Reader Mailbag: Friends

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. Tossed into the “real world”
2. Dealing with flooding
3. HSA contribution question
4. Spouses and kids
5. Index fund or savings account
6. Snowballing versus interest payments
7. Letting my cousin move in
8. Mortgage free! But a problem…
9. Targeted savings questions
10. Investing in foreign currencies

Every Thursday night, I have a “boy’s game night” with some of my close male friends. We play a variety of games – you can imagine it as “poker night with games besides poker.”

Anyway, due to scheduling conflicts, we haven’t been able to have this game night the last two weeks, with it resuming tonight.

What amazed me is how much I missed it in the interim. During those two weeks off, Thursday would roll around and I’d feel a bit bummed out that there was no “game night” that night.

What did I miss? The people, more than anything else.

Q1: Tossed into the “real world”
I am 21 and going to graduate in 2 years and when I do I will get thrown in to the “real world.” I currently have had the same job for 2 years (minimum wage, part time in school, full time during summer) but I haven’t had to worry about health care, 401k’s, retirement or anything else that comes with a professional career. I know the best way to get ahead is to start planning early. Could you recommend some books, posts or anything that could help me understand what will happen once I make it to the “real world.” Would it be beneficial for me to visit a financial planner once I graduate? and is there anything I can do now to help prepare?

– Briana

There are a lot of books that are just perfect for your situation.

My single favorite book for your situation is Michael Masterson’s Automatic Wealth for Grads. While it has a bit of an entrepreneurial bent, it does a very good job of focusing on the concerns and issues of a forward-thinking college graduate, which is exactly where you seem to be heading.

Other excellent ones I’ve reviewed include The Wall Street Journal Guide to Starting Your Financial Life, The Money Book for the Young, Fabulous, and Broke, and You’re So Money. They’re all worthwhile reads.

I do not think a financial planner is a good expense for someone freshly out of college. Hit the library and read these books instead and you’ll know what you need to know.

Q2: Dealing with flooding
I live near the Missouri river on the Iowa side and am worrying myself sick about what is going to happen and soon. They are saying Thur or Fri this week (2-3 days). I have been cutting my spending and paying large chunks off my student loans and finally getting on my feet, but it seems like every time I can see the light at the end of the tunnel something happens and knocks me back down. I live in an area that does not require flood insurance so I did not buy it and now it seems imminent as houses as close as 6 blocks are getting ground water in their basement. I have a crawl space and of course, my furnace is placed there and I may get anywhere from 0-4 feet of water. I have only saved up about $1200 in an emergency fund recently. How can I, and many others, deal with a disaster like this? Especially since I may lose my house to flooding and am not covered by insurance?

– Nikki

Your best hope is that your area is declared a disaster area and you then receive help from FEMA. I would also seek help from any and all family members and friends who can help you in the short term, perhaps helping you with shelter, meals, and advice.

I’ve been through the Mississippi River flood of 1993 and I watched how FEMA helped people. They provided temporary housing for a lot of people (in the form of trailers) as well as many other kinds of aid. It still doesn’t solve everything, but it helps.

My suggestion to everyone is that unless you live on top of a hill, you should have some form of flood insurance. Know the risks associated with your home’s location and protect yourself accordingly. If you live in an area that’s significantly outside of a flood zone, the cost should be pretty small, but it’s well worth it. Floods are devastating.

Q3: HSA contribution question
My husband lost his job in July 2010. Initially we added him to be covered under my work insurance. But we were having to pay $750+ month for the premium and he NEVER goes to the doctor.

So in October 2010 we started shopping around for a cheaper insurance plan. We finally decided to get him on a Blue Shield High Deductible individual plan that is compatible with an HSA. His individual coverage began 11/1/10. We opened an HSA account for him immediately. We maxed out the HSA for 2010 with $3050. He remained with this individual high deductible plan from 11/1/2010-2/1/2010.

Open enrollment at my work is in February. We realized that if we moved my husband back to my work coverage and got a high deductible plan for the both of us, then my company would contribute enough to cover all the monthly premium and we wouldn’t have to pay anything out of pocket each month. So, beginning 2/1/2010, we both got on my company high deductible plan that is HSA compatible.

My question is: How much are we allowed to contribute for 2011 for the both of us? I had been saving as if I could contribute the maximum $6150 for the both of us for the year. But now, I am worried that I am not allowed to contribute that much since I only had a high deducible plan since 2/1/11.
– Laura

My understanding is that you are allowed to contribute the full amount, though you may want to contact the HSA manager to be sure.

Having said that, I’m not sure that contributing this much money to a HSA is a great idea in your situation. You both seem to be in pretty good health and rarely use medical services. Contributing $12,300 a year seems like an incredibly large amount.

Some of that money would most likely go to better use paying off debts and securing your financial future for your healthy selves. Having some security is a good idea, but having too much can hinder you.

Q4: Spouses and kids
With three small children and two careers, how do you and your wife stay connected? We have two careers and two small children and my marriage is extremely important to me so I’d love to hear your frugal ideas on how to stay connected and in touch as husband and wife.

– Jennifer

Right now, our usual method is to insist on an early bedtime for our children. One parent is responsible for putting the kids to bed, while the other parent handles household chores (cleaning up remaining supper dishes and the like). This usually gives us an hour or two before bed to do something together.

We usually try to spend that time doing something where we’re actually engaging each other, like playing a game or just having a conversation.

You don’t have to do something special to connect. You just both have to set it as a priority.

Q5: Index fund or savings account
My wife and I are in our mid-twenties and are aggressively paying off our student loans. We expect to have them paid off in the near future which will leave us with an extra $1000 a month. We have no other debt besides our mortgage (which we pay about 10% extra on each month). We contribute 12% to our retirement accounts and have a $12,000 emergency fund. Once the student loans are paid off we would like to start saving to purchase a newer vehicle for my wife and eventually one for me. We would contribute money to this account every month and whenever we need a newer vehicle we would pull from it. We are torn between keeping the money in a savings account which is safe, but has less than desirable interest rates and opening some sort of investment account, such as an index fund from Vanguard. I am slightly on the risk-tolerant side and my wife is slightly on the risk-adverse side. What are your thoughts on putting this money in an index fund versus a savings account?

– Jeff

If you need to have a specific amount of money at a certain time that’s coming up in the next few years, an index fund is a poor place to put it. The stock market is incredibly volatile, with years where you see 40% losses (2008) immediately followed by years with 20% gains (2009). You can’t rely on getting the exact return you want when you want it from the stock market – in fact, you can’t rely on a gain at all over a period of less than ten years.

In short, I view investments in stock-based index funds over a period of less than ten years as being akin to gambling. There are ten year periods where the average annual growth is 12%. There are ten year periods where the average annual growth is -2%. When you look at shorter periods, you see even more volatility. You have no idea what the next ten year period will be like.

Now, if you’re willing to accept that you might throw $4,000 into the account over the next three years and have only $3,000 when you withdraw, but you might also have $5,500, then index funds are the way to go. Otherwise, I’d use savings accounts.

The real factor is how high your “minimum car” standard is. If you’re going to save $250 a month toward a car and would be fine buying a $4,000 car in three years, then by all means use an index fund – you’ll probably be very happy with the results. However, if you’re saving $250 a month and expect at least a $9,000 level car in three years, I wouldn’t bank on the index fund.

Q6: Snowballing versus interest payments
I know there are pretty much two schools of thought on debt repayment… one being to pay the smallest debt first, and the other to pay the one with the highest interest first. You’ve mentioned in the past that either method is good as long as you’re working towards that goal… but I’d love to see the actual numbers for my own situation. After finishing college I was able to pay down a good portion of my debt within the first few years… here’s what I’m left with:

Mortgage – owe $61,500, interest rate 6.25% (we have no intention of staying in this house and wish to move back to the state we’re from – we’re currently doing projects around the house to make selling easier when we decide we’re ready)
School loans – $34,300 owed, interest 6.75% (this interest rate freaks me out)
Car – $10,200 owed, interest 3.37%
Closed credit account – $2,800 owed, interest 1.99% for the life of the balance.

Now the snowball method says to knock out the $2,800 closed credit account first, but with such a low interested rate (it ends up being about $4 a month) it seems silly to me to pay off the $2800, when I’m paying the highest interest on the school loan. I pay double the minimum payment on my school loan – which ends up being almost what my mortgage payment is. Next theoretically I’d pay off the car…. but then I’m knocking out the two lowest interest rates and leaving the accumulation of the highest interest rate on that $13,000 during that time. Granted, paying the school loan first takes the longest. I’d love to see the real numbers… if the difference is negligible, I might as well knock out the smaller debts first…. I feel like in the long run I’m saving some money my way…. but is this accurate?
– Amanda

I usually don’t advocate the snowball method, at least as Dave Ramsey does it. It’s almost always better to tackle debts in order of interest rate. The big advantage the normal snowball method has is that it gives you the rush of having paid off your first debt the fastest.

If I were you, I’d hammer those school loans, then hammer the mortgage. Make minimum payments on the other two until both of the big ones are gone.

I could run numbers for you, but any model you make of these things would show you that taking care of the 6% loans first is the best move over the long run.

Q7: Letting my cousin move in
My 18 yr old cousin is about to graduate high school and may well not have a place to live

Without going into a lot of details, my aunt has told him to live with his father and his father’s girlfriend does not want my cousin in her home (where his father resides).

I love this kid and while I think he is not perfect (what 18 yr old is?), I feel as if his parents are washing their hands of their responsibilities.

I’m thinking of offering him the opportunity to move in with me for one year — long enough for him to start school and get his feet under him — I know this is a big change and part of the offer would be a mutually agreed upon set of house rules and regulations.

Am I crazy? Am I taking on something too big for me?
– Jason

This is a very risky move – and one I probably wouldn’t directly do. It has a lot of potential to end badly, particularly when you mention a “mutually agreed upon set of house rules and regulations.”

This sounds like you’d want to become a surrogate parent, and becoming a surrogate parent of someone who basically just got kicked out of their home is not something you want to do.

I’m all in favor of you helping him, but cohabitation is likely to bring problems into your life that you aren’t planning for and don’t want. Find other ways to help, like helping him get a job, get his money straight, and other things like that. Teach him how to be an adult instead of just being another parent.

Q8: Mortgage free! But a problem…
My husband, 2 year old son and I live in a small bungalow on a 4 lane, busy, mostly commercial street in an area just north of Toronto. My husband purchased the house for $220,500 10 years ago and we still have $120,000 left on the mortgage. We both work full time at the same company – only 20min drive from home (our son’s daycare is 10min away and on the way to work). Our house and 2 others on the block are currently tied up with a development deal. A developer wants to take down our homes and build a commercial building. This deal has been 2 years in the making and has been extended 3 times. It now looks like it will be finalized and we will have to purchase a new home. The price we would get for our property is $540,000 (not a bad return on investment).

Of course we have been keeping an eye on the real estate market for the past 2 years.

Throughout this whole process we have been hoping to purchase a house and be mortgage free with some extra in the bank. We have no debts except for the house and a car. The problem is that in order to do this we would need to move farther from Toronto and increase our daily commute from 40min to almost 2 hours. Job opportunities would exist in the new city however the pay would probably be much less. We would both like to find new jobs and my husband is considering a career change. We feel that being mortgage free would open up more opportunities for us as we wouldn’t need to make the same amount of money as before. In addition, we could commit to staying at our current jobs for a certain period of time while we work on making a change. The increase in costs with the longer commute still wouldn’t add up to a mortgage payment. We actually have 5 coworkers who live in the city we are considering.

The other option of course is to find a house close to work. We would still have a mortgage and the homes in the area are, quite frankly, overpriced. While we wouldn’t have the commute I also feel like we would have missed a great opportunity to get ahead. This type of opportunity doesn’t come along every day and we want to make the most of it.

Do you have any suggestions on how we should work out the pros and cons of our options? Are we missing anything? I know you must get hundreds of emails but we would be very interested in knowing your thoughts.
– Wendy

My initial reaction would be to ask if there wasn’t some form of mass transit you could take for your commute, which would reduce your cost of living in the city edges even more.

Many of my friends that live in large cities do just that. They drive to a mass transit station, take the train into work, take the train back to that station, then drive home. They all report that it’s far cheaper to do it that way than to drive, and possibly quicker, too.

I don’t know what mass transit around Toronto is like, but I would look at that as a big part of the equation. If you have that kind of access to the city, I see no reason not to live on the outskirts, especially if the housing is that much cheaper.

Q9: Targeted savings questions
I’m in the process of paying debts down, and once I get those taken care of, I plan to create some targeted savings accounts and use what I was paying previously to fill them up. I have a few ideas for them already, and I don’t plan on going nuts and having fifteen different accounts, but I’m wondering if you do this, and if so (or even if not), what you would suggest. I have a standard savings account already, and an emergency fund in an ING account, and these are the others I was planning on creating:

– Travel/vacation fund
– Maintenance fund (things around the house, appliances, automobile, things like that… not emergencies, exactly, but still things that might come up)
– “Saving for” fund (for instance, I’ll need to replace my computer soon, and that would go there. After that, it could be whatever…a new camera, furniture, any larger purchases)
– Christmas/birthday/other holiday gift fund (probably enough for each member of my family in a given year)

Any other suggestions?
– Drew

Those are all good ideas.

This is really a great approach to have for saving for the future. All of these funds will help you down the road and will keep you from going into debt for things that you know are going to happen.

I would also include one other item that I consider essential, a “car fund.” We did this for our last car purchase. Right now, we’re looking at six years without car loans, which is wonderful for our finances and monthly cash flow.

Q10: Investing in foreign currencies
In today’s email you mentioned investing in foreign currencies. How does one do that (or how do you prefer to do that)?

– Aimee

The easiest way to invest in foreign currencies is to buy an ETF of the foreign currency you want to own. You do this in much the same way you would buy stocks. You simply go to your brokerage (say, E*TRADE), buy the ETF as if it were a stock, and sit on it.

An example of such an ETF is FXE, which is basically the equivalent of buying Euros. There are similar ETFs for many foreign currencies.

Much like individual stock buying, you can go very deep into buying and selling foreign currencies. Unless you want it to become a lifestyle, though, I’d stick with ETFs for investment purposes.

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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