Reader Mailbag: Sports Fan

I am a big fan of three sports: basketball, baseball, and golf. The next week and a half is perhaps the most exciting period of the year for someone who is a fan of those three sports. The Masters. The men’s and women’s Final Four. The opening of the baseball season.

Why do I like sports? I like watching competition. I know the incredible amount of hard work that goes on when we’re not watching that makes it possible for those people to perform on the screen. I like the strategic choices of it.

And every once in a while, all of that clicks together into something sublime.

Do interest rates fluctuate over time, or do you get locked in to a certain rate at the time you sign up?
- Jamison

Bank interest rates definitely fluctuate over time, at least with online banks. Some banks – usually large brick and mortar ones – do maintain the same rates over many years, and it’s usually a low one. Smaller banks and online banks tend to vary their interest rates more.

How do they vary it? It varies based on what the Federal Reserve does with the prime lending rate (going up when the Fed raises rates and so on). It varies based on the marketing goals of the bank. It varies based on what the competitors are doing.

If you sign up for an account at an online bank, don’t be surprised to see the rate you earn vary over time. Right now, I would say that rates are definitely at the low end of the spectrum, but the Federal Reserve rates are also very low, too.

I have a private student loan at 6.54% (154/mo) and a car payment at 3.9% (493/mo). The car will be paid off in 30 months and both loans currently have a balance of 13k each. Also, I do not receive any tax benefits from either debt.

I am in the process of saving up for a home/condo but NJ is still very expensive and with the excess of shadow inventory I don’t think its quite the time to buy yet. My DTI is only 12% and I only have about 25k in non-retirement liquid investments saved up. Ideally I would need 25-50k minimum saved for a 10-20% down payment. So I’m currently debating hoarding cash or paying off at least one of these loans ASAP.

I’m a math/stats guy so paying off the student loan at the higher rate first would be my best instinct. However, would it make sense to pay off the car loan first, even though its a fairly cheap interest rate, to free up more cash flow on a short-term monthly basis (with sights on real estate purchase from 6-18 months away)?
- Bryan

What you’re essentially doing here is comparing the Dave Ramsey snowball debt repayment method against the “maximize every cent” repayment method. If you pay off the smaller loan first in order to improve your cash flow, you’re basically using Dave’s method.

I think your plan makes reasonable sense – paying off the car loan first because the monthly payments are higher. If I were you, I’d throw every dollar towards that car loan and get it out of the way, then re-evaluate where you’re at with your money and where you want to go next. If you still feel like the housing purchase is a long way off, then pay off the student loan.

I wouldn’t worry too much about “shadow inventory” and timing the purchase perfectly. The market isn’t going to suddenly overheat again. Buy when you’re ready with a down payment – you’ll save far more money by doing that than you would by timing the buy perfectly.

I have a car loan with a balance right at $15K @ 5.49%. If I were to pay it off with the normal amortization it will be repaid around January of 2013.

I also have about $22K in liquid savings, along with another $12K in stock that I could sell at any time. My monthly living expenses are only about $3000 to $3500 (probably at the lower end if I were to lose my job as I could cut back on some things), meaning my emergency fund is about 7.33 months assuming just my savings, and about 11.33 months if you count the stock I could sell.

My question is this: should I go ahead and pay off the car loan with money from savings and take advantage of the roughly 4% spread between my savings account and car loan (and the benefit of less debt and increased cash flow)? Emergency fund would go to 2.33 months with just savings, and 6.33 months if I include stock. However, I would be able to build this back up pretty aggressively with the car payment going away.

More on my story: I am single, no kids, stable well-paying job. No big purchases coming in the near term. If I no longer had a car payment I could stash away about $1,000 a month into my savings account to build my emergency fund back up. And yes, I’m contributing to my 401K (about 16% of my salary when you include my employer match). My only other debt is a mortgage with a balance of $165K @ 5.25% and a student loan with a balance of about $21K @ 2.1%.
- Nick

If you’re single with no kids, I would absolutely go ahead and pay off that debt. Dropping your emergency fund to “only” two and a half months’ worth of living expenses isn’t a deep concern in your position, particularly if you have other assets you can tap beyond that if you absolutely must.

Larger emergency funds are more important for people who have dependents – spouses and children. The more people that are represented on your tax return, the larger your emergency fund ought to be.

For single people, a two month emergency fund is just fine, though it doesn’t hurt to have a larger one.

At what point in the Dave Ramsey baby steps should I begin saving for a house? His advice seems to assume that I am already stuck in mortgage debt and discusses when to finish paying it off, but when should I actually purchase it if I am currently debt free?
- Kevin

Dave’s advice makes several assumptions about people’s lives, but it’s still sound advice in the end. You just have to do a bit of interpretation.

From the way I read it, saving for a down payment is part of the sixth baby step. In other words, you should get debt free, build an emergency fund, start saving for retirement, and start saving for college if you have kids before you start saving for a down payment.

From my perspective, I think his advice makes sense. However, I also understand why people are very anxious to own a home of their own. My advice? Be intense. Don’t let up when you manage to pay off your debts. Use every tactic you can to cover all of your goals. Think big (your home), not small (that treat on your way to work).

I’m 26 years old and in a high-paying field – my salary is $145K a year. I’ve only been at it for 2 months, though, and I don’t much like the job. Turns out I value my free time more than I value making money (as I suspected I would), and I’m sacrificing a lot of the former for the latter. As it stands, I’ve saved about $2,000 and put another $1,500 in my 401K, but I’ve got $160,000 in student loan debt ($130K at 7.6% interest, the rest at 4%). I don’t have any credit card debt, live pretty cheaply and could and would cut more.

My goal now is to move to another city with a much cheaper cost of living and buy a small house. Aside from that goal (and buying a dog), I don’t have any others. I don’t know what kind of work I want to do or anything like that. I just know I want more time.

My plan right now is to build up an emergency fund, try to save up a down payment for the house, and then make the move. I’m willing to be saddled with the debt for the next 30 years if that’s the price of freedom. I’m writing to you to try to put some solid figures on everything; how much do you think I should shoot for in savings? That question will determine how long I stay at my current job. I know I’ll have to get another job, but I don’t think I’ll ever make as much as I do now again. My hope is that I never have to work for someone else as much again either.
- Mike

My first question is whether or not you’re going to try to get a job in the same field as your current job. Are you going to continue your career or not?

If you are going to continue your career, then I would start job hunting immediately and move quickly. If you’re not going to continue your career, I’d stick around as long as I could possibly stand it, because that’s very good money and you’ll need a financial foundation to make a career leap.

If I were you, I’d pick a very clear “end date” and focus on it. Until then, cut all of your spending to the bone. Build a nice, healthy emergency fund, then throw as much as you can at your student loan debt (the higher interest portion). If you possibly can, get debt free before you leap, because those loans will seriously hamper your cash flow and restrict what job you can afford to get when you make your leap.

Good luck!

I am writing just to ask for your personal advice on what to do with approximately $10,000 (I received from the trust). I have absolutely no background in finances or any real understanding of it, except that I know I shouldn’t just let it sit there. When I look on my bank’s website, there are so many different options that I do not even know where to begin and I am left just waiting. Do you have any suggestions of where to start looking so that it is not so overwhelming?
- Joelle

There are really two things you need to ask yourself. First, what do you want to do with this money and when do you want to do it? Do you have any goal for this money? Will it be a home down payment in five years? Will you want it for a trip in three months? Will you want it as the foundation for a business you want to open twenty years down the road? Figure out a time frame and a goal for it.

Second, can you tolerate losing money in your investments? Some people can and some people can’t. If you think to yourself, “Sure, I can tolerate risk,” but then you get scared when you’ve lost 40% of your investment, you’re going to make the worst possible move you could with your money. If you can’t imagine being able to stand it after losing 40% of the money, then you should be in something safe and conservative that doesn’t earn a large return.

If you have a long term goal and don’t mind the risk, I would put all of it in Vanguard in their total stock market index fund. If you do this, just let the money stay there until you start to get close to your goals (in terms of time). If you have a long term goal and can’t stand risk, put it in a certificate of deposit at your bank. If you have a short term goal, keep it in cash (or in a very short term certificate of deposit).

What would be some safe(ish) ways to get my hard-earned money to do some legwork in this shaky economy?
- Adam

You should essentially re-read the answer to the previous question, because the same ideas apply.

Unless you’re incredibly rich (nine figure wealth or so), nvesting is about goals. What do you want to do with that money? When do you want to do it? Also, what is your risk tolerance?

Simply investing for the sake of investing usually leads to suboptimal results when you actually need the money. Think about your goals up front and they’ll practically tell you how to invest.

I wanted to know your opinion on cash vs. check card. In my case, I hardly ever carry cash. I used my Citibank check card mainly for 2 reasons: 1) I can more easily track my expenses using Mint.com; 2)I earn an American Airlines mile for every dollar spent (My wife and I have gone to Jamaica and St. Martin for “free” using our accumulated miles). What are your thoughts on this? Are you a cash carrier? Do you feel that using plastic makes you lose sight of the fact that you are spending money? I feel like I’m getting a better bang for my buck by using my card. Curious to know how you feel about this.
- Tony

I use plastic. I think that using plastic can result in losing touch with the idea that you’re actually spending money – unless you’re mindful of it.

For me, I’ve learned that any time I go to purchase something – no matter how I purchase it – I’m deducting from the future that I want. I keep that thought as front and center in my mind as I possibly can.

The end result is that the “trigger” for making me think about my spending isn’t pulling out cash. It’s simply approaching the “Buy Now” button or the checkout line. Every time I do either thing now, I think about what I’m doing and, sometimes, I talk myself right out of it.

We bought a house about 3 years ago, and looking back we were young and stupid and really had no business buying the house we did. But I cant change that now. We are basically able to make our payments every month, pay all the bills, and have a decent life, but at the end of the month, there is very little or none to put towards long term savings. We currently owe $290k on a house that is probably worth closer to $240k at this point in time. This is split up in a mortgage and a HELOC that we used to do 100% financing, which was yet another bad idea now that I look back. Both are with Bank of America. Neither of us can afford to stay there without both your incomes, but with our situation, staying really isnt an option.

The way I see it, there are a few possibilities. We cant just sell as we dont have the cash to make up the difference in what we owe vs what we can sell for.
Option 1 is a short sale, which I am told by a realator is doable, but Bank of America tends to be hard to work with on these, and could take up to 6 months.
Option 2 is to just walk away and let the bank forclose, hope for the best. We do live in Illinois, which is a recourse state, so they could come after us for the difference down the line.
Option 3 would be a deed in lieu of forclosure, which if my understanding is right, means the bank forcloses, but I would not be on the hook for the difference in what they sell for and what I owed. Is that correct?

Someone did suggest that we stick it out as roommates, but thats not going to happen. I am at a point where I just want out of the house and not owe anyone any money when its all said and done. I am not overly concerned about my credit rating right now, I really just need to get out of the house so I can move on with my life. She feels the same way.

Other than the house, we dont have much debt. Cars are paid for, no credit card balances, my wife has some student loans, but her parents pay those.
We maxed ourselves out on the house, so there is no retirment funds that we could draw from if we had to.

We are both likely to be living back with our parents, at least temporarily until we figure out new living accommodations.

So, any advice? is there an option I am missing here?
Looking for the quickest and cheapest way to get out of the house. Even if i could get the bank to modify and lower payments, I dont really want to stay in the house, its to far from my family/friends. Same with her.

- Jeff

The general advice of sticking with it is a good one and that’s probably what I’d recommend, but it sounds as though there are personal reasons why it’s untenable.

In that case, I’d look seriously at option #3. You have to talk to your bank about this, because it’s functionally very similar to foreclosure except you don’t get the negative credit bump out of it. It allows you to walk away scot free, almost as if you had just been renting the house for a while.

If you live in a recourse state, I wouldn’t walk away. You’ll end up being chased by them for years as they try to get their money back.

It is easy over time to have time wasters creep back into your life (perhaps TV and WoW for you) and an article like this helps to refocus our energies.

I haven’t played board games in a number of years but your bi-monthly get-togethers sound like a great idea. Any recommendations for board games or perhaps you could include them on another blog?
- Jason

My favorite game to play with people who don’t play board games much at all (aside from memories of childhood) is Ticket to Ride. It’s elegantly simple, yet can be as strategically deep as people want it to be. The pieces and graphics are beautiful, too, and it’s really flavorful, capturing a sense of riding the rails very well.

If you prefer trivia games, the best one I’ve found is Wits and Wagers, which basically combines the better elements of Trivial Pursuit with some wagering and a limited timeframe on the game (so it doesn’t go on forever).

Four other games that would fit if the above two don’t trip your trigger: Dominion, Pandemic, Carcassonne, and Modern Art.

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.

If you enjoyed reading this, sign up for free updates!

Loading Disqus Comments ...
Loading Facebook Comments ...

28 thoughts on “Reader Mailbag: Sports Fan

  1. Nicole says:

    for the last person: check out boardgamegeek (www dot boardgamegeek dot com)

  2. reulte says:

    Mike – “I’m willing to be saddled with the debt for the next 30 years if that’s the price of freedom.” That’s a pretty oxymoronic sentence when you give it a moment’s thought. You’re essentially earning $70 an hour and about 2 days (opr 16 hrs) of work would earn you a decent sum to put in your emergency/moving fund. I would suggest that you promise yourself a SET AMOUNT of time that you devote to overtime on a regular basis. In other words – two months of an hour of overtime a day, or occasional overtime until your EF is $1000 higher than it is now. If you set it up front as limited, then it becomes easier to do. Also, if you are not going to continue in your work, see if you can find some type of work where part or all of your debt will be forgiven (i.e. teaching, Peace Corps, some governmental agencies provide loan repayment as do some companies).

  3. anne says:

    about the mortgages-

    fha mortgages require a much lower down payment.

    and for the underwater mortgage- the fha might have a program to help you.

  4. Christine says:

    Anne,

    It doesn’t sound like they want help. They just want to walk away from the house without owing any money.

  5. JT says:

    I must ask a big sports fan that works from home: do you do ANYTHING from noon to midnight during the first round of the NCAA tourney?

    If I worked from home, those days would be completely burned (not to mention opening day and the first 2 rounds of the masters….) — but, that’s why they invented slingbox :)

  6. Kat says:

    reulte – often, people making that sort of money are salaried employees, professionals that don’t get overtime pay, but often work more than 40 hours a week. Since Mike said his job takes a lot of time, and his student loan debt suggests graduate school, my guess is he is a professional salaried worker. I would say that other than possible bonuses, his salary is fixed and he still is expected to work “overtime.”

  7. Johanna says:

    @Mike: This might not be relevant to your situation, but how’s your commute? Can you move closer to your workplace? I’ve read recently that most people underestimate the impact that a long, stressful commute has on their quality of life, and if you have a long commute now, you can free up a lot more time for yourself by shortening it.

    Also, I’d caution against jumping to conclusions about what you do or don’t want to do for the next 30 years, just based on 2 months at your job. Going from college/grad school to the working world can be a big adjustment, just with the differences in how your day is set up. Give it some time.

  8. anne says:

    christine-

    i know what you mean.

    i’m pretty sure our place is worth less than when we bought. it was probably even worth less than we paid for it back when we bought it- oh well. live and learn. and it’s a 3 family, the tenants’ pay for almost all of the mortgage payment (which includes property taxes and mortgge insurance.)

    what makes me feel better is how much money we would have “lost” if we had been renting this whole time, and hadn’t bought the house at all. we’re still ahead of the game, when i think like that.

    is it possible they would have lost the same amount of money if they had stayed renters? it’s easy to spend $50,000 on rent in 3 years.

    our apartment was $1250 per month, if that doesn’t add up to $50,000 over 3 years, i’m sure it comes close.

    and it was a tiny little attic apartment- i’m 5′ tall, and i was too tall for the shower.

    i figure even if our house has gone down in value, or wasn’t even worth what we paid, it’s still ok- in the long run the house might go up in value, but that rent money we were paying wasn’t ever going to come back.

  9. Johanna says:

    @Bryan: If you really think you might want to buy a home in 6-18 months, while your car loan is for 30 months and the student loan is for longer than that, then you will maximize what you have available for a down payment if you make the minimum payments on the debts and hoard cash.

    Let’s say, to make the numbers easier, that you have $1000 a month to save after you pay the minimums on your debts. So if you have $25K in savings now, you’ll have $31K in 6 months, and $43K in 18 months.

    If you pay off your car loan out of savings, that knocks your savings down to $12K, but now you’re saving $1493 a month. Call it $1500. So in 6 months you’ll have $21K in savings, and in 18 months you’ll have $39K. That’s less than before.

    If you leave your savings where they are, but put the whole $1500 toward the car loan, you’ll pay it off in about 9 months, but you won’t add to your savings at all during that time. So in 6 months you’ll have $25K, and in 18 months you’ll have $38.5K.

    But if you’re worried about shadow inventory (homes that haven’t hit the market as foreclosures yet, but inevitably will) now, I wonder why you think the situation will be any better 6 months from now, or even 18. Foreclosures take a long time to work their way through the system.

    And I think that *is* worth worrying about. The worry is not, as Trent weirdly suggests, that the market will “overheat,” but that it will *crash*, and you’ll end up underwater. That can be a problem even if you can afford the payments, if you have to move for personal or other reasons. (Jeff’s letter is a good example of this – although he doesn’t actually say it, it sounds like he wants to move because he and his wife are splitting up.)

    Even if you don’t have to move, if you buy into a neighborhood where everybody else is getting foreclosed on, that’s bad news for you. It’s especially bad news if you buy into a condo building where everybody else is getting foreclosed on. If another unit in your building isn’t generating a condo fee (either because the owners can’t pay or because it’s vacant), everybody else has to pay more to cover their share of the routine maintenance costs. Either that, or the routine maintenance doesn’t get done. This is a big part of why I’m not buying right now.

  10. Sara says:

    I think Jamison’s question needs some context. Is he talking about interest rate for a loan? Savings account? CD? The answer to the question depends a lot on what type of account he means, but for any of these things, it will be spelled out in the terms of the account. Most loans are fixed-rate, so they will be locked in at whatever the rate is when you sign up (the exception, of course, is an adjustable-rate loan, which has a changing interest rate based on an index). Most savings accounts have fluctuating interest rates, although some will lock in the initial interest rate for a certain period of time as an incentive to sign up. A CD is a fixed interest rate for a fixed period of time (you pay a penalty for taking out your money early).

    It also looks like Jeff’s question is missing some information. If I understand correctly, it looks like Jeff is getting divorced and that’s why he had his wife don’t want to stay in the house (they want to live separately). Anyway, another option might be to try renting out the house. If he and his wife will be staying with their parents, they won’t have a house payment, so any rent they could bring in from their house would offset the cost of the mortgage payment.

  11. Bill says:

    I don’t understand Trent’s answer to Bryan, he clearly states “both loans currently have a balance of 13k each” then Trent’s answers with “If you pay off the smaller loan first”

    Which of the 13k loans is smaller?

  12. Brittany says:

    @anne #8

    is it possible they would have lost the same amount of money if they had stayed renters?

    First off, the attitude that you’re “losing” money by renting is silly. You’re buying something of tangible value (shelter). But anyway that’s another discussion.

    Since you weren’t willing to do that math that shows your point (or rather doesn’t), I will:

    Cost: $290,000
    Value: $240,000

    Your monthly rent value: 1250

    Over three years, if they stayed in an apartment costing that, they would have paid 1250 x 3 — $45,000. At first glance, your claim that they barely “lost” money in this three years sounds okay, if you consider $5000 not a lot of money. But…

    Closing costs when buying the house — average tends to be 2-4%. Let’s go with low value of 2%…. 03.x290000 — $5800
    Let’s assume they short-sell and manage to get the full value of $290,000.
    Selling closing costs tend to be around 2-7%. Let’s be generous and say only the 2% again. That still .02×290000—5800
    No state information, so an accurate property tax evaluation is impossible, but on a house of that value, property taxes are likely to range from $1000-$3000/year Alabama, Mississippi, or West Virginia. Let’s continue being generous and say $1000 x 3 year —$3000
    $5000 (“loss” from buying instead of renting) + $5800 + $5800 + $3000 = 19600
    Suddenly, our couple has paid almost $20,000 to avoid money “lost” renting. This does not include home maintenance costs (all included in the rent) or utilities (often at least one of gas, water, trash, etc. is included in rent) and doesn’t beginning to touch the cost of time of either maintaining a home, buying, or selling.
    Please stop feeding us crap about how irresponsible home purchases are still better than that awful money waster of renting. Renting is a better financial choice for many people.
    (The last line is directed at our whole society’s dumb home ownership fetish, not just anne’s comment. Owning a home is great, but it doesn’t make nearly as much sense for many as we’re constantly told.)

  13. Brittany says:

    Typo in the part about short-selling —”Manage to get the full value of $240,000″

    .02×240000—4800

    Makes the final figure $1000 lower: $18600.

    Point still stands, though.

  14. deRuiter says:

    Dear Mike,
    1. Don’t buy a dog, go to Petfinder and adopt a 6-18 month old of the breed you want, for a modest fee you’ll get a nice dog with all his shots and most likely altered too, a bargain.
    2. DON’T GIVE UP YOUR DAY JOB! You’ve just incurred $160,000. in debt to prepare for a career you don’t like. Keep the job, save every penny, pay off the student loan debt, then save for a downpayment. How happy are you going to be making less money, paying off that massive studen loan debt for 30 years, and never having financial freedom? It’s a lot easier to pay off $160,000. making $145,000. per year, thank making $45,000, if you can get a job in today’s world of 10%+ unemployment and 6 applicants for every job. Not everyone loves their work, and not everyone has the opportunity to earn $145.000 per year to pay off debts in a hurry. Also you don’t seem to have a clue what you want to do for work. Since your first career choice was not a success, how can you think a new job at less money will make you happier. Maybe you need to grow up a bit and realize that most people work to earn money, not for the “fun” of it.

  15. anne says:

    brittany-

    believe it or not, i think we agree!!

    i first had the word lost in quotations because i think shelter costs money, whether it’s a house or an apartment or a trailer w/ lot fees, or whatever. i don’t consider it wasted or truly lost- just gone.

    and i also agree w/ you about renting often being a better option- friend of mine explained to me a while ago that the first step shouldn’t be to decide to rent or buy- the first step should be to narrow down where you need to live, then how much space you require, then which you can have for which amount of money. if it’s less expensive to rent, then rent, and if it’s less expensive to buy, then buy.

    i know there are costs associated w/ the home purchase that add a lot to the equation, and then again when they sell- that’s why it usually makes sense to buy only if you’re gong to be there a while.

    i actually didn’t want to buy a house at the time- we made our offer in january of 2008, and closed in june. i wanted to continue to rent, because i thought the market was a mess, and was going to get worse. plus i don’t even want to live up here in the cold much longer, and i don’t want to have to try and sell. so we compromised- we bought a 3 family we can hire a property management company to manage if/when we move.

  16. matt says:

    I actually agree with Johanna for once, Mike: going to a real job from school suck, you loose a lot of freetime. That will be the case with any job, you will not have the same amount of free time you did in college, its just the way life works, unless you can find a job where you are not expected to be at the office for a solid 8 hour day.

  17. reulte says:

    Kat (#6) That is a possibility which I hadn’t considered. I still think Mike should stay in his position for a while earning as much as he can before he considers moving unless he can drastically and severely cut his costs by moving. I’d also suggest not getting a pet for a while until he is settled somewhere for a least a year.

  18. J says:

    @Kevin — my comment has been awaiting moderation since yesterday, so I’ll post without the URL that’s likely forcing it to wait.

    Dave Ramsey is pretty clear about mortgages. I can’t recall if I heard it on the podcast or read it in the books, but here’s a quote from his site:

    “The ideal way to buy a house is the 100%-down plan. Sounds weird, doesn’t it? But think how much fun that would be! I say don’t borrow money. Period. If I can’t get you to postpone the purchase that long, I strongly suggest you save a down payment of 20% or more, choose a 15-year (or less) fixed-rate mortgage, and limit your monthly payment to 25% or less of your monthly take-home pay.”

    That’s just a snippet from
    daveramsey dot com slash article slash the-truth-about-mortgages

    You can go there to read the remainder of his advice.

  19. DiscoApu says:

    Its sounds like mike is at his first job after grad school. 145k for a 26 year old is fantastic. What I think Mike failed to realize is that he had a lot of free time because he racked up 160k in debt to pay for it. Do you want freedom or to be lazy? I am guessing you are in the 60-70 hour work week range, is it possible to go down to 40 hours and get 100k? Did 18 year old Mike just want a small house and a dog? Because I am guessing that 30 year old Mike is going to want something different then 26 year old Mike.

  20. Johanna says:

    DiscoApu, I don’t think it’s productive or necessarily fair to conclude that Mike is/was lazy, just because he has student loans and wishes now that he had more free time. In my case, I worked very hard when I was a student – I probably spent more time on my classwork than I spend now on my 40 hour/week job – but it still felt like I had more free time then. For one, my time was less structured: I could do something fun in the afternoon, and then do my homework at 1:00 in the morning. Two, social opportunities were easier to come by: It’s easier to hang out with friends when they live in the dorm room down the hall than when they live on the other side of town.

    Like I said, it’s an adjustment. If Mike is chasing the kind of life he had while he was a student, he’s probably not going to find it. Working life is different.

  21. Erin says:

    @Kevin – I’ve heard people ask Dave Ramsey your question on his radio show a few times, and I believe he says that saving for a house is “Baby Step 3B”. In other words, complete baby step 2 of paying off all debt, then baby step 3 of saving an emergency fund of 3-6 months of expenses. I concur that is very important because once you buy a house you are very likely to have an emergency – the furnace goes, a pipe bursts, major appliance dies, etc.

    I think it’s odd he didn’t put this in his book since this has to be a common question. I have to say I agree with his advice. If I had it to do over I would have paid off all debt before buying. You really want as much cash flow as possible before taking on a huge purchase like a house so that you have wiggle room when Murphy’s Law happens.

  22. Honey says:

    It sounds like the write-ins in this mailbag would be better served by renting than by buying.

  23. Shevy says:

    Let me start with Mike.

    You make 145k per year, you’ve only been working for 2 months and you want to quit. You’ve saved $1,000 and put $750 into a retirement plan each of those 2 months. Even if taxes and such take up about half of your pay, you’re taking home at least $6k/month and you spent $4,250. That’s not “[living] pretty cheaply” for a single person, even if you live somewhere really pricy, like NYC.

    How much are you paying down on your student loans per month? At least $1,000? Do you realize that, even *without* interest, it would take you almost 13 1/2 years to pay them off at that rate? Do you think it will be easier to pay them off if you’re earning significantly less money?

    I think you should plan to spend at least 2 years at this job (longer if you can). While you’re there you should really live as cheaply as possible. Keep funding the retirement plan, save $1,000/mo in an EF until you have $24,000 (which would be about 6 months EF at the rate you’re *currently* spending and longer if you’re living cheaper) and throw every penny you can at the student loan with the higher rate, while paying the minimum on the other one.

    You can talk about “freedom” all you want, but you will never have freedom as long as you’re chained to $160k of debt! You’re young and chafing under it now. Wait until you’re 50 and still paying it off!

    Oh yes, did you notice that you’ll have your Emergency Fund fully funded in 2 years but won’t have saved anything towards a down payment on a house? I’d take another 3 years (yes, a total of 5 years) and put away another $36k to use as a down payment before making a change. Then you’ll be able to move jobs and/or careers, move to another city, buy a house and have at least 6 months worth of expenses socked away, while having taken care of maybe 1/3 of your debt load.

    Depending on the kind of dog you want and your living situation, I might consider getting the dog within the next few months though. The unconditional love that dogs provide and the exercise you’ll get taking care of him will go a long way to reducing your stress levels at the end of the day. Just make sure the dog *will* get enough exercise though.

  24. Shevy says:

    Now, Jeff. And if you thought I was tough on Mike, you ain’t seen nothin’ yet!

    First of all Jeff, you seem to have a really serious problem communicating. Reading your letter carefully it appears that the *key* point in your whole problem is that you and your wife are splitting up, yet you don’t actually come out and *say* that anywhere!

    So the problem isn’t the cost of the house or the fact that you’re underwater on the house or that you’re going to lose it. You could actually make the payments just fine if you stayed together and you’d have enough money to get by adequately (but not to save for future goals, including retirement).

    No, the reason you want to leave the bank holding your house is that you don’t want to be married anymore and you don’t want to continue living in that particular location because it’s too far away from your friends and family (something you should have thought about before you bought it). Oh yes, and you don’t want to end up owing anybody anything.

    Grow up! You were happy to play house and pretend to be all grown up and responsible (while the bank and your wife’s parents took up the slack). Now you get to actually *do* it.

    If you really can’t stand being married anymore and want to move back with your folks (assuming they’ll take you and are okay with you sponging off of them for the foreseeable future, because that’s exactly what it is) you should do that. Let your wife stay in the house and have her pay her share of everything. But *you* have to keep on paying *your* share. Yes, even if you aren’t there. Why? Because you signed a contract saying you’d do that. Nobody held a gun to your head. You chose to buy a house you couldn’t afford.

    And, if she doesn’t want to stay there either? Then she does the *same* thing. Move back with the folks and keep paying her share of the house costs. Then you have an empty house that you can rent out and each of your costs will go down.

    It’s not great or ideal, especially if you’re absentee landlords, but you need to hang on until you can get just enough into the black to be able to sell the house. How long will that take? That depends on how fast you’re paying down principal and how fast houses are regaining their worth in your part of the country. If you want to get out from under faster then you should look at getting a second job and throwing all that money at reducing the principal. And your wife could do that too. Or, if she stays in the house, she could look at getting roommates and using that money to pay the house down faster.

    But don’t look for the bank or taxpayers or the government to bail you out of your marriage or a house you never should have bought.

  25. Johanna says:

    Shevy: I agree with you mostly, but here are a couple of things to consider:

    With Mike, his expenses for the first 2 months might not be the same as his expenses generally – especially if he just moved to take this job. He might have had to pay an apartment security deposit, fees to connect the utilities, shipping for his stuff and a plane ticket for him. Maybe he bought some furniture. If he did in fact pay for all those things out of his first two months’ salary and had money left over, then he could be living pretty cheaply.

    With Jeff, I suspect that Trent might have edited the letter to make it a bit less of a novel, and accidentally cut out the crucial piece of information. I agree, though, that Jeff could work on communicating better. He could have simply said, “My wife and I are $50K upside-down on our mortgage and have less than that in savings, we want to split up and live separately, but neither of us can afford the house payments on our own. What should we do?” – and then Trent wouldn’t have needed to trim anything.

  26. anne says:

    wow-

    everyone’s comments made me reread the letter from jeff- i don’t know how i missed it that they are splitting up.

    divorce is expensive- it really is. my first husband and i had no assets to fight over- just debt!! we had the house we bought w/ the help of his father- we were lucky enough to sell at a slight profit, and i made a few thousand, but owed so much more to creditors that the money wasn’t really mine.

    jeff- you and your wife might both lose money divorcing, but that’s life. there might not be a way to come out of this breaking even, no matter what you do.

  27. JuliB says:

    “For single people, a two month emergency fund is just fine, though it doesn’t hurt to have a larger one. ”

    Except… if you’re single, you have NO ONE else to fall back on. If you are married/involved, the other person may make enough that you are ok for awhile. But single? Eek – it’s scary!

  28. Bethany says:

    My comment was waiting since Friday, so I will try again…

    Jeff: I would recommend you seek counsel from a real estate attorney. I am a legal assistant at a firm that does this kind of work in the Chicago area. I would really consider the short sale option.

    I’m not sure how easy it would be to negotiate Option 3, but it can’t be that easy or everyone would do it.

    If you just walk away, realize that it will not be over in 6 months, or even 12 months. Banks are being very slow to foreclose, and until they do it will be a nightmare. In some cases the bank can come after you for the deficiency after the foreclosure sale, too.

    You would have the most control over the situation if you negotiated a short sale. While Illinois is a recourse state, banks do not usually pursue you for the deficiency, in my experience, unless they believe you have substantial assets or the ability to make significant income.

    A short sale would seem to be the best solution for both you and the bank – generally speaking the bank should get more money out of a short sale. It will hurt your credit, but not as badly as foreclosure.

    I’d be willing to recommend more resources for you, if interested. You can email me at “bethany” at “powellandboyer” dot com.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>