Reader Mailbag: Rainy 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. Climbing the car ladder
2. Apolitical
3. Upside down car loan
4. Military debt
5. Basic will question
6. Mortgage or not?
7. Health care costs
8. Buying silver
9. I’m almost 30, what’s next?
10. Career and life crossroads

My children have had their last four soccer games cancelled on account of rain. Our basement water pump has kicked on every few minutes for days. Our front yard is like mud.

Winter is over. Spring is here.

Q1: Climbing the car ladder
One of the oft-touted pieces of personal finance advice I hear is to avoid financing a car if at all possible. The idea is that one should buy a car within their means and set aside a “car payment” in savings every month so that when the car dies, they will have more to replace it.

But I’ve recently found myself in a situation where I realized that only works in theory. I finished school last year and since then have been working an entry-level job. I live in Indiana, so cost of living isn’t particularly high, but I make just shy of $24,000/year before taxes. I had about $3,000 set aside hoping not to need to buy a car for awhile yet, but life happened and I needed to purchase one pretty urgently.

I started looking for cars in the sub-$3,000 range, and what I started to discover is that none of the cars available in that price range could reasonably be expected to last the 20 months it would take me to save even to replace them if I can really only save $150/month. Almost all of them are mid-to-late ’90s models with 190,000+ miles on them, and not Hondas or Toyotas or other makes that regularly see 250k. Even if they did make it that long, they wouldn’t do so without repairs, which would push the date back even farther.

So how is one to mount the “car ladder” and start using cars till they die while saving for their replacements when the bottom of the ladder is so shaky? Is there a hidden caveat to the guideline? “Until you have $5,000 saved, ride a bicycle. Not only will you eventually be able to afford safe, functional cars, but you’ll keep your medical bills in check so you can save faster!”
– Lindsay

Quite often, this advice is given with the assumption that you already have a car in your possession and that these cars lead into a “trade-in train” where you trade in your old car and pay the difference with cash.

For some people, yes, a bicycle is an option. For others, buying a low-end car with a loan is the best way to start out. Then, set a monthly “car payment” that’s a bit higher than your real payments.

Let’s say you get a car with $150 per month payments to the bank. Decide that your monthly “car payment” is going to be $180. Use the first $150 of that payment to make your real car payment, then put the next $30 into savings. When your car is paid off, keep making the “car payments” and put the full $180 per month into savings. If you stick with that, you’ll be slowly upgrading your car with each trade-in and never having to actually pay interest on a car loan.

Q2: Apolitical
The one thing that I am constantly impressed with is your ability to exercise your capacity for delivering frank advice with an apolitical stance. So much of the media we consume is highly political on one side of the spectrum or the other, and I find myself more receptive to your ideas because they are carefully refined to reach everybody. Kudos, sir! Is this a conscious effort on your part? Do you comb through your posts in an attempt to be more diplomatic? I am always struggling to be more diplomatic in how I speak to those who may not agree with me, and I’d be interested in hearing your thoughts about it.

– Veronica

It’s indeed a conscious effort on my part. On the rare occasions when I’ve not done it, I’ve regretted it.

The truth is that the advice on this site works for everyone, rich or poor, conservative or liberal. Surrounding the advice with political talk might entertain some, but it’s likely to drive a lot of other people away for no real reason.

It also helps that I’m politically a moderate. I don’t trust either major party, though, because everything they claim to stand for and promise to people never actually happens when these people get to Washington.

Q3: Upside down car loan
I have a 2007 Toyota Camry 50,000 miles good condition, runs terrific. Problem being my car loan is $366.00 and it is killing me. Yes i know i am what they call upside down. How do i get rid of it, the loan is with wells fargo I have had it for a yr and a half.

– Sue

If you’re upside down – meaning that the car is worth less than the remaining balance on your loan – your only options are to allow it to be repossessed, to keep paying on the loan, or to sell it and make up the difference out of pocket.

Since I don’t have a full picture of your finances, it’s hard to say which option is the best for you. Given that you bought a used Camry and are paying $366 a month, I’m going to guess that you either have just a three year loan or you have poor credit. If you do already have poor credit, the repossession won’t be as painful to your credit as it might be otherwise.

My best advice is to simply try to stick with it and pay it off unless you can easily find a buyer for it.

Q4: Military debt
I know someone who has quite a bit of student loan debt and who will soon be leaving for boot camp for the U.S. Army one semester short of graduation. I’ve looked for information concerning what types of loans and how much the government will refund those who join the military but have always come across conflicting information. What all can you tell me about student loan repayment for those joining?

– Jamie

The big thing to note is that many types of student loans receive some repayment assistance from the military. This can actually be a very beneficial program.

It’s important to note, though, that this program doesn’t work with all types of student loans. Some loan types, particularly private ones, are excluded from this offer.

On the flip side, some specific loans interact well with military service. You’ll want to inquire about each of the loans your friend has.

Q5: Basic will question
I have a question in regard to making a Will that I would like some advice on. My husband is 90 years of age and I am in my early 80’s. At present time we know we should have a will but have kept putting it off. We do not drive any longer and family are not close by so do not know of any lawyers in our area. I have read that you can make out a will online that would be valid in what ever state you live in. We are in Florida. What can you advise us about doing it this way?

– Joyce

There are many online services that will help you prepare a will, such as Legal Zoom. I highly recommend either using a lawyer directly for will preparation or using a service such as Legal Zoom. I have heard of too many questionable experiences from do-it-yourself will kits.

If you have a local lawyer you trust, I recommend using them. The process of creating a will is very simple and you shouldn’t be charged significantly for it.

It sounds like your will should be a fairly straightforward document. Good luck.

Q6: Mortgage or not?
I’m 39, and I purchased my home with cash. I’m thinking of taking out a $200K mortgage and investing that over a 25 year period since I have very little in retirement funds. At my age, my financial adviser thinks its a good idea because I’ll still have equity in my house, and it will basically force me to save money for retirement by buying some money at a relatively cheap rate. Would you agree this is a good idea?

– Glenn

This is not a good idea at all unless you want to introduce a lot of risk into your life. You’re basically giving yourself a mortgage, which constrains your monthly cash flow for a very long time, in exchange for an investment that may or may not retain its value. If you somehow magically got a mortgage that charged a 0% interest rate, it might be worthwhile, but considering you’re going to be paying 4% or more interest constantly on this debt just to invest it in something that’s going to have to either be risky or highly illiquid to beat that rate, I wouldn’t do it.

Assuming that your advisor works on commission, he has a lot to gain by you doing this. If you invest $200,000 and he gets a 1% commission, he’s pocketing $2,000 for your risk.

Instead of taking out a mortgage and handing that interest (and most if not all of your gains) right back to a bank, make a “mortgage payment” every month straight into whatever investment you have in mind.

Q7: Health care costs
I have a question about how best to handle health care costs. Here’s the situation: I’m employed at a high-paying ($90,000/yr) job that I absolutely love and will not consider leaving. My wife is just beginning a career as a novelist, which means she is self-employed and has very little income. We both obtain health insurance through my employer. It is excellent health insurance, but it costs us $500/month in premiums. Believe it or not, that is the cheapest family plan my company offers.

We both have chronic health conditions that require weekly outpatient visits and several expensive medications. Even though we are paying fairly low co-pays on those, it all adds up. I put 10% of my pay into a health FSA, which we use for the co-pays. Then, add to that the things that a flex account won’t cover anymore – transportation to and from appointments, ingredients for special diets, etc. We also spend a lot of money dealing with flare-ups. For example, if we’ve gone out for the evening, we sometimes need to take a taxi home because public transportation isn’t an option during a flare-up. Or we require some housekeeping or cooking assistance, because both of us are sick at the same time and there is no one available to maintain the household. We have very few family or friends in the area, so we generally need to pay for the help that we require.

I realize that we are very blessed to have my income and insurance. I get that there are families with worse health conditions and fewer resources. Still, all of these costs added together reach nearly 40% of my salary. That makes it very difficult for us to save money for other important goals, like buying a house.

We seem to have too much income to qualify for social services programs that are designed to help people with medical costs. Are there any other options you can think of for reducing our health care costs?
– Ron

There are no social services that exist for people in your situation. In the eyes of most social services, your income protects you.

In the past, such situations have been aided by family, but the family as a structure isn’t as strong as it once was and many people are left in your situation.

Your best bet would be to try to build relationships with others in the area who have similar conditions as your own. Are there any groups for people with your condition? Quite often, the support you can give to each other can make an enormous financial difference for all of you.

Q8: Buying silver
I would like to buy some silver boullions since the value of the dollar is going down so is it a good idea? And how do I go about it? I am handicapped and starting to feel insecure about the economy.

– Sylvia

It’s not a bad idea to have a small amount of your assets in precious metals if they make you feel secure. However, the current prices of gold and silver give all the signs of being an investment bubble (oversaturation of buyers, for one), so I would never invest all my money in it.

Your best bet is to shop around, both online and locally. If you’re going to buy online, make sure you’re buying from a reputable business, even if it costs you a bit more. If you reach a point where you feel uncomfortable at all with a particular seller, back out and go elsewhere.

I’ve had success buying from a local shop, to tell the truth. They offer competitive prices and the ability to carefully inspect what you purchase.

Q9: I’m almost 30, what’s next?
I’m about a year out from my 30th birthday and it’s dawned on me that I need to make some changes. I am currently in a job I do not like and living in a town I have outgrown.

I would like to relocate to the San Francisco Bay Area for both personal and career reasons. I need to prepare my finances before making this move. I have the normal twenty-something debts: car, a few credit cards, a small personal loan, cell phone, cable, etc.

I know that most of these will need to be paid off before I make any sort of move. However, San Francisco is much more expensive than where I’m currently living. I’m giving myself a year to get my finances in order. How much do you recommend I save prior to moving?

Also, I’m looking to jump into a different career field. I’m currently working in insurance and burnt out after nearly 10 years. I have 14 years of strong work experience but no degree. I’m currently going to school while working both a full-time and part-time job. Can you suggest some ways to highlight my strengths so the lack of degree isn’t an issue?
– Chelsea

Quite often, a degree is used as a limiter for job applications. They’ll state that having some degree is a minimum to apply in order to reduce the number of applicants.

The truth, though, is that if you can get your resume in the door, they’re going to care more about the skills you offer and the experience you have than anything. Highlight those things when you construct a resume. Spend time wording them so that they’re as strong as possible without being false.

As for how much to save prior to moving, it depends heavily on whether you have a job in hand when you move. If you do, I’d have at least one month of living expenses in hand (plus deposits) before going. If you don’t have a job, I wouldn’t go without three months of living expenses (plus deposits).

Q10: Career and life crossroads
I left my job last November, where I was working at a large corporation as a financial analyst and just flat out hated the work and the company. I have since taken a job at a small family business that is currently being run by my one of my bestfriends. She recently left her own career to take over as the General Manager to help save her family business which is really struggling financially. I took this job originally to just make some extra money and help her out with her workload as I interview for other positions, but there is now an opportunity for me to take over as the Director of Finance. This would be a nice opportunity for me but also a huge challenge and risk considering the financial condition of the company. I would have to take a much lower salary than I am accustomed to, just because of the company’s financial condition. In just a couple of months working there I have found that the small business atmosphere is very appealing to me and being able to turn around this company would be a huge accomplishment!

I also just received an offer for another financial analyst type position at a large company. This is a very strong and stable company and the salary offer was considerably higher. What would you do? What things would you think about when making this decision?

I feel like I am at a huge crossroads in my career/life and any advice would help.
– Mike

If I were you, I’d go for the Director of Finance position at the small company.

For one, you’re happy there, it seems. For two, it offers you much more of an opportunity to make your mark. For three, that type of position is going to look a lot better on a resume later on than being an anonymous analyst in a large company.

It probably does come with more risk, but you’re happy there and with great risk comes great reward. You have an opportunity there that you won’t have at the other company.

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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