Reader Mailbag: Audio

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. First investments
2. Credit question
3. Yoga teacher training
4. Credit counseling agencies
5. Taxes and inflation
6. Amazon and library synergy
7. Student loan repayment options
8. What’s real poverty?
9. “Cashflow” board game
10. Gas prices and inflation

Almost all day long, I have some sort of audio playing in my office. I listen to podcasts. I listen to music. I listen to the local radio show of someone I know socially.

I don’t pay deep attention to these programs. I usually just let them flow in one ear and out the other. What I find, though, is that sometimes ideas from these programs stick in my head. I’ll recall them later and be stunned at how useful they are.

Q1: First investments
I am currently a 20 year old college student, I have no debt, or student loans. I work full-time and go to college in-state and also stay at home with my parents to save. I currently have 10,000 in savings with very little in my emergency fund (1,300). I want to invest it but I am not sure where to start. I thought of putting it into an IRA but I do not qualify for the tax deduction since I am a full-time student so I opted to wait 2 more years to contribute the maximum amount. What is the best option for me? I currently make very little (18K a year) but I manage to save at least half. Should I wait another year to save another 10K? My amount seems too little for the stock market.

– Beth

The big question I’d ask is what you were saving for and when.

Do you intend to spend this money when you graduate in order to relocate and set up your own household? Are you going to try to live as lean as possible until you can buy a home in, say, ten years? Is this all for retirement?

If your goals are long term, you certainly can invest in the stock market with $10,000. You can sign up at Vanguard and put all of that money right into a broad-based index fund, then just sit on that until you need it. However, I wouldn’t do that unless your goals really are long-term, like buying a house in ten or twelve years.

If your goals are short-term, such as a quick post-graduation goal, then I would keep that money in cash for now.

Q2: Credit question
I’m starting up graduate school in the fall and will be moving in with my fiancee. Her salary will be able to support us both over that period. The only credit history I have is from my credit card, as I have been fortunate to avoid student loans. My fiancee has student loans as well as a credit card. Both of us have always paid all our bills on time. My question is with regards to what happens when we get married, as I’m concerned I won’t have much of a history to get approved for a mortgage. Do our histories combine? Or should I take out a small student loan and consider the interest paid as a small cost for a better credit history? Thanks for the help.

– Kevin

When you take out a mortgage, a lender considers both of your credit histories when deciding whether to lend to you.

While you’re correct in that your limited credit history probably means you don’t have a spectacular credit score, you probably have a very solid one. I wouldn’t take out additional loans.

If you’re still concerned about it, I would try to get a mortgage from an institution that does manual underwriting. That means that, rather than just basing everything on your credit score, they actually look at your full credit history and your personal situation in making their decision. This usually works in the favor of people like yourself.

Q3: Yoga teacher training
I am an avid yogi and spend $79/month on a yoga membership.

There is a yoga teacher training at my studio and I am considering it as an option for making extra money in the summers when I’m not teaching high school and a couple times per week during the school year.

My issue is that I don’t have the money yet to pay up front. The program is 8 weeks and costs $2000.

I will have the whole summer off after the training to find yoga work at the several studios in my city.

The catch- there is another training in September. For this one I could have enough money to pay the whole thing, but will be teaching full time on top of teacher training.

I am hesitant to do the training with a fat chunk of change on my credit card but am confident that this would improve my life, income and yoga practice. In addition, I would no longer have to pay the $79/month at any studio where I work.
– Jenna

Are you certain that you will be able to find seasonal work as a yoga teacher? That would be my chief question here.

If yoga studios would be hesitant to hire you because of that seeming requirement, then I wouldn’t invest that money into teaching accreditation.

Another approach might be to see if there is a bartering system you could work out with that studio. Could you take the class for free or at a reduced rate in exchange for teaching some classes there afterwards for free?

I would be very hesitant to put this onto my credit card unless I was absolutely sure that I would earn money with it on the other end.

Q4: Credit counseling agencies
I was wondering what your thoughts were on credit counseling agency. Currently I am paying off my credit card debt on my own, adding an extra payment where I can. Does working with credit counseling agencys hurt your credit? Do you recommend working with agencies? What are the benefits of working with this type of service?

– Justin

Not all credit counseling services are the same. Some can hurt your credit. Others don’t. Some can charge outrageous fees. Others don’t.

While I don’t have any specific recommendations for you, I would suggest researching as many different agencies and programs as you can. Look for personal stories. Look for the real numbers, too.

Be aware, though, that such services mostly just provide a structure around things you can do yourself. I view them as being much like a coach. They’re coaching you through things you could do yourself and giving you a training regimen for making it possible. Is that of value to you?

Q5: Taxes and inflation
Looking at history, I can assume that as I get older inflation is going up and so are taxes. So I will pay more in taxes when I retire (I’m 30 btw), and the value of my retirement dollars will be less. Based on these assumptions, how does tax-deferred savings in my company’s 403b make any sense? Isn’t there a better way to take advantage of compounding interest?

– Devin

This is exactly why I usually encourage people to invest in a Roth IRA rather than in their 401(k) or 403(b), with the exception being when they can get matching money from their employer (which is valuable enough that it overcomes inflation and tax increases).

A Roth IRA, if you’re unfamiliar with it, is an account you sign up for yourself with a reputable investment house (I use Vanguard). You then deposit money into that account (up to $5,500 per year) and designate that money to one of many investment choices, much like a 401(k)/403(b). The big difference is that you’re using after-tax money and the gains you make, if withdrawn at retirement, are not taxed, either.

Most people, in my opinion, should contribute to their 401(k)/403(b) up to the amount necessary to get all matching funds from their employer. After that, they should be funding a Roth IRA.

Q6: Amazon and library synergy
I thought of you when I saw this posting on parenthacks (I don’t remember if you follow parenthacks them or not):

She basically covers how she uses Amazon features (other books like this one, oher books by same author) to help select books at the library.
– Scott

I do this exact thing for both my library books and for PaperBackSwap.

I often hop onto Amazon, look up books that I know that I love, and see what similar books are recommended. Because of the enormous amount of buying patterns and reviews and ratings on Amazon, their recommendations are pretty good.

I then just take those titles to other sources and get the books for much less expense elsewhere.

Q7: Student loan repayment options
I have almost $30k in student loans @ 2.125% interest. Assuming I have the money to pay it off (either all at once, or under the normal pay structure), what’s the wisest thing to do?

Here are a couple of scenarios that I’ve come up with.
-Pay it all ASAP.
-Pay as little as possible and consider it a cheap loan for a car, house, travel, etc.
-Pay as little as possible and invest any extra money in something that would return more than 2.125%, but be liquid enough for me to pay the loan monthly.

I prefer the last idea, but I’m not sure if that exists.
– Josh

The big question is whether or not that 2.125% is fixed or variable rate. If that rate is fixed and you have it locked in forever, I would pay down that debt as slow as possible regardless of what I used the money for.

It’s worth noting that there is no guaranteed and liquid investment right now that consistently gets 2.125% without some caveats. However, as the economy rebounds, interest rates will slowly inch upwards and you’ll find savings accounts that do beat it.

If that 2.125% is a variable rate loan, I would probably focus on paying it down. Again, if interest rates go up, that rate can rebound and become very nasty very quickly.

Q8: What’s real poverty?
I am sure you have many reasons why this article is crazy.
– Marilyn

This article argues that a family is in poverty if they earn $68,000 a year or less. I can speak from personal experience that a family can thrive on that level of income.

My personal feeling is that this number is too high, but that the federal poverty line is too low. There’s a happy medium between the two.

Location is also an important factor in this. The cost of living in rural Iowa is much lower than the cost of living in, say, San Francisco. There does need to be some location information included in asking the question of poverty.

Q9: “Cashflow” board game
Have you ever played the board game “Cashflow” from Rich Dad Poor Dad? If so, do you feel that it is a good way to learn about basic money management and investments?

– Jen

While “Cashflow” has some good money management ideas in it, the game is so encumbered by rules and repetitive gameplay that I would find it easier to just talk to my children about money and show them what I do than to play this game with them.

I don’t think there’s any one game that does a great job of teaching personal finance. The ones that actually mirror personal finance really well tend to be poor games.

Why is that? I just don’t think modern personal finance translates well to board games. It’s not an exciting theme.

I did create a draft of a Dominion-like deckbuilding game that simulated personal finance that was quite fun, but when I showed it to a publisher, he practically had a heart attack with regards to the theme.

Q10: Gas prices and inflation
Adjusted for inflation, are the current prices the highest in history?

– Jennifer

It might be, but it’s not a runaway. It’s near one of the three previous historical peaks, when adjusted for inflation.

The first peak was in the very early days. The price of a gallon of gas, adjusted for today’s dollars, in 1918 was about $3.80. In 1981, the price of a gallon of gas adjusted for inflation was about the same, and we hit a similar peak in 2008.

The current peak, as I write this, isn’t quite as high as those earlier peaks. Of course, ignoring those other peaks, the current gas price blows everything else out of the water.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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