Reader Mailbag: Bad Books

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. Planning for future relocation
2. Growing a blog
3. First time homebuyer advice
4. How to grill foiled potatoes
5. Refinancing a vehicle
6. Predicting Social Security’s future
7. Teaching the value of money
8. HELOC or not?
9. Just starting out with credit
10. Pre-tax or after-tax 401(k)?

As many of you know, I’m a voracious reader who typically reads three books or so a week. Every once in a while, though, I’ll start a book and it’ll just turn into a painful slog. I’m stubborn, so I’ll keep trying to read it, but it’ll just completely turn me off so that I actually avoid reading for a couple of weeks.

Eventually, I just give up on the book, close the cover, and put it in the “never again” pile. I’m currently just about there with the book I’m currently reading, The Children’s Book by A.S. Byatt. So much potential in the characters and setting. So many, many, many pages of virtually nothing happening.

Knowing that we plan to relocate — to the burbs — in the next 3 years, mostly for better public schools, how would you go about planning to do it? Would you make the move sooner or later? Would you sell now, pay off debt and rent a place, or, buy something lower priced right away? And, given our debt load, what makes the most sense to tackle first?
- Karin

The first thing I would do is take a look at my credit report, which you can get from the federal government for free at AnnualCreditReport.com. Do you have any negative entries on your report? One or two is okay, a lot is problematic.

If your bad entries are small in number, I would shop around for a mortgage right now because of the ludicrously low interest rates. The traditional advice is to wait until you have a full down payment, but if you do wait that long, there’s a very good chance that interest rates will have risen enough to take away any advantage they might offer. Since I’m unsure where exactly you live, I’m going to guess that you don’t live in one of the overpriced metro areas and that you can find something relatively cost-effective in the suburbs. I usually tell people to not get a mortgage more than double their family’s combined annual income, because anything more than that puts their household income in the hurt locker.

If you have some credit irregularities, spend some time getting your own financial house in order. Make your payments on time for at least a year – preferably two or three. Focus on paying down your debts, starting with the highest interest one.

I read on Monday’s q & a section that you have 700,000 visitors a month. I know your blog is just a few years old, so I was wondering if you could share with your newer readers what you did to grow your blog (besides writing good posts frequently). How did people find your blog? I would love to know more.
- Melissa

The number one most important thing a new blog can do is write a lot of good content. If you can’t consistently turn out worthwhile articles that people actually want to read, then nothing else is really going to matter.

The next step is to make sure there are a lot of links out there to your site. One way to do that, especially at first, is to participate in blog carnivals. Start searching for them at BlogCarnival.com and also use Google to seek them out, because many ongoing carnivals do not participate on BlogCarnival. These are easy ways to get links back to your site and to your articles, and also to get your articles read by bloggers who share a common interest and focus with you.

You should also target blogs that are somewhat more popular than your own by either writing guest posts there (if they accept them) or by writing posts that directly match the topic of that site (which would encourage them to link to you). When you do write such an article – and make sure it’s a good one – contact that site owner. This may or may not get you a link depending on a number of factors (how busy the site operator is, for one), but if nothing else, you’ve written a good article.

Really, in the end, good content and lots of links are the key to people finding you. To get people to stay and recommend you, you have to consistently write good stuff and make it easy for them to stay in touch by making your site available by RSS feed and by email. If you want lots of readers, you have to make it as easy as you can for them to keep reading.

I’m a 23 year old guy finishing up my Master’s degree in engineering. I already have a job lined up in the Washington, DC area, and it’s a government job, so my job security is great, and I’ll be making decent money. I’m still considering condos or townhouses, but I really want to buy a house. My financial situation is fairly secure; I’ll be making around 60K a year with my Master’s degree, I have about 10K in savings, and between my parent’s and grandparent’s investments for me, I have around another 40K-50K for the downpayment. Do you have any tips for a first-time homebuyer, like questions I should ask, additional costs I should factor in, or any other general tips?
- Andy

Well, you’re going to be buying in the D.C. area, which is notoriously expensive. I usually don’t recommend that anyone get a mortgage for more than two times their annual income because of the crunch that a higher mortgage can put on their monthly cash flow.

My recommendation would be to sit tight and let your career develop a bit before buying. Work hard and seek to move up in the pay scale and your GS level. Keep saving your money. Keep thinking about what you actually want.

Eventually, your life will settle and it’ll become clear to you what the best long term choice is – and you’ll be in the right financial position to make it happen. Good luck.

I read your menu and am interested in how long and at what temperature you cooked the potatoes on the grill wrapped in foil.
- Kelly

I usually don’t worry too much about the “perfect” temperature.

My technique is just to make sure that the potatoes are in small pieces – meaning either baby potatoes or quartered/eighthed whole potatoes – and that they’re most – using ice cubes – before I wrap them in foil and toss them on the grill. Temperature doesn’t matter so much as making sure they’re the right tenderness for you.

I usually put the wrapped package on the grill right as I begin to preheat it to cook something that takes longer than a minute or two (burgers, vegetables, pork chops, chicken breasts) and the potatoes are ready to go when the main course is finished.

I have a question regarding refinancing my current truck, a 2006 Chevy Colorado with 85,000 miles in good condition.

I bought my truck at Carmax in March of 2008 with a total purchase price (including absorption of trade in vehicle debt) of $20,084.63. I put no money down (I know, I was young and dumb!) and financed through Carmax for 60 months at an APR of 8.95%, which brought my monthly payment to $417.68/mo.

Right now the truck is worth between $8,300 (low KBB trade in value) and $12,900 (high KBB private party sale value). Current payoff amount is $12,214.81 after 28 months of payments (never been late, but always just paid the minimum amount each month.)

I have heard about refinancing auto loans, but haven’t found a good solid list of pros and cons.

I have good credit (740) and the only debt I currently have other than my auto loan is $3,000 in CC debt at 0% apr (balance transfer offer) which I am paying down about $400-$500 each month. I also have an emergency fund of $1000 saved up.

My question is, should I look around to refinance this loan? If so, where is the best place to look? What are the downfalls to refinancing? If I refinance at a lower APR for a 36 month loan, will my payments be lower? How about for a 24 month loan? I know it depends on the APR rate I can get, but maybe a break even analysis is in order to determine if its worth it to refinance? I would do it myself but I barely passed my finance classes in college, thus the reason I stuck with a marketing degree!
- Kirk

Your payments will probably be lower if you refinance to a lower interest rate, but refinancing itself will often have additional costs – loan application fees, points, origination fees, and early termination penalties. You’ll also have to pay a lien transfer fee which varies in amount from state to state. If your credit isn’t good, you won’t be able to refinance at all, either.

In other words, you’ll have to be careful and take your time with this to find a lender who will actually get you a lower rate without any fees tacked on.

You’ll also want to do this soon before further depreciation sets in, because if the car goes below $7,500 in value, most lenders won’t refinance because it’s not worth the risk.

My suggestion? Start at your local credit union. See what they have available.

I finally visited some retirement calculator sites to see what my ideal contributions would look like. I’m 28, currently working at a nonprofit but hoping to go to nursing school in the next year. I’m not worried about having enough for retirement, but do wonder how you feel about the probable end of Social Security as a means for increased retirement income. How do you keep from feeling frustrated that significant amounts of each paycheck are being withheld and likely will never be seen again?
- Joanna

In my opinion (merely as someone who reads the Wall Street Journal, The Economist, and BusinessWeek), I do not think that Social Security in its current form will exist when we reach retirement age. The numbers simply aren’t sustainable. As Boomers retire, go on Social Security, and live for another twenty five years, the system is going to empty out because there are fewer people in Generation X and Generation Y to fill the coffers.

Social Security was not designed to handle people living into their eighties with any regularity. When the system was invented, 65 was older than the average age at which people died.

One of several things will eventually happen. Either they’ll cut off all people under a certain age from the system, they’ll severely delay the “retirement age,” or they’ll drastically increase the amount of money people have to pay for Social Security. All of those are political nightmares, of course, but when the system approaches bankruptcy in about twenty years (when I’m around 50 and you’re around 48 or so), one of them will have to happen.

My bet is on the severe delay of “retirement age.” My guess is that Social Security won’t kick in until you’re 80 or 85 by the time we get around to seeing the benefits.

Thus, for most people who want some semblance of retirement when they’re in their sixties or seventies, I usually encourage them to think of Social Security as a complete non-factor in their planning.

I’ve read over all your archives about a child’s allowance but can’t find just the right mix for our kid. It’s a unique situation for our “family”. We are each divorced, planning to be married and living together for the most part. Danny was adopted at 8 and is behind in some teachings parents take for granted. He’s 13 now and his mom and I have tried several ways to introduce money but he has no interest in managing it. If he gets money, he asks to go shopping with no clue what he wants. We’ve required savings, giving, spending amounts. That didn’t work. We’ve tried providing allowance and deducting when chores weren’t done. We’ve tried $0 allowance with money tied to each chore and that didn’t work.

We’ve decided to create a need for money and a need to manage it, then give him $25/month. We’ve made a list of things he’ll have to buy, like batteries for his games, tires for his bike, snacks at the pool, movies with friends and the like. His friends are starting to work and save for things. Danny wonders why they’d waste their summer working when they can watch TV instead. I try to teach him the value of hard work and money, among other things, but he just isn’t getting the money thing. I asked him at 12 how much he thought the average person makes/year. His answer: $3,000,000.

Any suggestions? I value your advice and wonder which direction you’d go on something like this.
- Tom

The problem seems to be that Danny doesn’t equate work with money in any way, shape, or form. The only way to create this connection is to simply stop giving him money for any purpose.

Put food on his plate and a roof over his head and perhaps minimal clothing, that’s all you should provide. When he wants something, don’t give it to him, no matter how much you’d like to. As long as you keep doing that – and that means everyone involved in his care – he has no reason at all to see the value in working for money. Why work for something when you can just ask for it and have it?

Yes, he probably won’t like it when he finally puts the pieces together. Yes, it might make home life rough for a while. But if he doesn’t start learning how the world works now, you’re going to have a permanent resident on your hands.

What do you think, should a person take out a HELOC even if they don’t need it? The lowest interest rate would be 2 percent more then we are paying for our mortgage and it will fluctuate with the prime and with savings interest where it stands even with money markets it would be a loss. Yes our money is in money market funds, CD’s are at a terrible rate and we are waiting for them to improve and I want our savings liquid.

We had a couple of unexpected major house repairs this last year which we were able to pay for in cash because we had ample savings. Our savings is now about half which is still more then the 6 months of expenses everyone says you need and I will be able to build it back over time, but my other half wants to get a line of credit. We have no other debt other then the house which I am paying enough extra to have it paid off in a little over 6 years, baring any unforeseen issues that might come up. I personally don’t want any credit that is tied to the house, I want the house free and clear ASAP. I also plan on a couple of improvements that we will be able to get a tax credit for that ends this year that will make our house worth more and more energy efficient.
- Mary Ann

I don’t know why you would do this. It seems to work against your goal of wanting to own the house free and clear “ASAP.” If you want that, don’t put more debt on your house.

Yes, it’s tempting to use a HELOC as an emergency fund, but the costs of it are disastrous if you actually have an emergency. By sitting on cash, you’re earning 1-2% on your savings and paying 6% on your mortgage – a difference of about 4%. If you actually have an emergency, you’ll be paying 8% on that HELOC.

In essence, the only reason you’d empty your emergency fund and have a HELOC is because you’re betting that there won’t be an emergency. It’s that exact moment when Murphy’s Law usually kicks in.

I’m 18, fresh out of high school, and have a job that pays me far more than my friends make. College is on the way, as soon as I’m made a full-time employee as opposed to a temp.

I’ve applied for 5 different credit cards, all designed for people with limited credit history, and have been denied for them all. It’s kind of dissappointing actually. I attempted to open an account, and bam, denied due to a lack of credit history. Apply for loans? Denied. Apply for financing for a car as a last resort? Denied.

I’m confused as to what to do here. I’ve been told to avoid monthly/yearly fees, but it seem’s that these are the only things that will be able to get me started.
- Matt

The first thing you need to do is make sure your credit history is clear, because this sounds like it’s not. Take a look at my credit report, which you can get from the federal government for free at AnnualCreditReport.com. Do you see anything that shouldn’t be there? If you do, get rid of it.

If you’re still having trouble getting a card, there are several options available to you. See if your parents will help you cosign for a credit card. If that’s a nonstarter, consider getting a secured card. A secured card with a $500 limit, for example, means you send them $500 when you open the card, then you use the card as normal. When you cancel the card (assuming you’ve used it normally), you get your deposit back. It’s one way for people with no credit to start building it.

The credit system in America is deeply flawed, unfortunately, but it can be gamed.

What’s your opinion of contributing to an after-tax 401k versus a pre-tax 401k? My company offers both options and I’m trying to decide if I should switch to the after-tax option. P.S. I’m 24 so I do have quite some time before I’ll be withdrawing.
- Sean

I generally encourage people to save for retirement in after-tax retirement savings vehicles unless their income greatly exceeds what they think they’ll be making in retirement.

The reason for this is simple: tax rates have nowhere to go but up. Thus, it’s a lot better to pay income tax now than it is to pay income tax later on.

So, unless you’re making well into the six figures, you’re probably better off with the after-tax account.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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  1. CopRock says:

    I’m also anticipating a move to the burbs in the next few year, and I’m not sure that I understand the advice to “shop around for a mortgage right now because of the ludicrously low interest rates.”

    Can I get a commitment from a lender today to lock in today’s mortgage rate for a few years? Would I be able to get a loan against an unspecified home that I’d be purchasing in a few years? What would I be doing?

  2. anna says:

    Trent, I do not hesitate to abandon an uninteresting read. Yes I give it a chance, but the days when I felt the compulsion to finish a book just because I started it are long gone. If you started to eat something that tasted pretty bad, would you force yourself to finish it?

    Usually I realise that a book is going nowhere for me when I sense that I couldn’t give a damn about what happens to the characters.

    There are too many great books out there to waste a minute more on those that are just so-so.

  3. Elaine says:

    To Andy who will be moving to DC -

    I live in the DC area (grew up here, work here, own a house here) and am in my mid-20s. I would encourage you to wait at least 6 months before jumping into buying. First, if you’re new to the area, the dynamics can be overwhelming. Second, without an understanding of the area dynamics, you could purchase a place in an area you discover you no longer enjoy or cannot afford or is a long way from work or friends.

    Please take some time after you graduate and have worked for a little while to learn what your expenses will be living in and around the city. Your costs for everything will increase from parking/transportation, to take out food, to insurance. Once you’ve lived on an “out of grad school” budget, start looking at the real estate market and see what you can afford and if you like the neighborhood you can afford.

    Also, please have realistic expectations about what you can get for your money. Popular areas in NW DC or Arlington that are metro accessible and have vibrant night life can really give you sticker shock.

    Good luck and welcome to the area. It’s a really vibrant and exciting town.

  4. Johanna says:

    @Andy: There *are* houses in the DC area (mostly in the less wealthy suburbs) that are within your price range now. But I still agree with Trent that it’s best for you to rent for a few years before you even thinking about buying anything (even a condo).

    First, prices in the DC area as a whole still have nowhere to go but down. So you have nothing to lose by waiting, and quite a lot to gain.

    Second, the DC area is also notorious for its terrible commutes. If you work downtown and buy a house in the suburbs or exurbs, you’re locking yourself into a long, stressful, and possibly expensive commute for as long as you have that house and that job. Rent for a while in the area where you’re thinking about buying, and make sure that’s something you can handle.

  5. Jules says:

    Thanks for the heads up about The Children’s Book. I thought about getting it but it didn’t look *quite* interesting enough to be worth the risk.

    I REALLY STRONGLY ABSOLUTELY recommend Justin Cronin’s The Passage, though. He’s a great writer (he even came and gave a talk to my writing class and signed my copy of Mary & O’Neil) and it’s a fantastic, awesome, splendid, wonderful book. It’s even got my boyfriend hooked on it, and he HATES “literary” stuff.

  6. J says:

    Re: pre-tax / after-tax 401K – Can you give a bit more detail as to what you consider “well into the six figures”? 150K? 250K? If you are already in a high income tax bracket, wouldn’t using a pre-tax account allow you to use the 1/3 that you would have paid to taxes if you used an after-tax account to earn more interest over the life of the pre-tax account? Thanks.

  7. Gal @ Equally Happy says:

    It’s better to give up on a book if it’s boring then to keep forcing yourself to slog through. I’ve never found a book where I forced myself to slog through and somehow the ending was so good it made it all worth while.

  8. Elaine says:

    @Johanna – I disagree with your assessment that DC prices have nowhere to go but down. That might be the case in areas well outside the Beltway, but prices in DC and closer in suburbs (including those with decent access to the further out metro stops) are stable or increasing from the low point in January-June 2009. Does this mean some folks are no longer underwater. No, some are still underwater. The housing craze in the DC area was intense. But, in many places you’re breaking even or are getting more on your sales price than you were going to get year ago.

    Personally, it is my feeling that prices in the DC area, with a manageable commute never really fell far enough to really be affordable for first time buyers. But, the housing crisis served a necessary evil in most hot housing markets. For cooler heads to prevail and restore balance. Unsustainable price increases could not continue forever.

  9. Weston says:

    While I generally agree with the advice to Andy when looking at the specifics of the situation I think there are two factors that need to be brought up that would mitigate against that advice.

    Mortgage rates…. If Andy waits a few years it is highly likely that he will be looking at mortgage rates far, far higher than the historically low rates we are currently looking at. When I got my graduate degree in 1981 the average mortgage rates were at an all time high of 16.63 percent. Right now it is probably an average of 4.5 percent.

    Real estate trends…. I disagree with Johanna’s comment above. I think the view of “real estate prices have nowhere to go but down” does not apply to the D.C. area. Because of Federal employment stability and spending, and the stability of DC employers seeking (directly or indirectly) the federal dollars I think that DC is one of the few areas in the country where real estate prices will hold steady (at the very least)

  10. KT says:

    @Andy,
    It all depends on what you want, but you definitely, definitely want to rent and get a feel for the vast differences in neighborhoods and commutes. I know of a local in the DC area who thinks because he test ran his commute on a Sunday he’ll be able to make it from a future apartment in 45 minutes. You want to actually try the commute from your perspective area on a week day (mid week to avoid Monday and Friday lighter traffic). By doing that my husband and I ruled out looking in an area where his commute would have been an hour and a half each way using a bus!

    There are closer neighborhoods that have yet to gentrify and are less expensive. There are the insanely expensive neighborhoods where a condo will run you $350K and that’s just the price and doesn’t include the high condo association fee (don’t forget that – recently we found a condo where the association fee was more than our current monthly rent in a nice part of downtown). There are the further suburbs where you’ll be stuck driving or riding a train for hours. Remember that you have to factor in commuting costs, even though the government covers a big chunk if you use public transportation.

    Even if after a few months you locate your ideal suburb and figure out your budget as per Trent’s guidelines, you want to give yourself that time to look around and learn the whole area first.

    –a fellow first-time homebuyer (and a frustrated one)

  11. Johanna says:

    @Weston: Getting a mortgage when interest rates are high is not a bad thing. When interest rates are higher, prices are lower (because the average person can afford to borrow less), you get a bigger benefit from having a substantial downpayment (because you’re borrowing less of that expensive money), and best of all, you have the opportunity to refinance to a lower interest rate later (thereby getting the best of both worlds – low interest and low debt).

    The argument that prices will hold steady because of the government ignores the fact that DC saw one of the biggest run-ups in prices of any city during the bubble years. As far as I know, the Federal government was here the whole time, so why were houses in 1996 only worth 1/3 of what they were worth in 2006?

  12. JRules says:

    Trent, I struggled through that whole book and it was a waste of my time. So frustrating! Especially since I loved Byatt’s other books. I wish I had abandoned it halfway through.

  13. Johanna says:

    The entire shortfall in Social Security could be filled simply by eliminating the regressive nature of the payroll tax. I don’t understand why we haven’t done this already.

    In a way, I agree with Trent that “Social Security in its current form” will not survive. What’d I’d like to see, eventually, is for Social Security to be redefined in a way that gets rid of the pretense that the money you pay into the system is somehow the same money that you get back in benefits (plus some return, which you can calculate and find to be minuscule). Instead, let’s call it what it is: A payment from current workers to current retirees to keep the retirees from having to live in poverty after all the work they’ve done to help make this country what it is.

    There is enough to go around to make this happen. It’s only because the very, very rich are playing different segments of the middle class against each other to try to make us believe that there isn’t, that anybody is even thinking, “Well, maybe we can’t afford to take care of our senior citizens after all, so let’s just forget the whole thing.”

  14. MB says:

    I don’t think the poor kid of the questioner is so out of line about money. How does a kid knows what a typical job pays? You need to *tell* him, not punish him for not knowing. And rather than withdraw all his money just because he wants to spend it, give him a base allowance, so he has practice spending it and seeing what happens when he spends it all the first three days and then has to wait two weeks to get more. (Why dole out the allowance only once a month? Don’t most people get paid every two weeks.) *Then* if he wants more, he can do chores for a pre-agreed amount. It takes time and experience to become proficient with money. The other thirteen-year-olds are not that good at it; don’t be fooled. I think consistency is also important. It sounds as if you have changed the money system around on him a number of times, hoping each one will make maturity kick in. My parents did this — not hoping I’d become more mature, just because they kept getting new ideas about how allowances should work. “Now you have to earn all your money! Now you’re paid a different rate for chores! Now you’re paid this rate for this chore but nothing for this chore!” Etc. It was very unsettling and I never knew what I could count on. I think it would best to pay, as I say, a certain base allowance that he can experiment with (if he spends it all at once, that’s a useful lesson — even if it takes him a year of doing it to learn it). Then on top of that offer a consistent rate for extra chores. And being supportive rather than critical is always helpful — people feel much better owning up to their mistakes when they know someone isn’t going to say “I told you so!” It sounds as if this boy has a lot to deal with anyway, so letting him grow in his own time, with supportive consistency, sounds like the best path to me.

  15. Aaron says:

    @Kirk,
    I just went through the same thing, although I tackled attempting to reduce interest paid on a second mortgage and a car loan at the same time. If you’re considering a 2 year loan, implying you can pay back $12K over the next 24 months, you may consider doing what I did to reduce my second mortgage interest – use another balance transfer credit card with convenience checks. You want to of course make sure you only make a check out for what you’re absolutely sure you could pay back within the 0% intro period. In my case, USAA offered a balance transfer with a 3% fee capped at $75 per transaction for 0% interest over 12 months. I make minimum payments on the card every month automatically, and I put the rest of what I should pay to have it paid off next year into a SmartyPig account, earning 2% interest. I’ve almost already earned back the $75 fee from the interest within just 3 months. I know Citibank is offering an 18 month 0% interest card right now, but the fee isn’t capped.

    I also refi’ed my car through my credit union after shopping around for rates. Credit unions I found were by far the best as far as fees went as well as interest rates. Mine didn’t charge me any at all aside from a $50 application fee, and I managed to get a 1% rate reduction. However, had I not needed to use a balance transfer to help pay down my second mortgage, I’d have gone that route for the car. Even though the rates are higher after the into period, it often makes sense to do the balance transfer on some or all of the balance if you’re careful.

  16. Aaron says:

    Johanna,

    The other thing about Social Security is it actually benefits the people paying into the system even before they ever draw benefits. By providing retirement income to seniors, they create demand for goods and services retirees will spend that money on, while usually not competing for the jobs non-retirees will get because of the demand since retirees are by defintion not working. That means more jobs and higher wages for non-retirees right now.

    This surprisingly is almost always overlooked.

  17. Courtney says:

    I once heard someone say “Life is too short to read bad books” and offer this general rule of thumb: subtract your age from 100. If you’re not hooked on a book after that many pages, forget about it.

  18. Honey says:

    Regarding the allowance thing, I would cut him off from TV and video game (if he has them) privileges, install one of those boxes that requires a password to turn the TV on, and charge him by the half hour to watch or play. You can set these up to turn off after a specified time, I think.

    It seems like the problem is that he has plenty of leisure opportunities even if he doesn’t do anything to earn them.

  19. Weston says:

    Johanna

    “When interest rates are higher, prices are lower”

    While you’re premise seems logical I’m not sure it is accurate. Can you point me to some recent statistical evidence that supports that correlation?

    A quick google search returned a paper from Columbia Business School that severely questions this commonly held belief. Again, I don’t have any statistics of my own, but my experience is that the correlation you refer to is commonly held but often not true.

    “As far as I know the Federal government was here the whole time…”

    Well for this premise there are easily available statistics to look at. Yes the Federal government was there the whole time. Lets for ease of reference take a 10 year period for “the whole time”.

    During that 10 year period the Federal Budget has increased by Two Trillion Dollars. I repeat, Two Trillion Dollars. I imagine that more than a minuscule portion of that $2,000,000,000,000 increase made it’s way into the economy of the D.C. area.

  20. Johanna says:

    @Sean: Trent’s answer is similar to the one most other people give, but I think it’s too simplistic. The reason is that when you put money into a before-tax investment, you save on taxes at your marginal rate (say, 25%, so if you deposit $1000 you save $250 in taxes), whereas the money you take out is taxed at your average rate. Using today’s tax rates, some would be tax-free, some would be taxed at 10%, some at 15%, and so on.

    Tax rates and/or your income would have to increase by a *lot* before your average tax rate in retirement is greater than your marginal tax rate is today. That’s a good reason to put at least some of your retirement savings in before-tax investments.

    Put another way: Every year, you have the opportunity (through deductions and personal exemptions) to earn a bit of money tax free. If *all* of your retirement savings are in after-tax investments, you’re leaving that opportunity on the table. Why would you do that?

    All this is assuming that the bulk of your income in retirement comes from withdrawals from your retirement accounts. If you’re planning on continuing to work for pay when you’re “retired,” that changes the calculation a bit.

  21. Johanna says:

    @Weston: “A quick google search returned a paper from Columbia Business School”

    Would you care to be more specific? There are a lot of people at Columbia Business School, and they write a lot of papers.

    “During that 10 year period the Federal Budget has increased by Two Trillion Dollars. I repeat, Two Trillion Dollars. I imagine that more than a minuscule portion of that $2,000,000,000,000 increase made it’s way into the economy of the D.C. area.”

    Even if that number is right (and I’m not so sure that it is), that explanation doesn’t make any sense. Are you really saying that federal spending made fundamental values shoot up in the DC area at exactly the same time and by the same amount as prices were rising in other cities from the inflating housing bubble? That would be a remarkable coincidence, wouldn’t you think?

  22. Jackie says:

    Matt doesn’t need a credit card at 18! You don’t need one, just live debt free for a while and learn to really manage your money and your life before adding that level of complexity.

    Your credit score is not all about credit cards! You don’t need them to “build credit”. Simple things like putting your utilities on auto pay, paying your rent on time (especially if it’s on auto pay or with a big rental agency) putting a gym membership on a subscription-type auto pay tend to show up on credit reports. No credit cards required.

  23. a.k. says:

    Anyone interested in learning more about the drivers of the D.C. economy should check out the reports produced by the Center for Regional Analysis at GMU. They recently produced a report on The Role of the Federal Government in the Washington Area Economy that is very interesting.

    DC weathered the recession better than other areas because it’s one of the few areas in the country that is still generating white-collar jobs. A lot, but not all, of those jobs are tied to the government, either as direct-hire or procurement. People finishing college or grad school right now (Like questioner Andy) are coming to DC because there’s a healthy job market. That creates demand for housing and has helped buffer the city from the severe downturn seen in other areas. The most recent Case-Shiller showed that DC prices rose 7.3% in the last year — emerging strong from the downturn.

    Does that mean prices won’t go down? No – anything is possible, and a radical shift in federal spending will definitely impact the city. But there are healthy fundamentals at work right now. And for close-in neighborhoods, there is more demand than supply for housing, which is putting upward pressure on prices.

  24. Jennifer says:

    OH MY! I just had to say that you are not alone with The Children’s Book. I got it for Christmas and it’s about half read, sitting under my nightstand. I gave up in March. I love Possession another A.S. Bryant book, and it’s also a bit slow, but this one is just painful….

  25. Michelle says:

    Andy – Regardless of whether housing prices are going up or down in the DC area, I don’t know of any houses available for less than $200k (based on Trent’s formula of $60K income x2 + $60K for your down payment). The 1 bedroom condos you’d get for that price aren’t even much to speak of. So as Johanna said, you could live somewhere undesireable, or have a hella-commute. I’m sure you’ve got better things to do with your time than sit in traffic for 2 hours – each way – to reach the exurbs.

    Our housing prices fell in 2007-2008 but have heald steady since then. My own opinion – and that of some real estate professionals I’ve recently talked to – is that the DC market is holding steady. It might have nowhere to go but down, but that doesn’t guarantee if you wait it will go down.

    I agree with those who advise not to buy a home as an investment. Buy it because you need shelter, and because you’re ready, you’re able and it’s the right thing for your stage of life. And buy it knowing all the costs of homeownership beyond PMTI. If that’s now, happy house hunting! But be truly honest with yourself about if now is really the right time.

  26. Molly says:

    I’m here to chime in with #1 Anna and #7 Courtney. I have no problem starting a book and not finishing it. In fact, this is part of why I like to only get books from the library – then it doesn’t cost me anything. If I bought books, I’d feel more compelled to finish them even if I didn’t like them. This is also part of why I’m not too keen on e-readers.

  27. Johanna says:

    @a.k.: That 7.3% year-over-year increase spans the period from near the beginning of the $8k tax credit until the last month it was available. Let’s at least wait until next month before proclaiming a strong emergence from the downturn.

    @Michelle: I didn’t say undesirable. I said “less wealthy.”

  28. Gretchen says:

    I can hardly get to the books I want to read without wasting time on ones I don’t like.

    usually I give books a chapter or 2 before deciding- depends on how long the chapters are.

  29. Nikki says:

    For Danny’s parents – I’ve worked with a lot of kids who have been adopted and a lot of kids who have developmental delays in the sense of not being able to connect cause and effect and see consequences. I think Trent’s advice is great and I’d like to add that I’ve noticed that sometimes for kids who just don’t seem to “get it” the reward for hard work sometimes needs to be immediate, and concrete. As in the 60 seconds following the work in question, and cold hard cash in hand rather than a ball-point tally somewhere. And they usually need lots of repetition, consistency and opportunities to experience the reward and connect it with the hard work. Allowance deductions every week might be too separated from the non-chore-compliance for a kid to make the connection. And I’m sure you also know this, but sometimes because adopted kids struggle with feeling accepted and loved, they seem very needy. Parents want to provide unconditional love, but when basic affection isn’t meeting that need, sometimes the kid and the parent, usually unconsciously, start to equate that love with stuff.
    So the challenge is to teach cause and effect while still providing the security and love the kiddo needs. Fun!

  30. jim says:

    Joanna: If they raise the tax rate on social security by 1% and increase the retirement age then the money should last forever. They raised the tax rate on social security over a dozen times in previous decades. Even if they change nothing then social security will be able to pay out about 70% of current benefit levels.

  31. jgonzales says:

    Kirk: Before you talk to anyone else about a refinance, talk to the company you already work with. My husband and I have a truck that had a payment similar to yours (although we paid on it a lot longer). A few months ago we called the company and changed they changed the APR and monthly payment. I would also suggest that if you can afford it, keeping paying the previous rate even with a lower payment. It will get the truck paid off that much faster and it’s money you are already used to paying, so it won’t feel like quite as much of a squeeze than if you started adding money from another part of your budget.

  32. Beth Beth says:

    @ Matt:
    My daughter, same age went through the same thing. She did eventually find a place that would give her a card – a jewelry store. Now, my daughter is very good with money so she knows to only charge something small & make payments on time for credit history.

    Also, I want to suggest not to apply for too many cards at one time. The credit card companies see that too. -Good luck

  33. KAD says:

    To Danny’s parents: I agree with Trent’s suggestion — cut him off — and with the poster who suggested cutting off the video games, too. I have another one to add.

    Include Danny in your monthly budgeting and billpaying sessions (I assume at least one of you does this, if not both of you together). Sit down and walk through all the numbers: paycheck coming in, expenses going out, how much you spend on groceries, etc. If your own spending habits are solid, he’ll see what the real numbers are like. At the very least he won’t think grownups make three million dollars anymore!

  34. Valerie says:

    @Tom — It sounds as if your adopted son may have issues other than understanding the work –> $money$ equation. I cared for my nephew for a couple of years; he had severe math, reasoning, planning and money issues. It took more than extra training. Finally in his early 20s, my nephew began to see the meaning of work, money and saving. The “executive function” part of his brain (frontal lobe) which helps us plan, did not mature readily in him. Parts of math, reasoning, and planning occur in the same parts of our brains. You may consider an individual educational plan in school to assist.

  35. Laura says:

    Andy: I’m a young professional in my 20s, and I’ve lived here in the DC area for about 3 years now. I don’t know if you’ve lived in the DC area before or not, so I don’t know how much you know about housing here. If you haven’t, I would STRONGLY encourage you to rent for at least a few months or a year before deciding to buy a place. It takes that long just to figure out what the best commutes are and where you like to hang out.

    Yeah, you might “want” a house, but in DC that costs way more than what you can afford right now. At only 60k a year (which is not going to turn any heads in DC), I might even say you would be extremely lucky to find a condo you can afford. Things under 300k are going to be small 1-bedroom or studio condos, or older “fixer-uppers”, or places in less desirable locations. While there are exceptions to the rule, this is the norm. Allow yourself some time to figure what you can sacrifice – be it location, space, or features – and then start looking for that condo or house.

    If you have job security, as you say, you’ll have plenty of time to make the right decision.

  36. Courtney says:

    The problem with Andy’s question is that ‘DC area’ is so vague – DC proper? Montgomery County or Prince Georges County, MD? Fairfax, Arlington, or Alexandria, VA? Housing prices vary wildly across those areas.

    Andy won’t be buying a house in Adams Morgan or Georgetown on $60K. But depending on where his job actually is there are plenty of homes to be had in the ‘DC area’ for under $200K – especially with the influx of foreclosures/short sales on the market right now (not as many as some other areas of the country, but they’re there).

    All that said, I agree that he should rent for at least a year to allow his new habits/friends/patterns settle down. I don’t think he needs to wait years for his career to develop though.

  37. Ashley says:

    Andy, #22 Laura and #23 Courtney raise some excellent points. Listen to them. I also live in the DC area, like many of the commenters on year. I’m also starting a new government job after just completing my masters out here. I’ve lived here the last two years.

    Give it at least the time that Courtney recommends. I’ve found that most of my friends out here either love DC or they hate it. There aren’t a lot of people who are lukewarm about the city or the metro, and there are many people who live in inner suburbs who wouldn’t dream of living in the District just as there are a lot of people who live in the District who think people in MoCo, Arlington, and Alexandria area crazy. Take the time to explore living in the metro before locking yourself into a place.

    I can’t even imagine buying a place here yet and don’t anticipate being able to do it semi-comfortably for a number of years.

  38. “When the system was invented, 65 was older than the average age at which people died.”

    That’s either incorrect or misleading. While it’s true that the average life expectancy *at birth* was lower than 65 in 1940, the year Social Security monthly payments began, it was *higher* than 65 for people who reached adulthood. Newborns don’t pay Social Security taxes; adults do.

    Social Security does face some demographic and fiscal challenges, but, as noted in other comments, they’re not insurmountable ones. There are folks, however, who have an interest in dismantling or privatizing Social Security, some of whom write for publications like the Wall Street Journal, and who therefore make Social Security’s problems sound more dire than they actually are.

  39. SZCZEBRZESZYN says:

    Allowance — Pay the allowance like interest. Each month my two daughters get 5% of whatever capital they have on hand. They can increase their capital thru birthday presents, saving, or the occasional job (so far they have only worked as docents at the local museum).

    My 14-year-old has about $700 and therefore gets about $35. My 16-year-old is more spendthrift and only has about $500.

    I have used this scheme for several years. Their initial capital came from birthday presents.

  40. SZCZEBRZESZYN says:

    Social Security: They could eliminate the early retirement at 62. They could put a limit on divorced spouses. (If you are divorced with at least 10 years of marriage the ex-spouse can claim on your SS account, and it costs you nothing. It would easily be possible to have four of these by age 65.) They could remove the maximum on collection of the SS tax. This is currently just over $100,000 a year, I think, so someone making a million a year only pays against 10% of his income.

  41. Emilie says:

    great answer on the allowance! It is my answer to finances with my kids and it is paying off. My older kids (13&14) are working for as many people as possible this summer trying to make money since they don’t get an allowance. My younger 2 (8&10) don’t really need that much money, so they still manage to squeak through the year on birthday and Christmas money. They hang on to it for months, knowing they don’t have an allowance coming to them.

  42. mote says:

    I read The Children’s Book and while it was a little slow at times the ending and the twists meant that there was at least somewhat of a payoff at the end. It’s fair to say that A.S. Byatt is not the most lively of writers, however, and the only book by her that I really, really recommend you read is Possession. It was and still is one of my favourite novels, and a comforting book to come back to every now and again. There is some amazing work there, both in terms of her own writing and in the fact that she basically _invented_ an entire corpus of works for not one but two imaginary Victorian poets. She definitely deserved the Booker Prize for that one.

    One thing I’ve noticed is that as the computer and the internet becomes a larger part of my daily routine, my attention span and willingness to sit down and really get absorbed into a novel of that depth and intensity becomes less and less…. I still think it’s worthwhile to find the time to work on that kind of deep, focused reading though.

  43. Jane says:

    @Molly
    Our library system now has ebooks to check out. It’s great. I can browse books online and download it from the privacy of my own home. And I can of course return it online as well.

    I’m glad one commenter explained Trent’s misleading statement that people in the mid-twentieth on average only lived to 65. That sounded off to me. I also think that it is highly unlikely that they will raise retirement to the 80s by the time I retire (I’m in my 30s). Perhaps they might raise it to the upper 60s or early 70s, but not to the 80s. But, unlike Trent, I don’t think our life expectancy is going to go up THAT much.

  44. Nicole says:

    As someone who works with social security and knows the big players in it, I seriously doubt that they are ever going to cut people off from benefits.

    They will delay the Normal Retirement Age if they can. The sooner they can do that, the better. They probably will not change the Early Retirement Age, because they worry about low income people who cannot find work because of health reasons, declining industries, age discrimination, etc. Still, this is equivalent to a benefit cut. It’s a benefit cut that makes sense because SS wasn’t designed to support 30+ years of post-retirement life, but only makes sense as long as there is a safety net for those who need it.

    They may some day finance Social Security from general income taxes, as is done in many countries. There will probably also be a lot of smaller tinkering– not letting people get both TIAA-CREF SS replacement and maximum SS benefits (e.g. for people who worked the minimum number of years in a SS covered job and then 30 years as teachers not covered by SS, in effect drawing double SS benefits), taxing various benefits that didn’t used to be taxed, eliminating or increasing upper limits on SS tax etc.

    Remember, too, that baby booms are cyclical and followed by baby busts. Social security has faced this problem before, though not as large, and it will come out of it as the boomers die off.

    A few years back, Social Security was what everybody was worried about. But today forecasted Medicare costs dwarf any problems with Social Security. There will be changes, but Social Security will not disappear.

    Also agree with previous commenters– I’ve seen those forecasts too.

  45. Lisa Ramaci says:

    This is a question for a future mailbag (I hope!), not a comment on this entry. I am wondering if you can explain what a “callable CD” is. Merrill Lynch has begun offering a “15 year callable CD” at 4.50% interest; I tried doing some research online but what I could find was in such business-ese (a language I don’t really speak) that I couldn’t figure it out. I don’t see bank interest rates approaching almost 5% for a long time, if ever again, so would not have a problem tying up my money for that long, if only I knew exactly what I would be getting myself into. Can you explain? Thank you!

  46. Aaron says:

    “The [social security] numbers simply aren’t sustainable.” Not as long as we’re spending about $700 billion a year funding a pointless war machine. So, yeah, I’m not counting on it either.

  47. Sandy says:

    As for Social Security, I think they should up the amount after which FICA is tken out of one’s paycheck. If folks pay the SS up to about $100,000 income, after that amount,none is taken out. It’s like a raise after you hit that amount. My husband’s salary has increased over the years (25 years of work) and for the last 3-4 years, we have found ourselves with extra cash flow after he’s hit that amount. Being a frugal type, we used all that extra cash flow to pay off our mortgage. Now that that is history, that extra $$ is going to flow into the girls’ college funds. I absolutely see the day coming where this is the decision our gov’t. will have to make, and this extra cash flow will not be there. But in the meantime, all that extra cashflow will be working for us to shore up our family’s future.

  48. CarrieM says:

    #31 Lisa

    A callable CD is a certificate of deposit that can be called away from the investor after the call-protection period has expired, but before the CD matures. A five-year CD with a six-month call protection would be callable after the first six months.

    Banks offer callable CDs to shift interest-rate risk to the depositor. Because the depositor is taking on this interest-rate risk, a callable CD will have a higher yield than the same maturity CD without a call provision. The additional yield is partial compensation for the depositor accepting the interest-rate risk.

    If interest rates go lower, the CD gets called away and the investor has to reinvest in a lower interest rate environment.

    I have only had a callable CD once and it did get called when the rates when significantly down. But the rate was so good that it made far and above more than the CD I broke and paid a penalty on even though the callable CD was called only 2 1/2 years into the CD term. It was worth it to me to take the risk and earn an interest rate that might not be coming again for a very long time.

  49. SZCZEBRZESZYN says:

    Lisa Ramaci — callable CD: “Callable” means they can terminate the contract and give your money back. What you lose is the future intetrest earnings. Not a big problem in my opinion.

    Lots of CDs and other bonds have been called in the past couple of years as interest rates have gone down.

  50. elderly librarian says:

    I agree that Medicare funding will be a bigger problem than SS. Also, they ALREADY reduce SS benefits if you also receive a pension from work that didn’t pay into SS.system. It’s the govt. pension offset and the windfall elimination provision. Some former teachers and others get their SS. severely reduced because of this in certain states that have pension systems that don’t pay in. I think SS should definitely get more revenue from higher earning individuals. But maybe it would screw up their formulas for payouts? not sure.

  51. Bonnie says:

    @Sean-Be sure you’re clear on whether you’re making Roth 401k contributions or After-Tax 401k contributions. Roth contributions are fully tax-free on distribution, but after-tax contributions are taxed on earnings upon distribution. Also, most companies only match on pre-tax contributions, so be sure you make the correct type of contribution to get the full match.

  52. Matt says:

    Thanks Trent, I appreciate the answer.

    I’m at 9 denied credit cards at the moment, and signed up for a secured card at my bank today.

    I’m hoping this will lead to something, but if it doesn’t, I’m pretty stumped as to how to get started.

    I guess my only option is to wait it out, show them that I’ve been in my job for even longer, and hold even more money in the bank? I’m not sure.

  53. Marc J. says:

    @ Andy who wants to move to D.C.

    The town in Northern VA that I live in (http://en.wikipedia.org/wiki/Herndon,_Virginia) has just put out their yearly budget.

    Total amount to be spent: 42 (and some change) million dollars.

    Average house price: a little over 250 thousand.

    Average tax bill for the house: 687 dollars

    True, Herndon isn’t exactly the closest to DC proper, but there are plenty of Government jobs in the suburbs. (Herndon alone has a huge Homeland Security complex and a fairly large Department of Agriculture/Commerce building)

    @ DC house prices:

    They aren’t going to go down for simple supply and demand reasons. There are more young (and dumb) college grads wanting to come into the area then there are old government retirees looking to leave. The government retirement benefits are extremely generous around here — most retirees can live comfortably in the middle of the suburbs without too much problems.

    High demand, (with great job security and high income potential) meets medium-to-low supply, (some houses are being sold, some new ones are being built further out in the ‘burbs) and high house prices are going to result.

    The only way prices in the DC Metro area is for the government to stop hiring college grads, (not likely because everybody’s gotta hire their nephew when he graduates) or to cut back on benefits to ‘encourage’ the older people to find cheaper housing. That would put large quantities of housing on the market, thus driving the average prices down.

    Trent, if you read this, *always* recommend a new college grad to rent in the DC area — 60K *will not* cut it here. 60K, minus taxes and expecting to pay about 40% in housing only leaves about 2.5K to pay everything else.

  54. Melissa says:

    Although I haven’t read The Children’s Book, A.S. Byatt is one of my all-time favorite authors. I have occasionally found various books/stories to be slow, but I find that I love the intricate descriptions, as they make me feel as if I’m actually there. I loved Possesion, as well as Babble Tower. I don’t know if you’ve tried other books already or if this is your first, but I think that both of those two are really satisfying reads. There are other Byatt books that I’ve struggled a bit more with, but I think that is because their plots became a bit intricate and I had trouble tracking characters through the story.

  55. R S says:

    @Andy Since you’re a recent college grad, I assume you’ve just starting earning. Settle into your paycheck and living off your own paycheck.
    This will help you understand the cost of things like:
    1)Electric bills (they soar in the winter due to heating costs in this area, and this summer is off to a crazy hot start so AC is been pretty significant for me this year) – these costs will increase significantly w/ the size of the home, and the age of the home due to deteriorating seals around doors and windows.
    2) Communication bills – cable, phone, internet
    3) Emergency bills – parking tickets, speeding tickets, red light cameras, car trouble.. you won’t escape these, it just happens
    4)insurance – either homeowners or rental, but it’s not a cost you think about in college
    5) Relationship status – living with a significant other? Dating is expensive ;)
    6) Furniture – more space = more furniture..
    7) Emergency fund – all living expenses for 3 months atleast

    Get a handle on these expenses, and then use a mortgage calculator for homes you see and like. See if your income can support it, or see what you’d be willing to give up. It will take some sacrifice, so you’ll have to figure out what’s really important to you. 2x your salary isn’t going to cut it in this area. But with a large enough downpayment, you help keep your monthly expenses lower.

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