Credit card use: Which rewards card is best for you?

Credit card use works best when you have a card that grants rewards at the vendors you use most.  Credit card use is question six in today's mailbag

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. SmartyPig update
 2. Figuring out debt repayment order
 3. Buying elderly mom a home
 4. NCUSIF insurance
 5. Ending naptime
 6. Credit Card use
 7. NACA question
 8. Splitting regular and Roth 401(k)
 9. Paying off student loans quickly
 10. Spousal Christmas presents

My mother came to visit recently, so I put aside the time to just spend a day with her. It was really enjoyable to just spend several hours together. We wrapped some Christmas gifts, played a couple of games, went out for a light lunch, and visited a bookstore (neither one of us bought anything, but we browsed for a while).

When I take time out to do things like this, it somehow makes my life seem better even if it makes other aspects of my life that much busier.

Q1: SmartyPig update
 My question relates to the interest rate on SmartyPig. I have opened multiple goals with them since seeing your post on them awhile back. But I can’t help but take notice of the several interest rate decreases that have occurred recently. I understand (or I guess) that the economy is driving the interest rates down; I’m just wondering if they’re still the competitive savings resource they once were. Do you still recommend SmartyPig to your readers?
 - Jill

Right now, SmartyPig’s interest rate is comparable to a lot of other online savings accounts. Early on, SmartyPig offered a rate that was significantly better than online banks, and that interest rate was a big reason to use SmartyPig.

However, SmartyPig’s appeal isn’t just interest rates. They offer a lot of nice tools for saving for specific goals, like saving for a vacation or for an appliance replacement. Often, they work with the retailer from which you’re buying that item to get you a reduced rate on that item. For example, if you’re saving for a goal that is an item that you can buy on Amazon (say, a MacBook Pro), you can choose to cash out when you reach your goal in the form of an Amazon gift certificate instead of cash, and they’ll add 3% to the face value of that certificate.

I think SmartyPig is a worthwhile tool for saving for specific short-term goals. In fact, I’ve used it myself when saving for a replacement computer.

Q2: Figuring out debt repayment order
 I’m a proponent of paying highest interest rate debt first, so as to minimize total amount paid over time. However, lately I’ve been concerned about my three loans. I have one private student loan for ~$47K at a variable 4% (mo. payment: $354) and two fixed federal loans for $2,308 at 5.75% and $2,491 at 6.55% (mo. payment $32.50 each). My snowball is $1,856. With all the negative economy talk, I started getting nervous about a surge in inflation that would cause my variable interest rate to skyrocket, and therefore, really hurt me since the variable but lowest rate has the largest balance. So I was going to ask you if it would make sense to pay off my variable-low-interest-rate-but-high-balance debt first, and then start paying by highest interest rate.I am extremely risk-averse. But after I ran the numbers, this scenario really didn’t pan out. It became quite obvious that only in the event that interest rates soared past my highest rate loan now, would it make sense (of course!) to pay off my biggest balance (which would then be the highest rate) loan first. Does this check out/have I done this right?
 - Lauren

The best mathematical way to pay off debts is always to pay debts in the order of interest rate. If the rate of a debt changes so that a new debt is now the highest interest rate debt, then you should switch to the high interest rate debt.

The only alteration I would make to that statement is that if you’re informed in advance of an interest rate change, it makes sense to immediately switch your extra debt payments to whichever debt will have the highest interest rate.

I would not make extra debt payments based on a feeling of what interest rates will look like in the future.

Q3: Buying elderly mom a home
 My 75 year old mother is in mediocre health. She’s losing the place she’s living in and needs to move in the new year. She hasn’t one penny of savings, has a beater car and routinely drives to our part of the state twice a month to visit some vulnerable relatives. This is a 2 hour ride each way, but I agree that these relative actually need her.

I will be earning a big chunk of money in the first part of the new year and would like to buy a home for her to live in and as an investment. I’d like to take advantage of the crazy low prices in the suburbs near our home. Here are several questions for you.

1. Would you pay all cash for a house? Pros and Cons (My spouse makes more than enough money to support us, so our life would not be affected by this)
 2. Would you make her pay a small portion of her social security toward rent? She currently has to pay half her social security for rent and is barely making it. I’ve always heard it’s a good idea to make people pay a small amount toward what they need. I was thinking 1/4 of her SS.
 3. I want to spend about $200K and these homes might not be well insulated, etc. What things would you do to a house to make it as frugal as possible for her. She currently lives in a very old drafty house and her heating bill is killing her.
 4. She is know for her very poor decisions. Is it practical to set a list of rules for her? She has completely disregarded the rules her current landlord imposed (a relative) and this is part of why she has to find a new place. I’d like to make her promise she won’t let deadbeat relatives move in. That she can’t have too many animals, etc. Is this too parental?
 5. We use a property management company for one other rental we have. Should we do this with her? It costs us 10%, but then she would have them to call for maintenance. It would cost me money, but it may be a great buffer. I’m wary of putting a handyman at her disposal since she might possibly have them put on a new deck or build a turret rather than just have them unclog a drain or fix a sticky door. She has very qualms about doing what she thinks is “necessary” with other people’s money. “But I needed a greenhouse, my plants were dying”. If I do use a management company I might not tell her I bought the house since she might try to do less “quirky” things if she doesn’t think a relative will let her get away with it.
 - Sheila

I would be really hesitant to enter into this type of “landlord” situation with a parent for much of the same reasons that I encourage people not to lend money to family and friends. It just adds an element to a valuable relationship that you really don’t want.

When there is something wrong with the house, you will be the person called. Because you’re family as well as the owner of the house, you’ll be expected to fix the problem very quickly and efficiently. Unless you have an exceptional person for a mother, this will hold true whether you have a management company or not.

There’s also the concern that the house that might make for a good investment might not be the same house you’d wnat your mother to live in given her current health situation.

If I were you, I would rent an apartment for her. If her health is slipping, it’s likely that the period of time you would rent would be limited. It would also put the burden of the “landlord” role onto someone else, and it would also allow you to purchase a house solely as an investment.

Q4: NCUSIF insurance
 I have a couple questions: I am interested in a local credit union, with a checking account that has 2.51% interest if you have an automatic depost/withdrawal and minimum 12 debit transactions which I already do. What do you think about going with a credit union who is NCUSIF insured, which they claim is equivalent to being FDIC insured.
 - Ron

NCUSIF insurance is extremely similar to FDIC insurance. Both are insurance programs on savings and checking/draft accounts backed by the full faith and credit of the United States government. In terms of the end user, they’re pretty much identical, as they both offer $250,000 in insurance against the failure of the financial institution that manages your account.

So, why the difference? Credit unions, in terms of the law, are different entities than banks, with different restrictions and requirements. One could go into a long list of these differences – for example, credit unions are not-for-profit while banks are inherently for-profit, to name just one. Because they work differently, it makes sense that the same insurance policy wouldn’t work for both entities.

From my perspective, your money is going to be just as safe in an NCUSIF-insured credit union as it would be in an FDIC-insured bank.

Q5: Ending naptime
 I’m a stay-at-home mom who also runs a small online business. I usually do work needed for this while my daughter (3) is napping. However, lately, she’s been really restless at naptime and requiring lots of attention. My business is suffering. Any suggestions?
 - Tessa

If you want to prolong the magic of naptime, the best way to do that is to utterly wear out your child in the morning. Engage in activities that require a lot of energy prior to lunch so that your child feels a strong energy lull after lunch.

Eventually, though, your child is simply going to grow out of naptime – and it sounds like this is happening right now. This is simply going to mean that your daily schedule is going to change. You can no longer bank on naptime as a time to get things done.

For us, our approach was “quiet time.” We continued the same routine as nap time, except that we simply mandated that they lay down and be quiet for a certain period of time. If they were still awake at the end of that period, they were free to get up and usually engage in a solo activity that would allow me to finish whatever task I was working on.

Q6: Credit card challenges
 My husband and I live very frugally due to having student loan debt along with other debts (auto, home repair, mortgage) and my husband is getting his undergrad degree while I work full-time. Since we do not have much money left over to save for vacations and the like we tend to put a lot of purchases (including bills) on our Discover Miles credit card and then timely pay the statement balance each month and cash in our Miles for travel expenses. This has worked very well for us and we are hoping to have enough miles for a family trip to Florida next summer (or enough to pay for our gas if we choose to drive). My question is this: would we benefit from a different kind of card, maybe one that gives us a better percentage back on our purchases? Right now we get about 1 mile for $1 spent on most purchases but I always sign up for their special bonus miles when they’re available. We get 3 miles on every $1 spent on travel expenses but we don’t really travel except for maybe 1 or 2 small trips a year. I did notice that now Discover offers us the option to use our Miles toward just about anything, including cash back or paying the balance on the card but if we could benefit from a card where we get a better percentage on every day things like groceries, I would rather have that. I don’t really care about the APR on the card since I always pay the balance but I don’t want to pay a monthly or yearly fee. Any suggestions? Also, it doesn’t need to be Discover, that’s just what we have now; we also have a Visa Amazon card but hardly ever use it since we don’t buy many things on Amazon anymore. Thank you!
 - Shannon

There probably is a better card out there for your specific situation. I’m just not sure what that is.

My suggestion to you would be to sit down and really look at where you spend money, then use that as the basis for finding a new card. What retailer sees the largest amount of your transactions? That would be one sure place to start.

The key thing to remember is that rewards are rewards. If you receive “cash back” rewards or discounts, bank those rewards for your travel goals. Don’t just limit yourself to airline miles.

Q7: NACA question
 Got a question for you. Have you heard of NACA? https://www.nacalynx.com/nacaWeb/index_main.aspx

My father in law mentioned it to me the other day. He said a friend of his used it, but he didn’t know much about it. Since my wife and I are looking into buying a house in a few years I checked it out. It seems a little fishy to me though. From what I can gather, if you get a mortgage through them, there is a $50 a month membership fee, plus you have to volunteer your time 5 times a year. I don’t have a problem volunteering, its the fee I am worried about. If you do get a mortgage through them, there are no closing costs and things like that.

What do you think? Have you heard anything about this at all? Seems risky to me.
 - Deval

Your description of the program from the perspective of a potential borrower sounds pretty accurate based on my experiences.

NACA is a non-profit homeowner advocacy group. They work to get strong mortgage deals for members from large banks and often engage in political activism and protests to get the job done.

They seem to do a solid job of working with homeowners to get them a better interest rate, but through the rules of membership that you suggest above, they tend to at least try to draw people into their political activism. If that’s of interest to you, I’d follow up.

Q8: Splitting regular and Roth 401(k)
 The company I work for has just recently added a ROTH 401k option to the existing 401k plan. I can’t contributed to ROTH IRA as I have real income plus “income” that exceeds the ceiling set by the IRS (the fake income is received via a family real estate owning LLC, we’re divesting of excess land and that carries forward to my 1040).

The only debt we have is our house, I put down way more than 20% and its value has held steady. We have a well stocked rainy day fund, plus other non-company investments (mostly mutual funds). We make solid contributions to charity, etc.

Is there a good rule of thumb, or do you have a suggestion, on what allocation I should make between the 401k and ROTH 401k? When I do planning and make financial decisions (like to potentially refi to a 15 year mortgage) I always assume my income won’t grow. But for this scenario I can see it increasing. My assumption is that taxes will rise in the US later, which makes the ROTH 401k a smart place to put a lot of money. However I’m also not totally convinced that ROTH plans won’t have a new tax levied on them in the future. But I also have to assume that if I ever get to retire that I’ll be in a much lower tax bracket than I’m in now.

To keep it simple I was going to split it 50/50, but I am wondering if you see it differently?
 - Lenny

There is no “perfect” solution when it comes to splitting money between a regular 401(k) and a Roth 401(k). If your tax rate in retirement is lower than it is now, then a regular 401(k) is better. If the opposite is true, then a Roth 401(k) is better.

No one has any idea what their earnings will be over the years between now and their retirement, nor can they be certain what income tax rates will be in twenty years.

Because of that uncertainty, I think hedging your bets is a great approach. While you’ll probably not stumble upon the “perfect” balance, a 50/50 split will give you a pretty good balance.

Q9: Paying off student loans quickly
 I have a question on what you think about living in a cheaper/less ideal situation if it means you can pay off student loans faster, but be less psychologically at ease. Right now the place I’m living is in a great location with reasonable rent, but my housemate isn’t so into cleanliness and it’s not that comfortable, and long story short, I’d like to move somewhere else. But I know the next place I move into will likely be more expensive – I live in a city with a high cost of living, where you’d be hard-pressed to find a studio apartment in good location for less than $1800/month, or a 2 bedroom, 1 housemate situation for less than $800-$1000 (both numbers excluding utilities). I’ve lived in places really far from public transportation, a hostel with with tons of housemates (8 people in a room), places with cheap rent but roaches everywhere…and to me, a good combination of location, considerate housemates, comfort/cleanliness, and piece of mind are important. I think home should be a place to relax and feel at ease, not be on edge or stressed. (The reason location is really important to me is because I ride buses or the subway everywhere.) How much do you think one’s monthly salary should go to rent, is it worth spending an extra $100-$200 per month for a nicer living situation (at the opportunity cost of less money going to student loans)?
 - Linda

It’s all about balance, and no one has the same exact balance. If you spend more on having a nicer home now, reducing stress, you’re taking away money from extra debt payments, which means that you’ll have the debt hanging over your head for longer, adding stress.

The mistake that a lot of people make is that they regularly skew that balance toward the present, sacrificing the future. They’d rather have a little more now in exchange for something less later on, believing that something will come up to take care of that future shortfall.

Doing that for something deeply important to you is okay. Doing that regularly is a mistake. The key? Self-analysis. The more time you think about all of your decisions, the more likely you are to make good ones.

I can’t tell you which way to go because I don’t know your values. All I can tell you is to spend some time carefully thinking about this and whether you’re willing to add a lot of time back onto your debt due to the extra payments you won’t be able to make.

Q10: Spousal Christmas presents
 My wife and I are working through the issue of whether to get each other Christmas gifts. How do you and your spouse do it?
 - Carl

Generally, what we do is set a spending cap for each other. We talk it over beforehand, look at our budget, and set something reasonable.

Then, when we’re figuring out what exactly to get each other, we get the children involved. We allow them to help us select these gifts, which enables the children to feel as though they have a part in this process even though they don’t have a source of income.

This does enable us all to be able to open at least a few gifts on Christmas morning, allowing us to take turns and enjoy not only receiving gifts, but enjoying watching each other open gifts.

This process works well for us. I’d suggest just setting a reasonably low spending limit with your spouse and then sticking to it.

Got any questions? Email them to me or leave them in the comments and 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 hundreds of questions per week, so I may not necessarily be able to answer yours.