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 expensive schooling
2. Handling a closed credit account
3. Lowering high housing costs
4. Investing while in college
5. Solid credit, no credit cards
6. Planning for after debt elimination
7. Jealousy of the rich
8. Executor advice
9. Investing now or later?
10. Planning ahead for side business
When I get myself in the flow of writing, I usually lock myself in my office (or go somewhere else where I’m completely alone), turn on some podcasts (think of it as talk radio that I control), surround myself with the needed research materials, and just start writing. I try as hard as I can to stay in that state until the words just don’t come any more.
Sometimes, I never quite get there. At other times, I can get in there all day, completely lose track of time, and be interrupted by my wife wanting me to help with supper when it’s not even lunch time yet. Those days enable me to have lots of other days where I can just spend time with my wife and kids.
Q1: Handling expensive schooling
I am nearing the completion of my bachelors degree and am looking into continuing straight into a masters. I am 27, work in the public safety sector and need to go to a school that offers an online experience due to my work schedule. I believe I have found the perfect school with the exact degree I want, but of course there is a major road block. Money. The school costs a significant amount of money, more than a lot of other masters programs out there, but it is a well known school and this particular program is highly regarded. In addition, it is one of the only schools that offers this degree online.
My employer has a reimbursement program, but it is capped at a level that will just cover 40% of my tuition costs, which leaves me with around $18,000 to find somewhere. Scholarships are nearly nonexistent in the area I wish to study, and I already have $9,000 in student loans from a failed experience at college during my youth. Needless to say, I am reluctant to take out more loans and am having a hard time deciding if I should still go for it. This degree will help my career, but it will not pay off for me for years to come, and will never pay off like other graduate degrees due to the nature of my career field. It is more about maximizing my potential and educating myself to benefit my employer, fellow employees and my profession as a whole. There is a possibility I could leverage the degree into a consulting gig, or public speaking, but those aren’t rock solid.
So now to my question, should I pursue the dream school and dream degree, risking debt/not being able to pay. Or should I choose a less fulfilling program because I can get scholarships and save a dime? I have been excited about the prospects of this program for a year now, and the hard reality of the money situation is bearing on me now. I am having a difficult time deciding the correct course of action.
Education is one thing in life that I don’t begrudge going into debt over. The investment almost always pays for itself over time.
It seems as though you’re pretty confident as to what field you should be going into. If you know that, then you should do everything you can to prepare for entry into that field, even if it costs you money in the short term. You are going to be far better off with an education and a degree in a field you’re passionate about, even with a little debt, than you are with an education and a degree in a field you don’t care about.
Go to school in the field of your choice. You’re going to get more value out of it, even considering the debt.
Q2: Handling a closed credit account
I last wrote to you inquiring about debt management organizations and I have decided not to go that route. However, when I called one of my credit card companies and asked them to lower my interest rate (they said no, and were actually the ones to suggest a debt management organization to me) said that they could “work with me” and lower my rate/monthly payment but part of the deal would be that they would close my account.
This is actually fine with me – I don’t want to pay it down and charge it up again (hopefully, I won’t!!!). I want it to be gone for good, but I don’t want to hurt my credit score (which is good).
So, do I suck it up and keep plugging away at this card with an over 20% interest rate (not the first debt I am attacking – but maybe it should be??) OR take their offer, get my interest rate lowered and close the account?
Lowering the interest rate and closing the account will have a slight negative impact on your credit score (at first), but the impact of that will most likely be overcome by the reduced interest rates on that debt.
How big is the negative impact? It depends on the balances on your other cards and their credit limits. One significant part of your credit score is your debt-to-credit ratio, which is the sum total of your credit card debts (and certain other types of debts) compared to the sum total of your credit limits. The closer your debt total is to your credit total, the worse it is.
If you have all of your other cards maxed out while this card had a low balance compared to the limit, closing the account will have a fairly bad impact. If that’s not the case, I’d close it and enjoy the lower interest rate.
Q3: Lowering high housing costs
I see stories all the time about people who paid off their mortgages in 10 years, 5 years, even 2 years, which is a fantastic achievement. But I also noticed that a lot of them were able to do that because they purchased the property for $200K, $100K, or maybe even $80K. In the Los Angeles area, you couldn’t find a decent property for less than $300K. (I’m talking about apartments/condos only, since the threshold for a house is even higher at $400K.) Sure, there are cheaper properties in gang-infested neighborhoods, but most people there are trying to get out, so why would you want to buy in? The other option is to buy something way out in the boonies, but then you’ll have to deal with a 2-hour daily commute (yes, each way).
For people like me who make less than $100K per year, it would be very tough to make the monthly payments on a $300K loan if the term were only 15 years. Yet the prospect of paying a mortgage for 30 years is rather daunting (and depressing).
Renting is an option, but the $1200 monthly rent on a 2-bedroom apartment is almost the same as the $1300 monthly mortgage payment for an equivalent property. We would move to a cheaper area, but my husband works in the entertainment industry, so the only other place for us would be New York, which is even more expensive.
What can people do if they live in an area with high housing costs?
Usually, they rent until they have either a large down payment or they have an opportunity to move to a lower-cost area in the United States.
If they don’t take one of those two options, they often end up in foreclosure. An awful lot of the people who took on adjustable rate mortgages during the housing bubble watched them adjust, found they couldn’t make the new payments, and watched the bank take their house from them.
Don’t fall into that trap. Rent and save as much as you can, then see where your path leads. It might lead right out of your expensive housing area.
Q4: Investing while in college
I currently hold $12,500 in student debt, with another year, and that much to go before I’m finished. So, at the time I graduate, I will have about $25,000 in student debt at about 6.8% interest. I am still undecided about going to graduate school. My financial situation is fairly stable, with a steady income leaving me with about $400/month which I currently place in a 1.4% savings account which has a balance of about $10K at the moment. My dilemma is whether I should keep saving, invest, begin paying off the loan early, or I have the option of paying off the interest early. If I do invest, I’ll need to keep in mind that some of my savings are my emergency fund. What do you think, Trent?
I would figure out how much you need for an emergency fund and then apply the rest to knocking down that debt.
So, how much of an emergency fund should you have? If I were you, I’d keep two months worth of living expenses of a level you would reasonably expect to have once you leave school. What is rent like in the area where you’re at? What about transportation and food? Make some estimates for a month, add them up, double it, and that’s how big my emergency fund would be.
I would apply the remaining savings toward that student loan and channel the income toward the loan, too. If an emergency does come up, I’d focus on rebuilding the emergency fund, then re-focus on the loan.
Q5: Solid credit, no credit cards
The Situation: I find myself in a strange situation. I have good credit scores (762-789 in Experian, Equifax and TransUnion). My credit reports say my credit score is affected negatively because I only have 1 credit card (limit $3,500, use 30% or less, paid off every single cycle). I applied for a standard card and was denied…because I have only 1 credit card and have not exhibited that I can carry more. Hello, Catch 22! I live in NYC so I don’t have a mortgage or car payment or even student loans that create other credit avenues to be listed on my credit reports.
The Background: I have $0 debt for 3-4 years now, have an emergency fund for 5 months worth of expenses and am currently employed at a decent salary (have been steadily employed for life, save one 2-week stint in 2001). Back in 2001 I had $14k of debt (which I paid off) and *no* credit score to speak of since all my cards had been withdrawn by the lenders and thusly I had no credit scores since I had no active credit. When I had credit scores show up most of them were awful because of so many past late payments. They are all past statute of limitations now and no longer appear on my reports. 3 years ago I started with a $250 secured card, after 1 year was offered an unsecured $900 limit card and the limit’s been raised a few times. I don’t really think I *need* the extra credit but I’m trying to raise my credit scores in the event I want to buy an apartment one day, so they can see that I can hold multiple lines of credit (and higher limits of credit) responsibly.
The Question: Do I get a secondary secured credit card since I can’t seem to get an unsecured card? If so, should I put a few thousand in so I am working with a card that’s immediately got a higher limit (easier to use it for the 30% or under costs and will show I can be responsible with higher credit limits)? Any other ideas? I applied for a fairly reasonable card so I’m not sure I want to apply for others as I’m assuming I’ll get turned down again and I will have that many more hard inquiries on my credit report.
A secured credit card should be a last resort in your situation. You should be able to get some sort of unsecured card.
If I were you, I’d apply for a card from a different card issuer than the one that denied you. Your situation as described seems like a situation that a credit card issuer would be happy to issue a card to.
If you can’t get such a card, I really wouldn’t worry about it. Your credit scores are very strong and I don’t think you have a strong need to reinforce it – at least not one strong enough to pay the cost of a secured card.
Q6: Planning for after debt elimination
I do have a specific question for you. The background info: I’m 25 and single. I earn $3,000 per month (net). I have one student loan ($11,000 remaining principal balance, at 6.75% interest) and $1,000 in an emergency fund. I also contribute 5% of my gross pay to a 401(k), which my employer matches.
Currently, I take 30% of my take-home pay and use it to pay off my student loan. I try to make a payment of $1,000 per month.
First question: am I saving enough money? I agonize over my budget, and I suppose I’m looking for assurance from you that I’m being aggressive enough about becoming debt-free (major goal #1).
Second question: once my loan is paid off (goal date: next June), what do I do with the money that I was formally using to pay off my debt? My ultimate dream is home ownership (major goal #2).
For your age and financial state, your money choices are strong. You’re contributing a total of 10% to your retirement and you’re hammering away hard at your student loans, both of which are going to set you up with a brighter future.
When your loan is eliminated, I would start socking that $1,000 per month into a savings account. At that rate, you’ll have a down payment on a modest home in a couple of years, so I would not put that money into other forms of investment that may carry some risk to the balance. Keep an eye on properties in your area and when you start to get close to a 20% down payment, start looking.
I think you’re in great shape. Keep it up!
Q7: Jealousy of the rich
You’ve written many times about abundance versus scarcity. I understand that, but I still feel very jealous of people who have more money than sense. How can it possibly be fair that idiots have so much money?
For one, the people you decry as “idiots” are often putting on a public act, one that their audience will consume. The audience will watch their “stupid” television specials and other media appearances to laugh at their idiocy, not realizing that these “idiots” are laughing their way to the bank. Most public figures that you perceive as “dumb” are often at least somewhat smart – they’re smart enough, at the very least, to find skilled promoters and backers.
The real crux of your question boils down to a desire for wealth. For me, eliminating the desire for excess riches came about from thinking about what I would have to give up to have that kind of wealth. The last thing I want is paparazzi – in fact, I’ve turned down some great opportunities related to The Simple Dollar out of fear that it would bring a level of fame that I do not want. I also don’t want friends and family turning to me as their financial spigot.
Sure, I’d have lots of material things, but without a happy life with lots of great relationships, it’d be a stretch for me to enjoy them.
Q8: Executor advice
My mother in law wants my husband (and I) to be the executors of her estate. We have politely refused, saying we simply can’t handle the responsibility and workload of such a task (or the emotional toll, since my husband’s siblings are being cut out of the will). Unfortunately, each time we see her she broaches the subject again, as if we haven’t already refused, stating that she’s counting on us to take care of things and pretending not to hear our concerns.
My question is, if she were to die suddenly and we found that my husband was named executor, what are the implications if he then refused the job? I think the court appoints someone to do it, but I don’t know what that entails–or how much it would cost her modest estate. Any thoughts?
Typically, the courts do appoint someone as executor. That person (or the state, depending on the arrangement) takes the executor’s fee and attempts to execute the will to the best of their ability.
An executor’s fee is usually around 3% of the total value of the estate. This fee can vary in some situations. It’s often larger in the case of small estates, and it’s often a bit larger when someone needs to be cajoled into being executor. This is all at the discretion of the judge, but the judge is usually following some strict guidelines from the state.
If you refuse to be executor, someone else will be. The executor fee that would have gone to you will instead go to this other executor and it may be enlarged a bit. For the most part, the actual work of an executor is really straightforward, so they most likely wouldn’t do much differently than you would do as executor. That’s really all that would happen.
Q9: Investing now or later?
The recent post regarding paying off low interest loans has got me rethinking some things. Currently the only debt I have is a signature loan with a current balance of $1629.71 at a 5.9% interest rate. I’ve been saving as much as I can to put towards investing and currently have a balance of $1659.23. As you can see, I could pay off the loan today but then I’d have to start over saving for investments. My job situation is fairly stable, I believe. I work for a retailer/restaurant that has been been in business for over 30 years, has over 600 stores and I believe is fiscally conservative no matter what the current economy. Plus, I have been with them ten years now. I don’t have any real concern about losing my job. I would like to acquire disability insurance – not offered by my employer – and paying off the loan will allow me to do that without undoing all the bill reductions I’ve achieved in the last few months (replaced the land line with a pre-paid cell phone, for example). However, it will put back my plans for having enough investment income to quit working for money in five years. I originally planned to go on making monthly payments, figuring that it was better to invest ASAP and start making returns than to wait, if I indeed wanted to make this five year goal. So, which takes priority? Smaller investments sooner or larger amounts available (the money previously going to the debt payment) for investing later?
It depends on how you invest. If we assume that you’re five years from retirement (as you mention), your retirement investing should be fairly conservative. Thus, over that five year period, the return on your money will most likely be less than 5.9% – but it will be a stable return.
My view is that if you’re saving for retirement aggressively at this point (meaning you’re heavily into stocks and the like), you’re committing a big investment mistake with consequences that will trump all of these decisions. You should be pretty conservative this close to retirement, with the largest portion of your retirement savings in bonds and cash.
Given that, the best return on your money is paying down that debt. As you mentioned, it frees up your cash flow so that you can make bigger retirement investments later.
Monica had another question as well
Q10: Planning ahead for side business
I’m forty-six years old, unmarried, no children. I live with my mother, so I don’t pay rent, a mortgage or utilities and I have access to a car. I can also use the city bus to get around. This year I went back and restarted the “Your Money or Life” FI program. So far so good. I got out of debt management 12 months ago. My monthly bills were never very big, aside from debt payments, but now I can easily live on as little as 25% of my income from an $8.06 an hour job of 25 to 30 hours a week. I also am an artist and plan on expanding my artwork considerably and making it into a true side business, before and after I quit my ‘day job’. That being the case, I do want to quit as soon as I have enough investment income to cover the basics – health insurance, disability insurance and regular monthly bills – as well as an emergency fund. As I said above, I’m currently aiming for that to be five years from now. I’m told my employer only offers 5 cents on the dollar for a Roth 401k and I don’t want to wait until I’m 59.5 anyway, so I’m currently reading “Bogleheads Guide to Investing” and looking really seriously at index funds. What do you think? Is it feasible? The five year goal is pretty arbitrary but fifteen years is enough to give any employer and it’s a nice round number.
As I mentioned above, if your goal is to effectively retire in five years, it’s not a wise move to put your money heavily into stocks. The value of stock investments is pretty volatile over a five year period – you might gain 40% or lose 30%, it’s hard to tell.
If I were you, I would probably buy either a mix of index funds (with a bond fund being the biggest one) or I would just put it all into a target retirement account that’s just a few years out, like a Target Retirement 2015 or 2020 fund. This will keep you in a pretty safe place with regards to your investment.
I’d also try very hard to expand that artistic side business now. Try to build it while you still have a steady income so that when the time comes to make that leap, you can easily make it. Give as much of your spare time as possible to your art and to the business behind selling it.
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.