More family income! Now what? Save, remodel, or splurge?

Reader mailbag: With the prospect of more family income, decide what's most important to both of you.

John Nordell / The Christian Science Monitor / File

Reader mailbag: A reader wants to know where to put extra family income, now that her husband will be out of school and working full time.

By Trent Hamm Guest blogger

June 19, 2010, 8:47 p.m. ET

What’s inside? Here are summaries of the included questions in five words or less.
1. Downgrading a car for e-fund
2. Handling an increase in income
3. Dealing with financially unsound parents
4. Starting out with a Roth IRA
5. Quicken or GnuCash?
6. Preparing for a second baby
7. Buy CD or pay debt?
8. Minimizing impact of car payment
9. Getting a detailed insurance policy
10. Retirement or student loan repayment?
11. PS3 games

Seemingly endless rain. What I wouldn’t give for a nice, dry day. The only problem? After all this rain, the first couple warm days without rain are going to be insanely humid.

I have about $4000 in credit card debt and I’m about to lose my job due to the owner’s decision to sell the business. I’m currently a student living with my parents so I’m not too worried about the job situation but I would really like to wipe out most of the debt in one fell swoop. I’ve been considering selling my fully paid for Honda and replacing it with a sturdy volvo I’ve seen for sale. The net cash gain would probably be about $2500-$3000. Now here’s the rub. I really love that Honda(her name is Lola). But I understand that a bit of sacrifice now for the sake of my sanity and financial security probably wouldn’t kill me. I know the numbers sound like small potatoes but without any source of income for the time being, it could make my emergency fund go a long way.
- Matty

The first thing I would do is get a vehicle history report on that Volvo and make sure there’s nothing fishy going on with it. I’d also test drive it and take it to a dealer to make sure it’s not got anything hidden that will blow up in your face.

If both of those things pan out, then it’s probably a good move in your situation to downgrade. It’ll gain you some cash and likely also help with your insurance a bit, too (since the car value has dropped).

The other option, of course, would be to just get a job anywhere, even a minimum wage one, which would allow you to keep the Honda at least, but might restrict your free time.

My husband recently graduated with a masters degree in teaching and, in an incredibly lucky turn of events, got a job right out of school. We’re thrilled not only for getting his career off to a good start but also at the prospect of having two salaries. Throughout our marriage we’ve always survived on my single salary (currently $54,000/year) and his part-time work while he was touring as a musician. He will start out at around $40,000/year which will increase with experience. We’re facing student loans (we will owe about $32,000 at 6.8% interest rate) and we have a 30 year fixed mortgage towards which we pay about $1500/month. We still owe about $230,000 on the mortgage. Other than that we have no debt. We do use credit cards for the rewards/convenience but always pay them off each month and never carry a balance. We own one car which we bought used and paid for in cash so we have no car payments. Mortgage payment plus other expenses of insurance, utilities, food, etc come to approximately $2200/month. In terms of retirement savings I contribute 8% to a 401k through my job (current balance $48,000) and we each contribute $100/month per person to Roth IRAs. We are 31 and 33 years old so have a long way to go before retirement. We have about $13,000 in the checking/savings and $17,000 invested in a money market fund. We are not very savvy with investing – we mostly put money somewhere and just let it do its thing. We live a fairly frugal lifestyle but are comfortable with occasional spending.

Basically, we have the happy problem of increasing our income and we don’t know what to do with the extra money. I know we should probably save or invest most of it but we also kind of want to splurge on something. We own an older home built in 1928 and have a constant list of projects, but it needs no major repairs. I’m not sure we’ll stay in this house forever so we hesitate to invest too much into it if we outgrow it and move later. One idea we have is to tear down and rebuild the old shed in the backyard (it is in bad shape) and enlarge it to double as tool/bike storage and a writing retreat/studio space. Lately though we’ve been dreaming of buying a 1970’s era VW camper bus. We love road trips and have always wanted one to wander around in (and could park it in the backyard for that retreat space). Another dream we have is to do some traveling, to South America or New Zealand – somewhere exciting. Here’s another thing – we are trying to have a kid, one or two, which I know will increase our monthly expenses and savings for college. I plan to keep working after kids so there would be some daycare. (Actually, I would love to not work but also can’t see myself leaving my career, both in losing that income and for my own creative interests. That is a whole ‘nother mailbag.)

What would you do in our situation?
- Penny

The first thing I would do is just sit down and have a long talk about what you both really want over the next five years or so. Do you really want children? Sooner? Later? Is the camper bus really a big dream or is it just a whim? What about the shed rebuilding? What about the idea of a new home?

Be honest with each other. There’s likely things that one of you is really into that the other one is kind of “meh” about. The best thing you can do for each other and for your relationship is be honest about how you feel about future goals. Don’t feel bad about saying that you don’t feel too hot about saving for the next year for some project you’re not all that interested in.

What you’ll find is that – if you give it time and careful thought and mature discussion – one or two strong mutual goals will emerge that you both believe in and are passionate about. That’s where your planning should be focused.

Give it time. Give it honesty. And don’t be upset with each other if something you want doesn’t completely match what your partner wants. You might just find that there are things you both hold dear, and the rewards of those far outweigh the individual things you each want.

About me: Come from a family perpetually in debt. My father is the only income earner, and he supports my mother and two younger sisters. I left home at 18 and racked up a whole bunch of my own debt while in university. I smartened up just before graduating, opened an RRSP, started an emergency fund, started saving etc. 3 years later, I’m pretty comfortable – have a small mortgage in Vancouver, paid off $10 000 of my consumer debts and only student loans left to go! I was even able to go back to school with some of the money I saved while working.

The problem is, my family is still badly in debt. They’ve refinanced their debt into their house three times and now owe more than their house cost them originally to buy it. I’ve helped them out a few times with cash gifts. My parents always ask to “borrow” but I know I probably will not see the money back, and that’s okay. I’ve never “loaned” them any more than I could afford to lose.

But now my dad is under-employed due to a bad economic situation in his field of work – this has gone on for about a year. I recently handed over a cheque for $1500 to help them cover their mortgage. Supposedly they will pay me back, but I don’t expect it.

I’m very concerned about how they will cope and what I can do to help – I am finishing a second degree right now and living on a strict budget that allows me to take classes and pay for my expenses without incurring additional debt. I work two part time jobs while in classes and will start a 9 month work term in August. My income will be good, but I can’t continue to help them out when they are short because I need to save money to finish my schooling/cover living expenses once the work term is over.

I’ve suggested renting out the extra bedroom they have, but they are resistant. My mother has health problems and is unable to work long periods of time. She used to do some babysitting, but hasn’t in a while. To make things worse, my sister is starting university in the fall (though living at home while in classes). She has enough scholarships to pay for one semester of classes. I’ve encouraged her to get a part time job during the summer to save up money for future tuition but she has not wanted to. My parents are encouraging her to take out student loans instead. They’ve even asked ME to take out student loans and “lend” them the money – I refused.
- Michelle

You made a good move there, refusing to lend money to your family members. One of the worst things you can do with a family relationship is turn it into a lender-borrower relationship. Think about it: who loves their lender and invites them to dinners and parties? If I were you, I’d assume that any money you’ve already given them won’t be paid back. Think of it as a gift and just forget about it.

The question is what you should do going forward from here. I don’t think you have any sort of responsibility to begin supporting your family. You absolutely should not lend them any money at all for the reason mentioned above. You also absolutely should not do anything that puts you even in a slightly more challenging place.

If you still feel an obligation to help, help via one-time gift, like you did with the single check you already gave them. Whether or not you do that, of course, is up to you.

I am looking to start my own IRA but I have heard some stuff that makes it seems a little more complicated. I was under the impression that a Roth IRA was kind of just a set it and forget it type of account. I’ve been reading into it more lately and found that this isn’t really the case. I don’t know if I’m the only person who was thinking this but I thought it may be beneficial to your readers. What I’m asking I guess is how exactly do I setup a Roth IRA and what should I be investing in? Are there suggestions for investments when you get all of your stuff setup?
- Brandon

The Roth IRA certainly can be a set it and forget it kind of account if you choose it to be. My own Roth IRA through Vanguard, once I had it set up, has needed no changes in years. I just selected an appropriate Target Retirement fund, set it to withdraw $100 each week, and sat back and forgot about it.

Assuming you’re using it for retirement and not some sort of gamesmanship (there are some somewhat kooky plans out there that try to exploit specific loopholes in the Roth laws which rely on those tiny loopholes remaining open for years – don’t bother), the best thing to do is to simply open up a Roth IRA account at an investment house you trust, select a Target Retirement Fund from their investment offerings, and then set up an automatic investment plan to put money into that target retirement fund.

That’s really all you need to do. It is pretty automatic once you get it into place. Just pick a company, sign up, select an appropriate Target Retirement Fund, and set up automatic contributions. Done.

In a recent Reader Mailbag, you recommended Quicken in response to a list of criteria for personal accounting tools. I was wondering whether you had any experience with GnuCash (www.gnucash.org). I’ve not got enough experience with it to know whether it meets the criteria, but it is free (and Free Software – meaning those with programming skills have the ability to make changes), and does seem to do a lot. If you are familiar, where do you see it lacking (as compared to Quicken or more generally)?
- David

GnuCash is a solid accounting program – and it’s free – but it doesn’t match what Quicken does.

The big thing that Quicken does that GnuCash does not – and this is huge for new users – is that it automatically downloads your financial data for you from your banks, credit cards, and so forth. Transaction data is often included in this. This drastically reduces your bookkeeping time once you’re used to the procedure.

GnuCash does several things well, but the sheer accounting work that has to go into it drives away a lot of users. And for me, who did all of this by hand for many years? I used Excel, quite honestly.

On your blog, you’ve mentioned that you did a lot of little projects to prepare for baby #3, and — being in a similar situation myself, although for me it’s baby #2 — I’m curious to know what they were. I’m also curious about which ones were the most useful in retrospect. I am getting hit with that serious 3rd trimester nesting urge, and I’d like to put it to good use. Last pregnancy, I was doing things like dusting the window blinds — something that wasn’t especially useful.
- Emily

I’ll just list the projects we took care of during the run-up to the arrival of baby number three.

We signed up for a 529 for him (putting myself as beneficiary, then switching that after he was born). We did everything we could to acclimate the older children to the idea of a baby, including reading lots of books about babies and new baby siblings. We pulled lots of baby clothes out of storage and hit quite a few yard sales and consignment shops to replace some of the more well-worn items. We pulled the old bassinet out of storage, cleaned it, and set it up, and also came up with a long term sleeping plan for the three kids. We pulled out our old breast pump, fully cleaned and sterilized it and all of the bottles, and did some maintenance work on the AC adapter. We washed and prefolded all of our cloth diapers, setting the adjustable ones to the smallest setting.

I’m sure I’m forgetting something, but all of these things happened during the months leading up to the birth of the third child.

I’m an undergraduate student and will continue with a PhD after graduating next year. I’ll be leaving my alma mater with around $15-20k in Federally subsidized loans and won’t be required to make payments until six months after I cease being a half-time student. As far as I can tell, the government pays off the interest at the lowest rate so long as I’m in school. I will be paid a stipend of $25-30k during my PhD schooling (5-7 yrs.)and intend to save a significant amount towards these loans and financial independence. My question is this: if I have around $6k in savings right now, would it make more sense to invest in a moderate-return CD or similar option, or should I apply it directly to the loan capital? I’m pretty sure a 33% dent in the principal would be fantastic, but the opportunity for seven years of interest is also appealing. Can you shed some guiding light? I currently have taken three discrete subsidized Stafford loans with fixed rates of 6.8, 6 and 5.6%.
- Joe

First of all, make absolutely sure that your interest is being paid while you’re in school, because that completely changes the answer to the question.

If the interest is being paid while you’re still in school, then you should hold onto that money until you finally graduate because your loans won’t be growing at all. You can buy a CD if you wish, invest it in the stock market, whatever you feel is appropriate with that $6K (it mostly depends on your risk tolerance and how long you’ll be in school for the Ph. D.).

If the interest is not being paid while you’re in school, you should pay down the highest interest student loan, but you should save at least $1,000 of that money for an emergency fund for yourself so you’re not tapping credit cards to deal with an unexpected expense. Why? Very few investments will top the 6.8% guaranteed you have on your loan.

My 12-year-old car (given to me by my parents) is about to die. Though I haven’t gotten it formally checked out, I know there are problems with the engine and transmission, and I have this feeling that it won’t make it through the summer. It has 195k miles on it, so I think it’s past the point of trying to fix it any more.

I also have recently started a new job after 10 months of unemployment. Before being unemployed, I had started a debt snowball to pay off my debts, but had to put that on hold for obvious reasons. Here’s where I stand now: $15k on a student loan at 3.9% ($117 monthly payment) and $24k on 6 credit cards with interest rates averaging around 18.5%. I take home about $1200 every 2 weeks and pay $600 for rent and spend about $400 monthly for groceries, cell phone, gas and other stuff. I also have $300 in savings (the remainder of my original emergency fund) that I’d like to build up to at least $1000 to feel more comfortable.

My question is this: Should I save up as much as possible to have a larger down payment, or should I throw as much as possible at my credit cards to have a lower debt:credit ratio and improve my credit rating? I’ve never financed any sort of major purchase before, but I do have a decent credit score (708 as of two months ago). I’m looking at a used car (certified if I can find it!) in the $12k range. I guess I’m just basically nervous about having this new large monthly expense and am looking for the best ways to minimize it.
- Larissa

In your situation, you shouldn’t buy a $12,000 car right now. You should get something much lower that you can drive reliably for just a few years, then replace it with that $12,000 car.

Doing that saves you money on financing the car and on auto insurance as well (since you’ll probably only need to carry liability insurance on it). That money can be channeled towards paying off your existing debts (and a $1,000 emergency fund, too, which will keep you from tapping credit in emergency situations).

Look lower-end for now for your car. You can save up for it if you wish, but don’t worry about a small loan for it, because if you have decent credit at all, it’ll be lower interest than those credit cards. Then, once that’s taken care of, snowball. Get rid of that high interest stuff first and whittle through everything else. You’ll have much more money to do this quickly if you get a lower-end car for the time being, taking you to debt freedom much faster. When you’re there, then think about a higher-end car.

I am trying to do some emergency planning, and as part of that my goal is to understand all of my insurance policies thoroughly. I have checked my insurer’s website, but they only have generic information and say to contact your agent for more details. I have tried my state’s (NJ) Department of Banking and Insurance, but there is no standard there, either. I e-mailed my agent with some questions, and she called me back instead of e-mailing her response. Is there a good way to get a complete guide to what a person’s insurance will cover in the event of a claim? It is all well and good for my agent to tell me somethings over the phone, but I will have no proof of what was said if there is a problem. Do you have any advice on how a person can obtain, in writing, exactly what will be covered by their insurance if a claim is filed? I am referring mostly to my Renter’s policy, but would like something similar for any policy I own.
- Tracy

Call your agent and ask for a copy of the policy, point blank. If they won’t provide this policy, then you shouldn’t be doing business with that company.

The agent wanted to call you because the agent is a salesman and it’s much easier to make a sale by talking to someone than it is by sending them emails. Pretty much any insurance agent will do the same thing – because, in the end, they’re salespeople.

If you can’t acquire a copy of the policy you’re looking to buy, something is really fishy and I would run away from the situation.

I am a 23 year old AmeriCorps volunteer. I currently have $2,000 as an emergency fund. I also have roughly $25,000 in student loan debt. I receive $1,000 a month for a living stipend before taxes, and will receive a $4,725 Education Award (to pay back federally backed student loans) in August.

I am torn between saving for retirement and aggressively paying back my student loans. I hate being in debt, and would really like to get rid of my student loan debt as soon as possible. Currently, I have an $11,000 Stafford Unsubsidized loan (6.8% interest rate), a $10,000 private educational loan (8 percent interest), and a $5,000 Department of Treasury loan (4.5%). They are presently in deferment for economic hardship, but I’ve been paying about $200 a month toward my private educational loan, since it’s the only one that can’t be partially repaid with the AmeriCorps Education Award.

However, I also understand the importance of saving money for retirement, especially in my early twenties. Optimally, I would like to open a Vanguard Target Date Roth IRA and start socking money away as I am able. However, the minimum initial balance is $3,000. Do you know if Vanguard or any other reputable agencies offer IRAs with a lower minimum initial balance (possibly with the requirement of automatic fund transfers)?
- Alex

When I started with Vanguard, I didn’t have the $3,000 I needed to get into the fund I wanted, either. However, there’s a much easier way to do it: the Vanguard Star Fund.

The Star Fund is a composite of several different Vanguard index funds. What makes it noteworthy, though, is that it has a minimum of $1,000, not $3,000.

When I signed up for Vanguard, I first saved cash in a savings account until I had $1,000, then I contributed all of that to my Roth IRA and bought Star, setting up an automatic investment plan to keep building from there. When I reached $3,000, I just switched it to the Target Retirement Fund of my choice.

As for the student loans, I think you’re doing the right thing paying the private one off now, a bit at a time, as you’re doing.

All right, ‘fess up. What PS3 games do you own?
- Kevin

A surprisingly large number of people wanted to know this after my post yesterday in which I discussed trading my Nintendo DS for a Playstation 3. So, here are the games I traded for (all used, of course) when I got the Playstation 3, with links to Wikipedia for details. I picked up Red Dead Redemption, MLB 10: The Show, Final Fantasy XIII, Uncharted, and Skate 3. I still have some store credit remaining, too. RDR and MLB 10 seem to be the popular online games with my group, so those will be the ones I’ll mostly play, I’d imagine. My plan is to just trade them as I play through them and maybe receive a few more as gifts for various gift-giving occasions.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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Seemingly endless rain. What I wouldn’t give for a nice, dry day. The only problem? After all this rain, the first couple warm days without rain are going to be insanely humid.

The other option, of course, would be to just get a job anywhere, even a minimum wage one, which would allow you to keep the Honda at least, but might restrict your free time.

What would you do in our situation?
- Penny