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. 403(b) or Roth?
2. Inexpensive romance
3. Student loans or 401(k)?
4. Paying back an employer
5. Video games and board games
6. Grandmother wants to be helpful
7. Switching to prepaid contract
8. Hair care for shorter hair
9. Hold on to your dreams?
10. Turning my financial ship around
While the basics of our summer vacation have been in place for a while, we’re starting to add details to the trip.
Our plan involves visiting western South Dakota and eastern Wyoming, hitting the Badlands, the Black Hills, and Devil’s Tower. The focus, obviously, is seeing some of the natural beauty our world has to offer. (Our original plan, to extend the trip to Yellowstone, created a long enough trip that we weren’t able to fit all of it between other obligations, so Yellowstone will wait for another year.)
Whenever we travel, Sarah and I both spend a long time looking for interesting things to see and do along the way. We’re both fans of Americana, so a drive-by of the Corn Palace is in the cards, for example. My father wishes to see Deadwood, so we’ll be visiting that, too (we’re traveling with my parents).
Eventually, we’ll wind up with a huge list of things that we can potentially see and do, most of them free. That list will more than fill our days on the trip, making for an awesome (and pretty inexpensive) vacation.
Q1: 403(b) or Roth?
I work for a school district, and they provide a 403b for retirement contributions through Vanguard. There is no matching. I’ve just started contributing, but wondering if my money would be better invested in a Roth IRA instead. I also have the state (Arizona) retirement system that we have to contribute to each month.
The general rule of thumb for retirement planning is that you contribute to your 401(k)/403(b) until you get all of your employer’s matching money. If you want to invest more, open a Roth IRA. If you hit the annual Roth IRA cap, contribute more to the 401(k)/403(b).
There are a lot of reasons for this (diversification, maximizing tax advantages, etc.). All in all, I think it’s a pretty solid way to go.
In your case, that would mean you should open a Roth IRA and start contributing to it. If you find yourself contributing to the point that you’re reaching the annual cap ($5,000 for most people as of this writing), contribute the extra into the 403(b) at work.
The important thing with retirement is to start saving sooner rather than later. Don’t let the perfect become the enemy of the good. Start saving now.
Q2: Inexpensive romance
My wife and I have really been struggling with our finances over the last couple of years. Her patience with all of this and her commitment to making things better has been amazing and this whole situation has actually drawn us closer together, and we’re thrilled that it finally feels like we’ve turned a corner.
I’m trying to think of ways to show her I love her without spending a lot of money, but I’m not good at coming up with ideas like this. I thought you might have a few.
There are lots of things you can do.
Write a note telling her you love her and appreciate her and stick it in her car or her work bag. Stop on your way home from work in an open field somewhere and pick a bunch of wildflowers (assuming you have permission, of course). Spend two or three hours making the best version you can of her favorite meal in the world and serve it to her in a romantic setting. Take care of a bunch of household chores for her sometime when she’s not at home (assuming you have a responsibility split like most couples do).
The most romantic things you can do involve giving your time and effort, not your money. My wife appreciates an hour taking care of something that needs done far more than she appreciates a token gift.
Q3: Student loans or 401(k)?
I am trying to decide whether to push extra money towards my students loans, at 6.9% interest, or into my 401k, with an expected return of ~5-7%. I know that the student loans are a guaranteed 6.9% return on investment, so this seem like the obvious choice. However, the 401k contributions are pre-tax, so if I contribute I get an extra 25-35% that is then earning the returns. Is there a good way to figure out which is better? Perhaps a math whiz could give me an equation to punch in different scenarios? My employer does not match, and I max out my roth IRA yearly so it simplifies things some.
For starters, you don’t actually “earn” that extra 25-35% on your 401(k). You’re deferring those taxes until retirement, at which point you may actually be paying a higher rate. I recommend not including such deferrments in your calculations.
The problem is that there’s no way to tell which one is better because of the uncertainty of investments. You cannot know where the stock market will be in ten years. If it’s way up, then the 401(k) is the better investment. If it’s down, then the student loans were the better investment.
If I were you, I’d sit down with a retirement calcuator (here’s a good place to start) and figure out how much I needed to be saving to hit my retirement goals. I’d invest that first, then I’d channel anything (and everything) extra toward additional student loan payments.
Q4: Paying back an employer
My husband is switching employers. Up until the day he left, employer A was supplementing his graduate.school tuition. This was a huge benefit as my husband was able to attain his master’s degree and is several years into a phd with very minimal student loans. We knew with the change of employer he was breaking his agreement and that we would owe employer A the money back, so my question is what is the best way to finance the approx 13,000? We have only been in our home for a year and a half so I am not sure we have enough equity built up to borrow against the home. Rolling my husband’s 401k into a private account would give us access to nearly 10,000 he has in an IRA, so we wouldn’t be penalized if we withdraw it (we are in our late twenties) or the bank has suggested borrowing against our 401k. We have 90 days to repay employer A, which appears to be some what flexible. I think we should pay what we can to satisfy the employer until we can file for and receive student loan money in the fall. What are your suggestions?
The first thing I’d do is talk to the former employer and see if you can come up with a payment plan that works for both of you. If you can come up with a payment plan that you can afford and that they’re happy with, then that’s good for both of you.
If you can’t come to such an agreement, I’d visit a local credit union and see what sort of loan options are available to you. I don’t have your full financial picture here, so I can’t say what sorts of assets you might be able to borrow against or what your credit looks like.
I would be hesitant to tap the retirement money for this when there are other options available to you. The retirement genie can’t be put back in the jar – once you take the money out, it’s a permanent hit to your retirement plans.
This was an excerpt from a rather long rant, but I think it’s worth addressing.
The only time I play video games in the last year or so is during the hour or so after the kids are in bed, when I try to stay within earshot of them and try to be involved in something that I can easily pause in case something comes up (trust me, things come up with a 6 year old, a 4 year old, and a 1 year old). Perhaps once a week or so, I’ll play a game for an hour or two with some of my friends that no longer live around here as a way of keeping in touch with them, in which case it’s basically an online chat with a game going on in the background.
I also have a weekly “game night” with a few of my closest friends, where we get together to play board games or card games. Think of it as equivalent to a “poker night.” Sarah and I will play a board game or a card game some evenings after the kids are asleep and there are no major chores left to do. We also sometimes have several friends over on the weekend and a few board games or card games are played. In this case, the games are mostly part of being social.
They’re both hobbies of mine, but they’re both hobbies primarily oriented around being social.
Q6: Grandmother wants to be helpful
As I prepare to be a grandmother for the first time, I have some questions about what to buy or not. It’s been more than two decades since I became a parent and the number of products now available for babies and their parents is mind-numbing. My daughter and her boyfriend are almost as clueless as I am. How do I make sensible decisions about what to buy and how much to spend on items? Which items must be brand-new and which are okay, gently used? They have a crib, stroller and playpen. What did you and your wife consider essential and/or most helpful when your children were very young? Or should I simply give them stocks, savings bonds and the like?
You’ll hear all kinds of opinions on this topic. I don’t think there’s any problem buying most of these items gently used.
However, there are a few exceptions to that. I would buy a carseat new if the other option is more than five years old simply due to the degradation of the plastic that most of them are made of. I would probably buy a crib new unless I had witnessed the previous usage of the crib; the bottom boards of a crib can easily wear and can break at a very bad time, as most cribs aren’t made to handle some of the things people do with them.
The big way to save money is to simply not buy into the maternal marketing hype and avoid most of the items for sale. Most of them aren’t really needed.
If I were you as a grandma, I would only buy a few key items in advance that you know will be needed, like diapers. Instead, hang onto some cash and help out the parents during those first few months by doing things like shipping them some diapers or bringing them a meal (or having it delivered) or things like that. Those actions will have much more impact than buying a wipe warmer now.
Q7: Switching to prepaid contract
My current T-Mobile contract is up, I use the same phone I got two years ago and I pay 68.00 a month for 500 mins and unlimited text, I don’t have a data plan or any internet. I think this price is quite high, but when I look at pre-paid phones without contracts I will still have to buy a new phone or pay a fee to have mine “flashed” or cleared. What are your suggestions?
It’s fairly high for a single line with just those services.
This might be a good time to switch carriers. If your phone is compatible with another service provider, I would look into their introductory offers for people who are switching carriers. Phone companies compete for customers and they’ll often go to great lengths to acquire a new one.
If I were you, I’d look online at what Verizon, Sprint, and AT&T can offer you. Then, if you find an offer you like, stop into a local shop for that company and ask about phone compatibility. If there are “flashing” fees, ask them to be waived.
You’re a customer. Let them compete for your business.
Q8: Hair care for shorter hair
Awesome to hear that you cut your hair short. I do it because it’s low maintenance, but also because it saves money. I don’t buy shampoo. I just put some soap on my washrag and scrub the top of my head. No shampoo, no gel, no anything needed.
I do the same thing, actually.
I’ve started a routine where I use clippers with a short comb attachment to cut my own hair every two weeks or so (no barber costs). This keeps it short enough that a bit of soap and water keeps it very clean and soft (no shampoo), I don’t have to worry about styling it or anything (no extra hair care products), and it’s very fast in the shower (lower water and energy costs).
It looks perfectly fine, it’s incredibly low cost, and I enjoy doing it. It’s just a win all around.
Q9: Hold on to your dreams?
My wife and I live in Austria, in a 920 sq.ft. 3-bedroom apartment just outside Vienna, with a toddler and one more on the way. Our plan was to enjoy the apartment for a few years and then buy a small lot of land to build a house on (that’s very common in Austria, and long-term often a smarter move than buying an old house).
By a stroke of luck, a very desirable 4700 sq.ft. lot went for sale Nov’09 and we bought it because the price (€110.000 on bank loan) was only around 70% of the usual market price (seller had health problems). We figured that we would never get a similar chance in terms of price and location (walking distance to train station, shops, and schools, and quiet safe neighborhood). If we skipped this opportunity, we’d only find more expensive lots that are farther from the infrastructure, requiring more vehicle use. This was a rare opportunity and we felt it was smart to grab it. To keep the costs down, we would build a small house (€230.000 bank loan) without anything fancy – 1200sq.ft. with three bedrooms and a dining/living room. Possibly a 1-car garage. Nothing more. The total monthly payments would be less than what we pay today for apartment+property (currently around a third of our monthly take-home pay), so it’s in our best interest to buy the house and sell the apartment sooner rather than later.
So far we’re following our original plan, but here’s the catch. We have now been trying to get a bank to finance the house construction, but that turns out to be nearly impossible. Of course we can only sell the apartment *after* the house is completed. The apartment should be an easy sell because of excellent location, good condition, and the favorable market situation, netting us more than €100.000 which would fully repay the property loan — and yet, the banks won’t take the risk (“what if the apartment can’t be sold, or what if we decide to not sell it”). This is very, very frustrating. I feel that we’re throwing money out the window for every month that we still don’t have the house.
With that background, here’s the actual problem: Yesterday (on my birthday, no less!) our only car broke down. I’ve got an emergency fund for repairs, but it looks like the engine might have a fatal problem so we would have to replace the entire car. We could do that; we would look for another used station wagon, like we did last time. But that would cost at least €15.000 which we would have to take from the pile we had reserved for the house. So if the car is irreparable and we have to get a “new” used car, then the house construction goes down the drain. If we can’t build the house now, then we would sell the property because it’s not sustainable long-term. If we sell the property, we’ll “never” find another property that is both affordable and in a good location. We’d be “stuck” in the apartment, along with our failed dreams, but at least with a better economy than right now.
If I were a spiritual man, I’d be praying to the gods of engine failure. I’ve talked with my wife, and we both feel that we’re not in control anymore — the banks control whether or not we can build a home for our family, and the auto mechanic controls whether or not the car is dead or not, and the car controls whether or not we can fulfill our house dream. This is even more frustrating than the money “lost” each month.
Question: Would you try to hold on to the property, or would you ditch the dream? How would you act in our situation, how would you resolve the frustration?
I don’t think selling the property necessarily means ditching the dream. From a financial standpoint, not dumping money into interest each month is probably a better financial move than hanging onto it.
So, yes, I would sell the property, get the rest of my finances as straight as possible, and start saving for the right opportunity again. I think that your current situation leaves you dumping far too much into interest on your debts each month without really gaining you anything, and the payments seem to be leaving you in a place where you’re not able to really make forward progress on this dream of yours. The only way you’ll make it is if you get through several years of almost perfect luck, and that’s probably not going to happen.
Sell the property, get things straightened out, and start saving. There will be more opportunities down the road, and this time you’ll be ready for them.
Q10: Turning my financial ship around
I don’t really know where to start. I think that’s the whole problem. I graduated almost four years ago from a university with high career hopes and student loan debt in the ballpark of $60,000. With the stock market crash in 2008 my degree in finance was almost useless and I couldn’t find a job other than waiting tables for almost three years. Eventually all my loans went into default and were either sold to collection agencies or call me incessantly to this day. I don’t know what the (balance + late fees + collection fees + interest) on all of this is now but I have a feeling it is over $80,000. I finally got a job about a year ago that didn’t even cover my monthly bills (at the time about $2,800/mo). About three months ago I landed a second job to make some extra money for my upcoming wedding in June and I had hopes of paying off some of my debt.
A couple weeks ago I received my weekly check and found out that one of my loans is garnishing my wages and taking over $100 a week out of my check. I realize that I got into this mess on my own but now I know I need help to get out. I am afraid to answer my phone. I am afraid to check my mail. I am afraid I will get sued and have more money taken from me that I can’t afford to lose.
I’ve done a lot of reading about solutions and I still don’t know what I should do. Consolidation sounds like it would be my best bet and I don’t want to declare bankruptcy if I can help it. I would like to know more. I want to get a counselor but I don’t know who to trust and many places sound like they just want my fee money and don’t really care about helping me.
I have cut back on my spending and figured out that my monthly costs are around $1,800 for food, rent, transportation, insurance, and utilities. I make around $700 a week from my full time job but I only get to bring home $450 of that each week and around $150net/week from my 2nd job. My 2nd job has been going to a little safety net savings ($1,000 now) and wedding costs. My fiancee is graduating in May and we don’t know her employment situation so for now I am leaving her additional income/costs out of the equation. I only have one more car payment and then my monthly payment needs will fall to $1,500. That leaves me with about $900/mo to hopefully start turning this ship around. What are the first few steps I need to take?
You’re right that the field of credit counseling is full of sharks. My own grandmother was caught by one, ending up in a credit counseling scam that cost her thousands of dollars.
If you’re afraid and unsure what to do, a reputable credit counseling service is probably a good first step in your situation. I would start with the National Foundation for Credit Counseling, which is a network of reputable credit counselors. Find some counselors in your area using that site and research them.
I don’t have your full financial picture here, so my advice would likely be a bit misguided. I would suggest, though, that you not be afraid of bankruptcy. It is an option in particularly bad debt situations. I can’t tell if yours warrants bankruptcy or not, but bankruptcy simply means that the courts help you figure out a plan for repaying your debts. It hurts your credit pretty badly in the short term, but it will recover.
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.