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.
Overinvesting or saving?
Home exercise equipment
Little change, big impact
Emergency fund or lower expenses?
Non-FDIC insured CDs
401(k)s and job concerns
Basic home buying finances
Obsessing over finances
Learning board games
Book for younger beginner

Where do I want to be in ten years?

I want to have a novel published. I want to be living in the country rather than on the edge of a town (my back door view looks like the country somewhat, but my front door looks practically like suburbia). I want to have three happy and curious children who enjoy reading and asking questions that challenge them.

These statements pretty much set the stage for the next ten years of my life. Most of what I do moves me toward these things.

Q1: Overinvesting or saving?
How do we know if we鈥檙e investing more than we should compared to saving for a big purchase (a house)?

We鈥檙e a newly married couple. The stats: He鈥檚 35, makes a salary of $70K and contributes 9% to a 401(k) and gets a 50% match up to 6% of his salary. He鈥檚 also one of those really lucky people who works for a place that has a fantastic pension that will be there when he retires (railroad retirement). She鈥檚 31, makes $93K/year and contributes 4% to 401(k), which is matched dollar-for-dollar.

We contribute $10K/year to Roth IRAs. Hers is new and is kind of earmarked to be used for a home purchase if needed/desired.
Monthly expenses: $3500 (not including long term savings or investments, just day-to-day expenses plus vacation and car replacement). On top of this, we tithe 10% of our salaries.
Debts: $83K on a rental house (bought before marriage by her). $24K equity in the house. It generates about $100/month profit on top of paying the mortgage. Not huge, but not nothing either. Could sell it to roll it into our next house or might keep it a rental for as long as it is easy to do so. No loans or credit card debt of any other kind.
Savings: $40K cash (in addition we have a 10 month emergency fund of expenses)

Situation:
We鈥檙e hoping to buy a house as debt free as possible in a year when our apartment lease is up. Amount of the house will be around $120K. Also hoping to have a child at about that time, in which case her salary will either be cut in 1/2 (if employer agrees to part time work) or go away completely to be a full time mom.

Our questions:
1) Are we investing too much, given our short term goal of buying a house with as little mortgage as possible? We know that a lot of experts recommend to dedicate 15% of your salary to retirement, but is that based upon his salary or our salary 鈥� with the knowledge that her salary will probably go away in a year or so. Currently, we鈥檙e saving $2953/month (21% of our income) and investing $1943/mo for retirement.

2) If we are investing too much, what should go away (temporarily)? The easy one is the extra 3% of his 401(k) contribution that isn鈥檛 getting matched, but that鈥檚 not significant if that鈥檚 the only change we make.
- Rhonda

I don鈥檛 think you鈥檙e doing anything wrong. The problem is that your goal is so big compared to your income.

This is really about realistic goals. You鈥檙e making $160K a year, yes, but right off the bat, 20-25% of that goes to taxes, another 10% goes to retirement savings, and another 10% goes to tithing. Immediately, you鈥檙e down in the $90K range. You have $3,500 in monthly expenses, quickly dropping your money down to the $50K per year range.

No matter how you slice it, you鈥檙e not going to be able to turn that $50K into $80K. There鈥檚 no one big piece that will give you back that $30K. If you trim his retirement savings, that鈥檚 really only giving you back about 1% overall, and that鈥檚 not enough.

My suggestion is to extend your timeline to something more realistic. Push your plans back a year, at which point you鈥檒l be in much better shape to make this happen.

Q2: Home exercise equipment
I鈥檝e started going through a few home exercise routines at your suggestion and I鈥檓 loving it. I鈥檓 considering buying equipment, but I鈥檓 wondering if I really need any at all or, if I do, what I should get for a beginner.
- Jeff

First of all, I鈥檇 visit a secondhand sports equipment shop if I were going to buy anything. Items like dumbbells, kettle bells, treadmills, and so on can almost always be found for much less at secondhand shops.

Now, do you need any of this? The one low-cost purchase I鈥檇 urge you to consider are resistance bands. A set of these is inexpensive and does a very good job of helping you with basic weight training. I myself have that work really, really well.

Other items I would look at are a small set of kettlebells (my preferred weights), a chin-up bar, and a jump rope. All of these are inexpensive (except for a big set of kettlebells).

If you can possibly run outside, I would not buy a treadmill.

Q3: Little change, big impact
LOOK at this 鈥� I was working on my budget 鈥� I am paying off business debt in 3 years and working on a plan for paying off the house early and then really saving so I can have the option to retire in 15 years (will probably work longer but you have to have a plan!).

AND I calculated how much sooner the house would be paid off if I saved $50 per week 鈥� that is what I used to pay a housekeeper and now I clean myself.

Anyway 鈥� what a crazy thing 鈥� if you pay an additional $50 per week you don鈥檛 notice that 鈥� it replaces the housekeeper 鈥� and the house is paid off 8 years earlier for a savings of $66,000 鈥� that is crazy! It is not hard to clean a little every day and a smaller house makes this easy!

We just downsized our house and we moved to a better part of the country so we can drive to vacations and we are happier 鈥� it cut our budget in half. I paid off all personal debt and have 3 years left on business debt. I am saving some now and at the time the business debt is paid off I will really start to sock money away and can retire in 15 years although I can keep working if I want. It is my business!! I really love your column!!
- Judy

This is exactly the kind of change that people should constantly be seeking in their life.

Here鈥檚 the thing: our values change over time. Things that were deeply important to you five years ago might not mean as much now. Your time constraints two years ago aren鈥檛 your time constraints now.

Good personal finance is about a constant evaluation of your life, determining what your needs and desires are right now rather than what they used to be, and putting that money aside for uses that are more important to you.

Q4: Emergency fund or lower expenses?
When you know that you鈥檙e going to have a large unusual expense in the upcoming month, such as new tires, 6 months of car insurance or whatever (something around $500-1000) how do you handle it? Do you purposely adjust your spending for the month (skip dining out all together for a month, use the pantry freezer for food, purposely drive the least amount possible) so that you can take none or very little out of savings or do you just keep your regular spending the same, use your savings and then just replenish over the next few months?
- Julie

Right now, I don鈥檛 have too much obvious fat to cut from my monthly budget, but I do things like this pretty regularly. I鈥檒l really skimp on things one month to be able to afford something bigger in a later month so that I don鈥檛 have to tap into savings.

For example, my family really views eating out as a big splurge rather than a routine thing to cut back on.

On the other hand, I鈥檓 saving for a big travel expense this summer, so during the months leading up to summer, I鈥檓 trimming back very hard on my incidental spending in order to be able to afford it without dipping into anything.

Q5: Non-FDIC insured CDs
I was thinking about purchasing a CD through my local credit union as they tend to offer a little higher rate. However, I was surprised to find that although they are insured, it is not through the FDIC, which is what the 鈥渞egular bank鈥� CD鈥檚 are insured / backed by. I forget what institution 鈥渂acks鈥� credit union CD鈥檚, but it is not the FDIC. Is my money just as safe in a CD with a credit union as it would be with a 鈥渞egular鈥� bank?
- Kelly

CDs and accounts offered by credit unions are typically insured by the NCUA, not the FDIC.

In terms of consumers, NCUA insurance is basically the same as FDIC insurance. Both protect deposits up to $250,000 in the face of institutional failure.

I would consider NCUA insurance on an CD to be sufficiently safe to feel confident to buy that CD.

Q6: 401(k)s and job concerns
I鈥檓 not really sure how to go about this. I鈥檓 23, and I just started a 鈥渞eal鈥� full-time job making about 28k a year. Not the greatest pay, but I like what I do and have opportunities to move up in the company. Prior to this, I just worked retail. I have about $4k left in credit card debt that I鈥檓 aggressively paying off, and then I have about $70k in student loans to work on.

My question is sort of a two parter:

My new job offers a 401k, but I am not eligible for a year (that鈥檚 11 months from now). If I contribute 5%, they will match 4%. I plan on contributing when I am able, but that seems pretty low. I鈥檓 thinking I should open an IRA to also contribute to. Does that sound like a good idea? I could also contribute to an IRA while I鈥檓 waiting to qualify for my company鈥檚 401k.

Also, I have two 401ks from previous jobs that I don鈥檛 know what to do with. One has maybe $400 and the other maybe $600. Both are fully vested. Should I close these and roll them over? Or should I close one, and keep one open to contribute to while I can鈥檛 contribute to my current employer鈥檚 retirement plan? All the documents I read talk about what to do when you have a lot of money in your 401k鈥� but I don鈥檛.
- Jen

You should absolutely open an IRA in the interim while you wait. I would recommend opening a Roth IRA, which you contribute to with post-tax money (straight from your checking account). This has several advantages, the biggest of which is the fact that when you鈥檙e retired and withdraw that money, you won鈥檛 have to pay any taxes on your withdrawals.

I would talk to the 401(k) plan manager at your current employer to discuss rolling over the old 401(k)s.

Given the small amounts involved, the convenience of simply having all of the 401(k) money in a single amount is worth the possibility that one of the old 401(k)s is a slightly better investment product than your current 401(k) plan.

Q7: Basic home buying finances
My husband and I are a young and married within the last year (we鈥檙e 25). We鈥檝e been renting in an area outside a major city for the last 3 years. I worked for a while, but recently went back to graduate school. My wonderful husband has been employed the whole time we鈥檝e lived together. We鈥檝e done what I consider is quite well for ourselves 鈥� we have a minor car loan (at 0% interest), and student loans (more on that later). We have no credit card debt, 5-6 months emergency fund, and have both made healthy contributions to our respective retirement funds. We estimate having about $120,000 in student loans, both from undergrad and grad school, when I graduate law school in 2013. We鈥檝e done everything we could to minimize students loans 鈥� state school, aren鈥檛 taking out cost of living loans, and when I was working I payed down a huge chunk of my undergrad loans.

My question is really this. We鈥檝e started saving for a house, and when I graduate law school we want to move into 鈥渢he city鈥�. However, houses in the city, even small ones, are really expensive and we want to make a 20% down payment when we do buy (for all the reasons that that is a good thing). For a (modest in the area) $400,000 house, that would be $80,000. We鈥檝e been saving as much as we can while I鈥檓 in school, which has us at about $8000 from the last year. We really want to 鈥渟tart our lives鈥� when I graduate law school, by buying a house and having kids before we鈥檙e 30. I鈥檒l be 27 when I graduate.

Is there any way to speed up the rate we鈥檙e saving? We can鈥檛 really save any more money 鈥� we already have ditched our cable, don鈥檛 eat out, make our own cleaning solutions, and all those regular frugal things.

Are there any circumstances under which buying a house without a 20% down payment is financially wise? We don鈥檛 want to purchase a 鈥渟tarter home鈥� and 鈥渦pgrade鈥� and that doesn鈥檛 make a lot of sense for us anyway because what we want is really pretty modest (2 or 3 bedroom, not too fancy, no lawn at all because that鈥檚 how the city works).
- Robin

Robin, your story is exactly why I often state that young people today have a harder time getting a foothold in the world than people did thirty or forty years ago. You鈥檙e dealing both with a housing market with costs that have grown faster than inflation, education costs that have grown faster than inflation, and real wages that have notgrown as fast as inflation. Simply put, you鈥檙e trying to pull off something 鈥� getting an education, getting a job, and getting into a house 鈥� that鈥檚 much more difficult today than it once was.

Now, as to your question. Buying a home with less than 20% down usually means that you鈥檙e going to be saddled with a higher interest rate (either on the amount over 80% or on the whole amount) and also with PMI. Simply put, it鈥檚 going to be far more expensive per month than it would be if you simply waited until you have the 20% down payment. Your impatience will cost you 鈥� a lot.

If I were you, I wouldn鈥檛 do it, particularly considering the large amount of student loans you鈥檒l also have. It is generally a bad idea to get into debt that adds up to more than twice your household income, and if you finance an entire $400,000 house on top of $120,000 in student loans, you鈥檙e going to have to be making a mint to make that viable. If you were to lose a job, your house of cards would collapse very quickly.

Q8: Obsessing over finances
I鈥檝e been working on resolving my financial issues for several months now. I鈥檝e suffered a few setbacks in my employment, with some contracts ending prematurely, and was forced temporarily to return to menial labour to pay the bills until I could find a new job. I鈥檓 finally back on track with a decently paying job and I鈥檝e formulated a plan for getting on top of my finances. My primary goals are to be debt-free within 1 year and to have saved enough for a house within 5 years.

The problem is that I can鈥檛 help obsessing over my finances. I spend a lot of time reviewing my options, tweaking my spreadsheet calculations, reading blogs and books for further tips etc. I鈥檝e already adopted a number of the techniques I鈥檝e read about on your site and others, and believe that I have a solid plan and have taken the necessary steps to implement it, but I find that I鈥檓 constantly thinking about it and trying to come up with other options.

At what point do you sit back and just let things run their course, confident that you鈥檝e made the right decisions ? How do you avoid that niggle of self-doubt that makes you question your plan and feel the need to refine and perfect it ? How do you get comfortable in the long wait between starting on your path and seeing visible progress ?
- Tim

I think this is more of a psychological issue than anything.

There was a time when I did the same thing. I was neurotic about every dime. I was constantly looking at spreadsheets and evaluating plans.

Eventually, over a long period of time, I stopped doing that so much. What changed? I think I finally grew confident that I was making good choices for the first time in my adult life.

I don鈥檛 think anything you鈥檝e described is necessarily bad. It mostly sounds like someone who is trying to make sure he鈥檚 on the right path. The longer you walk that path, the easier it鈥檒l get.

Q9: Learning board games
I am trying to adopt board games hobby for my free time as you suggest. I bought Pandemic and couldn鈥檛 understand how to play it. In one of your post, you stated that you can go for game store for demo. Which store are you referring to? In NYC, we have ToyRus and I have never seen demo for board game. Or any web site? Thanks and hope to hear from you soon.
- Fred

Shops like Toys R鈥� Us and Target don鈥檛 do board game demos. If you want to learn how to play this type of game, you need to go to a hobby store.

I鈥檓 not familiar with board game shops in New York City, but I gave Googling 鈥溾�� a shot and found a lot of results. seems to be a highly regarded choice.

I would try stopping in there (or at another shop on that list) and asking about how to play Pandemic. You might find, for example, that Forbidden Island is a similar game that might fit you better. You might also find thatPandemic isn鈥檛 as complex as you thought.

Q10: Book for younger beginner
My son is turning 18 and is now interested in investing and personal finance as our school district skips these important subjects.

Do you have any book recommendations for the beginner? I鈥檓 looking for a very good personal finance book, then a good investing book.
- Bud

My favorite book for someone in that situation is by Dara Duguay (). It does a good job of addressing personal finance in terms relatable to a high school senior or college freshman.

Depending on the person, though, a more thoughtful book like might be appropriate. This works really well for very self-aware late teenagers and twentysomethings. It certainly woke me up.

Both of these would make great graduation presents!

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.

.

SEE ALSO: How bankruptcy-proof are you? Find your color.

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

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.