Reader Mailbag: Iowa Flood Waters

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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. Optimizing cash flow
2. Getting past the “acquaintance” phase
3. 529 for another child
4. The cost of saving coins
5. IRAs at fairly high income
6. Student loan or not?
7. Credit scores and card payoffs
8. Dealing with a small windfall
9. Windfall and mortgage refinancing
10. Passive investment advice

Several people, after hearing about the 2010 central Iowa flooding, inquired as to how we’re faring. We had a small amount of water in our basement due to the entire system becoming overloaded with water and backflushing right into our house. In short, everything worked just like it’s supposed to – except the town’s storm drainage system doesn’t deal well with 11 inches of rain in a fifty hour span.

We have a bit of wet carpet and some ruined items near the drain. We’ve been drying everything out to see what’s left.

My situation, my wife, son, and I live with my wife’s parents. We’ve been renting out a condo that I purchased in 2006, and that lease is coming to an end this month. The renters have decided to move on. I intend to sell the property. I’ve been aggressively paying down principle ($14,000 this year) to try to get the amount I owe down to an amount I can afford to cover after sale, closing costs, and fees. The short term goal is to get out of my inlaws and into a single family rental property. The long term goal is to eliminate debt completely, contribute the max amount to retirement accounts, begin saving for a house of our own, and begin college savings for our child.
By the numbers:
Mortgage: $184,300 @ 5.875 Fixed
Credit Card 1: $200 @ 3.99 Balance Transfer fixed for life of balance
Student loan: $3500 @ 3.25% Fixed
Credit Card 2: $13,342 @1.99% — this will go to 16.5% in September
Family Loan: $46,000 @ 0% — family member loan that is not expected to be repayed, but which I feel obligated to, and will repay.

liquid Savings:
$8,500 Bank of America Savings account
$7,500 ING Savings account

Cashflow: As of September, we will have a positive cashflow of $1075/month.

While CC2 has been at a lower interest rate, I’ve focused my debt paydown on the mortgage. Looking at the local market, I beleive I could sell the property for between $180,000 and $185,000) Factoring closing costs, I beleive I’ll have to come up with $195,000 to get out of it. Currently, this would likely eliminate any emergency fund I have.

Longwinded way to get to my question — where should I focus my cashflow? Do I keep funneling it towards the Mortgate (reducing the amount of emergency fund that I need to use), Put it towards CC2 (highest interest rate), or funnel it into liquid savings to bolster the amount I have to pay off the mortgage at closing?
- Paul

I think your emergency fund is probably an appropriate size for the size of your family. Considering the debt load you’re carrying, I wouldn’t sweat growing it much more than you already have.

My focus would be on that credit card, which will be at 16.5% soon enough even if it’s not there right now. Paying down the balance on that card now means you’ll have less to pay back at 16.5% later on.

Of course, you might want to look at further balance transfers for that amount in order to keep the interest rate low.

I really enjoyed your recent post on building self-confidence, and after reading your post on “overcoming extreme social anxiety” I decided to write you about an issue that I’ve been dealing with for most of my adult life, since from what I’ve read in your blog, we seem to have come from similar backgrounds (small town, somewhat shy, etc).

I tend to do OK with small talk & meeting people initially, but for some reason, I have a hard time getting past the “acquaintance” phase and moving into developing real friendships. I have joined several groups in the past, but again, it doesn’t seem to result in any long term friendships. My husband & I have been in the community for several years, but we only have a handful of close friends that I feel I could call and ask if they’d like to go out for a drink, come over for dinner, etc. I’ll invite someone out for coffee, but it seems to end at that point. I feel like I come across as a friendly person, so I don’t know what the problem is. When I speak with others, it seems like most people have plenty of friends. I’d love to have the problem of too many social engagements, but unfortunately, it seems like I have the opposite problem.

Any practical suggestions? Has this ever been a problem for you?
- Nancy

I would say that my wife and I have only a fairly small circle of friends that we regularly invite to social events at our home. I don’t think that’s terribly unusual.

However, we do have tons of connections throughout our local community and in various other interest-based communities. I have a very long list of people that, although I don’t invite them to dinner weekly, I can call on them in a time of need. They also often call on me when they need something.

Having a lot of these types of relationships takes time, too. I’m regularly getting calls or messages from people that I don’t have a “strong” connection to asking for some sort of help, and the time I spend providing that help is time I’m happy to share. However, it does mean that I’m losing social time in other areas.

It sounds like you’re trying to simply seek a larger number of “close” friends. I’ve found that those don’t happen spontaneously. Usually, you just meet lots of people – some of them “click” and some of them do not. Keep trying.

A cousin of mine in college recently had an unplanned child, and dropped out of college to live with her mother, who’s supporting the child on her own meager income. I want to somehow contribute to the child’s welfare, and my natural instinct was to start putting money into a 529 for her future education needs. However, in the situation my cousin and aunt are in, it’s easy to imagine scenarios where the daughter doesn’t end up going to college. Is a 529 still the best option? Should I tell my cousin about the account, or keep it private until the child is nearing college age? Or should I just concentrate on more immediate needs? What would you do in this situation?
- Stephen

The best thing you can do for that child is give your time by being a mentor – someone who will listen, treat them with respect and maturity, and give them genuine and non-judgmental advice and help along the way.

As for the money, a 529 doesn’t strictly have to be used for a four-year college. The money in a 529 can be used for pretty much any postsecondary educational expense, from trade school to community college. It also doesn’t have to be used immediately, either.

If I were you, I’d start a 529, but focus at least some energy on being a mentor for that child as he/she grows up. That kid is going to have a more challenging path than other kids and will need that helping hand.

I belong to a local credit union and they are charging 7% to deposit coins into my account. I have thrown my loose change into a jar for years and really don’t want to give them 7% to deposit it into my account. Do you have any ideas what I can do with it? It almost seems like they are discouraging you from saving money.
- Larry

7% is rather high. If I were you, I would look around for other banks that will allow you to turn in change without such fees. In my community, most banks don’t charge a thing for turning in change, which I consider to be a nice service.

As to whether they’re discouraging people from saving money, I think it’s more of a reflection of how many people are moving more and more in a cashless direction. Twenty years ago, many people paid for their groceries with cash or checks. Now, almost everyone uses cards. There’s not nearly as much pocket change out there floating around as there once was, thus change conversion isn’t as much of an in-demand service and is likely not nearly the benefit for banks that it once was.

It’s more of a reflection of the times, in other words.

I still have a car and a second mortgage to pay off, the second mortgage at 8.625%. I also fully contribute to my wife’s and my Roth IRA’s while I pay off this remaining debt because I’m rapidly paying them down, so I figure I’d be better off getting money in the IRA’s to take advantage of that opportunity each year even though it will take me longer to pay down my remaining debts. I currently contribute to a Roth IRA, and a traditional 401k to tax diversify. I’ve also read that with tax rates at an all time low, and considering that I’m 33 with an income likely to go up over time, this would be the most ideal time for me to contribute to a Roth IRA vs. a traditional. I currently make about $100,000/yr, and my wife stays at home.

Lately though, I’m beginning to wonder if maybe I should be contributing into traditional IRA’s instead of Roth’s in my particular situation, and I wanted your thoughts on it. Since we’re trying to pay off debts, and with my salary being what it is, wouldn’t it be better to get the tax break in my case instead with a traditional IRA now? With that tax break, I could pay down my debts even faster. I also began to think that perhaps people should also consider a Traditional instead of a Roth if they’re not able to max their IRA’s/401k’s out each year if their current income now is high enough that it would allow for a significantly higher tax break, that could be funneled into those same accounts. IE, even if tax rates would be higher upon retirement, would more money invested now pre-taxed assuming it’s invested be better than less money in post-tax accounts?

As a thought experiment, this gets very interesting to consider when you look at all the variables, too. If for example I was only making $50K/yr instead that would push me more to a Roth now because I wouldn’t get as much of a tax break now. I wonder though in my case if I might actually be better with a Traditional now until I can pay my debts off and max my 401k.
- Aaron

The big assumption you’re making is that tax rates will continue to be the same from now until you retire. I just don’t think that’s going to be the case.

The truth of the matter is that right now, income taxes are at post-World War II lows. The last time income taxes were this low for this long was the roaring ’20s, and that eventually ended with the Great Depression and the New Deal and higher rates.

We will eventually have to rebound, and I don’t think we’ll see rates this low again for a very long time. I’d bet on the Roth IRA.

I still need more money for school this upcoming semester and have been offered a $2000 unsubsidized stafford loan (6.8%), meaning $1000 would be applied to the Fall. Depending on how many hours I can work when school starts, I think I may be able to pay the amount left myself if I split it into payments through a payment plan at my school (interest free). But I am not totally sure as it would mean nearly emptying my bank account. But I am not too keen on the loan either: I already have over $18,000 in student debt already, and my intended career is NOT high-paying. Is it better to pay the tuition now and stretch my wallet thin or just take the loan?
- Vera

In your situation, I encourage you to take out the loan. At 6.8%, it’s far from devastating, especially when compared to the situation you’d be in if an emergency befell you with an empty bank account.

That doesn’t mean you shouldn’t live as lean as you can. Start repaying that loan as soon as you can. Don’t change your way of living just because you have a bit of breathing room.

While you’re in school, take advantage of every benefit of your school – live cheap, absorb freebies, and pocket that cash to use towards your debts.

This might be a foolish question, but I have to ask: am I inadvertently lowering my credit score when I pay off my credit card each time I make a purchase? Most financial websites tell you to “pay [your] balance in full at the end of each month.” If I pay off the balance multiple times in one month, is this harming my credit score in any way?
- Rebecca

You’re not harming your credit score at all. In fact, you’re likely helping it.

Now, it should be said that the exact formula for your FICO score is not public – it’s a trade secret. However, based on the information they’ve provided publicly, it seems that the best thing you can do for your credit score is to keep the debt paid down and not miss payments.

For more information, I suggest reading this section on credit scores at myFICO.com.

I have recently come into about $5,000 (through various means, but this is the total more or less) and I’m not sure what to do with it. There is of course the wonderful idea of buying a whole new wardrobe or going on a swanky vacation, but I know that in the long run I’d like to choose something a lot more wiser. I currently have graduate school debt consolidated at 5.625% (Stafford loans). I also have two more Perkins loans at 5% for smaller much more manageable amounts (I could actually pay one off). I want to pay off the smaller loan to get it out of my life, but I know that it would be more prudent to cut down at the one with the higher interest rate.

My question is, though, should I be investing? I could put the money into a 5 yr CD at 3%, but would that help anything? I could do the math here, I just realized, but maybe you have gotten this question a gazillion times before.

My financial status is pretty stable. I contribute to a matching retirement account, have no credit card debt, and my car is paid off. I still take classes part-time, but I can afford them without having to really pinch pennies and I have money in savings account that compounds at 1.29% every day (I hope that’s good…).
- Charlene

OK, if you actually have a savings account that compounds at 1.29% daily, I will put every dime I have into that account, because you would be very, very rich in a year. Likely, it compounds daily but has a 1.29% APY, which means that it compounds a small fraction of that each day so that at the end of the year, your balance should grow 1.29%.

I would not buy a 5 year CD at 3%. Interest rates on CDs fluctuate a lot based on the state of the economy, and locking away your money for five years to only get 3% on it is not a good choice for an individual investor. You’re better off with the money in a savings account for now and being patient until rates go up.

If I were you – and I’m assuming you have some cash already in savings for an emergency fund – I’d whack at the debts. Don’t feel bad about eliminating the small 5% debt first. It will help your monthly cash flow by eliminating one of your bills and the interest rates aren’t too far apart. If that one feels right for you to pay off first, do it. Yes, the best mathematical solution is to pay down the 5.625% one, but the difference is small and if paying off the other debt is more motivating and inspiring for you, that’s what you should do.

My Aunt passed away in March. Her husband, my Uncle, passed away a month later. They left an estate large enough to make quite a difference for many of their heirs. They didn’t have children of their own, so the money has been divided amongst my cousins, Aunts and Uncles. I would much rather have my Aunt here than to be given this money, but it is enough money to make quite a difference for us. They’ve divided the disbursements up so that whatever taxes or fees are left will be taken out of the 2nd disbursement. The first one we will receive is around $92,000. I believe the second to be around $40,000, but I don’t know how much will be taken out.

My plan is to pay off all credit cards (around $30,000), student loans ($18,000) and our van loan ($14000). According to Dave Ramsey, I should sock the rest away in an emergency fund.

But then I looked into refinancing our mortgage. We’re in the 2nd year of a 30-year FHA loan (balance: $207,151). In order to refinance, because we only have 9% equity, we would have to refinance into another FHA loan (which means more UFMIP)- and that’s based on an optimistic zillow “zestimate” ($230,000). I tried talking with someone from Quickenloans about a no-cost streamline refi, but he stated we’d have to pay UFMIP of $3600 (and it would have to be rolled into the loan, we couldn’t pay it up front). I’d like to get away from the entire UFMIP issue altogether- would you advise that we use finds to pay down the mortgage so we could?
- Jen

Most likely, you’re making the right move in paying off your credit cards, student loans, and van loan. That should leave you with $30,000. I’m assuming you have no emergency fund and I’m assuming you have children, so that amount would be a great emergency fund.

Unless there’s some immediate reason you need to refinance now, I’d just stick the extra cash in savings and wait until the next $40,000 comes in, then refinance with that. Paying off all of that debt is going to have a huge impact on your monthly cash flow – no credit card bills, no student loan bills, no van payment bills. It’ll make the mortgage payment feel a lot easier and should allow you to start making extra payments towards it (which is what I’d do).

Then, when the $40,000 comes in, you should have plenty to refinance your mortgage, which will probably get rid of PMI and lower your interest rate and also lower your monthly payment. Try to refinance into a fifteen year – you’ll likely find that your monthly payment on the 15 year isn’t higher than your current 30 year mortgage payment.

I am a 20 year old college student with about $3,000 from my summer job to passively invest in a fund. I would invest in an index fund but I already have some savings there, and want to know which fund you would recommend for a passive young investor who does not want to be too risky. Or if there is something else, completely different, that I would be better off investing in.

Right now I have about $3,700 in a Vanguard Wellesley Income Fund (VWINX), $3,000 in the Vanguard Total Stock Market Index Fund (VTSMX), and $60 in the Vanguard Intermediate-Term Bond Index Fund (VBIIX). The stock/bond proportion is 64% stocks, 36% bonds.

Any advice would be greatly appreciated! Thanks so much.
- Emily

I’m going to assume that when you say “passive,” you’re mostly looking at this as a source of income from the dividends and you don’t have any intent of touching the balance for a long while. That’s usually what is meant by “passive” investing.

If that’s true, I would look strongly at the Vanguard High Dividend Yield Index Fund (VHDYX). It’s an index fund that just seeks to match the FTSE High Dividend Yield Index, which is a collection of companies known for paying a high dividend. This means that it’ll be paying out regularly to investors. The history of the fund isn’t too long, but it seems to be paying out about $0.12 per share per quarter on average, which is about 1% of the face value of a share ($3,000 in it, in other words, is averaging about $30 a quarter in dividend payments). That’s through a pretty terrible market where lots of companies have cut their dividends, so in a good market when companies are paying higher dividends, it should be pretty good.

If you’re looking for passive investing, you can’t go wrong with that one, I don’t think. I’ve considered owning it myself simply for passive income.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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32 thoughts on “Reader Mailbag: Iowa Flood Waters

  1. That is too bad about a credit union charging to deposit coins! Our credit union lets us deposit or simply exchange up to $250 in coins per day at no charge, with their very quick coin-counting machine.

    CoinStar charges high fees if you convert to cash, but you can also convert to certain merchants’ gift cards and codes at no charge. The CoinStar website says the selection varies by location, but some that they include are Lowe’s, JCPenney, Amazon, Borders, Starbucks, etc. I know this isn’t as good as saving, but if you frequent any of these merchants anyway, it might be something to consider, then put the equivalent amount in dollar bills in your savings account.

  2. I have to admit that I have moved several times as an adult and my experience has been the same as Nancy. My friends end up being “friends from church” and “friends from work” or “friends from the German club”. My closest friends come from college or longer…
    And as for Stephen’s cousin and child… Why couldn’t he contribute to a semester or two of college? He could babysit or help with tuition or transportation etc. Having a two year degree so that the cousin could get out on her own would be the biggest help.

  3. Larry — Are there any TD Banks near you? Even non-customers can use the Penny Arcade, which is a bit like Coinstar minus the fees and gift card option. After the machine is done counting your coins, it gives you a receipt which you take to the teller for cash.

  4. I’m surprised CoinStar doesn’t publicize its no-commission service more. I take my coins to the CoinStar machine at my supermarket once every few months, and I usually have $80 or so. I get an Amazon gift card and there’s no commission. I use my coins to pay for part of my book habit.

    There are other merchants who participate in this service, including Lowes. Between Lowes and Amazon, as long as you spend your gift certificate on stuff you would have bought anyway, it’s a great way to handle your “spare change”. You can, of course, save your change until you have enough to buy that special item you’ve planned for.

  5. I didn’t get the sense from Emily’s question that she is looking for income, but rather another fund for long-term investing. I have never heard passive investing described as a source of income from dividends – I always associate passive investing as a buy and hold strategy. A passive investor doesn’t want to be buying and selling, so seeks funds that don’t need to be watched closely (nothing too aggressive). The Vanguard fund might be suitable or it might make more sense to invest in a retirement target fund.

  6. Seems to me that coins are money, “legal tender for all debts public and private”. So, use the coins to pay for things that you might normally use paper money for. Then make your deposits using the paper currency.

    While you’re at it, tell your credit union that a 7% penalty for depositing coins is enough to drive your business elsewhere.

    (Or maybe I should move to your town and go in business of converting coins for 1%.)

  7. Hi Trent, can you do a longer post on passive investing? This seems like an interesting topic worth exploring.

  8. Regarding the 529 plan question – I was in a similar circumstance myself a couple of years ago when my sister’s son was born. I decided to proceed with the 529 because not only does it not have to go towards a traditional 4-year college type of education, but also because the designated beneficiary can be changed. So if my nephew ends up not choosing any additional education beyond high school, I could redesignate the funds toward someone else’s education instead.

  9. I live in Iowa. Currently in Ankeny. But I grew up in the Ames area, which is where my parents still live and where my girlfriends parents live. I spent every day this week up until today cleaning out their basements because both of them flooded. Ruined everything. It was a mess. I am so tired of rain!

  10. @Paul, I also would think that the future 16.5% credit card is your best bet to pay off.

    @Nancy, I concentrated on finding groups that share the same interests (like board gaming for me) and then found some really close friends within that group. We are couple-friends with 4 other couples now and I am close friends with 2 of the women. It’s amazing and worth trying to find (I haven’t had actual close friends before). Yahoo Meetups is a great place to see what’s going on in your area. :-)

    @Stephen, I’m not a fan of 529′s since life is full of surprises. I’d take Trent’s advice to spend time with the kid as often as possible so they see other options. I’d save the money in cash (like Smarty Pig or CD’s) so to leave options open.

    @Larry, there really are a ton of banks that will cash in your coins for free. 7% is awful in my opinion. If you Google “Free Coin Counting Machines” for your area, you will come up with some options. Good luck.

    @Aaron, I also think tax rates will go up, so I’m a big fan of Roth IRA’s too.

    @Vera, could you get a part-time job to help pay off your loans as you go? Either way, I’d take the loan for the reasons Trent mentioned and concentrate on getting them repaid as soon as you can when you get a job.

    @Charlene, I’d use 5%-10% as fun money and hit the debts with the rest. It’s like a reward for being wise and it prevents debt payoff burnout.

    @Jen, simple is usually the best. As Trent said, hit the debt and save the rest as an emergency fund. Maybe it will help lower your everyday stress (that we all have).

  11. Is that 7% on coins just for loose coins? At one time my credit union charged for loose coins, but not for coins that had been rolled. (I don’t know what the current policy is). I’ve used coinstar as well, both for a fee-free gift card and at one time they allowed you to donate your fee to a charity. I haven’t noticed the charity thing lately, it might have been a test run or special event or something.

  12. re Aaron – As you mentiong, the other consideration is whether post-retirement income will be lower or higher than pre-retirement – if you retire with a fully-paid home & other lower living expenses, and therefore aren’t planning to match your pre-retirement income at that point, then a traditional might be the way to go, as you’d be paying taxes on less money in a lower bracket. There have been several articles lately in some of the financial columns & I think maybe even AARP’s magazine discussing just this issue – that a Roth IRA is not necessarily always the best option.

  13. I and my boyfriend are in the same situation as Nancy. We live in his country, and our close friends consist of his elementary school friend & wife, and my language school classmate & husband. I think we’re slowly building the network, but it takes time, patience and effort. And we’re not very social people in the first place!

    I think the hardest thing I’ve learnt is that if someone I would like to become a friend doesn’t, it’s not a big deal and isn’t worth stressing over – “What’s wrong with us? Why don’t they like us?”.

    As for practical suggestions, I’ll have to find them for myself first. But one thing I’ve been considering is having an ‘open-home’ type thing maybe once or twice a month. Basically just a very casual dinner party, casting a wide net for invitees. Not sure how well it would work, but hey, it’s an idea. :)

  14. Trent,
    I really like the links at the top of the mailbag post. However, the bold font does not make it any easier to id where the question ends…how about a different font/color (or both)? I think it’ll make it easier to read.

  15. Paul: If your going to sell a house then I’d take care of that first. I’d accumulate cash for the time being until you get the house behind you. It won’t hurt too much to pay interest on your credit cards fora few months. If you sell the house and have some unforseen cost then you might end up cash poor. Also, have you considered for sale by owner or a discount broker? That would cut your sales costs a lot.

    Nancy: “we only have a handful of close friends” I don’t think thats unusual or necessarily a problem. A few close friends is all I’ve ever had or needed. Most people I know are like that.

  16. re: the coins

    Casinos will convert your change to cash for free. Of course they hope you will gamble it away but they are happy to turn it into cash (which you can deposit).

    My boyfriend and I live about 10 minutes away from one and we bring our change jars in on a regular basis. We usually have some sort of competition associated with it such as the person who has the larger amount buys dinner at the casino (the one near us has some excellent restaurants that are very inexpensive) or we guess the total amount and the person furthest away from the amount has to buy dinner.

  17. Aaron: Some level of diversification between 401k and Roth IRA is good to have. You don’t want 100% of your retirement income to be tax free since that would be wasting your standard deduction and exemptions in retirement. You’re probably in the 25% bracket. That is a medium level tax rate for middle income earners. Its not historically really. So I wouldn’t look at 25% as a once in a lifetime deal you must pay today. SO I wouldn’t feel too compelled to put that into Roth IRA. I would definitely take advantage of any employer match on your 401k first and foremost. You didn’t mention one so you might not have it but if you do thats the #1 priority. After that feel free to put some of your money into the 401k. But if your deductions get your taxable income down to the 10% or 15% brackets then thats when I’d think a Roth is a better deal cause that is a low tax rate.

  18. A couple friends of mine recently had a baby. They used to live in my state and have been friends with me since junior high school. They recently bought a house and neither one has a great job, but they are not struggling financially. However, I don’t think they have much money to contribute to a college fund for their new daughter. I am going to fly and visit them later this year and wanted to get something for their daughter, like a college savings account. Neither one of them finished college, so I am not sure how much importance they will put on sending their daughter to college. I don’t want to ask them beforehand as I want it to be a surprise, but I don’t want to put money into a college savings account that will never get used. I am thinking about putting about $500 in it to start, then contributing smaller amounts every birthday and Christmas and hoping they’ll contribute a bit here and there. So my question is: Is contributing to a 529 the best idea? Is there another type of account that could be used either for college or just be good for general getting off her feet expenses when she grows up? And is $500 as an initial investment sufficient to get a good amount in 18 years?

  19. Regarding the credit union’s 7% charge – Is there a “self-serve” grocery store nearby? Their machines don’t care how many coins you pay with :-)

  20. @Jackie #8 – The last time we took rolled coins into our local bank we were asked to unroll them. They gave us a bucket to put them in and we sat in the lobby unrolling them and dumping into the bucket. They then fed them through their count counter. I guess they prefer to trust the machine’s count rather than a human.

  21. I’m wondering WHY is Rebecca paying off her balance every time she makes a purchase. Isn’t paying it in full each month enough? Am I missing something?

  22. Your response to Rebecca is wrong. It helps your credit score to see some utilization, and the ideal amount is some percentage of your available credit. It works like this. Say your limit is $100. You make 30 $1 purchases throughout the month. You could pay them $1 every day, and reflect a $0 balance/0% utilization all the time. Or you could pay them $30 near your due date. In both scenarios, you would pay no interest. But, in the second scenario, if the credit card reported to the credit bureaus on a day when your balance was $15, you’d reflect an 15% utilization. Credit scores are designed to reflect how well you manage your credit, and low, consistent utilization can improve your score. I can’t think of a single good reason to pay off a credit card after every purchase, unless you like the hassle of lots of small payments, or feel compelled to give your money to the credit card companies more than a month before you have to in some cases.

    Trent, these Q&A posts are starting to bother me. People write to you with detailed information and very specific questions, and in a lot of cases it sounds like you just mumble some vague generalities at them, or fixate on some detail and ignore their question. Nancy asked for specific practical suggestions, and you said, essentially “My wife and I have friends. Keep trying!” How is that helpful to her? I think that you should focus on what you’re good at – posts on frugal living, personal examples, and book reviews, because I don’t think you’re very good at the mailbag advice.

  23. Trent glad to hear you had minimum damage from the floods. My parents have flooded twice from tropical storms – 1st time 3 1/2 feet of water – so know what you are dealing with. Everyone safe is the most important thing!

  24. Stephen–

    I think a 529 is a great idea! I work with kids whose families don’t have the resources to pay for college, who people imagine won’t go to college. Be a mentor, yes, but be a mentor who says, “If you put in the work, I’ll put in the cash.” (You work hard to get in to college and I’ll pay for it.) Having that expectation–you will go to college–along with the resources to make it work (and an adult who cares enough to do that) is really powerful.

    I would wait until the kid is about in 6th grade to mention you will pay for it for a variety of reasons. First, the cousin/aunt might resent you not helping out with immediate expenses (which is not your responsibility). Second, that’s an age where kids need that kind of direction and reinforcement. I wouldn’t wait until high school though–by that point, you might have already lost an at risk kid.

  25. I just finally noticed today that you had a new layout for reader mailbag!! I’d been skipping them for some time now because they are so long and many times did not apply to me. But I LOVE the new format!

  26. I’m the Aaron above.

    Just to clarify:

    I do NOT believe income taxes will stay the same. Quite contrary, I believe they’ll go up from here. Not sure if I articulated that well in my question.

    What I’m getting at really is this:

    Suppose in my case I can put $10,000 into an IRA, traditional, or Roth. If I put it in a Roth, I’m taxed on that money. If I put it in a traditional, I’m not taxed on it right now, saving me $2,500 in taxes this year assuming I’m in the 25% tax bracket. Despite me likely paying higher in taxes in retirement, would it still be better to use a traditional instead of a Roth IRA because now I could put an extra $2500 in say a 401k (or pay down a debt)?

    IE, even in prime conditions for a Roth IRA over a Traditional, if you’re not maxing your taxed advantaged accounts, would more money in the not as optimal tax advantaged account be better than less money in the more optimal one?

  27. Look for a small store or restaurant to trade your coins. These always need small change. I’ve known of small restaurants to spot you a coke for a good haul.

    Trent–Do get mildew-proofing services. Chronic sinus and ear infections can create permanent allergy problems in children, eroding their learning ability, and of course, ill and crying children are no picnic to deal with. Long-term mildew effects are unknown but cancer is a well-known side effect of aspergillus.

  28. for your next Reader Mailbag… a question:

    Two years ago, I had a credit card debt of $16800, $1100 in savings and found out that my work contract was not to be renewed. Not the best position to be in when the global recession was hitting its stride! This was then followed by:
    - 3 months of unemployment
    - credit card debt further ballooning out to $18800
    - savings almost reaching $0
    - finally landing a job(however, it paid 35% less than my previous contract and was a terrible place with very low morale; most of the people aside from the power-tripping managers were like me, just clinging on to tide themselves over until they could find another job)
    - having to move 4 times due to horrible living conditions when I moved into a shared apartments with roommates who often trashed common living areas, were frequently drunk, and stole my food/money
    - eventually found a studio apartment close to work so I wouldn’t need a car, and found that though it was cheaper than living with unpredictable roommates, also discovered that I could have leased a cheaper place of the same quality for $100 less per week if I had searched a little longer…
    - huge knock to my confidence in general!

    How I ran up a $16800 credit card bill in the first place was due to your usual stupid twenty-something antics: too much stuff, too much going out to expensive bars and restaurants, holidays in Europe, and general poor budgeting.

    So two years ago, when it finally came down to me trying to pay rent and food with my soon-to-reach-the-limit credit card, I got really furious with myself for screwing up so bad. I guess the rage in a way was good, because I really cracked down and focused on budgeting, living a much much much more frugal lifestyle and improving my career prospects.

    It’s been a tough couple of years, and I have now reduced the credit card debt to $8400 and have $26400 in emergency funds. I think I am stockpiling the cash instead of paying off all the debt left because I came really close to having $0 in my savings account that one time and it traumatised me more than the massive amount of CC debt I had…

    The job market in my area has also picked up a bit and I recently landed a new job that’s slightly less soul-destroying than the one I had before and pays more.

    Most importantly, I now know who my true friends are! I am really grateful to them for sticking with me through thick and thin, and very glad to be rid of the ones who were only there for drinking and partying.

    I have also lost around 20 pounds in weight, not due to any drastic dieting, but simply due to always taking healthy home-cooked lunches and breakfasts to work(simple wholemeal sandwiches, oatmeal, fruits, vegies and my new fave: chickpeas) and giving up beer. Friends have commented on how good I look these days(though I need to go clothes shopping very soon as 100% of my wardrobe now looks too loose on me).

    The new job is currently offering to keep me on until the end of this year which would allow me to pay off the $8400 left on my CC bill as well as $26000 in retirement. If I stick to my current savings plan, I will also be able to boost my emergency funds to approximately $38000.

    However, my real dream is to live and work in Europe at least once! I have just turned 30 and this is the last opportunity for me to apply for some working holiday visas to many of the countries over there. I guess I’m a bit scared that I will definitely be unemployed for at least 2 to 3 months again(maybe even 6+ months!) considering the tough economic conditions over there right now. It will definitely dent my hard-won savings. I have a couple of contacts in the UK who may help me find work, though it will be at a massive paycut to what I’m earning right now…

    If I stay at my current job and try to get them to keep me until at least mid-next year, I’ll be able to have approximately $70000 in savings and/or possibly look into getting a mortgage for my first home instead of being under the mercy of a landlord.

    So my question is… should I take a chance and leave for Europe by the end of this year? (hopefully in time for New Year celebrations somewhere over there)
    Or should I stick around and make the most of my new high-paying, career-boosting job? I have a real opportunity here to build up a massive deposit for a mortgage, however, I’m afraid that after the age of 30, I will not be able to follow my dream due to the visa issues. Help! This has been playing on my mind for months now…

    Anyway, really sorry to rant on for so long… I think a lot of my self-hate due to my terrible financial mistakes in my 20s still lingers… (any advice on how to deal with this would be great too…)

    Oh, and by the way.. Hi Trent, love this blog! I’ve recently discovered it after a link was forwarded to me by a friend who knew I had financial worries. Wished I had seen it so many years earlier – it would have saved me a world of trouble!

  29. @Aaron: If the money would be taxed at the same rate now versus in retirement, then it does not matter whether you use a traditional IRA or a Roth.

    Suppose the tax rate is a flat 25%, and the investments grow by a factor of 10 between now and retirement (this is just to make the numbers easier – you can use any growth rate you want). And suppose you can afford to invest $7500 in after-tax dollars in the IRA. If you use the traditional IRA, you’re actually depositing $10K ($10K pre-tax = $7500 after-tax), it grows to $100K, and after taxes you get $75K. If you use the Roth, you deposit $7500, it grows to $75K, and you pay no taxes, so you get the whole $75K.

    In mathy terms: Multiplication is commutative, so it doesn’t matter whether you multiply by 75% before or after you multiply by 10.

    But that analysis is too simple, because we have a progressive income tax, not a flat income tax. Even though you’d say you’re in the 25% tax bracket, a lot of your income is being taxed at 0%, 10%, and 15%, so your *marginal* tax rate (25%) is greater than your *overall* tax rate (the actual percentage of your income you pay in taxes). The money you put into a Roth IRA now is taxed at the marginal tax rate, whereas your withdrawals from a traditional IRA are taxed at your overall tax rate. And even if taxes go way up, it’s very possible for your overall tax rate in retirement to be less than your marginal tax rate is today.

    That’s awfully technical, but it basically boils down to what jim said earlier: If all your money is in a Roth, you’ll be wasting your standard deduction and exemptions in retirement.

    Finally, as far as I know it’s still the case that if you’re covered by a retirement plan at work, there’s an income limit beyond which you can’t get the tax deduction for a traditional IRA anymore. Make sure you’re actually eligible for the traditional IRA before you try to contribute to one.

  30. I just wrote a long reply to Aaron’s question, but it got sent to moderation.

    Trent, if you’re going to let the moderation queue stagnate for days on end, could you please let us know what criteria you’re using for sending posts to moderation? It’ll save your thoughtful regular commenters a lot of time and frustration.

  31. Trent, can we stop calling the current market a ‘terrible market’? The market has rebounded extremely well the past 12 months. Comments like that make me wonder if you even pay attention to your 401k/IRA or the market at all or if you just watch Fox News and copy what they say about the markets.

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