Reader Mailbag: Unfinished Business

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. Strange credit card fee
2. Handling sudden income increase
3. Great job, next financial move?
4. Children’s movies
5. Keeping papers
6. Determining ownership percentages
7. Taking control
8. Stuck in a condo?
9. 529 plans and multiple children
10. Saving old magazines

On my desk, I keep a stack of papers that reflect “important but not urgent” tasks I need to get taken care of, like submitting an invoice for some work done or cancelling a subscription we’re no longer using.

About once a week, I take a few hours and clear out that “important but not urgent” stack. The day I do that usually ends up being one of the best days of the week because I feel as if I’ve accomplished a lot.

Q1: Strange credit card fee
I have Mastercard credit card linked to American Airlines miles rewards. I’ve had this card for about 15 years, and over the years the available credit limit has gone up to $54,000. We never used up even remotely that much, and currently the card has $2,000 on it which will be paid off by summer if not before. It’s a 0% transfer sum, so no interest is being paid on this amount presently. We have not charged anything to this card in over a year.

Anyway, this months’ statement is the second where I noticed a small fee added to it, 50 cents. It is not a late charge or anything related to a purchase (since there hasn’t been one made). I wonder if this is an “inactive” fee, meaning that they aren’t making money off of us since we are not buying anything and therefore aren’t paying any interest, and the card company needs to get some money out of us and thus is charging this kind of fee. I wouldn’t be surprised if this is one of the card companies work-around to get additional money out of people who pay their bills on time…

I am annoyed by this fee, of course, but am reluctant to cancel the card (we really don’t use it, and once the current amount is paid off, it’ll basically just be laying there in its file.) It is my oldest credit card and with the high available credit limit, it is good to have on my credit report, right? I do pay an annual fee of $50 because it’s an airline travel credit card….

I know I can call the card company and complain about this extra fee, but I was wondering if other readers/people have the same fee appearing on their statements. My only other credit cards are a corporate AMEX credit card that I use once or twice a year and pay off promptly and a Discover card that is paid off every month and only has very few dollars charged to it every month (gas). Both these cards are relatively new, less than 3 years and the available credit limits are less than $10,000.
– Bill

You should call your credit card issuer and ask them what the fee is for. It’s hard to tell what it’s for, though an “inactivity fee” is probably a good guess.

However, if the card is often inactive, I’m not sure I would want to pay a $50 annual fee for the card. I would only pay it if I were clearly getting more than $50 worth of value from this card beyond the cards I could get for free.

If it is an “inactivity fee,” I’d assess whether or not you’re going to need spectacular credit in the next couple of years. Do you have a car loan or a mortgage coming up? If not, cancel the card. If you do, hold off until the big purchase is finished, then cancel the card.

Q2: Handling sudden income increase
I have something of an unusual question, particularly during these times. After college, as well as several years of alternating unemployment and minimum-wage jobs, (we’re both 27) my fiancee and I are now both employed in extremely well paying (six figures each) positions for the foreseeable future. We are incredibly lucky to be in this position, especially in the current economic climate and given our lack of debts (we both attended college on full scholarships, and each bought our cars used for cash). We’re already setting aside enough for our 401ks to max them out by the end of the year, and have been fortunate enough to give sizable amounts to several charities we favor. The only problem is… what else should we do? Besides filling up an emergency fund, should extra money just go into a savings account? Should we look at CDs and IRAs?

Most of all, are there any books you would recommend that are more tailored to our situation? Personal finance seems split between getting out of debt and playing the stock market, neither of which really apply to us; since we don’t really have problems with overspending, I feel like we’re sort of left adrift. Adrift and extremely extremely lucky and fortunate, but adrift nonetheless. Thanks for any help you might be able to offer.
– Ron

You need to sit down together and assess your goals. Do you want to buy a house? Do you want to have any children? Where do you guys want to be in five years? In ten years?

Your plan for the extra money should follow the answers to those questions. If you’re saving for a short-term goal (less than, say, five years), I would just keep all of the money in cash or in CDs, as the volatility of other investments probably isn’t worth it.

For a book to read, I’d suggest The Bogleheads’ Guide to Investing, which is my favorite book on investing I’ve ever read.

Q3: Great job, next financial move?
At 25 I landed my dream job. Its fun flexible and has a great six figure salary. When I finished school in May of 2011, I racked up a few thousand dollars in credit card debt to bridge me over to my first paycheck, which came in September. As of January this year, I’ve paid off all credit card debt and have 54,000 left on my student loans (at 6.7% and 7.6% interest) and about 1,000 in emergency funds. I’m still living like a poor college student and am planning to pay all my student loans by January 2013. I haven’t been able to invest in a 401(k) because my employer only offers it after you’ve been with the company for 6 months. Because I only worked several months last year, I am in a smaller tax bracket than I will be in 2012. I’d like to invest some money in an IRA or Roth IRA before I file my taxes for 2011. Basically, I’d like to take full advantage of being in a lower tax bracket while I can (for instance, next year I won’t be able to claim up to 2,500 plaid toward student loan interest) and was wondering if I should divert money I’m intending to pay toward my student loans to open an IRA or Roth IRA and which type one would would be the wisest choice for my 2011 income.

– Lana

If you qualify for a Roth IRA based on your income, I’d choose a Roth IRA. I think it’s a good idea to diversify your retirement money in both pre- and post-tax retirement accounts since no one knows what the future will hold.

As to whether you shoud divert loan repayment money into a Roth, it’s really an apples-and-oranges decision. There are good arguments to be made both ways on it.

If I were in your shoes, I’d probably fund the Roth fully before making extra payments on the student loans. The big reason is that, if push came to shove, I could always withdraw the contributions from the Roth at a later date if I so chose.

Q4: Children’s movies
What movies do you let your children watch on your “movie nights”?

– Alex

If it says “Pixar” on the label, we’re generally okay with it. Many of our family movie nights involve Pixar films.

We also often watch Studio Ghibli films, but we’re a bit selective on those as some can have scenes that might frighten really young children (like the fate of the parents at the start of Spirited Away).

These two categories give us about 25 movies to choose from, so we just rotate them. We also have a few additional Disney movies in the mix.

The thing to remember is that movie night with my family isn’t about the move so much as it is about the whole family cuddling up under blankets together, laughing together, and enjoying time together.

Q5: Keeping papers
I’ve got a well controlled financial situation, but I’m overwhelmed by the paperwork. I get statements from multiple bank accounts, investment accounts, 401ks, etc. I get bills for the utilities and my credit card and such. I’ve got my tax returns. Some of these “papers” are actually digital, but most of them are paper still. I’m planning to get a house in the next year, and I imagine there will be a ton of paper involved with that as well.

How long do I need to be hanging on to the various paper and digital copies of all of this paper work? Do you have a preferred method for handling the onslaught of papers?
– Alan

If you’re just keeping paper copies, I’d keep most of them for seven years. I would keep tax returns and other truly key documents forever.

However, I think the best solution is to just make digital archives of everything. Scan all of the paperwork onto your computer using a document scanner. Then, just keep them forever on backed-up hard drives and other formats.

This can take up some serious hard drive space, but then you have an archive of all of your documents. It takes some time, but I think it’s really worth it.

Q6: Determining ownership percentages
My fiance and I are getting married next fall. We will most likely be purchasing a home before we get married. I currently make about 70k per year and she makes about 26k per year. We will be looking to purchase a home in Southern California in the price range of 365k-400k. I will have roughly 80k saved for a down payment/closing costs and my fiance will have roughly 8-10k saved for the down payment/closing costs. She is currently working on paying off 8k of student loans. My question is, what is a fair way to determine percentages of home ownership with the varying amounts of money that we have available for a home purchase and considering our difference in annual income?

– Mike

I would be extremely wary about taking on a mortgage that’s more than double your combined salaries, even with low interest rates. Such a situation is practically begging for Murphy’s Law to take effect.

I don’t think there is one fair way to determine ownership percentages in this situation. It has far more to do with your relationship than anyone else’s ideas of fairness.

My wife and I have had income inequality since the day we were married, but as far as we’re both concerned, everything is a 50/50 split. We’re in this together for the long haul and we’re constantly helping each other in terms of emotional support and other assistance, so it just makes sense to have a 50/50 split.

Q7: Taking control
I recently turned eighteen and my parents are slowly turning over control of my finances to me. However, I have no idea what to do or where to start! Do you have any suggestions for getting started on the right track to ensure financial stability in the future?

– Shawn

I would start with a basic personal finance book. I’m not sure exactly what experiences you’re going through right now, but I would guess that college is either a current experience or one that’s in the near future for you.

If that’s the case, I’d probably suggest Please Send Money by Dara Duguay. It’s a great “getting started” personal finance book.

On the other hand, the book that had the single greatest impact on my thinking with regards to my money was Your Money or Your Life by Joe Dominguez and Vicki Robin.

I feel both are well worth reading in your situation.

Q8: Stuck in a condo?
When housing values started to slide we started making larger principle payments on our condo to stay above water. Eventually the value was going down so quickly we couldn’t keep up. We borrowed $340,000 in 2004 and the current value of our condo is around $200,000 on a good day. We still owe $250,000. Two years ago we stopped putting money toward paying down the principle and started living even more frugally and managed to save up $100,000. The plan was to pay down the principle and refinance into a loan that allows us to rent out the condo then save a down payment to purchase a house. This is due to our family doubling in size since our condo purchase. Now that we have saved up the $100,000 and lived so lean to make it there the idea of throwing it away for a place we have grown out of anyway is pretty painful. Short Sale or Foreclosure don’t seem to be options since we can afford our payments. What other choice do we have?

– Randall

Sadly, your options are fairly limited.

You can just hand your keys to the bank, which will severely damage your credit and make it difficult to borrow anything for the house you want for quite a while.

You can keep living where you’re at and keep saving until you can simply pay off the condo. If you do this, I’d start making extra payments on the condo mortgage rather than sticking the money into savings. Then, you could save for a down payment for a house while trying to sell the condo.

You can also just pay down your condo right now so that you’re at a break-even point on it, then start focusing on your next house immediately.

I don’t know which is the right choice. The second one is probably the safest and most conservative option, which is what I’d go with because that’s how I usually react to such situations.

Q9: 529 plans and multiple children
We have two kids but only 1 529 account setup. Should we increase the contribution to that one account or open another one for the 2nd child? I am not sure if it matters or quite frankly if two kids can even share one account – but I know I didn’t find the answer easily on the web page for the Iowa 529 plan.

– Espen

You would simply open up a new 529 account with your second child as beneficiary.

With many college savings plans, you’d basically manage them together, as they’d appear under the same login name online and they’d send paperwork together. This is exactly how Iowa’s plan works.

I have three seperate 529 plans, one for each of my children. They’re easy to manage together.

Q10: Saving old magazines
I have this tendency to save old magazines, particularly cooking magazines and project magazines. The problem is that my closet is starting to get full of them. How do I get rid of this clutter without losing that information?

– Jill

I have this exact same problem with food and project magazines. They tend to really build up over time!

What I do is once a year or so, I go through the magazines and look for things I’m actually going to use. In a food magazine, for example, there might be five or ten recipes I actually want to save. I actually cut out the pages, scan them onto my computer, then throw all of it away.

It takes some time, but I have this wonderful archive of pages on my computer to browse through. I give the files sensible names so I can easily find them again.

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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