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. Old houses
2. Student loan interest deduction
3. Interest rates and debt freedom
4. Mortgage or car payment?
5. Parents misused my SSN
6. Partial payoffs of credit cards?
7. 457(b) or Roth IRA?
8. Old football and hockey cards
9. New job and employer matching
10. Balancing expenses and job fear
A few weeks ago, the slide-out keyboard on my old phone stopped working correctly, so I replaced it with a newer model.
For me, phones are one of those things I have a hard time getting used to. When I get into the groove of using a particular phone and then it’s switched out, the little changes throw me off.
So, I’m a few weeks in now and I’m finally getting used to it. The thing that’s still weird for me is how different the shape is in my pocket, since the new phone is thinner. Half the time, I still think I’ve lost my phone.
Q1: Old houses
Do you have any particular advice for people who live in very old houses? My house is 96 years old and I am looking for ways to modernize and make it more energy efficient. Today I insulated all the pipes and put a fiberglass blanket over the water heater. I had the roof replaced this spring and had a ridge vent added. Should I look at having some attic fans installed as well? New insulation, windows, doors? Do they make energy efficient vinyl siding? I’m fairly handy, so what can I conceivably do myself to shave off some extra dollars? I’m on a small budget so I want to do the things that will make the biggest impact first… assuming that’s financially wise, of course. And before you suggest it, selling unfortunately isn’t an option. I do not, however, have a mortgage, so I can put most of my excess funds into home improvements.
Old houses were simply built without much energy efficiency. You’re probably going to find that there are a lot of improvements you can make.
If I were you, the first thing I would do is my energy company. Many energy companies will provide a free home energy audit, which will point out things to you that you can do to reduce the energy use in your home.
Once that’s done, you should have a checklist of things to do along with some idea of how much you’ll save by making that change. Choose the one that gives you the biggest bang for the buck that you can afford and go for it.
Q2: Student loan interest deduction
I have about $45,000 in student loans. I know that the interest on these loans is tax deductible. What I’m wondering is whether or not it makes financial sense to pay off the loans slowly to get every bit of the tax deduction on the interest or to pay them off quickly.
In general, it’s not worth it. You’re still better off paying them down quickly.
Let’s say you’re paying 6% on your student loans and your income tax rate is 25%. Effectively, after your taxes are filed, you’re still paying 4.5% on your loans, even after the income tax reduction.
The interest deduction for your student loans doesn’t eliminate them. It just reduces it a little… and you don’t get the benefit of that reduction for many months. You’re better off just getting rid of the debt quickly and enjoying the perk of the interest deduction along the way.
Debt freedom is a good idea because you’re not paying the interest, but it’s not the real reason why debt freedom is a home run.
Debt freedom is a home run because you’ve minimized your monthly bills. You are no longer required to make that monthly debt payment, and instead you can invest it in other things or take a pay cut for a different career path or countless other things.
Investing in other things while you still have debt is a dangerous road because, in order to beat the interest rate that you’re paying on the debt, you have to invest in something with risk. If things go sour at the wrong time, you’re left with a devalued investment and a steady debt payment.
Q4: Mortgage or car payment?
I am trying to figure out what loans to pay off first. I have a 15-year conventional mortgage on a house appraised at $135,000 @ 3% interest. The monthly payment is $1310, $97 of which goes to PMI. I also have an outstanding car loan of $4300 @ 4.25% with a monthly payment of $230. Does the PMI add enough to my mortgage payment so that I should be paying that off first, even though the interest rate is lower? How does the math work in these situations?
According to my back-of-the-envelope math, the PMI is adding about 0.9% annual interest to your mortgage. Given that you’re currently paying 3%, that totals up to 3.9%. So, on that level, you’re better off to pay down the 4.25% interest loan.
However, as soon as you get below the 80% threshold, your mortgage goes down to just 3%. The faster you get there compared to making normal payments, the more you’ll save.
In other words, if you’re able to make enormous extra payments, on the order of double or triple payments, I’d pay down the mortgage first, then switch to the car loan when the PMI goes away. If you’re only making smaller extra payments, I’d get rid of the car loan first.
Q5: Parents misused my SSN
When I was fourteen or so, my parents apparently used my Social Security number to take out some credit cards in my name. They charged them to their limit then just didn’t pay the bills and ignored the creditors. I’m now eighteen and my credit is pretty bad. I am going to start applying for student loans soon. Is there anything I can do to clean this up?
There’s probably not much you can do unless you’re willing to get your parents in legal trouble over this.
In essence, your parents committed identity fraud with you as a victim of that fraud. That’s a crime, one that the legal system will help you clean up, but for them to help, you have to be willing to cooperate with the prosecution of that crime.
If you’re not willing to do that, you’re essentially saying that the debt is yours, which means there isn’t anything beyond the normal steps of credit recovery that you can take – things like paying bills on time, getting and keeping a credit card, and so on.
Q6: Partial payoffs of credit cards?
One of my relatives swears up and down that the best way to maximize your credit is to only pay off 70% to 80% of your credit card balance each month. This way, you maintain a strong debt to credit ratio. If you pay it all off, he says your ratio is zero and it’s really bad for your credit. Is this true?
That’s not true. If you pay off 70% to 80% of your debt each month, you will stay in pretty good credit shape, but you’re going to be carrying a balance on your card and paying the resulting interest.
On the other hand, if you pay it off each month, you’re going to be in good credit shape and you’re not going to be paying interest, either.
Part of how your credit score is figured is your debt-to-credit ratio, which you do want to be low. However, you’re not penalized for having no debt as long as you have open lines of credit (i.e., credit cards, student loans, and so forth).
Q7: 457(b) or Roth IRA?
My question is regarding funding a 457(b) vs Roth IRA. I am a police officer, & I have been contributing to a 457(b) plan since the day I was hired. I contribute $200 per month, and its pre tax. It’s currently worth about $25,000.
I also contribute $100 per month to a Roth IRA. I am considering not funding the 457(b) & redirecting the $200 towards my Roth IRA. This will allow me to get a little closer to fully funding it.
I will be eligible for retirement at age 54 (22 years from now) & the 457(b) will be able to supplement my pension until I can collect the Roth IRA, at age 59.5. My pension will be 70% of my final salary.
Should I stop funding the 457(b) & add $200 more per month to my Roth IRA contribution or let it be?
If you are not getting a match from your 457(b), I would focus on fully funding the Roth IRA.
There are a lot of reasons for that. One, income tax is at historical lows right now and by contributing post-tax money, you’re locking in the low income tax. Two, with a Roth IRA, you have far more control over your investment options. Three, by contributing now, you’re going to balance out your pre-tax and post-tax retirement income which lets you hedge your bets overall when it comes to taxes.
There’s no better time than now to fund that Roth IRA.
Q8: Old football and hockey cards
I purchased a house several months ago. I was cleaning in the attic when I found a bunch of boxes back in a crawlspace. Most of the stuff in there was junk but there was a box of football and hockey cards from the 1960s. Are these worth anything? I can find lots of stuff about baseball cards from that time, but almost nothing about cards from other sports.
Vintage football cards and hockey cards are popular memorabilia items among fans of the respective sports.
My best advice to you is to go look up the lists of players in the Pro Football Hall of Fame and the Hockey Hall of Fame and compare those lists to the cards you have. Any cards of Hall of Famers usually have some value.
As for the rest, I would guess that they would have limited value. I would probably feel okay taking the non Hall of Fame cards to a sports card shop, since the value of them would be limited. For the Hall of Famer cards, I’d research them further on an individual basis.
Q9: New job and employer matching
I have two job offers sitting on the table. One pays about $50,000 per year and doesn’t offer any matching in their 401(k) plan. The other is about $45,000 per year but they match 100% up to 6% of your income in your 401(k). Which is the better offer?
Let’s see what the total compensation is on each offer.
If you contribute 6% of $45,000 to your 401(k), you’ll be contributing $2,700 a year. If they match that amount, then you’re essentially getting an extra $2,700 a year in income, making your salary effectively $47,700.
That’s not quite the end of the story, though. Let’s say you’re contributing 10% at either job. At the first job, you’ll be putting $5,000 away into retirement, leaving you $45,000 in taxable income. At the other job, you’ll be contributing $4,500 ( that extra $2,700 from your boss), leaving you with $40,500 in taxable income.
On $45,000 in taxable income, you’ll be paying $5,793 in total income tax. On $40,500 in taxable income, you’ll be paying $4,748 in total income tax.
So, with the $50K job, after taxes and retirement contributions, you’ll earn $44,207. With the $45K job, after taxes and retirement contributions, you’ll earn $42,952.
The higher salary job wins, but not by much. I’d go with the job that appeals more to you.
Q10: Balancing expenses and job fear
About a year ago, I took control of the financial picture of our household under somewhat traumatic circumstances (long story based primarily on a lack of communication). I now have all the income coming into my checking account and I am in charge of paying all the bills. I got a second job where I work on the weekends and we have tightened up the financial ship significantly over the last year. I was, prior to this, very intimidated by this responsibility ( practically denial about the whole thing) but have since gotten educated and I feel like I am moving forward for sure! We have managed to save about 35,000 into our emergency fund and we are still paying off some debt.
My question is where to put the most effort towards my remaining debt. My husband is constantly under threat of losing his job and thus an emergency fund fully funded is important to my ability to sleep at night and not worry constantly-which I seem to any way. We need to have about 70,000 for 9 months of monthly expenses so we are on our way but certainly not there yet! We also have a time share that we owe about 13,000 on at the moment and about 2,500 left to pay off the orthodontic braces for our kids BUT….no credit card debt! :) I throw as much money as I can at the timeshare and still contribute as much as possible to the emergency fund. As for the braces, we are paying the minimum 300.00 a month and steadily grinding it down. I am now at the point where I can really focus on one problem and make progress towards achieving at least one of the goals. The question is…where should we put the effort? Should I let the emergency fund hang tight for awhile and focus on the timeshare and kill it off? (Cannot wait for that day!) Or finish the emergency fund and just pay the minimum? Or start with the braces and then work on the other two?
Right now, you have about four to five months of living expenses in an emergency fund. I consider that quite good.
If I were in your shoes, my focus would be getting to debt freedom. My immediate next step would be to throw everything but the kitchen sink at whichever debt has the highest interest rate and move down the list by interest rate as each one is paid off.
Once the debts are gone, go back to the emergency fund until it’s at a level that makes you comfortable. At that point, you’re going to be in great shape.
Got any questions? The best way to ask is to email me – trent at thesimpledollar dot com. 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.