Reader Mailbag: The Cost of Friendship

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. Balancing limited income and values
2. Getting started with a Roth
3. Balancing social obligations and money
4. Investing for non-retirement goals
5. Economical recipe collections
6. Overpaying for life insurance?
7. Student loan dilemma
8. Daycare options
9. Cloth diaper recommendations
10. Huge student loans versus retirement

Just a rhetorical question to think about: if you moved into a new home and discovered that your best friend was allergic to some aspect of that home that you couldn’t change, what would you do? Would you try to move again? Would you accept that the friendship would probably end?

Those kinds of things are never easy to answer, but I see those kinds of situations pop up all the time. We are all faced with really hard choices in life, no matter what our specific situation is.

The more reader emails I read, the more sympathy I feel for everyone involved. The situations usually come about as a result of a lot of choices. A little more understanding never hurt anyone.

My wife and I are in a quandary. We live in coastal (read: expensive) California and bought our first house, a modest townhouse in a nice neighborhood, in October after finding out we were expecting our first child. A while back we went through some of your exercises to determine our values and priorities.

The main ones upon which we agreed are:
Quality time together with family and friends
Sharing great food experiences (cooking/dining/entertaining)
A home to call our own
A strong foundation/stable future for our child(ren)

To make a long story shorter, ever since we bought our place, we’ve watched our $40,000 cushion dwindle to now just shy of $7K. Part of that money was invested in furnishing our home and a few niceties for ourselves, but mostly it feels like it’s been death by 1,000 cuts. I think part of the problem is that we never adjusted our expenditures to meet the higher costs of homeownership and baby, my wife leaving her job to care for our newborn, and my salary cut (I’m furloughed 10% since July of 2009).

After months of this slow budgetary attrition, we finally broke down and crunched the numbers last weekend. It was pretty grim. I bring home about $3500 a month after taxes. Our fixed costs including mortgage, student loans, retirement savings, insurance, utilities, gas, and formula/diapers total about $3,000. This leaves us $500 for everything else including dining out, entertainment, groceries. We’ve basically talked about using cash only and when it runs out we have to make do, but the thing is we truly value entertaining friends (my wife is a chef) and dining out. We generally encourage pot lucks when we entertain, but somehow we always wind up making the expensive entree.

I’ve done everything I can think of to reduce our fixed costs: reduced insurance coverages, pared back our cell phone plan, minimized our internet service, made energy efficiency improvements to our home, etc, but the savings aren’t enough to free up money for our interests. I feel like maybe we’ve exhausted other remedies. With the money remaining to us, some of our favorite things feel like an impossibility. We can’t afford to shop at more expensive natural grocers anymore, farmers markets bleed us dry because we’re like kids in a candy store. Blogs like “Cheap healthy Good” are helpful, but even those ingredients tend to add up, and that still doesn’t solve our dining out issue, which we’ve agreed to cut out entirely to our extreme displeasure. Any suggestions you could offer on how to balance our value of food with our newly restricted budget would be much appreciated!
– Brad

If you’re living in a coastal California community, live in a furnished home, and are making it on $3,500 a month, you’re doing incredibly well for yourself. I’m genuinely impressed that you’ve managed to make ends meet while retaining any ability to entertain guests at all.

The difficulty is that you’re living in an area with a very high cost of living. Maintaining a life in an expensive community while also entertaining and dining out regularly is a set of choices that is simply beyond your means.

This leaves you with a few hard choices to make. You can live in a less expensive community. You can reduce the amount you spend on entertaining (probably through entertaining less). You can reduce the cost of each time you entertain by moving more towards potlucks, etc. than dining out. You can do something to raise your income level, whether through another job or a business or something.

I can’t tell you which choice to make, but one of those choices will have to be made. You seem to be consistently spending more than you’re earning and it’s eaten through your savings and is about to start sinking you into debt. Make the choice before you go down that road.

I graduated from college in ’09 and was blessed by my grandparents to have my federal student loans immediately paid off. Since then I have begun a 5-year graduate program. In my field, we are paid to go to grad school so while I have a rather small budget I do have income. At the beginning of the month I immediately pay rent (my only monthly bill), send 10% to my church and sock 20% away for savings. I have always been a frugal person so even on a small budget I find that I usually have a couple hundred dollars left at the end of the month that gets added to savings. In the last year I have a sizable emergency savings account ($5,000) which seems more than adequate considering that I am single with no dependents or debt and a paid graduate program.

My thought was to stop saving more for an emergency savings fund and start saving so that I can open a Roth IRA retirement account. From what I can see it will take ~$3000 to open an account which will take me roughly a year to save for. I do not intend to put the whole 20% I had been saving directly toward retirement, but rather portion it out into other financial goals. Am I missing anything to consider before I begin routing 10-15% of my income to retirement?
– Rachel

Why would it take you $3,000 to open a Roth IRA?

I’m guessing that you went to Vanguard (that’s who handles my Roth), looked at the funds available, and observed that virtually all of them have a $3,000 minimum. I would suggest starting with the Vanguard STAR fund, which has a $1,000 minimum balance and is well-diversified. Once you reach a $3,000 balance in the STAR fund, you can move the money to whichever fund you wish to have your money in.

Before the $1,000 mark, you’re probably better off just keeping the money in cash.

We are in our mid-30s and have a 1 year old daughter. We live in a small condo outside a large city and our daughter goes to daycare 11-hrs a day, 4-days per week (my husband works 5-days, I work 4). We are both only children with hobbies we love and most enjoy spending our free time together with our baby at home. Exhausted at the end of the work day, our main free time is on weekends. My question for you surrounds the myriad of social invitations we receive: not only weddings, baby showers, etc…, but going out for dinner with friends, visiting others’ homes, staying with my parents for the weekend (they live 1.5 hrs. away). It may sound as if I don’t appreciate having a great social network, but it has become overwhelming for us and our friends and family do not seem to grasp that we need time to ourselves and that many of these outings are costly. Given the choice of attending a graduation party at a catering hall with 100 other people and loud music or spending time at home, enjoying each other, reading to our child, engaging in our various hobbies, we’d pick staying at home every time! (The graduate, in this instance, has basically threatened us into attending her party even though she knows it’s not really our thing.) I have slowly been attending graduate school to begin a career in elementary school teaching, but have put it on hold due to expense, so we’re really trying to cut back. In addition to not really being excited about attending these outings (perhaps we’re just anti-social), the cost really does add-up. Before we alienate everyone by declining their incessant requests to visit, attend parties, etc…, any suggestions?
– Beth

If it’s something that’s not fulfilling to you, don’t attend the event. Being close to your family is not a requirement. If it does not bring positive value into your life, don’t throw time or money or effort into it.

Having said that, I think there’s a happy middle ground here. To put it simply, if I want someone at an event, I don’t care if they bring a gift or anything else. If I invite someone to a birthday party, they don’t have to bring a gift. They can if they want to, but they don’t have to. The same goes for any event in life. Gifts should never be an obligation – if they are, then they’re a cost of admission, not a gift.

The best thing you can do is talk these things out. If you feel uncomfortable doing so, then there are other problems at work in the relationships beyond the ones mentioned above.

My question is on investing for something other than retirement. I recently opened a High-Yield Checking Account and Brokerage Account with Schwab in an effort to both earn some interest on the money in my checking account and get some investing experience. I don’t have a lot of money to devote to this at the onset (between $1,000 and $2,000 when I fund the Brokerage Account, adding about $100 a month thereafter), and I’m not terribly well-versed on the finer points of investing. What I’m wondering is, if I’m looking to potentially use this money before retirement (say, to buy a house in 5 or 6 years), how should I go about investing it? Most of the information I’ve been reading has been geared towards investing for retirement, and this money is separate from my retirement accounts, as well as my more short-term savings goals.

Just for the sake of background, I’m 24 years old, have a steady job, contribute to my 401(k) and Roth accounts, and have a sufficient emergency fund, as well as an ING account for more immediate savings needs.

I’d love any advice you could give me, even if it’s just to suggest a book or two that would give me more information on this. I would really like to have a solid understanding of the different types of investments before I dive into this venture, but I’m not sure how exactly to go about finding the information I need.
– Katie

Your best bet is to just pick up a general investing book and read it cover to cover. I recommend The Bogleheads’ Guide to Investing as a great book to get started with.

As for a more specific answer, the best approach is to treat your investing as though you’re going to be retiring in five or six years. In other words, your investments should be fairly conservative at this point. Why? If the stock market has another 2008 in a few years, your five to six years will become ten to twelve years because you’ll lose half of what you’ve saved.

I would probably stick with index funds (which are basically big collections of investments, so you own only a little bit of a ton of different stocks, different bonds, or different commodities, depending on the specific index fund). Buy mostly conservative ones – bond funds and the like.

My biggest challenge is in the area of finding reliable, “you don’t need to be Cordon Bleu trained”, recipes that actually contain protein and no tater tots! :)

Seriously, rice and beans would be great, we even like them, we cannot seem to locate good recipes that are also economical to prepare.

Do you have any thoughts/cookbooks to recommend?
– Celia

I’m guessing that you’re vegetarian. The best cookbook for beginning cooks with a focus on vegetarian dishes is How to Cook Everything Vegetarian by Mark Bittman, which focuses pretty much exclusively on easier dishes with fresh ingredients. It’s the only strictly vegetarian cookbook on my kitchen bookshelf.

The most important thing to learn about cooking is that recipes are generally just suggestions. You’re almost always well-served by substituting things in-and-out as you desire. The advantage of being skilled in the kitchen is that you easily understand how to substitute things, like how to substitute a few grated potatoes for tater tots, for example.

Practice in the kitchen is more important than recipes.

What is a good resource to learn about different kinds of Life insurance?I’m paying almost 1500 dollars for our family of 5 in universal life insurance that a friend sold to us but feel that its the wrong thing for us.But I don’t know who to ask for more info and would just like to know more about all types of insurance.Any suggestions?
– Preethy

Over what period are you paying the $1,500? That makes a huge difference.

I generally don’t recommend that people get anything other than term life insurance. The only exception to that would be insurance for newborns, often purchased by a doting grandparent.

The reason is that the investment potential of the insurance isn’t very good, especially during the first decade or two of the insurance. Almost any diligent investment plan will beat the investment potential of such insurance.

Why do people still get it? It can be good in a few situations, like a grandparent picking it up for a grandchild. At first, it’s a gift to the parents, protecting them from the financial burden of losing a child early. As it grows, it becomes a gift to the grandchild. Also, it’s often a product that earns a very nice commission for the salesperson, so they often pitch it whenever they can.

As it stands now, my tuition for the next eight semesters will be around $9086. I have four more semesters of state financial aid and a university scholarship at $6000. I also qualify for a Subsidized Federal Direct Loan at $4250 a semester and an Unsubsidized Federal Direct Loan at $6000 a semester.

I could accept only $3086 worth of Subsidized Federal Direct Loan, which means I would be declining $1164 worth of subsidized loans.

When my state and university scholarships run out, I don’t believe that my Subsidized Federal Direct Loan awards will increase at all, which means I will have to pay the difference either from my savings account or using Unsubsidized Federal Direct Loan (something I do NOT want to do).

Should I go ahead and take the full amount of Subsidized Federal Direct Loan and put the excess in my savings account to gather interest and then use it when I need it after my scholarships run out? Is there some other option you believe would be more advantageous?
– Justin

That’s probably the best option available to you. It’s essentially taking out a student loan this year for your education bill next year.

There are a few things I’d worry about. First, I’d make absolutely sure that you never touched a dime of this during the passing year. Don’t get tempted to spend it or else things will end badly. Second, before you take it out, make sure that you will have enough to cover your schooling during the following year.

In short, you don’t want to take out this debt and then not wind up in school the next year.

My wife and I have a 1-year old who goes to daycare (one that is very hard to get in). I’m currently unemployed and have been freelancing while looking for a permanent position; my wife works full time but is worried she may get the axe. We have a large chunk in savings (ING at a decent rate) that we are loathe to use except for emergencies.

For most of my life, I have had a sense that I need to be prepared, so when I was single, I often paid ahead for services (electricity, phone, etc.) by a few months should I become unemployed. My wife is more concerned with money earning interest. She is also more learned about investing.

We had a discussion last night in which we asked ourselves what would we do if my wife lost her job. W/out her job (and if I hadn’t found a job), we would have to take our child out of daycare b/c it is the largest expense outside our mortgage. I proposed that we use our savings to pay for an entire year (or half year) of daycare (if they permitted that) so that we could look for work w/out having to also care for a toddler all day. She nixed that idea right away b/c we’d be losing money. I think she is too short-sighted, but is she correct in her thinking? She’d also love to be a stay-at-home mom, so I believe that factors into her thinking.

She also recognizes that if we take our girl out of daycare, she’d lose a lot of the constant interaction and attention she receives, and wouldn’t see her new friends as often.

What do you think about this? Have you already discussed this? I’m betting it’s a discussion many new parents are having.
– Choi

I wouldn’t worry about the friends at your child’s age. I have a four year old and a two year old and their friendships are extremely fluid at this stage. Even my four year old just moves on with life if he doesn’t see his friends or they move away. What’s important is the social skills – the ability to meet people, interact well, and form new friendships.

As for whether it’s better for your child to stay in daycare while your wife seeks another job, I think that more depends on what her goals and values are – and yours, too. Does she want to be a stay-at-home mother? If she does – and you can financially swing it – why not use that opportunity to let her be a stay-at-home mother?

More than anything, this seems just like a value conflict between you and your wife that you should talk through carefully so that you’re on the same page. It may be that your wife really does wish to be a stay-at-home mother but isn’t doing it for various reasons.

You often refer to how your family uses cloth diapers for your kids. We do this as well. I have kept track of all the diapers I have bought and sold, and I figure with my first son, we will just about break even over the cost of buying disposables. Now that my second son is due in about a month, we will finally start to actually save money! But I’m trying to figure how the cost of water and electricity figure into the equation. We have a top loader washing machine, and just the standard dryer. I wash the diapers in hot water with two cold rinses to get them really clean. Have you ever figured out what the cost is to wash the average load of laundry? I would also be curious to hear what brand(s) of diapers you use — there are a ton of options out there!
– Juli

There is such a huge variance in the cost of a load of laundry that such a calculation is almost meaningless. You have to pro-rate the cost of your washer into each load. Water prices vary greatly, as does the amount of water used in a given load (though in any case, this is still a small cost). The cost of detergent varies enormously. There’s just no consistent way to calculate it.

A friend of mine wrote a guest post on The Simple Dollar about such costs and she basically concluded that the first child is a wash and that the second child generates very nice savings, even with all sorts of costs figured in. Disposables really, really add up.

As for what we use, we use BumGenius diapers. They were initially expensive, but they’ve held up through three kids very, very nicely and are about as convenient when using them as disposables are.

Currently I owe $95,955 in student loans – all loans are issued through the federal government and have been consolidated. My current interest rate is fixed at 5.250% and the loans are in forbearance until March 2011. The only other debt that I have is $1300 dollars in monthly credit card bills that I pay off in full each month – I use my credit card because it earns me airline miles, and so far I’ve booked 2 free tickets back home to California!

In terms of employment, I’m one of the lucky few at my graduate school that have landed a job working for the federal government. While my starting salary is $52,527 – as long as a meet expectation in all 4 of my six-month reviews, I will receive a 7.55% raise. So in 2 years my salary should be around $70K.

My problem: I don’t know what to do first. Part of me wants to start paying my student loans, but part of me wants to wait until I’m making $70K to start paying them off. My rational is that since I’m a public employee my loans can be forgiven after 120 consecutive payments (http://www.finaid.org/loans/publicservice.phtml).

What I’m currently doing is putting $200 dollars a pay period – which is $400 dollars a month – into a savings account with my credit union. I contribute 5% of my salary to my TSP – Thrift Savings Plan – since the government matches me dollar for dollar up to 5%. Other than that I don’t really do much with my money. The worse part is that my credit score is at about 654. I really want to raise my score because I eventually what to buy a house, but I have no idea where to start, or how to start chipping away at my debt.

Can you please help me!
– J. P.

Your credit score isn’t devastatingly bad at all. You’re in an area where you probably wouldn’t get the absolute best home loan, but you’d likely get a pretty good one. The best part is that your credit rating will slowly go up as you consistently keep your bills paid.

I think your plan in paying off your student loans slowly is a good idea considering you have that payoff option. Make sure you know exactly how that plan works (it seems straightforward).

I think you’re doing the right things overall. Keep it up. When you get your raise, amp up your savings for the house down payment and make sure you have no other debts.

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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