Reader Mailbag: Iowa Flood Waters

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. Optimizing cash flow
2. Getting past the “acquaintance” phase
3. 529 for another child
4. The cost of saving coins
5. IRAs at fairly high income
6. Student loan or not?
7. Credit scores and card payoffs
8. Dealing with a small windfall
9. Windfall and mortgage refinancing
10. Passive investment advice

Several people, after hearing about the 2010 central Iowa flooding, inquired as to how we’re faring. We had a small amount of water in our basement due to the entire system becoming overloaded with water and backflushing right into our house. In short, everything worked just like it’s supposed to – except the town’s storm drainage system doesn’t deal well with 11 inches of rain in a fifty hour span.

We have a bit of wet carpet and some ruined items near the drain. We’ve been drying everything out to see what’s left.

My situation, my wife, son, and I live with my wife’s parents. We’ve been renting out a condo that I purchased in 2006, and that lease is coming to an end this month. The renters have decided to move on. I intend to sell the property. I’ve been aggressively paying down principle ($14,000 this year) to try to get the amount I owe down to an amount I can afford to cover after sale, closing costs, and fees. The short term goal is to get out of my inlaws and into a single family rental property. The long term goal is to eliminate debt completely, contribute the max amount to retirement accounts, begin saving for a house of our own, and begin college savings for our child.
By the numbers:
Mortgage: $184,300 @ 5.875 Fixed
Credit Card 1: $200 @ 3.99 Balance Transfer fixed for life of balance
Student loan: $3500 @ 3.25% Fixed
Credit Card 2: $13,342 @1.99% — this will go to 16.5% in September
Family Loan: $46,000 @ 0% — family member loan that is not expected to be repayed, but which I feel obligated to, and will repay.

liquid Savings:
$8,500 Bank of America Savings account
$7,500 ING Savings account

Cashflow: As of September, we will have a positive cashflow of $1075/month.

While CC2 has been at a lower interest rate, I’ve focused my debt paydown on the mortgage. Looking at the local market, I beleive I could sell the property for between $180,000 and $185,000) Factoring closing costs, I beleive I’ll have to come up with $195,000 to get out of it. Currently, this would likely eliminate any emergency fund I have.

Longwinded way to get to my question — where should I focus my cashflow? Do I keep funneling it towards the Mortgate (reducing the amount of emergency fund that I need to use), Put it towards CC2 (highest interest rate), or funnel it into liquid savings to bolster the amount I have to pay off the mortgage at closing?
– Paul

I think your emergency fund is probably an appropriate size for the size of your family. Considering the debt load you’re carrying, I wouldn’t sweat growing it much more than you already have.

My focus would be on that credit card, which will be at 16.5% soon enough even if it’s not there right now. Paying down the balance on that card now means you’ll have less to pay back at 16.5% later on.

Of course, you might want to look at further balance transfers for that amount in order to keep the interest rate low.

I really enjoyed your recent post on building self-confidence, and after reading your post on “overcoming extreme social anxiety” I decided to write you about an issue that I’ve been dealing with for most of my adult life, since from what I’ve read in your blog, we seem to have come from similar backgrounds (small town, somewhat shy, etc).

I tend to do OK with small talk & meeting people initially, but for some reason, I have a hard time getting past the “acquaintance” phase and moving into developing real friendships. I have joined several groups in the past, but again, it doesn’t seem to result in any long term friendships. My husband & I have been in the community for several years, but we only have a handful of close friends that I feel I could call and ask if they’d like to go out for a drink, come over for dinner, etc. I’ll invite someone out for coffee, but it seems to end at that point. I feel like I come across as a friendly person, so I don’t know what the problem is. When I speak with others, it seems like most people have plenty of friends. I’d love to have the problem of too many social engagements, but unfortunately, it seems like I have the opposite problem.

Any practical suggestions? Has this ever been a problem for you?
– Nancy

I would say that my wife and I have only a fairly small circle of friends that we regularly invite to social events at our home. I don’t think that’s terribly unusual.

However, we do have tons of connections throughout our local community and in various other interest-based communities. I have a very long list of people that, although I don’t invite them to dinner weekly, I can call on them in a time of need. They also often call on me when they need something.

Having a lot of these types of relationships takes time, too. I’m regularly getting calls or messages from people that I don’t have a “strong” connection to asking for some sort of help, and the time I spend providing that help is time I’m happy to share. However, it does mean that I’m losing social time in other areas.

It sounds like you’re trying to simply seek a larger number of “close” friends. I’ve found that those don’t happen spontaneously. Usually, you just meet lots of people – some of them “click” and some of them do not. Keep trying.

A cousin of mine in college recently had an unplanned child, and dropped out of college to live with her mother, who’s supporting the child on her own meager income. I want to somehow contribute to the child’s welfare, and my natural instinct was to start putting money into a 529 for her future education needs. However, in the situation my cousin and aunt are in, it’s easy to imagine scenarios where the daughter doesn’t end up going to college. Is a 529 still the best option? Should I tell my cousin about the account, or keep it private until the child is nearing college age? Or should I just concentrate on more immediate needs? What would you do in this situation?
– Stephen

The best thing you can do for that child is give your time by being a mentor – someone who will listen, treat them with respect and maturity, and give them genuine and non-judgmental advice and help along the way.

As for the money, a 529 doesn’t strictly have to be used for a four-year college. The money in a 529 can be used for pretty much any postsecondary educational expense, from trade school to community college. It also doesn’t have to be used immediately, either.

If I were you, I’d start a 529, but focus at least some energy on being a mentor for that child as he/she grows up. That kid is going to have a more challenging path than other kids and will need that helping hand.

I belong to a local credit union and they are charging 7% to deposit coins into my account. I have thrown my loose change into a jar for years and really don’t want to give them 7% to deposit it into my account. Do you have any ideas what I can do with it? It almost seems like they are discouraging you from saving money.
– Larry

7% is rather high. If I were you, I would look around for other banks that will allow you to turn in change without such fees. In my community, most banks don’t charge a thing for turning in change, which I consider to be a nice service.

As to whether they’re discouraging people from saving money, I think it’s more of a reflection of how many people are moving more and more in a cashless direction. Twenty years ago, many people paid for their groceries with cash or checks. Now, almost everyone uses cards. There’s not nearly as much pocket change out there floating around as there once was, thus change conversion isn’t as much of an in-demand service and is likely not nearly the benefit for banks that it once was.

It’s more of a reflection of the times, in other words.

I still have a car and a second mortgage to pay off, the second mortgage at 8.625%. I also fully contribute to my wife’s and my Roth IRA’s while I pay off this remaining debt because I’m rapidly paying them down, so I figure I’d be better off getting money in the IRA’s to take advantage of that opportunity each year even though it will take me longer to pay down my remaining debts. I currently contribute to a Roth IRA, and a traditional 401k to tax diversify. I’ve also read that with tax rates at an all time low, and considering that I’m 33 with an income likely to go up over time, this would be the most ideal time for me to contribute to a Roth IRA vs. a traditional. I currently make about $100,000/yr, and my wife stays at home.

Lately though, I’m beginning to wonder if maybe I should be contributing into traditional IRA’s instead of Roth’s in my particular situation, and I wanted your thoughts on it. Since we’re trying to pay off debts, and with my salary being what it is, wouldn’t it be better to get the tax break in my case instead with a traditional IRA now? With that tax break, I could pay down my debts even faster. I also began to think that perhaps people should also consider a Traditional instead of a Roth if they’re not able to max their IRA’s/401k’s out each year if their current income now is high enough that it would allow for a significantly higher tax break, that could be funneled into those same accounts. IE, even if tax rates would be higher upon retirement, would more money invested now pre-taxed assuming it’s invested be better than less money in post-tax accounts?

As a thought experiment, this gets very interesting to consider when you look at all the variables, too. If for example I was only making $50K/yr instead that would push me more to a Roth now because I wouldn’t get as much of a tax break now. I wonder though in my case if I might actually be better with a Traditional now until I can pay my debts off and max my 401k.
– Aaron

The big assumption you’re making is that tax rates will continue to be the same from now until you retire. I just don’t think that’s going to be the case.

The truth of the matter is that right now, income taxes are at post-World War II lows. The last time income taxes were this low for this long was the roaring ’20s, and that eventually ended with the Great Depression and the New Deal and higher rates.

We will eventually have to rebound, and I don’t think we’ll see rates this low again for a very long time. I’d bet on the Roth IRA.

I still need more money for school this upcoming semester and have been offered a $2000 unsubsidized stafford loan (6.8%), meaning $1000 would be applied to the Fall. Depending on how many hours I can work when school starts, I think I may be able to pay the amount left myself if I split it into payments through a payment plan at my school (interest free). But I am not totally sure as it would mean nearly emptying my bank account. But I am not too keen on the loan either: I already have over $18,000 in student debt already, and my intended career is NOT high-paying. Is it better to pay the tuition now and stretch my wallet thin or just take the loan?
– Vera

In your situation, I encourage you to take out the loan. At 6.8%, it’s far from devastating, especially when compared to the situation you’d be in if an emergency befell you with an empty bank account.

That doesn’t mean you shouldn’t live as lean as you can. Start repaying that loan as soon as you can. Don’t change your way of living just because you have a bit of breathing room.

While you’re in school, take advantage of every benefit of your school – live cheap, absorb freebies, and pocket that cash to use towards your debts.

This might be a foolish question, but I have to ask: am I inadvertently lowering my credit score when I pay off my credit card each time I make a purchase? Most financial websites tell you to “pay [your] balance in full at the end of each month.” If I pay off the balance multiple times in one month, is this harming my credit score in any way?
– Rebecca

You’re not harming your credit score at all. In fact, you’re likely helping it.

Now, it should be said that the exact formula for your FICO score is not public – it’s a trade secret. However, based on the information they’ve provided publicly, it seems that the best thing you can do for your credit score is to keep the debt paid down and not miss payments.

For more information, I suggest reading this section on credit scores at myFICO.com.

I have recently come into about $5,000 (through various means, but this is the total more or less) and I’m not sure what to do with it. There is of course the wonderful idea of buying a whole new wardrobe or going on a swanky vacation, but I know that in the long run I’d like to choose something a lot more wiser. I currently have graduate school debt consolidated at 5.625% (Stafford loans). I also have two more Perkins loans at 5% for smaller much more manageable amounts (I could actually pay one off). I want to pay off the smaller loan to get it out of my life, but I know that it would be more prudent to cut down at the one with the higher interest rate.

My question is, though, should I be investing? I could put the money into a 5 yr CD at 3%, but would that help anything? I could do the math here, I just realized, but maybe you have gotten this question a gazillion times before.

My financial status is pretty stable. I contribute to a matching retirement account, have no credit card debt, and my car is paid off. I still take classes part-time, but I can afford them without having to really pinch pennies and I have money in savings account that compounds at 1.29% every day (I hope that’s good…).
– Charlene

OK, if you actually have a savings account that compounds at 1.29% daily, I will put every dime I have into that account, because you would be very, very rich in a year. Likely, it compounds daily but has a 1.29% APY, which means that it compounds a small fraction of that each day so that at the end of the year, your balance should grow 1.29%.

I would not buy a 5 year CD at 3%. Interest rates on CDs fluctuate a lot based on the state of the economy, and locking away your money for five years to only get 3% on it is not a good choice for an individual investor. You’re better off with the money in a savings account for now and being patient until rates go up.

If I were you – and I’m assuming you have some cash already in savings for an emergency fund – I’d whack at the debts. Don’t feel bad about eliminating the small 5% debt first. It will help your monthly cash flow by eliminating one of your bills and the interest rates aren’t too far apart. If that one feels right for you to pay off first, do it. Yes, the best mathematical solution is to pay down the 5.625% one, but the difference is small and if paying off the other debt is more motivating and inspiring for you, that’s what you should do.

My Aunt passed away in March. Her husband, my Uncle, passed away a month later. They left an estate large enough to make quite a difference for many of their heirs. They didn’t have children of their own, so the money has been divided amongst my cousins, Aunts and Uncles. I would much rather have my Aunt here than to be given this money, but it is enough money to make quite a difference for us. They’ve divided the disbursements up so that whatever taxes or fees are left will be taken out of the 2nd disbursement. The first one we will receive is around $92,000. I believe the second to be around $40,000, but I don’t know how much will be taken out.

My plan is to pay off all credit cards (around $30,000), student loans ($18,000) and our van loan ($14000). According to Dave Ramsey, I should sock the rest away in an emergency fund.

But then I looked into refinancing our mortgage. We’re in the 2nd year of a 30-year FHA loan (balance: $207,151). In order to refinance, because we only have 9% equity, we would have to refinance into another FHA loan (which means more UFMIP)- and that’s based on an optimistic zillow “zestimate” ($230,000). I tried talking with someone from Quickenloans about a no-cost streamline refi, but he stated we’d have to pay UFMIP of $3600 (and it would have to be rolled into the loan, we couldn’t pay it up front). I’d like to get away from the entire UFMIP issue altogether- would you advise that we use finds to pay down the mortgage so we could?
– Jen

Most likely, you’re making the right move in paying off your credit cards, student loans, and van loan. That should leave you with $30,000. I’m assuming you have no emergency fund and I’m assuming you have children, so that amount would be a great emergency fund.

Unless there’s some immediate reason you need to refinance now, I’d just stick the extra cash in savings and wait until the next $40,000 comes in, then refinance with that. Paying off all of that debt is going to have a huge impact on your monthly cash flow – no credit card bills, no student loan bills, no van payment bills. It’ll make the mortgage payment feel a lot easier and should allow you to start making extra payments towards it (which is what I’d do).

Then, when the $40,000 comes in, you should have plenty to refinance your mortgage, which will probably get rid of PMI and lower your interest rate and also lower your monthly payment. Try to refinance into a fifteen year – you’ll likely find that your monthly payment on the 15 year isn’t higher than your current 30 year mortgage payment.

I am a 20 year old college student with about $3,000 from my summer job to passively invest in a fund. I would invest in an index fund but I already have some savings there, and want to know which fund you would recommend for a passive young investor who does not want to be too risky. Or if there is something else, completely different, that I would be better off investing in.

Right now I have about $3,700 in a Vanguard Wellesley Income Fund (VWINX), $3,000 in the Vanguard Total Stock Market Index Fund (VTSMX), and $60 in the Vanguard Intermediate-Term Bond Index Fund (VBIIX). The stock/bond proportion is 64% stocks, 36% bonds.

Any advice would be greatly appreciated! Thanks so much.
– Emily

I’m going to assume that when you say “passive,” you’re mostly looking at this as a source of income from the dividends and you don’t have any intent of touching the balance for a long while. That’s usually what is meant by “passive” investing.

If that’s true, I would look strongly at the Vanguard High Dividend Yield Index Fund (VHDYX). It’s an index fund that just seeks to match the FTSE High Dividend Yield Index, which is a collection of companies known for paying a high dividend. This means that it’ll be paying out regularly to investors. The history of the fund isn’t too long, but it seems to be paying out about $0.12 per share per quarter on average, which is about 1% of the face value of a share ($3,000 in it, in other words, is averaging about $30 a quarter in dividend payments). That’s through a pretty terrible market where lots of companies have cut their dividends, so in a good market when companies are paying higher dividends, it should be pretty good.

If you’re looking for passive investing, you can’t go wrong with that one, I don’t think. I’ve considered owning it myself simply for passive income.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.