海角大神

What鈥檚 inside?聽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.
1.聽Friendship and money
2.聽Home sale and mortgage question
3.聽Multiple savings accounts
4.聽Used car question
5.聽Refinancing conundrum
6.聽Fast elimination of student loans
7.聽House cleaning system
8.聽Affordable car payment question
9.聽Roth IRA for young children
10.聽Save now or later?

Since most of you will be enjoying family time this Thursday (as will I), there won鈥檛 be a Thursday mailbag this week. Instead, the mailbag will return next Monday at its regularly scheduled time.

Q1: Friendship and money
My roommate is a dentist and the exact opposite way with money. She takes care of the cable/Internet bill (while I do the electricity and gas), but never tells me the amount. When she buys something for me (expensive hair gel for instance), she won鈥檛 tell me how much it is, but when I pester her, she asks me to 鈥渓ook it up and transfer the money to her bank account.鈥� I don鈥檛 want to take advantage of her, so I do that. Would it be too patronizing to start a 鈥渞etirement fund鈥� for her with the money I owe her? I鈥檓 not sure exactly how it would work 鈥� likely just open a checking account and then when we stop living together transfer everything to her and beg her to either put it towards her student loans or open a Roth IRA. Or should I just continue to transfer the money each month to her and watch her waste it?
- Jenna

If your roommate is doing things in a way that鈥檚 comfortable for her, respond by doing things in a way that鈥檚 comfortable to you. Which route feels better to you?

In your case, based on what you鈥檝e said, I鈥檇 probably put all that money into an account and quietly hold onto it until the right moment, like when your friend needs a financial boost for something big in their life or something like that.

Clearly, your friend does not think of this as any sort of big deal, so don鈥檛 treat it as such. Do your own thing quietly and if an opportunity comes around for payback, jump on board then.

Q2: Home sale and mortgage question
I am currently in the process of selling my home (about $150k left on the mortgage) and am planning on renting for a few years. I have no debt, emergency and car fund and an additional $40k in a high interest savings account. I do not plan on using this savings until after I sell my home and can get a plan together for the equity in the home and $40k savings. In the meantime, what benefit would I have in using the entire $40k to pay down my mortgage (effectively giving me a 4.5% return) until I sell my house? Are there downfalls to this plan?
- Lawrence

If you already have an emergency fund and a car fund, then this is a pretty good method for getting you a short-term 4.5% annual return on your money.

There aren鈥檛 really any significant drawbacks to it. It鈥檚 basically a way to lock in a better return in the short term for that money than you鈥檙e getting in a savings account.

The only problem I can see is that it makes that money pretty illiquid for a short period, but if you still have an emergency fund, that鈥檚 not really a significant problem. I鈥檇 go for it.

Q3: Multiple savings accounts
First, some background: I鈥檓 26, I have one full-time job, and one part-time job working as an organist for a little church. I鈥檝e made a bit of a mess of my finances to the tune of $6000 of credit card debt, $29,000 in student loans, and $3000 of a car loan. Right now I鈥檓 in the process of reading/going through Dave Ramsey鈥檚 Total Money Makeover. Currently, I鈥檓 on the first step, which is working on saving up an emergency fund. I鈥檝e budgeted for November and December, and I will have it saved by Jan. 1. I understand I鈥檓 supposed to put this 鈥榬ainy day fund鈥� in its own account and not look at it, which is where my question starts.

My savings currently fall into three categories: saving for taxes (because my organist job doesn鈥檛 withold anything), my $1000 emergency fund, and saving for various sundry expenses (just $25/week until I have my debt paid off, but I want to have something set aside for car repairs and other expenses that doesn鈥檛 come up frequently enough to justify a monthly budget line item). Should I have different savings accounts for these three categories? Right now I鈥檓 keeping an Excel spreadsheet of what money I have saved for what purpose all in one savings account, which is a bit of a pain, but I鈥檓 not sure if it鈥檇 be easier or just ridiculous to have three savings accounts. Should I put my rainy day money in a CD or money market account? Will that make it too difficult to take out cash in case an emergency actually happens? I would greatly appreciate any advice you could give.
- Shawn

There鈥檚 really no problem with having three savings accounts. In fact, some banks (like ING Direct, the bank I use) make it quite easy to do so.

A money market account mostly functions like a savings account. They traditionally have had a pretty solid rate of interest, but they鈥檙e just as depressed as savings accounts are right now, so you鈥檙e not getting a big advantage from using them.

I would not lock your money down in a CD, as this would make your money inaccessible without giving you much of a boost, either.

Q4: Used car question
I have a question regarding automobile purchasing. I was recently involved in an auto accident and my car 鈥� originally bought brand new and maintained like a gem by my father 鈥� was totaled. I just got back from working overseas and have about 7K in savings. I don鈥檛 have a full-time job yet but I have two part-time jobs which I expect will pull in about $1,600/month if I鈥檓 lucky (it鈥檚 hard to say because one depends on tips) and I have college loans at about $300 a month and some other small bills. I will be getting about $3,500 from the insurance company to replace my car, which was a 1998 Nissan.

My dilemma now is this: I definitely know I can鈥檛 afford to lease a new car with a semi-unstable job situation, and I don鈥檛 want a new one anyway since there鈥檚 always going to be this possibility of some idiot running a stop sign again and ruining it. I can either buy an older make used for around what I鈥檓 getting from the insurance company, or I can dip into my savings and get something slightly newer, like a 2003.

What would you suggest? Do I shell out the extra money for a slightly better car and make the dive into my savings, or do I just go with what I have and get an older one? I also have the option of financing a newer one, but as I said, am not sure if I could make the payments every month without feeling squeezed (not to mention that鈥檚 extra for interest).
- Rhonda

Your last sentence tells the story. You can鈥檛 afford an expensive car right now, so get the best car you聽can聽afford with the cash you鈥檝e got.

The key thing to remember is that you鈥檙e not going to be in this situation permanently (at least not if you鈥檙e willing to work hard for something better). This car you鈥檙e buying is to get you through to the point where you鈥檙e in a better state, at which point you can move to a more reliable car.

Never buy a car that鈥檚 beyond your means once you鈥檝e reached a basic level of reliability with what you鈥檙e looking at.

Q5: Refinancing conundrum
My husband and I purchased a house in March 2008 for 200,000 (30 year mortgage, 5.875% interest rate). We currently owe $170,000 on it. We would like to refinance right now, but we need your advice whether this is the best thing for us to do financially right now. We shopped around for rates and the best deal we found is going through a mortgage broker in our town. He is quoting us 3.875% based on high credit scores, which we both have (closing costs would run around $1500). We had 3 different realtors run comparables on our house, and using this as an estimate, the broker believes our house will only appraise for $189,000 (max) right now because of the housing situation in our area. WE are currently paying private mortgage insurance (PMI) since we did not have the 20% down payment when we initially purchased the house. If we refinanced right now, using the 189k appraisal as an example, we鈥檇 only have 10% equity in our house, meaning we鈥檇 still have to pay for PMI again. Is this worth it? Or should we pay extra on our mortgage each month to effectively give us a lower interest rate?
- Lilith

It depends entirely on how much longer you鈥檇 be living in the house.

Let鈥檚 run the numbers. Your current payment is about $1,189.08 per month. If you refinanced, your payment would be about $799.40. To make back the closing costs, you鈥檇 have to make payments for about four months. Of course, you鈥檝e also tacked on about four extra years of payments onto your mortgage, but if you continued making payments at your original $1,189.08 rate, you鈥檇 eliminate all of those extra payments in about eighteen months.

In other words, if you鈥檙e going to live in the house for more than two years beyond the refinancing, it鈥檚 worthwhile. The PMI is a moot point, of course, but you鈥檙e likely to get below that PMI level faster if you refinance and continue making payments of the size of the original mortgage payments.

Q6: Fast elimination of student loans
After three years of temping and waitressing, I just got my first full time job out of graduate school. During those first three years my student loans were in deferment (on account of not being employed full time and the employment I did have was sporadic), but now I鈥檓 ready to get rid of them as soon as possible.

Here鈥檚 the deal: The total is $43,000. The website where I make my payment shows all my individual loans (amounts ranging from $4,000 to $12,000) and I can chose to pay as much as I like over the minimum payment on each one. Each loan is a Stafford loan at a fixed rate of 6.8% and I have not consolidated. I鈥檓 of the mind that I should throw as much money as possible to the smaller loans to get those out of the way, because they will be the easiest to pay off and then I鈥檒l focus on the bigger ones. But, by not paying off the larger balances faster I know I鈥檓 racking up interest.

Is there a better way to approach things or some ideas I haven鈥檛 thought of? I鈥檝e read some nightmare stories about consolidating and interest that piles on and just won鈥檛 quit.聽
- Betty

If they all have the same fixed rate, it doesn鈥檛 matter which order you pay them off in in terms of the overall amount you owe.

Paying off the small ones first does make your minimum monthly payment smaller, which can free your money for other purposes if needed. It gives you flexibility. However, that flexibility can also mean that you end up not contributing as much each month to your debts as you might otherwise be doing, stretching out your loans and causing you to actually owe聽more聽than before (because you鈥檙e not making extra payments).

Your best bet is to simply say 鈥淚鈥檓 going to pay $X per month towards my student loans,鈥� where X is some amount greater than the total minimum payments. Always make the extra payment toward the one with the lowest balance. Ignore any changes in minimum payments because of loan payoffs until they鈥檙e all gone.

You may also want to investigate refinancing options, as that can potentially help with the interest rates.

Q7: House cleaning system
I would like to know about your system for regular house cleaning (cleaning kitchen countertops, stove, sink, microwave; cleaning bathroom sink, tub/shower, toilet; vacuuming or mopping floors; dusting; changing bedsheets and bathroom towels). How often do you do each of these chores? Do you do them all in one block of time or spread them out over the week? How do you divide them up with your wife (and kids)? How do you keep track of what has been done or needs to be done? Do you ever choose to hire a professional cleaner, and if so, when and why?

I realize that these things will vary from family to family, but I would like to know how you do it as a starting point and because I appreciate your value system.
- Carly

We tend to clean by triage, honestly. Cleaning up in the wake of a six year old, a four year old, and a one year old is a real challenge.

We tend to do most of our cleaning in one block once a week, split across Friday evening and Saturday morning. Aside from that, we just use a triage method for handling disasters.

We鈥檝e considered hiring a professional cleaner, but we鈥檝e honestly never been able to justify the cost to ourselves.

Q8: Affordable car payment question
I鈥檓 a first year doctoral student who has already spent a decent number of years living the grad school lifestyle. I have a rather large amount of debt hanging over me right now; my credit card debt is at about $4,000 and my student loans are at about $35,000 (although I won鈥檛 have to 鈥渨orry鈥� about that one until I leave school in 2016). The biggest worry currently, however, is paying for a car with my meager monthly stipend.

I make about $1150 per month from my work as a graduate assistant. My rent is $387 and my utilities usually run that up to about $450. I do qualify for EBT/food stamps and utilize the $200 per month I receive from that. My biggest 鈥渘on-essential鈥� payment, however, is the $240 I pay for my 2011 Kia Soul. (Add about $60 per month for insurance; thankfully, I do not have to pay for my own gas鈥搚et.)

I鈥檝e made some bad decisions with cars. I was gifted a new car in 2004 but sold it in 2008 when I got a job; I desperately wanted the newest and fastest Ford had to offer, and I paid for that ($275/month, to be exact). I traded this in in 2010 for a Honda lease because I wanted the lower monthly payment and wasn鈥檛 too worried about the lack of equity. Because I now live rather far from my parents鈥� home, however, I had to trade the lease in for my current car in May 鈥�11. I refinanced Kia鈥檚 3.99 rate (60 months) through USAA for 3.65. I added gap coverage for $600 then but just had it refunded when I realized how much that truly was.

Essentially, I鈥檓 looking at a payment that is over 25% of my monthly income until just after I graduate. I don鈥檛 know if there are other options, especially when decent used cars are still pretty expensive today. I have pursued additional work, but the extra income won鈥檛 appear until the spring and will still be few and far between鈥揳nd about an additional $1k per month (teaching college courses). Any suggestions?
- Ernie

It is almost impossible to turn around a new car. As soon as you drive it off the lot, you鈥檙e underwater on that loan unless you had a聽sizeable聽down payment. At this point, base don what you described, it sounds like you owe substantially more than it鈥檚 worth.

If that鈥檚 the case, you鈥檙e basically stuck with the car unless you literally just go to the dealership, toss them the keys, and then take a devastating hit on your credit report. You鈥檝e already explored refinancing, so that鈥檚 not a further option. You鈥檙e really not going to find a much lower rate than you鈥檝e got.

Your best bet? Just sit tight, make it through this, and then聽drive the car for a long time. Don鈥檛 replace it because of the siren song of a new car. You鈥檝e got to resist such temptations or they will haunt your entire life.

Q9: Roth IRA for young children
My wife and I are expecting our first children this year (twins) and I was considering starting a Roth IRA for each child now while they are very young. I was thinking I could contribute something like $10 a paycheck.

Is this legal? Does it make sense? Do more parents do this? Any reasons not to?聽
- Eric

Roth IRA contributions are limited by the income you earn from working. Thus, unless your children are out there earning a wage, they can鈥檛 have a Roth IRA.

If you want to save $10 a check for them, your best approach is to open a 529 college savings plan for them. This type of investment has strong tax benefits for education for them as they grow older. Even if they don鈥檛 go to college right after school, the odds are very high that they鈥檒l take on聽some聽type of postsecondary education, and the account will be there for them if they do so.

Don鈥檛 sweat the exact investment too much. It鈥檚 far more important that you start saving now and worry about the investment specifics later. One missed payment can do more damage than an imperfect investment selection.

Q10: Save now or later?
I am currently in my second year in college and I have been saving money from my part-time job at McDonald鈥檚 ever since I graduate high school in 2010. I am currently trying to save as much money as I can so when I graduate from college I will have good amount of money to pay off that debt and also help my parent to pay for my little brother鈥檚 college tuition. So far, with one and half year of effort, I managed to save up to about $6,000. I took the Federal Subsidized-Loan so I know how much money they will lend to me through-out my four years in school, which will be about $20,000 total.

I will have better chance to get a job right after college if I have some internship experience during my college years (especially with my major, Industrial Design). So right now I am trying hard to get ready to find an internship and hopefully I will find one by next summer. However, my problem is that if I do find an internship, I will have to quit my job. And if I quit my job, I won鈥檛 be able to save money anymore and I will not able to make close to $20,000 after I graduate. I would say my internship experience will be much important to me rather than keeping my current job so I know once I found it I will quit my job. Therefore, I am thinking I should start doing some investment with my current money to earn some interest right now. I want to ask you what kind of investment should I look into that is best fit for my age (I am currently 20). My parent told me I should put into CD account and let it roll but with our current economy, I don鈥檛 think that is the best option. Also I would like start saving for retirement like you said, but I really don鈥檛 know how right now. Could you please give me some suggestion or advices on what鈥檚 the best action I should take with my current situation?
- Millie

A CD has traditionally been a great choice for investing in this situation, but we live in strange economic times where CD rates are just terrible. You can barely earn more in a CD today than you can in a savings account, so there鈥檚 little motivation to lock up your money in a CD.

If you want to start saving for retirement, your best method is to sign up for a Roth IRA account. I have one, through Vanguard (just type it into Google). You can set it up so that a small amount goes into that account from your checking account automatically each month.

The advantage of a Roth IRA is that if a desperate situation sets in, you can withdraw the amount you contributed to the Roth without penalty.

Got any questions?聽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.