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. Handling new income stream
2. Celebrating debt freedom
3. Car payments or emergency fund?
4. Bang-for-the-buck hobbies
5. Starting no-cash banking
6. Good cookbooks for quick meals?
7. Home sale proceeds question
8. 401(k) or student loan?
9. Cleaning out parent’s junk
10. Families and co-parenting
Over the past few years, we’ve become used to the convenience of GPS for travel. While it’s nice, all it really does is replace one’s ability to read a map and one’s willingness to stop at a gas station and ask a few questions.
Picture this: the kids are in the backseat. It’s lunchtime. They’re getting restless. Ideally, you’d like to find a simple sandwich shop to pick up lunch, then hit a park to eat and allow the kids to run off some steam. You’re in an unfamiliar area.
With a GPS, we can just punch a few buttons to find both a sandwich shop and a park. Without GPS, we can just stop at a gas station and ask, “Hey, are there any good sandwich shops in this town?” and then ask about a park when we’re at the sandwich shop.
A GPS is convenient, yes, but I don’t think it’s vital enough to be a must-have.
Q1: Handling new income stream
I’m refinancing my home mortgage from 6.8%/26 years left down to 3.75%/15 year mortgage. The home appraisal did not come in for as much as I had hoped. My home was appraised for $200,000 and I currently owe $172,200 on the house. They are estimating closing costs will cost about $4,000 total and that will be initally be put into the mortgage and I can pay it later if I decide to.
My wife and I recently became home care providers and have a wonderful woman living with us. The state is going to pay us a large sum each month to have her live with us (about $2,400). We had originally agreed to put the money into a seperate savings account with the only use being us building our dream house in 3-4 years with a $90,000 cash down payment. Most likely we would sell our current house, but there is a possiblilty of renting it.
Would you put this check each month into the mortgage until we are down to $160,000 on the mortage to save on PMI? Or would you rather have the large savings account with a distinct goal?
Our only other debt is a college loan at 3.5% / $25,000.
I would strive to get rid of the PMI quickly, since it will steadily eat away at your money for a long time if you don’t deal with it.
However, the bigger question is the state of your emergency fund. Do you have one? Given your low debt load, I would strive to have at least three months of living expenses sitting in a savings account just in case of unexpected events.
I would first build your emergency fund, then knock your debt down to the point where you no longer have PMI, then reassess your goals at that point.
We stayed up late drinking some wine. That was about all.
It wasn’t a big surprise for us, really. We are really careful about charting our finances and we had a good sense for many months beforehand that our final payments were coming up.
It felt good, but it wasn’t a huge life changing moment. It was something we knew was coming.
-My wife and I have about $10k in credit card debt, which we are definitely paying off.
-We also have 1 car payment that is $269/month on a $15k loan with 0.9% interest.
-We just bought our first home
-Besides the $30k, we have around $5k in savings.
-I have $20k in a TSP account that I had in the military (sorta like a 401k or an IRA)
-I have $1400 in a 401k which I just started with my new employer.
-My wife has $2000 in a rollover IRA.
The thing I’m torn on is whether to use the money to pay off the car or make a healthy emergency fund. I’m kind of leaning towards the emergency fund since the interest rate on the car loan is so low, and the fact that we just bought a house, and who knows what could possibly go wrong. I guess I’m just looking for some advice. Thank you in advance!
I would pay off the credit card, which is likely high interest debt. I would then bank the rest for an emergency fund.
Your two other debts – your home loan and your car loan – are both at a very low interest rate. While paying them off early is nice, having a healthy emergency fund is more important (in my opinion) than paying off low-interest debts.
I would absolutely leave the retirement savings alone and consider the presence of an emergency fund as encouragement to bump up that retirement savings a bit.
Q4: Bang-for-the-buck hobbies
My wife and I have started looking at our hobbies in terms of how much money we spend on them compared to time. For example, my golf hobby is very expensive per hour spent on it. I’m trying to find some better hobbies with a good bang for the buck. What hobbies do you enjoy?
My favorite hobbies are non-electronic games (board games, card games, etc.) and reading. Both of them are pretty inexpensive by the hour.
The best hobby, in my opinion, is one that doesn’t require you to keep buying stuff to enjoy the hobby. With golf, you’re going to have to keep paying green fees and keep buying balls, for example. There’s not much you can really do to trim that continuous spending.
Just go through things you might be interested in and ask yourself whether there’s a required cost to continue enjoying it. Do you have to pay each time you do it? Do you have to buy new things? Is there a free or very low-cost source for new things?
Q5: Starting no-cash banking
I currently have several bank accounts with different banks, but two that I primarily use. I have a USAA checking account and a Wells Fargo checking account. My USAA account is used to my day to day transactions and bill payments. My WF was set up while I was in college and is currently only use it when I need to deposit cash since USAA has no physical locations. (Once I make the deposit in my WF I just transfer it over to my USAA).
In a few months, WF will begin charging a monthly fee on all their accounts. I have looked into a few Credit Unions and it looks like they charge a monthly fee on their accounts as well. I do not want to pay a monthly fee on an account that I rarely use.
Do you have any suggestions of where I can find a bank (a) with a local branch (b) that doesn’t charge monthly fees for an account that will rarely be used?
If not, do you have any suggestions on how I can transition to cashless banking or how I can get cash deposited into my USAA account.
When you’re looking for a local bank, you simply have to shop around
Q6: Good cookbooks for quick meals?
I’m trying to transition my family away from eating fast food consistently. I’d like to find a good cookbook with simple and fast and tasty recipes in it so I don’t have to go haphazardly all over the net to find things. What do you suggest?
My guess is that you’re not highly familiar with cooking at home. I would probably start with a cookbook that focuses on teaching technique while preparing simple recipes, so my immediate suggestion is Mark Bittman’s How to Cook Everything.
It’s not just a collection of recipes. There is a ton of discussion in that book about how to prepare the recipes. Scrambling eggs, for example, is a lot more than just beating eggs together and tossing them in a skillet. There are a lot of little things that go into making it turn out well.
Once you can cook almost anything in that book, there are a lot of great books that cover recipes with a small preparation time. My favorite at the moment is Jacques Pepin’s Fast Food My Way.
Q7: Home sale proceeds question
I own a home in Virginia and one in Massachusetts that my husband and I are renting to friends. I plan on retiring in 2015 or 2016, selling the home in Virginia and moving back to the one in Massachusetts. We have about $200,000 equity in the Virginia home and owe $100,000 on the Massachusetts home. What would be the best thing to do with the $200,000 Virginia home equity? I would like to pay off the $100,000 Massachusetts home and purchase a new vehicle for my husband’s business and possibly down payment for a condo (they go for about $175,000) for rental income since it is a college town. Question: I am concerned about having to pay capital gains tax or higher income tax on the $200,000. I will also have about $400,000 from my Federal government 401K to invest. Should I put some of the home sale proceeds and 401K into an IRA or are there other options to avoid the taxes? I will be 56 and my husband 51. Thanks for your insight.
While I’m not clear on the full situation of selling your home, it appears as though you may not owe any income tax on the sale.
For more details, I’d review this wonderful guide on the ins and outs of income tax and home selling. It sounds like your home in Virginia is your primary residence, so you get some very nice income tax benefits for selling it.
There may be issues involving Virginia state income tax. To be sure, it probably wouldn’t hurt to contact a Virginia CPA before you sell.
Q8: 401(k) or student loan?
I am 37. I have $57k in my 401k. I contribute 6%, employer 4.5%. Balance on student loan approximately $74,000. I’m sick of paying the loan. It’s been 12 years since repayment started but I had to defer for some years while I tried to start a business so the interest accrued and added $10k. Loan interest at 6.75%. I was really inspired by that Harvard MBA who paid off $90k in less than a year.
It sounds like you’re tempted to cash in your 401(k). Don’t. It’s a really poor long-term financial move.
It is very tempting to push yourself to accomplish some goal because someone else has achieved it. I used to do this all the time with jogging. I’d see or hear of someone else running a 5K or a half-marathon and I’d push myself too hard, often to my own detriment.
The only time you should tap retirement funds is if that is the only financial option left to you. It’s not a savings account to bail you out in a pinch. It’s how you’re going to survive when you’re too old to work. Don’t sacrifice it to score an immediate goal right now.
Anyway, his house is sitting there, full of his stuff. I’ve gone in there to get documents and a few specific items, but I just don’t want to face the task, both because it’s going to be a huge job and because it’s going to be hard emotionally.
I’m not sure there’s anything of much value in there. Most of it is just going to get thrown away. Is there a way to do this that I’m not thinking of?
I would ask friends for help in this situation. This is the exact kind of thing that a good friend will help with.
One approach might be to split the proceeds from any sales with a friend that would take charge of the whole process. That person would just inventory items, discuss with you which ones you actually wish to keep, and then quietly sell the rest, splitting the proceeds in some fashion with you.
If a close friend asked me to do this, I’d gladly take on the task.
Q10: Families and co-parenting
About 6 years ago I went through a divorce and a job location change at roughly the same time. At the time i had 2 very young children, a new house in a thriving community and area, and as divorces tend to do, it got messy. Our Home had to be sold and she moved to another State other than the one my job was taking me to. Fast forwarding a bit, she and my children now live about 150 miles away from where i live and i do the driving to pick the kids up, bring them back to my place, or sometimes get a hotel closer to them using points (my job has me traveling quite a bit so i rack up points pretty well…etc…you get the general gist.
I would like to upgrade houses as the one i got post-divorce was OK at the time, for the money, but is now more trouble and poorly laid out than its worth. (remarried, need more room and rooms etc). I’d LOVE to buy a place closer to my children but unfortunately the location they live in and around is about the second most expensive area to live in around the US. (need a ton of cash to put down and homes are around 400k median price).
I make a good salary at over 6 figures, and have very little consumer debt so I’m not in bad shape, but i have child support to pay, along with all the other associated costs you can imagine.
My dilemma is do i go ahead and buy something here now where its more reasonable (250k) knowing my commute to spend time with my sons will be permanent until they can drive etc….couple years off, continue to rack the miles up on my truck (paid cash for it years ago and its a diesel so extended miles are more sustainable…i get 22.2MPG). Or do i tough it out in the very small home I’m in now and save so i can be closer to them, understanding that quality of life may diminish due to less available cash that will be tied up in the move, the more expensive area, etc. My oldest will be off to college in 3 years, youngest is just entering Middle School.
It is a tough question to answer i know, but perhaps you could help with the financial side?
If you’re looking for the best strictly financial answer, it would be to stay where you are now and commute on a regular basis. If you don’t have the kind of cash needed to put down a strong down payment in the area you are thinking of moving to, then you shouldn’t consider that move. The mortgage will be painful. A $400,000 mortgage, even at today’s very low rates, is still well over $2,000 a month, and that’s assuming your credit is stellar.
However, you’re interjecting children into that equation. If I were in your shoes, there’s almost nothing I wouldn’t pay to be close to my children.
If I were you, I would sit down with my new wife and figure out if (a) she really wants to do this and (b) if it is actually financially feasible for you guys to make this move. Talk it all out. She may not feel the same way you do about this move, and that needs to come out before you push a decision that she’s not comfortable with.
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.