海角大神

What鈥檚 inside? Here are the questions answered in today鈥檚 reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
Car trade-in math
Putting others at ease
Safe savings
Refinancing timing question
Board games for young ones
Retirement account diversity
Personal finance intervention
Mortgage readjustment
Mortgage prepayment versus savings
Blog focus

On Black Friday, I attempted exactly one sale 鈥� an online one. I failed to be at the site in time for the sale. No major loss.

Instead, I spent almost all the day with family members and friends, which took the 鈥渂lack鈥� out of Black Friday.

Q1: Car trade-in math
My wife and I just moved out of our house after doing a short-sale. We were fortunate to live there long enough to pay off our credit card debt and essentially wipe the slate clean. Now at the age of 26, we are living with my parents with close to no bills and a decent monthly income and trying to save as much as possible to position ourselves for a better future. We own a 2008 Nissan Titan, which we financed for 27,000 out the door. Its our only real debt and I believe we owe less than its value because we pay slightly more every month than the minimum. I鈥檝e been considering trading it in on a 2011 Hyundai Sonata for a few reasons. Assuming the dealer paid off the Titan in full, I should be able to negotiate a lower monthly payment on the sonata, the insurance is the same, the gas and maintenance would be much less. So all in all, I think by doing so I could save an additional $200 dollars a month to be reinvested. I understand that all the money we鈥檝e paid into the truck would be 鈥渓ost鈥� but in the 鈥渨iping the slate clean鈥� phase we are in, and with the primary goal to be save as much as possible, do you think this would be a wise decision?
- Beau

From what I can tell from your description, you鈥檙e wanting to trade in a vehicle that you borrowed $27,000 for (likely giving you payments of about $500 a month, depending on how you purchased it) essentially for the current value of the car in hopes that the amount will be enough to pay it off, giving you a break-even on that car. Then, after that, you want to buy a Sonata, ideally with a loan that gives you payments around $300 a month, 鈥渟aving鈥� you $200 a month.

I agree with trading in the Titan. $500 a month is pretty steep for a car payment and if you can easily get yourself out of it, that鈥檚 a good thing.

I鈥檓 not in favor of replacing it with a brand new Sonata if you鈥檙e having to take out yet another car loan to finance it. I would get a late model used sedan for about half as much as you鈥檇 pay for a new Sonata, pay that off as fast as possible, then save at a significant rate for its replacement.

Why? If something goes wrong in your life 鈥� you lose your job, etc. 鈥� you either have a paid-off sedan or, in the worst case, a car with much lower monthly payments than if you 鈥渂ought鈥� a new one.

Never buy a new car unless you can write a check for it.

Q2: Putting others at ease
I noticed you mentioned the ability to 鈥減ut others at ease鈥� in a couple of recent posts. I am a caseworker for social assistance in Ontario, Canada and I would like to improve my ability to do just that, to help the clients I work with to feel at ease with me. Are you able to recommend any reading on this subject or do you have any further observations in regards to developing this specific skill?
- Kyla

The best book on this is probably Dale Carnegie鈥檚 . I would suggest that for detailed reading.

The easiest method I鈥檝e found for putting other people at ease face to face is by figuring out what they most enjoy about their life and asking them about it as a conversation starter. Look for clues. What鈥檚 on their clothing? Do they have a keychain with a picture of a child on it? Just look them over for things that identify what they鈥檙e passionate about.

When you have an idea or two, ask about them. Get them talking about something that makes them feel good and they鈥檒l begin to feel more at ease with you.

Q3: Safe savings
I鈥檓 saving $30,000 for animation school which I won鈥檛 be attending for about 3 years. In the interim, I鈥檓 going to finish my fine arts degree. After that, I鈥檒l then use the money saved towards animation tuition. While I鈥檓 working on my degree, though, what should I do with the $30,000? What鈥檚 something that is safer, yet allows my money to grow? It needs to be locked away, essentially, since I鈥檒l be on student loans during the three years. I was thinking GIC鈥檚, but the return is only 2.5%. Others have said I should put a down payment on a house and then sell it. What would you suggest?
- Tighe

I鈥檓 pretty certain that Tighe comes from Canada, where GICs are roughly the equivalent of treasury notes in the United States.

The real question is how stable Tighe wants his savings to be. If he has zero tolerance for losing any of the balance 鈥� well, in truth, there is no zero-risk investment but you can get the risk pretty small 鈥� a GIC is probably a very good choice, especially at 2.5%. Another option would be to simply stick it into a savings account somewhere, wait, and perhaps move it as interest rates rebound over the next few years.

If you start looking at things like buying a house, you鈥檙e introducing significant risk into the equation 鈥� you鈥檙e banking on an open market, where the value of the home can go in either direction. If that specific market falls from where it鈥檚 currently at, then you鈥檒l lose money. The risk in buying a house strictly for a return in three years is pretty significant.

Q4: Refinancing timing question
My husband & I are expecting a large investment to pay off in the next year or so. It would pay off half the value of our home. After we make that payment, should we keep paying off the mortgage as it stands (rate of 6.25%) or refinance? Which would prevent us from paying the most interest on a home loan?
- Stephanie

Your best bet is to refinance, considering you can refinance down to 4% or below. Any time you can drop your interest rate more than a percent or so, it鈥檚 probably worth it to refinance.

Can you refinance now? If it is possible, now is the best time for you to refinance so that you can spend the next six months or so paying 4% interest instead of 6% interest on your home loan.

Of course, you might not be able to, particularly if you鈥檙e underwater. If that鈥檚 the case, make your big payment in 2011, then refinance as quickly as you can.

Q5: Board games for young ones
I want to get my 4 yr old twin daughters involved in board games. Could you recommend a couple to get them started. Maybe some that your kids have enjoyed that really get them thinking.
- Justin

I currently have a five year old and a three year old, so my best suggestions for you would be the ones that the two of them request and play together.

The one the two of them most often request is , which really helps the younger one with spatial skills. The older one sees a bit of strategy in it and is thus often able to beat his younger sister.

They also have a copy of that they play against each other quite often. As with the above game, my son sees the game differently than his sister and usually wins.

My older one鈥檚 favorite game is , which is similar in complexity to checkers but with much cuter pieces.

Q6: Retirement account diversity
What are your thoughts about having all your retirement accounts at one financial institution? I have a 403B and Roth IRA at Vanguard. My part time job boss is starting a SEP IRA for me and gave me the option of starting it at Morgan Keegan or any other institution of my choice. my initial reaction is just to stick with Vanguard, but what if they go bankrupt? Would I lose all my accounts? Is it safer to put the accounts in a few different places?
- Jennie

Vanguard鈥檚 funds (as are those of virtually every investment house) are protected by the , which ensures that most missing investments are reimbursed. You can to find out more.

The SIPC protects your investments up to $500,000 in total value (up to only $100,000 in cash). If you have investments exceeding that, you may want to consider diversifying across various investment houses.

If you鈥檙e nowhere close to that, I wouldn鈥檛 worry about it at all. Pick the best investment house and stick with them.

Q7: Personal finance intervention
It recently occurred to me (I finally admit) I am dangerous when it comes to my personal finances. I quite honestly don鈥檛 know what to do 鈥� how to create a budget, how to keep a budget, how to manage monthly expenses鈥� all of it.

I realize I need help鈥� and the best help I can think of is to find someone who can teach me how to manage a budget on a month-to-month basis鈥� kind of like taking piano lessons. I need to take lessons in personal finance. What do you recommend I do as a first step?
- Phillip

The actual 鈥渓earning鈥� of how to create a budget and use it from month to month is something you can teach yourself. In itself, it鈥檚 not challenging.

The challenge comes from sticking with it, and that鈥檚 a matter of psychology and motivation. The best thing to do with regards to this is to find a 鈥渕oney buddy鈥� of sorts 鈥� someone who you feel comfortable enough with to openly talk about your finances with, both your successes and failures.

There鈥檚 no need to pay for someone like this 鈥� you probably have such a person in your social network. Do you have a close friend who might also be going through such a period of financial re-evaluation? That鈥檚 the type of person you鈥檇 want as your 鈥渕oney buddy.鈥�

Q8: Mortgage readjustment
My husband and I recently bought a single family house. We got a loan for 392k after 20% down payment and the interest rate is about 4.5%. The monthly payment is about 1986.21 and I pay 2000 per month. Apart from our mortgage, we don鈥檛 have any debt. Both of us work and we don鈥檛 have any kids right now. We both put in around 10% of our pretax income into our 401k and have a healthy emergency fund to fall back on. I鈥檓 currently searching for a new job and recently sold all the stock that I had in ESPP from my company 鈥� around 35k. The question is regarding what to do with this money. We have 2 options 鈥� one is to put this money into our mortgage. If we put this down and readjust our mortgage($250 charge), the monthly payment goes down by approx. $200. A concern I have with this option is that with the housing market down, should we put down more money into our house?

Other option is to invest this money in a CD or mutual funds. I鈥檝e checked out the CD rates and they鈥檙e very low 鈥� around 1.5-2% at the most. I鈥檓 not very familiar with mutual funds and am hesitant to take a risk in putting such a large amount into the stock market.

Are there any other options I should consider?
- Shanna

One mistake I think you鈥檙e making is tying the value of your home to your mortgage. Unless you鈥檙e considering walking away from your mortgage 鈥� which you shouldn鈥檛 even be considering unless you鈥檙e way underwater 鈥� making extra payments on your mortgage shouldn鈥檛 hinge on the value of your home. It should hinge on interest rates and minimizing the overall amount of money you鈥檙e handing to the bank in the form of interest.

When you choose to sell your home, you鈥檙e going to have to deal with the mortgage on it, regardless of whether you sell sooner or later and regardless of whether your home value goes up or down. The more you鈥檝e paid down your mortage, the more likely it is that you鈥檒l have a surplus when you decide to sell.

In your case, I would absolutely pay down the mortgage first. It鈥檚 essentially a risk-free way to maximize the return on your money.

Q9: Mortgage prepayment versus savings
I have ~$450K in retirement savings and $27K in emergency funds (4 months worth). My mortgage has 28.5 years to run at a 4.1% fixed rate, which I can reduce to 10.5 years if I prepay $1K/mo (which would basically require an either/or choice to add to the emergency fund or to prepay). I am 43 years old, job is fairly stable, no looming risks that I can see. With company match, currently contributing 17% of my pre-tax salary to 401(K) with plan to increase that at the rate of 1% per year. Should I be prepaying?
- Brent

Do you want to retire on the first possible day or do you not mind waiting a few years beyond that for a more stable retirement?

That鈥檚 really the question here. If you prepay, you鈥檒l have your mortgage gone at age 54 鈥� otherwise, it鈥檒l be at age 70.

If you鈥檙e shooting to retire on the first possible day, meaning you鈥檙e maximizing your retirement savings, you鈥檙e going to have mortgage payments for the first decade or so of retirement, making it much tighter to make ends meet.

Really, the 鈥渂est鈥� choice relies on being psychic about the future of the stock market 鈥� and no one can really predict it.

If I were you, I鈥檇 figure out a retirement age at which I鈥檇 like to retire, then figure out how much extra I would have to pay each month on my mortgage to make the mortgage vanish at that date (or just a bit before). Then, I鈥檇 use the remainder of that $1,000 per month and put it into retirement.

Q10: Blog focus
Sometimes you write posts or include questions in your reader mailbag posts that have little to do with personal finance. Nevertheless, you maintain the focus of The Simple Dollar very well and people seem to enjoy (and request) these little diversions. I鈥檓 guessing a lot of that has to do with regular readers wanting to get to know you better. How do you maintain your blog鈥檚 focus while allowing for this flexibility?
- Christine

That鈥檚 because The Simple Dollar isn鈥檛 really a personal finance blog per se.

Yes, on the surface, I talk about money issues a lot. The real focus of the site, though, is finding a balanced life 鈥� and I鈥檓 using my own life as something of a laboratory for finding it.

Personal finance is a key part of that balance and it was the first part of it that I really understood. Without having your money in order, it鈥檚 very difficult to build a better life for yourself.

But it goes beyond merely being all about the dollars. It鈥檚 about time management and knowing what you want out of life. It鈥檚 about setting goals and reaching them. It鈥檚 about relationships with others and the career that you want. These are all tied in with money, of course.

It took me a year or so of doing The Simple Dollar to really start understanding that it wasn鈥檛 really about money. It was about finding a better life and using myself as a lab to do it, with the implicit understanding that good personal finance is a very key part of it. That鈥檚 what I鈥檝e stuck to ever since 鈥� and it allows me a pretty broad range of stuff to write about.

I find that it takes a while for every good blog to really figure out what it鈥檚 about. It鈥檚 usually not immediate 鈥� it takes some time for the idea behind the blog and the person (or people) writing it to really come together. Often, it winds up being something completely unexpected. I didn鈥檛 think The Simple Dollar would end up being about the things I write about now when I started writing pure frugality posts in late 2006.

Got any questions? Email them to me or leave them in the comments and I鈥檒l attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

--------------------------

海角大神 has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.