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. Thoughts on national debt
2. Working through distractions
3. Debating options for covering education
4. Books and ebooks as gifts
5. Trouble thinking about future
6. Cheap gas or not?
7. Checking fees
8. Christmas and birthday overlap
9. Pressured into mortgage
10. Food as Christmas gift?
Is the car gassed up and the tires inflated? Check.
Do we have everything we need packed away? Check.
Has everyone gone to the bathroom? Check.
Does everyone have everything they want in their backpacks? Check.
Do we have some road snacks? Check.
Do we have our GPS set to our destination? Check.
Usually, making sure all of these checks are in place adds roughly an hour to any significant road trip we take.
Q1: Thoughts on national debt
How do you feel about the U.S. debt? Why is it so huge? Can the U.S. ever pay it back? Is the U.S. bankrupt? What should they do to better their economic situation?
While it would be nice to have no national debt, I don’t consider it to be a sign of the apocalypse like many do. While debt is slowly climbing as compared to our gross national product, it’s not close to the all-time peak. The raw number isn’t nearly as important as a comparison to gross national product, because the more we produce, the more debt we can easily handle, and it also helps account for inflation, too.
The reason we have a national debt is that some of our leaders think we should be spending more on programs like education, while others think taxes should be as low as possible. When you pass both types of initiatives, you result in spending more than you bring in. The government makes up the difference by selling treasury notes. The U.S. only goes bankrupt if people stop buying the treasury notes and they’ve never really had a problem doing that.
The only way to get out of it is if the leadership collectively says that they’re either going to spend less or they’re going to raise taxes and then actually do it. There’s no other way for it to happen. In a very generic sense, if liberals are elected then we’re likely to move in the “raise taxes” direction (particularly on the wealthy) whereas if conservatives are elected, we’re likely to move into a “spend less” direction. I think they both have good arguments; the only thing that frustrates me is when either side tries to paint the other one as somehow “evil.” Neither perspective is evil. They’re both valid and worthy of discussion and debate.
Q2: Working through distractions
I try to get a little extra work done in the evenings sometimes, but it rarely works. Sitting at home trying to work is loaded with distractions, whether it’s my wife or my kids or something I need to do around the house or something I’d rather be doing. How do you block it all out?
For me, the best way to handle this is to have a place in the house that’s designated for work. For me, it’s the small bedroom upstairs.
In that place, I’ve tried to eliminate as many distractions as I can. There’s no phone in there and, when the door is shut, it’s pretty quiet, too. The walls are plain. It’s mostly just a place for working.
When I go in there, I turn off the cell phone and I try to set everything up to maximize my work focus. I fill the screen with work-related things right off the bat and I try as hard as I can to dig deep into something and get into a “zone” of deep focus on a project.
Sometimes it works well. Sometimes it doesn’t. But without those steps, I’m pretty sure it would never happen.
Q3: Debating options for covering education
I’m 30, she’s 27. We currently have $20k in retirement savings–$15k in a Roth IRA and $5k in a targeted account through Vanguard (no 401k option). We are anticipating needing about $15k to cover her last year of grad school (Social Work). The three options we are considering are:
1. A federal loan at 5.41%
2. Taking the money out of our retirement account
3. Borrowing the money against our paid-off 2008 Toyota Prius
We really would love to keep what we’ve saved for retirement, but feel it may be a better use of our money to not take on more student loan debt (currently about $60k at 4%). A car loan would be 2.5%, but again, we’d rather pay with what we have, and it would begin repayment immediately.
The first part of the question is whether this solution makes sense. Second, should we decide to take the money our of our retirement account, does it matter when? This year our combined incomes are about $49k, next year it will be about $35k. Do we take it all out now? Do we split it up between this year and next? Do we do it all next year? Are one of the other options better? Is there another option we’re not considering?
The problem with taking money out of a Roth IRA for this is that you can’t really “repay” it. You’ve already used up your contribution windows for previous years. All you’re doing when you “repay” it now is just pay in using your current year’s contributions. It’s what you would do anyway.
If you’re taking money out of the Roth below your contribution amounts, there’s no tax concerns. The only concern is if you withdraw more than you contributed, which I would really, really advise against.
Honestly, if I were in your shoes, I would use the car loan. A car loan at 2.5% is incredibly low and if that provides enough to pay for this, that’s the route I would take.
It depends on what they would find useful. Do they mostly read using their ebook reader (Kindle, for example) or do they mostly read using print books? The best gift is in the format most useful to the recipient.
A slight advantage for print books (if other factors are equal) is that they can be traded or sold very easily once you’re done with them. This is much harder to do with ebooks at this point without blatantly committing piracy.
My feeling is that unless you know the recipient well, a print book is the best default choice. However, for some people, an ebook is a better choice.
Q5: Trouble thinking about future
I am 24 years old, living at my parents’ house with my fiance. I am a teacher and I make $42,000 before taxes and deductions. My fiance has a great job and he makes about $46,000. Together we almost make $90,000. At the age of 24 I think that’s pretty solid, especially for this market.
Living at home reduces our living costs tremendously. We only pay our bills, no rent payments or anything. So you’d think we’d have some serious cash in savings or something, right? I mean, what the heck else do we have to pay for?
The bane of our existence can be stated simply in two words: Student. Loans. We both picked our college of choice in 2006, before the market crashed. We went to expensive schools thinking “the better the school, the better the opportunities we will be presented.” That terrible, yet simple misconception has left us $150k in the hole. We pay $1400 a month for student loan payments. We will be paying that for the majority of our lives. We could have a vacation home for that monthly price tag. Most of the loans are my private student loans. Consolidation is not an option without cosigners, and our parents are maxed out and get denied. I feel like we’ve tried everything and gotten nowhere.
The path we are currently following worries me = we are both jacking up MORE student loans so we can get Master’s degrees. BUT – master’s degrees in each of our fields will significantly raise our income. About 25% just the first year actually. But in the meantime, we’ve added on about $15,000 more in loans. Are we just digging our hole deeper? What do you think the next step is for us? Should we dedicate the next ten years to paying off those loans? Or pay them off slow and steady and just consider it a life-altering financial error? Do we invest in a home and try to make some equity on it? Or is driving up our debt just another mistake?
I guess at age 24, it’s hard for us to see the future. We think about “the now” and we feel like we’re missing out on life. It’s very difficult for us to imagine how we will feel when we’re 30, 40, 50…. For some reason it just doesn’t seem as important as “the now,” and I’ve read enough of your posts to know that that mentality is foolish. We’d love to know what you think, and (unfortunately) I’m sure there are many stories out there that are just like ours.
On average, higher degrees do increase income. Over the course of a career, it usually makes up for the additional educational cost.
The problem is that you’re talking about the average. You can find situations where people make far more – they find themselves in the right situation at the right time. On the other hand, you’ll find people who get a higher degree and barely make more than they originally did – or less. A degree isn’t just an immediate ticket to more income.
The advantage that you have is youth. Getting into student loan debt when you’re young means you have a much longer period to recover from the financial impact of it and to take maximal advantage of the benefits of the degree.
The key is to take every advantage of this educational opportunity. That doesn’t just mean getting a degree. That means building professional contacts and relationships that will last. That means putting in every ounce of effort to get good grades and, if applicable, access to good internships. That means developing resume items that will matter.
This varies quite a bit, actually. Do any of the fuels have ethanol added? If so, the gas will get poorer mileage. What’s the actual difference between the prices? Also, what kind of car are you driving and how fast do you drive? All of these things can affect the answer.
You need to really figure this out for your own car. My suggestion is to record the data over a few tanks. The next time you fill up, write down your odometer reading and what kind of fuel you added. The next time after that, write down your new odometer reading, what kind of fuel you added, and how many gallons you added. Do that a few more times, then switch to a different type of gas. Get a few fill-ups for each type.
Then, figure out the average mileage you get for each type of gas. Figure the difference in odometer readings between fill-ups (subtract the smaller reading from the larger), then divide that difference by the number of gallons added. That’s the fuel efficiency your vehicle gets for that type of gas. Figure that out for two or three fill-ups and average them (if you have three different numbers, add them together and divide by three).
Once you know the fuel efficiency of each type of gas, divide that fuel efficiency by the cost of the gas. That will tell you how many miles you get, on average, for a dollar’s worth of that gas. So, if your car gets 30 miles per gallon on a type of gas that’s $3.00 per gallon, that means your car gets 10 miles per dollar on that gas.
You’ll simply want to buy the gas that gives you the highest miles per dollar.
Q7: Checking fees
Just got a letter from my bank that they’re going to charge me $10/month if I don’t have a certain amount of withdrawals or deposits every month. Do you know of any big banks that offer no strings attached free checking? I’m currently with an online bank as well, but I want an option in case I need to deposit cash in person.
A lot of banks have moved to a “tiered checking” system like this where there are minimum requirements to get the truly “free” checking (or to get checking with a bit of interest).
Many banks do this based on balance level – you have to maintain a certain balance to keep free checking. Others, as you mention, are now requiring a certain number of transactions to maintain free checking.
The banking industry tends to move around on these offers over time depending on the needs of the bank. When they need more money sitting in their coffers, they tend to offer better deals on accounts. When they have plenty of money in their vaults, they scale back on the accounts. Your bank is scaling back right now – and it seems like quite a few are, from what I can see.
Many banks will let you deposit checks into a savings account, so perhaps you can consider just having a savings account at your local bank.
Q8: Christmas and birthday overlap
My son is due to turn four on December 24. In previous years, just combining Christmas and his birthday hasn’t been a big deal, but he’s starting to notice that other kids have separate birthdays from Christmas and get gifts twice. What’s a good way to handle this?
I have two friends who are in this very situation, so I looked at their situations for ideas.
In one of the families, they simply held a birthday celebration about two weeks away from Christmas. Even though it wasn’t really close to the child’s birthday, it did give a sense of them having their own special day.
In another family, they simply got the birthday child extra gifts at Christmastime and rolled it all into one day.
Personally, I like the first idea better. Regardless of the presents, many children enjoy having a day that’s special for them and rolling it into Christmas takes that away.
Q9: Pressured into mortgage
I live in Australia, and I’m being pressured into getting a mortgage by friends and family. For reference, I earn $77,000 a year, and my wife brings in another $50,000. A realistic mortgage for a place nearby would be $300,000 minimum. Repayments on this based on variable interest rates right now would be about $500-600 a week.
We have $30,000 in savings, $30,000 in retirement (superannuation), and about $1,000 in shares.
Here’s my problem: I don’t plan on getting a mortgage because my wife is going to become a stay-at-home mother as soon as we have children (in the next year). This is going to severely restrict our income, so I would rather rent, save the difference and invest in other ways. A mortgage will just stretch our budget too far, considering we’d have to pay taxes, rates, etc.
But my friends and family keep saying that, “you can afford it, you just don’t want to”. But after a mortgage payment, bills, etc, we would have about $50-60 left each week. Who can live and sustain a family on an extra $60 a week? What if interest rates go up? (Fixed rate loans aren’t popular here and only last for a few years). What happens if the plumbing breaks, etc?
I get the argument that I should be putting money into equity rather than just savings, but on my income my family and I would be eating rice and beans for 25 years, and not just that, we wouldn’t have money for *anything else*. Not a substantial savings buffer, nothing. Our mortgage payment would be over 50% of our income each week.
They say I should just sacrifice that and put the money into equity. I say I don’t want a mortgage until I can comfortably sustain it on my income.
Should I heed their advice? I don’t want to stretch my income beyond what I can bear.
Ignore these people. Ignore them completely.
You never, ever want to put yourself into a situation where your housing expenses are eating the vast majority of your income. You’re going to be constantly miserable and completely at the mercy of your employment situation and the housing market, let alone the Australian interest rates and any other emergencies that come along.
The people encouraging you to do this have no real grasp of your finances. Don’t listen to them.
I don’t just think that homemade food items are an acceptable gift, I think they make for some great gifts. In fact, a couple of the items I actually hope to receive this year are homemade food items.
As always, a good gift has to be thoughtful of the recipient. Some people aren’t really big fans of these kinds of items, while other people are. If you know what things a person actually likes, then a homemade food gift can really strike those chords.
When you hear friends arguing against it, it’s likely that they’ve received some item in their past that was less than appealing to them that has shadowed their perspective.
If you know someone would enjoy a particular item, it always makes for a great gift.
Got any questions? The best way to ask is to email me – trent at thesimpledollar dot com. Iíll 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 many, many questions per week, so I may not necessarily be able to answer yours.