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. One-time retirement savings drop
2. Challenging gifted child
3. Dogs of the Dow
4. Handling loss of business income
5. Part-time jobs
6. Spouse’s religious donations
7. ING Direct becomes CapitalOne 360
8. False political views at work?
9. Student loan repayment versus investing
10. Live music for cheap
Whenever we choose to spend our money or time on something, we choose not to spend it on something else. To make one vine in our garden of life grow, we have to let another one wither. If we split our attention among a bunch of different things, we do them all half-way.
Everything has a cost. Even if we figure out secrets of greater productivity, we’re still just practicing methods of better selection among all of the options in our life.
Q1: One-time retirement savings drop
I am thinking of reducing my retirement contributions by 90% for one year and use the money to do some maintenance and improvements on my home. I am 42, married without kids. Our debt consists of a 20-year mortgage and a $30,000 home improvement loan from a family member (we repay $150 per month). We used this for a new roof ($25,000) and some structural repairs. We have no other loans. We have to fix some drainage problems, rotten window sills, and a back door that is rotting due to exposure to weather–we want to add a gable roof over that door. All told, we probably need $7000 for the maintenance, repair, and improvement work.
We currently have $44,000 saved for retirement in Roth IRA and 403(b) accounts. Additionally, I have a defined benefit retirement plan through my employer. For every year I work, I receive 2.2% of my final average salary. I already have worked there 7 years, and anticipate working there an additional 25 years. I also fall under the windfall elimination provision of social security. Each month I contribute a mandated 10.5% towards my pension, and 8.5% to my other retirement accounts. We have a $10,000 emergency fund, and we add about $100 to that each month. On average, we spend less than we earn, and our net worth grows by about $1000 each month.
If I divert $5100 from my retirement savings over the next year, I am reducing my nest egg by about $27,000 in 25 years time. My other alternative would be to use a home equity line of credit. To repay the line of credit, I would need to reduce my retirement savings by about half until the loan is paid off. I could also defer the home maintenance, but that seems to be a supremely bad idea. Do you have any advice?
What you need to do is sit down with a good retirement calculator and see whether or not it’s realistic to swing this.
Part of the problem here is that I simply do not trust pension plans. I’ve seen too many companies offer a pension plan to their employees, then pillage the contents of that plan when they ran into business trouble, then get a legal injunction so that they don’t have to ever pay out those pensions. I want my retirement in a separate account that is not tied in any way to my company’s future.
It is very hard to accurately assess your pension based on what you’ve said above, though. Given the information in this note, it looks as though you’re behind the overall pace you should be on to retire at age 65. Skipping a year of savings will put you even further behind. The only way you can catch up is by putting away tremendous amounts of money.
If you want to make this move, you’re mostly betting on the viability of that pension plan for the next fifty years or so. That is not a bet I would make.
Q2: Challenging gifted child
Our daughter is advanced intellectually for her age. She is in first grade and scores at sixth to eighth grade levels in reading and math. She gets bored at school and reads in class and gets lost in books and ignores what’s going on in the classroom which frustrates her teachers. Her teachers want her to skip a grade level or two but I really don’t feel good about her being that much younger than her classmates, and the other option they give me is to send her to a private school, which we can’t afford. What kinds of cost-effective options do we have here?
It is really easy for a gifted child to become totally complacent in a school system that does not challenge them. They get bored with it and can sometimes fail to see the point at all, which can cause them to actually get poor grades even though the work is almost trivial for them. They can learn terrible habits because of that, too.
I would have some conversations with private schools in your area to see if there are any scholarships or other endowments that can help out children in your situation. Many private schools will give drastically reduced or free admission to truly exceptional students in financial need and your situation sounds like a prime case of that.
At home, keep pushing and challenging her. Make sure she has access to plenty of books that are on the upper end of her reading level (not the bleeding edge, where reading becomes a struggle, but enough of a challenge so that it’s rewarding and fulfilling). Look for projects that expose her to topics and intellectual challenges appropriate to her cognitive age and do them at home.
The “Dogs of the Dow” strategy refers to buying the ten stocks out of the thirty in the Dow Jones Industrial Average that have the highest dividend yield – they pay out the highest dividend compared to their stock price – at the start of the year, then rebalancing into the ten highest each year thereafter.
If you want to try to do this, your retirement account is probably the place to do it so you’re not financially penalized for buying and selling.
Of course, like any well-known strategy, the “Dogs of the Dow” seems to keep pace with the market. It has had a few good years as of late, but it wasn’t spectacular during much of the 2000s. Sometimes it will work well, sometimes not so much. I would expect it to roughly match the overall stock market over the long term, nothing more, nothing less.
Q4: Handling loss of business income
I have sold [marijuana] to coworkers and friends for twenty years or so. My wife has always kind of looked the other way at the business but now with a child on the way she says we can’t afford the potential damage an arrest would do. The problem is that I made about $15K a year doing this and it would really damage our family’s income. What strategies are there for making this loss in income work?
You have to treat it much as anyone would when they face a loss of income. You’re in for some challenging choices. You now have $15K less to spend each year, so what are you going to cut?
Your best approach is to start looking through your spending and figuring out what things can easily be tossed to the side. Given that you have a child on the way, situations where you go out on the town will probably go down drastically, saving you money there, but the child will be expensive and eat up more than that.
Instead, I’d look at your regular bills. Can you live in a less-expensive location? Can you drive a car for as long as it lasts rather than trading it in? What about your phone services – do you need both a landline and a cell phone?
I don’t exactly know how you’re spending that extra money. You are implying that both you and your wife work full time and you have the extra business income, plus you’re really worried about the negative impact of losing that income, so I’m pretty sure you’re spending quite a bit of money each year. You just need to figure out how to trim it back.
Q5: Part-time jobs
What you wrote [about part time jobs increasing a person's income] is true – but the actual amount earned changes dramatically depending on one’s tax bracket – and just because one makes a good income doesn’t mean that there aren’t higher expenses that accompany that – say, self employment tax which is a rip off. with my husband a self employed, solo private practitioner (physician) earning the majority of our income (about $100,000) our effective tax rate is about 37%. our accountant has discouraged my getting an outside job because i would take home only about 50% of what i was ‘paid’. even if i earn $40/hour for part time – and i could do that for about 10-12 hours each week as a tutor – i would earn only $20/hour and that does not factor in transportation, work supplies, my homework time, and other work related expenses which would not seem to offset the additional time i would work at a second job (primary job is office manager for my husband which means uncle sam has us taking money out of one pocket and putting it in another so he can get his cut).
I find it far better to be frugal in my spending than increasing income in a way that may not bring in enough money to offset the increased workload.
I agree, but frugality only takes you so far. If you’re living on beans and rice and you still can’t make ends meet, you flat-out need more income, and the most effective way to immediately generate that income is with a part-time job.
The question I always ask when it comes to part-time jobs is what would you be doing with that time without that job? Would you be doing things that would be costing you money? Would you be completely idle?
If you’d actually be spending money, then the job is gaining you more than just your wage. If you would be completely idle, then the job is better than just sitting around doing nothing at all.
On the other hand, if you would actually fill those twenty hours with something genuinely productive, I’m willing to bet you have no need for that part-time job anyway.
Q6: Spouse’s religious donations
My wife has joined a church and has become very involved, which is okay with me. She wants me to join, too, but I’m not a believer. The problem I’m having is the donation checks she’s writing to the church, which are adding up to about 10% of our take-home. We can afford it, but I don’t like our money being spent in that way and I don’t know how to approach this discussion without it turning into a big fight.
Tithing is a pretty well-established and well-known religious tradition. People are often called to donate 10% of their income.
If I were in your shoes, I would have no objection to her tithing 10% of what she brings home. I would have a problem with her making a unilateral decision to also tithe 10% of what you bring home.
That’s where I’d start this conversation. It has nothing to do with her religion and she should feel free to practice it, but tithing beyond 10% of her income is disrespectful to you and to your beliefs. It’s not a partnership if she is going beyond that.
I haven’t seen a single change to ING that I’ve been unhappy with since the transformation to CapitalOne 360. I’m certainly watching for changes, but I haven’t seen a thing at all.
My understanding was that ING Direct was actually a pretty strong performer for ING and the only reason they dropped it was because of unrelated business requirements that basically forced them to sell off ING Direct.
CapitalOne may decide to make changes in the future, at which point I’d reassess. At this point, though, it mostly just looks like a color change on a website.
Q8: False political views at work?
Everyone in my workplace seems to subscribe to the same political philosophy. They’re all members of the [same] party and most of them seem to volunteer for that party or [that party's] candidates. I don’t agree with their philosophy and it seems wrong to fake it, but I’m afraid if I don’t fake it I will be hurt in my career.
First of all, if I were you, I’d just stick to a line of not wanting to talk politics in mixed company. If a political issue comes up, just completely avoid the conversation and, if pressed, simply say that politics is something you don’t feel good discussing in the workplace.
Most people will respect that stance. If they do not respect that stance, then there is a problem in your workplace and you should look for work elsewhere.
If you do feel drawn into this, look for specific areas where you do have common ground and focus on those. Most thinking people have common ground on a lot of issues.
Q9: Student loan repayment versus investing
What’s a good rule for prioritizing student loan repayments versus investing elsewhere? The general overview of the situation is that my fiance and I are starting out under masses of student loan debt.
I have about $60,000 and am a little more than halfway finished with my masters degree. He’s got a little more than $50,000 in student loan debt with a bachelors. We’re both working full-time, and making a combined income of about $70,000. We bought a small home a couple years ago and, aside from the wedding, don’t foresee any major purchases. We are working furiously to pay off the last $10,000 of our consumer debt, and it should be gone within a few months. We’ve already cut up the cards.
My question is: With so much student debt (nearly DOUBLE what we owe on the house) which do we prioritize: paying off the student loans as quickly as possible, or contributing up to the limit in my Roth IRA or his 403(b)?
I know that investing early will allow our money to grow a lot in the long term, and I feel like we may never pay off the student loans — this is complicated by the fact that we have a mix of public and private loans, some that will be eligible to be written off after ten years of payment, some after 30, and the laws keep changing. I feel completely competent with our finances in many ways, but with student loans I am constantly frustrated by trying to understand which program is which, which servicers our loans keep getting transferred to, and what I ought to be focusing on, or whether I ought to be making minimum payments until everything is forgiven.
Is there a formula to all this? Or debt experts who specialize in student loans — not just the finances and math, but all the new laws?
There is no straightforward formula to follow because, as you mention, it all keeps changing. Similarly, you’ll get different suggestions from different advisors because different philosophies apply here.
I’m of the belief that you should be saving 10% of your income for retirement and every dime over that should go toward minimizing your debt load. This assumes that you don’t have any high-interest debts, in which case you need to get rid of them first and foremost.
So, sit down and figure out what 10% of your income actually is, save that much each year, and then throw every extra dime toward the debt. 10% per year will put you on a great pace toward retirement.
Q10: Live music for cheap
My biggest passion is hearing live music. There is nothing I enjoy more than the energy of a live concert. The problem is that tickets are really expensive. I have spent way too much money on tickets! I don’t know how to make it less expensive either and a life without that experience in it for me is a sad life. Do you have tips on how to get free or cheap concert tickets?
There are a lot of things you can do.
One technique is to join a “street team” for the musicians you like. You spend some time spreading the word about their concert in exchange for a ticket (and maybe some other goodies).
Another technique that works well if you go alone is to show up at the concert site about an hour beforehand with a small amount of cash in your pocket and try to buy a single ticket. People are often outside of a venue looking to get rid of extra tickets, so you can often get a cheap one that way. People will sometimes just give you their ticket.
Don’t be afraid to ask your music-loving friends, either. They may know ways to get inexpensive or free tickets. If someone gives you a ticket, thank them immediately, then, after the event, write a very nice handwritten thank you note to them. You’re likely to wind up on their list of people to toss extra tickets to.
You might not get into every concert you want with these techniques, but you’ll get to see an awful lot of shows without spending an awful lot of money.
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.