Reader Mailbag: Sleeping Toddler

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. Investing advice
2. Good advice for college student
3. International mortgage question
4. Favors as gifts
5. Allowance strategies
6. Life insurance for children
7. Buying local
8. Retirement savings challenges
9. State retirement plans
10. Podcasts

I’m typing this while holding a sleeping one year old on my shoulder. He’s been up most of the night with some sort of intestinal illness and has only slept in fits and starts.

Sleep deprivation and worry are fundamental parts of being a parent.

Q1: Investing advice
My husband and I have a 14 month old son. We have 15k that we would like to put towards his college education but unfortuantely we just aren’t sure how to go about investing the money.

My husband and I are great savers, but really know little about investment even when it comes to our own money. We have some money in a mutual fund and the rest in a money market. Do you have a good book that you suggest reading for financial advise, really just a good overview of the options for investment?
– Shanda

If I were you, I would look at the 529 plans offered by various states – you don’t necessarily have to be the resident of a state to use their 529 plan, though they do offer some additional state income tax benefits if you’re a resident of that state. For example, the plan in Iowa is run by Vanguard and I’ve been incredibly happy with it.

If you invest money in a 529, then take all of it out for educational purposes, you don’t have to pay taxes on any of the money – even the money you earned on the investments. It’s all tax-free if you use it for education.

Beyond that, one book I would definitely read if I were in your shoes is Debt-Free U by Zac Bissonnette. It’s a great look at how to save for college and some clever ways to reduce costs there.

Q2: Good advice for college student
My daughter is 20 years old and a sophomore in college. I pay all of her college expenses (tuition, books and living expenses). She has a part time job and is paying for her incidental expenses (gas, coffee, iTunes, moves, etc.) I have taught her a great deal about personal finance and have been a good example by living well, saving money and keeping out of debt. I talk quite a bit with her about finances and using money smartly. However, I am wondering if you could recommend a good baseline book for her to read about overall finance strategy.

– Margie

The book Please Send Money by Dara Duguay is pretty much the perfect book for the situation you describe. It addresses the college stage of financial maturity, as students grow toward financial and personal independence.

Even with that book in her hands, she’s not going to magically begin understanding her financial situation unless she wants to, and that’s a decision that’s internal to her. You can’t make someone care about their finances.

The best thing you can do is what you’re doing – making the information available. It’s up to her to take the next step.

Q3: International mortgage question
I’m currently planning to invest in a house in a different country. I won’t be able to take any loan in that country as I don’t work there. I want to know if there is any way I can take a house loan here to buy a house in a foreign country. By the way, I’m not a US citizen.

– Ama

It is very rare for a bank to take out a loan using a house in another nation as collateral. The only banks that might consider doing it are large multinationals that operate both in the United States and in the nation you’re hoping to buy the house in.

If the bank does not do business in the nation that you’re buying the house in, the risk the bank takes on in offering the mortgage is incredibly high – likely far outside the realm that any bank would take on.

If you’re going to look further into this, start with the huge banks like J.P. Morgan Chase or Bank of America that might be operating in that nation or have close relationships with banks in that nation.

Q4: Favors as gifts
For our baby shower, our friends and family all gave us certificates for a night of babysitting. We have a pile of about twenty of them from various people. The problem is that now I feel sort of guilty using them. We’ve just left them in an envelope.

Should I feel guilty about using them? Should I expect that people would feel guilty if I gave similar things as gifts?
– Annie

You shouldn’t feel guilty at all about using these certificates. They were a gift to you, likely from people who understand how important an occasional night out without children is to new parents, and they likely want to fulfill that certificate.

If someone gives you a gift, there’s an intent that you will use that gift. If they didn’t want you to have that night of free babysitting, they would have given you bags of diapers for your baby shower or something similar.

Use the certificates and enjoy some date nights with your husband.

Q5: Allowance strategies
We are talking about starting allowances with our two children, ages 9 and 5. I would just like to read your ideas and strategies, then compare them to ours. We would just like a second opinion, if it’s not too much trouble. Thanks so much!

– Mel

We start allowances at age four and plan to discontinue them at age sixteen. The allowances are not tied to any particular household task, but the amount given isn’t very large. The amount given is equal to fifty cents times the age of the child.

We use a Money Savvy Pig for our allowances. The children are required to put one quarter in each of the slots and then are free to put the rest of the quarters wherever they see fit.

The entire point of an allowance for us is to get our children talking about money and also to provide a method by which they can make spending decisions themselves instead of just directly asking Mom and Dad for everything.

Q6: Life insurance for children
What is your take on life insurance for kids? I would assume that someone taking life insurance on their children isn’t in it for the financial long haul.

– Charlie

The only reason I can see for having a life insurance policy for your child is if you’re unsure if you could afford the costs of a child funeral upon their death or if you’re purchasing some sort of whole life policy for your child that extends into adulthood.

I’m not particularly a fan of such whole life policies. They tend to really only pay off if you find that your child has some condition not obvious when they’re young that causes them to become uninsurable later in life, which is a reasonably rare occurrence.

Currently, we have very small whole life policies for our children for this exact reason. The amount is very small – just enough to cover funeral costs. Most of the money we’re investing in our children is going into college savings.

Q7: Buying local
I really love the main street in my town, but most of the shops sell things for much higher prices than I could pay online. How can I justify paying $50 for a pair of shoes when I can get them for $25 online?

– Emily

The reason is so you can have the opportunity to stroll down the main street of your town and not see boarded-up windows and shabby businesses that are barely surviving.

A thriving main street in a town is an indication that the citizens of the town value having such a main street and are willing to pay somewhat higher prices there than they could find online. That is a town I would want to live in. It’s one of the things I admire about towns that have thriving main streets and town squares.

The cost of keeping a physical location open in an average town simply drives up the prices in that store because online retailers don’t have to worry about a traditional storefront. They just have to keep the servers up and they can ship out items from a tightly-packed warehouse.

If you value having that main street, be a patron of the stores there. If you would rather save $25 on your shoes, order them online and accept that the main street you profess to value is likely soon to be a thing of the past unless everyone else in the community steps up to support something that you supposedly value but don’t actually bother investing in. You can’t have it both ways.

Q8: Retirement savings challenges
I am 27 years old and have been working for two and a half years. My current income is $52,000 (pre-tax), take-home pay is about $3000 per month. I only have student loan debt from medical school: $47,587 at 4.25% and $135,179 at 6.625%. My parents generously paid for my undergraduate education, and although they don’t expect repayment, my hope is to assist with my brother’s college tuition. My fixed expenses each month are rent ($750) and student loan repayment ($500); I also spend about $300 per month on groceries, gas, utilities and laundry. The remainder goes into savings. I currently have $6500 in an emergency fund, $10,000 in a traditional IRA and $27,000 in a catch-all savings account at 0.9%. I signed up for my work’s 401(k) this year and will start contributing 15%, but do not get matching from my employer. I plan to get married (budget $15,000, split between me and my fiance) and buy a house in the next five years. I have guaranteed employment for the next three and a half years, but will be making less than $65,000 a year. I am hopeful that once I am done with my training in four years, I will be making $150,000+. I still feel like I am not saving enough. How much should I be saving? What should I do with the money in my savings account that is earmarked for retirement (about $10,000)?

– Ron

I think you’re saving well given your current financial reality.

You need to ignore what you think you might be making in the future and focus on what you’re making now. Relying on your future self for income or anything else is almost always a mistake because when we visualize the future, we tend to rarely visualize what will actually happen. Instead, we usually visualize something better than what will actually happen.

Making financial moves now that relies on you earning a truckload of money later on puts a greater burden on your future self. It adds stress and pressure to your future that doesn’t need to be there.

Q9: State retirement plans
I was wondering what you thought about the following retirement plans that are available to me as a fairly new State of Connecticut employee. I started working for the state in August of 2011, and I need to choose a plan by February 28 of this year.

As a bit of background, I am 37 and married with two children. My husband is self-employed, and contributes 10% of his income to a retirement savings account. I have a very small retirement account with Fidelity, left over from my last job (around $20,000), which I haven’t rolled over or cashed out yet. My plan was to just keep it in Fidelity if I choose one of the SERS plans below, or roll it over into ING, which is the State’s ARP funds management company.

I plan on working for the State of Connecticut for the rest of my career, so I’m leaning toward option 1 or 2 (but which one?), and contributing an additional 10% of my income to my own IRA each year. In the old days, I know you were supposed to take a pension if you had the chance, but with budgets and politics as they are these days, I’m not so sure. After seeing my Fidelity account shrink with the market, though, I’m not sure if the Alternate Retirement Program would be any better.

Here are the three plans from which I must choose:

1. State Employees Retirement System (SERS), Tier III – This is a defined benefit plan qualified under section 401(a) of the Internal Revenue Code. The employee contribution to this plan is 2% of your salary and contributions are made on a pre-tax basis. Should you meet the requirements for receipt of a retirement benefit under this plan, the benefit you receive will be calculated based on a formula which uses the number of years you participated in the plan and the average of your five highest years’ salary. Under the Tier III plan, retirement credit may be granted for some prior employment service, including military service and municipal employment. Restrictions apply. See the SERS Tier III Summary Plan Description for more details.

2. State Employees Retirement System (SERS), Hybrid Plan – This is a defined benefit plan with a “cash out” option qualified under section 401(a) of the Internal Revenue Code. The employee contribution to this plan is 5% of your salary and contributions are made on a pre-tax basis. At the time of retirement you will have the option of receiving a retirement benefit calculated based on a formula which uses the number of years you participated in the plan and the average of your five highest years’ salary or in lieu of such benefit a one-time lump sum payment with a five percent employer match and four percent interest. Under the Hybrid Plan, retirement credit may be granted for some prior employment service, including military service and municipal employment. Restrictions apply. See the SERS Hybrid Plan Summary Plan Description for more details.

3. Alternate Retirement Program (ARP) – This is a defined contribution plan qualified under section 401(a) of the Internal Revenue Code. An ARP member’s benefit is based upon their contributions to the plan and investment earnings. The employee contribution to the plan is 5% of your salary and is made on a pre-tax basis; the State of Connecticut contributes an amount equal to 8% of your salary. Plan contributions are invested at the direction of the member in investment funds available under the plan. ING is the State’s administrator for ARP. Information on ARP is available at www.CTdcp.com.
– Jan

I tend to be very hesitant to trust pension plans that are run by the government – actually, I don’t trust pension plans of any type. Governments and businesses will often start pillaging their pension plans if they need cash to stay afloat, no matter the promises they’ve made.

If I were you, I’d choose the plan that allowed you the most independence possible from the state, which sounds very much like the third option. I did some reading on the plan and it sounds as though your money is held in an independent account managed by ING.

If I were you, I’d also start up my own Roth IRA, which enables you to save money for your retirement completely independently of your job.

Q10: Podcasts
What’s your current list of podcasts you listen to? I know you change your rotation regularly (as do I) and I’m always looking for new ones to listen to.

– Evan

I listen mostly to NPR programs – Marketplace, Fresh Air (I pick and choose episodes), This American Life, Wait, Wait – Don’t Tell Me, and Radiolab.

Aside from that, I listen to The BS Report with Bill Simmons (which mostly covers sports and pop culture) and The Dice Tower (which covers board games).

That, along with some music, is what I listen to in a given week.

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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