Hello Michelle, My husband and I have about $70K in student loan debt combined from our graduate schools--but we are very lucky in that we were able to lock in a 2.75% interest rate. I am interested in paying down the debt more aggressively despite our low interest rate. (Not outright paying it off, but paying more each month to whittle it down more). We have no other debt (we pay credit cards on time) and do have almost $100K in savings. We are both employed. If we didn't use this money to pay off student loans we would invest it for something with a 5-7% return rate after a few years. Thank you.
So I'm guessing you are asking me whether you should take part of the $100,000 and pay off the student loans? Or whether I would pay off the student loans.
So since you asked me or I think you asking me, I would get that monkey off my back. Now. And breathe.
And I know the moment someone out there reads that, they will want to argue with me that you can get earn more on that money in the market even when you factor in the low interest rate.
That may be true. That may not be true. Remember the recession? Remember the awful years of no returns and actual losses in the market?
Remember the hundreds of thousands of people who lost their job and many still trying to find out.
Even at a zero interest rate, debt can take you down if you don't have the income to pay it off.
If you are good savers and clearly you are, why not pay the loans off and then aggressively build back up your savings and invest?
But then I hate debt with a passion.
But I love being debt-free so that when things go wrong I don't have the extra stress of having debt to worry about.
Presently, all debt is zero, but my score is still less than 600, I had poor monthly payments. How do I improve my score?
Stop having poor monthly payments.
You score is lower than you like because you aren't paying your bills on time, which is the NO. 1 way to get a better credit score.
So pay your bills on time starting now.
Hi Michelle, I love your chats and read them every week! I have never had to ask a question though because I've always had a good financial situation. I'm 29 and have lived at home with my parents since graduating in 2007. I bought a car when I graduated and paid it off in a year making $35,000! I wanted to wait until my income moved up, now I make $75,000, still in a secure federal government job, max out my TSP to the IRS limit, and have 40,000 in savings. I don't have any student loans or credit card debt. I planned to move out this year and buy a townhouse with some of my 40k savings. I planned to drive my car into the ground but my car was totaled in an accident last week! I'm trying to figure out should I take money out of my 40k savings to pay for some of the car in cash (insurance will give me about 9K toward a new car), OR finance the car and continue as planned with saving money back up again (maybe contribute less to my TSP?) to move out this year or next? I'd hate to pay a mortgage and a car payment at the same time when I move out, but I can't live at home forever! Thank you!
First, bravo to you for being such a great saver. And bravo to your parents for allowing you to stay home so that when you launch you will have a great financial start.
Now, to the hard advice:
-- I would take the $9,000 settlement and buy a $9,000 used car because you have money in savings to cover the taxes, taggs, etc. Or buy a nice later model used car for $12,000 to $16,000 taking some of the money from savings.
-- Do not get a car loan. You don't need one. So why get one?
-- You are not ready to get a house if you have to pull the downpayment and closing costs from your 401 (k). Leave that money alone and let it grow for your retirement like it should
-- If you want to pull back on saivng for retirment so that you can save more for the house, I'm cool with that. Once you get settled in the house you can go right back to the retirement savings you had before.
So if your parents are willing, give yourself a little more time to save for the house. I would also suggest you start making mortgage payments to yourself to see what it's like to pay them. Meaning, take out of your pay the amount you need to live on your home (mortgage, utilities, food, etc.) as you are saving for the house. Make is a realistic as you can so you know the pain before you feel the pain. You can make this money part of your house savings but the point is I want you to know before you move what it's like to put out all that money every month.
Hi Michelle, I read your chats religiously and find them inspiring. Thanks for all you do! Now to my question. I am engaged and getting married in a few months. My fiance and I each have a small amount of student loan debt. The plan is to cut expenses to the bone and pay off all the debt ASAP. I have a few thousand dollars which will be used to jumpstart that process. From the perspective of a credit score, does it matter where those dollars go? It could either clear my debt, or make a good dent in his. If I put it towards mine, I have no debt, but if I put it towards his, I will be making regular payments on my debt, which can help a credit score. Does it matter? Thank you!
You are so kind thank you.
And congrats on the impending marriage.
Your credit scores will go up as you pay off debt. They will also go up and stay up as you pay your debts on time.
I love that you are planning to be debt-free before you get married.
However, until you are married, you pay your debts, let him pay his. Not to scare you but some folks don't make it to the altar and I wouldn't want you to pay off his debts and then not get married.
I read the paper edition of The Post, so I didn't see last week's article on 401(k) fees until after the chat. I am guilty of being head-in-the-sand on the issue of fees, not because I don't know how much they can affect the growth of my savings, but because I don't know what to do about it! I have various options among the offerings of my 401(k) plan. Should I switch my investments to a lower-fee fund regardless of fund performance? How should investors evaluate fees vs. fund performance? What is a reasonable percentage for fees, and is the "reasonableness"ÂÃÂ of fees different for bonds than for stock?
A paper subscriber. Bless you!
In picking a fund you want to look at fees and performance, although you know past performance does not guarantee future performance. Nonetheless, you don't want to choose a fund that is a dog just because fees are low. So factor in everything, including how risky you want to be.
As comparing fees, here's an online link for the column and in it I gave you information about a website that will help you answer your other questions about comparing fees.
Michelle, Everytime I want a new car, I get my 2010 car detailed. I pay about $80 dollars and then I push my desire back for 3 months. Then, I repeat. I would rather spend the money for the detailing then thousands for a new car. It works for me at least!
Reminds me I need to get my 2006 van detailed. He's a little ratty now but PAID FOR!
Not a question but I wanted to thank you for pointing out the financial aspects to letters written to Carolyn Hax. There's definitely an overlap with money matters, as you pointed out: i.e. telling people how to spend their vacation is also telling them how to spend their money. There's often crossover between the etiquette/manners column and the general advice columns; not so much with the household hints column, though I guess that's possible. I hope you do some more commentary on similar letters in the future.
Thank you. Love your comments. I always see overlap because often there is. Hope others read the weekly newsletter (just click the link). And subscribe to it.
And trying to get Hax to do a joint chat, which I think would be awesome.
So folks nag her for me :)
Interesting column. I saw a lot of information but couldn't really hear your voice/opinion on the matter. For a generation with decidedly lower income levels for age/education compared with previous generations, do you think it is okay to pay for the basic retirement benefits of an older generation that failed to save adequately? No doubt it is a good wake up call for people who are younger and can avoid that mistake. Do you think SS benefits should be reduced now, for people who paid less into the system? Do you think part of the fault of the millenials' money misfortune lies with millenials - for taking on debt (any kind - education, cars, lifestyle) they could not afford? Is SS supposed to do more than keep the elderly from abject poverty? Just curious how you generally view a solution to this.
Wow. Lots of questions. Not sure I can get to them all but here's my take:
-- Its not a us vs. them situation. If we keep thinking that way, we won't come up with a humane and fair solution to the issue.
-- It's not just that the generation before -- baby boomers -- didn't save enough. Sure many didn't. But part of the problem wtih SS is that there are more old folks than there are younger folks paying into the system. The fact is people are living longer straining the system. The fact is people aren't having as many kids to help put money into the system. Although I'm doing my part with three kids.
-- I don't think it's fair to reduce benefits now and besides the avg. benefit now is what about $1,000 a month? That's tought if nearly impossible to live off in most communities.
-- Many people didn't anticipate such a bad economy, so many job losses and the demise of pensions, which means they have to had to save for their own retirement. It means regular folks with little financial knowledge have to figure out how to invest and not get scammed in the process.
-- Yes, millenials and a lot of other people have and are taking on more debt. But that's the message we've been sending to folks. Borrowing is okay they told us, especially for college because it's a "good investment."
-- SS is suppose to be a net that keeps folks from being homeless and hungry.
Whateve we do or do to fix what's wrong, we need to remain compassionate. Yes, people make bad choices but we still need to help folks when they are down. And that means making sure when they get old they don't go without health care, are hungry or homeless.
Hi Michelle Do you or have you told anyone in the family about your net worth? Until my spouse let it slip to a sibling (I am a very private person about money), only our broker knew how healthy our assets were. Am I being silly to like to keep the information private?
You are not being silly. And absolutely no, I do not tell folks what my net worth is. It's none of their business. Besides in some families the more they know, the more they may press you for money because you "got it like that."
Nowhere was a 401(k) mentioned. If you read more closely, you'll see it's in reference to $40,000 -- that is, 40k -- in savings.
The person mentioned a TSP and 401k.
Hi again, I meant should I use some of the 40,000 towards a new or used car not the 401K trust me I won't be touching that!
Ok, but didn't you mention using TSP to help getting the house?
Was just adding my 2 cents to that.
But yes, use part of the $40,000 cash to get anothe car. So with the $9,000 and money from your savings you don't need to get a loan.
If you guys did that, the Post servers would melt down! They'd have to build up capacity first. :)
"the survey found an overwhelming majority tips less than the customary 20 percent" ?!? And the government says there's no inflation. That's some high-octane propaganda there. "As everyone knows..." When did 20% become 'customary'? At the outset of 2 decades of my adult lifetime, a 'customary' tip was 15%. In more recent times, the "customary" tip was bumped up to 18%. That conveniently coincided with the practice of many (most?) patrons putting the tip on their credit card -- a credit card which usually takes about a 3% fee. Funny how that works out, huh? But now 20% is "customary"? I call "Blowing Snow". Are people so math illiterate that they don't realize that servers tipped on percentage get a raise every time prices go up? The bottom line is that tipping remains in practice because the businesses want it to. They alone have the power to say "We're raising our prices to pay servers a reasonable market wage -- no tip is expected." But they don't. Because it is to their (and the servers') benefit. How simple it would be to put a flat rate service charge on the bill, or incorporate it into the prices. Instead they rely on propoganda campaign. Shady.
I don't know about shady but the range of tips people expect is now 18 to 20 percent. And you are right about people tipping on taxes too, which makes the tip more.
You are right that businesses like the customers paying what should be a business expense.
You right that I would just prefer fair prices that covers the pay for the wait staff like they do in Europe.
She is 29 years old and makes $75K with no debt. Time to move out of mommy and daddy's house! If you are not ready to buy, rent/move in with a roommate. You are an adult - time to act like one.
Wait a sec.
Why the rant?
There used to be a time when people lived at home until they got married. I have no problem with a young adult living at home, saving so that when he or she moves they can do so as a financially stable person. Paying rent and sharing an apartment doesn't make you an adult. Taking care of your business does. If the parents are okay with it so am I.
But it would be a problem if the young adult wasn't saving and preparing to one day be stable enough to be on his or her own. If he or she was partying and spending wildly. Then yes I would agree. Out you go.
Social security's retirement age of 65 (for full benefits) was selected at a time when people only expected to live a few years past that. We have made a few very minor changes to the retirement age, and as you point out, people spending decades on Social Security are undermining its financial support (my own parents are alive and well at 86 and 84 -- my dad will soon have spent as many years retired as he did living). It will take some very strong politicians to make realistic adjustments to the retirement age for Social Security.
Love it. A civil comment. No naming calling. A rational observation that we all have to realize adjustments do have to be made.
Hello Michelle-First I want to say that enjoy your column and your Color of Money Live Chats. My situation is that my Boss informed me a few months back that our department will be downsizing and that my position will be affected. My question to you is that I took out a loan of 5k back in 2012 on my 401K for my schooling to get my BA in Accounting. Can you tell me how will that affect my 401K and will I be able to continue making payments?
Oh my goodness. First, I'm so sorry for your job loss.
The problem you have now is that loan will become due about two months after you lose your job. If you can't pay the loan back, it's treated as a distrubition and you will have to pay taxes and a 10% penalty for early withdrawal if you are under 591/2.
This is one of the reaons why I try to discourage people from taking out 401 k loans.
Here's a link with more information.
Ask your parents and grandparents what it was like a couple of generations ago before Medicare ad Social Security. Seniors were the largest group living in poverty. They were often crushed by medical bills late in life. It was common for grandparents to live with their children.
She didn't. She referenced her $40k worth of savings.
You are right, I read 40k ad 401k.
Reading and trying to answer many questions, your read over something. But my advice is still the same.
Don't borrow or take from your retirement savings TSP or 401k to buy a home.
Don't borrow or take from your retirement savings TSP or 401k to buy a car.
Use cash to buy a car if you have the cash and it doesn't leave you without any savings.
If the person only had $9,000, I would say get a $8,000 car to make sure had money for taxes and tags and a little something for savings.
And my friends if you find typos or misstatements it's because I'm trying my best to answer as many of your questions or respond to as many of your comments as possible.
While I'm a private person (in general), my parents and my sibling know our net worth. Parents' is well in excess of ours and sibling's is similar so "it doesn't matter". However, my spouse's sibling and parents do not know (as far as I know) since their net worth is nowhere near and getting "pressed" is a concern. However, they probably have some idea given our vacations and house, etc.
Generally, you shouldn't share your net worth information. If people guess, they guess. But you don't need to confirm it or even acknowledge they may know. That level of information is on a NTKB.
Dear Michelle (Carolyn on Friday :)), I have a 3yo daughter with an ex-boyfriend. He did not want to be involved, but his mom does (I do refer to her as my MIL). So, we see MIL about once a month. And we saw her for a Thanksgiving dinner at her home. One of my daughter's favorite dishes is green bean casserole. Though I have brought it in the past, MIL insisted on giving it a whirl this past year. Little did I know that she had put bacon in it (she knows both me and my daughter are allergic to pork). My daughter ate about half of it before her face and lips started to swell. Fortunately, I had her epi-pen with me. I then rushed her to the hospital where they administered more medication. I just received the hospital bill of $3000. I think MIL should pay for this but she refuses. Her excuse was that it was only a few slices of bacon in the recipe, and she didn't believe me when I said we were allergic in the past as I've served bacon to her (it was turkey bacon). How do I go about this? I'll just pay it with a credit card but now I'll have that debt to work off. Any suggestions? I'm so mad.
I'm so sorry about what happened to your daughter. Really, the fact that your MIL knew about the allegery and still put bacon in there leaves me stunned. Even if she thought you were overstating the issue, don't do it.
But you know what. You asked. She refuses and unless you are going to take her to small claims court, you are stuck with the bill.
But I tell you I wouldn't eat another meal made by her.
As an aside, please try to boost your savings if you can so that such expenses don't end up on a credit card. I'm so sorry this one does. And why didn't your insurance cover more? Just wondering.
Oh, Michelle, I agree so much with your newsletter comments today about vacations with others. Probably sharing one this summer with the in-laws-- one of whom I find troublesome. It's going to be interesting to see how it goes!!
I'm just not interested in going away with folks if I even suspect they will get on my nerves.
Another factor, besides her parents being ok with it, is how she is contributing to the household. Is she doing chores? Paying rent (up to the parents) or utilities, offering to take on special projects, shopping for them? Overall being respectful of her parents' home and values. That will help the young woman understand what it is to be a homeowner.
Contribute in some way.
Although I wouldn't even mind the person not paying rent if again the point is to help him or her save to move out if that's what all want.