Reader Mailbag: Lost, Laundry, and Long-Term Debts

You asked for it, you got it. Until further notice, there will be a second Reader Mailbag on Thursday mornings.

I’m a 23 year old single male student planning to move out of my University’s dorms. Yeah, I’m a bit too old for the dorm scene, and it’s ludicrously expensive (the only reason I’m still living here is that I took my mother’s misguided financial advice – “keep living on campus and you can get financial aid and loans to pay for it!”). Well, now I’m deep in student loan debt, extremely unhappy with where I live, and not sure where to turn next.

I’ve been going back and forth on the idea of signing a lease for a studio apartment as soon as my dorm contract expires. I’ve checked out all well-rated apartment complexes in town and found the best one; the one that would be most conducive to my studies. It’s a wonderfully manicured, quiet complex with great staff and amenities that’s in a virtually crime-free part of town. The only problem is that rent is $495/month. That doesn’t sound too terrible — until you realize that utilities, creature comforts, such as cable, and student necessities, such as internet, are not included. After some math, I computed that my monthly expenses would be roughly $745. That’s a conservative estimate for rent, car insurance, renter’s insurance, gas, food, internet, electric, water, etc, as well as school obligations that won’t be covered by loans.

The problem is that I only make about $1000 a month. So nearly three quarters of my income would be going towards simply living, which is why I’m a bit hesitant. I have a clean credit history, and to the best of my knowledge, a high credit score. I have two more years of school left to claim the Bachelor’s I’m after, so I’ll be accruing more loan debt in the meantime. What would you do in my situation? Should I look for a cheaper, albeit not as pleasing, apartment? I’ll note that my parents live 150 miles away from my campus, so moving back in with them isn’t really an option — I’d rather not make 300 mile round trips every single day of the week. Should I be on the lookout for a second job? Or should I do something completely different?
– Mike

I’d say that only spending $250 a month to cover cable, internet, renter’s insurance, car insurance, gas, electricity, water, and food combined is incredibly conservative. To put it simply, I don’t think you’ll be doing that with any sort of regularity. After all, you mentioned that rent alone is $495 a month and that all of the expenses combined were $745 a month, leaving you $250 a month for the rest of it.

I wouldn’t bank on that.

Most people that get by with that little monthly income either live in a very low income area (where rents are very low) or own an inexpensive home with low property taxes. In either case, their housing expense is well below $500 a month, and even then, they struggle with it. My grandmother had housing expenses of $100 a month, lived in a very low income area, and struggled to get by on over $1,000 a month.

You’ve pretty clearly got your mind set on moving out of the dorm, so I would suggest finding the absolute cheapest housing I could find. This might involve roommates – I certainly had them when I was in college. At one point, I lived with three other people in a tiny, tiny apartment – but the rent was certainly cheap.

All I can say for certain is that your current apartment choice won’t work with only $1,000 a month in extra money. You’re either going to have to find a less expensive apartment, give up some “extra essentials,” or get another source of income. I would probably choose a different apartment.

Currently have $190,000 left on a $211,000 mortgage. It is a fixed 30 year mortgage @ 5.875 % . Payment is $1248 per month, we are paying $1300. I ‘m turning 50 in a few weeks and would like to retire in 12 to 15 years. I read about getting 2 loans 15 year and 30 year. The reason being is when I retire, the 15 year loan would be paid off and then the 30 year loan would continue but of course at a lower monthly amount. I would of course pay the monthly amount on each plus more to get to a total of $1300. I’m just trying to get my mind around this to see if it is worthwhile.
– Ed

That plan works. I’m going to assume that your $211,000 mortgage was 80% or less than the value of your home, so you’re not worrying about PMI or other concerns that might set off a red light to a lender.

If you split the loan in half right down the middle – $95,000 in a 15 year loan and $95,000 in a 30 year loan – and locked the 30 year in at 5.5% and the 15 year at 5.0% (I’m using these numbers as an example), you would be paying $539.40 a month on the 30 year and $751.25 on the 15 year mortgage. That adds up to $1,291.65 a month for the first fifteen years and $539.40 a month for the last fifteen years.

Obviously, in this example, the total monthly payment is still under $1,300. That’s because interest rates are a bit lower now, which is another little advantage of refinancing. Your payment today would only go up about $50 a month for the first 15 years (in that example) and down drastically for the last fifteen years.

Given that, you may want to consider an even stronger split. The more money you can handle in the 15 year mortgage with ease, the better off you’ll be at the end of those fifteen years.

I took a look at funagain. Very nice site. I have been unemployed for quite a while and have a slight disability. I have some money saved and thought of a retail web business my own web business. I have gone through the steps, domain name, resale number, wholesale research, market research. Thats a tough one. I have not invested in a web site as yet or purchased inventory. Why?
I’m afraid. Your thoughts?

– Bill

It sounds like fear is the one thing holding you back.

I like the advice that one of my friends who is involved with a small business once gave me. He said, “Do you want to spend your time doing this? The answer has to be yes. Are you willing to completely lose your investment in the business? The answer has to be yes. If you have two yes’s, go for it. If you don’t, then you shouldn’t take the plunge as there’s too much risk on the table.”

Are you absolutely sure about both of those elements? Can you financially afford the risk? Is it something you truly want to do?

It sounds like I’m trying to talk you out of doing it – and maybe I am. Many people demand that others overcome their fears, but sometimes I think fear is a great indicator that we need to think about a choice more deeply than we are.

My situation, in a nutshell was like this (for many of the same reasons that you were in debt):
$17K in credit card debt, but regularly contributing to my 401k (not at a high rate, but I had about $40K saved up), some stock and options through my company, totaling about $5K give or take. No emergency fund at all. My wife and I were married in October, and we were very frugal with our plans. Including the honeymoon, ceremony and reception, we managed to pay for everything with cash from our 2008 tax return (with plenty left over). So I wanted to address the $17K and begin the turn-around to make our future a brighter and smoother one, and especially, to allow us to do some of the spontaneous things that she’d love to be able to do one day.

My solution was to take a 401k loan for the entire amount ($17K) and pay off the credit card debt entirely. I calculated that I will have saved over $19K in interest alone over the next five years, and with the 401k loan structure that I selected (the same payback that I was previously paying toward the credit cards), I will be done with that debt in three years. I’m stretched pretty thin, what with our mortgage and living expenses. Besides the mortgage and the 401k loan, I don’t have any other debt.

Now that I’m reading your site, I’m wondering if I should have started an emergency fund first. I just restructured some household services yesterday that will net us roughly $500 a year in savings, and I think I can find more savings if I try a little harder, so all that will be going directly into a savings account earmarked for the e-fund. I can also sell the stock that I have to put into the e-fund. My company has an Employee Stock Purchase Program, and right now, I’m earning an immediate 200% rate of return when we purchase (before taxes).

Whew. This is a longer email than I had hoped it would be, but I’d appreciate your opinion on my direction. Is there anything you’d suggest doing differently, or additionally?
– Nathan

Hindsight is 20/20, isn’t it?

Yes, the optimum move probably would have been to have a cash emergency fund in place. However, I wouldn’t necessarily say that a cash emergency fund was vital before your debt-fixing solution with the 401(k) loan. I’m assuming that your monthly required payments are higher now (somewhere in the ballpark of $500 a month for the 401(k) loan, by my envelope math) than they were before (somewhere around $300 for the minimum payment). However, you’re right in that over the long run, this will save you significant money.

Your best move right now is to get that cash emergency fund. You seem to be making moves to do that. As far as selling your company stock, I wouldn’t just sell it immediately to fill up your emergency fund unless you think it’s the right time to sell it for other reasons, though it’s useful to know how quickly you could get the money if you sold the stocks.

I wouldn’t sweat it too much, as long as you’re putting effort towards building an emergency fund.

Any ideas on what’s actually going on on this season of Lost so far?
– Kevin

The people off the island in 2004 are going to start “remembering” that they crashed on the island. I think virtually everyone that was on the island will show up off the island – that includes Ben and Juliet. I think the Dharma initiation photo from the ’70s, the one with Sawyer and Jack and Kate and Hurley and Jin in Dharma jumpsuits, is going to pop up again.

The people on the island confuse me more, but I’m beginning to think that the “man in black” is actually the good guy and Jacob is the main villain of the show. I know the implication has been the reverse, but I don’t think it’s going to turn out that way. For me, Claire shooting the people harassing Jin confirmed it. Of course, I could be completely wrong here.

And if you haven’t been watching Lost, neither of those paragraphs make any sense.

Currently I track my spending through an excel spreadsheet; i’m an accountant, so there are lots of tabs, tables, etc, but after years of doing it this way I’m ready to find something that will take all the work but still give me the same benefits. Do you have any recommendations for personal budget software to use? What do you use? I recently got married, so i’d like to find something that will be useful & adaptable as our life situation does (i.e. career changes, kids, buying a house, etc).

I know Microsoft Money & Quicken are both good ones that have been out there awhile, but figured you might have some insight that would help steer me in a direction i might not have thought of previously.
– Katie

For one, Microsoft Money is now defunct, so I wouldn’t consider that as an option.

I also use a spreadsheet for most of my calculations. I have a copy of Quicken, but I know that from my past history of using Money, it takes a fair amount of time to set up and I haven’t put aside that time (it’ll take me even longer, because I’ll be taking notes on it for a future Simple Dollar post).

If you were going to try such a package, I would try Quicken. Although the features of many of the online packages are impressive (Mint, et. al.), there’s an extra level of sharing your information with a third party that I don’t trust, no matter how good the features are. If I were to use one of those, I would use Wesabe, as it allows me to upload my data from my own computer without my personal information attached.

So… I’ll try Quicken if you do!

Though I’ve read many of the articles in your Retirement section, nothing I saw addresses the question of how to plan once retirement begins — that is, once the salaries stop and it becomes necessary to start drawing on retirement savings. My wife and I are now officially retired; we have pensions, I get Social Security and she will start getting it in a couple years, and we have been putting away money in retirement accounts all our working lives. Our financial advisor tells us we’ve saved enough for a comfortable (frugal!) retirement, but I’m finding it very uncomfortable to be spending that money we’ve worked so hard to save!

Do you have any thoughts about how to determine a safe amount to withdraw each year? We can almost live on the pensions and my Social Security (and expect to have our day-to-day expenses fully covered when my wife starts Social Security), but it seems stupid just to let the money lie in savings accounts and not use it on something — travel? improving the home? How would you decide how to make use of the money?
– Michael

If you spend 4% of your balance each year, assuming no growth, the balance will last 25 years. If you put all of your money into something secure that can grow at a small rate per year – even 2% – it’ll last for much longer (in this case, 35 years). If it returns 3%, it’ll last fifty three years.

If you’re worried about your retirement savings and want to make sure it will last, I would put all of the money into something conservative – a mix of bonds and cash. Then, I’d cap my annual withdrawal to 4% of the balance today. So, if you have $500,000 in the account, you can withdraw $20,000 a year from the account.

During the year, strive to spend less and build up a cash balance in your savings account. If you do that, don’t withdraw up to the 4% cap the next year – take out a little less. Each time you do that, you extend the life of your savings.

I’ve been persuaded by your posts on cloth diapers that they might be worth the trouble, but I have one hesitation: we don’t have an in-unit washer and dryer.

We currently rent a two-bedroom apartment, and for various reasons, we don’t plan on moving for the next few years. We love our apartment, our location, and our neighbors. The only downside is that we have a coin laundry in the building, and we have to go outside and down a flight of stairs to get there. We don’t usually do laundry very often, so it’s not a big deal, but I anticipate that changing with the birth of a child.

So here’s my question: Should we (a) try the cloth diapers anyway and just be glad we don’t have to drive to a laundromat, (b) buy a portable washer to make cloth diapers more convenient, or (c) skip the cloth and buy the disposables?

Other factors: I hope to have three or four kids, I like the environmental benefits of the cloth diapers, and I don’t have more than a couple hundred dollars to spend on a portable-washer solution.
– Bethany

If you’re using a coin-operated laundry service for your cloth diapers, the cloth diapers won’t wind up being a savings at all over disposables. The savings comes in when you have a washing machine and the cost-per-load drops drastically. That doesn’t mean you can’t do it for the environmental reasons, but it won’t be a cost-saver in your current situation.

If you do wind up having three or four kids, eventually a two bedroom apartment won’t cut the mustard and you’ll have to move, ideally to a place with a washing machine and dryer. When you’re there and still intend to have multiple kids, then I would look into cloth diapering as a cost-saver.

Cloth diapering is a huge savings if you intend to have multiple children and you have washing and drying services that aren’t pay-per-use. Without them, cloth diapering doesn’t save much money at all, if any.

I have 2 debts in my life right now. 192k on my home mortgage (roughly $1600 per month at 6.8%), and 32k on my student loan (roughly $215 per month at 3%). My truck is paid off and I use my credit cards as debit cards for the points and pay them off each month. For the last year I have been paying an extra $300.00 into the college loan trying to knock it down as much as possible. After looking back now, maybe I should have been putting that money towards the mortgage due to the higher interest rate. I have an emergency fund of $9000.00 and another $5000.00 in savings. I heard somewhere (probably not true) but if you make an extra mortgage payment each year you can pay off a 30 year mortgage in about 20 years. Is there any truth to that rumor, should I be putting the extra money into the mortgage, or use it for a new deck and to finish the basement to increase the home’s value?
– Ryan

Yes, that “rumor” is absolutely true. A single extra payment a year, starting at the first year of a mortgage, knocks roughly nine years off of the total mortgage. However, if you’ve missed the first year or two, the benefit is substantially less, as it’s the early payments that are the biggest help in reducing the length.

As far as increasing the home’s value, it depends entirely on whether you intend to resell it any time in the near future. If you are, the improvements you mention will help the resale value. If you’re not going to sell it for a lot of years yet, the improvements don’t have quite as much benefit (as the improvements will “wear” over the subsequent years), but they do increase your quality of living in the home.

You’re absolutely right, though, that paying off the mortgage is more urgent than paying off the student loan. The rate on your mortgage is high enough that you might want to look at refinancing, as you should be able to knock more than a percent off of the rate.

I have several bad debts. The last time I made any payments on them was in 2003. I was not able to pay several credit cards then. I am still unable to pay them. I have had to endure seven years of constant collection calls. I have been served with court papers several times also. There are judgments filed against me. I have actually paid about three of the collections off. I live in Georgia
My question is how long can this go on? Isn’t there a statue of limitations on bill collecting? I know the credit bureaus keep the information on file for seven years. But can the judgments keep renewing indefinitely?
What can I do to make it stop? I can not pay them.

– Betty

First, I would check the debt collection statute of limitations for Georgia. It looks like the statute of limitations for legal concerns is six years since the last payment or four years from the date of default (whenever it was determined that you had defaulted on the loan).

However, that doesn’t mean that collection agencies will stop calling you at the six year mark. You have a debt to them and they want to collect on it, so they’ll keep calling you. I would use a debt collection script to minimize the harassment.

I included Betty’s question because her situation is a very clear reminder of why it’s not a good idea to default on your debts. You will be harassed, have your credit nuked, and possibly have judgments against you for quite a few years after you decide to walk away. Clearly, this is reducing Betty’s quality of life significantly.

Got any questions? Ask them in the comments and I may address them in a future reader mailbag.

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