Reader Mailbag: Emotional Control

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. Costs of going to seminary
2. Is vehicle trade worth it?
3. Are we doing okay?
4. Roth IRA versus Roth 401(k)
5. Dealing with an overzealous client
6. Best “safe” option for money
7. Cash flow in big city
8. Wedding versus emergency fund
9. Habits for handling life instability
10. Frugal video gaming habits

One of the biggest challenges of parenting – at least for me – is teaching our children how to control their emotions. As adults, most of us are pretty good at controlling our waves of emotions – they might be really powerful inside of us, but we’ve trained ourselves to not let those emotions spill out.

Children – particularly young ones – haven’t learned that control yet, and sometimes (often when you least want it), that emotion spills out of them.

Our solution, thus far, has been to take them out of any social situations that they might be interfering with and placing them in a fairly isolated spot to get their emotions under control to the point where communication is fruitful, followed by a chat about handling our emotions and a minor punishment (usually removal of some minor thing they like in their daily routine).

Still, it’s no fun when such an emotional spill happens in public, requiring a parent to simply leave.

In pursuit of what I feel I’m called to do I’m planning to quit my job and attend seminary next fall. I’ll bring my family with me (I’m 29 and my wife is 27 and we have a three month old daughter). In the next year there are a ton of large and small decisions to be made. One of the biggest decisions will be what to do with our house. Here are some specifics, our house appraised about a year ago for $76,500 and I’m six years into a 30 year fixed loan @ 5.6% with a balance of $35,000. I believe we could find a nice house to live in for the 3-4 years of seminary for about $90,000. Keep in mind that in my denomination there is almost always a parsonage provided for the pastor. We’re going into seminary knowing that it will be a tight time for us financially. Tuition alone for a Masters of Divinity is close to $50,000 and that doesn’t include all the other associated costs. We have about $25,000 saved specifically for seminary with the hopes of saving more in the next year. I will also receive tuition assistance from my denomination and from the military. Needless to say we’re saving now and trying to be as good with our money as we can. I have a couple of scenarios regarding our house, although I’m open to other options.

Scenario #1: We rent the house that we live in now for $500-600/month (monthly mortgage is $337) and my dad who lives about a mile away could manage the property for us. We would then need to find a place to rent while in seminary, I’m guessing that it’ll cost around $700-800/month. This keeps us from buying and selling while under the gun and possibly gives us a bit of extra income (which will be needed).

Scenario #2: We sell our current house and buy a house close to the seminary. We could conceivably put down 50% on a new house and then after our seminary days either rent to seminary students or try to sell the house. The upside is that we could possibly have a lower monthly payment than most places that we would rent since if we put down a large down payment.

So what do you think? How can we best make our money and our house work for us?
– Chip

Scenario #2 seems like the right choice to me.

Under Scenario #1, you’re still losing money each month even if you have a renter in the price range you’re hoping for. You’re still paying the mortgage and shelling out $700-$800 a month for rent while only taking in $500-600 more if you have a renter. That’s a net loss of $100-$300 a month, which most likely exceeds the equity you’re building each month in the mortgage. Overall, I don’t think this is a winning situation for getting ahead.

I vastly prefer the second scenario, because you’re probably not drastically altering how much you pay for housing each month, but you’re also building equity with each house payment and you have a property in the end in a high-value place.

I have a 2003 Toyota 4Runner 120,000 miles – I could trade in for $7000-$9000. It is paid off, and in pretty good condition, although it does need a $1500 repair in the next year. Should I trade in? I can find 2005 Toyota Camry’s with 50,000 miles or less (one with only 28,000 miles) for $12,000 or less. Do I fork over the $3000 (which we have saved)?

The whole reason for this is I would like to increase my mpg, and lessen gas costs. I am also worried about the 120,000 – I think my car will only get less valuable, and I do not want to take on a car payment – so I am right at the point where I could break even. I travel about 6,000 miles/year, and I am a stay at home mom of a 1 year old boy.
– Megan

This seems like the right move, provided you’re paying cash for the car.

I used and found that the 2005 Toyota Camry averages 25 miles per gallon, while the 2003 Toyota 4Runner 2WD (I assumed that – the 4WD is worse) gets an average of 18 miles per gallon. Driving 6,000 miles per year, with gas at $2.75 a gallon, will save you $257 a year.

Another thing to consider is whether or not it lowers your insurance costs. I would contact your insurance company and simly get a quote on a 2005 Camry and see how it compares to your current ride (my guess is they’ll be somewhat comparable, but it’s worth checking). Also, many areas charge different vehicle registration rates for such different types of vehicles.

In the end, if both vehicles meet your needs for reliability and other such requirements, it really comes down to cost of ownership, and I’m pretty certain that a Camry, with such better gas mileage, will get you the best deal.

My husband and I feel we are on the road to a simple, yet comfortable, life financially. I am 20 and he is 23. Though we currently do not make a ton of money, I’d like some reassurance we are doing the “right things” with what we have earned thus far. We currently have no children and do not plan to for a couple of years. We are both in school on and off and are currently more than half through our degrees. Here are our stats:

His salary: 36400 yrly gross (job security, some flexibility, travel perks make up for the low pay…sort of)
Mine: 27000 gross
Mortgage: 94,000 at 6% 30yr
Student loan: 1800 total
Car loan (his poor-advised purchase before we got married…ugh): 215 monthly. (payoff around 5,000 with penalities… bad purchase for other reasons).
Our current vehicle in use is my car from college, for which nothing is owed.
Credit Card Debt: 1800 total
We had a few other small debts that we just paid off. We are currently living off of his salary and banking mine.

We just started adding an additional 350 to our mortgage principal monthly (out of his pay). According to my calculations, this should help us pay off our mortgage before we are in our mid-thirties. Paying off the credit card debt first seems like it would free up about 120 dollars in cash flow per month. The only real benefits of paying off the vehicle would be to lower insurance on it, since it doesn’t run, and to have a clean title so we can sell it and minimize our loss. I suppose the student loan would be last since the interest is low?

With all debt (excluding mortgage) paid off, we would have monthly “bills” down to about 1450 per month. This is including our 350 extra toward mortgage. We can easily live off of 300 for gas, groceries, and any extras per month, putting our total budget per month at less than 1800 dollars. We’ve really worked hard at scaling down our living expenses and minimizing our debt.

The small remainder of his salary per month should be spend where? Is now the time to open up the IRA? Am I correct on the order I should be paying off what’s left of our debt? I feel like we are doing really great in comparison to whom we know in similar situations, am I wrong? The averages of net worth and such online feel like a hoax, and what I read in blog forums just doesn’t add up in comparison to average american statistics.
– Ashley

You’re making the right move in paying off the debts in order of interest rate, from highest to lowest. That’s the most efficient way to pay off one’s debts.

As to whether you should open an IRA or do something else with the remaining money each month, the answer changes depending on whether or not you each already have retirement plans. As young as you are, if you shoot for 10% of your gross income going into retirement, you’ll be doing well, and if you already have that much going in due to your workplace, you’re probably better served for your life by putting that money towards paying down the debts.

You’re doing very well for a couple at your age. The simple fact that you’re able to bank all of your salary means that you’ll be entering your thirties in a much better financial state than most people your age. Kudos.

My employer offers both traditional 401(k) and Roth 401(k) options. I’m 26 and participate in both, putting enough in my regular 401(k) to receive the full company match, while putting some additional post-tax money into the Roth 401(k). Lately, I’ve been wondering if I would be better served by starting a Roth IRA instead of funding the Roth 401(k). I understand that contributions to a Roth IRA can be withdrawn without penalty – are there any other benefits/costs I should consider when making this decision? I like the convenience of my employer’s Roth plan, but would be willing to set up the IRA on my own if the benefits are worth it.
– Jessie

The ability to withdraw one’s contributions is certainly an advantage of a Roth IRA – in some respects. On the flip side of that is that you’ve suddenly made your retirement savings pretty easy to access whenever you want without penalty, which makes it easy to just grab it and go.

In my eyes, the biggest advantage a Roth IRA has over a Roth 401(k) is the freedom you have to decide where exactly your money is invested. You’re able to choose your investing house and the specific investments held by the account.

At the same time, you should also be aware that there are income limitations to a Roth IRA (you can’t contribute if you’re above a certain income threshold, currently just a bit over $100K for singles) and there’s also a cap on how much you can contribute, one that’s much lower than the 401(k).

So which option is better? If you have a Roth 401(k) available to you and the investment choices are solid (meaning they’re not loaded with fees and earn competitive returns), I’d put my money there.

This article does a great job of outlining the differences between the two accounts.

Not to muddy the waters too much, but there are also some compelling arguments about how a traditional 401(k) is better than a Roth 401(k). While there are some good points there, I think they hang far too much on current tax rates remaining the same from now until retirement. Given the strong political resistance towards eliminating entitlements and government spending, plus the upcoming retirement of a lot of baby boomers (meaning they’ll be paying in a lot less income tax) and the current spending that far exceeds what the nation is bringing in, tax rates have nowhere to go but up (in my opinion), which swings favor to the Roth 401(k).

All such choices are speculative, though. The real key is making sure you’re actually saving as much as you can and making sure it’s in a low-cost retirement vehicle with good returns. If you’re doing that, you’re ahead of the game, no matter how the tax issues turn out in thirty years.

I recently quit my job and went back to school. I started my own business which so far has taken off so quick I can barely keep up. Before I decided to do this I was unsure on how much money I would make so I worked out a daycare solution with a sick neighbor. (she was recently diagnosed with Lupus and her digestive system is degenerating pretty quickly) The deal was I would watch her two kids while she attended doctor appointments and she would watch my one kid while I attended class. So far I have 3 classes and one is online. So two days a week I need care. My problem is that so far I have watched her kids every day for at least 5 hours a day. I had agreed to this knowing that I was watching two vs my one and being okay with that, but every day has become a strain. Now I have 3 kids in my house for at least 5 hours, 5 times a week and she has watched mine for 2 days for 4 hours. I have night classes. I know she is sick and cant help how many times she had a doctor appointment a week, but this is getting in the way of my homework for school, and new business. Yesterday I was up till 4am just catching up on math homework, and doing revisions to a menu I am designing. (my new business is Graphic Design just like the job I left) In the long run this is saving me valuable money, but i am so strained that I cant keep up. My ultimate question is, how do I tell her to back off a bit, or maybe find another person that she can also swap babysitting services with. If it goes on any longer I will need to go hire someone in place of swapping. Is there services for people like that. She does desperately need the care, but I can only help for part of it.
– Shauna

I think this is a time where candor will pay off.

Just stop over there for a visit and ask her about her medical situation. How is the treatment going? How often will your neighbor have to be visiting doctors in the future? Is five times a week the norm, or is it exceptional due to early stages of treatment?

If this kind of imbalance is a short-term thing, I’d just ride along with it for now. The load will lighten soon and you’ll have a very valuable arrangement on your hands.

If the large number of appointments are going to continue for a long time, ask her about a partial arrangement, where you watch her kids for a limited number of times a week.

If you really want to help your neighbor out, you might want to seek out a third person for your arrangement so that there’s another person to take on the children in this scheme and you have some extra time to excel at your classwork.

I’m a soon-to-be 22 year-old college senior with absolutely zero debt. My tuition and room & board is 100% paid for via grants and scholarships, and knowing that I’m super lucky to be in this situation, I want to take advantage of it if at all possible.

I currently have $2,000 in checking, $6,500 in savings, and have managed to save $4,500 in a Roth IRA over the years since opening it when I was 18. I also have $500 in a Scottrade account from my dad, but I largely let that take its course.

With a bachelor’s in Psychology, graduate school is a must if I plan on making a “comfy” living (to me, “comfy” = living below my means and saving money every month). By May, I’m anticipating having around $15,000 in checking/savings combined after financial aid payments and a monetary gift from my grandparents as a graduation gift.

What should I do? All the graduate programs I’m looking at are around $15,000 total. With that in mind, I’ll be living with my dad during graduate school so I won’t have to worry about rent or groceries (though I will have an added car insurance payment of ~$600/yr.) and by nature, I’m not one to spend frivolously, if at all. I know that CD’s don’t have the greatest interest rates right now, but would it be worth it to make possibly a couple hundred bucks by opening a CD if there aren’t any other “safe” options?
– Jaime

You have almost exactly the cash in hand that you’ll need to pay for graduate school, in other words? You have $15,000 in hand and will owe $15,000.

That means you’ll need access to all of that money in 9-12 months, which means that your CD options are pretty limited. You’re more likely to earn a bit more from your money by just shopping for a high interest savings account than you would from a short-term CD right now, with the rates as depressed as they are.

I just wouldn’t buy any CDs right now, honestly. The rates are so low that you can nearly match short term CDs with savings rates and the long term ones that offer you just a bit more will likely be painful in a few years when rates rebound.

Keep your money in cash and look for a high interest savings account.

My wife, myself and our toddler live in the San Francisco Bay area, and purchased our house this past April for $870k, with 20% down, 30 year fixed @ 5.125%. When we went into this, we were both working, I was pulling down $122k base, and she $105k base. Our mortage on the house is $690k, with our only other debt being 2 car loans, totaling $34k. So our monthly outlay is $5000 mortgage + taxes & insurance, and about $1400 for car loans.

Since then, our situation has changed – my wife was laid off in June, with severance that just finished. She is now collecting unemployment at $810 every other week while continuing to look for work. She’s also pregnant with #2, due in March, which makes full time positions harder to find as time goes on.

We’ve cut back on non-essentials like eating out, and canceled our satellite TV (which I’ve not missed at all). Our emergency fund is currently $6000, way too low I know. We have about $33k in stocks, and $175k in a mix of 401(k)s & IRAs.

The company I was working for was purchased 2 years ago, and a retention bonus was put in place for all employees, and just came due, so I’ll have a check for $87,500 before taxes on the 15th. I’ve also just accepted an offer for another job @ $155k base, with a $10k signing bonus. I’m very aware of how lucky we are compared to many folks struggling right now. After taxes are taken out of the retention & signing bonuses, there will be around $64k left.

My initial thought is to pay off the car loans to improve our cash flow ($30k left), and stick the rest into our emergency fund. At that point, my single salary will be enough to get us by until my wife finds work again, which may become June 2011 at the earliest. Does this seem like the best way to move forward? Is there anything else I should be thinking about?
– Dan

First of all, I know previous mailbag readers have complained in the past about responding to people with high incomes. An important thing to consider here is how high such a family’s housing expenses are. They have an $870,000 home for which they paid 20% down, meaning they took out a $696,000 mortgage over 30 years at 5.125%. Boom – there’s a $3,800 monthly mortgage payment. As the note mentions, their total monthly outlay for housing is $5,000 a month just to keep owning the residence. That’s $60,000 a year right there, folks, gone in a flash. That is the cost of owning a home in a city like San Francisco, and renting really isn’t all that much cheaper for anything comparable. To put it simply, someone in that situation has the same challenges as someone earning $45-50K a year in the Des Moines, IA area.

Having said that, you absolutely should use those bonuses to improve your monthly cash flow by paying off the car loans. That would unquestionably be the first move. After that, an emergency fund is a very good idea for what’s left.

I would encourage your spouse to spend her free time when she’s not job hunting doing everything she can to reduce your monthly expenses or bringing in more income, even if it’s just a little. If you’ve never taken a lot of frugal steps before, the money saving will probably pay off more. Air seal that home of yours so you’re not losing heating or cooling with the outdoors. Put in a programmable thermostat and program it so that the heating or cooling shuts off at night. Put heavy curtains up in your lesser-used rooms and use them to block direct sunlight in the summer months and retain interior room warmth in the winter months. Become a master of the kitchen and take charge of home meal prep so you’re not eating out. There are countless things she can do that will reduce your shared monthly expenses – and those things produce a return for you guys, just like any employment outside the home.

My fiancé and I just bought a townhouse with 25% down. Our broker told us that we could get a lower rate by putting 25% down instead of 20%, so we did. That extra down payment was a stretch for me though, leaving me with $1000 in my emergency fund and $500 cash.

My monthly cash flow will cover all of my current expenses, including all of the new housing costs. If my spending habits don’t change, I should have around $600 left over each month. However, every penny of that $600 is going toward the wedding. I need $3,500-$4,000 in 6 months if I want to pay my half of the costs. I won’t be able to start rebuilding my emergency fund until early next summer. Is that wise?

My fiancé still has $10K left in savings, so if I choose to save for the wedding, he can take care of me in case of an emergency. If I choose to save for my emergency fund, then I’ll probably have to ask him to cover more of our wedding costs.

I take pride in being able to support myself financially and pay my fair share of our expenses. Even though I know my fiancé won’t think less of me if I ask him to pay more for our wedding, I would feel bad inside, which is why I want to put all of my savings toward the wedding.

Is my pride making me foolish? Should I save for the wedding or for my emergency fund?
– Kat

You’re choosing to be married. That means that your financial futures are becoming a single financial future. Your expenses and his expenses are going to become our expenses.

Even if you keep your money separate, it doesn’t really work like that. The financial choices either one of you make will eventually help out or weigh on your spouse because of how it changes the money flow in your home.

Sit down today and start planning this stuff together, not as individuals splitting the cost of a wedding. You’re both going to be paying for this wedding, indirectly or otherwise. You’re both going to need an emergency fund. You’re both going to have the same housing expenses, the same electric bills, and the same internet bills. Start treating this wedding as the same thing.

What’s the best solution if you treat the two of you as a single person in terms of the money? That’s how you should start thinking about these things, because it’ll put you both in the best long-term state.

Good financial habits are easier if you’re life is stable – stable expenses, stable income, stable location so you can get to know the territory and find the deals. The details of my case don’t matter, because I suspect I’m not that unusual. Generally, I’ve been telling myself for years that once my life is stable (i.e. once I finish school and get a Real Job and settle down and so on), spending less than I earn and setting money aside for an emergency fund and savings will be easy … and so I don’t have to worry about that now since I’ll do it later, I can develop the skills later when it’s easy.

However, I’ve realized that in order to be happy, my life is going to continue to be unstable in some ways, and it might be that way for a long, long time or even most of my life. Do you have any tips for spending less than you earn and still managing to save when you plan to move from one city to a more expensive one in the next few months; when you anticipate continuing to move among neighborhoods with some regularity; when you often can’t anticipate very closely either your income or expenditures from month to month?

Personally, I find it really easy to just buy things that would be useful but aren’t necessary when I have money left over. I just won’t pay much attention to how much I spend on groceries because I don’t have a specific goal in mind and “as little as possible” leads to me feeling guilty about eating which is [messed] up in the first place and then I don’t eat enough until I go back to not paying much attention. (My grocery bill isn’t ridiculous and I rarely throw food out, but I am in a position where paying more attention to one of my main expenditures would be worthwhile.)
– Jessy

You’ve got the old variable income problem. It’s not even so much that variable expenses are the problem – everyone has them – but it’s variable income.

My suggestion – the one thing that’s worked for me – is to use a two account system.

Every single dime of income you make should be direct deposited into a savings account at a different bank than the one you normally use. It shouldn’t be very easy to access. Don’t allow yourself to have an ATM card for it or anything like that; in fact, consider having the bank in a fairly far-away town.

Next, set up an automated recurring deposit from this account to the account at your normal bank. This way, some amount is deposited into your checking account every week from this “hidden” savings account elsewhere. Make that amount small – an amount that ensures that your source account will never, ever run out. It should be an amount that equates with one of your lowest income months over the last year.

Now, live on that money in your main checking account. Let it guide the life choices you make. If that means you end up having to be roommates with someone in a tiny apartment in the city somewhere, so be it. That’s part of the equation for the lifestyle you’re choosing.

If you do this, then you can effectively budget your money each month. You’ve now got a steady income instead of an irregular one.

If, at a later date, you’re consistently earning a lot more, give yourself a “raise” and direct deposit a bit more each week.

My biggest money sink is video games. I don’t watch any television, but I’ll stay up playing games many nights a week with my friends online or at my apartment. I did the math and I realized that this is a really expensive hobby. I know you’re a gamer so I am wondering if you have any good ideas for how to cut the expenses. I have an Xbox 360 and a lot of games for it.
– Donnie

There are a lot of ways to reduce the cost of a video gaming hobby. I’ll comment on some of the stuff that I do.

First, I keep a close eye on video game deal websites, looking not so much for deals for games I want (though those are nice), but for deals I can exploit. This site is my favorite of such sites. I look for situations where I can acquire a popular game for really cheap, trade it for additional credit at a game trading shop, and hold onto that credit for the future games I actually want to play – usually an occasional new release that a bunch of my friends also are into playing (because video gaming is far more of a social hobby than it used to be).

I’m also not afraid of used games – in fact, the vast majority of my games are used. I constantly shop at and trade at used game stores, converting my old, played games into other games that I haven’t played. I’m in the “customer” club at two different local used game shops as well, which gets me 10% additional credit on trade-ins and 10% off any used games I buy or trade for.

So, instead of spending $60 on a new release at Target, I’ll go to a used game shop, trade in a used game I’ve played through for $10, get a $1 credit for being a regular customer, pick out another used game for $20, get $2 off for being a regular customer, and spend only $7 on an interesting new game.

My biggest advice? Simply get rid of the “cult of the new” mindset and play some of the classics available for your system. The biggest way to blow too much money on video games is to buy them the day they’re released. If you absolutely must do that, trade in your older games to take the edge off that blow.

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.

Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.