401(k) plans sometimes allow you to borrow from them. So are 401(k) plans a good way to save for buying a home? Question No. 6 in this reader 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.?Career change conundrum
2.?Teaching children chess
3.?Home alarms
4.?Developing a savings plan
5.?Financial advice media
6.?401(k) plans as mortgage savings tool
7.?Book deals
8.?Headaches
9.?Home buying and retirement saving
10.?Handling minor legal issue
My youngest, who is well into his second year of life, has officially decided that he is capable of climbing everything.
Last night, I asked his six year old brother to play with him?on the floor?while I went into the next room to find pajamas for them. When I returned, the two of them had climbed into the top bunk of their bunk bed.
When I chided the older one for letting him climb, he just said, ?It?s okay! I was behind him!? Not exactly a comfort, to tell you the truth.
Parenting seems to involve nightmare visions of children falling on their heads.
Q1: Career change conundrum
My partner (27) and I (26) work in IT management jobs (his is consulting, which he travels for). I make just under 70k, he makes 85k, usually gets at least a 10k raise each year. For the purposes of conservative planning, let?s say he?ll make more or less 85k indefinitely. We both fund our 401ks, he has about 20k in savings, I have about 15k. We live in NYC, so our cost of living is high.
My job used to bring me day to day satisfaction, but no longer does. I cannot get behind the overall goal of my company (retail), and I am very unmotivated to be successful here, although I know I could be. The corporate atmosphere is suffocating. I have health insurance through my partner as my benefits aren?t great, and I have had numerous health issues throughout my 20s that have taken years and upwards of $25,000 to ?sort out? (took me a few years to pay off my medical debt, but we have been completely debt free as of Sept 2011). Through this process, I was turned on to oriental medicine. The quality of care is amazing, and helping people change their diets and lifestyle to create lasting health is exciting.
After thinking about it for a few years, I finally applied and was accepted to a great school for oriental medicine in Texas. I am excited about the idea of doing something for others, with others, as my job, something where I am on my feet more (not in front of a computer all day), where I interact with people, a career that could be flexible with a family down the line (most practitioners open their own practice). Additionally, I feel like working in health care is not only an investment in my future health and that of my family, but a reasonably sound business decision with the aging baby boomer population. Here?s the deal: school costs $50,000 (total), plus living expenses, and the program is 4 years long. Additionally, when starting a practice, a few years of hard work is needed without much pay.
We have begun looking at apartments near the school, and the financial implications of going back to school have really sunken in. We like to travel and are lucky enough to have the time and money to do so now. We will need to spend a large chunk of change moving and buying a used car, and after that we will primarily have to live off my partner?s one income. I am overwhelmingly worried about ?making it work? under these circumstances. We have been reading Smart Couples Finish Rich for help, and I plan to roll my 401k over into an IRA that I will contribute to as often as possible. We plan to get married in 2013, so I should be ok on the benefits front, provided my partner maintains a job with health insurance. I know I will have to take on loans to do this, but I am so worried about the stress debt will bring in the future. I am so happy debt free and while I know we will likely eventually have a mortgage, I would like to keep our finances as strong as possible, yet at the same time, my job and my attitude towards this kind of work are greatly bringing down my overall motivation and confidence. Do you think I can pursue this career change without greatly jeopardizing our livelihood in our 30s (when we would like to have a family)??
- Dave
For the next decade, you guys are going to be living leaner than you were. There?s no question about this. You?re simply not going to have the funds to live the life you were previously accustomed to, when you look at the addition of school costs and the subtraction of salary.
Having said that, it?s not impossible, and if this is a route you?re passionate about, it will be well worth it. You will still have enough money to eat and have a roof over your head, which is what really matters. One key suggestion: find a mentor. Find someone who is actually doing this for a living and ask them for advice regularly.
As for having a child, you?re just going to have to wait and see where this path leads you. Just remember that there is no truly?bad?time to have a child if you and your partner are both deeply yearning to have one. You?will?make it work, as billions have families have done before you.
Q2: Teaching children chess
I?ve been trying to teach my five year old how to play chess. Playing chess with my father is one of my best memories of childhood and I am looking forward to experiencing it with my own child.
However, I?m having a lot of trouble making it work. My son is just overwhelmed with what?s going on with the game.
How do you teach your kids how to play games? I know based on other things you?ve said that you?ve taught your children how to play a lot of games.
- Leon
I started teaching my son chess and arimaa (a chess-like game) when he was four. The key is to break it down into little pieces.
The first time we played chess, we used nothing but a king, a queen, and two pawns apiece. Seriously. We played a bunch of games with just those pieces.
After that, I kept adding pieces to the left and right. One day, we added two bishops and two pawns to the game, and we took that slowly. After several more games, we added two knights and two pawns, then, later, we added two rooks and two pawns to each side.
Doing this step by step made the entire process far less overwhelming for him and now he loves playing both chess and arimaa.
Q3: Home alarms
My husband?s store, which had an alarm system, was recently robbed. This got me thinking about our own home and whether we should invest in an alarm system. I don?t feel like safety is a factor in our neighborhood, but there is always the ?what if?? Do you have an alarm system for your home? Why or why not and what was your reasoning? By the way, I?m pregnant. So does having a young child in the home make it our responsibility to get an alarm system if we can afford it? Right now, I?m thinking it?s a want versus a need, so I wanted your input.
- Charity
My feeling on a home security system is that it?s mostly there to make the homeowner feel more secure. A home security system will not completely prevent your home from being robbed, though it does make it more difficult for the less enterprising thief.
In other words, it won?t stop the careful individual who will know how to meticulously clear out your valuables. It will stop the individual who will stumble into your home, grab the two or three valuable things he/she sees right off the bat, knock over a few things in the process, and run out the door.
I think the biggest benefit is that it enables people who really worry about any form of home intrusion to sleep a little better at night, and that?s worth the cost.
Q4: Developing a savings plan
I graduated from Nursing school this past December 2011. I work at a hospital, 36 hours a week (full time). Every two weeks my take-home income is roughly $1,400. I have 4% invested in my employer?s retirement plan (2% employer match) ? pre-tax of course. Also pretax is a contribution to my Health Savings Account. My living expenses are roughly $600/month (rent, electricity, cable (which my roommate wanted and never uses), food and fuel). My auto loan is roughly $16,000. Monthly auto payment is $368. My school loans (payments begin this July, but I?ve been making payments since I began my job this February) total roughly $15,000. Monthly payments will be $150 between the two different student loan organizations. Therefore, every two weeks, I make an auto loan and a student loan payment. My budget at this point is set up for every two weeks and I am still getting use to living with my new budget. My problem is, I am having problems paying myself (meaning putting money in my savings ha!) because I want to be debt free as soon as possible. As of right now, I have roughly $4,000. My other financial short-term goal is to live alone (my roommate is bugging me at the moment and my friends are telling me that my emotional happiness is more important than my financial happiness. She?s not bugging me to the point that I am actively looking at apartments. I do plan to stick it out for a while?at least till the end of summer and then reevaluate the situation. But until then, I?d like more in my savings so I can purchase quality products (used is great) the first time. I?d also like to save up to purchase property at some point and go to graduate school (not till about 5-10 years from now).
What is your advice? How much do you suggest I put into savings every two weeks?
- Connie
I think that once you have a healthy emergency fund ? meaning you have enough to cover two to three months of living expenses for yourself ? you?should?focus on removing that debt. As long as you still have those debts hanging over your head, you should be focused on getting rid of them.
So, what I would do if I were you is calculate your living expenses and bills for three months, then target that amount as your savings goal. Make minimum payments until you reach that much in savings.
After that, target your debts. Don?t put anything into savings (unless you need to replenish after an emergency has claimed some of the money). Instead, just focus on paying off the highest interest debt as quickly as possible.
Q5: Financial advice media
Do you watch any television shows or listen to any radio shows for financial thoughts and advice?
- Megan
I listen to NPR?s?Planet Money?and?Marketplace?from American Public Media pretty regularly. I also sometimes listen to Dave Ramsey?s radio show.
I?m pretty selective as to the media I listen to or watch. Often, I feel like the things I read or hear or watch are just trying to sell me things that I don?t really want, like overpriced mutual funds or luxury goods.
I usually stick to books, because in those instances writers usually have to make the full case for what they?re talking about. On radio and television, they usually don?t.
Q6: 401(k) plans as mortgage savings tool
After renting for the last 4 years, my wife and I recently decided to start saving for a down payment on a house or condo. Since we intend to stay in our very expensive city, it will take 2-3 years to reach our goal. This savings will be in addition to our retirement savings. Our marginal income tax rate including federal, state, and city taxes is approximately 35%. My 401k program (actually the federal TSP) allows me to take a loan out against the balance.
I?m trying to determine whether it would be more beneficial for us to: (1) save my portion of the down payment in my 401k, and take a tax deduction now, but eventually have to repay the loan back into the account (I have an investment option in the 401k that is very similar to a savings account with a 2.5-3% return); or (2) just save the money outside and not have to pay it back, but not receive the tax savings up front.
I know there is some risk to #1 ? if I lose or leave my job, I would need to pay back the money within 60 days, or it would become subject to tax and early withdrawal penalties.
- Kenny
I would not use a 401(k) as a savings tool for a down payment. There are too many chances that you?ll wind up having to pay a stiff tax penalty or not have adequate retirement savings, neither of which is an outcome that you want. The risk-reward ratio is pretty bad.
I would save the money outside of the 401(k). Don?t worry about tax benefits when you?re saving for something like this, because the tax benefits aren?t going to add up to a whole lot and have some risk of costing you more than they?re helping.
Don?t worry ? you?ll get there.
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