Reader Mailbag: 3 AM

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. Locking in student loan rates
2. Future of Roth IRAs
3. Handling a mini-windfall
4. Planning for the unpredictable
5. Time for fun hobbies?
6. Stay at home mom decision
7. Overseas trip planning
8. Personal threats
9. Giving up a hobby
10. Ten best books

As I’m writing this, it’s three in the morning. Why am I writing this at three in the morning? We have a baby who seems to be crying every hour or so with some incredibly painful teething.

A nap may be in my future later today.

Q1: Locking in student loan rates
My girlfriend has one private $25K student loan that has a pretty good interest rate (4.2%)….for now. It’s a variable interest rate, which concerns me. I’m certain that interest rates will start creeping back up soon and before that happens I want to know if there is any way possible to fix the interest rate. We tried calling the lender and asking them to fix it, but to no avail. Do you have any other suggestions? Would writing a letter help our cause? Can you consolidate just one private loan to get a fixed rate?

– Josh

If your current lender won’t cooperate with locking in a rate, I would shop around. Contact other lenders in the private student loan business and see about consolidation.

Yes, you can consolidate a single loan if you’re eligible for loan consolidation. In that situation, it’s more of a refinancing than a consolidation, of course, but the procedure is the same.

You may have some difficulty finding a lender, however, as many lenders would prefer to have a variable rate loan on the books with interest rates as low as they are.

Q2: Future of Roth IRAs
I agree that the way the Roth IRA rules currently exist make it an appealing investment vehicle. However, I am not confident that the rules will remain unchanged for the thirty years until I start withdrawing the money. Do you see ROTH IRA’s as an easy target for which politicians will try to reduce the tax effectiveness?

– Tim

It’s difficult to say that any aspect of the tax code will remain consistent over the next thirty years.

However, I don’t see Roth IRAs as being the easiest target for politicians who want to increase revenue. Roth IRAs tend to be used heavily by people making between $50,000 and $150,000 a year – a group that both political parties want to have supporting them at the ballot box.

There are many other tax targets that the government will aim for besides Roth IRAs that don’t come with the political liability of targeting Roths.

Here’s my situation: My husband and I are at a point in our debt-reduction/financial turnaround where we are seeing encouraging results and feeling pretty positive about the do-ability of our dreams. Together we have *huge* student loans (about 2/3 federal, 1/3 private) that have recently entered repayment and we’ve got a handle on those payments for the time being – not really freaking out about it but sufficiently aware of the seriousness of this type of debt. We also have some credit card debt that we’ve been snowballing; we’re about a third of the way through that, estimating it’ll be gone in about 12-16 months. When that’s gone, the plan is to take the money that once went to cards every month and split it between savings and attacking student loans. We currently have two small savings accounts – only about a month’s salary in those, combined. We don’t own a car, we rent a small apartment in a major city, have good benefits thru work, and are generally getting by a little better every month, thank goodness.

So, in the coming weeks & months we expect some irregular bumps in our income due to some side work we are each taking on (about $5000 total, after putting away some for taxes since it’s freelance work). In addition, our rent for the month of June ($1200) will be free because of a promotional deal when we signed the lease. We’re debating how best to handle this surplus – really wipe out a huge chunk of cc debt, or put it toward the loans, or add it to savings, or somehow divide it up between the three? I realize I didn’t give you specific debt numbers to work with – but based on this, can you get a sense of what would be a wise use of this money? And for the record, we do plan to use about $100 on a train ride or car rental for a much-needed day trip out of the city (don’t worry, we’ll pack a picnic!).
– Angela

It is really hard to say what the best move is without specific numbers.

For starters, I would make sure that you’ve got a debt repayment plan in place, preferably ordered by the interest rates on the loans. Pay off the high interest rate loans first.

Where should a large emergency fund fit in there as a priority? There is no right answer. I usually encourage people to first have a $1,000 emergency fund, then pay off their high interest rate debts (anything over, say, 8% or 9%), then build a larger emergency fund (up to three months or so of living expenses), then pay off all remaining debts. I think this is a good general plan to follow.

Q4: Planning for the unpredictable
I am graduating from college this May and will immediately commission as an USAF Officer. Since childhood my parents have always been supportive of my interest in personal finance and are very open about their own financial situation. In particular, what struck me is that they were very regular about saving for retirement until ‘life’ happened in the ‘80s: my two older brothers and I were born in two year increments like clockwork. Since that time, for various reasons, they have saved very little for retirement and will have some tough decisions ahead.

My current situation: My service commitment is 10 years (pilot). I am single, will not buy a house for at least a decade (I PCS every 3 years to a new location), and I have just purchased (in cash) a nice used diesel Jeep that I plan to see through 300,000 miles. I have one $27,000 personal loan with a 5-year term @ 4.99% interest left over from school, no credit card debt, and I already have a 6-month emergency fund in place. I will have very predictable income, expenses, and pay increases during my service.

My plan: Fully fund Roth IRA to $5000/year, fully fund Thrift Savings Plan (Government 401K) to $16500/year, and make minimum monthly payments on the loan. Achieving this is as simple as not letting my lifestyle ‘inflate’ too much from college.

My rationale: While I don’t like the idea of debt, my logic is this: by not making additional payments on the loan, I am able to fully fund TSP – reducing my tax burden by more in a single year than I will pay in total interest on the loan over the course of 5 years. My pay will increase at the 2 year mark, and I can use the excess monthly income to pay down the loan rapidly. If my circumstances change (marriage, etc.) it is only a matter of reducing my contributions to TSP to put more money in my pocket each month. When the loan is paid off, I will have plenty of monthly income to start saving for other goals (like a house).

Is my logic sound? If I anticipate “life” happening at some point, but can’t predict when, is it not logical to take FULL advantage of the investment vehicles available to me while I am a bachelor with essentially no commitments?
– John

I absolutely think it makes sense to “front-load” your retirement savings with as much money as you can when you’re very young. Every dollar you contribute to your retirement in your twenties is the same as contributing several dollars in your forties and fifties.

My only suggestion to you would be to make sure you have something of an emergency fund in place – at least $1,000 in cash. This way, when small “life” events happen, you’re not forced to dip into debt to handle them. Replenish this fund as soon as possible every time you need to use it.

It is often very tempting to stop contributing to retirement when big “life” events happen, but try as hard as you can to avoid it. People never complain about having too much money in their retirement accounts.

Q5: Time for fun hobbies?
How do you find time for fun hobbies like boardgaming and still have time for your career and for your family and for any kind of self-improvement?

– Elliott

The biggest reason is that I don’t “waste” time. I don’t spend time idling in front of the television and I rarely do it in front of the computer.

If I have spare time, I usually try to engage in some activity that has real value to me. That means either engaging in something that needs to be done (a household or work task), some kind of self-improvement, or a clearly defined leisure task (such as playing a board game with someone).

I’m often amazed at how much time I wasted once upon a time.

Q6: Stay at home mom decision
My husband and I are 28 years old and recently found out we are pregnant (which we are THRILLED about and it was planned), and before this, we had done some inventory of our budget and have been saving pretty intensely. My husband makes about $3,200/month (after taxes) and we try our best each month to use only his salary for all of our bills, groceries, everyday expenses, etc. We usually come up at least $500 short. I make about $3,400/month after taxes, and of that we put just about $2,400 directly into savings, and the other $1,000 gets put into a separate checking account that we pull from to make up the difference in our monthly expenses that can’t be made using just my husband’s paycheck. We also decided we’ll try to use this checking account for most expenses when summer comes (my husband is a teacher and therefore doesn’t get paid in the summer). We’ve been exploring other ways of saving some money, which has included the possibility of getting rid of cable (this will be a tough one for the husband – huge sports fan. But we do have Netflix and a Roku box which would allow us to stream from amazon and hulu when we wanted), and we’ve gotten pretty good at planning meals at the beginning of each week and only going to the grocery store once per week (that alone as saved us up tp $75/week or more), and rarely going out to dinner. We currently have $14,000 in a savings account, plus a few stock accounts which probably add up to about $10,000. Our only debt other than our mortgage is my student loans (about $45,000 worth) which I pay the minimum payments on each month which ends up being about $350/month with a 6.125% interest rate).

I recently just started a new job (accepted the position and two weeks later found out I was pregnant!). We are struggling with the decision of whether or not I should stay home when the baby comes. This is something that means alot to BOTH of us. I’ve always wanted to be able to stay home, but I worry that it will put us in a tough financial situation if I do. Since I just started, I will not be eligible for any sort of extended leave with the Family Medical Leave Act, therefore the most I see myself being able to take off is about 8 weeks (6 weeks disability plus 2 weeks vacation time). This upsets me to even think about. I can’t imagine only staying home this long. While I know my husband is supportive of me staying home for a little while (we figure we can easily do this for one year or maybe a little more with what we have in savings), I worry that 1) I have no idea what the job market will be like when I decide its time to go back to work. The economy is so bad, and I work in public health (on grant projects no less). These types of programs are frequently the first to get cut when state budgets are struggling. 2) I worry that if I do stay home, we will be unable to save much of anything until I get back to work.

We’ve thought about how much we would save in childcare costs – which is substantial. We’ve also realized that I spend almost $200/month on gas, given my job is about 33 miles away from home. This is money saved if I were to stay home. BUT – we also have decided that we may want to trade my husband’s car which is a 2 door coupe for something more family friendly. This would add a car payment to the mix, which would easily replace the $200/month we’d be saving on gas.

I guess I’m just looking for advice. What do you think of our situation? Do you think its a stupid decision to leave a good paying job to stay home for a year or two, not knowing what the job climate will be when I’m ready to return? Any help is so appreciated!
– Kate

I don’t think it’s a stupid decision at all. My wife took FMLA leave (unpaid, without benefits) for almost a full year recently to be with our children when they were young. I changed my career path so that my time would be more flexible, too. The time that your children are young is a time that, once it’s passed, will never return.

I would not stress yourself out about what the job climate will look like in two years. It’s almost impossible to say what it will look like then. The job you have now might not exist, either, so staying in isn’t a guarantee that you’d be working in that field in two years.

It sounds like you’re in pretty good financial shape for making this move. If it’s something you feel compelled to do, then you should do it.

Q7: Overseas trip planning
I am taking an overseas trip towards the end of the summer this year. I will have the money for the trip saved up by then. I like to put all of my purchases on my credit card(s) and pay them month to month. I know both of my current credit cards charge a foreign exchange fee of 1% of each American dollar spent. One card is a Visa and one card is an American Express, which I have read is not accepted outside the country often. Do you have a recommendation for a card with a 0% foreign exchange fee? Or is there a better way to handle money/purchases overseas? Does the exchange rate make a difference in the choices I should make? Although, I suppose 1% is not very much money considering how frugal I am on trips; pictures and experiences, not souvenirs’, are what make a trip worthwhile to me.

– Daniel

Right now, there aren’t a ton of cards that offer a 0% foreign exchange fee. Most of those cards are pretty limited in terms of rewards, so if you’re an active rewards user, it’s probably not worth it.

If you are seeking such a card anyway, most of the major credit card issuers (Capital One, Chase, Citi, etc.) offer a few cards that have a 0% foreign exchange fee.

My experience with foreign travel was that my ATM card handled everything I needed quite well. I was able to easily use international ATMs after informing my bank that I was traveling abroad.

Q8: Personal threats
I started a blog like you suggested as a creative vent and to maybe earn a bit of money. It was going really well until yesterday, when someone sent me a very personal threat. Have you ever received such a thing? How do you handle it?

– Shanda

I receive two or three such disturbing messages a week. At one time, they really bothered me – in fact, I closed up my first successful blog (a parenting blog) because of them.

Now, I basically ignore them. The people who would send such things are people who are “internet brave,” meaning they’re willing to show their sadistic side only because the internet offers them some anonymity. They’re cowards, in other words.

I have been called almost every insult you can imagine. I’ve been sent Photoshopped pictures of my children. I’ve been sent a few emails that I would describe as being essentially “snuff.” Frankly, I don’t care any more.

The only drawback I’ve seen to such things is that it basically desensitizes me to some things that might be considered legitimate complaints. I often view people who come at me with negative tones as being the type of person who would send such stuff, and I’ll either just ignore them or respond with a “get a life” type of message.

Q9: Giving up a hobby
I used to play guitar and bass in a band through college. I put a lot of money into the equipment I have. I have 5 guitars/bass of various styles and 3 amps, which I probably spent $7,000 when all is said and done. Now that I am out of college the inevitable happened: I don’t play with a group anymore. While my finances are good (1 year out of college, no debt, own my car, $60k in income a year) part of me says just letting the equipment sit there is not doing me any good. The other part of me is in pain thinking about trying to sell them (memories of playing and thought of trying to sell all of it doesn’t exactly thrill me).

– Josh

The first question is whether any of this has significant re-sale value. Can you get much out of it used? I can’t tell you the answer to this because I don’t know the equipment and I’m not familiar with guitars. Does this type of equipment sell well used on, say, eBay?

If you can’t get a large return on it, I’d just keep it. You might yet have value from those instruments.

If there is significant value there, you have to ask yourself how much time you want to put into selling it. Generally, the more time you put into selling it, the more you’ll make from the sale because you can break the sale down into smaller pieces and try more approaches. If you just want to get rid of the lot, invent a fairly low price and list it all on Craigslist as one giant lot.

Q10: Ten best books
My question is what are 10 books recommended to read? I don’t mind financial, investing or leisure books and if you categorize them but what are you top 10 favorite/most read/most worth reading books.

– Samantha

That’s like asking a record collector what his ten favorite records are. I’ve read thousands of books over the years. Picking ten favorites is basically impossible.

I tried to come up with a list based on asking myself what ten books I’d keep if I could own only ten books. These would have to be books I could read and re-read and read again and find value in each time I read them, either from the content or the writing style or from something else entirely. This is what I came up with.

Your Money or Your Life by Joe Dominguez and Vicki Robin
Getting Things Done by David Allen
Walden by Henry David Thoreau
Voluntary Simplicity by Duane Elgin
The History of Western Philosophy by Bertrand Russell
The Complete Poems by Walt Whitman
Invisible Man by Ralph Ellison
A Prayer for Owen Meany by John Irving
A Game of Thrones by George R. R. Martin
House of Leaves by Mark Danielewski

This list is far from constant, and I might give you a drastically different list in a month.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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