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. Buying a car
2. Life insurance when uninsurable
3. Consolidating accounts
4. Selling homemade items online
5. Investing down payment
6. Credit card conundrum
7. Psychological blow of mistake
8. Is bankruptcy the right choice?
9. Lending to father-in-law
10. Fearing financial armageddon
This past weekend, my parents visited us for two full days (Saturday and Sunday) and the better parts of two other days (Friday and… well, they probably haven’t left quite yet as you’re reading this – I’m writing this really early on Monday morning before everyone is awake).
I love it when they visit, and my children do as well (my wife… well, she gets somewhat stressed out, much like I do when her parents visit, regardless of how well we both get along with our in-laws). Unfortunately, it also means substantial extra work – preparing meals, cleaning, prepping the guest bedroom, and so on.
By the time the house is empty again, I’m ready for some sleep!
Q1: Buying a car
So- I have a 1999 Toyota Corolla with ~125,000 miles. The engine has been making noises since last year and now the check engine light is on again. After dumping about $700 into it, plus new tires, plus frequent oil changes, plus 2 cosmetic accidents, the car is still really taking a turn for the worse. I am afraid of dumping more money into it if the engine is a mess… It’s knocking really badly.
I’m a teacher, don’t make much money (2,300/month), have no debt other than $70,000 in student loans, and have become super frugal since graduating in May. I’m working on building up an emergency fund but just started so it’s slow-going as I just paid off a bunch of debt before knowing about the importance of an emergency fund.
I will need a new(er) car in the next year or so but am scared to have to be making car payments and much higher insurance payments with such a small monthly check. I am also afraid of buying a used car because I don’t want to get a money pit. I’ve been thinking about a 2010 Honda Civic ($15,000 and 0.9% financing for 60 months). Do you have any suggestions? My sister is really adamant about me not buying a new car because doing the same thing put her in a bind a few years ago.
Don’t buy new unless you can easily write a check for it. If you can’t, then your sister is right – you’ll be in a bind.
If I were you, here’s what I’d do. I’d start making a car payment right now. Your monthly payment on the loan described above, ignoring sales tax and any other fees, would be $256 a month. I would actually recommend that you start making a $300 per month payment right away.
Pay it to where? Your savings account, of course.
If you’re thinking that you can’t swing such a payment now, how are you going to swing it in a few months when the bump in insurance and the new payment plan for the car will add up to at least $300.
Keep saving that $300 a month and wait to see what happens to your car. Wait until it’s finally finished, then get the best car you can for what you’ve saved. If you have to take out a small loan, that’s fine, but the key is to get yourself a car that will last for a few years while you keep saving.
Avoid a car loan if you possibly can. Such loans are an incredible pinch on your monthly cash flow, one that you’ve got to head off.
Q2: Life insurance when uninsurable
I have most of my financial house in order; no bad debt, only a mortgage, 12 month safety fund, funding my 403(b), etc., and following a budget. The one item that eludes me is life insurance. Ten years ago, I had a kidney transplant and since then, I cannot find a company to provide life insurance. I’ve thought about self insurance but you just can’t build up much at $25 a month. Are there other options or paths I should consider? By the way, even though I’m single now, I figure this is something I should address before I get to the point of having a significant other.
The problem is that life insurance after such a major health crisis is going to be prohibitively expensive if you can even get it at all.
When someone quotes you a rate for life insurance, they’re doing so based on a model for how long you’re expected to live. These models are incredibly sophisticated and usually accurate.
When those models show a result that indicates your likely death will occur before your policy finishes out, then they will either deny you insurance or offer you prohibitively expensive insurance.
Life insurance is a business. The people selling it are trying to make a profit, and the way to do that is to hedge their bets on people.
Now, what can you do in this situation? Your best route is to save and keep your financial house as clean as you can, which seems to be what you’re doing. You may also want to see whether or not your employer offers life insurance as a work benefit.
Q3: Consolidating accounts
I think my finances are too complicated–too many different banks, etc. I’d like to consolidate, but I don’t want to end up putting all my accounts at one place. That scares me. I’d really appreciate your thoughts on how to do this.
Here’s the deal:
2 different banks (checking/savings/CDs)
3 different mortgage companies (house, 2nd home, HELOC)
2 different credit card banks (one card for each of us)
3 investment houses (Vanguard, Fidelity, one other)
3 different DRIPs (thankfully not much to manage there)
2 more DRIPs (one for each kid, it’s a stock we really like)
This is alot of paperwork coming in every month (online statements would save paper, but I’d still have to track them all). It gets really complicated to keep track of every month!
Fortunately, our finances are solid (good salaries, solid jobs, low mortgage interest rates, low balances on mortgages, pay the credit cards off every month) so that’s not the problem. It’s just alot of details all fighting for my limited brain power.
1 bank for checking/savings/CDs: Keep the friendly bank, ditch the one that keeps making stupid mistakes. Keep the 3 mortgage companies (rolling it all into 1 is an option, but the interest rate would go up). Just keep making extra payments to eliminate them one by one.
Credit cards: I want to close mine (hate the company) and open a new one. Two concerns: It’s a card with a really, really high limit and I like that flexibility. I don’t spend what I can’t pay, but I really sleep better at night knowing I can slap that card down and get out of almost any bad situation. It’s in my name alone, and I like that. Will a new company consider giving me a high limit? I have a great credit score, but virtually no wage income. My income is passive, and my means-to-pay are in the bank. Secondly, the best cards available now seem to all be at Chase. That’s fine, but my husband’s card is from Chase, and he likes it there. I feel like I should ‘diversify’ and have my card from another company. Is that valid?
Investment houses: we can consolidate down to 2: the firm we like + the one his firm’s retirement funds are housed at. Are we allowed to move some funds from his ongoing-employer 401k to an IRA elsewhere? How does that work?
The DRIPs. Are there any consolidators? One statement a month that had all 5 different accounts?
Your plan is very good. I’ll address your specific points in turn.
I’m not sure there’s a need to “diversify” your credit cards by having them held by different banks. A new company may give you a high limit, but that depends on your credit score.
Typically, you have to have some sort of “event” to roll over your 401(k) to an IRA. The most ocmmon event is switching jobs. Without such an opportunity, you have to take a large tax hit to do the transfer yourself, completely undoing any tax advantage from such an account.
You can consolidate all of your DRIPs with a brokerage, but the costs will be much higher. DRIPs typically are run by the individual companies.
Your best bet is to use etsy or a similar site that focuses on selling handmade items. I’ll freely admit that I’m a semi-frequent shopper at etsy, as I’d rather give unique homemade gifts at many occasions than giving whatever’s on the shelf down at Target.
It’s important to note that unless you’re doing an extremely high volume of sales, such sales will likely just be a nice perk of a hobby that she’s already passionate about. The exception to that, of course, is if she’s extremely talented, on the order of the top jewelry designers in the world, and can command a very large premium price for her items.
Since she’s probably not at that level and also assuming she’s not interested in running a sweatshop, keeping this as a hobby is probably the best option.
Q5: Investing down payment
I’m not in any financial difficulty and I’m doing quite well financially. As a 25 year old recent college graduate, I was fortunate enough to find a good paying job right out the door. I have a 4 month emergency fund, have no credit card debt, and have my car paid off. My question is this: Within the next several months, I’ll have come into ~$20,000 that I’d like to put away for a down payment on my first house. I don’t anticipate needing this money for another 3 to 5 years. I’m wondering if it’s ever occurred to you to invest this money in REITs? I’ve read in a number of places, and understand the reasoning, for why investing a down payment in stocks is a terrible idea. But if REITs are correlated to real estate, then wouldn’t the down payment money be catching rising real estate prices? (Or conversely, losing money when the market goes down?) Since the $20,000 is explicitly for purchasing a house, then tacking that money to the real estate market doesn’t seem unreasonable. I know this may sound unorthodox since I haven’t found anything written on it – but am I missing something here?
The problem with your plan is that not all areas have identical real estate situations. Some areas were barely affected by the 2008 downturn, while others are so devastated by it (with thousands of McMansions sitting unoccupied) that prices are still tumbling.
If you’re in an area where prices are moving upwards, then if you own a REIT that’s flat or going down, you’re going to be hurting.
I agree that stocks are not a great choice for such a short-term investment. I would probably buy something that retains value, like bonds or CDs. Yes, you won’t earn much, but you won’t be putting your balance at risk, either.
Q6: Credit card conundrum
[A certain large bank] recently sent a notice that I would now be assessed a $59/year annual fee. I have never missed a payment, always pay over the minimum due and have never been late. Yes, my credit report has taken a few hits lately because of my ex-wife going foreclosed on 2 properties that my name was still attached to even though she was granted full control. However, when I called [this certain large bank] they said everyone was gettin this fee even though the letter was written stating there was either; serious delinquency, too high balance, or poor review of our banking relationship.
My question is…do I close this account to show my anger and save the fees, or pay the piper to keep my credit report from dropping even more?
I don’t think the bank will notice your anger. Megabanks see many accounts closed and opened each day – losing one probably won’t be noticed at all. I would be much more concerned about your personal situation than making the bank realize their mistake in losing you as a customer.
If you don’t actually need the credit card for your personal finances, I’d cancel that card as soon as possible. There’s no need to have that card hanging around, swallowing down steep annual fees.
It’s hard to tell why they caused the fee based on what you described in that letter, but I will say that the banks have done some scrubbing of people holding accounts with them, tossing fees, reduced credit limits, and sometimes cancellations on them. The best solution, as always, is to ensure that your personal finances don’t rely on having that credit card.
Q7: Psychological blow of mistake
I was humbly wondering Trent, if you would have any advice on surmounting the psychological blow it is when, after making so many fundamental changes in behaviour and working so hard for the last eight weeks, you find you have made a banking error and bounced a cheque costing one $40… While I’ve tried to console myself via “as long as I learn from it (ie. fine-tune my banking systems etc.), I was wondering if you had any sort of sage advice that could propel me over this mental(and connectedly emotional) hump any faster…
Every one of us makes little mistakes like this. I certainly do. I’ll forget to pay the trash service. I’ll forget to plan ahead for Thursday night’s dinner. We all make little mistakes.
My method of handling such mistakes is pretty straightforward. I start off by simply saying “Yep, I made a mistake. It was my fault. I can learn from this.” I then also remind myself that overall, I’m in a great financial position with far more good moves than bad.
After that, I directly address the problem. Why did it happen? What can I do to make sure it never happens again? I try to implement some sort of solution to make sure it never repeats.
Usually, at that point, I feel pretty good about things.
Q8: Is bankruptcy the right choice?
Long story short, I’ve got $50+ grand in credit card debt, $40+ grand in student loans, a mortgage, car loan… Considering a bankruptcy falls off your record in seven years (correct?), and I’ll realistically never be able to pay off my debts (least of all not within seven years), is bankruptcy the smart decision here? For what it’s worth, the majority of my credit card debt came mostly from some unfortunate situations, unemployment, and of course some bad decisions overall. I make decent money now and have a good credit score (703ish), with no late payments on anything. I’m keeping my head above water, but that’s about it, with everything going towards bills and nothing into savings.
Just trying to figure out the best way possible to break out of this hole and start moving forward with my life. Would appreciate any honest, realistic advice.
Chapter 7 bankruptcy stays on your report for ten years. Chapter 13 bankruptcy (where you basically agree to pay back all of your debts over a longer period) only lasts for seven, but it sounds like you’re in a Chapter 7 situation.
Chapter 7 means that the courts will liquidate most of your non-essential property, then distribute the earned money to your creditors, at which point they go away. The bad news is that student loans are generally not discharged in a Chapter 7 bankruptcy.
In short, there is no magic wand that will make all of the debts you have right now disappear. Since you’ve not actually been late on any debts, if I were you, I would focus on increasing your earnings in any way you can. Get a side job, start a side business – anything to increase income. Throw that extra income at your debts. Eliminate the smallest debt first – I think you’re really hurting for cash flow, and that’s the easiest way to improve cash flow.
These savings and one paid-off home, that gives a very small income in the form of rent, is ALL we have (we rent the house we live in), no 401k, no investments, nothing!
His father would use the money to build residential apartments to rent out. He made the commitment late in January, but it is causing him anxiety and elevating his already-high blood pressure. My husband, sweet and caring as he is, wants to help his father not worry so much about not being able to make the payments.
My husband is a contractor, I work part-time as a nanny (which I do not enjoy), and study the rest of the time.
I know his father is honest; he even said that if he would get the money (he has refused it so far, but said that he might accept the offer if things get tighter), he would make a legally binding contract to pay it back, with interest, but I still don’t feel comfortable, and knowing myself, I know that the second this money leaves my account, I will start to be very worried and will obsess about it a considerable amount of my time.
My husband talked about this with his parents before he talked to me.
My husband says that I create reasons to be worried, that I agonize about everything too much. He might be partially right on the last one. He also said I’m trying to impose my rationale on him, even when half of the money is his own.
Additional info: my father-in-law is married and has two other sons.
Am I so wrong? If I am, I must be really wrong, because I really resented my husband’s request.
I can’t say whether or not you’re right to resent your husband. I will say, though, that he should have discussed this plan with you first before taking it to his parents. I also find it a bit strange that you’re looking at the money as half his and half yours, rather than our money. Such a perspective does not imply a shared future, which makes for a worrisome long term picture.
As for the loan, I usually think it’s a horrible idea to loan money to family members and friends. I have no problem with a gift, but lending money creates a lender-borrower situation, and people typically don’t have warm and fuzzy familial feelings towards their banker – or towards anyone to whom they have to make a regular payment to. Often, the borrower views such an arrangement as being the lowest priority in their financial life, lower than other forms of spending, and this just creates resentment.
Given your respective worries and stresses, you might want to consider gifting a smaller amount rather than lending a large amount.
Q10: Fearing financial armageddon
I can’t sleep because I am so worried about political stupidity here and political unrest abroad sand-bagging my savings and my stocks. I am half-convinced that this country is facing financial Armageddon. The constant loss of jobs worries me too, since I am a sole supporter of an elderly parent. I am saving as much as I can now, but I came to this realization so late in life, I fear it may be too late for me. Although I have credit-card and mortgage debt, I have two jobs that I love (full & part-time). I can’t afford to invest but I have a 401(k) – fully matched. I already do batch-cooking, scratch-cooking, garden, can and sew. I have a stocked freezer. I pay extra on the 2 credit cards every month. I pay an extra mortgage payment every year.
My questions are as follows:
What are my best options to lessen the impact of inflationary prices on food? Should I invest in a 40 lb bag of brown rice? How about cases of razor blades and chocolate like folks did in the Depression?
Is there anything besides skills that I can stockpile now?
Besides not carrying any debt, what’s the best thing I can do to be ready?
I am also trying to read about the depression and about poverty in general to see how people cope. Can you recommend any books that might ease my mind?
What exactly is the scenario you’re envisioning? It sounds to me like you’re attempting to prepare for something, but you don’t know what it is.
If you’re envisioning a return to the 1930s, that is impossible. The jobs that were cut in the 1930s don’t even exist in the United States today – they’re already gone. I don’t think reading books about the depression and about poverty will ease your mind in this situation.
Are you envisioning massive food shortages? A breakdown in the transportation network? A complete devaluation of the dollar? Each of these scenarios has a different course of action.
Personally, I don’t prepare for any of them because, frankly, I don’t believe any of them are likely to happen. Sure, they’re possible, but it’s also possible that Earth is hit by a giant meteor tomorrow, destroying life as we know it.
I do things that make me more self-sufficient, but I don’t do them in fear of some unknown bogeyman. I do them because they make my situation better right now and they have a secondary effect of improving my situation in such a dark future.
I will say one thing: people who promote such a negative view of the future often have a big financial stake in convincing people that such a negative future is about to happen. Such premonitions are usually coupled with advertisements for gold, non-hybridized seeds, a new book, and other such products. Beware people who quickly segue from negative premonitions to product sales pitches.
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.