Reader Mailbag: Christmas Shopping

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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. Pension benefit options
2. Unapplied mortgage funds
3. Moving and investing simultaneously
4. Underwater home and credit cards
5. Setting priorities
6. Toilet paper value
7. First time credit worries
8. Car cost versus salary increase
9. Helping family with finances
10. Insurance priorities

My Christmas shopping is almost finished for the year. Aside from some children’s gifts, every present that I’ve picked up so far is either homemade or is something specifically utilitarian. None of those “Thanks for this…. thing” gifts – no one likes those, neither the sender or the recipient.

The one exception to that: our extended family is doing an interesting “Yankee swap” Christmas gift exchange in which everyone is putting a DVD into the mix, then we’re opening them “Yankee swap” style, which means you can swap your newly-opened gift for a gift that someone else has already opened. This will make a normally ho-hum gift exchange decidedly more interesting – and entertaining.

Q1: Pension benefit options
I got a job with a large insurance company directly out of high school. After ten years of working my way up the ranks, I took a position with a different institution. my company notified me that since I have ten years of service, I have a pension available. I can take a monthly benefit of $202/mo or a lump sum payment of approximately $4,800. The monthly annuity would begin at age 65. If I took the lump sum, they would withhold 20% for taxes. My current tax bracket is right on the cusp of the 15/25% border, so I would likely have to pay an additional 5% in taxes.

So which option do I take? On one hand, the annuity is a nice backup to my 401k savings (10% of gross income). However, factoring in inflation over the next 35 years brings the value down considerably. Also, this is a company with a choppy history – what guarantee do I have that the pension will be available in 35 years? Is that a serious risk? The lump sum is enough to pay off all my remaining existing debt (which is scheduled to be paid by March of next year) and cushion my emergency fund. My husband and I want to start and family in the next year and purchase a house in the next five, so debt reduction and aggressive savings are our top priorities right now. The lump sum could make this happen much faster, but I don’t want to cheat my future self out of the benefit of a lifetime annuity.
- Heather

The first thing you need to find out is whether this annuity is actually a product of your company or whether it’s held by someone else. If you doubt the long term viability of the company you work for and the pension isn’t insured in any way, then I would be suspicious of the long term value of that pension.

In other words, if you believe there’s any sort of significant chance that the company providing your pension won’t exist when you’re 65, I would take that lump sum now. Just put half of it in the bank for taxes – you probably won’t need that much, but you’re better off being safe than sorry.

I’d probably use the first half of the money to finish off your debt repayment just a little faster, then turn your focus to savings.

Q2: Unapplied mortgage funds
My wife and I have a 30 year mortgage, held by a bank which I will call Fells Wargo, at 5% on a $230,000 home which we are a year and a half into. From day one, we decided to enroll in bi-weekly payments knowing that by doing this we would trim some time off of the 30 years. I’ve come to realize that the first “half” payment sits as, what is called by Fells Wargo, Unapplied Funds. The definition of Unapplied Funds on their website is as follows:

“Unapplied funds: When funds received from you are not sufficient to cover your minimum payment, it’s unclear where additional funds sent should be applied, or payments on your account cannot be posted, these funds are held or unapplied until the situation is resolved.

When there are unapplied funds associated with your loan, you’ll receive a letter instructing you how to resolve the situation or to send the additional funds required to make your payment. You can also contact Wells Fargo Home Mortgage to let us know where the funds should be applied.”

The very last sentence turned on a lightbulb in my head. If I tell them where to apply my funds, then this will cut the amount I pay in interest. Am I right by saying so? If so, how would I tell them to apply my funds? Here are some numbers to play with… Bi-weekly payment = $847.72. Last full payment: Principal = $294.25, Interest = $920.71, and Escrow = $480.48. Remaining balance = $220,677.29
- Justin

You’re absolutely correct. If you request that your oddly-named bank apply your extra payments towards your principal, you’ll reduce the amount of interest owed on future payments.

Note that this does not mean your monthly payment will become lower. Instead, it means that a larger part of each subsequent payment will go towards the principal of your debt because the interest portion of your monthly payment is now smaller. What will actually happen is that your house will just get paid off quicker.

Also, some states don’t allow prepayment of home mortgages, so you may find that the money may just be refunded to you or deposited in an account of your choosing.

Q3: Moving and investing simultaneously
We’re tired of Manhattan and ready for a change. For several years we have been thinking about going into the Peace Corps. We’ve both done a lot of volunteering in the past and I spent some time living in an un-industrialized / less-developed country when I was in high-school so we do have some sense of what we are getting into. We also want to spend some time traveling. My husband is more adventurous in nature, he is very focuses on not squandering his time, youth and health ( its not unlikely that, if I were less pragmatic, we might be camping on a beach in South American right now rather than living in the East Village).

Also, we’re thinking about buying an investment property in Minneapolis. My family lives in the twin cities and we visit there 2-3 times a year. The real estate market is good right now, we can’t afford to buy in New York but we could afford to buy in the mid-west. We would hire a management company to over see the property. We have been pre-approved for up to a $275,000 mortgage at 4.25% and we’ve run all the numbers carefully – depending on the property we could likely make a few hundred dollars profit per month. The rental market in the Twin Cities is strong and worse case scenario we would be able to pay the mortgage and the Manhattan rent if we need to. We would have the rental property, ideally, for about a year before we move overseas for the Peace Corp so if it seems as though we would have to pay the mortgage long term we could postpone the Peace Corps until a later date.

My question is – are doing BOTH of these things risky? I like the IDEA of buying a property that will hopefully increase in value or at least have renters to help pay off the mortgage while we spend a few years overseas. This will also make me a little more comfortable with the idea of not actively contributing to a 401K or IRA for a few years because I would be investing towards my future in another way.
- Kate

I don’t have a full picture of your financial state, but I will say that you shouldn’t even consider doing this if you don’t have enough cash in the bank to cover all of the mortgage payments while you’re out of the country doing the Peace Corps gig.

If you don’t do this, you set yourself up for a very sticky situation in which you likely won’t have the resources to cover the mortgage while overseas and you’re relying on a reliable renter, something I would never bet everything on.

If I were you, I’d either choose one or the other or wait until I had a pretty fat bankroll.

Q4: Underwater home and credit cards
I recently got married and my husband and I are in a unique situation. We both own houses that we rent out and we are currently living in a house my mom owns and paying her rent of $1250 per month. My husband owns a home with his sister and until recently she was living there with a roommate and he paid a third of the mortgage. Now she has moved in with her boyfriend and their house is rented for most of the mortgage. We pay $500 a month towards that mortgage and they have no intent to make any changes to that situation.

I came into this marriage with about $20,000 worth of credit card debt and we’ve managed to pay down about $5000 of that in the past 6 months. Our original plan was to have it all paid off within two years (which is on track) and then start putting money away for a larger house than the one I own. The trouble, is my house. I rented it out when I had to move south because it was worth just about exactly what I could sell it for, and it seemed to make more sense. It’s an interest only loan at 7.4% and I pay just under $1500 a month for the mortgage. The rental income is $1,000 so it’s only $500 out of pocket for me currently. When my tenant’s lease is up in April, we plan to move back into that house for 3-5 years before buying a larger home to accommodate the kids we’ll start trying for in the spring. The problem is the house is scheduled to reset in July. We’d like to refinance – and with my husband and my incomes, ordinarily it wouldn’t be a problem – especially since by the time we’re living there again, we’ll have paid off at least another $5000 of the credit card debt. But sales in that area have declined and I’m about $30,000 underwater. I have no idea what to do now. Paying more for the mortgage when it resets won’t break us (I hope) but I’d like to get better terms. We’re not behind, we’re not in dire straights, but is it even possible to refinance when prices are so low? I don’t see how we could qualify for assistance; we make around $7,000 a month. Oh, and we can’t refinance until we’re living there, because if I’m renting it out, it’s considered an investment property and when we asked our credit union, it was going to cost $10,000 just in fees & closing costs.
- Jenny

If I were you, I’d move into the house at the first possible instance in April and then refinance as quickly as you can before the rate resets.

I’m going to assume that you’ve been keeping up with your bills recently and thus have improved your credit rating. If this is the case, then you should be able to easily qualify for refinancing once you’ve moved into the home.

Of course, the big question is whether you can find a financial institution that would be willing to refinance an underwater home. The first business you should approach is the mortgage holder, who will likely be willing to work with you to refinance.

Q5: Setting priorities
I’m at a point where I’m unsure of where to go with my extra money every month. Here is a quick backstory on me: 29 years old, single, no children, stable job making over $100K/year. I currently have about 5 months of expenses in an emergency fund. My only debt is the $165K balance on my mortgage at 4%, and $20K in student loans at 2.13%. I am currently putting 13% of my pay to 401K (some of that is Roth so it is post-tax), and my company is putting in an additional 3%.

My immediate near term goals are to add another month to my emergency fund to get 6 months worth of expenses, and increasing my 401K to the annual max. After doing these two things, each month going forward after paying all bills and other expenses I will have about $1,000 left over. Here are what I see as my options, in no particular order (feel free to add more options):

1) Continue to add to savings for a bigger emergency fund

2) Start paying extra on my mortgage (keep in mind the low interest rate)

3) Start paying extra on my student loan (keep in mind the VERY low interest rate)

4) Start investing more money into a brokerage account for stocks/bonds/mutual funds (I already have about $15K invested in a personal account)

5) Contribute to an IRA (can I do this if I’m fully funding my 401K?)

6) Purchase my company’s stock (we are an S&P500 company that everyone loves) at a 10% discount through our ESPP and sell whenever the window opens that allows us to sell (typically a one week period once a quarter). Assuming the stock didn’t go down 10%, I will have made money (although taxable). If the price goes nowhere, that’s a 10% return (greater when annualized). If the stock goes up, that’s an even greater return. I also get a decent quarterly dividend with a current yield of about 4%.

7) Other potential options I didn’t list that you recommend
- Nick

These are all worthwhile options, but before you commit to any of them, you need to figure out why you’re saving. What are you saving for?

If you can’t think of a specific reason that you’re saving, I would focus on eliminating all of your debts, starting with the higher interest ones. I know that they’re relatively low interest, but doing it anyway has two benefits.

First, a debt prepayment is basically a guaranteed investment that returns the interest rate of the debt. So, if you’re prepaying a 5% loan, that’s basically a 5% return that you don’t have to pay taxes on, which is pretty good.

Second, eliminating debts early gives you personal and career flexibility that you’ll never have with a debt hanging around your neck requiring you to make a payment each month.

Q6: Toilet paper value
Up until about 3 years ago or so, I used to be able to tell if a sale on toilet paper was really a good deal or not. Now that companies are doing the double & triple-roll thing, I can’t tell if a sale on toilet paper is truly a good deal or not. Do you have any rule of thumb on this?

- Nancy

I use sheet count. Of course, this will require you to have a calculator with you unless you’re really good at mental math.

Take the cost of the package. Divide it by the number of rolls in the package. Divide that by the number of sheets per roll, and you’ve got the cost per sheet. The lowest cost per sheet is the best bargain, but you can obviously restrict that by brand or type as you wish.

Obviously, companies do this to make comparison shopping a bit tougher. I don’t like it, but we all need toilet paper (or a bidet, I suppose).

Q7: First time credit worries
My grandson wants me to teach him to build credit so he can buy a boat next summer.

He has his first job straight out of high school. He makes about $26,000 a year after taxes.

He splits an apartment rent with a brother who makes the same amount. The brother is going to college to become an engineer.

I can show him how to build credit, however; I want him to know much more than just how to buy stuff.

To my knowledge, he spends all he earns, and has no emergency fund.

I believe that getting credit for the first time and the responsibility that goes with it would be a good post.

I would like to show him the good, the bad and the ugly about credit.
- Joan

Responsibility with one’s money isn’t something you can teach very well without a willing student. If he has no interest in getting his finances straight, then you can talk all you want but it will just go in one ear and out the other.

If you want to interest him in good personal finance, I would start with goals. Wait until he’s able to articulate things about his future that he actually wants, then start looking about how to get there.

I find that connecting goals to the mundane nature of personal finance is the best way to get people interested in and excited about it.

Q8: Car cost versus salary increase
I’m currently on the hunt for a new job. I live in Australia where the job market and economy isn’t anywhere near as unstable as the USA. My boyfriend and I are a one-car family and I bike or public transit to work. Some of the new jobs I would like to apply for include a 20-25K jump in salary range. So I’d be making significantly more. However, some of these jobs would also necessitate the purchase of a second car. Unfortunately we can’t switch positions as my boyfriend can’t take public transit to his job. This second car would most likely be a 4wd pickup truck (used) as it would benefit his career (furniture builder which requires moving significantly large pieces of furniture obviously) and our lifestyle (we enjoy a lot of camping and 4wd trips with friends and family). Unfortunately I don’t have the cash to buy a car outright. At what point does a car payment, insurance, petrol, etc. negate a 20K+ salary increase? Am I better off only applying for jobs I can public transit to?

- Carolyn

A $20,000 salary increase is well worth buying a used car for, without a doubt. (Yes, I checked the exchange rate – US dollars and Australian dollars are fairly close.)

From what I can tell, you can get a reliable used car for $8,000 in Australia. I don’t have good numbers on petrol and insurance prices there, but unless they’re enormous and far beyond the scale of prices in the United States, it’s worth it.

The deal gets even better when your car is paid off and you’re just pocketing that money.

Q9: Helping family with finances
I have begun reading your blog this year and think you have some great advice so I wonder if you could help us out.

My brother-in-law and his wife have been having financial trouble for a number of years, including difficulty with holding down full time jobs due to the economy, and as a consequence of both low income and poor spending habits they frequently do not manage to stick to the “spend less than you earn” rule, despite low living costs in the small town in Iowa where they live. Consequently they frequently ask my in-laws for money to help pay their bills, sometimes up to $1000 in a month. While they want to help out my in-laws are retired and on quite a low income themselves, their retirement savings were hit by the market crash, and we would all prefer that they were able to be saving up their money for the future, or even better spending it on enjoying their retirement rather than constantly having to rescue their kids.

Can you offer any advice on help or advice we could be offering to my brother-in-law to help to get them on a better financial track? They have a 3 year old and are about to have another child next month so it is only going to get worse with the increase in costs and decrease in income when the baby arrives and my sister-in-law stops working, we are really worried about both families financial situation. While we are reasonably financially stable ourselves we aren’t really in a position to be handing them money regularly, we could help out in an emergency but that isn’t really going to solve the problem in the long term anyway.

In addition, do you have any advice on how to broach a subject like financial advice to family members without offending anyone?
- Penny

Much as I responded to Joan above, it’s extremely difficult to get people interested in personal finance if they don’t care about it.

Also, as I stated above, the best method for getting people interested is to focus on goals. Is this a lifestyle they want to sustain over the long haul? Where do they want to be in the future?

I’ll freely admit that I find it uncomfortable to talk to my siblings about personal finance. It’s just not a subject that goes well between us, so I just let it lie.

If I were you, the closest I’d get to the subject is goals. Talk about where you want to be in five years with them and then clearly state how you’re going to get to where you want to go. Don’t tell them how to do anything.

Q10: Insurance priorities
How would you rank the following with 1 being the most important and 5 being the least important: accident, disability income, health, life, and major illness? Also, what percentage of one’s pre-tax income should be allocated to each of these items? You could put in 0% if you think I shouldn’t get this type of insurance.

- Ronald

It depends heavily on the situation in your life. Do you have children? Are they young or are they near adulthood? Are you married? Is your spouse in a financially independent position, meaning would your spouse be able to survive without you?

Is there a history of disabling illness in your family? Do you work in a career where you’re at risk for disability?

Those questions will help lead you to what the most important insurance types are for you. There is no ready-made solution that works for everyone.

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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43 thoughts on “Reader Mailbag: Christmas Shopping

  1. Q1: Would the Pension Benefit Guaranty Corporation not apply in this case? About ten years after my father retired, his former employer went into bankruptcy, and PBGC continued paying the pension benefit. Are there details I don’t know about that would keep PBGC from kicking in if Heather’s former employer were to dissolve?

  2. I’m sorry… I’m not understanding the statement, “debt prepayment is basically a guaranteed investment that returns the interest rate of the debt. So, if you’re prepaying a 5% loan, that’s basically a 5% return that you don’t have to pay taxes on”.

    Can trent or anyone else please clarify? Thanks!

  3. Re: Q6 Toliet Paper Question

    Assuming a 12-pack double roll (equivalent to 24 single rolls):
    - If you need tp and it’s not on sale, usually Angel Soft is a bit cheaper than the other brands

    - When regular Charmin (in the red package) goes on sale it’s usually a great combination of value and quality. (And Ultra Charmin in the blue package is usually on sale at the same time — yes it’s ultra cushy for your tushy, but the rolls aren’t as big and run out quicker)

    - If you’re bargain shopping, surprisingly WalMart’s White Cloud toliet paper isn’t bad. Turns out that what we were using at the beach this summer, and I was shocked to find out it was WalMart brand (which I assumed would be one step above tissue paper).

    - I rarely find Cottonelle on sale and Quilted Northern goes on sale, but I don’t think the sale prices are as good as when Charmin goes on sale.

    Somewhat embarrassed that I know this much about tp prices, but hopefully it helps!

  4. @Penny, Q9: “we would all prefer that (my husband’s retired parents) were able to be saving up their money for the future,”

    This, to me, reads like “My in-laws are flushing my inheritance down the toilet – how do I make them stop so that I can get my hands on their money instead?” If that’s any part of your motivation, mind your own business.

  5. Re: Q2: Unapplied mortgage funds

    I also have a 30 year mortgage with this strange entity called Fells Wargo. And, I am also in the bi-weekly plan.

    From what I have seen, is it’s all done automatically. Your first bi-weekly payment of the month is labeled “unapplied” but I believe that is just for the purpose of letting you know they are waiting on the second one. Once the second one comes in, it is combined with that first one, and treated like a normal mortgage payment.

    The trick is that there are two months out of the year that you will be making THREE payments, instead of two. So, that month you’ve paid 1.5 payments. The 0.5 (or one half of your regular payment) is automatically applied straight to your principal. Which equals out to a full payment a year.

  6. @Q2
    What Steven said – also, you need to be very careful *not* to do what it sounds like Trent is saying. Do not tell them to apply the first payment to principle, because if you do, you’re actually going to be short your full mortgage payment since you’re early enough in the loan that you pay far more interest than principle … and you’re probably going to get hit with late fees, etc.

    @Q9 I think the best answer is just to let them know that you have an interest in personal finance and it’s an area you know a lot about and love to talk about and if they have any questions, you’d love to talk with them about *their* goals and ways to achieve them. Do NOT start talking about your own goals and plans, because it’s going to come across like you’re bragging and it’ll probably make them feel either guilty or resentful and turn them off from the conversation completely.

    @Q10 While I agree that what kinds of insurance you need is based on family circumstances, etc, I think that absolutely everybody should have health insurance. Good health insurance will help you in the event of three of your concerns (health, major illness, and accident). If you have a good emergency fund, short term disability is usually not necessary. Long term disability is one of the things that depends a lot on your individual circmstances.

  7. @Johanna — I think you are stretching to reach that conclusion from what Penny wrote. Here’s here full sentence: we would all prefer that they were able to be saving up their money for the future, or even better spending it on enjoying their retirement rather than constantly having to rescue their kids.

    You stopped at the first comma and missed the part where Penny says it would be better if the in-laws could spend that money on enjoying their retirement.

  8. Q1 can you roll over the pension $ into an IRA? Also do the math on what $3840 (80% of the pension lump sum) invested for 35 years would amount to. Since you’re already on track to pay off your existing debt pretty soon, you might be better off in the long run keeping the pension fund as a retirement investment of some kind.

  9. Q4: Pull out your loan docs and try to figure out what your reset scenario is. It will tell you what the index and the margin is (ex: 1-year Treasury plus 3%). If you took the loan out 5 years ago, there’s a good chance it will reset to a lower interest rate, assuming your index rate doesn’t increase dramatically in the next few months.

  10. Q2: Unapplied mortgage funds

    Tell them to take a frickin’ guess. Since the mortgage interest is covered 100% by your regular payment, where else should the extra money go but toward the principle?

  11. @Derek

    A bi-weekly payment as structured by the bank isn’t two full mortgage payments every month – it’s half a mortgage payment every two weeks.

  12. @Tracy, OK, but why are they asking you what to do? Cover the interest as owed, then apply immediately to principle. What else is there? Let the money stew?

  13. It’s what Steven said above – the benefit is that you’re making 26 payments a year of half the amount, or the equivalent of 13 full payments, so one extra month’s payment.

    They’re not really asking Justin what to do with the money – they’re not sending him out a letter or anything. They’re depositing the money in the unapplied fund so they have some place to keep it until he makes the second half, then apply the whole thing in the appropriate portions. It has to sit in unapplied, however, because until he’s made the full payment the bank isn’t ‘sure’ how much of his mortgage that month he’s going to pay. Does that make sense?

    If he was overpaying and money went into Unapplied, THAT is when he’d have to tell them he wants it to go to principle, because otherwise they may try to put it as a prepayment on the next month’s mortgage and he wouldn’t get the benefit of knocking off some of the principle.

  14. @BJD: Just because I didn’t quote something doesn’t mean I didn’t read it.

    It is very common for heirs to feel entitled to their future inheritances, and to get bent out of shape when they see the money being spent on other things. So no, I don’t think it’s a stretch to suspect (not conclude) that Penny might be thinking this way to some extent. Why else would a couple of retirees need to be “saving up their money for the future”?

    If Penny’s brother-in-law were to approach Penny and her husband for money, then Penny and Mr. Penny would certainly be within their rights to say no. Or to say yes, but on the condition that they all sit down and have a chat about BIL’s financial situation.

    Or, if MIL and FIL are the type of people who have trouble saying no, and BIL is taking advantage of that, it could also be appropriate for Penny and Mr. Penny to intervene: Approach MIL and FIL privately and say, “If you want us to back you up in turning down BIL’s requests for money, we’re there for you.”

    But if neither of those things is the case, then this situation is not Penny’s business. MIL and FIL are adults, and they’re allowed to do whatever they want with their own money. If bailing out BIL is what they want to do, that’s their choice.

  15. The good thing about Fells Wargo is that if you make any extra payments on the website (which I would highly recommend, I love their interface) you avoid that problem. Fells Wargo won’t let you submit the payment until you tell them what to do with it. So, although my bi-weekly payments are completely automated, if I have a few hundred bucks that I want to pre-pay on my mortgage, I just go to the website, select “apply to principal” (or whatever it says) and bam. Done.

  16. Johanna,

    Don’t you think you’re ignoring the possibility that the heirs are concerned with their parents’ expenses related to age? The future for a retired couple with limited income can be very uncertain, and might include expensive healthcare costs, or maybe even nursing home costs. I don’t think it’s unreasonable for an heir to feel like they have a small stake in the parents’ financial decisions if the burden for their care in old age could fall on the children. This is especially true since the burden will likely fall on the most responsible child, which in this scenario may likely be Penny and her spouse.

    Just because your speculation isn’t necessarily conclusive doesn’t make it any less harsh. People write in for advice about their problems, and deserve the benefit of the doubt on such matters.

  17. “I’ll freely admit that I find it uncomfortable to talk to my siblings about personal finance. It’s just not a subject that goes well between us, so I just let it lie.”

    I guess this answers the question of how the “estate talk” with your parents and siblings over Thanksgiving went.

  18. For the Peace Corps couple: Peace Corps is two years that can very well change the course of your life and affect all your priorities. (Been there, done that.) You will be a new person when you return, and your relationship as a couple will be different, too, in some ways. I suggest you go unencumbered,and be open to the experience. In short, I wouldn’t go with a property investment to worry about.

  19. I’m with #17 – wondering how “the talk” with.

    Second, I think it’s important not to discount how necessary health insurance is, even for the young and healthy. If his wife didn’t have a public sector job which offers health benefits, it would practically be impossible for him to purchase coverage given the preexisting conditions he’s mentioned having (at least for now, until HC reform kicks in). And it might have made it almost impossible for him to take the leap from “employee” to “writer.”

  20. Re: Q8:

    When you consider applying for jobs that require a car, you should also consider the non-financial effects of car ownership and commuting. For me, the desire to avoid the stress of driving everywhere and the extra time out of my life sitting in traffic means that I have turned down several jobs (and an entire industry, for that matter) that required a car.

    Only you can decide whether the extra driving would have a negative effect on your life, but it does for many people. So your “calculations” should include consider both financial and intangible outcomes.

  21. @Q4 If you can refinance underwater, be sure to write a post about it, or something! That is the black hole of personal finance information. It’s nearly impossible to find even a blog post or article the mentions it, leaving me thinking its not really possible.

  22. @Q7: He wants to build his credit score because he can’t afford the boat right? If he had money he wouldn’t need credit. He’s just out of school and excited to have lots of money and wants a big toy.
    Please please please explain to him the burden of a debt like this, how long it will take to pay, how a boat depreciates in value, how an emergency will cripple him.
    Teach him how easy it is to work for a bit more, save up, and own it outright.
    As someone who went into student debt with no idea what I was doing, please teach him how bad debt is and how to avoid it.

  23. Q10 – Insurance – Several of the big personal-finance gurus make suggestions based, as Trent said, on a lot of variables depending on your specific situation. Keep in mind that you can lock in lower rates when you sign up at a younger age assuming you’re healthy; also that accidents and disease can happen at any age so don’t put off getting health & disability/accident insurance just because you’re young. Go with term life rather than whole life.

  24. @17 maybe Trent means that he doesn’t feel comfortable talking to his siblings about their finances and his finances so he doesn’t, but the estate planning is different.

    I’m not sure, because Trent’s response almost sounds like it was written by a different person from the Estate planning post.

  25. Q1: The pension should be insured by the Pension Benefit Guaranty Corporation. So if the company in question goes bankrupt then it will be covered by the PBGC. Or if they convert it to an annuity covered by an insurance company that isn’t really a pension then the annuity will be insured by the state guarantee association.

    Q3 Kate : There are risks in owning a rental. What if the furnace goes out or your property manager rents the place to meth heads? Normally renting should be smooth and most renters are good. But you do have problems as a landlord so you should be prepared for them. I think your plan is OK if you are sure you know what you’re getting into and you actually want to be a landlord. But I don’t really like long distance real estate investing. Its hard to keep control and you have extra expenses. I speak from experience. It can work just great but it can be a nightmare too.

    Q4 Jenny: First, do you know what the mortgage payment will be when it resets? With mortgage rates so low right now its possible your payment could go down. Second, you could look into the government making home affordable program. They have a program to help people refinance at current interest rates. I don’t think any bank would refinance an underwater house otherwise, they have absolutely no to.

    Q5 Nick: I would put some of your money into that stock purchase plan #6 option. IF and only IF your company is in good financial shape. Don’t bet on a sinking ship. Assuming your company stock doesn’t crash you’d be getting a 10% guaranteed return that way which is hard to beat. BUT I would not put more than 5-10% of your income into it. And I would sell during the window rather than accumulating the stock.

    Q10 Ronald: I don’t know what ‘accident’ insurance would be, do you mean auto or home insurance? Health insurance and life insurance are most important. Life is optional if you don’t have dependents. Disability is important too. So I’d say #1 Health, #2 Life if you have dependents, #3 disability.
    Major illness is probably a waste in most cases, especially if you have health insurance. You can’t really budget most insurance costs as % of income. It costs what it costs. Disability & life may be more proportional to income though, but you need the coverage to meet your needs, not hit an arbitrary % of your income.

  26. Johanna, I really don’t think its fair to assume that Penny is motivated by wanting an inheritance. Yes its possible and even common for people to feel entitled to inheritance. But its not fair to assume that is the case. She explicitly said her inlaws have a low income level and that she’d prefer that they spend their money enjoying their retirement. Thats very contrary to an attitude of wanting to get her hands on that money for herself.

  27. How many times has Trent gotten answers about pension or insurance guarantee’s totally wrong? Seems he keeps answering that insurance and pensions are not safe which is completely ignoring the institutions and safeguards in place.

  28. Caring for your inlaws’ well being is a very different thing than greedily waiting for their inheritance. And, if they are low income retirees, I doubt it would be much of an inheritance to get excited about anyway. To read that mailbag question, and to jump to the automatic conclusion that the reader is just trying to preserve their future windfall, is quite silly, and I’m not even really sure how one would automatically even go to that line of thinking.

  29. Q5: Take that extra money and use it for the ESPP. If your employer is anything like my husband’s (also a popular S&P 500), they will keep the money they deduct in a holding account until the end of the period. At the end of the period they will purchase the stock and it will be available for you to sell the very same day. It’s an instant 10% turnaround.

    After that, you can use your savings and earned profits toward whichever other goal you choose. This is what my husband and I have done and it has netted us an extra $2000 per year to put toward our other goals.

  30. Q7: I agree most emphatically with Evan #22. Please show your grandson that if he saves the money he earns (within his possibilities) he will be able to pay for his boat one day, without incurring debt; and show him, spell it out if need be, how cripling debt is!w

  31. #6 The approach my mother swore by was buying the cheap toilet paper. The cheaper the better. Her thought: if it was sandpaper like, it would discourage people from using too much.

  32. I work as a book-keeper for an elderly client who was put in a nursing home because her son and daughter were not in a position to care for her needs. She has a good income (twice what my parents get) but nursing home care is expensive and she isn’t even at full level care yet. She also has a 2 year long term care policy that we are into the first year. It only pays $60/day when the cost is currently $140 per day. Every year there has been a cost increase. It consumes 3/4 of her income and then she bails out a daughter who constantly has financial problems. I can’t force her to not give money to her daughter because it is her money, and I am just there to pay the bills. All I can do is remind her that her costs are going up and gently question if her kids can bail her out when her money is gone. We live in a state where our Republican Governor wants to pull us out of Medicaid because he believes in small government and people should bear all of their own expenses. If that happens, then she will not have Medicaid to bail her out. I also had another client who paid for daily in home care for 3 years until she died because she did not want to go into a nursing home. That was also very expensive, but she had a million dollars in the bank besides her social security check. She never felt secure. She would try to reuse her adult diapers among other things to stretch her finances. I worry about the drain on mine and my siblings finances in trying to save for our own retirements if my parents have to go into a nursing home or require in home care because they do not have the income or savings to pay what I see these other clients have paid. I think Penny has valid concerns. However, all she can do is gently remind her parents that their costs are going to increase as they get older and gently encourage the sibling to set goals that are achievable that maybe they will reach for.

  33. Q1: If your pension is like most, when they said you will get $202/month in benefits at age 65, they mean in today’s dollars. At 3.5% interest, your $202 benefit today will only buy $72 worth of goods in 30 yeas (2040). Take the lump sum & invest it, you’ll beat inflation & then some if you manage it properly. Check with a tax or financial professional to see if it could go in an non-retirement account, & in 5 years you can withdrawal it to help buy a house. Your debt is so close to being done, just get a jump-start on saving.

  34. Q9: I would help your brother in-law and his wife find new jobs. This may be fruitless in this economy, but you never said they wouldn’t work. If they had their own money, maybe they wouldn’t take from your in-laws.

  35. Q7 : did you really read the question, Trent?
    The grandson is WILLING since he asked himself to be taught about credit.
    He has a GOAL since he wants to build a boat in a year’s time.
    Now, how about a really useful answer to help his grandmom Joan?

  36. @Q4, the house mortgage refinancing question:

    1) I don’t see why you need to refinance. Which means you won’t likely have to move back in to the home. The rate is getting reset, likely at market rates which are currently very low. In other words, I don’t understand the urgency here. You didn’t say it was a balloon loan, you just said the rate and terms were going to reset. Well, what are the terms? Look in your lending agreement to find out, then with that information:

    2) You should be talking to your lender and to a mortgage broker about how this might pan out, not the internet.

  37. @Q7, grandson wants to learn about credit and buy a boat but grandma thinks he doesn’t have the financial basics of budgeting, planning and savings down:

    I would just say: “Sure The first thing you need to do is make sure your foundation is secure. Your foundation is your monthly income and budget. Making a monthly buidget and plan for the next three to six months if you’re not already on one will show you where you stand on a month to month basis and will give you the information you need to plan for something like that. Then you’ll know what kind of debt you can afford to take on or can make a better decision about whether to take it on, and I could help you with that decision too. When do you want to get together and talk about it?”

    I would recommend he buy YNAB for his computer and visit the forums there as well.

  38. What exactly is more adventurous about sleeping on a South American beach as compared to living and working in NYC or investing in the MidWest? Find the excitement in the life you have!

  39. I would only invest in the rental property in the MidWest if you could escrow enough $$ to handle a reaasonable vacancy rate for a period of 6 mos to a year. You’ve stated what you have been offered to borrow, well what about your actual assets and financial picture? What’s the worst case scenario, the medium bad scenario, the normal scenario, and the best case scenario here? Impossible to give advice based on the info you’ve provided. However, if you’re really adventurous you won’t care about living on the financial edge I guess. Trent’s advice is reasonable and conservative and says, basically, “don’t try to bite off more than you can chew.” Whether that’s really important guidance for you guys is another question.

    I will say that the obsession with not wasting time/youth could be viewed either as a healthy impulse or as an OBSESSION that is actually based on FEAR. Figuring out which it is might require more introspection on your husband’s part.

  40. @ Daria, “I can’t force her to not give money to her daughter because it is her money, and I am just there to pay the bills. All I can do is remind her that her costs are going up and gently question if her kids can bail her out when her money is gone.”
    You could do more than gently question. Who put a gag over your mouth or told you what you were “permitted” to say? How about this: “I’m really uncomfortable with you sending your daughter money. They are unable to help you, which is why you are living here. She is able to work and take care of her needs. You are no longer able to work and you barely have enough money to handle your needs now. She is having enough trouble taking care of her own life now and it’s unlikely to change in the future. She won’t be in a position help you or pay you back.”

    Who cares how she responds? Make up your mind to tell her what you really think. She’s tough enough. If she tells you to mind your own business say, “No. This IS my business. It is my responsibility to look out for your interests and tell you when I see something going on that you can’t afford this. Your two year benefit policy will run out soon. It’s going to be increasingly difficult to pay for your care. You cannot afford to send money to able bodied people who should be taking care of their own needs.”

  41. @Q5,

    you have an opportunity to make nearly 30% annualized on $4000 per quarter in your Employee stock purchase plan. I would put all the money in that, and assuming that the share price stays level, wait until your holdings are considered long term holdings to avoid the 20% short term capital gains tax on preference to the 15% long term cap gains tax. (120 days from purchase) before liquidating any. You can do this 3x per year, thus giving me my ballpark 30% rate, which assumes you can re-roll the proceeds right back into the plan after selling. You’ll have to do the math.

    There is no risk to this other than lack of diversification really since you have a good emergency fund. But keep in mind that you really aren’t after this as a long term investment strategy but more as a hedge strategy. If you wanted to, you could take the proceeds and use them to pay off your debts, but why bother when you are getting that kind of return?

  42. Regarding TP. I noticed at Sam’s Club the cost used to be broken down per roll. It is now broken down to cost per hundred sheets. So their Member’s Mark touted as the least expensive is about twice what their institutional Dom brand is priced at 10 cts. / 100 sheets. Having been introduced to german TP 40 some years ago (think of planks shaved with a hand tool) the industrial is not much different than the home brand in softness.

  43. TP:
    I don’t think it’s all just about screwing up your comparison shopping. Jumbo/double rolls are also very practical.
    Having lived with roommates in a 3/4 girls to one bathroom place, we had a ‘no single-roll TP’ rule of shopping. Because we’d be changing the roll every day. The big ones make a big difference. It’s just that every company seems to have come up with their own slightly different way of doing it.

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