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
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.
Q6: Multiple student loan payments
I’m a 23 year old grad relatively recently graduated out of college. I accumulated about $25,000 in total loans (all subsidized), and payment time has finally kicked in. The total monthly minimum I’m looking at is about $275, with my intention being to reach $400 per month whenever I can.
The thing that I find annoying is dealing with five separate payments coming out at varying times of the month. Do you think it would be prudent, and worth the credit score hit, to consolidate my loans for the sole sake of making one payment? I’d plan to pay the same $300-400 a month, but would just like to worry about making one transaction.
The only downside I see to is that because I use direct deposit from one of the lending house, they’re giving me a 2% interest rate reduction on the two loans I owe them ($11,000, 5.5% interest rate, $100 monthly minimum payment).
How would you advise I approach this?
There’s no reason not to investigate what kind of rates you would get with consolidation. You can certainly call around and get some rate quotes before you make such a move.
I’m going to guess that with some shopping around, you can find a rate that’s lower than that 5.5% that might also reward you for direct deposit payments while also providing the easier depositing that you want.
One way to start shopping around is to check out the organizations you already have loans with and see what they offer for consolidation.
Q7: Cars with leg room
We are looking for a new car. My teenage son is almost 6′ 6″ and I was wondering if you know of a sedan or SUV (we are going to be looking for one with good gas mileage), that has a lot of leg room in the back seat. He has his own truck and drives back and forth to college but we still need room for him in our vehicle sometimes.
I’ve got a lot of experience in jamming myself into cars that are smaller than my frame will allow. My height is “top-heavy,” which means that I can wear pretty ordinary length pants but my shirts pretty much must be tall shirts. This means that I do okay for leg room in most cars, but my head often bumps the ceiling.
This means that cars like my wife’s Toyota Prius actually works okay for me provided I ride in the passenger or driver seat, but there are many SUVs and vans that are pretty awful to ride in because of my head bumping the ceiling.
Given that body proportions vary so much, my honest suggestion would be to just go test out a lot of vehicles at a large dealership so that you have an idea what works well for him. Once you have some models you’re sure about, use that information to shop around before buying.
Q8: Good items on credit report
I’m 30 years old and just a few months into my first full-time 9-to-5 job (previously I have been doing freelance writing or photography to supplement part-time work while taking care of family responsibilities). I have a bit of a checkered financial history, mostly due to a couple of credit cards being charged off after my house was nearly destroyed in Hurricane Ivan in 2004 and I missed a couple of payments. I’ve worked with the collection agencies that purchased those debts and this month I will be debt-free. Even though I know that if I had ignored the debts, they would nearly all be off my credit report by now, I feel good about having repaid my legitimate debts.
Here’s the problem. My only “in good standing” item on my credit report is a store credit card that I never used, and that has been inactive since the store (Bombay Company) closed a few years ago. I found out today that this item will leave my credit report in June 2013. Because I have avoided opening any new lines of credit, once this is no longer reported I’m worried about how bleak my credit will be.
Now here’s my question. How can I add more “good” items to my credit report? I checked with Orchard Bank and the card I qualified for was a secured card. I’ve never really felt like secured credit cards were a good idea (since I don’t intend to use it) but is it worth opening one just to have another line of credit on my report? Can you suggest any alternatives?
The only reason to get a secured credit card is to raise your credit score. I truly look at them as though you’re loaning money to a bank at 0% interest in order to raise your credit score. Very rarely will you find a secured card that makes sense for a person to use for actual purchases because the interest rates are usually really high on them and they rarely have any sort of good rewards programs.
Now, is that worth it? If your credit score without that secured card is really low, it probably is. A decent credit score helps with your insurance rates and also helps with the interest rates you’ll get on things like car loans and the like.
You may want to see if you’re eligible for an unsecured card of some form. If you do have a positive history with the one card on your report, it might not quite be as bad as you’re thinking. Use the secured card as a “last resort.”
Q9: Personal finance in the U.S.
I have been a follower of your site on and off for a few years, more of a casual reader than anything purely on the basis that many articles did not apply to me, being from the UK and having no debt to clear. Now however, I am reading every post you make as I am moving very shortly to live in the States. A lot of things are very different; by this I mean the basic way financial intuitions run, the way mortgages work, the way banks and investments work… the ‘basics’ on my financial education here in the UK will not apply. This will be very strange for me – here in the UK I’m very well financially educated, working as a personal tax accountant. So I feel I will not enjoy suddenly floundering! I was wondering if you had any general advice for me, and if there was a particular book or blog or any such that you could recommend to me… sort of an ‘American Finance for Dummies’ but for people who do want a little more than just passing knowledge?
In terms of basic principles – pay off your debts, spend less than you earn, etc. – most economies work pretty much the same. In terms of your day-to-day actions, you’re not really going to be doing much differently in the U.S. than in the U.K. A standard Personal Finance for Dummies book written for a U.S. audience will actually answer surprisingly few of the questions you come across. They also tend to focus on the principles.
Honestly, the source I would use the most for this would be Wikipedia. I would start with entries related to the areas that concern you the most, such as income taxes. One good entry to start with would be “Banking in the United States.”
Another good tactic is to simply ask entry-level employees of institutions you intend to use. Bank tellers and the like are often good sources in terms of how things functionally work, which you can then supplement with ideas and theory from other sources.
Q10: Overspending family and holiday politeness
I’m writing for some advice on dealing with my financially irresponsible mother and grandmother. I am 25, living in NYC on my own. All of my school loans (~24K) and credit card debt (~5K) are in my name – I haven’t taken any money from my mom (who raised myself and my 2 brothers alone, with minimal financial help from my father) since I was about 17 years old. I saw what a struggle money caused in my house growing up – it was a main cause of my parents divorce – and I’ve always worked to be as independent and responsible as possible. That, of course, is not without incident so I’m actively paying down a bit of credit card debt that I accrued while in my early 20s and trying finding a job/figuring out the whole ‘financially responsible’ thing. I’ve since managed to make quite a dent in my debt despite my high cost of living. I contribute to a 401K with a 5% employer match and I also maintain a personal savings account.
I’m writing because my mother and grandmother are compulsive over spenders. They are both in a fair amount of credit card debt but they still shop compulsively (nearly every Saturday is spent at the local mall, Kohl’s, Target or flea market, etc.) My grandmother spends so much money that my 85 year old grandfather still works two jobs to make ends meet for the two of them. He also works to lend additional funds to my mother as she is also in debt and has no savings to speak of.
That in and of itself has serious implications for me as I am sure that I will be charged with caring for my mother in retirement as she has nothing. However, I’m wondering if you might be able to advise me on how to politely decline presents and shopping trips with my grandmother and mother. When I visit (usually about twice a year), all they want to do is shop. I’m not a big fan of shopping ingeneral however, when I do purchase things I do so with a “quality over quantity” mindset – I pick out one classic, high quality piece and I save up to buy it. My mother & grandmother just buy anything that is on sale, favoring low quality department stores – usually falling into the trap of “it was on sale, so i bought 3 of them!” My mother even took a part-time job at a local department store for the employee discount.
They don’t seem to have any interest in chatting with me and discussing my life, accomplishments, plans, etc. They want to go to the mall and buy things. This makes me feel incredibly uncomfortable as I know that they are not financially in a position to spend the kind of money that they do. Additionally, it hurts my feelings because I work my butt off to make my life what I want it to be – I’ve worked my way up the corporate ladder quickly and I have a budding romance that is quickly maturing in to something that could very well result in marriage, yet they make no effort to inquire or be a part of my life. I feel that their wanting to shop for me is more for themselves than for me. They push clothes and things on me that are not my style and then guilt trip me when I try to politely decline. They tell me that i have become a snob. I don’t try to deny that or defend myself because I don’t want them to know what I really think about their financial promiscuity – I just let them think that I’ve become a total snob.
With Christmas coming up, I’ve asked all my family members to get my gift cards to Target so I can purchase a television (I haven’t had one for 4 years to save money). My mother is now insisting that she can buy me a TV for Christmas [...] with her employee discount. When I tried to make up excuses why I didn’t want that, she acting like I had just refused her the chance to meet her new grandchild or something ridiculous like that. How do I politely approach this situation without hurting anyone’s feelings but also not accepting gifts that I’m not comfortable accepting?
My reaction would be to just accept the gift and move on with life.
You have to remember that you cannot change the behavior of others. People have to find within themselves cause for change. External forces rarely can do anything at all to cause someone to change, unless it’s to simply trigger something that’s already inside of them.
You’re growing and maturing and finding yourself on a different path than many of your family members. Your values are different at this point. The choice is really up to you: are you willing to set aside some of those values differences to maintain a relationship or not?
In some ways, I’m in the same boat as you. I know that many of my extended family members find our situation confounding. We’re both college educated and earn a good income, but we do things like make homemade Christmas gifts (when other family members just buy all kinds of random things) and buy our vehicles used off of Craigslist. There are values clashes.
At the end of the day, though, I’m okay with that. I know a gift from them is still a gift from the heart, even if it’s not a match for the things that I value. It’s a show of affection and an attempt to maintain a connection.
In your shoes, I would just suggest that you roll with it. Bond with your family where you can, and tread lightly in the areas where you can’t.
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.