Reader Mailbag: Pee Wee Baseball Season

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. Rent or buy a condo?
2. Prioritizing limited money for savings
3. Encouragement for staying at home
4. Cell phone: pay-as-you-go or not?
5. Prioritizing debts
6. Wedding gift registry etiquette
7. Worried about dad
8. Tax savings for independent work
9. Delaying student loan repayment
10. Choosing a savings account

Out of the five games scheduled in my son’s three-and-four-year-old tee ball league, four of them have been cancelled due to rain. I haven’t seen him this disappointed since his third birthday, when he invited four kids to his party and they all cancelled due to a flu bug.

Currently my husband and I are renting a 1-bedroom apartment while we pay down student loan debt and save for a down payment for a house. The problem is this: we are paying about the max we are willing to in rent (which is still the middle-bottom of the scale), but lately, my husband and I have felt unsafe– thugs and their ilk hanging around our complex. If we move to a safer complex, our rent will increase by 20%. All the while, we’re seeing condos for sale for which the mortgage would be 35% less than we are currently paying in rent. So we feel trapped — get out of the unsafe apartment complex and delay buying a house that much longer, or take a risk and buy the condo with close to 0% down but save significantly on rent every month. What should we do?
– Rachel

If your monthly payments on the condo are less than the rent on a one bedroom apartment in a bad neighborhood, get the condo.

In most normal situations, rent is substantially less than the mortgage payments on an equivalent space – and even if they’re close, the cost of homeowners’ insurance and the maintenance costs add up to more. The general advice of “keep renting” is usually predicated on this.

However, it sounds like you’re in a situation where your monthly condo payments would be significantly lower than your monthly rent. If that’s the case, you should move to the situation that has a lower monthly cost, without question. Even if you have PMI in this case, you can just view it as paying rent.

In my opinion, if all costs are equal between renting and buying (including maintenance, insurance, commuting costs, and so on), then one should buy, because one will build equity over time with that purchase. However, if you don’t have a down payment and the cost of buying is higher than the total cost of renting, then a person should continue to rent until they have enough down payment to avoid PMI.

I am married to an up-to-his-eyeballs-in-debt lawyer. However my lawyer is on a government repayment plan where if he does community-service-like work for 10 years, whatever amount is left of debt will be forgiven (the catch is that he has to make full payments throughout those 10 years).

We’re wondering where we should be putting our extra cash–here’s our story: we live in a very modest home with a very modest mortgage (about $800/mo mortgage (with 5.5% interest), where renting an apartment would cost us around $850 in this area). I’ve started some Roth IRAs for us and have started squirrling away some cash to get a healthy reserve in place. Right now, we have about $10k in savings, with a $88k mortgage and $140k in his law school debt. I have about $10k in student loans at varying percentage rates (from 1.8 to 5.8). Like Jeremy, we are in our late twenties and thinking about kids in the next couple years. My current plan is to work on my 5.8% interest loan and then to let the 1.8 go to full repayment since it’s such a low rate. If you were in our situation, what would you do?

We have about $300-$400/mo to work with and our 5-year plan is to have our first child and move to a larger home, so should we be maximizing savings? Putting away money for retirement? Paying down our mortgage? Should I even be thinking about his legal debt if it’s scheduled to disappear at the end of 10 years? (monthly payments are about $900)
– Jean

How much is your current home worth? Are you underwater in it, or are you in a housing market that is starting to grow again (yes, some housing markets are doing okay)?

This is actually pretty key, because when you do decide to move to a larger house, the equity you’ve built in your current house will be a big asset for that move. If you can sell that small house for, say, $140,000 and you only owe $88,000 on it, then you’ve got $52,000 towards your next home. On the other hand, if you’re even right now (or underwater a bit), you likely won’t have that much built up.

If your primary goal is saving for a new home and that goal is within the next five years, you’re going to want to save in a stable place. If I were you, I’d make extra payments on the mortgage by tacking on some extra each month.

If your husband is fully planning on working in community service for the next decade, I’d not worry about his debt beyond that. Just keep paying it each month with nothing extra. I would also just make minimum payments on both student loans for now.

As for retirement savings, it really depends on the worth of your current home. The bigger the gap between what you owe on it and what you can get for it, the more I would focus on retirement savings. Remember, you should be shooting for a home equity equal to about 20% of the type of house you hope to buy.

Both my husband and I are currently working, and we have a small one (a daughter who just turned 6 months)
that is in daycare full time. Our ultimate goal is to get her out of daycare so I can be at home with her. We want to do this by December.

I feel we make more than enough money to be able to do this but, all the math I do, is just doesn’t seem to add up for me to be able to stay at home, despite how much we bring in.

I’ve read a lot of the comments on your articles about staying at home and how people make it work, I guess I just need some encouragement to stay the course.

I just am at the point where I’m banging my head against a wall, feeling like I am stuck in this cycle; working to afford the expenses and my greatest fear is that we are just stuck in this cycle, and one day I’m going to look up and she’ll be 16 and we missed it all.

At the same time, I just want to quit my job, and sign up with my husband’s benefits (which will be an additional expense, and also more expensive than my benefits) and see what happens, but I’m afraid that it will be such a huge change in what I’m accustomed to that I will fall into wanting things that I don’t need and possibly putting us into debt.

We know that our goal (and our values) are for me to be a stay at home mom, but some days it seems almost impossible.

Any thoughts?
– Liz

It takes a lot of discipline to pull this type of thing off.

If you truly want to be a stay-at-home mom, then you have to make sacrifices to get there. I made a lot of sacrifices to get to where I currently am and it was worth it, but it was hard along the way.

What can you cut? Look at all of the stuff in your life and ask yourself whether you need it as much as you need to be a stay at home mom. What about your cell phone? Do you need that more than you need to be a stay-at-home mom? Keep in mind that every time you spend money, you’re pushing that dream of yours off a little bit further.

You absolutely can do this. You just need to keep in mind that, as Dave Ramsey puts it (and it’s one of the best ways of putting it I’ve ever heard), sometimes you have to live like no one else so that you can live like no one else.

You mentioned once about Pay As You Go phones, but I wondered where these cell plans are as the ones in my local areas do not seem like good deals (25 cents a minute)? My current plan is $35 a month for 500 anytime minutes (with nights and weekends free), but I currently use about 200-250 monthly. What would you recommend in my case to save more than my current plan, if possible?
– Michael

You might be using enough minutes so that a pay-as-you-go phone won’t be worth it to you. Such phones only really pay off for very low users (like myself, actually; I don’t like cell phones, but that’s a whole different story).

Your first step would be to check with your provider and see whether they have a lower minute plan. A 300 minute plan looks like it would fit you – do they have something like $25 for 300 minutes? If they do, see if you can switch to that, because that will likely be the best fit for you. If not, look at competitors.

If such options aren’t available, you need to sit down and really evaluate your usage. Do all of your minutes happen on only a few days during the month? If so, you might want a pay-by-the-day phone, for example. Are you using the phone at home when you could easily use Skype or a landline?

Here’s a summary of our remaining debts:

Primary mortgage = $160K @ 5.25%, $1100/mo payment
Secondary mortgage = $24K @ 8.625%, $322/mo
Car loan = $17K @ 4.99%, $540/mo (We refinanced to extract equity to pay down second mortgage in order to qualify for a refi on the primary mortgage)
Balance transfer credit card = $7K, 0% through next April, used to help pay down second mortgage to save interest, will pay it off in time to avoid interest

Retirement accounts are at Vanguard, some with our state’s retirement system from when we both used to teach public school, all totalling about $35K. On our IRA’s for this tax year, we’ve contributed $2500 out of $10,000 we possibly could. My 401k will be resuming in July, which I’ll contribute about 6% of my income to get a full match from my employer.

Here’s my question: I know my priority is to first pay off the balance transfer credit card. But after that, what should be my priority? I almost see that secondary mortgage as like a consumer debt, and the interest rate is a killer, and I’d like to pay that off. However, while three months of an emergency fund is good, I don’t feel that’s adequate either. But sitting on more money in an emergency fund with so little being earned in interest compared to the car loan or secondary mortgage seems like a waste, too. Perhaps I should focus on paying the car off, because that would free up $540/mo and I’d only have to pay $17K back to do that. Should we not contribute the full $10K/yr in our IRAs in order to pay down debt or build up our emergency fund faster?

There doesn’t seem to be an obvious choice here. Help!
– Aaron

Your first debt priority should be that balance transfer, because it will be very painful when the interest resets if you don’t have it paid off. Luckily, we agree on that point.

After that, my first debt priority would be the secondary mortgage. It’s only a bit bigger than the car loan but the interest rate is much higher.

If you feel that your current emergency fund is inadequate, then channel some more into that emergency fund first.

Once that secondary mortgage is gone, I would hit the car loan next, simply for cash flow purposes. The difference between that interest rate and the primary mortgage rate is negligible.

My girlfriend and I recently got engaged. We are getting married in April next year. We are both from small towns that are close together so there is no way around having a big wedding. We are following lots of tips for saving money on the wedding, but I have a question about gifts. Because the wedding will be big, there should be a lot of gifts. We don’t really want to register for a bunch of junk that we are never going to use. We are going to register for some good quality kitchen and bath stuff, but its not going to be too much. We really want to be able to buy a house soon, so we are saving up for a down payment. Would it be bad etiquette to register for a few things and then ask people to give us cash to go towards a house down payment? Also, do you have any advice on the whole registering and wedding gift getting process in general?
– Lance

The important thing to keep in mind with a wedding registry is that it’s merely a list of suggestions for people who aren’t sure what to get you. It’s not a list of stuff that people are required to get you – it’s just a helper.

Directly requesting cash as a wedding gift will come off as tasteless to a lot of people. You’re better off allowing people the freedom to get you whatever they’d like – using the registry as a “helper,” of course.

If you want cash, just register at somewhere like Target and put a bunch of easily-returnable items on your list. After you unwrap them, return the ones you don’t really want to Target and get the entire balance on a gift card, then use that gift card to buy groceries and save the equivalent amount of cash for your down payment.

Here’s my situation. I am a 25 year old high school physics teacher. I’m recently engaged and I just moved to Houston to be closer to my fiance. She’s in medical school currently. Ironically enough, out of the two of us, I’ll be bringing the most debt into this marriage. I have about $15,000 in student loans from college and about $4000 in credit card debt currently. Both of those numbers are way down from what they were once I pulled my head out of my rear about a year ago and busy paying them down.

I make a decent income for me currently and the credit card debt will be gone a few months. Our plan though is for me to go back to grad school after this next to seek a phd in engineering. These are all things that we’ve been planning and we’re budgeting accordingly.

However, with Father’s day I started thinking about my dad a bit. He’s a 64 year-old programmer who works from home making about 200K a year. The company he works for just got sold this last year and is now under new management. I’m really scared they are going to try to force him out and I highly doubt he’ll be able to get a comparable job.

He’s getting older and he has a lot of health problems. Also he hasn’t been financially sound throughout most of his life, so basically if he got fired tomorrow he’d have to declare bankruptcy. Obviously I would do anything for my dad and if this were to happen 8 years later I’d be able to support him. At this point in life though, I just don’t see how I could help at all. Any advice?
– Bobby

It doesn’t sound like, in your current situation, there’s much you can do to directly help your father in a financial way. Nor, would I imagine, would he want you to if it were to unbalance you financially.

They may try to “force out” your father, but he’s making $200,000 a year. He’ll receive maxed-out Social Security benefits. Depending on his exact situation, he may have a pension and he may receive an exit bonus in order to get him out the door. In other words, I don’t think his financial crisis will be immediate.

If I were you, I’d simply be as supportive as possible during this stage. Call him regularly. Send him emails. Let him know you’re in his corner. Tell him if he wants to talk through what’s going on, you’re there.

This can be a hard conversation to have at first (depending on the relationship), but it’s well worth it and will be a bigger net positive to your father than going further into debt to “help.”

I have a few questions that hopefully you can shed some light on since you are self employed. I am 24 and finishing my MS and have been awarded a research contract position at the US EPA. In order for them to process my contract I had to register with DUNS and CCR and am now my own business I think.

I know I need to save a portion of my income (would 20% of 21.84 per hour be enough?) and pay estimated taxes but am not sure how to execute that.

I also know that I will be able to deduct many things from my taxes like student loan payments, health insurance payments but are you aware of any other things I am may be able to deduct? Someone told me if I kept track of mileage I may be able to deduct that. I just want to make sure I am keeping track of anything I might need to before I start working. I have been told a CPA would be helpful but I don’t want to spend the money on that if I can easily handle this myself.

I am also looking into opening a Roth IRA since I have no employer matching, being a contractor. I saw you mentioned a SEP IRA but I don’t know much about that or if I would be eligible.
– Kristin

A CPA is much more likely to point out deductions for you and to help you make sure your taxes are correct and your prepayments are done correctly. That’s the value in hiring one.

The biggest thing you need to know is that you’ll have to file quarterly estimated income taxes at both the state level and the federal level. You’ll want to study up on 1040-ES and your state’s equivalent.

During the year, you’re better off socking a significant portion of your income away in a savings account for tax payments. I sock away 40% of every dollar I bring home in a savings account strictly for taxes. (I label it 2010, and start a new account each year.) At the end of each quarter, I pull money from that account to make my quarterly payments, then at the end of the year, I pay all of my income taxes from that account. If there’s money left over, I just transfer it straight into my primary savings account.

With a SEP-IRA, you can only save money that you earn as part of the business. You’ll probably want to contact the HR folks at the EPA to see what retirement options are available to you.

I was laid off last May from an industry that has little prospect of improving in terms of hiring and never paid well to begin with. Faced with those bleak prospects, I went back to college last fall at the age of 31. I’m taking prerequisite classes at a local community college and hope to gain admission to a master’s degree program in the health field with a very high employment rate.

My student status makes me eligible to suspend payment on my existing loans which are all consolidated, previously-subsidized Stafford loans that I borrowed for my bachelor’s degree. They are at about 3 percent and I have a little over $4K left on the balance. I am also eligible to take out more unsubsidized Staffords to cover the $2,000/semester cost of attending community college.

Are cutting out the $125/mo student loan payment to make room in my budget now, and borrowing extra to slow down the depletion of my savings account, both smart financial decisions in the long run?

I have a health emergency savings account that is keeping me afloat for the duration of my schooling. Yet, my budget is rather tight. The extra $125 would help me slow down the draw-down on my savings by more than 10 percent. (I recently began taking out $1,000 a month for living and school expenses after my unemployment benefits stopped.)

The only money I have coming in is from sporadic freelance writing jobs and renting out two of my bedrooms but that all goes to the mortgage. I’m also not borrowing for this part of my reschooling; I have another six months of taking pre-requisite classes ahead of me before I can even apply for the master’s degree program I have my eye on. I do plan to borrow for graduate school. The interest rate on the existing loans is around 3 percent and the balance is about $4,000.
– Jen

If your choice is between cutting a $125 a month payment on a 3% loan that you can defer or pulling $125 a month off of a credit card that you can’t pay back or from an unsubsidized Stafford loan, the choice is obvious. You should defer the student loan payments.

Your goal, in the end, is to owe the least amount possible when you get out of school. That means maximizing the low interest loans as much as you can so that you don’t have high interest loans building up your principal while you’re in school.

If you’re not making ends meet right now, you’re likely racking up consumer debt, which comes at a much higher interest rate than 3%.

My wife and I have about a 6 month emergency fund in a money market. We’re only getting a whopping .25% interest rate. I’ve taken your advice to try and open up a new higher interest account for this fund but there are so many options – even some in Australia. Could you recommend a few bank options for us? Is it safe to have our money in a bank account from another country?
– Brian

There are a lot of good banks out there that blow away a 0.25% rate.

The two online banks I use are ING Direct and SmartyPig. I use ING Direct for most of my primary banking needs – savings, checking, bill pay, and so forth. The accounts there earn around 1%, but it varies quite a lot.

I use SmartyPig to save for specific goals. The interest rate there is higher – between 2% and 3% – but you have very limited account access. You can only deposit once a month on a schedule, for example. It works great if you’re saving for a goal piece by piece, though.

Shop around. I guarantee, though, you’ll get a better rate than 0.25%.

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.

Loading Disqus Comments ...