Reader Mailbag: Sad Child

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. Spouse with large savings
2. Split payment offer
3. Late taxes and debts
4. Elizabeth Warren
5. Timing of Roth IRA contributions
6. Funeral budgeting
7. Orange Loan from ING
8. Escrow account question
9. Loose change
10. Empty savings for bills?

One of the most difficult challenges of being a parent (at least for me) is dealing with the justified sadness of my children. Something bad happens in their life and they’re sad. What should I do?

The trick is to find the right balance between consoling a sad child that you love very much (and you don’t want to see hurting) and their own needs for personal growth, which includes a personal ability to deal with such disappointment.

This morning, my son was very disappointed because a friend wasn’t able to visit him. I felt bad for him – he was really looking forward to the visit. My response wasn’t to buy him things and baby him, though. I simply gave him a hug and told him that his friend would be able to visit again in the future.

It didn’t stop his tears – and it didn’t stop my desire to do something to help. But soon he was acting normally again and we headed outside to ride on our bicycles, both of us having grown a little bit.

Q1: Spouse with large savings
I make 52k/yr working full time and my wife around 30 working part time and otherwise staying home with our baby. We live in a major metro area so cost of living is ridiculous. I own my car and the only debt I have is 33K in student loans for grad school. I pay all bills in full every month. I spent a lot of time outside the US and dont have any savings or retirement money. My wife however has major savings, about 35k of her own and about double that’s her family has put aside from her. With my student loans (still in grace, just graduated), my wife has encouraged me not to save and put every extra dollar into student loans. She can cover an emergency and its better to save on all the interest. I think she’s right and have followed this. The money I “save” costs me in the daily loan interest accruing so its counterproductive I think.

However, I do want to start saving for retirement and have opened a Roth IRA and plan to enroll in my employers Simple IRA plan. What advice do you have?
– Dwight

I agree with your wife. Right now, you have an enormous emergency fund sitting there to protect you both in the event of the unexpected. There’s no reason not to head strongly towards debt freedom.

However, if you are not saving anything for retirement, I would start saving as soon as possible. Make sure that you’re saving 10% of your income overall (meaning including any employer contributions).

Once you hit that baseline, there’s no reason not to dump everything you can into your student loan debts.

Q2: Split payment offer
My bank has offered me the opportunity of paying my mortgage in two payments a month. It would not be a problem for me. But, because I do not believe banks are out to help me I am questioning the offer. Is there an advantage for me to pay my loan in this manner, or does it just give them my money earlier?

– Sadonya

If there is no additional fees associated with this payment split, it will likely save you a small amount of money over the lifetime of your loan. However, before you sign up, ask the lender for a full payment schedule over the course of your remaining loan years.

The idea with such a payment split is that, instead of having your full payment applied to your loan on the last day of the month, half of it would be applied halfway through the month. That means you have half a month during which the balance of your loan is lower than it would otherwise be, meaning it accrues less interest and more of your payment at the end of the month goes towards principal. This results in an earlier payoff of the loan.

Sometimes, banks will facilitate such an arrangement for you without a catch. Usually, people just do it themselves by making half-payments twice a month on their own. Other times, banks will charge a fee for this arrangement, resulting in the consumer not saving anything at all.

Get the full details from your bank before you sign up, but this should be a net positive for you.

Q3: Late taxes and debts
I’ve been reading with interest your articles about how to convince others to put their finances in order, and thought you might have some ideas about how I might help a close relative who has found steady employment and a stable family situation, but is haunted by some bad decisions she made in the past.

Her main problem is with the internal revenue service, who take a thousand dollars a month from her paycheck because of unpaid taxes, owed dating back to a time when she was self-employed. This was a difficult time for her, from a work-flow prespective, but also in term of organization and psychological issues, and I’m not really sure what the facts are.

She doesn’t know what interest rate she is paying, or what the penalties are, or when she will be done.

Do you know whether such settlements can be renogiated, at least in terms of penalties and fees? Do you know any sources of information about such cases? I am worried that she is paying a lot more than she should have to in fees and interest, and won’t be out from under this for a long time.

I believe a similar situation exists with her student loans, but I’m not sure. I’m very worried about mounting fees and interest.

She is well-educated, but very emotional and in something like denial, and has a hard time talking to us about her situation. She has “hit bottom” and stabilized her earning and is improving, but I think there’s more she could do. The loans are from law school, and the taxes are from the time after law school when she couldn’t find consistent work.

She has talked to financial planners who were obviously just looking to get some fees from her, and doesn’t want to rely on someone in that industry.
– Tom

The first thing to recognize is that you can’t make someone open up to you. If you try to force them to do so, you’ll often just drive that person away. It sounds like you’re unsure as to the specific problems your relative is having, but you’d like to help.

My suggestion would be to simply sit down and offer your help to her. If she doesn’t want it, fine. If she does, then work with her to get things going down the best possible course. She’s got to want your help, though.

As for renegotiating with the IRS, you can certainly try, but they usually have no interest in renegotiating unless the person actually is unable to pay the wage garnishment.

Q4: Elizabeth Warren
There’s a movement afoot to draft Elizabeth Warren, the personal finance writer and professor, to run for the Senate in Connecticut. Do you think she should run?

– Kevin

Absolutely. I’m a big fan of Elizabeth Warren and I certainly hope that more people with her type of fiscal sanity can get elected to Congress.

I think one quote from her sums it up: “To restore some basic sanity to the financial system, we need two central changes: fix broken consumer-credit markets and end guarantees for the big players that threaten our entire economic system. If we get those two key parts right, we can still dial the rest of the regulation up and down as needed.”

We need more of that in Washington, in my opinion. If I were in Connecticut, she’d almost assuredly get my vote.

Q5: Timing of Roth IRA contributions
Do I have until I file my 2010 taxes or until April 18, 2011 (regardless of when I file my taxes) to contribute to my 2010 Roth IRA?

– Jordon

You have until the first of those two dates (the second date is actually April 15, not the 18th which is when taxes are due) to contribute to your 2010 Roth IRA. If you file your taxes before the final day, then the day you file your taxes is the cutoff date.

So, if you file your taxes on February 28th, that’s your cutoff date. On the other hand, if you file an extension and then don’t actually file your taxes until July, your cutoff date is still April 15th.

Q6: Funeral budgeting
I know this is a terribly morbid subject, but I have three grandparents in their mid-late 80’s who live 12 hours away. At some point I know that I will be going home for a funeral and I don’t want it to break the budget. Do you have any tips on how to budget for this or what kinds of special travel deals are out there for people going to funerals? I will have my husband, 7 year old, and 1 year old with me when I travel, and my family lives 2 1/2 hours from the nearest large airport (and I live 1 1/2 hours from the nearest airport here), so flying probably isn’t a great option. I know it will be a tough enough time so I don’t want to have money issues to add to my grief when this occurs. Any ideas and help you can provide would be wonderful.

– Gina

Most airlines offer “bereavement fares,” which offer very nice discounts in situations where you are traveling for a funeral or for a major illness of someone close to you. Here’s Delta’s bereavement fare program, for example.

You usually have to provide some basic information to get the reduced rate, mostly just so that your story can be validated. Information required includes your name, the name of the ill or deceased person, your relationship to that person, and contact information for a hospital, hospice, or funeral home so the information can be verified.

It’s hard for me to determine from your email how long the trip would be, but it certainly sounds as if airline travel is your best option in this situation.

Q7: Orange Loan from ING
Got this offer:

“We’re pleased to offer you an easy to access line of credit designed to help you plan for the expected and cover the unexpected.
The current variable APR for this offer is 9.900%
The Orange Loan Account is responsible borrowing, made simple:

* No annual or monthly fee
* No minimum withdrawal
* No transaction charges or prepayment penalties

There’s no tedious form to fill out. Just answer three short questions, confirm your info and you’ll immediately receive your line of credit.”

I have about $6,000 in credit card debt at 14.99% that I’m slowly paying off ($250/month is the max I can afford). That’s all the debt I have. Would there be any potential pitfalls to opening this loan account? What can I expect the interest rate to do? Will this affect (either positively or negatively) my credit score?
– Trevor

This line of credit certainly will help you pay off that credit card just a bit faster. It’s hard to say what exactly that rate will do, but I would not expect a rate hike if you don’t make any negative credit moves. In any case, I’d keep the credit card open so that you can bump the debt back and forth if needed.

Will it impact your credit score? In the short term, I would expect it to have a slight negative impact, which will turn into a positive impact when you pay off the credit card debt and continue a positive payment history.

I think this is a solid move, provided you don’t get yourself into additional debt to finance more purchases.

Q8: Escrow account question
We recently refinanced and they did not escrow enough to pay our tax payment. The bill just came out and it is $2,895.98 due 4/1 our escrow account only has -$1,424.06 in it. It looks like they just paid the taxes and now our account is short. We pay $210.28 into it per month and the taxes are 2 twice a year. I was actually writing you to see what we should do about the payment and not having enough in there, but it looks like they just paid it last week and now the account is short. What should we do next? Should I dip into our emergency fund and send in a check for the balance? Or, instead of paying off our credit card this month should I use that money and send it as an additional payment into our escrow account? We always pay off our credit cards and don’t have any debt other than our mortgage, but we don’t have a lot of “extra” money at the end of the month and we really worked hard at building up our emergency fund and I don’t know if this is something that is a “true” emergency that we should be using this for. Or, should I wait for them to send me a bill? I’m not sure what they do in this instance, but we are just trying to avoid having our payment go up in the least amount possible. Do you have any advice?

– Annie

I’m guessing that your bank is handling this escrow for you as part of an additional payment along with your monthly mortgage payment. I’m also guessing that you’re able to make up the shortfall in your escrow account out of your personal savings.

If both of those statements are true, I’d probably just contact the bank to see what the next step should be. Likely, your monthly escrow payment needs a positive adjustment. Your bank, in all likelihood, will simply adjust your monthly escrow amount up a bit rather than having you send in an additional check.

This should be a very straightforward matter to resolve with just a phone call.

Q9: Loose change
My question is, I have around $4000- $5000 in loose change I have been saving over the last several years. What do you suggest I do with it? I am 32 with two young children myself. My wife has a fully funded retirement thru her work. I have opened a Roth IRA but very little in it.

– Dave

There are lots of questions here. Do you have any retirement for yourself? If you have none, I’d probably open a Roth IRA for yourself and put all of the change into there.

If your retirement is covered, I’d look at other options. Do you have any savings for your children’s education? Are you saving for any other big goals in life, like a home? Do you have any major outstanding debts?

Look at the options before you, figure out the one that seems the most important in your life, and put the change towards that. Almost any significant life goal will present a choice to you that’s better than $4,000 in loose change.

Q10: Empty savings for bills?
I currently have a few thousand dollars in my savings account as a rainy day fund, approximately 1 month’s bills plus a few hundred dollars. I also have stocks, and a 401k. I contribute to all of the above on a biweekly basis (20$ into rainy day/savings, highest company matched amount into 401k, 75$ into a company stock purchase plan). I have numerous debts that I’m working to pay off. Currently the one with the highest interest is a credit card, whose balance is about the total of one month’s bills. I could empty my rainy day fund and completely pay it off, which gives me back an extra 100$ or so a month to use on paying off the next debt. I know the general rule is to never touch savings or your rainy day fund unless its an emergency, but I see it gaining about 30 cents a month, whereas my credit card is gaining about 40$ in interest a month. My urge is to just take the gamble and pay it off. My girlfriend is also pushing me to do this since she is lucky enough to be fairly well to do for her age, and she feels that she can help me should that ‘rainy day’ hit. However, i know that mixing up relationships and money is also a bad idea.

I’m trying to sort through all of the factors in my head, and I’m not really sure what the best approach would be. Do you have any advice?

Also, with each bill I pay off, I plan to increase my biweekly rainy day savings contribution by 10-15$ so it rebuilds faster, and the company stock contribution by 1% of my take home. I know it will slow down my avalanche approach, but I’m still young, and I know time is an investor’s best friend. I feel like any delay I incur by taking a little bit longer to pay down my debts will pay off in spades later on down the line.
– Matthew

In your case, I think I’d go somewhere in the middle. I’d have a smaller emergency fund and put the rest toward the credit card debt.

How much? One common rule of thumb that’s passed around is to have an emergency fund of $1,000 as you pay down your high-interest debts. I think that’s a pretty good target, as it usually covers the deductible on most insurance types while not emptying out the account to do so, but small enough that you’re not saving for events with small likelihood of ever occurring.

For now, I think I’d lower the emergency fund to $1,000, then use the remainder to wipe out your debt. Once it’s gone, I’d raise that emergency fund back to about two months of living expenses.

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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