Reader Mailbag: Tips on handling a debt snowball

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. Debt snowball questions
2. Cost-effectiveness and breast pumping
3. How much life insurance?
4. Which debt to pay off?
5. Choosing 401(k) investments
6. Saving for nieces and nephews
7. DirecTV arbitrage
8. How websites make income
9. Carpooling stress
10. Challenges of single motherhood

Right now, I have so many projects in the queue that it feels like I’ll have something to do almost around the clock for the next, say, fifteen years.

Whew.

I have a few quick questions in relation to setting up a debt snowball plan (I know this is a Dave Ramsey thing, but you’ve talked about it before and I like you a lot more than Ramsey!)

1. It’s advised you put away $1,000 right from the get-go. That doesn’t seem like enough, but I want to start paying down debt as soon as possible! Do you think socking back $1,000 (this will take me about two months) and then adding $20/a week is a good way to go?

2. I have three main credit card debts, and I’ve set up a spreadsheet to calculate the payments, interest, etc. However, I have some smaller debts. It roughly goes like this (rounded a little):
Credit card 1: $12,000
Credit card 2: $7,000
Credit card 3: $2,200

The smaller debts are:
IRS: $900 (I pay them $75/month)
Hospitalization bill: $500 (been paying on this one for two 1/2 years at a rate of $55/month, it was originally $2,000)
Hospital tests bill: $330 (pay $70/month, been working on this one since beginning of 2010)
Doctor’s visit: $100 (new bill this month)
Dentist: $100
Hospital tests #2: $70 (new bill this month)

I was wondering if I should include the smaller bills in the debt snowball. I feel like I could have them paid off fairly quickly in the next few months even outside the debt snowball because none of the smaller bills have interest added to them (except the IRS, and it’s a very small amount) and payment plans are already worked out for them. I wonder if I should just focus on the credit cards because they have higher interest.

I also want to note I’m current on all these bills.
- Sarah

The reason for the small-ish emergency fund early on is that a $1,000 emergency fund will handle a lot of the smaller emergencies life sends at you, like a forgotten bill or a small car repair. A lot of the emergencies that send people over the edge into debt aren’t the big apocalyptic emergencies, but the little ones that stretch a wallet just a bit too far.

On the other hand, shooting for a big emergency fund right off the bat will help you handle almost every emergency, but while you’re doing that, you’re compounding debt.

At some point, you have to turn the corner from an emergency fund to tackling the debt. $1,000 is a reasonable number for doing that. If you’d like to aim higher than that, go for it, but the sooner you get on your debt, the sooner your monthly cash flow problems will clear up.

As for the smaller debts, they should all be included in your debt snowball because they’re all debts that interfere with your monthly cash flow. Get rid of them quickly so repayments aren’t clogging up your plans.

Sarah also had a follow-up question about cost-effective breast pump choices.

I read your article on the cost benefits of breastfeeding. I’m having my first child in six weeks (give or take!), and I’m going to be working part-time and supplementing by working at home. Even my part-time job will only involve about 10-12 hours a week outside the home (all my work is writing, which is wonderful because you can do it from home, as you know!). I’ve looked at breast pumps, but I’m wondering if since I’m only going to be out of the house for 10-12 hours a week for work, do I really need a fancy expensive electric model? Can I get by with a manual pump? This may be a question for your wife :-)
- Sarah

I asked my wife what she thought in this case (after having pumped for three kids and working full time while doing so) and she suggested that, in your case, you shouldn’t buy a pump. Instead, you should check with your hospital about the cost of renting a pump for a few months.

She says that at first, you’ll need to pump much more frequently than later on, so at first, you’ll probably need to pump when you’re outside the home. Later on, your child will go longer between feedings and you’ll be able to go longer between pumpings, so you won’t need the pump then.

Of course, this depends on how your twelve hours outside the home are spread out. If it’s all in one day, you’ll need the pump for much longer than if it’s in two or three hour blocks.

My question is how much life insurance should my husband and I have now that we have a newborn? Is there some formula for figuring this out?
- Anastasia

There’s no exact formula. Different people say very different things when it comes to how much life insurance to have.

I would, at the very least, make sure that you’re replacing five years’ worth of salary if you have a young child at home. So, for example, if you make $30,000 a year, I would have a $150,000 term policy at the very minimum.

I’d encourage you to get a 20 year policy if this is going to be your only child or a 30 year policy if you intend to have more. After all, the biggest result of the policy will be to protect the children.

If you want to use a more specific calculator, try the one at Bankrate.com.

I have the opportunity to pay off my wife’s school loans (130k) or the mortgage (about 160k).

The school loans’ average interest is about 5.5% and the house is at 5.25%.

I’m at odds with which to pay off. Any guidance would be appreciated.
- Jason

With the interest rates so close, I’d pay off the one that has the largest monthly payments.

Why? It’s all about the cash flow. If you have fewer/smaller required payments each month, you’re much more likely to just roll through problems that occur in life. Your emergency fund will last longer. You’re more able to put massive payments toward the other debt.

I’d pay off the school loan, in other words.

I have a question regarding my 401k. I promised myself that I would start contributing towards my retirement when I turn 27. I turn 27 in two weeks, so it is time to start planning for the future

I am currently a single woman who owns her own house, and car. I have a small amount of CC debt and my student loans. I am currently working a full time job and a 2 part time jobs. I use my full time job to pay my bills and my part time jobs as my fun money.

My question to you is, I want to start contributing to my 401k. My company will match up to 5%. All of this is straightforward and I will be able to start investing at 5%. However, there is a list of 19 companies that I can invest my money into. I have to chose the companies I want. I have no idea where to start. I am not sure if I should pick one company over another. I know i don’t want to put all my money into one company, as that would just spell disaster. Should I spread the 100% equally over all 19? The 401k is through ADP Retirement.
- Barb

If your 401(k) offers 19 separate companies to invest in, I would diversify, diversify, diversify. I would put a small amount into each of the companies, if that’s possible. $5 to each company each paycheck, perhaps?

Here’s the reason. Each of those companies has some chance to fail and some chance to greatly succeed. If you put all of your money into one or two companies, you’re taking a giant risk with your retirement money.

Instead, you should be focusing on minimizing risk. The best way to do that is to simply spread out your money as evenly as possible.

Frankly, I don’t like retirement plans that require investment in specific companies. A good retirement plan offers the ability to invest in a broad-based index fund which essentially lets you spread the risk over thousands of companies at once.

My brother and sister-in-law are horrible with money. In tons of credit card debt, one has a shaky job, the other is unemployed and complains about not finding work without actually trying to find anything, they have two children which they put in daycare (which also goes on the credit card), etc. etc. It drives me nuts, especially as they are always buying new stuff they don’t need – a new tv, designer shoes and purses, exercise equipment. My question is in regards to how much we should help them for the future. While I would never give them or loan them money as I don’t want to encourage their behavior, I do feel that it shouldn’t negatively impact our niece and nephew. My husband and I make a very good salary (over 150K combined) and our only debt is our mortgage. I feel like we should set up some sort of college fund for our niece and nephew so they have something when the time comes around (15 years from now for the oldest), but at the same time I don’t want their parents to know as they’ll then count on it and I feel they’d be less likely do anything for the kids on their own. I also would like to have access to the money in the event my husband and I ever fell on hard times, which I know probably negates setting up a 529 plan (and I’d like to keep it if the kids choose not to pursue college, hopefully that doesn’t sound mean). Do you have any suggestions? My current thought is to set up a savings account in our names that we transfer money into with the intent of giving it to the kids at the appropriate time, though I know it won’t earn too much in interest.
- Danielle

Given your requirements, a savings account is probably the simplest choice. You likely won’t have enough in the account to invest in other things for a while without brokerage fees that would eat any extra gains.

However, I’m not sure that you actually want to give this money to your nieces and nephews. I get the feeling that you’re annoyed by your siblings’ poor buying habits and you see this negatively affecting your niece and nephew and you want to help, but you don’t want to be on the hook for their future. That’s completely fine.

The end result, though, is that you’re going to end up with poor results with your saved money than if you either fully committed to a college savings plan for them or you just didn’t save for them at all and invested yourself. I would suggest really looking at those two options instead of the savings account route. Honestly, I’d probably lean towards getting yourself into the best shape. If you build a strong foundation now, you may be able to help those kids a lot later on.

My wife and I are both Canadian, and live in Michigan about 30 miles from the border, with many relatives in Canada. We are currently subscribers to DirecTV (a conscious choice on our part as we do not go out to see movies, or eat out that often)… this is our entertainment spend and we enjoy it. Because Canadian broadcast rules preclude DirecTV being sold in Canada, we “supply” the service to some of our relatives by providing them with a receiver, which is added to our subscription (it’s all legal). In this way they can access programming that otherwise wouldn’t be available to them (i.e. MLB, NFL, NHL games, Big10 Network, Top Chef, etc.). My wife and I thought it was fair to divide our monthly bill equally, in addition to passing along the cost of the receiver, so that everyone who shared the benefit, also shared the cost. Some of our relatives are upset with paying for the ongoing programming as they view that as a sunk cost (i.e. we were going to be paying for it anyway), whereas we view it differently. These relatives are using the service as a replacement, or enhancement to their current cable/satellite choices. On a monthly basis we’re talking about everyone’s share being about $12, so it’s not a great deal of money, but more about the principle. Your thoughts on how to handle this?
- Jeff

It’s your account, right? You choose the channels. You’re essentially letting them have boxes from your account for $12 a month. If they don’t want to do that, they don’t have to participate.

Obviously, if someone wants a particular channel, you should work out an arrangement with them and probably add the channel to your plan, but you should be able to choose the channels you want and not have to remove them because of someone else’s desires.

If I were you, I’d just have a meeting with everyone at the next family reunion. Let everyone pick the channels they want to have and then get a plan with all of those channels and split the cost. If someone doesn’t want to participate, they don’t have to.

I have gathered from your blog/newsletter that you work at home, and that (with the exception of any income from your wife), The Simple Dollar is your primary source of income. If not, then I guess this e-mail is rather moot! But if it, my question is how? Basically, how do you make money from The Simple Dollar? I have seen some ads on the site, and I see some downloads available for $2 each. Are these the only methods?

The reason I ask is because I have an idea for a website that I think could be helpful and useful to many people, and I would love to work at home as you do. I’m just not sure if this is a practical way of doing so, because I’m not sure how much money I could make off doing such a thing. My website would be an informational site, as yours is, but its focus would be much broader. Basically, my intent is to offer a series of articles on several topics that bridge the gap between school and life – topics such as basic financial info (balancing a checkbook, credit cards 101, 401ks, etc), career (how to get a job, resume building, interviewing, etc), home (basic upkeep and maintenance, basic cooking info, etc) and many, many more. My goal is to help people who would like to learn, or have never learned, basic life skills. Hence, the name: Life Skills Simplified. My thought is that a lot of the people who are in a mess financially or socially are in that mess because they were never taught the skills needed to be successful and productive in life. If they have a resource to learn these skills, maybe less people would be in that mess. I’m not expecting my site to be the greatest thing since Google, but if I can help a few people, I would consider myself successful.
- Vanessa

Writing is my primary source of income. The Simple Dollar helped to launch that and forms a significant part of my income. I also make income from the books I’ve written, selling ebooks, and freelance writing (like my pieces for OPEN Forum covering frugality and small businesses), as well as occasional freelance web development.

It takes a lot of work to launch a successful website. You have to write a ton of content – specifically, content that people will want to read. You have to write it with a machinelike regularity, because if you stop writing, people stop reading. You have to be willing to promote it, too.

It takes a long time to build an audience large enough that you’ll be making much with advertising. Most advertisements that starting bloggers can get pay you $2-3 per thousand page views, which basically means if you manage to build to 1,000 people reading a page on your site each day, you’ll make a whopping $2-3.

It is a long slog, but it’s a rewarding slog if you love to write. If you don’t and are just seeing this as a cash-in… well, good luck with that.

I have recently started a sewing course, about a 20 minute drive from my house. At the end of the first class (there are 9 students in the group), we were talking, and it transpired that two other women in the group live quite near to me. Additionally, they don’t have car access at that time of day, and had arrived by bus, and when they discovered I was going their way, asked if I would mind taking them home. I did this happily, and even provided one of them with my mobile number so that I could perhaps help out in coming weeks instead of them traipsing on 2 buses each way (this was my idea). The second week I didn’t take them because I came straight from a show with my children, so I wasn’t sure I’d even be on time, but the third week (yesterday), I picked them both up on my way, having arranged for them to wait for me in a convenient place.

My gripe, though, is during the journey. I now know what my mother meant when she used to complain of feeling like a taxi driver when taking me places as a teenager…They say they are very grateful to me, always thank me as they leave, but during the journey they completely ignore me. They both choose to sit in the back, and talk to each other all the way home (they are friends from before the course). I actually have to remind them to fasten their seatbelts – the first time I said it, one of them said “okay, but you know that if we get stopped then the fine is for us, not for you”, I replied “whether that’s true or not, in the event of an accident, the guilt will be for me for not insisting” – I guess they are used to taking the bus…

The financial issue is not really relevant – I am going that way anyway, and although I actually take a very slightly longer route to pass one of their houses, it only adds a minute or two to the journey and no extra cost, since my husband has a perk of a prepaid gas budget on his company car and we never come close to that limit. So really, for no extra effort or cost on my part, I am saving them bus fare, time, and hassle. Yet because of their behaviour, I feel I’m being used. This is a 14 lesson course, so I don’t want to cause an uncomfortable situation by confronting them about this, or refusing to take them, but I’m not delighted about doing this for another 11 round trips, either. It’s not that I expect them to be my best friends in return, but I do think that they could keep the conversation at a less personal level so that I could be included.

I’d be interested to hear your thoughts – am I being oversensitive? Should I say something? If so, what?
- Valerie

This is one of those things where no one is at fault, really. Put yourself in their shoes – would you feel more comfortable talking to your friend or to someone that you don’t know well that’s focusing on driving in the other seat? There’s probably a small social wall – built by all of you – between the front and back seat.

Want to break it? As soon as they get into the car, start a conversation yourself with a question to them. Focus on what you have in common – probably the class, for now. Yes, the conversation will probably eventually fold into the two of them talking to each other, but don’t sweat it. You don’t have the established relationship yet.

If it’s all frustrating you, vent. Venting can be very therapeutic for situations like this where there’s really no fault.

So I sit here writing this at a very challenging job that I enjoy the bulk of, but zaps the life right out of me, and leaves little of me for my 2 young children, ages 6 and 2. (I am a paralegal.) I enjoy the majority of what I do, but there is so much of me invested in this, and I feel over-worked. I am currently the only paralegal for 2 very busy attorneys, and I only have a helper to answer the phones for about 20 hours per week. This all leads to my question.

I am a single mother for the majority of the past 2 years due to a nasty divorce. My ex has left me emotionally, logistically, and financially alone to raise these children, the older one of which has Autism. If he shows no interest in them, how hard should I pursue him for the nearly 5 figures he is behind in child support? Yes, he has been Court-ordered to pay, but manages to “hide” his income, and tells people that he has no work. And yes, I really need the financial assistance. I have cut expenses to the bone, and before my last, meager raise, I was receiving food stamps, to my shame. I have moved to a cheaper place, but can’t take on a roommate, as 1. The place is too small, and 2. Not many people can live with an autistic child.

I already pay approximately 25% of my income on nursery school and after-school care. I just can’t face taking on a second job. I am exhausted already, the babysitting fees would be sky-high, and I already feel as though my children don’t get enough of my time.
- Callie

Do not be ashamed to receive food stamps. You’re the person that system was designed for – a single mom with children who’s working very hard to be a good mom and to make ends meet. The negative stigma from food stamps comes from people that abuse the system – you’re the very person the system is designed for. You’re the person I’m happy to have receive assistance from my tax dollars.

You should be using every possible service out there to help you keep your head above water. Use the food pantry in your community. Use WIC. Ask the people running these services for other suggestions.

As for chasing the money you are owed – and yes, you are owed that money – that’s your prerogative. Use whatever channels you have to keep the pressure on him. This is money that you are entitled to and that your children need. I have zero tolerance for people who try to hide money like this, which literally takes food out of the mouth of children.

You’re doing great. Be proud. Take advantage of the helping hands that are out there for you.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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