Reader Mailbag: Book Suggestions

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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. Investing in tax liens
2. How much for housing?
3. Stuck in a rut
4. Choosing an investment house
5. Turning the economy around
6. Investing for youths
7. Reactivating old card
8. Auto loan credit question
9. Handling an inheritance
10. Philosophy reading list

I get two or three book suggestions from readers a day. Usually, one of them is related to personal finance, while the other one or two could be anything.

I just wanted to give a shout out to three great books readers have recommended to me and I’ve enjoyed in the past year: Where Men Win Glory: The Odyssey of Pat Tillman by Jon Krakauer, The Way of Kings by Brandon Sanderson, and Moonwalking with Einstein by Joshua Foer.

Reading a great book is one of my favorite experiences.

Q1: Investing in tax liens
I have heard a lot about investing in tax liens as a risk free (?!) method to get an 18% or more return on your money or acquire the property. I am interested in seeing an evaluation of investing in tax liens. What do you think about tax liens?

- Roger

Investing in tax liens means that you’re purchasing liens held against a property, usually from the state. This is usually due to unpaid taxes and accrued interest.

It is not a risk-free method of investing. If you don’t know the exact procedures for the process in your state, you can very easily end up losing your deposit or find yourself holding a worthless lien. For example, you often have to pay the full amount within 24 to 72 hours of agreeing to buy a lien and putting down the deposit, and if you fail to do so, you lose the lien.

There are also risks involving the property you’re holding the lien against; you can’t insure it, for example, and if the property has environmental problems, you could be responsible for the cleanup.

Tax lien investing works well for institutions that have the bankroll to handle the risks inherent in such investing. If you don’t have a lot of money and a strong legal understanding of what you’re getting into, they can be dangerous.

Q2: How much for housing?
How do you determine how much you can afford for a mortgage and/or rental payment? For instance, I’ve read that you shouldn’t pay more than 25% of your monthly take-home pay for housing costs. But does this include taxes, insurance, and utilities?

Here is my specific situation. Background info: I have an emergency fund of $7,000, I have no debt, I am 26, female, and I currently rent (living alone), paying $860/month for a one-bedroom apartment. Heat and hot water are included; I pay the electric bill, which averages $22/month.

It has my been my lifelong dream to own a dog, and I finally found a dog-friendly apartment in my city. The rent is $950/month (for a one-bedroom apartment), but no utilities are included. Per the current tenant, the gas bill runs about $160/month in the winter. I would still have to pay electric (about $50, as this apartment does have a washer/dryer).

After contributing 15% of my income to my 401K and Roth IRA, I have about $1300/month to put into savings. If I rented this apartment, that would be a hit of $300/month from that savings, plus the cost of caring for a dog.

My ultimate question is two-fold: First, what percentage of your income should go toward housing costs? Second, am I better off saving the full $1337 for a home? Or going for the rental situation? Am I losing out if I decide to rent?
- Lauren

There are a lot of “rules of thumb” out there regarding how much of your income you should put toward housing. From my perspective, if you’re putting much more than 25% of your income toward your housing, you’re starting to put yourself in a risky situation.

As for renting versus buying, if you’re paying more in interest on your monthly mortgage payment than you would be paying in rent, then I would probably rent.

The easiest way to figure this out is to get a mortgage quote, then run some calculations on it. The housing market is depressed enough right now that I would not look at a home as an investment in the short term.

Q3: Stuck in a rut
I’m unable to leave my home due to health issues, I’ve lost my job, but I have my finances taken care of, that isn’t an issue, nor is housing, etc. Everything is in order.

My issue now is that I’ve lost my way regarding what to do with my life. Everyday is like the movie Groundhog Day for me. I’m on the internet looking at sites or watching a movie, not really doing anything. I write for a local political site from time to time, but do not get paid. It gives me something to do.

Even with the little writing I do, I feel like I’m wasting away. I want to make a contribution to society or at least do something that I feel makes me a better person. I’ve thought about starting my own website, doing more regarding social media, but I don’t know if it’s for me.

I’m in a rut and don’t know what to do. I want to get out of the repeating cycle but don’t know how. Any advice would be welcome. I don’t want to keep looking back and seeing that I’ve done nothing.
- Gary

My suggestion would be to try something new every day.

Try knitting one day. Read a book of philosophy the next. Try a new computer game. Learn how to do acrostic puzzles. Try cooking a challenging recipe. Learn how to write the code to make a website. Learn how to use Photoshop. Learn how to speak French. The list is never-ending.

I’m not entirely sure what your health situation limits you to doing, but if you’re able to use the internet, you’re able to read and write, which opens the doors to a lot of things. Keep trying things until you find something that really excites you, then start hammering away at that thing.

Q4: Choosing an investment house
I am 23, married and my husband & I just graduated from college this past May. I want to go ahead and start saving for retirement ASAP and I have spoken with a friend of mine, who is older and has worked in the financial field for many years. He advised that we open an Roth IRA account (in my name initially) and put in $50/month, increasing that as we are able and eventually open another account in my spouse’s name. So that is the plan, but my question is where should we open this account? He mentioned Vanguard, T. Rowe Price, and Fidelity as well as a few others. Advise would be greatly appreciated! How do I decide where to open this account/what should I take into consideration? We don’t make a lot of money right now; however, I plan to just take that $50 and the money we give to church out before we even consider what to use our income on as if it was never even there in order to be disciplined in saving. I also have a set amount from each pay check that is going towards building an emergency fund that is nearly complete.

- Kelly

I can’t tell you where to invest. Most of the major investment houses have their good points and their bad points.

What I can tell you is what I use and why. I use Vanguard for my personal investment purposes. I chose them because I believe strongly in using index funds for passive investing, which is their strong suit, and their hands-off approach to dealing with investors. I don’t feel like they’re trying to sell me stuff.

What’s a drawback to using them? Many of their funds have a $3,000 minimum before you can start putting funds in. This means if you want to diversify across, say, five funds, you need $15,000 to start with. There are a few ways of getting around this (not starting until you have $3,000 in the bank, for one), but it can be a limitation for many.

Q5: Turning the economy around
Have you noticed people shifting their thoughts about their financial lives in the last 12 months? It seems like a financial turn-around in the U.S. will require more than just money, it will require a change of spending habits and how people think about money. Do you see any evidence that people are changing in those ways?

- Emily

I feel like there’s been some change since I started this site in 2006, but I don’t feel like too much has changed over the past year.

In a nutshell, I think 2008 woke up about 5% of the American public to keeping better care of their money.

The other 95% are still doing pretty much exactly what they were doing before the financial downturn began.

Q6: Investing for youths
Our 10-year-old has saved $500 from his odd jobs around the neighborhood and within our household. He wants to start investing. What would you suggest for him?

- Amber

It depends on whether he’s actually investing for a specific goal or whether this is going to be an experience in learning about investing.

If it’s about learning, I’d get an account at a brokerage and let him manage the money himself. Get him a basic investing book and let him invest it as he chooses. If you’re unsure of things, learn along with him.

If it’s about a specific goal, I’d figure out how far out that goal is and how much risk he’s willing to take on. The closer the goal and the lower the risk, the more likely I’d be to just put it in a savings account (a low-risk investment with a low but guaranteed return). If the goal is long term and some risk is acceptable, I’d do something more high-risk like investing it mostly in stocks.

Q7: Reactivating old card
I just finished paying off my debt management plan (DMP)! I am looking to have one or two credit cards to charge small bills to and pay off each month to boost my credit score. Many of my unused lines of credit were closed when I started my DMP program but there is an inactive account with a small credit limit that it still showing as open on all 3 credit reports. This inactive account was opened in 2003.

Do you think it is better to open a new credit card for my plan or should I call the bank to see if they will reactivate this old account?
- Charlene

It’s likely that the business has closed the account, but failed to notify the credit bureau. It’s probably a net positive for you for it to remain open in this fashion, as it extends the length of your credit history.

If I were you, I’d try to establish credit elsewhere, keep it paid off for a while, then contact this company to get it straightened out.

Once you don’t need the account any more to establish the length of your history (in a few years), you’re better off closing the old account.

Q8: Auto loan credit question
I graduated with my Bachelors in May of 2010 and have been working full-time since making about $50k/year. I currently live at home with my parents but am moving out soon. I had been using my junker car I got when I was 16 until I recently totaled it in a snow storm so now it is time for a new car. I have plenty of cash on hand to pay for the car (about $40k in cash) but because my current types of credit on my credit report are so low and limited (2 student loans, a credit card, and that’s pretty much it, no auto or home loans) that I want to improve by credit score. Types of credit and amount of accounts seems like one of the most glaring negatives on my credit report. I want to upgrade from my previous junker but nothing too crazy (I’m thinking about $15k). I was thinking I would make a large down payment of around $5,000 and get a $10,000 loan at a low percentage like 2.99% through my local credit union and pay it off quickly. Does this sound like a good plan or is there a more ideal plan to build my credit while avoiding the interest and debt? It seems like I have several options in this situation. Should I pay it off immediately or will this not be as good for my credit as paying it off over a few years? Should I just take an auto loan for the full $15k and pay it all off immediately? Should I take out a loan for the full $15k and just make the monthly payments while investing my cash elsewhere (hopefully at a rate higher than 2.99%)? What is the ideal way to handle this?

- Kevin

Assuming your card is in good standing, I don’t actually think your credit is too bad. If you have a large down payment on your car loan in hand, you’re likely going to get a very good rate on your car loan.

Now, as for the question of how much you should put down, if I were you, I’d pay as much as possible down except that I’d keep a thousand or two for an emergency fund.

Having debt means that you’re leashed to a monthly debt payment for the foreseeable future. That means you’re required to keep a job that can cover all of these payments, meaning you’re not free to make many career changes and you’re in complete panic mode in the event of a job loss.

Unless there’s a compelling reason to do otherwise, it’s always best to minimize one’s debt.

Q9: Handling an inheritance
Short back story…

I am in my late 20′s with student loans (about $40k left @ 6%) and a mortgage ($220k left @ 6.5%). My husband and I have worked hard to reign in our spending and have paid off about $25k in credit cards, $30k in car loans, and are saving money for our future in terms of an emergency fund and our retirements. We plan on renting our house out next summer(just enough to cover the mortgage costs) by living in a tiny house on our 6 acre property to further reduce our living costs. I will be leaving my job next month and my husband makes about $60k/year and our living expenses total about $1k without the mortgage.

My question is this:

My great aunt passed away in October after a very long battle with cancer. I have learned I will be inheriting about $500k from her estate after taxes (estate is paying taxes).

I would like advice on how to invest this money in a way that allows me to live off the interest without touching the principal balance for the remainder of my life.

I understand if you cannot offer specific investment advice, but it would be greatly appreciated if you could point me in the right direction on whom I should contact (attorney, financial planner, investment broker, etc.), books to read, and what I should be looking for as I don’t want this money to fall into the wrong hands and would like to maintain as autonomous with it as possible. If you need any further details or information, please let me know.
- Jill

$500,000 is not enough money for you to live on the interest for the rest of your life. You can invest it in a way that will pay you some nice supplementary amount for the rest of your life each year, but it will not be enough to sustain yourself.

For example, Warren Buffett suggests that a 7% annual return is a good estimate of long-term stock market returns. That would mean an annual return of $35,000. While that would provide for a moderate lifestyle today, with inflation, you would not be able to live that lifestyle for long.

You have a lot of options for this money. If I were in your shoes, I would take that $500,000, pay off all my debts, and then buy a diversity of high dividend paying blue chip stocks in very large, stable companies, and I’d just collect the dividend payments.

Q10: Philosophy reading list
I was just wondering what’s on your philosophy reading list.

- John

I’ve actually been trying to read through Boston College’s MA Philosophy reading list. I’ve been reading them in the order listed there in order to try to see how ideas have evolved over time.

So far, it’s been quite enjoyable. I tend to read it in fits and starts, picking up a piece or two here or there, then reading other things for a while.

Mostly, it’s caused me to reflect a lot on how I behave and how other people behave.

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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20 thoughts on “Reader Mailbag: Book Suggestions

  1. Q2: Sounds like you want to own a house, someday. If that was the case, I’d live as cheaply as possible now to get to the point where you could buy a house. Meaning, stay where you’re at, delay getting a dog and moving up in cost for a year, then buy your house. Use that extra $300+ towards your house fund.

    Q8: Curious on why you don’t take that $40K, pay cash for the car and apply most of the rest towards your debts? Wipe out a credit card or a student loan debt? As Trent said, with debt, you’re obligated to those companies – no matter what the interest rate is. And without those debts, you can start to stockpile cash for yourself – for whatever you want in the future.

  2. Q2, Lauren: I suggest analyzing your expenses against Elizabeth Warren’s 50/30/20 budget (50% of after-tax income for committed expenses, 30% for flexible expenses, 20% for savings). I think that makes a lot more sense than any guidelines for how much you should be spending specifically for rent, transportation, etc., because everybody’s situation is a little bit different. Some places have higher utility costs than others, some people choose to spend more on housing so they can spend less on transportation (or vice-versa), and so on. By lumping everything together and looking at the sum of all your committed monthly expenses, you can get a better idea of whether you’re on the right track.

    And it sounds like you’re doing very well. You can move to the more expensive apartment and still have plenty of money left over to put into savings. If this is really your lifelong dream, I say go for it. It is easily within your reach, right now.

    Do you want to own a home someday? It’s not a given that you have to, and it’s not for everyone. There are benefits to homeownership, but there are also some big drawbacks. Think them over, and decide for yourself whether this is a goal you want to pursue. Don’t listen to the people who talk about “throwing money away on rent” – they’re talking nonsense. From a purely financial perspective, if you’re disciplined about saving (which you are), there’s no reason why you can’t do very well as a lifelong renter, if that’s what you want.

  3. Q9 You could live off the $500K for many years, if and only if your expenses are minimized. Assuming you only got a 3% return, or $15,000 a year, people can live off that. The advice to eliminate the debt isn’t bad, provided you don’t incur more debt. If you did that, given the $60K your husband earns, a good chunk of the take home pay could be saved and you could still live reasonably well. (e.g. 20K in taxes, 20K saved, living on 20K for utilities/food/vacation/etc.) I know $20K sounds like a little, but you would have no bills except utilities and food for two people (property taxes are in the 20K for taxes pile). Plus you’d have around $200K remaining earning interest during that time. Ten years down the road you’d likely have the $500K back, with no mortgage, no debt and still living pretty good. I’d suggest doing your homework and finding a good fee only planner and discussing the details of the investing and savings aspects. Just be careful with letting other folks know you have the money.

  4. Q9: Take a few hundred dollars and schedule a session with a fee-only financial planner. I’m sure you’ll get lots of advice from people here, and some of it may even be good advice, but this is a big deal for you, and it’s not a decision to be made lightly.

    But here’s my take: From the numbers you’ve given, it sounds like if you pay off your mortgage, rent out your house, and live off the money you’re bringing in as rent, that will go a long way toward what you’re trying to do.

  5. Q10 – an excellent new book is The Swerve: How the World Became Modern, by Stephen Greenblatt. It’s as much about the background behind humanism as about the philosophy itself. Afterwards, read the actual book it’s about, The Nature of Things by Lucretius, for a straight does of the philosophy.

  6. Q9: As my husband and I have $48,000 in student loans at 6.8% and a $128,000 mortgage at 5.25%, I have often wondered what I would do if I suddenly had a large chunk of money. Personally, I would suggest paying off all your debt, especially if you are considering renting your house. I know some would say that having the mortgage interest deduction on your tax returns is a good thing, I don’t think it’s worth carrying debt for. If you continue to depend primarily on your husband’s income for a while and avoid lifestyle inflation, you can probably set aside most of the money for an early partial retirement.
    Above all, speak to a professional you trust before making any major decisions.

  7. Q4: Vanguard also has several funds – including their Target Retirement funds – with account minimums of $1000. That’s still almost two years’ worth of saving at $50/month, but it’s within reach. I’d recommend putting the $50/month in a regular savings account for now (or under your mattress, or whatever), and opening a Vanguard fund when you have $1000. Whatever gains you’d lose out on by not having the money invested during that time will probably not amount to much in the grand scheme of things.

    Q6: If your son just wants to learn about investing, I suggest turning him loose on one of the sites (mentioned in the comments on a recent mailbag) that let you pretend to invest with play money. If he’s dead-set on investing his real money, then don’t “learn along with him” – learn ahead of him, and then guide him. Help him think through the potential consequences of his decisions before he makes them. That’s what parents are for.

    I don’t even have kids, but the thought of a 10-year-old losing his life savings to the stock market (or to transaction fees and the like), because he didn’t know what he was doing and his parents couldn’t be bothered to help him figure out what he was doing, makes me very sad.

  8. Someone inheriting $500k needs to go see a reputable fee only financial planner, not ask an internet blogger for advice.

    That said, since you asked, pay off your debts and then follow the advice of a fee only financial planner with the rest of it. He’ll probably say to invest in blue chip dividend paying stocks that are undervalued in relation to their dividend yield.

    $500k is not enough to quit your job and stop working for life where I live, but it may be in some rural parts of the USA.

  9. Q3 Gary: First, congratulations to you for having your financial house in order. It must be a huge relief not having to worry about finances in light of your health issues. I’m assuming that you are single since you don’t mention a family.

    Sorry, but I think Trent’s answer to you is a stinker (knitting!). I’d like to offer a different approach. I think you need to get out of your own head day after day. One proven method of doing this is to help others. If you have someone else to care about, it’s easier to forget your own problems. With current technology there are many ways you can do this, depending on your abilities. Can you call other shut-ins just to say hello? Can you use your writing skills to help unemployed people polish their resumes? Can you help a non-profit write grant proposals?

    It sounds like you could benefit from having more people to care about. Funny thing, you start to care about them, they care about you in return and both of you feel better. If you can shift your focus outward, you will find your answer and develop a renewed sense of purpose in your life.

  10. Q2 The 25% thing is just one of the vague rules of thumb. It fails when you look at higher income or low income people. It can fail in high cost of living cities. Like Johanna said, I’d look instead at how much you split your money between savings and spending. If you live in a higher cost city then it may be very hard to stay under such an arbitrary 25% rule.

    Q7 Charlene : Call the bank and verify if that card is still actually open or what. If its open then I’d go ahead and use that card again (assuming you are satisfied with that bank). A card with a longer credit history like that one will help your credit score more. If you keep using it then it will extend that history further. A new card will start the history over and not help your score as much.

    Q8 Kevin : You don’t need a car loan to get a good credit score. Don’t voluntarily pay hundreds of dollars in interest. My credit score is in the high 700 range and I haven’t had a car loan for >10 years.

    Q9 Jill : As others have said it would be worth consulting a fee only financial planner. I would emphasise to make sure they are not an insurance salesman or bank employee. Go for an independent fee only financial planner. General rule of thumb is that you can spend 4% of your money per year and expect it to last. That means you can spend around $20,000 per year out of that $500000 if you want it to last. As Trent said its not really enough to live off of forever. And even that rule of thumb is no guarantee and you could feasibly run out of money in 30-40 years.

    Paying off your debts would probably be a very good use for that money especially that 6.5% mortgage. Just don’t make any rash decisions with it and make sure you take a few months to research things.

  11. Q3 – given your writing skills, the United Nations’ Online Volunteering might be a good fit for you. Their site is onlinevolunteering dot org. I’ve done a couple of their projects.

  12. @Q4: If you can commit to the $50/month, a lot of IRAs (Roth and regular) will let you open one with a couple of hundred dollars as long as you’re doing an automatic withdrawal (deposit?) to them every month. I think USAA lets you do it with an initial $50 deposit. ING or Vanguard might also. Using that method, you can get to the minimum deposit at another institution, and just roll over your account from the first place. And you’re still getting the benefit of saving for retirement immediately instead of waiting for 2 or more years.

  13. Q9, it pains me to have to bring this up but there’s something you should consider. In every state I know of, an inheritance is your separate property in the event of divorce. Before you pay off joint debt, open investment accounts, or do anything else with it, consider talking with a family law attorney to make sure that you understand your options and consequences.

    Once you’ve done that and taken whatever protective measures are recommended, I agree the best bet is to first pay off your debt. I part company with Trent on the type of investment you should make with the rest. He recommends high dividend stocks. I love high dividend stocks, but at your age, if you want to make that inheritance pay off long term, you probably need more focus on growth stocks. Think of the amount you used to pay off your debts (6%+ yield on your mortgage and student loan debt) as the conservative “bond” portion of your portfolio. The rest should probably go toward higher risk higher return choices.

  14. Q9, Consider putting $5,000. into a ROTH for yourself every year, and if your marriage is solid, $5,000. into a ROTH for your husband. This will shelter some of the money from the greedy clutches of the tax man (all interest and dividends are tax free) and you can still do your investing inside the ROTH accounts. Paying off debts is a fine idea IF YOU DO NOT RUN UP MORE DEBT AFTERWARDS. A fee based financial planner is the way to go.

  15. Q9, I agree with everyone else to talk to an expert, but If I was in your scenario (in age and debt profile, we are similar), I almost certainly would pay off the student loan. See previous discussions about lack of consumer protections, you can’t get rid of them in bankruptcy, you can’t sell them back to the lender, and they’re difficult if not impossible to refinance. Also, “guaranteed” 6% return on your money.
    If you didn’t want to pay off the mortgage, and some people advocate keeping a mortgage rather than paying it off quickly, you could put enough money into it to get a refinance. Anyone with reasonable credit and income ought to be able to refi well under 6%, saving you hundreds per month and you’ll be able to rent it for a profit. Congrats and good luck!

  16. If you want to turn the economy around, do two things:

    First, give companies tax breaks for employing citizens of the country where the company sells its products, not for executive compensation and stock options and fictional paper losses. How can American companies expect the employees they just fired in favor of cheaper offshore workers to buy their products if these ex-employees can’t find a job that pays a living wage? Even an economist should be able to do the math and see that this is a zero-sum game that nobody will win. The usual argument against this is that it encourages companies to hire employees they don’t actually need. That’s nonsense. Corporate managers are smart enough not to do that. And if they’re not smart enough, so much the better for the employees and the domestic economy. At least it keeps the money at home.

    Second, require that companies that produce their products abroad (i) ensure that the products meet domestic standards for safety and (ii) pay for government-performed testing that will ensure the standards are met. If it’s still cheaper to manufacture safe products overseas, then so be it. But companies must not be allowed to shift the cost of compliance to the federal government, and thus to the taxpayer. Optional but nice: (iii) Deny import rights to any products that are produced in a factory that does not meet developed-world standards for worker safety. Suddenly, North American products will seem a lot more competitive. Pure fantasy: (iv) Give companies carbon credits (for greenhouse gas emissions) for manufacturing locally instead of shipping products halfway around the world.

    I have a dream…

  17. Q1 ROger : “risk free (?!) method to get an 18% or more” Anytime you see an investment bragging double digit returns risk free then thats a good sign that its not very legit. If there was a risk free investment with >10% return then everyone would do it.

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