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The Simple Dollar

Retirement question: In college. Working. How do I save for retirement?

Retirement saving: If you're starting early, try a Roth IRA. Retirement question is No. 10 in the reader mailbag. 

By Guest blogger / November 28, 2011

In this file photo taken earlier this month, students walk on the campus of the University of Washington in Seattle. For college students wanting to save for retirement, try a Roth IRA – question No. 10 in this reader mailbag.

Elaine Thompson/AP/File

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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. Friendship and money
2. Home sale and mortgage question
3. Multiple savings accounts
4. Used car question
5. Refinancing conundrum
6. Fast elimination of student loans
7. House cleaning system
8. Affordable car payment question
9. Roth IRA for young children
10. Save now or later?

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Since most of you will be enjoying family time this Thursday (as will I), there won’t be a Thursday mailbag this week. Instead, the mailbag will return next Monday at its regularly scheduled time.

Q1: Friendship and money
My roommate is a dentist and the exact opposite way with money. She takes care of the cable/Internet bill (while I do the electricity and gas), but never tells me the amount. When she buys something for me (expensive hair gel for instance), she won’t tell me how much it is, but when I pester her, she asks me to “look it up and transfer the money to her bank account.” I don’t want to take advantage of her, so I do that. Would it be too patronizing to start a “retirement fund” for her with the money I owe her? I’m not sure exactly how it would work – likely just open a checking account and then when we stop living together transfer everything to her and beg her to either put it towards her student loans or open a Roth IRA. Or should I just continue to transfer the money each month to her and watch her waste it?
- Jenna

If your roommate is doing things in a way that’s comfortable for her, respond by doing things in a way that’s comfortable to you. Which route feels better to you?

In your case, based on what you’ve said, I’d probably put all that money into an account and quietly hold onto it until the right moment, like when your friend needs a financial boost for something big in their life or something like that.

Clearly, your friend does not think of this as any sort of big deal, so don’t treat it as such. Do your own thing quietly and if an opportunity comes around for payback, jump on board then.

Q2: Home sale and mortgage question
I am currently in the process of selling my home (about $150k left on the mortgage) and am planning on renting for a few years. I have no debt, emergency and car fund and an additional $40k in a high interest savings account. I do not plan on using this savings until after I sell my home and can get a plan together for the equity in the home and $40k savings. In the meantime, what benefit would I have in using the entire $40k to pay down my mortgage (effectively giving me a 4.5% return) until I sell my house? Are there downfalls to this plan?
- Lawrence

If you already have an emergency fund and a car fund, then this is a pretty good method for getting you a short-term 4.5% annual return on your money.

There aren’t really any significant drawbacks to it. It’s basically a way to lock in a better return in the short term for that money than you’re getting in a savings account.

The only problem I can see is that it makes that money pretty illiquid for a short period, but if you still have an emergency fund, that’s not really a significant problem. I’d go for it.

Q3: Multiple savings accounts
First, some background: I’m 26, I have one full-time job, and one part-time job working as an organist for a little church. I’ve made a bit of a mess of my finances to the tune of $6000 of credit card debt, $29,000 in student loans, and $3000 of a car loan. Right now I’m in the process of reading/going through Dave Ramsey’s Total Money Makeover. Currently, I’m on the first step, which is working on saving up an emergency fund. I’ve budgeted for November and December, and I will have it saved by Jan. 1. I understand I’m supposed to put this ‘rainy day fund’ in its own account and not look at it, which is where my question starts.

My savings currently fall into three categories: saving for taxes (because my organist job doesn’t withold anything), my $1000 emergency fund, and saving for various sundry expenses (just $25/week until I have my debt paid off, but I want to have something set aside for car repairs and other expenses that doesn’t come up frequently enough to justify a monthly budget line item). Should I have different savings accounts for these three categories? Right now I’m keeping an Excel spreadsheet of what money I have saved for what purpose all in one savings account, which is a bit of a pain, but I’m not sure if it’d be easier or just ridiculous to have three savings accounts. Should I put my rainy day money in a CD or money market account? Will that make it too difficult to take out cash in case an emergency actually happens? I would greatly appreciate any advice you could give.
- Shawn

There’s really no problem with having three savings accounts. In fact, some banks (like ING Direct, the bank I use) make it quite easy to do so.

A money market account mostly functions like a savings account. They traditionally have had a pretty solid rate of interest, but they’re just as depressed as savings accounts are right now, so you’re not getting a big advantage from using them.

I would not lock your money down in a CD, as this would make your money inaccessible without giving you much of a boost, either.

Q4: Used car question
I have a question regarding automobile purchasing. I was recently involved in an auto accident and my car – originally bought brand new and maintained like a gem by my father – was totaled. I just got back from working overseas and have about 7K in savings. I don’t have a full-time job yet but I have two part-time jobs which I expect will pull in about $1,600/month if I’m lucky (it’s hard to say because one depends on tips) and I have college loans at about $300 a month and some other small bills. I will be getting about $3,500 from the insurance company to replace my car, which was a 1998 Nissan.

My dilemma now is this: I definitely know I can’t afford to lease a new car with a semi-unstable job situation, and I don’t want a new one anyway since there’s always going to be this possibility of some idiot running a stop sign again and ruining it. I can either buy an older make used for around what I’m getting from the insurance company, or I can dip into my savings and get something slightly newer, like a 2003.

What would you suggest? Do I shell out the extra money for a slightly better car and make the dive into my savings, or do I just go with what I have and get an older one? I also have the option of financing a newer one, but as I said, am not sure if I could make the payments every month without feeling squeezed (not to mention that’s extra for interest).
- Rhonda

Your last sentence tells the story. You can’t afford an expensive car right now, so get the best car you can afford with the cash you’ve got.

The key thing to remember is that you’re not going to be in this situation permanently (at least not if you’re willing to work hard for something better). This car you’re buying is to get you through to the point where you’re in a better state, at which point you can move to a more reliable car.

Never buy a car that’s beyond your means once you’ve reached a basic level of reliability with what you’re looking at.

Q5: Refinancing conundrum
My husband and I purchased a house in March 2008 for 200,000 (30 year mortgage, 5.875% interest rate). We currently owe $170,000 on it. We would like to refinance right now, but we need your advice whether this is the best thing for us to do financially right now. We shopped around for rates and the best deal we found is going through a mortgage broker in our town. He is quoting us 3.875% based on high credit scores, which we both have (closing costs would run around $1500). We had 3 different realtors run comparables on our house, and using this as an estimate, the broker believes our house will only appraise for $189,000 (max) right now because of the housing situation in our area. WE are currently paying private mortgage insurance (PMI) since we did not have the 20% down payment when we initially purchased the house. If we refinanced right now, using the 189k appraisal as an example, we’d only have 10% equity in our house, meaning we’d still have to pay for PMI again. Is this worth it? Or should we pay extra on our mortgage each month to effectively give us a lower interest rate?
- Lilith

It depends entirely on how much longer you’d be living in the house.

Let’s run the numbers. Your current payment is about $1,189.08 per month. If you refinanced, your payment would be about $799.40. To make back the closing costs, you’d have to make payments for about four months. Of course, you’ve also tacked on about four extra years of payments onto your mortgage, but if you continued making payments at your original $1,189.08 rate, you’d eliminate all of those extra payments in about eighteen months.

In other words, if you’re going to live in the house for more than two years beyond the refinancing, it’s worthwhile. The PMI is a moot point, of course, but you’re likely to get below that PMI level faster if you refinance and continue making payments of the size of the original mortgage payments.