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. Unplugging the microwave?
2. Morality and employment
3. Loan modification versus refinancing
4. Saving for vehicle replacement
5. Living expenses and college debt
6. Unequal chess skills
7. Handling banking errors
8. Repairs to increase equity?
9. Ahead on student loans
10. Investing without worry?
The Midwest has been loaded with weird weather for the last month or so. The tornadoes have captured the headlines, but most of the middle portion of the country is seeing oddly strong thunderstorms, exceptionally windy days, torrential downpours, and flash floods.
It’s enough to make a person really paranoid that something is going to strike them soon.
It really depends on the microwave. Many microwave units do slowly sap energy. For example, if it has an LED clock on it, it’s probably sapping a bit of juice constantly.
How much juice, though? It depends quite a bit on the model. Some models have almost no “phantom” use and the trouble to unplug them and plug them back in isn’t worth it. Others use quite a bit.
I use a Kill-A-Watt meter to check on these devices. I simply unplug them, then plug the meter into the outlet and plug the device into the meter. The device tells me pretty quickly how much phantom electricity the device is using. Unless it’s more than about fifteen watts, I don’t bother unplugging it, even on trips.
Q2: Morality and employment
Now that my life is a little more under control, I am seriously thinking about my career and what I want to do with my life. I am 24 and thought I wanted to be in politics. That led me to my toxic job and taught me the hard way that it’s just not for me. In an effort to fix my situation, I took a job that meant little to me but offered a much higher salary. I like it just fine but I know it’s not my life’s work. I’m learning some transferable skills (like marketing and business development) and it puts food on the table. The main problem? I seriously disagree with the fundamental goal of my company. As in, it goes against all of my values. Although I am not directly working toward our product, it makes my stomach flip to think I am contributing.
So my question for you is: what do I do? I am so afraid to quit my job in case my finances spiral out of control again. Yet, I know I can’t stay where I am. I don’t want to take another random job that comes along. That only perpetuates my problem. My parents and friends are encouraging grad school, but I’ve learned enough from you that grad school is probably the worst thing I could do if I don’t have a plan. All that debt makes me shudder. My compromise plan is to figure out what to do with my life over the next year and in the meantime save, save, save so I can confidently quit my current job. Yet, I still have the fraud feeling and the problem that I don’t exactly know what I would rather be doing. I love to cook and want to do something with some “meaning”, that I believe in. Yes, I realize that is idealistic but I can’t kick the idea of service (which, I believe, is what led me to politics in the first place). I just feel stuck knowing what I don’t want, yet unable to decide what to do instead. Any advice? I guess I’m also looking for reassurance that if I stay in my job short-term, it doesn’t make me a horrible person.
There’s nothing wrong at all with taking a job in the short term just for the money. When someone employs you, they’re giving you money in exchange for some work. If you’re holding up your end of that bargain, then there’s nothing at all wrong with that.
I’d suggest you use this period doing some real soul-searching, as well as exploration of areas that you might be interested in. Figure out a path while you have this good-paying job, then follow it.
No matter what, don’t get used to the high pay. Live lean and bank as much as you can so that when you do discover the right path, you’ll have the financial resources to make it happen.
Q3: Loan modification versus refinancing
We are looking to refinance our home only to take advantage of a lower interest rate. We are not in financial trouble of any kind and have the cash to cover closing costs and fees. After shopping around for rates, I found that our credit union (who the loan is currently with) has the lowest interest rate. I called to inquire about a refinance and they offered us a loan modification instead of a refinance. They do not require that we be late on any payments (in fact they won’t do a modification if there are any late payments).
It cuts the fees in half, the process is much simpler and we get the same interest rate as a refinance. I’ve heard a lot of negative things about loan modifications though and I am worried it will hurt our credit score somehow? We are fully able to do a refinance if that is better for our credit.
The two biggest elements that people usually worry about with a loan modification are impact on one’s credit due to late payments and large processing costs and legal fees. You seem to have both of these elements well in hand.
You’re entering into a loan modification from a different angle than most people enter loan modifications from. Many people who get a loan modification are in a very poor financial position. They’re often late on mortgage payments and are worried about foreclosure. A loan modification does not get rid of those problems for you.
Similarly, many modifications are loaded down with a pile of fees and other costs, which you seem to be avoiding here. I’d call it a good move for you.
Q4: Saving for vehicle replacement
I am writing to find out your advice on how to save to replace a vehicle. My wife and I just paid off our ’08 Ford Escape (40,000 miles – shouldn’t have bought it in the first place, but that’s in the past), and last year I paid off my ’05 Chevy Cobalt (115,000 miles). We both work and two vehicles are necessary.
Our current situation:
Monthly take home = $5,300
Debts = two student loans (total $23,500), mortgage ($125,000), no credit cards or other consumer debt
Monthly allocation to debts = $2,800
I generally follow the Dave Ramsey debt snowball plan, and by my calculations, we will be debt free except for the house in 12 months. But I have now become worried if one of the vehicles gets totaled or otherwise stops running. I believe Dave Ramsey advocates paying yourself a car payment each month to save up for a replacement, but that will greatly slow down my snowball. I could cross my fingers and hope there are no catastrophes for at least a year.
What do you recommend? Reduce my debt snowball by $300~/month or stick to my plan?
I would absolutely consider saving for the next replacement car by socking at least a couple hundred away a month because I would consider that car loan that you know would be coming as part of your snowball.
The advantage you have by saving, though, is that the interest is working in your favor. If you were to continue your snowball without saving, you’d face a debt in a few years at, say, 7%.
Now, if you instead made payments to a savings account right now, you’d earn 1% on those payments. In effect, those early payments are like tackling an 8% debt – the 7% your car loan would likely be in a few years plus the 1% you’d earn on the early payments.
I’d stick that 8% “debt” into your snowball and see where it fits.
Q5: Living expenses and college debt
I currently have $16K in student loans at 6.5% rates. I have no other debt, I have a comfortable emergency fund, and I already contribute substantially (although not the maximum) to a Roth IRA (my employer does not offer a 401K plan). I have also built up an “extra money” savings account of $8K over the last three years that I think can be put to better use.
I expect to begin a Master’s program within the next 2-3 years. With the exception of three remedial classes, I am able to complete this program without paying tuition through a full-time work/study type of program. However, I will need to cover my own living expenses, books, and the other miscellaneous expenses that pop up in life and the program that I am enrolled in does not realistically allow for me to work any extra hours to earn additional income- the “free time” I have between attending work and class will be spent completing homework and assignments to get the most out of this education!
Does it make sense to use my “extra money” to pay down my current loans so that I have a reduced amount of debt going into the program or should I continue to stockpile this money and attempt to pay expenses out of pocket while in school so that I don’t have to add on any additional loans to repay?
If you know you’re going through a period without any income in the near future, the best thing you can always do is buff up your emergency fund before that period.
The reason for this is simple. If you have expenses and no income, your cash reserves are going to drop. When it gets low, you’re going to have to turn to some other source and, often, that other source is credit, because credit is so easily available. Unfortunately, easy credit often has a terrible interest rate, something you want to avoid.
Thus, your best approach is to save now so you don’t have to incur that high interest debt later on. You’re far better off saving too much and carrying a bit of unnecessary lower interest debt than not saving enough and having to dip into credit cards.
Q6: Unequal chess skills
You mention board games an awful lot, so I thought I’d run this by you. My roommate and I both like to play chess, but he’s at a much higher skill level than me. We tried a piece handicap, but it seems like every one we try unbalances the game, either leaving him far better or making it easy for me. Do you have a suggestion to help us play chess on equal ground?
For one, you can play Chess960. This is Bobby Fischer’s preferred chess variant, in which the home row pieces are randomized using a few simple rules. This almost completely eliminates the advantage of knowing opening books, which is one thing that good chess players often know. They know a handful of opening move sets that put them in a very strong position. Chess 960 wipes out that advantage.
If none of those work, you can always try studying chess yourself using some strong chess-playing software. I used to use Shredder.
Regardless, abstract games are a great way to really exercise your mind. Kudos for keeping with it.
Q7: Handling banking error
Basically, back in December PayPal charged a transaction on my fiancé’s PNC bank account which caused an overdraft fee. We had switched to Bank of America a few months earlier, so we weren’t really keeping track of the account (and she had mail going to her parents house anyways so if they did send notices, they got lost in the shuffle). PNC of course started charging fees daily, and ended up closing the account and sending it off to collections. We just received a notice from a collection agency that we owe over $200.
I contacted PayPal, who gave me a form letter explaining to the bank that it was a mistake, but PNC doesn’t care because they already sold the debt. Of course, the collection agency won’t care that it was a mistake.
What should we do? All I can think at this point is to try and negotiate a deal with the collection agency.
The best thing you can do is just get rid of the debt quickly, which probably revolves around negotiating with the collection agency. You want to get this paid off as soon as possible to minimize the damage to your credit report.
Again, none of the other businesses have any reason to be involved here. At this point, you need to focus on the business that holds your debt.
An aside: this is yet another example of why I dislike how credit reports are handled in the United States. It is incredibly easy for a misunderstanding or a record-keeping error to result in someone having damaged credit, higher insurance rates, and so on.
Q8: Repairs to increase equity?
In 2007, my wife and I bought a new house that was probably above our income level. It wasn’t a huge thing; it was about 1/3 of our monthly take-home, and we had no children and no plans for one. Bills, groceries, gas, etc, took up about another 1/3 of our income, so at the end of the month, we had about $1500 to $1700 of unbudgeted money left over, which went into savings. Flash forward to spring ’08, and we found out my wife was pregnant. Of course you know, having a child means many more new expenses, and that $1500 in monthly spare cash quickly dropped to around $400, if we were lucky. The money we had been saving before mostly disappeared due to an incident largely beyond our control. After basically a year of trying to make all this work, I told my wife a few months ago that I believed our biggest problem was the house and it’s large payment, and that I thought we should spend a year fixing it up, making some needed repairs, and put it on the market next spring. My reasoning was that I figured it would sit on the market for a few years, and since we are still able to comfortably make the payments, it would give us the ability to build more equity, give the housing market time to recover some more, and give us the freedom to turn down offers as needed. My wife agreed, so we’ve started slowly fixing things around the house.
Here’s where it gets hairy. There is a house for sale down the street that has the exact same floorplan as ours, listed for $25k less that what we’d have to get out of ours just to break even, and it’s been listed for several months (although our lot is MUCH bigger). I suggested to my wife that we not just make repairs, but make targeted upgrades to certain areas to really blow away potential future buyers (around $8,000 to $10,000 worth of upgrades). My wife is for the idea, but now isn’t sure if she wants to list the house next spring, because we may not make the money we spend back on a sale. I should mention that the costliest upgrades would be to things we have to repair anyway (for instance, the carpet in our great room needs to be completely replaced, due to muddy dogs, spilled milk, and just general wear and tear. As long as we’re ripping up the carpet, why not just lay down new hardwood floors?).
It is often hard to tell if you make the money back on a sale after doing home improvements.
For one, the market changes over time. During the time in which you’re doing these improvements, the market might shift in ways that raise the price of a given house or lower it.
For another, the reasons why people buy particular houses are often inscrutable. The person that buys your house might be attracted to the larger lot and not care about the improvements at all. Another person that might buy your house might love the improvements you’ve made.
Home improvements generally make a profit for the homeowner when there’s a lot of sweat equity involved and they target things that buyers will really like. In other words, do it if you enjoy home improvement. Otherwise, I would bank my money elsewhere.
Q9: Ahead on student loans
Other than our mortgage, we only have one other loan payment: my student loan, currently around $18,000. The monthly payment is $150, but since August I’ve been making payments of $200 every two weeks. Currently I’m so far ahead that my next payment is not due until August 2012. However, even at this rate, it would still take me over 4 years to fully pay off the loan. Would you stop or reduce these payments in order to pay for house repairs/upgrades (or some other purpose) or continue making these payments?
If you have another goal to fulfill, sure. Go ahead and divert some of that money into whatever project you’ve got in mind.
However, if you don’t have anything clearly in mind that you’re shooting for, keep knocking down that debt. It’ll be gone before you know it and that will be a tremendous thing for your net worth.
It sounds like you have some nebulous ideas for the future. Unless those are really clear and important to you, I’d keep paying down the debt.
I don’t agree with you that the U.S. dollar is going to be rapidly devalued. Many people point to the huge national debt, but the real way to look at the debt is in terms of GDP. How much money is the nation bringing in in comparison to how much debt we’re carrying?
The truth is that we’ve had worse debt in the past. Right now, we’re fighting two foreign wars that are winding down and we have an economy that’s starting to rebound, both of which are great signs for the debt-to-GDP ratio.
Still, if you’re under the belief that the dollar is about to be rapidly devalued, your best bet is to buy things that are tangible assets. Land and food are good places to start. If inflation goes rampant, the prices of both of those things will go up very quickly. Land and food are things that are always needed.
Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.