Reader Mailbag #31

Each Monday, The Simple Dollar opens up the reader mailbags and answers ten to twenty simple questions offered up by the readers on personal finance topics and many other things. Got a question? Ask it in the comments. You might also enjoy the archive of earlier reader mailbags.

As usual, we’ll start things off with a few links to older articles that directly answer questions I’ve heard recently. One reader asked about books on parenting and money, so here are three reviews on such books I’ve done in the past.
My review of Make Your Kid a Millionaire
My review of The First National Bank of Dad
My review of Young Bucks

And now for some great reader questions!

I am buying my first home this month and will qualify for the $7500 tax credit/interest-free loan. Even though I don’t need it, would it be a good idea to take it anyway and invest the money? Or is there some catch I haven’t realized?
– Sara

If nothing else, it’s not a bad idea to take it and just sit on it. You could in theory take the loan, park it in a 3% savings account, and pay back the $750 each year. At the end of ten years, you’d have $1,481 in the account in interest – free money. Of course, this requires willpower – you have to just let the money sit and not touch it.

It can also be a very convenient way to have a nice emergency fund. If you do it that way, you only have to replace $750 a year – about $15 a week – and you’ll have a $7,500 emergency fund. Of course, you’ll also have to pay back any emergency expenses, too.

The purpose of it, of course, is to allow you to “fix up” a house without any interest or tax penalty – it’s an encouragement to buy a home. If you have a specific home improvement, particularly one that fixes a glaring problem, that can also be worthwhile.

The problem with taking such a “loan” without any purpose is you often wind up feeling compelled to spend it without any real reason. If you have willpower, then you might as well do something like the above, since there’s no penalty for doing so.

Were you frugal when you met your wife? Or is it something you became interested in after….and how did you meet!?
– Crystal

I met my wife in grade school, actually. I actually wasn’t close to my wife until high school. In grade school, I used to fight with my future wife’s best friend on a fairly regular basis, though.

Since my interest in frugality mostly took off in the last three years (as I talked about in my mini-biography, it was well after I met her.

Is there a way to tell an employer, “No, I don’t want that promotion – I’m happy with the position I’m in now” without coming across as an apathetic slacker?
– Johanna

Candor rarely hurts you. Go to your boss and flat-out say that you love your current job just as it is. It makes you fulfilled, and the risk of losing that fulfillment even for higher pay isn’t a trade you want to make.

If you’re really wanted in that other position, you’ll likely receive an even better offer. But that decision is up to you.

Question for the next mailbag: What is your proudest Simple Dollar moment? You’ve received a lot of media mentions, surpassed some pretty big subscriber/traffic goals, etc. I’m curious which Simple Dollar “moment” you are most proud of.
– Frugal Dad

My best moment, for my own enjoyment, was my interview with Amy Dacyczyn, the author of the 300,000+ subscriber Tightwad Gazette in the 1990s. That newsletter, in a lot of ways, broke the ground that The Simple Dollar walks in now.

It was special for me because it turned out that there was a ton of overlap in our writing experiences, even though she wrote a print newsletter and I write mostly online. I probably felt more of a kindred spirit with her than with anyone I’ve ever talked to about anything related to what I do.

my husband has his own service-based business with no employees and very little capital involved, netting $20-30K/year. As he has been starting up over the last couple of years, we have had no trouble keeping careful track of his income and expenses from this business separately from our other income and expenses. But he doesn’t have a separate bank account or credit card for his business. Last week his father expressed shock that we were “mingling” our funds in this way. Do you have separate accounts for the Simple Dollar vs. your personal accounts? What are the pros and cons of starting separate accounts for a small business?
– Elizabeth

The reason that such sole proprietorships and small businesses often have separate accounts is for the accounting you’ll have to do to keep things straight and to file your taxes correctly. If you actually form a LLC or something like that, you’ll keep your business income completely separate from your personal finances simply to keep the accounts of the LLC straight – you’ll just pay yourself out of the accounts of that LLC.

I think if you’re running anything more than a very simple sole proprietorship, it’s useful to have a separate business account. I think the business you describe is definitely large enough for that.

How often do you weed your garden and yard?
– Anne K.

During the summer, we did both on Saturdays, providing that the weather was clear. As fall has started to come in, we’ve not had to mow our yard in a few weeks and the garden is largely dead (except for the oddly thriving marigolds, which are utterly enormous and dominate about a third of the garden). In a week or two, we’ll winterize the garden – pull most of the stuff, spread compost, and till it in.

I will be getting a bonus of about $2500 (maybe more) for Christmas/End of year. I could use this to pay off debt or contibute to my IRA. I haven’t contributed to my IRA all year and feel like maybe I should do that, but would love to use it for my debt too. What to do, what to do? What would YOU do?
– Bobbi

If my normal retirement savings was in place without the bonus, I’d use it to pay off debt. So, the decision depends entirely on your other retirement savings. Are you saving a significant amount for retirement in a 401(k)? You should be saving at least 10% of your income for retirement.

If you’re not otherwise saving for retirement, fund the IRA. Otherwise, pay off the debt.

Have you ever considered hiring an assistant to help with The Simple Dollar and other endeavors? Just to deal with small matters?
– Fred

I’ve thought about this quite a bit and I even attempted to train someone to filter my email and moderate comments, but it ended up being more work to train the person and they were approving some very suspect spam comments.

Part of the reason that good discussions go forward on here is because I quietly moderate them with some care. I’m at least somewhat concerned that these conversations would fail if I farmed out moderation.

So, I’ve considered it, but I basically decided against it.

I have a question – Now that Wachovia has been bought, should I keep my checking account there? Is there any way to know how things will change with the purchase?
– Robin

It looks as though your Wachovia account will eventually just become a Wells Fargo account. You’ll have to decide for yourself if Wells Fargo is the bank you want. Does it provide the services you need without fees? That’s your own personal call, but if you don’t like Wells Fargo, now’s the time to change.

If you were back in college right now at age eighteen, no children, no anything, what would you do? What would you major in?
– Andy

I’d be involved in politics. I was much more apathetic about politics when I was originally in college. Since then, I’ve gradually grown more and more passionate about public policy, the process of government, and the mechanics of polling.

All of that would likely push me into a career of political science. Not only does participating excite me, so does studying government and evaluating better ways to run government. If I were to start over, I think that’s the path I would follow – I’d major in political science and get involved in political groups.

Got any questions? Ask them in the comments and I’ll use them in future mailbags.

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  1. KC says:

    Sara – Take the money. I, too, am preparing to move (not to my first home, but my second). As the economy and borrowing goes right now I feel I can’t get my hands on enough money even though I have more in the bank then I’ve ever had in my life. You’ll have unexpected expenses that come along with a home – stuff breaks, you have to buy some things you didn’t realize you needed. Moving is very expensive – home ownership is too. Plan on spending about 2% of you home’s value annually to repair and maintain your home.

    I would take the money, put it in as good an interest bearing account as I can find and then just sit on it. If nothing else use it to buy a nice bottle of champagne when you finally get settled.

  2. Catherine says:

    To Johanna: I have also seen the advice to turn down a promotion by saying something like, “I’m glad you believe I have potential, but I think I have more to learn in my current position.” You should probably be ready to back that up with a specific example or two, because your boss will probably ask questions.

  3. Your Friendly Neighborhood Computer Guy says:

    Another well rounded and interesting mailbag!

    I think you may have skipped Elizabeth’s second to last question, about having a seperate account for the simple dollar? I’ve recently been curious about how small business owners seperate their cash and how they figure out waht to “pay themselves” vs. what to put back into the business.

    Here’s another question for you along those same lines that I’m curious about: Now that you’re a full-time writer, do you treat this Blog as a small business? Is it registered as a business (sole proprietorship, llc, etc.)? Do you plan on expanding the Simple Dollar as a brand into other areas besides blogging? I think answers to these questions will help others who may be considering blogging as a career.

  4. Artemidoros says:

    Hello, Trent. I love your blog and I would like your advice. I live in Spain and, in a matter of one year and a half, I will buy an appartment (still under construction) with my boyfriend.

    My question is: if we empty our accounts (leaving just a safety nest of 2 months-expenses), we can pay the appartment in cash. Should we do that or take a mortgage (in which case we would have the money growing in the bank but we should have to pay the interests)?

    Thanks for your help!

  5. Joe says:

    re: tax credit

    1. If you have no emergency fund at all, then the tax credit is your new emergency fund.

    2. If you have outstanding credit card debt, then the tax credit solves that problem.

    3. Put it toward the principal on the house you just bought. You’re being dinged at -6% from your mortgage, and you’re only getting +3% from savings. It’s nice, it’s safe, it’s free. I’ve worked this into my master plan, and it looks like I will own my house in less than 10 years.

    4. Max out your ROTH contributions with it.

    5. Interest free loans are too sweet to pass up, whatever you end up doing with it.

  6. Eve says:

    Trent, seriously, law school is where to go if you want to be involved in politics. You don’t have to do well, you don’t have to take the bar exam, heck, you don’t have to graduate or even attend classes. All you have to do is hang out at the law school and make friends. Half the students in a state law school are extremely well-connected to local government, usually through family but also through personal ambition, and would be the most valuable kind of contacts to have. Political science departments, not so much. Surely the law school nearest you offers some sort of lectures that are open to the community, or you could study in their library, or something, just to check it out for yourself.

  7. Mike P says:

    As to the question of intermingling funds–there is an additional benefit of keeping funds separate beyond simplifying recordkeeping.

    If you run your business as an LLC or as a corporation, it’s possible that sufficient intermingling of personal and business finances can lead to your liability protection being invalidated should you ever get sued.

  8. Brandon says:

    re: elizabeth’s comment about co-mingling funds.

    Trent, what kind of company/corporate entity is the simple dollar? Have you taken steps to ensure that in the event of a law suit no one can come after your personal assets?

    Where can I find more info about the $7500 fund? That sounds like a great way to have an emergency fund for 0% interest

  9. Anne says:

    Two comments.

    First, to Bobbi: As of today I am 100% consumer debt free because of a similar bonus. I thought about it and decided that the reduced stress was worth it (ie, it felt right in my gut even though, technically, it wasn’t a perfect financial decision). I would not do that with non-consumer debt, though, and current plan to put everything towards getting my IRA funded from now until the end of the year.

    Second, to Elizabeth: As a child of self-employed parents, please please look into incorporating and getting your finances un-mingled. It will make your lives easier as the business grows. Becoming an LLC is not difficult and can be done with a minimum of legal-wrangling and forms. The goal is to completely separate your family/household finances from the business finances in the event that something ever goes wrong.

  10. Walt says:

    For the $7500 “tax credit”, it’s $500 per year that you pay back over 15 yrs, not $750 over 10.

  11. $7500 is good about for your emergency fund however if you have to pay it back since it is a loan this could come back to haunt you if you get careless and spend it all. Choose your option carefully here.

  12. Kevin says:

    Elizabeth – as a CPA I can tell you having business and personal accounts separate is much easier to deal with come tax time…which will save you money if you use an outside preparer.

    You might also look into a single-member LLC to add a layer of legal protection between your husband and potential lawsuits. They are pretty easy to set up and ignored for tax purposes (meaning you just keep filing the schedule C or F or whatever he’s doing now).

  13. cv says:

    I’d say separate out business accounts from personal accounts as much as possible. I knew someone in college who couldn’t get sufficient financial aid because her family business income looked just like personal income from a tax and account perspective. The capital they needed to keep the restaurant running (or whatever the business was) looked like money that could be spent on college on paper, but it wasn’t really available for that. Do yourself a favor and separate the money.

  14. Shevy says:

    I have a question this morning, based on the spread of the financial crisis to the European banks.

    According to Charley Blaine and Elizabeth Strott today on MSN:

    “The meltdown has been ugly in the U.S., but it’s looking worse in Europe.”

    The EU is looking at their options but apparently can’t do a similar bailout to the US one because they don’t have a federal budget (for the EU as a whole). The article mentioned Italian bank UniCredit and Fortis, which operates in more than one country and has already been bailed out once unsuccessfully *in the past week*.

    I haven’t seen any mention of ING (where so many of us bank online) but I’m wondering what effect the European situation is having on it or may have in the near future and how that affects us in North America.

    I realize that US and Canadian deposits are insured up to the amounts required federally in both countries, but if ING were to have difficulties in Europe what impact (if any) would that be likely to have here in North America?

    And, just as a comment, reading that investors are now flocking to TBills even at their newly lowered rate of .48% because of their perceived security makes me even happier to have just arranged to lock $5k into a 2 year GIC with a
    guaranteed rate of 4%! Now is *not* the time to take risks if you are approaching retirement age!

  15. Jennifer says:

    Hi – My husband and I bought a townhouse in the DC area in May 2005, with a no money down, 80/20 5 year interest-only ARM. The house (at least according to http://www.zillow.com) is worth nearly $100k less than it was when we purchased it. Is there hope? Have we ruined our financial future forever? Is there anything we can do now to help offset our (now glaringly) bad financial decision?

    Thanks!

  16. Johanna says:

    (To Catherine and anyone else who’s interested: My question was actually hypothetical, and had more to do with another reader’s situation of having to deal with an unwanted promotion than with my own.)

  17. Misty says:

    About the question from Sara–What is this “tax credit”/interest-free loan she is talking about? I too bought my first home this year but haven’t heard about this???

  18. SAB says:

    I have a fun question: I accepted my first job out of grad school, starting in May, and I will be getting a $25,000 sign-on bonus and then a good salary. That’s the good news, and I am grateful for it.

    I have a husband, who is just starting his career, and a young child. We have $11,000 in credit card debt, a $6000 car loan, more student loans than you can imagine, we need about $3000 in dental work, we have no savings really, we’d like a house sometime in the next year or two…

    Essentially we’re starting out with nothing but our jobs and this sign-on bonus. Do you have some advice to keep me grounded at this exciting time? I have some financial discipline, and I read your blog regularly, but please tell me I can do something fun, too!

  19. Armando says:

    Hello,

    I’m not US citizen but I have one account in the US. The bank is not so bad but the CD earnings is too slow (1%) to keep the money there. As foreigner, Can I open an account in another bank, like ING direct?. What about oppening an 401K, is this possible?. What would you suggest for readers from outside the US?.

  20. Sara says:

    Thanks for answering my question! My plan was to put the money in a completely separate account (a savings account or maybe CDs) from all my other money so I won’t forget that it’s not really mine, but Joe makes a good point about putting it towards the principal. I will have to consider that.

  21. angie says:

    I have a slight dilemma: I have been paying into a whole life policy (yes, I know) for my son for the last 10 yrs with a 4% return. I’ve lost over $1,300 so far and am thinking of cashing it and investing for his future. (We have term insurance for him) Any suggestions where to put it-I have no investments for him at all and plan to keep contributing the $240/yr plus about another $1500-2000 of his child support (he’ll be getting that for about another 5 1/2 yrs). I’ve researched CDs but not convinced that’s the way to go. Any suggestions would be appreciated.

  22. K says:

    Artemidoros – If you still have a cushion after buying the apartment with cash, you should do it. I would build up your emergency fund as soon as you can to at least 6 months though after the purchase. And don’t do it if it means you have to empty out retirement accounts. That is a BAD idea.

    SAB – Congratulations! Here’s what I suggest for the bonus:

    1) Figure out how much it will be after taxes so you know what you actually have (maybe $15k).
    2) Use $500-$1000 as fun money (either right away or put in a vacation fund).
    3) Then use a little to get set up in an apartment if you need (I don’t know what you have already, but don’t go overboard).
    4) Set up an emergency fund with maybe $2000.
    5) Check your dental benefits and see what they cover. Then get the dental work done.
    6) Set up 2 Roth IRAs with $3000 EACH for yourself and your husband.
    7) Put whatever is left toward the debt with the highest interest rate and stop using the credit cards.

    Now, take a look at your budget. Continue to live on the amount you have been until you have paid everything off. If your combined salary is $60,000 and you have been living on $25,000, you have maybe $15,000 or more after taxes to put toward debt/savings. With that money:
    1) Make sure both you and your husband are putting enough in your 401k to get an employer match if you are eligible (this will actually reduce your taxes).
    2) Your max for the Roth IRA is $5000 each, so try to put $150/mo into each of your Roth IRA’s that you set up before.
    3) Put $200-300/mo into your emergency fund.
    4) Then I would divide the rest between saving for a house and applying toward debt. Use Dave Ramsey’s debt snowball for the debt portion and put the house savings into a high interest online bank (maybe set up 2 accounts at ING, one for house and one for emergency fund).

    You can have a little fun but this is a great opportunity to use the extra money you’re getting to get your financial life in better shape. With a good salary you can increase your standard of living later on but right now continue to live like grad students until you’re on more solid ground.

  23. femmeknitzi says:

    I would advise Sara that there IS a catch with the new homebuyer tax “credit.” It’s not a credit; it’s a tax liability.

    If you intend to stay in your home for 15 years, go for it. If you do not, know this: You will owe the full amount if you sell the home. And it will NOT come due at the closing table. You’ll owe this money in the next tax year.

    Which means that if you’re not a VERY disciplined money manager, it’s quite likely that the equity from the sale of your first home will be securely located in the down payment of the second home before you even remember that you owe it. This will leave hundreds of people in this country owing a debt to the government that will collect fees and penalties.

    I qualify for this credit and I am NOT taking it. I would never take out debt to save–even interest free. An emergency fund built out of this money is never really safe to use for an emergency because you’ll need to have your full balance on hand–just in case.

    I’d prefer to take the money I’d be paying back to the government each year and put it directly on my mortgage.

  24. Kevin says:

    Misty – here’s the link to describe the first-time homebuyer credit/no interest loan:

    http://www.irs.gov/newsroom/article/0,,id=186831,00.html

  25. Otis says:

    @femmeknitzi & Sara

    Keep in mind though, that if your house loses value, that you won’t have to pay the money back…in that case you get free money!

    Honestly if you are on this site, then it means that you’re financially disciplined or on your way towards becoming so. For all of us on this site that are eligible, you should take the money and run. It’s not often you get the chance for free money, and even though it’s a loan, it’s a payback of only $9.60/week…talk about the Latte Factor.

    Honestly I’ve never heard of a deal like this with so few strings attached. I’m definitely going for it and can’t wait to use the money as needed for my situation.

  26. Sarah says:

    What does your wife think about how you manage your time? I’m not being a smartass, I really want to know!

  27. plonkee says:

    To get an idea of how the financial crisis is affecting European banks, read something like The Economist, The Financial Times, or just the BBC news (British bias, but still acceptable).

    As far as I’ve read ING looks ok at the moment as does HSBC. The biggest banking systems to have failed are the Icelandic ones. Irish banks have had all their deposits guaranteed. Each member of the EU is approaching the crisis differently as they have different exposures to US debt.

  28. Michelle says:

    Hi Trent,

    Keep up the good work. What are your thoughts on ensuring your mortgage is covered if you die or are disabled? Right now, I’m trying to decide whether to up my life & disability insurance to cover my mortgage or continue with mortgage insurance through my bank. It seems going the L&D route is smarter. But I’d like to hear your thoughts…

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