Reader Mailbag: Baby Steps to Music

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. Retiring (very) early
2. Pessimism and thriftiness
3. Checking account cushion
4. Cash advance questions
5. Cutting term insurance
6. Handling a lemon
7. Why no political commentary?
8. Frugality or hoarding?
9. Frugality and motivation
10. Self-employment concerns

Over the past week, I’ve been giving some very simple and incredibly informal piano lessons to my two oldest children. My daughter seems to have taken to it the best, as she’s gone from just banging on the keys to playing one at a time and listening to them, not attempting any songs as of yet. My son will start playing a very simple melody, like “Mary Had a Little Lamb,” get frustrated, and bang away on the keys. They both request that we try things on the keyboard a few times a day, though.

I prefer my daughter’s progress, actually. She’s listening to what the instrument can do. We’ll see if their interest continues.

Q1: Retiring (very) early
Here are my stats: I’m 52, never married, no kids. No consumer debt. Don’t own a car (drive a company car which would vanish when/if I quit). Own two homes. Don’t want to sell either property in this down market. The first home could be rented for break-even cash flow. Second is rented with about 600/mo. negative cash flow (This is CA, don’t jump to conclusions yet.) The second house has a guest house which is mine. It could be used as a remote base of operations in the proposed plan. My tenant is 92 and has health issues. I am NOT going to sell and kick him out of his home. The house is in a 55+ community, so I can’t live there as the primary yet, but can use the guest house at will.

I have 225K (=3 years gross salary) in retirement funds, 17K (=8.5 mo. mortgage payments) in cash reserves for the rental property, 80K (1 year gross pay) in cash. I’d like to quit my job (yes, I still have one, but I’m in a down industry and see changes coming.) buy an older, small motorhome (say, 10K cash) and travel for a year or two. I have seen first hand what happens when people wait too long to travel. I had cancer 30 years ago and have a lot of ticks on my Bucket List. Rambling, non-specific travel without regard to a schedule is one I haven’t completed and I’m yearning to. I’d probably have to buy high deductible health insurance and self-insure the rest.

Am I crazy? Can this even be done? Are there others out there who have done something similar?

When I was growing up, I was deeply inspired by a friend of mine’s mom. Upon her husband’s untimely demise, she received enough insurance money to either pay off the house or travel throughout Europe with her 3 kids for a few years. Remarkably, she chose to travel with her children! I met them after they had returned from their years of travel. They were the most wonderful, well-adjusted family, and though we’ve long lost touch, I remember them clearly to this day.
– Melinda

The things you describe certainly can be done, but they’re typically done by people who have a significant amount of cash in the bank with which to weather any storms that come their way. I’m not convinced that you have enough cash to pull it off.

Look at it this way. Let’s say you do this for five years. You’ve bought the vehicle. You’ve rambled around for a few years. You’re now 57. Your emergency fund is going to be mostly gone.

To put it simply, you’re probably going to have to return to the workplace at that point. You’ll own a house, but it will have utility bills. You’ll own an aging RV.

Will you be able to return to the workplace at that point with a job that pays $80,000 a year? At age fifty seven? It depends on your field, but I would never bank on that.

I think you’re in a good place to retire early, but today might be a bit too early. Give it a few more years. Consider what you’ll do if the money runs out.

Q2: Pessimism and thriftiness
I enjoy reading your column and have a question that your readers may enjoy commenting on. I was raised by parents that were a product of the Great Depression. Until the age of thirteen I lived in a small three bedroom house with six family members until my dad built a beautiful five bedroom house with a neighbor and paid it off the next year. “Use it up, wear it out, make it do, do without” was engrained in all five children. We all graduated from college debt free and have lived like our parents with great success.

I teach high school art and because I’ve previously written college guides, students will come to me for advice. After discussion about goals and majors, I ultimately steer students to think about the costs and loan repayments. I always end each conversation with, “It’s entirely up to you where you go and what you do, but remember, college loans must be repaid, and if you don’t choose carefully, those loans could dictate your life. Be sure to multiply your college offer by four! (Four years) That’s how much it will cost!”

I look at these wonderful young people and fear for their futures! What I see in most of these young people is ego-centricity coupled with an amazing sense of optimism. They all think that they will make $60-80,000 right out of college with bachelors in history, political science, and communications, so they rationalize that a $40-100,000 student loan debt is ok. (Isn’t it a good debt?) Parents encourage their children to “aim high!” with little research as to where their children will end up at the age of twenty two.

My own daughter, a recent graduate with two degrees in August (BA and BS) is having a hard time landing that first job. She is debt-free, so her search isn’t quite as stressful as some of her peers who are facing $40-50,000 of student loan debt for one degree. My other two daughters are going the same route as their older sister.

Am I becoming overly cautious and pessimistic because of my personal thriftiness? Is there ever a time that students should take on deep debt for a four year degree? (I’m not talking about graduate degrees.) I don’t want students to limit their potential and am a firm believer in re-invention, but I also don’t want them to be a slave to debt.
– Nancy

I don’t think your thriftiness is causing your pessimism. However, it might be that your thriftiness is an outgrowth of your pessimism.

For me, thriftiness is a tool that leads to a more optimistic place, not a pessimistic place. Thriftiness makes you more able to deal with the hands that life deals you. I think, to some degree, thriftiness is a reflection of your worldview.

Most people have an overabundance of optimism when they’re young. Don’t stunt it – instead, channel it. Tell them that they can major in whatever their heart desires, but that their post-college life will be much, much easier if they live as cheaply as possible during college. Enjoy what the campus has to offer instead of spending money on “stuff.”

Q3: Checking account cushion
How much money do you keep in your checking account? Once all the bills are paid, of course. I am trying to decide on a “cushion” amount.

– Kay

I usually keep an amount equal to roughly a month’s worth of bills in my checking account as a buffer. The rest resides in savings.

Mostly, this is just a protection against miscalculations and simple mistakes, like my wife and I both making simultaneous withdrawals or minor unexpected expenses. The value of having a big enough buffer to ride through these things without an accidental overdraft is worth the tiny loss in interest from not having more of this buffer in savings.

How much should you have? I think the real answer is “as much as you need to feel completely comfortable.” If you feel nervous or worry about not having enough buffer, by all means, have more buffer. An extra $200 in your checking account over the course of a year is going to cost you $3 or so in lost interest – interest that you’d also have to pay taxes on. That small amount is well worth eliminating a worry.

Q4: Cash advance questions
I received a promotional offer in the mail for a cash advance with 0% apr until Oct of next year, about 9 months. Would it make any sense for me to to take this money and because I don’t necessarily need it, put it into a high interest account and just pay it back before the apr kicks in? This way, I would make interest on someone else’s money without having to pay a high interest rate.

– Joe

You can do that – the technique is usually called “credit card arbitrage.”

The problem with it is that it’s not very much reward for some significant risk. The risk comes in the form of your own behavior. If you just let the account sit there for months, you have some likelihood of forgetting about it, then finding yourself with a fat interest bill at the end of the term. I’d make absolutely sure that you’re not going to be liable for any interest if the 0% advance period expires and you haven’t repaid the loan.

Let’s say, hypothetically, that you would borrow $1,000 doing this. You’ll find, at best, a 1.5% interest rate in a savings account right now. That will earn you $15 for your efforts. At the same time, you’re increasing your identity theft risk and giving yourself some more accounts to manage. That’s not worth it to me.

Q5: Cutting term insurance
I am a 46-year-old, single female putting myself through college. I’m trying to cut expenses. In 2002, I took out a 20-year term life insurance policy for $250,000 at $36 monthly. I only have one child left at home who is now 20. Can I discontinue the policy now that they are all adults? Or maybe just lower the amount? Can this type of policy be used to pay off a home loan in case of my death?

– Nancy

Yes, that money can be used to pay off a home loan in the event of your death. Whoever you willed the home to will become responsible for the mortgage on the home. If that person is also the beneficiary of your insurance, they can use the money to pay off the mortgage.

Often, in order to lower the amount of a policy, you’ll have to get a new policy and allow the old one to expire. Given that you’re older, you might not save too much in that process, depending on your health.

The question of whether or not you should reduce your insurance amount depends heavily on how much you still owe on your home and whether someone would use it for a residence (like your child that is still at home). I would not completely eliminate all life insurance as there will be funeral expenses in the event of your passing.

Q6: Handling a lemon
My daughter purchased and financed her first used car through a dealership on 12/22 , I co-signed the loan for her. She went out of town to purchase the vehicle so this dealership is about a two hour drive from our home but still in our state of Louisiana. The vehicle had an implied warranty and she also purchased an additional warranty to cover parts and labor. She drove the car home on the 22nd then drove the car on the 23rd then on Christmas Eve she noticed it had leaked an enormous amount of oil and would not even start. Since it was so late on Christmas Eve and the next day was Christmas and the day after was a Sunday (dealerships closed on Sunday’s in Louisiana) we waited until Monday and contacted a tow truck to pick up the vehicle and move it to the closest GM dealership. We were told when she purchased the vehicle that any GM dealership can service the vehicle.

The GM dealership closest to us refused the vehicle, they no longer work on that particular brand but they referred us to another one that was in the next city. So the truck towed the vehicle to that dealership Monday afternoon. Tuesday morning my husband went to check on the vehicle and was told that the warranty my daughter purchased may not go into effect for 30 days. He had not even had a chance to look at the vehicle at that time so didn’t even know what the problem was or if it would be covered.

I contacted the dealership where the car was purchased by email on 12/28 to let them know what was going on and I asked that they contact the dealership where the car is at to authorize and cover for any repairs to the vehicle. I was sure to email the General Manager, General Sales Manager, Finance Manger and the salesperson who closed the deal. I was expecting either a phone call or return email by this morning but have not heard anything concerning the vehicle. I’m planning on calling them later today if I don’t hear from them first.

My question is what recourse do I have? The car was purchased and drove one day then quit and now we’re being told the warranty might not be any good for another 30 days! Are there lemon laws for used vehicles in Louisiana? We just want the vehicle repaired and don’t feel as though we should have to pay for those repairs. Your input on this matter would be greatly appreciated.
– Peggy

Whenever I hear of an obvious “lemon” car purchase like this one, I encourage people to go to carlemon.com, which is a good clearinghouse of information about how to handle a “lemon” purchase.

If you are unable to reach the dealership within a reasonable amount of time, I would contact a lawyer in Louisiana. Pointing the lawyer toward that website might be of use, since it does contain the text of Louisiana’s “lemon laws”.

One of the first things I would do is make sure I had a copy of the warranty issued by the dealership. Without that, it may be hard to prove that you purchased a car with any type of warranty on it.

Q7: Why no political commentary?
I am curious as to why you refuse to comment on well documented cases of national fiscal hypocrisy, such as (several links that I excised). Given your willingness to comment on sports, I honestly don’t see why you fail to comment on these issues, given their importance for the financial future of the country (as well as for the future of Social Security, which will be applicable to every Simple Dollar reader).

– Brent

I comment on sports occasionally because sporting events (from a fan perspective) are fun. Few sports fans get enraged because someone else is a fan of another team (outside of hooliganism); instead, it’s good-natured joking around and enjoyment of a shared interest.

Politics, on the other hand, is a no-win game, particularly in an era where there is blunt refusal to even listen to someone else’s political perspectives. A comment on anything vaguely political quickly dissolves into a left-versus-right battle with vicious and acidic diatribes coming from both sides. Even a mere statement of fact is immediately weighted with interpretations and accusations of bias. Try reading the comment section of any political blog – and trust me, the moderators on such site are out in force knocking down dissidents and flamers and trolls.

My interest in politics is local. I have very little interest in national (and even in state) politics at this point. My focus is doing what I can to make sure I can handle anything that may come, mostly in terms of building and preserving my own skills and having realistic assets for the long term. I have no interest in commenting on national politics much at all aside from when they directly affect personal finance, and projections about the future of Social Security do not fall into that. They fall into yet another pawn in the never-ending political war between the left and the right, and any comments I would make about the future of Social Security will completely change with the policies of whoever is elected next.

Q8: Frugality or hoarding?
Now that I and my siblings are adults (or nearly so), my parents are starting to think about downsizing to a smaller house. The problem is that they have a bit of a hoarding problem. While it’s not as bad as some of those cases you see on tv, there are still piles of things all over the house, boxes in corners, and generally no clear surfaces anywhere in the house.

My parents realize that they need to get rid of things, but they seem to have trouble actually doing so. I was talking to my mom about a sofa they have in the basement; it’s threadbare and has two broken legs. They’ve tried getting rid of it on craigslist for free, but there was no interest. Still, they refuse to throw it out. “Someone could fix the legs and reupholster it. I would just hate throw it out.” she says. I completely agree with donating, selling, and fixing things if possible, but in this case it just doesn’t seem like it’s going to happen.

That’s just one example; there’s old games from when my siblings and I were small that are missing pieces, pieces of wood from a porch that my mom thought ‘looked neat’, and whole boxes of things in the attic that have not seen the light of day in 20 years. Part of the problem is that my parents don’t have a whole lot of money, and don’t want to get rid of things that can be useful or that they think have value, but I think this is beyond that (and they can’t seem to see it). They seem paralyzed when they try to decide what to do with something. At the same time something ‘might be useful to someone’ but they’re ‘not sure it’s good enough to donate’, so they can’t make a decision on what to do and whatever it is sits there for another couple of years.

I don’t know how to help my parents see that by keeping some of these things, they’ve crossed the line and gone beyond frugality. Do you have any suggestions? Articles I could send them? Things I could do?
– Sarah

Hoarding is the result of people failing to realize that possessions have a cost until the weight of those possessions is overwhelming.

What do I mean by saying that possessions have a cost? Each thing you own requires some amount of storage space. You’re paying rent or taxes or mortgage payments on that storage space. The more stuff you have, the smaller your livable space becomes and the larger portion of your taxes and rent and mortgage payments go to paying for a space just to keep your stuff. Each item you own also has a time cost, meaning the time you spend cleaning it and taking care of it in order to preserve whatever value it has.

Take an old boardgame. It costs some amount to store that board game, even if it’s just a cent or two a month. That board game also takes time, in that you’ll eventually have to move it (if nothing else), clean around it, etc. Is the presence of that board game repaying that financial cost and that time cost to you?

Hoarders tend to place more value on the future than is realistic. They believe that an extremely vague “someday” has some sort of value that counterbalances the cost of keeping an item. I think of my own father, who has some hoarding tendencies. He has more stuff stored around his property than he will ever be able to use. He’s actually erected additional sheds to hold all of this miscellany, and all it does is accumulate.

If hoarding is becoming a problem in someone’s life, they need to seek therapy. However, it sounds like it’s not a problem for them at this point. Your best approach is to simply talk to them about the cost of their items, both in terms of time and the space they take up, and then compare that to the value they’ll ever get from a broken-down board game.

Q9: Frugality and motivation
How do I (or is it even possible) get someone motivated about saving money and being more frugal?

A little background – My fiance and I are pretty different when it comes to money. I’m the saver, and he’s the spender. I’m all about the future, and he is more about the present. He has changed a lot after we got together, and now that we are saving together for a wedding, he has definitely cut back on most of the big spendings. But I get very bothered by the fact that he speaks of saving money and of eventually buying a house, and verbally, we are totally on the same page as to what we want for the future, yet he is always wanting to eat out (I do try to cook at home), to look and perhaps purchase the latest gadgets (he’s switched cell phones 3 times in 2 years and has gotten a macbook and ipad), and to go on vacation. The latte factor could definitely work on him – he has a gold card from Starbucks which goes to show how much he frequents it. Also, his last job had really good pay but not the current one, so that may also contribute to the spending habit. I’m not sure if I am just giving him too hard of a time or if there is just some thing I am not doing right. Do you have any advice?
– Linda

Take it slowly. Your partner is not going to change overnight.

It sounds as though on some level he does understand the importance of saving, but has yet to connect the idea of saving to his day-to-day actions. My suggestion would be to do an annual budget. Start off talking about your basic things you need (basic shelter, food, clothing) and subtract that from your income. Talk about what you could do with the money that’s left – how long would you need to save to reach your goals?

Then start adding in all of the extra stuff. How much has he spent on gadgets in the last year? Let him see how those gadgets make the goals further out of reach. Do the same with the Starbucks habit. Do the same with the cell phones. Figure up how much they cost per year, subtract that from what you could be saving, and figure how much time those things are adding to your savings goals.

You might find that Starbucks alone is moving your down payment years into the future.

Examples like this can be startling, as they show the magnification that little things today can have on your future.

Remember that this is the start of a long discussion that will take a long while to come to fruition. Take it slowly and don’t demand that he immediately change to your worldview, or else you’re begging for a fight.

Q10: Self-employment concerns
I’m an independent consultant in the financial services industry. While most have been scrambling to keep their jobs, I’ve had the good fortune to parlay a niche software skill (knowing a vendor’s application) into a successful consulting career. For the past three years, while the industry has been in downturn, I’ve managed to create a very comfortable living in consulting.

I never planned to go this way but quite frankly, I’ve discovered that I don’t work well when others tell me what to do. Hence, I actually enjoy my line of work. I find my own clients (albeit right now through recruiters), work and design my own game plan to make my client successful, and I get paid handsomely for it.

The unfortunate part of consulting is that it is typically budget oriented. If the client can’t afford it then the well dries up, even if there is work. However, I have found that client’s somehow manage to find money if they want to keep you.

The lifestyle is hard, though, when you have a family. I have a two year old son and wife I leave every weekend so that I can commute to my client in Boston. Earlier this year it was in Frankfurt, Germany but I brought them with me.

However, as I get older, I think that perhaps I may need to go work for a company. Somehow, people think this is more stable. My father believes that you get benefits in your older age had you worked at a company. Of course, he worked at IBM where he gets great medical coverage and a pension.

I’m not of the same belief. I’ve seen people work for a company for years only to be summarily to be dismissed. I see downsizing happen all the time.

What are your thoughts on this? Does it make sense to work for a company or for yourself? Hard to answer but what do you think about the pros and cons as one gets older.
– Vincent

They each have benefits and drawbacks.

One big benefit of working in a corporation is the structure and motivation. If you’re self employed, you don’t have a boss pressing you forward to make progress. Self-employment requires self-motivation – and a lot of it. If you don’t have it, self-employment is going to fail. It sounds like you have that.

Another challenge of self-employment is handling the irregular pay. You have to live at the level of your worst paycheck and bank the rest for the future, particularly if you have a family to feed. If you can’t survive on an income level equal to your worst month over the past year, then you’re not handling irregular pay very well. How would you handle a year at the level of your worst month? Could you handle that? To be able to handle that means that you’re banking a lot of your income as a buffer against the unknown.

At the same time, I think it’s a mistake to put your full trust with regard to your future in the company you work for. Companies can and do discard employees all the time. I have come to view any form of employment as a form of self-employment. You have to look at any job as a contract position in which you want to leverage yourself for the best situation you can be in at the end of that contract. That means not necessarily giving it all to the company, but building yourself up as well.

There is no “best” solution for everyone. It depends on whether you’re self-motivated, financially sensible (especially in terms of spending control), and focused on improving yourself. The more of those traits you have, the better suited you are for self-employment. The fewer you have, the better off you are in a corporate environment.

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.