Reader Mailbag: Weekend Switcheroo

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 trade-in question
2. Preparing for marriage
3. Used car buyer’s remorse
4. Credit score questions
5. Child cost question
6. College savings question
7. Handling house sale profit
8. Preserving digital records
9. Switching insurance companies
10. Baby sleep tricks

Because of the influx of family members visiting this past week, I made the decision to essentially move my weekend to Wednesday and Thursday to accomodate them. I didn’t mind this at first because the weather forecast for the weekend looked awful at the time.

However, it’s now late Saturday afternoon as I begin to assemble this mailbag and the weather outside is gorgeous. I can hear the kids playing in the yard with their friends from the neighborhood and I can smell the sweet fresh air.

Q1: Car trade-in question
My husband and I (foolishly) bought a new car in 2009 with no down-payment and no pre-approved loan with from our credit union (also foolish). The car cost $16,995. We ended up paying roughly $20,000 for it through the dealership’s loan office. *shakes head* Talk about rookie mistakes. I kick myself for this one regularly. We currently owe $15,726 on it, and KBB.com says it’s worth $12,775 trade-in value (it’s in Good, but probably not Excellent condition, although we have taken very good care of it). Considering we’re underwater on it for $3,000, I’m trying to figure out what our options are. Our monthly payments are $376 right now, and the interest rate is 8.5%. I would love to get a used car that the trade-in would completely pay for, so we’d only have to deal with the $3,000 excess. Is something like that even possible?

I know you’re not a financial adviser, and I’m not necessarily looking for specific advice (although if you had some, and were willing to take the time to give it, I would be extremely grateful). Mostly I’m just looking for places to start looking. There’s a lot of information out there on the web, and while I’m more financially savvy than some (mostly through mistakes I’ve made and the lessons I’ve learned from them), I could still use a guiding hand.
– Megan

If you’re underwater by $3,000, you have to come up with that money just to break even on selling the car for cash. In other words, if you can find someone to actually write you a check for $12,775 for the car right now, you’ll still have to come up with just shy of $3,000 to pay off the debt, leaving you with no vehicle but, thankfully, no debt.

The only way a car has trade value is if it’s worth more than is owed on it. Otherwise, selling the car only serves to eliminate the outstanding debt on the car. You won’t even be able to sell the car unless you’re able to come up with the cash to make up the differences.

If you want to get rid of this car loan, your only option is to buckle down, save every dime you can, and wait until you have enough saved up to make up the difference between the value of the car and what you owe on it. At that point, your best bet is a private sale via Craigslist or eBay Motors.

Q2: Preparing for marriage
I am 27 and I have been in a bad financial situation for several years, but thanks to some personal reflection and your website, I have been turning things around in the past few months. I have previously never had a savings account (I know), but I have saved almost $1,500 at this point.

Here is the situation. I make about $40,000 a year but I live in a city with a high cost of living. However, my rent is very cheap and I drive a beater car and mostly use public transit. Most of my money goes to savings and paying down student loans. I have two government loans that total about $25,000 and I am up to date on these payments.

My biggest issue is a credit card that was charged off at almost $7,000 in 2008. Long story short, I was a recent college graduate and back at home and my mother (who is also very bad with finances) had just lost her job. Neither one of us had any savings and we ended up using the credit card to pay rent and for basic living expenses. Long story short, I moved away for a job, and I trusted my mom (who had access to both of our checking accounts) to continue paying the balance on the card. This was my mistake. After reviwing my credit report, I realized that my mom never paid on the bill and never told me and the account was charged off. I am really at a loss as to what to do about this. The statute of limitations on my debt is seven years in my state, but that is still a long time to wait. I would really like to pay the debt off completely, even though it will still be on my CR but I definitely don’t have $7,000. I have also considered using Consumer Credit Counseling Services and possibly settling the debt. I just want to improve my credit, but I don’t know how to do that. I have considered getting a secured credit card to pay for gas to help rebuild my credit. But I am extremely wary of credit cards.

I am in a very serious relationship, and I am pretty sure my boyfriend is going to be proposing within the year. I really want to get things in shape so my mistakes don’t affect him. Thoughts on how to do this?
– Eileen

In your situation, a secured card is a good first step to take. You might be eligible for a low credit limit unsecured card if your credit is otherwise strong – all you can do is apply. I don’t know how bad the rest of your credit report is, so I’m uncertain whether or not that move will work.

If you do choose to repay the debt, it will become “fresh” on your credit report. In the short term, it will make your credit score worse, as it places more emphasis on current debts than older ones. Mostly, time is the best cure for credit mistakes like this.

Your best route with regards to the relationship is openness. Don’t be afraid to talk about this situation with him. If he’s a man worth marrying, he’ll understand and be at your side regardless.

Q3: Used car buyer’s remorse
I recently purchased (less than a week ago) a 2009 Volkswagen GTI for $23,000 + taxes, etc. I did some research while I was at the dealership and the car seemed to be well priced for the make of the car and all of its options. This is the car I’ve been drooling over for some time and mine is loaded with leather, heated seats, turbo, etc. The catch is that these are all the things that my personal finance/minimalist journey in recent months has helped me to realize that I don’t really need. I can say with certainty this car in itself does not make me happy. When I was at the dealership, however, I quickly forgot about my self-established target price ($10-$12k) and apparently threw caution to the wind for what I “wanted”.

The car is very nice and is the best I have ever owned in my life but I can’t seem to settle with the idea of the payments I’ve gotten myself into.. nearly $400/mo. Fortunately, I can make them and still have some extra to save (still have student loans and mortgage) but I can’t keep thinking that this is such a frivolous waste. If I took the $25,000 (after tax, title fees) and bought myself a $10,000 car and put the rest toward debt or saved, I could still accomplish my goal of a reliable vehicle. Everyone else says “Everyone has payments. It’s not that big of a deal”.

Question is: I do think it is a big deal; are there any options now?
– Sarah

“Everyone has payments. It’s not that big of a deal.” Really? I haven’t had a car payment in literally years, yet we have two fairly new cars (the oldest one is seven years old). Everyone who enjoys debt has car payments, perhaps, but not everyone has car payments. Statements like that let people justify their own debts.

I agree that a $10K car will meet your needs quite well and you’ll find yourself with lower payments to boot, allowing you to save the difference for other things.

Unfortunately, you probably don’t have a lot of options now. Likely, you’re either underwater or just barely above water on your car, so if you were to sell it, you’d mostly just pay off your debt on it. You’re probably going to have to live with your purchase for the time being.

Q4: Credit score questions
my husband and I are on the road to fixing our financial state (yay!) and I have a question about using a credit card to help raise my credit score. My husband has a credit card that he pretty much kept maxed out ($2000.00, though they lowered his credit limit to $600 the second we paid it off). We just paid it off a couple of months ago and he currently uses it sporadically (a few very small charges a month), which we then pay in full. Currently I don’t have a credit card, so I’m thinking of trying to get a card to use for my regular monthly purchases (say, at Target), which again, I would pay in full each month. It would only be used for things I need to buy and have the cash for anyway. Since my credit score is low, I assume I’m going to have a hard time getting a card, maybe I’ll have to get a secured card to start, but either way I figure my limit will be low. My question is if I charge close to the limit, and pay it off right away is this ok? My understanding is that while I’ll get good “points” for not carrying a balance and paying on time, but what about the debt to credit ratio? For a time (even if it’s only a week or two) the card would be almost maxed out before I pay the bill. That cycle would continue each month. Is it such a short window where the card is “maxed out” that the debt to credit ratio won’t hurt me in the end? I just want to raise my score and establish good credit, but I’m confused on this point.

– Nicole

If you pay off your balance in full each month, it’s fine to use the card until it approaches the credit limit. For example, if you have a card with a $500 limit and you fill it up with $450 in groceries and gas, then pay the thing off in full, it won’t have an adverse affect on your credit.

What likely happened with your husband’s card is that he kept it close to the maximum for so long, giving him a poor debt-to-credit ratio and driving his credit score downward. As soon as the balance was gone, the credit card issuer likely re-evaluated him, saw his low credit score, and adjusted his limit accordingly.

If you just focus on paying off the card in full each month, you’ll be fine using that card with an eye on improving your credit score.

In Nicole’s long email, she actually had two more questions worth addressing.

Q5: Child cost question
We are probably 9 – 12 months away from even trying to get pregnant and in that time I have a concrete plan to save up the necessary “start up” money needed (I’ve done lots of research and thinking about the basics of what we’ll need for a baby). We’ll be the first of our family/friends to have kids, so no second hand furniture or baby gear will be handed down to us, though I know we’ll receive some gifts from our generous family. Even taking gifts and some second hand purchases into account, the start up costs are high! As I said, I do have a savings plan begun for these beginning expenses, but how do I determine what the child care costs will be once the child arrives? It’s easy to say they’re “expensive”, but how does one figure out how to financially fit a child into their family? One child expense calculator suggested we’d need an extra $1500.00 to cover just ONE child! This seems crazy to me – I know we’ll need to spend more if we begin a family, but I can’t seem to get a reasonable handle on how much. If everything goes according to plan, I plan on breastfeeding and cloth diapering, so some money will be saved there. Also, I plan on staying home (financially it wouldn’t make sense for me to pay for day care so I could work, it’d be a wash, though I probably will work extremely part time – when my husband was able to be home with our child). I have no problem looking for second hand clothes/toys/books at thrift stores and the like (though I’m sure some things will be purchased new). I imagine our utilities will increase at least a bit with an extra person. There are doctor co pays and higher insurance to consider. But does all this add up to an extra $1500/month?? I know you can’t give me a magic figure, and obviously costs change as the child grows, but do you have any insight into a reasonable figure I can expect? Or a better way to formulate the projected costs on my own? Am I missing some key element that ups the monthly costs?

– Nicole

$1,500 for startup costs? That’s really unnecessary. All you really need for a newborn baby are clothes, a place for the baby to sleep, diapers, and feeding equipment. Toys aren’t necessary, nor is an ultra-expensive crib or the tons of other things that marketers try to convince newborn babies that they need.

When the baby comes home, make sure you have a simple bassinet or crib, several changes of clothes (which you can get very inexpensively at a children’s clothing consignment store), whatever you need for feedings (depending on whether you’re breastfeeding, using formula, pumping, etc.), and some diapers (cloth diapers are far cheaper over the long run, but they require some work and have a startup cost). You really don’t need much else.

For the first year or so, your upkeep costs will mostly revolve around clothes (which you can get for cheap at consignment), child care, diapers (if you’re using disposables), and formula (if you’re not breastfeeding). Babies really don’t need that much, and child care is the biggest part of the equation by far.

Q6: College savings question
I’m curious about college savings. We’d like to put money into a college savings plan, though I’m planning on making sure our retirement is fully funded first. While I’d like to be able to help our future children with their college expenses, I’m of the mindset that if they have to pay for some of it as well, it’ll make them more responsible and conscious of how they spend their time there. Also, I feel that our retirement must come first. My question is bout how much to shoot for when saving. I’ve recently heard that by the time my potential child goes to college, the costs for an undergraduate degree will be around $250,000. Crazy! I can’t imagine being able to save that much, much less half that, with all of the other expenses we’ll have. In your opinion are these figures just crazy, something to scare us all into saving? Also, do you have a percentage that you think is reasonable to shoot for? Say, 50% of college expenses? 25%? Assuming we’re fully funding our retirement, we have an emergency fund and all our bills are paid, the money we have left over will have to be split among college savings and “fun” money. I think that’s where I’m getting tripped up. We can’t do it all, so do I forgo, say, saving for a short family vacation in order to put extra into the college savings plan?

– Nicole

I think the figure you’re looking at assumes four years at a rather expensive school. It’s not looking at the cost of four years at your state school or two years at a state school with two years at a community college on the front end of it.

Still, it will be expensive. A college degree from a four year school, earned without any scholarships, is a pricy proposition, no matter how you slice it, and it’s not going to get cheaper unless politicians change how they value higher education. I’m of the belief that the best thing we can be funding for our future isn’t the military or paying off the debt, but great education at all levels that reduces classroom sizes and increases teacher quality at the lower levels while reducing the economic burden at higher levels.

My wife and I are planning on paying for roughly one third of our children’s education at that level. If they get a scholarship that covers all of it, the money will “trickle down” to a younger sibling (after covering books and other necessities).

Q7: Handling house sale profit
My husband and I are attempting to do a short sale on a new house, and we offered 290,000. We owe approximately 80,000 on our current house. When we sell the current house, I would expect to get around 225,000. We also have two rental properties. One is paid off and is worth about 200,000. We still owe around 190,000 on the second one and the mortgage is 15 years at 6%. Combined we make approx. 150,000 per year and that is with me working part-time. I will most likely go back to working full time in a year or so once our kids get a little older.

Our offer on the new house is not contingent on selling our current house. We have about 80,000 saved up in cash. If the short sale goes through, we are thinking that we will use that cash to pay off our current house and get a mortgage for the 290,000 we would be paying for the new house. Our new house mortgage would be for 15 years and about 3-4% interest rate. The dilemma is what to do with the profit from selling our current house. I think we should put that entire amount on the new house mortgage. We value financial security and my reasoning is that since it is our home, we should take care of that debt first, as compared to the rental property debt. My husband thinks we should put that money toward the mortgage of the second rental property since the interest rate is so high. Our general goal is to have all of our properties paid off in about 8-10 years when my husband retires.
– Bonnie

I agree with you in that putting most of, if not all of, the profit from your house sale towards your next mortgage is a good idea. It’ll reduce your monthly payments or make it easy for you to get into a 15 year mortgage without exorbitant payments.

The only exceptions I can think of is if you have nothing set aside for an emergency fund (in which case you should take some of the profit and build one) or if you have other outstanding debts that are at a higher interest rate than your mortgage (in which case you’re treating this mortgage as a home equity loan at a very low interest rate).

If neither of these are true, I’d dump it all into your mortgage.

Q8: Preserving digital records
I was just curious, as you’ve scanned most of your records and disposed of the originals, how are you planning to preserve the digital records past your current computer? As someone else with an old clunker of a computer and incompatible software with more recent developments of technology, I would be curious to find out how you plan on keeping your digital files for the required 7 years.

– Mary

I store all of the documents on the hard drive of our primary family workstation. Every day, that hard drive is backed up to an external hard drive that is attached by USB.

Once every month or so, I back up a copy of all documents on that external drive to a pair of DVDs (right now, the documents I want to save fit on two DVDs) and I store those off-site, which will help in the event of a house fire.

I considered using a backup service like Carbonite, but the security made me uncomfortable. I don’t like sharing my data with third parties unless I absolutely have to.

Q9: Switching insurance companies
My wife and I currently have a question about who should manage our supplementary investments. We like to keep things simple so we decided to do all of our investments outside of work through State Farm because we carry insurance through them. We have no relationship with our agent and don’t really feel connected or updated with what our accounts are doing. However, a very good friend recently moved over to a different insurance/investment company and I am considering being one of his clients. I would much rather my commissions go to someone I know and make regular contact with than a stranger.

– Brad

If you prefer having someone manage your investments (something I’m not convinced is necessary for anyone except for the excessively rich) and you feel more comfortable with someone you have a personal relationship with, there’s no reason not to move the investments.

I manage my investments myself. I don’t feel that an adviser gains me anything too significant for my own money.

If you’ve decided to make that move, talk to your new adviser. He (or she) should be able to help you move the investments over quite easily.

Q10: Baby sleep tricks
How do you consistently get a newborn baby to sleep? Our baby was born last month and I haven’t had a good night of sleep since!

– Bob

The first trick I use is to hold the baby close while rocking in a chair (or bouncing the baby gently while standing) and whisper in his or her ear. I just make a “whooossh… whooossh…” sound in time with my heartbeat. This seems to always calm babies during their first two months or so of life.

Another trick I often used is to use my finger as a pacifier. I’ll clean my hands well, then allow the baby to suck or gnaw on my pinky. This usually worked well, particularly when they’re just starting to cut teeth.

I would often sing a very repetitive song to the baby while rocking the baby, like “99 Bottles of Beer on the Wall.” The repetitive rhythm often seemed comforting to them.

Sometimes, though, nothing at all works. Don’t ever get angry at the baby. If you find yourself reaching your limit, don’t be afraid to lay the baby down in his or her crib, then go into another room for a while. The baby won’t have any problems if they’re not old enough to crawl or pull themselves up and you’ll get a breather for a while. This is vital for your sanity – don’t feel bad about it.

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.