Credit card debt: Indebted mom wants to buy me a TV. Should I accept?
Credit card debt is burdening mother, so how should responsible daughter respond? Also, contribute to charity or pay off credit card debt? Questions 10 and 4 in this reader mailbag.
What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries.
1. RRSP question
2. Inadequate income for student loans
3. Emergency fund question
4. Taxes or other uses?
5. Sales over the weekend
6. Multiple student loan payments
7. Cars with leg room
8. Good items on credit report
9. Personal finance in the U.S.
10. Overspending family and holiday politeness
The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.
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As December dawns, Sarah and I are looking over and checking a fairly long Christmas list as usual, filled with siblings and nieces and nephews.
Much like last year, we’re looking for homemade gift options for some of the people. Unlike last year, though, Sarah is back at work full time, limiting the time we have for making such gifts.
What are our solutions? One weekend, we’re planning on making some homemade foods, like salsa. These make great small gifts for siblings and others. We’re also going to assemble a few sentimental gifts for a few people.
Q1: RRSP question
We are a couple in our 50’s and hold $150.000 mortgage (we remortgaged to pay off a debt from our business that we no longer own) and hold no other debts. We have one cell phone, basic cable, 2 car insurances with regular house hold bills. My husband changed careers and we will not see the financial gains for awhile. I bring in $2000.00 a month and that barely covers our monthly bills.( 400.00 short per month) We have had to cash in some of our RRSP’s to exist. I am cashing 5000.00 now and when that runs out I’ll cash another 5000.00. My husband has started into the real-estate business. So the cash is unpredictable and at the beginning there are fees to pay out. My question to you is Should I continue to cash in RRsp’s and put them in different accounts like a tax-free account.
For those unaware, RRSP stands for Registered Retirement Savings Plan, which is much like a Roth IRA for Canadians. Essentially, Linda and her husband are withdrawing $5,000 at a time from their RRSP in order to make ends meet.
As for your specific question, you seem to be in a situation that’s going to be financially unstable for a while. Often, when a person starts out in the real estate business, they don’t see a large income at first. It tends to grow as one’s reputation and contacts grow.
You’re essentially robbing your retirement savings to make a go of this business, and it’s really hard to tell if it will pay off in the way that you want it to. It has a lot to do with the state of the real estate market where you live, your husband’s ability to build contacts, and so on. Many real estate people in my area start off doing it part-time until they have a strong network of contacts enabling them to move into the business full time – and some of them are never able to make that transition.
Obviously, if it’s a choice between going under and using your retirement savings, you should use them, but your focus should be on cutting every possible expense for the time being. I’d even cut the basic cable and use over-the-air signals for a while, and spend that extra time you would have been watching television instead building your husband’s business. You have a lot of ways that you can contribute, such as writing notes to contacts and so on. Your future is tied to the success of this business, and it’s in these early days where the sacrifices are needed to build a foundation.
Q2: Inadequate income for student loans
My situation is this: I owe about $120,000 in federal and private (mostly private) loans. I make $44,000/year (but live in NYC with high costs of living, even though I do live in a much cheaper part of town and live *very* minimally). For the past 4 years after graduating I’ve only been paying interest on the private loans and the federal loans have been deferred. I don’t anticipate ever having a career that pays $100k a year etc. and imagine my salary cap as I grow in my job to be around $65,000. Even if I achieve that I do not feel like this is a debt that can ever be realistically re-paid due to things like compound interest etc.
So essentially should I just stop paying (the private loans – I would pay my federal ones as I know the penalties for not doing that are nasty)? I’m currently spending $400+ a month on them and that’s *interest only*. I know that these loans cannot be discharged in bankruptcy (although I do wonder if since I’m in such an extreme position I might be able to rid myself of some of them) – but I almost feel like if I defaulted and they garnished my wages based on the laws of the state I live in that would actually be less of a monthly commitment! I posited this thought to the loan officer who called me one month when I couldn’t make a payment and asked him what to do about it. His response was to try the lottery. Hopefully you have some better advice.
That “try the lottery” advice is actually pretty insulting. If I ran such a company, I’d fire that loan officer because he’s doing nothing to help the bottom line of the business he’s working for and is actively damaging relationships with clients.
The first thing you should do is directly contact each of the organizations that hold your student loans and discuss your situation with them. Many student loan programs have need-based deferrments, reduced rates, and loan forgiveness programs for people who are in careers with lower earnings potential. I don’t know exactly what your career is, but I do know that it’s in a fairly low earning path, with means it’s at least reasoable that you’re eligible for something like this. You must make it clear when you contact them that your earnings potential is making you look at defaulting because you simply can’t pay the bills and feed yourself at the same time.
The next thing you should look at is loan consolidation. Do you have any options for consolidation that would reduce your monthly payment load? It sounds like you have multiple public and private loans, so it would stand to reason that you’re a candidate for some form of consolidation, and rates are certainly in your favor right now.
A final important thing to remember: you are far from alone here. Many people struggle with what seems like overwhelming student loans. The lenders have a vested interest in having plans for working with people in your situation.
Q3: Emergency fund question
You’re supposed to have 6 months living expenses in a emergency fund, which for me would be about $9,000. I currently have $1,800 saved with plans to save $100/month or more until I reach that amount. This seems like alot of money for me to just have sitting there ‘in case of emergency,’ even just the smaller amount I have now. I also save regularly for retirement, travel, a current goal (right now a digital SLR camera), etc. I have student loan debt and no other debt (including no mortgage/car payment). I rent and take the bus. I have no children and my husband works full time (ie, is not dependent on me for more than my share of the expenses). Do I really need $9,000 sitting in the bank? How do I decide? Can I invest the money? Where? I’d like to put it in stocks because of the higher returns, but that seems to defeat the purpose of an ‘emergency’ fund if I could lose my investment.
I usually encourage people to have two months of living expenses in the bank for each dependent they claim on their taxes. In your case, you and your husband should have four months of shared living expenses in the bank, which would be somewhere around $6,000, apparently.
The reason for that isn’t just for the small expenses you mention. It’s also to help with things like unexpected job losses, unexpected loss of income due to a major injury or illness, and things like that.
When you live paycheck-to-paycheck, things like a dehabilitating injury or an untimely pink slip can cause financial apocalypse. An emergency fund is protection against that, enabling you to keep living your life while you transition through those hard times. A fund with four months of living expenses means that you can be jobless for at least four months (probably much longer), which can be huge if you’re suddenly fired.
Q4: Taxes or other uses?
I earn about $50,000/yr through my work and a side gig and minimized my withholding last year in order to use the extra cash to get out of debt (I’ve paid off $8000 in credit cards so far) so I’ve paid very little on my 2011 income tax so far. I can contribute to a 403(b) at work, but no matching. I foresee an end of the year surplus of $5000, which I could either use to finish off my credit card debt ($5000 more) or make an extra payment on my mortgage (900) & student loan (300), and contribute to the 403(b) (3800, the rest of the $5000) or give to charity in order to reduce my taxes. Before April of 2012, I will have another $5000 surplus which I could contribute to an IRA for 2011, or save to pay my taxes, or again, finish off my credit card debt.
How would you handle this situation to make the most of my extra money to improve my finances?
First and foremost, make absolutely sure that you’re going to be able to cover your tax bills in April. If you find yourself in a situation where you’re facing a big tax bill without the means to pay it, you can be in a world of IRS hurt.
Assuming, though, that you have taxes taken care of, I would put the extra money toward my high interest debt first and foremost, where high interest debt means anything above about 8% interest. In your case, this would be the credit card debt, most likely.
If you’re only giving to charity as a tax reduction, it’s not really a good return on investment. Most people only get about 25% of the amount they donate back in the form of a tax reduction, so if you donate $4,000, it would only cut your tax bill by $1,000. Charity is a great thing, but the tax benefits are really just a perk.
Sarah and I did a little bit of Black Friday shopping, but only online. There were a few specific Christmas gifts that we looked specifically for at some of the big online sales. We found exactly two of the items we were looking for on discount, so we bought exactly two items. I also spent a total of about $7 on Steam on computer games.
I anticipate similar spending levels today. I’m not planning on buying anything that wasn’t already an intended Christmas gift. I have one item that I’m looking for as a gift for Sarah, but aside from that, we’ll probably just browse a few sites together this evening after the kids are in bed to see if we find anything matching our lists.
It’s not a surprise if you’ve been reading this site for a while that I’m not really into the sake of spending money for the sake of “sales” or “bargains.” If you can get an item you were already intending to buy at a steep discount, that’s great, but it’s a rare occurrence when the things I would already buy match up with Black Friday sales.