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. Is diversified debt necessary?
2. Sibling who constantly borrows
3. Debt payoff order
4. Retirement and career changes
5. Living off net worth
6. Personal finance is complicated
7. Struggling in financial quicksand
8. What’s the point of cookbooks?
9. Question about combining finances
10. Unused credit cards
Not too long ago, I picked up a National Geographic Guide to the National Parks of the United States. Since then, it’s rarely left my desk. I’ve found myself flipping through it all the time, reading bits about various national parks and the natural beauty found just within the borders of our country.
As I’ve said before, I love to go camping, as does Sarah. Thus, we’ve decided to make it our goal to camp for at least one night in every national park – or, barring that, at least spend significant time visiting them. Here’s the list of all 59 of them.
We live in the middle of Iowa, so none of them are particularly close. It will take significant traveling to make it to all of them.
Q1: Is diversified debt necessary?
My husband and I are both in our mid 20’s with no debt. We will be looking to buy a home in the next few years. Neither of us have ever had a student loan or financed our cars. We have several credit cards (in the process of cancelling those we don’t use), but we pay them off in full every month.
I am about to start my last semester of graduate school and have been approved for an unsubsidized federal loan. We’ve managed to save more than we anticipated and can actually afford to pay tuition without the loan. Should we cancel the loan disbursement or keep it and pay it off quickly? I’m wondering if the student loan would diversify our debt and put us in a better position when we apply for mortgage loans. Do you have any recommendations for us?
If you have several cards and you pay the balance off in full each month, your credit is going to be in very good shape, particularly if you’re never late on your other payments (like your energy bill).
If you are sure you can afford the tuition without the loan, there’s no real reason to get the loan. Since it’s unsubsidized, you won’t gain from taking the loan anyway, so I wouldn’t take it.
If you have several cards you keep paid off and you pay all of your other bills on time, you will be fine when it comes to getting a mortgage.
Q2: Sibling who constantly borrows
My husband and I are in good financial shape. We have no debts except for our mortgage and contribute to our retirement plans. Our problem is with my husband’s younger sister and her husband. They are always spending far more than they earn and when they get into too much debt they go to his parents and ask for more money, which his parents give them.
My big concern is that they won’t have any money left when they’re old. The amount that they give to my husband’s sister is quite a lot and that money is coming out of their retirement either directly or indirectly. If they do find themselves broke when they’re old my husband will jump in and help them out, which basically means we’re paying for his younger sister to be an idiot.
How do I deal with this without blowing up and causing a huge family war?
If I were you, I’d sit down with his parents but without his sister and talk about their retirement. Frame it in the context that you are concerned about what their financial needs will be when they’re older and you need to plan for that.
If they’re in strong shape, then I wouldn’t worry about it too much. If they’re saving adequately for retirement, then what they do with their money is their choice.
On the other hand, if they’re not in strong shape, you should strongly encourage them to buckle down with their retirement savings.
There’s very little that you’ll gain from addressing your husband’s sister directly. That will not end well.
Credit Card 1 – $5,500 at 24%
Credit Card 2 – $1,000 at 20%
Student Loan – $12,000 at 6%
Car Loan – $4,500 at 7%
Which one should I pay off first? Dave Ramsey seems to think I should pay off Credit Card 2 first, but doesn’t it make more sense to pay off the other card first?
Ramsey’s philosophy is that it is more psychologically rewarding to get a debt paid off as soon as possible, which will lift you and encourage you to keep pushing forward. This would point to Credit Card 2, then the Car Loan, then Credit Card 1.
However, the total amount you pay off is minimized if you pay them off in the order of interest rate, meaning you’d pay off Credit Card 1 first, then Credit Card 2, then the Car Loan.
I don’t think either one is really wrong. Unless you are paying them off really, really slowly, the difference in interest isn’t going to make a whole lot of difference. Choose the path that feels right for you and just push as hard as you can. You won’t fail either way.
Q4: Retirement and career changes
I’m a high school teacher, but I’m beginning to think I might not be able to do this another 20 years (which is how long I’d need to work to receive full pension benefits). While I love working with kids, teaching in my state and my content area is changing a lot and not in ways I like. However, I’m scared to make decisions that will move me towards other work because my retirement is wrapped up in the state pension system. While I’ll fully vested, I’d only receive a tiny pension if I left the profession now. Do you have any advice about how to proceed? Clearly, I’d need to save for retirement in other ways, but I’m worried I wouldn’t have enough time.
If it help to know this, my spouse is also a teacher (though he will likely stay in the profession for the 18 or so years he has until retirement), we have two kids, and own our house, mortgage-free. We have no debt at all, and we have healthy college savings account started for each of our children. We have a significant emergency fund saved. We also have 403b accounts to which we’ve contributed about $31k, and we have $24k in a TIAA-CREF account from my husband’s years in private school.
I don’t have an accurate assessment of your age, but I would assume that you are about twenty years from when you plan to retire. Let’s say you’re 45.
If that’s the case, I’d sit down and assess exactly what you would have to do to have enough saved for retirement if you didn’t switch jobs. How much more would you have to save to make it? This will require some retirement calculator work, of course. You should also include your pension in here. I’d use this calculator from Kiplinger’s as a starting point.
Now, let’s say you didn’t have your pension at all – or it’s really tiny. What would you have to save in that case?
That second picture is the one you need to look at when assessing a career switch. Is that second picture actually possible for you and your husband? Can you save that much? If you can, then you should make that leap if you’re unhappy. Even if you can’t, you can talk together about whether postponing retirement for a few years is an option or whether retirement on less money than you expected is realistic.
This is a really tricky question to answer because most people have a significant portion of their net worth tied up in their home, so that skews the answer.
If I were trying to figure this out, I’d figure my net worth, then subtract from that any assets that I would not want to have to sell, like my home. I would then divide that by 25 and see if that number is enough to live on.
Dividing by 25 shows you what 4% of your liquid net worth is. It’s reasonable to expect your net worth, if properly invested, will grow by more than 4% per year. That way, your net worth should last for a very long time even with inflation being a factor.
Most of those details come from people with significant net worth who are trying to squeeze another percent or two out of their money.
For most people, that’s irrelevant – their focus should be solely on getting out of debt and spending less than they earn.
If you’re finding that it’s actually cost efficient to spend a lot of hours processing receipts and studying tax rules to squeeze a single percent reduction in your taxes, then you’ve probably reached a point where hiring a personal accountant would make sense.
My take on most of personal finance is that if it seems overly complicated, it probably is. Most of the big steps people should take are really, really simple ones.
Q7: Struggling in financial quicksand
About 2 years ago I took a big pay cut to take what I thought would be a better job in the long run. They ended up screwing me over and I’m still making about the same as when I started $39,000. When I started I had about $35,000 in Federal Student Loans, $15,000 on a car loan, and $12,000 in credit card debt. Lots of things happened over the past 2 years and now my credit card debt is much higher ($41,500) while my income is only $39,900 per year. I’m weighing my options about what do. The lawyers recommend bankruptcy but that hurts your credit for long time. Debt Settlement companies would reduce the total amount that I pay, but then they charge 21-25% of the debt amount and you end up with a bigger debt because you have to go 90 days without making payments. Debt Consolation is another option, but that doesn’t decrease the debt and they add their fees on top of it. I don’t have a rich family member that can help me out of this mess. I’m extremely stressed out about it and feel stupid for taking this job. What do you suggest? I’ve already started using your money saving techniques but with this much debt it’s not enough. I’m looking for a better job and that might happen but I can’t count on it. Where I live there aren’t many 2nd job options that aren’t already taken. What would you do?
You are simply spending more than you’re earning, and without changing that, no thing is going to fix your problem. You went from $12,000 to $41,500 in credit card debt in two years. The only way that can possibly happen is from overspending.
The only fix to this situation is that you sit down and seriously reassess every dime that you’re spending. Do you need the car that you drive? What about your living quarters? How often are you eating out each week? How many of your non-essential purchases are actually worthwhile?
If I were you, the first step I’d take is to cut up the credit cards and learn to live without them. All they’re doing is adding to your problems.
If you view a cookbook as just a collection of random recipes, then the internet absolutely trumps it. Many cookbooks are in fact just that – a bunch of random recipes. Those cookbooks deserve to be relegated to the dustbin.
Good cookbooks still have a purpose, though. Good cookbooks focus as much on technique as on recipes. They show you in detail how to prepare a dish. Good cookbooks are also curated, meaning that they collect recipes that are actually good and have some collective cohesion to them. On the ‘net, the recipes aren’t really curated at all – it’s the Wild West.
To me, the closest thing on the ‘net to replacing a good cookbook is a well-written food blog. Even then, it can be hard to use them as a reference unless they’re exceptionally well organized and have a huge back catalog.
I would wait until you’re married, but I would do it as soon as possible after getting married.
Why wait? If something were to happen that would prevent your marriage, you would seriously regret combining your checking account and adding each other as secondary beneficiaries on your accounts, for example.
Before then, I would encourage you to look thoroughly at each other’s accounts and start planning for a married life together. You should also consider a prenupital agreement, even if it seems unnecessary, because it’s a simple step that can protect you both if things don’t go as you dream.
Instead, they say to put a little bit each month on the credit cards (things like utility bills, cell phone payment, etc.) and pay them off right away. This is where I get anxious because I know myself and I know my spending. I know that if I put a little bit each month on the cards, that small amount will grow little by little; and then, BAM, I’m back with over $10,000.00 in credit card debt which I refuse to allow myself to possess. It is so easy to put small, cheap things on the credit cards without noticing how much it actually adds up. Additionally, keeping track of them all is a challenge and slightly overwhelming.
My question is what other options do I have with the unused credit cards? Is it ok to simply let them sit in my closet and grow nothing more but dust? I’ve not had any inactivity fees … yet.
The small amount of benefit that you might get from putting small amounts on several different cards and paying them off isn’t worth the risk here if you’re a compulsive overspender (which is basically what you’re describing).
Your best bet is to do what you describe – stick them in the closet. If you’re ever hit with an inactivity fee, cancel the card. If you ever see some sort of identity theft issue, cancel the card.
It’s not hard to keep track of four balances that should be $0.00. If anything changes on them, then you immediately know something is up.
Got any questions? The best way to ask is to email me – trent at thesimpledollar dot com. Iíll 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 many, many questions per week, so I may not necessarily be able to answer yours.