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. Reasonable or unreasonable expenses
2. Charity auctions
3. Next step after debt freedom
4. Learning chess for free?
5. 401(k) investment options
6. Teaching children animation
7. Credit score versus debt freedom
8. Separating things after breakup
9. Converting cassettes to MP3
10. Library sales
I have this list of historical figures that I find endlessly fascinating. I’ve read multiple biographies and other books about each of them, and I immediately dive into any new books released about them.
On that list: Abraham Lincoln, Woodrow Wilson, Jack Johnson, William Buckley, Theodore Roosevelt, Ned Kelly, and Napoleon Bonaparte, among others.
I’d love to someday find a common thread among these people, but as of yet I’ve not been able to figure it out.
Q1: Reasonable or unreasonable expenses
I enjoy reading this column in the Globe and Mail on people’s personal finances, and this one made my head explode.
This couple makes tons of money ($176 000/year), but apparently has nothing left over, and the financial adviser says their expenses are reasonable! I hardly agree. What do you think? I just thought you might be interested because it is so different from your lifestyle.
If you scroll down, they report their “monthly disbursements” as being: “Mortgage $1,330; property tax $460; maintenance $300; utilities, insurance $310; auto lease $545; car insurance $165; fuel $400; auto maint. $170; groceries $870; child care $1,950; clothing $320; gifts $85; charitable $20; vacation $50; grooming $265; dining out $375; entertaining $120; hobbies $60; subscriptions $85; life insurance $120; disability/critical illness ins. $85; phones $220; cable, Internet $240; RRSP $200; tuition $325; TFSA $100; her DB pension plan $675; other $60. Total: $9,905.”
If you look at that list, there are some things that they’re spending a lot on. Their phone, cable, and internet bills combined are $460 a month, which makes me believe that they must have the highest speed internet available, every possible service on their phones, and pretty much every cable channel that has ever existed. They spend $320 a month on clothes, which is way beyond what I spend. They spend $375 a month eating out, which is a bit high.
However, a lot of their expenses are the result of the price of their home, their education, and where they’re living. I think the financial planner is giving them a lot of breathing room with how they spend their money when he says that they’re doing well, but they’re not doing anything completely outrageous with it.
Q2: Charity auctions
A local charity is having an auction where local businesses are auctioning off goods of various kinds, like gift certificates. I like the charity and feel like I should bid, but there’s nothing up for auction that I have any interest in. What would you do?
I’d just go to the auction and, if I didn’t want anything, give a small donation to the charity after the auction.
I’ve found that charity auctions like this are a great way to get to know people in the community. You’ve got to be willing to introduce yourself to others and be willing to involve yourself in polite conversation, but if you can do that, you can really start building great relationships at such events.
If there’s a charity auction in our area and the cause is reasonable, I usually make it a point to go.
Q3: Next step after debt freedom
We are about to be debt-free (except for the house) in a few months. Now that we have paid off over 50k in student loans, I am not sure what to do next! We have an emergency fund of a few months expenses and a very small retirement account with no company match option (I am 29, he is 28, and we have one child). I know we need to start getting serious about retirement, but we are planning on moving to another state in about a year and would like to put a bigger down payment on our next house so we can comfortably afford a 15-year mortgage. So, my first inclination is to save our “extra” money every month (about $1700) to put towards our next house. However, I don’t want to be tempted to spend that money, so I am wondering if there is any downside to putting that extra money into our current mortgage every month? We live in a very stable housing market and currently have 30-40k of equity in our house. I figure if we just put the money into the house, we save a little on interest and then when we move it ALL goes to our next down payment. Thoughts?
You’re completely fine putting that extra money into your mortgage every month. That’s actually a pretty safe place to store the money while you prepare for the move.
I don’t think that making extra payments on a mortgage is ever a bad idea unless (a) you don’t have an emergency fund or (b) you have other outstanding higher-interest debts.
If you feel good about putting your money into your mortgage at this time, then go for it. It will leave you in a great place with regards to your next move.
The best free chess program I’ve ever used is Crafty Chess. It’s not a strong tutorial program, but it’s a very good opponent.
If you’re looking to learn, I’d couple Crafty with a good online chess tutorial, like this one, which takes you from the basic moves to understanding many different kinds of openings.
Take it all slow, even slower than you think is slow. Run through the same opening a lot of times so you really understand it.
Q5: 401(k) investment options
I’ve long been a believer in low cost investing. My wife and I hold our Roth IRAs at Vanguard in a low fee target date retirement fund. However, our 401ks, as is typical, have limited options. My wife’s account has target date fund options, but have significantly higher fees than a mix of other lower fee options. My 401k does not have target date fund options.
My question is how do I balance the target date funds with the other low cost options? And eventually, I’ll want to blend taxable accounts into this investment strategy. Do you know of any resources that I can read to help me with this problem?
If you want to balance everything, my suggestion is to look at the actual mix inside of your wife’s target funds and then match it with the same exact mix in your own retirement funds. Every few years, check the mix again and readjust your own retirement savings.
If you want to use the least-expensive funds in your wife’s account, you can also just watch a particular target retirement fund from another investment house and just keep matching both accounts to the asset allotment in there.
So, for example, you might be looking at a target fund that’s 60% domestic stocks, 20% international stocks, and 20% bonds. You just split your own investments up in the same way, buying an index fund of each type. In a few years, the target fund might be split up with 55% domestic stocks, 15% international stocks, and 30% bonds. You just redistribute your own retirement account(s) to match it.
The best way to start is with some drawing tools and a thick pad of paper that’s thin enough that he can trace through it.
Animation, when it comes right down to it, is just a sequence of drawings with minor changes between them. With a pad of paper and some drawing utensils, you can make animations at home pretty easily. If he wants to digitize them, some time with a digital camera can make that happen.
If he’s really into animation, the best tool for under $100 for him would be Adobe Flash. It’s a pretty challenging program to learn, but if he’s passionate about animation, it’s a tool worth digging into. There are a lot of professional cartoons made using this program.
Q7: Credit score versus debt freedom
Short version: If I want to maintain my strong credit scores, should I delay in paying off my student loans in order to keep an installment loan on my credit report?
I took out six figures worth of student loans for law school (and a much smaller amount for undergrad). I have been aggressively paying off the loans and aim to be able to pay them off completely by January or February of 2013. The loan is a federal fixed rate loan at 3.75%, so the interest is relatively low (though more than I would likely be able to make saving the money). I am excited about the prospect of being debt free, but I am concerned that my relatively strong credit scores might be hurt if I no longer have a “mix” of credit. I checked recently using myFico, and my credit is 782 – not perfect, but a score I’d like to keep (or improve). I have several credit cards, which I have always paid in full, on time. I use between 1 and 4% of my credit limit in a given month.
I am about 5 years away from a potential home purchase because my location may not be permanent, and even if it were, it is one of the most expensive housing markets. However, I worry that paying my loans off completely now might hurt me if I do need a mortgage in 5 or so years. Should I instead pay most of the balance off, and then pay the monthly rate for the next 5 or so years, just to maintain my credit mix?
Paying off your loans in full now will not hurt you when you apply for a mortgage, as long as you maintain the credit cards and the spending patterns you have now.
The key thing to remember is that as long as your credit report is in good shape, you can always seek out manual underwriting of your mortgage if you find that your credit score isn’t as high as you want it to be.
Credit scores are useful, but they’re not perfect. Banks know this, and many will do manual underwriting (where someone actually examines your credit report instead of just relying on a credit score).
Q8: Separating things after breakup
My boyfriend and I have been dating for three years. We were talking about marriage and we shared an apartment and we had split up many of the bills. We are even both listed on some accounts.
A week ago, we broke up and he moved out. I’m in a good place about the relationship, but I’m not sure what I should be doing with the financial stuff. What moves should I make?
Your first step should be to figure out, as best as you can, which accounts have either both of you listed on the account or the wrong one of you listed on the account. Look at bank statements, your lease, your utility bills, your entertainment bills, your credit cards, and so on.
Once you have such a list, make sure each item is corrected in turn. This will likely involve contacting each business involved and following whatever procedure they have for such an account change.
Once you’ve done this, you may want to encourage your ex to do the same with any remaining accounts. That should take care of it.
Q9: Converting cassettes to MP3
I just read the reader mailbag that ended with cassette recordings. You mentioned that the software you used was outdated now. Audacity is simple, powerful, and best of all FREE software that can record from a microphone input to a file. It requires an extra file to export to MP3, but I haven’t found a better piece of quick software for this purpose.
This is really a great solution for people struggling with the challenge of converting old recordings to digital formats.
If you have an old cassette tape, eight track, or record that you want to convert to an mp3, all you need is a microphone and the free Audacity software. Attach the microphone to your computer, fire up Audacity, and start recording.
The output won’t be perfect, but if you give it a few tries, you can make some very good recordings.
They’re a great bargain if you find a book there that you want to read. The challenge is sifting through the stuff that you don’t have any interest in reading.
I usually go to library sales with a very open-minded attitude. I don’t go with a checklist of books I must find. Instead, I tend to wander and browse and see if anything strikes my fancy.
I like library sales because the proceeds directly help the library and because the book prices are very low. It feels like a double win to me.
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.