Comments on: Reader Mailbag #2

By: Tina

Tina — Fri, 21 Mar 2008 11:34:33 +0000

This is part financial, part personal: When it comes time to deal with the bills, I get a sick dread that makes it very difficult for me to do more than the simplest tasks. Luckily most of my bills are on direct debit so I don’t have to think of it, and I finally made a ‘payday’ list of the bills I need to pay manually each month after the paycheck comes in. Even doing these 6 tasks each month (which take maybe ten minutes tops) requires an effort, but trying to make a budget or track my spending causes me serious distress. I deal with it by being very frugal in my spending in the hopes that I won’t be overdrawn by the end of the month, but obviously I could do a lot better if I had a plan. I know this. I’m very organized in other areas of my life. But when it comes to financial stuff, my anxiety is costing me and I don’t know how to defeat it.

By: Elaine

Elaine — Wed, 19 Mar 2008 21:16:49 +0000

Hi,

I really enjoy your articles, but you talk about being relatively young and happily married with 2 children, making good money.

Your ideas are great if you are young and make good money. I have lived frugally…ALWAYS…I make ok money, nothing great…and so does my husband…between the 2 of us…we make around $100k…I am currently going back for my masters. We have 1 child together, and we have 3 children that we pay child support for (over $1000 a month)….one is going off to college, which we will help as much as possible. We have 2 cars…both paid for, but both on their last leg and no money saved for a down payment when necessary. We have all our bills paid for except are mortgage and we are barely making it. We live in the Chicagoland area. We have no savings. We both have small 401k’s. We do not have cable, internet, or any extras. My sister cuts are hair and we rarely buy clothes, unless their is an occasion (interview, wedding, etc. We both bring lunch to work and eat by our parents twice a week (free meal). Our treat is going out to dinner once a week (date night – and my parents babysit for free)and we usually use coupons….2 for 1 deals. My daughter is in daycare only 3 days a week and my parents babysit the other 2 days for free. We both have cell phones with the smallest package. We both work side jobs. What are we doing wrong! Any suggestions

By: Andrea

Andrea — Wed, 19 Mar 2008 04:00:23 +0000

@Looby

I don’t think I’ve ever had this conversation before, so I don’t think I’m the same one. And I don’t think we live in the same city if your transit pass is only $80 b/c mine is $110.

I DO live with someone, in a one bedroom apartment, and my rent/utilities is about $600/month. Add $200 for groceries and I’m already at half of my take home pay. I do manage to save/pay off debts with most of the other half, but I was just trying to point out that there is a certain base number to cover living expenses and if 50% of your income doesn’t cover that base, then it’s not so easy to save half of everything that you make.

By: JP

JP — Wed, 19 Mar 2008 01:08:25 +0000

Trent – I do have another question. How do you feel about the 75k cutoff for the tax rebate(reductions start at 75K)? I know I make more than 75k and live frugal – I did work my way through college and graduate school with no debt and don’t feel I should be penalized now. I already pay higher taxes and yet continue to subsidize lower income workers. I don’t want to seem crude – but I worked my butt off and now the government seems to penalize the responsible people and reward the irresponsible (either in business – currently banks – and personal)

By: Nathan

Nathan — Tue, 18 Mar 2008 17:05:08 +0000

I’m looking to read up more on Global Warming, what books would you recomend?

-Nate

By: WhirlMind

WhirlMind — Tue, 18 Mar 2008 17:00:11 +0000

Thank you for answering my question on Warren Buffett.

By: Michael

Michael — Tue, 18 Mar 2008 16:16:27 +0000

Brian, $2,000 in additional deductions is not much. Real estate taxes are often more than that, as are state income/sales taxes. Charitable contributions, cash and non-cash, count too. None of these are reduced, so even $1 counts.

By: John

John — Tue, 18 Mar 2008 15:39:55 +0000

@ Anne

That a great point. I think the annualized 2 year return would be reported as 0%, though I could be wrong about that.

By: Anne

Anne — Tue, 18 Mar 2008 15:26:13 +0000

It is a terrible fallacy to extrapolate from the average annual return and call the result “compounding.”

Let’s say you are looking at a fund that gained 100% in year 1 (i.e., you doubled your money) and lost 50% in year 2 (i.e., you lost half your money). The average return over 2 years is (100-50)/2, or 25%. Sounds great, right?

If you invested $10,000 in that fund at the beginning of year 1, at the end of that year you doubled your money to $20,000. But then, at the end of year 2, you lose half of the $20,000 and are right back where you started, at $10,000. Your ACTUAL returns over the 2-year period are ZERO.

By: John

John — Tue, 18 Mar 2008 15:22:35 +0000

I think your right Frank. According to the website Trent linked to in the article, the annualized pre-tax return for the past 10 years is 5.83%, today. Based on that number, I calculate that you now have $17, 623. Of course, that’s before taxes and any fees for selling the shares. And of course, inflation, while low, will make also take its toll on how much return you make. I’d guess you’d end up with an actual return, after taxes and adjusting for inflation, of about 20 – 25% over that ten year period.

By: Brian

Brian — Tue, 18 Mar 2008 15:06:24 +0000

Regarding the mortgage interest deduction, I don’t think this is “rare” by any means. It may be more rare in certain areas, such as where Trent lives and also where I live, but as you begin to get into more densely populated areas with higher costs of living, it is definitely used in much greater proportion.

In my area, a nice single-family 3/2 home can be had for $150,000. I’ll assume a 10% down payment of $15,000, financing $135,000 @ 6%. Which means approximate mortgage interest of $8,055 in the first year. Still leaving another $2,000 to come up with in itemized deductions to beat the standard deduction, and that is the FIRST year on the mortgage. As time goes by, and you are paying more principle and less interest, you will need even more itemization to beat the standard deduction.

However, if you moved somewhere where you were financing, say, $300,000 for your home, the numbers change significantly. You’ll be paying almost $18,000 in mortgage interest in Year 1. Bye-bye standard deductions.

It’s all in location and life factors – if you have significant donation write-offs or medical write-offs, plus the mortgage interest, it’s pretty easy to beat the standard deduction.

However, if you live in a fairly inexpensive area, and you sock significant money away in pre-tax avenues, significantly lowering your tax burden anyway, then the mortgage interest deduction isn’t always the best route. I wouldn’t call it “rare” to not use it, but like everything it has to be weighed as an option.

By: James

James — Tue, 18 Mar 2008 14:31:57 +0000

@ Hana

The formula for compound interest is:
A = P*(1+r)^t

where
A = final amount
P = principal or initial amount ($10,000 in your example)
r = the percentage rate as a fraction of 1 (0.07 in your example)
t = time in years (20 in your example)

so, the solution to your question is:
A = 10000*(1+0.07)^20 = $38,697

This equation is precise only if your are compounding on an annual basis. However, it is still a pretty good approximation when compounding on another basis, such as monthly or quarterly (there is a slightly more complicated equation which can do this exactly, but in most cases, eh, why bother :-) )

By: Laura

Laura — Tue, 18 Mar 2008 12:44:31 +0000

Hi Trent

I have a question. In the process of clearing out all of the clutter in my house, I noticably have a tiny room that has turned into what my kids have termed, a computer grave yard. There is a giant prehistoric monitor, old towers, printers, etc. How do I safely get rid of stuff no one wants? I live near Des Moines IA, so I figured you might know more about this than I do.

Thanks Laura

By: Hana

Hana — Tue, 18 Mar 2008 12:21:01 +0000

I have a question re: compounding. Is there a relatively simple formula to figure out how much one would have after a certain number of years? For instance, if I have $10,000 and make 7% interest how much would I have in 20 years? Thanks so much.

By: Nina

Nina — Tue, 18 Mar 2008 06:57:47 +0000

Got a question for you:
How do you discuss finances with your partner? Mine spends a lot of money on his family while I am being frugal because I have a dream that I am saving for. I really dont know how to bring this topic up for discussion – Its a very touchy area! :(

By: Frank Kelly

Frank Kelly — Tue, 18 Mar 2008 00:13:39 +0000

“If you take a peek at Vanguard’s information abot the fund, it shows that over the last ten years, it’s had an average annual return of 12.69%”

No it hasn’t the ten year return on VFINX is nowhere near that (although I wish it was). Check again! :-)
You must mean the 5 year return pre-tax.

-Frank

By: Quatrefoil

Quatrefoil — Mon, 17 Mar 2008 23:50:58 +0000

In an email to me you said that you thought it was easier to make frugal choices if you were single. I’m not sure that I agree. I can see that it’s easier if you don’t have dependent children, but from my point of view it seems much more expensive to live as a single person than as half of a couple. For example, I pay a lot more rent for a one bedroom flat than I would pay for half of a two bedroom flat, or even half of a three bedroom house. I also have to run a whole car, a whole fridge, a whole washing machine, etc. and don’t have the option of sharing those expenses. I realise that I could solve some of those problems by sharing a house, but I’m at an age where the opportunities to share with friends are rather limited. I’d like to know your reasoning for the argument that it’s easy to be frugal if you’re single. I think it could make an interesting blog post.

By: Looby

Looby — Mon, 17 Mar 2008 23:21:15 +0000

@ Phil, perhaps I misread your comment, the part about candles and bread and water came across as quite sarcastic to me.
@ Andrea, I never said it was easy- I believe you live in the same city as me, we have had a similar exchange on GRS if you are the same Andrea. My previous salary here was under 1100/month and I still managed to save small amounts. I live with a partner but I have single friends who are still on that wage who are surviving and saving. My share of rent and utilities (incl internet) is $500, health insurance and medications $160, transit pass $80, groceries $150-200. So no it wouldn’t be easy to save half your earnings but you could come close and certainly if you were inclined you could try and that was the point I was trying to make.

By: ama

ama — Mon, 17 Mar 2008 23:18:26 +0000

Thanks, first of all, for this blog. You’ve helped me finally be ready to grow up and take responsibility for my money and my family’s future. I wonder if you have any advice for talking to loved ones, spouses in particular, about making big money/lifestyle changes. I’m not sure I know how to open up this dialogue with my husband in a way that doesn’t make him feel scared, threatened, accused, or confused. I want to communicate how excited I am at the idea that we are really going to be OK, that we don’t have to be out of control anymore. Any tips for starting the conversation would be very much appreciated…and again, thank you.

By: Bella

Bella — Mon, 17 Mar 2008 22:44:35 +0000

@ JW
As mentionned in Sab’s question, they are just starting up in life! They have no real obligations! The matter is to do it as if they had only half what they truly have! It’s differing your own salary!