Reader Mailbag #83

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.

I recently graduated college and have 2 student loans to pay off:
Loan 1: about $4,000 left on it with a 6.8% rate
Loan 2, Part 1: about $3,000 left with a 6.8% rate
Loan 2, Part 2: about $7,000 with a 4% rate
Loan 2, Part 3: about $6,000 with a 5.3% rate
The kicker on loan 2: I was ‘automatically selected’ to pay off both part 2 and 3 before I can even start paying off part 1 (with the crazy high rate).

I have asked around and done a bit of research on my own. Really the only thing that I keep coming back to is Ramsey’s idea of paying off the smallest loan first, while still making minimum payments on the other loan (so I don’t default). I have already built up an emergency fund and am trying to decide how to tackle these loans that would be the most profitable in the long run.

Any and all advice will be welcomed. Please and thank you in advance!!
– AReynolds42

The first thing you need to do is figure out the true interest rate on that second loan. Effectively, you need to treat loan #2 as one loan – ignore the separate “parts.”

It’s easy – multiply $3,000 by 6.8%, $7,000 by 4%, and $6,000 by 5.3%, then divide all of it by $16,000. You get 5.0125%. Then, compare that interest rate to the other loans and start paying off either the one with the smallest total (the first loan) or the one with the lowest interest rate (again, the first loan), depending on whether you’re using the Dave Ramsey plan or the mathematically superior plan.

The answer’s easy for you – pay off the first loan first and just wait on the second one.

What is your process of reviewing books? Do you read the whole book and then do the review? Do you have any advice for writing good book reviews?
– Jules

I usually read the book chapter-by-chapter or section-by-section and jot down my impressions afterwards. Sometimes, I focus in on the big point of the section – at other times, I end up jotting down the individual point that sticks with me the best.

Once the book is done, I write down a few final notes on it and ask myself whether it was a worthwhile read.

From those scribblings, a book review comes together pretty easily. The real time investment is in the reading. I tend to put two hours a day aside for just that purpose – reading for the purpose of learning more about personal finance, careers, and so forth and writing reviews of those books.

Uh…you think emergency funds should have no limits? So, if I was a college kid with a $50,000 emergency fund in a savings account, you wouldn’t suggest I do something with that money?

One should never stop replenishing an emergency fund, yes, but that’s because emergencies keep using it up.
– Michael

Michael, it might be useful to put away your “jumping to conclusions” mat that you like to pull out all the time.

Yes, I think an emergency fund should have no limit. No, it doesn’t necessarily need to all sit in a savings account. Put some of it into CDs or bonds or short term treasuries.

An emergency fund shouldn’t just be used for negative emergencies. Life often throws us opportunities (or positive emergencies), and our emergency fund should be there to easily help us with those, too. That means the typical “six month emergency fund” – intended to just help with negative emergencies – isn’t enough. You need more. And given the number of opportunities we have in life, the more the better. If you keep your ears and eyes open, life is full of great opportunities.

In the past five years, three of my grandparents have passed away, having had the usual run of health issues, and having been helped tremendously (at near-sainthood levels) by their respective children – my parents, aunt and uncle. My sister is on the verge of getting married, and we’ve been debating the merits of having children. I love children, and hope to have several of my own. My sister doesn’t much like children, and doesn’t consider herself good “mom” material. But we both agree there are lots of times in life when having family support is necessary, and old age/failing health is the biggest. We always expected that the grown children would take care of the parents. But what if there are no children? Seeing the number of families where the kids grow up and are completely estranged, unwilling to help take care of aging parents, there’s no guarantee they’ll take up the task either.

My sister says raising kids and paying for college is expensive, and that amount of money invested wisely could pay for a great deal of home health care when the time comes. Does that work? We have a family friend in her 90’s, never married, who has had a home health care aide (let’s call her Jane) for years, who does all the cooking, cleaning, personal care and PT. How do you estimate how much to save for that? I suppose it’s like planning for retirement, but sadder.
– TheOtherKathi

If you have children and raise them in a loving and supportive environment, they’re often there for you in your dotage. I’ve seen it time and time again in my own family and in my wife’s family as well.

If you don’t have children at all, you simply don’t have that support. You don’t have children popping in to check on you or calling you every day. All you have is you (and perhaps your spouse).

That’s not a reason to have a child. If you’re not capable of being a good parent, your children won’t be capable of being good children. Don’t have children unless you want to have children.

Another caveat: it’s a bad idea to plan on your children helping you. Instead, you should focus on not being a burden to them in your final years – they’ll often still help you, but it’s impossible to predict how much they’ll help you.

Do you dream in color or black and white? Do you remember your dreams?
– Ashley

I dream in frighteningly vivid color. Sometimes, I have dreams that remind me of Yellow Submarine, actually – I don’t know how else to describe them. Many of my dreams are more reality-based, though.

I tend to remember one dream a night or so and I usually write them down in as much detail as possible in my journal. For example, last night I had a dream that my wife and two kids passed away and I wound up remarrying a very short woman – I never did see the woman’s face. She had also lost her husband in an accident and we found each other in a support group. She had a teenage son (that I do remember) who practically demanded that we get married.

I usually write these dreams down because they become the basis for short stories later on. I read through these recollected dreams and every once in a while, one will become the source of a piece of fiction.

Me and my partner are planning to go to live in Southeast Asia for up to a year (or longer – it’s very open-ended). We both have roots there, and think it would be one of those life-enriching experiences that we’d never forget and would thank ourselves for later on in our lives. We’re planning to use about 20k in savings to pay for basic things, and then try to start a little business (English tutoring, guest house, or online service). However, we’re both concerned that when (if?) we get back to the US, we’ll have to resort to office/other drudgery again. Also, our parents are getting to that age where they need more of our financial and emotional support. Being in a traditional family, they’d like to see us buy a home to which they’d most likely move to as well. Do you think it makes sense to travel now or to hold it off until we save more?
– Ty

Travel now.

Here’s why. The older you get, the more likely you’re going to be entangled in many different demands in your life. Your parents will be in worse health. You may wind up with children whether you intend to or not. You’ll become a part of a community and more attached to the people around you.

And travel will seem less realistic than it does now. It’ll be harder to take such a leap.

The best time to do such a thing is when your entanglements are few, and they’ll never be fewer than they are now.

If you’re dreading returning to “drudgery” when you return, you should consider a different career. What do you consider to not be “drudgery”? Think about that and try to find work in that direction.

Do you ever write fiction?
– John

I try to write a short story a week. I’d love to be able to write more than that, but fiction writing is harder to find success with today than nonfiction and memoir writing (which is what The Simple Dollar is, for example).

I’d love to be able to primarily write fiction at my own pace, but that’s a future that seems a long way off. My plate is happily full at the moment, so I mostly work on fiction to keep myself from getting completely rusty.

I haven’t written anything that I feel is publishable yet, but I may be too hard on myself.

May I know what you consider as the best personal finance book for people in their 30s that you have read so far?
– Joy

It depends on what you’re looking for.

If you want a book that focuses on the nuts and bolts of investing and money management, I’d probably vote for Get a Financial Life by Beth Kobliner.

If you’re re-evaluating your whole relationship with money, nothing beats Your Money or Your Life.

If you’re at a career crossroads, look at something like Career Renegade by Jonathan Fields.

Those all speak well to thirtysomethings, I think.

How much money does a person have to have before you consider them rich?
– Kelly

There’s no set dollar amount.

For me, a person is rich if they can wake up each morning and do whatever they want to do. It might be some kind of work or it might not, but the person has the freedom to choose between work and play and define entirely for themselves what work is and what play is.

That, to me, is what it means to be rich. It doesn’t mean a huge number of investments or a fleet of expensive cars. It just means freedom.

Did you enjoy Professor Layton and the Diabolical Box? You tweeted about it a few times.
– Kathy

It’s just as good as the first Professor Layton game, if not better.

For those unaware, Professor Layton and the Diabolical Box is the second in a series of games for the Nintendo DS. The games are simple adventure games (with amazing graphics and voice work) that involve solving a huge number of puzzles – 150 directly in the game and a few very engrossing puzzle-based side quests.

Both games are well worth playing. They only have between five and ten hours of gameplay in each one, but it’s some of the most enjoyable gameplay around. It’s great to pick up for fifteen minutes, solve a few puzzles, dig a bit deeper into the story, and then put it down.

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

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