Reader Mailbag: What Gets Mentioned

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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. Bankruptcy and student loans
2. Refinancing question
3. Revocable living trust questions
4. Using Vanguard for retirement
5. Retirement savings or debt?
6. Flaw in retirement calculations?
7. Success with cutting cable
8. Goals for 12 year old
9. Skype and prepaid phones
10. Financial focus for divorced mom

One question that popped up several times in the last week or so revolves around how I choose what details to mention and what details not to mention on The Simple Dollar.

It’s not an easy process. For one, I do not want this blog to ever violate someone’s privacy, particularly someone I care about. They did not make the choice to write publicly about things – I did make that choice. Whenever I write about someone in any way that’s not glowingly positive, I check with them. I often alter names and relationships, too. These people don’t deserve to be thrown out there publicly.

Because of that, there are times when I have to be very careful with how I write certain posts – and that has gotten me in trouble with commenters more than once. If I choose not to mention a key criteria for a decision because it violates the privacy of someone I care about, readers certainly let me know about it and inform me as to how awful my decision was. It’s a difficult balance, but if the choice is between violating the privacy of someone I care about in front of hundreds of thousands of readers or not being entirely clear on a certain post, I’m going to choose to be a little vague.

That’s part of the price of writing a popular blog – you have to make choices like this constantly. What details do I mention about my children? Will this post still make sense if I take out a couple of details that my friend might not want talked about on the site? Sometimes, I choose wrong (and I certainly hear about it), but overall, it’s a balance I think I’m doing a fairly good job of maintaining.

Put yourself in my shoes for a moment. What details about yourself would you reveal? What details of your friends and family? What about those times – and those times pop up a lot when you’re talking about money – when you’re riding right on the fine line of what you would consider private?

If I’m not sure, I choose privacy, and sometimes that hurts a post a little. I’d rather lose the respect of a handful of readers because I chose to maintain someone’s privacy than lose the respect and trust of a lifelong friend or a close family member.

I’m 25 years old and within the last couple years or so, mostly due to poor planning and financial decisions but also due to some tough breaks, I found myself overwhelmed with consumer debt. I dropped out of college a few years ago due to lack of funds and motivation but was able to secure decent paying administrative/secretarial-type jobs despite my lack of a degree. But due to the economy, for the past 2 years I’ve had to take progressively lower paying jobs just to stay afloat, all the while stretching my finances too thin (I went from making $31,000 per year in 2008 to I’ll be lucky if I clear half that for 2010).

I already lived paycheck to paycheck in December 2009 when I was let go from my administrative assistant job at a law firm and was unable to find work for three months. When I finally did find a job, it was only part-time for $9/hour (40% less than what I was making before). This salary was barely enough to cover my basic living expenses, to say nothing of having “extra money” to pay down almost $20k in debt. Things finally came to a head in May of this year, when I voluntarily turned in my car for repossession. After talking to my parents and doing some research on my own, I decided filing for Chapter 7 bankruptcy would be my best option.

I’ve since filed and I am on the road to becoming more financially responsible. I’m currently saving for a new (used) car right now (paying cash, no more car notes for me!) and after that I want to establish an emergency fund and begin saving for a home and retirement. I realize that to even get my foot in the door for better jobs, I would need to invest in my education and go back to school. I plan to continue working while going to school to cover living expenses and help pay down school loans while I’m in still a student (I want to finish with a little debt as possible). Do you have any advice for applying for student loans after bankruptcy? I know that federal loans do not consider your credit as a factor but what should I look for in a private lender? Are there certain lenders in particular I should seek out/be wary of?
- Bri

For federal student aid, your bankruptcy shouldn’t have any impact at all unless you continue to have delinquencies or defaults. This includes Title IV stuff and Pell grants. Such federal student aid isn’t supposed to use bankruptcy as a sole criteria for approving or denying aid.

Other types of loans certainly will look at your bankruptcy, but they’ll treat it as part of your overall credit history. Student lenders tend to be a bit more forgiving of bad or suboptimal credit because of the government support they receive.

My suggestion is that time heals all credit wounds. Give it a couple of years. Spend those years keeping your financial nose as clean as possible and, if you can, saving money for college and college expenses.

For more details, I’d check out this article.

My husband and I are currently debating refinancing our home. We purchased our house in 2007 at $189,00 with 20% down with a fixed rate 20 year mortagage at 5.875%. We currently pay an extra $100 (and some change) towards the mortgage every month and right now we are two months ahead of payments. Last year we paid an extra $10k towards principal and intend to do the same again at the end of this year. Our current balance remaining is under $120k. We are wondering if we should refinance the remaining balance at a lower rate and continue to paying at the old rate, and ultimately paying the mortgage off in less time with less interest. I know one critical thing to this is the value of the house which does not appeared to have decreased since we have made some additions (all out of pocket so no loans are pending). I am just not sure where the line in the sand is drawn when it comes to using the cash to pay off an existing mortgage or pay for a lower interest rate at the cost of some of the cash being sacraficed for closing cost, etc.
- Charlene

If I were you, I’d refinance that into a 15 year assuming your credit is strong. 15 year mortgage rates are now in the 4% or below category. Usually, the best rule of thumb on refinancing is to see whether you can knock a percentage point or more off of your rate – and you can nearly knock two percent off.

But why 15 year? For starters, you’ll get a better interest rate on a 15 year mortgage than a 20 or 30 year. Another reason to switch to a fifteen year is that, if you had a 20 year and have already paid off three years of it, your monthly payments under the 15 year on your remaining amount will almost assuredly be lower than what you’re paying each month now. Lower interest rates plus lower monthly payment plus quicker payoff time sounds like a good move to me.

If you’ve had a good relationship with your lender, I’d start there with my loan shopping. A bird in the hand is worth two in the bush, after all.

Trent, I have had an ING account for years but just recently learned that you must have a revocable living trust set up for your beneficiaries. Do you know anything about this? I haven’t looked into getting one set up yet but I assume there is some cost involved. My brick and mortar bank allows me to designate beneficiaries to sidestep going through probate court. I haven’t seen this ever addressed on your blog and would appreciate your input. I have enjoyed your advice and incite for years. I appreciate all your work.
- Kim

There is no must in terms of having a revocable living trust for your beneficiaries. It’s an option, albeit one with some real benefits, especially if you have a seven figure net worth or higher (because probate becomes painful when you have a significant estate).

What are the benefits of a revocable living trust? The biggest one is that you avoid probate. Probate basically means that a court supervises the distribution of your assets after you pass on and charges some fees for that “service.”

Another big way to avoid probate is to set up a P.O.D. on your cash accounts that basically says that any amount in this account is paid on your death to whatever beneficiary you designate. P.O.D. supercedes a will and avoids probate. If your bank doesn’t have such a designation, then another option is to name a co-owner of the account. I believe that ING Direct does not allow P.O.D. designations on their accounts for now.

Your easiest immediate step is to put a co-owner that you trust on your ING accounts, then include information about that account with your estate papers. After that, research a revocable living trust on your own and decide if it’s right for you.

I know that you are a big fan of Vanguard, and the research I’ve done shows why. My question is, do you recommend putting our extra $ in the 500 account, or in a target retirement date mutual fund? We do not anticipate needing to access the money before retirement, so we’re okay with it being tied up. I’m just trying to decide which is a better choice. I am thinking the target retirement date, since we still have some time between now & retirement, so it seems more long term? I’d love to have your opinion!

Also, w/ either Vanguard accounts, can you move $ (differing amounts) to the account every month, or do you have to set up a particular $ amount for a monthly draft?
- Amy

If I were just setting up an ordinary taxable investment account, I wouldn’t invest in a target retirement fund. That’s because every year, the investments in that fund shift and with each buying and selling, I’ll incur some taxes. Then, when I sell everything at the end, I’ll incur even more taxes. I’ll be double taxed on some of that money – once when they move money from aggressive to conservative, and once when I take it out.

Target retirement funds are best used in Roth IRAs and other tax-free accounts. Money moved within a Roth IRA doesn’t affect your taxes today.

As for the differing amounts, once you have the minimun invested for your fund (usually $3,000), you can do any combination of the payment options you mention. You can just not invest any more. You can automatically transfer money each month. You can add money as you please. Or, you can use both payment options together.

I’m 31 years old – I work in marketing so I’m sure you’re going to know what comes next…I was laid off from my $70,000/year job about three weeks ago. Luckily, I am employed again at another marketing agency, but I’m only making $50,000/year, and it’s smaller than the first agency…in fact, I wouldn’t be surprised if it was closed within a year or two. When I was laid off, I did not have any sort of emergency fund to fall back on. In fact, my only savings is my retirement which is about equal to the amount of debt I owe.

I have a LOT of debt. So much so it’s overwhelming and I think about it a LOT. I have a car loan of $12,000 @5% – I had that much in credit cards, but came up with the genius idea to put it on the car to get a better interest rate…NOT my smartest move. I have about three other cards with a total of $15,000 on them…most of them have 7% or better interest rates. In addition, I have a personal loan from my boyfriend of 10+years in the amount of $6,000. He had previously loannd me money, I paid him back, then he loaned my the $6k a few weeks ago to pay off a high-interest credit card. While I understand it’s not good to borrow/lend to loved ones, he has been great, we signed a real contract, he charges me an interest amount of 5% which we agreed upon.

All that being said, I have more than $30,000 in debt, plus small student loan. I have used credit cards to pay for $2,500 in car repairs this year…and that’s it. Not a penny has gone to them otherwise – since last Dec., I’ve been cash-only, so my total amount of debt has gone down significantly, but I still have a lot. I’m telling you this so you know my spending habits have changes. While I was making bigger money, I was able to pay about $1,500 a month to credit cards. I live with my boyfriend and my share of the house bills and my personal cell phone, internet, etc. each month is about $800. With the pay cut, I’m worried I won’t be able to pay enough on my credit cards. I already have a second job that is commission based sales, it brings in about $250/month.

With the job change, I’ve been looking at my retirement accounts. I have enough in retirement to pay off most of my debts. Is it incredibly stupid of me to cash out the money, pay off debt and then rebuild? I am confident my spending habits have changed. The peace of mind in having no debt would be immensely helpful to me and I feel like I could rebuild my financial life, taking the money I would be using to pay down debt and instead sticking it in retirement accounts. For right now, I’m taking the Dave Ramsey approach of saving a $1,000 emergency fund…but even if I lose my job again, I know that won’t keep me long. It’s going to take me years to pay off this debt…probably at least four or five and that’s if I buckle down even more than I already have. What would you reccomend?
- Ann

The way I see it, you’re stuck between two difficult choices – and neither one of them is good. On the one hand, you could cash out your retirement (bad because of the hurt it puts on your retirement plans) and use it to pay off debts (good). On the other hand, you could hold onto your retirement (good), but spend the next few years squeaking by with a very tight cash flow (bad) and you have at least some chance of having to tap that retirement anyway.

My biggest concern is that you’re really struggling to make ends meet right now. You’ve managed to live cash-only – except for $2,500 in car repairs. That means you didn’t have adequate savings to cover that expense, which means you’re at risk of other expenses.

I’m going to speculate, based on the fact that you work in marketing and were able to quickly switch firms, that you live in a large and fairly expensive city, which means that your income isn’t going to stretch as far as it might in other parts of the country. Thus, you’re probably pretty tight on your monthly budget right now – you’re walking a tightrope.

Given all that, I would probably cash in the retirement money and clear out as much debt as I could with it, starting with that personal loan. After that, I’d get a healthy emergency fund going, probably adding up to three months of living expenses. Then, I’d double down on my efforts to build my retirement savings.

To calculate the future value of a retirement fund compound interest is very often applied at a fixed interest rate over the life of the investment. However, it is universally accepted that as one nears retirement a significant portion of their money should be placed in lower interest investments to reduce risk. Given that an investment fund will generate the majority of it’s earnings towards the end of its life (when more money is available to earn interest), neglecting to account for this reduction in interest that should occur in a well diversified retirement fund will lead to a significantly different amount of money. Why is this so often left out of the equation?
- Eli

Simple answer: because the math turns into a train wreck of assumptions.

When you do a calculation based on one asset class, you’re dealing with a much smaller set of unknowns. You can take their monthly contributions, pull out an expected long term return (I use Warren Buffett’s number – 7%), and calculate based on that.

As soon as you introduce the idea of switching asset classes, you begin to lose the message in the details. Not only are you now worrying about the unknown long term returns of two asset classes – stocks and bonds, at least, and possibly real estate and cash, too – you’re also dealing with the unknown of how the transfers between the accounts will go.

In the end, with that latter calculation, you come up with a number that’s so buried in guessed variables that the number is practically meaningless.

This weekend we had a friend install a very nice, very free TV antenna on our home and I cancelled our Dish Network. Now, my husband REFUSED to do this for the past 2 years. We have had this very nice very free (courtesy of Craigslist) antenna for a while but he listened to too much propaganda and believed we would not have any channels. When our bill for basic service plus his TEVO (which he rarely uses) jumped to 54.37 per month, I had had enough. I researched our antenna and the service we would receive at our location, all courtesy of antenna.org, and showed him that we would receive at least 30 channels FREE. He argued again that it wouldn’t be the same. Ok, I said, what do we really watch on TV? And with that question, I actually documented what we watched. 90% of it was on the local affiliates. Now our kids (we have 6 ages 17 thru 6) all watched Disney, but this isn’t a democracy and their votes don’t really count because I have been disturbed for some time about the programming on Disney depicting all parents as being idiots…very similar to the inmates running the asylum….so, with this knowledge in hand, he was on board. I pondered this whole process and learned some important points (which I am sure you already know, but some of us aren’t up to speed, so bear with me):

1. Don’t listen to propaganda. Dish told us we NEEDED them otherwise we wouldn’t have ANY TV. Bull. The reception is BETTER than the satellite and IT IS FREE.

2. Keep an open mind. Jim wouldn’t have been on board with this switch if I hadn’t shown him evidence online from a reliable source and detailed notetaking reseach on our program watching history.

3. Just like drug addicts (and I can truly say I am an expert in THAT field), there will be a withdrawal period but it will pass. I purposely warned my kids that Disney was leaving. I removed the programming on a MONDAY night when school and a busy week was looming ahead of them (they get no TV during the week) and the next few weekends will be FULL of activities out of the house. I also get movies free from the Sacramento library (our library charges, so I just visit the Sac library on my lunch for a wider selection and NO CHARGE). We can also figure out HULU.com for the laptop and they can watch Hanna Montana as a treat from time to time.

The best part about it is that I was excited to simplify.
- Lori

Absolutely. There are so many options out there right now for television viewing that paying a mountain for cable or satellite really only seems like the “high priced” option.

For example, you mentioned just using an over-the-air antenna. We can get about 17 channels over the air right now, including an extremely kid-friendly PBS station.

You can also use Netflix streaming if you have an internet connection. For $9 a month, you get more movies and non-commercially-interrupted television series than you could ever watch, plus you’ll get some DVDs in the mail to cover the things that aren’t on streaming.

If you don’t mind watching on a computer, Hulu is great, plus there are many shows streamed on the websites of the various television networks.

Don’t ever believe that the only way you can watch television is through cable or satellite.

I have a 12 year old step son, and we use money as the motivator of choice for larger chores such as mowing the yard. However, it seems like he takes on the chores more because he knows how much we appreciate the help, and less because of the monetary reward (not at all complaining here, mind you). Historically, he’s always liked the idea of earning money, but never really has any significant savings goals. More responsible things like college and cars don’t interest him due to them being “so far off”, and he doesn’t seem to ever be interested in purchasing anything to feed his personal hobbies (primarily reading and playing video games). As an adult, I can now appreciate how effective setting a savings goal for an item is towards helping you motivate yourself to work a little extra hard–or do with a little less–to reach that goal. While I don’t want to encourage him to blow all his money on frivolous things, how I can teach him the ins and outs of savings goals?
- Jon

Your son seems like a good kid if he’s doing stuff just to help out around the house. Here’s what I would do in your shoes.

First, I’d sit down with him and see if he has any big savings goals he’s dreaming about. A new video game system, perhaps. Maybe a laptop computer. It doesn’t have to be something lofty, just a big enough savings goal that he’s not going to be able to achieve it in a few weeks.

Once you’ve cinched that goal, I’d select a goal of my own to save for – something you want in roughly the same price range as what he’s saving for.

Pay him for chores as you have been doing and encourage him to toss some cash into a jar to save for that goal (I like jars because they’re very tangible and visual – yes, you don’t earn interest, but that’s not really the point yet). Have a jar for your own goal and toss some savings in there on occasion – a $5 or a $10. Talk about how you’re both moving towards your goal.

If you can, try to finish your goals very close to the same time – and go get the things you’ve been saving for together. He comes home with a laptop, you come home with … well, whatever it is you chose to save for. This provides double reinforcement of the idea that saving for a goal is a big winner.

I believe in the idea that families who save together encourage those behaviors in each other.

You say you use Skype and a prepaid phone. I’m interested in the logistics of this – specifically that you said you use Skype “even when out and about” – how do you do this? I am very interested in using Skype (and even the new gmail phone feature) and I do so from home, but if I don’t have my computer and internet access around, I can’t use it.

I’m also interested in prepaid phones. I’ve tried researching them quite a bit, but I’m wondering what service you use. I’m not sure whether a monthly no-contract plan or a literal pay for every minute you use kind of plan is more cost effective.
- Rowenna

I use Skype on my iPod Touch, an item I received as a Christmas gift a couple years ago. I have headphones that also have a built-in mic on the cord. I simply use the Skype program on my iPod touch sometimes when I’m at a place with wi-fi.

As for prepaid phones, it really depends on how heavy of a user you are. The first thing I’d do is try to get a grip on how many minutes and texts I realistically used in a month. If you currently have a cell phone, use some old bills to find out these numbers and average them over several months.

Once you have that information, shop around. Calculate what the cost would be each month for your usage. You’ll likely find that different plans are better for different usage levels (that’s exactly what I found). This market is so much in flux that any “best plan” recommendation one month would likely not be the best plan a month from now.

I have been divorced for about 3 years now. I am trying to teach myself personal finance and applying those techniques but I’m not sure if I’m catching on too well. I am 30 years old, finishing my MBA concentration Accounting, and have two young kids (both under 10 years old). My student loan balance will be about $100k once I reach graduation (includes out-of-state undergrad tuition) – this is about 90% of my total debt. I have no credit cards. My 401(k) balance is less than $5,000. My Roth IRA balance is less than $2,000. My emergency fund is about $6,000. My current salary is low $40′s and my term life insurance policy is 10 times that amount. I do get $480/month in child support which I use for childcare expenses or throw into the e-fund. If you can believe it, my financial situation is much better than it was 3 years ago but moving from two to one income continues to be a strain.

Right now, where do you think I should place more of my financial focus right now?
- Lacey

I would stock your emergency fund higher than $6,000.

The first thing I’d do is I’d sit down and figure out what my monthly expenses will be post-graduation. Your student loan bills will be a part of that, as will your housing and all of the other expenses that are coming your way. I would shoot for an emergency fund that would cover all of that for six months, and because you have kids and no high-interest debt, I would make that my financial priority.

After that, start socking money away for retirement. If your employer has a 401(k) match, put money there so you get all of the matching money – after that, stock your Roth IRA. You want to be saving 10% of your salary each year.

If you’ve done all of that, use the rest to hammer your debt with extra payments. Pay them off in order of interest, with the highest interest debt going first.

Good luck.

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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53 thoughts on “Reader Mailbag: What Gets Mentioned

  1. @Jon: Does your family exchange gifts at Christmas (or another holiday)? If you do, you could tell your stepson that he’s now responsible for saving up the money to buy small gifts for a certain set of family members and friends. That’s a good medium-term goal for a child – and one that many adults struggle with, too. Even if he’s good at math, help him with the numbers: Point out that if he puts aside $2 a week for a year, he’ll have more than $100, so he can buy a $15 present for each of his parents and grandparents (or whomever) and still have money left to buy something for himself.

    That’s what my parents did for me (when I was about the same age as your stepson), and what I would do if I ever had children.

  2. Trent – this is an email to you, rather than a comment, but it fits well with much of these questiosn you receive. Are you familiar with “Individual Development Accounts”? It seems like a welfare-type of program but actually helps people advance in life (schooling, small business, home ownership). I’m interested on your take on these…I’ll include a link to one in our town: http://www.michigan.gov/mshda/0,1607,7-141-45866_45869-177685–,00.html

  3. Trent: In the past, you have recommended telling people about your goals, so that they would encourage you fulfill them. However, recent evidence shows sharing your goals makes it LESS likely you’ll achieve them.

    http://www.youtube.com/watch?v=NHopJHSlVo4

    In light of this evidence, do you still recommend sharing your goals with others?

  4. For the student-don’t take out private loans. Just don’t do it. It is just as bad, or worse, than a car loan–the interest rates can be (and usually are) outrageous, you cannot discharge them in bankruptcy, and in many cases you can’t defer them, get lower payments, or even have a fixed interest rate. Stick to the federal loans and if you can’t make it on that, ask your school for help, or find a cheaper school. It is not worth it.

  5. @Trent, I was wondering if you also sometimes you remove details from readers’ letters for privacy reasons? Sometimes it sounds like your answers are addressing something slightly different from what’s presented and missing details could explain that.

    Also, do you ever get follow-up from people you give advice to?

  6. @Amy, @Trent: It’s not just target retirement funds. Every mutual fund does some buying and selling of investments, so if you’re investing in an ordinary taxable investment account, you have to pay some taxes along the way just for holding the fund. Even index funds like the 500 buy and sell shares to keep the fund properly weighted as the companies grow and shrink.

    If you want to minimize the taxes you pay along the way, Vanguard has special “tax managed” funds, where they specifically seek to offset gains against losses and that sort of thing. But those have high minimum investments ($10K instead of $3K for the ones I just checked) and they have other restrictions to discourage frequent buying and selling.

    Amy, if you don’t anticipate needing the money before retirement, can you put it in a tax-advantaged account like a Roth IRA? If you’re already maxing out all the retirement accounts available to you (IRA, 401(k), etc.), then I’m tempted to say that you’re doing so well that it doesn’t matter very much what you do with the money that’s left over.

  7. @Lori
    With Netflix ($9 a month) and Hulu (free), I don’t need any TV. By the way, slight addition to what Trent says. Almost all modern TV’s can easily be hooked up to a PC. That means you can watch Netflix streaming and Hulu in your living room on your big screen TV.

  8. @Trent: right now I can’t think of any post where you took heat because you chose to omit some detail to protect someone’s privacy.

    But if it happens often enough, wouldn’t it be better to just NOT write that post? I mean, if you tell us a story, and we criticise you going solely on the info we have got (not being aware that you didn’t tell the whole story), then what is the point? Especially if the missing element changes the entire thing!

    Is this a way to defend yourself from some of the criticism you got on GRS?

  9. @Rowenna

    I use a prepaid phone and have Magic Jack at home. The set up works for me and costs about $10 a month total. I use TMobile for my prepaid because they allowed me to port my old number and their minutes were the cheapest ($100 for 1000 minutes that stay good for a year, plus any refills stay good for a year). 1000 minutes will last me about a year, since I use the Magic Jack phone at home and my work phone at work (95% of my life is spent at these two places).

    The downside is they have poor reception compared to regular cell phones. My husband has a regular Verizon phone, so even when my prepaid is out of range we can still be reached. If I didn’t have his phone to rely on, I don’t think I would use a prepaid for that reason. I wouldn’t want to be out of range in an emergency.

    I spent a long time researching the best option for us, and hemming & hawing before making the switch (I went from an iPhone to a prepaid and still have withdrawals sometimes).

    Hope that helps!

  10. Re: Eli’s question on retirement funds. Trent was right to point out that different asset classes determine the answer.

    When most people talk or write about investment “funds” they are talking about stocks and bonds. These asset classes don’t earn interest. They rise (or fall) in value based on overall market movement and macroeconomic forces. You can’t calculate compound interest on a stock-market investment, because there is no guaranteed return to compound.

    Bank accounts, CDs, and Treasury bonds earn interest. Stocks don’t. That’s why stocks are considered high risk (even “blue chip” dividend-paying stocks are classed as risky) and why investors as they age (regardless of how much money they have) are advised to rebalance their portfolios to emphasize cash and Treasuries. These have lower yields, but the yields are known and the chance of loss is effectively nil.

    If my father had paid attention to this, his retirement savings would not have been reduced by close to 40% two years ago. Now 72, he had almost everything still in stocks. And because he is no longer earning an income, he can’t just replace the lost funds – he has to wait for them to grow with the market. Or not.

  11. Your advice to Ann to cash out the retirement fund to rebuild finances, establish an emergency fund and in general get back on track with life was very interesting. I say interesting because this seems to fly directly in the face of every other piece of PF advice I’ve ever read on the subject.

    But I think you’re right!

    I essentially did the same thing last year. I had a pile of debt that I just wasn’t making enough headway against. I had no emergency fund. I was living paycheck-to-paycheck. So I cashed out an old 401(k), paid the penalties, and in just a few months turned my entire financial life around. Now I’m nearing a 1 year e-fund, paying for a week long trip to Rome in cash, and will probably have the down payment for a home within a year.

    Oh, and my retirement fund is double what it was before I cashed it out.

    It was the best decision I’ve ever made. It enabled me to get into a really solid state I wouldn’t have reached otherwise for years.

  12. A Roku box is a cheap way to stream wirelessly from Netflix on computer to the TV set in another part of the house. I tried using a splitter and long modem cable but there was too much static and reception was zilch. On mistake I made was buying a cheaper roku box that was for sd thinking that I got sd over the dish and that was all I needed. Better to by the hd roku for nexflix streaming to an HDTV.

  13. MikeTheRed, I believe Trent also cashed out his retirement accounts to be able to pay down debt, after his “financial meltdown”.

    Sometimes it’s preferable just to be done with debt quickly and then focus on rebuilding your savings. PF advice can’t always be of the “one size fits all” sort, and this is one example of that.

  14. @Ann: I’m reading a lot of strong emotion in your letter. This is not a decision to make based on emotion. Before you do anything drastic (and yes, cashing out a retirement account is drastic), you should run the numbers, look at where your money is going, and think about whether you have any real reason to panic.

    To start, I’d see how your expenses line up against the 50/30/20 budget: 50% of after-tax income going to needs, 30% to wants, and 20% to savings and debt reduction. (For the purposes of this exercise, the *minimum* payments on your debts count as a “need,” since you can’t skip them – the “savings and debt reduction” category is for any additional money you pay beyond the minimum.)

    If your “needs” work out to less than 50% of your after-tax income, then you’re doing well, so just keep doing what you’re doing. Only if they’re much more should you really think about taking money out of your retirement fund. Take out just enough to lower your minimum payments to get you under the 50%.

    Another thing: How are you dividing household expenses with your boyfriend? It sounds like the two of you are in very different financial situations, which makes me think that maybe you haven’t been dividing expenses fairly. After 10+ years together, you’re not just a pair of roommates – you’re basically a family, and everyone in a family should be entitled to approximately the same standard of living. I know that if I had a partner who’d just taken a pay cut and was stressing out about money as much as you seem to be, and if I could afford to contribute a greater share of the household expenses to help them out, I would do so gladly.

  15. “If you don’t mind watching on a computer, Hulu is great, plus there are many shows streamed on the websites of the various television networks.”

    Actually, if you’ve got a laptop or if your computer is sufficiently close to a newish TV, you can run a regular old monitor cable to the TV and watch from the comfort of your couch.

  16. @Ann
    you say your retirement is “about equal” to the debt. Please don’t forget the penalty as @10 did mention. for example 28000 -2800 – 4200= 21,000. So, you’ll still have close to 10k debt. I just think you need to consider all sides of your decision. Be aware you’ll still be in debt and not free of worry.

    Not sure I understand your situation with your car but can u sell car and get a $2000 Honda civic or Toyota? Or use public transportation for a short time? Even if you dip in retirement you can still do this to cut the other 9k or so…

  17. Another benefit to no cable/dvr:

    our electric bill went way down!

    We still have tv with antenna but watch so rarely (until football season coming up!) we have it on a powerstrip. Also watch lots on our computers and seems they suck less energy than reg tv!

    Cut our electric usage almost in half with just these changes!!

  18. If you have a gaming system (wii, ps3 or xbox) you can stream Netflix easily to the big screen. You can also stream hulu and much more content through your gaming device if you try playon.tv . Two week free trial to make sure your network and PC can handle the service and then it’s $40 for the first year and $20 thereafter. It’s awesome! Good luck.

  19. @ marta

    The point is that you CAN’T know if Trent “took heat” for a post where he omitted details because you can’t know IF he omitted them. And if he left them out in the original post, he wouldn’t be about to reveal them later just to take the heat off himself.

    Personally I applaud the choice of maintaining privacy even if it hurts a post once in awhile. Protecting one’s family and friends is putting them first, and that’s right where they should be.

  20. @ Charlene – Most definitely refinance. If you have strong credit (780 or better) you should get around 3.75% on a 15 yr fixed with maybe 1% origination. See if they will change that to a 1% discount point, since discount points are tax deductible and orig. fee is not.

    But over time you should save a good deal of money as well as pay off that home early. The payment will probably not increase much since you are knocking 2% off the rate. I’d still continue to make extra payments on the principle as income allows. Lucky you!!

  21. @Ann again: To clarify, the 50/30/20 budget is a goal – a lot of people don’t quite meet it right off the bat. So even if your necessary expenses are a bit more than 50% of your after-tax income, that’s still not a reason to panic. By my best guess based on the numbers you’ve given, they’re probably somewhere around 60%, which is still really good.

    You were paying $1500 a month on your credit cards before, which is awesome. You can’t quite do that now, and that’s *okay*. You’re still paying them down. As long as you are moving in the right direction, you will get there eventually.

    So take a deep breath, give yourself some time to see how your expenses work with your new salary, and make your decision with a cool head.

  22. J.O., I am well aware of that — what I was saying was that I can’t think of a controversial post where that might have happened. Such a post would probably mention his family or his friends, and I can’t remember anything along those lines that ended up with Trent taking heat. That is all.

  23. Re: living trusts.

    One advantage trusts have over POD designations is when a person becomes incapacitated. It will depend on your specific situation, of course. For example, if you’re married, most likely your spouse is a co-owner of your assets and will have no problem accessing them if you become incapacitated. But if you’re a widow/widower, your child may have a lot more trouble getting access to resources needed to pay for your care. Your child would have to go through a probate-like hearing to establish a guardianship. Co-ownership with your child will take care of this specific problem but might result in unintended tax or financial aid issues for that child.

    Estate size isn’t the only reason to have a trust. As a rule of thumb, the more complicated your situation and family dynamic are, the more likely you’ll benefit from having a trust. If you don’t want a chunk of money immediately going to your beneficiaries, then a trust will serve you well. Children with substance addictions, children who don’t get along, a desire to have an estate doled out in stages or set up as a child’s retirement fund are just a few examples.

    Also, a comprehensive trust package should also include a power of attorney (financial matters) and an advanced health care directive (medical matters) so you’ll be covered on all fronts if something unfortunate happens that leaves you alive but incapacitated. The trust and pour-over will will take care of financial issues after your death.

  24. I should also mention two other advantages: privacy and speed.

    Probate documents are public records filed with the court. Anyone can go down and find out what you filed which at some point will include a list and valuation of assets and who will be receiving what. Trusts are private. Nothing needs to be filed with the court unless something was mistakenly not transferred to the trust before death, and even then it will involve only the assets outside the trust, not the whole estate.

    My fastest trust administration (transfer of assets, winding up the estate) closed in three weeks. Most of that time was spent waiting for the death certificates to arrive. It’s impossible to close a normal probate in that amount of time since there’s a mandatory waiting period after opening a probate to allow claims (debts) against the estate to be made, not to mention all the other statutory hoops and hurdles. A probate closing in less than 9 months is fast.

  25. @Charlene: It probably makes sense for you to refinance, but it may depend on how long you plan to stay in your house. There are closing costs for a refinance, and the lower interest rate will make up for the closing costs eventually, but if you sell your house before you break even, you would be better off not refinancing. If you’re not sure if you’ll stay in your home for several more years, you can look into a “no-cost refinance,” which means that you don’t pay any fees or closing costs, but the interest rate will be higher.

  26. (I have no idea if this comment will appear, but here goes…)

    @Charlene – Sara (and others) make great points about closing costs. But also, most people tend to underestimate their break-even point. Using nice round hypothetical numbers for ease in explanation, they say “My closing costs are $3000 and I will save $100 per month with my new payment, therefore it will take me 30 months to break even.” What they need to do instead, is use a mortgage calculator to find out what the impact would be of taking that $3000 and making a lump-sum principle payment instead of refinancing, and THEN find out how long it would take to break even with a refinance. Depending on the closing costs and difference in interest rates, the difference can be anywhere from negligible to over a year.

  27. Bri: Avoid private loans, they suck.

    Kim: Most people probably do not need a revocable living trust at least not for financial reasons. They can be good idea if you have a lot of money or if your state has expensive probate. Otherwise most people do not need them and they do cost money to setup and can be a bit of work to handle right. If you do have a sizeable estate then you might want to research them some or even talk to an estate lawyer. Trusts do give you some other non-financial benefits like how you would want things handled if you were incapacitated.

  28. Re Ann – I guess I’m missing something here. You make $50K/year + $250/mo on the side, your fixed household expenses are $800. It seems that leaves you at least $2500/month net income personally, plus whatever share of other expenses your boyfriend pays. I am only halfway convinced your only option is to cash out your retirement to pay down the debt. I’ve been taking the long slow slog toward paying mine off & am finally beginning to see the light at the end of the tunnel, & it ain’t fun. If you do go cash out the retirement, I would strongly urge that, you then pay down the rest of your debts as quickly as possible and commit to rebuilding your retirement fund immediately after you’ve got a cushion in your emergency fund. Getting a decent retirement fund built up after age 45 is a real bear (take it from one who, unfortunately, is in that boat).

  29. oh god trent! i get 30 channels from courtesy of Craigslist cable trent………
    it has brought about revolution in the feild of entertainment, education and communication.
    have it………..

  30. at charlene: the point if view of all eminent persons, which can greatly help in the forming their openions. it makes gain a huge fund of information……..

  31. @charlene: the point if view of all eminent persons, which can greatly help in the forming their openions. it gain a huge fund of information……..

  32. If you remove details enough that it might possibly leave people with a different impression than the true story, simply noting that you have removed some details might go a long way for helping people understand.

  33. I wanted to comment on the subject of antennas vs. other forms of TV. Before I bought my house, I rented a house for which cable was part of the rent (community had a bulk cable deal and got lots of good channels), so I didn’t pay for it. I enjoyed many shows, especially “Top Chef” on Bravo, a whole slew of shows on the “Food Network” and got hooked on some HBO series, such as “In Treatment” and later “True Blood.” I didn’t think that I watched much TV, but in retrospect I realize I did.

    Then I bought a house and said no way will I pay for cable TV, so a friend of mine installed an antenna for me in the attic. I get a lot of wonderful channels in perfect clarity for free. I actually get 6 PBS channels (3 of them are “Create” so sometimes the same show is on all 3, but not always) and on the other PBS channels there is sometimes the same show running concurrently, but again, not always. And I get network TV. I am still able to watch cooking shows on Create, and have lately begun watching “Master Chef,” which resembles “Top Chef” in many ways. I watch MUCH less TV, however, and watch better TV, too, when I do because I’m watching a lot of public TV. I do miss C-Span’s Book TV, but I can’t have everything. In place of watching TV I listen to a lot more music than before. In short, the antenna has been a blessing for me and I am not suffering without the cable channels.

  34. I’m confused about Ann as well. Her income is 50,000 a year, monthly expenses 800…and she can’t pay off 32,000 in three years. She needs to look long and hard at what she NEEDS and what she WANTS.
    I just did some quick calculations with Bankrate and if she could an extra $1000 a month beyond min. (I figured everythying as credit cards..17000 at 5% and 15000 at 13%) she could have everything paid in just less than two years. Yes, it would leave her with about a thousand for gas,insurance, food, clothes, gifts etc. But I think she could do it…

  35. “I was wondering if you also sometimes you remove details from readers’ letters for privacy reasons? Sometimes it sounds like your answers are addressing something slightly different from what’s presented and missing details could explain that.”

    Yep, probably once per mailbag. I’ll get a reader emailing me in a panic to remove some detail and I’m pretty much stuck in a tough spot. Almost always, I just remove the detail and don’t change my answer, because that seems like the most honest thing, but it usually gets me flamed – because of that, I’ve been told I ignore my readers, that I give illegal advice, and so on. On the other hand, if I just edited my answer, I’d be doing something unethical there as well, and on occasions when I’ve done that, some readers have gotten extremely angry with me, saying that I’m trying to cover up my own ignorance and mistakes.

    Reader mailbags are easily the most time-consuming and difficult posts of my week.

  36. “But if it happens often enough, wouldn’t it be better to just NOT write that post? I mean, if you tell us a story, and we criticise you going solely on the info we have got (not being aware that you didn’t tell the whole story), then what is the point? Especially if the missing element changes the entire thing!”

    Here’s an example that happens all the time. Someone will write to me for advice, I’ll use their email in a reader mailbag, they’ll read the post and get really cold feet, then write to me in a panic.

    At that point, the post is up and many regular readers have already read it and are actively participating in the comments.

    I usually choose to protect the privacy of the reader, but if I completely change the content of my response, that can hijack discussions below. So I usually just edit the question quickly for them and leave my answer untouched. 95% of the time, it happens without notice. The other 5%, someone gets angry because of some element of the response that doesn’t match the (edited) question.

    It’s a touchy area, and whichever way I handle it is probably deserving of criticism from someone. I decided long ago that I’d rather have people “hate” me in internet comments than expose someone’s privacy to the world.

    A blog post is not worth ruining someone’s life over, intentionally or otherwise.

  37. So this is about the reader mailbags, not friends or family. I have to say I never noticed any such edits, although I have noticed that some answers didn’t match the questions at all (but most likely those are different cases). I wonder if it’d be better if you said upfront that some questions have been edited for privacy, because the sneaky editing doesn’t sit well with some people.

    Of course a blog post isn’t worth ruining people’s lives over. We agree on that.

  38. @Trent I agree with marta – a quick note added to either the question or answer to say that some details were omitted would possibly solve the problem, whether you change the answer or leave the original.

  39. #7 – I use Netflix (barely since my boyfriend dominates the queue) and Hulu (for select shows). And an antenna that we built, and that’s all I need. All for about $10 a month.

    #1 – Agreed with another commenter, avoid private loans like the plague. I have one that will not let me defer it, and I’m going back to school full-time. You can’t consolidate them with your other loans, and it’s just a general pain in the @$$. Are you considered an independent? If so it’s possible you can get more financial aid. I’m 24 and did that and, unlike before when I didn’t have enough financial aid to cover my expenses, I have enough to only have to work to pay for gas and groceries. Means more time to my studies, better grades and better opportunities for a job. :)

  40. So just say you edited it. BFD.

    Although the indications were this was about the details of your family life, all caps added:
    “It’s a difficult balance, but if the choice is between violating the privacy of SOMEONE I CARE ABOUT in front of hundreds of thousands of readers or not being entirely clear on a certain post, I’m going to choose to be a little vague

  41. I don’t know. If people are writing to a blogger for advice without thinking through what the consequences would be of having their letter published and discussed on the blog, I don’t really have a whole lot of sympathy for them. If they’re concerned for their own privacy, they can sign their question with a fake name.

    If somebody’s question has enough details that the person can be identified even without a name AND contains information that would ruin the person’s life if it got out AND all of that information is actually necessary to understand and appropriately answer the question, then maybe they should be seeking advice from someone other than a blogger.

  42. Why can’t you put a disclaimer like: “Some emails may have been edited for privacy” or if you have to go back and edit something “At the request of the sender this email was edited for privacy after it was published”.

    I’ve seen similiar disclaimers on other blogs. Things like “this has been edited for clarity from the original post” or “in the original post I stated X, which was incorrect. This has now been corrected”

    Somethign like that makes things clearer to the readers and causes less frustraton why not do it?

  43. I was unable to find info on the number of channels available over the air at antennae.org. It seems to be only info on where to buy. How did you find that info?

  44. @Johanna: I agree with you completely (believe it or not!) That is exactly what I was thinking.

    It seems weird that someone would write to Trent looking for advice, then get all panicky and want details taken out once the letter has been posted. I guess I could see that happening a time or two – but all the time? That’s odd.

  45. About mailbag post privacy. I disagree that you will be criticized no matter what, Trent. If the story you receive can be told without violating the privacy of the writer, and without removing information that compromises its meaning, then it should make everyone happy.

    It sounds as if, however, you don’t get many letters that fit this scenario; if you post it and it all makes sense, it’s too personal, and if you remove the personal element, then some aspect of the post doesn’t add up. I would say then, on those days, don’t do a mailbag at all, or don’t do one on the issues raised in the letter that cannot properly be shared publicly.

    Remember that we readers out here don’t know what you’ve received in the mailbag until you post it, or unless we’ve sent you a letter. In the latter case, if we don’t see our letter in the mailbag, well, you are so swamped with mail that you can do only a few per week, end of story.

  46. I agree with Johanna, but I wouldn’t want to be the ass that says “too bad” when somebody starts feeling remorse about submitting their email.

    To at least try to accomodate them is just the right thing to do, even if you can’t do it 100%.

    I also agree that a little note that “some information in this email was removed after publishing” would go a long way to explain why things don’t add up. I’ve been one of them to call you out when your reply doesn’t seem to match the email and it’s usually because I think you made a mistake (I like to know when I make mistakes). This note will explain what happened.

  47. @Lori- I also live in Sacramento and I only get about 10 channels with an antenna – are you getting 30 w/antenna alone?
    BTW even with 10 channels, I don’t miss cable at all. I use Hulu to indulge my weakness for Real Housewives and other junk TV, and I watch Dexter, etc on Netflix.

  48. @Trent and @chacha1

    Thanks so much for your responses.

    I think I should clarify just a bit. I wasn’t as much interested in trying to find out how to calculate a future fund value based on varrying allocations in different asset classes….

    What I aimed to do was to point out that I believe there is a HUGE flaw in using a single expected long term return at a fixed percent to show expected growth in a retirement fund.

    While I whole-heartedly agree that the expected long term return of a single asset class (i.e. stock mutual fund) could very well be 7%. You would only average that 7% while you were wholey invested in that fund. i.e. you probably aren’t averaging your 7% when you’re a few years out from retirement and invested more heavily in lower risk bonds, etc right?

    And, if you aren’t averaging that 7% in those final years when your nest egg has it’s greatest potential for earning, won’t the overall value of your smartly diversified account come retirement time be MUCH lower than the value estimated from your straight 7% compound interest calculation?

    I agree that it’d be pretty hard to calculate your exact retirement fund with mixed assests but I’d argue that using an assumption of a given percentage over the lifetime is even worse since we KNOW we’ll diversify and change it.

    It’ll be so far off I think it’s bad to even use as a benchmark.

    Long story short I guess I’m saying:
    A stock fund may average 7% long term but a diversified retirement account should not. Assuming it will in your calculations will leave you short and wondering why.

    But, I may be missing something.

    Thanks again,
    Eli

  49. Congratulations to Lori for getting rid of her costly Cable TV bill. My company raised the rate for my basic service to over $100 a month. I dumped them, got dish service & bundled it to my phone & internet & pay $100 for all 3. I recently dropped my newspaper subscription because rates were climbing, service was lousy(lots of missing papers, or under car, in rain filled gutter) and the quality was dropping. I do buy the Sunday paper at the store, but discovered that all my grocery ads, etc. come in the mail now! That was a major reason for subscribing. Little victories perhaps, but huge for a person with a limited income.

  50. Bri,

    You’re just coming out of a bankruptcy. Are you sure going into debt to go back to school is the right move? Being better educated definitely CAN enhance your employment prospects, but going to college isn’t necessariy the only or the best way to become better educated.

    Your first college effort failed for financial and motivational reasons. Are both those reasons definitely gone? The financial one sounds like it’s still a barrier. The motivational one may be too, although sometimes maturity can overcome that.

    Unless you have chosen a career path that REQUIRES a specific degree or certificate, AND you know you are well suited both to the requirements of the career and to the process of getting the degree, you may simply be getting yourself back into debt (and debt that is usually not dischargeable in bankruptcy) for no good reason.

    I have some suggestions:

    First, I would pick the most honest, blunt and hard-nosed of the people you used to work for and make an appointment (making it clear you are not applying for a job or upset at having been laid off, but want his or her advice about your best course to pursue for future educational goals).

    Several days before the appointment, I would spend two or three hours thinking back to that job, and list all the things I was good at and why, all the things I was bad at and why, all the things I liked doing, and didn’t like doing and why, and how I was different from the people who did similar work but didn’t get laid off.

    At the appointment, I would tell that former employer bluntly that I needed objective feedback on my strengths and weaknesses, and picked that person because I hoped he/she would give it to me unvarnished, even if it hurt. Since you worked for lawyers, make sure he/she understands you aren’t there to cause trouble; offer to sign a release of liability if needed.

    I would then ask what skills, habits, attitudes or knowledge I would have needed to be the employee they could not have managed without. If he/she struggles to answer, offer some more pointed questions off of your “strengths” and “weaknesses” lists. “Was I as dependable as you would have wanted? As organized? As good at setting priorities? Did I waste too much time on tasks you felt I should have done faster? How was my spelling, grammar, manner with clients, professional appearance? Would it have helped if I’d known a foreign language, known how to do bookkeeping, known how to use Powerpoint, Excel, known the court rules forward and backward?”

    Put off applying for loans and going to school for, say, six months. Test your motivation and commitment by choosing one or two testable skills to acquire, that can be learned on one’s own, learning them and getting tested on them. These could be skills suggested from your interview, that would make you the indispensable legal assistant, or they could be skills oriented to a different career.

    People think they have to take a class to learn something, but that is not true. Almost anything can be self-taught – software programs, better English skills, history, foreign languages, project management, business math, statistics, accounting, business systems (inventory control, human resources management, risk management), basically anything that does not require physical demonstration, and even there, many of those are on YouTube. Want to learn how to do sutures, field strip a gun, use a microscope, drive an eighteen-wheeler? It’s on YouTube. (Actually, I’m only guessing about the 18-wheeler, but I’ve learned the others and much more off YouTube.)

    Used textbooks are all over the place. You can easily find syllabi, course outlines and even tests on the Internet for classes in the subject you want to learn. If not, call a teacher of the subject at your local public community college or university and ask if you can get copies of past syllabi and tests for home study.

    For many subjects, formal tests can be arranged at the same places that offer SAT, LSAT, MCAT and GRE exams. You will then have a certificate to show that you have learned that skill.

    As an employer, a high school graduate who had high scores on the GRE – Graduate Records Exam – verbal, math and logic tests would impress me more than a college graduate with a B.A. in some undefinable program. I would have confidence that she had broad basic knowledge, drive, motivation and above-average intelligence; many B.A.s don’t offer that assurance.

    If you can sustain your discipline and motivation to accomplish a couple of self-taught courses like that, then you can make a more confident decision about whether you really need to spend big bucks to go to college and whether you’ll get your money’s worth out of it. And once you’ve learned how to teach yourself, you will make a much better student if you do go to college.

    Good luck.

  51. I am a little disappointed in the advice you gave to #5 today.

    The 31 year old marketing person is carrying $12,000 on a car that needed a major repair of $2500. Better advice would be to sell the car and replace with a paid-for-in-cash car that is reliable.

    She indicates she follows Dave Ramsey, but seems to ignore this part of his advice. You sell what you can, cut what you must, make more if possible. That’s Dave’s approach.

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