Student loans: Pay them off, or invest elsewhere?
Student loans at currently low interest rates should be paid off as quickly as possible, because there aren't many better investments out there. Student loans are question one in this week's mailbag.
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. Student loans, repayments, and rates
2. Finding cheap Kindle books
3. Incompetent landlord issues
4. Eliminating fast food
5. Health insurance for newborn
6. Waiting for divorce
7. Changing spousal money habits
8. Egg cartons
9. IRAs and tax rates
10. Home repair dilemma
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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Most weekdays, I go for a long walk around the neighborhood where I live. I usually do it to work through ideas, improve my physical shape a bit, and get a bit of fresh air.
Anyway, if you walk the same area enough, you begin to notice patterns, such as when people are typically home and what vehicles to notice in people’s driveways and the like.
Whenever I see a vehicle that isn’t familiar, I often wonder whether or not I should say anything to anyone. Should I stop by their house later and let them know? Should I call the police? Or should I just ignore it?
Unless I see something really out of place, I typically ignore it, but the thought of the out-of-place vehicle often sticks in my head.
Q1: Loans, repayments, and rates
I have two student loans. I have about $15000 in federal loans which are at a fixed rate of 3.375. I have $13000 in private loans at a variable rate, which has been 2.5% ever since interest rates dropped to their historic lows. The loan at the variable rate was at one point as high as 8.5%.
Currently I am not paying anything beyond the minimum monthly payments for each figuring that I can get a better return on my money elsewhere. Do you agree with this logic? If so, at what point do you think I should start throwing extra money toward these loans? I had reckoned somewhere between four and five percent but am curious to hear your thoughts.
Right now, there isn’t an investment where you can get a guaranteed return of 3.375%. When interest rates shift, there will be such opportunities. Of course, there are opportunties that one can reasonably expect to get that return, but they involve risk, meaning you’re not going to necessarily get that return over a given period of time.
In other words, unless you’re investing for something way down the road, like retirement, or you don’t have a decent emergency fund, you might as well pay down this debt.
It is never a bad choice to eliminate debt, even at 0%. If nothing else, it minimizes your monthly bills, which makes it easier to survive job losses and other unexpected events.
Q2: Finding cheap Kindle books
You’ve mentioned before how you view your Kindle as a money saver, but I just don’t get it. All of the books on there seem really expensive to me. Where do you find cheap books?
I read a lot of public domain books, though, which you can download for free at Project Gutenberg. I use it to read philosophy and classic novels.
Between those two sources, there’s a ton to read. If you must read the latest releases, use your public library and use their reservation system.
Q3: Incompetent landlord issues
My problem is that I have the landlord for H-E-Double hockey sticks. I have lived in my apartment for 3 years and only started experiencing problems around the 2 and a half year mark. My landlord frequently doesn’t cash my rent checks (I have about $4,200 in my bank account right now from 4 months worth of rent she hasn’t cashed). I started sending out the rent check via my bank (through the “Pay Bills” section) so that I have a record of payment. I have contacted her in the past about this and her explanation was that “the secretary was out sick”. The only problem is…She doesn’t have a secretary…The other issue is that I’m not technically on a lease. According to her, she never received my lease renewal and when I asked her to send me a new one – she never did.
So what should I do? This woman is old (maybe mid-60s) and I live in a large building so sometimes I wonder if she just gets overwhelmed. My lease expires in 4 months and am I DEFINITELY planning on moving but what should I do with that rent money? I realize that it’s rent and should be paid to her but she isn’t cashing the check.
I’d get out of this apartment, of course, but I really wouldn’t sweat the missed checks. Just make sure that you’re leaving enough in your checking to cover the uncashed checks.
You might want to call your bank and ask about their policy on stale checks. Many banks don’t accept checks that are older than six months as a policy (though they often slip through).
For now, though, make sure you can cover every single check you’ve written. It might be annoying, but it’s the safe route.
Q4: Eliminating fast food
I finally get it: fast food isn’t as cheap as I thought it was. I spent some time tallying my overall spending and it would actually be cheaper for me to go to a decent restaurant and take a doggie bag than it is to eat fast food, and making meals at home is cheaper than that!
The problem is that the convenience of fast food is just such a part of my life. Between grabbing kids from school activities and dropping them off places, keeping up with my meetings and other things, and my crazy job, most days fast food is just what I rely on to make it work. I grab some food and eat in the car on my way to my next thing.
My life is just incompatible with sitting down for a normal meal at the dinner table. I don’t see how I can trim money from my food budget and retain any level of convenience.
My suggestion to you would be to make meals at home and pack a small cooler or something with plenty of food for lunch, dinner, and any snacks you might consume. Put an ice pack in there so that the food stays cool.
I’ve done this many times on busy weeknights. I’ll eat a sandwich and a side I’ve made myself for the fraction of the cost of eating a fast food meal and without the ten minutes burnt in the drive-thru.
There’s a lot of variety in this as well. Given that you’re not wasting time in a drive-thru, you can pack meals that don’t have to be eaten while driving, and if you have access to a microwave at work, you can cook it just before you leave. It really works, both in terms of delicious food and financial savings.
Q5: Health insurance for newborn
My wife and I are expecting a baby in September and we are trying to determine whose health insurance we should insure the baby under once it arrives. My wife has traditional open access healthcare (pay co-pays, etc. but everything else is covered). I have high-deductible health insurance with an HSA. We intend to remain on our separate health insurance plans because her employer pays 100% of her premiums (for her only) and my employer pays a portion of my HSA contributions. We don’t want to miss out on this free money (untaxed, not part of income, no way to receive it unless enrolled in the healthcare plan). Her premiums will increase $320 per month to add the child. My premiums would only increase $69 per month. However, with the HSA, you know that I pay 100% of everything out of pocket up to deductible then I would be co-insuring (10% in my case) everything after that.
I’ve determined that to compare apples-to-apples, I would increase my cash out of pocket HSA contribution to $251 per month so that my premiums and HSA in total are $320. This would mean that cash out on a monthly basis I am neutral between both options. That said my employer will kick in $108 additional to my HSA. Therefore, assuming the facts above, I would be contributing $359 to my HSA monthly, $4,308 annually.
That said, my deductible would be $6,150 and my annual co-insurance maximum would be $4,000. My total maximum annual out-of-pocket would be $10,150.
The dilemma is this, which plan do we insure our child under? If the child is healthy, the HSA seems to make plenty of sense because I can’t imagine spending more than $4,300 even in the first year on the healthcare for the child. My wife and I are healthy so we won’t use much of the HSA money on ourselves. The obvious concern is that an accident could happen at any time which would mean we could max out the $10k in one year. However, I have emergency fund money to cover that and I am risking that whether the child is on the HSA or not because I am on it. The real unknown is whether the child will be healthy. We don’t have a family history of anything but I worry that the child could have some medical complications and that would get expensive quickly.
Can you advise me on what to do here? Also, we would be free to change during the open enrollment periods each year. This enables us to change our mind down the road so really the first year is what is in question here.
I would only go for the cheap option if I had an enormous emergency fund sitting there to cover situations that the cheaper insurance leaves up to you. In other words, I’d want to keep an emergency fund that covers the whole deductible and a few months of living expenses.
If you don’t have that, I would go for the more expensive insurance. This is about keeping your child safe, and that’s paramount.
It might be tempting to think you’ll be able to save enough to get there in a few months, but that’s the very point of insurance. Insurance is supposed to cover you in situations where you cannot, and if you can’t cover an unexpected expense and have access to decent insurance, get that insurance.
Q6: Waiting for divorce
My husband and I have mutually decided that we don’t love each other any more. We do love our children and have decided to continue to live together for their sake. We don’t hate each other, we just realize we don’t really love each other.
How do we go about separating our assets in a reasonable manner?
It sounds like you have time to do this and mutual respect during this process, both of which are invaluable.
If I were you, the first step I’d take is to start separating all accounts. You should each have checking accounts, credit card accounts, and so on that are independent of the other. You should each own your own vehicle without the other on the title.
As for large assets like your home or other investments, talk about it together and determine what creates the best outcome for everyone involved. I can’t give you the answer to this, but I would suggest taking your time, talking about it together, and seeing if there is a good way of resolving such big issues without involving lawyers (who will eat up a lot of the value of the disagreement, anyway).