Reader Mailbag #12

Each Monday, Money360 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.

As usual, we’ll start things off with a few links to older articles that directly answer questions I’ve heard recently.

Dealing with professional burnout without quitting your job
Financial implications of moving back in with mom and dad early in your career
If there’s a nearly identical product in both name-brand and generic, try the generic first

And now for some great reader questions!

Now that you’ve been a full time self-employed writer for two and a half months, how is it going? Do you have any thoughts to share?
– Tim

It’s still going great and I thoroughly enjoy it. I have tons of time to spend with my children and plenty of time to write and choose topics with much more careful consideration than before.

My sole complaint is the new impression that my time is now easily borrowed. People call and visit and ask things that they’d never dream of asking of a person who was working at a 9 to 5 job. The constant time intrusions are a serious frustration – hour long phone calls in the middle of the day, guests from out of town showing up at ten in the morning instead of at four in the afternoon because they know I’ll be home, a constant “oh, you can take a few hours and take care of this” drumbeat, and so on.

This can really be solved by me taking a stern stance with people who attempt to intrude and simply give them a clear “Not now… later” response.

Aside from that, I couldn’t be happier.

“I don’t worry at all about just busting out the plastic to cover it, going home, and paying off that whole card balance out of the emergency fund.”

Out of curiousity, do you really pay it off quickly after purchasing it, or do you do it on a monthly basis?
– StackingPennies

I pay off my full credit card balance each week on Sunday when I go through the unprocessed mail for the week. I just log onto the websites, get the current balance, and pay it off in full using online banking. No muss, no fuss.

This makes it easier to use credit cards for the regular expenses like groceries, gas, and so on. I just swipe my card, don’t worry about it, then pay the whole thing off in one lump from my checking account once a week.

This procedure allows me to (a) maximize credit card rewards, (b) get the buying protections that credit cards afford, (c) utilize the convenience of credit card purchasing, and (d) ensure I’ll never accidentally overdraft or anything like that. It works like a charm for me because I just keep the cards paid off.

The Lost season finale is this week. You’re a self-avowed Lost fan. Make three predictions about the finale.
– Mal

I think they’re going to show the funeral again from the end of last season and Locke will be the guy in the coffin – Locke’s been my guess since they showed that episode. What else? I don’t think Jin is going to die – they basically strongly implied that he was earlier this season, but I think he’s just going to be left behind. And I do think the island will actually move, and that’s why the chopper can’t go back to the island.

Actually, I have no clue what’s going to happen. I usually make guesses and they end up being massively wrong. The only big guess I’ve been right about for a long time is that Michael would be on the freighter.

Couldn’t you use a credit card instead of an emergency fund, and stash the emergency cash(sorry for the rhyme) into a higher paying investment?
– Nate

You can do that, but there’s a problem: you’re putting your emergency fund at risk. The point of an emergency fund is to be completely reliable so that you know it’s there during an emergency. In a “higher paying investment,” such as stocks, you lose that guarantee. If the stock market has a bunch of down days and then you need the fund, you may have lost a good chunk of your original amount.

If your emergency fund is enormous (a year’s worth of living expenses or more) and you’re putting it into a highly diversified investment, like the Vanguard Total Stock Market Index, then you’re probably at least somewhat protected from such a disaster. But if you know how big your fund should be, I wouldn’t invest like that unless I had at least 25% more than the amount I would normally have in my fund. That way, a 20% stock market drop would only take me down to the emergency fund level I would have normally.

For me, though, I simply wouldn’t do it. I prefer to keep my emergency fund as stable as possible, and that means in a high interest savings account.

On your Twitter feed, you mentioned you picked up Wii Fit. Any thoughts on it?
– Wilson

Frankly, I love it. It’s a very good motivator and record keeper for getting yourself into shape. I’ve been using the aerobic and yoga stuff primarily – they’re both easy at the start, but it’s not long before it gets challenging – maintaining some of the more advanced yoga poses for a long time is hard, and the thirty minute jog is a great little exercise (you run in place with a remote control in your pocket or hand).

My only criticism is that the balance board has a maximum weight limit of 330 pounds, which is very close to my current weight (I’m 6’6″ and broad shouldered – it’s not as bad as it sounds). Basically, that means it excludes some of the people who could use it the most. What’s even more strange is that the board is physically designed to support twice that much weight – it’s a software issue that keeps the weight limit at 330 pounds.

There’s been lots of information in the news about the price of food going up. Drastic language has been batted around (”silent tsunami” and whatnot) and staple grains have been rationed at Sam’s and Costco. Are you at all worried about food security in the US?
– T

It depends on where you’re talking about. I live in a rural area where we have our own garden and deer walk through our back yard all the time, we have several months’ worth of food on hand in our house. We both have the skill set we would need to convert quickly to making our own food. Thus, for us, it’s not a major concern.

However, if I lived in a city, I would be feeling nervous about this. People living in cities are largely reliant on people outside of cities providing their food – without that support, their food supply goes away. If it comes down to hard choices like this, farmers are going to make sure that they’re fed first and that their neighbors are fed next – in a drought, it will be the cities that are cut off first.

Another problem is the delusional view that crops can be used for fuel needs. Ethanol production is a neat trick, but if it reduces the amount of food available to the world, it’s also an expensive trick. We need to look at other forms of energy production that don’t intrude on our food supply.

What would I do if I lived in a city? I’d probably stock up on food in the basement – but I do that anyway.

I have an interesting situation. I have a credit card debt that has a total of $10,000. $3,500 of it is locked in at 0% on a balance transfer – the other $6,500 is at 18.9% APR. I’m trying to decide which debt to pay off first and I don’t know how to compare this debt to other ones. Help!
– Millie

There are a lot of approaches to this. What I usually recommend is that you figure out the current APR for that bill and use that to determine what to pay next – but realize that the APR will change over time on a bill like this, so you’ll have to recalculate it.

The current APR is easy to figure up. You just figure out what portion of the interest is at each amount. In the above example, 35% of it is at 0% and 65% of it is at 18.9%. Thus, this calculation is easy. .65 * 18.9% = 12.285% is what your APR is right now on that bill.

But let’s say you make the minimum payments over the course of a year. Depending on your agreement, the small amount of principal might come out of only the 0% part. If your minimum payment knocks the total bill down to $9,500 over a year, with $3,000 being at 0% and $6,500 at 18.9%, the proportions have changed. Your APR is now (6500/(6500+3000)) * 18.9% = 12.93% APR.

In other words, you need to recalculate the APR every once in a while to see if it changes your debt repayment plan. If the debt is now the highest APR on the stack, you should be focusing in on that debt.

Do you have any advice on how to go about finding a good financial advisor?
– Gayle

Let me be clear here: while it’s great to get some financial encouragement and some food for thought online, before you make a major financial move yourself, you should strongly consider ing a professional financial advisor. These people are trained to do this stuff. I made my own financial choices without one, but I took a sizable risk in doing so – I stumbled into the right moves instead of having a good plan right off the bat.

Your best best for finding a financial advisor is to hit up your social network. Ask people you know if they’ve used one and if it was a good experience. Hopefully, you’ll find some good pointers right there.

If that fails, turn to the yellow pages. Here are some specific criteria you should be looking for if you want to hire one:

First, ask if they’re fee based. Commission based advisors make their money by earning commissions on the financial products they sell you, meaning they’re more biased towards selling you stuff that makes them more money. Instead, look for one that’s fee-based – those charge a fee up front and don’t earn commissions on sales, thus they’re much more likely to be shooting straight with you.

When you find some that are fee-based, meet with them. The biggest factor (in my opinion) that the person should address is knowing you and, most importantly, understanding your goals and also the level of risk you can tolerate. If the advisor is immediately feeding you a plan before you’ve told them anything about yourself, you’re wasting your time.

One big tip of advice: put the money in a safe place for a while and educate yourself first. Read some good basic books on investing and know roughly what you want to do with the money before you ever start looking. If an advisor is going strongly against the stuff you’ve learned, you’ll know they’re feeding you a line.

Would you ever discourage your kids from marrying someone who does not have any tertiary education and they have a masters and are considering getting a doctoral degree?
– Audrey

I receive questions along these lines all the time, and my answer to them is pretty much the same.

I have only two things I’d look for when my child is considering marrying someone – that the potential spouse loves my child and respects my child. Other than that, I don’t care about their social status, their economic status, their race, their gender, their sexual preference, or anything else. Naturally, there are some situations where I might want to give them a lot of pre-marital advice, but if there is real genuine love and respect there, I would be the last person to squash it out.

All I really care about in terms of my children in adulthood is that they’re fulfilled and happy with their lives and have respect for other people, no matter what path they choose. If my children wind up being social workers at an orphanage in Romania making seven dollars a day, I’ll be happy for them if they’re happy.

I am an unmarried 25 year old guy in a well-paying and stable job. I currently have approximately $21,000 sitting in my ING Direct account and have no debt. I rent an apartment and save on average of approximately $2,500/month.

You have mentioned the importance of getting started early – given my situation what would you do with the $21,000 and the $2,500/month of saving? Thanks.
– Joe

If I were in your shoes, the first thing I’d do is figure out why I was investing. What’s the big goal? Right now, it’s probably pretty nebulous for you, which means that you can have a fair amount of risk in what you do with the money since you’ve got no distinct plans for it.

The first thing I’d do is keep two months’ worth of living expenses aside for an emergency fund. Know what you spend in two months and keep that much in savings.

After that, I’d invest the rest and – given your situation – I’d probably put it fairly risky. I’d probably put it in three index funds in equal amounts – a total stock market fund (that’s for domestic stocks), a total international market fund (for foreign stocks), and in an emerging markets fund (really high risk stocks). I’d do the whole thing through Vanguard, then just sit back and watch. Don’t panic if it goes down – just ride it out and study carefully what you’re holding.

Along the way, I’d also learn – read a lot of books about investing, starting with the great Bogleheads’ Guide to Investing. Read as much as you can.

That’s what I would do in your shoes, though you should probably a financial advisor if you want a structured plan that matches exactly what you’re doing.

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

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