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.
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Q6: Fast elimination of student loans
After three years of temping and waitressing, I just got my first full time job out of graduate school. During those first three years my student loans were in deferment (on account of not being employed full time and the employment I did have was sporadic), but now I’m ready to get rid of them as soon as possible.
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Here’s the deal: The total is $43,000. The website where I make my payment shows all my individual loans (amounts ranging from $4,000 to $12,000) and I can chose to pay as much as I like over the minimum payment on each one. Each loan is a Stafford loan at a fixed rate of 6.8% and I have not consolidated. I’m of the mind that I should throw as much money as possible to the smaller loans to get those out of the way, because they will be the easiest to pay off and then I’ll focus on the bigger ones. But, by not paying off the larger balances faster I know I’m racking up interest.
Is there a better way to approach things or some ideas I haven’t thought of? I’ve read some nightmare stories about consolidating and interest that piles on and just won’t quit.
If they all have the same fixed rate, it doesn’t matter which order you pay them off in in terms of the overall amount you owe.
Paying off the small ones first does make your minimum monthly payment smaller, which can free your money for other purposes if needed. It gives you flexibility. However, that flexibility can also mean that you end up not contributing as much each month to your debts as you might otherwise be doing, stretching out your loans and causing you to actually owe more than before (because you’re not making extra payments).
Your best bet is to simply say “I’m going to pay $X per month towards my student loans,” where X is some amount greater than the total minimum payments. Always make the extra payment toward the one with the lowest balance. Ignore any changes in minimum payments because of loan payoffs until they’re all gone.
You may also want to investigate refinancing options, as that can potentially help with the interest rates.
Q7: House cleaning system
I would like to know about your system for regular house cleaning (cleaning kitchen countertops, stove, sink, microwave; cleaning bathroom sink, tub/shower, toilet; vacuuming or mopping floors; dusting; changing bedsheets and bathroom towels). How often do you do each of these chores? Do you do them all in one block of time or spread them out over the week? How do you divide them up with your wife (and kids)? How do you keep track of what has been done or needs to be done? Do you ever choose to hire a professional cleaner, and if so, when and why?
I realize that these things will vary from family to family, but I would like to know how you do it as a starting point and because I appreciate your value system.
We tend to clean by triage, honestly. Cleaning up in the wake of a six year old, a four year old, and a one year old is a real challenge.
We tend to do most of our cleaning in one block once a week, split across Friday evening and Saturday morning. Aside from that, we just use a triage method for handling disasters.
We’ve considered hiring a professional cleaner, but we’ve honestly never been able to justify the cost to ourselves.
Q8: Affordable car payment question
I’m a first year doctoral student who has already spent a decent number of years living the grad school lifestyle. I have a rather large amount of debt hanging over me right now; my credit card debt is at about $4,000 and my student loans are at about $35,000 (although I won’t have to “worry” about that one until I leave school in 2016). The biggest worry currently, however, is paying for a car with my meager monthly stipend.
I make about $1150 per month from my work as a graduate assistant. My rent is $387 and my utilities usually run that up to about $450. I do qualify for EBT/food stamps and utilize the $200 per month I receive from that. My biggest “non-essential” payment, however, is the $240 I pay for my 2011 Kia Soul. (Add about $60 per month for insurance; thankfully, I do not have to pay for my own gas–yet.)
I’ve made some bad decisions with cars. I was gifted a new car in 2004 but sold it in 2008 when I got a job; I desperately wanted the newest and fastest Ford had to offer, and I paid for that ($275/month, to be exact). I traded this in in 2010 for a Honda lease because I wanted the lower monthly payment and wasn’t too worried about the lack of equity. Because I now live rather far from my parents’ home, however, I had to trade the lease in for my current car in May ’11. I refinanced Kia’s 3.99 rate (60 months) through USAA for 3.65. I added gap coverage for $600 then but just had it refunded when I realized how much that truly was.
Essentially, I’m looking at a payment that is over 25% of my monthly income until just after I graduate. I don’t know if there are other options, especially when decent used cars are still pretty expensive today. I have pursued additional work, but the extra income won’t appear until the spring and will still be few and far between–and about an additional $1k per month (teaching college courses). Any suggestions?
It is almost impossible to turn around a new car. As soon as you drive it off the lot, you’re underwater on that loan unless you had a sizeable down payment. At this point, base don what you described, it sounds like you owe substantially more than it’s worth.
If that’s the case, you’re basically stuck with the car unless you literally just go to the dealership, toss them the keys, and then take a devastating hit on your credit report. You’ve already explored refinancing, so that’s not a further option. You’re really not going to find a much lower rate than you’ve got.
Your best bet? Just sit tight, make it through this, and then drive the car for a long time. Don’t replace it because of the siren song of a new car. You’ve got to resist such temptations or they will haunt your entire life.
Q9: Roth IRA for young children
My wife and I are expecting our first children this year (twins) and I was considering starting a Roth IRA for each child now while they are very young. I was thinking I could contribute something like $10 a paycheck.
Is this legal? Does it make sense? Do more parents do this? Any reasons not to?
Roth IRA contributions are limited by the income you earn from working. Thus, unless your children are out there earning a wage, they can’t have a Roth IRA.
If you want to save $10 a check for them, your best approach is to open a 529 college savings plan for them. This type of investment has strong tax benefits for education for them as they grow older. Even if they don’t go to college right after school, the odds are very high that they’ll take on some type of postsecondary education, and the account will be there for them if they do so.
Don’t sweat the exact investment too much. It’s far more important that you start saving now and worry about the investment specifics later. One missed payment can do more damage than an imperfect investment selection.
Q10: Save now or later?
I am currently in my second year in college and I have been saving money from my part-time job at McDonald’s ever since I graduate high school in 2010. I am currently trying to save as much money as I can so when I graduate from college I will have good amount of money to pay off that debt and also help my parent to pay for my little brother’s college tuition. So far, with one and half year of effort, I managed to save up to about $6,000. I took the Federal Subsidized-Loan so I know how much money they will lend to me through-out my four years in school, which will be about $20,000 total.
I will have better chance to get a job right after college if I have some internship experience during my college years (especially with my major, Industrial Design). So right now I am trying hard to get ready to find an internship and hopefully I will find one by next summer. However, my problem is that if I do find an internship, I will have to quit my job. And if I quit my job, I won’t be able to save money anymore and I will not able to make close to $20,000 after I graduate. I would say my internship experience will be much important to me rather than keeping my current job so I know once I found it I will quit my job. Therefore, I am thinking I should start doing some investment with my current money to earn some interest right now. I want to ask you what kind of investment should I look into that is best fit for my age (I am currently 20). My parent told me I should put into CD account and let it roll but with our current economy, I don’t think that is the best option. Also I would like start saving for retirement like you said, but I really don’t know how right now. Could you please give me some suggestion or advices on what’s the best action I should take with my current situation?
A CD has traditionally been a great choice for investing in this situation, but we live in strange economic times where CD rates are just terrible. You can barely earn more in a CD today than you can in a savings account, so there’s little motivation to lock up your money in a CD.
If you want to start saving for retirement, your best method is to sign up for a Roth IRA account. I have one, through Vanguard (just type it into Google). You can set it up so that a small amount goes into that account from your checking account automatically each month.
The advantage of a Roth IRA is that if a desperate situation sets in, you can withdraw the amount you contributed to the Roth without penalty.
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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