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.
Where to keep emergency funds?
Catching up on retirement savings
Negative items on credit report
Head over heels
Helping a child in trouble
Preparing for career switch
Renting in retirement
Disability and ethics
Student loan concerns
Swimming pools

I picked up a nasty case of conjunctivitis from one of my infant son鈥檚 friends. As I type this, my eyes itch terribly and one of them feels like there鈥檚 some grit in it.

Thankfully, I have an abundance of cold, wet washcloths. Every once in a while, I鈥檒l go sit in a chair and hold them over my eyes for a while and this soothes the itching and grittiness 鈥� for a little while, anyway.

Q1: Where to keep emergency funds?
We have six months expenses as an emergency fund. 鈥淗igh yield鈥� savings accounts are at about 1% these days. Money market accounts seem to be .05%. Do you have a recommendation for a good type of account for an emergency fund?
- Tracy

High yield savings accounts really are the place to keep emergency funds, because they鈥檙e the only place available to most people that have the factors needed to hold an emergency fund.

First, it must be liquid. You have to be able to pull your cash out at any time. This eliminates things like CDs and real estate.

Second, it must not put the balance at risk. Quite often, you need the money most when the markets are down. This eliminates things like stocks.

When you keep peeling things away like that, you鈥檙e eventually left with high-yield savings accounts and money market accounts. Unfortunately, the rates on them are poor right now, but that鈥檚 not the point. You just need a place that鈥檚 liquid and your balance is not at risk.

Tracy also had a second question worth discussing.

Q2: Catching up on retirement savings
Also, we are in our early 40s. I have almost 200,000 in 401ks, but my partner has about 80,000. We plan over the next five years to save most of her income to try to catch up. Do you have any other advice for us on how to get her retirement savings on track?
- Tracy

Maxing out your 401(k) contributions is one path, which it sounds like you鈥檙e following.

Another way to do it 鈥� one that I鈥檇 suggest doing, actually 鈥� is to open a Roth IRA. With a Roth IRA, you contribute after-tax money (which means it comes out of your take-home pay), but if you just leave it there until retirement, you don鈥檛 have to pay taxes on the money you鈥檝e gained in that account.

Having some of your money in a Roth IRA and some in a 401(k) puts you in great shape with regards to taxes now and taxes later. Plus, you have the power to control your own investments if you use a Roth IRA (I invest through Vanguard in a Target Retirement fund).

Q3: Negative items on credit report
I pulled my credit report and found that there was one potentially 鈥榥egative鈥� area 鈥� it looks like a credit card with Chase Bank was opened in 10/2005, and was closed at credit grantor鈥檚 request. The last report was Mar 2006, and it looks like there was marked a 60 days past due, with a 鈥榟igh balance鈥� of $125. This seems strange to me, only because I was living in Japan from 2004-2007, and was not in the US at this time to open an account with Chase.

Additionally, there are no charges listed, and it doesn鈥檛 look like this was used.

I鈥檓 wondering how this could have been opened in my name 鈥� I did not receive any credit card offers at my address in Japan. Should I dispute this? Does it matter?

I鈥檓 trying to build credit 鈥� I have 3 credit cards, with no late payments and I pay off the balance each month. I have never taken out a loan, however, so my only way to build credit is through credit cards.

I took the FICO score estimator and got a range of 720-770, which seems good, but it bothers me that a credit card went past due in my name when I was out of the country.
- Rachel

That seems rather unusual. Given that the card seems to have been used ethically, my first suspicion is that someone in your family opened the card for some reason, perhaps because their own credit was in a bad situation at the time.

It鈥檚 also possible that there was an error with the Social Security number at some point.

If the account is closed, I wouldn鈥檛 worry about it too much, although it is strange.

Q4: Head over heels
My boyfriend lives in Boston. I live in Los Angeles. We met on New Years weekend and since then one of us has flown to see the other almost every single weekend. This is getting really expensive, but a day doesn鈥檛 go by when I don鈥檛 really really want to see him. What should I do?
- Glenda

Do you have an easy opportunity to professionally transfer to Boston? Does he have an opportunity to professionally transfer to Los Angeles?

If either one of you has this option available, it鈥檚 worth considering. You may also want to consider job searching in Boston (and he can look for lobs in Los Angeles).

In short, if you鈥檙e single and unencumbered, this is the kind of thing that you should try to make work. This is one of those things that, if you don鈥檛 run with it, you鈥檒l find yourself regretting it for the rest of your life. Don鈥檛 let it pass.

Q5: Helping a child in trouble
We have an employed 29 year old son who is beyond a spendthrift. He puts himself in situations that put us in jeopardy financially. I am looking for the pyscology articles of why he does what he does. Any suggestions. And yes he has had a substance abuse problem. Supposedly he is in rehab.
- Lionel

You don鈥檛 know if he鈥檚 in rehab or not, yet he has the ability to make financial moves that put you in jeopardy?

For starters, I would not allow him any access to any of your assets. If he has a credit card of yours, cancel it. If he has the ability to draw on your funds, deny him that ability.

For another, it sounds like he has an addictive personality, which can be incredibly financially dangerous. People with deeply addicitve personalities (of which I know a few) will spend every dime they have and every dime given to them by anyone and any dime that they have access to in order to chase their addictions.

The only solution to this is professional help, and a key part of that is their own desire to want that type of help. Until then, I would not allow him access to anything that could harm your financial position.

Q6: Preparing for career switch

After six years in the workforce, I will be going to law school in August and leaving behind a low-paying career. I have about $10,000 left in consolidated student loans, which I have been dutifully repaying since I graduated from college.

I have been preparing an expense budget for the next phase of my life and discovered that I will actually have more monthly income from my housing budget than I take home now. The end result is that I think I may be able to continue making my $117 a month student loan payment from my undergraduate studies without much pain. If I don鈥檛, I can add that money to my budget for savings/IRA. What do you think I should do?
- Tammy

It depends on the interest rates of the loan.

From my perspective, continuing to make that $117 a month payment instead of putting the loan in forbearance is essentially a $117 monthly investment that returns the interest rate of your loan. If that interest rate is very high at all, it鈥檚 a very good investment to continue, especially if you can afford it.

Of course, I am assuming that you have at least some emergency fund already in place and don鈥檛 have any history of accumulating debt, but both of these seem to be true based on your comments.

Q7: Renting in retirement

I have a friend who plans on renting for the rest of her life as she doesn鈥檛 like the idea of being tied to one area (as the [slim] chance to move could occur if she lost her job) or having to do maintenance on a property.

Recently her parents have become concerned that she will still have to pay rent after retirement. They have offered to give her a sum of money to assist with the down payment. This is making her consider purchasing a home since 鈥渢he market is great for buyers鈥� and her mom and dad are giving her free money.

Since we both live in the same high priced real estate area, we have used the 鈥�NY Times Rent vs Buy calculator鈥� to determine that she can only afford a $160k house. Looking at what鈥檚 available in the area; this leaves her with 1 and 2 bedroom condos, which are suitable for her.

I did a little Google-ing about renting during retirement and came across nothing but retirees that sell their homes to move into an apartment. In this scenario, it seems one would be putting money into a home for ~30 years and then be able to sell to break even or make a profit. After selling the home, the cash on hand could be seen as liquidating a retirement account that money was added to over time but with much greater risk. Whereas with a rented property, money would be put into someone else鈥檚 account, never to be returned.

Why can I not figure out how renting is better than buying in this scenario? Is the free money really worth it?
- Brian

Renting versus buying isn鈥檛 the cut-and-dried case that many people seem to believe that it is. One isn鈥檛 necessarily better than the other. It heavily depends on the situation of the person involved.

In many locations, the cost to rent per month is substantially lower than the monthly mortgage payment, the utilities, and the maintenance costs. In many areas, the gap is substantial. In retirement, cash flow is often paramount, and if you鈥檙e spending less per month by renting rather than buying, it makes sense. This is particularly true if you鈥檙e diligent about saving at least some of that difference.

However, in her situation, with relatively low-cost condos available and a big cash boost in her back pocket, the balance shifts strongly toward buying.

Q8: Disability and ethics
The world is a mean-spirited place sometimes. I have gotten many comments saying that I do not deserve disability from taxpayer money and that I knew what I was getting into when getting legally married, so I should stop complaining and suck up the dramatic decrease in our finances. I obviously don鈥檛 agree! I think government policy is VERY wrong and people need to know about and understand what the government is doing to us.

During the boom years, I was very much looked down upon for not being able to rake in cash through working. Now that more people are hurting financially, I am despised as a leech on society. If I got a vote鈥�I鈥檇 vote to NOT be disabled鈥�so would Rhett. I鈥檇 love it if some money person like you would write about what it鈥檚 like to live on very little. How would a money expert spend their money if they were me? What would they eat? How would they cope with it all? What are our best options?
- Wendy

My feeling is that regardless of how you feel about a particular type of financial aid, if it鈥檚 already funded and available to you, you鈥檙e throwing money away by not taking it. That doesn鈥檛 mean you can鈥檛 be politically opposed to it, nor does it mean you鈥檙e politically in favor of it. You鈥檙e simply talking about the immediate financial position you鈥檙e in and how to maximize that position.

If I were you, I鈥檇 take advantage of all aid that I was eligible for, but I鈥檇 also try to work in whatever way I could.

Most importantly, don鈥檛 be ashamed of who you are and stop worrying so much about what other people say. The person you have to wake up with in the morning and go to bed with at night is you, not all the naysayers and critics. If you鈥檙e happy with the choices you鈥檙e making in your situation, then that鈥檚 enough.

Q9: Student loan concerns
In 2011, I decided that instead of doing a year-long resolution, I would instead do a smaller resolution for each month. I wanted to slowly build myself up into a better person all around, instead of trying to jump into a huge goal that would fail within a few days. Plus, I continue what I learned from one month into the next month, slowly adding up skills and benefits. For January my goal was to get my finances under control. I joined Mint.com, I started reading finance blogs (yours included!), and being more aware of how I spent my money. While it has been difficult, I have learned a lot, and my mindset about money has really changed.

However, one thing continues to plague me, and I have yet to figure out a good answer. I, like many others in my age bracket, have a fair amount of student loans. Thankfully I have no student loans from undergrad, these are strictly loans from my mental health counseling masters program. I have consolidated all my loans through the federal government into one big loan. Currently I owe $46,942.39. My monthly minimum payment is $118, but I usually try to pay $130. I am currently paying on the income contingent plan, as I needed to have the lowest monthly minimum payment to get by. My interest rate is 7.350%, and I have $1,056.19 lurking in outstanding interest that has yet to be added to the principal balance. Here is my problem: when I have outstanding interest, even if I pay over my monthly minimum, none of my payment goes towards the principal. So basically I am just throwing money at the interest, which feels like plugging holes one at a time in a sinking ship. However, I am living in Chicago and I make roughly $28,000, so I am not really able to pay much more than the $130 a month. However, I wonder if I should even bother paying over 鈥� since I am a mental health counselor, I believe I am eligible for the Public Service Loan Forgiveness program (http://studentaid.ed.gov/PORTALSWebApp/students/english/PSF.jsp). After 120 payments, my loan will be forgiven, as long as I continue to work in my field (which I am obviously planning on doing).

So, do I bother to really try and tackle this debt? Or do I just keep making minimum payments for 10 years and let it all get paid off at that point? How do I save the most money doing this?
- Kelly

Given your income level and the fact that you鈥檙e probably stuck making those minimum payments for the foreseeable future, there鈥檚 no reason not to try to take advantage of the loan forgiveness program.

I would get enrolled in the program as soon as possible, then focus on making those minimum payments like clockwork.

Yes, there鈥檚 a risk that you won鈥檛 be in this field in ten years. However, your current income is pretty much limiting you to minimum payments or something close to it, so I wouldn鈥檛 worry too much about that risk.

Q10: Swimming pools
What do you think of swimming pools? Do you think it鈥檚 worth it? Can you tell me some pros and cons? Interested in buying, however not sure it鈥檚 the right thing to do鈥�
- Paul

With a major purchase like a swimming pool, I would encourage you not to get one unless it鈥檚 something you鈥檙e already doing. If you鈥檙e the type of person who goes to a public swimming pool very regularly to swim, then you鈥檒l probably get value out of your own pool.

However, I鈥檝e seen many people sink money into a pool that they think they might use, only to find that they rarely use it and are unhappy with the upkeep costs and the money they鈥檝e sunk into it. My in-laws have a swimming pool that they do use during the summer a little, but I suspect if they had the chance to re-do things, they probably would not have purchased the pool.

Never sink a bunch of money into something you 鈥渕ight鈥� use. If it鈥檚 not something you鈥檙e actively engaged with, I鈥檇 be very careful about laying out the cash.

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 (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.

.

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

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.