Reader Mailbag: Rain

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. Capital One and ING Direct
2. Increased used car prices
3. Freelancing for a college student
4. Advance baby planning
5. The optimal mortgage size
6. Eating what you believe
7. Roth 401(k)?
8. Dealing with student loans
9. Bankruptcy and divorce
10. Saving or debt repayment?

The upper Midwest has been drenched with rain lately. It seems like every day seems to alternate between quick torrential downpours, cloudy, sunny, and back around. Over and over again.

This is the strangest June I’ve seen in a long while when it comes to weather.

Q1: Capital One and ING Direct
I am certain you have heard the news ING Direct Bank is being acquired by Capitol One. Are you planning to remain a customer of this bank? What are some other good companies you can recommend for competitive interest rates and no fees?

– Jeff

For those unaware, earlier this week, the online bank ING Direct was purchased by the large American bank Capital One.

For me, this means very little unless there are changes to how ING Direct operates. If there are no changes to how ING Direct works, I see no reason to change banks.

My expectation is that little will change. The only new thing I would expect is an ING Direct-branded credit card with some sort of cash back directly into an ING Direct savings account. Depending on the cashback rate, this is something I may use. I would also expect that Capital One ATMs will soon allow ING Direct cards to be used with no fees. In other words, the immediate changes I see are nothing but positives for ING Direct users.

Over the long term, who knows? All I can say is I’m not going to make changes without a real reason.

Q2: Increased used car prices
Check out this article at CNN Money about the increase in used car prices.

If the price of used cars increase, is there a point at which you think it would make sense to buy a new car instead of a late model used?
– Amanda

Even right now, buying a late model used car is just a good rule of thumb to operate by. It’s not true in all situations, particularly when you’re buying with a loan rather than buying with cash (because new cars often have much better financing than used cars). Also, a new car with great reliability and fuel economy numbers is probably a better deal than a used gas guzzler that breaks down regularly.

What this article indicates is that there are going to be more situations where a new car is a better buy than a late model used car – or any used car.

Simply put, the rule of thumb that used is always the best bet will have to start being calculated on a case-by-case basis. Now more than ever, it makes sense to do the research and know exactly what you’re buying and what you should be paying for it. Don’t go onto a car lot without the knowledge you need to make a good buy.

Q3: Freelancing for a college student
Recently, government funding has cut my hours at work (from full-time with benefits and a set schedule to hardly part-time…). I’m a college student with one semester left, currently interning for a local restaurant. I am in charge of their marketing. I have plenty of ideas, and although I am a Communication Studies major, I found that I am enjoying the work and that this has potential to turn into something profitable. I’m interested in starting to freelance, but that’s also where my problem lies. How does one start to freelance? I was hoping you could point me in the right direction. Thank you for your time, and for all the work you do.

– Andrew

Freelancing, honestly, usually begins with relationships. You’ve done something that makes a connection to someone else, either through who you are or through your work. Because of that, they want to hire you to fulfill a need.

If you’re starting from scratch and don’t really have a portfolio of successful marketing campaigns to show off, then you’re going to have to work for your connections. Your first step would be to really make the marketing for the restaurant you’re working for shine, and try to gather data on the results generated by your marketing.

While building that, don’t be afraid to beat the pavement. Get to know lots of small business owners in your area. Chat with the owner of every small business you can, just so they know who you are. Keep a copy of the work you’re doing in your car or in your bag so you can show it off if it naturally comes up (don’t force it into anyone’s face, though).

If your work is good and your relationships are solid, you’ll start finding opportunities. It may take a while. Once the opportunities start coming in, they tend to snowball from there. Almost always, it’s the first few clients that are the toughest to reel in – and they’re the ones you really need to hit a home run with to make that snowball start rolling down the mountain.

Q4: Advance baby planning
My husband and I have been married for 10 months now and are 23 years old. He has been working full time ($63,000/yr) for a major corporation and I part-time (about $15,000/yr) for a church since our marriage. During this time, we’ve been living only on the income from his job. All of the income from my paycheck (along with any savings we had) went straight to first paying off the $20,000 in student loans (we did this 4 months ago) and then funding an $11,000 (3 months post-tax) emergency fund as well as starting to put 4% of his income into retirement (which his company matches). I am currently three months pregnant and have to leave my job at the end of the month (staff positions run July-June only). We have been living on the income from his job thus far because we plan on me staying at home full-time with the baby. While we can continue living without issue, the cost of living here is extremely high, there is not much left over after expenses for savings to come from his paycheck. We will need to replace my husband’s car in the next few years and would like to also save money for the down payment on a house (though we’re not sure we can even afford a house in this area without living farther away from my husband’s job than we would like, so this is may not be a possibility). We could probably reduce our spending a little and have an extra $100 left over each paycheck, but can’t really cut much more than that (our rent, which is fairly cheap for this area is 40% of his take home pay). I am trying to find work that I can do until the baby comes, and possibly afterward, but it is not looking hopeful. It really worries us that we will have so little for savings and were wondering what sort of advice you had. It is a very wide open question, but figured that it couldn’t hurt to ask!

– Erin

The first comment I’d make is that, although the expenses of young children are often loudly touted, they’re often absorbed in large part by lifestyle changes of the parents. Having a baby makes the things that you once easily did into a much greater logistical challenge. You can’t just hop into the car and go out – it doesn’t work like that any more. Because of that, people often end up spending far less after the birth of a child, more than enough to take care of the cost of diapers and so forth.

I’m not clear on whether you’re choosing to go the stay-at-home mom route for a while, but if you are, you’ll also have a strong ability to take advantage of home economics. Take charge of meal preparation, for example, and put in the time to find low-cost things for you and your husband and your baby to do on the weekends. There are lots of things out there – you just have to find them.

Unless you have a route to employment that will earn significantly more money than the cost of child care, I would forego it at first. Infant child care is far more expensive than child care for older children.

Erin has another somewhat related question.

Q5: The optimal mortgage size
I was also wondering how you suggest is the best way to figure out how big of a mortgage we could actually afford. There are calculators online, but they usually assume people are willing to pay a much higher percentage of their income towards a house than we are willing to (we’d like to keep payments under 25% of our income, or at least 1/3). We would like to get a 15yr. mortgage. I have very good credit (don’t know exact numbers, the estimators say I’m somewhere between 720 & 780) and my husband has no credit (never had any credit cards & student loans were all mine). I just want to know if you know of any way for us to calculate how much mortgage we can afford based on how much we would pay per month, rather than going the reverse?

– Erin

The easiest way is to just use a normal mortgage calculator and plug in numbers until you find payments that match what you’re looking for.

Your first step is to figure out what payments you’re shooting for. If you’re bringing in $63,000 per year, a monthly payment that amounts to 25% of that salary is about $1,300 per month.

Then, you might use Bankrate’s mortgage calculator and put in a loan for $150,000 at 15 years and 3.75% interest. This would give you a monthly payment of $1,090.83. You could then adjust upwards and find that you could get a mortgage for $180,000 and still be below your target payment amount.

Q6: Eating what you believe
I have struggled with how I should express one of my only strong beliefs.

I am a vegetarian edging towards veganism. Whilst I am aware of the health benefits that come with this life choice I am motivated only by trying to minimize animal cruelty and exploitation. Almost none of my friends or family are vegetarian and neither is my partner whom I live with. I have never forced this belief onto anyone but sometimes when I think about it I wonder if this is morally ok.

I know that people are less likely to listen to somebody who judges others for not sharing their beliefs but I wonder, if I was an animal being exploited, would I forgive somebody who knew what was happening yet kept my mouth shut and even socialized with those who were funding my exploitation?

I’m sure many are against murder and child abuse and would have no qualms about telling somebody who did either of those that they are wrong, the only difference I can see is that murder and child abuse are already commonly accepted as being wrong. If this were not the case do you believe it would be right to live your life not murdering or abusing children in the hopes that others might follow your ideals?
– Ben

Clearly, your diet is something you believe in from a moral standpoint and you have solid reasons for doing so. The question is whether the costs of evaneglizing your beliefs is worth the potential benefit. Moving from living your beliefs to evangelizing your beliefs means moving from telling people about why you’re eating a particular way when they ask to telling people about it regardless of whether they want to know.

In other words, is it worth it for you to annoy and create some negative sentiment from, say, ten people in order to convince one person to change their diet? Are you willing to use this moral stance of yours as a “filter” for the people around you, likely driving away some of the people who don’t agree with you?

That’s the cost of moving from living what you believe (something everyone usually respects) to evangelizing what you belief (something a lot of people dislike). Some will disagree with you and will end up being confrontational. Others won’t care and will dislike having your views pushed upon them.

If your belief in the issue is strong enough and that central to you, then you should go that route. It’s really up to you and what you value. Are you willing to drive away some people in order to convert a few?

Q7: Roth 401(k)?
My employer brought back 401k matching this year after a two-year hiatus. Recently, they announced that they were going to begin offering something called a Roth 401k. I know what a 401k is and I know what a Roth IRA is, but what is a Roth 401k? Is it better than a regular 401k?

– Tasha

A Roth 401(k) combines features of the normal 401(k) and the Roth IRA. It works like a 401(k), except you can put in post-tax money instead of pre-tax money, which means that you’ll pay income tax on it this year but the money will be tax free when you withdraw it at retirement (matching funds from your employer are pre-tax dollars).

So, is it a good deal? It’s basically the same deal as a Roth IRA with three differences, two of them positive. One, you can contribute far more to a Roth 401(k) than to a Roth IRA in a given year – $16,500 to $5,500 as of this year. Two, a Roth 401(k) can get matching funds from an employer, while a Roth IRA cannot. Three, with a Roth IRA, you can choose the investing house you want to deal with, while a Roth 401(k) locks you into whatever investing house is running the program.

My opinion is that if you have a Roth 401(k) available to you, you should contribute enough to it to get every dime of matching funds from your employer. If you wish to save more for retirement, I would open a Roth IRA and contribute to that. This will allow you to have more control over the investments (and almost always wind up with a lower-cost investment, meaning more returns for you).

Q8: Dealing with student loans
I am 25 and earn approximately $2460 net per month; I’m paid bi-weekly so twice a year, I earn an additional paycheck meaning $3690 for each of those months. I have $60k in student loans (approximately $30k in federal loans at 6.675% and approximately $30k in private loans at 3.5-4.5%). My living expenses are approximately $460 per month (I barely drive, my car was a gift, I take the bus to work for free or ride my bike, I split the rent with my boyfriend, we don’t pay for utilities, etc.), leaving $2000. Each month, I pay $1400 ($1100 for federal, $300 for private) for student loans, $300 for savings, and then keep the remaining $300 for miscellaneous expenses during the month. I actually make a loan payment each pay period so sometimes I pay $2100 in one month and the same goes for savings- sometimes I put $600 into savings.

My e-fund is currently at $3,000 but I would like to double it. I have no consumer debt but the student loans are terrifying. I would also like to start saving for retirement but just started a new job and I am ineligible for employer contributions until a year from now. I realize that I could start a Roth or traditional IRA but am thinking that maybe I should pay more money on the loans if I have money remaining each month. I am conflicted because the interest rates are relatively low for the student loans and I would likely get a higher return were the money to be invested. However, paying off the loans quickly would give me great peace of mind. At this current rate of savings and payments, I anticipate that the loans will be paid off by the end of 2014 and I would hit the $6,000 mark in savings sometime at the end of next year. Do you have any suggestions or does this seem on track?
– Peggy

First of all, your student loans are large, but not bone-crushing. There are people that have student loans that reach well into six figures and are jobless to boot. Your situation is manageable.

As for whether you could beat the interest rate on the loans with investments, I would say you would be able to beat the private loans but not the public ones. I’m not clear on whether any of those loans are adjustable, but a 6.675% loan should definitely be your focus given your financial situation. I would throw all of my extra payments at that loan and make the minimum payments on other loans.

In your situation, I would probably hammer away at the debts for the next year, then sign up for your employer’s retirement plan and get all the matching you can from it. If you want a bigger emergency fund, by all means spend a few months building it up. I don’t think it’s necessary, but if it’s making you nervous, make yourself feel safe.

Q9: Bankruptcy and divorce
Under mounting debt pressure I was convinced to apply for Chapter 7 bankruptcy in 2003 with my now ex-husband. It was discharged in Dec. 2003 but I am still seeing some of those debts on my credit report. How long am I going to see those? Also, after the divorce I agreed to deed the house we bought back to my husband, we did the proper paperwork through the court in 2006. Now my ex-husband is in serious arrears with the mortgage on the house. The house is still being reported on my credit report. How do I fix this? I have the deed indicating the home is his, do I contact the loan company? I’m afraid I may have messed up somewhere and now I have this nearly repossessed home on my credit!

– Ellen

Bankruptcy stays on your credit report for ten years. I would expect that those debts, at this point, are having only a small impact on your credit score and they’ll disappear entirely in a couple of years. I wouldn’t sweat it.

If the 2006 mortgage appears on your credit report and the mortgage company reports that your name isn’t on the loan, you’re going to have to contact the credit agency and see why this is appearing. It shouldn’t be.

If you think that your name should not be on this mortgage and you can’t get any attention from the mortgage holder, it’s time to contact your lawyer. You need to be sure that your name is no longer on the mortgage or the title.

Q10: Saving or debt repayment?
As of this month (June 2011), my husband and I will have no more credit card debt. We’ve been paying $300 – $500 a month toward paying down our credit cards for the last 14 months.

We still have a car loan of $16,000 (at 8.5% APR) that was going to be the next target of our debt repayment effort, using the debt snowball idea to pay $580 toward that debt every month. After that, we have (combined) $45,000 in student loan debt. Hence my inclination not to accrue more student debt.

I am hoping to go back to school in January of 2012, to start a Masters in Accounting. If I attend the State University, and we start saving $500 a month next month (July 2011), and continue to save that amount every month I am in school (until June 2014), I will be able to graduate with my Master having accrued no further debt, but it would mean not paying any extra toward our car payment.

A possible solution I have read about (on your site and others) is to sell the car that we owe $16,000 and get a less expensive one. That idea is hampered by the fact that we’re about $2,000 underwater on the car loan and the fact that my husband has absolutely no interest in selling the car, no matter how much I try to convince him that it would be better for us financially in the long-run.

Given those variables, what would you suggest? Should I stop paying off our debt in order to keep from accruing more over the next two and a half years, or should I get a student loan (usually have a lower APR than 8.5%) and pay off the car loan? Or is the some other, better option?
– Megan

If I were you, I’d focus on getting rid of the car loan as fast as possible, then see what happens with regard to your education and the need for loans. A bird in the hand is worth two in the bush, and a paid-off car loan at that interest rate is definitely a bird in the hand.

This might result in you having to take out a small student loan when you go back to school, but your monthly cash flow will be far better without that loan and you should be able to keep the loan amount small and pay it off quickly.

There’s also the fact that you might not necessarily go back to school in January, in which case you’ll be glad that you have that car loan out of the way with minimal interest paid.

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.

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