful.
- Emily

I’ll just list the projects we took care of during the run-up to the arrival of baby number three.

We signed up for a 529 for him (putting myself as beneficiary, then switching that after he was born). We did everything we could to acclimate the older children to the idea of a baby, including reading lots of books about babies and new baby siblings. We pulled lots of baby clothes out of storage and hit quite a few yard sales and consignment shops to replace some of the more well-worn items. We pulled the old bassinet out of storage, cleaned it, and set it up, and also came up with a long term sleeping plan for the three kids. We pulled out our old breast pump, fully cleaned and sterilized it and all of the bottles, and did some maintenance work on the AC adapter. We washed and prefolded all of our cloth diapers, setting the adjustable ones to the smallest setting.

I’m sure I’m forgetting something, but all of these things happened during the months leading up to the birth of the third child.

I’m an undergraduate student and will continue with a PhD after graduating next year. I’ll be leaving my alma mater with around $15-20k in Federally subsidized loans and won’t be required to make payments until six months after I cease being a half-time student. As far as I can tell, the government pays off the interest at the lowest rate so long as I’m in school. I will be paid a stipend of $25-30k during my PhD schooling (5-7 yrs.)and intend to save a significant amount towards these loans and financial independence. My question is this: if I have around $6k in savings right now, would it make more sense to invest in a moderate-return CD or similar option, or should I apply it directly to the loan capital? I’m pretty sure a 33% dent in the principal would be fantastic, but the opportunity for seven years of interest is also appealing. Can you shed some guiding light? I currently have taken three discrete subsidized Stafford loans with fixed rates of 6.8, 6 and 5.6%.
- Joe

First of all, make absolutely sure that your interest is being paid while you’re in school, because that completely changes the answer to the question.

If the interest is being paid while you’re still in school, then you should hold onto that money until you finally graduate because your loans won’t be growing at all. You can buy a CD if you wish, invest it in the stock market, whatever you feel is appropriate with that $6K (it mostly depends on your risk tolerance and how long you’ll be in school for the Ph. D.).

If the interest is not being paid while you’re in school, you should pay down the highest interest student loan, but you should save at least $1,000 of that money for an emergency fund for yourself so you’re not tapping credit cards to deal with an unexpected expense. Why? Very few investments will top the 6.8% guaranteed you have on your loan.

My 12-year-old car (given to me by my parents) is about to die. Though I haven’t gotten it formally checked out, I know there are problems with the engine and transmission, and I have this feeling that it won’t make it through the summer. It has 195k miles on it, so I think it’s past the point of trying to fix it any more.

My question is this: Should I save up as much as possible to have a larger down payment, or should I throw as much as possible at my credit cards to have a lower debt:credit ratio and improve my credit rating? I’ve never financed any sort of major purchase before, but I do have a decent credit score (708 as of two months ago). I’m looking at a used car (certified if I can find it!) in the $12k range. I guess I’m just basically nervous about having this new large monthly expense and am looking for the best ways to minimize it.
- Larissa

In your situation, you shouldn’t buy a $12,000 car right now. You should get something much lower that you can drive reliably for just a few years, then replace it with that $12,000 car.

Doing that saves you money on financing the car and on auto insurance as well (since you’ll probably only need to carry liability insurance on it). That money can be channeled towards paying off your existing debts (and a $1,000 emergency fund, too, which will keep you from tapping credit in emergency situations).

Look lower-end for now for your car. You can save up for it if you wish, but don’t worry about a small loan for it, because if you have decent credit at all, it’ll be lower interest than those credit cards. Then, once that’s taken care of, snowball. Get rid of that high interest stuff first and whittle through everything else. You’ll have much more money to do this quickly if you get a lower-end car for the time being, taking you to debt freedom much faster. When you’re there, then think about a higher-end car.

I am trying to do some emergency planning, and as part of that my goal is to understand all of my insurance policies thoroughly. I have checked my insurer’s website, but they only have generic information and say to contact your agent for more details. I have tried my state’s (NJ) Department of Banking and Insurance, but there is no standard there, either. I e-mailed my agent with some questions, and she called me back instead of e-mailing her response. Is there a good way to get a complete guide to what a person’s insurance will cover in the event of a claim? It is all well and good for my agent to tell me somethings over the phone, but I will have no proof of what was said if there is a problem. Do you have any advice on how a person can obtain, in writing, exactly what will be covered by their insurance if a claim is filed? I am referring mostly to my Renter’s policy, but would like something similar for any policy I own.
- Tracy

Call your agent and ask for a copy of the policy, point blank. If they won’t provide this policy, then you shouldn’t be doing business with that company.

The agent wanted to call you because the agent is a salesman and it’s much easier to make a sale by talking to someone than it is by sending them emails. Pretty much any insurance agent will do the same thing – because, in the end, they’re salespeople.

If you can’t acquire a copy of the policy you’re looking to buy, something is really fishy and I would run away from the situation.

I am a 23 year old AmeriCorps volunteer. I currently have $2,000 as an emergency fund. I also have roughly $25,000 in student loan debt. I receive $1,000 a month for a living stipend before taxes, and will receive a $4,725 Education Award (to pay back federally backed student loans) in August.

However, I also understand the importance of saving money for retirement, especially in my early twenties. Optimally, I would like to open a Vanguard Target Date Roth IRA and start socking money away as I am able. However, the minimum initial balance is $3,000. Do you know if Vanguard or any other reputable agencies offer IRAs with a lower minimum initial balance (possibly with the requirement of automatic fund transfers)?
- Alex

When I started with Vanguard, I didn’t have the $3,000 I needed to get into the fund I wanted, either. However, there’s a much easier way to do it: the Vanguard Star Fund.

The Star Fund is a composite of several different Vanguard index funds. What makes it noteworthy, though, is that it has a minimum of $1,000, not $3,000.

When I signed up for Vanguard, I first saved cash in a savings account until I had $1,000, then I contributed all of that to my Roth IRA and bought Star, setting up an automatic investment plan to keep building from there. When I reached $3,000, I just switched it to the Target Retirement Fund of my choice.

As for the student loans, I think you’re doing the right thing paying the private one off now, a bit at a time, as you’re doing.

All right, ‘fess up. What PS3 games do you own?
- Kevin

A surprisingly large number of people wanted to know this after my post yesterday in which I discussed trading my Nintendo DS for a Playstation 3. So, here are the games I traded for (all used, of course) when I got the Playstation 3, with links to Wikipedia for details. I picked up Red Dead Redemption, MLB 10: The Show, Final Fantasy XIII, Uncharted, and Skate 3. I still have some store credit remaining, too. RDR and MLB 10 seem to be the popular online games with my group, so those will be the ones I’ll mostly play, I’d imagine. My plan is to just trade them as I play through them and maybe receive a few more as gifts for various gift-giving occasions.

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.

This past weekend, one of my heroes passed away. I’ll memorialize him with five of my favorite quotes from him.

“Be more concerned with your character than your reputation, because your character is what you really are, while your reputation is merely what others think you are.”

“You can’t let praise or criticism get to you. It’s a weakness to get caught up in either one.”

“If you’re not making mistakes, then you’re not doing anything. I’m positive that a doer makes mistakes.”

“Do not let what you cannot do interfere with what you can do.”

and my personal favorite…

“If you don’t have time to do it right, when will you have time to do it over?”

I applied for a credit card with a zero % introductory rate in order to transfer the balance of another credit card with a higher rate (14.4%). Now that I have the new card, I noticed the introductory rate is only for 7 months and then the interest rates goes up to over 20%! Plus, the new card doesn’t even have enough available credit to transfer the full amount of the old card. What should I do? I assume I should just keep the old card and plug away at it. (I also plan to call and see if I can get an interest rate reduction.) But what should I do with the new card? Cancel it? I haven’t activated it yet.
- Kay

If I were you, I’d transfer an amount that you’re absolutely sure you can pay off in seven months, cut up the card, and never actually use it – just pay off debt with it. Since you’ve already opened the line of credit, it’s not going to make much difference at all in terms of your credit rating.

So, let’s say your minimum payment on your first card is $80 a month and you’ve been paying $200 a month to pay it down. That means you’re paying $120 a month extra. Transfer $600 to the new card, then each month, make the $80 minimum payment to the old card and a $120 payment to the new one.

What does that save you? It’ll only save you about $20, but that’s better than nothing, especially if you can use your bank to automate the bill payment.

Your summer reading list is insane! How do you manage to read so much?
- Evan

Three simple things.

One, I make sure I have a book with me everywhere I go. I usually just keep the book I’m reading near me throughout the day, but I also have a “backup” or two laying around here or there. I have a novel in the car, for example, just for these opportunities.

Two, when I’m idling for a little bit (like when I’m trying to coax the baby to sleep), I read. I don’t watch television. I don’t surf the internet. I read a book.

Three, I actually read fairly slowly and at the end of each paragraph, I mentally ask myself if I’m sure what I needed to pick up from that paragraph. I used to read much “faster” before I started doing this, but I was constantly backtracking and I often missed big chunks of what the book was about. In the end, I would get through a book at about the same speed I do now, but I get a lot more out of them now – my enjoyment factor is way, way up.

I’m a 26 year-old computer developer and am looking for some advice from you and your readers on mid-term savings ideas. I’m going to be taking a 2-year international assignment to China and my wife and I are trying to figure out what to do with some of our mid-range savings. We renovated a house over the past 3 years and are about to sell it and make roughly $30k. We have no debt other than the house. I have a vehicle provided by my employer (and will once I get back also) and we’re probably going to just let our family borrow our other truck while we’re gone so no major changes there. We have worked pretty hard to save up another $25k in my 401(k) and a Roth IRA. We’ve also got another $10k in general savings. With my international assignment I’m expecting to save anywhere from $40-$100k while I’m overseas. We don’t have kids (although we’re planning on it at some point soon) and are kind of thinking we might just try to pay for our next house with mostly cash. My question is what should I do with this amount of money over the next 2-3 years. Savings rates and CDs have such low interest rates and in that short a time-frame, I’m not very confident in the stock market either. I would consider a rental property but we’ll have no good way to manage it while out of the country. Thanks in advance for any suggestions you and your readers may have.
- Joe

Keep it in a high-interest savings account, one that you’ll be able to access from over there, and wait. If interest rates start to go up, you might want to rate hop a bit.

You’re right, though, there’s nothing out there paying good interest without taking on some risk. That’s because the Federal Reserve wants investors to be dumping their money into stocks and things like this that can spur the economy along much more directly. When the economy is humming along, interest rates go up and such stable investments look much better.

Still, I don’t think it’s worth the risk of putting money in the stock market right now unless you’re okay losing a good portion of it in exchange for a good probability of turning a profit. If you’re banking on that cash, then it’s not a good move.

I am curious how you budget for periodic charges that happen throughout the year. For instance, once a year, I pay for my car tags. Twice a year my daughter has soccer registration. Once a year we have our furnace serviced. I am thinking of adding up all of the charges for a year, divide the number by 12, and that is how much I need to try and set aside each month. I would like you input about what you do in your situation.
- Robyn

That’s exactly how we do it

Well, almost exactly. I tend to “front load” the year. Think of it this way: divide that amount by 6 or so, then make that payment each month for the first six months of the year.

Why do it that way? Those extra payments don’t come in evenly throughout the year. Sometimes, they come in bunches, and if they come in bunches early in the year, you don’t have enough saved up.

Aside from that, you’ve got the right idea.

I’m an avid reader. and I came across this article today on yahoo. For some reason I immediatly thought of you! I was curious as to what you would think of it. Not just as a way to save money but also as a way to network and meet new people!
- Ruth

That’s an extremely good idea. It’s one of those things that demonstrates the power of a local community.

In the end, it’s just formalizing how a healthy neighborhood works. If I help my neighbor watch his kids a few times for an hour or two, he helps another neighbor mow their grass, and then that neighbor helps me with snowblowing in the winter, we all save money. A time bank just makes it more formal, which makes it easier for people to join.

I’m all in favor of stuff like this because it simply saves people money.

What would be your advice to new bloggers when it comes to finding their voice for their blog?
- Gina

Write a lot. Nothing else solves issues of writing voice like writing a lot.

When you do that, pay attention to what people react to. Read the comments. Read the emails readers send to you. You’ll begin to figure out what things you write that readers like – and which things they don’t like. Use those clues to figure out what you should emulate and what you shouldn’t.

Over time, what will happen is that you’ll find it natural to write in a way that appeals to whatever readers you happen to have collected – and then you’ll find it easy to collect more readers like them.

My fiance and I are due to be married next February. We’ve consolidated our checking accounts, I’m about to buy a house (a duplex), and I just paid off all of my consumer debt (today! yay!). However, my fiance has a sizeable amount of debt, we both have car loans. I’m currently in re-payment of my student loans while he won’t have to begin payment until he graduates. I plan on going to law school in the fall of 2011.

Any insight you could provide as to where I could invest it would be helpful!
- Melissa

As I mentioned above, interest rates are low right now across the board on savings accounts and CDs. There’s just nothing that can be done about it other than sit on cash and wait.

Why are they so low? The banks have no incentive to make the rates any higher because they can pretty much get as much cash as they need for about 3% interest whenever they like, so they can’t afford to pay out anywhere close to that while also ponying up for FDIC insurance.

If I were you, I’d just sit on the cash for now. You’re better off having it for emergencies even just earning 1% or so than having it at risk or having it tied up to just earn 2% or so.

Ha! I loved the “Life’s too short to drive a used car.”

I concur and have never purchased anything but a new car for the last two decades. I keep them until they start to fall apart though! I don’t finance and always buy a cost effective car that I can pay cash for. I currently drive a 2009 Honda Fit. I love it. I am very good at living within my means and would never drive a status car. But I do have a hefty commute and having reliable transportation is not negotiable for me.
- Aaron

You listed two things that new car buyers rarely do.

One, they rarely keep them until they start to fall apart. Proof? Go to your local dealership and look at how many 2004 to 2008 used cars – perfectly drivable for a lot of miles – are just sitting out there on the lot.

Two, they rarely pay cash for them. 73% of all new car purchases are financed, according to this article.

You’re basically buying new because you’re willing to pay extra to get those early reliable miles – the first 80,000 are usually the most trouble-free. That’s worth a premium to many people.

Aside from that, you’re buying how a typical late model used buyer buys cars, and that’s the way to do it, in my opinion.

Things are very stable at our house as we at paying down the mortgage and watching our net worth grow. I try to keep up with whats going on financially but I recently had a suprise in the credit card/credit report world. During the last few years its been hard to keep up with what the credit card and banking industry is doing. There is more detail to the backstory but the simple story is that I have a personal credit card that has a $15K credit limit. I only charge a few hundred a month and pay it off but this is my main card. I recently pulled my credit report and noticed that the card had the date and highest usage listed but the credit limit was blank. This made my debt to credit ratio upside down even though its not (600/0 is different than 600/15,000). Talk about skewing my credit score! I assumed this was a reporting error and called the credit card company requesting that they report my credit limit. The customer service representative confirmed that I have a $15K credit limit and that she would put in a note to have my information reported to the credit agencies. The kicker is that a few days later I got a letter in the mail saying that my credit card does not have a credit limit but is actually an open credit access line and an actual value is not reported to the bureaus. Say what?!?! Since when is a national bank credit card (with mastercard logo) with a specified credit limit actually an open access line? What do I do about my credit report that shows 600/0? Luckily I’m not trying to get any loans asap but its very frustrating to see that my should be almost perfect credit report is mud. (the mortgage loan is in my husbands name so it doesn’t show up and just like Cindy today our ‘joint’ credit card doesn’t show up. I recently had another card (my oldest card) with a $18K credit line closed on me by the bank due to inactivity which messed everything up and made me a very grumpy customer). So have you heard about other cards making credit limits actually credit access and not reporting the information? Is there a way around this or something else I can do to beef up my credit report?
- Patty

I’ve heard of that, but it’s usually pretty rare and only happens to people with very good credit.

I wouldn’t worry about it affecting your credit score. Instead of showing up as a credit card, it now looks more like a very small home equity loan to the score calculators. If you don’t have any missed payments or anything, your credit score is probably very good.

If you really want to check, you certainly can get a peek at your credit score, but with a credit report like that, I wouldn’t worry a bit.

My family needs an intervention. I’m 24, live on my own in Boston and am doing okay about saving, paying off my student loans ($700+ a month) and adjusting to adult life. I am a marketing writer and make $53,000 annually before taxes. I contribute to 401k, have about $12,000 emergency fund and have great credit. I have no credit card debt. The problem is my dad. He constantly assured us in high school that we would be able to go to the college of our choice – finances would not be a problem, and refused to speak to us about the situation. Even now he won’t talk about it.

One sister is in college currently. I am advising her to move home and transfer to a local state school as a commuter student so she is able to work and still graduate with minimal bills. My other sister graduated 1 year ago and has a student balance of about $95k. My Dad told her this week that her payments will be a whopping $1,400 a month (she makes $40k a year in her job, lives with my parents, and has a $250/ monthly car payment, no credit card debt). Should she put her loans under her name? My dad has not been making payments on her PLUS loans so she has a lot of capitalized interest from the last 2-5 years.
- Anna

The absolute first thing you should do is check your credit report. Head over to the FTC’s website at http://www.annualcreditreport.com and find out for sure what loans are outstanding and in your name, because it isn’t clear to me which of the above loans you are liable for.

Any debts that you are responsible for currently repaying should appear on your credit report. If they do not, they’re probably debts that are in your father’s name and thus it is his responsibily to repay them, not yours, unless you choose to take on that debt for some other personal reason.

If you see a loan on there that you don’t have access to, then you need to seek out that loan and get full control over the maintenance and repayment of that loan. Do not leave such loans in someone else’s hands, no matter how much you trust them. Bad things can happen and you don’t need those bad events to have the secondary effect of wrecking your credit.

It sounds like – I’m not 100% sure on this – you have a personal arrangement with your father to pay him for the amount he owes each month on a loan he took out, the money from which was used to pay for your education. If that is the case, then your only obligation is the personal one to your father. The ethical and moral thing to do is to continue paying him, but it doesn’t appear that anything involving those loans will affect your credit.

Your sister is in the same boat. It appears as though she has a personal arrangement to pay your father each month for an amount equal to what he would be paying each month on that loan. With the amounts being discussed, however, you may want to consult a lawyer, because she would be giving him an amount each year that would exceed the gift tax (which means that taxes would have to be paid on that money).

Situations like this demonstrate why it’s very risky to mix familial and personal relationships and debt. It usually ends up poorly. If I choose to borrow money to pay for a child’s education, I’m going to borrow the money and then I’m going to give that money to my child for their education. There will be no lender-borrower relationship overshadowing our parent-child relationship.

Do you ever get depressed reading endless stories of people whose lives are in really deep trouble?
- Ellen

Not really, because I know that if someone has reached the point where they’re writing a question to me, they’re seeking a better answer for their situation.

I think society sends some pretty awful messages about money and completely distorts peoples’ senses of entitlement and wants versus needs. However, I already knew that before I started this site.

If anything, questions like that make me happier, because I see that people are trying to take control of their own situation instead of just blaming others and throwing their money at whatever’s new.

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.

Memorial Day is pretty much just confusing to me. It’s theoretically a day to honor fallen soldiers, but most people just go on vacation or play in the yard.

What happened to Decoration Day, which is May 30 of each year? That’s the original date created to honor those soldiers that have served our country in times of war, started after the Civil War. As the Civil War veterans began to pass away, it gradually turned into our modern day Memorial Day, which mixed some notions of American exceptionalism together with a convenient three day weekend at the beach. To me, that really waters down the point.

Charles Ives’ poem Decoration Day captures what I wish this day was – and what it could be. But it’s lost amid the jet skis and the barbecue grills.

I love Computers and couldn’t survive with out the internet. I wouldnt say im a geek, as i dont play video games at all, and love sports. Im 17 years old, and live in the west coast, California. I currently work at Starbucks with minimum wage (the job sucks!). So im contacting you today because ive spent the past couple of months stressing about careers, as im graduating high school soon. Ive been looking for things i could do online as a career, or even a entrepreneur like you.

Anyways, So ive been looking to start making a career online, and have tried some programs such as “richjanitor.com” which didnt work out at all. So im emailing you today, hoping that you could help get me jump started like you. Im wishing to not have to pay for any program, but to get some 1 on 1 support from you to help me get started. I would love to be your testimonial of success. I would preach of your work to everyone, and promote you on my youtube channel, which gets over 215,000 views a month. You sound like a great guy from the things ive read about you online, I really hope you can help me out, it would be un imaginable.
- Mike

Most online programs that promise to help you earn a great living online don’t work. Ignore all of them. You do not earn $100,000 a year online within three months of starting in your spare time on your own or with any program. It just doesn’t happen.

The key to making money online is traffic. Nothing more, nothing less. The more traffic you have, the more you earn. (Not all traffic is created the same, but that’s a different subject.)

The way to get traffic is to make content people want to read and that they want to return to. It sounds like you have a good start at that with your technology channel on YouTube. You need to be patient and keep adding good content.

What you’ll find over time is that every piece you put up will get a slow “long tail” of traffic each month. So, let’s say each of your videos gets just 50 views each month. Well, if you have 20 videos up, that’s 1,000 views a month. If you have 200 videos up, that’s 10,000 views a month. If you can get 2,000 videos made, that’s 100,000 views a month.

If they’re high quality, though, traffic will begin to drive itself. People will see one of your videos and watch some more. If you just have a few videos, there aren’t many to watch and they’ll leave quickly and probably forget about them. If you have tons of videos, they’re not likely to get through them all and they’ll probably bookmark the site. You’ll eventually stick in their minds and they’re more likely to share your stuff, driving more traffic.

Your best bet, honestly, is to just pump out those good videos as fast as you can while still maintaining the quality. You already have the snowball rolling there – keep it up.

I’ve told myself it will be fine, that we have our rental agreement and my son is responsible, but deciding to rent our home to him and his family is a concern still. I’m not sure what his wife will do when paying the rent gets too “hard”. We believe the risk is worth it to see them enjoying our home, but is it too risky?
- Abigail

These types of arrangements always make me uncomfortable, and it has nothing to do with the risk.

Whenever you enter into an arrangement like this, you’re transforming a parent-child relationship into a landlord-renter arrangement. The “rules” of these two arrangements are very different from each other – most people don’t have loving feelings for their landlords and view it as a merely financial arrangement.

What you’re doing is multiplying the chances that the relationship between you is damaged. If the parent-child relationship is soured or the landlord-renter relationship is soured, then you’re going to have a strong negative impact on the overall relationship.

For me, the parent-child relationship is one that, if it’s healthy, can be incredibly valuable for both of you. I wouldn’t rent to my child unless it was under the assumption that it didn’t matter if they didn’t pay me, thus eliminating the landlord-renter arrangement from the equation.

It’s not the financial risk that would worry me, it’s the relationship risk.

If I were you, I’d try really hard to move on from this, even if it means stepping in as a parent to help them buy a house elsewhere or something like that.

One topic that I don’t think that I’ve seen you cover and would like to see what you have to say about it is the finances of adoption. My husband and I adopted a domestic newborn boy about 10 months ago (our first child). We are now planning on adopting internationally for our next 2 children, most likely through a lawyer from the Democratic Republic of Congo. We have noticed that one of the main things we mention when we talk about adoption is the money. Domestic adoptions can cost anywhere from $10k-$40k depending on the method of adoption, birthmother considerations, and, shockingly, the race of the child. International adoptions tend to run from 18k-30k, depending on the country.

I would love to see what you have to say about this topic! With infertility on the rise across the country, I bet other couples would benefit from your advice on the matter.
- Monica

This is the truth of adoption and it’s one of the reasons my wife and I have been hesitant to do it. That’s a lot of money, an amount that, for many families, is destabilizing, and the entire point of adoption is to provide love and stability for the adopted child. So you essentially have two factors working in opposition to each other.

You already know the only real antidote for this – cash in the bank. Make sure you have a cash emergency fund (a few months’ worth of take-home pay) sitting in an account to deal with your current family’s crises, then start a second savings account and sock it away.

If you’re adopting domestically again, you may want to consider a private adoption, which can be a bit cheaper but has a different set of concerns and risks.

Whenever adoption is mentioned, people often mention foster homes. The problem with foster homes is that the law is bent against foster familes. The law essentially discourages building a long-term loving and trusting relationship between the foster child and the foster family because the foster child can be removed essentially at any time. This type of relationship takes a very special type of person or family to make it work – successful foster parenting isn’t something that many people can do. I consider the foster system to be just as broken as the adoption system.

I am a United States citizen and currently live in California, but I will be living in France during the next two to three years and am thinking about some financial questions, mainly about my tax situation, and thought you might be able to help. I will work as a freelance editor and as an editor for my university, but also may do some teaching, partly for people (or institutions) in the United States and partly for people in France, and so I probably will have to file two forms at least for 2011.

I want to make sure I follow the law but also am thinking that some good planning could land me in a lower tax bracket or have other benefits. Can you offer any advice or recommend any other sources?
- Tom

As a U.S. citizen, your worldwide income is subject to the U.S. income tax regardless of where you’re living. The FEIE you mention above applys when you are not living in the U.S. and your employer is not based in the U.S.

I do not know how French income tax law works, but if you are a resident there, you’re likely going to have to pay some form of income tax in France as well. My understanding (which is admittedly poor on this subject) is that if you are not a French citizen but living in France for a short period, you would only have to pay French income taxes on money earned from French businesses while living in France. You would have to pay U.S. income taxes on all money earned.

Yes, it’s a double whammy, but governments want their tax dollars.

I never watch infomercials; never! But the other day, I paused to watch one when I saw that the product they were advertising was the Magic Jack. In short, it seemed like for $3.33 a month (or a one time fee per year actually), you can carry a jack which plugs into your computer…plug a regular land line into the jack and call out anywhere in the US and Canada. If anyone has a M. Jack anywhere in the world, they can call you and talk unlimited for the same price. But I think that it is the same as Skype in that you can only call out.
- James

MagicJack is great if it works. I have one friend who swears by it.

I have another friend who used MagicJack for several months and was incredibly happy at first. Eventually, though, he began to complain that many of his calls were suffering from him being able to hear the caller but the caller not being able to hear him, so he dropped the service after seven months.

My impression from their stories and from reading a lot of reviews is that it works best if you have a very, very high speed connection that doesn’t suffer many slowdowns during peak traffic periods. If that describes your connection, then MagicJack will probably work well. If you have a lower-end high speed package, then you’re likely to see problems.

One note: MagicJack (and Skype) both give you your own number so people can call you up. You just have to have your computer on to receive the calls.

So here’s where I stand now:

So back to my questions:
How much credit is too much credit?
Do you think I should close one of these accounts?
Which account should I close?
- Julie

I wouldn’t close any of the accounts. I don’t think you have excessive credits. I have one card with more credit than all of yours combined.

The problem seems to be that you worry about your own ability to control your spending habits. If that’s the case, hide some of the cards from yourself. Freeze them in a block of ice (fill a pan half full with water, freeze it, lay your cards on the ice, fill it up the rest of the way with water, freeze it again). Cut them up, even.

If you feel you must cancel a card, cancel your most recent card. Always keep your oldest credit card because it’s the one that establishes the length of your credit history, and the longer it is, the better it helps your credit score.

I am American and live overseas with my foreign husband. I am almost finished with my Masters degree which focuses on the European Union. My husband and I are planning a move/to start a family over the course of the next 1.5 years and as it is difficult for me to find work that interests me in this country, I am looking into different jobs I can do online/from home. I have experience teaching English and a little experience editing. I would like to get more involved with the editing but am unsure as to how to go about finding more work. I recently secured 2 freelance editing jobs but need a few more in order for us to be able to save the amount of money we need to move and start a family. There are many websites (guru.com, elance.com, gofreelance.com, etc) where editing jobs are posted and you can post your resume as well. The thing is that most of these websites charge for membership (seems like $10 and up a month). In addition, some of them also take a percentage of what you earn. Would you recommend using these websites to get started? If not, what are other ways I can find editing work online or other online/work at home jobs.
- Meagan

Those websites are a good place to start. They will help you get starting jobs and contacts.

Ideally, though, that’s exactly what they are – a starting point. Eventually, you’ll be able to actually build relationships with people who need your services and, over time, the jobs will come directly from them, not through the websites.

This will not happen overnight, though. The competition on such sites is fierce because a lot of people want to do what you’re doing. You have to be doing quality work to stand out – if you’re not doing good work, they can easily just cast a line right back into that job pool.

My husband and I are having our first child in September. Last night I finally sat down and crunched the budget numbers and it was quite a wake up call — babies are expensive! Of course I knew that one level, but to see it on the spreadsheets was a bit of a shock.

This is such a major decision! I worry that my child won’t be properly socialized if he’s not in some sort of daycare, and I worry about isolation — I have been a driven career-woman all of my adult life, and I do enjoy the duties of my work, just not the pay and lack of really any benefits. However, I went through a job loss a few years back and it really helped me learn there’s more to life, and me, than my job identity.
- Sarah

There are support circles in most communities for stay-at-home parents where they meet together in parks and other public places for the purpose of socializing their kids (and socializing with each other about shared experiences). If you’re interested in doing this, seek out people already doing it in your community and ask how they make it work. Ask around. You don’t have to be isolated.

As for the financial part of the equation, it really, really depends on where you live. If you live in a rural area, a family of three can make it on $28K. If you live in a higher-cost urban area, it won’t work – there won’t be enough to make ends meet.

Given the amount of debt you’re carrying, I’m not sure you’re making ends meet now, let alone with another family member and a halving of your income. Even with the savings from doing that, it’s not going to make up for the huge loss in income without some very radical life changes (like moving to a lower-cost area and dropping your standard of living a fair amount). I can’t answer for you whether you’re up to that.

Have you ever tried making your own windshield washer fluid? I’ve heard that a solution of vinegar and water in equal parts works well. How much of a cost savings do you think it would be?
- Tanya

If you live in a climate where the temperature never goes below freezing, this should be fine. However, a water-vinegar mixture will freeze at about 30 degrees F, making it impossible to use at that temperature. Most windshield washing solution freezes at a much lower point (often around -20 F), which makes a huge difference here in Iowa.

So, if you live anywhere north of the southern tier of states, I wouldn’t try it. If you live in southern Texas or something where the temperature never drops to freezing, give it a shot – a water-vinegar mix can be a great cleaner.

After all, you don’t want it freezing up on you if you go outside to drive when it’s 25 F out. When you’re below freezing but not so cold that the salt doesn’t work and the roads are covered in wet, grimy sooty water that splashes up on your windshield, the last thing you want is for your windshield cleaner to be frozen.

So finally I think we have our financial house in order. All our debts except the house are paid off. For past 3-years we have been maxing out our 401K’s and Roth’s. Bought a house with 20% down, good emergency fund, term-life insurance, following frugality tips, buying index-fund ETF’s. Basically been doing everything that PF gurus have been recommending. While I was aggressively paying off debt, saving money for home, etc I had something to look forward to. Now everything is on auto-pilot. It definitely saves me time. But it seems that I was so focused on the financial aspect for the past 3-years, that I have lost interest in everything else. I don’t like spending money on anything. I tried setting aside some fun-money and I do spend it, but I don’t derive any fun out of it. It’s not that I have turned asocial or anything but I just feel bored all the time. By the way, we are not rich or have very high paying jobs but are super-aggressive savers. Oh I forgot, we have a 2-yr old and I do love spending time with him. I’m not depressed
- Sam

Your answer is in your next to last sentence: “we have a 2-yr old and I do love spending time with him.”

The exact same thing happened to me. We had a child and I discovered, especially as he reached his toddler years, I often enjoyed playing in the yard with him more than I enjoyed spending time and money on other endeavors. I also began to feel that it was more important to keep him financially safe and secure than to spend money on other things.

The key for me was finding fun free stuff to do. I got involved in the parks and recreation service in my town, which has tons of free activities. I’m going to coach both my four year old and my two year old in soccer in the fall (the two year old will be three by then). I got involved in volunteer activities and committees. Most of my time is now filled with stuff that doesn’t cost money to participate in, and that itself has a very positive impact on our finances.

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.

One of my favorite personal finance tactics is “snowflaking.” For those unaware, “snowflaking” refers to the idea that if you make little frugal steps throughout the month, you simply add the amount you saved with that method and include the total as an extra payment at the end of the month. So, for example, if you used coupons to save $5 on your normal purchases, you would then add $5 to an extra debt payment at the end of the month. This knocks $5 off of the total amount you owe, reducing your interest owed in future months and getting rid of the total debt that much faster.

“Snowflaking” is almost always used in a debt-related context – the name itself comes from the popular “debt snowball” – but I’ve actually found that snowflaking is incredibly powerful for almost any goal in life. In fact, I use snowflaking all the time in my own life for bigger goals.

Here are some examples for how I use snowflaking for some of my personal goals.

Bigger savings goals The biggest savings goal that Sarah and I have right now is for our next home. We intend to buy a piece of land in the country with some wooded area on it (expensive) and then build a house to spec on that land (even more expensive), along with a barn (whew!).

That’s an expensive goal.

So I keep that big goal in my mind as often as I can. I have a picture of a home with a barn and some woods in the back that I look at all the time to keep myself reminded of it. When I make a choice to save a few bucks – buying something in bulk or some similar little effect – I log onto my online banking and transfer that amount to a separate savings account, never to be touched until we’re ready.

With every little choice, that account grows and we move a little closer to our dreams.

Motivational goals I’d like to get a better pair of walking shoes. Instead of just going out and buying a new pair, I simply pledge that if I reach the 250 mile mark with my walking this spring and summer, I’ll allow myself to buy the shoes.

Again, this is snowflaking, just in a little bit different form. If I don’t have the motivation to go on a really long walk, I’ll just talk myself into a short walk around the park near our house. I’ll kick out a mile and a half or two miles and be back at the house in less than a half an hour, but that little bit contributes to my larger goal.

Cash snowflaking can work well alongside this non-cash goal. If I talk myself into walking for an hour instead of renting a pay-per-view movie or something like that, I can contribute the savings to an account for that goal.

Splurges Let’s say, hypothetically, that I wanted an iPad. I might want that in the short term, but still want to save for the bigger goal in the long term. What do I do?

I could simply split the snowflakes, putting half of the money into the big goal account and the other half into the iPad account. I could also just go for the short term goal now, putting all of it towards the iPad and moving back to the other goal once I have my gadget.

My preferred way, though, is to snowflake in certain ways for one goal and snowflake in other ways for other goals. So, for example, if I save money by choosing free entertainment instead of something with a price tag (like I might normally do), I’d save that money for an entertainment splurge (like an iPad). On the other hand, if I save money with smart food buying, that would go towards the house instead.

Of course, this is a hypothetical assumption that I want an iPad instead of, say, a good paperback.

To put it all simply, snowflaking is a great tactic for any financial goal. It creates a powerful connection between big goals and the little choices we make each day, often in a very tangible fashion.