Reader Mailbag #47

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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.
The Basics of Estate Planning
How to Create a Debt Repayment Plan
How I Created a Budget that Worked for Me

And now for some reader questions!

Like alot of people, I have major credit card debt. If I die first, is my wife (or legal partner) responsible for that debt?
- Tommy

If the card is yours and yours alone, they’re not responsible for the debt. Of course, the executor of your estate will be responsible for settling your accounts, meaning that if you leave behind money when you pass on, that money will be used to pay off the debt.

The exact rules should be spelled out in the cardholder agreement that you received when you signed up for your card. If you don’t have a copy of it, request one from your credit card company.

My husband and I are in our early 30s and have managed to get rid of all of our high interest debt. In this crazy market, what would you be doing if you were in our shoes — continue to chip away at our mortgage (5.75%) or invest as much as we can since everything is on “sale”?
- Nancy

First of all, you’re asking about market timing – and market timing is a loser’s game. One can never accurately guess where the stock market is going in the future. We could wake up in a year with the Dow at 5,000 or at 12,000.

In short, putting money in the stock market is a risk. You have the potential to earn a greater return than with your mortgage – but you also have the potential to earn a far worse return (or a loss). Over a long period – ten or more years – the stock market is usually worthwhile, but over the short term, that’s not a given at all.

The question then comes back to your current financial situation and your goals. Are you planning on children in the near future? If so, you might want to go “safer” and put the money into the mortgage – or simply keep it in a CD or in a savings account. Is your big concern retirement? Then consider opening up a Roth IRA and put it in the stock market. Spend some time thinking about what you want to do in the future and that will lead you in the right direction. Don’t worry about timing the market.

A local bank (Newport Fed)is offering something called e-loop checking. You will earn 5% APY on every dollar UP TO 50K in their saving account and have free ATM fees anywhere if you do the following – make 10 check card transactions per calendar month and have one direct deposit or ACH exchange per month. For every dollar over 50K you earn 1.2%. If you do not make the required transactions, then you do not earn 5% for that month, you only earn 0.1% on the entire balance. You have to use electronic statements. Is this a good deal?
- DrFunZ

Unless you’re already routinely using a check or credit card far more than ten times a month, this isn’t a good deal. This account is really only worthwhile if you use the card that many times month in and month out.

Sit down and take a serious look at your current usage with your current account. Are you actually using a card that often? Or is that completely different than what you’re doing?

If your normal behavior does not involve using a card that much, don’t switch to this account. A new account won’t change your day to day spending behavior.

So, you’re rooting for Arizona in the Super Bowl. Any prediction about the final score?
- Al

Arizona 35, Pittsburgh 28.

Arizona simply has nothing to lose in this game. They weren’t expected to be there in any way. Aside from Warner, none of their players have been to the Super Bowl before. The odds are strongly against them.

This has pretty much been the story of every game Arizona has played this postseason. I just think they have the right mix of good leadership (Warner) and talent that doesn’t have a big burden of expectation (everyone else) that will put them over the top.

There is something basic I don’t understand about economics. Why are people always encouraged to spend? And given loans to do so?
- Josh

People are always encouraged to spend because the economy runs on transactions. The more transactions that occur, the more businesses that can exist to take advantage of those transactions. If everyone stopped spending, businesses wouldn’t be able to operate and then most people would be unemployed – and eventually, no one would be employed, the government would go bankrupt, and society would regress significantly.

People borrow money because they’re impatient for purchases, and banks are happy to lend that money because banks make money on the loan. It’s just another type of transaction where money moves from one person to another.

I recently received a gift of $10k from my father in law, yes this is truly a gift. However, he told me that he would like to see me invest in and create a handsome roi. I agree. I am a second year law student, I own a home in AZ (that I currently rent out) but live and rent in another state. I have 55k in a money market savings with capital one, no 401k, or other investments, I have about 80k in student loans accrued with about 30k more to go. I am trying to figure out what would be the best vehicle(s) to invest in. I keep hearing gold is strong and stable but don’t know too much about it, my wife thinks we should just put it in a CD for 1.5 – 2 years, I disagree, especially since the markets should rebound within the next year or two and I would hate to miss out. What would you recommend, I would love to have a 10% roi for this upcoming year, but realistically 5-6% would be suitable. What do you think?
- Andy

You need to decide whether you’re more concerned about getting a good positive return in your first year or if you’re more interested in earning a good return over the long term.

If you just want to show off a positive return in your first year guaranteed, you should buy something very conservative – something like a certificate of deposit from a bank. With that, you’ll get a 4% return or so over the first year guaranteed.

If you are more interested in building wealth over the long term – ten or more years – then you should be investing in the stock market. Put the money in a broad-based index fund (I use Vanguard for this) and sit back. You might not get a positive result in any given year, but you’ll get a positive result over the long haul, one that’s most likely substantially better than what you’d get in CDs – but there’s risk there.

I’m a 24 year old grad student, and I’m thinking about starting an IRA. I don’t have any debt – I have student loans but I have the money in the bank to pay them off (and since they’re subsidized, I’m waiting to pay them back to earn the interest on the money). I’m not eligible for a 401k through my employer. I think a Roth IRA is the way to go, and I’m eligible for one.

My question is, in this economy, what should I be investing in with the IRA? Or should I not even worry about an IRA at all yet?
- Liz

The best possible time to start saving for retirement is when you’re still single and early in your career. Being single means you have much more financial flexibility than you will later on with a family and other demands on your money, plus it gives you the longest timeframe for your investment to earn good returns.

In your situation, you’re absolutely right that a Roth IRA is the way to go. Look for an investment house that you’re comfortable with (I use Vanguard for my Roth IRA), then sign up and start an automatic investment plan. I’d recommend choosing a “target retirement” fund for your actual investment.

What do you allow your three year old to watch on television?
- Ellie

Our children don’t watch much television. We DVR a few specific programs from PBS and occasionally watch DVDs. My son basically has no idea what a commercial is (which I view as a good thing, as he sees them as being alien rather than the norm).

His viewing preferences center around Bob the Builder, Sesame Street, and Pixar movies. We don’t permit him to watch more than about 45 minutes of television a day – and even when it’s on, we usually turn the volume down low and get him engaged in something else (like reading a book).

What is a good book or program to teach a teenager about saving money? I have a stepson that does not learn anything from his mother (she cannot manage finances so isn’t teaching him anything) and our time with him is limited since he lives in another state.
- Leslie

Well, you’re going to have to somewhat rely on him to be self-motivated when learning about money. The best thing you can do is to simply set a great financial example for him when you have the chance to interact. Talk about things like frugality and money management and make them seem normal and also beneficial to the things you want to do.

If you want to send a book along with him, I’d probably recommend Please Send Money by Dara Duguay. It’s somewhat targeted more towards college students, but I often find that giving slightly advanced books to engaged and interested high schoolers will often get them to avidly read the book.

Don’t push him, though – frugality and money management isn’t a topic that most high schoolers like to think about a lot. Just provide a good example and give him the resources to learn for himself.

How many cloth diapers do I need for my baby?
- Mal

I would shoot for as many quality ones as you can, enough to make up a bit more than a full laundry load. The more diapers you have, the less often you’ll have to run a load of diapers and the less detergent and water you’ll have to use to maintain fresh cloth diapers. It also depends on whether or not you’re going to exclusively cloth diaper or if you’re going to mix cloth diapers and disposables.

If you’re going to do nothing but cloth diapering, I’d get a minimum of thirty five diapers – but getting up to fifty or fifty five or so is fine. If you’re going to just try it out, you can get by with a much smaller number – my wife and I started with twelve, though we’ve added quite a few more since then.

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

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54 thoughts on “Reader Mailbag #47

  1. I’m not huge on either team, but I’ll pull for Pittsburgh based simply on geography. Though the main reason I’m watching the game is for Larry Fitzgerald. That guy is CRAZY good.

    If the law student wants to make a good return on his investment in the first year, his only option is a fixed income investment. There is an argument for market timing, but he risks way too much investing a gift that is “expected” to get a good return. To much pressure, play it safe.

    Question for Trent:
    We’ve all absorbed your advice on how to spread the word about our respective blogs when getting started. As a more “established” blog, do you have any other methods you employ to market your blog?
    This question may have been asked in the past.

  2. “The best possible time to start saving for retirement is when you’re still single and early in your career. Being single means you have much more financial flexibility than you will later on with a family and other demands on your money”

    I cannot for the life of me figure out what this has to do with the question Liz asked. First, she didn’t even mention whether she is married or not. Second, many married people don’t have kids or buy a house right away (and some never do at all). Third, didn’t you just write a whole post arguing that kids are not such a big demand on your money?

  3. I disagree with your advice regarding the 5% APR on a checking account if you meet certain requirements. I have an account almost identical to this and I would encourage everyone to take advantage of this kind of opportunity. My husband and I are not debit card users but we make an effort each month to swipe 10 transactions in order to qualify for 4% interest on our account. This has been relatively easy to incorporate into our day to day lives. We only debit small amounts like going to the post office to mail a book for paperback swap, my lunches out at work. If by the end of the month, we are short, my husband and I split our groceries into 2 transactions and debit one or both of them. Its easy and for us, its worth it to accumulate interest – every little bit helps since it is just my salary that we live because my husband is a student.

  4. I think 50 or 55 cloth diapers really is overkill, unless you have twins. If you use all-in-one or pocket diapers, I’d go for 24-30 for doing laundry every other day. For chinese prefolds and the like, 36-40 allows for laundry every 3 days, and you’ll need 3 to 6 covers per day. Going longer than 3 days for diaper laundry is going to make it much harder to keep them clean and smelling normal.

  5. @Sarah: While that is true, don’t forget you’re losing rewards + purchase protection from swiping with credit cards. And if you ever need to go out just to use the debit card, you lose a lot in time and/or gas. I think Trent’s analysis was spot on, myself.

  6. I am an attorney. I don’t practice law in the area of estates and trusts. So take this with a grain of salt. You need to read your actual credit card agreement. I would be very surprised if your wife was not in some way responsible for your credit card debt. Especially if some of the debt was accrued during the course of your marriage. If marital assets have accrued, then they can be used to pay marital liabilities. Talk to an estate planning attorney. Bring it up during the course of something you need done anyway – like setting up a living trust or having your will drafted. Good luck.

  7. Josh’s question encourages me to send a “basics of economics” question of my own, Trent: Why is growth so important? Every company is always talking about ways to grow their business, looking for new investors so they can grow into new markets, etc. Why do they need to grow? If they’re in the black, why can’t they just keep doing what they’re doing?

    Thanks so much if you can help!

  8. I agree with Wendy. That is WAY to many cloth diapers! I use Bum Genius and have about 20. That is plenty and creates a full enough load. I do laundry every 2.5-3 days. 35-50 is just crazy.

  9. Neal Godfrey has good books on money for young children; older kids (and folks) can get peter Lynch’s LEARN TO EARN.

  10. Here’s a question for a future mailbag.

    Back in my high school classes I learned that the energy needed to start up something is more than what is required to keep it running. Following this logic, is it cheaper to turn lights on and off as I enter and leave the room or to leave them on?

    If you could run numbers for us, that would be great. I’m also using CFLs in most sockets but I’d be curious to see results for both regular lights and CFLs.

    Thanks!

  11. I agree with Sarah on the rewards checking. I never used my debit card before, but once my bank started a similar program I easily put the required 10 transactions into my routine.

    Sure, the purchase protection isn’t quite as good on debit cards, but I only use it at local merchants, never online. I concede that point, but I’m not too worried about it.

    As for the rewards, if I use the debit card 10 times a month on a $10 purchase, I’m losing out on at best $5 in rewards (probably closer to $1). But if I have $10,000 earning 5% instead of 2.5%, I make an extra $20. Pretty easy decision for me.

  12. I agree that high-interest checking accounts like this are a great deal. Mine pays 4.25% for any amount up to $100,000, so when my CD expired (for $85,000), I moved the money to my checking account. There’s no other guaranteed, flexible account that pays that much interest. I had never used my debit card before in my life, but now I do my grocery shopping with it and that easily accounts for the ten transactions per month. It means that I get around 3000 fewer frequent-flyer miles per year since I’m not using my frequent-flyer card, but that’s no big deal in comparison. Those frequent-flyer miles are 1/5 of a free ticket — say around $80 per year — where the 4.25% interest is $3000+ per year for me. Granted, I have a high amount to put in the checking account. But however much you have, 5% is a much better interest rate than you can get on CDs right now. (There’s a credit union in the Midwest that’s paying 6% — check Bankrate.com.) And ten debit transactions per month is easy-peasy.

  13. Of course they will go after your family if the estate can’t pay the debt. Ever heard of those sad stories in which the debtor commits suicide mistakenly thinking he can save his family from the bill collectors?

  14. Maybe a mailbag question, or maybe something condo-owning readers can help me with; it’s not directly finance-based, but it’s pivotal in determining whether I apply for a mortgage this summer:

    I’m thinking about buying a condo or townhouse, which is all I can afford here in SoCal. I’m not passionate about homeownership, but I’m very passionate about *silence*. The sound of blasting TVs, thundering video games, and late-night laundering throughout the complex is driving me crazy.

    What should I look for in a condo or townhouse that will make a significant difference in deadening neighbor noise? Or are condos basically the same as apartments, in which case I’m out of luck until I can afford a house? I’d really like to hear others’ experiences and advice before I take on a 15- to 30-year debt!

  15. OK, if you buy 50 cloth diapers, all-in-ones like Trent has, then you’re looking at about $750 right out the gate (50*$15 each). We have 40 prefolds and 15 covers, and I do a full load maybe every 3-4 days. We never use all of our pre-folds, it’s running out of covers that force us to do laundry. You also have to think about how old your kid is. A newborn goes through diapers much faster than a toddler. Don’t know why, but there doesn’t seem to be a diaper on earth, cloth or disposable, that can handle newborn poop!!

  16. @Dru: I’m not a condo owner, but it seems to me that whether you hear your neighbors’ noise would have much to do with how thick the walls are and little to do with whether you own or rent. Plus, if you buy into a building, and then a really loud person buys the unit next door to you, you’re pretty much stuck.

    Have you looked into renting a detached house? From what I’ve read, there are rental houses available in SoCal for a lot less than the monthly cost of ownership. Or even just look into renting in a different complex – how well noise carries can vary a lot from building to building.

  17. Trent, I disagree that others are responsible for one’s credit card debt when one expires. CC debt is unsecured debt and the company has to eat the cost if the only one on the card that signed is the one that expired. They will try to collect aned hound the survivors but they can be told to take a long walk off a short pier. See Liz P.l Weston’s article “When your parendt die broke”

    http://articles.moneycentral.msn.com/CollegeAndFamily/CaringForParents/WhenYourParentsDieBroke.aspx

    Morally should one pay it off? Hmm that is tough one to answer. I wouldn’t because they steal money from borrowers by their deceptive trade practices and can well afford to eat the cost. My wife and I have stand alone CC and we do not plan on paying off each other’s debt when one of us expire before the other. We have included this in the what to do if we die letter to our son. In fact, some think that if you die deeply in debt you have won in the game of life.

  18. @Sarah and @Noah
    The only thing that scares me off any bank with really specific requirements in order to give you a certain interest rate is the kind of fees they charge when you make a mistake. I am Canadian so I’m not familiar with the bank you’re discussing. However, you should look into what kind of fees crop up if you ever slip up – if you slip up just once and are slapped with a couple $15 fines, it can easily override the benefits of the interest. It depends how much money you have saved (if it’s a larger amount it is more likely to be worth it – a small amount like $5000 probably is not.) Weigh in the extra effort required to figure out if it’s really worth your time and risk. Just something to consider.

  19. I also think that that is way too many diapers. I have 12 pre-folds and 5 covers and do a load of diapers every 3 days (I do use disposables at night). If I wait longer than that to wash the diapers they start to stink really bad. I did also use disposables in the first couple of months when they go through way more diapers than later on. I couldn’t deal with cloth diapers early on anyway with all the other issues that come with a newborn.

  20. Trent, another great mailbag, keep it up. However, I do disagree with you regarding children and commercials.

    I have two kids, roughly the same age as yours, and they probably watch 90 minutes of TV a day (usually just on while they play with something else). Anyway, they watch shows on the The Disney Channel and they do have commercials. My 3-year old son has actually become de-sensitized to them completely. I tell him when they are on that they are just trying to sell you junk that you don’t need. Now he has basically started ignoring them, or telling other people that they should just ignore the commercials.

    If a child is never exposed to something, when they are exposed it will pique their curiosity and possible lead to the opposite effect of them being MORE interested in it.

    I would rather have my son see commercials and understand what they are and how to deal with them, then shield him from them.

    Just my take on it.

  21. Liz the grad student should look at the source of her funding. I’m a grad student paid by a fellowship. Fellowship stipends are generally not counted as “earned income” by the IRS; because I’m not “earning income,” I can’t contribute to my IRA. However, if she’s paid as an employee off of a grant, it would count as “earned income,” and she should contribute. If she’s earning money at real jobs on the side or during the summer, that money definitely counts as “earned income.”
    Incidentally, this classification of fellowship stipend income really hurts talented academics, since those are the people who continuously earn fellowships. One brilliant postdoc I know has been on one fellowship after another from the beginning at grad school, and it’s now been close to 10 years that he hasn’t “earned income” according to the IRS. He is very bitter that he hasn’t been able to contribute to an IRA or accumulate “income” for the purposes of SS for all of his adult life.

  22. If you are participating in 401(k) with your employer, and if you are not maxing it out at 15500, can you open an IRA or a Roth IRA by yourself. My employer doesnt offer Roth options and I am more interested in that.

  23. I also thought the diaper estimate was too high, although it could be skewed if Trent has 1.5 or 2 in diapers (the .5 is part-time diapering, of course). For my one year old daughter, I have found that 8-10 happy heiny pocket diapers will mean laundry every other day as I put a disposable on her at night. Maybe she’s an unusual pottier, though . . . Of course, I used probably 8 a day when she was tiny, so I’d wash every day back then.

  24. Hi Trent…

    There is definitely some confusion here.

    See the question starting “There is something basic I don’t understand about economics…. why encouraged to spend blah blah…” .

    That question was asked by me, WhirlMind, on 17th November 2008, as Comment No. 22 on Reader Mailbag 37.

    You have already answered it on December 22 on Reader Mailbag 42, quoting my name rightly as the questioner.

    Today, you have answered it once again, on Reader Mailbag 47, but wrongly quoting the questioner name as Josh. What’s happening ? Caught you there, no ? :) :)

    I do like both answers, :) :) after all how many get the unique chance to get two answers from a busy blogger for the same question ?? But, I am sad that so many of my questions from the barrage [ 15 of them, record still unbeaten :) ] I posed on 5th March, opening Q & A thread, are still pending but this one on economics gets a bumper crop…. :)

    I wonder, what Mr.Josh will be wondering and what was his question ? As always in life, one man’s delight is another man’s disappointment….

  25. I would think it would be overstimulating to try to encourage your son to read a book while watching TV. Trying to “counter” the effects of watching TV by reading as well seems to me like it would cause him to pay attention to neither. At least that’s what it would do to me ;)

  26. Hi,

    I have a question…

    I am in Canada and Capital One credit card just informed me of a new service that they offer. For $15 a month, they can keep track of our credit card as well as our financial situation with the help of Equifax and Trans Canada ( i think ) bureaus. As well as identity theft. We had it for 3 month but I hated paying $30 a month for this service. Would you recommend it? Or is there something else better that I have not seen? I have it for free with my CIBC bank account, but I would have to look into the identity theft part. Is this a ploy for more money to the cc people?

    Thanks,

    Lynn

  27. @Saver Queen:
    I can only speak for the local bank that I am with but the only catches on our account are losing out on the interest at 4%, instead you get a measly .2% and not having ATM fees refunded. My husband and I don’t use an ATM so the fees are not a hindrance for us. The account is advertised as a way to use any ATM anywhere and not have to pay fees but the account also have a high interest rate, the latter being why we moved our checking to that bank. We have to have one direct deposit (easy, my semi-monthly paycheck), log online once (easy, I do it at least once a week), 10 debits in the month, and you have to take your monthly statement electronically. I would recommend this type of account to anyone who can stick to it long enough to hit the 10 debits each month.

  28. Great job on last week’s LOST predictions so far. I’m also beginning to think Locke isn’t really dead, just sort of in some kind of suspended animation as a ploy to get the Oceanic 6 back to the island. Anyway…

    What did you think of the season opener?

  29. Trent, you should write a tip-off post about Nouveau Riche. It’s Kiyosaki style MLM with a real estate twist.

  30. @Dru

    I am a recent condo purchaser, here are my thoughts:
    - We avoided “apartment-style” condos altogether. Those ones where you’re stacked in a multistory building with one floor for yourself and people above/below you. In that situation, you’ll never get away from hearing footsteps above you, and the people below you hearing yours.
    - Look for as few shared walls as possible. Ours only shares one living wall with another unit.
    - Shared walls can still transfer noise. Our place is multiple stories. Just the other night, we heard what sounded like people running/stomping around upstairs. We figured that it was the neighbors and their vibrations were translating across the floor between the walls.

    Bottom line, as long as you share a wall, you can’t get away from bleeding noises. And all it takes is one neighbor who loves to crank up the bass on their stereo to really ruin your day.

  31. I agree with Elisabeth – trying to distract a child from watching tv instead of turning the tv off seems odd to me. In my house growing up, we never just had the tv on in the background – we were watching what was on, or it was off. Of course, now that I’m an adult I find tvs in public places like airports and bars to be terribly distracting, as I never learned how to tune them out.

  32. Question for the mailbag: I hope I speak for several of your readers who, like me, are Americans not living in the USA.

    I would like to contribute to an IRA, but am not sure I can. I also tried (admittedly just once) to open a Sharebuilder account with ING, but it asked for my employer details, so I stopped the process.

    I do have a US address I can use, but technically I don’t live there, don’t pay taxes in that state, don’t have any US-based income.

    How can I and others living abroad invest, ideally with tax advantages, in the US? Any tips are appreciated.

  33. Question for the future:

    I have a credit card that I use infrequently and it never carries a balance. Because of that, I didn’t pay much attention to the APR until I recently got a new Terms and Conditions pamphlet. The APR is 25%. I know that I can call and ask the company to lower your rate, but how should I go about doing it? I’ve only had the card 2 or 3 years, but I’ve never been late and always paid in full. What rate should I ask them to lower it to? I would appreciate some kind of mini-script or guidelines. Thanks!

  34. For the mailbag –

    I’m 52 years old, widowed, childless, and own, free and clear, a double co-op apartment in Manhattan for which I paid a grand total of $500 some 20 years ago, thanks to a NYC program in place when the city was desperate to shed the thousands of landlord-abandoned buildings on its rent rolls. Even in this current market, it’s probably worth about $750,000, but I have no intention of moving, so that’s immaterial. I have no credit card debt save my monthly charges that I pay in full, a decent job that pays me enough to be able to spend wisely and save, and a six-figure online ING account. I also stand to inherit a mid-six-figure inheritance at some point. I have a few IRAs, a 401(k) with almost nothing in it, and no stocks or bonds whatsoever thanks to my Depression-era father whose mantra was “Cash is King”, and who avoided the stock market like it was plague-infected. I figure I’ll be working for another 15 years or so before retiring. Given all of this, is it absolutely essential that I invest in the market, or do you think I could do well enough the way I am, accruing interest with ING and keeping strict tabs on what I spend? Thanks -

  35. To Dru, #14, about buying a condo. I have lived in my condo in Houston, TX for almost 16 years. And yes it is very much like living in apartments except you are responsible for all appliances, light bulbs, repairs, etc. just like if you owned a house but no yard work. I have been very lucky that I have great neighbors even tho two of the units by me are rentals. You have to be careful when buying due to noise, etc. Our walls are thin. I don’t hear TVs but I do hear phones, vacuuming, water running, fighting, etc. Also be sure the check out the monthly maintenance fees – ours are high but include all utilities and cable which is nice. Just make sure you do your research and survey the property and if possible ask questions of those who live there. Good luck.

  36. I use pre-fold cloth diapers. We have 3 wraps and about 36 diapers. We launder every other day. It works for us!

  37. @Saagar: The maximum contribution to 401(k), 403(b), TSP, and other deferred compensation plans has increased from $15500 in 2008 to $16500 in 2009 (it’s indexed for inflation). If you are 50 or older, the maximum catch-up contribution (also indexed for inflation) has increased from $5000 in 2008 to $5500 in 2009. So, if you are 50 or older, you can put a total of $22000 in your 401(k) or other deferred compensation plan in 2009.

    Roth IRA is independent of the 401(k), you can put $5000 ($6000 if you are 50 or older) in a Roth IRA, provided your adjusted gross income (AGI) is below a certain amount. The Roth IRA contribution is post-tax (meaning you don’t get a tax break for putting money in the IRA), but all the proceeds are tax-free. There are other advantages to a Roth IRA, including not having to take minimum distributions at age 70.5, the ability to pass the IRA to heirs, etc.

    A traditional IRA can be funded with pre- or post-tax dollars; if you are covered by what’s termed a “qualified” pension plan, you can’t put in pre-tax dollars (you document post-tax contributions on Form 8606). You have to start taking minimum distributions from the traditional IRA at age 70.5; any pre-tax contributions and all earnings are taxed when the funds are distributed. If your AGI exceeds the limit for Roth IRAs, a traditional IRA is your only choice.

    Another plug for Vanguard, they have great information available online and in hard copy that explains all the arcana and restrictions of various retirement plans. And when you call, you can ask to be transferred to a retirement specialist who will answer all your questions without floundering (I’ve been quite pleased with their flawless knowledge of all the retirement criteria that I needed to consider).

  38. Andy said: ” I keep hearing gold is strong and stable…” If you want a safe return then stay far away from gold. Gold was trading at $980 an ounce in July and then dropped to about $740 by November. Thats a 25% loss in 4 months. That performance is not safe nor stable as an investment. Not much better than equities. Over the past 4 decades or so gold has underperformed stock market and has been about as volatile.

    Regarding the high % rate account DrFun asked about, my wife has one and it works fine for us. The key is you have to make SURE that you’re going to make the required 10 transactions a month. That can be well worth the effort or it can be a hassle. The more money you have in savings then the more it is worth it. If you’ve got $50k to deposit then 5% interest will net you $1250 more a year than an account with 2.5% like ING. So thats $100 a month and well worth making a few more debit transactions. But if you’ve got $500 in the account then we’re talking $12.50 a year which is not at all worth the extra time and effort.

    Jim

  39. Nice mailbag, as always, Trent.

    For the teenager, I highly recommend The Motley Fool Investment Guide for Teens. I read it when I was 18, and it really propelled me forward with thinking about my finances. And as I read it, I kept wishing I had read it earlier!

  40. @Mark B

    That’s a great counterpoint. I think it really depends on your child’s tastes/personality. My experience is watching two sisters under five years old: neither gets any candy at home and when the candy lady comes around one could care less, the other is practically a junkie. For one kid strange stuff isn’t appealing, for the other it’s very exciting. I imagine the same argument could be made in reverse if something was commonplace.

  41. I agree with Michael, Trent. Please provide SOMETHING on Nouveau Riche.

    Also, question for you…. I am in the deferment period of my undergrad subsidized student loan (14k) period until July…is it more important to chip away at that principal or building up an emergency fund?

    Another question…health insurance? I have a seizure disorder that is well controlled by the medicine I’m on but my current coverage will expire in February because I am no longer a college student. My job does not provide health insurance because I am not full-time. Do you have any recommendations on companies? I’m just looking for bare-bones coverage

  42. People who do not want to keep track of “10 minimum debit card uses” and minimum log ons have other options for higher yields. I have a high interest rate (3.5%) savings account with DollarSavingsDirect.com, an online subsidiary of Emigrant Bank in New York. Accounts are FDIC insured. There are a very few limitations, but nowhere near as bad as the above minimum # of debits per month. You will not lose your interest rate. The account is savings only, no checking, so you have to transfer funds electronically to another checking account if you want to spend it. There are no charges for the transfers, which take about 2-3 days to complete. (There is a longer delay on withdrawals when starting up the account.) Your statements are also online only- no paper- so save download your statements monthly. If you can live with these minor limits, then you can just park your money and let it sit. Just log on to download your statement every month. Hope this helps.

  43. Trent, I must respectfully disagree that wanting to buy stocks on “sale” is market timing. I agree 100% that I have no clue what the market will do in a day, a month, or a year. However, I do know if a stock (or the general market) is cheap RIGHT NOW. While you will never know if you’re getting in at the bottom of the market, you will always know whether you got a good deal on the stock at the quoted price, provided you did your due diligence.

  44. @ Steve J,

    I see your point, a lot it depends on personality. If my son was wanting everyhing he saw on TV I probably would be cutting the TV out.

  45. To satisfy the 10 card transactions, just go to a pay at the pump gas station and do 10 quick transactions for less than $1 each. That’s what I do one day a month before the statement cuts. Quick and easy, then use the credit cards for everything else to reap the rewards.

  46. Hello Trent, Have you any comments on Ron Paul’s take on the collapse of the dollar on You Tube? My husband & I lived in south America many years ago ant this very thing happened there. The Government even froze our dollars in the bank. We lost some money. Anyway, what do you think of buying gold bars or coins rather than holding money in low intrest savings accounts and watching it de-value, if this does indeed happen?

  47. Hi, I have a question for a future mailbag. Is it a good idea to buy a preforeclosure home? This isn’t as an investment, it’s as a primary residence. Thank you!

  48. @Saagar: If she’s a full-time grad student, she doesn’t have the option to use a 401(k) either. I don’t know if postdocs are generally eligible for university 401(k) or similar retirement plans.

  49. Hi Trent,
    It’s been awhile since I left a comment, but I wanted to add that I think Suze Orman’s “Money book for the young, fabulous and broke” is a good read for the teenager/college level person.

    I read it when I was in that age group and found it to be very helpful. Especially the sections on Car and Home purchasing.

    Anyway, thanks again Trent.

  50. first,
    there are five players on the AZ Cardinals that have been in the Super Bowl, not just Warner.

    second,
    for Andy who would like some roi on his $10,000. You did not mention whether or not you own your investment property outright. If you still owe on that, consider putting the $10G towards that mortgage in a lump sum. Now your monthly income from the rent increases… forever. Plus you’ve added $10G in equity to your portfolio with no risk.

    You may want to also consider refinancing that mortgage as well. With interest rates at historical lows you could lower your monthly mortgage payments significantly (include the $10G to lower the balance). Now you’ve got even more monthly income from the rent.

    Increased monthly cash flow is always a great roi.

    Then take that increase in your monthly cash flow and invest automatically in an no-load index mutual fund (or ROTH IRA if you prefer). The dollar cost averaging of your forced monthly investments will smooth out the ups and downs of the market and eliminate the risk of trying to time it.

    Or pay down any high interest loans (credit cards)… people don’t think of that as a roi, but it is.

  51. You’ve mentioned that you’re considering selling your truck. What brought you to that decision? I would ideally run my car into the ground before selling it, but my 10 year old Chevy has 155,000 miles and surprisingly few mechanical problems. I’m pretty sure I can hold on to it for another year if not more while I budget for another vehicle, but I guess my question is – what helped you make the decision that buying a new vehicle was the correct (and frugal!) thing to do?

  52. Trent, you haven’t posted anything on (term) life insurance for a while… any hints or advice on where or how to shop for the best rates with good companies?

  53. Diapers: I am currently cloth-diapering my 3rd baby. Trent uses a drying rack instead of a dryer (right?) That may account for why he recommends so many. He has to wait longer for loads to dry. I have the same thing at my house.

    Television: As a former early childhood educator, I will tell you it is not really a good idea to use TV as background noise w/ small children. When kids are small and their language skills are developing, it helps to have more quiet/less background noise when they are communicating with you. It is easier for them to focus on the conversation at hand or the book they are being read or whatever if it is quiet around them. There have actually been studies linking language delays in kids to households where TVs and music are left on all the time. It is best to just turn the TV on, let them focus on that, and then turn it off when they are done watching.

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