Reader Mailbag: What Gets Mentioned

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. Bankruptcy and student loans
2. Refinancing question
3. Revocable living trust questions
4. Using Vanguard for retirement
5. Retirement savings or debt?
6. Flaw in retirement calculations?
7. Success with cutting cable
8. Goals for 12 year old
9. Skype and prepaid phones
10. Financial focus for divorced mom

One question that popped up several times in the last week or so revolves around how I choose what details to mention and what details not to mention on The Simple Dollar.

It’s not an easy process. For one, I do not want this blog to ever violate someone’s privacy, particularly someone I care about. They did not make the choice to write publicly about things – I did make that choice. Whenever I write about someone in any way that’s not glowingly positive, I check with them. I often alter names and relationships, too. These people don’t deserve to be thrown out there publicly.

Because of that, there are times when I have to be very careful with how I write certain posts – and that has gotten me in trouble with commenters more than once. If I choose not to mention a key criteria for a decision because it violates the privacy of someone I care about, readers certainly let me know about it and inform me as to how awful my decision was. It’s a difficult balance, but if the choice is between violating the privacy of someone I care about in front of hundreds of thousands of readers or not being entirely clear on a certain post, I’m going to choose to be a little vague.

That’s part of the price of writing a popular blog – you have to make choices like this constantly. What details do I mention about my children? Will this post still make sense if I take out a couple of details that my friend might not want talked about on the site? Sometimes, I choose wrong (and I certainly hear about it), but overall, it’s a balance I think I’m doing a fairly good job of maintaining.

Put yourself in my shoes for a moment. What details about yourself would you reveal? What details of your friends and family? What about those times – and those times pop up a lot when you’re talking about money – when you’re riding right on the fine line of what you would consider private?

If I’m not sure, I choose privacy, and sometimes that hurts a post a little. I’d rather lose the respect of a handful of readers because I chose to maintain someone’s privacy than lose the respect and trust of a lifelong friend or a close family member.

I’m 25 years old and within the last couple years or so, mostly due to poor planning and financial decisions but also due to some tough breaks, I found myself overwhelmed with consumer debt. I dropped out of college a few years ago due to lack of funds and motivation but was able to secure decent paying administrative/secretarial-type jobs despite my lack of a degree. But due to the economy, for the past 2 years I’ve had to take progressively lower paying jobs just to stay afloat, all the while stretching my finances too thin (I went from making $31,000 per year in 2008 to I’ll be lucky if I clear half that for 2010).

I already lived paycheck to paycheck in December 2009 when I was let go from my administrative assistant job at a law firm and was unable to find work for three months. When I finally did find a job, it was only part-time for $9/hour (40% less than what I was making before). This salary was barely enough to cover my basic living expenses, to say nothing of having “extra money” to pay down almost $20k in debt. Things finally came to a head in May of this year, when I voluntarily turned in my car for repossession. After talking to my parents and doing some research on my own, I decided filing for Chapter 7 bankruptcy would be my best option.

I’ve since filed and I am on the road to becoming more financially responsible. I’m currently saving for a new (used) car right now (paying cash, no more car notes for me!) and after that I want to establish an emergency fund and begin saving for a home and retirement. I realize that to even get my foot in the door for better jobs, I would need to invest in my education and go back to school. I plan to continue working while going to school to cover living expenses and help pay down school loans while I’m in still a student (I want to finish with a little debt as possible). Do you have any advice for applying for student loans after bankruptcy? I know that federal loans do not consider your credit as a factor but what should I look for in a private lender? Are there certain lenders in particular I should seek out/be wary of?
– Bri

For federal student aid, your bankruptcy shouldn’t have any impact at all unless you continue to have delinquencies or defaults. This includes Title IV stuff and Pell grants. Such federal student aid isn’t supposed to use bankruptcy as a sole criteria for approving or denying aid.

Other types of loans certainly will look at your bankruptcy, but they’ll treat it as part of your overall credit history. Student lenders tend to be a bit more forgiving of bad or suboptimal credit because of the government support they receive.

My suggestion is that time heals all credit wounds. Give it a couple of years. Spend those years keeping your financial nose as clean as possible and, if you can, saving money for college and college expenses.

For more details, I’d check out this article.

My husband and I are currently debating refinancing our home. We purchased our house in 2007 at $189,00 with 20% down with a fixed rate 20 year mortagage at 5.875%. We currently pay an extra $100 (and some change) towards the mortgage every month and right now we are two months ahead of payments. Last year we paid an extra $10k towards principal and intend to do the same again at the end of this year. Our current balance remaining is under $120k. We are wondering if we should refinance the remaining balance at a lower rate and continue to paying at the old rate, and ultimately paying the mortgage off in less time with less interest. I know one critical thing to this is the value of the house which does not appeared to have decreased since we have made some additions (all out of pocket so no loans are pending). I am just not sure where the line in the sand is drawn when it comes to using the cash to pay off an existing mortgage or pay for a lower interest rate at the cost of some of the cash being sacraficed for closing cost, etc.
– Charlene

If I were you, I’d refinance that into a 15 year assuming your credit is strong. 15 year mortgage rates are now in the 4% or below category. Usually, the best rule of thumb on refinancing is to see whether you can knock a percentage point or more off of your rate – and you can nearly knock two percent off.

But why 15 year? For starters, you’ll get a better interest rate on a 15 year mortgage than a 20 or 30 year. Another reason to switch to a fifteen year is that, if you had a 20 year and have already paid off three years of it, your monthly payments under the 15 year on your remaining amount will almost assuredly be lower than what you’re paying each month now. Lower interest rates plus lower monthly payment plus quicker payoff time sounds like a good move to me.

If you’ve had a good relationship with your lender, I’d start there with my loan shopping. A bird in the hand is worth two in the bush, after all.

Trent, I have had an ING account for years but just recently learned that you must have a revocable living trust set up for your beneficiaries. Do you know anything about this? I haven’t looked into getting one set up yet but I assume there is some cost involved. My brick and mortar bank allows me to designate beneficiaries to sidestep going through probate court. I haven’t seen this ever addressed on your blog and would appreciate your input. I have enjoyed your advice and incite for years. I appreciate all your work.
– Kim

There is no must in terms of having a revocable living trust for your beneficiaries. It’s an option, albeit one with some real benefits, especially if you have a seven figure net worth or higher (because probate becomes painful when you have a significant estate).

What are the benefits of a revocable living trust? The biggest one is that you avoid probate. Probate basically means that a court supervises the distribution of your assets after you pass on and charges some fees for that “service.”

Another big way to avoid probate is to set up a P.O.D. on your cash accounts that basically says that any amount in this account is paid on your death to whatever beneficiary you designate. P.O.D. supercedes a will and avoids probate. If your bank doesn’t have such a designation, then another option is to name a co-owner of the account. I believe that ING Direct does not allow P.O.D. designations on their accounts for now.

Your easiest immediate step is to put a co-owner that you trust on your ING accounts, then include information about that account with your estate papers. After that, research a revocable living trust on your own and decide if it’s right for you.

I know that you are a big fan of Vanguard, and the research I’ve done shows why. My question is, do you recommend putting our extra $ in the 500 account, or in a target retirement date mutual fund? We do not anticipate needing to access the money before retirement, so we’re okay with it being tied up. I’m just trying to decide which is a better choice. I am thinking the target retirement date, since we still have some time between now & retirement, so it seems more long term? I’d love to have your opinion!

Also, w/ either Vanguard accounts, can you move $ (differing amounts) to the account every month, or do you have to set up a particular $ amount for a monthly draft?
– Amy

If I were just setting up an ordinary taxable investment account, I wouldn’t invest in a target retirement fund. That’s because every year, the investments in that fund shift and with each buying and selling, I’ll incur some taxes. Then, when I sell everything at the end, I’ll incur even more taxes. I’ll be double taxed on some of that money – once when they move money from aggressive to conservative, and once when I take it out.

Target retirement funds are best used in Roth IRAs and other tax-free accounts. Money moved within a Roth IRA doesn’t affect your taxes today.

As for the differing amounts, once you have the minimun invested for your fund (usually $3,000), you can do any combination of the payment options you mention. You can just not invest any more. You can automatically transfer money each month. You can add money as you please. Or, you can use both payment options together.

I’m 31 years old – I work in marketing so I’m sure you’re going to know what comes next…I was laid off from my $70,000/year job about three weeks ago. Luckily, I am employed again at another marketing agency, but I’m only making $50,000/year, and it’s smaller than the first agency…in fact, I wouldn’t be surprised if it was closed within a year or two. When I was laid off, I did not have any sort of emergency fund to fall back on. In fact, my only savings is my retirement which is about equal to the amount of debt I owe.

I have a LOT of debt. So much so it’s overwhelming and I think about it a LOT. I have a car loan of $12,000 @5% – I had that much in credit cards, but came up with the genius idea to put it on the car to get a better interest rate…NOT my smartest move. I have about three other cards with a total of $15,000 on them…most of them have 7% or better interest rates. In addition, I have a personal loan from my boyfriend of 10+years in the amount of $6,000. He had previously loannd me money, I paid him back, then he loaned my the $6k a few weeks ago to pay off a high-interest credit card. While I understand it’s not good to borrow/lend to loved ones, he has been great, we signed a real contract, he charges me an interest amount of 5% which we agreed upon.

All that being said, I have more than $30,000 in debt, plus small student loan. I have used credit cards to pay for $2,500 in car repairs this year…and that’s it. Not a penny has gone to them otherwise – since last Dec., I’ve been cash-only, so my total amount of debt has gone down significantly, but I still have a lot. I’m telling you this so you know my spending habits have changes. While I was making bigger money, I was able to pay about $1,500 a month to credit cards. I live with my boyfriend and my share of the house bills and my personal cell phone, internet, etc. each month is about $800. With the pay cut, I’m worried I won’t be able to pay enough on my credit cards. I already have a second job that is commission based sales, it brings in about $250/month.

With the job change, I’ve been looking at my retirement accounts. I have enough in retirement to pay off most of my debts. Is it incredibly stupid of me to cash out the money, pay off debt and then rebuild? I am confident my spending habits have changed. The peace of mind in having no debt would be immensely helpful to me and I feel like I could rebuild my financial life, taking the money I would be using to pay down debt and instead sticking it in retirement accounts. For right now, I’m taking the Dave Ramsey approach of saving a $1,000 emergency fund…but even if I lose my job again, I know that won’t keep me long. It’s going to take me years to pay off this debt…probably at least four or five and that’s if I buckle down even more than I already have. What would you reccomend?
– Ann

The way I see it, you’re stuck between two difficult choices – and neither one of them is good. On the one hand, you could cash out your retirement (bad because of the hurt it puts on your retirement plans) and use it to pay off debts (good). On the other hand, you could hold onto your retirement (good), but spend the next few years squeaking by with a very tight cash flow (bad) and you have at least some chance of having to tap that retirement anyway.

My biggest concern is that you’re really struggling to make ends meet right now. You’ve managed to live cash-only – except for $2,500 in car repairs. That means you didn’t have adequate savings to cover that expense, which means you’re at risk of other expenses.

I’m going to speculate, based on the fact that you work in marketing and were able to quickly switch firms, that you live in a large and fairly expensive city, which means that your income isn’t going to stretch as far as it might in other parts of the country. Thus, you’re probably pretty tight on your monthly budget right now – you’re walking a tightrope.

Given all that, I would probably cash in the retirement money and clear out as much debt as I could with it, starting with that personal loan. After that, I’d get a healthy emergency fund going, probably adding up to three months of living expenses. Then, I’d double down on my efforts to build my retirement savings.

To calculate the future value of a retirement fund compound interest is very often applied at a fixed interest rate over the life of the investment. However, it is universally accepted that as one nears retirement a significant portion of their money should be placed in lower interest investments to reduce risk. Given that an investment fund will generate the majority of it’s earnings towards the end of its life (when more money is available to earn interest), neglecting to account for this reduction in interest that should occur in a well diversified retirement fund will lead to a significantly different amount of money. Why is this so often left out of the equation?
– Eli

Simple answer: because the math turns into a train wreck of assumptions.

When you do a calculation based on one asset class, you’re dealing with a much smaller set of unknowns. You can take their monthly contributions, pull out an expected long term return (I use Warren Buffett’s number – 7%), and calculate based on that.

As soon as you introduce the idea of switching asset classes, you begin to lose the message in the details. Not only are you now worrying about the unknown long term returns of two asset classes – stocks and bonds, at least, and possibly real estate and cash, too – you’re also dealing with the unknown of how the transfers between the accounts will go.

In the end, with that latter calculation, you come up with a number that’s so buried in guessed variables that the number is practically meaningless.

This weekend we had a friend install a very nice, very free TV antenna on our home and I cancelled our Dish Network. Now, my husband REFUSED to do this for the past 2 years. We have had this very nice very free (courtesy of Craigslist) antenna for a while but he listened to too much propaganda and believed we would not have any channels. When our bill for basic service plus his TEVO (which he rarely uses) jumped to 54.37 per month, I had had enough. I researched our antenna and the service we would receive at our location, all courtesy of, and showed him that we would receive at least 30 channels FREE. He argued again that it wouldn’t be the same. Ok, I said, what do we really watch on TV? And with that question, I actually documented what we watched. 90% of it was on the local affiliates. Now our kids (we have 6 ages 17 thru 6) all watched Disney, but this isn’t a democracy and their votes don’t really count because I have been disturbed for some time about the programming on Disney depicting all parents as being idiots…very similar to the inmates running the asylum….so, with this knowledge in hand, he was on board. I pondered this whole process and learned some important points (which I am sure you already know, but some of us aren’t up to speed, so bear with me):

1. Don’t listen to propaganda. Dish told us we NEEDED them otherwise we wouldn’t have ANY TV. Bull. The reception is BETTER than the satellite and IT IS FREE.

2. Keep an open mind. Jim wouldn’t have been on board with this switch if I hadn’t shown him evidence online from a reliable source and detailed notetaking reseach on our program watching history.

3. Just like drug addicts (and I can truly say I am an expert in THAT field), there will be a withdrawal period but it will pass. I purposely warned my kids that Disney was leaving. I removed the programming on a MONDAY night when school and a busy week was looming ahead of them (they get no TV during the week) and the next few weekends will be FULL of activities out of the house. I also get movies free from the Sacramento library (our library charges, so I just visit the Sac library on my lunch for a wider selection and NO CHARGE). We can also figure out for the laptop and they can watch Hanna Montana as a treat from time to time.

The best part about it is that I was excited to simplify.
– Lori

Absolutely. There are so many options out there right now for television viewing that paying a mountain for cable or satellite really only seems like the “high priced” option.

For example, you mentioned just using an over-the-air antenna. We can get about 17 channels over the air right now, including an extremely kid-friendly PBS station.

You can also use Netflix streaming if you have an internet connection. For $9 a month, you get more movies and non-commercially-interrupted television series than you could ever watch, plus you’ll get some DVDs in the mail to cover the things that aren’t on streaming.

If you don’t mind watching on a computer, Hulu is great, plus there are many shows streamed on the websites of the various television networks.

Don’t ever believe that the only way you can watch television is through cable or satellite.

I have a 12 year old step son, and we use money as the motivator of choice for larger chores such as mowing the yard. However, it seems like he takes on the chores more because he knows how much we appreciate the help, and less because of the monetary reward (not at all complaining here, mind you). Historically, he’s always liked the idea of earning money, but never really has any significant savings goals. More responsible things like college and cars don’t interest him due to them being “so far off”, and he doesn’t seem to ever be interested in purchasing anything to feed his personal hobbies (primarily reading and playing video games). As an adult, I can now appreciate how effective setting a savings goal for an item is towards helping you motivate yourself to work a little extra hard–or do with a little less–to reach that goal. While I don’t want to encourage him to blow all his money on frivolous things, how I can teach him the ins and outs of savings goals?
– Jon

Your son seems like a good kid if he’s doing stuff just to help out around the house. Here’s what I would do in your shoes.

First, I’d sit down with him and see if he has any big savings goals he’s dreaming about. A new video game system, perhaps. Maybe a laptop computer. It doesn’t have to be something lofty, just a big enough savings goal that he’s not going to be able to achieve it in a few weeks.

Once you’ve cinched that goal, I’d select a goal of my own to save for – something you want in roughly the same price range as what he’s saving for.

Pay him for chores as you have been doing and encourage him to toss some cash into a jar to save for that goal (I like jars because they’re very tangible and visual – yes, you don’t earn interest, but that’s not really the point yet). Have a jar for your own goal and toss some savings in there on occasion – a $5 or a $10. Talk about how you’re both moving towards your goal.

If you can, try to finish your goals very close to the same time – and go get the things you’ve been saving for together. He comes home with a laptop, you come home with … well, whatever it is you chose to save for. This provides double reinforcement of the idea that saving for a goal is a big winner.

I believe in the idea that families who save together encourage those behaviors in each other.

You say you use Skype and a prepaid phone. I’m interested in the logistics of this – specifically that you said you use Skype “even when out and about” – how do you do this? I am very interested in using Skype (and even the new gmail phone feature) and I do so from home, but if I don’t have my computer and internet access around, I can’t use it.

I’m also interested in prepaid phones. I’ve tried researching them quite a bit, but I’m wondering what service you use. I’m not sure whether a monthly no-contract plan or a literal pay for every minute you use kind of plan is more cost effective.
– Rowenna

I use Skype on my iPod Touch, an item I received as a Christmas gift a couple years ago. I have headphones that also have a built-in mic on the cord. I simply use the Skype program on my iPod touch sometimes when I’m at a place with wi-fi.

As for prepaid phones, it really depends on how heavy of a user you are. The first thing I’d do is try to get a grip on how many minutes and texts I realistically used in a month. If you currently have a cell phone, use some old bills to find out these numbers and average them over several months.

Once you have that information, shop around. Calculate what the cost would be each month for your usage. You’ll likely find that different plans are better for different usage levels (that’s exactly what I found). This market is so much in flux that any “best plan” recommendation one month would likely not be the best plan a month from now.

I have been divorced for about 3 years now. I am trying to teach myself personal finance and applying those techniques but I’m not sure if I’m catching on too well. I am 30 years old, finishing my MBA concentration Accounting, and have two young kids (both under 10 years old). My student loan balance will be about $100k once I reach graduation (includes out-of-state undergrad tuition) – this is about 90% of my total debt. I have no credit cards. My 401(k) balance is less than $5,000. My Roth IRA balance is less than $2,000. My emergency fund is about $6,000. My current salary is low $40’s and my term life insurance policy is 10 times that amount. I do get $480/month in child support which I use for childcare expenses or throw into the e-fund. If you can believe it, my financial situation is much better than it was 3 years ago but moving from two to one income continues to be a strain.

Right now, where do you think I should place more of my financial focus right now?
– Lacey

I would stock your emergency fund higher than $6,000.

The first thing I’d do is I’d sit down and figure out what my monthly expenses will be post-graduation. Your student loan bills will be a part of that, as will your housing and all of the other expenses that are coming your way. I would shoot for an emergency fund that would cover all of that for six months, and because you have kids and no high-interest debt, I would make that my financial priority.

After that, start socking money away for retirement. If your employer has a 401(k) match, put money there so you get all of the matching money – after that, stock your Roth IRA. You want to be saving 10% of your salary each year.

If you’ve done all of that, use the rest to hammer your debt with extra payments. Pay them off in order of interest, with the highest interest debt going first.

Good luck.

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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