Reader Mailbag: Early Mornings

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. Paying off low interest debt
2. Refinancing question
3. Coaching youth sports
4. Building credit from scratch
5. Buying home without down payment
6. Breakfast question
7. What happened to WaMu?
8. Handling my first large paycheck
9. Collectible toys for kids
10. Retirement fund on low income

About three times a week, one of our children wakes up really early. It’s often due to a bad dream, but sometimes it’s due to a noise in the night or simply stirring to wakefulness.

Usually, the kids come into our bed for a while, but I don’t get any more sleep once they arrive due to their moving around and restlessness, so I’ll get up with them sometimes.

I’m writing this early in the morning. There are Legos all around me. One of our children has fallen back asleep on the carpet.

Welcome to parenthood.

Q1: Paying off low interest debt
Two sentence summary of question: What should I do with my money when I already have a significant amount of money saved and my only debt has a very low interest rate? Is it a bad decision to pay off low interest debt?

I am 30 and married. My wife and I hope to start a family this year. We are both lawyers and we currently make approximately $350k a year (combined). Once we have a child (God willing), my wife will attempt to work part time and we expect our combined income to drop to approximately $250k. We currently rent ($2200 a month) and we are looking to purchase a home in the next 12-18 months. We have $116k in student loan debt ($66k at 2.625%, 36k at 1.63%, 13k at 2.25%). We were fortunate to have low interest rates on this debt. We also owe 11k on one vehicle (.9% financing). So, we owe $1,110 a month for our debts (education and car). We have approximately 350k saved for a house in our ING account and I have 30k in a Vanguard account (investing in index funds). We both max our our 401k contributions.

For the past year, I have been making minimum payments on our debt. For this year, I am thinking about paying off one of my wife’s two remaining loans (the 13k one) in order to free up our cash flow when she no longer works full time.

We currently save $6k a month. Would you continue to make minimum payments on these student loans or would you start to aggressive pay them off. I know that I have a lot of money saved up for a house etc. I just do not know whether I should save more or get out of debt (even though the interest rate on the debt is low).
– Vince

It is never a bad decision to pay off debt, even debt at a low interest rate.

The best way to think about paying off low interest debt is to think of it as an investment that’s guaranteed to return that interest rate through the original length of the debt.

So, let’s say you have a car loan that is at 4.5% and it has three years left to go. If you pay it off now, you’re essentially doing the same thing as buying a three year CD that returns 4.5%, with the advantage that the returns aren’t taxable but with the disadvantage that it’s a bit less liquid than a CD.

Is that a good choice for your money? I think that most of the time, the positives outweigh the negatives.

Q2: Refinancing question
I currently have a mortgage with a rate of 6%, but I have seen rates offered as low as 3.5% to some of my friends when they refinanced. Because I was curious, I called up my current bank and they offered me two options:
1.) 4.25% on a 30 year loan. This would reduce my mortgage by about $60-$80 a month. But, I would lose the $12,000 that I already paid off on the house, which I don’t like.
2.) 4.00% on a 20 year loan. This would save me approximately $35,000 over the life of the loan, although my mortgage payment would go up about $25 a month.

The numbers above include the $3000 I would pay for closing costs and another $3000 I would have to pay off (from a grant i rec’d when I purchased the house). Both these would be wrapped up in the refinancing loan above.

SO, now the big question…should I choose #1, knowing that the extra money would help in paying off my $27,000 in credit card debt (which we are trying to dig out of now) and about $25,000 in student loans. OR, do I choose #2, even though I would like to move within the next 5-7 years (so I don’t know how much of a real savings I would get). My husband and I think #2 may be the better option but it will just take us that much longer to pay off our debt. Our budget is a bit tight at the moment – we have enough to live month to month, but extra spending like presents for Birthdays or Christmas, do put quite a burden on the finances. And, we have no savings or emergency fund to speak of – aside from taking a loan against our 401K.

What do you think?
– Eve

You should look at the results of a detailed mortgage calculator, like the one over at Bankrate.

I don’t know what your balance you’re hoping to get a mortgage on is, but let’s say it’s $200,000. At the seven year mark (the point at which you think you might sell), your balance would be $172,726.96 on the 30 year loan. At that same seven year mark, your balance would be $146,519.38. Simply put, at the seven year mark, you’ll have $26,000 more in equity in your house if you choose the 20 year loan over the 30 year loan now. The point is that taking the shorter-term mortgage will result in a lot more equity in your house in a few years when you choose to sell.

Is that the right choice to make? It’s really hard to tell. I think it depends on other factors such as job stability, the size of your emergency fund, and the career opportunities you have. The more stable you are, the more I’d lean toward the twenty year loan.

Q3: Coaching youth sports
Coaching youth sports seems like something really interesting to me. It’s a way to give back to the community and get myself outside, plus it’s a free form of entertainment. The only thing I’m unsure about is how to get started.

– Marvin

The first step is to contact your town’s parks and recreation department and find out if they have any openings for youth sports.

You’ll find, though, that if you’re not a parent, you’ll probably have significantly more luck serving in other roles, such as a referee. My experience in several communities has been that the coaches in many early youth sports are parents of some of the children involved and the coaches of more advanced youth sports are professionally trained to do so.

Regardless of what role you fill, there are few things better that you can do in the community. It means physical activity, lots of fresh air, and providing great opportunities for kids.

Q4: Building credit from scratch
My brother-in-law has recently turned 18, moved out of his home with his parents, and into a home with a school friend. He is finishing high school, and will graduate in May. At that time, he will be moving closer to us and attending one of the local junior colleges for at least a year. I am trying to give him some budgeting and credit advice but my own path in each of these areas was initially flawed at that age.

My question is this: being that his income is comprised of social security (until he graduates high school), and should have a job within a few weeks, what is the safest and smartest way for him to establish and then build his credit? His initial solution was to open a credit card, but I am afraid the allure of spending will be too much for him to control.
– Jenny

One option is to have him open a credit card, but give the card to you. Then, use that credit card for things like gas only when you’re with him, and have him give you the cash to cover it. This will build his credit without any risk.

Another option is to contact your card issuing company and ask about adding him as an authorized user on your own card. Make sure that such information is reported to the credit agencies and will benefit his credit before you do so.

A final key is to remember that he won’t be listening to a lot of the things that you tell him. The best thing you can do is make sure he knows you’ll be there for him whenever he needs you. While stuff about “credit” and “Equifax” will likely go in one ear and out the other, making it clear that you care and support him as he finds his own path will stick around.

Q5: Buying home without down payment
My husband and I would like to buy a house. This is our dream and we have been trying to buy but unfortunately prices were always too high for the places we wanted to buy. This time around I’ve finally convinced my husband to look in an area which he previously didn’t want to live in (no real reasons) and where prices are a bit more affordable. The houses are around $400,000 for something decent. This is a bit expensive for us, but I think we can do it.

The problem is he wants to put down a 20% deposit, which we don’t have. We only have about $50,000 and we can maybe reach $60,000. So he becomes stubborn and asks me to look for cheaper homes, which is impossible because for $300,000 we would get nothing or a house in a crime infested neighborhood. We have a 3 year old! My thinking is, let’s put down less. 10%. His thinking is let’s put down 20% or we don’t buy the house. Because of his thinking we still don’t own a house.

What do you think? If we both really want a house, how much is really PMI going to be in the long run and is it right to make PMI such an important factor. I understand that it would be nice to have the whole 20%, but if you don’t have it and if you know it would take at least another 5 years to get that money together, what would you do?

I have a toddler and I would like her to have her own backyard, her own home and such… Also, if this makes a difference, I am not planning on being in this new house for more than 4 years, so the PMI wouldn’t be as substantial as it would be in a 20 years home…
– Linda

I don’t think you should get a house at this point. Essentially, if you’re only going to stay in the house for four years, you’re basically going to be renting for that timeframe as you’re not going to build much equity given the current housing market.

That “rent” will include your mortgage principal, your PMI, your property taxes, your homeowners insurance, your lawn care costs, and increased energy bills, at the very least. That’s a lot of money each month for a home that your child will barely remember when they get older.

Rent as cheaply as you can for four years and sock every dime away for a down payment that you can. When you reach the four year mark, then you’ll be in a much better position to buy the house that you’ll be in for the long term.

Q6: Breakfast question
I need a breakfast of some kind in order to get going in the morning. However, most mornings, all I have time for is grabbing something through the drive-thru on the way to work and that adds up quickly (both in the wallet and around the waist). Any suggestions?

– Jill

Plan ahead for that breakfast.

My solution to this problem was to make giant batches of breakfast burritos on the weekend and store them in the freezer. Then, in the mornings as I got ready to go, I’d grab one from the freezer, wrap it in a paper towel, and microwave it. I’d grab this on my way out the door and eat it on my way to work.

The cost per burrito was much lower (helping with the wallet), the ingredients were healthier (helping with the waist), it was pretty tasty, and it actually cut five or ten minutes off of my commute time because I wasn’t stopping at a drive-thru.

Q7: What happened to WaMu?
I’m a college student that’s starting to look around at banks to see which one might be best for me. In reading some old articles, I discovered a bank by the name of WaMu that was very popular and apparently a fierce competitor to ING. However, when I went snooping to their website, I discovered that they were now becoming a part of Chase. Do you know if this has changed much about the experience of using WaMu?

– Mark

WaMu is short for Washington Mutual. Washington Mutual was a bank chain that failed during the banking crisis of 2008. It’s now out of business. JP Morgan Chase wound up with most of the assets and accounts of Washington Mutual.

Most of the features that made WaMu distinct – good rates, a very unique floor plan in the branches, aggressive and quirky marketing – have not really continued under the new ownership. It’s just a part of Chase.

WaMu made a lot of poor business decisions, but it made some good ones, too. More competition is always better for customers, so I’m kind of sad to no longer see WaMu in the mix.

Q8: Handling my first large paycheck
Taking advice from your blog and several others, I’ve recently quit a low-paying job in the education field (about $19K a year, September to June) to take on a position as an office admin assistant (for about $30K a year). I feel good about the move: while I’m not using the degree that put me into such debt, I enjoy office work, I’m good at it, and it both pays better and is far, far closer to home (hour commute compared to fifteen minute commute!). I’m looking forward to no longer living paycheck to paycheck within the next two months, and have a plan in place for getting rid of my debt a bit faster and creating a more solid emergency fund (it’s currently about $1,000).

While I know I’ll still be living on a tight budget for some time, I’m looking forward to having a bit of “breathing room” – no longer living paycheck-to-paycheck, having an emergency fund, etc. Talking with friends has raised what I think is a good question, even though it might not apply to me for several years. I’ve witnessed (and even succumbed to) the “first paycheck” trap: the “hey, look, I’m making a ton more money than I’m used to – that means I can splurge and treat myself to xyz!” Obviously, until I’ve paid down my student loans in the coming years, I won’t be able to fall into this trap, and I’m hoping that after my loans are gone I can begin saving for a house.

But I was wondering: what, if anything, do you consider worth splurging on once you’re comfortably making more money than you’re used to? Assuming debts are paid off, emergency funds are more than adequate, retirement is funded, and you’re already saving towards whatever goals you have in mind, etc. Obviously, the trap of just splurging on instant-gratification items isn’t the way to go, nor is pitching out everything you’ve “made do” with until this point to buy bigger, better, brand-new whatevers. But once you’ve achieved that leeway, what do you think would be worth spending that extra in your paycheck on?
– Ben

If I were you, I would focus your “splurging” on replacing items you already use with very well made and reliable replacements.

There’s not really an exact answer here, as it depends a lot on what you do with your time and the lifestyle choices you make. If you spend a lot of time preparing high-quality meals, for example, you may want to focus on upgrading your kitchen tools slowly. If you have a lot of guests, you may want to slowly upgrade your flatware and dishes.

Don’t buy “new” things – or, if you do, be wary. Instead, slowly upgrade the stuff you actually use to high quality and reliable versions.

Q9: Collectible toys for kids
How do you handle it when your children get into some sort of collectible toy that never seems to end, like Pokemon or Pokemon cards?

– Andy

They buy such things out of their allowance. Because of that, it somewhat limits itself.

My son got heavily into Pokemon cards for a while, as it was heavily spurred by a cousin who gave him several hundred cards and some older kids at school who played with the cards in the cafeteria. He received a few packs as stocking stuffers and bought some more with his allowance, but eventually the fad passed.

This isn’t really a problem if you don’t give into your children and constantly buy them things.

Q10: Retirement fund on low income
I am 24 years old and renting in NYC. I have roughly $11,000 in student loan debt, and only $1000 in an emergency fund. I don’t have any credit card debt because I hate the idea of spending money I don’t have. I am aggressively paying off the loans (5 separate loans, averaging a 5.5% interest rate) paying close to 3x the minimum payment. I hope to have it all paid off in 3 years. Even though I have a masters in social work, the field doesn’t pay too well. Luckily I do LOVE what I do. My job offers a 403b but I am afraid to invest my contribution because I know nothing about investing, however there is a savings account type option. Then I hear all about IRAs and other retirement fund options, which, again, I know little about. I feel like I don’t have too much disposable income to even begin to put towards retirement. I still feel like I’m so young, but I don’t want to struggle to catch up later in life. What type of retirement fund is appropriate for someone who potentially can only contribute $100 or so a month?

– Fred

Your best option is probably a Roth IRA, as you can set it up yourself quite easily, keep control of it yourself, and it’s pretty simple when it comes to taxes.

However, where you save your retirement money is less important than the fact that you’re saving it. You are better off saving $100 a month in a sock drawer for retirement than you are saving $0 a month in the perfect retirement account with the best possible choices.

Just save. That one right decision dominates any small wrong decisions you’re likely to make.

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.