Reader Mailbag: Abraham Lincoln

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. What is a callable CD?
2. Frugal laptop questions
3. Reducing budgeting stress
4. Adequate insurance for single folks
5. Minimizing post-college debt
6. Rent or sell old house?
7. Retirement calculations
8. Drawing the line
9. Splitting the rent
10. Netflix streaming movie recommendations

Abraham Lincoln once said, “Most folks are about as happy as they make up their minds to be.” I agree deeply with that sentiment. It’s all about what you choose to focus on in life – the bad or the good.

I am wondering if you can explain what a “callable CD” is. Merrill Lynch has begun offering a “15 year callable CD” at 4.50% interest; I tried doing some research online but what I could find was in such business-ese (a language I don’t really speak) that I couldn’t figure it out. I don’t see bank interest rates approaching almost 5% for a long time, if ever again, so would not have a problem tying up my money for that long, if only I knew exactly what I would be getting myself into. Can you explain?
– Lisa

A callable CD is basically no different than a regular CD except for one key thing: the bank can close the CD at any time. So, in six months, they might decide that paying out 4.50% annually to you is paying too much, so they just close the CD, paying you what you’ve earned and dropping all of it into a savings account.

On the other hand, if you close the CD, you’re going to be facing the usual fairly steep penalties for early closure, which usually means forfeiting a decent chunk of your earnings.

If interest rates were to stay this low forever, this would be a great deal. If they rebound in a year and return to 2007 levels, this will be a much less positive move. Still, it’s a 4.5% return guaranteed, so it isn’t too bad no matter what happens.

Do you mind telling me what model laptop your using for the frugal laptop. I know its a Dell Inspiron but I wanted to know the model because I’m interested in purchasing one from craigslist or ebay as a secondary laptop. Also how as it worked for you up till this point?
– Marvin

The frugal laptop was a Dell Inspiron E1505. It worked very well for several years. The only problem I had with it until near the end of its lifespan was that the battery stopped holding charge – a $40 replacement battery took care of that.

After about four and a half years or so of heavy use, though, the machine began to experience hardware problems that I was unable to diagnose. A friend attempted to fix it, but reported to me that the costs to repair it (unless I did it all myself) weren’t worth it compared to just getting a new laptop.

Still, during its lifespan (aside from a nine month idle period), it got a ton of use.

How can I reduce the stress I feel from budgeting all my money around, and feeling like I have none left? Or perhaps you have a suggestion for a better way to manage my money or how I should be saving/spending!
– Chris

I actually find budgeting – or at least how I do things – to be stress reducing on the whole.

My technique is pretty simple. Almost everything I do for budgeting is automatic with my bank. I have most of my bills set up to be paid automatically. I have automatic transfers set up that move money into various savings pots. I also have an automatic transfer set up into an account that I can safely spend freely from.

Most of the time, I don’t have to worry about any of it. It just works. I build up savings, have a bit of money to spend as I please, and move on with life. It’s pretty low stress.

If you’re still stressing out over it, spend some time focusing on your goals. Why are you budgeting so fiercely so as to cause yourself stress? What is the big dream you’re aiming for?

I’m 28, single, no kids, rent, only debt is a $4,000 car loan which will be paid off by the end of the year. I have about 20K invested for retirement and a small emergency fund. I earn 50K/year. I have full coverage insurance on my car, renter’s insurance, and health/dental/optical insurance through work. My employer covers some insurance for me: Life = 50K and Disability (Short & Long Term) = 60% of salary.

As long as I’m working for this company is it necessary for me to carry any additional insurance? I feel pretty well covered.
– Abby

If you’re single, without kids, healthy, working for that employer, and young, that’s adequate insurance.

The reason to buy additional insurance is if you see any sign of any of those factors changing. If you’re going to get married, you’ll need more insurance. If you’re going to have kids, you’ll need more. If you get older, you may want to up the disability insurance. If you change jobs, you may end up needing to get your own policy. If you suspect an illness, you may want to ramp things up.

You’re better off being proactive here. If you see any of those changes happening, supplement that insurance sooner rather than later.

I am a soon-to-be-20 Spanish major and religion minor who will be a sophomore in the fall at a private college. My family’s finances are such that I qualify only for an Unsubsidized Stafford Loan, which I am paying the interest on during college. I try to pursue scholarships, but since I can’t demonstrate “financial need,” I often do not get them. I do have about $21k in scholarship, but tuition is $32k, necessitating loans.

Here’s what I have for assets. My savings account currently has approximately $2600 in it, while checking has nearly $300. I have a minimum wage full-time “temp” job this summer (so no benefits), and I do not currently pay any expenses such as gas, food, etc because I share a ride with someone and I pack my lunch. I do not have a car or any other physical assets. I expect to earn approximately $3700 gross this summer- since I will be earning minimum wage ($7.25/hr) for 40/hrs a week for 13 weeks. Of course, after taxes that will be a much smaller amount. I file a tax return in two states since I live in one and work in another.

My current financial strategy is “Don’t spend money; put it all in the bank.” This is all well and good, but the interest rate is so low at my bank that I only make about 50 cents per interest period. I know that investing while I am young is a good idea, and so I’d like some advice on what to invest in. I am currently thinking of putting some of my funds into a Roth IRA for later in life, but I’d also like to invest in the short-term to help pay off my student loans/prevent having to take out as large of a loan. My loan for last year is $5000, and I expect the loan for the rest of college to be approximately the same amount per year, so I will have about $20,000 in loans to pay off. I plan to get married to my boyfriend right after college, and I want to bring as minimal an amount of debt into the marriage as possible. We want to start off in a good place.
– Anna

Your “filing taxes in two states” set off an alarm bell. Are you taking a credit for taxes paid to the nonresident state on your resident state taxes so you’re not double taxed? Here’s some more info on that.

Aside from that, I think you’re doing exactly what you should be doing right now: building up your cash reserves while keeping your expenses low. When you get married right after college, you’re going to be hitching your life’s financial plans to someone else and the best way to make sure that gets off on the right foot and you stay secure is by having a good liquid reserve.

You absolutely need to talk with your boyfriend about how you’re going to manage money together when you’re married and make sure you’re on the same path when it comes to money.

We will be moving to Virginia, and wonder what to do about our house. We bought it in 2005 for $258,000, and realtors are suggesting that we could expect to get about $140,000 for it now. Our mortgage is $97,000, so we could sell it for that and still come away with cash in hand. However, it’s crushing to think that we put $150,000 down, and have lost so much of that.

We could rent it, but only clear about $750 from rental after paying a management company. (We will be far away, so paying 15% to a management company seems wiser than saving a bit and dealing with who knows what from a distance.) We’d need to put another $400/month or so into the house, not including money for things like repairs and upkeep.

My new employer has a place we can rent for $700/month, so we could swing the extra amount to put into the rental. If we decide to buy in the new town, we have a $50,000 gift from a deceased relative that we could use. In terms of making the cash flow/down payment happen, we can go either way.

Our concern is long term. What would you suggest? Better off to rent it, put in the extra money, and deal with the hassle? Or sell it, take the hit, and be done with it?
– Charity

So, you’d make $750 a month from the house if you rented it, but you’d have to put $400 a month back in (I’m assuming taxes) and that doesn’t include repairs and upkeep? What about the remaining mortgage payments? This doesn’t spell a big money winner here.

If I were you, I’d sell that house, pay off the mortgage, and sock the difference away somewhere else, whether it’s in the bank or some investment or into a down payment on another house.

You can’t let the loss of value of your home distort your choices now. That loss is water under the bridge – you can’t do anything about it now. You have to make the best choice based on your current situation.

My primary-breadwinner husband (age 32) and I are expecting a baby in Dec. and re-evaluating his disability insurance policies. Currently, he has three policies: one through work, and two individual policies. On the last policy, there is a “rider” for a service called Retire Guard. According to their website, they will make 401k contributions on his behalf should he become totally disabled. My husband pays about $26/month for just over $1200/month coverage. They say that they will make the contributions on your behalf into a trust in your name, and they offer you some different investment options. They do not actually put that money into your 401k. The Retire Guard option is with a policy through Mass Mutual, which I know is a reputable insurance company. Can you offer some guidelines for disability insurance? I don’t understand the total/partial disability, “riders”, or how to calculate how much you need.
– Leigh Ann

From what I was able to learn about RetireGuard, it sounds like they just put money into a trust for you instead of directly into your 401(k), likely because they can’t directly contribute to your 401(k).

Riders are simply modifcations to the basic policy. For example, some policies have a COLA rider what adjusts your benefits based on increases in cost of living. Riders usually affect the amount you pay and then affect the benefits you get.

Total disability refers to the inability of a person to perform the functions of their job. Partial disability refers to the inability of a person to perform some of the functions of their job, but are able to perform others.

As for how much you need, this worksheet from SmartMoney is the best tool I’ve seen.

You’ve mentioned before that there are aspects of your life that you don’t discuss on The Simple Dollar. How do you decide where to draw that line?
– Emma

In terms of my own thoughts and issues that only directly impact me, I’m pretty open. My only restrictions are on elements about my own life that, if revealed, would inherently affect the lives of others I know and care about.

When you extend the same issue to my immediate family, though, things get less clear. I do mention them, obviously, because they’re important in my life, but this is not their blog. Sarah and I have had many discussions on what exactly is the limit of what should be discussed on The Simple Dollar about specific aspects of our family. It’s mostly a matter of protecting the privacy of someone who is a non-public figure while also recognizing that the domain of what I talk about does inherently involve them at times.

When you start looking at people I’m connected to less directly, things get much vaguer. I have no interest in “outing” people in my extended family or my friends on The Simple Dollar without their explicit permission. When I do talk about them, I usually “blur” some aspects of their identity to protect their privacy (altering names and relationships in insignificant but privacy-protecting ways), sometimes with their help and sometimes just based on my own judgment.

Basically, I want to talk about financial and career and life issues here. I don’t want to destroy reputations or hurt feelings or reveal personal data.

Me and my girlfriend of 2.5 years are moving in to our first apartment together since we graduate from college in less than a week. We are both really excited and are in the right mindset. I have a job at a local corporation making a hefty salary, more than some of my peers. She will be attending graduate school in the fall and so cannot get a job directly related to her major just yet, so she landed one at a local department store for $8.25/hr. Our apartment is pretty nice, one of the more expensive ones around here. We liked the quality, convenience, and space it provided and it fit within our budget.

My question is: I will be making much more than her per month and while I can see how splitting rent and utilities 50/50 makes sense given there are two people living in one apartment, I am wondering if there is a better option to take into account the difference in income. I plugged her income into my budget sheet and while she’ll be able to afford everything, there is a little less padding than I would have liked. She’s been searching for a job for the past couple months so asking her to find one that pays more probably isn’t something she can do easily (or will want to). She is fine with paying 50% but in my mind that doesn’t seem fair. I was thinking of some sort of method that would split the rent so that our ratio is the same as our income ratio. However, she felt that that was a little unfair or that she’d feel like she “owed” me money.

Another idea I had was to use the same ratio method but to give some extra padding, perhaps making it more like 60% me, 40% her. Or, perhaps it would be fine if we only lowered her rent to 40% bi-monthly. Some variation that weighed our income into the equation.

I was just wondering if you’ve had any experience with this or know of a common method people use to account for differences in income that is fair for everyone involved.
– Kam

If there is a deep inequality, you might want to consider paying portions of your monthly bills in proportion with your monthly take-home checks.

So, let’s say your girlfriend takes home $1,000 a month and you take home $3,000 a month. That means you’d pay 3/4 or 75% of the bills. If your girlfriend suddenly started making $2,000 a month, you’d shift the percentages with you now paying just 3/5 or 60% of the bills.

That would be my recommendation to you two, but there may be some pride at stake here. If your girlfriend doesn’t like that arrangement and wants to pay her half, she may be operating on a sense of personal pride. If that’s the case, go along with whatever arrangement works for her. The above is just a suggestion.

OK, I signed up for Netflix mostly so we could use the streaming service for free on my Wii. We were renting about $15 worth of movies each month, so this is actually a money saver.

Got any suggestions for good movies to add to my streaming queue? I’ve liked the movies you’ve mentioned in the past.
– Kevin

There’s more great stuff to stream than I could possibly recount. Here are some things worth looking at that I’ve enjoyed.

Man on Wire. Moon. Jesus Camp. Firefly. Arrested Development. Lost. Hoop Dreams.

The piece that’s got me intrigued right now is that all of Ken Burns’ documentaries are available (save Baseball). They’re pretty much all great – Civil War got all of the press, but I learned more about the world and enjoyed other entries much more (like Huey Long). Here’s a full list.

If you can’t find something in those to watch, I’m not sure I can help. However, I do think it makes a pretty good case for considering ditching cable or satellite television.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.