Reader Mailbag: Post-Christmas Haze

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. Favorite Christmas present
2. Career and schooling choices
3. Oldest card issues
4. E-readers
5. Investing while on Social Security
6. Rebuilding savings after children
7. Preferred vanilla bean
8. Planning for the future
9. Starting over
10. Dealing with tenuous income

The presents are opened. The children are playing with their new toys. The days are just starting to get longer. The new year is about to begin.

Q1: Favorite Christmas present
What was your favorite Christmas present?

– Dan

I received quite a few items this season, but my favorite is probably the gift my daughter got for me, the board game Descent: Journeys in the Dark.

Why was that my favorite? It became my favorite when my wife told me about the process that they went through in choosing that as a gift.

My three year old daughter wanted to get me a game. She wanted it to be a really big box. She wanted it to have monsters in it. She wanted one that I would play with my friends. In other words, my three year old did all the work in narrowing down what gift to get me over a period of time.

Not only that, she sat there with me as I went through the pieces of the game, punching them out and assembling the figurines.

For some reason, over the last few weeks, I’ve felt a deeper bond with my little girl than I felt before. I’m not sure why. It’s not the gift – it’s something else.

Q2: Career and schooling choices
So here’s my situation. I’m 26, married, own a tiny house (it works for now), and am about to finish my AAS in business with accounting emphasis. I currently work at my college’s library making an average of $1000/month take home. This fluctuates a lot due to the college’s schedule. My husband (25) works for a local grocery distribution center and his pay also varies a lot, being anything from $800-$1300 every 2 weeks, with no sort of regularity or guarantee that a pig check is coming. He has also just started college, enrolling in the AAS for building and construction.

As I previously stated I have almost completed my AAS. The current job market where we live has had very few opportunities for work in my field, and because of our house and my husband just starting school, we can’t move for at least 2 years. At this point I am considering a few different options regarding my educational/professional future. We just had transfer day at the college, this is where several area universities come and talk with students about transferring to get bachelor’s degrees. What I found out was that most 4 year institutions will only accept about 5 of my AAS classes (15 credits out of 63). This isn’t something they tell you at advising, or make mention of in the catalog, they tend to make it sound like any class is accepted by any college.

There was one university that accepts all of my credits; however it is not as well known or respected. It is mostly an online university, but I would be able to get a bachelor’s in business in about 2-3 more years, I attend part time because we do not qualify for assistance and I pay out of pocket rather than having student loans.

My other option would be to start over and get an Associate of Arts degree which would transfer to the 4 year college I wanted to get my bachelor’s from. This option would be cheaper in the short term, as the community college classes are about ¼ the cost of the online universities’ classes, but then I would be going to school for another 4-5 years instead of the 2-3.

The other possibility I’m debating is to just get my AAS and not continue school, but continue working and looking for work in my field, possibly returning to school later when our finances are a bit stronger. Currently we get everything paid, have an emergency fund and contribute to retirement, but there is hardly any wiggle room, and next to no money for fun.

For the record, my husband likes the last option best because it would free up some extra money in our household.
– Misty

I’m not familiar with your field. My suggestion would be to seek out someone in that field, then have a conversation with them about these options. Take them out to lunch and see what their impression is of the various educational opportunities in front of you.

You also need to establish what your husband’s degree will get him. What is he hoping to do with it? Is it a realistic hope? What do job prospects look like when he’s done with his schooling?

Getting a degree in a part time situation as you’re doing is really only worth it if it’s got a very good chance of improving your income after you’ve earned it.

Q3: Oldest card issues
Am 44 YO w/ spouse, 2 kids, 4 dogs etc. Have two credit cards, one has a zero balance the second has a $3,000 balance that is just months to paid off. The only other debt is a couple of medical bills (new this quarter) and the house. The cars are mature, and paid off. There has been no “running up the bills”. I was laid off early this year, but was only unemployed for a few months before I found new work. There has been no significant change in life, purchasing power, or expenses.

Over a year ago, our Credit Card company (large, national bank) raised the interest rate. Called, nope we won’t drop it back. OK, then work harder to get it paid off. Then they dropped the credit limit by half. That was not the end of the world but I felt the FICO recalculating debt ratio. Figured it’s a sign of the times, economy is bad and credit is tight. Now we received mail where the bank is going to start charging a monthly service fee, whether you have a balance on your card or not. This is ridiculous!

I know it is important to credit history to keep your oldest credit card and NOT use it, and I have had this credit card for umpteen years. Also, it’s only $5 – BUT, how much more does a consumer have to take? I can opt out of the monthly charge on the condition I close the card and pay off the balance.

With travel for business, and they don’t issue company credit cards to everyone, occasional car rentals & hotel reservations a credit card is necessary. We reliably use the expense check to pay off those charges on the credit card. Should I transfer the balance to a new credit card? Are there other options that I am missing?
– Cheryl

Do you have a more recent card than this one?

The key thing is to make sure that you have a card that’s been open for at least seven years, if at all possible. If you have more than one card that’s been open for that long (or close to it), you can choose from among them and cancel the rest.

In your case, I would look to cancel that card as soon as possible. Monthly service fees are needless and ridiculous.

Q4: E-readers
Could you address e-readers — Nook, Kindle, etc., at some point? I would like to know what you think of them, how they might work into a sane budget, or not. You may have already addressed them, but I missed it if you did.

– Terry

My wife owns a Kindle and she quite likes it. She’s downloaded quite a few books on it over the years and has spent an awful lot of time using it.

The problem for her, though, is that it’s very, very convenient to just go buy another book. After all, that Kindle store is just sitting there waiting for her. Yes, there are ways to get some free books for the Kindle, but that doesn’t sate the reading needs of a voracious reader like my wife.

My belief is that while they offer some reading conveniences, they also make reading more expensive. You can’t check Kindle books out from the library, nor can you swap them a la PaperBackSwap.

Q5: Investing while on Social Security
I have a disability and I receive an SSDI payment each month. I want to invest, but I’m worried that I’ll be penalized for doing so and lose the SSDI payment. I have talked to the Social Security office about how much money I can make per month before my SSDI is affected. They said I can make up to $1000/month before it affects my SSDI. If I were to invest in an Index Fund, would I exceed that $1000 limit from returns on my investment? Or should I be looking at a different kind of investing for my purposes?

– Heidi

If I were in your situation, I’d put my money in places that would reduce my monthly expenses, not in places where I would earn significantly more.

I’d pay off all of my debts, first and foremost. If I were debt free, I’d sink my money into improving the energy efficiency of my home and other home upgrades. I’d replace my appliances when they needed to be replaced with energy efficient models. I’d keep an emergency fund to ensure that I never had to dip into debt again, and I’d pay cash for things like automobiles and the like out of my savings.

This way, no matter what happens in the future, you’ve got a situation for yourself that’s as flexible as possible.

Q6: Rebuilding savings after children
We are a family of 6, who has been struggling to survive on less than $3000 monthly income for the past few years. I became a stay-at-home mom when I gave birth to our first son, and for most of our marriage, my husband’s main source of income was as a real estate agent. We have always been fairly frugal (usually buying generic rather than store-bought brands, checking the unit price at grocery stores to make sure we’re getting the best value, reusing clothing as hand-me-downs, mending and patching things rather than throwing them out, giving my family haircuts rather than taking them somewhere to pay for one, etc.), and seemed to do OK. However, a few years ago my husband was diagnosed with testicular cancer. Although I’m happy to say he is cancer-free today, the astronomical medical costs sent our financial world in a tailspin. He had to have daily radiation treatments and couldn’t work as much as he had been accustomed to, due to sickness from the treatments. This was coupled with the collapse of the real estate market in Las Vegas, and our income was drastically cut. After years of stress, heartache, and constant struggling, we lost our home and had to file for bankruptcy. These past few years have brought changes I never in my life would have imagined would happen to me, and have been the most difficult of my life. Although we weren’t outwardly stupid with our finances (we didn’t even own credit cards), I am realizing now so many things we could have been doing differently. Nevertheless, you live and learn.

Our situation today is not much improved, but if anything good can come out of this, it is that we will learn to make wiser decisions, and help to raise financially-prudent kids. My question today is in reference to saving. Because we have been living paycheck to paycheck for so long, we have failed to build up a savings. (Any savings we once had was quickly eaten away in medical bills). Our problem is that any time we have even a couple hundred dollars saved up, something always seems to come up…. The car’s brakes are going out (and we only have one car, so we need to keep it working), a tooth gets chipped and a dental crown needs to be put in, etc. It always seems to be something. Our savings account is currently tied to our checking account, so whenever something comes up, it’s extremely easy to transfer money from savings to checking, and then the money is spent before we know it, and the savings is non-existent again. I want to set up some kind of savings account where we both would have to be present at the same time to withdraw funds. That way we could be sure we are both in agreement and that it is an absolute emergency before withdrawing any funds. However, I am having a hard time finding a bank that offers this service. The best they can recommend is to just cut up the debit cards when we get them, but no one offers a joint account where both parties have to be present to withdraw funds. I want something that would be really difficult and inconvenient to withdraw money from, so that when we put money in that account, we can be sure it will actually stay there. Most CDs or other accounts of that nature require a minimum of $5000 to put down – which is just not an option for us. We recently held a yard sale, with the determination that anything we made from it would go toward savings – which amounts to only about $100. Do you have any recommendations of a good program or type of savings account, which could help us with the goal of building back up a savings, when we are more cash-poor (with 4 children) than we have ever been in our lives?
– Mitzi

Many CDs do not have these types of minimums. However, such CDs generally do not return much better than a savings account.

In the end, this is all about willpower. If it’s your money, you do have access to it and you do have to constantly choose not to touch that money.

My suggestion to you would be to open an account at a bank where you don’t have easy access, such as an online bank like ING Direct. Set up an automatic transfer that pulls a small bit out of your checking account each week, then forget about the account for a few years.

Q7: Preferred vanilla bean
What is your preferred kind of vanilla bean for making things like vanilla extract?

– Steve

To be honest, I don’t have a strong preference between types of vanilla beans. They all taste fairly similar to me.

I usually choose my vanilla beans based on the price because I usually just use them in vanilla extract. If there’s a sale on a particular type of vanilla bean, that’s what I’ll pick up.

There are minor differences between the types, but the differences are so small as to not make any impact on me.

Q8: Planning for the future
My wife and I have been together for almost 10 years, and we have a 6 year old son. Oh, and we live in a large Canadian city (not THE largest, but in the top 5).

Ages: 37 & 40
Total Gross annual income (combined): ~210K
Mortgage: 610K (3.6%, 4 year left on term, 35 year amortization). *I KNOW!*
Line Of Credit balance: 27K
Other debt: none.
Retirement: WIFE—defined benefit pension plan (awesome), plus about 12K in RRSP

Retirement: husband—hopefully will be a kept man, but have ~120K in RRSP. Have been contributing ~12000/year over the last several years. Have experienced negative returns (over the long term…since 1994, I’m down about 13%).

Emergency fund: ~5K (in ING across a few accounts, including small TFSAs [I believe that’s similar to a david-lee-roth IRA?]

RESP value (for the 6 year old): ~12K (12 years to go until he’s ready for higher edu-macation). We each have two university degrees (useful ones) so we are pro-university.

About a year and a half ago, we left the burbs, and went “all in” on a house in our preferred neighbourhood. We took out a HUUUUUGE mortgage. We can handle it as we both have good salaries.

We had two cars, but sold one. We put that money down against our other car (we bought out the lease—a Japanese sedan that we plan on keeping for another 10 years). So, as of right now, we have our mortgage, and our line of credit (4.25%) has a balance of about 27K, which we plan to pay off by next September (or earlier). This is where my question comes in.

I plan on NOT doing any RRSP (401K) contributions for calendar year 2011. Performance has been horrible, and I want to get rid of the LOC debt more quickly. My plan is to put my ‘normal’ RRSP contribution toward the Line of Credit, until it’s gone (perhaps be done in June instead of September). From there, build up the emergency fund a bit more (to 10K initially). THEN, once that is all done, I’d like to build up a bit of a lump sum mortgage payment (we’d have ~3500k/month available for this, once LOC is gone). Does this seem like a reasonable plan?

Right now we have a low (locked in) rate, but that may not be so in ~4 years time when it comes up for renewal. We hope to have ‘er all paid off in 15 years from now. We plan on retiring in 20 years.

If the next 20 years go by as quickly as the LAST 20 years, we have to have a solid plan.
– Marty

I want to say right off the bat that no matter what the interest rate, a mortgage of value more than twice your combined income is a mistake. That’s true for everyone. It’s a tremendous mountain of debt.

However, now that you’re in this hole, I think you have a sound plan. I think you need to get rid of your non-mortgage debt as soon as possible. I think your retirement savings are healthy enough to spend a year focusing on getting rid of debt.

If you can, I would seek a way to permanently lock in your rate, because an adjustment in your situation would be absolutely brutal.

Q9: Starting over
I asked my husband to move out about a year ago…..he was cheating on me with men……that was a hard hit to take; and he stole jewelry my grandparents had given me, that literally devastated me, I’ll never be able to understand….….I could go on and on. Since then I don’t really know for sure where he is. He left a pile of debt, credit cards, etc., and I’m struggling to keep the house payment and truck payment up. I need a roof over my head and I need transportation for work. It seems, though, that every time I think I am making a little progress something drastic happens and what little savings (very little) I’ve managed to accumulate gets wiped out: I’ve had to spend money on getting rid of unwanted guests in the attic, then a very windy storm knocked down 35 feet of my fencing, and the latest is coming home to blood everywhere and a dog with a severe cut on her foot, requiring a vet visit……those three things were well over $1500. All I see in the future is more expenditures: home insurance, property taxes, auto insurance, etc. I try to think positively about these things and sometimes I can manage it by figuring it can’t possibly get any worse but it is getting worse and my self confidence is gone. He’s already taken my self esteem. I’m at the point where I don’t want to talk to people, I just want to be left alone. I sit and stare at the wall……doesn’t cost me anything. I think I’m depressed but I don’t have the energy to do anything about it even if I am. I keep thinking I’m not the one who did wrong, though he’s done his best to make me feel guilty for throwing him out. Good grief, I can’t even afford to divorce the man! And now for some reason he’s had all his mail redirected back to the house so I’ve got a big pile of mail that he hasn’t called to ask about and he doesn’t respond to any phone messages I leave. I don’t have a good support system, in fact, I don’t think I have any support system. Most of my family lives in other states. My mother is an invalid in this town so I go over just about every day after work to help my brother take care of her. I’m sinking.

– Ellen

My honest suggestion for you would be to reboot everything in your life. You need to get a divorce. Seek out legal help – you might be surprised what you can find in your current situation. You need to sell the property you’re living in because, clearly, you can’t afford it right now.

It sounds like the only nearby support you have is your brother and your mother. If I were you, I’d do everything you could to establish as strong of a relationship as possible with your brother right now. If he’s a good person at all, he’ll recognize that you need him and be there for you.

You may also want to consider some sort of therapy. I do not know what sort of services you have available to you with your insurance and so on, but I do know that you have a lot of issues going on and some sessions with a psychotherapist will probably go a long way toward helping you to resolve them.

Q10: Dealing with tenuous income
I have just graduated from my master’s degree and my husband is finishing up his first year in grad school (graduation date December 2011). I am 29 and he is 31. Since we were married over a year ago, we have merged our savings accounts so that we can save and pay bills as a couple, while still maintaining individual checking accounts. In the past year, we have accumulated $2000 into an emergency savings, both have health insurance (an exciting accomplishment for us), are contributing to our retirement at 12% each (because we are starting in earnest later, we feel like 10% is not enough), and have established a small vacation fund (input of $100 month, covers traveling home to visit families for holidays and a couple of backpacking trips for us). However, we have almost $79,000 in debt from school loans (70,000) and our land in Alaska (9,000 left on the loan). I have been reading your blog for some time and I was beginning to create a debt snowball plan for us to begin attacking our debt in earnest. I have a two-part question for you:

1. As my school loans are not yet activated and my husband is still in school, we are not paying any interest on most of them because they were subsidized. I would think that starting off by paying off our land should be our first priority (8.75% interest rate). Addressing this debt is not only our highest interest rate of all of our debts, but every dollar we pay toward it increases our net worth. But, according to the debt snowball plan, we should start with the lowest amounts of debt, even though they aren’t gaining interest. What is your advice?

2. This is where it gets tricky. My two part-time jobs end in May and I am sure I will be able to get work after that, but I would say our incomes are relatively impermanent. Right now, we have about an extra $900/month that we could put toward our high debt load. I would love to throw all of that money at our debt, but I’m not sure, given our tenuous income situation, if we should build up our emergency fund even higher first or split the money between them somehow. Our monthly costs are fairly low – about $2500 including monthly payments, rents, living expenses, retirement, health insurance, etc. so having $2000 is probably reasonable, and I know it is higher than what Dave Ramsey recommends, but I still am not sure. We are both the kind of people that would work at the corner gas station before going without work, so I know we will always have some kind of income.
– Lindsay

The reason that the “debt snowball” suggests that people start with their smallest debt is for the psychological boon of actually having paid off a debt. If you start with the smallest one, you’ll get that boon first and it’ll give you the motivation to keep going.

If you’re able to find motivation from other sources, then you’re better off paying off your debts in order of interest rate, with the highest interest rate first.

As for how large your emergency fund should be, I think that if you know you’re going to be losing income in May, I would have a larger emergency fund that even what you already have. You do not want to be in a place where you can’t pay your bills. Yes, a bigger emergency fund means you’re going to put off your debt repayment plan a bit. It’s worth 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. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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