Reader Mailbag: Family Visit

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. Selling off items
2. High-interest foreign accounts
3. Putting off home ownership
4. 401(k) leftovers
5. Early payments on 0% loan
6. Vegan snacks
7. Using a windfall
8. Self-employment and taxes
9. Paying down credit card debt
10. Reference books

My parents visited us this past weekend. I love it when they come to visit us, yet I also sometimes feel some relief when they’re gone. I feel the same way with almost any guest – I’m glad they’re here, yet I also feel glad after they leave.

It’s just the natural stress of houseguests. A guest in my home for an afternoon isn’t stressful, but once someone is here for several days, I almost always find myself getting stressed out.

Q1: Selling off items
When you said the first thing you did was to sell all your media (DVD’s, CD’s, etc.), where did you sell? I have a hunch it was eBay or Amazon, but I’m not certain, and I would like to know the best way to go about selling media. I find eBay and Amazon very time consuming to use for selling. We have a local buyback store, although I’m not sure they offer a respectful amount of money for items. In a nutshell, where is it worth it and what makes it worth it?

– Sandra

I did not sell all of my media online when I first hit my financial bottom. I did use eBay for some items, but I was very selective about what items I sold (particularly after the first batch), focusing on ones where I felt the return would be worth the time investment.

What I actually did was sell a handful of items online, then sell most of the rest at a used media store. The few that were left wound up at a yard sale, and the unsold ones there wound up at a Goodwill store.

I was pretty happy with the financial return here compared to the time invested. That money went a long way in helping me deal with my initial debt load.

Q2: High-interest foreign accounts
I am a long-time reader of your blog and have loved your insights. I was wondering if you could provide some insights into how I could profit from the extremely high interest rates available in countries like Brazil or Turkey? It would seem prudent to park our money in a cash-deposit or savings account in a foreign bank paying high interest for a while… then move it back to the US.

– Tim

There are several concerns I would have here. First, in order to use the money, you’re going to be converting your currency twice and paying a fee on that conversion twice. This will eat up a significant amount of your gain.

Another concern is that, to an extent, you’re playing the foreign currency market. If the exchange rate moves in favor of the U.S. dollar while your money is in the Brazilian or Turkish bank, you’re going to see most of your gains eaten up.

Yet another concern has to do with the banking industry in those nations. I’m not clear on how stable the banks are there and how protected ordinary depositor accounts are.

There are enough uncertainties and risks in this that I wouldn’t try it unless I was actually from one of those nations and very familiar with the risks and concerns involved.

Q3: Putting off home ownership
My husband has a stable job at which he excels. I have an office job that I was happy to accept in the depth of the recession (after a two-year low-paying but freelance blogging gig) but that I don’t love. We were married in May 2008, and started our life together with $43,000 in credit card, car and student loan debt.

In just over 2.5 years, we’ve reduced that debt to about $7,500, which we are on track to pay off by the end of this year, using monthly automated payments. On January 1, we began weekly automatic savings of $230 per week to an emergency fund (we began with Dave Ramsey’s $1,000 mini-fund back in 2008).

Our gross income in 2010 was about $120,000, and in 2009 it was $96,000. However, due to our aggressive debt repayment, our entire savings consists of $2,000 in our emergency fund. I do have $3,200 in a retirement account from an old job, and I just started contributing to my current company-matched 401k in January. My husband (who earns about 70% of our combined income) is not contributing to retirement.

Here’s the quandary: we both dream of owning our own house. We are currently renting a house for $1,400 (a great deal in our area) from a family friend who would like to sell it to us. She has offered owner financing (not sure if we need this — we have good credit, but understand that lending is tight and we have no down payment), but won’t name a price range. We’re a bit concerned about this, as she previously listed the house for a price that was aspirational to the tune of $100-$150K over market value (needless to say, she received nary an offer, not even a low-ball one).

Our lease is up in June. I would like to quit my job next year to explore a new career, travel and raise children (we are in our early 30s, no kids yet). With only my husband’s salary we can afford mortgage payments up to $2,500, which, depending on what calculator we use, seems to put us in a $375,000 home. This is about the value of the house we are renting, and an average price for a “starter home” where we live. We keep and stick to a meticulous budget.

I feel like conventional wisdom would tell me to stay in my current job until the emergency fund is built, the debt is completely paid off, max out retirement, and then and only then, start saving for a 20% down payment on a home. But that might take us another 3 years or more, and involves asking to extend our lease on a property we know our landlord wants to sell, or moving to another rental that could be more expensive or far less comfortable and convenient in the meantime. Also, home prices are temptingly low right now, and while we have little savings, our income is healthy, and would still be without my income, though we’d probably qualify for a smaller mortgage (that wouldn’t be enough for a house in our area).

So what do you think? Should we ask to extend our lease? Should I plan on staying in my job longer than I’d like? Is there any good reason to halt our debt repayment and emergency fund savings to redirect towards buying a house?
– Johanna

I think you should sit down with your landlord and try to get a bead on what kind of arrangement she’s wanting for the sale. What’s the price? How does the financing work? You need more information with which to make a decision here.

If that’s a non-starter, I would try to extend the lease and then get your financial house as solid as you can. You have the right ideas – pay off your debts, build your emergency fund, contribute to your retirement.

As for your wish to take a year off, I think it’s fairly incompatible with the other things you’re mentioning. While I’m not opposed to the idea, you have to reconcile yourself to the fact that you can’t have everything. You can’t have jobless freedom while also paying off your debts and building up your down payment. You’re going to have to make a choice there.

Q4: 401(k) leftovers
I’m a 24-year-old writer who graduated from college in 2008. I was lucky (and hardworking) enough to graduate with zero dollars in student loans. But thanks to the terrible economy of the summer of 2008, I haven’t exactly had much career success. Just out of college, I had a paid internship that afforded me a 401(k) and matching funds. I contributed as much as I could, but my small intern salary for the summer left me with just around $500 in the 401(k).

Since then, I’ve been working, but not contributing to a retirement fund. I make a very modest salary as a receptionist, combined with some side money from freelance writing. The writing is my passion, though, and with my networking contacts, I’m considering making the move to be a full-time Freelancer in the upcoming year (As soon as I have my $900 credit card bill, my only debt, paid off).

But now I’m ready to start modestly (only around $100 per month) contributing to a retirement fund again; I know it’s important to sock away as much as I can while I’m young. I’m considering opening up a Roth IRA to take advantage of the tax benefits later on in life (when I hope my income and tax bracket may be higher), as well as the flexibility to take out my capital contributions if times get really tough (Journalism is a fickle industry).

But my problem is that I have no idea what to do with that 401(k). Should I take the money out and put it in my (eventual) Roth IRA? Wouldn’t that leave me with pennies after the early withdrawal fees? Should I roll it over into a Traditional IRA? If that’s the case, should I keep both a Traditional and a Roth IRA? Just the Traditional? Can freelance contractors make tax-deductable contributions to a Traditional IRA? Would that be a better idea for a self-employed person? Should I leave it in the 401(k) for simplicity’s sake? I would jump at the chance to re-join the non-Freelance workforce if the right opportunity presents itself, so perhaps I’ll have another 401(k) down the road.
– Evelyn

The usual process is to roll a 401(k) into a Traditional IRA, then convert that Traditional IRA into a Roth IRA. That’s the type of thing that a fee-based financial planner (do not use a commission-based financial planner for this – ask them if they operate on commission before using them) can help with. This usually doesn’t incur early withdrawal or other fees. However, the conversion from a Traditional to a Roth IRA will cause a taxation event because you’re moving from pre-tax to post-tax dollars. You’ll have to pay income tax on that money. If you can’t do that, leave it in the Traditional IRA.

You can certainly have a Traditional IRA and actively contribute to a new Roth IRA, just as you can have a 401(k) and a Roth.

I like IRAs because you have more control over how your money is invested. You pick the investment house and you usually get a much wider and richer range of investment options.

Q5: Early payments on 0% loan
What do you think about making early payments on a car loan that has 0% interest?

I’m torn between reducing the car loan debt (about $28k), opening a Roth IRA, or starting another account to save for a house. I already contribute 10% of my salary to a 401k which my company matches 50%, so the Roth IRA doesn’t seem urgent. I’m a few years away from wanting to buy a house, but I’d be able to pay for a mortgage a lot easier if I’m not spending $500/month on car payments (there’s about 57 months left to go!).

Selling the car to buy a “reliable, used car” instead is not in my interest, despite that being the typical finance blog approach.
– Charlotte

The reason the “typical finance blog approach” involves buying a reliable used car is because it provides the most driving bang for your buck. If you choose not to do that, you’re simply choosing to redirect money from other financial goals into having a shinier car, which pretty much opposes most financial sense. If a “typical financial blog” advocated buying a new car on a loan, then that “typical financial blog” would pretty much constantly be ridiculed for offering dodgy advice.

If you’re committed to your current car, that means you’re committed to it above your other goals, which is good – you’ve assessed your goals and figured out what you want. The advantage to paying off the loan early in this case isn’t to avoid interest, but to maximize your cash flow as soon as possible.

However, if your loan really is 0% interest for the entire life of the loan, you’re better off making extra payments into a savings account, waiting until that savings account matches the balance of your loan, and then either paying it off right then or simply using that savings account for all remaining car payments. This takes financial willpower, but it’ll put you ahead financially, perhaps saving you the equivalent of a car payment or so in interest earned.

Q6: Vegan snacks
On your diet, what kinds of snack foods do you eat? I’m amazed at how much stuff has milk or eggs in it!

– Jeff

I eat nuts. I eat fruit (I love dried apricots). I eat mushrooms that have soaked in olive oil, a touch of vinegar, and spices. I eat crackers. I eat pretzels dipped in hummus.

You just have to look around your grocery store for options. The best place to start is usually in the produce section. Look for things that look like you could munch them. Hummus is a great thing to dip these vegetables in.

Pick up some nuts and try them. Try out a variety of dried fruits. You’ll be shocked how many good things are out there once you start looking in the right places.

Q7: Using a windfall
After a year of unemployment I am now gainfully employed. I have cut my budget down to bare bones (no extra spending of any kind, no cable, no shopping, no…anything) in order to be able to save $1000 each month.
15% of my salary goes to my 401k/Roth401k
$200 a month goes to my RothIRA
I save $1000 a month (starting this month)
I have $8000 in savings
I have $9000 in debt. I pay this off at $300 a month, and there is 0% interest (praise God)
At this rate, I will be paying this debt off until December 2013.
We are planning on having a baby in Summer of 2012 and that is what we are saving up for.
We currently rent, and are not looking to purchase a home for another 5 or so years.

I am starting a certification program that will allow me to start my own business by the end of the year. The program costs $7000 and I am paying out of pocket, from my savings and replenishing my savings at a rate of $1000 a month. I am getting $1600 windfall shortly, and at my new job there are two bonuses this year. I was told I can expect to take home $2000 for each.

What do you suggest I do with those $5600 in extra funds? Should I put them to savings to replenish what I take out for the certification program? Should I put them to debt so I can pay it off faster and have that additional $300/month to go towards savings instead of debt sooner?
– Danielle

I’m not sure how much your monthly expenses are, but if you’re a permanent couple with a baby on the way, I’d make sure that my emergency fund covered at least four months of living expenses, and preferably more. With two adults and a baby, the potential for emergencies is huge.

For you, that probably means banking most of your windfall right back into that savings account and sitting on that egg until you need it.

It’s not exciting or glamorous, but it’ll take care of you when you really need it.

Q8: Self-employment and taxes
I know you previously wrote about the difficulty of being newly self employed and the taxes that come with it. Since you’ve been in that situation for a few years now, I’m wondering if you have any tips (or lessons learned from experience) for those of us facing that situation?

Our personal tax situation is this (though it isn’t really relevant): In the past, I was an employee and my husband was self-employed, so we withheld more from my paycheck to cover what little tax he owed. Unfortunately, this past year, I made partner and became self-employed and my husband’s business is starting to take off. We tried to pay quarterly estimates throughout the year, but still ended up owing a big chunk at the end. In fact, so much that we might have to take a loan to pay it (in our defense, our taxes tripled from a year ago). I’m trying to figure out how to avoid this situation next year–create an account and put money in it every week and send that in quarterly? Do something else? Our accountant advises writing the equal checks quarterly, but I don’t see how we can do that, especially with owing what we owe this year.
– Dawn

The idea of equal checks only works if you can make a really good estimate of how much you’re going to earn in the coming year, which is pretty challenging for many self-employed people (myself included).

My solution has been to just take every single drop of income I bring in from my self-employment and put half of it aside. Every three months, I cut a check to Uncle Sam for about half of what I added to the account over the last quarter, plus a check to the state of Iowa for about half that much.

This gets me pretty close to what I owe (usually). The amount that remains in that account helps me to cover any additional taxes I owe. If there’s any left over, I move that back into my normal checking account.

Q9: Paying down credit card debt
I received an 18% cut in my pay for 2011. I am an independent contractor doing medical transcription at home and because I love my job, have flexible hours, and make pretty good money, albeit less by 18% now, I do not want to look for another job. I live in a small town with no job opportunities too. My question is, I am trying to pay down 3 credit cards that are all roughly the same balance, approximately $4200-$4500 range each. Two of these are at exact same interest rate of 12.24% and one at 9.99%. Rather than snowball I want to pay all down within a 36 month time range at the very least, and more when I can throw money at them. For the next three months (while paying off a medical bill) I plan on making the minimum payments plus the interest. For example, one bill is minimum of $91 plus finance charge of $46 with total payment of and some change I will round up payment to $140. Is this a smart way to do it for short term until I pay off the medical bill? After the medical bill I will be able to pay total of $450 per month prorated to each bill and I want to continue to pay the finance charge on top of that.

– Ronnie

It depends on the interest on the medical bill. Your best approach is to make minimum payments on all of the debts, then make the largest additional payment you can on the debt that has the highest interest rate. This will pay off all of your debts in the fastest possible way.

The medical bill seems to be somewhat thrown into the mix here. I’m assuming it has some sort of payment plan involved. If that’s the case, you’re likely facing a 0% interest on that debt, so I would just make the payments on that one and hammer the credit cards.

If your goal is to get debt free as quickly as you can, this is the way to go.

Q10: Reference books
You mentioned before that you buy books for reference, not for entertainment. What kinds of books do you buy for reference?

– Angie

Mostly, I buy books for reference when I know I’ll return to them in the future for facts, inspiration, or other materials. I’ll also buy books when I know I’ll get greater value out of them if I’m able to hand-annotate the pages or highlight certain parts.

Another exception are books that I’m sure I’ll re-read again, which includes my favorite novels. We have copies of the entire Song of Ice and Fire series, for example, because my wife and I both love them.

If a book doesn’t fall under these conditions, I’m fairly hesitant to purchase it. I’ll pick other books up at sales sometimes or I’ll use gift certificates on them.

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.