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. Retirement vs. long term savings
2. Chess set for beginner?
3. What comes after emergency savings?
4. Long shot dreams?
5. Size of emergency fund
6. Moving back to hometown
7. Back door Roth IRA?
8. Giving money to adult children
9. Shipping and handling at Amazon
10. Music for focusing
It turns out that my “computer life cycle” seems to be clocking in at about six years, as I’m about to pick up my third computer since graduating from college.
My old one is prone to hardware failures and crashes regularly, so it’s time to turn it into a “family computer”/”parts computer” along with some time spent diagnosing some of the hardware problems.
My new one? I’m still trying to figure out what to get. I’m either going to just build something very low-cost out of parts or I’m going to try to figure out a system that will last for as long as humanly possible… which isn’t a surprising split for readers of the site.
(A note: I mentioned buying a new computer a few years ago, but I ended up not going through with it. Instead, I just did a bunch of hardware testing on my current computer and figured out that there were two minor hardware issues, both of which I fixed, and reinstalling Windows took care of the rest. I experienced a hardware failure earlier this year, too, but I felt I could again get this one up and running… turns out it didn’t quite work.)
Q1: Retirement vs. long term savings
How should the investment strategy differ between retirement and long-term savings? Is it okay to have the same strategy of index funds for both objectives since something like Vanguard’s Total Market Fund can deliver the 7% average? For retirement I have an additional target retirement fund, but I’d like to know if I should be diverse in how I approach both goals. My taxable account is set up for goals 5-8 years out. Thanks in advance for your thoughts.
The biggest factor is the amount of time until you arrive at your goal. The longer that time period is, the more likely you are to actually get that 7% average in stocks. The shorter that period is, the more you’ll be affected by annual fluctuations in the stock market, which you generally do not want. Thus, when a goal gets close, it makes sense to shift it into something more stable (close meaning less than ten years or so).
Another factor is that within a retirement account, you can make investment changes without incurring any tax issues. If you switch investments outside of a retirement account, you’re going to face tax concerns. Thus, rebalancing within retirement actually involves shifting balances around, whereas outside of retirement, you should strongly consider rebalancing via your contributions.
In your situation, your future contributions to your taxable account should almost entirely be in stable investments so that your overall investment moves more and more conservative as the date approaches.
Q2: Chess set for beginner?
Do you have a recommendation for a chess set? There is a chess club at my son’s school but my son is unfamiliar with the game. I’m poor at it but I know the rules at least and thought it would be something we could learn together.
Any chess set works for teaching and playing. You can go to any shop and get the cheapest set they have and it will work just as well as an expensive set.
The expense of getting good at chess comes later when you’re trying to learn opening move sequences, as books and software will start to add up.
At this point? Any old chess set will do. There’s really no functional difference between a cheap one and an expensive one.
Q3: What comes after emergency savings?
A little background: I am in my late 20’s, married, own a house, have a stable job that I love, and am pretty conservative with my savings. My emergency savings is more than enough, I have 40k in student loans but am on track to pay them off in less than four years by paying over three times their suggested monthly payments, and contribute 7% of my salary to my 401k with a company match. Other than my student loans and my mortgage I have no other debt.
My question is what comes after you have built up an emergency savings? Should I redistribute the money I was saving every month for that emergency fund towards my 401k and student loans? Or should I continue putting money into my savings account despite having built an emergency savings fund? I am having trouble seeing any other huge financial events I will need to save for other than possibly a child or moving into a new house…both of which are years away for me but perhaps those are the next goals.
Once you have an emergency fund, you pick another goal. What the “right” goal is can be argued endlessly, but I think it somewhat depends on the person.
In your situation, given that you own a home and have a stable job, I would focus on debt freedom. Use the money that you were putting into your emergency fund and put it toward your debts, starting with whatever ones have the highest interest rate.
Regardless of where you go from here, debt freedom will be a powerful thing to have.
Q4: Long shot dreams?
My son has wanted to be an astronaut since he was a very little kid. He’s now in high school and that seems to just be his entire life’s goal. He’s read almost every book there is on being an astronaut and is focused on getting good grades, getting into great shape, and studying everything he can find about the space program.
While I love his work ethic, isn’t being an astronaut kind of an unrealistic goal? What can I do to set him on a more realistic path?
Why do you need to set him on a more realistic path?
He’s getting good grades. He’s in great physical shape. He’s focused on a positive life goal. There’s not much else you can really ask from a teenager, to tell the truth.
At some point, reality might push back on him, but for now, let him follow that path and see where it leads. Even if he doesn’t become an astronaut, almost every step along the way is a positive life step that will put him in a good place. Let him walk that path.
That seems too extreme to me because it assumes both my husband and I could be unemployed for 8 months (at the same time) and I seriously doubt that could happen.
What do you think about this? How many months worth of essential expenses do you think an Emergency fund should cover?
I think that’s a good target for a family with two or more children. I think it’s a little high for a married couple without children and for single people.
Generally, I suggest two months of family living expenses for each person in your home. The reason for that is that a big emergency fund is particularly important for larger families where there’s a greater likelihood of a major crisis at some point.
Of course, there’s no reason not to have a larger emergency fund than this. It’s just that once you reach a certain point – a point that I generally think comes a bit sooner than Suze does – you should shift your financial planning toward other goals.
Q6: Moving back to hometown
My husband has a great job offer in his hometown area. He is somewhat positive about moving there. I am not. I am very nervous about living near his family and it is a much smaller city than I’ve ever lived in before. The cost of living is lower and our income will go way up. I am very torn. Suggestions?
I would dig into the reasons behind your apprehensions about moving there. What are your concerns about his family specifically? What conflicts do you perceive? What are your concerns about living in a smaller city specifically? What do you think you will genuinely miss?
Don’t just feel nervous about it and don’t just think in general terms. Get very specific on the problems you see this move bringing about. Make a list of them. Don’t worry about solutions yet.
When you feel you have a list of things that really express your concerns, go through them and see if there are any you can resolve on your own. The ones that are left should be discussed with your husband, as they are the core reasons you are not wanting to move.
You may find that when you really dig into the specific reasons for your nervousness, you see solutions you didn’t see before.
Q7: Back door Roth IRA?
Both husband and I work and we try to contribute fully to the 401k. I contribute to both 401k thru employer and also 457 plan advantage plan. Because of combined income, we do not contribute or unable to contribute to Roth IRA . Someone at work told me I could do it via the back door method. I did google this, but how legal is this, since it seems like a loophole. Can you explain more about it?
If by “backdoor” you mean converting a 401(k) to an IRA then converting that IRA into a Roth IRA, it’s a legal process.
The “catch” in all of this is that the conversion of the IRA into a Roth IRA is a taxable event, which means that you will have to pay income taxes now on the amount that you convert.
If you’re converting $10,000 or more, that’s going to be thousands added to your tax bill this year.
If you’re able to handle that, converting can be a great idea in many situations. Once you’re in a Roth, you won’t be taxed on that money in retirement and you’ll have a lot more investment flexibility.
It really depends on the family situation. There is a danger of running into a situation where a child is reliant on financial assistance from the parents and thus makes life choices that could really put them in a bind without that support, putting the parents in a difficult situation as they’re about to face retirement. However, in some situations with children, it can work well.
If you have multiple children and a solid relationship with all of them, such gifts should be on the table to begin with. If they’re not and it comes out later, you’re begging for problems.
When I’m in that situation, I would either give equal gifts to all children or amend my estate to reflect any gifts given earlier in life.
Q9: Shipping and handling at Amazon
As you mentioned, Amazon does offer free “super saver” shipping on most purchases over $25 if you’re not a Prime member. In my experience, “super saver” packages tend to arrive in about a week. This isn’t bad, but I find that it usually costs me money. I’ll want an item that costs, say, $18, and then I’ll see the shipping costs. Of course, if I just get something else for $7 that I don’t really need, then shipping is free. The catch is that I don’t really need that $7 item…
If you find yourself with this dilemma more than once a month, Prime is worth it for these savings alone.
It really depends on how much you use Amazon.
For example, if you’re a Netflix user, the only advantage Netflix really has over Amazon Prime Instant Video is the handful of Netflix-only original series. If you don’t care about those, Amazon Instant Video is probably a better deal for roughly the same price and it gets you Prime shipping for free.
I’ve found Amazon’s prices to be low enough on enough products we buy that Prime has been worth it for our family.
I think this really depends on the person.
For me, lyrics are really distracting. I find that listening to classical music or to ambient techno (like The Future Sound of London) enhance my concentration, but lyrics almost always pull me out of my focus.
Other people have different experiences. My wife listens to a wide variety of music when focusing and it all seems to help her.
I’d suggest listening to lots of different music types using Youtube or other tools and see which ones distract you. Toss them out and narrow it down to the ones that don’t distract.
Got any questions? The best way to ask is to email me – trent at thesimpledollar dot com. 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 many, many questions per week, so I may not necessarily be able to answer yours.