What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Checking account “buffer”
2. Choosing between many housing options
3. Cheap boy’s birthday ideas
4. Optimizing the “retire early” point
5. Chance to start over
6. Loan forgiveness questions
7. Getting ideas for quality items
8. Online access and credit cards
9. Stocking up on LED bulbs
10. Planned obsolescence
11. Homemade pasta?
12. Identical wardrobe
One of the best things about The Simple Dollar is the huge varieties of stories that I receive.
One message will be from a person who is barely able to put food on the table. Another message is from someone trying to struggle through the long slog of paying down debts. Someone else is on the verge of declaring complete financial independence and walking away from their job.
What’s really cool about all of this is that all of these people are trying to make positive choices for themselves. All three of those stories – and many more – are all about self-improvement and waking up tomorrow in a better situation than you’re in today.
If you can do that every day, you can virtually guarantee that your life will be better down the road.
Q1: Checking account “buffer”
How do you decide how much “buffer” you need in your checking account and/or what would some recommendations be for that number?
We are aggressively paying off debt, so I don’t want to keep it too high, but I also want to set a minimum threshold that means I won’t have to move money back and forth between accounts during the month.
– Megan
I don’t think there is a “set amount” that is perfect for everyone. Some people have highly variable bills, while others do not. For the people with more variable bills, a bigger buffer is appropriate.
Personally, I would suggest one month’s worth of living expenses. That’s what Sarah and I use. The rest of our money is in a savings account (our emergency fund) or in investments.
Of course, the trick is figuring out what constitutes the living expenses of an average month. We all have irregular bills, so averaging those out over the course of a year is a good idea.
You don’t have to be exactly at a month’s worth of expenses here. In fact, I’d just round it to the nearest hundred or five hundred or thousand to make it easy.
Q2: Choosing between many housing options
My husband and I recently moved to a city (city A) just outside of Washington DC. We currently rent in a great location. Our rent is probably as cheap as we’ll find for this area, and we are a short walk from the metro. The downside is that we live in an old poorly-maintained building, with very thin walls, poor insulation, ancient appliances, etc.
My husband and I would both prefer to own our own home. Home ownership is tied into his identity as a successful adult; I enjoy DIY projects, and want a house that I can put some “sweat equity” into. A detached home would be better for us: we have a very active dog, so a yard would be nice, and he needs a little space from neighbors. We are planning to have children, so schools are relatively important.
I enjoy city living, and ideally would like a small fixer-upper bungalow with walking access to stores and restaurants, and within walking or biking distance to a metro. He wants more space, and would prefer moving to a “commuter suburb”, where our money would go further but we would lose city access and lifestyle.
We don’t have a large down payment saved. Our purchasing options would either be an FHA loan with 3.5% down at around 4.25% interest (probably a $400,000 budget) or a 100% financed loan at around 5.15% interest (we have been pre-approved for $500,000). My concern, particularly with the latter, is that we would be essentially house-poor. We currently wish we had more money to spend on travel and entertainment, and that would only get worse with a high mortgage payment.
We have no credit card debt, but are making payments on two cars. We have approximately one month’s living expenses in our emergency fund. We both contribute enough to our 401Ks to receive the employer match. We have trimmed our budget as much as we are comfortable with, but the high living costs around us make it difficult to save. We have discussed selling my car – I usually take the metro to work, so it’s largely a convenience. We bought it new two years ago and it has been very reliable. We could try being a one-car family, or we could buy an older, less expensive car (which might cost more to maintain). We don’t know where we will live when our lease is up in 6 months, however, so have been reluctant to do anything until we have a plan in place.
So, in a nutshell, our options are these:
1) Continue renting where we are now, and put up with the inconvenient aspects of the property. Save a larger down payment. Possibly sell my car to enable us to save faster. (Side note – it would probably take us 3 years to save up a 20% down payment for a $400,000 property, if we sold my car. Housing costs could potentially increase in this time period.)
2) Rent a nicer place in city A. This will certainly be more expensive, and would almost certainly preclude us buying a house in the next several years. We would likely have to sell my car, just to be able to afford the increased rent.
3) Rent in a different city. We would lose the city advantages, and at least one of our commute times would increase, but our housing costs would probably not increase. We could continue saving for a house, but would definitely need to own two cars.
4) Purchase a small house in city A. We could most likely only afford a fixer-upper, but I don’t exactly know how we would be able to afford to do any major repairs. We can’t afford even a small house within walking distance of the metro in our current city, so we might still need to own two cars.
5) Purchase a house in city B – we would lose metro accessibility and the advantages of city life, but our money would go much further. We could potentially buy a nicer house with more space for under $400,000. We would need two cars, my commute would definitely increase, and my husband’s might as well. City B has good schools, however.
6) Purchase a house in city C. City C is in the process of gentrification, so we could have the perks of city life at a lower price tag (including metro accessibility). If we were within walking or biking distance of the metro, we could theoretically be a one-car family. Also it’s closer to my husband’s job than city A. The downsides to city C are that the schools are not very good. Most of the properties I’ve seen for sale need major work. Finally, some parts of city C are a little rough, which makes my husband in particular nervous. (Theoretically this will improve in time, but there are obviously no guarantees.)
We have been wrestling with the best course of action for the past two months. Do you have any advice? We have a very good income, and are frustrated that our options still feel so limited! While we both greatly enjoy luxuries, we have been
– Carly
First of all, do you consider it professionally and personally likely that you will be in this area for a very long time? I don’t have any assessment of your professional trajectories, so I can’t really say anything. If there’s a significant likelihood that you guys won’t be in the area in a few years, I wouldn’t buy anything permanent.
Now, assuming that you are staying put, you should be asking yourself what your timeline is really like. The longer you stay put in a lower cost of living situation, the better your upgrade will be and the more tolerant your finances will be because of it.
So, the first thing you need to do is seriously define your timeframe. In general, the longer you hold onto option #1, the easier other options become. The sooner you abandon option #1, the harder and more limited the other options are.
Q3: Cheap boy’s birthday ideas
My son turns 5 at the end of July. I want to have a cool birthday party for him but the other kids in the area have had ridiculous 5th birthday parties with inflatable bouncy houses in the yard and clowns and one of them even had a live musician singing children’s songs.
I don’t want to spend that kind of money on a party but I want to do something cool for my little guy. You have two young boys so do you have any ideas for a birthday party for a young boy that doesn’t break the bank?
– Carla
Have a superhero-themed birthday party. This is a great idea that works well for all children in that age range.
Buy a few large pieces of cloth at your local craft store, then measure your son and make an eye mask and a cape that fits him from that cloth. Then trace several copies of that pattern in different colors – red, blue, pink, etc.
When the children arrive, help them to cut out costumes for themselves, then let them decorate a bit (maybe by putting the first letter of their first name on their cape). Then have everyone put on their “superhero” costume and pretend to be superheroes.
The kids get to take their costume home at the end of the party, you’re only out the cost of a few yards of cloth at the fabric store, and your son had a memorable adventure. Sounds good to me.
Q4: Optimizing the “retire early” point
My husband and I never planned on “retiring” young, but have worked very hard to be “work optional”. That point where all our basic needs are met by our investments and passive income and work just become a choice because we feel it’s meaningful or enjoyable. This year we are finally hitting that point, and are considering leaning out a bit more from the professional jobs. But at 32, I find myself questioning if we shouldn’t lean in a bit longer. Our passive income will give us over $1000 more a month than what we really need. But when is “enough”, well “enough”? I know your wife and you haven’t had to cross that bridge just yet, but how will you evaluate it once it nears?
– Riley
I’d absolutely work a bit longer, especially given your timeframe. Remember, what you’re doing by working longer is reducing the chances that either one of you will ever have to return to the workforce.
Usually, a person’s “work optional” point represents merely the point where the odds that they’ll have to return to work are fairly low. The longer you work, the lower and lower those odds get.
Sarah and I have a “work optional” point that involves a very low percentage chance that we would have to return to work. That’s why our point is fairly far off in the future.
Q5: Chance to start over
I am 34 years old. I am single with no interest in dating or marrying or having children. For the last 12 years I have worked as an electrician. I moved in with my grandmother about five years ago as she was in declining health and I helped her with her increasing frailty and medical needs. She passed away about four months ago. I did not know that she had three different life insurance policies that she had taken out on herself at various times, but she had changed all of them for me to be the beneficiary in the last few years and I am also receiving most of the cash value of her estate.
She had a lot of money, all told. I am now suddenly a multimillionaire.
So now I am trying to figure out what to do. My grandmother’s lawyer encouraged me to keep living my life as normal for at least a year before making any decisions regarding the money. It is invested almost entirely in a total stock market index fund.
My initial plan is to just lock it up into some kind of trust and just give myself a “salary” from it equal to a little more than I make now, then just walk away from my job. I have always wanted to go to college to study Mexican history.
What “potholes” should I be looking for in this plan?
– Jefferson
I think that’s a perfectly reasonable plan. My only comment is that you should make sure that you have no debts whatsoever before you do this and that your “stipend” from your trust includes plenty to cover the cost of education.
You might want to set up the trust to allow additional funds to be withdrawn solely for the cost of tuition.
Other than that, this seems like an amazing plan, and I can’t help but to admit a twinge of jealousy at it.
Q6: Loan forgiveness questions
I’m having trouble figuring out whether it’s worth it to pay off my student loans early. I work for a nonprofit so I should be eligible for the Public Service Loan Forgiveness program (PSLF).
I have 75k in federal student loans left. From what I understand: 57k are direct loans, which are eligible for PSLF, and 18k are Stafford, which are not.
I have been making payments for just over 2 years, mostly under IBR. Under the standard 10 year repayment plan, my monthly payments are $900, $680 of which goes to the direct loans and $220 to Stafford. All these loans are serviced by the same company, so the payments get allocated automatically. Under IBR, the payment was $400, $300 of which goes to direct loans and $100 to Stafford.
If I throw all my extra cash at the loans, I figure I can pay them off in 6 years, for a total of 8 years of payments. But PSLF will forgive the direct loans with only 2 additional years of payments (10 years total), and I can be on IBR that whole time. So won’t it save me money if I make IBR payments on the direct loans for 8 more years and put the money I’d save doing so towards the Stafford loans? And then have $400 extra each month thereafter? I’ve considered getting a second job, but if all the money I earn is just going to go to an increased IBR payment, then obviously that’s no help. Loans forgiven under PSLF are not taxable income, so that’s not an issue.
All in all I’m feeling very hopeless because I was pressured into spending all this money on an education to get a job that I don’t really like but am stuck in for the next 6-8 years because it’s the only one I’m qualified for that pays enough to support me. I don’t want to be 33 before I get to live.
– Gary
I don’t think your question is really about loan forgiveness.
It sounds like you’re in a career path that you don’t really like at all – or at least you don’t like the entry level jobs in that path. However, you have a bunch of student loans for a degree in that career path so you’re kind of “stuck” there financially.
The best approach I can give you is to simply persist in this career path at the best paying job you can afford until you can get rid of your loans. Live as cheaply as possible and absorb everything you can from this career path. Save lots of money in a 529 college savings plan.
The second you can get your loans forgiven, do so, then return to college on the back of the 529 you’ve been building and get a degree in a field that you actually want.
That should be your plan, in my opinion. Almost every other route ends in long-term misery for you.
Q7: Getting ideas for quality items
How exactly do you go about getting recommendations when you want to “buy it for life”? Do you just ask your friends? Where do you do research?
– Kevin
I usually go looking for forums related to that specific item, wherever they may be. I usually find them through Google searching. Ideally, I can find multiple online communities related to the item in question.
When there, I try to look for threads about reliability and read what’s written there.
I usually also give a shout out to my own personal social network to see what they have to say about the item. Surprisingly often, the thoughts of my friends match what I read in those online communities.
I also value the impressions of Consumer Reports quite a lot, especially for larger items.
Q8: Online access and credit cards
My boyfriend is 33 years old. He has a perfect track record of on-time payments on his credit cards and generally doesn’t carry a balance. However, he has a very limited credit history. He’s never had any loans in his name and has only two credit cards. He’s had them both for many years, but one of them for much longer, since his first year of college.
The older card was opened through our small town local bank, which has an old, clunky website and makes it very difficult to manage the account online or to pay the bills by mail. Because of this, he avoids using the card. Since it is his oldest account, he’d like to keep it on his credit history, so we decided to follow the advice to make a small purchase and pay it off every 6 months. But it’s a SERIOUS pain and it’s difficult to make sure the payments get there on time in the mail. Is there any possible way to keep that card’s history by transferring the account (not the balance; there isn’t one) to another credit card that would be easier to use? (I know you don’t like to mention brands on the blog, but it’s a VISA if that matters.)
– Marjean
A person’s credit history only goes back for seven years, so if he’s had the “newer” card for at least that long, I wouldn’t hesitate to cancel the “older” card. I would do that even if he’s not quite at the seven year mark with it.
For that matter, even if there isn’t a seven year history, I would just cease using the older card entirely, which it sounds like he’s more or less doing.
In this day and age, a “clunky’ website amounts to terrible customer service.
Q9: Stocking up on LED bulbs
A nearby store had a great sale on LED bulbs recently. I considered stocking up but my neighbor said that it made much more sense to just replace my incandescents one at a time as they go out, but then you wouldn’t get them on sale. What do you think?
– Jerry
I actually agree with your neighbor.
Here’s why: LED bulbs are in constant development. I started trying to use them back in 2008 or so and they weren’t nearly as good as they are now, as the lights were dimmer and had a strong blue tint to them. Some of the bulbs they’re making right now, to my eyes, look as good as incandescents, but some brands aren’t quite up to snuff. There also seem to be some constant improvement in LED bulb lifespan, going from 20,000 hours to as much as 60,000 hours of use.
By buying slowly as you need them, you’re likely to get better and better bulbs as the technology matures. They’re never going to be cheap as the components in such a bulb prohibit that, but they will get better and the cost will go down slightly.
Q10: Planned obsolescence
Whenever something stops working, my father immediately claims that it is “planned obsolescence” and stops buying anything made by that company. He has this huge list of companies that make “planned obsolescence junk” and won’t buy stuff that they make. How real of a thing is this? I’ve read that car manufacturers used to do this but does it go down to things like toothbrushes?
– Nathan
Planned obsolescence is a real thing and it does exist in a lot of industries. However, with regards to a lot of product types, stuff just wears out. It gets old and doesn’t work any more.
Take toothbrushes. It would be practically impossible to design a toothbrush that would last for years and years. For it to be like that, you’d have to have bristles that were basically indestructible. Eventually, the sheer wear of brushing your teeth is going to cause bristle wear.
It’s likely that your father’s list is a mix of companies that actually do use planned obsolescence, companies that just make cheap stuff, and companies that do neither and were on there just as a result of normal wear and tear. It’s going to be very difficult to figure out which is which.
Q11: Homemade pasta?
Can you actually save money by making pasta yourself at home? My husband’s grandmother used to make her own pasta and dry it and save it in jars. He said that it didn’t cost her much at all, just some eggs and flour, and she used to make huge batches of it. Given the cost of a pound of pasta at the store I can’t believe this is really much cheaper.
– Andrea
It is cheaper, but it’s not enough cheaper to account for the labor unless you have a love for homemade pasta.
Don’t get me wrong, I think homemade pasta is delicious. I have made from-scratch fettuccine several times and it’s turned out wonderfully each time. It’s not hard at all to make – it just takes some time.
That’s why, for us, the homemade pasta is a bit of a treat, while purchased pasta is the norm.
Q12: Identical wardrobe
Have you ever written about an “identical wardrobe” like what Steve Jobs or Mark Zuckerberg use? They essentially have a closet full of the same clothes and wear basically the same items every single day. It seems to me like this would be a pretty frugal choice as you’d just need to find good prices on a small handful of specific items when you wanted replacements.
– Darren
I think, more than anything, this kind of clothing approach would save time. You’d quickly learn how to wash the small number of items in the outfit, so that would become easy. There would be no time spent picking out clothes, either.
For myself, I wear a pair of jeans and a solid-colored pocket t-shirt almost every single day. It makes laundry easy and picking out clothes easy.
I think that if you found an appearance you really like and that works for you, this approach would work.
Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. 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 many, many questions per week, so I may not necessarily be able to answer yours.
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