Reader Mailbag #98

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.

If I have to get an auto loan to finance purchasing my next car, I can get one through my credit union (running about 5%, with an active checking account) or through the dealership (special 3%APR on 2010 models). I prefer your route if saving up and paying cash for a late-model used car. However, if one has to choose between loans, which is better – the credit union or the dealership? My parents always strenuously argued against dealership loans, and I had the vague impression it’s like buying batteries at the gas-station convenience store: you can do it, but you’ll pay a premium. OTOH, the dealership rates look awfully tempting. What are the pros and cons of each?
– Kathi

The big disadvantage of dealership loans is that they almost always carry more hidden fees than a credit union loan. Before you sign any contract, read the agreement carefully. It only takes a few fees adding up to a few percent of the car’s price to undo any interest rate advantage you might get.

Your parents’ wariness against dealership loans is probably largely based on such hidden fees. Added on top of that, unless you buy when there’s a strong financing deal going on, dealership loans don’t offer great rates, either. Thus, the general consensus is that if you’re not digging in and studying what you’re doing, you’re better off using a credit union for such purchases.

The big thing to remember is this: read the contract before you sign. If you don’t know what something is, find out – preferably from an independent source.

I appreciate the idea of shopping bulk and then cooking and freezing, but this plan depends on two things: having a car to do the shopping, and having a good-sized freezer to do the storing. What frugal cooking advice would you give to someone who has neither? (I live in a city, so no car needed, and I have a mini-fridge with a freezer about 12?tall x 18?wide x 45?deep)
– Enma

In your situation, one of the best things you can do to reduce your food bill at home is to buy plenty of dried beans and rice and use them in lots of different meals. Buy these items in bulk rarely when you have access to appropriate transportation – especially the rice, since a big bag of rice can be heavy, but it can save you a lot per pound.

Complement these items with plenty of fresh vegetables. Use your grocery store flyers and choose items that are on sale to make the centerpiece of your meals that week.

Given your situation and the fairly short shelf life of fresh vegetables, I would suggest perhaps shopping just for fresh items two or three times a week, hitting the specials at different stores each time. This will allow you to eat very fresh stuff, have some variety, and keep it cheap.

In your last Time Machine post I was following a few links and came to your post of 101 goals in 1001 days. I was very inspired and started my own list. I noticed that the end of your 1001 days is coming up in January. Are you going to give us an update?
– Sarah

It’s close enough to the end that it’s probably appropriate to comment on my 101 goals in 1,001 days list, so here goes.

I accomplished 52 of the items. The biggest reason I didn’t accomplish the rest of the items was the change in family dynamics after the birth of our second child, which actually altered things more than the first one did (since just trading off with the child didn’t just leave the other parent free to do things). Some of them – like the travel-related ones – became more difficult after changing careers and buying a house, both moves that were done to allow me to focus more on my family. A few were complete pipe dreams, but I still came surprisingly close to reaching them, anyway. One, for example, was to reach 100,000 subscribers to The Simple Dollar when, at the time, I had 8,212 of them. I really didn’t expect to ever accomplish it, but I came much closer than I would have guessed, as I now have about 72,500 or so.

When the deadline hits, I’ll do a final count and then take care of #26 – donating to a charity for each item I missed.

I’ve been thinking of changing from the Fidelity debit card I have to a similar credit card with cash back. I’m worried about possibly losing my debit card and having money hijacked out of my account. Should I make the switch?
– Dale

If the debit card has a Visa or MasterCard logo attached to it, it affords the same protections as credit cards of the same type. Most of the horror stories floating around out there concerning debit card fraud occurred in the early days of such debit cards before Visa and MasterCard had extended such protections to the cards. However, you should always use your debit card as a credit card when making purchases. Tell the retailer and sign the receipt – don’t use your PIN, ever.

If you are uncertain exactly what protections you have, check out your bank’s web site – in this case, Fidelity.

That being said, no matter what card you’re using, you still need to be vigilant. Keep an eye on your account and make sure you know exactly what every charge is. The second you see a charge you don’t know, call your bank.

My view is that, all things being equal, cash back credit cards are a bit safer than debit cards. For example, MasterCard’s liability statement clearely states: “Zero Liability does not apply to MasterCard cards if a PIN for a debit transaction is used for the unauthorized purchase.”

I have 4 student loans which have gone into default and been thrown to the collection agencies, roughly a couple of months ago. I had been granted economic hardship deferments for the last 4 years, but the time came to make the hard decision to just default – especially since I moved out of the country (yes, I was one of those people, but not just to escape debt – it was also a personal career move).

The loans are 1 federal Perkins direct loan [excised specific info]. The other 3 are Federal direct Stafford loans [excised specific info].

My questions are: if the loans have already gone into collections, are they still collecting interest? I think they are, but aren’t sure. What would your plan of attack be for getting rid of this debt? I think about the way of doing $1000 in emergency savings, and then using the debt snowflake and starting with the smallest debt first\, but there are so many options to choose from.

How would you handle it?
– Jessi

Once your debt is in collections, it begins to function a bit differently. In essence, the people that originally held your loan have given up hope of collecting anything from you. Usually, they sell your debt to a collection agency for some small amount of what you owe and then that agency tries to play hardball with you to get you to pay up – that’s their business.

When you’re in that situation, you do have some bargaining power. Since they paid a discounted rate for your debt, you can negotiate with them to pay a smaller amount to get rid of your debt. Try negotiating. Offer what you have. Insist that they mark the debt as paid on your credit reports, however, so that this episode can be put behind you.

The problem, however, is that your credit will be damaged for seven years for going into default. It will be hard to get loans in the United States, your insurance rates will be high, and you may have some difficulty getting a domestic job, since many employers look at credit reports to get a bead on your reliability.

I’ve recently discovered your blog and all thanks to you have learnt quite a bit about money. I’ll be glad if you can devote a post to fixed monthly income for young people. Let me elaborate a bit.

I’m 24, single and have made around $500,000 through my business. Unfortunately I’m not money savvy and can’t handle the stress of managing it. So I was thinking how great it would be if I could just invest the money somewhere for fixed monthly income to pay my expenses.

I’ve searched annuities and it seems like they’re only offered to old retired folks. Is there a monthly fixed income option available for young folks like myself? I don’t want the stress of handling the money myself, I’ll just blow it all off on friends and end up in debt. This has happened before and I can’t trust myself again. Please let me know what you think. Thanks!
– Keen

Annuities are marketed to older folks, but they’re available to everyone. They’re usually marketed to older people because they’re often the ones who have significant money in the bank and also yearn for the simplicity of an annuity.

If this is a path that’s of interest to you, do some research and find a few reputable insurance houses that sell annuities. Contact them, get some quotes, and find out what sort of deal you can get.

I would probably not put all my eggs in one basket, however. Consider putting some of the money into something else, like a long-term treasury note, that pays out money over time.

Regarding kids and cars: My wife and I both have two very small 2-door cars (both fairly new). These were purchased when we had just first met each other, and we were both in a pinch with our old vehicles. Our cars both work great and there’s no immediate need to replace them. However, in the long term we will obviously be wanting to get something slightly larger for when kids arrive (in about 5 years). Our biggest concern is that we don’t want car payments with kids, or have to worry about getting something else when kids arrive, since income might be dropping with only one of us working. Hence, we’re thinking of selling my car (which is worth a fair bit more than what I owe on it), and getting something slightly larger. When kids come, we have exactly what we need, and no car payments.

Some people tell us that’s good planning, yet others say that we’re buying a vehicle when we don’t need to. We’re both in good financial shape with 2 good incomes, so we’re fine with the slightly higher payment (now). Is this good planning, or jumping the gun a little? My ‘gut’ tells me it’s worth it to do it this way.

I was just curious about your thoughts regarding longer term planning and kids (another example, is it worth getting a bigger house right off the bat if you know you’re going to need the space in the long term).
– Scotty

If your cars are fine right now and you don’t have kids right now, I would just sit tight for the time being. There’s no reason to upgrade.

Instead, I would suggest driving the cars until they’re starting to show significant real problems, then sit down and have a discussion about the purchase. Are you actually close to having children, or is it still a mirage in the future (as it is now)?

Another note: unless your cars are two-seaters, you’ll be fine with a child at first in a small car. We fit two adults and two kids in a Toyota Prius without any difficulty and plan to fit our third child in there as well.

What do you think about signing up for bank accounts at banks that offer bonuses (say, $100 for a new checking account) and then closing the account after meeting the requirements (500 dollars in the account for six months or whatever) to get the bonus?
– Sean

I don’t have any problem with this. You’re doing exactly what is asked of you in exchange for the value in question.

Banks spend this money in order to acquire new customers and have more cash sitting in their reserves. A growing bank is also more appealing for mergers and the like, even if that growth is sometimes a bit of a mirage.

In other words, by having your account open for that time, you’re providing the value that they need for that account. They need a customer for a certain period – you need the cash. I see no reason not to do this.

Besides, you might actually discover that the bank is better in some ways than your current one, so there would be no reason not to switch at that point.

Where do you suggest you should invest your money? We have been investing in the stock market for the past 15 years (in stocks, bonds and mutual funds) and have not made any money (and have lost a significant amount over the years). I have read that investing in CD’s or a savings account will not keep you ahead of inflation. So we are at a loss as to where to invest our hard earned money. Thanks!
– Robert

If you’re looking for an investment that’s just guaranteed to beat inflation by a little bit, TIPS (Treasury Inflation-Protected Securities) are exactly what you’re looking for. When you buy a TIPS, it promises to pay you a certain (pretty low) interest rate for whatever period you buy it for. However, the federal government adjusts the value of that TIPS upward in times of inflation (and downward in times of deflation). That adjustment is directly tied to the Consumer Price Index.

The stock market is notoriously risky, and it looks like you happened to sit on the market through the end of a bull market, a big bear market, another bull market, and then the biggest downturn since the Depression. Quite often, people make the wrong moves at the wrong time in a panic – they’ll sell out of stocks and buy bonds right at the time it’s starting to get close to the bottom and most professional investors have already switched gears to buying again.

If you’re just looking to match inflation and aren’t worried about the big gains, put your money in TIPS and don’t worry about it.

I am just out of college and was recently offered the option to invest in a Variable Universal Life Insurance plan as a retirement/investment vehicle through my workplace. The investment plan seems reasonable, but I had never heard of these vehicles before. Preliminary Internet research seems to indicate they are beneficial under a certain set of circumstances, but I’m looking for some disinterested 3rd-party gut-check opinions.
– Alex

This article from the Consumer Federation of America is the best summary I’ve read on VULs. To put it simply, they’re not worth it, because often their benefits rely on an assumption that the tax laws in the United States will never change – and they change all the time.

Even if everything did go as assumed, such policies are at best comparable with buying a term life insurance policy and a Roth IRA with the money tossed into premiums.

Unless your employer is paying for a lot of the policy, I would probably skip it and find other ways to insure and invest.

My 10 month old daughter got hurt in her day care. They called us promptly and we went and picked her up. She had a bump right in the middle of her forehead (about the size of a quarter) with a minor scratch in the middle of the bump. Her teacher told that she might have fallen against the edge of a wall or another kid might have pushed her or something. The center manager said it happens all the time and expressed surprise saying that my daughter didn’t get hurt sooner. I found that to be odd. We called the doctor’s office and they said my daughter’s situation does not warrant a visit and she should be fine (and she is). The reason i write this is because of the way the manager talked to us and they weren’t apologetic at all. I felt that is kind of rude…What should i do in this situation?
– Amy

I felt similarly the first time my child was bumped at daycare. My son was about a year old and got a nice scratch on his cheek from another child wielding a block.

Here’s the thing, though. Not long afterwards, our son spent some time playing with another child his age right under my own supervision. Guess what? Even though my eyes were right on them, the other child inadvertently swung around and bumped my son on the nose really hard, resulting in a lot of tears and a slightly bloody nose.

Children are going to get bumps even if they play by themselves. When children play together, that’s even more likely. Unless you literally stand at your child’s side constantly, at some point, they’re going to get bumped or scratched while under your supervision. The same is true no matter who is watching your child.

My son is four. I’ve seen him get whacked, bruised, bumped, and scratched more times than I can count. I’ve seen bloody knees, bruises, and scrapes. Most of them happened while I was watching him. Just yesterday, he slipped and fell on some ice and wound up with a very red elbow.

Given that, I do think the daycare provider probably handled the situation poorly. My reason for being concerned with the daycare would have nothing to do with the bump itself, but in the dismissive attitude toward parental concern. I would probably continue to use the center if I had no other thing to be concerned about, but I would also watch how other parental concerns are handled.

My husband and I made the decision that after we had our second child, I would transition to being a full-time parent. This would have many benefits: great quality time and quantity time with our children, a household manager to make sure everything is running smoothly, and less stress on the family as a whole. We have a strong social support system, and I truly love being a full-time mom to the girls which I was able to experience during maternity leave. Of course, it will have a financial impact as we both earn roughly the same amount. We are not quite able to spend less than he earns, but we have planned for this gap. We have been attacking our debt for a few years; we carry no credit card balances and both cars are paid off. We only have our mortgage and some student loans left. We have a healthy emergency fund, some retirement savings, great life insurance, and a fund to cover the “gap” for three to four years. I do earn some additional income which is very part-time, and I plan to gradually increase my efforts in this area. In addition, I noticed during my maternity leave that we are able to cut more costs when I am home (e.g. less convenience foods, less fuel purchases, etc.). I feel like we have thought about our decision from all angles and have covered the bases, but obviously I am no longer objective. I know financially this decision flies against some traditional wisdom (Dave Ramsey would probably say to keep going on the debt), but we can never get back this time when our children are little. What are your thoughts?
– Heather

In my opinion, you should go for it. As you said, you can never get the time back, no matter what you do.

Some suggestions, though. First, I would try very hard to maintain connections within your career path and stay up to date on what’s happening in your field. Don’t fall out of touch with these people and these connections as you’ll probably need them in five or ten years.

Second, spend some of your time making sure your relationship with your partner doesn’t suffer. The dynamics are going to change dramatically, in ways you can’t see yet. Set aside some time to spend with just your spouse doing something you both enjoy – and don’t feel guilty about it. Talk about how you’re both feeling when it gets tough, and there will be times when it is tough.

Finally, don’t feel guilty about your choice. There are going to be times where you’re going to feel the pinch and you might feel some regret about quitting. Don’t dwell on what could have been and let it bring you down.

Got any questions? Ask them in the comments and I’ll try to include them in a future reader mailbag.

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