Reader Mailbag: Bad Books

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. Planning for future relocation
2. Growing a blog
3. First time homebuyer advice
4. How to grill foiled potatoes
5. Refinancing a vehicle
6. Predicting Social Security’s future
7. Teaching the value of money
8. HELOC or not?
9. Just starting out with credit
10. Pre-tax or after-tax 401(k)?

As many of you know, I’m a voracious reader who typically reads three books or so a week. Every once in a while, though, I’ll start a book and it’ll just turn into a painful slog. I’m stubborn, so I’ll keep trying to read it, but it’ll just completely turn me off so that I actually avoid reading for a couple of weeks.

Eventually, I just give up on the book, close the cover, and put it in the “never again” pile. I’m currently just about there with the book I’m currently reading, The Children’s Book by A.S. Byatt. So much potential in the characters and setting. So many, many, many pages of virtually nothing happening.

Knowing that we plan to relocate — to the burbs — in the next 3 years, mostly for better public schools, how would you go about planning to do it? Would you make the move sooner or later? Would you sell now, pay off debt and rent a place, or, buy something lower priced right away? And, given our debt load, what makes the most sense to tackle first?
– Karin

The first thing I would do is take a look at my credit report, which you can get from the federal government for free at AnnualCreditReport.com. Do you have any negative entries on your report? One or two is okay, a lot is problematic.

If your bad entries are small in number, I would shop around for a mortgage right now because of the ludicrously low interest rates. The traditional advice is to wait until you have a full down payment, but if you do wait that long, there’s a very good chance that interest rates will have risen enough to take away any advantage they might offer. Since I’m unsure where exactly you live, I’m going to guess that you don’t live in one of the overpriced metro areas and that you can find something relatively cost-effective in the suburbs. I usually tell people to not get a mortgage more than double their family’s combined annual income, because anything more than that puts their household income in the hurt locker.

If you have some credit irregularities, spend some time getting your own financial house in order. Make your payments on time for at least a year – preferably two or three. Focus on paying down your debts, starting with the highest interest one.

I read on Monday’s q & a section that you have 700,000 visitors a month. I know your blog is just a few years old, so I was wondering if you could share with your newer readers what you did to grow your blog (besides writing good posts frequently). How did people find your blog? I would love to know more.
– Melissa

The number one most important thing a new blog can do is write a lot of good content. If you can’t consistently turn out worthwhile articles that people actually want to read, then nothing else is really going to matter.

The next step is to make sure there are a lot of links out there to your site. One way to do that, especially at first, is to participate in blog carnivals. Start searching for them at BlogCarnival.com and also use Google to seek them out, because many ongoing carnivals do not participate on BlogCarnival. These are easy ways to get links back to your site and to your articles, and also to get your articles read by bloggers who share a common interest and focus with you.

You should also target blogs that are somewhat more popular than your own by either writing guest posts there (if they accept them) or by writing posts that directly match the topic of that site (which would encourage them to link to you). When you do write such an article – and make sure it’s a good one – contact that site owner. This may or may not get you a link depending on a number of factors (how busy the site operator is, for one), but if nothing else, you’ve written a good article.

Really, in the end, good content and lots of links are the key to people finding you. To get people to stay and recommend you, you have to consistently write good stuff and make it easy for them to stay in touch by making your site available by RSS feed and by email. If you want lots of readers, you have to make it as easy as you can for them to keep reading.

I’m a 23 year old guy finishing up my Master’s degree in engineering. I already have a job lined up in the Washington, DC area, and it’s a government job, so my job security is great, and I’ll be making decent money. I’m still considering condos or townhouses, but I really want to buy a house. My financial situation is fairly secure; I’ll be making around 60K a year with my Master’s degree, I have about 10K in savings, and between my parent’s and grandparent’s investments for me, I have around another 40K-50K for the downpayment. Do you have any tips for a first-time homebuyer, like questions I should ask, additional costs I should factor in, or any other general tips?
– Andy

Well, you’re going to be buying in the D.C. area, which is notoriously expensive. I usually don’t recommend that anyone get a mortgage for more than two times their annual income because of the crunch that a higher mortgage can put on their monthly cash flow.

My recommendation would be to sit tight and let your career develop a bit before buying. Work hard and seek to move up in the pay scale and your GS level. Keep saving your money. Keep thinking about what you actually want.

Eventually, your life will settle and it’ll become clear to you what the best long term choice is – and you’ll be in the right financial position to make it happen. Good luck.

I read your menu and am interested in how long and at what temperature you cooked the potatoes on the grill wrapped in foil.
– Kelly

I usually don’t worry too much about the “perfect” temperature.

My technique is just to make sure that the potatoes are in small pieces – meaning either baby potatoes or quartered/eighthed whole potatoes – and that they’re most – using ice cubes – before I wrap them in foil and toss them on the grill. Temperature doesn’t matter so much as making sure they’re the right tenderness for you.

I usually put the wrapped package on the grill right as I begin to preheat it to cook something that takes longer than a minute or two (burgers, vegetables, pork chops, chicken breasts) and the potatoes are ready to go when the main course is finished.

I have a question regarding refinancing my current truck, a 2006 Chevy Colorado with 85,000 miles in good condition.

I bought my truck at Carmax in March of 2008 with a total purchase price (including absorption of trade in vehicle debt) of $20,084.63. I put no money down (I know, I was young and dumb!) and financed through Carmax for 60 months at an APR of 8.95%, which brought my monthly payment to $417.68/mo.

Right now the truck is worth between $8,300 (low KBB trade in value) and $12,900 (high KBB private party sale value). Current payoff amount is $12,214.81 after 28 months of payments (never been late, but always just paid the minimum amount each month.)

I have heard about refinancing auto loans, but haven’t found a good solid list of pros and cons.

I have good credit (740) and the only debt I currently have other than my auto loan is $3,000 in CC debt at 0% apr (balance transfer offer) which I am paying down about $400-$500 each month. I also have an emergency fund of $1000 saved up.

My question is, should I look around to refinance this loan? If so, where is the best place to look? What are the downfalls to refinancing? If I refinance at a lower APR for a 36 month loan, will my payments be lower? How about for a 24 month loan? I know it depends on the APR rate I can get, but maybe a break even analysis is in order to determine if its worth it to refinance? I would do it myself but I barely passed my finance classes in college, thus the reason I stuck with a marketing degree!
– Kirk

Your payments will probably be lower if you refinance to a lower interest rate, but refinancing itself will often have additional costs – loan application fees, points, origination fees, and early termination penalties. You’ll also have to pay a lien transfer fee which varies in amount from state to state. If your credit isn’t good, you won’t be able to refinance at all, either.

In other words, you’ll have to be careful and take your time with this to find a lender who will actually get you a lower rate without any fees tacked on.

You’ll also want to do this soon before further depreciation sets in, because if the car goes below $7,500 in value, most lenders won’t refinance because it’s not worth the risk.

My suggestion? Start at your local credit union. See what they have available.

I finally visited some retirement calculator sites to see what my ideal contributions would look like. I’m 28, currently working at a nonprofit but hoping to go to nursing school in the next year. I’m not worried about having enough for retirement, but do wonder how you feel about the probable end of Social Security as a means for increased retirement income. How do you keep from feeling frustrated that significant amounts of each paycheck are being withheld and likely will never be seen again?
– Joanna

In my opinion (merely as someone who reads the Wall Street Journal, The Economist, and BusinessWeek), I do not think that Social Security in its current form will exist when we reach retirement age. The numbers simply aren’t sustainable. As Boomers retire, go on Social Security, and live for another twenty five years, the system is going to empty out because there are fewer people in Generation X and Generation Y to fill the coffers.

Social Security was not designed to handle people living into their eighties with any regularity. When the system was invented, 65 was older than the average age at which people died.

One of several things will eventually happen. Either they’ll cut off all people under a certain age from the system, they’ll severely delay the “retirement age,” or they’ll drastically increase the amount of money people have to pay for Social Security. All of those are political nightmares, of course, but when the system approaches bankruptcy in about twenty years (when I’m around 50 and you’re around 48 or so), one of them will have to happen.

My bet is on the severe delay of “retirement age.” My guess is that Social Security won’t kick in until you’re 80 or 85 by the time we get around to seeing the benefits.

Thus, for most people who want some semblance of retirement when they’re in their sixties or seventies, I usually encourage them to think of Social Security as a complete non-factor in their planning.

I’ve read over all your archives about a child’s allowance but can’t find just the right mix for our kid. It’s a unique situation for our “family”. We are each divorced, planning to be married and living together for the most part. Danny was adopted at 8 and is behind in some teachings parents take for granted. He’s 13 now and his mom and I have tried several ways to introduce money but he has no interest in managing it. If he gets money, he asks to go shopping with no clue what he wants. We’ve required savings, giving, spending amounts. That didn’t work. We’ve tried providing allowance and deducting when chores weren’t done. We’ve tried $0 allowance with money tied to each chore and that didn’t work.

We’ve decided to create a need for money and a need to manage it, then give him $25/month. We’ve made a list of things he’ll have to buy, like batteries for his games, tires for his bike, snacks at the pool, movies with friends and the like. His friends are starting to work and save for things. Danny wonders why they’d waste their summer working when they can watch TV instead. I try to teach him the value of hard work and money, among other things, but he just isn’t getting the money thing. I asked him at 12 how much he thought the average person makes/year. His answer: $3,000,000.

Any suggestions? I value your advice and wonder which direction you’d go on something like this.
– Tom

The problem seems to be that Danny doesn’t equate work with money in any way, shape, or form. The only way to create this connection is to simply stop giving him money for any purpose.

Put food on his plate and a roof over his head and perhaps minimal clothing, that’s all you should provide. When he wants something, don’t give it to him, no matter how much you’d like to. As long as you keep doing that – and that means everyone involved in his care – he has no reason at all to see the value in working for money. Why work for something when you can just ask for it and have it?

Yes, he probably won’t like it when he finally puts the pieces together. Yes, it might make home life rough for a while. But if he doesn’t start learning how the world works now, you’re going to have a permanent resident on your hands.

What do you think, should a person take out a HELOC even if they don’t need it? The lowest interest rate would be 2 percent more then we are paying for our mortgage and it will fluctuate with the prime and with savings interest where it stands even with money markets it would be a loss. Yes our money is in money market funds, CD’s are at a terrible rate and we are waiting for them to improve and I want our savings liquid.

We had a couple of unexpected major house repairs this last year which we were able to pay for in cash because we had ample savings. Our savings is now about half which is still more then the 6 months of expenses everyone says you need and I will be able to build it back over time, but my other half wants to get a line of credit. We have no other debt other then the house which I am paying enough extra to have it paid off in a little over 6 years, baring any unforeseen issues that might come up. I personally don’t want any credit that is tied to the house, I want the house free and clear ASAP. I also plan on a couple of improvements that we will be able to get a tax credit for that ends this year that will make our house worth more and more energy efficient.
– Mary Ann

I don’t know why you would do this. It seems to work against your goal of wanting to own the house free and clear “ASAP.” If you want that, don’t put more debt on your house.

Yes, it’s tempting to use a HELOC as an emergency fund, but the costs of it are disastrous if you actually have an emergency. By sitting on cash, you’re earning 1-2% on your savings and paying 6% on your mortgage – a difference of about 4%. If you actually have an emergency, you’ll be paying 8% on that HELOC.

In essence, the only reason you’d empty your emergency fund and have a HELOC is because you’re betting that there won’t be an emergency. It’s that exact moment when Murphy’s Law usually kicks in.

I’m 18, fresh out of high school, and have a job that pays me far more than my friends make. College is on the way, as soon as I’m made a full-time employee as opposed to a temp.

I’ve applied for 5 different credit cards, all designed for people with limited credit history, and have been denied for them all. It’s kind of dissappointing actually. I attempted to open an account, and bam, denied due to a lack of credit history. Apply for loans? Denied. Apply for financing for a car as a last resort? Denied.

I’m confused as to what to do here. I’ve been told to avoid monthly/yearly fees, but it seem’s that these are the only things that will be able to get me started.
– Matt

The first thing you need to do is make sure your credit history is clear, because this sounds like it’s not. Take a look at my credit report, which you can get from the federal government for free at AnnualCreditReport.com. Do you see anything that shouldn’t be there? If you do, get rid of it.

If you’re still having trouble getting a card, there are several options available to you. See if your parents will help you cosign for a credit card. If that’s a nonstarter, consider getting a secured card. A secured card with a $500 limit, for example, means you send them $500 when you open the card, then you use the card as normal. When you cancel the card (assuming you’ve used it normally), you get your deposit back. It’s one way for people with no credit to start building it.

The credit system in America is deeply flawed, unfortunately, but it can be gamed.

What’s your opinion of contributing to an after-tax 401k versus a pre-tax 401k? My company offers both options and I’m trying to decide if I should switch to the after-tax option. P.S. I’m 24 so I do have quite some time before I’ll be withdrawing.
– Sean

I generally encourage people to save for retirement in after-tax retirement savings vehicles unless their income greatly exceeds what they think they’ll be making in retirement.

The reason for this is simple: tax rates have nowhere to go but up. Thus, it’s a lot better to pay income tax now than it is to pay income tax later on.

So, unless you’re making well into the six figures, you’re probably better off with the after-tax account.

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.

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