A Financial Heart-to-Heart 

By DailyWorth Team on Friday January 22, 2010
This post is about planning


heartsWhen we sent out the DailyWorth reader survey late last year, and we asked what your burning questions were for 2010, more than 80% of you asked for more practical information about investing, budgeting and saving.

Yet, when we delve into practical topics like refinancing and target date mutual funds, 30% fewer of you read emails on those days.


Ladies. Here's your money mantra for 2010: Discomfort.

We know you want to grow and change financially—i.e. you want to develop a mature and secure money life. But it won't happen unless you stretch yourself to absorb information that makes you uncomfortable. And so, with the affection and respect that you've come to expect from DW, here are some questions for ya. The first five people who answer all three correctly get a free copy of MP's inspiring, eye-opening book, Money Can Buy Happiness.

  1. If you have $10,000 on your credit card at 19.99% interest rate, and you're paying the monthly minimum of 2.5%, how long will it take to pay it off?

  2. If you add a 13th mortgage payment every year, how much sooner would you pay off your 30-year mortgage?

  3. Let's say your income now is $50,000 per year and you'd like to retire in 30 years, and live on the same amount. You're 35 now and have $50,000 saved in your retirement accounts. What is the total you need in savings at age 65 to comfortably withdraw $50,000 per year? (Hint: The standard withdrawal rate is 4% of your nest egg. Also, for this example, do not include Social Security benefits.)
Comments (46)add
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written by Stephanie Feldmann , January 22, 2010
1. 5 years, 5 months
2. 5 years, 3 months
3. 1,250,000

Hope I'm right, been a big fan for ages.

Steph

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written by Twice , January 22, 2010
I completely hear you there about discomfort, but much of the more detailed savings advice that you provide doesn't actually apply to me because I don't live in America. Would that I could *use* the advice; then I would actually read the posts in more detail.
Just to clarify the statistical data a little. :]
I greatly appreciate your other more general advice though.
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written by Marcie , January 22, 2010
I'm not good with financial math...which is why I would really love the book ;)
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written by Melanie , January 22, 2010
1. Don't ever carry a balance on your credit card and you don't have to worry about it.
2. Approximately 2.4 years sooner. Or you could buy a smaller house on a 15 year mortgage and pay it off 15 years sooner without any extra payments!
3. If you plan on dying at age 66 and don't earn any interest on your $50K then you don't need to put any more money in at all. But remember.. $50K will buy a lot less in 30 years so maybe you should plan on checking out at 65.5 years to be safe.
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written by MP Dunleavey , January 22, 2010
To clarify about the mortgage question, please include the amt of your payment (or the fictional payment you're using, i.e. $160,000 30 year fixed mortgage with a monthly payment of about $1,011--which was the example from the Refinancing DW recently).

@Twice--where do you live that the savings advice doesn't apply? i'm curious to know which DWs you're referring to, specifically. we try to make 90% of our savings articles about Saving In General, so that anyone can benefit.
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written by Melanie , January 22, 2010
I think when people wanted more practical tips they also meant ways to save on the little things in life – such as making their own coffee instead of hitting up Starbucks, using a cloth diaper service, etc. I know that’s what I meant. Maybe mix a few fun tips in with the technical, financial stuff?


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written by Delphine , January 22, 2010
1. 67 months
2. 78 months
3. $1,250,000


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written by Delphine , January 22, 2010
Oops -- I would like to change my answer on number 1 to 30 years and 10 months!
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written by Kaye , January 22, 2010
1. 67 months
2. approx 7 yrs
3. Aprrox 1.5M
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written by Rani , January 22, 2010
1. 96 months
2. 5.5 years
3. $1,250,000
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written by Christine , January 22, 2010
I'm horrible at math... but I don't have issues with spending too much because I was raised to be frugal by Irish protestants who seem to know a lot about living on less.

I am Canadian, and so there are a number of emails that I receive that aren't applicable, to second "Twice's" comment. However, I always open emails, and I'm not sure if your email provider can tell if I don't read them :P

1. here this calc can do it
http://www.csgnetwork.com/creditcardmincalc.html
50.083333333333336 years is my answer
2. One extra payment a year will pay off a thirty year conventional mortgage in about twenty three years. That will save you seven years of payments.
3. 1,250,000

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written by Beth LeVine , January 22, 2010
1. 403 months or 33 years and 7 months to pay off the debt
2. 6 years and 3 months sooner
3. $1.357 million and change



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written by Toni , January 22, 2010
1. 67 months
2. on our 60,000 30 yr mortgage at 5.75% we'd shave off 6 years of payments for the once a year addition of 350.14.
3. I get 481,319 (to save in addition to the 50 k our example has already saved.)
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written by Di , January 22, 2010
1. 67 mo. or 5.58 years
2. 6 years 1 mo. sooner ( assuming $200,000 mortgage, 30 years, 7% int., mo. pmt of 1330.60)
3. $1,250,000 (or you'd have to save an additional $1.2M on top of the $50K you have and assuming that your retirement portfolio gains 4% every year to maintain this balance so the 4% withdrawl will be $50K/year)

I love the DW! =)
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written by JANET , January 22, 2010
If you have $10,000 on your credit card at 19.99% interest rate, and you're paying the monthly minimum of 2.5%, how long will it take to pay it off?

ANSWER: JUST OVER 50 YEARS

If you add a 13th mortgage payment every year, how much sooner would you pay off your 30-year mortgage?

ANSWER: 2.5 YEARS SOONER.

Let's say your income now is $50,000 per year and you'd like to retire in 30 years, and live on the same amount. You're 35 now and have $50,000 saved in your retirement accounts. What is the total you need in savings at age 65 to comfortably withdraw $50,000 per year? (Hint: The standard withdrawal rate is 4% of your nest egg. Also, for this example, do not include Social Security benefits.)

ANSWER: $103,500
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written by kateh , January 22, 2010
If I don't get this, it's bad for my engineering profession :-)
1. 37.6 years (as long as you continue with 2.5% minimum payment and not 2.5% of the 10,000)
2. For a $160K mortgage at 6.5% interest per year with $1011 monthly payment, you could pay it off 5 years and 8 months earlier.
3. You need $1,250,000 in savings when you retire at 65. I feel like you gave us info we didn't need on this one, though?
Fingers crossed - I love reading MP!
3.
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written by JANET , January 22, 2010
reposting - i did think this question was a bit unclear and after I posted my response, I see that MP clarified the question...

If you add a 13th mortgage payment every year, how much sooner would you pay off your 30-year mortgage?

If mortgage was $160,000, and your monthly payment was $1011/month, then a 13th payment will allow you to pay off the 30 year mortgage 6 years sooner.



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written by Laura , January 22, 2010
Well, I'd get a bad mark on this one! I too live outside the US (France), so some of the specific types of savings and retirement plans don't exist (or just don't have the same names?!), though that's not to say there aren't any. When the terms are a bit technical, I tend not to comment as much as on more general posts.
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written by kateh , January 22, 2010
PS When doing your calculations on the readership, you must note that some items (such as refinancing) don't apply to everyone. I skimmed that article because I don't own a home.
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written by Jordana , January 22, 2010
1. 37 years
2. 6 years
3. 1,250,000
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written by Sophia , January 22, 2010
I went to www.bankrate.com to use their online calculators. Here's the answers I got:

1. It will take 403 months or 33 and a half years to pay off your credit card if you have a $10,000 balance and pay the minimum payment each month if your interest rate is 20%. That's a REALLY long time. So don't try this at home.

2. Mortage Question: Loan $165,000, 30 year fixed rate @ 5.5%. If you took out the loan today your payment (Principal and Interest) would be $936.85. If you made an extra payment each January your house would be paid off in Feb. 2035 instead of Jan. 2040 saving you about 5 years. Try this at home.

3. This question was a bit more complicated and I assumed some things: If you have P,000 in your 401(k) now and get a 3% annual raise you will need to save 12% of your income per year and make 8.29% on your investments,in order to have 2.5 Million at age 65 and have it last until age 90. This example also assumes a federal tax rate of 25% and a 6% state tax rate. So ladies, start investing!

This was really fun! I love math! I just found out on Tuesday that I passed my exam to become a Certified Financial Planner! Yippee!

~Sophia
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written by Krystal , January 22, 2010
1.) 67 months, assuming that you don't charge anymore
2.) 26 months saved
3.) $719,677
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written by Amanda , January 22, 2010
1. 403 months (33 years, 7 months)
2. On a mortgage of 165,000 at 7%, adding an extra annual payment of 1097.75 will pay off the mortgage 6 years sooner.
3. $1,250,000
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written by Debi , January 22, 2010
1. 67 months or 5 yrs and 7 mos

2. Paying 599.55/mo on a 100,000 mortgage at 30 fixed rate and paying a 13th payment a year would reduce the time by 41 months or 3 yrs and 5 mos.

4. Total savings 1,250.000
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written by Debi , January 22, 2010
Oh, forgot to add the interest rate on question 2- 6%
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written by C , January 22, 2010
I skim the articles you mentioned because I don't have a mortgage payment and right now am barely covering basic expenses and am struggling to setup a small emergency savings account. Investment topics just aren't a realistic topic for me right now.
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written by Mindy , January 22, 2010
1. 403 months
2. 5 yrs exactly. We just bought a house so I used my own mortgage of $241,000 30 yr fixed with a monthly payment of $1354.
3. $1.25 million to receive $50k/yr.
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written by Kenia , January 22, 2010
1. 403 months
2. This can range. It could be 4 years early, or 7. It depends on the principle amount and the interest that is being paid.
3. Not enough information. $50,000 (4% of nest egg) per year, for how many years? What is the life expectancy? Is the nest egg still earning interest in some form of investment, during retirement? Is it a break-even type of deal (i.e. expect to earn 4% annually, then take out the 4% that totals $50,000 - so the principle is left untouched and you live only off that 4% interest)?
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written by Lori , January 22, 2010
Don't get discouraged. The financial help range for us gals is huge. I love the personal stories but this idea of quizzing us is good too. Word problems were always my weak point and they are what real life is all about. My 8 year old daughter is really into them tho and I love shopping with her. She's the one telling me that the bill is getting to big cuz she's adding up all of our items in her head as we shop!!!
I LOVE THAT YOU"RE MAKING IT INTERACTIVE IN A REAL LIFE SORT OF WAY. love the suggestion from your other reader re same sort of quizzes but with little things in life that cost too.
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written by Linda , January 22, 2010
1. 120 months
2. 10 years
3. $1250000.00
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written by Niki , January 22, 2010
I am currently trying to pay off debt of more than 10K.
I am not calculating with compound interest and may have figured incorrectly, but here are my answers :):
1) 3.5 years
2)27.7 years or 2.3 years sooner
3)1,040,000 for 20 years of use

I would love a copy of MP's book, since I am desperatly trying to be a debt free parent and show my daughter how it can be done :).
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written by Nia , January 22, 2010
1. 3 years and 4 months (40 months).
2. 27.7 years
3. 1,450,000

Please furnish the right answers for all who really want to learn. Thank you.
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written by Jamie V , January 22, 2010
1) 67 months
2) 6 yrs. 1 mo.
3) $1,250,000
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written by Jamie V , January 22, 2010
to clarify answer #2:
$165,000 mortgage, 7% interest, 30 yrs,$1097.75 monthly payment.
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written by Jamie V , January 22, 2010
Argh, can I change the answer to #1 to around 403 months?
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written by Mary , January 22, 2010
Long time, no algebra, but I'll try!!!
#1--40 months
#2--approx 7 years early
#3--approx $1,250,000 in savings
(and if I'm way off, I really need the book.) Thanks!
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written by CARRIE , January 22, 2010
1. Approx 31 years...this depends on how the intrest was compounded. I did it monthly but most credit cards would compound the intrest daily making it an even longer period of time. But that's only if you hade the minumum 2.5% each month, which I doubt you would once your debt was like $10.

2.Once again it depends on how good of rate you got and what size of loan you started out with. Not enought info for a permenant #. But most likely between 5 - 10 yrs would be shaved off.

3. Approx $1.25 million in savings if you wished to have your intrest income = $50,000
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written by Evieee1 , January 22, 2010
1. 30 years

2 5 years

3. $1,500,000

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written by Evelyn , January 23, 2010
1- 67 months.

2- You will save 7 Years

3- 1,200,000 because you already have $50,000...


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written by Mizbee , January 24, 2010
The fact that I had absolutely no idea of how to solve these problems says a whole lot. The fact that I have just over $50K of savings and I am already 50 (15 years older than the 35-year-old person in your hypothetical) scares me to death. What to do?
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written by Cindy , January 25, 2010
Not submitting the math, but wanted you to know I read all of your emails, but maybe not on the same day they are sent...in case that makes a difference to your statistical tool. I also forward some of them on...

I am loving the challenges, insights, tips and information that simply makes one think!
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written by Stephanie , January 25, 2010
OK, I have the book, did not look them up. However, I am resolving publicly to get comfortable with my discomfort about these topics and better deal with it all.
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written by ds , January 25, 2010
where are the multiple choice answers???? teehee
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written by Kristina Moffitt , January 25, 2010
1. 67 months
2. 7 years earlier
3. assuming 30 years to retire, with a 4% withdrawal rate and retirement lasting 25 years an investor needs approximately 1.8 million in the bank.

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written by Amanda Steinberg (DailyWorth founder) , January 25, 2010
I know you're all waiting for the RIGHT ANSWERS and to HEAR THE WINNERS. MP's getting to it -- she promises.
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written by Val Cunningham , January 27, 2010
I have absolutely no idea how to answer your questions and that is why I subscribe to your site.
Can you help?
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