Updated on 02.06.12

Reader Mailbag: Saint Bernards

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. Vacuum sealed bags
2. Boardgame with new couple friends
3. Investing for house down payment
4. Roth IRA versus Roth 401(k)
5. Hedging bets for retirement
6. Multiple savings “funds”
7. Extra mortgage payment impact
8. Car selling advice
9. Dodgy mortgage lender behavior
10. Going back to school

Sarah and I attended a Super Bowl party yesterday hosted by a couple who have two giant Saint Bernards as pets.

I love the dogs. They’re like children in a very big body. They want to hug you and play with you and they wear themselves out from all the excitement.

Q1: Vacuum sealed bags
I was wondering what your take on vacuum seal bags is. We have 2 freezers and stock way up on meat and frozen vegetables when we catch a really good sale. Especially since we live way out in the boonies with the closest store being 17 miles away. My question is, with the price of the vacuum seal rolls (we make our own bags) how much are really saving by doing this. I do wash, sanitize and re-use the bags until they get too small to use. So, I get 3-5 uses out of each bag depending on what the size of it was to begin with.

– Megan

I used a vacuum sealing system for a while. I found that they merely make it possible to store food in the freezer for just a little while longer than ordinary Ziplocs. Eventually, the freezer burn gets to the vacuum sealed stuff, too.

Dollar for dollar, I’m pretty happy with the gallon freezer Ziploc bags that we use. We get at least a dozen uses out of them (using masking tape for the labeling) and there’s no equipment.

The only disadvantage with freezer Ziplocs is that the food doesn’t stay protected from the freezer burn for quite as long, but if you’re reasonably consistent about eating your frozen goods, it’s not a big deal.

Q2: Boardgame with new couple friends
You’ve probably run into this, so I figure I would ask you. My wife and I play board games and card games with each other quite a lot and we also play with other friends. We’re going to have a couple over soon that’s open to trying some games, but have never played anything other than things like Monopoly when they were kids. Do you have any “go to” games for this situation?

– Shawn

My default games for these situations is either Ticket to Ride or Settlers of Catan. I usually bring them both out and give a one-sentence explanation of each, then let them decide.

However, I throw that out the window if I know there’s a game that will really fit the other interests of the people involved. For example, my wife has a friend who is really into the “zombie apocalypse” subgenre, as is the friend’s husband. We’re already planning on inviting them over to play Last Night on Earth after dinner.

Remember that you never want to overwhelm someone with a game if they’ve never played many games. Some games are just more complicated than others, and when in doubt, go for the one with simpler rules.

Q3: Investing for house down payment
I am 26 and my soon to be fiancee and I want to buy a house in 5 years. We are debt free, already have an adequate emergency fund, and I recently got a raise from 62k/yr to 85k/yr. I had been saving $100/month for the down payment, but that’s not nearly enough and I intend to take the difference in my paychecks and put it all to saving for this goal. I have been using SmartyPig to save for this, but the interest rate of 0.7% is bumming me out. Would you recommend investing in bonds? I know bond duration should be less than my investment time frame, but I’m also concerned about the tax implications (as I’ve never invested in bonds, and only know that they are less tax efficient than stocks). I already max out my Roth IRA contribution in an aggressive portfolio, and I contribute another 5k/yr to a similarly aggressive portfolio at my employer (no match there, sadly). Is there any tax sheltering I can do for my house down payment saving? I know IRAs allow you to withdraw for a first time home purchase, but I’m concerned about losing out on my retirement goals if I do that (plus 5k/yr is not enough to get me where I need to be for this down payment). Am I worrying too much about taxes and should just go for a short- to intermediate-term bond index fund at Vanguard (where my Roth IRA is)?

– Rick

I think you’re worrying far too much about the taxes here.

The real reason people worry about tax sheltering is that they’re trying to minimize their total tax bill taking into account a lot of years. For example, they might want to pay minimal taxes on their investments in a year where they earn a lot of income from other sources, and pay more of the tax load in a year where they earn little income from other sources. Eventually, you do have to pay the income tax on your investments – and it’s only on the gains, anyway. If you invest $100,000 and earn a 2% gain on that investment and find yourself in the 25% tax bracket, you’re talking about only $500 in taxes.

It sounds like you’re looking at a fairly short term period where you’re worrying about this, and it doesn’t sound like you’re expecting significant changes in income during that period. The only real advantage that such tax manipulations might get you is if you think you won’t be prepared to pay such an amount one year, you expect huge changes in how income taxes are assessed, or you think you might see a big income bump. If neither of those is true, you have very, very little to be worrying about.

Q4: Roth IRA versus Roth 401(k)
My employer gives the option to contribute to a regular 401K and/or a Roth 401K. I currently contribute 14% to the Roth 401K, 0% to the regular 401K, with my employer matching the a percentage of the first 6%. My employer matches the first 4% and I currently do not contribute to a Roth IRA. My yearly contribution comes out to about 12,000.

Should I instead be contributing in the Roth 401K up to what my company matches, then maxing out the Roth IRA at 5,000, and then anything leftover going back into the Roth 401K?

The past couple of years I have put any increases in my salary straight to retirement contributions. I should be on pace to be able to max out the Roth 401K and Roth IRA contributions within the next 4 years so it’s more of a short term problem for me.
– Sully

The first thing I’d do is make sure I was milking every single drop of possible employee matching, as the value of that blows away any tax benefits you might get.

Once that’s covered, I would max out the Roth at $5,000 and contribute the rest to the normal account. This diversifies you in both pre- and post-tax retirement savings, which hedges your bets against whatever may come in terms of taxation changes.

You seem to be completely on the right path here. Good work.

Q5: Hedging bets for retirement
My husband (31) makes $120,000 and I (26) make $70,000 per year, so we are well over the income limit to contribute to a Roth IRA. We would like to take advantage of the Roth accounts at least in part to hedge our tax burden in the future. Currently my husband contributes the max in a non-deductible, traditional IRA and I contribute 5% of my income to my Roth 401k. My employer matches that 5% dollar for dollar and has a discretionary extra contribution which has been 10% of my salary per year for a number of years. Since all of my employer’s contributions are pre-tax and we are not eligible for Roth IRA or deductible traditional IRA accounts as it stands now we are only contributing 5% of my income on a Roth basis.

Should we put more money in the Roth 401k or convert some of the money in the traditional IRA to a Roth in order to hedge our tax bets for retirement? Additionally, would it make sense at all to convert the traditional IRA to Roth since we are already using after tax money to fund it, even though it is treated as pre-tax? That seems like we’d be paying taxes twice on the money.
– Kendra

Converting a traditional IRA to a Roth IRA more or less means that you’re paying the income taxes on the money now rather than at retirement age.

By paying now, you’re providing yourself some level of tax-free income in retirement. If you can shoulder that tax hit now, it can be a good idea.

I usually recommend that people do as you suggested and hedge their bets between pre-tax and post-tax (Roth) retirement investments. This way, you’re spreading out your taxes between now and retirement since you don’t know for sure which point will have the higher tax rate.

Q6: Multiple savings “funds”
One thing that I’ve noticed through reading your posts is that you mention you several ‘funds’ that you put money back into. Savings, emergency, appliance replacement, etc. My question is: how do you manage these various funds? Do you have multiple bank accounts, one bank account and a spreadsheet showing the balance on each fund, multiple piggy banks, etc? That’s one of the biggest problems we’ve had when it comes to allocating money to specific funds. No matter what method we try, it takes more time to put money in each one, or maintain the balance in each one.

– Calista

I do use multiple savings accounts for this. I handle all of the transfers automatically from one bank which makes the automatic transfers really easy from their online banking servies.

ING Direct, to name one specific bank, also allows you to open as many savings accounts as you wish under your name and handle them all through one login. You can set up all kinds of transfers using their service – it’s one I’ve used for years.

It really comes down to how convenient your bank’s online services make such tasks. If you have great online services, this type of thing can be really easy.

Q7: Extra mortgage payment impact
I have a $107,895 mortgage that I have 23 years left to pay on (it is a 30 yr mortgage) at 5.5% interest. If I make two extra payments a year (that go to principle only) how quickly can I get it paid off?

– Leona

For starters, I’d highly suggest playing around with a mortgage calculator like this great one at Bankrate.

As for your specific situation, the exact answer depends on when exactly you started paying your mortgage off and exactly how long ago that was. I guesstimated that your original mortgage was for $120,000 and you’re just a little over seven years into the mortgage.

Given that, making two extra payments a year would shave just a bit under six years off the end of your mortgage. For just making 17% in extra payments, you’re shaving about 25% off the length of your mortgage. That’s money ahead, no matter how you slice it.

Q8: Car selling advice
My husband recently bought a new car, and now we’re in the process of getting his old car ready to sell. We’ve checked the Kelly Blue Book value for it, which says in its condition, we should be able to fetch about $3,500 for it in a private sale. Neither one of us has sold a car before, and we’re not sure how to go about doing it. What would be the best places to list it? How should we go about negotiating? Should we start at $3,500, higher or lower? We both find it hard to believe we could sell it for so much just because it has so many miles, but it’s in pretty good condition otherwise. Plus, we have proof for why we would ask that much; it’s not like we pulled a number out of nowhere. We need to get at least $2,000 out of it because our emergency savings recently took a hit when we had a plumbing emergency, and that will get us back to where the savings needs to be at, but is going down all the way to $2,000 ridiculous when supposedly we can get $3,500 for it?

– Tessa

First of all, the Blue Book value of a car is what you should consider a reasonable selling price for the car. It’s not a guarantee or anything at all. In order to sell a car, you have to have a willing buyer for the price.

My suggestion would be to define what you consider to be the minimum amount you’d sell the car for, then add at least 25% of that price to the car without exceeding 10% more than Blue Book value. If you exceed Blue Book value by too much, very few shoppers will bother looking at your car.

Pricing a car fairly high gives you plenty of room for negotiation, and buyers that can negotiate the price of a car down some is more likely to buy it. Just don’t put it so high that you scare away people to begin with.

Q9: Dodgy mortgage lender behavior
A few years ago I fell behind on my mortgage. My mortgage company was “good” enough to restructure the mortgage even though it took almost 2 years to get everything settled with them. The initial lapse was my fault, but it took them 9 months between 2 separate decisions to let me restructure the mortgage. The whole time they’re adding fees. The original loan amount was $169,000. I had paid on it for 2 years when this happened. Now the loan amount is $203,000 and I can’t get any information from them about why this is. I’ve called a number of times over the past 6 months, each time they promise to send me all the information, and I never get it. Is this illegal what they are doing since they can not provide me with the information?

– Mark

If I were you, I’d contact a lawyer.

My initial impression is that you’re dealing with a financial institution that’s struggling in some fashion or another. The current climate of the real estate lending market is a mess, and some companies are not handling it well.

$35,000 is a significant amount of money. A decent lawyer should be able to help you resolve this situation.

Q10: Going back to school
I currently have a student loan of $14,700 at 4.5% fixed interest rate. I have a master’s degree in marine biology and work in my field, but my salary is quite low. I’m playing with the idea of going to nursing school in the fall of 2013, which would give me job security and a better income (very important in my rural area). I love my job, but I want to go in a different direction. Nursing school tuition would be about $11,000 (3 semester program, since I already have a degree), would require increased use of my car, and because it’s an accelerated program, I would not be working. Of course there will be books, and normal living costs as well. I’m wondering if I should save every penny for nursing school, or pay as much of my loan down as possible?

I pay $200/month to my IRA. My minimum student loan payment is $132 (I have no other debt). Right now, I can probably pay about $350 towards that loan monthly. Is it best to pay off this loan, or save for school, and thus decrease the amount of a second student loan that I will need in the future? Should I decrease my IRA contribution and put it towards my loan?
– Erin

If I were in your shoes, I would continue the IRA payments and the minimum student loan payments for now and save as much as I possibly could to have a fat chushon in your savings account for when you start school.

Having that cash in your savings account will make it much easier to make ends meet during this period of reduced income. That’s really the key – you need to make sure you’re still paying your monthly bills. Your best friend is improved cash flow and access to an easy cash reserve, and since the first doesn’t really seem possible, your best bet is to maximize the second.

I would also look into forbearance on that student loan for any period where you return to school. If you can eliminate that monthly payment during your crunch time, all the better.

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. Chris Schneider says:

    Regarding #6, I’ve been happy as a customer of Smartypig. It lets you separate out goals, and have periodic withdrawls from your checking (mine coincide with paychecks, totally automated).

    I’ve started putting all my long-term recurring bills in there (car insurance, HOA fee, etc), in addition to my savings goals (emergency fund, etc).

    All your money is in a “high yield” (hahaha) savings account, and it’s all just a bank, except with a singular goal, and slick interface.

  2. AnnJo says:

    Q9, didn’t you have to sign any papers when you restructured your mortgage? Those papers should explain exactly what was added to your mortgage. If you stopped paying your mortgage for a couple of years, the unpaid interest, late fees and preliminary foreclosure costs (appraisal, etc.), plus the property taxes and insurance your mortgage company paid on the house if you didn’t pay them, could easily add up to $35,000.

  3. Tom says:

    So, uh, what was your answer to #3 again?

  4. T'POL says:

    Being a foreigner, I have been wondering: Why is there a cap on the maximum contribution to retirement plans? Just curious…

  5. Adam P says:

    #4 T’POL – the plans are tax deferred or tax exempt depending on what sort of retirement plan. The government wants to encourage saving so it gives tax savings but only to a point. They do need to make some money after all!

  6. Kyle says:

    Does anybody else find that playing games with other couples often leads to some hard feelings? I have some relatives who have a hard time losing gracefully, and it often ruins an otherwise nice evening.

  7. sarah says:

    Q2 – Don’t underestimate the fun of “simple” games. We love Apples to Apples, Battle of the Sexes, and even Monopoly. We have some good friends who love Settlers – I’ve never played it because my husband HATES it (and other games like it), so we skip out on game nights that include that.

    Q8 – Unless you live in a Tiny Town, use Craiglist. As for price, it depends how quickly you need to sell the car. If you need to sell in the next week, take Trent’s advice.

    If you have a few weeks, price it about 10% above Blue Book and see what hits you get. You can always repost lower a week or so later (although don’t plan to repost and reduce the price daily – people will just wait to see how low you’ll go). Craigslisters always negotiate. We usually plan to get 10-25% less than our Craigslist list price. My husband’s rule of thumb is that if you get a serious buyer in 24 hours or less, you priced it too low (unless that was the plan because you needed the cash ASAP).

    Also, we had one instance selling a set of tires where he got no responses, then reposted $100 HIGHER and had someone buy immediately. You may inadvertantly scare away buyers if you price it too low – they’ll assume something is wrong.

    PS – We’ve successfully sold five vehicles on Craigslist this way in the last four years.

  8. Michael says:

    Kyle #6, sometimes. Back when Settlers was the popular game, I’d get stuck with the robber about 80% of the time whether I was winning or not and I got a little annoyed. I finally made the problem go away by keeping count with my spare roads. It was a passive-aggressive thing to do but it worked. Nowadays I only get annoyed at people who take too long to play.

  9. Gretchen says:

    “I recently got a raise from 62k/yr to 85k/yr. I had been saving $100/month for the down payment,”

    Is that second part a typo? Unless the house has not been a priority until now.

    I don’t understand 9. you said they added fees. Well, was it $35K in fees? Possible.

    craigslist or the local paper on the car.

  10. jim says:

    Q3 : Yes you’re worried about taxes too much. You want to maximize your investment return. Taxes will hit you in almost any investment and are of a secondary concern.
    For short term investment you don’t want to invest in stocks since they’re too volatile. You could do bonds as well if you can find a good yield.

    Q8 Tessa : I find Kelly Bluebook values to be a little inflated. Also check the resale value on Edmunds and do some comparison shopping in your area on Craigslist and Autotrader. The car value is priced by the market and your desire to get $2000 to replenish your emergency fund is not really relevant to how much the car is worth. If you aren’t in a huge rush to sell then start higher price and drop the price over time if necessary. You can list your car for free on Craigslist which is often a good route. Make sure to post pictures and a detailed & accurate description of the car.

    Q9 Mark: That increase in principal seems very high. Were you making payments during the 2 year period? If you didn’t make payments then they may have added those payments to your principal balance. Read all your documentation carefully and look for discussion of fees. There should be some record of the transactions. If there isn’t then the bank certainly owes you an explanation, keep calling and pestering them and don’t take no for an answer.

    You may need help sorting it out. Rather than paying a lawyer, check for government agencies. The HUD website should have some pointers for consumer help with mortgage problems, I assume one of those agencies or non-profits might be able to help out.

    Q10 Erin: Save for school. You can defer payments on your existing loan while you’re in school. That 4.5% rate will be hard to beat. As you already have a Masters I don’t think you’ll be treated as undergrad even if you’re taking undergrad coursework, so a new Stafford would run you 6.8% Don’t pay off your 4.5% loan to take out a 6.8% loan.

  11. Nick says:

    The couple is under the limits to contribut to Roth IRA’s that number is on gross income after deductions the couple would qualify to contribute with even with the standard deduction.

  12. jim says:

    I’ll agree with AnnJo’s comment on Q9. Its quite likely the fees and back interest added up to that much. Its impossible for us to know what went on though, so we can only guess.

  13. jim says:

    Nick, the income limits for the IRA’s are Modified Adjusted Gross Income (MAGI). Adjusted Gross Income (AGI) is before you subtract deductions and exemptiosn. The MAGI is your AGI plus/minus a few things like IRA contributions/withdrawals and a few other misc. things most of us don’t do.
    So for the most part the income limit for Roth IRAs is pretty similar to your gross income.

  14. Andrea says:

    On Q9, the principal left on a $169k mortgage after 2 years was probably not much less than the original amount– about $165k, if you assume a 7% interest rate, which wouldn’t be at all unreasonable for when the mortgage began. So the principal with accrued interest over the 2 years of non-payment would be:
    $165k * 1.07 * 1.07 = $189k
    Add in taxes and insurance of about $7000 (reasonable based on where I live) and you get a balance of $196k. This number is very close to the balance Mark is questioning, and if his interest rate is just slightly higher than 7%, or if there were fees involved with the restructuring, then the balance is fully explained. I don’t think a lawyer is necessary in this case- just some basic math.

  15. Des says:

    RE: Andrea – I agree that the amount he owes is probably reasonable, what’s weird is that the company can’t/won’t tell him the breakdown. If it were me, I would want documentation from them as to what fees were charged and when as well. I don’t think its unreasonable to want to know the specifics. If they won’t give it to him after many requests, his only real option is to get a lawyer to put the pressure on.

  16. jim says:

    Given the way the question is written, it doesn’t really sound like Mark failed to pay his mortgage for 2 years straight. It sounds more like he ‘got behind’ as in missed a few payments rather than failed to pay anything for 24 consecutive months.

    We’re just guessing here.. he needs to sort it out with the lender. I’m not really surprised if they’ve failed to mail him specifics, many banks are poorly staffed in their mortgage servicing dept. relative to the amount of defaults and foreclosures they’re dealing with lately.

  17. Lindsey says:

    Q5: You probably won’t benefit much from increasing your Roth savings. By my calculations, you are currently earning $190K a year (gross). You’re saving roughly 20% of your income and paying probably 25% of your income in taxes. You’re living on far less than what you are making now, and you most likely will not increase your standard of living THAT much in retirement. You will move down the tax brackets just by not contributing to retirement savings anymore. I’d wait and pay the lower taxes. (and who’s to say the government won’t change their mind & start taxing the Roth money?)

  18. Temi says:

    Q5: If you are already making non-deductible contributions to a traditional IRA, you will almost certainly benefit from doing a conversion. When congress removed the $100k income limit on doing conversions, they made the income limit for Roth contributions essentially meaningless. You can convert you’re nondeductible traditional IRA contributions each year. If all of your past contributions were not deducted, you will only pay taxes on the gains that have occurred within the IRA. Once converted, both the conversion amount and the gains will be potentially tax free at retirement. If you leave it in the traditional IRA, you will recover your basis (nondeductible contributions) tax free at retirement, but the gains will be taxable. In my opinion, the only good reason to make a nondeductible contribution to a traditional IRA, is so you can convert it later. :)

  19. deRuiter says:

    Q10, “…fat chushon in your savings account…” I’d like two fat chusons, please. Or, I might just like to learn how to operate spell check, with that passion for writing.
    Q2, Any reason you don’t break out the Monopoly board for this first time venture?

  20. Carol says:

    Hi, I loved the comment about the Saint Bernards, it made me smile! We feel like our two golden retrievers are just furry kids too.

  21. Sharon says:

    As for starting a nursing career. Look carefully at it. The jobs for RNs are not as nearly as prevalent as they were. Pay is still good but many places are using LPNs and CNAs for most of patient care and stretching their RNs as thin as possible because of that pay rate.

  22. Skrpune says:

    Re Q6, I’ve also found ING to be fabulous for setting up separate funds. Once you have an initial account with ING, it’s super easy to add additional accounts, and you can name them how you wish so it’s easy to see what each fund is for.

    Automated recurring transfers into these accounts is super-easy as well. I don’t even have to think about it once it’s set up. Every now and again, I review my fund spending/saving and see if I have to notch the periodic contributions up or down.

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