Reader Mailbag: February Thaw

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. Helping sibling with retirement
2. Cheap haircuts
3. Podcast baby steps
4. Recent graduate with car trouble
5. Selling car
6. Handling big raise
7. Down payment or investment?
8. Contradicting financial advice
9. Splitting rent
10. Setting priorities

The last few days have been surprisingly warm, melting the snow and providing me with a few opportunities to go on a wonderful outdoor walk. I loaded up my old iPod with some podcasts and strolled around my neighborhood for the first time in a long while.

Sure, there’s brown grass exposed from beneath the snow cover, but rather than being frozen ground beneath it, there’s mud from the freshly-melted snow. Before long, fresh grass will begin to peek up.

There are many trees and shrubs that are barren, but with just a few more nice days, buds will begin to appear.

Late winter is full of the promise of a beautiful spring and a warm summer.

Q1: Helping sibling with retirement
I’m interested in your thoughts on the most effective ways to support my sister in saving for retirement. My sister is 31 and is a Ph.D student with a year to go. Due to her path through grad school, she has not had access to (or income for) a 401k. We received a bit of inheritance 3 years ago; at my advice she opened a Roth IRA and fully funded it for 2012 and 2013. She is keeping the remaining inheritance in cash as her emergency fund (8 months worth or more). That is the extent of her assets. Fortunately, she has no student loans or other debt.

I am concerned because she is behind on saving, and in her chosen field it’s very unlikely she will make a lot of money. It is just the two of us family wise. I can afford to fund at least a partial Roth contribution for her annually and plan to do so (I max out my own 401k/IRA already). She will receive at least $250k in assets/insurance if I die. Once she is working full time I will ensure she contributes to the available retirement plans. Are there other methods I should consider to help ensure her financial future?
- Cherie

If you just do this, you’re doing far more than anyone could ever expect you to do for your sister. She’s well covered in the event of your death and you’re also helping her with retirement savings that, if I understand you right, is going to amount to 5 to 10% of her annual income.

I only have two suggestions. One, act as her life advisor as much as she will let you (if you’re not already). This doesn’t mean pushing advice on her, but taking every opportunity to listen to what she’s saying when she expresses frustration and also when she expresses joy so that when she does actually need advice, you deeply understand her life and can give stellar advice. This is incredibly valuable – probably more than anything you could give her financially.

Two, if there is ever a point where you are struggling financially, don’t be afraid to pull back your support. This should never drain you. If it were to do so, you would not only be endangering your own future, but you would likely drop a ton of guilt on your sister should she find out about it. It’s not worth it. Only help her when you can easily afford it.

Q2: Cheap haircuts
I can’t believe you would advise anyone to get a cheap haircut or to cut it themselves. Cheap haircuts look cheap.

- Danielle

One of my closest friends keeps his head completely shaved. He shaves it each morning with an electric razor and it looks great. Most of the time, I keep my entire head shaved down to roughly half an inch. It’s incredibly easy to maintain and looks fine. My wife has incredibly straight hair that she gets cut only rarely – and even then, it’s pretty cheap. It also looks fine.

You don’t have to have an expensive haircut to look professional. You just need to look clean and neat and not disheveled.

If someone wants to judge me for not having some perfectly coiffed $500 men’s haircut, they can so judge me. Anyone who passes that type of judgement on me is not someone I particularly want to build any sort of relationship with.

Q3: Podcast baby steps
During the day, I watch television and leave it on for background noise like you said. I am curious about how podcasts work. I tried listening to the radio instead of television so I could cut the cable bill but most of the radio stations around here are either bad music or loudmouths. The idea of “programming my own radio station” sounds interesting but I do not know where to start.

- Tess

For most people, I recommend using iTunes on their computer as the easiest program for managing podcasts. They have a podcast “store” (you don’t have to pay for them; it’s just an easy way to browse the thousands of podcasts out there) and automatically download new episodes for you when they come out.

Apple has a great guide for getting started with listening to podcasts.

Personally, I subscribe to about 40 podcasts. Each day, I just instruct my player to play any episodes I haven’t listened to. If I find I’m running out of listening material, I’ll subscribe to new ones.

Q4: Recent graduate with car trouble
I’ve just graduated college and am having trouble nailing down any job. Many retailers are not hiring due to the holiday season among whatever other reasons there may be. I have applied at a number of “big boy” jobs and may be waiting up to a few months to get something like that. I’m running into a little car trouble and was wondering what I should do.

I have an ’05 Taurus that has been pretty good but has high mileage and recently some serious issues have arisen that will require very expensive repairs. My question is, should I cash in some bonds I have (may only be around $2k worth) and once I get (any kind of) job put that money and whatever I get for the Taurus towards a new(ish) car? Or should I just put what I can towards repairs and wait until I become a little financially more stable, holding on to the Taurus for as long as I can. In a few months I will have to start paying loans back, is it too much to consider a car payment as well?
- John

If you don’t have a stable income, I wouldn’t add any additional bills to your pile. That would probably mean holding onto that Taurus and keeping it running for as long as possible.

This is one of those situations that comes back to cash flow. Each month, a person has a certain amount of income and a certain amount in total bills. Ideally, the income is higher than the bills and you want the biggest possible gap between the two. If your income is really low, you should avoid adding to the bills whenever possible.

Be patient. Look for work. When you find it, then start worrying about the new car.

Q5: Selling car
My wife and I have decided to try being a “one car home” for a while. We decided to stick with the larger car so we have a 2009 Toyota Corolla that we want to sell. Do you have advice on selling used cars?

- Randy

You have a lot of options. My preferred option is Craigslist, simply because I have personally witnessed many happy buyers and sellers, including myself.

Having said that, you need to be very careful when selling on Craigslist. Here’s some great advice for Craigslist car selling from Edmunds.

I would add one additional element: I would make the final transaction at the bank. Draw up a contract between both parties, have a notary at the bank notarize it, and have the title and the money exchanged all at that bank. This provides a public place for the transaction as well as much security as possible for both the buyer and seller.

Q6: Handling big raise
On February 28, I walk out the door at my current job for the last time. On March 1, I start at my next job. The pay is going to almost double. I want to make sure I’m doing the right thing with this extra money.

- Max

The first thing I would do is figure out the difference in your take-home pay between your new and old job and set things up so that you are living off of pay equal to that of your old job. Bank all of the difference.

How do you do that? Set up an automatic transfer with your bank, moving that money from your checking to your savings automatically a few days after each payday. So, let’s say you were making $1,000 per check at your old job and now you’re making $1,800 per check (assuming the same pay periods). Just have your bank automatically transfer $800 from checking to savings a few days after each payday. Most banks can set up this type of weekly or monthly transfer.

As you work at your new job, spend some time thinking about goals. What do you want to do in the future? Spend some time learning about investing at your own pace. Your money will be just fine building up in that savings account until you know what you want to do.

Q7: Down payment or investment?
My new wife had quite the surprise when we were sitting down to talk about finances: she has an account of a mutual fund of stocks with almost 150k in it! We’re hoping to buy a house sometime soon, and due to the high property values in our area, that will likely cost in the 400-600k range.

My question to you is: do we use this fund for our down payment? Or should we keep this invested and try to pull together a down payment on our own (we can probably save up 50-100 in the next 2-3 years)? We are 28, we have an emergency fund with 6 months living expenses, and are both already contributing more than 10% of our income to retirement accounts (diversified stocks mostly, a mix of Roth IRAs and 401ks) and have been for some time, so we’re in pretty good shape for our age.

Obviously the lower the mortgage costs, the sooner we can pay it off and the more we can invest with the improved cash flows, but I’m having trouble breaking down the math here. Do you have thoughts or guidance you can help us with?
- Roger

The math here is very difficult since there are multiple factors for the future that you just don’t know. Will the Federal Reserve raise interest rates in the next three years? What will the stock market do in the next three years? Both are rather unknown.

However, if you’re intending to use that money you have in the mutual fund for your house down payment, regardless of whether you buy now or buy in three years, you should recognize that it’s in a rather volatile investment right now. 2014 could be another good year for the stock market or it could be another disastrous 2008. You can say the same thing for 201 or 2016. I generally encourage people to only use stocks for long term investments (riding through at least a bull and a bear market) and three years isn’t long term.

Given that – and also given that it would provide a down payment which would allow you to avoid PMI and also given that interest rates are really low right now – I’d buy sooner rather than later. At best, I would wait until there are strong hints that interest rates are about to rise and then jump, but if I did that, I personally would be very nervous about leaving my down payment savings in the stock market.

Q8: Contradicting financial advice
It seems like every little piece of financial advice even as simple as emergency funds has people that are in favor of it and against it. How can a person figure out what is right?

- Dean

There is only one rule of personal finance I’ve found that’s absolute. Spend less than you earn if you want to build wealth. I don’t think anyone on earth would argue with that one.

Here’s the whole problem with personal finance advice. A lot of Americans can’t even do that one simple thing. It’s not nearly as easy as it sounds and it requires good psychology to do it.

As long as you’re spending less than you earn, just stick with the personal finance plan that makes the most sense to you in your gut. Read the different sides and make up your own mind.

Q9: Splitting rent
I am going to start renting an apartment with a friend of mine in March. We already signed the lease for the apartment. One of the bedrooms is quite a bit bigger than the other one. Is it better to split the rent equally and flip a coin to see who gets the bigger room or is there a better arrangement?

- Darcy

Sit down and talk about it before anything else. Do you both want that large bedroom? Be honest about it.

If you both truly don’t care, then a coin flip is probably the best solution. However, I suspect that at least one of you does care.

Given that, I suggest that you should bid for the larger bedroom. Each of you should pick a number that says how much extra you’re willing to pay in rent each month to get that larger bedroom. Reveal them both at the same time and the person who is willing to pay the most gets it.

So, you write down that you’d be willing to pay $25 more a month to have the larger room and your roommate writes down $5 per month. You get the room, but you’re on the hook for half of the rent plus $25, while your roommate only pays half of the rent minus $25.

Q10: Setting priorities
Background Info:
20 years old (Living with parents)
3rd year attending California State University – Fresno (Full Time – Economics Major)
Busser at a restaurant earning $1000-$1400 monthly (tips + paychecks)
Fortunate enough to not have any living expenses besides a few annual expenses (Taxes/Vehicle Reg.)

Financial Situation:
$500 cash assets across 2 savings accounts and 2 checking accounts
Discover IT Card: $1,400/$2,500 — 56% utilized — (APR is still 0% due to the no interest grace period ending in February)
Wells Fargo Visa Card: $1,000/$1,600 — 63% utilized — (APR: 21.15%)

The first half of this year will be very critical, as I am planning to transfer to a CSU in Southern California. The move is not certain yet, if I cannot get into a CSU I will be staying here in Fresno and continue attending CSU Fresno. However if I do get in, I will be looking to move in July at the latest. Also, it is certain that I will be moving with and rooming with a friend of mine to cut living expenses in half. They have already has been accepted down in Southern California.

Last year I had an emergency savings of $3,000 that I unfortunately had to use up while I was in between jobs for about 4-5 months (back then I wasn’t living with my parents so I had bills to pay).

I would like to re-establish an emergency savings so I have some security when I move, I also want pay off my credit cards before I move so I am out of debt and to raise my credit score (currently 685) for the apartment and such, and to begin investing once I am out of debt, although, It seems as if I won’t be able to do both in this short 7 month time frame which is why I’m requesting advice from The Simple Dollar.

Should I pay off debt then build up savings, build up savings then try to cut down the debt, or work on saving and debt repayment simultaneously?
- Adam

If I were you, I’d generate a small emergency fund that will protect you from accumulating more debt ($1,000 to $2,000), then I’d hammer the debt hard.

The reason for the emergency fund is to keep you focused on that debt repayment. It’s really easy to get discouraged when you’ve spent three months hammering at your debt, one bad thing happens, and suddenly your debt total is right back to where you started.

If you have an emergency that eats up some of your emergency fund, go back to minimum payments on the debt until you rebuild the emergency fund. You should strive to never see your debt total go up again.

Got any questions? The best way to ask is to email me – trent at thesimpledollar dot com. IĆ­ll 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 many, many questions per week, so I may not necessarily be able to answer yours.

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