Does a Credit Score Matter to Someone Living a Debt-Free Lifestyle?

Mary writes in:

My husband and I have been debt free for seven years. Hooray! We cancelled all of our credit cards in 2001 and paid off our home mortgage in 2002.

A few weeks ago, our homeowners insurance premium went up substantially. I called our agent to ask why and he told me that our premium was automatically raised because our credit score was low.

I got worried and checked our credit report at annualcreditreport.com (as you suggested before) and found nothing at all on our credit report. So, I called our agent back and told him the story. He did some follow-up and found that because we didn’t have any outstanding credit of any kind on our credit report, they couldn’t verify that we were responsible payers, thus we were placed into a higher risk category.

This seems nonsensical! I am shopping around for new insurance but I wanted to know what you thought of this policy.

Obviously, on an individual level, this is nonsensical. A person with no debt at all and a long history of never having debt is the type of person that ought to be considered a great client for an insurance company. I can’t think of anything that screams “stable and reliable” than a person without any debt.

Yet, if you step back and look at the broader view of society, this policy does somewhat make sense.

First of all, the insurance company has to have standard rules and practices for setting their rates. They have to know cold the risks associated with different factors, from the color of the car to the reliability of the driver. When they know these risks, then they can calculate the exact rate to charge to simultaneously be competitive with other companies and earn a profit for themselves.

Hand in hand with that is a society that lives and thrives on personal debt. Between automobile loans, student loans, consumer loans, mortgages, and credit card debt, the vast majority of Americans possess some form of debt in their lives. Given that as a baseline, it’s reasonable to argue that a person who pays their debts in a timely fashion is more reliable – and thus less of a risk – than a person who does not.

That information is packaged up nicely in our credit reports and usually calculated down to a single number that represents how efficient we are at paying our debts – our credit score. Insurance companies will often take this score and run with it, using it as a basis for determining our premiums.

Unfortunately, a person’s credit score is higher if they have small, reasonable debts and always make their payments instead of having no debt at all.

The next question, obviously, is how can a debt-free person improve their credit score without getting into additional debt? There is no easy answer to that question.

The simplest solution is to simply use credit for the most routine of purchases – groceries, gas, and so forth – and to pay off that debt in full each and every month. One way to do this – to keep things under control – is to simply get a credit card at your preferred gas station, use that card just to fill up on gas and nothing else, and then pay off the card each month. So, for example, you might have a BP card, and you would only use that card at BP.

A second option would be to stop by your local credit union and talk to a loan officer. They may be able to develop some form of no-risk personal loan for you based on using some of the assets you have as collateral. You then just leave the money at the credit union in an account and have all payments for your loan deducted from that account. If you have such assets, the actual cost of this would be minimal.

Yes, society has stacked the deck a bit against people with no debt, as there are many financial incentives to carry debt. With a little clever thinking, though, such risks can be pushed back.

Continue reading Does a Credit Score Matter to Someone Living a Debt-Free Lifestyle? …

From The Simple Dollar.

Retirement or Education?

Chris writes in:

We are friends with another couple that is around our same age, income level, status, and number and age of children. When I was mentioning to them that we were planning to pay off our car this year (leaving us with our mortgage and a small student loan) and the starting to put $50 to $100 per into 529s for each of our kids (currently aged 1 and 3), she mentioned that they were not starting 529s, but rather had a different philosophy….. They were going to contribute up to the company match in the 401K, max out a roth IRA (every year) and then pay off their house in 15 years, which would be just when their oldest is about to start college. Then they would use any excess from their income (that was now free because they no longer had a mortgage) in order to help with their child’s education. She also mentioned that she did not believe that her children would qualify for much (if any) financial aid. This would be the case for us as well. We are currently putting approximately 10% into our 401K and we plan to put approximately $3,000 per ear into a Roth IRA starting this year. Can you comment on what might be the pros and cons of either financial philosophy? I suppose that I should also mention that I do not forsee us having any issues with having enough $ for retirement and my philosophy is that I would like to contribute to 25-33% of my children’s college costs.

First things first: with all things being equal, you’re better off putting your money into retirement savings than into college savings. There are several reasons for this.

First, your children can make college happen even if you don’t have a dime saved for them. Between student loans, scholarships, and other aid, most students who are accepted to a school will be able to find some way to go there. They may end up with a lot of student loans in the process, but it won’t prevent them from getting an education.

On the other hand, you can’t make up for missed retirement savings. Nothing can undo missing the early years of your retirement plan, because those are the years when compound interest is at its most powerful. The money you put away right now will be much more valuable than any money you put away in your 50s or 60s.

Another factor to consider is that many retirement plans allow you to “borrow” against them for educational expenses. You can withdraw some amount, agree to a repayment schedule, and use that withdrawn money to help pay for your children’s college education.

A final note: if you haven’t saved adequately for college, you may end up being a financial burden for your children late in life. You might not ever ask them for money, but they’ll see that you don’t have much money and will stretch their wallets to help you when they can. I have seen this many, many times.

In short, if you’re unsure, I recommend saving for your retirement over saving for your child’s education.

The next question, then, is why should one ever save for their children’s educational expenses?

We’re saving for that purpose. That’s because we have plenty of money to save at this point – our retirement savings are fully covered, plus we have extra money beyond that to push towards long term goals. One of those long term goals (for us) is to pay for some significant portion of our children’s college education. After doing the math, we decided that saving $100 per month for each child from the day they were born to the day they leave for college is the best bet.

In other words, if you can save for college without short-changing your retirement, go for it.

What about that third factor, though? Where does paying off your house rank?

When it comes to using your home as an asset for college savings, you’re betting on two things. First, you’re betting that the payments you make on your home mortgage are more financially efficient than money socked away in your 529. If your mortgage interest rate is 6%, then your money channeled into that is effectively earning a 6% return. If you put that amount in a 529 instead, you could earn more or less than 6%, depending on your investment choices and the risk you’re willing to take on.

The second (and more challenging) bet comes later, when you want to tap your home equity. You’re betting on the interest rates at that future date, because your loan will charge you some interest rate. Will you need the money at a time like today, where the Federal Reserve is keeping rates low? Or will you need it at a more challenging time, when interest rates are higher?

If saving for college is important to you and your family, I would probably do things in this order: retirement savings, then college savings, then mortgage.

One final note: I would never rely on future earnings to pay for college education. Our lives are far, far too uncertain to bank on your professional income in fifteen years as a source for college savings – or savings of any type. People radically change careers. People are downsized. People are disabled. People stumble into great opportunities. These things happen all the time. To bet on stability there would be the biggest gamble of all.

Good luck.

Continue reading Retirement or Education? …

From The Simple Dollar.

Retirement or Education?

Chris writes in:

We are friends with another couple that is around our same age, income level, status, and number and age of children. When I was mentioning to them that we were planning to pay off our car this year (leaving us with our mortgage and a small student loan) and the starting to put $50 to $100 per into 529s for each of our kids (currently aged 1 and 3), she mentioned that they were not starting 529s, but rather had a different philosophy….. They were going to contribute up to the company match in the 401K, max out a roth IRA (every year) and then pay off their house in 15 years, which would be just when their oldest is about to start college. Then they would use any excess from their income (that was now free because they no longer had a mortgage) in order to help with their child’s education. She also mentioned that she did not believe that her children would qualify for much (if any) financial aid. This would be the case for us as well. We are currently putting approximately 10% into our 401K and we plan to put approximately $3,000 per ear into a Roth IRA starting this year. Can you comment on what might be the pros and cons of either financial philosophy? I suppose that I should also mention that I do not forsee us having any issues with having enough $ for retirement and my philosophy is that I would like to contribute to 25-33% of my children’s college costs.

First things first: with all things being equal, you’re better off putting your money into retirement savings than into college savings. There are several reasons for this.

First, your children can make college happen even if you don’t have a dime saved for them. Between student loans, scholarships, and other aid, most students who are accepted to a school will be able to find some way to go there. They may end up with a lot of student loans in the process, but it won’t prevent them from getting an education.

On the other hand, you can’t make up for missed retirement savings. Nothing can undo missing the early years of your retirement plan, because those are the years when compound interest is at its most powerful. The money you put away right now will be much more valuable than any money you put away in your 50s or 60s.

Another factor to consider is that many retirement plans allow you to “borrow” against them for educational expenses. You can withdraw some amount, agree to a repayment schedule, and use that withdrawn money to help pay for your children’s college education.

A final note: if you haven’t saved adequately for college, you may end up being a financial burden for your children late in life. You might not ever ask them for money, but they’ll see that you don’t have much money and will stretch their wallets to help you when they can. I have seen this many, many times.

In short, if you’re unsure, I recommend saving for your retirement over saving for your child’s education.

The next question, then, is why should one ever save for their children’s educational expenses?

We’re saving for that purpose. That’s because we have plenty of money to save at this point – our retirement savings are fully covered, plus we have extra money beyond that to push towards long term goals. One of those long term goals (for us) is to pay for some significant portion of our children’s college education. After doing the math, we decided that saving $100 per month for each child from the day they were born to the day they leave for college is the best bet.

In other words, if you can save for college without short-changing your retirement, go for it.

What about that third factor, though? Where does paying off your house rank?

When it comes to using your home as an asset for college savings, you’re betting on two things. First, you’re betting that the payments you make on your home mortgage are more financially efficient than money socked away in your 529. If your mortgage interest rate is 6%, then your money channeled into that is effectively earning a 6% return. If you put that amount in a 529 instead, you could earn more or less than 6%, depending on your investment choices and the risk you’re willing to take on.

The second (and more challenging) bet comes later, when you want to tap your home equity. You’re betting on the interest rates at that future date, because your loan will charge you some interest rate. Will you need the money at a time like today, where the Federal Reserve is keeping rates low? Or will you need it at a more challenging time, when interest rates are higher?

If saving for college is important to you and your family, I would probably do things in this order: retirement savings, then college savings, then mortgage.

One final note: I would never rely on future earnings to pay for college education. Our lives are far, far too uncertain to bank on your professional income in fifteen years as a source for college savings – or savings of any type. People radically change careers. People are downsized. People are disabled. People stumble into great opportunities. These things happen all the time. To bet on stability there would be the biggest gamble of all.

Good luck.

Continue reading Retirement or Education? …

From The Simple Dollar.

Retirement or Education?

Chris writes in:

We are friends with another couple that is around our same age, income level, status, and number and age of children. When I was mentioning to them that we were planning to pay off our car this year (leaving us with our mortgage and a small student loan) and the starting to put $50 to $100 per into 529s for each of our kids (currently aged 1 and 3), she mentioned that they were not starting 529s, but rather had a different philosophy….. They were going to contribute up to the company match in the 401K, max out a roth IRA (every year) and then pay off their house in 15 years, which would be just when their oldest is about to start college. Then they would use any excess from their income (that was now free because they no longer had a mortgage) in order to help with their child’s education. She also mentioned that she did not believe that her children would qualify for much (if any) financial aid. This would be the case for us as well. We are currently putting approximately 10% into our 401K and we plan to put approximately $3,000 per ear into a Roth IRA starting this year. Can you comment on what might be the pros and cons of either financial philosophy? I suppose that I should also mention that I do not forsee us having any issues with having enough $ for retirement and my philosophy is that I would like to contribute to 25-33% of my children’s college costs.

First things first: with all things being equal, you’re better off putting your money into retirement savings than into college savings. There are several reasons for this.

First, your children can make college happen even if you don’t have a dime saved for them. Between student loans, scholarships, and other aid, most students who are accepted to a school will be able to find some way to go there. They may end up with a lot of student loans in the process, but it won’t prevent them from getting an education.

On the other hand, you can’t make up for missed retirement savings. Nothing can undo missing the early years of your retirement plan, because those are the years when compound interest is at its most powerful. The money you put away right now will be much more valuable than any money you put away in your 50s or 60s.

Another factor to consider is that many retirement plans allow you to “borrow” against them for educational expenses. You can withdraw some amount, agree to a repayment schedule, and use that withdrawn money to help pay for your children’s college education.

A final note: if you haven’t saved adequately for college, you may end up being a financial burden for your children late in life. You might not ever ask them for money, but they’ll see that you don’t have much money and will stretch their wallets to help you when they can. I have seen this many, many times.

In short, if you’re unsure, I recommend saving for your retirement over saving for your child’s education.

The next question, then, is why should one ever save for their children’s educational expenses?

We’re saving for that purpose. That’s because we have plenty of money to save at this point – our retirement savings are fully covered, plus we have extra money beyond that to push towards long term goals. One of those long term goals (for us) is to pay for some significant portion of our children’s college education. After doing the math, we decided that saving $100 per month for each child from the day they were born to the day they leave for college is the best bet.

In other words, if you can save for college without short-changing your retirement, go for it.

What about that third factor, though? Where does paying off your house rank?

When it comes to using your home as an asset for college savings, you’re betting on two things. First, you’re betting that the payments you make on your home mortgage are more financially efficient than money socked away in your 529. If your mortgage interest rate is 6%, then your money channeled into that is effectively earning a 6% return. If you put that amount in a 529 instead, you could earn more or less than 6%, depending on your investment choices and the risk you’re willing to take on.

The second (and more challenging) bet comes later, when you want to tap your home equity. You’re betting on the interest rates at that future date, because your loan will charge you some interest rate. Will you need the money at a time like today, where the Federal Reserve is keeping rates low? Or will you need it at a more challenging time, when interest rates are higher?

If saving for college is important to you and your family, I would probably do things in this order: retirement savings, then college savings, then mortgage.

One final note: I would never rely on future earnings to pay for college education. Our lives are far, far too uncertain to bank on your professional income in fifteen years as a source for college savings – or savings of any type. People radically change careers. People are downsized. People are disabled. People stumble into great opportunities. These things happen all the time. To bet on stability there would be the biggest gamble of all.

Good luck.

Continue reading Retirement or Education? …

From The Simple Dollar.

Paying for College

I was watching a morning show today and they were talking about how a lady didn’t know what she was going to do because she owed $163,000 in student loans and was only earning $50,000 now.

The experts of course helped her negotiate the student loans down to a lower price for her.

Jack started crying so I didn’t hear if they said this or not but I would like to point out that if you can’t pay cash for college then you shouldn’t be going! Period!

Frankly I’m tired of hearing people whining about how they just “can’t” pay for their student loans because they aren’t earning enough.

Why is it people think it’s ok to have student loans on their backs for 10-20 years but they can’t take 6-8 years to go to school part time and work to pay cash for it?

The fact is you should be paying cash for college. For years people worked at night, on the weekends and in the summer to pay for it.  They worked hard to get scholarships and grants to help pay for it.  They worked hard to pay their living expenses; they scrimped and saved so they wouldn’t have any debt after school.

If you have kids that are planning to start college next year or are there right now encourage them to pay cash for it themselves.

You may have to start at a junior college to get the basics, work to get scholarships and grants and yes, go part time so you can work full time, to pay for it and your living expenses.

If you are a parent and feel the need to help your kids out with school that’s fine but all your debt should be paid off first including your house. If your house and debt is paid off then you will have the extra to help out.

Tawra

Continue reading Paying for College …

From Living On A Dime Blog » Living On A Dime Blog.

Paying for College

I was watching a morning show today and they were talking about how a lady didn’t know what she was going to do because she owed $163,000 in student loans and was only earning $50,000 now.

The experts of course helped her negotiate the student loans down to a lower price for her.

Jack started crying so I didn’t hear if they said this or not but I would like to point out that if you can’t pay cash for college then you shouldn’t be going! Period!

Frankly I’m tired of hearing people whining about how they just “can’t” pay for their student loans because they aren’t earning enough.

Why is it people think it’s ok to have student loans on their backs for 10-20 years but they can’t take 6-8 years to go to school part time and work to pay cash for it?

The fact is you should be paying cash for college. For years people worked at night, on the weekends and in the summer to pay for it.  They worked hard to get scholarships and grants to help pay for it.  They worked hard to pay their living expenses; they scrimped and saved so they wouldn’t have any debt after school.

If you have kids that are planning to start college next year or are there right now encourage them to pay cash for it themselves.

You may have to start at a junior college to get the basics, work to get scholarships and grants and yes, go part time so you can work full time, to pay for it and your living expenses.

If you are a parent and feel the need to help your kids out with school that’s fine but all your debt should be paid off first including your house. If your house and debt is paid off then you will have the extra to help out.

Tawra

Continue reading Paying for College …

From Living On A Dime Blog » Living On A Dime Blog.

Paying for College

I was watching a morning show today and they were talking about how a lady didn’t know what she was going to do because she owed $163,000 in student loans and was only earning $50,000 now.

The experts of course helped her negotiate the student loans down to a lower price for her.

Jack started crying so I didn’t hear if they said this or not but I would like to point out that if you can’t pay cash for college then you shouldn’t be going! Period!

Frankly I’m tired of hearing people whining about how they just “can’t” pay for their student loans because they aren’t earning enough.

Why is it people think it’s ok to have student loans on their backs for 10-20 years but they can’t take 6-8 years to go to school part time and work to pay cash for it?

The fact is you should be paying cash for college. For years people worked at night, on the weekends and in the summer to pay for it.  They worked hard to get scholarships and grants to help pay for it.  They worked hard to pay their living expenses; they scrimped and saved so they wouldn’t have any debt after school.

If you have kids that are planning to start college next year or are there right now encourage them to pay cash for it themselves.

You may have to start at a junior college to get the basics, work to get scholarships and grants and yes, go part time so you can work full time, to pay for it and your living expenses.

If you are a parent and feel the need to help your kids out with school that’s fine but all your debt should be paid off first including your house. If your house and debt is paid off then you will have the extra to help out.

Tawra

Continue reading Paying for College …

From Living On A Dime Blog » Living On A Dime Blog.

Incidental expenses for study abroad

My daughter is doing an international study abroad next semester.

I will go into more detail in a few weeks as to how, what and why a family on a budget is sending a student overseas. Bottom line: This is been part of the plan all along for her college experience.

However, if you or your student is even considering such a venture, I have some tips about handling the expenses that come up long before you get on the plane:

• Your first expense is the passport. My daughter already had a passport. But get a passport as soon as you start looking at travel brochures. There are documents you may have to track down and it does take a bit of time to get this done. It also costs some money. Since this is one of the few tasks you can handle way ahead of time, and will need to be done regardless of where you travel, do this first.
• Save, save, save money and park it in an easy-access account. You will be amazed on how short of a time frame you have to come up with the plane ticket, travel insurance and out-of-pocket medical expenses such as vaccinations. These expenses will need to be paid before any scholarships, grants and student loans for that semester are deposited into your student account. We also have had to eat $17 two times already in Express mail fees to get documents shipped ASAP.
• Pay very close attention to the orientation materials from your study abroad office and agency representative. Among the useful information you will get during orientation is what stuff to take or not to take upon departure, what supplies or amenities will be available from the host family or in the college dorm room when you arrive, and what can or can’t be shipped overseas at a later time.

Continue reading Incidental expenses for study abroad …

From Monroe on a Budget.

Reader Mailbag #83

Each Monday, The Simple Dollar opens up the reader mailbags and answers ten to twenty simple questions offered up by the readers on personal finance topics and many other things. Got a question? Ask it in the comments. You might also enjoy the archive of earlier reader mailbags.

I recently graduated college and have 2 student loans to pay off:
Loan 1: about $4,000 left on it with a 6.8% rate
Loan 2, Part 1: about $3,000 left with a 6.8% rate
Loan 2, Part 2: about $7,000 with a 4% rate
Loan 2, Part 3: about $6,000 with a 5.3% rate
The kicker on loan 2: I was ‘automatically selected’ to pay off both part 2 and 3 before I can even start paying off part 1 (with the crazy high rate).

I have asked around and done a bit of research on my own. Really the only thing that I keep coming back to is Ramsey’s idea of paying off the smallest loan first, while still making minimum payments on the other loan (so I don’t default). I have already built up an emergency fund and am trying to decide how to tackle these loans that would be the most profitable in the long run.

Any and all advice will be welcomed. Please and thank you in advance!!
- AReynolds42

The first thing you need to do is figure out the true interest rate on that second loan. Effectively, you need to treat loan #2 as one loan – ignore the separate “parts.”

It’s easy – multiply $3,000 by 6.8%, $7,000 by 4%, and $6,000 by 5.3%, then divide all of it by $16,000. You get 5.0125%. Then, compare that interest rate to the other loans and start paying off either the one with the smallest total (the first loan) or the one with the lowest interest rate (again, the first loan), depending on whether you’re using the Dave Ramsey plan or the mathematically superior plan.

The answer’s easy for you – pay off the first loan first and just wait on the second one.

What is your process of reviewing books? Do you read the whole book and then do the review? Do you have any advice for writing good book reviews?
- Jules

I usually read the book chapter-by-chapter or section-by-section and jot down my impressions afterwards. Sometimes, I focus in on the big point of the section – at other times, I end up jotting down the individual point that sticks with me the best.

Once the book is done, I write down a few final notes on it and ask myself whether it was a worthwhile read.

From those scribblings, a book review comes together pretty easily. The real time investment is in the reading. I tend to put two hours a day aside for just that purpose – reading for the purpose of learning more about personal finance, careers, and so forth and writing reviews of those books.

Uh…you think emergency funds should have no limits? So, if I was a college kid with a $50,000 emergency fund in a savings account, you wouldn’t suggest I do something with that money?

One should never stop replenishing an emergency fund, yes, but that’s because emergencies keep using it up.
- Michael

Michael, it might be useful to put away your “jumping to conclusions” mat that you like to pull out all the time.

Yes, I think an emergency fund should have no limit. No, it doesn’t necessarily need to all sit in a savings account. Put some of it into CDs or bonds or short term treasuries.

An emergency fund shouldn’t just be used for negative emergencies. Life often throws us opportunities (or positive emergencies), and our emergency fund should be there to easily help us with those, too. That means the typical “six month emergency fund” – intended to just help with negative emergencies – isn’t enough. You need more. And given the number of opportunities we have in life, the more the better. If you keep your ears and eyes open, life is full of great opportunities.

In the past five years, three of my grandparents have passed away, having had the usual run of health issues, and having been helped tremendously (at near-sainthood levels) by their respective children – my parents, aunt and uncle. My sister is on the verge of getting married, and we’ve been debating the merits of having children. I love children, and hope to have several of my own. My sister doesn’t much like children, and doesn’t consider herself good “mom” material. But we both agree there are lots of times in life when having family support is necessary, and old age/failing health is the biggest. We always expected that the grown children would take care of the parents. But what if there are no children? Seeing the number of families where the kids grow up and are completely estranged, unwilling to help take care of aging parents, there’s no guarantee they’ll take up the task either.

My sister says raising kids and paying for college is expensive, and that amount of money invested wisely could pay for a great deal of home health care when the time comes. Does that work? We have a family friend in her 90’s, never married, who has had a home health care aide (let’s call her Jane) for years, who does all the cooking, cleaning, personal care and PT. How do you estimate how much to save for that? I suppose it’s like planning for retirement, but sadder.
- TheOtherKathi

If you have children and raise them in a loving and supportive environment, they’re often there for you in your dotage. I’ve seen it time and time again in my own family and in my wife’s family as well.

If you don’t have children at all, you simply don’t have that support. You don’t have children popping in to check on you or calling you every day. All you have is you (and perhaps your spouse).

That’s not a reason to have a child. If you’re not capable of being a good parent, your children won’t be capable of being good children. Don’t have children unless you want to have children.

Another caveat: it’s a bad idea to plan on your children helping you. Instead, you should focus on not being a burden to them in your final years – they’ll often still help you, but it’s impossible to predict how much they’ll help you.

Do you dream in color or black and white? Do you remember your dreams?
- Ashley

I dream in frighteningly vivid color. Sometimes, I have dreams that remind me of Yellow Submarine, actually – I don’t know how else to describe them. Many of my dreams are more reality-based, though.

I tend to remember one dream a night or so and I usually write them down in as much detail as possible in my journal. For example, last night I had a dream that my wife and two kids passed away and I wound up remarrying a very short woman – I never did see the woman’s face. She had also lost her husband in an accident and we found each other in a support group. She had a teenage son (that I do remember) who practically demanded that we get married.

I usually write these dreams down because they become the basis for short stories later on. I read through these recollected dreams and every once in a while, one will become the source of a piece of fiction.

Me and my partner are planning to go to live in Southeast Asia for up to a year (or longer – it’s very open-ended). We both have roots there, and think it would be one of those life-enriching experiences that we’d never forget and would thank ourselves for later on in our lives. We’re planning to use about 20k in savings to pay for basic things, and then try to start a little business (English tutoring, guest house, or online service). However, we’re both concerned that when (if?) we get back to the US, we’ll have to resort to office/other drudgery again. Also, our parents are getting to that age where they need more of our financial and emotional support. Being in a traditional family, they’d like to see us buy a home to which they’d most likely move to as well. Do you think it makes sense to travel now or to hold it off until we save more?
- Ty

Travel now.

Here’s why. The older you get, the more likely you’re going to be entangled in many different demands in your life. Your parents will be in worse health. You may wind up with children whether you intend to or not. You’ll become a part of a community and more attached to the people around you.

And travel will seem less realistic than it does now. It’ll be harder to take such a leap.

The best time to do such a thing is when your entanglements are few, and they’ll never be fewer than they are now.

If you’re dreading returning to “drudgery” when you return, you should consider a different career. What do you consider to not be “drudgery”? Think about that and try to find work in that direction.

Do you ever write fiction?
- John

I try to write a short story a week. I’d love to be able to write more than that, but fiction writing is harder to find success with today than nonfiction and memoir writing (which is what The Simple Dollar is, for example).

I’d love to be able to primarily write fiction at my own pace, but that’s a future that seems a long way off. My plate is happily full at the moment, so I mostly work on fiction to keep myself from getting completely rusty.

I haven’t written anything that I feel is publishable yet, but I may be too hard on myself.

May I know what you consider as the best personal finance book for people in their 30s that you have read so far?
- Joy

It depends on what you’re looking for.

If you want a book that focuses on the nuts and bolts of investing and money management, I’d probably vote for Get a Financial Life by Beth Kobliner.

If you’re re-evaluating your whole relationship with money, nothing beats Your Money or Your Life.

If you’re at a career crossroads, look at something like Career Renegade by Jonathan Fields.

Those all speak well to thirtysomethings, I think.

How much money does a person have to have before you consider them rich?
- Kelly

There’s no set dollar amount.

For me, a person is rich if they can wake up each morning and do whatever they want to do. It might be some kind of work or it might not, but the person has the freedom to choose between work and play and define entirely for themselves what work is and what play is.

That, to me, is what it means to be rich. It doesn’t mean a huge number of investments or a fleet of expensive cars. It just means freedom.

Did you enjoy Professor Layton and the Diabolical Box? You tweeted about it a few times.
- Kathy

It’s just as good as the first Professor Layton game, if not better.

For those unaware, Professor Layton and the Diabolical Box is the second in a series of games for the Nintendo DS. The games are simple adventure games (with amazing graphics and voice work) that involve solving a huge number of puzzles – 150 directly in the game and a few very engrossing puzzle-based side quests.

Both games are well worth playing. They only have between five and ten hours of gameplay in each one, but it’s some of the most enjoyable gameplay around. It’s great to pick up for fifteen minutes, solve a few puzzles, dig a bit deeper into the story, and then put it down.

Got any questions? Ask them in the comments and I’ll use them in future mailbags.

Continue reading Reader Mailbag #83 …

From The Simple Dollar.

Reader Mailbag #83

Each Monday, The Simple Dollar opens up the reader mailbags and answers ten to twenty simple questions offered up by the readers on personal finance topics and many other things. Got a question? Ask it in the comments. You might also enjoy the archive of earlier reader mailbags.

I recently graduated college and have 2 student loans to pay off:
Loan 1: about $4,000 left on it with a 6.8% rate
Loan 2, Part 1: about $3,000 left with a 6.8% rate
Loan 2, Part 2: about $7,000 with a 4% rate
Loan 2, Part 3: about $6,000 with a 5.3% rate
The kicker on loan 2: I was ‘automatically selected’ to pay off both part 2 and 3 before I can even start paying off part 1 (with the crazy high rate).

I have asked around and done a bit of research on my own. Really the only thing that I keep coming back to is Ramsey’s idea of paying off the smallest loan first, while still making minimum payments on the other loan (so I don’t default). I have already built up an emergency fund and am trying to decide how to tackle these loans that would be the most profitable in the long run.

Any and all advice will be welcomed. Please and thank you in advance!!
- AReynolds42

The first thing you need to do is figure out the true interest rate on that second loan. Effectively, you need to treat loan #2 as one loan – ignore the separate “parts.”

It’s easy – multiply $3,000 by 6.8%, $7,000 by 4%, and $6,000 by 5.3%, then divide all of it by $16,000. You get 5.0125%. Then, compare that interest rate to the other loans and start paying off either the one with the smallest total (the first loan) or the one with the lowest interest rate (again, the first loan), depending on whether you’re using the Dave Ramsey plan or the mathematically superior plan.

The answer’s easy for you – pay off the first loan first and just wait on the second one.

What is your process of reviewing books? Do you read the whole book and then do the review? Do you have any advice for writing good book reviews?
- Jules

I usually read the book chapter-by-chapter or section-by-section and jot down my impressions afterwards. Sometimes, I focus in on the big point of the section – at other times, I end up jotting down the individual point that sticks with me the best.

Once the book is done, I write down a few final notes on it and ask myself whether it was a worthwhile read.

From those scribblings, a book review comes together pretty easily. The real time investment is in the reading. I tend to put two hours a day aside for just that purpose – reading for the purpose of learning more about personal finance, careers, and so forth and writing reviews of those books.

Uh…you think emergency funds should have no limits? So, if I was a college kid with a $50,000 emergency fund in a savings account, you wouldn’t suggest I do something with that money?

One should never stop replenishing an emergency fund, yes, but that’s because emergencies keep using it up.
- Michael

Michael, it might be useful to put away your “jumping to conclusions” mat that you like to pull out all the time.

Yes, I think an emergency fund should have no limit. No, it doesn’t necessarily need to all sit in a savings account. Put some of it into CDs or bonds or short term treasuries.

An emergency fund shouldn’t just be used for negative emergencies. Life often throws us opportunities (or positive emergencies), and our emergency fund should be there to easily help us with those, too. That means the typical “six month emergency fund” – intended to just help with negative emergencies – isn’t enough. You need more. And given the number of opportunities we have in life, the more the better. If you keep your ears and eyes open, life is full of great opportunities.

In the past five years, three of my grandparents have passed away, having had the usual run of health issues, and having been helped tremendously (at near-sainthood levels) by their respective children – my parents, aunt and uncle. My sister is on the verge of getting married, and we’ve been debating the merits of having children. I love children, and hope to have several of my own. My sister doesn’t much like children, and doesn’t consider herself good “mom” material. But we both agree there are lots of times in life when having family support is necessary, and old age/failing health is the biggest. We always expected that the grown children would take care of the parents. But what if there are no children? Seeing the number of families where the kids grow up and are completely estranged, unwilling to help take care of aging parents, there’s no guarantee they’ll take up the task either.

My sister says raising kids and paying for college is expensive, and that amount of money invested wisely could pay for a great deal of home health care when the time comes. Does that work? We have a family friend in her 90’s, never married, who has had a home health care aide (let’s call her Jane) for years, who does all the cooking, cleaning, personal care and PT. How do you estimate how much to save for that? I suppose it’s like planning for retirement, but sadder.
- TheOtherKathi

If you have children and raise them in a loving and supportive environment, they’re often there for you in your dotage. I’ve seen it time and time again in my own family and in my wife’s family as well.

If you don’t have children at all, you simply don’t have that support. You don’t have children popping in to check on you or calling you every day. All you have is you (and perhaps your spouse).

That’s not a reason to have a child. If you’re not capable of being a good parent, your children won’t be capable of being good children. Don’t have children unless you want to have children.

Another caveat: it’s a bad idea to plan on your children helping you. Instead, you should focus on not being a burden to them in your final years – they’ll often still help you, but it’s impossible to predict how much they’ll help you.

Do you dream in color or black and white? Do you remember your dreams?
- Ashley

I dream in frighteningly vivid color. Sometimes, I have dreams that remind me of Yellow Submarine, actually – I don’t know how else to describe them. Many of my dreams are more reality-based, though.

I tend to remember one dream a night or so and I usually write them down in as much detail as possible in my journal. For example, last night I had a dream that my wife and two kids passed away and I wound up remarrying a very short woman – I never did see the woman’s face. She had also lost her husband in an accident and we found each other in a support group. She had a teenage son (that I do remember) who practically demanded that we get married.

I usually write these dreams down because they become the basis for short stories later on. I read through these recollected dreams and every once in a while, one will become the source of a piece of fiction.

Me and my partner are planning to go to live in Southeast Asia for up to a year (or longer – it’s very open-ended). We both have roots there, and think it would be one of those life-enriching experiences that we’d never forget and would thank ourselves for later on in our lives. We’re planning to use about 20k in savings to pay for basic things, and then try to start a little business (English tutoring, guest house, or online service). However, we’re both concerned that when (if?) we get back to the US, we’ll have to resort to office/other drudgery again. Also, our parents are getting to that age where they need more of our financial and emotional support. Being in a traditional family, they’d like to see us buy a home to which they’d most likely move to as well. Do you think it makes sense to travel now or to hold it off until we save more?
- Ty

Travel now.

Here’s why. The older you get, the more likely you’re going to be entangled in many different demands in your life. Your parents will be in worse health. You may wind up with children whether you intend to or not. You’ll become a part of a community and more attached to the people around you.

And travel will seem less realistic than it does now. It’ll be harder to take such a leap.

The best time to do such a thing is when your entanglements are few, and they’ll never be fewer than they are now.

If you’re dreading returning to “drudgery” when you return, you should consider a different career. What do you consider to not be “drudgery”? Think about that and try to find work in that direction.

Do you ever write fiction?
- John

I try to write a short story a week. I’d love to be able to write more than that, but fiction writing is harder to find success with today than nonfiction and memoir writing (which is what The Simple Dollar is, for example).

I’d love to be able to primarily write fiction at my own pace, but that’s a future that seems a long way off. My plate is happily full at the moment, so I mostly work on fiction to keep myself from getting completely rusty.

I haven’t written anything that I feel is publishable yet, but I may be too hard on myself.

May I know what you consider as the best personal finance book for people in their 30s that you have read so far?
- Joy

It depends on what you’re looking for.

If you want a book that focuses on the nuts and bolts of investing and money management, I’d probably vote for Get a Financial Life by Beth Kobliner.

If you’re re-evaluating your whole relationship with money, nothing beats Your Money or Your Life.

If you’re at a career crossroads, look at something like Career Renegade by Jonathan Fields.

Those all speak well to thirtysomethings, I think.

How much money does a person have to have before you consider them rich?
- Kelly

There’s no set dollar amount.

For me, a person is rich if they can wake up each morning and do whatever they want to do. It might be some kind of work or it might not, but the person has the freedom to choose between work and play and define entirely for themselves what work is and what play is.

That, to me, is what it means to be rich. It doesn’t mean a huge number of investments or a fleet of expensive cars. It just means freedom.

Did you enjoy Professor Layton and the Diabolical Box? You tweeted about it a few times.
- Kathy

It’s just as good as the first Professor Layton game, if not better.

For those unaware, Professor Layton and the Diabolical Box is the second in a series of games for the Nintendo DS. The games are simple adventure games (with amazing graphics and voice work) that involve solving a huge number of puzzles – 150 directly in the game and a few very engrossing puzzle-based side quests.

Both games are well worth playing. They only have between five and ten hours of gameplay in each one, but it’s some of the most enjoyable gameplay around. It’s great to pick up for fifteen minutes, solve a few puzzles, dig a bit deeper into the story, and then put it down.

Got any questions? Ask them in the comments and I’ll use them in future mailbags.

Continue reading Reader Mailbag #83 …

From The Simple Dollar.

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