Updated on 09.08.11

Reader Mailbag: Rereading

Trent Hamm

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. IRA contributions and taxes
2. Buying on credit
3. Biggest weakness
4. Using IRA for other purposes
5. Kids and memorable experiences
6. Approaching a pastor
7. Vacation rules of thumb
8. Retirement money for housing help
9. House repairs and debt
10. Insomnia

Over the last few weeks, I’ve been re-reading some of the books that really got me excited about personal finance to begin with, like Your Money or Your Life and The Total Money Makeover. I’m really trying to see what elements of these books speak to me in the completely different personal finance situation that I’m in now compared to five years ago.

Guess what? Most of them are still enlightening and thought-provoking, just in different ways.

This will undoubtedly be fodder for posts over the next few months.

Q1: IRA contributions and taxes
As I understand it, I will have until April 15, 2012 to contribute the maximum $5000 to a Roth IRA for the 2011 tax year. How is the “tax year” determined for these purposes? What I’d like to do is up my savings (I have $0 currently designated for a ROTH IRA) and contribute $5000 by December 31, 2011 because I like using the new year to set my financial goals benchmarks and then “start over” in a sense for the new year. Would any contributions made in February of 2012 automatically count towards the 2011 tax year or would it count towards the 2012 tax year? Or do I specify these things when I make a contribution?

– John

The tax year is still January 1 to December 31. You’re allowed to apply contributions until April 15 to the previous year’s contribution totals. This makes sure that people are able to put bonus money and final paychecks that might have been taxed in the previous year toward the previous year’s retirement contributions.

You can essentially choose which year you wish to designate a contribution in that January 1 to April 15 window. You just have to appropriately label it on your tax return for that year.

It’s a messy situation, I know, but there’s not really a better way to do it that allows fairness for all.

Q2: Buying on credit
My husband and I are considering buying a second TV. The one we want costs around $750 at Sam’s Club.

There’s more than enough money in the bank to pay for this, but we really don’t want to dip into our savings. Sam’s Club has a deal where you can buy the TV with a credit card at 12 months with no interest.

We feel like it would be smarter to invest this money over the next year (as planned) and pay off the TV with the credit card little by little. I don’t see the downside since there’s no interest, but all the personal finance blogs recommend targeted saving for big purchases to avoid buying on credit.

We have zero debt and we currently save about 60% of our income.
– Monica

This is the pitfall of debt. When people look at the future, they assume that it will go along smoothly. They believe that it will always be easy for them to meet their obligations if it’s easy to meet them now and that it will always be hard for them to meet their obligations if it’s hard to meet them now.

Because of that, people in a good situation at the moment tend to burden down their future self with debts because they can’t imagine a future where it’s difficult to make ends meet. I know I certainly fell into that trap once upon a time.

In short, if I were you, I wouldn’t follow either of these plans. Instead, I would start a new savings account and start contributing some amount to it per week or month. When that account has enough cash in it to buy the television, buy it.

Q3: Biggest weakness
What is your single biggest weakness when it comes to overspending?

– Lisa

This is going to sound completely strange. My biggest weakness is startup companies, particularly ones in my areas of interest (particularly gaming).

When a small business is just starting out and I see that they’re doing something of value, I have this innate drive to want to support that business. I’ve really got a weakness for this.

I think it’s because, far beyond the item that my dollar is buying, I see how the money is really helping a real person make a go of their dreams. That’s a very heady icing on the cake for me.

The most dangerous website in the world for me right now is Kickstarter, for that reason.

Q4: Using IRA for other purposes
I have almost $39k in an IRA (it was a 401k rolled over to an IRA) and I have been considering pulling some/all of it out to do a couple things:

1) Pay off a second mortgage (I owe $16,750 and the interest rate is 13% – I know ouch and bad for even taking it.) The second mortgage is $265/month.
2) Catch up on primary mortgage (about 3 weeks behind consistently.) Total is $1050/month, but at 3.375% right now (ARM, 1% max in any direction each year.)
3) Set aside money for an emergency fund (2 paid off vehicles that occasionally need repairs, potentially need to replace 1 in the next 6 months.)

The goal is to reduce expenses to bring our income/expenses in line. While I am not super concerned about the ARM right now, if interest rates start climbing, I want to be in a position to refinance, and we cannot do that with the 2nd mortgage (value of the house is appx. equal to the first mortgage now.) Our household income is about 70K (gross), and part of that is a 2nd job I work that brings in $1600/month that I would like to find a way to quit because I would like to start my own business but find there is very little time after both jobs. So realistically we are looking about about $50k income is what we want to work with. My wife has a chronic illness which limits her ability to work more than she already is and there are medical bills every month that we pay out of pocket. We were over our heads for a bit due to job loss where I was making more money, and have been cutting back a little more every month.

Does the high interest rate of the 2nd mortgage in any way offset the 10% penalty the gov’t is going to charge? (I know there will be taxes as well as lost opportunity costs.) We are not currently adding anything to any retirement accounts as we have been paying off our debts (almost done, about 1 or 2k to go except for the 2 mortgages.)
– Andrew

Even with that high interest rate, I wouldn’t pull the money out of the IRA. The penalty is more devastating than the debt, because not only are you losing 10% right off the bat by taking money out, you’re also, as you mention, losing a ton on the opportunity costs and depleting your IRA. I would only touch it if it comes down to losing your house.

If I were you, I’d just stick to your plan like a bulldog. Get rid of that first debt as fast as you possibly can, even if it means getting rid of some creature comforts. Look at every extra thing you do as part of buying and securing your house. “I’m doing this for this house that I live in and love.”

Throw everything but the kitchen sink at it. You’ll feel incredible when that debt goes away because of your own hard work.

Q5: Kids and memorable experiences
Per your recent mailbag post on taking your kids to an art museum, I was reminded that you are the kind of level-headed parent whose thoughts on raising kids I respect. I don’t have any kids yet, and am hoping to start a family in the next year, and this is a question that’s been on my mind the last few days. I spent the weekend doing a number of tourist attractions, and I was really surprised by the number of children, from infants up. This isn’t a question about badly behaved kids wreaking havoc in public, though! My question actually concerns the well-behaved children – I know my own memories of family trips or visits to museums and whatnot is almost nonexistent before age 6 and even up until age 10 is pretty fuzzy. I don’t remember my first trip to Disney World or Washington DC or the natural history museum. I know that I was there – I’ve seen pictures. But the fact that it happened has little meaning to me.

So why are parents taking their kids on adventures that they won’t remember? It seems kind of pointless to me to take children to see things they probably aren’t all that interested in yet, spending money on tickets and snacks and wrangling strollers and diaper bags, taking pictures that someday the kid can look at without remembering, when if the parents waited just a few years, the kid might actually get something out of the trip.

Is this just about the value of the experience for the kid at their current age, even if they won’t remember it? Is it about the parents wanting to do something and taking the kids along is just how it works now? What age do you think is appropriate to take kids to places like museums or historical sites? What about places geared towards children like Disney World?
– Rachel

Before I get started, I’ll mention that the Art Institute of Chicago is free for children under the age of 14. All three of our children didn’t have to pay a dime to go there. We were also visiting family in the area and staying with them, so there was no lodging expense, either.

The biggest reason we take our children on trips like this isn’t because we think they’ll remember it in detail as adults. It’s so that next summer, we can talk about how much fun the trip to the Art Insitute was (“Do you remember when we leaned in close on those paintings? Do you remember how neat it was to see “Bedroom at Arles”? Let’s look at these vacation pictures where you’re having fun at this museum!”) and easily convince them to go to another museum.

It’s establishing a long history of positive memories, one that will encourage them to go to such things throughout their life. It’s establishing the idea that activities that provide educational benefits can be fun and enjoyable.

As for things that they’ll actually remember – really big things, like international trips – we’re waiting until they’re significantly older. We have three or four big ideas for international trips, but they’re going to wait until our oldest is in high school (at least).

Q6: Approaching a pastor
You’ve mentioned before on The Simple Dollar that if you were in a dire financial situation, one person you would talk to is a pastor at a local church.

How would you even really go about that? What would you go to a pastor for?
– Evan

I would simply go visit a church in my area of the denomination I was most familiar with (and if I wasn’t familiar with one, I’d pick one at random) and ask to meet the pastor. I’d lay out my full situation to that pastor and ask for help on what I should do next.

I have witnessed, over and over again, how local pastors tend to provide incredible help to the needy. If you have true needs and talk to a pastor, they’ll go a long way toward helping you provided you’re willing to do something to help yourself.

People often hold themselves back from this due to pride. Don’t. We all find ourselves in difficult positions at some point in our lives.

Q7: Vacation rules of thumb
How much should I spend for vacation? Do you have a rule of thumb (like 1/12th of yearly net income)?

Until now I haven’t spend much money on vacation, I usually only visit my family twice a year. But I’m plannnig bigger holidays (visiting foreign countries) and I’m wondering how much I could spend. I neither have credit card debts, nor a mortgage.
– Valerie

It depends entirely on how much you value vacations.

If I were you, I would set a budget for the year and identify a certain percentage that I was spending on non-essentials. One plan that’s often mentioned is the 40/30/30 plan – 40% on required bills (like a mortgage, electricity, basic food, and so on), 30% on things I want (like a cell phone bill, vacations, magazine subscriptions, nights out on the town), and 30% for the future (retirement savings, early debt repayment, and so on). Your vacation would come out of that 30%. If your 40% exceeds its boundaries, it should eat from the “things I want” part first.

Within that 30% you can spend on wants, you simply have to decide how important vacations are compared to the other things you want. I can’t answer that for you.

Q8: Retirement money for housing help
My husband and are are 48 and 53 and currently live in a huge 4200+ square foot old Victorian house. We are empty-nesters with our youngest still in college. Our home has 14 rooms but we are only really using about 5 of them. The rest are closed off and used for storage or are just sitting there. It is located on a busy street and a corner lot with very little yard and no garage. We have about 50% equity in our home right now based on current market value. My husband also co-owns his late mother’s home with his 2 siblings and that house is for sale but in this market, we’ve had very few people looking at it. That house is much smaller than ours and a better size for us as we move toward retirement. It is in a more residential neighborhood, has a garage and a large back yard. Our house is only about 3 blocks from his mother’s house.

We are considering buying his mother’s house from his siblings so we own it ourselves. We would then continue to live in our home while doing some repairs/remodeling in the smaller home–maybe over the course of several years. Then we would move to that house and do any repairs/whatever needs to be done to our large home and then sell it. If we did this, not only would we not have a mortgage, but because of the significant difference in prices of the two homes, we’d have a substantial amount of money to put into retirement.

Here’s the downside–first, we really like our current home but it’s a lot of work on upkeep and it seems silly to have so many unused rooms. Second, the only way we could buy his mother’s home while keeping our current home is to tap into his retirement account which I KNOW is a no-no in the financial planning world. We would need about $20,000 to buy the house outright with no mortgage. We do not want a mortgage on 2 homes at the same time.

We’d like some input from you and your readers on if this is a good idea or not. We do know about the tax implications of using retirement money. We just want to know if we’re crazy to even think about this or if anyone has any other ideas we’re not seeing. By the way, we did have some people renting his mother’s home. They moved out and now we are spending a lot of time fixing their “improvements” so we really don’t want to rent it again.
– Monica

I would sit down and talk about this plan with the siblings and see if you can reach an agreement that doesn’t involve multiple mortgages.

One approach might be that you could live in the house rent free for, say, a year, but you would cover the property taxes for the year and shift ownership of that house to 35/35/30, with you having the smaller portion. This would be in lieu of rent, of course. During that year, you could pay down your mortgage on the bigger house while spending your free time repairing it.

At the end of that period, you could sell off the big house that you’ve repaired and use the proceeds to buy the small one.

This is the approach I’d take on that situation. Get the siblings involved in the discussion and see if you can’t come up with a plan that makes you all happy.

Q9: House repairs and debt
About 4 years a go, my husband and I bought an old house (circa early 1900’s). The house was liveable but needed some upgrades to plumbing, electric, central A/C, the list goes on and on. At the time we did not have any children and had minimal credit card debt. Since then we have had two children and have had to do quite a bit of work on the house, adding to our already existing debt. We now have about $35K in credit card bills, school loan payments, car payment (I was driving my grandmothers car before), and childcare costs. Every month we seem to be spending our entire paycheck paying off debt, leaving us little to no money for even our groceries and day to day living, let alone any savings for future home renovations. Our house still requires quite a bit of work – new bathrooms, new pipe, new support beams for first floor to name a few..one job ties into the next and starting one will most definitly snowball into a huge project costing us thousands of dollars – adding MORE debt. I have since taken on a new plan of action and am following a bill payment plan as directed on mint.com to reduce credit card debt. We are going to see how things go for the next 6 months and not do any work on the house until we see if we can reduce our debt with my new plan. If we had kids at the time we bought the house we would have never bought it in the first place…it needs too much work and costs too much money. But now my question is, does it make sense to stick it out and keep the house and make it into our dream home if it means going further into debt – with the goal of it benefiting us down the line? (Maybe use as rental property in the future or sell 10 years from now when housing market will hopefully be better than it is today)Or should we just sell as is now – stop spending money on it and live in a smaller more manageable house in a differnet neihborhood.

We love this house and the area and the neighborhood is really regentrifying every year – new stores and schools and restaurants, we love our neighbors and we’ve just put so much into the house already. My husband is dabbling with the idea of moving in with his mother and renting out our home until we can get back on our feet – which I DO NOT want to do for reasons I need not explain.

I feel like we have hit a dead end – we have debt, yet we need to spend more money…how then, are we ever going to get out of debt?? Unless we make more money – but it would have to be A LOT.
– Laura

This sounds like a situation where you have to make some tough decisions about how you spend your money, and I’m not talking about the house. You have to sit down and decide whether you want to keep that house or whether you want to continue having many of the perks you have in life.

Do you have a cell phone? Do you ever eat out? Do you have internet access? Do you do grocery shopping without planning and without using resources like food pantries? Do you have Netflix? Do you have a car payment when an old beater would do the trick for commuting? Do you use public transportation or avoid it? The list goes on and on.

If you find yourself saying, “Well, yeah, I have that, but I need that,” then you’re choosing that desire over your house. This isn’t judging you – everyone has a different set of priorities. However, if you find yourself not wanting to give something up in your current situation, the only result is bankruptcy. You have to decide what to give up.

Q10: Insomnia
Have you solved your insomnia problem yet?

– Aimee

Thanks to the many readers who emailed me about my insomnia problems.

I finally had a good night of sleep. How did I do it? I took a three hour walk. I followed that with basic steps to avoid cramping, such as eating two bananas and drinking a lot of water. That evening, I found myself so physically tired after the long walk and the lack of sleep that I just passed out at about 8 PM.

I don’t know if that was the perfect solution, but it seems to have done the trick and somewhat reset my sleep cycle.

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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  1. Monica says:

    Note: I’m not one of the Monicas who asked questions today.

    I think Trent’s answer to Q5 is spot-on … especially the part about establishing a long history of positive memories.

    We went on many, many trips as a family when we were young (day and overnight) – national parks, museums, apple farms, historical sites, the beach, etc.

    It’s true … I don’t remember every single activity. But I remember a surprising number of them, and these memories are absolutely priceless to me.

  2. Cheryl says:

    I agree with Monica. I remember trips with my family starting at age 3. Not all kids will retain memories that young, but some do.

  3. Johanna says:

    Q9: “Every month we seem to be spending our entire paycheck paying off debt, leaving us little to no money for even our groceries and day to day living, let alone any savings for future home renovations.”

    If this is really true, and is not an exaggeration, then your problem is much bigger than spending too much money on cell phones and restaurant meals. If the money you earn isn’t enough to keep up with your debts and buy groceries (and if earning significantly more isn’t a realistic option), your best option may be to look into declaring bankruptcy.

    Whether you do that or not, it sounds like you can’t afford this house right now, at least not with all the upgrades you want.

  4. Finance Nerd says:

    @Q1 — Trent is correct, but missing an important step. You must tell the bank/brokerage that you send the money to what tax year you want the contribution allocated to.

    This is a very common situation, so in all likelihood, there will be a box on the form you send in with the money asking what year to apply it to.

  5. Finance Nerd says:

    @Q2 — I have to disagree with Trent here. If you have no debt and are saving 60% of your income, take some money out of savings to buy the TV. Or take the 0% interest deal, and allocate $750 of your savings to pay it off in a year and don’t use that money for anything else.

    While buying on debt is dangerous, saving 60% of your income and being afraid to touch any of it may be too extreme in the opposite direction.

  6. Kristen says:

    Q8: I would take out a home equity loan on your current house before raiding the retirement accounts.

  7. Adam P says:

    Re: Q7’s answer: One thing I hate is when PF bloggers/experts (not just Trent) throw out these rules of thumb without mentioning whether it’s gross or net.

    This 40/30/30 thing for example, if my income was about 105k gross last year and 70k net of taxes, mandatory deductions and retirement funding. Do I take my 105k gross and apply 40/30/30? What about the 25k in income taxes then, is that part of my needs, leaving me roughly 15k left to pay for housing and food? Some of my deductions are for government pension, which is retirement, so is that in the 30% bucket?

    Do I avoid all that and use net take home income, in which case, how do I account for my works Profit Sharing plan amounts which goes directly into my retirement or my retirement savings that are pre-tax and not in my net take home pay?

    Ugh. Throwing out a rule of thumb without giving clarity to what you’re supposed to start with is irritating, and it’s not just Trent who does it so really just venting in general.

  8. Johanna says:

    Q2: I’m inclined to agree with Finance Nerd, but I think we need more information. Monica, are you saving 60% of your income toward any particular goal? Why don’t you want to dip into the savings you already have? If it’s just a matter of wanting to keep the money invested, the return you’re likely to get on a $750 investment in one year is not that great.

  9. JS says:

    Q1: With Fidelity, if you do the transaction online manually, they have an easy-to-find box that lets you pick which tax year you want to allocate the money towards. The automatic investments are allocated to the same tax year as the calendar year. I imagine other institutions work the same way.

    Q2: When we bought our couch set, interest rates were a lot higher than they are now. We did the 18 month no-interest deal and put the money to pay the full bill in a 12-month CD, rolled it over to a 3-month CD and then paid off the bill in full. Putting the money in a CD earned us more interest, guaranteed the principal and made it harder to tap the money. I was pleased with earning the interest, but if I were in your situation, I probably wouldn’t do it just because interest rates are so low right now. Do you have a rewards credit card you could put the TV on and pay it off immediately? I’m guessing that would yield about the same benefit.

  10. Cass314 says:

    I don’t know if this is the case for a lot of people, but I have a few very scattered memories from ages 2-3 and a pretty solid memory of what happened from kindergarten (age 4 1/2 ish) and on. Or, at least, I remember grade school as well as I remember high school. What I think is my first memory, though I guess it’s possible that it’s not really because for the longest time I didn’t know what the memory was of–I just remember sitting under something and everything around me shaking–is of a huge earthquake I was in when I was 1. I finally asked my mom, and she told me it was probably the earthquake. I definitely remember all our major family trips in grade school and after. So I think the chances are quite good that kids would remember.

  11. Ginger says:

    I would take advantage of the 12 month 0% financing, as long as you have the money to pay it off (in reference to Q2). I’ve done it using the home depot credit card and see no problem with it. It is no difference than charging something on your credit card and pay in full every month, imo.

  12. valleycat1 says:

    Q1 – We’ve been catching up on our IRA contributions for earlier years while making current year contributions & it’s no big deal to designate the year you’re paying into. You just need to keep track of which years you’ve maxed out.

  13. Valerie says:

    Q6 — Approaching a Pastor — Many financially settled folks who attend a church provide funding (anonymously) for a Minister’s discretionary fund and donate grocery & healthcare items for folks in need.

    Asking a minister for help requires that you establish a relationship. Attend a few church services and when you find a congregation and that meets your spiritual criteria (I’m unitarian-universalist), ask. Don’t shy away from a spiritual community in a time of need. You may find compassionate folks who can help.

  14. bogart says:

    Q5 I think Trent’s got it right. I’ve puzzled over this one since having a kid myself, so don’t get me wrong, but taken to a logical extreme the “why bother, they won’t remember” angle could be interpreted to mean we just throw kids in a box and leave them there until they are … 5? Why not? They won’t remember any of it as adults, anyway.

    I don’t expect my preschooler to remember the stuff we do now when he is an adult, but I am astonished by how long some memories stay with him already; as one example, he specifically remembers a particular camping trip (of many we’ve taken, most more recently) we took last October that involved a few “unusual” (for us) features — a long bike ride, cooking directly over the campfire. Not that this is going to change his life forever, but we do, after all, have to be doing something, so might as well be (e.g.) that.

  15. Evita says:

    Q2: Monica, buy the TV that you want now. You can afford it. Interest rates are so low right now that either plan will make little difference. I would not bother and just use my savings.
    Q5: the 3 kids are of different ages, it makes sense that some of them will have memories of those trips!

  16. Kathy F says:

    Q4: Instead of taking money out of your IRA to pay off your home equity loan, see if you can reduce the interest rate on the home equity loan by replacing it with a loan at a lower rater from Lending Club. If you have good credit, you might be able to qualify for a lower rate.

    You also may want to consider the impact of the tax deductibility of the home equity loan in your calculations. You probably are in the federal tax bracket of 15% based on your income. If you do take itemized deductions and include the interest on the home equity loan, then the 13% you are paying is effectively more like 10.2% because of the tax deduction. Still high, but if you could refinance that loan with Lending Club or Prosper for less than 10% that might be an option to save money. I would try to find some other option besides cashing out an IRA. You would be robbing your future.

  17. Steve says:

    Q2: it’s not worth the hit to your credit score, small though it may be, to open a line of credit to buy that TV. Especially given today’s interest rates. You’d make $5 or $10 in interest in that time, but a credit inquiry is worth at least $25, and probably more.

    So, either buy the TV and pay out of savings, or save up for it (it shouldn’t take you long.)

    Q5: My wife and I just took our 1 year old on a international trip. She seemed to enjoy herself. Still, it’s not like she learned about another culture. I think we mostly traveled despite her, not because of her. Most of the things she needs right now to grow (for instance, hearing words so she can learn to speak) are location-independent.

  18. Baley says:

    Re Q9: I’m not sure why bankruptcy is unavoidable. She said she has a plan in place to pay off some of the debt. Stick to it! Times will be tough for a while, but once one bill is gone, you’ll have that much *extra* money to put toward another bill or toward savings to fix the house. Use those 6 months to get as caught up as possible, and try more frugal ways of doing things. Then reevaluate!

  19. Courtney20 says:

    Q1 – doesn’t the April 15th deadline also have to do with the income cutoffs for eligibility? That is, it allows people to wait and see what their total income was for the previous year and then make a Roth IRA investment if they are still below the income cutoff, instead of investing during the year and then possibly having to undo some/all of their contributions?

  20. Brent says:

    I’m going to disagree on Q2 as well. It sound exactly like what he did with his Prius. If your “savings” is for emergencies then don’t, but if its general purpose and you could still cover emergencies if you paid for the TV out of it then buy on credit, set the payments to automatic for 12 months and enjoy your arbitrage.

  21. jim says:

    Q2 Monica : You have no debt and save 60% of your income? Good for you. I see no reason you shouldn’t buy a TV if you want and its OK to buy it on credit with some qualifiers. Make sure to pay off that debt before its due. Some of the 0% promotions have a ‘gotcha’ that if you don’t pay it off entirely in full by the end of the promo term then you owe them the full interest rate. So if its a year long deal and you don’t pay it off in full you might owe them 1 years interest at 20-30%. I don’t know if Sams Club does that but make sure to read all the fine print. Also if you have had any problems with credit card debts in the past then you may be safer just avoiding it. Honestly theres not a lot of investment return you can get in a short period in todays environment so playing the 0% financing deal today rather than paying with cash isn’t going to get you much.

    Q4 Andrew : You are generally better off paying that loan down rather than cashing out your IRA. The 13% interest is high but unless you plan to keep that loan for 30 years the amount you’re spending on the interest wouldn’t offset how much you’d lose in tax & penalty by cashing out your IRA.

    I would recommend you try and get some other form of loan at a better rate to pay off that 2nd mortgage. You might be able to get a personal loan from the bank or credit union with better interest or maybe from Prosper or LendingClub.

    Q6 : I’m not really surd what the goal/expectation is of asking pastors for help. I think its a little more likely you’ll get a free meal or other help than a handful of $100 bills. Am I wrong in thinking that churches don’t just hand out free money to random strangers who claim a need? I don’t mean to be callous but pastors also have to be realistic. They can’t help everyone in need and there are a lot of scammers out there who would lie to a church for free money.

    Q8 Monica: Moving into the mothers house sounds like a good idea. I’d put your house on the market and try to sell it and prepare to move. Then if/when you sell it you can buy the mothers house and pay off the siblings. The siblings would be no worse off since you can’t sell the mothers house now. Maybe your house will sell faster.

    Q9 : It really sounds like you can’t afford that house. I’d sell it and rid yourself of the money pit.

  22. Stephanie says:

    Kids and Memories

    Child development experts will tell you that each experience a child has grow his or her mind a little, adds new connections and brain cells. So even though they may not remember it, standing in from of a painting in an art museum or going to a new place will help them expand their minds and make new connections, which will help them in the long run.

  23. jim says:

    Steve #17 said : “it’s not worth the hit to your credit score, small though it may be, to open a line of credit to buy that TV”

    Thats a common line of thinking that makes sense. But I don’t think its necessarily really true that simply adding a card hurts your score.
    I got a Sears credit card to buy a dishwasher cause they were doing the 10% discount thingy. My credit score did not change at all due to getting that card.

    Theres no automatic negative impact from just getting another card. Carrying the balance may hurt them a little but I doubt having $750 on a single card is going to matter a whole lot if at all. Even if their credit score does drop then it will be maybe 10-20 points that should not have a specific short term consequence.

    This is not to say people should run out and get all the credit they want. Just that people shouldn’t run their lives in fear of losing 10 points on their credit score for a few months especially when the formula of the scores are a secret that the public is mostly guessing about and everyones situation is different resulting in different impact on the scores.

  24. jim says:

    Many kids will remember something about trips at ages as early as 3-4 years old. Maybe not enough to warrant spending a ton of money but nobody said you have to do that. I have specific memories of visiting San Francisco when I was pretty young myself, probably 4 years old.

    As others have said,, just because you don’t remember it when you’re an adult doesn’t mean the vacation or outing had no impact to you as a child or in your development.

    Who said the vacation is done just for the kids benefit?? Sometimes I think families go on vacation with very young kids as much cause the parents want a vacation more than anything. Just cause you have a 2 year old doesn’t mean parent’s shouldn’t enjoy a vacation and bring the kid along.
    You can also have a family with children of various ages. My sisters kids span 9 years. Should they go on no vacations until the oldest is 14 so the youngest will be at least 5? Maybe the vacations are more for older kids and parents and the youngest kid (or infant) is brought along.

  25. Mister E says:

    I have spotty memories of being 3 or 4 years old. Stuff from pre school and yes, family trips.

    We rented an RV and toured upper New York State.

  26. Kathryn says:

    I’m with Stephanie and Mister E. This is why DH and I take our daughter on local cultural outings and inexpensive, family-oriented trips now. It’s good for family bonding for us all to get out and share a fun experience. And, even if DD doesn’t remember these little trips, they’ll help her grow into an open-minded, intelligent woman.

    We’re saving the more expensive, elaborate trips until she’s older, just because we don’t have money for a lot of them and want to save them for when we think DD will get maximum benefit from them. If we had tons of discretionary income, we probably would have started traveling the world years ago.

  27. Re Q6: The church I attend has a program for rent and utility assistance. You don’t have to be a member to apply.
    Obviously not everyone who needs it can be helped; there’s only so much money to go around. But churches with programs like these probably know about other assistance programs in the area and can tell you how to apply.
    You may find other forms of help, too. My church has both a preschool and day care center whose fees are based on income. Thus a struggling family might be offered free or extremely cheap child care so that an at-home parent could get a job.
    My advice would be: Ask. If one church can’t help, another one might. At the very least you will probably learn about other ways to get your needs met until times are better.

  28. con says:

    Re Q6: I totally agree with Donna Freedman. If a church cannot help, they might have resources to direct you toward. I don’t really think it would matter to find a church that would align with your beliefs. Any church, if they are able and willing to help in any way, I would think would if they could. Maybe offer to help them out with a little maintenance, etc. in return.

  29. Annie says:

    I think you should buy the TV on your credit card with 0% interest for the 12 months. Not only will you keep your savings account full but you have the option to pay off this debt with no interest payment over a 12 month period. I think there are certain opportunities out there like this that you should take advantage of especially since your only going to charge 750.00. I would be more hesitant if it was more than that like 1500 or more. Good luck to you and enjoy your TV.

  30. Tom says:

    Did anyone actually run the numbers for Q4? Its kind of lazy analysis to say “Oh penalty bad!” in response to his entire situation, which includes:
    1. Consistently late on 1st Mortgage
    2. Gouging rate on 2nd mortgage
    3. Sounds like he doesn’t have an emergency fund
    4. Having a tough time dealing with loss of income and big medical bills. (Medical bills, coincidentally, qualify for penalty free withdrawls)

    Let’s say you withdrew $16,750 from your IRA, to pay off the 13% 2nd mortgage. You’ll pay $1675 in the penalty, and I’m going to guess your in the 15% tax bracket currently, so about $2500 in taxes (Total is about $4200)
    If you orginiated a 30-year, 13% $16,750 loan today, over the first two years you’d pay about $4300 in interest (You pay over $2000 a year in interest every year for the first 12 years). If he’s not going to payoff the 2nd mortgage in less than 24 months, I think you could make an argument that it actually could make sense for him to tap the IRA, rather than dismissing it out of hand.
    Now, saying all that, reading your letter makes me nervous for your financial situation in general. A $1050 mortgage on $50K of income is cutting it close, in my opinion. If you can’t realistically make ends meet on that money, you shouldn’t really be considering dropping the 2nd job and starting a new business. But if paying off the 2nd mortgage is going to have a Dave Ramsey debt snowball effect for you, I don’t think its that bad of an idea.

  31. deRuiter says:

    Q1 “It’s a messy situation, I know, but there’s not really a better way to do it that allows fairness for all.” What’s messy? Tax year runs Jan 1 through Dec 31. You are given an additional 3 1/2 months to make the ROTH contribution for the year which ended Dec. 31. If you want to contribute to your ROTH in the year in which you earn the money, do so. As an earlier commenter mentioned, some people get end of year bonuses, or want to get their income tax refund to use for the contribution.

  32. Rachel says:

    Q2: I don’t really understand why Monica would want to buy on credit, or why some readers are suggesting she should. She says that they have “more than enough money in the bank to pay for this” and that they save 60% of their income. How much is she going to make on investing the $750 in the next year? Really, I just don’t get it…pay for it now and enjoy it. Why bother with financing something you can easily pay for, even if it is interest free for 12 months? Seems like a hassle for no good reason!

  33. Courtney20 says:

    “If you orginiated a 30-year, 13% $16,750 loan today, over the first two years you’d pay about $4300 in interest (You pay over $2000 a year in interest every year for the first 12 years).”

    Except either it’s not a 30-year loan, or he’s already on year 20 of the loan. Using a mortgage amortization calculator with the known variables (current balance and monthly payment) he would have had to take out a 30 year loan of $24000 at 13% in 1981 to get to his current balance today.

    Either way, he is paying considerably less interest than your example suggests.

  34. Tom says:

    Either way, he is paying considerably less interest than your example suggests.
    I sincerely doubt it.

    I had to make an assumption because he doesn’t give out the exact terms, but maybe I was inaccurate quoting interest from a 30 year mortgage. Maybe it’s a 15 year mortgage and maybe he’s 74 months into paying it (which isn’t a bad guess, that would put the original balance close to $21K in 2005, when piggyback loans were common; His first mortgage numbers suggest his original balance was north of $200K, so maybe he did an 80/10/10 finance scheme). Even in that scenario he’ll pay about $4100 in interest over the next 24 months. At 13% interest, you pay a significant ratio of interest to principal for a long time in a loan.

    He’ll break even on the taxes and penalties in about 16 months at 265 a month. If he is struggling to make ends meet, doesn’t have an emergency fund, and has significant medical bills likely to occur with his wife, I don’t think withdrawing some retirement money is that bad of an idea. My point was maybe you should run the numbers before saying the interest doesn’t outweigh the penalty, because in this case, I believe it’s actually pretty close.

  35. Vivianne says:

    Another vote for the “travel when they’re young.” My DH did a lot of travelling, and visited Italy when he was 8 or 9 — thought it was the most romantic place he had ever seen, and wanted to go back there, especially Florence and the Amalfi coast.

    My kids now know, and have seen with their own eyes, that there are places where people don’t have electricity or running water or internet, places where people don’t speak English, and places where it doesn’t rain, or where there’s snow on the ground in the summer. In some places there are high rises where kids have to walk three blocks to find a patch of grass to play on. And nothing like spurring curiosity and research like having kids plan part of the trip, or travel based on a book tie-in. We’ve done Blue Balliet — Hyde Park in Chicago; Magic Treehouse — the Cloisters and Central Park, NYC; Jean Fritz — Boston and Philadelphia.

    They may not remember details, but I hope it’s shaping their outlook.

  36. littlepitcher says:

    Trent, I know it’s not on your diet, but a great old hillbilly stress reliever and soporific is a pint Mason jar of (fat-free) buttermilk a half-hour to an hour before bedtime. Yes, I’ve tried calcium pills, and no, they did not work.

  37. jim says:

    #32 Rachel : “I don’t really understand why Monica would want to buy on credit, or why some readers are suggesting she should.”

    The idea there is that they would borrow the money at 0% and then invest it elsewhere for the period of the 0% promo. For example if she could borrow $10,000 on a 0% promo and then put it in a CD for 1 year making 4% then this is a free way to make $400 in interest with someone elses money. Now in this case Monica is only talking borrowing $750 and wouldn’t be likely to make more than 1-2% in a guaranteed investment so here it makes little sense to bother for $7-15 in interest. But she has no ‘need’ to borrow money, its just a trick to get some free interest.

  38. Melissa says:

    @5, I agree with everything everyone here said but also wanted to add, taking our children on adventures may not always stick in their memories, but they stick in my mine. My daughter probably won’t remember being scared to death of the giraffe’s tongue at the zoo last summer, but my husband and I always will. There’s lots of good reasons to include them on these trips.

  39. Finance Nerd says:

    @ #30, #33 and #34 — it’s actually not that hard, he gives you everything you need to calculate it.

    Current balance $16750, current rate is 13%. That is about $180 dollars of interest per month. He is paying $265 so $85 dollars of principal per month. Obviously the interest amount declines as the balance declines, but since most of it is interest, it declines slowly.

    Putting this into excel tells you he would pay just over $4k in interest in the next two years, and decrease the principal by just under $2300.

    I’m assuming you meant 1991, not 1981 for the year of origination. Even if that is accurate, he still is going to pay $4K in interest over the next two years. The current interest charge has NOTHING to do with the original balance, and everything to do with the current balance. You simply do not need to know the original balance in order to calculate current interest.

    Tom had it right, treating it like it was originated today gives you the correct answer for current interest as long as you know the payment and current balance.

  40. Finance Nerd says:

    @ #31 — I agree, I thought it odd that Trent called it messy and brought up fairness. It’s not messy, they just give you an extra 3.5 months if you want them.

  41. Courtney20 says:

    Finance Nerd – yes, I did mean 1991 and not 1981 (which is embarrassing, because I turned 30 last month and not 20…)

    Tom – I *do* agree that he should run the numbers. Another thing to account for in those numbers is what his after tax rate is (if he’s able to deduct all the interest).

  42. jim says:

    13% interest on $16,750 is $2,177 a year.

    But its not just a mater of paying 13% on that 2nd loan or not. The IRA money isn’t sitting idle. If you cash that out you lose the potential growth.

    Lets say he has his IRA money in a safe bond fund that makes 4% a year. Thats 4% interest on $22,333 that he’s losing each year if he cashed out the IRA. Thats $893 per year. Hopefully his retirement does better than that long term. If we assume a reasonable 7% return long term then thats $1563 lost growth.

    Also the $2177 interest he is paying on the mortgage may be tax deductible so he should be getting a tax break on that. In the 15% bracket thats $326 in tax savings. Could be more if theres state income taxes.

    So the 13% interest lost isn’t the only factor here.

    Between potential lost growth of the IRA funds and the tax benefit of the mortgage interest deduction he may be looking at more like net difference of $288 a year rather than $2177 a year. That would be more like 9-10 year break even point.

    We don’t know enough details to give a certain answer here. If he itemizes and has reasonable future growth in his IRA and only has 8 years left on the 2nd mortgage then cashing out the IRA may put him behind financially.

    I do agree that if they are really struggling currently to make ends meet then the IRA should not be considered ‘off limits’ due to the taxes and a 10% penalty alone. Paying 10% penalty to avoid bankruptcy and avoid paying 13% interest could make sense.

    I had the impression their finances were closer to on track today. He’s making $70k and considering dropping down to $50k. I don’t think he’d be thinking of quitting the 2nd job if they were currently on the edge of bankruptcy. In fact a motivation of the question seems to be him wanting to quit the 2nd job to attempt that side business.

    He said that “We were over our heads for a bit due to job loss where I was making more money, and have been cutting back a little more every month.” that sounds more like the financial problems were mostly do to losing that job in the past but now that he’s gainfully employed again they are getting back on track. He said they are “cutting back a little more every month” which kinda sounds like he’s still in the process of cutting fat out of their spending, which implies there may be more fat to cut. I mean if he’s already cut all the expenses he can then he’d say that instead of saying they are “cutting back” in present tense.

    He said : “we have been paying off our debts (almost done, about 1 or 2k to go except for the 2 mortgages.)” Clearly they are making progress in the right direction on their debts. Its unclear how much extra they may be paying towards the debts but once they have that “1 or 2k” paid off then thats extra money to snowball into the 2ndd mortgage.

    If they can currently manage their expenses and still cut some more spending, keep working the 2nd job rather than trying to start a side business, and get that 2nd mortgage paid off out of pocket then thats the first choice I think. Moving the debt to a cheaper interest loan would help too. If he could get a 7-9% rate at Lendingclub or something then thats a lot better than 13%. Securing another loan may not be as easy to do but its worth investigating.

  43. Michele says:

    Q6- I work at a downtown Church and we get calls and doorknockers ALL THE TIME.

    ‘Hi, I’m traveling to … (800 miles away) and I ran out of gas. Can you put gas in my car/truck/motorhome to get me there?”
    ‘Hi, I need a down payment for rent. Can you give me $600?’
    ‘Hi, my electricity is about to be turned off. Can you pay my $600 bill?’

    Note- 99% of the people who call are NOT of our denomination (Roman Catholic) let alone go to our Church.

    The Pastor will go out to each person’s house, evaluate the situation, and then give what he can. We give no matter if they are parishioners, or not. If they go to Church, or not.
    It does not matter what their affiliation (or no affiliation). Our pastor gives if there is true need.

    We get these calls 8 or 9 times a DAY and we are a very small church in a small town.
    We also get people who have been turned out of the Gospel Mission around the corner because they don’t want to stop drinking for one night.

    People who are parishioners at a Church and have fallen on hard times DO get help right away.

    But, the mission of the Catholic Church is to serve the poor and needy…regardless of your circumstances.

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