Reader Mailbag: The Band

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 loans and retirement
2. Being a frugality mentor
3. Food shortages
4. Selling unused items
5. International transitions
6. 2011 versus 1980
7. Annuity rollover?
8. Establishing a budget
9. Wedding registry ideas
10. College savings made easy

A close family member serves as the keyboardist for a great band that seems to be in the process of disintegrating. The lead singer and guitarist of this band has tons of talent and charisma, but just doesn’t quite have the desire to do something amazing with it.

I’ve got really mixed feelings about it. On the one hand, if you’re not happy doing something, don’t do it. On the other hand, if you’re giving up just because success didn’t happen just like you dreamed… don’t give up. Ask for help.

I’m talking right to this person, right now. He knows who he is. If you enjoy the music and want to do this, don’t give up on it. You’re too good at this to just give up on it if it’s something you want to do.

Q1: Student loans and retirement
I have a follow-up question regarding your post about paying into both student loan repayments and building up you emergency fund ( I’m in a similar boat, with about $40,000 worth of students loans with a 6.5% interest rate. I’m currently paying the minimum because my student loan company makes it difficult to pay more, but I’d like to pay more. I’d also like to build up my emergency fund (I almost have 3 months’ worth of living expenses saved, but I’d like 6). But I also wonder about my 401(k). I’m currently putting in 6% of my paycheck, which is being matched by my employer (who doesn’t match above 6%), but should my priority be to keep my 401(k) payments at 6% and pay off my student loan faster (after building up my emergency fund), or should I keep my loam payment low and increase my 401(k)?

– Alisa

It depends on how much you’re socking into retirement in total with your employer’s match.

If your employer is matching dollar for dollar up to 6%, that means you’re contributing a total of 12% to retirement, which is a healthy amount for someone freshly out of college. If that’s the case, I’d stay at 6% and get rid of those student loans.

If your employer is matching at a lower rate, that means that you’re probably only getting about 8% or 9% of your income into your retirement savings, which isn’t as good. In this case, I’d add more to your retirement contribution to make sure that you’re at least at 10%.

10% is a very good rule of thumb for people freshly out of school and already contributing to their retirement while also facing student loans.

Q2: Being a frugality mentor
We are unofficial mentors to a family that has 3 children (and a fourth older child who lives with his mother but they still pay child support). Our interest, frankly, is mostly with the 3 children as we have none of our own, and we are not going to be blessed that way. But we know the parents and interact with them as well.

The family is financially hurting, and there are emotional/psychological issues as well, tho not as extreme as some. (We do not need to get Child Protective Services involved at this point).

The problem that we see on the one hand is that they are very limited in income and in potential to make income. The other is that when they do get some sort of windfall (a tax return earlier this year) they make poor choices with that money that could have helped them down the road had they made better choices. They did some extra work this last month and are going to use it to vacation somewhere, when we live in a resort area with lots of vacation potential, and they are struggling to pay rent. I think they live with the idea that life is so hard day to day, when they get some sort of windfall they need to “reward” themselves for having it so hard.

Our desire is to show/model to the children that there are alternative ways to live. (We don’t shout at each other in our home, and we attempt to show consequences for actions rather than punishment for behavior.) I’m not sure that we are actually able to model these things well (i think the children see us as “rich” when we are simply mid level income and trying to make good choices). We do try to talk about “saving our money” for things in the future. We also are very aware that we cannot “rescue” the family or fix things for them, simply try to share choices that will make things different for them.

The problem, of course, is that the parents believe things are “easy” for us because we do have higher income and no children. Every suggestion made is countered with a “We can’t do that because . . . ” or “Yes, but . . . ” So i am aware that we are not able to help them much. People only change when they are motivated to do so.

Because this family’s life seems to be so similar to that of your childhood in some ways, i wonder if you could comment. Most of your site seems to be focused on folks who are making an adequate income to make changes in their lives. I’m interested what you would say to a family who is struggling so much to put food on the table that at times they have to decide whether to pay the electric bill or the gas. Also, they drive a big, old gas-guzzler. Their large vehicle uses as much gas in a 80 mile trip as our small Honda uses in 300. And it is unreliable as it has continued to break down. But with no money, i just don’t see how they can replace that vehicle to one that would be more reasonable for them. What would you say to a family in such a status? It seems to be such a deep money pit that it is impossible to know where to start.

What would you say to us trying to be a help but not “rescue” them? We have helped on occasion, mostly by choosing to pay for the activities of the children (baseball/tee ball for the boys, a dance class for the girl), and it was our choice, not their request. What would you say to a non-parent trying to mentor a child as far as money decisions? I don’t want these children to think of us as rich, but the reality is we do have a lot more freedom to do as we choose. How can we relay our choices to them? Do you think that is even possible?
– Kim

I think it’s difficult to do this because of the social “taboo” of talking about money. It’s a subject that many people do not feel comfortable talking about, particularly when you’re looking at situations where there are economic inequalities between families (as there seems to be here).

I think your best approach is to just drop little hints here and there. I’d do things like say, “You know why I like this car? It doesn’t use much gas, and gas is expensive, so I can use my money for other stuff. It gets me to where I want to go.”

Those little things have surprising impact on kids. For one, when you say things like that, kids often have a sense that you’re talking to them like an adult, which they tend to crave. For another, kids are often information sponges, pulling in little things from all over the place and synthesizing them. I see all three of my kids doing this all the time.

Don’t push it. Don’t overdo it. Just drop little hints.

Q3: Food shortages
I’ve been reading and hearing a lot lately about the coming food shortage and how we should be prepared. I believe this is tied to our disastrous economic situation in the US with a 14 trillion dollar debt. If somthing does happen to where we can’t get to the grocery store, or that trucks won’t deliver foodstuffs, or that farmers won’t be able to grow our food due to weather or govt. overspending, what would you do? What are your thoughts on this subject? Do you agree that we’re headed for a tough time soon? Do you think it’s all bunk? Or should we really be prepared for the worst?

– Julia

I don’t think there will be a true food shortage. The United States produces absurd amounts of food. However, there are challenges.

One challenge is logistics. The places where much of the food is produced is in a different place than where it’s consumed, and if you add in processing, that’s often in yet another place. There’s a cost in transporting those foods from place to place. It takes fuel, for one.

Another challenge is international trade. Free trade zones, resistance to such zones, high tariffs used as a bargaining chip in other negotiations, changing currency prices, and many other such factors all alter the cost of imported food.

What’s likely to happen isn’t a food shortage, but a change in the foods that are available at reasonable prices, likely followed in a few years by shifts in agriculture to handle the changes. I think if you expect to always have this specific food available at this specific price, you might be disappointed. Flexibility is always a good thing.

Q4: Selling unused items
I have started trying to sell some collectables, toys and books of my children’s and attempting to declutter our small home. However I am not finding it all that easy. I am using Craigslist and EBay, but many of our items are repeatedly going unsold and I don’t understand why. I see other similar items selling for sometimes more money than what I am asking. Am I just better off donating the items and taking a tax deduction? It is a bitter pill to swallow when you realize the things you have spent so much money on are virtually worthless.

– Cindy

Part of the difficulty you may be having is in your promotion of the sale. For one, you’re probably using an account that doesn’t have a long history of successful sales. The seller is certainly a factor in determining whether a buyer hits the bid button on eBay.

Another factor might be in how you’re describing the item. Use pictures. Make the description shine a little. This will entice bidders to bid. Shipping costs can also be a factor.

If you’re still having difficulty finding buyers, you may want to consider donating the remaining items or take them to a consignment shop.

Q5: International transitions
I’m 26 and live in the UK. I’ve completed three degrees. I have no debts, and I have £12k in an ISA earning less than 2% a year (though it tracks present interest rates, so it used to earn around 6.5% a year). I’m about to move to the US for my first job, a wonderful three-year position of my dreams, and will be making around $60-65k gross a year. At the end of three years, I am coming back to the UK to find a permanent job.

I’m very financially inexperienced at best, and this situation has me totally confused. As this is my first job I want to start off my independent financial life on the right foot, as it were. I have already good spending and saving habits. I know that I want to save as much as possible from this job, so that I’ll be in a position at the end of it to get a mortgage once I’m back in the UK. But how does one manage transatlantic finances? I have three questions.

1) My present UK savings: Should I be investing that £12k in something other than a 2% interest ISA while I’m away? I don’t need to access it. I’m highly risk averse and have never done any investing at all. From your writings I have the sense that I ought to put it into some kind of fund that tracks the stock index, but I have no idea how to do this. Or ought I just to leave it in the ISA, be content that it’s earning at least a bit above present interest rates in the UK?

2) My future US earnings: What would be the best way to save and grow my income from my US job? If I put money into a US pension fund (for which I would get no employer contributions) or into a Vanguard or Fidelity investment fund, how, if at all, would these earnings transfer to the UK? What taxes would I pay on them? Should I be trying to watch currency rates and transfer money into sterling when they seem propitious? Or ought I to leave the dollars I earn in the US and let them grow in US-based funds, thus maintaining separate UK and US accounts?

3) My credit: Having been a student most of my adult financial life thus far in the UK, even though I have large savings, I have basically no (or bad) credit history. I’ve never used a credit card, only a debit card, and never taken or had to pay back any loans. I know credit history doesn’t follow you to another country, so I’ll start fresh in the US and conscientiously build my credit there. But as my goal is to get a mortgage when I come back to the UK after 3 years, how can I ensure that my credit rating is good enough *in the UK* to get a good interest rate, when all my credit history will be US-based?

I’d be really so grateful for any wisdom you might have about this. I’m basically looking for a little help in putting together a transatlantic financial gameplan. I’m very sorry if you’ve answered a question like this before, and if you have, I’d be perfectly happy for you to point me to it rather than compose a whole new reply. Thank you so very much for your time.
– Rachel

For the first question, if you’re saving for a long-term goal (even a nebulous one) with a timeframe over ten years, you’re probably better off in a broad-based stock index fund, at least with some of your money. I’m not sure what sort of investments are available within the UK, but my understanding is that you can easily invest in investment houses in the US that offer index funds. I use Vanguard. You may want to think about a 50/50 split, where you leave half of your money in stable savings and put the other half into something more adventurous. This protects you against losses, but doesn’t allow you to ride the rocket ship of gains quite as much.

For the second question, my big concern would be taxes. I would discuss this with an accountant and find out how taxation would be handled with such investments. Another factor in this is your long term plans: where are you going to wind up over the long term?

For the final question, I would try to get a card in the UK before leaving, then attempt to use it occasionally while in the US (while keeping the balance paid off every month). Use it for sending gifts online for appropriate occasions or for when you return to the UK on trips.

Q6: 2011 versus 1980
I’m probably an “older” person as I remember the 1980’s and waiting on line for gasoline, and purchasing my first brand new car for $7800. at 18.9% financing. Yes, you read that right, I financed my first car at 18.9%. I worked at a bank and I remember mortgage rates being over 20% for a while during that time too. Credit cards were at 24%. How does the economy around now differ than it did around then, except for the high interest rates? Unemployment was in double digits then and people did not spend as much. I’m just trying to understand why people say the economy is so bad now, when not a lot of people remember the 1980’s and how bad it was then.

– Maureen

People have short memories. The economy was disastrous in the late 1970s and early 1980s. We had unemployment over 10% in 1982 and interest rates were as you describe. Virtually every significant economic indicator was as bad or worse then compared to now. We had negative GDP growth almost every quarter from 1978 to 1982.

Throw on top of that the 1930s… and 1907-1908… and even earlier periods, and you see that economic downturns do happen, and they can sometimes be quite lengthy.

Interest rates are low now because the Federal Reserve is handling the downturn differently than in the late 1970s and early 1980s. Bernanke is different than Volcker, plus one could say that they learned some lessons from the earlier downturn. My opinion is that they blunted the worst of it, but it probably created a slower recovery than before.

Obama is doing exactly what Reagan did in the early 1980s (late 1982 to 1984) to fix the economy: deficit spending plus lowered interest rates.

Patience is the key, but patience is a virtue very few people seem to have during a down economy.

Q7: Annuity rollover?
My husband changed jobs in March and recently received a letter stating that he earned money through a pension program – Single Life Annuity. Since the amount is less than $10,000, he is eligible to receive a lump sum immediately. We don’t want to pay penalties for early withdrawal. Are we able to move this money into a 401(k) or IRA, or would it be best to leave the money where it is?

– Kendra

You absolutely need to see an accountant if you want to try to roll that lump sum over into an IRA.

The rules involving such things are extremely nebulous and change constantly, so if I gave you specific advice on it, it’d be wrong next year (most likely). Not only that, your picture is a bit incomplete as it contains no information about your income (for one).

My guess is that you won’t be able to roll that money over into anything else, so you’ll have to choose between letting it sit or just taking the payout and paying taxes on it. That’s a personal choice you’ll have to make.

Q8: Establishing a budget
I’ve spent a lot of time trying to come up with a solid budget/savings plan….but I’m not really finding a lot of comparables. I dont know if I’m going overboard with trying to be aggresive in saving, or if I am not being aggresive enough. So, like everyone else, I figured I would air out my “facts” and see what your opinion was, and where you might suggest making some changes. Im 26 and have roughly $10,000 remaining in student loans (divided amoung 3 of them all at ~5%), and bring in about $4,200 a month (after tax/insurance/ and a 5% contribution to 401k). After that, Im maxing out my Roth IRA by contributing monthly, putting an additional $400 a month toward longer term savings, or an eventual down payment on a house, $350/month toward student loans, and another $700 tithed to my local church. My car is paid off, and I carry no credit card balance. Whatever doesnt get sucked up by regular monthly expenses at that point sits in my checking until I hit a certain value, and then I chop it down by throwing some into various investment accounts and savings. Am I on track with everything, or is there something I am missing? Any suggestions you have would be very helpful. I read several financial blogs like yours on a daily basis, and feel like I have tried to take a mix of advice from them, as well as some books I have read, to come up with my plan thus far.

– Jill

You’re doing just fine for the most part. You’re contributing a pretty significant chunk of your income to future savings beteween the longer term savings, your Roth IRA, your 401(k), and your use of your checking account excess.

My only concern is that you don’t seem to really have a plan with that money. The Roth and the 401(k) are understandable – they’re for retirement. However, you’re “putting an additional $400 a month toward longer term savings, or an eventual down payment on a house” and you’re also using your checking excess by “throwing some into various investment accounts and savings.”

This is good, but it’s not directed and it’s possibly costing you money. What is your goal? If you don’t know, ask yourself where you want to be in five years. Ten years? Identify what the big cost is in that picture and focus everything toward that. If it’s a down payment, direct all of that excess money into savings for that down payment. If it’s something else that’s longer term than ten years, put some of that money into other investments. The longer off your big goal is, the more of it should be in something with more risk and higher reward.

Figure out your goals and make your moves based on that.

Q9: Wedding registry ideas
My fiance and I are getting married this coming October. As such, we are going through the process of registering for wedding gifts. I have mixed feelings about people spending so much money on us but I figured we can use this opportunity to acquire some quality items. So far during the process, we have been trying to be smart about the things we decide to put on our registry. This means adding things have we’ll definitely use often, will last a long time, and will enhance frugality. It’s been difficult since we are being pretty selective. We both want to have less “stuff” laying around the house and I refuse to get any “uni-taskers”. Do you have any suggestions for items to put on the registry? Perhaps, there are some things you received that have stood up to the test of time.

– Eric

In my mind, it’s more a matter of what you do around the house.

If you cook, for example, you really only need three good knives (bread knife, chef’s knife, paring knife) and three pieces of enameled cast iron (two pots of different sizes and a saucepan) and perhaps a skillet to cook almost anything you’ll need. However, each of those items can be a bit pricy – you can get the bread knife and the paring knife relatively cheaply and a fairly inexpensive chef’s knife will work, but enameled cast iron will cost you.

It all follows from what you like to do. Focus on those things, research them in detail, and you’ll be in good shape.

Q10: College savings made easy
We have 2 daughters under the age of 3. They have just about every toy imaginable (thanks, grandparents!), and both have birthdays coming up. We are considering setting up some type of college savings for them. Do you know of any type of account that family members or friends can easily contribute to instead of adding to the Toys R Us in my living room? An easy-to-use website would be ideal.

– Dana

Many 529 college savings plans allow direct contributions from anyone. I would look into the 529 offerings in your own state to see what’s available.

Another option (if you don’t want to use the money strictly for school) is to open up a SmartyPig account and set up a savings goal for each child. Again, this allows anyone to contribute. It doesn’t have the education restrictions of a 529, but it might not have the same “pull” to convince people to donate that a 529 would have.

We’re more or less in the same boat as you. We have grandparents who love to give gifts and, at times, it feels like we have too many toys around. Part of the challenge is that we’ve not eliminated some of the toys our oldest child has outgrown because he has a younger sister followed by an even younger brother.

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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