Reader Mailbag #73

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.

Why do you consider “a bit of interest on the checking” to be so important? If your average checking account balance is $1000, and you get 0.25% interest on it, that’s $2.50 a year. Even if your average balance is $5000, that’s $12.50 a year. Sure, that’s $12.50 that you didn’t have before, but it doesn’t seem like enough to make “interest on checking” an essential requrement for choosing a bank.
– Johanna

I view not having such interest as essentially being an invisible fee charged to you by your bank, for starters. Given that quite a few banks have at least a bit of interest on checking account balances, not having that feature is in essence a fee.

It’s not a make-or-break feature, but would you tolerate it well if your bank suddenly started issuing a $12.50 annual fee for “account services”? Probably not – you’d call and complain.

So why tolerate no interest when you could be getting a little?

Where do you draw the line between saving money in order to have a better life later versus spending money to have a better life now? My dilemma: I’m currently saving $500/month by living with a roommate. This money all goes toward paying off my student debt ($18,000 principal balance, with 6.5% interest). However, I’m at the age (mid-twenties) where I would really prefer to be on my own. I found a studio apartment that would be more than my current rent, meaning I would only save $300/month.
– Becky

You draw the line wherever you want, because it’s your life to live.

If you find that it’s worth $200 a month more to live on your own in a smaller apartment than having a roommate in a larger apartment, then by all means, do so. I cannot tell you what your values are – all I can do is suggest ways to think about money and save money.

You have to come to the value conclusions yourself.

I’m just curious about some aspects/areas of finance and frugality that you DON’T touch on your blog or don’t subscribe to in real life. Other than couponing and the fact that you are willing to pay premiums for good food, I can’t think of any specifics that you’ve mentioned.
– MT

Hmm… I really don’t like haggling. If I think a price is unfair, I just walk away from it and don’t bother. There are a few exceptions to this, like at the very end of a garage sale or a farmers market where the items are likely headed to the dustbin anyway.

I rarely shoot for the bottom dollar on any item I purchase. Instead, I’m more of a researcher – I’ll look carefully at the multitude of options available, figure out where the best bang for the buck resides, then try to get the best deal on that item.

I don’t tolerate dogma or zealotry very well at all. I don’t believe there are “rules” to frugality – instead, I believe in figuring out each situation and finding the best deal for you. If you hold to the absolute truth that you must always buy a used car or that you must always buy generic and feel the need to fling insults at people who don’t subscribe to those rules even though they did their own investigation and simply came to a different conclusion, I have little need for you.

I don’t think excessive reusing is a good frugal strategy. Many people seem to believe that saving everything, from ice cream buckets to newspapers, is a good idea because eventually you’ll find a use for it. Instead, it just seems to overload you with more stuff than you can manage. Having more stuff has a real cost – time spent finding things when you could be enjoying your life.

I’m 18 years old but looking about 7-10 years into the future at the purchase of my first house. Without getting into the whole renting vs. buying debate, I’m internally debating whether or not it would be a good idea to put my savings toward a down payment into my Roth IRA for the time being and, when the time comes, use the contributions earmarked for the down payment plus some earnings (since up to $10,000 would be non-taxable for a first time home buyer).

My thinking is this: with the way the market is now, I have a great chance to buy low. I’d like to think that, in 7-10 years when I’m looking to buy, the economy will have turned around, allowing me to sell high. This idea wouldn’t affect my normal contributions to my Roth IRA and I’m thinking that I’d determine how much of the earnings I’d pull by some simple ratio of (contributions earmarked for down payment/total contributions * earnings).

Thoughts? Ideas? Comments?
– Kevin

Saving for a home is a really good idea. The only problem with this is that you’d be stripping out your Roth IRA and essentially starting over in terms of retirement savings in ten years.

Think of it this way: if you put in $5,000 a year between now and 28 and the stock market returns 7% a year, then stopped putting in another dime, you’ll have more in the account at retirement than if you emptied it out and contributed $5,000 a year for the rest of your adult life.

Depending on where you live, there may be a better option. Montana, for example, has a first time home buyers savings program that stops taxes on any earnings. Other states have similar programs, and there is talk of a federal move to do the same thing.

If I were you, I’d start contributing to a Roth, like you suggest, but if a federal plan for home savings comes through, switch to that immediately. Leave the money in the Roth and don’t touch it unless there’s a real need.

Trent sees college as just a way to make money. The primary purpose of college should be to gain a liberal arts education.
– Michael

I don’t see college as a way to make money – for some people it is, but for many people (who don’t finish, or who earn a low-paying degree) it’s not at all. I do see college as a waste of money for many people straight out of high school who aren’t really equipped to actually appreciate a liberal arts education.

So, if I had a child who had a successful business going out of high school that wanted to put off college for a few years, I’d thoroughly approve it. The years spent learning how life really works while getting that business going will either teach him what it takes to make that business roar or show him the real value one can get out of college.

I didn’t really understand what was useful about college until I was mostly finished with it. I basically looked at it as extended high school – which is completely the wrong approach. Many of my friends and others in my class did the exact same thing – if you got a good grade, that was all that mattered.

Now, I see the value in actually learning things – and learning how to learn. College is jam-packed with opportunities, but many people straight out of high school simply don’t see them – or they don’t value them much at all.

My husband and I recently withdrew equity from our house in order to pay off considerable credit card debt. I felt that this was a reasonable risk because 1) we owe less than one quarter of our home’s value in a mortgage, 2) Our bank offered us a HELOC loan with a fixed rate of 4% for the next ten years, 3) we would be able to pay off the loan within 10 years with a lower payment than we were currently making on the credit card, and 4) the interest rate on the credit cards were much higher than 4%. I was so relieved when we sent in the last credit card payment and paid the full statement balance. What I didn’t expect was that this month the credit card company sent us another bill for a full months interest even though the balance had been paid off in the last statement. The company said that this was for the difference in days between when the statement was issued and the balance was paid. What I don’t understand is that the last payment was made before the due date and no further charges were made, so how can they charge me more interest?
– sleigh

It sounds to me like your credit card company uses two-cycle billing, which pretty much acts exactly how you describe. There’s a great description of it over at All Financial Matters, but what it essentially means is that the credit card company uses an average of your balances over the last two months to calculate the interest you owe this month. Thus, if you pay off your whole balance, you’ll still get another bill.

Discover is known for using this tactic, for one. My wife had a Discover card for a while which she’d pay off every two or three months, yet she’d keep getting another small bill after she thought she had paid it all off.

I don’t understand what you mean when you say you’re leaving lots of moneymaking opportunities for The Simple Dollar behind. What could you do to make money on the site that you’re not doing?
– Angie

I could run more ads. I could sell links during my weekly roundup (I’ve had some surprisingly large offers). I could sell reader mailbag questions (again, I’ve had offers). I could sell whole posts. I could sell individual links in posts. I could do paid reviews for specific products. I could run ads for products I don’t approve of – I’ve had some huge offers here. I could sell my name to various financial products.

I don’t do any of these things. Instead, I just run a small handful of ads, enough to pay the bills and keep food on the table.

Why not cash in? The real issue is that lots of people trust what I write. They recognize I’m not perfect and I do make errors, but they also know I’m not out there lying to them, shilling for things I don’t believe in. Those people will stick around for the long haul. They’ll tell their friends about the good stuff they read here. They’re likely to buy books that I write in the future. If I came to their town, they’re likely to attend a talk I would give. They even support charities I talk about, like Jump for Joel.

That trust is a long-term trust, and it’s not one I will ever sell out. Doing the things I describe above tells those people that trust me that they should no longer do so.

Another big problem: if I started writing stuff like that, I would stop really caring about The Simple Dollar at all. The passion I have for doing this is what fuels the site, and if it were merely a way to scratch out some cash, my attention would pretty quickly go elsewhere.

If I were writing The Simple Dollar to turn a quick buck and didn’t really care about that relationship, you better believe I would cash in. Flashing ads for bogus loans and articles talking about how great a $4,000 debt consolidation program is would be all over the place.

I noticed that you’re reading Infinite Jest along with the Infinite Summer “book club.” How is that going?
– Will

Pretty well. Infinite Jest is a novel that I read in college and started rereading twice since, never finishing it either time. I’ve always thought it’d be enjoyable to read it in something of a “book club” format, so I decided to jump on board the opportunity.

Infinite Jest is a really, really good, but really, really complicated novel. It’s over 1,000 pages and you need to read it with two bookmarks (seriously) because the “footnotes” at the back actually make up a fair amount of the story. The amount of stuff going on at times often seems overwhelming.

Having said that, it’s probably the best picture of modern life and addiction that I’ve ever read. It’s funny, it’s entertaining, it’s thought provoking – what more can you really want?

My mother loaned me $5,000 a few years ago to help me buy a car, put a deposit in on an apartment, and get a few basic furnishings. At Christmas, I wrote her a $1,000 check in an effort to begin paying her back. She got upset, refused it, tore up the check, and told me to keep the money. I now feel guilty, because I think my mother needs the money. Any thoughts?
– Ruben

My suggestion would be to repay your mother by helping her in other ways. Take her out to lunch regularly. If she says things are tight, offer to cover a bill for her. Help out around the house once in a while so she doesn’t have to spend money on a housecleaner or a gardener.

There are lots of ways you can repay that $5,000 – and more – without writing big checks. I wouldn’t be surprised if that’s what she wants – and even if she doesn’t, she’ll surely appreciate the time together and the little efforts you make.

Your mother helped you out when you really needed it. Now it’s your turn to repay the favor, but it’s not as simple as just writing a check.

I was pretty much a [screw]up for most of the last decade, but in the last year I’ve really started turning things around. I have a job, my own apartment, and a good girlfriend that I don’t deserve. The problem is that no one in my family trusts me with any sort of responsibility. What can I do to show them that I’ve changed?
– Dan

Actions speak far, far louder than words.

The next time a family event happens, show up early to help. When there’s a crisis, step up and be there for people who need it. Volunteer to help with things that need done, like driving a parent to a doctor’s appointment. Give thoughtful gifts for gift-giving occasions, not just what you found at the gas station on the way.

Over time, if you keep doing these things, they’ll begin to see that you’re actually changing your ways. Telling them you’ve changed doesn’t really matter – they’ve probably been burnt before by trusting words.

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

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