Reader Mailbag: Communication

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. Converting to Roth IRA
2. Going part time
3. Short sell our home?
4. Going back to school
5. Pushy in-laws
6. Healthy but tasty lunches
7. Which debt to repay first?
8. Should we refinance?
9. Underwater loan
10. Frugality costing more money?

My best friend (besides my wife) sometimes has interesting issues when it comes to communication. He reads his email perhaps twice a week, plus he sometimes forgets to charge his cell phone and leaves it without charge for days. He doesn’t have a landline. He also sometimes keeps strange hours at home.

Needless to say, there are times where it can be very tricky to get ahold of him. I recently spent three days trying to track him down.

Q1: Converting to Roth IRA
I have about $7,100 in a 401k from my old employer in FL and have not contributed to it since 2009. I moved to NC from FL in July 2010. NC has state income tax, something new to me but I’m adjusting. I am a 36yo single female state employee making $43,650 a year and I’m required to save 6% of my gross income in a state plan, to which the state contributes 10.5% (of my income, not my contribution.) I will not be vested until July 2015, provided I stay with the state that long and don’t take any breaks in working. I plan to increase my retirement contribution gradually to 10% after I pay off some moving debt next month. The 401k is my only retirement savings thus far.

Should I convert my 401k to a Roth IRA and split the taxes over 2011 and 2012? I know you will probably say yes and I am leaning that way. I wish I’d done it last year so I wouldn’t be paying taxes on the $2000 my 401k has gone up since early 2010.

If I do convert, how are the taxes determined? Is it by my current tax bracket? Does the conversion increase my income for those two years? Do I pay state taxes on the conversion, even if I didn’t earn any of the income in North Carolina?

Should I figure out my taxes and increase the FICA withheld on my paycheck?

Do I have to convert the 401k before filing my taxes?

Am I missing anything here?
- Shannon

This is probably a good move over the long haul. I would certainly do it.

The $7,100 will be treated as regular income, so you will have to pay income taxes on it. If income tax rates in 2011 are the same as they are in 2010, you’d owe about $2,300 in additional taxes from that $7,100 in income.

Now, if you’re not prepared to pay that out of pocket, you should increase your FICA withholdings. That’s probably the safest way to do it.

If you do the conversion now, it will count towards your 2011 taxes, which you’ll file in 2012. You can do it at any time this year.

Q2: Going part time
At my current job, I have the opportunity to switch from full-time to part-time, meaning our (my husband and I) yearly gross income would be reduced by about $30,000. Plugging this new salary into our current budget, we’d only be able to save $2,000 a year (saving for a car and other long-term items is already included in the budget).

I have student loan debt of $5,000. Monthly payment is $82 at 2.5% interest. We just built a new house and have a 30 year mortgage fixed at 4.125% with a $1,493 per month payment. There is a second mortgage at 6.55% on a 5 year balloon with a monthly payment of $245. We are paying $500 per month instead. To have it paid off within five years, we would need to pay $549 per month.

Our monthly expenses include putting a total of $400 in Roth IRAs & 401(k)s and about $400 in company stock (getting a 15% discount). We will be needing a new (used) car within a couple years. I’m currently budgeting $360 per month intended for car repair and/or purchase. We have $20,000 in emergency savings.

My big question is: Should I go part-time? It would allow me a better chance to pursue my side business, which I’ve been doing in my spare time for the last few years, making a very small profit (around $5,000 a year), but it’s my passion and makes me feel like my life is worthwhile. I just can’t get past feeling like a complete moron for wanting to give up $30,000 a year!
- Liz

I gave up a little less than that each year in order to write a blog, so I can’t exactly say you’re a “complete moron” for wanting to go part time to pursue a dream.

If you believe that your family’s finances can hande it, then you should make that leap now while you can. It sounds as though your family will make it even if your expanded side business has no additional earnings. That seems like a very good situation to me.

I would make sure that (a) I didn’t burn any bridges during this transition and (b) I had a business plan in place for the side business that I hoped to expand.

Q3: Short sell our home?
We were $23,000 in debt. I quit my lower paying job and got a job with the family company. Due to some good success. We will be debt free by August. Right now, we are planning a move to Atlanta (currently outside Chicago). I am hoping to start grad school work in August. I am waiting on an acceptance letter (hopefully). We decided that no matter if I get in or not, we are moving anyways. My current job allows me to work from home and I can work anywhere. My wife started a photography business that is turning a good profit right now so financially the move is great. Plus, the cost of living is much lower, my wife’s family is there, and the 2 grad schools I want to get into are there.

Like many folks we bought a house a few years back at the height of the market and now want to sell it. We owe 169,000 on a 2 Bedroom 1 ½ bath townhouse. Most sell for between 155 and 185 depending on the normal factors. To get our house ready to sell, we would need some light carpentry work to fix a few things plus we would need to replace all of our windows. So we have to put some money in to sell it the normal way.

Our realtor suggested we short sell the house. I have read up some about it but we are apprehensive because of how it might affect our ability to purchase another house when we would want to.

The other part of this story is my wife is pregnant (due in July) with our third kiddo and we do not have maternity coverage. We just did not plan on having anymore kids so this was a complete surprise for us. We have 20,000 in savings. Which we estimate will cover the birth of our child. And we will be saving another 1,000 a month between now and july to cover other expenses to move ourselves. I want to preserve this cash and my worry is that the best offer on our house would mean we owe the bank a few thousand all the way up to a $10,000 sucking up our savings just to preserve our credit.

So ADVICE??? We are emailing and calling everyone we know to ask for advice. Short sell the house and move to pursue our dream? Or hope we can sell it for enough to preserve our cash flow?
- Ted

Your best route, given your overall situation, is to sell this property. You do not need that extra payment clogging up your cash flow with a third child on the way.

If I were in your shoes, I would directly contact the lender and discuss the situation with them. What is their stance on short sales? I would gather as much information as possible before contacting them so that you have a realistic estimate of what your property actually would sell for.

If you’re willing to cover the deficiency in the sale (if there is one), then there’s no reason a short sale would necessarily have to have a negative impact on your credit, provided of course that your lender acts reasonably.

Q4: Going back to school
I am currently working as a bank teller and this is absolutely not the job I want to be doing at this point in my life. I am 24 years old, graduated from Penn State University in 09 with a Business Management degree and have found it extremely tough to find work doing anything that I find interesting or would be willing to do as a career. I have about $40,000 in student loans at about 6.8%, and $2,800 in credit card debt that I just transferred to a 0% for 12 months credit card. I found work after graduation but quit that job because of many different factors. Then I was unemployed for about 6 to 8 months and am now working a $11/hr teller job.

I am almost certain that I want to go back to school and become a teacher. I had a application in, but decided to put it off till next year because I don’t think it would be wise to take on more student loan debt at this point (probably my smartest financial decision that I’ve made yet.) I am working on curtailing my expenses, and am living at home with my mom. I really want to go back to school and become a teacher. I figure I can save approximately $7,000 and then get student loans for the 1 year program that would be required to become a teacher (about 15-20k). Do you think this is practical?
- Ryan

Right now, you’re sitting in the middle of a disastrous job market. A lot of graduates are having a hard time finding work in their field of choice – not just you.

It sounds like this crisis has made you rethink what you want to do with your life, and I’ll say that being relatively young and without a marriage or children will make this process much easier than it otherwise would.

Before you go back, though, make absolutely sure that you want to be a teacher, as it is another year invested, another $7,000 invested, and a complete restart of your career path.

Q5: Pushy in-laws
One of my in-laws has been pushing my husband and I to meet with their ‘financial adviser’. When I say pushing, I mean every time we talk. This included our Christmas Eve visit during which the ‘adviser’ had phoned to chat.

I know that my in-law has purchased an annuity from this ‘adviser’, and that they don’t pay for this person’s services, hence this is a a commissioned based operator.

My question is this: my in-law might be pushing us just because they are being pressured to do so, or could it be that they would receive some form of reward for providing this ‘adviser’ a lead?
- Evan

They may or may not be receiving a referral fee. It is very hard to say in this case.

In any case, it is never a good idea to make a significant financial move because of a pushy relative or friend. That’s a horrible reason for any sort of financial move.

Thank them for their suggestions politely, but do your own research and find your own answers.

Q6: Healthy but tasty lunches
You often say that you just eat leftovers for lunch. Knowing your diet restrictions [I'm a vegan for the time being due to medical concerns, but I sure do miss cheese and some meats at times], what do you eat for a tasty lunch when you don’t have leftovers?

- Ron

I usually have a handful of frozen meals banked. Frozen vegan burritos, frozen leftovers packed up as an individual meal, and other such items litter our freezer, ready to be pulled out if needed.

If I can’t find those things, I’ll often just eat a big pile of mixed raw vegetables as a finger food at my desk. Carrots, broccoli, cauliflower, and so on tend to tide me over quite well.

On occasion, I’ll make a peanut butter and banana sandwich for lunch.

Q7: Which debt to repay first?
My husband of 1 year and I came into our marriage with one major debt each: “My” student loans, a lower amount and a lower interest rate (3.88%), and “his” investment property mortgage, about 1.5x the amount of the student loans and at a higher interest rate (4.875%). After some discussion we are both on board to do the snowball method to pay both of these sums down, which is great. The question is, which do we attack first? Do we pay down the investment property’s mortgage first since it has the higher rate, or do we tackle the student loans first since it’s a smaller amount? Again, we are definitely going to be paying them back as fast as possible and before their terms are up. My feeling is that we should take out the student loans first since the amount is smaller, and since whether or not the property is paid off it is still an asset (sell-able if there is some crisis and income producing in general) whereas the student loans are just deadweight. My husband would prefer to pay off the investment property first since its interest rate is higher. What do you think?

- Andrea

Your real question here is whether having a stronger cash flow faster is more important or whether maximizing every dollar you invest is more important. Is it more important to pay off a debt – and eliminate a monthly payment – right away? Or is it more important to pay the minimum total amount on the loans?

They both have compelling arguments. I don’t think there is a strict right or wrong answer.

My judgment would probably come down to a look at what you guys are planning on doing in the future. Are you going to have children in a year or two? Are you planning a major move in the next few years? If the answer is yes, I’d pay off the smaller loan with the lower interest rate first. If not, then I’d pay off the higher interest rate loan first.

Q8: Should we refinance?
I want to add onto our house but I’m worried about whether we can afford to do this or not. We have a morgage and 2 new cars and 4 kids; my husband works and makes great money and I’m disabled. We can refinance our morgage for the addition so it’ll still just be one morgage payment. Both car payment together are 535 a month and our morgage is 750. If we refinanced it would be around 960 a month and we’d have to pay our own insurance of about 100 monthly. I really want to do this but in todays economy is it smart to go ahead with this?

- Annie

Given the information you’ve stated here, I would not add any more debt payments to your current load.

Right now, you have a disability stream of income (small, but reliable) and your husband’s income (apparently larger, but not as reliable). All of this is banking on your husband keeping his job. If he loses that job, you are in deep trouble.

Do not add onto the house until your financial situation is secure enough that you could survive for many, many months on just your disability income. If you can’t honestly say that’s possible, then you shouldn’t be bringing more debt into the situation.

Q9: Underwater loan
I am 58 year old woman who lives with her husband of almost 5 years in a condo that belongs to me. At one time this two bedroom condo was worth around a $192,000 but now is probably worth $33,000, at two different times I refiid for the equity which gives me at this time a $107,000 interest only mortgage, with only one income, my husbands, who brings home approx $42,000, with bring home pay approx $38,000. I am unemployed at this time. Our mortgage payment is 710.49 and we have a HOA fee of a $195.00. Recently I was surprised to hear my father, who is a Real Estate agent advised that we would be better off just walking away from this condo we are what they call underwater, that the loan was one of those loans that made the economy crash, my husband thought it made a lot of sense. We researched and found that banks are also modifying loans but we have remained current in our payments so from what we read you usually have to be delinquent at least 3 months before they will even begin to consider modification. So we made this month the month to start not paying though I don’t feel like it would be to late to catch up with the missed payment I feel intuitively that we shouldn’t do it, but I am not making the money or the payment. My husband says we can’t afford to save the exact mortgage payment monthly and it is what we read we should do until this is resolved? I am hearing all kinds of arguments for and against and am just confused, I am starting an at home babysitting service, that will bring in around the same amount that I was making at my last job but I am wondering if I should work. I have some health issues so standing on my feet for awhile is out of the question. We also have lots of debt which we are now hearing that the banks usually only consider modification when your credit is good and that does not define my husband or I. I would love to read your opinion.

- Tammi

I just ran the numbers and it looks like a 30 year fixed rate mortgage at 4.5% on the amount in question results in a monthly payment of $542.15, which is significantly lower than your current payment while also building equity. This is approximately the type of loan you would get with a loan modification, provided you’re eligible for one.

As for whether you have to be late to get a loan modification: it’s not a requirement, but it helps. The problem is that there are so many bad or borderline bad mortgages out there from lenders that have let a lot of people go in order to remain solvent. That means there are many more potential modifications out there than there are agents to deal with them, so they deal with the urgent ones first. If you’re not late, you’re probably not urgent.

As for walking away: what does your game plan look like if you do that? Your credit will be even worse than it currently is. Will you be able to rent? Are you going to have credit needs in the next few years for a car loan or anything like that?

Many people believe that walking away will solve all of their problems, but often it just creates a new set of problems.

Q10: Frugality costing more money?
One question I have for you is, “have you ever found your frugalness to cost you more money?” An example would be (not a great one, but it demos my point) running back home for your grocery coupons because you forgot them and therefore paying twice as much in gas. Sometimes I feel frugalness can cost us more, no matter how careful we plan (and I love to plan).

- Jackie

If you’re burning a gallon of gas to retrieve $2 worth of coupons, then you’re not being frugal with your time or with your money.

Frugality means looking at each situation as it comes about and doing what you can to maximize the value you get from it. We’re all human and we all make mistakes sometimes. You’ve just got to stand up from a mistake, look at the new situation as it is, and make the best choice you can.

One particular choice (like your coupons) might be frugal some of the time (when they’re in hand) but not at other times (when they’re a 20 minute car trip away).

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.

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  1. Rebecca says:

    To Q6: FWIW Trent is a newbie to veggieism and frankly eats a very restrictive diet. Not that veganism is restrictive in a bad way, I am also veg, but he really hasn’t branched out into the HUGE world of vegan meals and is just veganizing what he already knows. That isn’t bad, its just boring. Find a good vegan website with a great support network like VegWeb. The recipes are great and the chat network is super supportive.

    Trent is a good guy, but asking him for vegan food advice is not his strength. Yes a bunch of veggies or a PB and J is a vegan lunch, but that type of advice is one reason why many think vegans only eat boring food.

    Hummus is great and there are thousands of different ways to make and consume it. I am a fan of a eggless egg salad made with tempe, or a tuno salad made with chickpeas. Veggie wraps, smoothies, home made soups frozen in individual portions, stews. Enchiladas and veggie lasagna are great frozen, I think even better than when the just come out of the oven. Coconut or soy milk yogurt and granola. Home made muffins, the list is endless.

  2. lurker carl says:

    That’s how communications were before cell phones, internet and answering machines. If you or your friend didn’t have a phone, you jotted a note on a post card and put it in the morning mail. Ahhh, the good old days!

  3. Diane says:

    Q3: I’m an architect, and I think the idea that you have to replace windows to be able to sell the house is insane. Put it up for sale as is, with new paint and maybe that minor carpentry you mention. You may need to short sell it, or not – but replacing windows is a waste of your money and time. Let the next owner do that.

  4. Renae says:

    For Evan:
    As Trent recommends, do your own research as it relates to finance. I went with Merrill Lynch a few yrs back thinking I needed professional help with our investments. What a mistake. They took 1% of all my investments. They “held” one fund for us, only to realize they skimmed money out of that too. The only input they had with that fund was a 15 second recommendation to sell it and put it in a volitile ML fund. I pulled all of my money out and manage it well in Vanguard with very low fees. What a difference in my returns too, even in this economy.

  5. Josh says:

    Q5: Commission based advisers are not the way to go. You want a fee based adviser, which means they charge you money for their time. Most likely, though, you don’t need an adviser at all.

  6. Elizabeth says:

    Q4: I’m surprised that Trent didn’t mention this, but I would carefully consider being able to pay back more than $50,000 in debt on a teacher’s salary.

    I’m not sure if it’s the same in the U.S., but I know there are a lot of costs associated with teacher’s college beyond tuition. If your placement isn’t nearby, you could also end up with considerable transportation costs or even have to pay rent if you’re placed outside the city. You’ll also be on the hook for text books, supplies, clothing (if you need a professional warddrobe) etc.

    I second Trent’s advice to make sure this is absolutely what you want to do, and one of the best ways to tell is to volunteer in schools. However, be realistic — work with the “difficult” classes, not the higher level ones as that’s what you’ll likely be dealing with the first years of your career.

  7. Kevin says:

    @Tammi, Q9:

    Banks “modify” loans because they don’t think they’re going to get the money dictated in the original loan. The reason you have to already be several months behind is because that’s usually demonstrative that your payment is unaffordable. If you can’t afford your payment, they’ll modify your loan.

    In your case, you can easily afford your payment. It represents less than 25% of your monthly take-home pay. Why would they modify your loan and give you a lower payment, when you can clearly easily afford the payment you owe? Answer: They won’t.

    If you stop paying, they’ll foreclose on your home, and sue you for the difference. If you truly could not afford that debt, then they’d issue you a 1099 for the difference, and let the IRS worry about collecting from you. But in your case, they’ll see you clearly have the money, and they’ll sue you for the difference (and win). They’ll get a judgement, garnish your husband’s wages, or whatever.

    “Loan Modifications” are for people who truly cannot afford their house payments – not for people who just plain don’t want to pay.

    You’re inviting a world of hurt into your financial lives.

  8. valleycat1 says:

    Q4 – Also, with today’s economic climate, teaching positions are as difficult to break into as other areas. Plus, once in a position, teachers are required to do a lot of additional training (much of it at their own expense) to keep their certifications current.

    Some districts will allow sub teachers to work on an emergency credential (i.e., you’re still going to school or plan to within a specified time period) – although a lot of regions have plenty of fully qualified subs now with school cutbacks.

  9. Eddie says:

    Trent, I’ve really got to call you on this and hope you will mention it to your readers.
    Short sales definitely DO have a negative effect on a persons credit report. It is reported as a settlement(basically paying less than originally agreed on a debt)and dings the individuals credit accordingly. Doing otherwise would likely be a violation of the Fair Credit Reporting Act.

    This is not by any means to say that short sales aren’t the best option for many, including the person who asked you about them- but it’s definitely an arrangement that should be entered into with full knowledge of both the pros and cons!

  10. Kevin says:

    Re: Q10

    Trent, I think maybe you focused a little too much on Jackie’s (self-admittedly poor) example. I think she was hoping for you to maybe address the broader issue. What if you choose a cheaper hotel for your trip, only to find out you get dinged for service charges that total to more than the middle-of-the-road accomodations would have cost in the first place?

    Or you buy a used, frugal car that turns out to be a lemon and costs you more in repairs than a slightly more expensive car would have?

    Or you cut your own hair, clog your drain and end up with a $300 plumbing bill?

    You know, stuff like that.

  11. Lexie says:

    @ Q4 Ryan-

    I second Elizabeth (#6). Make sure you really want to be a teacher and that you have ample savings prepared before going into student teaching (5 months when you will be paying them to work). If you are doing your teacher preparation in Pennsylvania as a post-baccalaureate program, be aware that you will NOT receive the same funding available to Master’s candidates. I believe the current maximum government loan you can receive will be around $12,000/yr, which may barely cover your tuition and expenses, causing you to need additional private support or a full-time job.

    Many universities also only offer some courses at the undergraduate level (a reduced cost to you). However, many of these courses are only offered during the day and won’t count toward a Master’s degree, if you decide to pursue one later (in PA you’ll have to get one to get Level II cert). This could also make working a full-time job difficult/impossible. Talk to several unviersities before you start and see if you can sit in on a class or meet/talk to students who are going through the program. Some of the best information about a school is found through that kind of networking.

    Look very closely at the program requirements before you start, too. Many schools advertise their programs as one year, but I am currently enrolled in a PA cert program that will take at least two years to finish, simply because of the schedule of course offerings.

    Teaching is a rewarding profession, beyond dollars and cents. If your not sure you’re ready to take the plunge and change careers, start by volunteering at a local school or substitute teaching. Sometimes a few days spent with kids can help you decide if you would really like working with them. Best of luck, Ryan!

  12. Lexie says:

    @ Q4 Ryan-

    I second Elizabeth (#6). Make sure you really want to be a teacher and that you have ample savings prepared before going into student teaching (5 months when you will be paying them to work). If you are doing your teacher preparation in Pennsylvania as a post-baccalaureate program, be aware that you will NOT receive the same funding available to Master’s candidates. I believe the current maximum government loan you can receive will be around $12,000/yr, which may barely cover your tuition and expenses, causing you to need additional private support or a full-time job.

    Many universities also only offer some courses at the undergraduate level (a reduced cost to you). However, many of these courses are only offered during the day and won’t count toward a Master’s degree, if you decide to pursue one later (in PA you’ll have to get one to get Level II cert). This could also make working a full-time job difficult/impossible. Talk to several unviersities before you start and see if you can sit in on a class or meet/talk to students who are going through the program. Some of the best information about a school is found through that kind of networking.

    Look very closely at the program requirements before you start, too. Many schools advertise their programs as one year, but I am currently enrolled in a PA cert program that will take at least two years to finish, simply because of the schedule of course offerings.

    Teaching is a rewarding profession, beyond dollars and cents. If your not sure you’re ready to take the plunge and change careers, start by volunteering at a local school or substitute teaching. Sometimes a few days spent with kids can help you decide if you would really like working with them. Best of luck, Ryan!

  13. Rebecca says:

    Re Q4: What about doing something like TEach for America? You basically teach during the day and work/study at night for usually 2 to 3 years. The commitment is intense and you usually work in low income areas which need teachers, but in the end you come out with a teaching degree without the school loans. I looked into doing it in college and it sounds like a great program, I have heard nothing but good things from those who have finished the program. It is especially helpful that you are young and single, as the program probably would require you to move to wherever your placement is.

  14. par717 says:

    @Ryan
    I agree with #8(valleycat1)

    It really depends on where in the country (world?) you are but take the time to try to talk to some teachers. Use your social networks and find someone who is currently in a school doing what you want to do (or close to it). When you do get in contact with such a person ask them about the job market in your area. Trust me, teachers know if you’ll be able to get a job. Ask them to be brutally honest with you and not give you false hope. Realize that if it is a tough market you could be waiting for years for a teaching job.

    I know these problems personally. In my area there are over 1,000 applicants for any single job that may come up. You can’t even get an interview without having some kind of “in” with the school.

    If, after you are certain there ARE jobs, then you should make sure it is something you want to do. Take a personal day from the bank or use a day off during the week and volunteer in a classroom. (Use those connections again and get the principal’s permission. Dress nicely, make a good impression.)

    If you still like the idea, then try to substitute teach. If you can get through a day on your own, keep at it and see what you can do.

    I also agree with #6 – are you in the position to be able to work on a substitute teacher’s pay and make all your payments? In my area that is less than $100 per day. You never know in advance if you are going to work 3 days in a month or 20. It is very uncertain. If you can get a job right out of school as a teacher, will that salary be enough?

    Lastly, really examine WHY you want to be a teacher. Liking kids is NOT enough of a reason. Is it because you get to work 9-4 and you get summers and holidays off? If so, think again. Good teachers, especially those just starting out, will be there early and stay late. They will work over the weekends and holidays to plan their lessons. Many will take classes over the summer (at their own expense) or teach summer school. You’ll worry at night that you didn’t get through to that one kid and you’ll worry about their home lives… you’ll see. Teachers get a bad “rep” in this country but the good ones do WAY more than anyone realizes.

    It is also sometimes a thankless job. You will find yourself living for the “a-ha!” moments your students get and that’s got to be enough for you because you aren’t getting paid massive salaries and you are putting a lot of your heart into it.

    If none of this sounds like what you want then focus your energy on advancing in the bank or finding a job doing something else.

    Sorry if this sounds negative but when President Obama said “be a teacher” in his State of the Union address I cringed. So many people I know (including myself) are trying to do just that and can’t. We don’t need more teachers to make education better in this country, we need the money to pay them, the money to support the programs, less “testing” and more learning. Oops, how did that soapbox get under my feet…

  15. zander says:

    $20,000 will cover the birth of a child if you don’t have insurance? (Q3)

    I’m astounded. I live where medical care is socialised, so I understand that anything will be more expensive than the $0 I would have to pay for the same service, but $20,000? Is this the average price for having a baby in the US?

  16. Tracy says:

    I’m really concerned about the mortgage in example 9. We’re looking at owing $107k on a condo worth only $33k – and it’s an interest only mortgage…nothing is actually getting paid off.

    When is it scheduled to go to a full blown mortgage + principle? How much will those payments be? Because while they can afford the interest only, I am doubting they will be able to afford a true mortgage payment.

    The figures quoted honestly don’t even make sense to me (unless the mortgage payment includes escrow and the assessment hasn’t been recalculated to reflect the true value of the home) or the interest rate is absolutely obscene.

  17. Rob says:

    To Q3: I also had a townhome that I needed to sell when I moved for a job. Rather than a true short sale to pay off my 1st and 2nd loan, I worked with the lender on my 2nd loan to do a “short sale modification.” Basically, I sold short (not enough to cover both loans), but sold with enough to completely pay off my first loan and provide *some* money to my 2nd lien holder. The holder of my 2nd loan then modified the short amount into an unsecured debt (at a reduced payment timeframe and interest rate). As such, they did not hit my credit report for the charge-off on the 2nd loan, and they still get the money they should have gotten if I would have broken even.

    See if you lender is able to work this type of deal with you.

  18. Rob says:

    To Q9: Be careful if you “walk away” from your mortgage. Just because you stop paying and the bank “charges off” the amount, doesn’t mean they can’t sell your bad loan to collectors. Be prepared to get hounded (and have all your relatives, friends, neighbors hounded) to get part of that money back.

  19. Melissa says:

    To Q4: Teaching is a very tough unstable career. If you are looking for financial security, you might want to look elsewhere. Talk with teachers in your local area and see what the job market is like before you commit to more schooling.

    To Q10: I think you are getting “frugal” and “cheap” mixed up. Frugal people analyze a situation to try to maximize the reward and minimize the cost. Cheap people have the sort of tunnel vision you describe.

  20. Des says:

    RE Q4:

    I know two individuals that graduated in the last few years with teaching degrees. One is unemployed and has been since graduation. The other found work as a bank teller (and was just happy to find work at all.) YMMV.

    Here’s my take on borrowing money for school: It is generally accepted that one shouldn’t borrow money for a depreciating asset. Education is not included in that category because it generally helps one achieve a higher income, so it is an investment instead. Therefore, if you are borrowing money to go to school to follow a career path that will lead to a higher income, it can be considered a good financial investment. However, if you are contemplating a degree that will lead to personal fulfillment but less pay, it is more along the lines of consumer debt. It is borrowing for something you *want*. I don’t see that as any different than borrowing money for a nice new car, or a big comfortable house.

  21. Amy says:

    For Ryan: is it possible you live in a state with an alternative teacher certification program? Here in Texas, they need teachers so (if I understand it correctly) almost anyone with a bachelor’s degree in anything can start teaching, and they work with you to get the necessary credentials as you go. I would hope this includes money towards tuition, so perhaps there are ways to do this without taking on further student loan debt.

    Best of luck!

  22. Elizabeth says:

    @ par717 — I couldn’t agree with you more! Excellent advice.

    Where I live (Ontario), teachers are better paid than in the U.S., but a significant portion of new teachers leave the profession within five years — often due to a lack of full time work. Teaching is like many other professions: it can be a struggle to get your foot in the door, and you’ll have to “pay your dues”.

  23. Michelle says:

    Q7 – The snowball concept of paying the smaller amount first is mostly psychological. The motivation in paying off a smaller loan keeps you going. But mathematically, it’s better to pay the loan with the largest interest first.

    However, there’s something else to consider. If for any reason you needed to declare bankruptcy, your student loans would not be dismissed. So you’d still be making a payment. If you paid the student loan first, then had to declare bankruptcy, the property load would be discharged, and you’d have no payments. It might be a long shot that bankruptcy would ever happen, but because both interest rates are low, I’d pay the student loan down first.

  24. jim says:

    Q1: No, don’t convert it. Why not just put an extra $2300 into a Roth IRA and keep your 401k in tact?? Theres no good reason to convert that 401k to a Roth now. If you want to move it out of the 401k account then roll it over into a plain IRA. I see no real benefit to a Roth conversion. You’d be voluntarily paying 15-25% fed taxes and 6-7% NC state taxes for 21-32% tax rate. Why? Theres really no strong reason to pay those taxes today. Your nest egg is not very big so theres little tax consequences from it. Your pension will be fair if you stay in NC govt. work but not enough to give you a high tax bracket at retirement. If you move back to FL then you’ll be voluntarily paying 6-7% to NC today for no reason.

    I don’t know what you mean by increase your FICA. FICA is the social security & medicare witholding. I don’t know how that can be indcreased and its a fixed rate. Do you mean increase your tax witholding for IRS taxes with a W4 form? That makes more sense.

  25. Interested Reader says:

    @Q6 – Rebecca’s right there’s a whole world that Trent hasn’t explored. VeggieBoards is another good community.

    Besides hummus there are other bean and vegetable spreads you can make and use in a variety of ways (White Bean Spread, Roasted Red Pepper Spread, etc). There are also grain based salads that can be made ahead and are good for lunches. Along with sandwiches (or soups) there are a variety of salads and slaws to have as a side.

    There are also a ton of different kinds of veggie patties you can make and turn overs/hot pocket style things.

  26. jim says:

    Q7 Andrea : Are you fully funding retirement? Do you have a nice large emergency fund? Make sure to take care of those first.

    I’d also look at the tax impact of both loans. If the interest of both are fully deductible then its a wash. But if you’re in a higher income bracket the student loan won’t be deductible and the rental loan is which could easily make the mortgage interest lower after taxes.

  27. Des says:

    Q7: Michelle has a really good point above. I know bankruptcy isn’t really on your radar right now, but things can happen (esp. medical things) that could put you in a tight spot. I would pay the student loans first for that reason. I don’t think the 1% difference in interest is worth the risk, but that is just me.

  28. Des says:

    Q10 – I find this happens to me A LOT.

    I bought programmable thermostats (which said they worked for my heating type) but it turns out the wiring in my house is different and they won’t work. Of course, I had to open them to find this out.

    We saved money by installing our tile flooring ourselves, but we mixed the grout wrong (our 1st tile job) and had to pull it out and redo it.

    I tried a cheaper conditioner, but now have to use more of it to get the same effect as the nicer stuff.

    We got a great deal on a house with a lot of land, but it is in a flood plain, so we have to insure the heck out of it.

    But the thing is, it isn’t always that way. We tried a store brand that turned out to be superior to the name brands. Our new (flood-plain) house also has gas heat, which is much cheaper than electric. We know how to mix grout now, so future tile projects will be easier. We bought an “off brand” car that has run beautifully for 250k miles and counting.

    Yeah, you take a risk with some frugal attempts, but hopefully the wins outweigh the losses.

  29. Maggie says:

    Q7: I’m not sure the amounts of student loans you’re talking about, but in addition to the bankruptcy consideration and the tax breaks for student loan interest, a few other things to keep in mind if these are federal student loans (which I’m assuming they are given the low interest rate):

    Remember that federal student loans are discharged if you die whereas other debt can be pursued from your estate.

    Also, depending on your circumstances, maybe look into the very recent developments in income-based repayment of student loans. If you happen to work in a low-paying, public-interest job, you can pay the income-based payment amount for 10 years and have the rest forgiven.

  30. Michelle says:

    Q4: Just wanted to say you are not alone. I graduated with a bachelor’s in accounting. After months of sending out resumes, I couldn’t find any kind of decent full-time job. I work two part-time jobs – one $10 hour office job, the other serving tables at a local restaurant – to support my husband and I while he’s in graduate school. It was encouraging to see I’m not alone! Keep pressing on!

  31. jackie.n says:

    i have been a follower of the SD since it’s formation. i am not understanding this “boiling” down format. yes, you are in effect reducing your emails to a subject for you to personally cover. what is the “boil” down thing? trent you are not cooking here–this is your livelihood and money maker. quit using this crap analogy every week. it cheapens your impact of the good information you accumulate to send out to all of your dedicated readers. i am by no means a degreed scholar in written papers, but i have composed enough in my non -chosen limited writing career to be astonished at myself to follow someone who professes that writing is his life long dream. there are serious struggles going on since you quit your full time job to pursue this “writing” gig. i have reseached some of your answers and found them to be seriously flawed,this in addition to the poor grammar illustrated by a portion of your answers.

  32. Aaron says:

    Q1, and I agree but with different reasons than commenter Jim, I would NOT even consider converting to a Roth IRA unless you’re able to do the following:
    1. Pay the taxes to do the conversion with cash.
    2. Max your 401k and IRA in the same year(s) you pay the taxes to convert.

    ONLY then when I consider it.

    Going with the ideal assumptions that favor conversion that taxes will be higher for this person due to higher taxes more likely in the future for everyone, and perhaps income would be higher in retirement, you still have to compare the two:

    Which makes you a better return from now until you retire factoring differences in tax paid:

    $7100 in a Roth IRA
    OR
    $7100 in a 401k + $2300 in a Roth IRA (what you would have paid in taxes to do the conversion, but now could put in a Roth IRA you otherwise wouldn’t have been able to do)

    It’s the latter, without question. I don’t see how the tax differential even if realistically ideal could ever make up for losing the opportunity to invest an additional $2300 to compound for 30 years. Trent, considering the above, would you mind explaining why?

  33. Gretchen says:

    Q6: I suggest fatfree vegan dot com.

  34. Gretchen says:

    The answer to 10 doesn’t make any sense (right there in the question she says it’s a bad example) and I don’t get the FICA withholding on the IRA at all.

  35. Evita says:

    Q2 : am I the only one who reads the numbers differently than Trent ?
    Liz, you have huge monthly payments, including TWO mortgages. In this economy, you are fortunate enough to have a full-time job that enables you to make those payments and also to pad your savings for the upcoming needed car replacement. If you walk away fror $30,000 a year, you put all that in jeopardy (what happens if your hubby loses his job?)
    Frankly, I would say that you cannot afford to go part-time for the moment. Can you tough it out until the second mortgage and the new car are paid off ?

  36. The description of your friend sounds like me…only if my phone is charged, I usually don’t answer it unless I really want to talk to whomever is calling. If they don’t leave a message, you can bet I don’t call them back. I hate phones.

  37. jim says:

    jackie.n if you are going to criticize Trents grammar then you yourself could at least bother to use proper capitalization when doing so.

  38. valleycat1 says:

    I’m with #36 & Trent’s friend. Just because someone wants to contact me doesn’t mean I have to answer the phone or the door when they come calling. I don’t keep my cell on all the time – just when I’m checking for messages or making a call. I’m at home when I’m at home, not on any prescribed schedule. If you really need to get in touch with me, use voicemail, email, or stick a note on the door. I can’t think of a single instance where I’ve missed out on anything important.

  39. Amanda says:

    Trends q1 doesn’t consider all the factors. See a tax professional.

  40. Des says:

    jackie.n – In this context, the word “boil” is not referring to cooking, and it is not an analogy, per se. To “boil something down” is a turn of phrase which means to shorten it up to its key point. Trent does this with the subject of each email at the head of Reader Mailbags so that readers can jump easily to the question they are interested in, as these posts tend to be lengthy.

    I am assuming jackie.n is a non-native English speaker, since the comment reads like a phishing email.

  41. AnnJo says:

    On Q1 re whether to convert to a Roth IRA. I’ve never understood Trent’s conviction that Roth IRAs are inherently better than regular IRAs or 401(k) plans.

    It would be foolish to = definitely – pay state and federal income taxes this year of as much as 33% of the value of your 401(k) in order to – possibly – save taxes at unknown rates an unknown number of years in the future.

    There are any number of intervening events that would make that a bad choice: Having a year of little to no income that would allow you to make the transfer at a much lower cost, or death or divorce, for instance.

    If your 401(k) is invested in well-managed, low-cost funds and you are not obligated to transfer it to an IRA, leave it where it is. Or if you feel that self-management would be better, transfer it to a regular IRA.

  42. David says:

    Nothing wrong with “boil down”, which is indeed (despite Des’s remarks) an analogy per se from cooking per se. But “five word summaries” should be “five-word summaries”.

  43. valleycat1 says:

    #42, actually they should be summaries in five words or less

  44. David says:

    You may or may not have meant “fewer”, but I am not a grammar policeman – more of a private detective. Let us call them merely “summaries in five words, for sufficiently vague values of five.”

  45. Borealis says:

    The grammar police may not like it, but “five word summaries” is not vague in context and thus is just as good as “five-word summaries.” Better perhaps, because hyphenating is disfavored when not necessary.

  46. David says:

    It’s a question of whiplash. On my screen, there is a line break after the word “five”, so that one reads “boiled down to five…” and is wondering “five what”? When one then sees “word summaries”, one half expects summaries of five mailbag questions, each in its own Microsoft Word document.

    True, a minimal effort on behalf of the reader will immediately resolve the discrepancy. But this does not excuse the fact that the discrepancy should not have been created in the first place.

    Posting links here is discouraged, but for the dire consequences of a missing hyphen, consider what happened in 1962 to the ill-fated space probe Mariner I.

  47. Gretchen says:

    They aren’t even five words, though.

  48. getagrip says:

    Q5 My MIL was being high pressured by a “financial advisor” to have anyone she knew talk to him; children, cousins, siblings, etc. The advisor’s company wanted him to drum up more “work” (i.e. commisions from our pocket) and he was getting desperate and applying more and more pressure. He eventually lost his job. This may be the case for your in-laws, because this guy was calling my MIL at least weekly and your guy may be doing the same, and your in-laws may be fearful he’ll screw with the money he is controlling if they don’t help him.

    It’s up to you how to handle it. Your statement doesn’t include any firm response on your part to your in-law that you are not interested. You may want to find out in a polite way why they feel the need to bring this up all the time. They may feel they are really helping you, they may feel pressured, they may be fearful he’ll mess with their money. While understanding, I would recommend sticking to your guns and not letting this guy talk to you, if he’s calling clients on Christmas eve to drum up business under the guise of “chatting”, he’s not the kind of guy I would want handling my money.

    Q9 You should look up strategic default on the internet since that is effectively what you are considering by walking away. Careful of the sites trying to get you sign up for something, but there are sites that help lay out the pros and cons of such a decision, and most importantly you need to know what your state laws and other financial consequences are with regards to what happens if you do walk. I’m not advocating either way, just that you want to know what you’re getting into before you make a decision one way or the other.

  49. Jonathan says:

    Wow, some people will complain about anything….

  50. Shannon says:

    I am the asker of Q1. Some explanation: the $2300 I’m required to save by the state goes into an account mananged by the state. I would not be able to combine, i don’t think. Also, I may move back to FL at some point down the road so I’m definitely taking that into consideration. Finally, i do believe taxes will be increased b/c we as a country cannot sustain our debt load without significant program cut-backs. My 401k is currently at an institution that charges a higher fee than where I would like to move it to. Right now I am only doing a Traditional IRA conversion as I realized too late about the 2010 advatage to spreading out taxes over 2011 and 2012.

  51. Michelle says:

    @ Shannon. Just like it’s not a bad idea to have both stocks and bonds in your portfolio to hedge for taxes, it’s also not a bad idea to have pre and post-tax monies in your retirement for the same reason.

    This is $7000 which in the grand scheme of things is going to be a tiny fraction of your retirement funds. To me, it wouldn’t be worth the hassle of rolling over now. I’d leave the $7K alone or roll it into a traditional IRA, and instead of increasing my contribution to the 401k put that 3.5% into a Roth IRA.

  52. Golfing Girl says:

    @ #4 “Ryan”:
    Many financial institutions have their own in house training organizations. You could still teach, but it would be teaching about banking. I worked at my bank’s in-house “university” and it was a great atmosphere and paid much better than traditional teaching jobs. I would look into this as another option. It may require travel.
    @ #9:
    How on earth are you going to run a daycare if you can’t be on your feet?!? Put that out of your mind right now. And trust your gut–you already said it doesn’t feel right, so keep making your payments since you can, and hopefully you will make it until thje housing market rebounds enough for you to sell and get into something you can afford, like an apartment. You are only underwater on paper.

  53. Diane says:

    #31 “jackie.n” – How are the views from your glass house?

  54. spaces says:

    #15 – Zander — $20k for everything for a baby is average, maybe even kind of cheap. A complication or two and the cost is easily double that.

  55. Aaron says:

    @Shannon & Michelle concerning Q1,

    Completely agree with Michelle, although I’d say even beyond the “it’s not worth enough to be worth it”, it’s still hurting you to convert to Roth if you also can’t max contribute to your tax sheltered accounts this year.

    Shannon, also, be aware that contributing to a 401k or Traditional IRA will at least in part result in you paying $0 in taxes now AND when you retire. If your retirement income is completely from Traditional IRAs and 401ks in retirement hypothetically, and you retire today, the first $12K roughly you take out of those accounts would not be taxed due to the standard deduction. This just reinforces that Roths are not the be all end all. Some of your money absolutely should be in a traditional IRA and/or 401k. Considering that, why convert to Roth?

    I generally agree with Trent, but just as other people have said above, I don’t understand his assumption that Roth is virtually always better than Traditional IRAs.

  56. Geoff Hart says:

    Tammi talked about being underwater on a loan:

    Tammi, Trent’s advice is bang-on. One of the first things you should ask yourself is whether you can find a rental property for significantly less than your mortgage payments. If not, and you can afford your current payments, walking away isn’t a good choice.

    What people often forget when comparing the relative value of renting versus owning a home is that when you rent, the net gain in your pocket at the end of a rental contract is always $0: the money is gone forever. But when you buy, you’ll keep at least some of the money through the equity you build in your home. Even if the real estate market is disastrous now, it should eventually recover, and that means your equity will recover too.

    So don’t walk away unless you’re sure the end result is that you’ll save money. Selling in a severely depressed market is generally the worst option unless you can’t afford to hold on. Walking away is worse, because you get no money back and wreck your credit record.

  57. matt says:

    Renae – did you read the agreement you made with merrill lynch? obviously not. you can get together with a primerica representative and they can set you up with an IRA and help you invest in other stocks/mutual funds. For free.

  58. If you forget the coupons, don’t buy the products that are coupon-friendly. Most people can get by for a couple of days, if not a week, with only the purchase of fresh dairy, meat and produce.

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