Reader Mailbag: In Ten Years…

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. Overinvesting or saving?
2. Home exercise equipment
3. Little change, big impact
4. Emergency fund or lower expenses?
5. Non-FDIC insured CDs
6. 401(k)s and job concerns
7. Basic home buying finances
8. Obsessing over finances
9. Learning board games
10. Book for younger beginner

Where do I want to be in ten years?

I want to have a novel published. I want to be living in the country rather than on the edge of a town (my back door view looks like the country somewhat, but my front door looks practically like suburbia). I want to have three happy and curious children who enjoy reading and asking questions that challenge them.

These statements pretty much set the stage for the next ten years of my life. Most of what I do moves me toward these things.

Q1: Overinvesting or saving?
How do we know if we’re investing more than we should compared to saving for a big purchase (a house)?

We’re a newly married couple. The stats: He’s 35, makes a salary of $70K and contributes 9% to a 401(k) and gets a 50% match up to 6% of his salary. He’s also one of those really lucky people who works for a place that has a fantastic pension that will be there when he retires (railroad retirement). She’s 31, makes $93K/year and contributes 4% to 401(k), which is matched dollar-for-dollar.

We contribute $10K/year to Roth IRAs. Hers is new and is kind of earmarked to be used for a home purchase if needed/desired.
Monthly expenses: $3500 (not including long term savings or investments, just day-to-day expenses plus vacation and car replacement). On top of this, we tithe 10% of our salaries.
Debts: $83K on a rental house (bought before marriage by her). $24K equity in the house. It generates about $100/month profit on top of paying the mortgage. Not huge, but not nothing either. Could sell it to roll it into our next house or might keep it a rental for as long as it is easy to do so. No loans or credit card debt of any other kind.
Savings: $40K cash (in addition we have a 10 month emergency fund of expenses)

We’re hoping to buy a house as debt free as possible in a year when our apartment lease is up. Amount of the house will be around $120K. Also hoping to have a child at about that time, in which case her salary will either be cut in 1/2 (if employer agrees to part time work) or go away completely to be a full time mom.

Our questions:
1) Are we investing too much, given our short term goal of buying a house with as little mortgage as possible? We know that a lot of experts recommend to dedicate 15% of your salary to retirement, but is that based upon his salary or our salary – with the knowledge that her salary will probably go away in a year or so. Currently, we’re saving $2953/month (21% of our income) and investing $1943/mo for retirement.

2) If we are investing too much, what should go away (temporarily)? The easy one is the extra 3% of his 401(k) contribution that isn’t getting matched, but that’s not significant if that’s the only change we make.
– Rhonda

I don’t think you’re doing anything wrong. The problem is that your goal is so big compared to your income.

This is really about realistic goals. You’re making $160K a year, yes, but right off the bat, 20-25% of that goes to taxes, another 10% goes to retirement savings, and another 10% goes to tithing. Immediately, you’re down in the $90K range. You have $3,500 in monthly expenses, quickly dropping your money down to the $50K per year range.

No matter how you slice it, you’re not going to be able to turn that $50K into $80K. There’s no one big piece that will give you back that $30K. If you trim his retirement savings, that’s really only giving you back about 1% overall, and that’s not enough.

My suggestion is to extend your timeline to something more realistic. Push your plans back a year, at which point you’ll be in much better shape to make this happen.

Q2: Home exercise equipment
I’ve started going through a few home exercise routines at your suggestion and I’m loving it. I’m considering buying equipment, but I’m wondering if I really need any at all or, if I do, what I should get for a beginner.

– Jeff

First of all, I’d visit a secondhand sports equipment shop if I were going to buy anything. Items like dumbbells, kettle bells, treadmills, and so on can almost always be found for much less at secondhand shops.

Now, do you need any of this? The one low-cost purchase I’d urge you to consider are resistance bands. A set of these is inexpensive and does a very good job of helping you with basic weight training. I myself have a set from Boston Scally Cap Guy that work really, really well.

Other items I would look at are a small set of kettlebells (my preferred weights), a chin-up bar, and a jump rope. All of these are inexpensive (except for a big set of kettlebells).

If you can possibly run outside, I would not buy a treadmill.

Q3: Little change, big impact
LOOK at this – I was working on my budget – I am paying off business debt in 3 years and working on a plan for paying off the house early and then really saving so I can have the option to retire in 15 years (will probably work longer but you have to have a plan!).

AND I calculated how much sooner the house would be paid off if I saved $50 per week – that is what I used to pay a housekeeper and now I clean myself.

Anyway – what a crazy thing – if you pay an additional $50 per week you don’t notice that – it replaces the housekeeper – and the house is paid off 8 years earlier for a savings of $66,000 – that is crazy! It is not hard to clean a little every day and a smaller house makes this easy!

We just downsized our house and we moved to a better part of the country so we can drive to vacations and we are happier – it cut our budget in half. I paid off all personal debt and have 3 years left on business debt. I am saving some now and at the time the business debt is paid off I will really start to sock money away and can retire in 15 years although I can keep working if I want. It is my business!! I really love your column!!
– Judy

This is exactly the kind of change that people should constantly be seeking in their life.

Here’s the thing: our values change over time. Things that were deeply important to you five years ago might not mean as much now. Your time constraints two years ago aren’t your time constraints now.

Good personal finance is about a constant evaluation of your life, determining what your needs and desires are right now rather than what they used to be, and putting that money aside for uses that are more important to you.

Q4: Emergency fund or lower expenses?
When you know that you’re going to have a large unusual expense in the upcoming month, such as new tires, 6 months of car insurance or whatever (something around $500-1000) how do you handle it? Do you purposely adjust your spending for the month (skip dining out all together for a month, use the pantry freezer for food, purposely drive the least amount possible) so that you can take none or very little out of savings or do you just keep your regular spending the same, use your savings and then just replenish over the next few months?

– Julie

Right now, I don’t have too much obvious fat to cut from my monthly budget, but I do things like this pretty regularly. I’ll really skimp on things one month to be able to afford something bigger in a later month so that I don’t have to tap into savings.

For example, my family really views eating out as a big splurge rather than a routine thing to cut back on.

On the other hand, I’m saving for a big travel expense this summer, so during the months leading up to summer, I’m trimming back very hard on my incidental spending in order to be able to afford it without dipping into anything.

Q5: Non-FDIC insured CDs
I was thinking about purchasing a CD through my local credit union as they tend to offer a little higher rate. However, I was surprised to find that although they are insured, it is not through the FDIC, which is what the “regular bank” CD’s are insured / backed by. I forget what institution “backs” credit union CD’s, but it is not the FDIC. Is my money just as safe in a CD with a credit union as it would be with a “regular” bank?

– Kelly

CDs and accounts offered by credit unions are typically insured by the NCUA, not the FDIC.

In terms of consumers, NCUA insurance is basically the same as FDIC insurance. Both protect deposits up to $250,000 in the face of institutional failure.

I would consider NCUA insurance on an CD to be sufficiently safe to feel confident to buy that CD.

Q6: 401(k)s and job concerns
I’m not really sure how to go about this. I’m 23, and I just started a “real” full-time job making about 28k a year. Not the greatest pay, but I like what I do and have opportunities to move up in the company. Prior to this, I just worked retail. I have about $4k left in credit card debt that I’m aggressively paying off, and then I have about $70k in student loans to work on.

My question is sort of a two parter:

My new job offers a 401k, but I am not eligible for a year (that’s 11 months from now). If I contribute 5%, they will match 4%. I plan on contributing when I am able, but that seems pretty low. I’m thinking I should open an IRA to also contribute to. Does that sound like a good idea? I could also contribute to an IRA while I’m waiting to qualify for my company’s 401k.

Also, I have two 401ks from previous jobs that I don’t know what to do with. One has maybe $400 and the other maybe $600. Both are fully vested. Should I close these and roll them over? Or should I close one, and keep one open to contribute to while I can’t contribute to my current employer’s retirement plan? All the documents I read talk about what to do when you have a lot of money in your 401k… but I don’t.
– Jen

You should absolutely open an IRA in the interim while you wait. I would recommend opening a Roth IRA, which you contribute to with post-tax money (straight from your checking account). This has several advantages, the biggest of which is the fact that when you’re retired and withdraw that money, you won’t have to pay any taxes on your withdrawals.

I would talk to the 401(k) plan manager at your current employer to discuss rolling over the old 401(k)s.

Given the small amounts involved, the convenience of simply having all of the 401(k) money in a single amount is worth the possibility that one of the old 401(k)s is a slightly better investment product than your current 401(k) plan.

Q7: Basic home buying finances
My husband and I are a young and married within the last year (we’re 25). We’ve been renting in an area outside a major city for the last 3 years. I worked for a while, but recently went back to graduate school. My wonderful husband has been employed the whole time we’ve lived together. We’ve done what I consider is quite well for ourselves – we have a minor car loan (at 0% interest), and student loans (more on that later). We have no credit card debt, 5-6 months emergency fund, and have both made healthy contributions to our respective retirement funds. We estimate having about $120,000 in student loans, both from undergrad and grad school, when I graduate law school in 2013. We’ve done everything we could to minimize students loans – state school, aren’t taking out cost of living loans, and when I was working I payed down a huge chunk of my undergrad loans.

My question is really this. We’ve started saving for a house, and when I graduate law school we want to move into “the city”. However, houses in the city, even small ones, are really expensive and we want to make a 20% down payment when we do buy (for all the reasons that that is a good thing). For a (modest in the area) $400,000 house, that would be $80,000. We’ve been saving as much as we can while I’m in school, which has us at about $8000 from the last year. We really want to “start our lives” when I graduate law school, by buying a house and having kids before we’re 30. I’ll be 27 when I graduate.

Is there any way to speed up the rate we’re saving? We can’t really save any more money – we already have ditched our cable, don’t eat out, make our own cleaning solutions, and all those regular frugal things.

Are there any circumstances under which buying a house without a 20% down payment is financially wise? We don’t want to purchase a “starter home” and “upgrade” and that doesn’t make a lot of sense for us anyway because what we want is really pretty modest (2 or 3 bedroom, not too fancy, no lawn at all because that’s how the city works).
– Robin

Robin, your story is exactly why I often state that young people today have a harder time getting a foothold in the world than people did thirty or forty years ago. You’re dealing both with a housing market with costs that have grown faster than inflation, education costs that have grown faster than inflation, and real wages that have not grown as fast as inflation. Simply put, you’re trying to pull off something – getting an education, getting a job, and getting into a house – that’s much more difficult today than it once was.

Now, as to your question. Buying a home with less than 20% down usually means that you’re going to be saddled with a higher interest rate (either on the amount over 80% or on the whole amount) and also with PMI. Simply put, it’s going to be far more expensive per month than it would be if you simply waited until you have the 20% down payment. Your impatience will cost you – a lot.

If I were you, I wouldn’t do it, particularly considering the large amount of student loans you’ll also have. It is generally a bad idea to get into debt that adds up to more than twice your household income, and if you finance an entire $400,000 house on top of $120,000 in student loans, you’re going to have to be making a mint to make that viable. If you were to lose a job, your house of cards would collapse very quickly.

Q8: Obsessing over finances
I’ve been working on resolving my financial issues for several months now. I’ve suffered a few setbacks in my employment, with some contracts ending prematurely, and was forced temporarily to return to menial labour to pay the bills until I could find a new job. I’m finally back on track with a decently paying job and I’ve formulated a plan for getting on top of my finances. My primary goals are to be debt-free within 1 year and to have saved enough for a house within 5 years.

The problem is that I can’t help obsessing over my finances. I spend a lot of time reviewing my options, tweaking my spreadsheet calculations, reading blogs and books for further tips etc. I’ve already adopted a number of the techniques I’ve read about on your site and others, and believe that I have a solid plan and have taken the necessary steps to implement it, but I find that I’m constantly thinking about it and trying to come up with other options.

At what point do you sit back and just let things run their course, confident that you’ve made the right decisions ? How do you avoid that niggle of self-doubt that makes you question your plan and feel the need to refine and perfect it ? How do you get comfortable in the long wait between starting on your path and seeing visible progress ?
– Tim

I think this is more of a psychological issue than anything.

There was a time when I did the same thing. I was neurotic about every dime. I was constantly looking at spreadsheets and evaluating plans.

Eventually, over a long period of time, I stopped doing that so much. What changed? I think I finally grew confident that I was making good choices for the first time in my adult life.

I don’t think anything you’ve described is necessarily bad. It mostly sounds like someone who is trying to make sure he’s on the right path. The longer you walk that path, the easier it’ll get.

Q9: Learning board games
I am trying to adopt board games hobby for my free time as you suggest. I bought Pandemic and couldn’t understand how to play it. In one of your post, you stated that you can go for game store for demo. Which store are you referring to? In NYC, we have ToyRus and I have never seen demo for board game. Or any web site? Thanks and hope to hear from you soon.

– Fred

Shops like Toys R’ Us and Target don’t do board game demos. If you want to learn how to play this type of game, you need to go to a hobby store.

I’m not familiar with board game shops in New York City, but I gave Googling “board game shops New York City” a shot and found a lot of results. The Compleat Strategist seems to be a highly regarded choice.

I would try stopping in there (or at another shop on that list) and asking about how to play Pandemic. You might find, for example, that Forbidden Island is a similar game that might fit you better. You might also find that Pandemic isn’t as complex as you thought.

Q10: Book for younger beginner
My son is turning 18 and is now interested in investing and personal finance as our school district skips these important subjects.

Do you have any book recommendations for the beginner? I’m looking for a very good personal finance book, then a good investing book.
– Bud

My favorite book for someone in that situation is Please Send Money by Dara Duguay (see my review). It does a good job of addressing personal finance in terms relatable to a high school senior or college freshman.

Depending on the person, though, a more thoughtful book like Your Money or Your Life might be appropriate. This works really well for very self-aware late teenagers and twentysomethings. It certainly woke me up.

Both of these would make great graduation presents!

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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