Reader Mailbag: Time Conflict

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. Using wedding money wisely
2. Percentage of savings for retirement
3. Asking for wedding money tactfully
4. What to do with savings?
5. Self-employment advice
6. Retirement Roth versus 529
7. Repayment troubles
8. Windfall options
9. Debt snowball or not?
10. Prioritizing reading

What do you do when you have a family commitment on the same day as something you’ve been planning to do with a friend for months? What if the two events are two states away from each other?

My solution right now involves a one-way flight and an extremely tightly booked day after my family commitments are complete. Family comes first, of course, but some creative thinking (and a bit of hyper-rushed travel) can make everything work.

Q1: Using wedding money wisely
I am getting married in June (huge wedding, not our choice!) and we conservatively anticipate receiving about $15,000 in gifts from our family and friends. In the past year, we have moved across the country to be closer to family and have finally in the last 6 months or so settled into our new routine. We bought a home, actually the one that we were renting. The owner wanted to sell and offered us first chance, she gave us owner financing, and counted all of our rent as a down payment. The house is livable but needs significant updates to all of the bathrooms and the kitchen. I found employment, but have significant travel everyday. Because of this, we had to trade in my car and get something more reliable for the winter weather and the route that I drive.

Our debt is as follows:
Student Loan 1: 10,000 @ 8.5%
Student Loan 2: 10,800 @ 6.8%
Student Loan 3: 7500 @ 6.8%
Car Loan: 14,000 @ 4.99%
Mortgage: 143,000 @ 5%

I am the breadwinner, my salary is $43,000. My fiance works part time at a university and is going to school for his master’s degree (free while he is employed there). We live off of my salary and save his. We do have an emergency fund saved up ($1000) and then other money in an online savings account for any other life events (approx 15,000). I pay $1000 a month towards debt (not counting the mortgage), which is the minimum on everything except for the SL at 8.5%. We have lived very frugally for the past 4 years and will probably always do so.

My question is: should we use the wedding money to pay down the loans as much as possible, or should we put that into savings and use it for repairs on the house? I feel guilty using the money to pay down the debt, but I know it’s probably the better choice for now and repair/update the house at a later time. I would love to buy new bedroom furniture (everything we have are hand-me-downs and nothing matches, plus we need a new mattress) and possibly renovate 1 or 2 of the bathrooms. It is MY student loan debt, but I’m also supporting the whole household. My fiance is fine with paying off the loans, but I’m feeling guilty.
– Marjorie

It really depends on how urgent the updates you need to make are. You say the house is livable, but that it needs updates. Is this for the purposes of decor? Or are there really important functions missing?

If it’s mostly decor, I wouldn’t make that a high priority unless you’re looking to sell the place fairly soon. I’d pay off the debt first.

If you’re in a position to sell soon or these repairs will make a significant functional improvement, then I’d go for the home repair.

Q2: Percentage of savings for retirement
We often hear of retirement savings goals such as: if you begin saving for retirement at age 20 you should strive to save 10% of your gross salary, if you begin saving for retirement at age 30 you should strive to save 15% of your gross salary, etc. When you think of the percentage of savings, should this be for a pre-tax account such as a 401K, a 457, or a pension plan or a post-tax account such as a Roth IRA? Or is it a combination of both?

– Kelly

Those numbers are very simplified “rules” for people who just want a quick answer without digging in deeper.

If you want to break down those numbers, my impression is that they assume you’re talking about an equal mix of pre-tax and post-tax savings. I would assume that of any simplified numbers bandied about for retirement.

I would never bank my entire retirement plan on such a number, though. Use some retirement calculators and get a strong sense of what you need for retirement.

Q3: Asking for wedding money tactfully
My fiancee and I have been dating for ~4 years. We both went to college and thanks to incredible parents, both managed to graduate without student debt. We’ve had our small debt struggles with credit cards, but we’ve got our act together for the most part. We currently rent in a not-too-desireable part of town, and as we both have fairly entry-level positions, it’s difficult to save the kind of money necessary to make a down payment on a house in a better area.

Her sister, who herself has been through 2 weddings, reccomended that for our wedding, we should ask for ONLY what we ABSOLUTELY need for our registry and ask for the rest in cash to put towards a home. This struck me as great advice, as in our 4 years together, we’ve accumulated more than we need without registering for things like tortilla warmers or color-coordinated coffee makers. However, I’m stuck trying to figure out how to ask in a classy, tactful way that doesn’t come off as a charity case. Do you have any reccomendations on how one might go about mentioning, on an invitation or otherwise, that this is our gift of choice?
– Pete

There is no real classy, tasteful way to say “give me money.” Not only does saying so imply that you’re expecting a gift, it’s also implying that you’re dictating what type of gift to give.

The best thing you can do is say nothing at all about gifts in the invitation. Set up a simple registry at a common place like Target. Then, tell your innermost circle that you’re hoping for money to help for the down payment. The word will get out to a lot of people.

Then, just be happy with the gifts you receive. After all, people are giving you things. If you don’t like them, return them and use the store credit on essentials, then bank the money you saved on essentials.

Q4: What to do with savings?
What should I do with the money I have in my savings account? I know it is low yield to keep it in a “high yield” savings account, but I am already maxing out my contributions to my IRA. Should I invest it? Where should I invest it if I do?

– Shelley

It depends on how much risk you’re willing to take on and how “locked down” you’re willing to allow that money to be.

Savings accounts don’t offer a great return, but there’s virtually no risk involved and you can take your money out as you please. With other investment options with a better return, you tend to lose one or both of those things.

For example, with stocks in large blue-chip companies, you take on risk in exchange for a higher average return. With a certificate of deposit, you lose the ability to take the money out freely for a somewhat higher return. With real estate, you lose on both counts but have some very nice long-term potential with the money.

The real question to ask yourself is why you’re saving this money. If it’s still more or less an emergency fund, leave it in the savings account.

Q5: Self-employment advice
My husband is about to graduate from grad school and will be self-employed upon graduation. I am wondering if you have any good resources for self-employment, and especially regarding affordable health insurance options for the self-employed. He is currently getting health insurance from his school, and I am on my employer’s policy, but I too would like to make the switch to self-employment (most likely working with my husband) within the next few years, or even being a stay-at home mother if we are able to afford it. We live in an expensive part of the US, and want to watch our expenses as much as possible. Going without insurance is not an option for us–I had a very expensive health situation over the last 5 years that has proven to both of us the need for good insurance. My health issues have recently been resolved, so I do not have any pre-existing conditions anymore. My husband has been healthy since I have known him.

– Catherine

I would start with the National Association for the Self-Employed when looking for options. There are a lot of options out there, and those options vary wildly from state to state.

I explored the options available in Iowa several years ago and we made the decision to stick with my wife’s work insurance for as long as she continues to choose to hold that position. Prior to that, I worked at a job with mediocre health insurance, so we were already using her insurance.

That’s not to say there aren’t good options available for the self-employed – there certainly are. I found the most luck starting with the NASE, though.

Q6: Retirement Roth versus 529
We are hesitant to put money into a 529 fund for our daughter when retirement amount may still not be enough. There are no loans available for retirement, as they say.

A Roth is almost as good as a 529 – except you can’t take the earnings out tax free for college, and it counts as income for the child – so no financial aid can be obtained. The upside is it can be used for school (I will be over 59.5 when daughter enters college) or retirement – whichever is needed more.

Certainly we could look for ways to save and afford to do both 529 and Roth, but I am not sure my family feels that is the way they want to live. We already do live fairly simply, but we could do much more. It might not feel like a positive to them, so I plan to identify areas one by one and see how far I can get them (and truth be told- myself) to agree to change.

Any advice?
– Oswald

You’ve basically summed up the benefits and drawbacks of a 529 versus a Roth for education. It’s flexibility versus better tax benefits.

If you’re asking which is better, you need to sit down and assess what your retirement looks like if you put all of your Roth money towards your child’s education. Assuming you do that, do you like your retirement picture?

If you do, I’d put that money into a 529 instead and then benefit from the taxes. If you don’t like that picture, then I’d try to balance it, probably committing more toward the Roth knowing that it’s more flexible.

Q7: Repayment troubles
I wrote to you last spring about advice regarding student loan repayment and starting a new business. Since then, I’ve moved to Canada, gotten married, and started my business, which I now work on full time. I have a steady client base, and am planning to expand more this year. I make approximately $300-$500/month at the moment.

Thanks to the low cost of living in our city as well as a wedding gift from my parents, we’ve actually been able to save nearly $30,000 in the 7 months we’ve been here. I have started to make payments on my student loan debt (all from law school) of $145,000. However, my husband’s contract may be ending at the end of June. I’m not sure if I should continue making payments on my loans or if we should continue to save for our potential “emergency” (unemployment). If we continue to save and defer the loans (the loans are currently on forbearance/income-based repayment, although I’m still trying to pay down interest), we’ll probably have approximately $35,000 saved by the time his contract ends.

My questions are the following: Should I stop making payments on my loans for now? Should I try to find some sort of part-time job to add to our emergency fund/throw at the loans (keeping in mind that most jobs here require you to be bilingual in French and English, and while I can speak French proficiently, I’m not bilingual)?
– Monica

My big question is whether or not you’re going to stay in the area you’re in when your husband’s contract runs out in June.

You seem to be in Quebec. Does it look likely that you’re going to be leaving Quebec at that time? Is your client base local or is it internet-based?

If you can retain your business through this transition and your business is growing, I’d put all my efforts into building it. You already have a start, after all. If you’re going to lose that base, I’d get a part-time job as soon as I could to get more short-term cash on the table before you leave.

Q8: Windfall options
My wife and I were gifted $15,000 by my grandmother recently and have a couple options. This is half of what we make in a year together so it would be easy to blow it on a bathroom remodel, but instead, I’d like to do something smart. We have only two debts: my wife’s $8,000 student loan and our $132,000 mortgage. The loan could be paid off instantly and the $150 to $200 we pay on that monthly would be freed up and that would be wonderful, but I could also refinance the house. We have a 4.875% rate, but rates are even lower than that at the moment. Our current mortgage payment is $1,004. But even if we only shave $50 off our monthly mortgage payment, that seems like it would add up to a whole lot more saved in the end compared to paying off the student loan, no?

– Charles

The question is would you honestly save that extra $50 a month, or would it end up being spent on something unimportant?

The best thing you can do right now is put yourself into a repayment plan that will take you to debt freedom the fastest. Refinance not into another 30 year, but into a 15 year or something. This would actually raise your payments a bit, but it would get you in a far better position sooner rather than later.

If I were you, I’d pay off the $8,000 debt, then refinance into a shorter term mortgage with a much lower rate. You’ll probably not see much change in your monthly payments for now, but you’ll be free from debt a lot faster.

Q9: Debt snowball or not?
I’m pretty new to your site but I have enjoyed it for the last couple of months. I have a couple of questions for you. My wife and I, along with our 4 young children have recently started on Dave Ramsey’s plan. We are currently on Baby Step 2 (debt snowball). We have approximately $14,000 in CC debt, and about $4,500 in student loans, along with about $4,000 left on our van payment.

I have also been trying to save a little money for different expenses I know we will have at some point (future car, car/home maintenance, etc). This is where my question comes in. Is it wise to do this while going through the debt snowball? Or since I already have the $1,000 EF in place, should I be putting every other possible penny towards the debt?

I mentioned the $4,500 in student loans my wife and I still have. I also have about $40,000 in other student loans but I do not have to currently pay on them because of the income based repayment plan I am on. My wife makes decent money but it is all “under the table”. So they only look at my salary when calculating my monthly payment. I am hoping to get through the debt snowball in about a year, then build up the EF to about $15,000 then try and payoff the $40,000 extra in loans I have. The loans are accruing interest but I am not obligated to pay anything on them unless our household income jumps. My wife plans to go back to teaching in 3 or 4 years so at that point I would have to pay at least something on them. My other question is would you stick with the plan I have in place as far as paying the loans back, or would you lump them in to the debt snowball?
– Andreas

First of all, you need to be very careful with “under the table” income. If the IRS hears of it from anyone – and there are a lot of people out there who quietly report such things – you guys will be in a world of hurt.

That being said, I would lump all of your debts into the debt snowball. If the interest rate on those debts is higher than the ones you’re currently paying, then I would make extra payments toward those student loan debts.

Eventually, you will have to start repaying them, and if you can keep that interest in check now, you’ll be better off for the long haul.

Q10: Prioritizing reading
I know you’re a voracious reader like me and I’m going to guess that you have a long list of books that you want to read like I do. How do you prioritize them? How do you decide what needs to be read next?

– Ivan

I keep a stack of about ten or fifteen books on my bedside table or on the front page of my Kindle. These books are ones that have been on my mind lately that I’m wanting to read. I rotate books in and out of this grouping pretty regularly.

When I finish a book (which happens once or twice a week), I just look through the books that are right there and pick the one that intrigues me at the moment.

That’s really all there is to it. I don’t really prioritize beyond that, but I’m usually happy with what I’m reading.

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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