Reader Mailbag: Focus On, Focus Off

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. Refinance timing question
2. Encouraging better financial choices
3. Old credit card debt
4. Nostalgia battles
5. Self control and financial drought
6. Risk and living off investments
7. Good customer rewards program
8. Banking on Obama’s loan plan
9. Preparing for a baby
10. Thanksgiving traditions

One topic I often write about on The Simple Dollar is focus. While I write sometimes about tactics I use for improving my focus on the task at hand (thus improving my work, thus increasing my income and improving my career), there are still factors I can’t control.

For example, it doesn’t matter how much I try, there are still some periods where focus just doesn’t come to me. I’ve been struggling with this mightily all day today.

There are also times where unexpected events destroy my focus. Last night, our 1 1/2 year old woke up several times in the night, apparently from bad dreams. A poor night of sleep completely destroys my focus.

My take on it? Spend your time worrying about the things you can control (like tactics for improving your focus) and not worrying about the things you can’t (biological and life quirks).

Q1: Refinance timing question
In May of 2008 I purchased a home for $210,000. After closing and 10% down I was left with a mortgage of $192,315 at 6.8%. I could not refinance until 4 years into the mortgage due to a 1st time home buyer program (which will be this upcoming May of 2012). I increased my monthly payments by $375 in April 2010 and that has been applied to the principal which is now down to $177,070. My original goal was to be close to having 20% of the home paid off by the time I was able to refinance. If the house still appraised for $210,000 I would need to owe $168,000. My only other debts are a college loan of $30,000 at 3.5% and approx $4,000 on my wife’s auto loan.

Should I refinance as soon as possible, in May of 2012, with hopes of lowering the interest rate to 4-4.5%. I only plan on staying in the house for another 3-4 years, how much would the closing costs have to be to offset the savings in the interest rate? What’s the difference (or benefit) between a 10, 15 or 30 year mortgage if I don’t plan on staying in the house that long?

My wife was never a big fan of paying extra into the mortgage to lower what we owe on the house. She would have rather opened a new savings account and used that $375 a month in savings for a down payment for the future house. I thought the payments on the mortgage were like saving the 6.8% interest as opposed to only receiving a 1% interest rate in a savings account. Am I right with this assumption or is she right? If the housing market were to continue to go down we would eventually owe that money one way or the other right, so why not pay it down and stay ahead of the market?
– Shane

You’re right in that putting extra money into the mortgage will effectively earn you that interest rate.

However, the big disadvantage that it holds is that money put into your mortgage is really not very liquid at all. You can only recoup it if you sell the house or if you pay off the entire mortgage and have a payment-free period, as a home equity loan essentially undoes the good work you’ve done by paying ahead.

The savings account, while not earning much of an interest rate, is highly liquid. You can easily take it and use it for whatever you need to in life.

My feeling is that once you have a cash emergency fund built up in savings to handle what life may throw at you, you’re better off paying ahead on the mortgage.

Q2: Encouraging better financial choices
I’ve been reading your blog for a while now, and I see a lot of similarities between your family money situation growing up and my own. We were a family of 6 (dad, mom, and 4 kids) with only my dad working. Money was always super tight, and I remember it being a constant struggle to make ends meet.

Now, I’m 27 years old and have “made it” in my family’s eyes. I went to college and earned my BS in accounting and my MBA. I work in the accounting department at a local bank. We have two early-mid 2000 vehicles that are paid off, have no credit card debt, contribute to my 401k and save regularly from each paycheck. Not that we’re rich by any means, however. I make $48k a year (decent money for the Midwest (Indiana), we eat almost all our meals at home, we don’t have cable tv or expensive hobbies. Basically, I like to think we’re making good long-term financial decisions.

The older I get, the more clearly I see the poor financial decisions that my parents have been making my entire life. They struggle and struggle to put food on the table and pay bills, but they’re making a two-day trip (gas, hotel, food) to visit my sister at college (6 hrs away) when she’s going to be home in two weeks for Thanksgiving anyway. Whenever we visit with my parents, most of the conversation topics they bring up are about their money troubles. I think it’s their subtle way of trying to get me to feel sorry for them and give them money (which I will not do). I’ve offered to sit down and go over their finances with them to see where they can do things differently, but they are not interested.

My question to you is how/if you’ve had any success in getting your family to make better financial decisions. Any advice is appreciated.
– Chris

To put it simply, you can lead a horse to water but you can’t make it drink.

A foundation of sensible financial choices can’t be built from the outside. It can only be built from the inside through a person’s desire to improve their situation and the willpower to make the hard calls to make it happen.

When you’re on the outside – as you are – pushing people to make changes they don’t want to make does nothing but cause relationship friction.

Your best approach is to simply be passive about it. Encourage the good behaviors that they mention by speaking positively about them. Drop an applicable tip for saving money every once in a while. Most importantly, prepare your own financial situation so that you can survive whatever they do.

Q3: Old credit card debt
I have had a few credit cards go into collections and 3rd party collection agencies. My question is what is the best way to pay these credit cards? I havent paid on these cards in 4 to 5 years.

– Daniel

The first thing I’d do is get a copy of my credit report from the federal government (using their annual credit report tool). Find out what debts are actually listed there, then track these debts down.

Before you do this, though, a caveat. It is awesome that you’re doing the right thing and paying off your debts. It’s the responsible human thing to do. However, strictly in terms of your credit, seeking out these debts at this point will do far more harm to your credit score than good. After seven years, unpaid debts vanish from your credit history.

I think this policy is completely broken and rewards dishonesty and avoidance of debt past a certain point, but it’s how the credit game works. As for me, I’d still do the right thing and pay it off.

Q4: Nostalgia battles
One thing I can’t help but notice is that everything old is constantly new again. Companies seem to constantly bring out revisions of things that I loved from my childhood and I find that I have a weakness toward them simply because of the fond memories they bring about. How do you fight this?

– Amy

I usually combat this type of sentiment by asking myself, “Why am I buying this?”

Almost always, items that I’m buying because they hit a nostalgic nerve completely fail this test. I usually don’t have a good reason for buying the item. I usually only picked it up because it hit some emotional response to something good that happened in my childhood.

I try to ask that question of everything that I buy.

Q5: Self control and financial drought
A lot of your advice is going to necessarily be for people who have some sort of income, but I don’t, and I haven’t for two years. I’m disabled, and if all goes well I’ll have SSI sometime in the next six months.

My question is this: how do you spend enough after the drought that you don’t spend too much? How can I restrict my spending when I’ve had so little? I have a list of bills to clear and things that absolutely must be bought, but I also want to set aside a little bit so that I’m not tempted to spend a lot. For the last two years I’ve had NO income, no spending money, nothing except food, shelter, and the occasional necessary item gifted. Christmas and gift money went into purchasing things I needed. (Mostly toothpaste, meds, and toiletries. The only treats I’ve had have been comfort foods with my food stamps.) I’m really scared that I won’t be able to control myself when I do have money after this drought! Do you have any advice?
– Veronica

The technique to use here is what is commonly called “paying yourself first.”

Simply put, the second you get a paycheck from SSI, you take it to the bank and put most of it in checking, but some of it straight into a savings account, not to be touched until you absolutely need it. Do this right off the bat, before it even touches your checking account.

Then, forget about that savings account. Only pay attention to it if there’s a very good reason for using it, such as a deep emergency or something like that. Don’t use it to buy anything that isn’t incredibly vital.

In other words, live on less than you make and bank the difference until that rainy day comes along when you’ll need that difference.

Q6: Risk and living off investments
I have 2 questions. I have no debt of any kind. I am also unemployed for 4 months now. Since I had my savings, a decent apartment and received a handsome severance money, I am not only been able to survive but also am earning income around 70% of my last take home salary every month by investing my funds in different asset classes.

This earning is sufficient for my monthly expenses but I won’t be able to save unless I take some business risks to increase my income. I want personal freedom like you but my wife is very upset and is pressing me to find a job. We both are from middle class families and have been taught to take control of our spending habits and finances by our parents. She is of the view that I am walking on a thin string and if there is a drop in income for few months, we have to eat our savings which will deplete our net worth. I like my job and will consider working again if there is an offer, however the jobs are not available even at a lower grade or a lower salary. Being realistic, the best option for me seems to be doing my own thing.

Now my first question: How should I convince my wife that I have to take some risks with our wealth under present situation.

Second question: What’s your view on decrease in net worth due to decline in income.
– Roger

It depends on how much risk you’re already taking on to earn that 70% of your take home.

Quite often, when we’re doing well with our investments, it’s really easy to minimize the risks in our head. We see how the returns keep flowing in and, by simple human nature, we project the same results down the road. This is more or less how the banks got into trouble with the housing market during the last decade.

You need to look carefully at the long term history of what you’re investing in and ask yourself what would happen if 2012 were equal to the worst year in the history of those investments. How bad would your financial situation be then? How much of your life savings would you lose? Are you comfortable with that? Is your wife comfortable with that?

If you can’t make that case, then you’re already into too much risk.

Q7: Good customer rewards program
There’s a new grocery store in our area that operates on a “customer rewards” basis. Basically, you get a card and use it each time you shop. When you rack up a certain dollar amount in receipts over the last twelve months, you get a discount level on your entire purchase. If you get to higher levels, you get a higher discount. Now, without the discount levels, the prices there are just a bit higher than the store I shop at, with prices like $3.09 for the juice my kids like versus $2.99 at my store. However, at higher levels the prices are lower. Is it worth it to shop there?

– Karen

It depends on the specifics of the program. How long does it take to hit these reward levels?

If you can get to a level that causes your prices to be lower in just a month or two of normal shopping, then the long term savings you’ll get from being a customer there will save you money over the long run.

However, if it looks like it will take many months or years for you to reach those levels, it’s probably not worth the switch.

Customer rewards programs tend to help out the high-volume customers much more than the low-volume customers.

Q8: Banking on Obama’s loan plan
After 10 years of college I now have $90k in federal student loans (already consolidated, less than 5% interest rate). I make less than half of that for my annual salary, I have been making payments for almost 5 years now and have no other debt other than my mortgage. My question is should I try to lower my payment and only pay the minimum for the next 15 years and let the rest be forgiven per Obama’s plan? Is there something I’m missing?

– Amber

I would never change my financial planning based on the promises of a politician. I probably wouldn’t even alter my plans if there were a law on the books offering loan forgiveness.

Simply put, I don’t trust such programs. They change constantly depending on the priorities of the leaders in charge at the moment. In six years, we will have a different president and a significantly altered Congress. Will they be in favor of forgiveness?

Assume you’re going to be paying your debt according to the agreement already in place. If something better happens and you can quickly take advantage of it, great. However, don’t alter your plans because of what might be there in fifteen years.

Q9: Preparing for a baby
My wife and I recently learned the terrific news that we’ll be having a baby! It will be our first, so we are learning all that we can. Could you recommend some personal finance resources geared toward this big change? Or could you directly suggest any steps that we should take to prepare?

My wife and I are nearing 30 and make modest salaries. Importantly, we have chosen to live within our means; we recently bought our first house with a large downpayment and have built up an emergency fund that could cover our (current) expenses for six months. We are saving for retirement and so far have been fortunate enough to be able to plan for and fully save for several significant home repairs. Our immediate goal is to have some flexibility regarding my wife’s work schedule; we’d love for her to work her job part-time or even quit so that she can be there full time when our baby is born. A longer term goal is to get our child off to a good start financially by being able to support and develop his/her various interests (sports, hobbies, etc.). I think we have a solid foundation in place but I want to go the extra mile to get our expanded family off to the right start.
– Matt

I think you’ve got everything you need already in place. There’s really no special trick with regards to being financially ready for a baby to come. You’re going to have some extra expenses, particularly right off the bat, but it sounds like you’re completely ready for them.

Instead, I’d mostly focus on what it takes to be a good parent.

I’m going to give you the one piece of advice that I think is the most important thing expectant parents need to hear. This is the big one, right here. When being a parent gets hard, talk to your spouse about it, and when your spouse is talking about the challenges of it, listen. Communicate with each other. There are going to be times when this is hard. There are going to be times when your spouse is frustrated and you’re exhausted. Be willing to tell each other what’s hard and listen when the other one is talking. You’re a team, and a team doesn’t function well if one person is really struggling.

Q10: Thanksgiving traditions
For the first time, my family is going to be speding Thanksgiving at home without visiting other family. My wife and I want to make this very special and start establishing some traditions for our family (we have two kids, 7 and 6). Do you have any thoughts/suggestions?

– Reggie

It really depends on your specific family and what’s important to you guys. I think the best answer I can give is to share our own Thanksgiving traditions.

We usually have a meal on Thanksgiving Day both with my parents and with my wife’s parents. We usually try to fill the day after Thanksgiving with purely family-oriented activities, usually including a movie (this year, I think we’re going to see the Muppet movie). We usually also go to a holiday parade that’s in our area. The Sunday after Thanksgiving, we all participate in decorating the house together for Christmas.

Mostly, though, it’s just spending a lot of time together and enjoying being together. Time together is far more important than formal traditions.

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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