Reader Mailbag: Easter Egg Hunting

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. Which loan to pay down?
2. Ending naptime
3. Roth or other investment?
4. “Credit” cards as windfall
5. What’s our next financial plan?
6. Moving now or later?
7. Considering starting a family
8. Nervous parents
9. Starting a retirement fund
10. Making case for less overtime

What I learned this weekend: hunting for Easter eggs becomes a lot less fun if you make the eggs too hard to find. When a little girl is entering into her second hour of looking for her eggs, it might be time to give her some help.

Q1: Which loan to pay down?
I have about 50k of consolidated student debt at a fixed rate of 4.5% (half subsidized, half non-subsidized, although that doesn’t matter since I’m now out of school.)

I also have another 40k of private student loans tied to the prime rate. But right now the interest rate on these is shockingly low — 2.5%.

I have some extra money I’d like to throw at my loans, but the question is, “which one?”!
– John

You should always pay down the one that has the higher interest rate at the moment.

While there may come a time where it would have been more cost-effective to pay down the variable rate debt first, you can’t bank your financial plans on that. You don’t know if that will occur or how far down the road such a time would be.

Focus instead on doing your best with the situation at hand. Focus on the debt with the biggest interest rate.

Q2: Ending naptime
My four year old is starting to not take a nap in the early afternoon, which is a problem because that’s when I handle a lot of the busywork for my insurance business. How did you handle it when your children stopped taking naps?

– Jenny

For a while, we held off this shift by having our children do a lot of vigorous activity in the morning. We’d go to the park or play an active game outside. This would cause them to be very tired after lunch, which would often result in a nap even if they had reached the age where naps weren’t always a requirement.

Once they simply had given up on taking naps, we instituted a “rest time” after lunch. They weren’t required to actually nap, but they had to go into the family room with the lights turned down low and listen to an audio CD. If they were awake when the CD finished, they could come back upstairs and play.

I’d suggest trying both of these approaches.

Q3: Roth or other investment?
I’m an international student working in the US, and hopefully about to switch from graduate student to full time instructor. I have a good emergency fund (about 16.000$) and have been wondering for a while about starting investing and/or contributing to a roth ira. The point is, I know I will not be working forever in the US, I know at some point will go back to my homeland, I just don’t know when. This considered, does it still make sense to contribute to a Roth Ira (Especially since, should I not be working in the US in the future, I couldn’t contribute to that), or should I consider a different investment not retirement-related? What would be the advantage (for me and in general) to have a Roth instead than just a regular investing account?

– Arnold

Given that you won’t be contributing to the Roth long term and your residency will be unclear at retirement age, I don’t think there’s a really big benefit for you to contribute to a Roth rather than putting your money into a normal investment account.

One thing to look at is the retirement options available in your homeland, which would likely be a wiser place to put your money (depending on the stability of your homeland, of course). You may want to consider investing there, or putting money in a place where you can easily turn it into a retirement investment in your homeland should there be a good opportunity.

A Roth IRA isn’t a mistake, of course, but I don’t think your projected life path allows you to fully enjoy the benefits of a Roth.

Q4: “Credit” cards as windfall
I have a question regarding getting money in the form of credit cards (like a Visa cash card). This sometimes comes to me in the form of gifts or rebates. I prefer to get cash of course because I always just deposit it immediately into a savings account. I can’t do that with a Visa cash card though. For some reason my usual financial discipline goes out the door when I get handed a gift card. I immediately think about something I would like to ‘splurge’ it on since my internal justification is that I can’t deposit it and it will need to be spent one way or another. Or even worse, I think of something more expensive I want and justify it by saying to myself that at least I’m saving X amount by using the gift card. It becomes a cash-like temptation where it burns a hole in my pocket and I have the urge to go shopping and spend it all, as I feel like I’m not really using any of my own money. In other words I always want to spend it on something I don’t need. In all other areas I have great financial discipline. I never spend more than I earn, I carry zero credit card debt and I save for retirement. How do you handle small windfalls in the form of a gift card? (Ranging from $50 to $200.)

– Juliana

I usually use such things for something like groceries as soon as I possibly can, so that the card (and the temptation) is out of my hands.

For me, it becomes a lot harder to justify an unnecessary expenditure if the money is coming from my checking account than if it is coming off of a gift card. So, if I spend the gift card on a requirement like a normal grocery trip, I’m not nearly as tempted.

My biggest challenge, honestly, is fully remembering to use such rebate cards. I usually stick them right on my grocery list with tape.

Q5: What’s our next financial plan?
My husband I make a joint income of about 163k. We have about 80k in cash savings and about 85k in retirement and 3k in investments. We are both 27.

We don’t have any plans in the next 5 years to buy a house or move (we rent a perfectly cheap apartment in a perfect neighborhood) or a car (public transportation only) or have kids. In general-we don’t spend a lot of miscellaneous items and we cash flow our vacations (we still stay at hostels!) and purchases (mostly food and toiletries) so that we don’t have credit card debt. We fully fund our IRAs and we aim to save more than half of our take home income. However, I do have student loan debt of 45k with an average rate of 7.5%. I overpay my loans by $700 a month and at this rate (and some other random overage payments that I make) I should have it paid off in 5 years.

So what do we do next? We don’t have any concrete plans as to what we are saving for (such as 20% down toward a house or a full purchase of a car) and we now have 2.5 years of emergency cash savings. Should I start applying more of our savings toward the student loans? Or should I take out a lump sum from our savings and pay down/off our loans? OR should we just continue to add to our emergency fund so we can prepare for future changes such as having children or buying an apartment in 15-20 years (we live in NYC). I struggle with how much planning we can do for our future as I don’t know how different our lives will be in 5-10 years (if we have kids-we will need a bigger apartment, babysitting, tuition..etc but do we plan so far ahead for this?).
– Rachael

You are in the perfect position to be rapidly eliminating debt.

If I were in your shoes, I would maintain a sufficiently large emergency fund (about three months of living expenses) and dump the rest into student loans. If you’re done with the student loans, pay off any other debts you have.

Debt freedom is wonderful, as it minimizes your monthly bills and maximizes your future options. It’s also a reasonably good investment of your money because you’re no longer paying interest on your debts.

If you’ve achieved debt freedom and are trying to decide what to do next, I would regularly talk about goals and keep the money in something reasonably safe (like a savings account) until you established what you want to reach for in the future.

Q6: Moving now or later?
My boyfriend lives in a remote area of Washington state. I live in a city in Colorado. He has asked me to move up there to live with him.

Currently, I have a teaching job making 38,000/yr, health insurance and love where I live. He has a military job and is pretty much the best thing since sliced bread.

The issue: If I move up there, the chances of finding a job with health insurance and a decent salary are slim to none. I have student loan debt (about $50,000) and will be dumping all state retirement funds as I won’t be vested for 3 more years. I’ve looked for jobs all over that watery state and haven’t found squat.

Should I move up there at the end of the school year? Or should I stay here another year while I try to find a job? (In any case, the plan is to spend the summer there as I get paid through August)
– Laurie

Be very clear that you want to move in with him, but be patient on the move. Making a leap like this without a good job in place puts you essentially at his mercy, as you’d be jobless and in a place without an existing social network outside of him.

I’d spend as much time as I could trying to nail down a good job in that area, but if one does not present itself, I’d move back to Colorado at the end of the summer and work.

Love is powerful, but there is a huge financial risk in moving without a job in this situation.

Q7: Considering starting a family
I will be 30 years old this year and would like to start a family. We only want one child as my husband and I are not living on a very high income. We just bought a small 2 bedroom home, our monthly payment is very low, only $643 per month. We have no debt. I make about $25,000 and my husband makes $32,000 a year. However, I work in retail, and my store is not doing very well. We could close in a few months, and if we do not close, i have been told that my position will be eliminated and if i want to stay on it will be part time work with a pay cut. I have been looking around for another job, but so far everything I have found has offered me a LOT less then what I am now making. We have $4000 in saving which we want to keep for emergencies. I desperately want to have a child, but I am feeling like it would be wrong for me to have one on an income of only $32,000 a year, the money issue is the only thing that is holding me back at this time. Everyone in my family tells me that we should just go for it, as we will never have the amount of money we want, to have a baby. Should I take their advice and just go for it at this point? Or should I continue to wait and see what happens? Or can you see another option that I am not able to? any thoughts on the matter that you can offer would be great.

– Angela

You won’t ever have enough money until you realize that you already have more than enough money. That’s really what it comes down to.

It’s really about the life choices you want to make. If you value having a child above all else, you will find ways to make it work, even on $32,000 a year. You’ll eat at home a lot and make other frugal decisions. It can work – I know people with multiple children who get by on less each year.

You need to sit down with your husband and decide how important having a child is to you and how important it is for you to be a stay-at-home parent for this child. You need to decide this together. If it’s truly the most important thing, you can do this, but you’ll have to let go of some material trappings.

Q8: Nervous parents
My parents have plenty of money in their retirement account to retire on. I know it’s into the seven figures but I don’t know the exact amount.

What I do know is that it’s driving them crazy ever since the big downturn in 2008. They are constantly – meaning multiple times a day – checking the balances of their investments, and they seem to be changing what they’re invested in on a weekly if not daily basis.

I think they’re being reactionary and that it’s stressing them out. I also wonder if it’s costing them money. Any thoughts on how to handle this?
– Alan

That does seem a bit excessive. I think they’re just really spooked after the downturn in 2008 and this is how they’ve handled it.

This might be a good time for them to talk to the retirement advisor they have in their workplace, who should be able to calm them down a little bit. If they don’t have such an advisor at work, they should talk to a fee-based financial advisor, one who won’t just try to take over their financial planning.

Most likely, their constant hopping around with their retirement investments is costing them long-term money.

Q9: Starting a retirement fund
My husband is 26 and is a full-time student. He served in the Navy and the GI bill currently takes care of his tuition and part of the cost of his books. He has 2 or 3 years of school left, of which only 1.5 more will be covered with the GI Bill. I am 25 and work full-time making pretty decent money. We recently moved into a larger house but did so with another couple, which reduced our monthly rent by $300 and also is reducing our monthly utilities. We have no kids and keep our emergency fund low – $2,000. We are living comfortably on my salary and are putting about $1000 / month towards my student loans (we are aggressively paying them off due to ridiculous interest rates – 12.75%). Over the past year we’ve payed off a little over 13k of my loans and we have about 29k left (7k in one, 22k in another). If we stay on track we can pay off the 7k loan by the end of the year and hopefully start on the second loan. All of this is taking into account bumps along the way and the cost of traveling for family functions/holidays. I would like to start some kind of retirement account – I’ve seen all the charts that show how much of an impact saving early in life makes. My question is how to go about this. My employer does not offer any 401(k) options. I don’t know much about Roth IRAs, but I’ve seen you recommend both Vanguard or Fidelity. What types of things should I be looking for when researching how to start this retirement fund? While we are paying off my student loans we want to keep any contributions to retirement small – about $100/month. Is this an unrealistic amount?

– Annie

The first thing you’d want to look for is what kinds of fees the investment house charges for opening and maintaining a Roth IRA. Do they charge you for each transaction? Do they charge you for keeping the account open? Both of these are things you don’t want, and Vanguard and Fidelity don’t do them.

You’ll also want to compare some of the investments offered. I would look at the Target Retirement funds from each of the companies you’re considering and see which ones had the best average annual returns over the longest time period you can look at as well as the lowest expense ratio (how much they charge for running the fund).

My retirement investing over the last several years has been done with Vanguard, and I’ve been happy with them.

Q10: Making case for less overtime
I am trying to get the company management to realize the cost of hiring new people vs paying the existing workers a little bit of respect/appreciation and maybe some much appreciated overtime. I need to figure out how to break it down into dollars and cents for it to make sense (pun?) to these folks and I really appreciate how you do that so well and communicate it so effectively.

A little background – the job is in manufacturing, is hard hot difficult work, requires heavy lifting, long days on their feet, monotonous tasks and does not pay well. Oh and it is fairly seasonable with the busy season in the spring/summer and a real die down in late fall until after xmas.

Lets say for consideration we have a core group of 50 workers. Most have been with us for a long time and are good/effective at their jobs and fairly productive. They haven’t had a raise in 5 years. Say about 80% of them would welcome overtime. Lets say they make an average of $10/hr.

Starting in January we attempt to hire a bunch of folks, Say we need about 40 additional people through August. We pay $8 per hour. For every 20 people we talk to/offer work to, about 10 actually show up and go through the orientation process. (which includes paperwork and watching of safety videos done by HR manager and then about 4 hours of on the job training with one of our existing workers). Of the 10 people that start to work, 80% quit within the first two weeks. (The job is REALLY hard)

Given the fact that overtime becomes somewhat a diminishing returns issue, production decreases as tiredness increases… there is some sort of sweet spot of OT that existing workers can work without risking quality and or safety…say its 3 hours per day.

Can you help me frame an analysis and identify what kind of data I need to pull to put together a recommendation?
– Julia

Numbers speak more powerfully to management than anything. They need to make sure that their choices are going to have a clear positive impact on their bottom line. Right now, they seem to believe that attempting to acquire new workers is more cost-effective than offering overtime to existing workers. You have to make the case that it’s not true.

The first step is that you’ve got to come up with an estimate of how much it is costing them to get a single new worker on the job, how much they pay that worker over the time they work there, and the average length of time a new hire stays with the company. What you’re trying to do is figure out the average annual cost for the company for a single new hire over the time they’re with the company. Given what you describe, it’s probably pretty high, but I have a hard time estimating this from your note.

Once you have that number, you just need to compare it to offering enough overtime to established workers over the course of a year to make up for that new employee. If you’re paying time and a half over $8 per hour, you’re looking at somewhere close to $25,000 per year. You might want to assume that you need 3 or 4 existing workers to come up with enough overtime to cover for that worker you didn’t hire, and they will probably want data on the quality of overtime work (how many parts are produced in overtime work versus regular work).

Does it cost more than $25,000 a year to hire and retain a worker? I’m guessing that it does, but you have to do the math yourself.

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. Johanna says:

    Q3: The advantage of a Roth is that you pay no tax…

  2. Johanna says:

    …on the withdrawals you make in retirement…

  3. Johanna says:

    …Check your home country’s tax laws…

  4. Johanna says:

    …to see how *they* treat Roth withdrawals…

  5. Johanna says:

    …if they charge you tax, there’s little benefit to a Roth.

  6. Andrew says:

    Moderation: calice et tabarnac!

  7. Johanna says:

    Q8: Have your parents asked your advice?

  8. Johanna says:

    If not, MYOB.

  9. jim says:

    Q10 : Julia, I don’t think you’ll win that argument. In the long run paying $8 is cheaper than paying $10 x 1.5 overtime. They may lose some money on people who quit but thats recovered fairly quickly.

  10. Wendy says:

    Q10: Factor in costs of paying current employee time for interviewing and training as well.

  11. Bookaunt says:

    #Q5 After paying off your student loans and making sure you are funding any other tax-advantaged retirement plans you are eligible for, look into starting a 529 plan for your future children’s college expenses.

    Yes, it IS thinking way ahead but with the way the cost of college continues to escalate, a little extra growth time could be very beneficial. You can start one with yourself or your husband as the designated beneficiary and change the beneficiary later. Or maybe there might be some continuing education expenses in your future for which it would then be available.

  12. Kevin says:

    This is just sad. The comments on the reader mailbags used to be the best part of this site.

  13. Brianne says:

    Kevin – They’re all in moderation.

  14. Brianne says:

    Q9 – Vanguard will require $3K to start a Target Fund Roth IRA.

  15. Johanna says:

    @Brianne: Vanguard target fund minimum is $1K.

  16. Joan says:

    #12 Kevin, the sad part is that the people who use to have the best most thoughtful comments are now the ones who seem to be more determined to make a point that the comments are not read.

  17. Brianne says:

    @Johanna – You’re right, they lowered it last year.

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