Reader Mailbag: Congratulations, Giants

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. Car dilemma
2. Very young children and money
3. Praying for money?
4. Retirement contribution calculations
5. Loans versus Roth IRA?
6. Library book sales
7. Can’t find internal motivation
8. Roth IRA and wills
9. Soda addiction
10. “Sinking” fund

Congratulations to the San Francisco Giants for winning the World Series in such a dominating fashion.

I am very frustrated by it, though. I pretty much knew that San Francisco would dominate the series because of what happened before the series even started. Detroit had a week off to sit on their hands because they swept the Yankees, while the Giants played seven games against the Cardinals.

The Giants came into the World Series fresh off their wins and without the long downtime spent having your skills gently rust and having a week to think about it. The Tigers were bound to play poorly, and they did. San Francisco was simply able to take complete advantage of it, to their credit.

I wish there was a way to have teams play such series on a more even playing field from the start.

Q1: Car dilemma
My 1998 Honda Civic “Blue Girl” has been an amazing car, she’s paid off and is approaching 380,000km and still runs really well. Unfortunately, someone backed into the passenger side door as I was driving through a parking lot (I was the only one in the car and I’m OK) a week ago. Now I have to decide whether the repairs (between $1500-3600) are worth the money or if I should take a settlement (likely <$1000) from my insurance company who thinks it might be a total loss situation in insurance terms and purchase in another (used) car. This car we've had since new (14 years!), and I really wanted to see it to 400,000km, which would likely be in about a year of regular driving for me. Anything past 400,000km would be bonus!

Should I get the repairs done (the minimum would be $1500, the insurance company estimated $3600) and drive this car for the remainder of its life (undetermined), or purchase a ‘new’ (new to me not off the dealer lot) car? I have about $8000 in savings but that would include my emergency fund and 5 months living expenses if I were to unexpectedly lose my job. I had been saving up for a car (since I knew I would need to get one soon) but also did some renos to my house (so I could rent out a room, which is rented now!) this summer so I dipped into that pot and am left with the $8000. And I wanted another year to save. I could likely save another few thousand dollars by this time next year.

Is this a good time to get a different car for under $5000 (?) which has unknown problems or stick with my current car and put in the $1500 to drive it, while knowing the expense I will have on this car (I know how much maintenance costs, mileage it gets, etc.)? There is security in keeping a familiar car, it still gets 500km/tank! (and if you couldn’t tell, I’m a little attached to it).
– Kelly

If I were in your shoes, the first thing I would do here is visit a junkyard. See if you can find a passenger side door for a Honda Civic at a very low price (ideally in the matching color), then pay to have it installed and repainted if needed. If you can find a side door, you can get it installed pretty easily.

The quotes you’re getting likely involve buying a door from a manufacturer somewhere. Again, I don’t know what the full damage is in this situation, but if you’re eligible for that, that’s the way I would go. I would take the buyout on the car and get a secondhand door put on it.

It really comes down to how well your Civic runs. If it’s running just fine with no problems, I would look seriously for a used door. If it’s starting to have problems, I would replace the car now.

Q2: Very young children and money
At what age should you start introducing basic money concepts to children? I have a four year old and a three year old and I’m wondering at what point they should start learning about money.

– Adam

My six year old and five year old both get a small weekly allowance that’s not tied to chores. Both of them tend to save up for a long time (months, in fact), then buy a big item or two with that money that’s built up. It seems to be a natural thing for both of them.

When my oldest turns seven or so, I’m going to introduce him to the idea of a bank. We’ll get him a savings account there and put some of his allowance in it (he saves part of his allowance for the future and thus has $50 or so saved up). Then we’ll watch the balance slowly go up with interest and additional contributions.

Keep the ideas small and straightforward. Repeat them often. Do those things in your own life. I highly recommend reading Joline Godfrey’s excellent book Raising Financially Fit Kids, which I am planning on discussing in detail in a series early next year.

Q3: Praying for money?
I have been praying for financial change in our life but it seems like we’re not making any progress forward in fact it seems like we’re losing ground if anything.

– Jean

In my own life, I have found prayer to be most successful when one is applying it to internal change, not to external change. For example, if I were to pray for my father to be back in perfect health, I don’t think I would find success there.

Where I would find success, though, is praying for my own internal change. I can ask for the strength to handle the problems in my life. I can ask for the willpower to make hard financial choices. I can ask for the motivation to work harder and increase my earnings.

I’ve found those things to be quite successful, actually.

Q4: Retirement contribution calculations
I have a quick question about retirement contribution calculations. First a little background. I have been working for a little over two years at a well-paying job (about 90k per year) but started at the age of 28 due to grad school and doing a two year postdoc position, so I’m a little behind on the amount I should have put away so far. For the past two years I’ve contributed 5% of my gross income into a 401k, and my company fully matches 5%. All of the prevailing wisdom tells me that 10% is merely okay, but not ideal, at my age. I’m ready to open up a Roth IRA, starting with $200 per month. This is my question: what will my total retirement contribution percent be with the 401k and Roth IRA, since I’m mixing pre- and post-tax investments. $2400 out of my net income is QUITE different from $2400 out of my gross income (I net about 60k). With $2400 in a Roth IRA and $9000 in a 401k, would I be contributing 12.7%? Just trying to figure out how much more I should be depositing into the Roth IRA to get to an ideal contribution amount.

– Jill

I generally figure that pre-tax contributions (like a 401(k))) should be calculated based on gross income since they will provide gross income in retirement. For things like a Roth that will provide net income, I would calculate it based on my current net income.

So, what I would do is sit down and figure out my gross income and my net income separately. From there, I’d figure out how much I was contributing pre-tax (401(k)) and post-tax (Roth IRA). I’d then divide the pre-tax contributions by my gross income and the post-tax contributions by my net income, and add the two results.

That’s the percentage I would use to determine how much of my income I was putting away for retirement. I don’t have quite enough data to calculate this for you.

Jill has a follow-up question.

Q5: Loans versus Roth IRA?
On a somewhat related question, the reason why I haven’t started the Roth IRA is because I’ve been paying close to double on my undergrad student loans to try and get them out of the way. Variable interest, about 15k remaining at 4% and 10k remaining at 2% (which is much better than the 40k I started with three years ago!). Minimum total payment $250, I pay $450. When I first started working I knew I had to get the company match for the 401k, but figured I should focus my money and energy on my student loans. I can contribute more to the Roth IRA if I pay less on my loans, do you think it’s better to continue to pay the extra $200/month on the loans, or to put $400/month into the Roth IRA?

– Jill

If you’re getting the company match for your 401(k) and it adds up to anywhere close to 10% of your gross income (your contributions plus your employer), I would focus on the loans.

From your other note, you’re close to 30 years old. 10% of your gross income is a very appropriate amount to be saving at that age. While extra is good, I would rank debt freedom as a higher priority because it gives you more life and career flexibility.

When your debts are out of the way, feel free to pump up your retirement. That’s a great time to do it.

Q6: Library book sales
Each year, our local library has a book sale. They charge $1 per book on the first day of the sale, $0.50 on the second day, and $0.10 on the last day. Each day is a madhouse with a big line forming at the start of the day. Library sales are a great way to save money on books.

– Kendra

I’ve hit local library sales many times!

The books are an interesting mixed bag at such sales. I’ve found many wonderful books at the local library sales, but you often have to dig through lots of dodgy books to find good ones.

Even if you only find a book or two, it’s usually worth it for me because I enjoy digging through the books and finding all kinds of strange things. It’s rather entertaining for me.

Q7: Can’t find internal motivation
I know that I should be spending less and saving more. The numbers show me that. My problem is that when it comes down to making a difficult choice, I can never find the internal motivation to actually make the financially sensible choice. I always spend, then I regret it later when I have the chance to think about it from a distance. I don’t know how to move past this.

– Angie

For me, it took a significant shift in my values for that to happen. I was at the place you are at now for several years, where I saw my finances sinking but I kept making the “wrong” choice in spending situations.

That’s because, at my core, spending seemed like the “right” thing to do based on what I valued at that time. That’s just who I was, for better or worse.

Over time, things changed. I’ve always spent a great deal of time soul searching and trying to figure out what I felt was the best thing to be doing in various situations and what I felt to absolutely be true. As the circumstances of my life changed – marriage, then children – my values and ideas began to shift, too, and eventually overspending began to feel like the “wrong” thing.

It takes time. My best advice for you is to just keep thinking about your life. Ask yourself what’s really important, and keep asking those questions over and over again. You’ll eventually find the answers you need.

Q8: Roth IRA and wills
We’ve been saving money for our kids’ retirement like suggested in many places (and probably here) online. We put away $20 every two weeks ~$520 per year per kid. When they start working, we”ll fund a Roth up to the maximum limit (their taxable income or $5k) for them for as long as we can (hopefully through college but not longer). BTW, yes we are also saving for college and fully funding our own retirement accounts. We are lucky enough to have these options and are taking full advantage.

But I wondered if there was a way to keep it as a ‘surprise’ and make it less likely that they will take the money out before compound interest has done its work. $6k for 50 years (with no additional investment) at 6% is ~$110k. Is there a way to open these Roths in their names and then not tell them about it? Then we could put the account numbers and access information in our will for them to find after our deaths or at least deep into their adulthood.
– Dave

There’s really not a way to do that without running afoul of the IRS.

For example, eligibility for a Roth IRA depends on income limits, and it also has a contribution cap. In order to know whether you can contribute, you have to know their actual income level. Also, if they open a Roth IRA on their own and contribute, they’ll likely zoom right over the cap.

Not reporting a Roth in your name on your IRS forms is tax fraud and the IRS will not be impressed.

My suggestion would be to set up a trust for each of them, but set the age at which they can have the money quite high. You should contact a lawyer for how to set this up.

Q9: Soda addiction
I am addicted to soda. I drink between six and twelve cans a day and I can really see it adding up both in terms of money and in terms of my body too. Whenever I quit, it’s devastating, though. I get giant headaches and I crave it all day long. The cravings and headaches are intense, and eventually I drink some just to take the edge off, and before you know it I’m back where I started. What can I do?

– Bill

Take it slowly. If you’re finding it that hard to quit cold turkey, it’s not going to ever work well.

For the next week, put a firm cap of six cans a day on yourself. Put only six in the fridge each day, for example.

After a week of that, cut it down to five per day. After a week of that, go down to four per day. Then three, then two, then one, then go without them.

You’ve got to cut down slowly when you’re making changes to your diet like this.

Q10: “Sinking” fund
I read recently about the idea behind a “Sinking Fund”, which basically is a way of paying down your mortgage without physically paying down your mortgage. The idea would be instead of making one extra payment per year to your mortgage, you make it to your sinking fund and allow it to appreciate in a safe liquid investment.

First, do you agree with the concept? What are the pros and cons to “paying down your mortgage” this way? I am intrigued by it as a new homeowner as I have several friends who bought before the bubble burst that either have to stay in their homes because they owe too much or cannot sell their home for the price they need to sell it at. I like the idea of paying off my mortgage early, but having that money set aside as a means of keeping it flexible in case of a need to move seems logical to me given the current environment.

Second, assuming this is a valid option, when would you set up a sinking fund? We make $200K+ combined, max out our 401K’s, have no credit card debt, but do carry about $30K in remaining undergraduate loan debt and are currently paying PMI of $285 per month after putting 10% down. Would you pay off mortgage to get it to 78%, thus removing PMI, before setting up the sinking fund? Would you prioritize the student loans at historically low rates as well before thinking about this approach.
– Jim

The idea is a reasonable one, particularly if you have a low-interest mortgage. All you’re doing is keeping your money in something liquid rather than tying it down in the asset that is your home.

The only real “con” I see is that in order to beat the “return” you would get through extra mortgage payments, you’ll have to put your money into something with at least a bit of risk to it, which means you could potentially take a loss on that money over the short term. If you’re in a secure financial position, that’s an acceptable risk, I think, but it is a downside.

I generally wouldn’t start on it until I had my other debts taken care of, though. Anything with a higher interest rate than my home mortgage would have to disappear first before I did this.

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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