Reader Mailbag #39

Each Monday, The Simple Dollar opens up the reader mailbags and answers ten to twenty simple questions offered up by the readers on personal finance topics and many other things. Got a question? Ask it in the comments. You might also enjoy the archive of earlier reader mailbags.

As usual, we’ll start things off with a few links to older articles that directly answer questions I’ve heard recently. A few people have asked for suggestions for books on how to live cheap. Here are four suggestions (besides my own book):
The Complete Tightwad Gazette
America’s Cheapest Family
The Ultimate Cheapskate’s Road Map to True Riches
The Frugal Duchess

And now for some great reader questions!

My wife is pregnant and our first kid is due in April. It really is a miracle but obvious money is always on the mind. Would it be better to:
1.) Buy life insurance in case something happens
2.) Start saving for their college
3.) Pay down our house payment to rid ourselves of the devil called PMI
4.) Pay down our very low (less than 2%) interest student loans that my wife and I have (25 g or so)

- Luke

Throw out #4 immediately. Compared to the other two, it’s a very poor choice. Stick with the minimum payments on that one.

I would look into term life insurance for both you and your spouse, just in case. Many insurance salesmen will try to sell you more than you need – you should strive to replace one’s salary for a few years, plus enough to cover burial expenses. Keep an eye out for any exclusions or loopholes that may apply to you or your wife. A term life insurance policy shouldn’t cost you too much, though.

I’d also start a 529 plan for the unborn child. Start it with one of you as beneficiary right now and set up a regular contribution plan, then when the child is born, change the beneficiary. You don’t need to contribute a ton to this one, either – $50 or $100 a month will give you a huge boost in nineteen years or so.

I’d probably focus most heavily on getting rid of the PMI. Get your mortgage down to 80%, then refinance that thing. It’ll be more financially beneficial for you over the long run than almost anything you could do.

I’m a gin and tonic fan myself. What is your favorite gin?
- Tyler

I am highly partial to Bombay Sapphire for the gin. I’ve tried several different kinds and I keep coming back to it.

More important for a great gin and tonic, though, is good tonic water. Skip the Schweppes or the Canada Dry or the store brand. Instead, look around for Fever-Tree tonic water. I swear by it, but I have a hard time finding it locally.

I am currently a college student. Throughout high school I worked really hard to earn scholarships and save money for college. During my third semester in college, I started CoOping (if you are not familiar with this, it is where a college student works for a company that does work related to the student’s major, and the college student earns money and gets work experience). Not only am I funding my entire education, thanks to scholarships and CoOp, but I also have a lot of money just sitting in the bank earning no interest (on the range of about an extra $5,000 – $10,000). I am 21, and I have thought the best choice would be to wait until I make a down payment on a future house until I start investing long-term or putting money in a 401k. So I have been trying to put money in short-term CDs. However, I hear that CDs don’t even keep up with inflation at times (such as now – I think). Is there anything I can do with this spare money for short-term investing with little risk other than CDs? Is this the proper approach – waiting to invest after I purchase my first home (which I plan to purchase maybe 2-3 years after college)?
- Tim

CDs are probably your best choice. Given your situation, I would go CD shopping, perhaps using the CD rate tool at Bankrate.com. Allow yourself to look at CDs that mature when you’ll actually need the money – if you know you won’t need the money for three years, then look at CDs up to 36 months, for example.

I’m almost sure you’ll find a CD much better than what you’re buying right now. They’re a pretty good choice if you’re seeking a simple investment choice that keeps your balance safe.

Do you keep tabs of your websites readers? How many did you have the day you began? How many at 6 months, 1 year, 2 years?
- Mol

Well, I started The Simple Dollar in November 2006. Let’s use Google Analytics to check my site usage.

During my first month, November 2006, The Simple Dollar had 6,287 visits and 17,080 page views.

During my sixth month, April 2007, The Simple Dollar had 288,301 visits and 586,509 page views.

During my twelfth month, October 2007, The Simple Dollar had 423,359 visits and 864,551 page views.

During my twenty-fourth month, October 2008, The Simple Dollar had 626,939 visits and 1,178,976 page views.

Other than astronomical growth during the second and third months of the site’s existence, the growth has actually been extremely steady on average (with a few months of fluctuation).

If you are frugal and smart, you have a credit union as your bank. However, my credit union does not have safety deposit boxes. Boxes seem like they are becoming a rarity in my area. The only bank that has them is the BofA in the next town, and that branch is closing. I’ve switched to a fire-proof “go” box, but are there better alternatives?
- Mikey

I highly disagree with your first sentence. Credit unions are good for some things, but not so good at others. For example, compare them to an online for-profit bank. Such banks can offer a higher interest rate than credit unions can because credit unions must pay for brick-and-mortar infrastructure. However, credit unions do have the advantage of manually underwriting any borrowing you might want to do, which means they’re a great place to go to get loans.

One option would be to open an “emergency fund” savings account at another local bank and use them for a safe deposit box. That’s probably the option I would use in your situation.

If money were no object, would you send your children to a private school?
- William

I would be open to it, but it would depend on the specific school.

I’d want to know about the school in detail. I’d want to tour it and perhaps take a look at the classes offered there. I’d ask around for referrals from people I trust in the community.

If it measured up, I certainly would send my child there. My primary motivation would be for my children to get the best education available to them, and if that meant a private school in my area and money didn’t matter, then a private school is what they’d have.

Where do you purchase your Certificates of Deposit (CDs)? Are the online banks reputable?
- Chris

I buy my CDs through my primary bank, ING Direct. It’s been incredibly easy – just a few clicks and it’s purchased.

I have more faith, actually, in an online bank than I do in a teller-based bank in my local community. With a teller-based bank, you have other members of the community who have access to your personal financial information – and that, frankly, makes me nervous. I’ve known bank employees who openly gossip about the account status of people who bank there. With the online banks, you’re largely just a number – rather private.

If an online bank is associated with a large financial institution and the accounts are FDIC insured, I actually feel more secure with an online bank.

Do you actually practice all of the stuff you write about?
- Gillian

I try almost everything I mention on The Simple Dollar. Obviously, sometimes I mention tactics that simply aren’t routinely applicable in my current life. For example, frugal dating tactics – I’m not a part of the singles scene, so I don’t have a good opportunity to try them out. My wife and I tend to spend almost every evening home with the kids.

Quite often, I’m innately curious and I want to see if things work. Can I really make homemade laundry detergent that works? Does baking soda and water really do a good job at cleaning grout? How much money do CFLs really save? I’m naturally curious and following these questions often lead directly to posts.

In what areas of your life are you NOT frugal?
- Shawn

Our big area of splurging is food. I confess, although I do use shopping lists for my groceries, I tend to choose food items almost entirely based on quality and not on price. We buy a lot of organics and a lot of farm-fresh poultry products. We buy meat directly from a butcher as well.

When we do buy items, we’ve moved from just buying lots of things to rarely buying things – but when we do buy things, we buy high quality items. Rather than buying tons of cheap items for wall decorations, we’re now slowly buying high-quality items (original art, for example) that click with both of us, for example. We plan for these purchases pretty carefully, but we’re willing to spend for quality items that will last us forever.

Do you participate in meetups with other bloggers? If so, which ones?
- Joely

I’m willing to participate in such meetups, but rural central Iowa isn’t a hotbed of blogging activity. There is apparently a regular blogger meetup in Des Moines, but I’ve never attended it – it would take me almost an hour each way to go there for a one hour meetup, so I usually find that I have something more high priority to do.

My wife and I have discussed going on a long trip this coming summer to a few large cities. If we do so, I’d be willing to have meetups with readers in any large cities we go to – meet somewhere, have a drink, and chat freely about whatever.

Got any questions? Ask them in the comments and I’ll use them in future mailbags.

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  1. Shelly says:

    Hi! My son is 2.5 and we set up a 529 for him when he was born. I just had my second child and I want to know if I have to set up a second 529 for her, or can they share the same one?
    Thanks!
    Shelly

  2. Rick says:

    Count me among the new readers in the site’s third month. I started reading in January 2007 and have been a regular since.

  3. Sara R says:

    Re: the first question, about student loans versus PMI versus other things: Just because student loan debt is at only 2% doesn’t mean it is not dangerous. Student loan debts are not bankruptable, which means if there is a sudden financial reversal there is no way to get rid of that debt.

  4. Blair says:

    That’s an interesting comment about purchasing food. I take a mixed approach, myself. Typically I find the store brands to be of poor quality, so I stick with the name brands. However, I grab the ones on sale, as there are few times that I care enough about one brand or the other.

  5. Alicia C. says:

    Great thoughts. I randomly found this site about 6 months ago. It has been an invauble resource for me and my husband.

    I do have a question though. I just found some tresury savings bonds that my parents bought for me awhile back. They are not mature, but they have past the pentalty point. I have some credit card debt at 10% and the bonds are only paying about 3.11% I think. Is it better to go ahead and cash in the bond and put it toward the credit card debt even though it wouldnt be for the full amount or wait until it matures?

  6. Elisabeth says:

    I would recommend that the college student start investing in a 401k at least as soon as he gets a job, which I would assume would happen before he gets a house.

  7. Kacie says:

    I disagree with your advice for the couple with the baby on the way.

    I agree that they should both buy term level life insurance policies (depending on their age, health, and needs it could cost less than $200 per year for each of them).

    However, while they have outstanding debt, I don’t think they should start a 529 plan just yet. It’s better for them to get rid of their PMI at the very least first, and then really whittling down their student loans.

    Perhaps they can start a college savings account to put financial gifts from family in it, but ultimately, I think the parents need to get themselves in a better financial situation before worrying about their child’s college.

  8. Matt says:

    For #1: Talk to different loan officers or mortgage consultants. If you have a good enough credit score, you may still qualify for a 90/10 mortgage without PMI. Depending on your home value compared to your mortgage, you may qualify. Even if you pay down to 80% by next year, house values may have destroyed your equity, and you might not even be ABLE to refinance by that time.
    With rates as low as they are today, try to get out of that PMI as soon as you possibly can. Even if you have to borrow money to refinance right this minute, it’s worth it. The amount you’ll save on the PMI payment and additional interest, you could easily pay back a family member/friend/etc on what you needed to borrow to get your PMI removed. Granted, I’m assuming you have a good credit score, but I’d put all efforts into getting rid of that.

  9. Ken Deboy says:

    Regarding PMI, depending on your lender you may not have to refinance in order to eliminate it. I bought my house with a small down payment and had to carry it for awhile, when I got my principle down to 80% of the purchase price all I had to do was send a letter to my lender requesting that I no longer be required to pay the PMI.

    Cheers,
    Ken

  10. The college kid should start a basic Roth IRA just so he can go ahead and have that money there. I think you can get into Vanguard for $3,000 min.

    The rest I’d put into a CD or ING Direct until he’s ready to buy a house. Congrats for being well put together at such a young age. He/she is starting out right!

  11. KC says:

    Concerning Luke’s question (#1)… I’d go with term level insurance for both of you – like Trent says it’ll be pretty cheap at your age (especially for your wife) and it is very important.

    My second option would be to focus on the PMI. Try to rid yourself of it. Focus on paying down that principle. Refinancing may even be an option. 30 yr fixed rates just came down to 5.5% on Friday. They were 6% on Monday – that’s a big drop. If you have a good credit score (over 730) you may even try to negotiate with a lender to see if they’ll refinance w/o any PMI. Call around and see who is willing to work with you.

    My third choice would be paying down the student loans (and any other debt you might have). The reason I’d focus on that before saving for college is that students can get loans for college, but you can’t get a loan for your future and retirement. You need to take care of yourself first – your children can take care of college. I know college costs are skyrocketing, but by choosing a good public school, working part-time and looking for good scholarships and grants most people can pay their way through college and come out with little to no debt.

    Besides, when you get your financial house in order you’ll be better able to assist your child in paying for their education.

  12. CreditShout says:

    As people have said above I agree that the college student should get started asap with a 401k, vanguard is fine. If he is really wants to have that money available for the short term, he could open up an account at Schwabb and do a CD.

  13. Battra92 says:

    Maybe it’s because I have no kids but I would personally skip the 529. I’m all for letting kids work their way through school. It’s how I got through.

    I’d tackle the mortgage first. The kid has plenty of time to earn money for college.

  14. Michael says:

    Some friends of mine sell reasonably priced, original art online at http://wallblank.com/. It’s better than buying prints.

  15. I must admit I splurge on food as well. I do a lot of shopping at Whole Foods Market and buy mostly organic. I think this is one area where it’s acceptable to spend a little more though… after all, we are what we eat. :)

  16. Sharon says:

    I think I would work on several goals at a time. First and foremost I would look at what Luke’s employer has for insurance, both for term life and DISABILITY.
    I would open a 529 but my major goal at first would be a place to put any monetary gifts for the child,so they don’t “dissapear” either in the parent’s checking account or against inflation in a savings account.
    Then I would attack the mortgage with a vengance. Once PMI is gone, you can put some money in that 529.

  17. Lola says:

    Hi, Trent. I think your blog already started big in November 2006. I mean, more than 6,000 hits for a first month is pretty good, no?
    I started my blog in January of this year. It’s a blog in Portuguese (about feminism and cinema mostly), so no way it will have the kind of international readership yours (and other blogs in English) has. When I finally installed a counter (it took a week), in February, I saw that I had 3,200 hits that month. This month, November, there were 22,200 hits, and 40,400 page views, so I’m happy, it’s been growing, the people who comment are great, and there’s been an average of 46 comments per post. But now for the big question: how can I make money out of my blog? Should I even be thinking about this now, or should I wait until it has a larger readership? And, of course, I don’t want to pollute my blog with ads. What can I do?
    http://www.escrevalolaescreva.blogspot.com

  18. Trent says:

    One of my articles during the first month was picked up on social bookmarking sites. Aside from that boost, my first month had very, very low traffic.

  19. Chetan says:

    Talking about CD’s check out the MoneyAisle website where you can propose how much you want to invest and several banks will compete for your business – all for free.

    This should help you maximize your returns on the CD or the High-Yield Savings account.

    I wrote a review on it at http://www.sense2cents.com/2008/12/01/max-out-your-savings-using-moneyaisle/

  20. Jake says:

    Hey Trent – my wife and I are not the most frugal people, but we are making strides…this year for Christmas gifts we want to give high quality unique homemade gifts, but are struggling to come up with things that would work with our families. We each have family members who are big tech geeks, but don’t really have the cash to spend on items they want. We have 7 relatives, male and female all over 22 years old that are on our list. Any suggestions?

  21. Good questions from your readers! Some things to note:

    - Whole Foods makes tonic water that is cane sugar based and doesn’t cost a ton compared to the fancy tonic waters on the market.

    - Great point on online banks and gossip!

    - We both share same philosophy on food. I buy high quality most of the time. And as I said in a recent post on my site, I get tons of pleasure from cooking and eating: http://www.scordo.com/blog/2008/12/getting-started-with-cooking-a.html

    - On 520 savings (and this is just a thought), I’m not a big fan. I’d encourage and poor money into my child’s education (helping them become better students and getting better grades along the way). Grooming a stellar student, in my view, is more important than “saving” via a 529. If you produce a stellar child student, then the child should receive more than enough student aid to cover costs of undergrad education.

    http://www.scordo.com.blog/blog – a practical living blog

  22. kristine says:

    What back-up is there if there is an overall problem with the internet? Or satellites? Will you have a record of your money, and be able to get at it easily?

    I’ve read that an EMP bomb set off in metro areas would shut down our online economy, and unlike a power outage, it would disable generators, and obliterate stored information. Increased solar spots can take out satellites too, which could cause probems.

    (An EMP bomb is an electro-magnetic pulse device that freezes electronics within a programmed range.)

    At least with paper, you can stand in a long line and prove what you have.

  23. Craig says:

    @kristine: Until all the businesses that you have paper certificates for have no way of verifying that what you/they printed are legitimate because the software and the digital signatures were all stored on a computer that was EMP’d.

  24. Clare says:

    Shelly: Yes, you need separate 529s for each child.

    I’d like to second Sharon’s advice on the 529 as very useful for depositing monetary gifts to the child. It’s also a great way to encourage grandparents and other relatives to give money for the child’s future education and discourage excessive amounts of toys, gadgets, clothes, etc. in the present. This is especially important if you have a large, gift-giving family with few grandkids.

    Re: private school. I know the question stipulated that money would be no object. Money is never not an object. We all pay for public schools. Some of them are excellent, many are very good, and most are adequate. We make public schools better by sending our children there. There are pretty bad schools out there, I know, but there are a number of overpriced and underperforming private schools, too. We don’t read as much about those.

  25. Hey Trent, I saw that you were mentioned in the USA Today today. That should bring you a few more new readers.

  26. Nate says:

    MAILBAG QUESTION:

    Trent, I’d like to see a comparison of homemade spaghetti sauce vs. store bought.

    “Review the readers digest penny pinchers almanac”

    “It’s just as good as pasta sauce from a jar and way cheaper.”

    I’ve looked around the internet and scanned my grocery store and all signs point to jar sauce being cheaper(though not nearly as tasty). I was wondering if you had stats to back up your claim.

    -Nate

  27. Robert says:

    I’ve seen these offers from credit-issuing companies for a kind of insurance that supposedly pays off certain kinds of debt when the person covered becomes disabled. I’ve also read that buying this insurance from say, a credit-card company is overly expensive and is generally a bad move.
    What’s the low-down on this kind of policy? Is there legit insurance of this type and what’s the best way to go about purchasing it?

    Thanks

  28. Mel says:

    We refinanced in April and got rid of PMI with an 80/20 loan. I know the market for refis is different now but if anyone has PMI and can afford to refi, they should ask their bank about it. My bank offered us a special rate on our second loan because we live in a “median income” area (it wasn’t based on our income at all) so we have 5.625% on our first and only 5% on our second. We have to pay off the second in 20 years so the payments are more than they would be for a 30 year but the interest is so low that we’ll save about $60K in total. We rolled some of our closing costs into the mortgage and still we’re caught up after only 6 months. Now, the difference in our payments ($250) is essentially profit that we don’t have to pay to our mortgage company or the insurance company. We can save that money and either pay down our mortgage at some point in the future or put the money towards our down payment on our next house.

  29. My loan was through the FHA, and even though I paid down 20% by 4.5 years, they required that I keep PMI for 5 years. I had no idea about that, and was expecting to just be able to drop it once I reached 20% equity.

  30. Anne says:

    MAILBAG QUESTION:
    You caught a lot of flak (and generated a very interesting conversation!) a while back for going to a bookstore and reading a passage from a book you were interested into a recorder instead of purchasing the whole book. Has publishing your new book changed your perspective on that action? And congrats on the book!

  31. Kathy says:

    It is tough trying to prioritize your financial issues, especially with a child on the way. I agree with some of the replies and would put off funding a 529 until you have reduced your mortgage to the point that you can dump the PMI. If you would like some help with how you can quickly pay down your mortgage, check out the following website. http://www.u1stfinancial.net/aces

  32. Sharon says:

    The term life insurance vs whole life isn’t necessarily as simple as you might think. Unless you have a convertable policy that lets you convert to whole life, and unless it is renewable without proof of health, you can be out of luck in the entire life insurance arena with a bad diagnosis, particularly if it is a long, slow illness ending in death. Also, your premiums will go up as you get older, and all the money you “save” young may be more than made up when you are older.

  33. Rebecca says:

    I need some advice!

    I graduated with my degree in Psychology, and I work two jobs. My first is at an investment firm, and I hate it. My second is at a foster care facility, and I like that one. I had an epiphany about six months ago that I would like to try nursing. I’ll need to go back to school, but I’m not sure what route I should take. Here are my options:

    BSN (Second Degree Program): about $10k without financial aid, 1.5 years to complete. Pros: I won’t have to go back for a bachelor’s degree if I want a promotion, quicker to complete than the associate’s degree. Cons: expensive and I can’t work while I’m in school full time, so I’d need to save up money for my living expenses as well.

    ADN: about $4k without financial aid, 2.5 years to complete. Pros: cheap! Cons: would have to go back for a bachelor’s if I wanted a promotion later or a pay raise, will take considerably longer than the BSN.

    I should note that I’m unwilling to enter into more student loans, so I’ll be paying for this all out of pocket. The more expensive the program is, the longer I have to save up for it. I’ve read some of your past advice, and it seems as if you’ve advocated for taking immediate steps on new plans to keep you motivated. I’m dying to get out of my current job, and I’m not sure I can wait three or four years to do so! Help!

  34. steve says:

    @ “is homemade tomato sauce cheaper”

    I tend to think so since I use tomatoes in a can I bought on sale.

    But even if it weren’t, my homemade sauce is SO much better than store bought, and so easy, that I wouldn’t bother buying tomato sauce when I can just have the canned tomatoes on hand, which are much more flexible for all kinds of different cooking purposes as well

  35. ken says:

    Actually buying good quality food not being frugal is a common misconception.

    I dated a financial adviser for a couple of years and she would mention how expensive health care is when in your older years. Eating good quality food will improve and maintain your health for the long haul. The money you spend now on quality food will be returned many times over in medical savings and quality of life.

  36. Mark B. says:

    Trent,

    Do you have any advice for someone living and working in Detroit right now, with certain economic disaster if the government does not act to bail out the Big 3?

    If the Big 3 are allowed to fail, there is a good chance that several of my family members (and possibly my wife and I) would be without jobs. There would be little chance of finding new employment in this area, and the prospects of selling our houses and moving out of the area would be very grim.

    We live frugally and have some savings, but we are young and bought our house at the peak of the market in 2004, so we are taking a beating and have lost all of our equity. We have about $15,000 in savings, but if we sold our house right now we would have to pay the mortgage company about $50,000.

    Should we be prepared to walk away from our houses and look for work in other cities? Things are VERY bad here, people outside of Michigan do not understand the devestation that has already taken place, and how much worse it will be if the Big 3 go down. It saddens me to see the complete disregard the rest of the nation has for one of it’s own states.

  37. Mark Fitz says:

    I can’t believe nobody else has weighed in on the important gin question!

    I used to be a Sapphire man myself, but if you can find it locally (if not – ask your favorite liquor store owner), you really must try Hendrick’s (warning, music auto-plays on that site).

    We’ll trade tips, and I’ll search for that tonic you recommended. Never thought about the impact that might have..

  38. Jihan says:

    QUESTION: Have you bought a house while being a student in college? Do you think it’s a good idea to be a college student and already planning to buy a house?

    Sorry if it seems like an odd question, but living in Brooklyn, NYC it’s quite difficult to rent for very cheap and condos are pretty expensive. A house, for a good one in the neighborhood I enjoy living in, is about $700,000 on average. And being that I decided to have 5 kids (yes, no rude comments please :] ) I would need a big place with 3 bedrooms.

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