Reader Mailbag #58

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 readers have asked for books to read on debt recovery. Here are my three picks (links go to my reviews):
The Total Money Makeover by Dave Ramsey
Pay It Down by Jean Chatzky
You’re Broke Because You Want to Be by Larry Winget

And now, some great reader questions!

I haven’t quite figured out why some experts recommend a 6 month EF (emergency fund), but a 9 month EF if you have kids. Why do you need the extra three months, just because you have dependents? Since you have kids your expenses would presumably be higher. Your EF would automatically account for that because it’s being guided by month’s worth of expenses and not a dollar amount.
- Seth

First of all, statements like “build up a six month emergency fund, but make it nine months if you have a kid” are useful rules of thumb for goal setting, but they’re never the absolute perfect solution for everyone’s situation. Some people are simply more prone to emergencies in their life than others. Things that make you more prone to needing an emergency fund include poor health, an unstable job, driving an old car, and so on.

It’s commonly held that children are another factor that increases your likelihood for emergencies, and I’d have to agree with that. Here’s my feeling: the more dependents you have, the more likely you are to have huge emergencies in tandem, and thus the larger your emergency fund should be.

If you’re the sole person you’re keeping an emergency fund for, you’re the only person who can suffer an emergency. On the other hand, if you have a spouse and two kids, you have four people who can have an emergency. You lose your job, then your kid gets hit by a car. Double whammy, one that can’t happen without kids.

That’s why it’s useful to have a longer-term emergency fund if you have kids. Six month versus nine month? Numbers that specific are somewhat a matter of opinion.

My question is regarding the size of home I should buy. My wife and I are newly married and do not plan to have children for probably 2 years. Should we buy a home that’s just big enough for what we need now and move up later, or should we take advantage of the especially low prices to get a house that is big enough to meet our future needs (without breaking the bank)?
- jonathan

As a rule of thumb, you’re better off just buying the house you need right now. Excess space is expensive, not only on the upfront sticker price, but also in terms of maintenance and a tendency to fill that space with stuff (which also has a cost).

However, you have at least three big factors pointing you to buy a little bigger right now. First, interest rates are incredibly low at the moment. You’ll likely not get a loan this low in two years once the economy has begun to recover. Second, the housing market is still reeling. Prices aren’t falling sharply like they were a year or so ago, but they’re certainly not rising at the moment. When the economy recovers, it’s hard to say what will happen to that number, but the prices are certainly better right now than they were two years ago. Also, you know that children are coming and you’re planning on settling in the area, which means you know you will actually need more space.

Given those factors, I would encourage you to go against the rule of thumb and buy that larger house. Don’t get anything unnecessarily large, but pick a home that’s appropriate for you and your family post-birth.

I’m currently looking to leave the nest of home. I have a good, stable job in a stable industry. What’s some things to have in advance. I am personally hoping to have a 6-9 Month emergency fund pre-established before I leave but how about other tips? Thanks!
- Battra92

First of all, you have incredibly supportive parents if they’re allowing you to continue to live at home while you have a good, stable job. Most parents would have shooed you out the door long before now.

That being said, you’re going to have a very hard time judging your real expenses until you’re out there on your own, and thus a “6-9 month emergency fund” is a hard number to judge (unless you’re trying to match salary).

With such supportive parents, I would move out sooner rather than later. If something goes wrong, they will apparently be there to support you. Moving out now gets you on your own two feet much sooner.

I recently got into a surprising argument with a friend who insisted that my partner and I should be buying a house as we are both securely employed and are making decent incomes. She argued that we would actually be saving more by taking out a home loan. My partner and I both live in a very inexpensive rented apartment in a very nice part of our city and have not wanted to take on the responsibility of a home especially because we both are somewhat nomadic. Owning a house is not something that either my partner or I aspire to in the near future but do you think we are missing an opportunity here?
- pv

That person’s idea is based on the sense that a mortgage payment builds equity. In part, that’s true, but most of a mortgage payment goes away in interest, particularly early on. There’s also some advantage to buying a home right now because the housing market is down and interest rates are very low (as I mentioned above).

That being said, if you’re not interested in being a homeowner, don’t be a homeowner. There are many other places you can put your money to build value – stocks, direct real estate investments, bonds, CDs.

The key is that you’re actually doing it. Many people who are in a situation where they don’t need to make payments don’t use that extra money effectively. If you use it effectively, you can build a lifetime of wealth and security.

I have seen a number of times the “rule” that people should pay themselves (savings) first, before their creditors and before their regular expenses, but this is something that I don’t understand. Partly because I thought it was obvious that if you have savings, you use them to pay debt where you have got it because it seems counterproductive to keep savings but also keep debt as well. If you used your savings, your debt would be gone quicker – the same goes, as far as I can tell, for putting money in savings on a monthly basis. Or does it depend on what you’re saving for and your income level (barely make the bills or got a little to trim down) and other things?
- princes_peas

The reason for having money in savings when you’re also paying down debt is to prevent emergencies from undoing all of your progress. From a psychological standpoint, that’s an incredibly powerful element.

Think of each of the two scenarios for a moment. For several months, you throw all your extra money into paying off debt, then an emergency hits and your balance goes right back to where you started with a life that’s seemingly reliant on debt. Or, you make minimum payments and put your extra money into an emergency fund without racking up any new credit, then when the emergency hits, you can actually deal with it without the credit.

In one scenario, you’re relying on high-interest debt to live your life. In the other one, you’re standing on your own two feet and merely paying off the mistakes of the past. There is a lot of psychological value in standing on your own.

My husband and I have been pondering the prices at Sam’s Club to determine what’s worth it. I read your earlier posts, and see that you buy diapers and a few other things. What have you found there to be less expensive than locations that do not require a membership. Could you estimate the price difference?
- Rebecca Hammer

For the most part, if you’re willing to buy a large quantity of a particular item, Sam’s Club will beat your local grocery stores in price. Although it’s not the case on every item, it’s a strong enough rule of thumb that we’re almost always willing to default to Sam’s on price.

The catch here is quantity. In a home with just two people, if you buy much at Sam’s Club, you’re going to be putting a lot of the extras into storage. Do you have a big freezer and an adequate amount of dry storage space? If you don’t, you’ll either end up restricting your purchases enough that the membership won’t be worth it, or you’ll end up wasting portions of your purchase.

One effective way of dealing with this problem is to buy bulk items with friends and then split them into reasonable portions. For example, you might go there and buy an eight pack of spaghetti sauce at a price per jar that’s much cheaper than the store, but you simply don’t have room for all the sauce, so you actually split the cost of the eight pack with a friend and each of you take four jars. You might even want to consider splitting the membership with a good friend.

How do I go about finding a local credit union?
- princes_peas

The easiest way to find a credit union in your area is to use the Credit Union Locator at the Credit Union National Association website.

Having said that, you should also hit your social network for advice. Ask people you know that live in the area if they use a credit union or have any good/bad anecdotes to share. I tend to trust what my friends have to say on topics like this, because the experiences of a “random” customer often reflects how you will be treated if you use the service.

I have an artist that I stumbled upon and I would like to own one of his paintings (even if only a print). What is your opinion on purchasing artwork? (Especially if they are over 200 dollars)
- Chris

First of all, never buy art as an investment. Investment-grade art is expensive and incredibly prone to huge market fluctuations that are hard to predict. If you buy art, buy it for your own enjoyment.

As for whether or not an expensive print or original art is an appropriate purchase, it depends on what you’re looking for. I tend to believe that it’s worth investing in one quality item that truly expresses what you want than it is to buy five low-quality items that merely fill a room. Your decorations should reflect who you are and a great piece of art can last a lifetime and be handed down as well.

Having said that, you need to be sure that a piece of art that you’re going to invest a lot of money in is something you’re going to want around for the long haul. Don’t buy it rashly – this is definitely a “six month rule” kind of purchase – wait at least six months and make sure you’re still passionate about it. See if that item really sticks in your mind. Put images of the item up in your home and see if they fit. Save appropriately so that you’re not putting such a person on credit.

If you go through that and come out on the other side still wanting the art, go for it – it can be a wonderful long-term addition to your home decor that brings significant personal value into your life.

My boyfriend’s father has been telling me recently how “dumb” it is to be putting away money for retirement at my age (24). He thinks I should be putting more money away in my savings, buying a house with a 15 or 7 year mortgage, then start saving for retirement around age 40 when my house is paid off. Now, I know this is taking a lot of things for granted: that when I’m 40 I’ll have a job with a decent retirement plan, that I won’t have kids in college, etc., and it’s not really a risk I’m willing to take. But I’m considering maybe a slight decrease in the percentage I am putting away. Right now I contribute 8% of my income to a 403(b). Once I have been with my current employer for one year (September 2009), they will begin contributing 11% of my annual salary. With the market the way it is, I know I am buying low and should continue to contribute, but is it worth maybe reducing my contribution to, say 6% and putting that money right into my savings? I have considered that my 403(b) contributions are pre-tax, so it’s not exactly an even trade. Sorry for the long-winded question! Thanks!
- Marcy

Not only is it dangerous to take for granted what you’ll be doing when you’re forty, it also ignores the concept of compound interest.

Let’s say you can put money away for retirement and it will always return 8% a year (we’re not going to worry about the vagaries of the stock market here). If you put in $5,000 a year (the Roth IRA maximum contribution right now) from age 24 to age 30 – just seven years – you’ll have $659,633 at age 65. On the other hand, if you wait until you’re 40 and put in $5,000 a year, you’ll have to put in $5,000 a year EVERY YEAR from age 40 to age 65 – and you’ll still only have $399,722 at age 65.

Assuming that 8% return, every $1,000 you put in right now at age 24 is worth $3,430 at age 40. Waiting until you’re 40 only means that retirement savings will be much harder than they ever would be if you started now.

Do you still do computer work on the side? How is that going?
- Nate

I still do computer work for people who ask me directly, but I am no longer seeking new customers. To put it simply, I have far, far too many things going on in other avenues of earning to keep up with computer work.

I didn’t particularly get tired of it. What happened is that my life filled up with commitments and income opportunities and I had to make some difficult choices. That meant, simply, that computer consulting, for now, has gone the way of the dodo.

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

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  1. Michael says:

    http://wallblank.com is a good place to buy inexpensive limited-run art from real artists. A friend of mine’s involved in it and I like some of the artists they work with.

  2. Kim @ money for disney says:

    We looked at the advice of pay down debt first, then emergency fund, then retirement and decided it was wrong for us. We had our own financial meltdown five years ago. We started with debt repayment (it was a necessity to put it first) with every bit of money we could squeeze from our budget. As soon as my husband got an annual pay raise, we put every bit of that raise into 401K. We slowly started to save an emergency fund once our debt payment hit a stable monthly level, Every time my husband got a small raise, we funneled the money directly into 401K. We are currently up to 14% of his pay. We’ll do the same with each additional pay incease. We have learned to live comfortably off our current finances and see no need to raise our standard of living. We’ve paid of 35K in credit card debt and are down to just a car payment and student loan. We are now shifting the money we used for the credit cards into dramatically increasing our emergency fund, which is quite small. We’re trying to transition form a Dave Ramsey e-fund to a Suze Orman level.
    We’ve learned to delay gratification and save for the things we want. We try to be creative and generate extra income to pay for vacations etc. so as not to derail our savings efforts by using money from the family budget. It takes longer this way, but not incuring new debt is entirely worth it.

  3. Johanna says:

    @Marcy: I think the big question to ask in your situation is, what are you saving for? If you want to build up your emergency fund, or if you’re saving up to buy a house (or a car or some other specific large purchase), then I say go for it. With you contributing 8% of your salary and your employer about to contribute 11%, that’s considerably more that you absolutely need to be saving, so you could probably scale back your contribution to 6% and still be fine. But you should only do it if you have a goal in mind for the 2% (minus taxes) – don’t just put money into (non-retirement) savings for the sake of putting money into savings.

    And ignore your boyfriend’s father. It’s never dumb to put money away for retirement at any age. (Well, never say never – it might be dumb if you have a terminal illness and know for a fact that you won’t live to see 59 1/2 – but that’s the only exception I can think of.)

  4. Bob says:

    Hi Trent,

    I want to start a Roth for my wife and I through Vanguard but the minimum fund amount is $3000 each so it would be quite a substantial amount of money to buy even two funds for each of us. Do you have any suggestions how to start one through vanguard without so much start up money?

    Thanks

  5. Johanna says:

    Typo alert:

    “considerably more that…” ==> “considerably more THAN”

  6. tightwadfan says:

    Battra92 – my parents allowed me to live at home too – in our culture (Latino) it’s very common. As you know, you’ll never have a better opportunity to save money. In addition to saving the 6-9 month emergency fund, take this chance to pay off any consumer debts if you have them (car loan, student loans if not too big, definitely credit cards). Starting on your own debt-free is one of the greatest advantages you could have. In my case, I left home when I bought my condo so I had saved up a down payment, closing costs, and money for furniture, decor, etc.

    If your situation is like mine was, it is a win-win for both parties – so I would disagree with Trent that you should move out asap, unless of course your parents want you out. As a parent I would prefer my child to leave home well prepared than to call me later asking for a bailout. My parents like having us at home (the youngest siblings are still there) and we reciprocate by running errands, helping around the house, buying groceries, and looking out for them in general as they’re getting older. It all depends on your situation. I’m assuming here that you’re not a mooch or drain on your parents.

  7. J says:

    @jonathan — I concur that you should go for the house that will meet your future needs (if you can afford it), since kids are in the near-term future, with a couple extra points added:

    - Currently a lot of real estate is sitting on the market. This means good news for buyers, but also if you are looking to sell in perhaps two years you could very easily be on the other side of the equation, waiting for your house to sell. If you buy in now with a house that will support your family size, you can live there longer and not need to move. Moving with small children (or a heavily pregnant wife) in the house is a real pain in the rear and I’d advise against it — new babies bring enough new stress, you don’t need to compound that with trying to sell and buy a new house.

    - There are a number of other costs besides the down payment you need to worry about — inspections, closing costs, appraisals, etc. These can add up to a few thousand dollars. If you are going to only live somewhere for two years and then sell, you’ll not only have to deal with these fees, but also the realtor’s fee as well. There are, of course, ways to reduce these fees (FSBO, discount broker, etc), but they may or may not be worthwhile for you to do.

    - If you add to your down payment for the next two years, you can significantly reduce your eventual mortgage. Or, if you aren’t debt-free, you can go after that with a vengeance.

    You might also want to seriously discuss how things should look post-baby with your wife. Will she continue to work? Will she stay home? Will you stay home? These questions have significant impact on your monthly budget, and when you have something like a house, you can’t sell it overnight to get rid of it if life plans change.

  8. tightwadfan says:

    pv- don’t buy a house. There is a misconception that renting is throwing away your money, but there’s extra costs to buying a house that people don’t realize like closing costs, taxes, interest, and the costs of repairs/maintenance. Since you and your partner don’t want to be homeowners you’ll be better off investing your savings.

    marcy- waiting until your 40s to save for retirement may be some of the worst advice I’ve ever heard and I’m glad you’re not listening. As to whether to decrease your contributions slightly – if you don’t have at least a $1000 emergency fund, and if you have a car loan, credit card balance, or student loans, you should decrease your contributions and put the extra money towards paying off the debt. If you’re debt free, good. You might then consider building your emergency fund to 6 months if it isn’t there. If you have all this stuff in place right now, I would stick with your current savings plan.

  9. Colin says:

    I am in my late 20s, college grad (engineering: go cyclones!), married, no kids, no short-term plans for kids, no house, *no* debt, fully paid off 2006 Accord, 25-30k in cash in the bank, and both of us are gainfully employed. I foresee no major expenses. The twist: I am hoping to go to med school in the fall 2010.

    I could easily blow that cash on tuition but I’m confident I could get loans to cover the whole thing. If I don’t get into med school then I would consider starting some kind of business (I’ve got a stack of ideas) and go that route (but I prefer to think I’ll get in).

    My current philosophy on saving for retirement is that I’m not done living yet. I would much rather spend that money on starting a business, buying a house, or something that I can do *now* that is constructive. Compound interest is neat and all but I’d rather start a business now (when I can wholly afford it to fail) than not and dump it into retirement.

    Anyway with all that said, what would you do with the cash and you were in my shoes? It would seem that something like a short-term CD would be most prudent since I’d rather use it than “gamble” it on the stock market.

  10. Andy says:

    @ Bob:

    Consider first investing in the STAR fund with Vanguard. It is a well divirsified fund of funds (60% stock, 40% bonds) with a minimum opening contribution of $1000 (the only one that starts lower than $3k I believe). Once you start to build on that, you can then move in to some other investments with Vanguard.

  11. Andy says:

    @ Bob:

    Consider first investing in the STAR fund with Vanguard. It is a well diversified fund-of-funds (60% stock, 40% bonds) with a minimum opening contribution of $1000 (the only one that starts lower than $3k I believe). Once you start to build on that, you can then move in to some other investments with Vanguard.

  12. teaspoon says:

    @ Bob–

    Actually, you can open a Vanguard Roth IRA with just $1000 by investing in their STAR fund. It’s not a bad fund, although it’s probably not their best, and it’s a good place to start. That’s what my husband and I have done. The money we’ve got in the STAR fund is just about to hit $3000, and then we’ll probably move it into an index fund. But since we’ve had it, that fund has, on average, out-performed the market.

  13. J says:

    @Colin — I’d save up for med school tuition and pay for it in cash. We are on the other side of paying for grad school with some loans (some we paid cash for), and it’s not pretty. Also, keep in mind that you’ll need to pay for living expenses as well as tuition, and if you are in your late 20′s, I’m guessing the kids are in the plans for the next 5 years or so. They will come sooner than you think, and cost more than you anticipate.

    I know doctors can make good money, but starting out with 100K of debt is likely not a good place to be, even with a decent income.

  14. KC says:

    Jonathan – Certainly buy a larger home if you can afford it. Including insurance, taxes, utilities, maintenance and mortgage keep it under 40% of your income (post-tax). Recently my husband and I bought a much larger home and we haven’t regretted it one bit. We’ve always said we’ll have kids, but haven’t yet. Even if I don’t have kids I’m glad I’m in the home I’m in. It is much better than the 2 bedroom we had. It was nice having the extra money when living in the smaller home, but frankly I like the space. It is just a matter or priority – I pay more for a nice house, but make concessions in other areas like keeping my car a year or two longer, eating out less, buying fewer new clothes, etc. Its just a matter of where you want to spend your money.

  15. Colin says:

    @J: In that case would you write a check to the university or still get loans, keep the cash as “emergency funds” in savings/CD, then pay it off after graduating? And 100k for 4 years is optimistic. :)

  16. KC says:

    Colin – Short term CDs are probably a good option, so you can keep the money liquid. Med school tuition can get costly, quickly. But loans are easy (once you sign your name with MD on the end, ANYONE will give you money) and the money you can make “moonlighting” as a resident is fabulous $75-$100/hour (pre-tax), but the hours are long.

    I’ve known people who have come out of med school with several hundred thousand dollars in school debt (private undergrad, out-of-state med school). He’s still working off that debt in his late 30s. I know another guy that had about $75k in debt – worked his a– off as a resident moonlighting, almost wrecked his marriage he worked so much, but paid off that debt before he finished his residency. Fortunately his marriage was saved, but he lost a lot of quality time with his wife and daughter. The third option is the one my husband took – in-state undergrad and in-state med school. He paid it off with inherited money, but it was still incredibly affordable even w/o the inheritance. He didn’t have to “moonlight” which meant he actually got to sleep some and his marriage and sanity stayed in tact. We’ve pretty much been able to stay debt free with most everything we’ve purchased (except the mortgage). I don’t regret our path one bit – it wasn’t glamorous, but it was pretty stress-free financially.

    So my advice is choose an affordable school. Get your low interest loans and grants as much as possible. But keep your debt load low. Medical school and residency are very, very demanding – on you and your wife – don’t let debt and finances add to the stress.

  17. Jenzer says:

    @Chris – This winter I finally purchased two prints from an artist that I first discovered ‘way back in the fall of 2002. I figured that, if I was still thinking about those prints six and a half years later, they’d be a good buy. I’m very happy with my purchase — no regrets.

    That said, I don’t *recommend* waiting almost seven years to make a decision like this. Six months sounds like an adequate time frame.

  18. Jenzer says:

    @Trent – Reader mailbag question for you. Have you considered reviewing children’s storybooks that deal with money management themes? We already own two (-The Peanut Butter and Jelly Game- and -Stock Market Pie: Grandma Helps Emily Make a Million-), and I’m familiar with a few other titles, like -Alexander, Who Used to be Rich Last Sunday-.

    I know Dave Ramsey has a handful of books aimed at kids, but I haven’t read them yet, and I’d be interested to hear someone else’s opinion of them.

  19. J says:

    @Colin –

    I personally would like to do it with cash, but I can see the appeal of the keeping the cash aside for “emergency funds”. Maybe the better way to explain would be to know:

    - what tuition is going to cost
    - what living expenses are going to be
    - what income is going to be on the other side of med school
    - what the interest rate on loans is going to cost you
    - how long school is going to take you
    - what options are going to be open for you to make money while you are in school (if any)
    - how your wife feels about the plan, and if she’s OK with it — especially since she may want to have kid(s) sometime, and there is a biological angle to that.
    - plans for what you are going to do after you complete school — will you need to move to pursue whatever you do, for example?
    - if your wife is working, how much can/will she contribute to the effort?
    - are there other savings priories that need to be considered (car, house, etc)
    - Are there other ways to get med school done more cheaply? Could you take a second job now and pile up cash? Move somewhere to get in-state tuition rates? Start with being a physican’s assistant or nurse, then use tuition reimbursement to pay for the rest?

    Given that kind of information, you can lay out a plan for how it’s going to be AFTER you graduate, as you have all the inputs you need to figure it out to some degree of certainty. You may need to make a trade-off between loans and cash to make it before other priorities come into play, but know how much of your budget will be tied up on debt repayment before signing the loan agreement. It’s very, very easy to get well above your eyeballs in debt with student loans — and they definitely suck up the ability to do things like invest for retirement later.

  20. SP says:

    Thanks for encouraging people to think outside the box when it comes to renting vs buying. I’m soooo tired of being told renting is wasting my money.

    Let me just say this — I’d likely refuse to buy a one bedroom condo (because of theoretical future kids), but I’m totally happy renting a small space. That fact alone can make renting a much more financially attractive option. Yes, you “get less” in terms of space and possiblibly quality of the home, but that also means you pay for much less.

  21. “I have seen a number of times the “rule” that people should pay themselves (savings) first, before their creditors and before their regular expenses, but this is something that I don’t understand…”

    Trent,

    I suggest a different response. By paying yourself first, you are well placed to ‘live beneath your means.’ Once the savings are set aside, you can assume you earn less.

    When you meet all your obligations with those ‘reduced’ earnings, you accomplish two major goals: Living within your means and saving for the future.

  22. Lisa says:

    Re: Sam’s club or similar – Remember that not all deals are on bulk purchases. Pricing on electronics can make up the difference in the membership fee. That’s why I joined a wholesale club after looking at competing prices on a particular TV.

  23. Skip says:

    Regarding Sam’s Club… after 5 years with three little kids (the youngest of whom is just now moving on to whole milk), I have to say that my wife and I have found it incredibly worthwhile for purchasing baby formula. While still exorbitantly priced, we find that you can get roughly twice as much at Sam’s Club for the price you would pay in the grocery store. I have no doubt that what we saved in baby formula alone over the past few years has more than paid for the membership.

    It used to be that way as well for other baby items (diapers, wipes, etc…), but it seems as though in our area they have bumped up pricing in the last couple years such that these items are priced about the same as in grocery stores (where we earn “points” towards cheaper gasoline purchases).

    I’m sure we have saved by buying bulk for other items as well (even as far as making fewer trips to the store overall), but nothing stands out nearly as much as infant formula. Note that we have avoided purchasing the “generic” formula brands, which is a conscious decision; I can’t compare on that basis. This comparison pertains to the major name brands of regular formula (i.e. not special dietary needs like soy or the like).

  24. Goal Hunter says:

    Trent: Another take on paying yourself first.

    Mark’s comment is 100% right, but add to it the psychological benefit of taking control. You are not only working to pay your creditors, but you are first and foremost earning money for yourself. The creditors can wait a little longer for you have plans and are not enslaved by them.

    The rule is usually pay yourself 10% first and that’s because most people, as Mark points out, can easily live on 90% of what they are used to living on.

  25. Kelley Vanda says:

    …okay, I wanted to ask a question but quickly realized that I was basically just describing my entire financial situation. I think my real issue is that I need someone that I can have a discussion with, and I know that you are very busy, so I was hoping you could point me in the right direction? Maybe a discussion board, or somewhere I could meet someone who could help me lay out a plan. I know there are financial professionals out there, but I really don’t think I can afford/need anything like that right now.

  26. Tea says:

    Why are people suggesting Colin pay in cash? Student loans are frequently interest free until graduation, so it makes more sense to keep the money in CDs until graduation, and then pay off the student loans.

  27. Alan Schram says:

    Warehouse Club memberships can definitely be worth the savings. My fiance and I got one (at Costco) just about six months ago for $55. That same day we found the Christmas present we were going to get for her mother in the book section – for $30 cheaper than we were about to pay for it.

    So while bulk food discounts can be good (we always get our cheese, eggs, cereal there), there can be huge savings in the other sections of the store (like Lisa #19 said).

  28. viola says:

    For Jonathan…don’t be shortsighted on buying a home. Buy a home that you could live in for quite a while if need be. Don’t assume that in 2 or 3 years when you want to move that interest rates will be as low or that larger homes will be as affordable as they are now. If you don’t want to pay for space you don’t need, avoid homes with formal living and dining areas or other spaces if you won’t use them.

    Also think about the home size that is very re-saleable in your area. If most people have 3 bedrooms and you buy a 2 bedroom, you may have a hard time selling when you want. 3 bedrooms minimum is good for a small family. Young children can share a room if necessary, so 4 bedrooms isn’t required right away if you’re planning on have 2 or more children.

  29. J says:

    @Tea –

    It depends on if the student loan is subsidized versus unsubsidized. Subsidized loans are loans by the federal government to eligible individuals based on financial need. The interest is not accrued during deferment. Unsubsidized loans accrue interest even if the loan is deferred. You can also get private student loans, outside of the government loans, from a lender like Citibank.

    With medical school costing quite a lot of money, even a “low interest rate” student loan can acquire a substantial amount of interest while on deferral.

  30. ub says:

    Trent – just out of curiosity, why are you allowing the Google ad scam to advertise on your site? I know from other posts that you tend to screen these ads rather heavily. It’s probably being served by one of your ad providers and not directly by you, but you might not want to be sending the message that that is something you endorse.

  31. ub says:

    @ub

    By the way, the scam I’m referring to is the picture of a check and the link titled “How I Make $1700 A Week Posting on Google” and links to http://www.kevinlifeblog.com/index.php?sub=vccpa

    and there’s a breakdown of the scam here:

    http://electronplumber.com/facebook-google-money-tree-google-cash-and-google-kits-part-time-work-scams/

  32. rpw says:

    sp – #17 and tightwadfan – #6

    Real Estate is a LONG term investment. Purchased my home in 1984 for $168K – today worth $1.9 million AFTER allowing for drop in housing market. Renting only makes sense when you know you will be moving in 2 years or less. Yes there are costs beyond a mortgage but many are tax deductable for the owner. Renters pay those same costs as part of their rent but do not see the tax advantages.

  33. Colin says:

    As a follow to my post in #7. I guess I didn’t explicitly say but that was also a question for Trent’s mailbag.

    An additional question. What about a 529 plan for myself?

    Otherwise thanks to those who’ve responded thus far. :)

  34. Gibson says:

    If you buy meat of ANY kind, a Sam’s Club membership could pay itself off in as little as two months, the prices are so much better. Generally high quality too.

  35. Ryan says:

    This won’t work for everyone but I am a 20-something that lives close to home. I just use my mom’s Sam’s card whenever i need to go there. Therefore I don’t pay for it. Not to mention, it is free to her because it is a necessary business expense.

  36. Sharon says:

    @Colin..
    When considering how to pay for med school factor in what will happen if you finish or don’t finish when you think you should. Stuff happens. You might not end up with the magic initials after your name and which would be worse, not having the cash on hand or being responsible for that debt?

  37. Reflection says:

    In regards to Seth’s question about Emergency Funds, while I don’t disagree with your answer I think it is still confusing for someone who doesn’t “get it.”

    Instead of thinking of the Emergency Fund as a number of months you should use the number of months as a guideline to make your fund and then just think of the fund as that amount of dollars.

    I think the hang up people have with this concept is that they hear “6 months” and think the only emergency might be losing your job and you’d need the 6 months to find a new job. Therefore, when you have kids your fund would be larger but only because of the extra expenses.

    The extra months, as Trent said, are for extra emergencies that happen with extra people. So instead of thinking of the Fund in terms of how many months you might need to survive without a job think about the amount of money you might need if your child got sick while you were out of work and your car broke down… all at the same time.

    More people = more money (rather than more months)

  38. Diane says:

    @Jonathan – Considering purchasing a larger house for planned children -

    One point I would consider if planning to buy a house to raise a family in is the location of the property in a good school district (unless you plan to pay for private schools).

    It won’t pay to buy a house now that you’d be happy to raise a family in, only to find later that you’re living in a bad school district where public schools are unacceptable and you’ll have to either move later or pay for private schools.

    This is something that does not occur to most young couples looking for a home if they don’t have children or friends with school age children.

    All school districts are NOT created equal, and home values in an area are impacted by the quality of public education. Being a couple of streets out of the best district will be cheaper, but will have a huge cost in the long run.

    I’ve seen this happen to several couples, including my sister, who is home-schooling 4 kids because they are currently tied to a house they can’t sell, in a bad school district.

    Just something to think about before making a long-term commitment to a house.

  39. Kim says:

    My Sam’s Club membership paid for itself in dog food alone for several years. (I have two dogs, one of which is a mid-size breed.) Also, being able to buy my husband’s jeans for $13 was amazing! Last year a new warehouse club opened much closer to my house and I regret joining that one. The wrong dog food, and many of the selections aren’t what we usually eat, so it was NOT worth it. I share my membership in either club with my son (in college and living with roommates). The money he saved on food was definitely worth it. Now that he’s out of school, I’ve had some health-related dietary changes and we’ve had to switch dog food, I need to make sure the brands are what we use now before deciding what I will do. Most warehouse clubs will let you in on a one-time guest pass to decide if it is worth it to you.

  40. SP says:

    @rpw – There are other long term investments that fare as well as real estate in general, unless you happen to buy in the right market at the right time (your case, it seems). And if you buy in the wrong market (SoCal, vegas) at the wrong time (2006), you are probably wishing you rented another few years.

    Like I said, I’d be unwilling to buy a place the size that I’m willing to rent. So I pocket and invest the difference, have the freedom to easily move, and most importantly am not cash flow poor. I’m not saying that everyone who buys is cash poor (hardly), but to buy something where I live, I would have to devote a crazy percent of my take home to a mortgage. No thank you.

    To say that buying is automatically the best choice is foolish, especially in very expensive markets.

  41. Sharon says:

    Colin, besides the risk that you may not finish medical school and have the loans, it is a myth that doctors get paid well immediately after graduation. And for your generation, you may never earn a lot of money. If you decide on a specialty that requires 8 or more years of training, you will be living in genteel poverty salary-wise for the whole time.

    Also, upon graduation, you have very little say about where you will live. It all depends on where you get “matched” to for residency. Take that into consideration for housing; I would advise against buying, since when the time comes to move you may or may not be able to sell quickly.

    If you like basic science and research, consider a MD/Ph.D. program. They sometimes pay for you to go to school, and you get out with a dual degree. If you decide that medical practice is not the way you want to go, you have a research degree that gives you added flexibility.

    Bless you for wanting to be a doctor; I just hope you aren’t planning to go into it for the money!

  42. Sharon says:

    Re Sam’s Club and meat: I have found that you can buy the loss-leaders at the grocery stores a lot cheaper than anything in the Sam’s Club. Except for the free samples, of course.

  43. Mol says:

    Comment: You should make some screenshots for some of the pieces of software in articles like the ‘Nine Free Pieces of Software I Use Everyday’. I become interested in them, but some of them seem a little complicated, and it discourages me from looking further =S

  44. V says:

    Questions for the next reader mailbag:

    If you have a little spare time, do you bother entering competitions, answering surveys, becoming a mystery shopper and the likes to make a little extra money, or is it just a waste of time?

  45. Mol says:

    How did you come up with the name The Simple Dollar?

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