Reader Mailbag: Drawing the Line

It’s Monday again, and that means it’s time for another Reader Mailbag.

I think I read an old post where you gave a suggestion into when it is good to utilize a credit cards rewards program and when it isn’t such a good idea. I don’t remember too much about the post but I think it’s somewhere along the lines of “you should sign up for the rewards program only if a certain condition is met”. I am trying to see whether or not I should keep my bank’s (Wells Fargo) reward program and it has an annual fee of $20.
– Raymond

Here’s my philosophy for rewards credit cards in a nutshell.

First, if you’re not earning multiple percentage points in rewards, don’t bother. A good rewards credit card will earn you more than 1% back in rewards. Some cards in some situations can earn you as much as 4% back. Don’t waste your time with a card that earns less than 2%.

Second, if those “rewards” are intrinsically tied to points that are very limited in terms of what you can use them for, don’t bother. If your “rewards” are tied to some catalog of consumer goods set up by your credit card holder, don’t bother with the card unless there’s some explicit way of maximizing that. For example, our Amazon card requires us to explicitly go to a catalog site and choose to use our rewards on Amazon gift certificates, which we can then use on all sorts of things.

Third, if the card’s rewards program encourages you to spend more at retailers that you normally don’t use, don’t bother. A rewards program should never cause you to alter your spending habits in the direction of spending more. Instead, look for cards in line with how you already spend your money, such as cards tied to the gas stations you use, the grocery stores you use, or aren’t tied to any retailer at all.

Use those three rules and you’ll filter out the vast majority of rewards programs. Stick with one that makes it through that trial by fire.

How did you get over the fear of introducing your blog to those closest to you? Weren’t you afraid they were going to know how deep your financial hole was? Did anyone judge you when you did reveal it?
– Gina

I really didn’t worry about it at all.

One big reason I started The Simple Dollar is I wanted to convince my friends and some of my family that it was okay to talk about money issues, particularly with me. I decided the best way to make everyone feel more comfortable about it is by confessing my mistakes right off the bat.

It actually worked. While it hasn’t wound up causing many big roundtable discussions about money, I have had many money-related one-on-one conversations with my family and friends about financial issues. They already know that I’ve messed up badly when it comes to finances and they also know I’ve done the footwork to figure out how to fix it. Add that into the fact that they know me personally and (most) judge me to be reasonably trustworthy (I think, anyway), they’re willing to talk to me about it.

I’m thrilled about it.

Another thing: if someone is going to look down at me because I’ve confessed my mistakes publicly and am working to fix the problems, I don’t really think too much of them. No one is perfect. Every single person you see makes mistakes – and they’re often big ones. If they simultaneously look down at me but, at the same time, don’t have the courage themselves to publicly share their life mistakes, I don’t really have a whole lot of respect for that.

How do you decide where to draw the line when discussing elements of your life?
– May

With an audience as large as The Simple Dollar has, this is an issue I’ve considered quite a lot over the years. I have a pretty set policy at this point.

If it directly affects just me, I’m pretty open about it. If it affects my wife, I know what boundaries she has about discussing elements of her life. The same goes for my kids – my wife and I have a policy when it comes to sharing about them.

I have a few minor disabilities that I don’t usually discuss because they usually don’t affect anything and I’m so used to them that I roll straight through it (for those curious, I am completely deaf in one ear, almost completely blind in one eye, and basically have no thyroid gland), although they have affected some of my financial decisions on occasion. In fact, those three minor issues might actually fill in a few little gaps for long-time readers.

When it comes to my family and friends, I obfuscate heavily. I will combine elements of different people. I will check with people before I write about them in any way that’s specific at all and allow them to read it first and veto it if they choose (no one ever has). I don’t feel it’s right to invade their privacy or dignity. I do have some blanket permissions from a few people very close to me to write about them (John being one).

I’m also careful with specific pieces of information that are irrelevant to the issue at hand but which could be used for identity theft. I often completely substitute false information in these cases.

There are times when these concerns can sometimes interfere with a full discussion of a financial issue on The Simple Dollar. In those cases, I usually do the best I can to make do while steering clear of those concerns. More than once, this has caused me to be strongly attacked by readers.

I am 31 years old with a comfortable income and no kids. I currently max out my Roth IRA contributions with a standing withdrawal from my bank account. I recently moved to Finland, so I am no longer receiving any 401(K) benefits. My 401(K) investments I had accrued with my employer in the U.S. is now just sitting in a Fidelity account. Is there any reason to roll this into a regular IRA? Or do I just move over some of it to the Roth IRA and stop contributing for 2010?
– Angela

The reason one would want to roll over a 401(k) is so that one has better access to investment options for that money. If you’re really happy with the options that Fidelity gives you for the 401(k), leave it there. Otherwise, I’d roll it over into a traditional IRA with an investment house that you trust (I usually recommend Vanguard).

A separate question revolves around converting a traditional IRA into a Roth IRA. 2010 is the year to do this if you’re going to do it because there’s no income test for a conversion in 2010. Anyone can convert to a Roth, pay the taxes, and secure untaxed income in retirement. Should you convert? If you believe your tax rate in retirement will be lower than your tax rate now, then it’s probably worth your while.

No matter what, it shouldn’t affect your contributions for 2010. You should absolutely continue to contribute towards your retirement.

I have question about closing a Roth IRA to pay off debt. Currently I have 7500 in credit card debt and my wife has about 11,000 (once we use our tax return to pay off some of her debt). I had a mutal fund that isn’t performing very well, I have had it for 10+ years ($1600). I’m closing the account and adding it to an emergency fund that has about $150. I also have a Roth IRA with about $1600 in after an intial investment of $4000 (during the tech boom). My question to you is should I close this Roth IRA and use it to pay off debt, knowing that I will get penalized for closing it and taxed or should I just transfer it to a another account (Vangard or Fedelity Roth IRA)? Can I write off the Roth IRA loss ($4000 to $1600) on my tax return?
– Oscar

Your only penalty here would be losing the balance of your Roth IRA without converting it. Your basis for the Roth is the amount you put into the account – $4,000. If you take out the full balance – $1,600 – it’s just a straight loss of $2,400.

Can you claim that on your taxes? You can only claim it if you close ALL of your Roth IRA accounts at the same time. This sounds like it’s your only Roth IRA, so you would just need to close this one.

If you wish to move your Roth IRA, contact the business to which you want to move the account and explain your situation. They will be able to help you move the account.

I will be getting back a substantial reimbursement from he IRS but I owe just as much on a credit card which has an interest rate of 23%. Since I do not have any emergency fund, I was thinking of just banking that money and continue paying my credit card at approximately $500. a month. I know the logical thing to do is pay off the credit card and save the $500. monthly but I’m actually almost afraid of doing that. I live with my boyfriend and he is currently facing the possibility of a lay off. What are your thoughts on this. Should I save the large sum or pay off the credit card with it?
– Yomaira

If you’re facing the strong possibility of a layoff and you would have to support both you and your boyfriend with your savings, then you should bank the money and keep making minimum payments on that debt. A job loss is a significant risk with some pretty strong consequences.

Once the situation is clear, however, you should keep an emergency fund of about $1,000, take the rest of it, and make a giant payment on that credit card.

The most important thing you can do in this situation, though, is get out of the habit of using credit cards. Put them in a place where they’re hard to reach and learn how to live without them for a while. One common suggestion is the old “block of ice” trick, but that’s often fixed with a hammer. I like the “put them in a coffee can and bury them” trick better.

My husband and I had a wonderfully misspent youth and much of our older lives. We were not financially wise and the way things worked out we moved around a lot to stay employed. Moving takes money and we find ourselves at the brink of retirement with insufficient savings. Worse, we do not have a house that is even close to paid off. And finally, my husband is being forced to retire in June pushing us to make some financial decisions.

Our current house is at the low end of the market for where we live. We confirmed with a real estate friend last night that pretty much any housing option in our town that puts a roof over our heads will cost about what we are currently paying. I am still employed in a good job but we will not be able to keep the house and our current expenses with just my salary. My husband can likely find some contracts and consulting but not full time employment at the salary he was making before.

We could move somewhere else. We have checked the MLS in areas where we used to live or would consider moving and we could have a house for much less than we pay here. Only if we move, I am walking away from a good job in an uncertain economy. At my current age I am competing with younger, fresher, and cheaper talent. There would be no guarantees beyond our fairly minimal retirement benefits for either of us.

The bottom line is that where we are we have one good job but living expenses beyond our means. We could move to where life is cheaper but would then have no additional income or guarantee of job. What to do….?
– Delores

The first thought that comes to mind when I read your story is cohabitation. Do you have a room or two in your house that you could rent out to someone, perhaps a college student or someone in town for a short period for a consulting job? That’s one efficient way to reduce the burden of your mortgage.

The second option I would suggest is polishing up your resume and seeing if you can find work in the areas where you would consider moving. There’s no penalty in at least trying to find work, even if you aren’t successful. If you do find a job there, problem solved.

The final thing I would do in your situation is encourage your husband to do the same thing you’re doing. He should be beating the pavement hard looking for opportunities. Now is the perfect time to hunt up old colleagues to see if they’re aware of any work opportunities.

Good luck!

When I bought my car almost 3 years ago, I had 2 90-day late marks on my credit report. I didn’t know about them until I got my car loan. At that moment I was in a bad spot – my home and lifestyle mandate that I have a vehicle and my old one was dead in the parking lot (and yes, I was also young and dumb, excited to be buying a new-used car, and fresh out of college making good money while my student loans were still in deferrment). So I got stuck with 11% interest rate and was too stupid to do anything about it for a while.

When I realized I can probably renegotiate my interest rate I assumed I should probably work on improving my credit score first so I’d have some negotiating power.

The two late pays were real, although both were honest mistakes (one was an account with an annual fee that I forgot to close, and the other had to do with the post office not forwarding my mail for a few months). They are both off my record now (worked with the credit card company to remove the one where I wasn’t getting the bill and the other one expired) but I’ve made some other mistakes. Nothing big. There have been several times when my car payment was 1-3 days late. And there’ve been some times when I had to defer a payment (within in the terms of the loan agreement) This wouldn’t be on my credit report but the credit union that owns the loan will surely know about them. I’m afraid it will go against my plea of “I’m a good customer. I always pay my bill. Please give me a break.”

I’ve also used my credit cards more than I should have so my debt-to-credit ratio is high.

Anyway, I thought you might be able to provide some insight about negotiating a lower interest rate on an existing loan.
– Julie

The first thing you need to do is go take a look at your credit report. Visit annualcreditreport.com and find out what your credit report looks like. You need to at least know what facts about you are being shared.

If you find anything on there that’s inaccurate, chase it down and get it off the report. This might take some time and some phone calls, but it’s usually not too terrible and it can make a big difference.

Once you’ve verified that the report is accurate and as good as it can be, you’ll want to head to a local credit union. Explain that you signed a very poor car loan and would like to refinance it. I don’t think direct negotiation with your current loan holder will do you much good here.

Good luck!

My husband and I and 2 kids love to go out to eat, especially Chinese or Thai food. We have done a great job in curbing our 4 times a week going out to once a week. Although both of us work, we are working to get debt free and any money saved goes to paying off debt. Hopefully we will only owe a mortgage by August. I am not too worried about the mortgage b/c interest rate is 4.75%. Back to my question: I really thinks my Dear Hubby believes that he is a king. When we go out to eat, he has to have the most expensive dinner and soup and salad and appetizer or sushi. The kids have come to expect this also, but we end up only ordering one thing between the two of them. I have finally convinced my dear hubby to drink water so the kids will not want a drink either. Our bill comes out to be $45 or more sometimes. And that is after I end up eating very light to compensate for his extravagance. We discuss this all the time and he feels I am wrong wanting to limit the amount he wants to eat. I feel that we should be able to indulge on special occasions (bdays and anniversaries) and on other going out days, eat sensibly. So who would you say is in the right?
– Nisha

If going out for a nice meal is something that your husband deeply values and he’s frugal in other areas of his life, you’re spending less than $50 to feed your whole family, you’ve cut dining out down to one night a week, and you’re spending quite a bit less than you earn, I think I have to side with your husband on this one.

Small extravagances, if done with forethought and moderation, are part of the spice of life and can contribute greatly to one’s enjoyment of life. If your husband’s one real splurge in a week is a very nice meal – one where the total family bill is still less than $50 – I see nothing wrong with it, particularly if you’re still spending substantially less than you earn ater that meal.

If your husband spends money left and right, then there’s a bigger problem at work here that involves overall responsible use of money and deserves special treatment and long conversations. But that doesn’t sound like the case here.

Why won’t you review [personal finance book X]?
– Sheila

First of all, there are thousands of personal finance books I’ve never reviewed and there are more printed every week. I have a single review slot each week to fill.

Because of that, I have to be somewhat selective about what I review for the site. I try hard to pick books that say something interesting to me and also to my readers.

At the same time, I try not to review books that engage in practices I dislike, like selling fear as part of the financial message or offering up highly questionable tactics without discussing the risks or drawbacks of those tactics. I don’t think books like that have value and I won’t waste editorial space on them.

After that, a major factor is availability. Does my library have it? Will the publisher send me a review copy of it? If one of those two is true, I’m much more likely to review it.

Got any questions? Ask in the comments or send me an email and I’ll try to include it in a future reader mailbag.

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  1. Moby Homemaker says:

    In complete agreement on the credit card rewards deal….if there’s a fee or the cc company rewards you for spending more than you normally would–forget it.
    That being said; I have been able to utilize rewards points for substantial gift cards and flight and hotel credits. We are taking a family trip for Spring Break this year… all on AmEx Rewards.

  2. Doug says:

    Trent – don’t you have the advice backwards?

    Should you convert to a Roth IRA? “If you believe your tax rate in retirement will be lower than your tax rate now, then it’s probably worth your while”. Isn’t it just the opposite?

  3. J says:

    I’m going with Trent on Nisha’s advice. Two incomes, debt-free (except mortgage) in about 6 months, and cutting down on the going out to eat from 4 nights to one night — lighten up. Especially if your husband was less than enthusiastic about the eating out reduction, you are pushing too hard.

    I have a similar “thing” with going out for coffee. I REALLY like going out to a coffee shop and getting a sweet treat / coffee and spending some time either on the Internet or reading a book. We were doing this too often before, now we have cut back to a more reasonable amount. If my wife started micro-managing what I eat when I’m there I’d tell her to kindly back off.

    The reverse holds for husbands providing unsolicited advice about the cost and/or location of their wife’s haircut. We all have our “things”.

  4. Shevy says:

    @Delores
    First, you have about 4 months to prepare for this, so you have a little breathing space.

    Second, you say you can’t manage with just your job living where you do *with your current expenses*. Is there anything you can get rid of out of your current expenses? Will some of those expenses naturally shrink when hubby retires (transportation, clothing or drycleaning, subscriptions to professional journals, food eaten at work, union dues, tools of his trade, whether it be computer programs and hardware or wrenches and boots, etc. etc.)?

    Third, you don’t say how old your hubby is. Will he be eligible for any kind of government retirement money, like Social Security, or is he too young?

    Four, be cautious about Trent’s advice that you should try to find a job in a cheaper area and then everything will be fine. It might be the case. Or, you might move because you got a new job and the job might not work out for a variety of reasons.

    Five, his suggestion of renting a room in your home out to someone is definitely worth considering.

    Six, use this breathing space to start making as many changes to your current life as you can and keep evaluating how it’s working. Put aside as much money as you possibly can during these four months. Have your hubby start today to do some serious networking and lining up of contract work for the summer.

  5. Johanna says:

    Trent, I think you’re reading all kinds of things into Nisha’s question that she didn’t actually say. She didn’t say that restaurant meals were her husband’s only indulgence. She didn’t say that they were spending “quite a bit” less than they earn. (They must be spending something less than they earn, since they’re paying down debt, but how that amount compares to the $200/month they’re spending on restaurant meals, we don’t know.) And finally, we don’t know whether Nisha has any indulgences of her own, or whether she’s depriving herself in other situations too to make up for her husband’s extravagance.

    Affordable indulgences are great, as long as they’re distributed fairly. When one member of a family feels they can’t indulge because the other members are indulging so much, then that’s a problem that needs to be worked through in a way that won’t cause resentment. When your preferred indulgences are things that you do and pay for on your own, you can say “Each person gets $X a month to spend as they please, no questions asked.” But that doesn’t really work here – dividing up the bill at a family restaurant meal doesn’t seem very familial.

    So here’s what I suggest: Talk with your husband and come to an agreement about how much, total, you can afford to budget for restaurant meals that will leave you with enough money to save and pay down debt. If you burn through that amount in the first three weeks of the month, then nobody goes out to eat in week 4. And at the restaurant, everyone orders whatever they want, and tries not to feel guilty (or make anyone else feel guilty) about it.

  6. kristine says:

    Johanna, great suggestion. Obviously if the wife is eating less to compensate, then she does not feel comfoprtable that they can afford larger restaurant bills. I would absolutely resent always feeling I had to get the cheapest entry so hubby could eat like a king. And if the kids come to see this as normal, then they will grow up to be the inconsiderate ones who order a feast at a check-splitting social. King of the jungle is literally taking the lion’s share, and food out of his wife’s mouth. Either agree on budget, or go out less, or be more equitable. Continuing with indulgent behavior that your spouse finds unfair, and is open about her growing resentment, is a very bad thing for a relationship. Is the soup worth it?

  7. Jonathan says:

    I was thrilled with my 1% back on my Citibank Visa card. How can I find one with better rewards?

  8. J says:

    To add to Johanna’s suggestion, do NOT have this talk when you are out to eat and he’s about to order. If you have a monthly budget meeting, talk about it there. If not, schedule a time to talk about it before you go out to eat.

    And yes, Dear Hubby is the King. You are the Queen. The Royal Couple needs to find out how to best administer the Royal Treasury, he wants his feasts — what do you want?

    My queen and I have a category in the budget called “blow money”, where we both can blow that money how we see fit. Perhaps you can administer everyone their own blow money for eating out (including the kids) and, as others have said, when it’s gone, it’s gone. We are also not allowed to judge the other’s blow money purchases in any way. So if your husband wants to splurge on a chalice of shrimp, then that’s his business. Also it would let the kids learn some money management skills, too. It may not seem very “familial” to some, but, hey, if it works then it works.

  9. Strick says:

    Nisha should look for a reasonable compromise, and there is an obvious one in her details. Agree to cut down on the eating out until debt free, more than a reasonable request, but then get off his back. (I’d frankly get more aggravated by you spending $10 on the chicken which I could have made at home for $1 when you could have had the steak for $18 which you would have paid $10 for at the market. God has blessed the man that feels like a king by only spending $45 out feeding a family of 4).

  10. Honey says:

    @ Delores, I find it very, very hard to believe that renting a one-bedroom apartment in your current town is as expensive as buying a house. Maybe what you can’t afford is to be a homeowner right now. Selling the house, even if you end up breaking even or taking a loss, but then renting a place that is significantly smaller/cheaper may be the best way to reduce your monthly expenses.

    It seems like you probably should’ve gone this route years ago, to be honest, given your emphasis on mobility throughout the question.

  11. Stacey says:

    My husband’s favorite meal is also Chinese… but we’ve been able to compromise by getting take-out and eating at home. It saves on paying drinks, and we’re left with lots of leftovers to enjoy over the next few days. We do this about once a month as a treat.

  12. Steve says:

    I am “only” getting 1.5% on my credit card, but it doesn’t have an annual fee and the rewards are deposited into the Fidelity account I already had. I just don’t want to put that much effort into it. In fact I already feel like I’m putting too much effort in, since I keep a second card that gives some higher percentage for grocery/gas/drugstores, and keep trying to get my wife to remember which is which.

  13. Mol says:

    When are we going to hear a guest post from Sarah again? It’s a nice change to hear from a woman around here. :)

  14. cherie says:

    I think you missed the boat on Nisha’s behalf

    The problem is not that he orders so expensively, but rather that she feels it’s unfair because she’s ordering less than she would like to compensate.

    He will never open his eyes to the real cost if she doesn’t order what she considers a ‘reasonable’ meal. Not the cheapest thing she can cope with.

    After doing this a few times she should sit down a discuss the recent totals and ask if he feels they are acceptable – there is some compromise involved – and if it makes him feel indulged and you can afford it then let this be his indulgence and order what you want, if he agrees it’s too much and wishes to come to a different solution work together to find one.

  15. Beth says:

    EATING OUT LIKE A KING: Besides a waste of money, he definitely does not need that many calories in one meal. Be grateful for your luxurious life without being gluttonous.

  16. Lily says:

    Liked your comment about speaking publicly about personal mistakes. I have found that when I talk about my own flaws, people open up to me and share their’s. It makes us all feel “connected” and we all learn from each other. And isn’t that the purpose of this blog?

  17. jim says:

    re: Nisha, I think a key piece of information we’re missing is their income level. If they struggle on $40k for a family of 4 then they may be spending a bit too much, but if they make $100k then I wouldn’t consider their spending a problem in the least. Honestly if she thinks spending $45 on dinner for a family of four is ‘extravagant’ then my impression is that shes being a bit too tight.

  18. AmandaLP says:

    I have a question.

    There is a big push to pay down debt, and student loans as the large one.

    I am a student at a prestigious university, getting a professional masters degree. I chose the university because it will improve my opportunities to get into a PhD program (should I choose to do that after a few years).

    Also, since I will be (hopefully) working within the public service sphere, I will be taking advantage of the new payment programs including loan forgiveness after 10 years. I will also be eligible for a few other debt forgiveness programs for working in an underserved clinical population.

    Using the traditional 10 year repayment plan, my payments would be equivalent to a house payment. In this instance, would it be best to use the new income based repayment plan for 10 years, and then take the loan forgiveness? The plan was created to allow those with high student loans an opportunity to work “for the public good” rather than not serving these populations, and often not working in their field of study. Or is it better to spend 10 years paying more than my rent towards the loans, which means several years of very lean living with no opportunities for savings. The difference in payments is between 800 and 1200 dollars, depending on how long the fixed loan payment would be.

    Pay off the debt, and miss out an opportunity for future savings for 10 or more years? Or take the loan forgiveness and channel most of that money into savings?

  19. JuliB says:

    I hope we get a follow-up post on Nisha’s situation and that she fills in a lot of information. Maybe even dedicate a column to it? Her story seems to have touched a lot of people in a short time.

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