I love hearing from readers, especially during my online discussions.
But, alas, time is always too short. So here are my answers to some leftover questions from my most recent chat (a transcript can be found at www.washingtonpost.com):
QI am a 25-year-old single woman with $13,000 in a savings account. But that still isn't enough to buy a condo [in Arlington]. How can I make that money grow safely so that I will be in a position to buy soon?
ASince you have a short time frame, I suggest a strategy called "CD laddering," which will give you safe interest income. To figure out how to set up a certificate of deposit ladder, go to www.bankrate.com/brm/calculators/savings.asp. The calculator will outline four different laddering strategies, from conservative to aggressive. I plugged your information into the calculator using the most conservative approach. Here's how it might work in your case (the interest rates are based on Bankrate.com's research). Split your $13,000 five ways. Put $2,600 in a six-month CD at 2.06 percent, a second $2,600 in a 12-month CD at 2.27 percent, a third $2,600 for 18 months at 2.27 percent, a fourth $2,600 for 24 months at 3.10 percent, and the last $2,600 for 30 months at 3.35 percent. When your first CD expires after six months, reinvest the proceeds in the longest-term certificate. By laddering, you can take advantage of higher rates offered by longer-term CDs. It also protects you against the rise and fall of interest rates. Over five years, you will have earned more than $2,200. But you can build your ladder for as long or short a period as you want, depending on when you need your entire principal. If you shorten it, though, your returns shrink. There is no safe way to make your money grow quickly.
Also, be sure to check for local first-time home-buying programs that may require you to put very little money toward the purchase.
I had money saved up and about $29,000 in student loans. I took all of my savings and paid off my student loans. In your opinion, was that a good move? I have been able to save $5,000 since paying off the loans.
Since I don't know what your interest rate was or when your loan payments began, I'm going to make some assumptions. Let's suppose you just started paying on the loans, which have an average interest rate of 5 percent. Typically, student loans are for 10 years. With a $29,000 loan, your total interest payments would amount to about $7,900. Of course there will be those who would suggest you might have been better off investing the $29,000, in which case you might have earned more than a 5 percent return over 10 years. But that's not a guarantee. Saving $7,900 in interest payments was. For a good student loan calculator, go to www.finaid.org/calculators/scripts/loanpayments.cgi.
We have two car loans, one at 3.9 percent ($20,000 remaining) and one at 1.9 percent ($15,000 remaining). We have enough in CDs at 3.7 percent to pay off at least the 3.9 percent loan, if not both. My spouse wants to keep the CDs and continue to pay off the cars monthly. I say we should at least pay off the 3.9 percent car loan. Spouse prefers liquidity over peace of mind. Is peace of mind (and home) worth the 0.2 percent we're paying out each month? Thanks.
Why not compromise? You're both right. Liquidity is important. You should have at least three to six months of living expenses put aside. But over that, if you have debt and the means to pay it off, then pay it off. Why carry higher-interest debt while your money is earning less in a bank account? So I also agree with you. Take some of the cash and pay off the car loans. But don't cash out any CDs before they mature or you may have to pay a penalty.
What do you do when family members who believe you are better off than they are ask you to lend them money? I'm not sure if we're "better off," but we try to be wise about our money. Occasionally, the request comes from an elderly grandmother to whom we give without question or any expectation of payback. More often, though, the request comes from parents who have not been so wise about their money. There's starting to be a hard feeling among the siblings about who's "helping out" and who isn't.
First, don't let trifling relatives make you feel guilty for not helping them out of a money mess they created. I believe that family members should help one another financially if they can. However, your being the "better off" family member doesn't entitle your relatives to treat you like an ATM. Set up guidelines under which you will give or lend money. Inform your family that if they are spendthrifts and come up short for a bill, it's not your problem, but if they need help because of something out of their control (job loss, medical bills, etc.), you'd be glad to assist. Don't give handouts to anybody who is financially irresponsible. To do so is not helping but hurting their ability to learn to manage their money so they can be better off.
Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online at www.npr.org. Readers can write to her in care of The Washington Post, 1150 15th St. NW, Washington, D.C. 20071 or send e-mail to firstname.lastname@example.org.