Reader Mailbag: The Little Things

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. Car leasing question
2. Separate savings accounts
3. Handling reduced income
4. Relationships and honesty
5. Why savings accounts?
6. Planning for debt freedom
7. Upgrading credit card
8. Trusting product reviews
9. Funding retirement
10. Figuring out priorities

Opening up the window and feeling a cool breeze when your office is stuffy.

Hearing a child laugh because of the sheer joy of life.

Eating a handful of strawberries straight out of the garden.

These little things have filled my day. These little things fill my life.

Q1: Car leasing question
I have been on my own, graduated from college for a year now. I just recently moved into an apartment with a friend after living with my parents after graduation. I am asking for some advice for a newly grad.

I have been reading the simple dollar for about 6 months now trying to figure my way around the adult world. When I went to college my parents were nice enough to pay for my gas and groceries on a credit card to build credit. However, the economy has hurt even my seemingly invincible parents and I am left with $3000 left in credit card debt.

Now I know that its not terrible, but still something I am now paying off. My parents also are being very generous and paying the minimum, and I am throwing $200 extra to help them/myself with the payments. The interest rate is 20% on the credit card debt. Also I have roughly $24000 in student loans with $186 monthly payments and 6.5% interest.

I also contribute 4%, about $50, to a ROTH IRA since I have to be in my position for a year to get 401k matching. I put about $100 a month to a savings account also. Now is it worth it to continue contributing to my IRA, or put the extra $50 towards my credit card bill? I know that it is good to start investing when I am young, but does that 4% make sense right now?

I also just started leasing a car in February since mine was going to need a lot of repairs. The monthly payment on that is $200. Now I was reading an article that you wrote about the differences in buying used or buying new, but you never mentioned leasing. You said buying new would be worth $63000 over 15 years. If you do the math it would only be $36000 to drive a brand new car if you figure $200 monthly payments for a new car.

Now I am young, but is it worth it to lease a new car for $200 a month? It is a Honda Accord so it gets excellent gas mileage.
– Pat

The difference between buying new and leasing is that, when the payments are finished, you’ll wind up with a late model used car that you can drive for as long as you want if you buy new, but at the end of a lease, you don’t have a car at all unless the dealership decides to sell it to you.

The only time a lease makes sense is if you absolutely must have that new car smell. For example, it makes sense for some salespeople to be driving new cars as it’s part of the sale to the customer. Since you need the shiny “new” effect, the ability to return a car at the end of the lease and getting a new one is enormous.

Having a lease is like always having a car payment, a payment you can never escape from. The reason to actually own your vehicle is that you can go for years (sometimes many years) without a payment.

The best option is always to pay cash and own the vehicle. This eliminates the money that’s lost to interest on the loan. Used cars are usually the best deal, but you should always be doing the numbers and the research.

Q2: Separate savings accounts
I have a mundane question about logistics. when you say you put away 4% to education, and $100 a month for vacation… WHERE do you put them? separate bank accounts? smarty pigs? how do you keep money separate for specific purchases? that’s the way I think of my finances, and I end up with lots of different accounts!

– Jimena

Why not have lots of different accounts?

I use SmartyPig and ING Direct. Both of these companies allow you to open several separate savings accounts under the same service. Both pay a decent interest rate on the money you save.

If all of the separate savings are listed under one login or two, it’s not really all that inconvenient. You can manage them from your home computer with ease.

Q3: Handling reduced income
My husband works in residential real estate (he’s a builder) so needless to say our cash flow has been hammered over the past several years. Before our daughter was born in 2007, we upgraded to a larger home which was completely within our budget at the time, but I was hit with a layoff a year later. I luckily landed a job I love six months later, but I’m currently making less than I was at my old job.

A smaller paycheck, combined with a husband making much less in a troubled economy, has equaled about $15,000 in credit card debt a couple of years later. I don’t see the home market getting back to where it was in the next couple of years at least. Selling the home isn’t an option: we just refinanced and any equity in the home was wiped out during the recession based on the new appraisal.

Hammering away with extra payments on the credit cards isn’t feasible with our current cash flow. If I could just make the credit card payments go away, most of my cash flow issues would be resolved. We have just under $150K in retirement savings between monies contributed to Roth IRAs, Traditional IRAs and a whole life policy. Am I totally crazy to think about hitting the retirement savings to pay off the debts? I can withdraw monies initially invested in my Roth IRA without penalty, right? We have the mortgage and one car payment, but no student loans or anything. BTW, I’m 34. Your thoughts?
– Jennifer

If you hit your retirement to pay off these debts, you’re pretty much adding a couple years of work directly onto the end of your working career. When you’re 70 (or so), you’ll be working when you could be retired.

That’s the real exchange you make when you empty out your retirement to pay off a $15,000 credit card debt. You’re going to lose 10% of your retirement savings. Over the course of your life, that will add up to about 5% of your total when you’re older (depending on your later rate of saving, of course). There’s also the income taxes and penalties and other factors (like loan costs from borrowing from a life insurance policy).

I would be very careful before taking retirement money for credit card debt. The total cost of early withdrawal of retirement money is enormous and often stacks up to the interest rate on credit card debt when you account for the total cost of withdrawing it and the lost returns over your lifetime. If I were you, I’d try to make lifestyle changes and pay off the credit cards without tapping retirement savings.

Q4: Relationships and honesty
I know that you’re married and have been for awhile and I have been in a relationship myself for over 6 years. I was wondering, do you think that total honesty is necessary for relationships? If something has happened, the event has passed, everyone has moved on, lessons have been learned, is it necessary to bring up the truth with your significant other simply to relieve yourself of some guilt even though it would just make them temporarily upset? Or is that just selfish? Who doesn’t make mistakes right? As long as you’ve learned from them and are truly apologetic and remorseful, is it okay to move on and not speak about it? This has been bothering me for a long time. There is something I want to tell my significant other but I’m afraid I only want to tell him so I don’t have to think about it anymore–I acted selfishly (though somewhat unknowingly) and I feel like I’d be doing that again just to make myself feel better.

– Robyn

Dishonesty, especially when guilt comes from that dishonesty, often affects your relationship in more ways than you think. It changes a lot of your interactions. It makes it seem more plausible to be dishonest at other times. It makes you feel guilty, which changes your interactions and alters your relationship today.

Think about it. Right now, you feel guilt toward your relationship. I’m sure there have been times when you’ve bitten your lip and chosen to not say anything or say something else. Each of those things alters your relationship – and not in a good way.

I think you should be honest. Every moment when you’re trying to choose your words carefully with the person you should be closest to in the world is another gulf in your relationship and you should strive to have as few of them as possible.

Q5: Why savings accounts?
This is both a question and an observation. When I see people describe the benefits of Savings accounts, they always seem to use big numbers. For example, “If you use a savings account with 3% interest…” is a common one. The thing is, there are NO accounts available that deliver that kind of interest. In fact, my credit unions offer .1, and .3% APY for sub $10,000 accounts, and going up as high as .4% for >$100,000. Searching around, the very best savings account I can find offers 1.25%, but isn’t FDIC insured. ING offers 1%.

Where do people get these inflated example numbers from? Was there a time when people actually could see >1% interest on a savings account? I’d really like to store my emergency fund somewhere where it can garner some decent interest considering I’m not using it for anything for now. Most of these banks seem to be wasting my time. I know its safe, and I am earning SOME interest, but honestly seeing a whole 25 cents coming into my account each month seems insulting since I know I could make far more money off of monthly dividends should I put the money in a real estate trust. Is this something to do with the economic climate? Or have banks always had a pathetic return on savings accounts?
– Marty

Yes, there was a time where people saw interest rates higher than 1% in savings accounts. It was called 2007.

Savings accounts tend to reflect the prime lending rate, which sets interest rates on a whole bevy of things from mortgage rates to returns on government bonds. That rate has been very low since 2008. When that rate is low, savings accounts return very little – between 0% and 1%, typically. At the same time, mortgages are very low.

When the economy rebounds, the prime lending rate will eventually go up. At that point, savings accounts will begin to inch up in order to attract savers so the banks can keep lending money in a hot economy.

In other words, in our current economy, you won’t find a good interest rate on investments that are both very stable and very liquid (which is what savings accounts are). In order to get a better return, you have to either give up stability (by buying stocks, for example) or give up liquidity (by buying land, for example).

Q6: Planning for debt freedom
I have $5,000 invested, $2,000 in savings and I make net $~ 2000 a month. I am planning on going back to school and would like to have some savings as it is an out-of-state move. I have been driving the same car for the last 12 years and I know it will last me until I go to graduate school in 2012.

Here’s the thing, I have debt! The good news is I have paid off 3 credit cards in the last few years. I still owe about $5,000 in personal line of credit and this year I owed in taxes because I was an independent contractor and there was very little I could write off. I actually saved up money for the taxes, but due to a job change, and my new employer taking over 4 weeks to pay me (and not receiving that pay retro and getting it after I end the position), I had to use up what I saved for taxes to live on.

So now I owe $ approx 5,000 in my personal line of credit, $ approx 5000 to the feds and $ approx 1,000 to the state. I have $5,000 (approx) in my investments and $2,000 in savings. My goal is to be debt free by the time I enter school in Fall 2012 and I need a chunk of savings for the big move to the school and a (newer) used car. Because I am driving my car to the ground, I was not planning to sell it, was hoping to just give it away and save up for $5,000 or so for a car when I get to the new school.

Oh and I have student loans which I pat $180.00 into every month. I plan on deferring it while I’m in school.

Do you have any advise on what I should do? Getting another job right now is not an option, I am busy as it is trying to prepare to get into school.
– Erika

The only way to make these debts go away is to pay them off. If you don’t have adequate income to pay them off before you start school, then they’re not going to be paid off. If you can’t get another job right now, then you’re denying yourself routes to a more adequate income.

I am a bit confused by the “busy trying to prepare for school so I can’t get a job” bit. What sort of preparation are you doing that keeps you from getting another part-time job doing something like being a nighttime gas station clerk?

What I see here are two priorities that are in conflict: getting rid of your debt and preparing for school. Which is the higher priority? It sounds like both are very difficult. I can’t tell you which is the higher priority. That’s a decision you have to make for yourself and live with.

Q7: Upgrading credit card
I have a Chase +1 student credit card. It’s a fine card, but I’m sick of points rewards and want to switch to something else. I have seen people talking online about “upgrading” from a student card to a normal card. Can you actually do this? How do you do this? And most importantly, when you upgrade to a new card if it’s possible, is it equivalent to opening a new account and closing the old one (thereby killing my oldest credit line in the credit report)?

– Kevin

You can. What they mean by “upgrading” is simply applying for a card with a better rewards system, switching to that as a primary use card, clearing the balance on the old student credit card, and either sitting on it (which is what I’d do since it’s the oldest card I have and beneficial for one’s credit history) or closing it.

Is it a good move? If you don’t close your old card, particularly if you don’t have other sources for your credit history, it’s not too big of a deal. If you can get significantly better rewards from the new card, it’s probably a good deal, particularly if you keep your balance paid off each month.

The only thing you can do is find the card that you want and apply for it.

Q8: Trusting product reviews
Can I trust product reviews on Amazon, or are people paid to write positive reviews to help sell their product? Any experience or research with this?

– Albert

Amazon reviews are a mix of different things. There are lots of reviews from real people legitimately describing their experience with a project. There are some reviews from people who are paid to write positive reviews (often employees of the company selling the product). There are also negative reviews from competitors or from sources with unrelated problems or axes to grind.

Of course, the same thing is true (to a lesser extent) with reviews from other sources.

When I want reviews, I usually stick to a few sources I really trust – a handful of bloggers, Consumer Reports, and so on. I use other sources as secondary sources, and Amazon reviews fall into that camp.

Q9: Funding retirement
I have started a new job and I’m trying to decide how to set up my retirement account. I have the option of a 401k or a Roth IRA. My only choice of companies is Vanguard, which is great. I get to choose which fund/s I invest in no matter if I choose the 401k or Roth. My problem is choosing which program. My employer does not contribute so I feel that I should choose the Roth but I already own a Roth account through my insurance company, USAA. Can I have more than one Roth account or should I role over my Roth to my employer’s account? I’m 36 and have not been able to save for retirement the way I want to. I would ideally like to put 15% of my income towards retirement. The contribution limit of a Roth would not allow me to do that. My first thought is to contribute 10% of my income to the 401k offered at work and then put the other 5% towards my Roth through the insurance company. I could also max out my Roth and make up the rest through the 401k at work. I would appreciate any advice you have.

Pre-tax income is around $100,000
Post tax is about $81,000
I have $63,000 in student loan debt

– Leslie

A Roth IRA is typically not tied to a specific employer. You can independently open a Roth IRA wherever you choose. You may only have one Roth IRA account, but that account can be hosted by multiple companies. So, you could open a Roth IRA here, but it would essentially be an extension of your earlier account and you’d have the investing limits spread across both investment houses.

If you’re happy with the USAA Roth, I’d leave it there and follow your second plan.

Note, though, that you’re close to the income limit for Roth IRA contributions. If you’re single and earn more than $107,000 per year, you can’t contribute the full amount that year to your Roth IRA. In that case, I’d probably just put more into the Vanguard 401(k) you have.

Q10: Figuring out priorities
I started a new job in September 2009. I am 28 years old and did not have a job before that I could fund a 401k, so I decided to try to max my contributions and contribute the max $16500. I figured that will help me catch up with my peers that have been saving since they left college. I currently make $87,700 (pre-tax) and I put $635 per bi-monthly paycheck in a 401k fund (about 19% of my pay). Since I started, I have been able to get $38,000 saved. However, I also have student loans and a car loan to pay off and I would like to set aside an emergency, house deposit, and wedding fund. I was wondering if I should put less money into my 401k (just put the 5% that my company matches) and pay off my debt and build my funds or just continue to do as I am doing and slowly pay off the other debts. I guess my question is which is better: put my savings towards things in the immediate future or put savings toward my retirement? I feel like I will lose on compound interest if I don’t save lots now for later but then again I will lose if I pay compound interest on my loans now. (student loans: $800 (5%), $1900 (3.75%), $15,600 (2.6%); car loan: $21000 (2.9%); 401k rate of return (22%); savings: $1000 (1%))

– Monica

For starters, your 401(k)’s rate of return won’t hold up over a long period of time. You’ve had a nice run recently, but that’s an incredibly good rate of return, one that doesn’t hold up over years and years. Don’t base your calculations on a 22% rate of return.

Based on your comments, you seem to be concerned about your cash flow in the future. You want to get rid of these debts so that you’re not responsible for those monthly payments, which will make it easier to save for other goals. If that’s the case, I see nothing wrong with cutting back your retirement contribution so that your contribution plus your employer’s contribution is 10%. Use that remaining money to wipe out those debts as quickly as possible.

Once those debts are gone, your monthly cash flow will be much higher. I would then return to your original contribution plan and use the additional cash flow you have to start saving for your other goals.

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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