Reader Mailbag: Rain

What’s inside? Here are summaries of the included questions in five words or less.
1. Downgrading a car for e-fund
2. Handling an increase in income
3. Dealing with financially unsound parents
4. Starting out with a Roth IRA
5. Quicken or GnuCash?
6. Preparing for a second baby
7. Buy CD or pay debt?
8. Minimizing impact of car payment
9. Getting a detailed insurance policy
10. Retirement or student loan repayment?
11. PS3 games

Seemingly endless rain. What I wouldn’t give for a nice, dry day. The only problem? After all this rain, the first couple warm days without rain are going to be insanely humid.

I have about $4000 in credit card debt and I’m about to lose my job due to the owner’s decision to sell the business. I’m currently a student living with my parents so I’m not too worried about the job situation but I would really like to wipe out most of the debt in one fell swoop. I’ve been considering selling my fully paid for Honda and replacing it with a sturdy volvo I’ve seen for sale. The net cash gain would probably be about $2500-$3000. Now here’s the rub. I really love that Honda(her name is Lola). But I understand that a bit of sacrifice now for the sake of my sanity and financial security probably wouldn’t kill me. I know the numbers sound like small potatoes but without any source of income for the time being, it could make my emergency fund go a long way.
- Matty

The first thing I would do is get a vehicle history report on that Volvo and make sure there’s nothing fishy going on with it. I’d also test drive it and take it to a dealer to make sure it’s not got anything hidden that will blow up in your face.

If both of those things pan out, then it’s probably a good move in your situation to downgrade. It’ll gain you some cash and likely also help with your insurance a bit, too (since the car value has dropped).

The other option, of course, would be to just get a job anywhere, even a minimum wage one, which would allow you to keep the Honda at least, but might restrict your free time.

My husband recently graduated with a masters degree in teaching and, in an incredibly lucky turn of events, got a job right out of school. We’re thrilled not only for getting his career off to a good start but also at the prospect of having two salaries. Throughout our marriage we’ve always survived on my single salary (currently $54,000/year) and his part-time work while he was touring as a musician. He will start out at around $40,000/year which will increase with experience. We’re facing student loans (we will owe about $32,000 at 6.8% interest rate) and we have a 30 year fixed mortgage towards which we pay about $1500/month. We still owe about $230,000 on the mortgage. Other than that we have no debt. We do use credit cards for the rewards/convenience but always pay them off each month and never carry a balance. We own one car which we bought used and paid for in cash so we have no car payments. Mortgage payment plus other expenses of insurance, utilities, food, etc come to approximately $2200/month. In terms of retirement savings I contribute 8% to a 401k through my job (current balance $48,000) and we each contribute $100/month per person to Roth IRAs. We are 31 and 33 years old so have a long way to go before retirement. We have about $13,000 in the checking/savings and $17,000 invested in a money market fund. We are not very savvy with investing – we mostly put money somewhere and just let it do its thing. We live a fairly frugal lifestyle but are comfortable with occasional spending.

Basically, we have the happy problem of increasing our income and we don’t know what to do with the extra money. I know we should probably save or invest most of it but we also kind of want to splurge on something. We own an older home built in 1928 and have a constant list of projects, but it needs no major repairs. I’m not sure we’ll stay in this house forever so we hesitate to invest too much into it if we outgrow it and move later. One idea we have is to tear down and rebuild the old shed in the backyard (it is in bad shape) and enlarge it to double as tool/bike storage and a writing retreat/studio space. Lately though we’ve been dreaming of buying a 1970′s era VW camper bus. We love road trips and have always wanted one to wander around in (and could park it in the backyard for that retreat space). Another dream we have is to do some traveling, to South America or New Zealand – somewhere exciting. Here’s another thing – we are trying to have a kid, one or two, which I know will increase our monthly expenses and savings for college. I plan to keep working after kids so there would be some daycare. (Actually, I would love to not work but also can’t see myself leaving my career, both in losing that income and for my own creative interests. That is a whole ‘nother mailbag.)

What would you do in our situation?
- Penny

The first thing I would do is just sit down and have a long talk about what you both really want over the next five years or so. Do you really want children? Sooner? Later? Is the camper bus really a big dream or is it just a whim? What about the shed rebuilding? What about the idea of a new home?

Be honest with each other. There’s likely things that one of you is really into that the other one is kind of “meh” about. The best thing you can do for each other and for your relationship is be honest about how you feel about future goals. Don’t feel bad about saying that you don’t feel too hot about saving for the next year for some project you’re not all that interested in.

What you’ll find is that – if you give it time and careful thought and mature discussion – one or two strong mutual goals will emerge that you both believe in and are passionate about. That’s where your planning should be focused.

Give it time. Give it honesty. And don’t be upset with each other if something you want doesn’t completely match what your partner wants. You might just find that there are things you both hold dear, and the rewards of those far outweigh the individual things you each want.

About me: Come from a family perpetually in debt. My father is the only income earner, and he supports my mother and two younger sisters. I left home at 18 and racked up a whole bunch of my own debt while in university. I smartened up just before graduating, opened an RRSP, started an emergency fund, started saving etc. 3 years later, I’m pretty comfortable – have a small mortgage in Vancouver, paid off $10 000 of my consumer debts and only student loans left to go! I was even able to go back to school with some of the money I saved while working.

The problem is, my family is still badly in debt. They’ve refinanced their debt into their house three times and now owe more than their house cost them originally to buy it. I’ve helped them out a few times with cash gifts. My parents always ask to “borrow” but I know I probably will not see the money back, and that’s okay. I’ve never “loaned” them any more than I could afford to lose.

But now my dad is under-employed due to a bad economic situation in his field of work – this has gone on for about a year. I recently handed over a cheque for $1500 to help them cover their mortgage. Supposedly they will pay me back, but I don’t expect it.

I’m very concerned about how they will cope and what I can do to help – I am finishing a second degree right now and living on a strict budget that allows me to take classes and pay for my expenses without incurring additional debt. I work two part time jobs while in classes and will start a 9 month work term in August. My income will be good, but I can’t continue to help them out when they are short because I need to save money to finish my schooling/cover living expenses once the work term is over.

I’ve suggested renting out the extra bedroom they have, but they are resistant. My mother has health problems and is unable to work long periods of time. She used to do some babysitting, but hasn’t in a while. To make things worse, my sister is starting university in the fall (though living at home while in classes). She has enough scholarships to pay for one semester of classes. I’ve encouraged her to get a part time job during the summer to save up money for future tuition but she has not wanted to. My parents are encouraging her to take out student loans instead. They’ve even asked ME to take out student loans and “lend” them the money – I refused.
- Michelle

You made a good move there, refusing to lend money to your family members. One of the worst things you can do with a family relationship is turn it into a lender-borrower relationship. Think about it: who loves their lender and invites them to dinners and parties? If I were you, I’d assume that any money you’ve already given them won’t be paid back. Think of it as a gift and just forget about it.

The question is what you should do going forward from here. I don’t think you have any sort of responsibility to begin supporting your family. You absolutely should not lend them any money at all for the reason mentioned above. You also absolutely should not do anything that puts you even in a slightly more challenging place.

If you still feel an obligation to help, help via one-time gift, like you did with the single check you already gave them. Whether or not you do that, of course, is up to you.

I am looking to start my own IRA but I have heard some stuff that makes it seems a little more complicated. I was under the impression that a Roth IRA was kind of just a set it and forget it type of account. I’ve been reading into it more lately and found that this isn’t really the case. I don’t know if I’m the only person who was thinking this but I thought it may be beneficial to your readers. What I’m asking I guess is how exactly do I setup a Roth IRA and what should I be investing in? Are there suggestions for investments when you get all of your stuff setup?
- Brandon

The Roth IRA certainly can be a set it and forget it kind of account if you choose it to be. My own Roth IRA through Vanguard, once I had it set up, has needed no changes in years. I just selected an appropriate Target Retirement fund, set it to withdraw $100 each week, and sat back and forgot about it.

Assuming you’re using it for retirement and not some sort of gamesmanship (there are some somewhat kooky plans out there that try to exploit specific loopholes in the Roth laws which rely on those tiny loopholes remaining open for years – don’t bother), the best thing to do is to simply open up a Roth IRA account at an investment house you trust, select a Target Retirement Fund from their investment offerings, and then set up an automatic investment plan to put money into that target retirement fund.

That’s really all you need to do. It is pretty automatic once you get it into place. Just pick a company, sign up, select an appropriate Target Retirement Fund, and set up automatic contributions. Done.

In a recent Reader Mailbag, you recommended Quicken in response to a list of criteria for personal accounting tools. I was wondering whether you had any experience with GnuCash (www.gnucash.org). I’ve not got enough experience with it to know whether it meets the criteria, but it is free (and Free Software – meaning those with programming skills have the ability to make changes), and does seem to do a lot. If you are familiar, where do you see it lacking (as compared to Quicken or more generally)?
- David

GnuCash is a solid accounting program – and it’s free – but it doesn’t match what Quicken does.

The big thing that Quicken does that GnuCash does not – and this is huge for new users – is that it automatically downloads your financial data for you from your banks, credit cards, and so forth. Transaction data is often included in this. This drastically reduces your bookkeeping time once you’re used to the procedure.

GnuCash does several things well, but the sheer accounting work that has to go into it drives away a lot of users. And for me, who did all of this by hand for many years? I used Excel, quite honestly.

On your blog, you’ve mentioned that you did a lot of little projects to prepare for baby #3, and — being in a similar situation myself, although for me it’s baby #2 — I’m curious to know what they were. I’m also curious about which ones were the most useful in retrospect. I am getting hit with that serious 3rd trimester nesting urge, and I’d like to put it to good use. Last pregnancy, I was doing things like dusting the window blinds — something that wasn’t especially useful.
- Emily

I’ll just list the projects we took care of during the run-up to the arrival of baby number three.

We signed up for a 529 for him (putting myself as beneficiary, then switching that after he was born). We did everything we could to acclimate the older children to the idea of a baby, including reading lots of books about babies and new baby siblings. We pulled lots of baby clothes out of storage and hit quite a few yard sales and consignment shops to replace some of the more well-worn items. We pulled the old bassinet out of storage, cleaned it, and set it up, and also came up with a long term sleeping plan for the three kids. We pulled out our old breast pump, fully cleaned and sterilized it and all of the bottles, and did some maintenance work on the AC adapter. We washed and prefolded all of our cloth diapers, setting the adjustable ones to the smallest setting.

I’m sure I’m forgetting something, but all of these things happened during the months leading up to the birth of the third child.

I’m an undergraduate student and will continue with a PhD after graduating next year. I’ll be leaving my alma mater with around $15-20k in Federally subsidized loans and won’t be required to make payments until six months after I cease being a half-time student. As far as I can tell, the government pays off the interest at the lowest rate so long as I’m in school. I will be paid a stipend of $25-30k during my PhD schooling (5-7 yrs.)and intend to save a significant amount towards these loans and financial independence. My question is this: if I have around $6k in savings right now, would it make more sense to invest in a moderate-return CD or similar option, or should I apply it directly to the loan capital? I’m pretty sure a 33% dent in the principal would be fantastic, but the opportunity for seven years of interest is also appealing. Can you shed some guiding light? I currently have taken three discrete subsidized Stafford loans with fixed rates of 6.8, 6 and 5.6%.
- Joe

First of all, make absolutely sure that your interest is being paid while you’re in school, because that completely changes the answer to the question.

If the interest is being paid while you’re still in school, then you should hold onto that money until you finally graduate because your loans won’t be growing at all. You can buy a CD if you wish, invest it in the stock market, whatever you feel is appropriate with that $6K (it mostly depends on your risk tolerance and how long you’ll be in school for the Ph. D.).

If the interest is not being paid while you’re in school, you should pay down the highest interest student loan, but you should save at least $1,000 of that money for an emergency fund for yourself so you’re not tapping credit cards to deal with an unexpected expense. Why? Very few investments will top the 6.8% guaranteed you have on your loan.

My 12-year-old car (given to me by my parents) is about to die. Though I haven’t gotten it formally checked out, I know there are problems with the engine and transmission, and I have this feeling that it won’t make it through the summer. It has 195k miles on it, so I think it’s past the point of trying to fix it any more.

I also have recently started a new job after 10 months of unemployment. Before being unemployed, I had started a debt snowball to pay off my debts, but had to put that on hold for obvious reasons. Here’s where I stand now: $15k on a student loan at 3.9% ($117 monthly payment) and $24k on 6 credit cards with interest rates averaging around 18.5%. I take home about $1200 every 2 weeks and pay $600 for rent and spend about $400 monthly for groceries, cell phone, gas and other stuff. I also have $300 in savings (the remainder of my original emergency fund) that I’d like to build up to at least $1000 to feel more comfortable.

My question is this: Should I save up as much as possible to have a larger down payment, or should I throw as much as possible at my credit cards to have a lower debt:credit ratio and improve my credit rating? I’ve never financed any sort of major purchase before, but I do have a decent credit score (708 as of two months ago). I’m looking at a used car (certified if I can find it!) in the $12k range. I guess I’m just basically nervous about having this new large monthly expense and am looking for the best ways to minimize it.
- Larissa

In your situation, you shouldn’t buy a $12,000 car right now. You should get something much lower that you can drive reliably for just a few years, then replace it with that $12,000 car.

Doing that saves you money on financing the car and on auto insurance as well (since you’ll probably only need to carry liability insurance on it). That money can be channeled towards paying off your existing debts (and a $1,000 emergency fund, too, which will keep you from tapping credit in emergency situations).

Look lower-end for now for your car. You can save up for it if you wish, but don’t worry about a small loan for it, because if you have decent credit at all, it’ll be lower interest than those credit cards. Then, once that’s taken care of, snowball. Get rid of that high interest stuff first and whittle through everything else. You’ll have much more money to do this quickly if you get a lower-end car for the time being, taking you to debt freedom much faster. When you’re there, then think about a higher-end car.

I am trying to do some emergency planning, and as part of that my goal is to understand all of my insurance policies thoroughly. I have checked my insurer’s website, but they only have generic information and say to contact your agent for more details. I have tried my state’s (NJ) Department of Banking and Insurance, but there is no standard there, either. I e-mailed my agent with some questions, and she called me back instead of e-mailing her response. Is there a good way to get a complete guide to what a person’s insurance will cover in the event of a claim? It is all well and good for my agent to tell me somethings over the phone, but I will have no proof of what was said if there is a problem. Do you have any advice on how a person can obtain, in writing, exactly what will be covered by their insurance if a claim is filed? I am referring mostly to my Renter’s policy, but would like something similar for any policy I own.
- Tracy

Call your agent and ask for a copy of the policy, point blank. If they won’t provide this policy, then you shouldn’t be doing business with that company.

The agent wanted to call you because the agent is a salesman and it’s much easier to make a sale by talking to someone than it is by sending them emails. Pretty much any insurance agent will do the same thing – because, in the end, they’re salespeople.

If you can’t acquire a copy of the policy you’re looking to buy, something is really fishy and I would run away from the situation.

I am a 23 year old AmeriCorps volunteer. I currently have $2,000 as an emergency fund. I also have roughly $25,000 in student loan debt. I receive $1,000 a month for a living stipend before taxes, and will receive a $4,725 Education Award (to pay back federally backed student loans) in August.

I am torn between saving for retirement and aggressively paying back my student loans. I hate being in debt, and would really like to get rid of my student loan debt as soon as possible. Currently, I have an $11,000 Stafford Unsubsidized loan (6.8% interest rate), a $10,000 private educational loan (8 percent interest), and a $5,000 Department of Treasury loan (4.5%). They are presently in deferment for economic hardship, but I’ve been paying about $200 a month toward my private educational loan, since it’s the only one that can’t be partially repaid with the AmeriCorps Education Award.

However, I also understand the importance of saving money for retirement, especially in my early twenties. Optimally, I would like to open a Vanguard Target Date Roth IRA and start socking money away as I am able. However, the minimum initial balance is $3,000. Do you know if Vanguard or any other reputable agencies offer IRAs with a lower minimum initial balance (possibly with the requirement of automatic fund transfers)?
- Alex

When I started with Vanguard, I didn’t have the $3,000 I needed to get into the fund I wanted, either. However, there’s a much easier way to do it: the Vanguard Star Fund.

The Star Fund is a composite of several different Vanguard index funds. What makes it noteworthy, though, is that it has a minimum of $1,000, not $3,000.

When I signed up for Vanguard, I first saved cash in a savings account until I had $1,000, then I contributed all of that to my Roth IRA and bought Star, setting up an automatic investment plan to keep building from there. When I reached $3,000, I just switched it to the Target Retirement Fund of my choice.

As for the student loans, I think you’re doing the right thing paying the private one off now, a bit at a time, as you’re doing.

All right, ‘fess up. What PS3 games do you own?
- Kevin

A surprisingly large number of people wanted to know this after my post yesterday in which I discussed trading my Nintendo DS for a Playstation 3. So, here are the games I traded for (all used, of course) when I got the Playstation 3, with links to Wikipedia for details. I picked up Red Dead Redemption, MLB 10: The Show, Final Fantasy XIII, Uncharted, and Skate 3. I still have some store credit remaining, too. RDR and MLB 10 seem to be the popular online games with my group, so those will be the ones I’ll mostly play, I’d imagine. My plan is to just trade them as I play through them and maybe receive a few more as gifts for various gift-giving occasions.

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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  1. Barbara Smith says:

    I disagree with your advice. I think she should keep the Honda because Honda’s are much easier and cheaper to repair than most Hondas. In the long run, I think the Honda will be cheaper. One serious repair of the Honda and the efund goes bye bye.

  2. CB says:

    I have a Honda and a Volvo. The Volvo is much more expensive to maintain.

  3. lurker carl says:

    Wow, a lot of car stuff in this mailbag.

    Matty – Don’t buy the Volvo. It will be cheaper in the long run to keep the Honda. Overall, Volvos are less reliable and more expensive to repair than Hondas. Get another job before the old one ends and pay off your debts.

    Penny – Forget about the VW Kombi unless you and your husband are willing to get your hands dirty performing the repairs and maintanence required for a 40 year old RV. It’s a nice daydream but will be a nightmare if you are not accustomed to dealing with quirky antique cars.

    Larissa – Fix your current car, you can not afford to replace it. If you buy a $12K car, you will not have the money to fix anything that goes wrong with it. Even certified cars need brakes and tires and hoses and belts and break down.

  4. valleycat1 says:

    @ Question 2 – Penny: In your discussions about what to do with the money, you might want to consider where you would find yourselves financially should your husband’s job not last beyond this first year (or 2). In our state, school districts began to feel the budget pinch this year, & newer teachers are often the ones laid off first. So if it were me in this economy, I’d build up a really strong emergency fund. Also, if his new job doesn’t pay in to Social Security, consider additional investments to supplement his regular retirement income – tax sheltered annuities, maxing out IRA contributions, or whatever. And long term disability insurance. Starting at your young age, the monthly amounts needed would be reasonable. Then tackle your dream list – IMHO, if you’re both serious about starting a family soon & you plan to stay at home, you’ll need to build up savings if you can’t live on his income alone – & that’s a lot easier to set aside before you get used to having the added money in your checking account! Wishing you the best….

  5. Molly says:

    Penny – I’d actually continue to live on your salary for a year. Take your husband’s first year salary and wipe out as much of the education debt as you can – 6.8% interest looks pretty high to me.

    Tracy – I work for an insurance company, and I completely agree with Trent’s advice. First, get copies of all of your insurance policies. They should have a cover letter, called a declarations page, with your EXACT amount of coverage. For my renter’s policy, I think it shows ~$30K in contents coverage – my stuff – and $100K in liability coverage – if somebody sues me for falling in my bathroom or something. This page also shows how much I pay for this insurance, the dates I’m covered, a signature of somebody from the insurance company, and a phone number to contact with any questions. The fine print in your insurance policy is very important to read and understand before you have a claim. The NJ DOBI may or may not be able to help you interpret it, but somebody at your insurance company must answer your questions. Ideally, this is your agent, but you may need to be pushy to get your questions answered, as they really are salespeople first and foremost. You can set up a meeting with your agent, ask all of your questions, and get, in writing, your understanding of the answers and your agent’s signature. The signature is VERY IMPORTANT. This is your backup in case of a disputed claim that you agent told you was covered, but your insurance company says is not.

    If you ever have problems with your insurance company, contact the DOBI. Continue to contact them. They are required to have consumer advocates whose job it is to mediate between insurance companies and consumers.

    (Sorry this is such a lengthy answer.)

  6. Jenna says:

    Alex – I have a Roth IRA through Fidelity and did not have enough to fund it upfront either. They have an option where you can start one with a $200 a month automatic transfer into the account and avoid the min. balance req. That may work for your situation.

  7. Bryce says:

    Trent, have you ever tried GameFly? I used to buy a game every month, then cut down to every couple of months to save on money. Eventually I realized that I would buy a $60 game, play through it once and then never play it again (or maybe once 2-3 years down the road).

    I finally switched to GameFly about a year ago and for the most part I like it. It’s ~$17 / month. I usually end up playing about 2 games a month, which saves me ~$103 if I was buying them outright. Yes, you can trade in your games to GameStop after you buy them. But in the long run you’re going to be spending more money that way.

    The biggest downfall to the service is that it doesn’t have the two day turn-around that Netflix has. I mailed God of War III back last Saturday and just received the email Wednesday that they were sending out the next game. Sometimes I get the game within 3 business days of mailing the previous one. In rare situations it has taken 8-9 business days. Usually it’s about 5 business days.

    I no longer play 20-30 hours of games a week. I’m more like you where I play maybe 5-6. It works well for me and has fully eliminated my video game purchasing budget.

  8. Shanna says:

    Alex – T. Rowe Price lets you start up a Roth IRA with as little as $50 automatic transfers each month.

  9. Julia says:

    “Seemingly endless rain”…when did you move to Seattle?

  10. JonFrance says:

    Metal Gear Solid 4, if that kind of game appeals to you at all, is incredible, and easy to pick up cheap used now.

    There is a learning curve, though, and you do have to accept Kojima’s storytelling style on its own terms. But it is probably my favourite video game of all time.

  11. Courtney says:

    Response to Joe: Yes, subsidized Stafford loans do not accrue interest while you are in school at least half-time, and you are not required to make payments. However, if you do choose to make payments, they are distributed proportionally across the balance of all your loans – you cannot choose to only pay down the loan that is at 6.8% like Trent mentioned. I don’t know that it changes the ultimate answer but I thought I would point out that correction.

    I went into a PhD program in 2003 directly after getting my BS, and half my undergraduate loan balance was subsidized. I paid what I could throughout the 5.5 years I was in grad school, knocked out about 25% of the principle as well as prevented the interest on the unsubsidized portion from capitalizing.

    For your situation, I would put the money into a 5-year CD, as well as saving any extra you can, and make a lump sum payment on the loan as soon as you graduate. Make sure you also look into a refinance as soon as possible after you graduate – you will likely be able to lock in a fixed rate lower than 5%.

  12. Craig says:

    Larissa only has $300 in savings,meaning she will have to finance any car she purchases. Any financed car will require full insurance coverage, not just liability…

  13. Penny says:

    Thank you all for the advice and thoughts. I knew Trent and his readers would come through! Our goal is to maintain our current level of spending on one salary and funnel the extra money towards savings and paying off the student loan. We’re definitely aware of the tenuous job situation and we do already have a 6 month emergency fund built up plus additional investments that we can tap into in a true emergency. I have to confess to you though that my husband is right now on the phone with a mechanic about a 1972 VW pop top camper that we found on Craigslist! We went to check it out last night and it needs some TLC but has a good engine and it’s a fair price. He used to drive a 1971 Beetle that he fixed up so he knows what he’s getting into. We agreed that it’s kind of a whim but – Trent, per your comments – the more we discussed our situation, the more we both fell in love with the idea of the van more than other projects. We also feel like owning it will allow us to take more small road trips that will ease my travel bug. Once the initial costs and repairs are done for that then we’ll resume our savings and focus on the loan repayment. After a celebratory road trip!

  14. Des says:

    Larissa – You have more in debt than you make in a year! A $12k car shouldn’t even be on your radar. I concur with lurker carl: get your current car fixed. 195k miles is hardly the end of a car’s useful life. We have never kept a car less than 300k miles (though, to be fair, we’ve nearly always owned Toyotas). Its not as glamorous or fun as buying a nice new-to-you car, but it is a much better financial move for your situation.

  15. Sally says:

    Michelle – I have a similar situation with my parents. They have huge fixed costs (they own a large home and a cottage, both mortgaged for more than the original purchase price), they eat out regularly and buy lottery tickets looking for a quick fix.

    They come to me for help whenever they max out their line of credit, but I am at a loss as to what advice to give. I have never lent them money but I fear that I will have to support them in retirement.

    I have encouraged them to either sell the cottage or downsize their home, but they are too emotionally attached. Two years ago my dad spend over $18,000 purchasing two brand new snowmobiles for the cottage. They have been used less than a handful of times. He won’t sell them because he can’t get enough from the sale to cover what’s owing on the loan. It makes me sick to my stomach that he makes these silly decisions and my mom just goes along with them.

    A few years back I made them rent out their basement, and this has helped but they are back to spending far more than they earn. How do I kick start them into thinking about their retirement? At this rate, they will be living in poverty and I will be the one responsible for ensuring their needs are met, while dealing with my own young family.

  16. Denise says:

    I agree. You need to learn to live within your means which is basically just changing your spending habits.

    Someone can win $1 million dollars on Lotto; but will probably blow it all in a year if they’ve been in debt most of their lives and don’t budget.

  17. Karina says:

    I have a question to continue up on Alex’s….My fiance and I have a healthy emergency fund of $14,400, and he has a 401k account that he contributes 5% too, with a company match.

    I am 23 and would like to start a retirement fund as well, but it’s a difficult situation since I am starting grad school and need to keep my 3k for the Vanguard Roth IRA I’ve been eyeing where I can access it. I think I could part with 1k though, to start that Vanguard Star Fund. Can you elaborate more on what it does? I am very inexperienced and unfamiliar with investing, so looking at the website didn’t really explain too much to me. How is this different from the Roth IRA and how easy is it to transfer the money to a Roth IRA?

  18. Kyle says:

    I just thought I’d throw another freely available financial product in the mix: AceMoney Lite. It has been a few years since I have used GnuCash, but finding it necessary to switch between Windows and Linux due to my job, it wasn’t practical. AceMoney runs without any fuss under Wine in Linux, so I was able to use it regardless of what OS I booted into.

    Another thing I didn’t care for in GnuCash was an inability to export the data to a common format for use in other applications should you change your mind. It readily imported Quicken files, but once you started using it you end up being trapped unless you are willing to recreate all your data. That may have changed since the last time I used it, but it was a deal breaker for me at the time.

    AceMoney Lite is limited to a single account, but I believe the full version is much more inexpensive than MS Money or Quicken.

  19. Joe Lemon says:

    MLB The Show! Good choice. Unfortunately it’s addicting playing online. Finally weaning myself off of it after a few weeks of fighting the urge to play it every night. An online game lasts a good 45-60 minutes. Good luck.

  20. Eric says:

    Alex can buy Schwab ETFs or Schwab S&P 500 mutual funds in an IRA as an alternative to Vanguard. The minimum is only $100.

  21. Kayla says:

    Hey Trent,

    You’ve got a good PS3 collection going there, and I can attest to the greatness of RDD and FFXIII (which I just finished).

    I was thinking, since I know how much you love spending time with your kids, if you don’t mind them playing (or watching you play) videogames I’d like to suggest a game called “Mini Ninjas.”
    It’s a sweet game thats filled with nature and not violent (if you “kill” a bad guy, he turns into a little animal).
    If you’re into that kind of stuff, my cousin (who is 5 now) absolutely loved the game (with my help). Also, check out “Flower” and “Eden” for family friendly games (which are also artsy).
    Take care~

  22. anonymous says:

    I would’ve appreciated a much more thoughtful response to Michelle. Yes, we all know lending to family is not ideal—Michelle already said that she doesn’t lend more than she can afford to lose, and thinks of the money she gives as gifts.

    She doesn’t ask a clear question, but I am in a similar situation and can ask for her. I want to know: is there any hope for people in this situation? Is there any way I can help my parents if they won’t change their spending habits? What will happen to them if they get fired, or when they get too old to work? Is there anything they can do now to protect themselves?

    My parents have so much in debt that they don’t even think about it anymore. They cash their paychecks to avoid their bank accounts from being garnished. They open accounts in my name because they won’t get approved otherwise. Realistically, I don’t think they can change. My mother is willing to put money into savings, but she can only afford to save maybe 100-200 per month. She’s 55.

    What should she be doing with that money? Putting it into a savings account will mean she’ll have maybe $15,000 when it comes time to retire. Should she be trying to buy a house, so that after retirement her monthly housing costs don’t keep going up? Is there some kind of insurance, like long-term disability or something that would protect her if she gets too old to work?

    I’m looking for concrete ideas that will help them create some sort of safety net for themselves. They can’t bring in any extra income because of health reasons; any extra money will have to come from me and my brother. If anyone has ideas, I’d love to hear them.

  23. gold bug says:

    Schwab ETFs seem like a pretty good deal. Although the volume has not picked up yet. So the lack of liquidity is an extra cost.

  24. jean says:

    I HIghly recommend Lumines and Critter Crunch (each a few dollars from the playstation store). Ridiculously addictive tetris/puzzle like games I think you would enjoy.

  25. Lauren says:

    Just wanted to say that I like the new format of the reader mailbag posts. Makes it easier for people like me who typically ignore them because they are so specific and instead of trying to weed out what I’m interested, I just wouldn’t read it at all. Now I can check out the parts I’m interested in. Thanks!

  26. Eric says:

    Regarding GnuCash. I think it actually does the transaction import that Trent mentions. I used it a few years ago and it did it then anyways.

    I just went to the website (gnucash.org) and one of the features they highlight is “QIF/OFX/HBCI Import, Transaction Matching”.

    I don’t think it does it automatically though. But then I’d personally rather it didn’t; I’d much rather keep control of who/what logs into my bank account! :)

    So, GnuCash may not be as polished as Quicken but it is definitely worth a try.

  27. Robin Crickman says:

    Maybe Molly can comment on our strategy on getting clear statements from insurance agents. We have a business and home policy (a farm) and when we have questions, we call the insurance agent and talk on the phone. After hanging up, we write up our understanding of the situation and mail a copy to the agent (telling the agent we are also keeping a copy in our files). We tell the agent that we expect to be told in writing if our understanding is not correct. We have always gotten either a phone call to confirm our understanding or a written letter to clarify the situation.

  28. j says:

    I love the new format – I have always skimmed or skipped the posts like this bc there was no index and some of it was weirdly formatted and hard to read/get the gist of what I’d be interested in.

  29. Valerie says:

    Regarding the insurance:
    1) Consider consolidating renters and car insurance with one company which will probably lower rates for both. Most insurance ads brag about cheap premiums, but never mention what happens when you need to file a claim. Military (including retired & dependents)should call USAA. I’ve had them for 25 years, and every time my parents or I have had a damage claim, we receive a very generous check within 24-48hrs that more than covers the cost of repairs.
    2) Be sure to clarify if the renter’s policy covers depreciated value or replacement cost. Your 10 year old couch that got moldy from a flood will probably only have a $100 depreciated value but $2000 replacement cost.

  30. Molly says:

    @Robin – I think your strategy is a great idea. Writing the letter and giving the agent time to respond is even better than my idea of making an appointment because it gives the agent time to really check it.

  31. Michael says:

    GnuCash is pretty powerful, but last time I used it (2 years ago?) it required double entry to keep things straight and was a real pain to do corrections when you mess up.

  32. Gemond says:

    Trent,
    I was truly surprised at how little you had to say to the woman who wrote in about her parents financial situation. You basically reiterated what she already told you: That she could not now/no longer afford to help them.

    The woman doesn’t mention whether she is close to these parents (although close enough to give money to them) or if they listen to her. Because she is clearly, given her own efforts to live her life, in a good position to role model and inspire them. At the least, she can sit down and talk lovingly and respectfully about ways they can make changes and really dig for the root of resistance.

    No matter your relationship with your parents, it’s the rare human being who can just stand by and watch them drown, regardless of the parent’s age or the child’s. You didn’t seem to address this aspect at all.

    We’ve been through this with parents and it’s been tough, and it involves a lot of tough love talks and follow-up and incentives, etc.

    This is a real issue today as so many parents in their 50s, etc. are finding themselves, often for the very first time, in real difficulties. (And many of them cause they went into hock for their kids!)

    You might want to speak to experts who have some advice on this and then share it.

    Cause your response wasn’t very helpful at all, and it doesn’t include ideas or suggestions, as you do in most other situations.

  33. Sara says:

    Penny: Resist lifestyle inflation! Congratulations on your husband’s job, but you are still a long way from having “extra money.” If you continue to live on your salary alone, your husband’s additional income could go a long way towards adding to your retirement funds and paying down the mortgage and student loans.

    If you really feel the need to splurge, I would suggest you decide in advance how much you want to splurge, set up a targeted savings account (the “VW camper bus fund” or the “shed renovation fund”), and add a specified amount each month. Also remember that after taxes, this additional income will be far less than $40,000.

  34. Matt says:

    Regarding GnuCash: I’ve used it for over a year now, and never used any other personal finance software. It doesn’t automatically download your financial data, but every online bank I use (even a tiny credit union I belong to) allows me to download data in a format GnuCash can import. It’s what I would call “mostly automated”: as long as you’re willing to log into your bank’s website and make a few clicks, GnuCash will do the rest.

    On the other hand, I find GnuCash’s budgeting kind of weak. It’s great at tracking your accounts, but kind of klunky to use for budgeting purposes. It’s not impossible, just non-trivial.

    There’s another open-source, cross-platform finance tool called KMyMoney. I haven’t used it, but want to give it a try when I get some time. If you’re starting out from scratch, it might be worth it to try both programs.

  35. Chad says:

    One point I’ll make in favor of GnuCash: it’s the only product I know of that can handle multiple currencies (at least on the Mac). Quicken could handle only US or Canadian dollars—not both.

    Maybe the situation’s changed since then, and if so I’d love to hear about it, but anyone with a two- or more-country problem should seriously consider GnuCash.

  36. leahbird says:

    Best puzzle game for the PS3 is Portal. My husband and I are on our third time playing. Plus, you get a bunch of other fun games (the Half-Life 2 series is awesome!) for a great price. Have fun with your new system!

  37. Debbie says:

    Michelle, my heart goes out to you. My husband and I have dealt with a similar situation and it can break your heart ! People who live beyond their means will find a way to get what they need….it isn’t your responsibility, or place, to continue to support their lack of discipline. Don’t divulge your financial situation to anyone. It’s none of their business. They don’t need to know that you have a savings. You said that you never loaned more than you could afford to lose…but you can’t afford to lose ANY….that would be money you could put to good use. Good Luck! Be Strong!

  38. Courtney says:

    I have a question for a future mailbag (or maybe someone else can answer this). I know what an expense ratio on a mutual fund or an exchange traded fund IS, but how exactly is it ASSESSED? Does the brokerage deduct it from your investment each time you make a contribution (similar to a load)? Do they ‘sell’ a small percentage of your shares annually to pay the expense ratio (or just deduct it from your share balance, which means they would only see the profit on the expense ratio when you sold)?

  39. George says:

    I am just floored at the “advice” you gave to Penny. First, with extra money, I would suggest they continue to live on one income and get rid of that student loan. I realize that some people really think that student loan is good debt, but there really isn’t such a thing and at 6.8%. How can you have her think about saving for other projects when that huge debt of $32,000 is still there???? That is absolutely the first thing. Second, perhaps working on a bigger E-fund??? they have some cash, but if the husband gets riffed, a years worth of expenses would be good to have. And getting riffed happens all the time to new teachers in this economy. Your advice was not sound at all.

  40. Brittany says:

    Agreed, George. And that the advice to the woman with the financially irresponsible parents was lacking. Not a great mailbag this week.

    Alex–I’m also Americorps. You don’t get access to a 403(b)? It’s part of my Americorps benefits. No minimum balance, maoney not taxed, deducted directly from my paycheck, very easy to set up.

  41. Nick says:

    Trent, when you have multiple posts with bookmarks on the front page they override each other. If I click on item #10 on the mailbag, it bring me to #10 on the post about the new book.

  42. Craig says:

    If the Honda were not paid for, I would want to ditch it and cut the monthly payment out of my life. But I wouldn’t take the deal on offer in this message–the used car market is a brutal place because of information asymmtetry. Even with a mechanic’s inspection, it is extremely difficult for a purchaser to get a feel for the “quirky personality” of a used car.

    Every used car on the market is a potential lemon, it’s hard to tell the lemons from the good cars, a “lemon discount” gets priced into all used cars, and people with quality used cars are less willing to sell them at the prices they can get–so the used car market fills up with nothing but lemons. That’s basically the argument behind Akerlof’s paper “The Market for Lemons,” which was published in 1970 and eventually led to a Nobel Prize.

    Again, if we were talking about a car that the writer owed substantial money on, that would be another story. Also if it were, I don’t know, a Ferrari or something ridiculous like that. But a solid, workaday Honda? Hold on to that car until the wheels fall off. We’re simply not talking about enough money here to justify walking away from a known reliable car.

  43. imelda says:

    Trent, i notice you didn’t post a comment I left (I wrote it as “anonymous” just this one time). May I ask why on earth not? I was really hoping to get some feedback from fellow visitors on helping to get my parents into a better financial situation.

  44. Fontaine says:

    Matty, i agree with others. Keep the Honda and forget the Volvo. Honda is much cheaper and arguably just as (if not more) reliable.
    Work wherever you have to, to make ends meet. The difficult times will pass.

  45. GnuCash actually supports both OFX and HBCI, which are standards for transferring financial data. Not all banks support them (the latter is really only in use in Germany), but if yours does it works great. You can also download in Quicken format and import the data. GnuCash has it’s warts, but then again so does Quicken. In general it is far more capable (although only slightly more user friendly) than has been presented here.

  46. Here’s a link to the GnuCash wiki with information on how to hook it up to a number of banks: http://wiki.gnucash.org/wiki/OFX_Direct_Connect_Bank_Settings

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