Reader Mailbag: Singing Bedtime Songs

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. Borrowing against life insurance
2. Splitting a property
3. Bankruptcy and loan modification
4. Tracking weight loss
5. How much down payment?
6. Helping someone drowning in debt
7. Spousal disharmony and debt repayment
8. Extra payments or not?
9. Is Dave Ramsey worth it?
10. Swimsuits and culture

One of the traditions we have at bedtime at our house is that I sit and sing a few songs to my children as they go to sleep. I usually let them each choose a song, then I choose a song or two.

In the past, they would each pick a child’s song – like “The ABC Song” or “Baa Baa Black Sheep,” then I would sing some song I knew, usually an old folk song or a song that was popular fifteen years ago.

Lately, it’s been fun to watch as my children’s tastes have grown. My son almost always requests one of the old folk songs. My daughter, interestingly, seems to be gravitating to a lot of what I would call the “alternative” hits of the mid-1990s (don’t worry, I’m pretty selective on what songs I choose to sing).

It’s quite fun. I can’t sing well, but I muddle through with light percussion, and if my children know the song well (as my son does with a few of the folk songs), they’ll sing along, too.

I recently graduated college and was fortunate enough to land myself a very well-paying job in a location that I like doing what I want (in the IT field). I have not been so lucky (smart) in the past, however, and during my college career accrued about $4500 in credit card debt that I’m working to pay off now. I’ve stuck to using cash and debit only for now and have been going strong at not accruing more debt for a few months, though I can’t admit I’ve been able to pay my cards off as quickly as I hope because I wasn’t earning income for over a month and before that I was still earning just enough to get by.

As part of my transition from college life to the ‘real world’, my parents have turned everything over to me – including a life insurance policy that they started when I was very young. I have no intention of getting rid of this policy despite the fact that I have free life insurance from my employer for an equal amount. I did however find out that I can take a loan of up to about $6000 from my policy at a 5.5% interest rate. Right now my weighted average of my debts is hovering just shy of 18%..to me, it seems to make sense to take out a loan against the policy and pay off my credit cards, then work on repaying the loan. I already have a plan in place to pay off my debts, but in the meantime it would save me money and would only require one (albeit automatic) payment each month. I also am planning on paying off my cards within four or five months as of right now, but if I can take out a loan at 5.5% it would help me sleep better to build up an emergency fund first and repay the loan at a slightly lower pace until I get a few months of living expenses saved up. What are your thoughts on what I should do with this? Would this have any impact on my credit??
– Dave

Really, all you’re talking about here is refinancing. Instead of carrying unsecured debt at 18%, you’re thinking of converting that to secured (by your life insurance policy) debt at 5.5%.

Reducing $6,000 from 18% to 5.5% would save you $750 over the course of a year. Given the “four or five month” timeframe you’re talking about for becoming debt free, your net savings would be about $200 to $250, depending on how you paid it down.

I would do this move, but not change a thing about my debt repayment plans once I had a small emergency fund – say, $1,000 or so – in place. Get that small emergency fund, get rid of the debt, and move on down the road. You’re in pretty good shape, after all.

I live in Brooklyn where what you get for $300k is almost nonexistent (or a shoebox and shoddily made) and have been talking to friends to see what we can get for $600k instead (sometimes small 2-family homes will still go for that but 3-family homes are going for $850-900k still). I’ve only found some stories that it’s been done and some of the agreements made between the homeowners, but not how to go about it (working with getting 2 mortgages finalized at one time, what to look for in a realtor that can handle both, what the timeline should look like). I recall meeting someone who did this with a 3-family house and then the split the property legally into 3 separate units after the sale.

Do you have any information on it? I know the risks re buying with friends but I do know we’ll both be interested in having a fair agreement contract and working through that stuff. We have about the same amount of money to put in as a down payment ($10k each).
– Jesse

It depends on the type of arrangement you’re considering, which isn’t clear from the question.

If you’re just wanting to buy the house, have everyone live there, and share the mortgage as one unit with the payments “split” among you, that’s a private contract between all involved parties. A lawyer could easily draw this up. However, I really, really would not recommend this because it’s going to be fraught with problems if one of the people involved decides to pull out.

I think, though, what you’re looking for is a way to effectively turn this one house with one mortgage into three properties with three mortgages. That can be done, but it requires that each of the separate properties have certain elements – their own exit, for one. What exactly is required for this depends on the specific zoning rules in your area and you’d want to talk to a real estate lawyer about it.

If you can get the property treated as three distinct properties, then it’s likely that a bank would help you refinance the single mortgage into three separate mortgages. However, if this is your long term plan, I would make sure the agreement for all of this is in place before signing anything at all. In other words, the first step is to talk to a property lawyer – and getting the bank involved would be another part of the equation before you even start looking at the property.

My husband has been disabled for the past ten years. Due to numerous medical bills and loss of income, we were forced to apply for a loan modification with our mortgage lender. I am currently in negotiations with my mortgage lender to modify my mortgage. I was approved for a trial Home Affordable Modification. I have to make adjusted payments for 4 months and then hopefully they will permently adjust my mortgage. My question is: Can I claim bankruptcy during this trial period? Will it effect my loan modification?

We hired a bankruptcy attorney back in April, he advised us to wait for the loan modification. He also advised us to stop paying our credit cards at that time. I sent the credit card companies a letter advising them that we were filing for bankruptcy and gave them my lawyer’s information. My second question is: How long will credit card companies wait for you to file bankruptcy before they start with legal proceedings?

So we are in kind of a bind. We do not want to lose the loan modification, and we do not and cannot afford to be sued by the credit card companies. Should we proceed with the bankruptcy or wait for four months until the trial period on the loan modification is over.

Our attorney says that we should wait and see what happens with the credit card companies. Do you have any thoughts?
– Brianna

Borrowes in bankruptcy are not automatically eliminated from the Home Affordable Modification program, so I wouldn’t worry about that.

What I would worry about is filing bankruptcy proceedings in the middle of this would cause some significant additional effort on behalf of the bankruptcy court, which would increase your legal costs (perhaps significantly).

I wouldn’t worry too much about the unpaid credit card debt, either. If you’re up to date at the start of all of this, you’re probably just going to be 90-120 days late at the time your modification finishes up.

The place to look is the contract you agreed to with the credit card company when you opened the card. Most likely, your debt will just be turned over to a collection agency eventually if you don’t pay because, honestly, unless you have a huge amount of debt, it’s not worth it to them.

If you’re filing bankruptcy, you’re going to have severe credit problems in the short term anyway, so that’s not a concern.

In the end, I’d trust your lawyer on this one.

I recently saw a post on your progress for your 2010 goals and saw that one of your goals is to lose 40 pounds. I was wondering if you use any software or systems to track what you are eating, how much you weigh, etc. to keep you motivated and informed as you are improving your diet and losing weight?
– Jenelle

I keep track of my weight in Excel. Not only do I keep track of my daily weight, I also have columns that automatically calculate my average weight over the last 10 days and the last 30 days.

I do this because I’ve learned it’s a bad idea to panic if your daily weight fluctuates a bit, even if it goes up. Food digestion, water retention, and many other things can cause your weight to go up on a day-over-day basis even if you’re eating well and exercising.

So, my focus is generally on making sure that my longer-term average weight is going down.

I’m 24, single and currently employed with a salary in the mid $40k’s. I’m living at home and plan to until I buy a house/condo. I have $10,000 in a savings account and another $13,000 in a money market. Most of my income goes into the MM and I’m planning to use it as the downpayment for my house/condo and let the savings become my emergency fund when I am on my own. I’m wondering what you think is a good amount (%) to put down when I do buy something and if I should use a part of the emergency fund for the downpayment. The only other debt I have is $5k in student loans at 4.5% and currently, my fixed expenses (student loan included) are ~$150/month.
– Nate

You should be shooting to put 20% down and you shouldn’t deplete your emergency fund to do it because when you move in, there will be lots of things right off the bat that you’ll need to do to fix up the house. I would keep an emergency fund equal to two months’ of expenses after your move, so probably somewhere in the $4,000 range.

20% seems like a lot, but if you’re earning $40K a year and you have only $150 a month in fixed expenses, you should be able to save a lot each month toward that goal.

My estimate is that you should be socking away about $1,500 to $2,000 a month, depending on how much you’re spending on other stuff. That will get you to your number surprisingly quickly.

What would your suggestion be for a good friend who’s going through a divorce, is having a hard time with money, but does everything frugally already? My friend cooks his own meals, even builds his own furniture, drives a small car, doesn’t drink/eat out, etc. I hate seeing credit cards and banks eat up 10-30% interest on his debt and late fees, and his credit situation doesn’t warrant him being approved for better credit card or bank offers. I’m torn with what to do, other than help him pay off his debt to improve his credit history and get him back on track.
– Matt

Help him, but not by loaning him money. Instead, do what you can to help him with his burdens as a friend.

Invite him over for meals. Listen to him when he’s frustrated. Offer solutions if you can find them. Offer him some short term living space if he needs it.

There are countless small things a friend can do to slightly relieve someone’s financial or emotional burden in their time of need without just lending them money.

I am working very hard to pay off an auto loan so my husband and I can be 100% debt free. We have money leftover every month, but I always worry about commiting so much money to debt repayment so soon before our next paycheck. What usually happens is that I wait until our next paycheck to pay off any extra toward our loan, and my husband winds up spending our leftover money.

I hate this. I want to be out from under this. My husband and I have $1,000 in an emergency fund and contribute to this fund monthly. What should I do, bite the bullet and pay it off immediately, or put half in our emergency fund and half toward debt repayment? Any advice would be appreciated!
– Rachel

If you’re just looking for a quick fix, the best solution would be to zip off an extra payment as soon as there’s money in the account to spend. In other words, spend it first.

However, doing that just hides the fact that there’s a real problem crouching underneath the surface here. There are some trust and responsibility issues going on with money in your marriage, and if you don’t nip it in the bud right now, you’re going to end up with much deeper problems.

Sit down together and have a serious conversation about what your goals are and what your specific tactics will be for reaching those goals. Quite often, things like this happen because people don’t have goals – or they have goals that are out of alignment with one another.

My husband and I are probably going to buy a house. It’s small, and there’s a chance we’ll only be there 3-4 years, and at most we’ll probably only be there 6-7 years (it’s 2 bedrooms, which if we start a family we’ll likely outgrow). We’re willing to take the buying chance because we’ll be paying much less for the mortgage than equivalent rentals in the area (mortgage plus property taxes will be about $1200 per month, whereas equivalent rentals are around $1500-$1600 per month, and the rent is not a tax write-off), and after a string of bad landlords (including on foreclosed on) we just would really like to own instead of rent.

My question is this: does it make sense to make extra mortgage payments if we aren’t staying there long term? We have good jobs and save a lot, and after funding our retirement accounts we have about $3,000 a month extra to save. Should we put part of that toward paying off more mortgage? It seems to me the real boon of extra mortgage payments is that you save on interest and reduce the length of the loan, but we won’t be there for the length of the loan, so I don’t really see how we’d benefit from extra payments. Your thoughts?
– Valerie

If you get a 5% mortgage, then every drop of extra payment you make is essentially netting you a 5% return on your money for as long as the mortgage exists.

Here’s what I mean. If you owe $100,000 on your 5% mortgage, you are paying $5,000 a year in interest. If you pay off $10,000 of that 5% mortgage, you now owe $90,000 on that mortgage and will only pay $4,500 a year in interest – a $500 savings per year for your $10,000 investment.

Now, you’ll probably put your money to better use by ensuring that your retirement plans are taken care of. After that, though, putting your money into something that returns 5% to you like clockwork until you sell the house is a pretty good choice.

what’s your opinion on Dave Ramsey’s programs? I saw the book review (I read it – borrowed from library) and have seen your arguments/opinions about his ideas toward debt (Snowball, 15%) and some of my friends are doing FPU and/or thinking about it. It got me thinking about it too, but I’m not sure I agree with spending $100 to learn how to manage money when there are a lot of free resources available on the web. Basically — is the program worth it? Have you heard really good or really bad comments about it?

In general, my spending/financial situation is mediocre. I have a 401k, IRA, and E-fund. I’m not bouncing checks but I’m not paying down debts (CC, school loans, car) with the speed that Dave wants me to. Who really benefits from the course? Dave or the attendee?
– Meg

I think Dave Ramsey’s material is just fine. What he provides for people is cheerleading and motivation built on top of a set of very simple but financially sound principles.

Those principles, as you said, are freely available on the web. What you’re paying for is the cheerleading and motivation, in other words.

For some people, that cheerleading and motivation is worth it. For other people, particularly people who are good self-starters, that money is better off being channeled into debt repayment.

Another department where men are able to cheap out over women and then preach like they know something – swimsuits! […] [I]t’s easy for a man to get cheap decent swimsuits— not so much for women. Once a woman has a good suit that wears well, it will be kept until it either no longer fits (for many reasons) or is falling apart.
– Jean

Here’s the thing, though, with items like swimsuits. I go to the beach or the pool in a pair of swim trunks and a t-shirt and I toss of the t-shirt when I want to swim. A pair of swim trunks costs about $2-3 and lasts me for years.

When someone – male or female – pays more than a few bucks for a swimsuit, they’re not paying for clothing to cover their bodies while swimming. They’re paying for a fashion accessory – a completely nonessential item. $70 spent on a swimsuit that shows off a woman’s figure might be a fun expense, but it’s certainly not required to swimm.

If you think you must spend that kind of money to have the perfect swimsuit to keep up appearances, you’re spending too much time (read: more than zero) and too much money (read: more than zero) worrying about what other people think of you. Think of it this way: if you were going to a completely private beach to swim, would you need that $70 swimsuit?

Update Several readers were upset by this response. My point was that if you’re spending more than $3 on a swimsuit because of vanity, it’s wasted money. What came across is that spending more than $3 on a swimsuit is vanity, which is not what I was trying to say at all. Spending more than $3 for a comfortable suit if you value swimming is a very worthwhile expense. I apologize for my ineloquence and my thick head.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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