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The Simple Dollar

Pay off school loans, or build up savings?

Debt priorities, size of emergency funds, and recommended board games are all topics in this week's mailbag

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Q5: Board games as gifts
I’ve been thinking of getting my wife a board game as a gift for us to play in the evenings. She enjoys playing video games that aren’t “twitchy” and has played cards quite enthusiastically with my family in the past. Any suggestions?
- Lucas

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I would probably choose a game without incredibly complex rules that’s not too long and also open-ended and changes each time you play it. I’d also pick something that would work with more players, but works really well with two. Here are some options.

Carcassonne involves building a village out of tiles. As you’re building, you place your villagers in the town to score points (essentially claiming fields and buildings for your villagers).

Ticket to Ride involves connecting cities on a map of the United States with matching colored trains. Your goal is to make a series of connections between cities that will enable two distant cities to be connected together, as you have goals that consist of distant cities. For example, you might connect Vancouver to Portland by connecting Vancouver to Seattle, then Seattle to Portland.

Dominion is a card game where you’re each assembling a set of increasingly better cards. You have a wide range of cards to choose from to add to your set as the game goes along and the earlier not-quite-as-good cards are used to “purchase” the better cards.

All of these work for at least four players (Ticket to Ride and Carcassonne work for five) and all work very well for two players as well.

Q6: Student loan payoffs or savings?
I am currently 23 years old working as a full time teacher. I am starting my first year of full time teaching, second year of teaching in total. I’ve been aggressively paying off my student loans since I’ve graduated. I started at $10,930 when I graduated in May 2010 (I worked all the way through college) and now I’m down to $3000. I pay off my credit card debt every month and I’m maxing out my Roth IRA. I have a $1000 emergency fund, as well as $3300 in other various savings goals (car, wedding, vacation etc) that could be used in case of an emergency. I just started attending graduate school part time in the evenings to continue to develop my skills. Should I continue aggressively paying down my undergraduate student loan debt (400+ per month for me) or should I put that money towards paying for graduate school without taking out more loans? Currently, my district does not offer tuition reimbursement, but I still want to continue my program. I’ve paid my first class in full, and I’m currently saving up for my second class in January. I only have $400 saved right now, and I will need to pay for the class by January 30. I won’t be taking enough classes to qualify for government student loans, so I would have to take out private loans. Should I pay down my undergraduate debt and then take out new debt for graduate school, or should I make a smaller payment on my undergrad loans and save more aggressively for graduate school?
- Reggie

It really depends on how stable your current employment is. The more stable it is, the more I would lean toward graduate school savings. The less stable it is, the more I would lean toward paying off your loans to maximize your monthly cash flow.

What’s the state of your school district? Are they making big cuts or are they pretty stable? How does your state handle education policy? Do you have any seniority or are you the first on the cutting block? Are you in a teacher’s union?

These are all factors that indicate the stability of your professional position. As I said before, that would be the biggest factor in what I chose to do here if I were in your shoes.

Q7: Master limited partnerships?
A friend recently recommended I get into MLPs (master limited partnerships). I wanted to get your opinion on them. I’ve started to do some research on my own but I’m a bit of a financial novice, particulary when it comes to investing and I’m having trouble weighing the pros and cons. Also, do you generally have MLPs as part of a tax deferred retirement account or not?

I have an account with Vanguard that consists of a Traditional IRA retirement fund and a non-retirement account for long-term savings – there’s about 10K in each. I’m considering moving towards dividend investing in the long run. My husband and I make about 100K (combined) per year and he has an additional 401K. We use a CPA for filing our taxes — I understand that MLPs might add another level of confusion…
- Chelsea

Master limited partnerships are essentially a way of investing in energy companies. The vast majority of MLPs are companies that own oil or gas pipelines, which means that they pay out a pretty steady dividend.

Because they’re a partnership, people who own a share of an MLP can claim the depreciation of the equipment as a deduction on their taxes. This is actually one of the big reasons people own an MLP – they provide a steady dividend and usually give a tax deduction to boot. However, the dividend isn’t usually a huge dividend – it’s the pairing of features that make them attractive.

Because the tax deduction is such a big feature, it doesn’t really make sense to put them into a tax-deferred retirement account, so I wouldn’t put them in my IRA. As for the other side of the coin, I don’t think MLPs really pay off unless you’re earning quite a bit more money than you are, as the deductions become more valuable at that point.

Q8: Bigger emergency funds?
At almost every PF blog I’ve read, including yours (great site, by the way!), there seems to be the standard advice of having 3-6 months in an emergency fund. Many even say only 2-3 months. I find this a little irritating because that’s been the standard advice for a very long time and it did not seem to change when the recession and high unemployment came along. Even before the recession, it took me almost two YEARS to find a full time position, and I have both bachelor’s and master’s degree in the STEM fields. So I think the emergency fund size should be at LEAST 12 months at a bare minimum. I prefer 18-24 months. I know that’s extreme and I know it’s very hard to save up that much (I currently only have 8 months and I do not feel that is enough). So, why are people still saying 3-6 months, or even at the lower end of that range?
- Ronald

There are a lot of reasons for that.

For one, there’s a assumption that if you’re unexpectedly downsized, you’ll receive some sort of compensation, either in the form of unemployment insurance or in the form of a severance package. This will certainly help.

For another, there’s an assumption that your expenses will actually drop a bit if you’re not going into work each day. There’s no commuting costs, there’s reduced food costs, and so on.

The big one, though, is the assumption that you’re going to actually get out there and find some form of employment pretty quickly. If I were unemployed more than a week, I’d be applying for a job at pretty much any retailer I could find. I’d then spend my evenings and off days circulating resumes and going to interviews. This would keep some level of income coming into my home, which I could then use my emergency fund to supplement.

You’re correct, a six month emergency fund isn’t enough to live off of for two years. However, I don’t think that one should ever live off of an emergency fund unless absolutely forced to.

Q9: Upromise credit card
Do you think the Upromise credit card is worth signing up for? I have my debit card linked to my Upromise account but I’ve only gotten $18 in the last 3 years. I think the interest rate is a bit high but the rewards seem good. I would appreciate your thoughts.
- Taylor

The Upromise card mentioned by Taylor is one that puts a small percentage of purchases into a college savings account for your child.

In all honesty, the Upromise card offers rewards at a rate comparable to a lot of other rewards cards. The appeal of it is that it puts those rewards directly into college savings.

Remember, we’re talking about amounts that will buy textbooks, not tuition. It’s certainly an option for rewards, but it’s not strictly better or worse than any other. The rewards program that’s best for you is the one that matches how you spend your money, so I’d probably still recommend getting a Visa or Mastercard that matches, say, your gas station or your most frequently used retailer.

Q10: Fringe thoughts
What did you think of the season premiere of Fringe?
- Erik

As I’ve mentioned on here before, my wife and I watch very few television series. One of the few we do watch is Fringe. We record it, then watch it on a weeknight that’s convenient for us.

I think that Peter is in some sort of limbo and I think September is going to end up going against the rest of the Observers and help him. I felt like September was feeling … guilty, maybe … about having done whatever they did to Peter.

I also think I find the alternate universe more interesting at this point. Every character save Olivia is more interesting “over there,” in my opinion.

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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