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. Life expectancy and Social Security
2. Generational inequality
3. Discretionary spending
4. Refinancing timing
5. Renting a car for vacation
6. Sticking to self-set deadlines
7. IRAs and brokerage fees
8. Parents and finances
9. Motivated to keep grinding away
10. Handling serious spousal disagreements
We’re pretty selective about what things our children can watch on television. We highly limit the total amount of time they can watch and we filter what they’re allowed to watch.
What’s interesting is that, given enough time, our children eventually begin to express interest in child-targeted fads even though they get no exposure to them at home. Instead, it rubs off on them from their peers.
As a result, we’ve actually watched some commercials lately with our children and talked about whether or not the items in those commercials were really as great as they seemed to be.
Critical thinking about such things will help them avoid becoming thoughtless consumers.
Q1: Life expectancy and Social Security
Love the blog, and I’m a long time reader. I’m also a master’s student in public policy, and I read a blog post of yours which mentioned Social Security. I sense that you seem to think that raising the age eligibility will help solvency, since Americans are living longer.
Here’s some food for thought. It’s not that all Americans are living longer – just the ones who are more financially well off. And since Social Security is truly important to the ones that aren’t well off – well, I think the statistics really lead to some interesting conclusions.
http://theincidentaleconomist.com/wordpress/subtleties-of-life-expectancy-ctd/ (Not my blog, just something I came across)
The challenge here is that those people who are living longer because they’re well off are typically people who are actually getting maximum benefits from Social Security. They hit the income cap for their qualifying years, which means that they paid in the maximum amount in those years and thus receive (or will receive) the largest benefits from the system.
I actually have thought about this phenomenon a lot and the only real solution I can come up with is to give people more options for when to start their Social Security benefits. Right now, there are different levels of benefits that people can get at different ages. Why not expand that? Is there any reason not to keep expanding the benefits on beyond that?
If I’m a well-off person in my upper sixties who’s happy with my job and I know that if I wait until, say, age 73 to start my benefits but I’ll get a lot more per year by waiting, I would be tempted to wait. Although it would take a lot of number-crunching to prove it, my intuition tells me that this would be a net benefit for both the Social Security program (more years to invest the Social Security money before it’s paid out) and the borrower (bigger annual benefits for the years they receive it).
I don’t think it would balance things, but it would certainly help. I know that I’d probably wait to cash in Social Security until I relaly needed it.
Q2: Generational inequality
I’m 28 and very annoyed with baby boomers, unions and the job market. I luckily just found a job I love but I was looking for years for a job like this…I just keep my fingers crossed that they renew my contract in a year. I constantly find people in their twenties hired for less than they are worth …excluded from unions…and in crazy debt. The job I eventually want to get into in 5-10 years is union ran and very difficult to get into, not at all based on skill, experience or work ethic. Its all in who you know. It kinda makes me furious when I think about what a position we are in….the kids of baby boomers….but maybe this is because I had very bad parents (drug addicts their both dead now and died without insurance).
Do you seen generation inequality? I find it really horrible but here I am wishing disabilities and deaths on boomers..ideally people I don’t know just so there are job openings. It seems like their generation gets all the rewards and ours is kinda screwed with the job markets, inferior school systems, high tuition rate increases.
I think you’re painting unions with a broad brush here. The union issue is a complicated one with abuses on both the side of the unions and on the side of people who would exploit non-union labor. Humans aren’t perfect and will certainly go the extra mile to get a better bargain for themselves, never minding the overall situation.
The real nut of your question is that of generation inequality. My parents will be the first to admit that, in many respects, their generation had it easier in early adulthood (their twenties) than my generation has. They were making far better real wages and the cost of a home compared to the average annual salary was much lower. They also had much lower expected costs, as they just paid Edison and Ma Bell and that took care of their utility bills.
However, put yourself in their shoes for a moment. Wouldn’t you take advantage of the situation as well? If you’re in a protected job, you’d be a fool to make it less protected. If you’re in a job with great benefits, you’ll naturally fight for those benefits.
The best thing we can do is make our own opportunities and bide our time.
Alison has a second question.
Q3: Discretionary spending
I just got this great job. It’s a pilot project and so next year is totally unknown. Keeping this in mind I am keeping a very good savings account and GICs around just in case I am making more money than I have ever made before and for the first time in my life I am allowing myself to spoil myself…nothing extravagant but the entire time I was in school, on maternity leave, underemployed I lived so lean I got laughed at. What percentage of your income do you spend on treating yourself? I feel like there are some purchases I need to get out of my system (a wardrobe upgrade, a living room upgrade) but once I am done I have no idea what I should spend on myself to keep me reasonably dressed and groomed. My office environment is a little snobby so there are expenses to fit in at work. I would say 100-200 a month.
I’d say we probably spend 15% of our income on stuff that isn’t necessary. However, if we were in a pinch, we could easily lower that percentage without seriously downgrading our quality of life.
The biggest piece of advice I can give you is to not let what other people say about your personal choices bother you too much. Much of the time, they’re saying these things to make themselves feel better about the choices they’ve made. They want to reinforce that they’re doing the right thing, and for them to be doing the right thing, you have to be doing the wrong thing.
Don’t let their judgments bother you. Focus on doing what you do well.
Alison also has an additional question.
Q4: Refinancing timing
I took out a mortgage in a dumb way….a 200,000 dollar mortgage on a [5/1 ARM] with a 3.9% interest rate. I can’t get 15 year fixed rates anywhere near what you get in the US. So in four years our rates will likely increase. We knew that when we took out the loan and knew at the time I was going to lose my job and so we can handle a rate increase presuming I get a new job which I did. At what point would you refinance? Once the rates start rising?
I wouldn’t wait until rates start rising to refinance that mortgage. I would refinance as soon as possible while rates are still low.
It’s far better to spend a year paying 4.5% when you could have been paying 3.9% than to miss the boat and have to refinance at a higher rate.
A bird in the hand is always worth two in the bush. If you have a chance to lock in a very, very good rate, lock it in.
Q5: Renting a car for vacation
In late September my wife and I will be taking a vacation that will last 10 days, cross 6 states, and involve around 2,000 miles of driving. Normally we drive our car on these trips, as it gets excellent gas mileage. The car has 110,000 miles on it, though, and we plan to drive it until it completely gives out on us. So far we have had no major issues, but I know that things will start going wrong and the more miles I put on the car, the sooner things will go wrong. I am wondering if renting a car for this trip makes more sense so that we decrease the rate at which we are putting miles on our own car.
From our research so far we should be able to rent a car for under $300. The gas mileage will be a bit less than in our own car, so there will be a small increase in expenses there. One advantage of renting a sedan is the closed trunk, since our car is a hatchback. Without taking trips we average driving maybe 500 miles/month, so theoretically renting a car for this trip will mean that we will be able to wait 4 months longer to replace our car than we would otherwise have had to. Is that worth $75/month? I can’t figure out a way to do a calculation that helps make that determination. When we do replace it we plan to pay cash for a low-mileage used car.
There are a lot of variables in play when you’re calculating this type of thing. I think you’re on the right page when you look at the $75 per month figure, and I think it’s probably worth it in your case to rent because of the miles you’ll be putting on the car.
One potential way to look at this is to examine the reimbursement rates that the government offers for driving. They suggest that each mile driven is worth 51 cents. This takes into account costs such as the purchase price of a car, a complete maintenance schedule, and so on. It does include some costs that you won’t really be counting here, such as insurance, and it also assumes the entire lifetime of the car (and not just a fractional bit late in life), so this figure is definitely on the high end.
Another factor is the sheer reliability for your trip. Taking a rental (which is going to be fairly low mileage) is simply going to be more reliable than taking your old car.
It’s a long road trip. I’d rent at the rate you’ve been quoted.
Q6: Sticking to self-set deadlines
I just finished grad school and have substantial student loans ($70,000 total). Our only other debt is a $6,000 car loan, for which we are a year ahead on payments. One $6500 student loan ($7400 with the capitalized interest) has a high interest rate (7.9% compared to 6.8% for the other loans), and I’d like to pay it off before the grace period ends at the end of November. We have exactly $7400 in savings, which we are currently maintaining, not increasing. We rent an apartment, have no children, and both have/will have secure jobs in the public sector (and I could use public transportation to get to work if one or our two cars died), so I am not particularly concerned about that fund at the moment.
I am quitting my job in a few weeks to return to the public sector, for a 10K pay increase. My initial plan was to take a week off between jobs to get my head on straight. I think this was part of the reason I had a rough start to my current job, because I had no real break after graduation. However, since we are trying to pay off the high interest loan, I realize giving up a week of pay is not necessarily the best plan. It is difficult to calculate when we will pay off the loan as the new job will increase my salary and switch my pay from monthly to biweekly, but even without losing a week of pay to take a break, I estimate that I might have to take $1500 out of savings to make my (self-set) deadline. So — do you think it is worth it to take some time off between jobs for the mental break, or should I minimize the time off so I can continue paying up on this loan take less money out of savings? Alternatively, am I being silly with this self-imposed deadline?
The amount of interest you’ll have to pay if you let a small portion of it outlast the grace period is much less than the situation you’d be in if you tapped your emergency fund to pay for all of it and actually needed that money.
You’re approaching a job transition, one that can often have ripple effects that you don’t see yet. You might loathe the job. It might have hidden costs.
Entering into a new job is not the right time to be tapping out your emergency fund. Let a small amount of the debt roll through your deadline and you’ll be better off come what may.
Q7: IRAs and brokerage fees
I have a question about Roth IRAs and commissions. Do trade commissions that I pay my brokerage count against my $5000 contribution limit? Do any brokerages allow you to buy stocks with your contributed funds but pay commissions from a separate, “non-IRA” source?
No, none of this will affect your contribution limit.
I will say that if you’re paying significant fees to contribute to an IRA of any time, I would consider setting up an account directly with an investment house instead of through a brokerage. I have my accounts directly through Vanguard and never see brokerage fees.
At the same time, I am limited to investing in Vanguard funds, but they meet all of my investing needs without having to pay extra.
I’ve been having some problems with my parents and would like to ask some advice to you and the other readers, because the more I try to talk them into finances and savings, the less they pay attention and want to talk to me about this particular subject.
I know (by my father), that they have a social security debt of about 10000€. Long story short, my mother didn’t pay the social security, and my father didn’t knew about anything because he leaves all the accounting for my mother. He’s employed and earning about 1300€/month, and my mother is unemployed.
Adding to this debt, that (I suppose) they are already paying, they have the car mortgage, that takes about 500€/month from my father’s salary. The car will be fully payed in 22 months.
So the situation is bad. I have the notion that they don’t have savings and can’t save any money by the month’s end. Nor do they show interest in this. One of the big problems is that they have a letargic attitude towards finances. They simply don’t bother to understand where all the money is going. I’ve tried talking to them, giving some “easy reading” books about personal finances, I’ve even gave some simple advices like “take 50€ in the beginning of the month and save it”. They simply ignore what I say, and now every time I try to bring the subject up they just say “yeah yeah, sure..” and divert the subject.
I live about 100 miles from them and visit them from 2 in 2 weeks, but it’s getting really frustrating dealing with them and this situation. It almost seems that I give more importance to this problem then them. I have saved enough to pay all their debts (that I know of), but I will not do that, nor do they want me to. They simply don’t accept any word of advice from me, and won’t do anything to improve their situation.
They are really good people and help everyone that they can. But they don’t seem to want to help themselves. They don’t have great and expensive lifestyles, and are modest and honest persons (that was my opinion before I knew few months ago that my mother hadn’t payed social security for 4 or 5 years). But in general, they are lovable persons and everyone in the neighbourhood loves them.
You can’t make other people care about their finances, no matter how much you might want to. You can lead a horse to water all you want, but you can’t make that horse drink.
Your best approach is simply to protect yourself. Make sure that the impacts you see coming from their mistakes will not affect you in any significant way.
At the same time, continue giving advice if it comes up, but don’t push it. You can’t make them do things the way you want them to. Just keep reaffirming good principles when the opportunity comes up and let them know that you’ll help them work through it when the time arises and they decide that it really does matter.
Q9: Motivated to keep grinding away
Let’s forego the reasons for how I got here and why. Everyone has their reasons, and mine are no more or less valid than anyone else’s. Let’s focus on the facts of the situation: I’m 26 years old, and I’m struggling under about $44,000 in debt, $42,000 of which is student loans. Since hitting bottom, I’ve been steadily working hard to try and improve my situation, but it’s slow going because in a good year I make $20,000 a year. I’ve minimized my expenses about as much as I can (I’m sharing a small 1-bedroom with my brother, to save on living expenses). I’m constantly looking for outside sources of income, or a job that pays more, but everytime I think I have a “lead” it just doesn’t pan out.
The fact is, I /have/ been making some progress. Unfortunately, I calculated last night that at the current rate, I’ll be paid off in 10 years. I can handle living below poverty level for the next 10 years. I don’t require a lot in the way of creature comforts to be happy. But the need to minimize expenses to nothing just to make the smallest progress has necessitated putting EVERYTHING in my life on the back burner. I don’t date, because what’s the point? I can’t pick up and move to pursue a career I would really enjoy and that might even be ultimately more profitable, because I can’t give up a guaranteed source of income right now. I’d like to have kids someday (probably through adoption), and when I see you write about your kids, it’s really hard for me. At the rate I’m going, I’m going to be 36 before I can even begin to think about starting any kind of life for myself. How long after that before I’ll be stable enough to bring children into my life? I feel like my life is going to be over before I even have the chance to get started with it, and that most of it will involve grinding away at a job that I have no special passion for (and which I actually have certain ethical objections to) just to have a chance to do something worthwhile someday.
No one has been able to help me figure out how to fight off depression and convince myself that it’s worth it to keep grinding away like this. What would you do in my situation?
I was in that situation a few years ago. My suggestion? Keep grinding and spend your free time looking for ways to produce more cash, either through selling stuff or through a side business or other form of gainful employment.
You’ve got to recognize that you’re doing the hard things now to give yourself a platform to stand on later. If you don’t do this hard work now, you won’t have great opportunities down the road.
It’s not easy. It’s painful at times. But with every sacrifice, know you’re building a better life for yourself.
His excuse – “We don’t have THAT much debt” “We are better off than most of our friends” “We already live frugally” “We already have a lot of money in our 401k’s, Why do we need Roth IRA’s too” Which are all true, but not good enough for me.
He’s okay letting me do the budget and getting an “allowance” – however, his allowance is $100 a week (Gasp) and he still cannot seem to live within his means. He seems to be dipping into my account more and more lately. He has one bill he pays with his allowance that his choice – netflix ($8). I have repeatedly asked him, told him, yelled at him, begged him, and asked nicely again to not spend money out of my account. I can’t seem to get through to him.
Even though I wish I could reduce his allowance and put that money towards debt, I can’t even get him to live on what he is given. He seems to “shut down” when I try to talk to him about his spending. I don’t feel like I have any reason to distrust him – he just spends money without thinking or tracking. This week alone he has spent $30 out of my account at gas stations!?! He thinks I am controlling and I worry too much. Because he (a) doesn’t think we have a problem and (B) thinks I worry too much – he discounts my attempts at being debt free.
I believe we have a lot of room to further reduce our cost of living and get bills paid off faster, but my determination wavers between steadfast and giving up because I’m the only one actively pursuing the goal. He’s content to let me handle it and do whatever he wants. I don’t want to give the impression that I’m blame free – but I feel like we both need to hold each other accountable. We are in a cycle where I complain to him about everything he spends, then I give up and do whatever I want and then I have to take money out of savings to cover our spending or pay off the credit card (again) and put money back in savings (again). I have a tendency to be a perfectionist and beat myself up when things go “wrong.” Even though I know that is useless behavior I can’t seem to break the cycle.
Much like my answer above, you can’t make someone else care about their finances, no matter how much you care about them.
Also, much like my answer above, your best solution is to minimize the damage he’s doing to your finances. Make sure your requirements are met and your obligations – the ones your name is attached to – are paid for.
It sounds like there are some significant problems in your relationship. If you want things to work better, you may want to seek out some counseling.
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.