Reader Mailbag: Amazon’s Deal of the Day

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Bank errors and credit cards
2. DirecTV contract
3. Pay taxes or shore up?
4. Next steps
5. Rental income as retirement strategy?
6. Iowa weather
7. High rate checking account
8. Sweating the small stuff
9. Missing old lifestyle
10. IRA question

Several people have asked me if I look at things like Amazon’s Lightning Deals and Deals of the Day. I do, actually, but I usually do it only if I’m looking for a specific item.

I usually have a list of items around our house that are still functional, but eventually need replacement. Our blender is a good example of this – the lid is missing, there’s a crack in the jar, and the blades are awful.

So what I do is I automatically search those things for “blender” just to see what pops up. I use this method to make it automatic.

If a great blender shows up, it’s likely I’ll go ahead and pick it up.

Q1: Bank errors and credit cards
I bought a house in 2009 and recently got married and am expecting our 4th child (he has two, I have one and we’ll have another one at the end of summer.) I have the house listed and it’s in a pretty popular price range in our little town. I am hoping to sell it by the end of summer and if not, I will rent it out.

Back in November, my mortgage holder sent me a statement that said I had over-paid into my escrow account and that they’d adjusted my payment. It was lowered $60. I paid it, on time, like usual. Then I thought about it. I had paid no taxes in 2009 because the previous owner was under the homestead act and didn’t have to. When I bought it in September of that year I wouldn’t owe any for the year either. But I would for 2010. So I called the bank and explained why I thought it was wrong and we agreed it was fine to make up the $60 into escrow over the next two months.

The next three statements were way out of whack. One said I owed double my payment (as if I hadn’t made the previous month’s.) The next month showed about the same. I called each time and confirmed they’d gotten it and Teresa, the gal at the bank in charge of my account said some how the statements were wrong and we’d get it fixed that I was current on my account. I was in contact with her several times. Two months ago I noticed there was a late fee on there, resulting from the “late” $60. I called, talked to someone other than Teresa who took it off and said everything was cleared up. I have never been late and have the bank statements to prove it. However, I have a “ding” on my credit report for a “possible negative action” and it lists the bank as the insitution that reported it. I also got a notice from my 2nd oldest credit card (that had a $7 balance) that lowered my limit from $2,000 to $500 due to the change on my credit report.

Is the bank wrong, or am I? I paid what they asked me to each time and I have never been late other than their mistake, which we agreed upon and was only caught thanks to myself thinking ahead. How do I fix this? Is it okay to cancel the credit card? That is the ONLY negative (or possible negative) action on my report and it’s only on one of the three reports. My husband and I will probably look at building a new house in the next couple of years and I don’t want to jeapordize our plans.
- Erin

I don’t think the “ding” will have a huge negative impact on your credit report. Still, I would be very suspicious of the behavior of the bank in this situation. Based on what you’ve said, it does not sound like the bank is handling the situation well.

The only impact of cancelling that credit card is that it would alter your debt-to-credit ratio a little, but if you have multiple credit cards and you’re cancelling one with just a $500 limit, it’s not going to have a big impact. If it makes you feel better, cancel it, but it won’t erase the “ding” on your credit report.

Your best approach would be to demand the bank get that removed from your credit report. Don’t be afraid to keep escalating the issue until it gets fixed. If you have documentation showing that you’ve made every payment as you should, they should not be “dinging” your credit report.

Q2: DirecTV contract
Trent, long time reader, first time needing your help! Wanting to simplify, not watch so much tv, and cut expenses, I’ve notified Direct tv of our intent to cancel. We signed up almost three years ago, so no contract. I thought. In March, 2010, we obtained a dvr through a third party, our locally owned private telephone company. Small town, we know these people, so it was very informal. I have verified with them that I never signed anything. Yesterday, DTV said I would owe them about $250. for the remainder of our “contract”. I’m taking this through the channels; first speaking to a woman in the retention dept. Following her instructions, I emailed DTV, and just received a response, with a copy of the contract, that supposedly I was presented. Of course, it’s just a form and has no signature. After a search, I’ve noticed it’s apparently quite difficult to get DTV to actually cancel this penalty fee. Your thoughts would be much appreciated. Is it a concern that I notice at the bottom of your page, that they are one of your sponsors? I don’t want to cause a “rift”.

- Peggy

My suspicion is that you’re being charged for terminating the lease on the equipment. I would highly recommend that you read what you signed to get DirecTV service very carefully. You may not have signed a contract, but you had to have signed some sort of agreement in order to get the service at all.

Services like DirecTV that involve both programming contracts and equipment leases can be very challenging to get yourself out of. Unless you can hold up a copy of all documentation you signed and demonstrate that there is no lease arrangement with DirecTV, you’re likely fighting a losing battle. They make it difficult to get out of such arrangements on purpose, as people will often just continue the service to avoid the conflict. It’s a good business model, though not a customer-friendly one.

DirecTV buys ad space on The Simple Dollar, but I have no “sponsors.” No one alters a word that I say, and if they try, they’re quickly told to get lost.

Q3: Pay taxes or shore up?
My fiance and I currently moved back to the US after living abroad in England (myself for only 5 months, him: off and on for about 2 1/2 years). We’ve been back in the States since early October, and since then we’ve re-established a household and are rebuilding our savings. We currently have about $5200 in an emergency fund, and another $500 or so in various accounts for things like vet expenses and car maintenance. We own our car (share) and have a reasonable rent ($920/month) I believe strongly in saving as much as reasonably possible and have so far been able to put aside about half of all my income. I currently work full time as a teller for $12/hour. And, at 24, am starting to plan for (our) retirement. Both my finance and I don’t have any debt to our names.

My boyfriend works in the music industry, which generally yields a good windfall every few weeks that covers our rent and utilities. It’s sporadic work, so he sometimes moonlights as a graphic designer, bringing in a decent amount of freelance work. The problem is this: as he was back and forth so frequently between the US and England for 2 1/2 years, with modest pay, he hasn’t filed his taxes in 3 years. When I took a look at his tax situation a few days ago, I realized he would end up owing between $5000 and $6500 in taxes.

My question is this: aside from the moral implications (I believe in paying taxes), would it be more fiscally prudent to risk another year not filing? I feel like another year will help us recoup from moving half a world away and also allow us time to bring in more income and reach our savings goals ($15,000 in emergency fund, start on both retirement funds). I feel like we’re currently crawling at a snail’s pace financially and I just don’t feel secure clearing out our savings accounts. We also both have low credit scores due to a lack of credit history and medical collection accounts, so I fear any loan we qualify for would come with a high interest rate.
- Lindsay

Playing games like this with the IRS is like playing Russian roulette.

Typically, when you earn money, it’s reported to the IRS. They keep track of what income should be reported for people. Their agents usually deal with the bigger fish and the easy-to-catch fish first, as the time invested for the reward makes more sense, but they do often eventually go after the small fish (which is what you guys are).

Should you not file? It’s a gamble. It’s not one I’d personally take. If I were you, I’d file and get the issue out of the way now when it’s relatively small.

Q4: Next steps
I feel like I’m at a crossroads in my financial planning and I’m not really sure what my next steps should be. For starters, I’m graduating next month with a Masters Degree in Counseling Psychology. I earned my masters at a costly private college because it was the only program in my area that would allow me to keep my current job and combined with undergrad, I have about 72K in student loans ( I only burrowed to cover tuition); all of which are currently in deferment. In the past year, I’ve finally become disciplined and managed to save $11,000 into my ING account. However, I’m not sure what to do next. Should I take a large chunk of this money (like half) and put it towards my student loan debt? I have no credit card debt or car loan debt and neither does my husband. Some people have also suggested investing a small amount ~1500 in gold and/or silver and putting the rest into a money market fund. Or would it be best to leave the bulk of this money alone as emergency money? I’m also planning a vacation to London for next year to visit family and would love to attend the opening ceremony at the summer Olympics while I’m there. This is something I’ve always dreamt of doing, but it would cost me approximately $654 for the tickets, which would be a complete splurge, but a lasting memory. My current salary is 55k. In my mind I feel that making a smart choice at this point would make a big difference for me in the future. What would you do?

A Few More specs about me: Married, 31, w/one preschool age child. Combined HH income is about 94K, but we live in the SF Bay Area so that’s not much for this area. My employment is relatively steady (I work as a counselor in public college) strong future prospects with my new degree but unfortunately bad timing – I anticipate being able to find a full time tenured position as a college counselor in the next 1-3 years, my husband works in the hospitality industry and his income sometimes fluctuates. We are currently renting and do not plan on purchasing a house for a long time since we want to be able to put at least 20% down and a moderate house in this area is in the very high 300′s or low 400′s. We also want to have the student loans completely paid off before purchasing a home.
- Yancey

First of all, I wouldn’t take money from your emergency fund to pay down your student loan. Usually, student loans are not high interest debts. If yours are, you should look into some form of loan consolidation.

I would not buy rare or precious metals unless they were part of a larger investment strategy. Having a significant portion of your finances in an extremely volatile investment is rarely a good idea, and silver and gold are both very volatile.

I don’t think the London trip is a bad idea. However, I would start saving for it now by putting aside a small amount each month – or even each week – for the trip. $25 a week, starting right now, would pay for that whole trip and then some.

Q5: Rental income as retirement strategy?
Two of my mom’s co-workers recently bought second homes in a desert community and, within a month, both found renters for $1600 per month. My mom is excited and wants to do the same. Her situation: she and my father are 8-10 years from retirement. My father racked up a huge amount of business debt, so they will have to sell their suburban home eventually to pay it off before retirement.

Houses out in the desert have fallen to the low $100Ks. My mom calculates she can pay in cash if she borrows about $30K from her 401k. She says she can pay it back within 2-3 years. Meanwhile, the rental would generate income until my parents sell their suburban home to pay off debt. Then they can move there and live almost rent-free in retirement. They would have about $200K cash leftover from the sale of their home, plus their 401k, IRA, and social security benefits for a modest but comfortable retirement.

My mom sees no downside to this strategy. She calculates that she can afford to make the payments even if she doesn’t find renters for a year and/or loses her job. Job loss is a distinct possibility within the next 6 months, but she assures me that she could still make the payments on unemployment benefits.

My opinion is that she is rushing into this decision, and I strongly advised her to wait until 1) her job situation was clear, and 2) she could buy the property without borrowing from her 401k. She thinks that by waiting, she is forfeiting $1200-$1400 per month in potential rental income. Plus, she already calculated that she could survive in the job loss + no renters. She plans to start making offers on properties this week.

Is this as foolhardy as I think it is, or am I worrying too much?
- Charlie

I agree with you. I don’t think this is a decision to rush into. Investing in rental properties can be fraught with headaches.

For starters, there is no guarantee of a renter. Even if you get one, there’s no guarantee, no matter how much you check them out, that they’ll be honest people who will take care of the property. There are also many regular expenses involved in owning a rental (maintenance costs being a big one), and it can be a time investment.

Rentals can work, but they usually work best with people who are devoted to the process of being landlords. Does she want to be a landlord? Does she relish dealing with tenants and maintenance requests? Is she willing to accept some significant financial risk? These aren’t easy questions and they shouldn’t be rushed into.

Q6: Iowa weather
I hope you and your family are safe after the nasty weather in Iowa.

- Donna

Most of the frightening weather earlier this month was far to the west of us. Generally, the only poor weather that affects us is in central Iowa.

If you hear reports of poor weather in northern Iowa or western Iowa or southern Iowa, we’re generally going to be safe. It’s bad weather near Des Moines that would affect us.

I’ve lived in the Midwest my whole life, though. I know about tornadoes. I’ve seen a few, and I certainly know what to do if I do see one.

Q7: High rate checking account
I have been toying with the idea of a separate savings account to encourage regular saving (i.e. automatic deposit to where I don’t see it). However, I cannot justify moving any money from our checking account. From the research I’ve done, much of it through your site, I cannot find any place that will give me the 2.5% APY that I get from the checking. Any hints about how to still save even though I can always see it in the checking account?

- Rachel

If you’re getting that kind of rate on a checking account, stick with it. You’re right: it’s better than pretty much any savings you’ll find right now.

Usually, such checking accounts come with some sort of catch: a certain number of transactions per month, a certain minimum balance, and so on. If you’re able to meet those demands without any additional effort, you should take advantage of it.

If you’re trying to find such an account, be careful. Many such accounts have fairly stiff requirements to get the rate – and if you fail to meet those requirements, you usually wind up with next to nothing.

Q8: Sweating the small stuff
I have gotten to a stage where I can’t cut much fat anymore. I have mastered all the low hanging fruits. Now I really have to look into things like making my own laundry detergent, tracking every single cent etc.

I have talked to many people about personal finance and they have told me not to sweat the small stuff. They said as long as you spend less than you earn and invest the difference over a long-term you’ll be fine. They said saving ~$x every few months by making your own detergent is not going to have a huge impact on your PF and that PF is terribly simple and no need to make things overly complicated.

Would you agree?
- Chris

Generally, the people who say “don’t sweat the small stuff” are at a very financially secure point. They have enough income that they really don’t have an imperative to sweat the small stuff because they’re not in a case of financial need.

Personal finance is simple if you have a large, steady income that is substantially higher than your expenses. If you’re lucky enough to be in that group, it’s very simple.

That’s not the reality that a lot of people face, though. A lot of people live paycheck to paycheck. Their income doesn’t exceed their expenses for whatever reason and they don’t live a lifestyle where there are big things to cut.

Quite often, people see the problems in their own lives and believe that they’re the same problems everyone else faces. I’m certainly guilty of that myself at times.

Q9: Missing old lifestyle
Growing up, I was not pretty spoiled, materially speaking, and was never taught to manage money. This led to bad spending habits in adulthood, and a divorce caused me to have to settle with my credit card companies because my debt was huge. I have always been one of those people that will buy something on impulse, and shopping has always cheered me up when I am down.

Recently, my fiance lost his job, and I am a grad student whose only income is as a teaching assistant, so we are really in a horrible place where it’s not possible to even pay our necessities, let alone “splurge” at all. We are both looking for full time jobs now, but are not having much luck.

I am so miserable right now. I miss being able to eat out, or buy something for myself now and then. I don’t know how to be happy like this, and I’m not sure how I can really work on accepting it. I also don’t want to live irresponsibly anymore either, because I know the importance of saving and being debt free now… so I really don’t want to return to that way of life even when I’m able to. Do you have any tips on accepting (and enjoying) this type of lifestyle?
- Ashley

For me, the biggest switch in getting away from materialism was to start focusing on what I had rather than what I didn’t have.

For example, I used to really lament not being able to eat out all the time with Sarah. After a while, though, I began to realize that the good part of that was that I got to eat with Sarah. Eating out was a treat, but it wasn’t the part of the equation I really valued.

I have a roof over my head. I have a wonderful wife and a wonderful family. I can keep food on the table. I have the things that are really important to me.

You can either look at your life as a cup half full or a cup half empty.

Q10: IRA question
I just realized I have made a mistake on my IRA contributions and I’m not sure how to clear it up.

Because of a change over to a new position at my job which included enrollment in a retirement plan and salary bump, I priced myself out of being able to deduct contributions to my ira from my income.

So I made $5000 worth of contributions this year to my traditional ira, which should instead have gone into a roth ira (higher income limit).

Do you know how I can recharacterize the contributions I made to the traditional ira as contributions to your roth ira? Is it a matter of simply transferring the money from one account to the other. I use vanguard.
- Stan

You typically don’t get “takebacks” on retirement plan contributions. If you contributed to a traditional IRA, it’s in the plan. You don’t get to take it back without facing tax penalties.

Your best bet is to live with this contribution and then convert your Traditional IRA into a Roth IRA. Obviously, you’ll have to pay taxes on the amount you convert, but then your money will be in a better place for the long haul.

You can always contact your brokerage and ask if there are any additional loopholes I don’t see, but this seems to be the best plan.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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46 thoughts on “Reader Mailbag: Amazon’s Deal of the Day

  1. valleycat1 says:

    Trent said: … items around our house that are still functional, but eventually need replacement. Our blender is a good example of this – the lid is missing, there’s a crack in the jar, and the blades are awful.

    Seriously, Trent? I hope you don’t consider this still functional. If the jar is cracked, it could break if you’re still using the blender. Not replacing this (assuming you normally use a blender) sooner rather than waiting for a great deal is foolish & dangerous. Thrift stores often have them, if you don’t want to get a new one.

  2. Mary says:

    @Q9 – I felt that way for a while when I was so broke. Felt like a rebellion stage for my finances. I couldn’t help but wonder if I just enjoy the more expensive things in life, like traveling, going to rock concerts and spending money on myself like clothes and fun things. Taking it away from myself was a huge eye opener. This past January my boyfriend and I spent a month where we didn’t go out at all – no eating out, no drinks, no going anywhere for the weekend except once for family. We saved a ton of money, started an emergency savings and paid off a substantial amount of debt. All in one month. So it is doable. I am a student so keeping myself busy with homework was fairly easy. Keeping yourself busy at home was super helpful for me. Do chores, play with your pets/kids, go for a walk, do outdoor activities that are relatively cheap, work out, learn something new in your field (or not) – anything to keep you out of the stores. And when you do save and plan for a purchase, that purchase will feel so good, knowing you were responsible and you’re rewarding yourself. You can do it, once you get started you won’t want to go back.

  3. valleycat1 says:

    Q3 – You might want to consider actually preparing the tax returns for the past 3 years so you’ll know what should have been paid (they’re going to add penalties and an appalling amount of interest to those late payments). Then contact the IRS by phone or in person to discuss what options you have. You probably will have to go ahead and send in the old returns, paying whatever you can, and then wait for the IRS to notify you of the total owed – then at that point contact them again to negotiate a deal & payment plan. They’d rather collect SOME of what you owe than NONE of it, & can be surprisingly accommodating for people who step up to the plate & approach them like (newly) responsible adults wanting to make good on past mistakes.

  4. Courtney20 says:

    Good grief, a functional blender is less than $30. I could maybe understand living with a less-than-great computer for a while, but is the possibility of the cracked, lidless blender flinging contents and/or broken glass all over your kitchen really worth the ‘security’ of having an extra $30 in your checking account??

  5. Tracy says:

    A cracked blender without a lid is not something I would describe as functional! And it’s potentially dangerous – VERY dangerous if it’s glass, but even if it’s plastic, there are safety hazards!

    @1

    The bank’s error definitely could have a significant impact on your credit score. The higher your score to begin with, the more dramatic it could impact it. You need to get that removed if you’re seeking a new mortgage in a few years.

    Canceling the credit card will also have a second negative impact on your credit. Don’t do it just for a lowered limit! (If they’d added an annual fee, than it might be better to cancel it)

    You’d be better off contacting the credit reporting agencies and attempting to get the negative removed, then calling the credit card company and asking them to raise your limit. The second is less important than the first, depending on your debt to credit utilization. But even if you pay that card off in full every month, if you use it for more than 100-200 dollars and it gets reported at the higher balance two days before you pay it off, it’s going to be a negative.

  6. Charlotte says:

    Q5:

    Can she pay back the 30k loan from the 401k if she loses her job? Those are usually due within 60 days of leaving the company.

  7. Jen says:

    Actually for IRA’s you can do a recharacterization of a portion of or all over your contributions, instead of a conversion to a Roth. The deadline is generally your income tax filing deadline including extensions.

  8. Des says:

    Q5

    Your mother cannot keep making payments off her unemployment, because the loan will be due when she leaves her employer for any reason. The entire balance is due in 60 days, or it will be considered an early withdraw and she will owe taxes and penalties.

    If her job was secure this might be a reasonable plan, but she needs to at least be aware that she will owe the full amount if/when she leaves her job.

  9. Evita says:

    Trent,
    I’ll bet that you are not using your dangerous, ineffective blender. Why do you even keep it? get rid of it and get yourself to Walmart for a replacement! shipping fees on an Amazon purchase would eat any savings you might make on a “deal”!

    Sorry for the outburst, but sometimes I feel that frugality can go too far…

  10. savvy says:

    Q10 – The poster CAN recharacterize those contributions as Roth. His brokerage should provide a form for him to do so. It’s not a loophole and is perfectly legal.

    Note, he doesn’t have to recharacterize if he doesn’t want to. He will just have a non-deductible traditional IRA.

  11. Des says:

    Q3

    Waiting to file your taxes doesn’t postpone your requirement to pay. That means that whenever you do get around to filing, you will be charged penalties AND interest on the amount you owe. This will cost you WAY more in the long run than completing your taxes now and getting on a payment plan with the IRS. I would use a chunk of that e-fund to get a professional to get you caught up on filing. They may see deductions and credits you don’t know about, and they can help you get squared away with the IRS.

    I know it is tempting to wait, but it will only make it worse for you later. This debt is currently *worse* than having credit card debt.

    (That is not to say anything of the legality. If caught, you could be charged with tax evasion, and jail time will hamstring your savings efforts as well.)

  12. Petunia says:

    Question 10 – Yes, you can do it over. Contact your custodian IMMEDIATELY and tell them you want to recharacterize your contributions. Do not simply transfer the money, that will not accomplish what you need to accomplish. Hurry, time is running out. Call Vanguard RIGHT NOW.

    Trent, yet another example of your giving incorrect tax advice. Please stop.

  13. Dorothy says:

    Q3:
    Hmm, a couple of comments.

    First, I’m at an age where the term “fiance” implies the two of you plan to marry sometime soon. If you do plan to marry this character, PLEASE make sure he handles his obligation to the IRS BEFORE you marry.

    Second, you state, “Both my finance and I don’t have any debt to our names.” Untrue. He owes money to the IRS. How is that “not” a debt?

    Third, aside from the moral and ethical considerations of tax evasion, it’s a crime. Don’t encourage him to avoid handling this situation ASAP, and extricate yourself from the web of self-serving justification he’s weaving to excuse his immature, unethical, immoral and criminal behavior.

  14. Maureen says:

    I hope you aren’t still using that blender.

    I still use the blender that I was given as a bridal shower gift over 27 years ago. It’s an Osterizer. A similar unit (brand new)can be bought at a department store today for $25-$30. So for about a dollar a year you could use a safe appliance. Even if they ‘don’t make ‘em like they used to’, that would only cost you a couple of bucks a year.

  15. Des says:

    Q9

    I love the honesty in this question. Its not “I’ll be miserable giving up my splurges, so how can I get financially solvent without having to”, its “I *am* miserable because I gave up my splurges, now what?” I think that displays a maturity that is refreshing to see.

    That being said, I can only tell you what worked happened with DH and I. When we were first married we regularly ate 1/2 price appetizers at Applebees for dinner, followed by shopping at Ross. It was the *funnest* way to spend the evening, but it was expensive. Yes, we were getting good deals, but we were still spending $40-$50 several times a week (!) and we definitely couldn’t afford it at that stage of life.

    The hardest part about being more frugal was just that we had created bad habits. It wasn’t that we were necessarily happier eating out than at home, but it was easier to do what we’d always done. The process of creating a habit is very painful, but once it is established it will be much easier.

    The second thing that helped is that I have *so much* fun getting good “deals”. Only now, they are grocery deals rather than clothing deals. When you can combine sales and coupons to get food free or nearly so, it feels awesome! I don’t recommend couponing for everyone, because it does take time. But I love the rush of getting something for nothing. YMMV.

  16. Sandra says:

    I used the Amazon Deal of the Day last week and got a pretty good deal on a new printer. However, we did have to buy a $25 cable to connect it to the computer.

  17. Allie says:

    @Evita @#9: “get yourself to Walmart for a replacement! shipping fees on an Amazon purchase would eat any savings you might make on a “deal”!”

    Um… Amazon has free shipping on purchases over $25.

  18. jackson says:

    Q5 Rental Property:
    I own a few rental properties that generate income for me but there are some risks and costs that you need to think about:

    You make money in real estate through price appreciation, reduction of principle (renters pay the mortgage), tax savings, and positive cash flow.

    Costs include propety management fees (5-10% of collected rent), maintenance, costs of not finding tenants or having to evict bad tenants. I always recommend buying properties within 50 miles of where you live. If you want to buy, you need to think about longer term (>7 years). Don’t buy if you want to sell within a couple of years.

  19. Evita says:

    @17 Allie
    Thanks for the reminder on the free “super saver” shipping. It applies on “eligible items” however… not sure if it applies on all discounted items….

  20. Courtney20 says:

    Evita – it doesn’t have anything to do with discounts. If it ships directly from amazon and not a third party, it’s eligible for free ‘super saver’ shipping (or free 2-day shipping if you have amazon prime).

  21. Finance Nerd says:

    @Q10 — As others have said, Trent is just wrong on this one. You can do a recharacterization, but you have to do it very soon.

    Or you can keep the money in, but it will be treated as a nondeductible IRA (you may also have to fill out some forms). No immediate tax benefit, but taxes are deferred on the investment income generated, and when you retire and take money out you only pay taxes on the gains (since you’ve already paid it on the contributions). You would need to fill out Form 8606 if you make contributions to a nondeductible IRA.

    That said, recharacterizing it to a Roth is probably the best bet.

  22. Adam P says:

    Q#4
    “I have about 72K in student loan debt”
    and
    “My current salary is 55k.”
    and
    “w/one preschool age child”
    and
    “we live in the SF Bay Area”

    To me, I’d not be planning any dream trips until I wasn’t so completely underwater with debt, even “good debt” via student loans. Borrowing more than you make in starting salary your first year is one of those personal finance rule of thumb “no no’s”. If your goal is to make a downpayment of 20% on your house, and pay off your student loan debt before you buy your house, I don’t think this big trip to England and Olympic tickets is a good idea, personally. Suze Orman would say “denied” in a heart beat.

  23. Johanna says:

    Q9: If your income is not even covering your necessities, then your “splurges” are not the problem – the problem is either the cost of your necessities or your lack of income. If cutting down the cost of your necessities (moving to cheaper housing, getting rid of a car, etc.) is not an option, you’re just going to have to hang in there until one or both of you gets a better paying job.

    While you’re hanging in there, you’re going to have to spend down savings or take on some debt. And as long as you’re doing that, you’re not going to be that much worse off if you budget a small amount of money (say, $10/week for each of you) for fun stuff. So do that. That way, if you see something you want (say, a $50 jacket), you don’t have to think “I want that jacket and I can’t have it, I’m so sad” – you can think “Well, if I save up my fun money for five weeks, I can buy the jacket.” It gives you something to look forward to.

  24. Nicole says:

    Gene Wilder had a great line in Young Frankenstein: “This is Elizabeth, my financier…financée…” I’m not sure whose error it was in Q3, but it made me chuckle.

  25. KAD says:

    Q9 Ashley — Two suggestions. First, try to replace what you used to do (shop) with fun and social things you can do for free. Now that it’s spring there will be more public events and concerts starting up in parks and community centers and so forth. Maybe even on your campus. Trent had a great column about finding these free events a while back. Second, find some friends who are being frugal too and do things together so you don’t feel left out or alone. Ideas from when I was in grad school: inviting friends over for a potluck dinner or even just stovetop popcorn and a DVD, hosting a games night at your house and asking everyone to bring a dessert, going to see a free play or a concert together, playing frisbee or hiking in a park instead of going shopping. It’s amazing how much less these things feel like “frugal” substitute activities when you do them with a bunch of people whose company you enjoy. If you’re pining for clothing, host a clothing swap — everybody brings stuff they no longer wear and you take home what you like (and what fits). Or hit Goodwill.

    You’re naturally going to feel deprived if you don’t replace what you used to do with something free and enjoyable. And you’ll feel even more deprived if you feel isolated — as if everyone else is having fun while you aren’t. Since you are in grad school, plenty of folks around you are penniless, too (as I know from experience!), and there will probably be lots of free stuff around to do if you look for it. Good luck!

  26. Amy says:

    I am a big fan of Trent and his website, but I must say that the tax advice he gives is often incorrect and could result in penalties & interest charges from the IRS if followed. I would hope that people don’t take this website as gospel, but rather a good starting place in their research. The best place to look for answers to your tax questions is from a CPA or the IRS website.

  27. Gretchen says:

    How do you even use a blender without a lid?

  28. jim says:

    Q3 Lindsay : You need to get working on paying those back taxes NOW. If you delay it then it will just add up more interest and make the situation worse. You need to file before they come after you and punish you for not filing.

    Q5 Charlie: Your mom’s situation might work fine. $1600 rent for a property that costs ‘low $100K’ range is pretty good generally. I would make sure she figures all the costs realistically. What about all the other costs? How much does property tax, insurance, HOA, etc cost? Is the property near by or out of state? If it is far away then being a long distance landlord is a recipe for disaster.

    Q10 Stan : Call Vanguard and see what they can do for you to recharacterize that IRA NOW.

  29. valleycat1 says:

    A 27 – with a dropcloth & lots of rags – & an umbrella?

    Actually, you can use anything around the kitchen that fits over the top, but you’d have to hold it on. But if I were Sarah (who apparently likes smoothies, based on an earlier post), I’d be stopping by a store on the way home to get a new one.

  30. Johanna says:

    Q4: I disagree with Adam P. True, $55K is less than $72K, but the $55K is what she’s earning *without* the benefit of her new degree. Presumably, once she gets a job where she’ll be using her degree, she’ll be earning somewhat more. It sounds like, overall, Yancey and her husband are in reasonably good shape.

    If, as she says, she managed to save up an $11K emergency fund in just one year, that sounds pretty good. And if that’s not the entirety of the household savings (say, if she’s also putting money in retirement accounts, or if her husband is also saving money in separate accounts), that’s even better.

    From the way she talks about the house, it sounds like they’re in no particular hurry to buy a home. If that’s the case, then sacrificing things that they really want (like the London trip) for the sake of buying a home a little bit sooner would be foolish, in my opinion.

    What would I do if I were Yancey? First, leave the $11K alone, and keep adding to it, until/unless I need it for an emergency. Second, make sure I’m putting 10% of my income, minimum, into some sort of retirement account. Third, stay the heck away from precious-metal investing. Finally, take the London trip and have the time of my life!

  31. S01 says:

    Q5: I would be more concerned that your mum is “excited” about a possibly large investment of funds into a financial vehicle. Any financial decision should be extensively looked into and researched by the time you get around to make the purchase of whatever it is you should be totally sick of the sight and sound of it and should basically “feel” nothing when you write the check.

    Excitement normally goes hand in hand with unknown risk with the hope of a large payout at the end ie gambling.

    I don’t live in the US but to me it sounds like your Mum needs to do a little more research find out things like:
    ~ Yearly maintenance costs (I’d imagine external wear and tear in a desert region will be higher)
    ~ Avg vacancy rates in the area
    ~ potential economic impacts in the future (ie a factory closing down)
    ~ Tax advantages/disadvantages
    ~ Potential over saturation of the market with rental properties

    Lastly and most importantly if “everyone” is jumping into this area as it’s the current big thing she should probably look elsewhere, normally in financial stuff you don’t want to follow the crowd as the crowd will have already artificially inflated things like sale prices etc in that area be it property/stocks or some other investment opportunity.

    Good Luck :)

  32. Temi says:

    Q10: You have until the due date of your tax return INCLUDING extensions to recharacterize your contribution. Your trustee will need to move the contribution plus any gains or minus any losses to a roth IRA. Instructions on how to report the recharacterization on your 2010 return can be found in the instructions for the form 8606.

    If you leave it as a nondeductible contribution it will add some complexity to your tax returns. You will have to track that basis until you completely liquidate all of your IRA’s and file the form 8606 every year you take a distribution from IRA’s for the rest of your life.

    In my eyes saving the trouble of that is well worth the effort now. Unless, of course, you already have after tax income (basis) in your traditional IRA.

  33. Annie says:

    I love new appliances especially if you need it. I would make a decision to buy a good blender or whatever it is that you need and not worry about the 30 dollars or however it costs. Sometimes, I think people think frugality is the only way to live and putting away money for the future is the number 1 priority. I agree to a certain extent and working in the healthcare field know that life is too short and you can’t take money with you when you die. If you want to splurge on something nice go ahead and do it. You can always make more money and save more. That is my philosophy in everything i purchase, i think i already saved part of my paycheck now if i want to buy something i am going to go ahead and do it. I don’t have to spend 20 dollars a week on starbucks and eating out for lunch but i want to. I don’t have to spend 150 dollars on a pappasan from pier one but i want to, i will enjoy it now and it will last me a couple years. Part of making money is to ENJOY it…lets face it money for retirement is what it is..healthcare costs, retirement home, funeral arrangements, helping your children, grandchildren, paying out of pocket for medical expenses. Seems pretty boring to me. I put away money after all my needs are met so i can live happy now and happy in my older years.

  34. AnnJo says:

    Trent offers a lot of good content, but why he selects reader mailbag questions involving tax issues is a mystery, since his answers are not researched and are often – as in almost always – way off base. Twice in today’s column he made mistakes that could cost his readers serious money (on the excess IRA contribution Q10 and the 401(k) loan after unemployment Q5), and missed tax issues that should have been part of the answer (Q5 has “serious business debt” which sometimes means big tax deductions from carried-forward losses, reducing the value of one of the advantages of rental property ownership which is deferring taxes through depreciation deductions).

    I don’t know why readers keep sending him such questions. The IRS offers its publications on all these issues online, and the tax prepartion websites also offer outstanding FAQ pages that clearly answer these questions.

    As for Q5, why is the mother borrowing from her 401(k)? If that is for the down payment, and her rental property would be 100% financed, there is a risk that an unexpected life event could put the mother in a really tough spot: Unemployed, possibly due to a disability or illness, forced to pay back the 401(k) loan or take a tax hit, and forced to sell a property with no equity. She really needs to study this issue better.

  35. Kevin says:

    @Q3, Lindsay:

    I’m Canadian, so take this with a grain of salt. But if my understanding of US income tax filing is correct (and it comes from listening to Dave Ramsey podcasts), filing taxes is not optional. It’s not a choice you get to make. It’s not something you can decide to hold off for a year, then do it next year and just pay a little back interest.

    It’s ILLEGAL. It’s literally a criminal offense to not file your taxes.

    You can file and owe and not pay, and they can come after your assets, but they can’t put you in jail – as long as you FILED. But if you DON’T file at all, THAT IS a criminal offense, and you CAN go to jail for that.

    Again, I’m not a lawyer, but I’d seriously look into that aspect of it before choosing to not file. It’s like choosing to rob a bank or choosing to commit fraud. It may be a smart financial move, but it’s not a serious option.

  36. Steve in W Ma says:

    @Q3, the thing to do here is for your partner to file for the 3 years and apply for a payment plan with the IRS.

    You guys do want to pay this off as soon as possible, because there’s both a late filing fee AND a monthly interest penalty on outstanding unpaid federal taxes. But you don’t want to tap out all your funds immediately, so file all three years and apply with the IRS for a payment plan.

    @Q9, it sounds to me like you are whining. My only serious suggestion is to think, really, really, think, about what it might be like to be really poor, not just grad-school poor. Read some news clips about people who live on $1.50 per day or less in, say, a country in Africa. Or, closer to home, what it would be like to be homeless and, say, metally ill in this country. Then compare those situations to what you have right now. I’m serious. Your current life is actually an adventure in which you have a lot of options and all of your real needs can be taken care of, but you don’t even realize it because you are fixated on “eating out”.

  37. Steve in W Ma says:

    @ valleycat “[the IRS would] rather collect SOME of what you owe than NONE of it, & can be surprisingly accommodating for people who step up to the plate & approach them like (newly) responsible adults wanting to make good on past mistakes.”

    I basically agree, with the following caveat: the IRS will get all their money, eventually. It’s just better to do it on mutually agreed upon terms by coming forward yourself than doing it on their terms when they discover you’ve broken the law by not filing.

    You also need to be very careful what you say to the IRS. You should say, if asked, that you got very busy and forgot to file. You should never say that you knew you were supposed to file and intentionally didn’t file, or anything that could be construed to mean that. Failing to file by decision of your own (“i knew i was supposed to file, but it just wasn’t convenient so I didn’t”) is considered a felony and my understanding is that an IRS agent is literally duty bound to prosecute if something like that comes out of your mouth. A plea of disorganizion is acceptable to the IRS (I was moving back and forth and must have forgotten to file) because it does not display intent to defraud the government of tax revenues, whereas mindful lack of filing does display intent to defraud the government.

    There is a number of books about dealing with the IRS that someone should read before dealing with them directly. And, in this case, it would perhaps be best to use a paid preparer or tax accountant to be the intermediary to avoid the possibility of incriminating yourself. Books to read include “What the IRS Doesn’t Want You to Know”.

  38. Steve in W Ma says:

    Trent, take the blades out of that blender and sharpen them with a file. Then, if the container is plastic, just wrap it with fiberglass packing tape to keep it together. If you want to get really crazy, find the end of the crack in the plastic, drill it out into a circle with a hand drill to remove the leading edge where the crack propagates, then fill the hole with food grade silicone glue and wrap the whole container in fiberglass packing tape. You’ll be good to go until the motor gives out.

    Any plastic item with a crack in it (say, a rubbermaid container) can be salvaged this way. First, stop the crack by drilling out the leading edge of the crack, which will stop it from lengthening, then reinforce the container using tape or some other method, depending on your needs. Other methods might be fiberglass mat and two part epoxy, or (low temp) hot glue and fiberglass mat.

    If it’s a glass container with a crack in it, you won’t be able to drill it out (I don’t think) but, wrapping it in tape will prevent it dis-assembling on you during use and keep it safe.

    That being said, I’m pretty sure that anyone with cracked blender container knows how to compensate for it safely.

  39. Steve in W Ma says:

    @Q8, if you haven’t gotten to “tracking every single cent”, which isn’t any harder than tracking the rest of the 90 cents of your dollar, then you probably haven’t gotten all the low hanging fruit. Is it really that hard to write down what you spend and earn that people consider that an “extreme tactic?”

    It is true that as you take care of the big stuff, the return on your effort decreases. I’m just not convinced that you’re all the way there yet. It doesn’t take any more time to track ALL of your spending than it does to track some of it.

  40. jim says:

    Kevin, You generally don’t go to jail for simply failing to file your taxes. First the IRS will talk to you and hit you with penalty fees and interest. If you work with them and cooperate then theres really no real fear of jail. But if you commit tax fraud, totally fail to cooperate, are an unrepentant tax protester (Wesley Snipes) or basically evade the IRS them then you’ll be more likely to risk jail time.

    The IRS wants the money, they don’t want to spend money paying for a jail cell.

  41. Steve in W Ma says:

    @ Gretchen, you can lid a blender with a plate and hold it down with a large dish towe, large enough to drape over the top and protect your hand, wrist, and lower arm against hot or boiling liquids if there is an accident. No problem. Or, you could put a towel over the top, then cover with a plate for a tighter seal. Or, if you have a silicone hotpad, you could use that over the top, further covered by a plate.

    there are lots of ways.

  42. Steve in W Ma says:

    To make a new top for your blender, take a thick plastic plate (say, melamine) and drill a hole or three in the center. This is to allow air pressure to release through the blender top when the blender blades force the liquid in the blender to change shape and decrease the free air space.

    Now, to make a handle for it, take a plastic cup and cut several crenellations or slots on the edge of it. Or, just drill some holes near the lip of the cup. (to allow the air pressure to vent). Hold this, inverted, over the vent holes of the plate to hold the plate down over the blender jar when you are using the plate as a cover.

    There. you are good to go. You’ll have to hold the top down with the inverted cup, but it will work, it will be very safe, and it will allow excess pressure to safely vent through the slots in the base of the cup that you are using as a handle.

  43. Andrew says:

    Oh, for pity’s sake–just buy a new blender!

  44. Heather says:

    Re: #3, I would advise this couple to file right away. The IRS will probably find you eventually, especially if you’ve ever filed before, and then not only will you owe back taxes, but you’ll owe late fees. Each year or even quarter, these late fees will be added to your principal, and interest will be charged not only to the taxes you haven’t paid, but to the fees you haven’t paid. (Ask me how I know…)

    However, if you talk with the IRS and explain the situation, they are likely to work with you on a payment plan. Even if they don’t, if your credit is good, you may be able to get a low interest rate loan from the bank, pay off the tax debt, and work on the loan repayment in installments rather than in a chunk.

  45. Fawn says:

    Q2- I used to work at DirecTV. When you bought your DVR, and called DirecTV to activate it, they are supposed to tell you it adds 2 years onto your contract. Weather they did or didn’t isn’t the point. When you activated it, it automatically puts you into a new 2 year contract. I never heard of anyone getting out of it. You can lower your package though, and remove the extra services. To only pay $19.99 per month. (Or whatever they are charging now.) Good luck! :(

  46. Jonathan says:

    This has been bugging me for a while, so I finally decided to drop back in and post a reply. It sounds as those Trent’s blender if functioning for him. I don’t know the details of how he uses it in the kitchen, but knowing how much he loves to cook I’m sure that if the blender was holding him back he would accelerate his plans to purchase a new one.

    Several comments have mentioned how cheap a blender is, and implied that Trent is being cheap by not getting a new one. The thing you have to keep in mind, though, is that Trent most likely isn’t replacing this with a $30 blender from Target. Based on his other purchases I would assume that Trent is looking for a higher quality blender, which from what I tell could easily cost $100-$150. I have no idea how much he’ll end up saving by shopping around and waiting for a good deal, but its not hard to imagine it could be quite a bit.

    The example I can give that I do know about is a mixer. If Trent said that his mixer was starting to need replaced, it would be easy to say he should just do it. Afterall, one can buy a cheap hand-mixer for $15. If, however, Trent is looking to get a Kitchen aid stand-mixer, he would be looking a price tag of something like $229, if he just ran out and bought one. It is very possible, however, to find these for $129 or even for $99 by waiting for sales and shopping around. I know, because my wife has bought two, one for herself and another for my Mom. This is an example of where waiting, as Trent is doing with the blender, could save a hundred dollars or more.

    My point is that even if he only saves $20 or $30 on the blender, chances are good that the process itself saves Trent a significant amount over time. If it allows him to buy high-quality, long lasting equipment while still saving money, then I think its a good method. As Trent has said in the past, its these small decisions that add up to big savings.

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