Reader Mailbag: Sun Tea Season

As I write this, I’m enjoying my first ice-cold glass of sun tea of 2011. Delicious.

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. Student loan consolidation question
2. Tabletop or electronic games?
3. Retirement worries
4. Groceries and kids
5. Quality of life versus money
6. 401(k) or mortgage
7. How to handle second mortgage
8. Balancing gas prices
9. Real Prius numbers
10. Refinance or pay more?

Q1: Student loan consolidation question
Our youngest child graduates from college soon. I have five Parents Plus loans that total approx $45,000 in debt. Four of loans are at 7.65%, one is at 4%. I could consolidate all to a “Weighted Average“ interest rate of just over 7%, which would reduce the total payment by $80.00/ month. I could consolidate the 4 high interest ones, and reduce the total net payment of all by $65.00/month. I would use the difference in the payments to snowball all of this. Or I could leave them alone and just snowball the whole works.

– Sandy

Based on the information here, it sounds like consolidation would not actually help you reduce your interest rates. However, it would extend the term of your loans, which means that although your monthly payment would go down a bit, the term of your loan would grow longer at the same time.

Over a long period of time, this is somewhat a bad thing, as it means you’ll be paying more interest over the lifetime of the loan. Over the short term – the next month, for one – it’s a good thing, as your monthly payment will be lower.

I tend to take the long term view. I’d leave things as they are now and snowball the debts.

Q2: Tabletop or electronic games?
I know you play many strategy boardgames and I have been been interested in starting to play one/some with my boyfriend who plays tons of tabletop warhammer and other computer army strategy type games. We recently saw that the online downloadable section of xbox live has many of the starter games you have suggested over time like carsconne, ticket to ride, and one other I can’t recall right now. They are priced around $10 to download. I thought the prices for buying the table top board games new you mentioned was a around the $20-25 range. What do you think about this option? Would it diminish the experience at all in your opinion if we were playing each other through the xbox?

We downloaded the trial of carsconne and liked that it showed us the legal tile placement and kept track of the scoring. That said, I have never played the real version so I don’t have anything to compare it to.
– Kristin

Electronic games and tabletop board games are such a vastly different experience that I can barely compare the two.

The biggest difference is the face-to-face interactions. Actually seeing the other players, watching their body language, and hearing their vocal inflections paired with mannerisms adds a rich dimension to board games that video games can’t match. There’s also the tactile experience of the pieces and lots of other little factors that come from sitting at a table with real live people versus playing a video game.

Board games also have the advantage of not requiring electricity for use. I can play a board game when the power is off provided I have a flashlight. In fact, I often do play such games when the power is off. The same is true for camping trips, etc.

Video games are a good substitute for game types that board games can’t capture. For example, I can’t see how something like Portal could be re-created successfully as a board game.

Q3: Retirement worries
I am afraid that i dont have enough money by the time i grow old. Or i do not know how much is sufficient to grow old with. I am aged 35, earning about RM 36,000 per year. So, about 3k per mth. I know the standard of living in US and Malaysia is different, lets presuming cost of living is equivalent as in 1usd to buy 1 usd goods, 1 rm to buy 1 rm goods.

Presuming a reasonable condo, cost about rm 200k to 300k. A macdonald value meal with french fries, a burger and a drink, cost about rm 9. I have no debt, own a car (year 1996). I am living with parents, but if they are no longer here, i have to move out as the house is belonged to my brother. I am not able to move out right now, as parents are old, need to take care of them.

I am thinking to buy a house or change a new car, but yet i am not sure, my salary is enough for all these. I like the way you plan for yr life, therefore would want to seek yr advice. I have 100k in stock investment. Everytime i got money, i just dump in. As you know, stock goes up and come down, so it is very hard to say what kind of dividen i am earning that with. But if i sell all those right now, i have 100k for it. Emegency fund around 3k. I save about rm 500 every mth. I have 2 life insurance policies which one of them include medical (very low), i know should have bought short term or medical only, but that was long ago when i purchased it so cant change much about it.

My friend told me that we need at least 1 to 3 million when we retired, as we are not able to generate income when we retired at age 55 and if living up to 90 years old. You have yr 401k , we also have employee fund, currently i have around 70k in those fund about dividen 5%.

Do you think i am in a bad financial position? Any suggestion to improve my situation? I would be gladly appreciate it.
– Nata

For starters, I would abandon the notion of retiring when you’re 55.

The traditional retirement age – 65 – was set at a time when life expectancy was barely beyond that. In fact, when it was mandated originally in the 1930s, the average life expectancy was below that.

If I were you, I’d investigate the life expectancy of someone your age and perhaps subtract a few years from it. That’s a more realistic estimate of your retirement age.

Using that as a guideline, retirement savings becomes much less pressurized. Do some calculation using those adjusted expectations.

If you still want to retire at 55, expect some challenges. It’s not an easy path to get there.

Q4: Groceries and kids
Looking at my budget, I know I need to cut my grocery bill but I have 2 young boys who already eat like teenagers. My 5 year old is still rather picky while my 10 year old will eat almost anything and in large quantities. Your family usually cook meals using little if any meat. I assume your kids aren’t picky eaters, true? Utilizing more veggies and less meat is cost effective but only successful if the boys eat it. Any suggestions?

– Denise

We make a wide variety of meals. If our kids don’t like what’s for supper some night, we just make them try a few bites of it. We don’t allow them to dictate an alternate supper and we don’t give them snacks afterward to make up for it.

They’re used to this, so they’re pretty willing to try everything. Like anyone, they have foods that they like and they don’t like, but they’re pretty well-rounded eaters.

We just don’t let them get away with protesting every meal until they get hot dogs and macaroni and cheese or something like that. If they don’t like what we have, they don’t have to eat much of it, but they’re not rewarded with other kid-friendly food later on. They always have the option to eat more of whatever we have for dinner.

Q5: Quality of life versus money
When I was younger I was extremely liberal with my spending on credit cards. With my wedding and the time my wife has spent off having my two children we have managed to accrue 24k in consumer(cc) debt. As well as a 96k mortgage. After a lot of soul-searching I was able to break my bad habits. I have lived mostly on cash for the last one and a half years. My debt has remained mostly unchanged during that time. Recently, I lost my primary source of income for a few months and took a job that provided regular paychecks instead of my quarterly windfalls that I counted on to keep current on my debt. I fell behind on payments and have basically given up on caring about due dates. I am floundering with a lack of direction. I want to pay off my debt and regain control of my life but I also want to maintain a normal life for my children. We have cut spending to the bone, but, I wonder if bankruptcy would help me achieve these goals faster than conventional debt repayment techniques. I am only 25 and have a good prospective working career at my feet. Any tips for someone in my position? Any help is good help.

– Jeff

Whether or not you’re able to handle that debt depends on a lot of things: your actual family income level, the cost of living in your area, the extra costs of your employment, and so on.

It may be that bankruptcy is your best option here, but unless the rest of the picture is really awful, this is a recoverable situation without bankruptcy. Bankruptcy usually doesn’t make your debts go away. It usually just means the courts create a debt repayment plan for you.

Managing weekly paychecks is far different than managing windfalls. It takes practice.

Q6: 401(k) or mortgage
Would you stop your 401-k to if you could pay off your mortgage by the end of this year? I am 44. Husband is 42. His contribution would not stop. Our mortgage balance is 32k.

– Sheila

Unless there was some sort of major life change occurring in the next couple of years that would involve a severe drop in income, I wouldn’t change a thing.

That is, unless you’re way ahead of where you should be on your retirement contributions. Use a retirement calculator and figure out where you’re at for your age. If you’re ahead of where you should be and you’d like to get that mortgage finished off, make the short term switch.

However, it is never a good idea to take your retirement savings off the rails for a while just to gently accelerate a debt repayment.

Q7: How to handle second mortgage
We’ve recently had to take out a government (FHA Title 1 Loan) loan to do some necessary repairs on our house, which we’ve only been in since late 2008. We purchased it from a family member and now we have some unexpected repairs to make. Unfortunately we didn’t have enough equity at the time to take out a loan to cover the repairs (which have cost in the neighborhood of $25,000 to be done), so we had to find an alternate route for funding. Luckily I found a bank that offered a loan that was specifically set up for this purpose and was government sponsored, which turned out to be our ONLY option. The down side is that the interest rate is a little high (It’s ~8%) and we had to borrow the maximum amount ($25,000).

While we’re still waiting for the necessary permits and everything to be approved so that we can begin the work, my wife and I have both been working hard to build up as much of a savings account as possible so that we can pay off as much of the loan in one lump sum as soon as the work is completed. We don’t want to drain our entire savings, but we have about $10,000 in “extra” savings that we can put towards the loan.

My question is, what do we do about the remaining $15,000 part of the loan?

My concern, first of all, is having such a big loan that uses our house as collateral. It’s got a fairly high interest rate, and although we’re working hard to pay off the loan, I’m not comfortable with maintaining such a high balance with something so important. I’m also not fully comfortable with the company that we’re dealing with to pay off the loan (I’m guessing the bank sold the loan as soon as it was made), because they don’t offer an online overview of your account, or any real communicative statements, and they just seem to be a little behind the times in terms.

We both have credit cards with a $0 balance (inspired in part by your blog!) with interest rates LOWER than the interest rate on the loan. My credit card is at 7.6%, and my wife’s is about the same. Unfortunately hers is based on a variable interest rate which is the prime rate + a certain percentage (right now it’s pretty low). Both of our cards offer 0% balance transfers for at least a year.

With this information, do you have any advice on whether or not it would it would make sense to pay our loan down to $15,000 and then split the remainder between our two credit cards with a 0% balance transfer? Is it any more “safe” to have a somewhat high credit card balance than having a second mortgage? Is it possible that if we transfer a large balance to my wife’s card that her interest rate will go up more than minimally because it’s based on the prime rate?
– Joe

I would get rid of this home loan first.

For one, it has a higher interest rate than your cards do. For another, it’s collateralized, while your cards are not.

Unless one of your cards suddenly spikes in terms of rate, I would focus entirely on paying down the second mortgage.

Q8: Balancing gas prices
I have a gas price question for you. Right now, we have two vehicles. Our Jeep Liberty is paid for, and has been for years. We are happy with it and have cared for it well, but it only gets 12.75 miles to the gallon. Horrible! It is due to the tow package on the truck. With gas prices as they are, is it better for my huband to continue to drive it (About 40 miles per day) or for us to purchase another car with better gas mileage? We would probably be looking at a used Prius or a used Volkswagon TDI for the gas mileage. Can you help me look at it from a financial standpoint?

– Marta

Although I can’t guarantee that it’ll be worth it (you’ve always got the “lemon” factor to worry about), I would think it’d be worth it to trade to a car with better fuel efficiency.

Let’s say you drive 40 miles a day for 300 days. That’s 12,000 miles a year. If you’re driving your Liberty, that’s going to eat up 941 gallons of gas a year. If you’re driving something that gets 30 miles per gallon instead, that’s going to eat 400 gallons, a difference of 541 gallons. With $4 per gallon gas, that’s $2,200 a year. It doesn’t take long for that to make a HUGE difference.

If you can trade without sacrificing anything else, do it.

Q9: Real Prius numbers
Since your wife has had a Prius for two years now, I’m wondering if you could share some real mileage numbers with us. I have been thinking about getting a highly fuel efficient car like a Prius but I’m trying to figure out if they’re really all that great in the real world.

– Ed

Over a very long period of time, the Prius has gotten 43 miles per gallon. Mostly, this is my wife’s commute and she tends to have a bit of a lead foot – if she kept it near 55, I’m sure it would be better than that.

This vehicle replaced one that got approximately 26 miles per gallon.

She’s putting about 15,000 miles per year on the car. That’s a savings of 228 gallons per year, which, at current prices, is about $1,000 per year in savings just from the gas mileage.

Over the lifetime we hope to own the car, that’s going to be about $10,000 in savings. We’re pleased with that.

Q10: Refinance or pay more?
We owe $95,000 on our home, mortgaged at 6% interest. We recently were approved for a 15 year re-fi at 4.37% interest. When we saw that the fees would increase our mortgage to $99,500 again, we balked. Thinking long-term, which would be best: to keep our current (30 year) mortgage at 6% and just pay extra principle each month, or to grab the new loan? I’m going to find out about early payment penalties or fees, should be make the progress we intend to make.

I realize you may need more information to go on, but I’m looking for a gut-instinct on this one.
– Debi

The real answer here depends heavily on your behavior, but if you’re not going completely crazy with the repayments, you’re better off refinancing.

The interest rate reduction will make up for the difference in balance in just a couple years. Now, if you were going to be overpaying to the extent that you’d pay off the loan in two or three years, then it wouldn’t make sense to switch because the fees would be more than the extra interest accrued in just a couple years.

However, it sounds like you’re in for more than just a couple years. In that case, the refinanced loan is almost assuredly the better deal.

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.