Reader Mailbag #47

Each Monday, The Simple Dollar opens up the reader mailbags and answers ten to twenty simple questions offered up by the readers on personal finance topics and many other things. Got a question? Ask it in the comments. You might also enjoy the archive of earlier reader mailbags.

As usual, we’ll start things off with a few links to older articles that directly answer questions I’ve heard recently.
The Basics of Estate Planning
How to Create a Debt Repayment Plan
How I Created a Budget that Worked for Me

And now for some reader questions!

Like alot of people, I have major credit card debt. If I die first, is my wife (or legal partner) responsible for that debt?
– Tommy

If the card is yours and yours alone, they’re not responsible for the debt. Of course, the executor of your estate will be responsible for settling your accounts, meaning that if you leave behind money when you pass on, that money will be used to pay off the debt.

The exact rules should be spelled out in the cardholder agreement that you received when you signed up for your card. If you don’t have a copy of it, request one from your credit card company.

My husband and I are in our early 30s and have managed to get rid of all of our high interest debt. In this crazy market, what would you be doing if you were in our shoes — continue to chip away at our mortgage (5.75%) or invest as much as we can since everything is on “sale”?
– Nancy

First of all, you’re asking about market timing – and market timing is a loser’s game. One can never accurately guess where the stock market is going in the future. We could wake up in a year with the Dow at 5,000 or at 12,000.

In short, putting money in the stock market is a risk. You have the potential to earn a greater return than with your mortgage – but you also have the potential to earn a far worse return (or a loss). Over a long period – ten or more years – the stock market is usually worthwhile, but over the short term, that’s not a given at all.

The question then comes back to your current financial situation and your goals. Are you planning on children in the near future? If so, you might want to go “safer” and put the money into the mortgage – or simply keep it in a CD or in a savings account. Is your big concern retirement? Then consider opening up a Roth IRA and put it in the stock market. Spend some time thinking about what you want to do in the future and that will lead you in the right direction. Don’t worry about timing the market.

A local bank (Newport Fed)is offering something called e-loop checking. You will earn 5% APY on every dollar UP TO 50K in their saving account and have free ATM fees anywhere if you do the following – make 10 check card transactions per calendar month and have one direct deposit or ACH exchange per month. For every dollar over 50K you earn 1.2%. If you do not make the required transactions, then you do not earn 5% for that month, you only earn 0.1% on the entire balance. You have to use electronic statements. Is this a good deal?
– DrFunZ

Unless you’re already routinely using a check or credit card far more than ten times a month, this isn’t a good deal. This account is really only worthwhile if you use the card that many times month in and month out.

Sit down and take a serious look at your current usage with your current account. Are you actually using a card that often? Or is that completely different than what you’re doing?

If your normal behavior does not involve using a card that much, don’t switch to this account. A new account won’t change your day to day spending behavior.

So, you’re rooting for Arizona in the Super Bowl. Any prediction about the final score?
– Al

Arizona 35, Pittsburgh 28.

Arizona simply has nothing to lose in this game. They weren’t expected to be there in any way. Aside from Warner, none of their players have been to the Super Bowl before. The odds are strongly against them.

This has pretty much been the story of every game Arizona has played this postseason. I just think they have the right mix of good leadership (Warner) and talent that doesn’t have a big burden of expectation (everyone else) that will put them over the top.

There is something basic I don’t understand about economics. Why are people always encouraged to spend? And given loans to do so?
– Josh

People are always encouraged to spend because the economy runs on transactions. The more transactions that occur, the more businesses that can exist to take advantage of those transactions. If everyone stopped spending, businesses wouldn’t be able to operate and then most people would be unemployed – and eventually, no one would be employed, the government would go bankrupt, and society would regress significantly.

People borrow money because they’re impatient for purchases, and banks are happy to lend that money because banks make money on the loan. It’s just another type of transaction where money moves from one person to another.

I recently received a gift of $10k from my father in law, yes this is truly a gift. However, he told me that he would like to see me invest in and create a handsome roi. I agree. I am a second year law student, I own a home in AZ (that I currently rent out) but live and rent in another state. I have 55k in a money market savings with capital one, no 401k, or other investments, I have about 80k in student loans accrued with about 30k more to go. I am trying to figure out what would be the best vehicle(s) to invest in. I keep hearing gold is strong and stable but don’t know too much about it, my wife thinks we should just put it in a CD for 1.5 – 2 years, I disagree, especially since the markets should rebound within the next year or two and I would hate to miss out. What would you recommend, I would love to have a 10% roi for this upcoming year, but realistically 5-6% would be suitable. What do you think?
– Andy

You need to decide whether you’re more concerned about getting a good positive return in your first year or if you’re more interested in earning a good return over the long term.

If you just want to show off a positive return in your first year guaranteed, you should buy something very conservative – something like a certificate of deposit from a bank. With that, you’ll get a 4% return or so over the first year guaranteed.

If you are more interested in building wealth over the long term – ten or more years – then you should be investing in the stock market. Put the money in a broad-based index fund (I use Vanguard for this) and sit back. You might not get a positive result in any given year, but you’ll get a positive result over the long haul, one that’s most likely substantially better than what you’d get in CDs – but there’s risk there.

I’m a 24 year old grad student, and I’m thinking about starting an IRA. I don’t have any debt – I have student loans but I have the money in the bank to pay them off (and since they’re subsidized, I’m waiting to pay them back to earn the interest on the money). I’m not eligible for a 401k through my employer. I think a Roth IRA is the way to go, and I’m eligible for one.

My question is, in this economy, what should I be investing in with the IRA? Or should I not even worry about an IRA at all yet?
– Liz

The best possible time to start saving for retirement is when you’re still single and early in your career. Being single means you have much more financial flexibility than you will later on with a family and other demands on your money, plus it gives you the longest timeframe for your investment to earn good returns.

In your situation, you’re absolutely right that a Roth IRA is the way to go. Look for an investment house that you’re comfortable with (I use Vanguard for my Roth IRA), then sign up and start an automatic investment plan. I’d recommend choosing a “target retirement” fund for your actual investment.

What do you allow your three year old to watch on television?
– Ellie

Our children don’t watch much television. We DVR a few specific programs from PBS and occasionally watch DVDs. My son basically has no idea what a commercial is (which I view as a good thing, as he sees them as being alien rather than the norm).

His viewing preferences center around Bob the Builder, Sesame Street, and Pixar movies. We don’t permit him to watch more than about 45 minutes of television a day – and even when it’s on, we usually turn the volume down low and get him engaged in something else (like reading a book).

What is a good book or program to teach a teenager about saving money? I have a stepson that does not learn anything from his mother (she cannot manage finances so isn’t teaching him anything) and our time with him is limited since he lives in another state.
– Leslie

Well, you’re going to have to somewhat rely on him to be self-motivated when learning about money. The best thing you can do is to simply set a great financial example for him when you have the chance to interact. Talk about things like frugality and money management and make them seem normal and also beneficial to the things you want to do.

If you want to send a book along with him, I’d probably recommend Please Send Money by Dara Duguay. It’s somewhat targeted more towards college students, but I often find that giving slightly advanced books to engaged and interested high schoolers will often get them to avidly read the book.

Don’t push him, though – frugality and money management isn’t a topic that most high schoolers like to think about a lot. Just provide a good example and give him the resources to learn for himself.

How many cloth diapers do I need for my baby?
– Mal

I would shoot for as many quality ones as you can, enough to make up a bit more than a full laundry load. The more diapers you have, the less often you’ll have to run a load of diapers and the less detergent and water you’ll have to use to maintain fresh cloth diapers. It also depends on whether or not you’re going to exclusively cloth diaper or if you’re going to mix cloth diapers and disposables.

If you’re going to do nothing but cloth diapering, I’d get a minimum of thirty five diapers – but getting up to fifty or fifty five or so is fine. If you’re going to just try it out, you can get by with a much smaller number – my wife and I started with twelve, though we’ve added quite a few more since then.

Got any questions? Ask them in the comments and I’ll use them in future mailbags.

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