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. Differing views
2. Jobs and automation
3. Investment management services
4. Handling injury settlement
5. Unusual door prize
6. Sneaking candy into theaters
7. Buy-it-for-life with a baby
8. Food date discounts
9. Jim Cramer’s frugal rant?
10. New car questions
One thing that has always annoyed me is the huge “golden parachute” bonuses that failed CEOs get. For example, the exiting CEO of Target received a $16 million payment on his way out the door. That’s his reward for bungling their Canadian expansion and also mismanaging the data breach.
When I step back, though, it makes sense. If you are negotiating a contract to become a company’s CEO, why wouldn’t you negotiate a big payment in there if you were to get fired for a mistake or two? It protects you from disaster. You’re going to do well financially regardless of what happens (though there are usually big perks for good performance).
The real question I have is what this guy (or other failed CEOs) brought to the table that make such a contract worthwhile? Does a CEO really make that big of a difference? They probably do make a difference, especially in a few exceptional cases like Steve Jobs at Apple, but a difference worth millions and millions of dollars? This article from The Atlantic makes a good case that it doesn’t matter very much.
I think it’s all about PR. A “splashy” hire of a new CEO that speaks well can make your shareholders feel more confident, but it doesn’t guarantee success at all.
Q1: Differing views
I came across your website and found one article where you proposed chase freedom as one of the best reward cards out there but another article on your website does not recommend it. Are you able to comment on what may have happened?
The company that owns The Simple Dollar occasionally runs articles from other writers. Ideally, they want a backup plan in case something were to happen to me, so they want to have a writer or two in place that could jump in if I were to suddenly pass away or become unable to write (or quit for some reason).
Likely, you read an article from another writer on the site. Other writers typically submit long “feature length” articles where they focus on a very fact-based financial topic, like comparing credit cards or something like that.
Different people have different takes on credit cards. My feeling is that if you’re carrying a balance on your credit card, your goal should be to get that rate to zero before even thinking about another card. In a financially healthy position, things like APR do not matter in the least and you’re mostly interested in the rewards program and customer protection. Others might assume that you’re going to be carrying a balance, so APR becomes a much larger factor in that comparison.
That particular card has a solid balance of features. It has a good bonus program and a decent APR and a good balance transfer offer. I would recommend it to some people – those who usually pay off their full balance but sometimes carry a balance for a few months and want a good bonus program that doesn’t punish with a brutal APR. However, I wouldn’t use it myself and I wouldn’t recommend it to people who never carry a balance – in those cases, a Mastercard or Visa that’s tied to their preferred retailer will usually earn them more benefits.
This, of course, reflects on what the Chase Freedom card offers right now. Card offers change fairly regularly, so this answer would have been different a couple of years ago and will probably be different in a couple years.
Q2: Jobs and automation
Do you have any advice for someone working at a job that might become automated in the future? I’m getting worried that I could be replaced with a computer system in the future.
As a human being, you can build things that a computer system (at least, with current levels of artificial intelligence) simply cannot. You can constantly acquire new skills. You can build relationships with the people who you serve in the workforce, making you able to anticipate your needs.
Those are the things that people should focus on in almost every job. You should always be learning new skills and trying out new systems. You should always build relationships with others and find better ways to serve the people you are serving.
Think of everything you do in terms of your resume and your referral letter. What can you do right now to improve at least one of those things? If you do that consistently, you won’t be replaced because you’ll be going far beyond what can be automated.
They’re good for people who are unwilling or are scared to learn a little bit about investing. If you understand diversification and are willing to look at your investments every few months and make decisions about them, most people don’t need investment management services.
The only real exception I can see to this is if you’re managing a lot of money so that a minor mistake can have a huge impact. In that case, it may make sense to hire someone to manage your investments.
For most Americans, that just doesn’t make sense. You’re better off learning about your money and your options and then taking charge of it yourself. Start with The Bogleheads’ Guide to Investing.
Q4: Handling injury settlement
I was injured badly in a car accident and may be receiving a settlement of around $800,000. While it seems like a lot of money, I know it’s not in comparison to the lifelong injuries I have and their impact on my life and earning ability. My plan was to spend $200,000 on a home for my wife, children, and myself, and to save the remaining $600,000, leaving it untouched so that interest alone provides an income for myself for the rest of my life. However, I’m really confused as to all of the investing options. Savings and CD’s provide so little in terms of interest, that they wouldn’t be sufficient in providing the income I need. Are there any investments that provide 5-7% interest annually without high risks of trying to trade stocks or dabble in risky mutual funds? What investing options do I have?
Right now, there aren’t any investments that return much over 2.5 to 3% without substantial risk, and even those are few and far between. If/when the economy rebounds, rates will go up, but that doesn’t help you right now.
If I were in your shoes, I’d probably invest in a diverse index fund of stocks that pays good dividends. You’re going to want to hold it for the long term and you’re also going to want regular income coming in off of that investment.
For example, you might want to buy shares of Vanguard Total Stock Market Index. Right now, Admiral shares are approximately $47, and it recently issued a dividend of $0.192 per share. With your $600,000, you could buy 12,766 shares, which means you’d get a payment of roughly $3,000 every three months just from the dividends. On top of that, the investment would grow over time – it’s averaged an annual growth of 5.32% since it started in 2000 (which includes the downturns of 2001-2002 and of 2008).
I don’t know what your full financial situation looks like, but this investment would put an average of $12,000 per year into your pocket along with substantial growth in the value of the investment.
If I were in your shoes, that’s probably what I would do. I don’t know if you still have some ability to earn additional income of any kind, but if you can, this is the route I would take.
Q5: Unusual door prize
A few weeks ago I went to a community fundraiser that had a bunch of door prizes and raffles and other things. I won a $250 gift card to Amazon but honestly I don’t know what to do with it other than buying stuff I don’t really need. It’s tempting to just go on a spending spree but is there something smarter I can do with it?
I’d use it to buy non-perishable goods like garbage bags, toilet paper, and so on. Amazon offers a lot of these items and will ship them via free Super Saver Shipping.
Their prices are reasonably comparable to a warehouse club, with some items comparing very well and some… not so much. You really need to price compare with your local store when doing this.
You can also hold onto it for gift-giving occasions. Use the card to buy gifts for people off of Amazon, which allows you to give a nice gift for “free.”
Q6: Sneaking candy into theaters
Frugal or tacky: sneaking candy into theaters? I used to do this all the time in college to have a cheap snack in the theater but is this actually frugal or just cheap?
Most theaters rely on a business model where they don’t make money from the movie tickets themselves. The film production companies gobble up that money. The primary income of most theaters is generated from the concession stand.
If you’re going to a movie and actually want a snack, buy it there. If you want to save money, have a snack before you go or after you leave. “Sneaking” in food is just a slap in the face of the movie theater.
Q7: Buy-it-for-life with a baby
We just had our first ultra sound yesterday and are so excited. We are now wondering which products you recommend for first time parents, the buy it for life type of products.
Many baby items aren’t “buy it for life” at all because, frankly, your baby is going to grow up awfully fast. Most baby clothes only get worn a few times before that little one just outgrows them. Before you blink, they’re transitioning away from milk to table foods, too, and then they’re learning how to get potty trained.
The biggest question with “buy it for life” and babies is whether you plan on having more children. If you’re not planning on that, then “buy it for life” doesn’t have a whole lot of meaning because most of your items will be used for a few months and then passed along to Goodwill.
If you are going to have multiple children, I highly suggest cloth diapering as it will save you a mint and drastically reduce your garbage production. We used Bumgenius, which are pricy up front, but if you use them approximately three dozen times, you reach the break-even cost against disposables and after that it’s much cheaper.
Beyond that, it’s still difficult to make “buy it for life” recommendations, so I’ll just suggest a few of the best things we used. We used Playtex VentAire BPA-free bottles that worked through all three children, though most bottles should survive that. Sarah used a Medela Pump-in-Style for all three children, though we didn’t use it much with our third one since Sarah stayed home with him until he was almost a year old. It worked great all throughout, but you’d expect that. We handed down blankets, clothes, baby beds, and all sorts of items like that, but again, most should survive three children.
All of these items will make for tremendously good baby shower gifts (along with the usual clothes and blankets you’ll receive).
Q8: Food date discounts
My grocery store always has a section where they have items that are close to or just past their “use by” date. The prices are really cheap but I’m worried about the food. Is it safe?
There are some differences between what exactly “sell by” and “best by” dates actually mean, but it’s for the customer, they’re pretty similar. For the most part, sealed goods that sport a “sell by” or “best by” date have a pretty long shelf life before they would do harm to you, one that’s usually far past that date.
So what does the date indicate? Freshness. Items past that date are more likely to be stale. Generally, companies use those dates as an indication as to whether their customer service department should respond to a customer’s complaint about a low-quality product.
“Use by” actually has a different meaning. You should probably avoid using items after their “use by” date because any food with a use by date is a perishable good – think of a gallon of milk. You shouldn’t generally find “use by” items on this kind of shelf.
So, if you’re looking at goods with “sell by” and “best by,” I wouldn’t object too much to buying and using an item that’s close to that date, especially if it’s cheap. I’d still use it quickly after bringing it home, though.
Q9: Jim Cramer’s frugal rant?
Did you happen to see Jim Cramer ranting about how frugality is damaging American business? Thoughts?
He’s right, to an extent. I think many aspects of the American economy became overextended in the mid-2000s, fueled by American consumers that were spending at a rate far outside of American history. We’re hung over from that splurge right now.
Compared to that period, America is more frugal. Savings rates are still low, but they’re closer to historical norms than now.
The result is that there is less money flowing to businesses that produce less-essential goods, which isn’t a good thing for investors in those companies.
So, overall, he has a point. Does it matter to you? It shouldn’t.
Q10: New car questions
One mistake I made was to lease a new car three years ago instead of buying a used one. My lease is up in July, and my husband and I have decided to buy the next car. I commute from Des Moines to Ames every day, so it’s important that the new car is good on gas (my current car gets around 32 mpg) and that it’s reliable.
I have $44k in student loans at 6.8% interest. We have $20k in cash. Our thought is to purchase a certified pre-owned car for $15k and drive it for the next 7-8 years (or 100,000 miles). We could put the $15k towards the student loan and pay off two of the loans ($7k each) or towards the car and have a fully paid off car. But, we can get a car loan from Veridian for 2.5%. My husband wants to put the money towards the student loan, and I want the satisfaction of the paid off car, even though I know we would save more in interest on the student loan. What would you do?
My second question concerns the car itself. I could buy my current car off the lease and avoid the lease end fees and mileage overages for $14,900. But, the car doesn’t get good reliability ratings from Consumer Reports, and I find aspects of it to be sub-par. It would also be off warranty. Would you keep the car you’ve driven for the past three years or trade for a car of similar value with a warranty and better ratings from CR?
It’s nice to get a question from a local person. If you’re commuting from Des Moines to Ames every day, you’re definitely nearby.
If you’re buying a car and don’t have the cash or assets to pay for it, your best bet is to get a late-model used car, get the cheapest loan you can, pay it off, then keep making those payments into a savings account in order to save for the next replacement. Once you have that loan, you should make decisions about overpayment by comparing interest rates on all of your debts. If you have other debts with an interest rate higher than 2.5%, you should pay those off first. However, when your car loan is paid off, you should keep making that “payment” into savings so that you never have to get a car loan ever again.
As for the leased car, treat it as just another buying option available to you right now. Shop around and see what other options you have for a cost comparable to that leased car. Just consider it one buying option among many. If you can find a more reliable and/or fuel efficient car for a similar price, then go with that and don’t worry about the leased car.
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.