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Saving money vs. paying debts: How to decide

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(Read caption) US one hundred dollar bills are shown in this file photo. Hamm suggests having plenty of money on hand in case of financial emergencies, but to pay down debt with any savings left over.

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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. Facebook alienation and human interaction
 2. Save or pay debt?
 3. Thoughts on inheritance
 4. Privacy and blogging
 5. Slow student loan repayment?
 6. Parenting blogs
 7. Loan or no loan?
 8. Savings versus complexity
 9. A “getting started” checklist
 10. Third child

For those of you who don’t know, Kickstarter is a website where people or groups can pitch a project for funding from the public. For example, you might have a game you want to publish, a book you want to distribute, or something else.

The site allows people to ask the public for support of their project. For that support, supporters are usually given some sort of reward: a signed copy of the book, an early release copy of the game, and so on.

Kickstarter has become my (no longer so) secret passion of 2011. I love the entrepreneurial spirit. I love the great ideas people come up with. It’s just fun for me to browse the projects and watch human ingenuity and creativity at work.

Q1: Facebook alienation and human interaction
 Earlier this morning I was reading an article on the New York Times (source: http://www.nytimes.com/2011/12/14/technology/shunning-facebook-and-living-to-tell-about-it.html?_r=3&hp=) about people who refuse to use facebook. Their reason is that in this modern day and age, they feel its actually driving a wedge between their closest friends and themselves. Where once they would call one another, now they shoot a quick message on facebook. Instead of calling to announce something, they would just post an open message announcing it. After giving it some thought, I actually agree with them a lot. I know you frequently write about the value of friendships and relationships, so what are your thoughts? Do you think that social media like facebook helps, or hurts our relationships with other people over time?
 - Dale

From my perspective, Facebook is roughly as personal as a phone call. With a phone call, I can’t see the person and I can’t share an experience with the person. Quite often, I find myself leaving a voice mail, which means the conversation isn’t synchronous. Phone calls do have the voice element to them, but as with Facebook, you’re still chopping away big pieces of communication when you can’t see someone.

Both Facebook and phone calls are trumped by face-to-face interaction, though. With that, you get the full experience: you can see the person, you can hear the person, you can share ideas, and you can share experiences.

For me, the sole purpose of Facebook and phone calls is to lead in some way to face-to-face interactions. It’s nothing more and nothing less than that.

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Q2: Save or pay debt?
 I live in Costa Rica in central America, I’ve always lived here and probably will always live here so there’s no going back to usa to live or retire.

I’m married and have two kids a 3 and a 9 year old, our currency is the costa rican colon, and the exchange rate is approx. 510 colones to a dollar.

My financial situation is this. (All the money I’ve translated into dollars for ease of explanation, but we use colones.)

My salary is 4000 dollars per month take home pay this is after taxes and retirement (a pension plan), my wife brings about 2100 dollars a month after taxes and retirement, our living expenses including mortgage and car payment, school for the kids, food, entertainment etc is about 2500 dollars/month.

My savings are about 36000 dollars in cash, my debt is 33000 left on my home with a loan at 14% (the rate is high because is in colones not in dollars) with 14 years to go, mortgage is about 500 dollars a month, also a car loan of 28000 dollars at 6% (this is actually in dollars, I know our rates are insanely high) with 8 years to go and a monthly payment of 455 dollars including insurance. I have no cc debt or any other debt.

I am able to continue saving about 1800 dollars a month, I know that there might be a chance (50%)my income will go down to about my expense limit in early 2014, this means I’m going to be able to cover my expenses but not save, only about 200 dollars a month.

Also education for my kids is not very expensive here, Medical school for instance can be about 20000 dollars for the whole career, I’m also saving about 100 dollars a month toward college for my kids.

My question is this. Should I:
 (1) continue to save $1800 every month (I can get about 8% in a CD, our stock market its not good)
 (2) pay down my house (which I don’t intend on living for the rest of my life as it is, I want to either buy a new one or completely remodel mine in a period of 3-5 years, my house has about 100% equity which means that’s worth double what my original loan was)
 (3) Pay down my car loan (In Costa Rica the cars depreciate not as bad as in the usa but pretty rapidly)
 (4) A combination of the above, and if so in what %
 (5) Or something else
 - Ron

If I were you, I’d follow a very simple plan.

First, I’d set aside about $1,000 for an emergency fund. This would help you in the event of a personal crisis or other such issue.

Next, I would take the rest of your savings and apply it to eliminating debts that are above the 8% you can get in a CD. I would start with that 14% mortgage. I would just eliminate the whole thing with your savings.

If you have all of your debts eliminated that have an interest rate higher than the CDs available to you, then I would return to a focus on savings. As long as you’re getting a return that’s higher than the interest rate on your debt, keep saving. If your debt interest rate is higher, pay off debt.

This will get you into the best financial shape for the future, I think.

Q3: Thoughts on inheritance
 I was just wondering…how much of the the economy and growth in the U.S. depends on inheritance (in your opinion)? People dying, other people getting their money/house, adding value to it, then passing it along when they die? And I don’t mean millions of dollars in inheritance–even smaller sums like a few thousand dollars. I feel that I hear an inordinate amount of stories from people who are only able to have a down payment for a house or fund their child’s education due to an “unexpected” inheritance from a late family member. Is that really how money works from a bird’s eye view?
 - Jessica

I think that receiving an inheritance from a parent or grandparent that passes away is a fairly common thing, and that people who receive such windfalls often put it towards a major purchase, such as a house down payment.

I think the entire process of parenting, from the birth of the child to the death of the parent, is a transfer of wealth and other resources from the parent to the child. Obviously, there are things that an adult child can give back, particularly late in the life of the parent, but the largest transfer is from the older to the younger.

That’s always been the case, I think. Since the earliest civilizations, resources have been kept within families. Farms, homes, and other assets were passed from parent to child and on down through the generations. What you see with such inheritances is just the modern version of that.

Q4: Privacy and blogging
 You mentioned that you shut down your popular parenting blog due to “privacy invasion issues.” Can you tell me about some of those issues — specifically, what advice do you have for other bloggers who are trying to maintain a balance between being open/transparent and protecting their privacy?
 - Ellen

In 2005, I started a parenting blog as I prepared for the birth of my first son. I continued it after his birth for a while, into early 2006, when I made the decision to take it down. There were a few personal threats made toward me and my child that went beyond what I consider normal internet “trolling.”

My suggestion to new bloggers is twofold. First, never post anything on your blog that you would not be perfectly comfortable with a stranger knowing about you. Hand in hand with that is to be extremely careful about what you post regarding people besides yourself. I often edit specific details of people I know and specific situations in order to protect the privacy of people I care about. The Simple Dollar isn’t about invading the privacy of people.

Second, get a thick skin. If you start writing about yourself and gain any degree of popularity, people are going to come out of the woodwork to say negative things about you, often unbelievably negative things. People can and will try to hit you where it hurts. Most of the time, they’ll use a curtain of anonymity to do it. My advice is to just ignore most of, if not all of it. There are sometimes valuable things that are said in there, but if it’s truly a valid concern, it will become apparent in other ways.

Q5: Slow student loan repayment?
 My fiance is moving from San Francisco to New York in a month to begin grad school. I had hoped to move with her but I don’t want to change companies and my ability to move with my current employer is in doubt. As a result, I will be moving back in with my parents for perhaps as long as two years when she will graduate and move back to SF. At that point we would get our own apartment again.

I was planning on saving a good chunk of money to help pay down her debt, or save enough to reduce the amount she would have to borrow in her second year. At the very least I was thinking I would be able to pay a big chunk of her debt (15 to 20K) right as she exits school. I was explaining this to a friend recently who said I should research because I may be able to write off loan interest.

My question is two parts; 1) Is my friend’s assumption true and is there upside to paying off debt slower? and 2) Is it better to not spend that money on paying down debt so we can use it toward a down payment on a small 4 to 6 unit apartment building (my dream) or our first house (more realistic). I’d expect we might look to buy a home in as soon as 4 to 5 years.
 - Leo

If I were you, I’d hold onto the cash until you’re ready to buy a home together. One big reason is that you’re entering what is going to be a challenging period for your relationship.

Long distance relationships are very difficult to maintain – I’m speaking from experience here – and you don’t want to have invested a lot of money into paying off your partner’s loans only to find that your relationship has not survived.

If you do find yourself together after this period, then I’d sit down and figure out what your shared goals are and what your realistic job opportunities are. These will provide you the clues you need to decide what to do next.

Q6: Parenting blogs
 Question for you – do you have any parenting blogs that you read on a regular basis? I’m a new parent, and now and ex-pat, and am looking for a few to keep me motivated in that part of my life.
 - Kristy

I had a lot of parenting blogs that I used to read that slowly went defunct over time. It’s very hard to keep the fuel behind a focused blog over a long period of time.

The one blog I’ve enjoyed for a very long time that’s still going strong is Parent Hacks, which I occasionally link to in my weekly roundup. I find useful tips there all the time and I often find myself searching through the archives for ideas.

I don’t read most of the “big” parenting blogs that people often mention.

Q7: Loan or no loan?
 I am going to school for my MBA (Master’s of Business Administration). My work has a policy to where they will pay for my schooling, but I have not heard a definate answer one way or another. The VP has approved it but the President has not, and until the President approves it, I may or may not get reimbursed for it. My dad has offered to pay for school until work pays me back, if they do so. If not, then i’ll owe my dad for the tuition. My dad is about to retire in the next few years, so I feel bad taking a loan him, especially since if work does not pay for school, it’ll take me a couple years to pay my dad back. My question is this: should I take my dad up on his offer or go ahead and take out a student loan to cover the remainder of my MBA? Oh and a few other things, my dad “gifted” me first semester’s tuition already. I don’t have a whole lot of credit either. I am working on that with my first credit card this year. A secured card. I have zero debt. Would a student loan boost my credit? is it worth the risk, if work doesn’t pay for school? Or should I take the “safer” route and take out a loan from my dad?
 - Ed

First of all, I wouldn’t borrow money from your father who is on the verge of retirement. I’m sure that he’s quite willing to loan you the money, but this is a time where you need to stand on your own two feet and not inject a lender-borrower relationship into your relationship with him.

That being said, if I were you, I’d probably directly ask the company president about the situation before I do anything else. If he denies it, then you’re working for a company that doesn’t stand by their word and I would start looking elsewhere for work, because they’re likely to change their mind about other things, too.

If you’re forced to take a student loan, that’s not necessarily a bad outcome. Student loans do help your credit. They can just feel like an albatross around your neck after you graduate and get your first post-graduation job.

Q8: Savings versus complexity
 Over time I’ve picked up specific credit cards that offer a 5% discount at specific locations, two airline cards, and three general cash back card (1% on everything plus 5% on rotating categories). In total I have 10 total cards and charge roughly ~$1000/month combined on the cards. So over the course of a month I can “save” between $10 and $50, but I add a lot of complexity to having to pay multiple cards at the end of the month and I worry that any “savings” that I get will be eaten up by the first mistake I make when I miss making a payment. The additional time isn’t major (maybe 15 minutes a month to pay the bills online) but how do I put a cost on the mental energy that that keeping track of this requires. I have a spreadsheet where I record all of my spending (and have for the past 3 years, a marketer’s dream) so I know what needs to be paid every month, but that doesn’t stop me from worrying that a mistake will still be made. I really think that I need to find a way to look at this issue just beyond any potential financial savings, any advice or suggestions?
 - Martha

If this is causing you significant stress – and it seems to be – then it’s not worth the $10 or $20 a month that you’re saving due to this plan.

If I were you, I’d simply decide on the one card that seems to rack up the most rewards for you based on how you spend, then just use that one card for everything. I would then close most of the other cards, keeping only the card I’ve had for the longest (to help with credit history).

For me, playing such games has never been worth the time or the concern about mistakes made.

Q9: A “getting started” checklist
 I’m about to graduate with a bachelor’s and go to law school. I’m also about to get married. Up until this point my parents have been so supportive and generous even to a fault. As a consequence I haven’t thought too much about money or done much about it. Considering I’m going to be really on my own soon I was wondering if you could offer a concrete checklist for people who are just starting out. I think this would be helpful for a lot of people.
 - Jim

One could write a “checklist” a mile long in this case because there are so many variations and contingencies in the type of situation that you describe here.

If I were you, I’d hit the library and check out a few books targeting your position in life. Two books that immediately come to mind are Automatic Wealth for Grads by Michael Masterson and Smart Couples Finish Rich by David Bach.

On top of those, I’d also read Your Money or Your Life by Joe Dominguez and Vicki Robin. It’s the book that changed my life in terms of my finances.

Q10: Third child
 I read a few of your articles and found them very interesting! we are also trying to pay off debt AND decide about a 3rd child. I notice you decided to stop at 2 but then changed your mind? What did it?
 - Jessie

Sarah and I had long ago decided to have all of our children relatively close together in age so that they would feel roughly like peers as they grew older – or at least have a sibling or two that they could consider a peer.

Sarah had a very close relationship with her sisters, particularly one that was born less than two years after her. I had a more distant relationship with my siblings, mostly because the closest one to me in age was nine years older than me. We wanted a dynamic more like the one she had with her siblings.

As time passed after our second child, we just kept talking about this subject more and more, and we basically decided that if we were going to actually ever have another child, we were either going to do it now or never do it. I think the immediacy of it convinced us to just go for 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.


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