Reader Mailbag: Dreams and Ideas

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. Comparing passive investments
2. Handling mistakes
3. Turning down guardianship
4. Am I being paranoid?
5. Disposable homes
6. How much for retirement?
7. To move or not?
8. Negotiating a raise at work
9. Lease or finance new car?
10. Airbnb thoughts

I keep a small notebook in the drawer of my bedside table. About once a week, I’ll have a vivid dream that seems like the seed for an interesting story, so I’ll wake up and jot down the basics of that dream.

A journal full of these is like a treasure trove of story ideas. There are story ideas, scenes, characters, and other elements all over the place in those books.

As many of you know, I love writing fiction, but I’m never satisfied with it. I’ll finish a piece, edit it several times, and then just get frustrated and move on to something else. I’ll turn back to the idea journal and I’ll quickly find myself inspired by a new concept.

My skills lie in getting the idea fleshed out and 80% of the way to the goal.

Q1: Comparing passive investments
I am a 29 year old working professional in the Midwest. I finished my horrible student loans two years ago and, except for my car loan, am debt free. Since then, I have put over $90,000 in my workplace based 401k and have saved about $30,000 in cash savings.

I am doing relatively well investing with my 401k, with Fidelity. The Fidelity site is easy to use and it’s easy to compare alternatives.

Since I am now rapidly accumulating savings, I feel like I should be investing these cash savings rather than have them sit in a bank. But to be honest, I have no idea where to start. I’m not even sure which website to trust. There are SO MANY person investing websites out there, and it seems like everyone of my friends who invest has a different opinion.

Could you tell me if there is a specific website that seems to be best for passive investors, low cost, easy to compare alternatives, etc.?
– Roger

As a free resource, Morningstar (http://www.morningstar.com/) is a great tool for comparing funds. I don’t entirely agree with their rating system, but it’s a very good place to start.

You can also find pretty good tools within the websites of various brokerages like E*Trade, but I don’t recommend actually using them for buying and selling if you’re a passive investor. You’re far better off investing directly with an investment house like Vanguard, as you’ll save on the transaction fees.

I stick exclusively with Vanguard. I sometimes compare their funds to offerings from other companies and while I sometimes find ones that are comparable or slightly better, there’s not enough of an edge to get me to switch away from Vanguard for my purposes. I use Vanguard’s website for obtaining all of the info I need on their index funds.

Q2: Handling mistakes
I tried writing a frugality blog for a while but I felt really guilty about telling people things when I wasn’t doing them in my own life. You’ve written so much, so I know that sometimes you have to fail to follow your own advice. How do you deal with that? Do you feel guilty?

– Marion

It’s not realistic to ever expect pieces of advice to be constant and immovable. Even the best piece of advice might not always work. Life interferes, and you can’t feel guilty about that.

For example, Sarah and I were really heavily committed to cloth diapering when our children were small, but it wasn’t long before we had a road trip where a child blew through all of our cloth diapers. Yes, we’d pledged loudly and proudly about our cloth diaper use, but I’ve never felt a second of guilt about buying a small package of disposable diapers.

That’s a very stark example, of course, but it illustrates the point. A frugal tip might work very well, but you may find other reasons for not using it in a particular moment. That doesn’t mean you should feel guilty as long as your reasons are sound.

Q3: Turning down guardianship
I’m a single female, age 33, with a very stable job and no debt. My younger sister and her husband have asked me to be guardians of my niece and nephew should they pass away unexpectedly. The thought of being their guardian terrifies me and I want to say no but I don’t know how to do it without causing a big rift. Thoughts?

– Angelina

I would walk through the scenarios first. It is far more likely that at least one of the parents to those children lives into adulthood than not. I would describe the odds of that negative outcome to be extremely low, so the odds of your niece and nephew never being parentless during their childhood is extremely high. Let’s put the odds at 0.1%.

Similarly, agreeing to be the guardian (regardless of outcome) is a mildly positive for your relationship with your sister, her husband, and their children, while turning it down is a mild negative.

So, you have four outcomes. There’s a 99.9% chance that the parents will survive until their parents’ adulthood. In that case, you have a mild positive outcome by saying “yes” to guardianship and a mild negative outcome to saying “no” to guardianship. There’s also a 0.1% chance that the parents won’t survive. In that case, you have a strongly negative outcome to saying “yes” to guardianship (your nightmare scenario) and a likely negative outcome to having said “no” to guardianship. In other words, think a little bit about what happens if you say “no” and your niece and nephew actually need a guardian later? Are you happy with the potential outcome in that scenario?

Once you’ve figured out how you would feel in a situation where someone else would be the guardian – and you might want to ask your sister who their other choice would be – you can assess the situation more clearly. If you say “yes,” then you have a mild positive outcome with your sister and her family 99.9% of the time and a painful situation (you’re now the guardian) 0.1% of the time. If you say “no,” you have a mild negative outcome with your sister and her family 99.9% of the time and a potentially difficult situation (someone else is the guardian) 0.1% of the time.

We were faced with this question ourselves in the past and this is basically the logic we used in answering that question. We did not want to add several more children to our home, but we also worried about what would happen to those children if we didn’t take them. At the same time, we also recognized that by saying “yes,” we were giving peace of mind to our friends and by saying “no,” we were probably hurting that friendship.

If you go through this thought process and still feel like the answer is “no,” I’d suggest being very straightforward with it. Simply tell your sister that you would feel woefully inadequate as a guardian for her children and that there must be better options available.

Q4: Am I being paranoid?
I’m living in a family owned 3 family home and I pay rent under the current rental market for a 1 bedroom ground floor. I have access to laundry (my own machine) and I don’t pay for utilities. I replace my own major appliances when necessary. I have no children or spouse and I turned 63 this month. I want your opinion on whether I’m being too fearful or insecure about what I intend to do during the next two years:

I plan to take vacation days and when any of 15 senior housing complexes within a 15 mile radius of my current apartment has an Application Day open to the public = I want to get an application and submit it so I get on The Waiting List for that complex and wait over 5 years to be called when an apartment becomes available. I don’t intend to move out of my family’s home for a long time since I intend/hope to work till 72 full time. I just want to get on a list so when I’m 80 or so I can move into a senior housing IF my relatives that are 5 yrs old than I am – die before me.

Do you think this is sound thinking on my part since I don’t have faith that the offspring (younger cousins) will be willing to take care of me or rent a room to me when my older cousins pass on.

I work for an investment firm and we have tools that measure shortfalls for our clients living in retirement or preparing for it. I have in the forefront of my mind how vital it is to “prepare for the worst but hope for the best”. I was a guardian/executrix for an elderly bank customer of mine years ago and he rented a room from someone for years and once he got sick and couldn’t live on his own – the landlady/owner of the home turned him out! I had to find assisted living for him VERY quickly before he left the hospital. He had no family – he trusted me and I learned from that experience that when you get older you are vulnerable. Best be prepared.
– Donna

Given your situation and your risk tolerance, I think this is a reasonable plan. You’re taking a great step in thinking about your future in such detail.

My feeling is that society right now is dealing with some growing pains as a result of the rapid growth in lifespans. In the not-too-distant past, people who lived past the age of 60 were the rare exception rather than the rule. Today, we’re struggling with what it means to handle a significant elderly population.

Social Security was an attempt to solve the problem, but it’s an imperfect solution, particularly as people approach the final stages of their life. For now, the best approach people can take is to plan for themselves as best they can – and that’s clearly what you’re doing. Bravo.

Q5: Disposable homes
I was listening to the Freaknomics podcast and they had a great episode on how homes in Japan are disposable and how homes basically aren’t an investment there even calling them “disposable.” Homes in Japan last 38 years on average, while they last for 100 years on average in America.

I was really interested in the debate about whether homes in the United States are a good investment. What do you think? They are terrible in Japan but what about here?
– Mark

I think a person’s primary home is a mediocre investment because you’re not doing anything to generate income with it. Plus, since it’s a primary residence, it’s not very liquid. You can’t sell it easily without making significant life changes.

A house purchased for renting, on the other hand, can be a really good investment, as it provides a steady stream of income while also holding resale value.

As for the article on how homes last for 100 years on average in America, I suspect that number will be dropping in the next 20 to 30 years. The last ten years have seen an explosion in new home building that drastically outpaces population growth, and the surest way to see a home grow fallow is to have no one living in it.

Q6: How much for retirement?
I’m 38 years old. I have been putting 15% of my income each year into my 401(k) and my employer matches 6% of that, adding up to 21%. According to retirement calculators, I’ll have $2 million in there at age 65 if I never contribute another dime. I have other goals in life and would love to cut back. Is $2 million enough to live on in retirement?

– Shawn

If you have $2 million in retirement and live by the “4% rule” (meaning you only withdraw 4% a year to live on so that the balance lasts for a very long time), you’ll be withdrawing $80,000 in pre-tax dollars per year. However, if you assume that inflation will continue at 3% per year over that timeframe, that $80,000 will only have the buying power of what $36,000 has right now.

Is $36,000 a year in pre-tax income enough for you to live on? It really depends on your lifestyle.

If I were in your shoes, I’d probably cut back to contributing just enough to get every dime of that employer match for as long as I worked there. If you’re getting a one-for-one match up to 6%, I’d cut back to 6% contributions. That way, you’re still getting 12% in retirement – the total contributions go down by less than half, but your share of those contributions goes down by 60%.

Q7: To move or not?
My fiancé and I are about to get married in August this year, and we are having thoughts of making a geographical move afterwards. Mostly due to unhappiness at our current jobs. The move would be from VT to the North West, most likely Oregon. Cost of living looks comparable, but I am unsure if it would be worth it ultimately to make the move. We would be downsizing to a smaller house. Is a big move like this worth it in order to improve happiness? And is it worth it financially…or would it hurt us?

– David

Never assume that a move that changes a lot of variables in your life will automatically improve happiness. Do you have friends in Oregon, more than you have in your current location? What about family? What about climate and physical environment? Would the jobs you have in Oregon actually make you happier than what you have now? What about comparative cost of living of the two locations? What about comparative income? What about the housing situation in each area?

You might find an improvement in one of those areas, but you might find decline in multiple other areas, adding up to a net negative.

Before you make a cross-country move, you should sit down and figure out what elements of the move are a positive and which ones are a negative and what all of those add up to.

If you’re looking at this strictly financially (I wouldn’t, but you might), I would examine the property markets and also notes on your potential new employers in Oregon (do they have lots of turnover?) as well as your new salaries.

Q8: Negotiating a raise at work
A few days ago my boss called me into his office and said I deserve a raise. Good, I thought. Then he asked me how much of a raise I thought I deserved. I told him I had to think about it. I’m not sure what to ask for. Is asking for too much greedy? Is asking for too little making me a pushover?

– Dan

Whatever you ask for, back it up with some statistics.

What is the average salary for someone in your position in your area? If you can’t find that out specifically, figure out the average salary nationwide for your position, divide that by 100, and then multiply that by the cost of living factor for your area. That will tell you, on average, what you should be making.

If you’re making below average, I’d ask for the average at minimum. I’d bring in these statistics and show them to your boss. If you’re already making average or above average, I would probably limit my request to around 10% as you run the risk of pricing yourself out of a job.

Q9: Buying a new car
I am going to buy a new car soon. Should I lease it or finance it?

– Ed

My advice is to not buy any car that you can’t write a check for.

If you’re looking at options like “lease” or “finance,” you’re adding a bill to your monthly expenses. This is the equivalent of wrapping a leash around your neck. Your monthly pile of bills will become higher and thus you’re going to be more dependent on steady employment and steady health.

The only car you should ever finance is your first one. After that, you should be saving back enough money each month so you can write a check for your next one.

The only time you should ever buy a new car is when you can afford it very easily.

Q10: Airbnb thoughts
Through your blog, you encourage readers to develop income streams beyond the their “day jobs”.I became interested in Airbnb through a Wall Street Journal article. I’ve done some research on the tax implications, but would love to see an article n the The Simple Dollar about the financial advantages and disadvantages of renting rooms in your home.

– Sam

I would never use Airbnb while renting space in my personal home. This article explains why.

There are situations where I would use Airbnb, though. I’d use it if I had a second home or apartment that I lived in during certain seasons or work periods that didn’t contain a lot of personal or valuable items. A close friend of mine works on the other side of the country for a few months out of the year (as well as brief periods at other times) and he uses Airbnb to rent out the other apartment. The only items in there are some low cost furniture and basic household stuff. If it were robbed in this way, he would not lose anything of personal value or be at risk of identity theft.

It might also make sense if you have a portion of your home that you can keep separate, with a separate entrance and no direct access to your living area.

In those situations, renting out that extra space really isn’t much different than renting out any extra space.

The entire model of Airbnb is attractive to people who simply want easy access to your home. Keep that in mind.

Got any questions? The best way to ask is to email me – trent at thesimpledollar dot com. Iíll 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.

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