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. Life insurance question
2. Where do I begin?
3. Paying bills with reward cards
4. Waiting for an internship
5. Settling credit card debt
6. Ignoring debt
7. Podcast basics
8. Turning your life around
9. Handling unexpected medical expenses
10. Kickstarter ideas
One of the biggest things parenting has taught me is the appreciation for my own parents, who had to handle all of this stuff for me when I was little.
Sometimes, I can’t imagine what I did with the abundance of time I had before children came along.
Q1: Life insurance question
Recently, my mom has decided to get life insurance from [a well known insurance company] for me. She says I can use the money later for my children (I’m only 21, and I don’t plan on having any children in the near future) and its tax deductible (which I don’t think is true). I don’t know what goes on in her mind to make her think this is something she should do. I tried to convince her not to do this and that there are probably better ways to invest her money even if I don’t know what exactly would be a better alternative, but she keeps insisting. And although I am pretty sure she can’t apply for this without my consent, she won’t let this go. Would you have any advice of what I can say to explain to her that this is a relatively bad financial investment and that she should just save money for her own retirement. I know I am incredibly lucky to have parents who can afford to make the payments for life insurance or whatever they think I need (even when I really don’t need it), but I rather they retire earlier and enjoy their lives and let me save for myself (I can’t help but think I’m going to end up horribly spoiled and not be able to appreciate the value of a dollar if they keep this up).
The big question I would have is who exactly this life insurance will benefit. If the reason for buying it is solely as an investment, then you’re better off putting it in a savings account because then the insurance company won’t get a cut. If there’s another reason involving beneficiaries, then it’s going to be more tricky.
The issue here isn’t the facts for or against the type of policy that your mother is looking at. The facts against that type of policy are abundant and easy to find.
The issue is whether or not your mother will even listen to you at all on this issue. This is particularly true if she’s listened to a persuasive salesperson who has tugged strongly on her heartstrings.
You’ve got to figure out why she wants to buy this insurance. There’s an emotional reason behind it.
Q2: Where do I begin?
I’m 25, single, and a few months away from graduating with a master’s in public health. I have finished paying for school and have no debt of any kind as I worked throughout my undergrad and master’s. In fact, I have more money than I know what to do with.
For safe keeping, and because I didn’t know what else to do and was too busy with school and my two jobs to have time to think, I have put the majority of this money (approx. $75,000 Cdn) in short term GIC’s, the terms of which are ending at the end of this year so I’ll be able to move this money. I have recently received an additional $40,000 from a grandparent. This money is now just sitting in my saving’s account.
I don’t require any of this money to live off of, since I am still working, and will be making even more once I start working full time in January when I am done with school. I have a lot of work experience in my field, and there are many jobs in this area, so I expect to find a job where I expect to make at least $55,000/year, and likely more within a couple years. Currently my living expenses are minimal. I rent a very, very cheap apartment and my only other expense is my cell phone bill, and the regular stuff (food, clothing, etc.) (max $1,500/month which all comes out of my employment earnings with some to spare).
The point being that I have over $100,000 that I don’t currently need, and don’t expect to need in the near future, which I know I should be investing, but I don’t know where to begin. Should I buy investment property? What kinds of investments should I be considering??? I don’t have any specific retirement savings plan set up. I know I am fortunate to be in this position, but I am completely overwhelmed. I have been trying to educate myself about investing, but I find myself quickly tossing the books aside because there are too many options.
My only goal is that within the next 5 years I hope to buy some property outside of the city (currently live in downtown Toronto). I anticipate that anything else I want to pay for (travel) can come out of money that I am earning/will be earning.
Your goal with this money is short term, so I would keep it in cash. Most other investments with a high potential return also have a high potential risk, so if you were to try to tap that investment in, say, three years, you could very well have a lower balance than when you started.
Sometimes, it’s hard to shake the feeling that money in a savings account isn’t invested. It is. Savings accounts are an investment that’s extremely low risk and very liquid, two features that are hard to find together in an investment. For those benefits, you generally get a low return.
These features make savings accounts a great place to keep money in the short term – less than five years or so. This is particularly true when you’re not absolutely sure when you’re going to need that cash.
Q3: Paying bills with reward cards
Does it make sense to make all your purchases and bill payments (minus the mortgage) with a credit card with a rewards program, as long as you can pay off your balance each month? My husband and I finally paid off our credit cards earlier this summer and started talking about how we want to handle payment for everything. We decided that our credit card, Chase Freedom, has a pretty good rewards system. There’s options for travel stuff and gift cards, but you can also get the money back on a cash card. Because our monthly spending is more than 1/3 of our card limit (it’s a really low limit), we actually make multiple payments a month to keep the ratio from getting too high, although we expect our limit to go up in a few months after we’ve shown we’re making the full monthly payments. Does this help at all in terms of the ratio idea on your credit score (I have no need to worry about mine right now, but my husband wants to buy a new car by next summer)? And is there something we’re not realizing in our plan of taking full advantage of our credit card’s reward program? Paying it off every month has really improved our picture of just how much we’re spending and what we’re spending it on, so that’s a bonus in my mind. And so far, at least, we haven’t seemed to revert to the mind set that we can spend more because it’s credit (we’re fairly frugal people, although we admit we eat out too much.) But I still have this feeling that we’re trying to cheat the system, and it’s going to bite us in the butt. Thanks!
While it’s tempting to jump on board with a plan like this, there are a few things to watch out for.
One, you need to be extremely vigilant with due dates. If you miss a due date, you’re going to be quickly accumulating interest that will very rapidly cost you more than the rewards are worth.
Two, you need to never be fooled by the balance in your checking account. If you go this route, your credit card will be coughing up a large bill every month that you will have to cover. Your checking account balance is a mirage at this point.
Three, you need to still have a pretty good sized emergency fund in cash. Credit cards do not work as an emergency fund because banks constantly tinker with credit limits and often cancel cards at inopportune moments.
I don’t really recommend or not recommend this path. It offers some rewards, but also offers some risks.
Q4: Waiting for an internship
I am a graduate student who just needs to complete my thesis to graduate so I decided to take a job while I finish so I wasn’t twiddling my thumbs. I took a position as a year long intern or volunteer which offers a $5500 bonus toward my $60,000 of student loans if I complete the year. It pays $375 every 2 weeks and I have food stamps at $176/month. I have some savings, and my loan is in deferment until June. Unfortunately the money I recieve from VISTA barely covers my rent and utility bills with practically nothing left over for gas or incidentals. I have been working here for 2 months at a position that I moved from GA to OH for which cost more than I expected, partially for the items I needed to buy since it was my first time living alone I had some gaps in my possessions. I do not have time to take a second job until I complete my thesis defense in November but I have already realized I’m not happy with this position or the organization I’m working for. Is it worth the money for me to finish out the year just for the bonus toward my loans or a leg up on getting federal jobs?
However, until I can line up a solid job or internship opportunity or a city I would like living in I don’t want to just quit and have to find a job that pays enough in a poor county and I am unattached and a recent graduate I’d prefer to move to a city I like and find a position or hunt for the perfect position while I can over just settling again for something that I find monotonous.
If you have a good paying job while you’re waiting for another one, I encourage you to keep the good paying job. However, you should spend your time at that job recognizing that this is not where your heart is and save your energy and focus for the next step in your career path.
Look at your current job for what it is: an exchange of some time for some money. It is not your career path. It is not life-ending when you leave this job. It’s just a way to make money.
Your focus should be on establishing a career path, and if your current job keeps you in a good place to do that, keep at it.
Q5: Settling credit card debt
I was just curious–I’m kind of new to the PF blog world (just started following the major ones [including yours!] on a daily basis a few months ago), and I’m finding it surprising how little coverage settling credit card debt receives. I see a lot of questions submitted by individuals who have (what I consider) extremely high amounts of cc debt (20k, 30k, 40k…) and I feel that I never see any advisement about the settling process. Instead, it seems that most everyone is advised to suck it up and strap themselves in to snowballing through the debt and insane amounts of interest for the next 5+ years (or more!).
My question is…why? Of course there are negatives to settling–the hit to the credit score, right?–but I have a friend who recently settled her 25k+ cc debt for 25% of its original amount and their score is still “good” (around 650). And this was a calculated move on her part. Although she could have kept up her monthly minimum payments (even though they took up 50% of her take-home pay and she would have been stuck in her hand to mouth existence), she purposely defaulted in order to settle. And she now is cc debt-free. It seems almost logical to me–she stopped paying her monthly minimum payments, defaulted, spent a few months getting badgered by collectors while she stockpiled the money that would have gone straight out the window to make the tiniest of dents in the debt, and then she settled and paid off those amounts in full with cash. Altogether, it was an 8 month process as opposed to a several years’ long torturous journey.
Is it an ethical issue? Is that why settling seems to be considered a last ditch effort (as in, only an option if you’ve already defaulted and have no other choices)? Or are there other negatives I’m not seeing?
For one, it is an ethical issue. Planning ahead to take someone else’s money then defaulting on that debt is just simply dishonest. It’s theft. There’s no other way to paint it.
Another factor is that it does drop a bomb on your credit report, even if you negotiate it away. It has a pretty big negative impact, one that doesn’t just affect the debts you might take on, but also affects job applications and insurance rates.
Yet another factor is that you’re hoping that the negotiation process goes the way you want it to. You’re betting on the company being willing to negotiate with you and doing it in a smooth and expedient process, which does not always happen. If it doesn’t, you’re going to have a giant wound on your credit report for many years.
Not only that, you’re also running a chance of being blacklisted from future transactions involving that bank. I have a friend who simply cannot get a card from Chase, even though he’s had strong credit for years, because of his previous default on a card from them.
No one offering reputable personal finance advice would suggest borrowing a bunch of money with the intent of defaulting and negotiating it away.
Q6: Ignoring debt
She is 24, has a degree in nursing, works full-time (three 12s = 26hours) at a hospital for $21/hr and is a whopping $130,000 in student debt (private school, no scholarships, and some bad decisions). Her monthly minimum payments are about $1050 a month, for the next 20 years. The way I see it, she has two options 1) pick up extra shifts, live extremely frugally, continue livinig with her parents, and hopefully pay it off in 8-10 years, or 2) pay the minimums, live her life, finally move out on her own, and just ignore that $1000 a month for the next 20 years. I am ALWAYS an advocate of getting out of debt as soon as possible, but in this case, is it worth giving up your life and your independence for 10 years? I’m just not sure!
It depends on whether she is willing to trade ten difficult years and ten great ones for ten mediocre years in terms of her finances.
Almost always, I would choose the ten difficult years and ten great ones. I would far rather live in a challenging situation for a while right now to have a great life sooner rather than later. I’d always choose that over a middle-of-the-road situation both now and later.
Part of the reason is that I’ve found that challenging situations always bring out the best in me. I rise to the occasion. I figure out ways to make it work. Then, because of that experience, I have the foundation in place for something great.
Q7: Podcast basics
You mention all the time how you listen to podcasts during the day. I get that podcasts are like free radio programs you can get on the computer, but how do you get them and how do you listen to them?
Podcasts are pretty much exactly what you describe. They’re free radio programs that you can download on your computer. There are a lot of them and you can thus use them to essentially program your own radio network to listen to while working.
I use iTunes to listen to and manage podcasts. It has a great interface for finding thousands of different podcasts. Once you’ve found one you like, you just click on the “subscribe” button and whenever a new episode of that podcast comes out, it downloads to your computer for your listening convenience.
I could list dozens of podcasts to start with, but I really just suggest going to iTunes, visiting the iTunes Store within the program, go to the Podcast section, choose a category that interests you, and check out some of the top podcasts in that category.
Q8: Turning your life around
I have a question for you. My sister was very rebellious in high school and dropped out and had 2 kids before she was 18. She is now almost 30 and through some difficult experiences has hit rock bottom and is ready to turn things around. Our family is going to support her getting her college degree. We were curious though about what degrees would be best to pursue if your not going to get into the field until your 34 or 35. My wife is a CPA and in that world it seems extremely difficult to get into at this age with no experience. Others seem like that would be a little easier. Don’t know if any of your readers would have any other advice on going back to college at 30+ as well.
Passion trumps age, every time. What is she interested in? What does she like to do?
It doesn’t matter what the field is. If you’re going there because you love the topic and you’re willing (and happy to) throw tons of time into learning from the classes, meeting people who are also into that topic, building relationships with professors, participating in organizations related to that topic, seeking out internships, and working on your own projects, you’re going to succeed.
Most of the tales you hear about people getting degrees and not finding work are from people who got into the field because they thought it would make them some money or got into the field because they kind of liked the topic but weren’t really passionate or don’t have a work ethic. If you have passion and a work ethic, you’ll succeed.
Q9: Handling unexpected medical expenses
I am really trying to be more aware of my spending habits, but due to health difficulties, I am finding additional expenditures that I normally don’t incur. I had purchased a product (aloe vera for the stomach) that was fairly expensive that I needed to take to treat the extreme pain th I’ve am experincing from a flareup of an ulcer (to nip this one in the bud at this point – the most recent research indicates that ulcers are not caused by stress). Anyway, my physical therapist ( I’m also dealing with a rather severe form of spinal stenosis) told me that he purchased aloe vera juice for $7.99 per gallon which is about a third of what I had paid. Unfortunately, it doesn’t work like the other did, and since, unlike Henry’s, I don’t think Trader Joes takes merchandise that has already been opened.
So, my effort to save kind of blew up in my face. Anyway, if you have any suggestions on how to deal with unexpected medical expenses, it would be greatly appreciated.
Sharon, you pretty much described why it’s useful to have a big emergency fund.
Life happens. One day, you wake up with a severe ulcer and find that the best way to treat it is with aloe vera. You try a sample of a kind and it works well, but buying more costs a lot of money. Where does that money come from? An emergency fund.
There are tons of things that happen in life that can really be supported with an emergency fund. It’s simply the best solution to the challenges life throws at you, in a general sense.
Q10: Kickstarter ideas
Have you ever considered using Kickstarter for any of your ideas? I would absolutely contribute to a Kickstarter campaign if you were to finally get off your [rear end] and write that fantasy novel you’ve mentioned several times.
I’ve actually thought about doing this for my fantasy novel that I’ve been working on.
For an example of what this would be like, here’s a kickstarter project for a book. In essence, people would “pledge” a certain amount to “kickstart” me to write the book. In return, they would get various things – a signed copy of the book, perhaps, or a PDF copy of the book as soon as it’s done, or a thank you in the acknowledgements of the book. I had some ideas for other perks, too.
The thing that’s held me back is the thing that’s held me back from doing it anyway – time. The content produced for The Simple Dollar, plus all of the other management, eats a lot of my time. Add on top of that family time, basic life management, and a bit of time for other hobbies and my time is pretty much eaten up.
I have considered slowing down the pace of The Simple Dollar for a while to give something like this a go, but it’s really going to be a personal decision whether I do it or not. In other words, the decision to jump on board with this has more to do with whether I think I could do a good job of this than whether a bunch of people would be willing to “kickstart” it.
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.