Reader Mailbag: Reading Long Books

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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. Roth IRAs and standard IRAs
2. How do people get rich?
3. Tailgating and profit
4. Marriage and conflicting money values
5. Buying individual stocks
6. Church as social group?
7. Best place for extra income?
8. Interest-free loan from grandpa
9. Wrong SSN
10. A day in the life

I tend to prefer longer books. I like books that create a world so detailed and full of information that it springs to life in your head, and it often seems that the longer narratives do it better than the shorter ones.

The problem is that my periods of uninterrupted reading as an adult are shorter than they were when I was in high school and college.

How do I solve it? Usually, I’m simultaneously reading a short book and a long book. The long book is usually for personal enjoyment, while the short one is usually a personal growth book – personal finance, time management, parenting, or something like that. That way, the long book can spread out over a month, while I usually finish a short book a week.

They’re usually on such different topics that it’s not hard to keep them straight, thankfully.

Q1: Roth IRAs and standard IRAs
A friend brought up an interesting point about Roth IRAs last weekend that I haven’t heard before. He said that if you reach the income cap and can no longer contribute, your money won’t be earning interest in the same way, so if you expect to pass the cap, you should use a traditional IRA from the start. My wife and I currently each contribute to separate Roths; I don’t think it’s terribly likely that we’ll pass the income limits (we both have high earning potential but have chosen lower-income paths within our fields). But if we somehow were to get there, would we be losing money?

The big difference seems to be the starting tax rate – at 25-28%, my investment switch performs better, but at 33% it changes over to favoring traditional. There are some gross simplifications here – it doesn’t allow for increases in tax rate or contribution limits over the course of the investment, and ignores a period where you could be in between the upper and lower income limits – but granted those it seems like it shows that my friend is wrong. What do you think? Did I miss something obvious? I thought this was an interesting angle since I haven’t heard it discussed previously – but perhaps that’s because it’s not true…
- Jeff

It’s perhaps true at the current moment, but so much of the situation is shifting all the time. For example, what are you invested in? Is it doing well or not in the short term? Are tax rates for your bracket going up or down? Is your income going up or down? Is the contribution limit going up or down?

All of those things are variable, and because of that, it’s essentially impossible to get a bead on it.

If you’re in a 33% tax bracket but are still able to contribute to a Roth, what you’re really asking yourself is whether or not the rate now is going to be higher or lower than what you’ll pay in retirement. I almost can’t foresee a future where income taxes do not go up, so if I had a choice, I’d rather pay them now at current rates.

Q2: How do people get rich?
I don’t understand how people who start with nothing get rich. How do people get rich?

- Emily

First of all, the general impression that people have where a lot of people start from nothing and become very wealthy is a bit misleading. The people that make large leaps in income level tend to be very rare, but when you just look for the rare cases, they stand out.

So, how do they do it? There are usually a lot of factors in play. The biggest one is usually hard work. Often, they develop a skill or a set of skills that is in demand in some aspect of the world. Many sports stars come from poverty and they do it because they worked like crazy to develop their athletic skills. Many people who become wealthy in entrepreneurship did it because they devoted themselves in an incredibly focused way to their area of choice.

Often, people who come from nothing have several mentors that helped guide them, and they often continually tap many of the relationships they built in their life. They made an effort to build friendships and relationships with people who were doing the things that they dreamed of doing. Much of the time, people who build their own wealth are pretty frugal people (their children are sometimes not that way, but that’s a different subject). Even after all that, there’s still some significant luck involved.

So, there’s a lot of things to think about: luck, mentorship, lots of hard work, selective friendships, a willingness to take risks and build your own thing, and many other things come into play.

I’m putting this letter from Joe right next to Emily’s letter because it somewhat illustrates what I’m talking about.

Q3: Tailgating and profit
My friends and I go tailgating before every home football game. There are thousands of people out there in the parking lot each doing their own little thing. Surely, there’s got to be a way to make some money on this situation. Any ideas?

- Joe

Before you start selling things, you’re going to want to make sure that you’re legally allowed to do so. Some universities frown on sales in the tailgating area, while others are fine with it. Contact the school to find out their policies.

If you can sell there, the sky’s the limit. Pretty much any food item will sell reasonably well, as would things like face painting and clothing/memorabilia sales. You just need to decide what you can provide that’s good enough that people will want to buy it.

A final point: whatever you do, start relatively small. Don’t spend thousands of dollars getting started when you’re not sure if it will all succeed. Start off on a much smaller scale and if the demand exceeds what you can handle, grow with it.

Q4: Marriage and conflicting money values
I married a man who has a large sum of assets (most are in stock/retirement and real estate investment). It’s been almost four years now and I still have a hard time getting around the number…partly because most of the assets are not in cash where I can see. I grew up in a low middle income family. Prior to meeting my husband, my idea of a nice life was to pay off a mortgage payment in my mid 50s (San Francisco housing market) and work until 65-67. Then, few months ago my husband started talking about retiring in his early 50s (he’s in his early 30s now). We would certainly have the means to do that at the rate we have been saving. Yet, somehow, these new concepts are very hard for me to comprehend having grew up in a family that had very little. I am also finding my lifestyle and preferences changing, too. Prior to meeting my husband, I was a poor graduate student who was very happy living in a 400 sq-ft condo. I didn’t have much yet I was satisfied with what I got. Even the thought of spending $100 on a bag few years ago was outrageous to me. Nowadays, I found myself thinking about buying a bag is asking for about 2k…I have been having these dreams of the life I want to have…that would involve lots of luxury and comfort. Yet, deep inside, I am a very frugal person. I don’t like spending money. My husband has been trying to help me feel more reflex about spending money, but no success there so far. I have a very hard time letting myself spend money (both my parents are extremely frugal and they instilled that in me), yet, I found myself having these desires to live a more comfortable life.

- Sally

It seems to me that you’re questioning who you are and what your values are more than anything else here, and that’s something I can’t help you with.

What I can tell you is that the values people hold dear change throughout their life, and it’s usually a very slow and gradual process that’s connected to the life they lead, the relationships they build, and the things that they learn. There is no “bad” or “good” path (excluding obviously wrong things, like harming others), just different paths.

As long as you are maintaining a strong financial buffer against the unknown and preparing for the future you want to live, spend as you please and as your heart tells you. If you know your bases are covered, you have a lot of freedom.

Q5: Buying individual stocks
My husband and I have decided to start investing in stocks. We don’t want to buy index funds because we’re very particular about the companies we invest in for ethical reasons. So we’re going to buy individual stocks.

We’re sure of six companies we want to invest in, but that list doesn’t seem diverse enough. If one of those companies fail, we lose 16% of our money, which is scary. We want to invest in more companies.

How do we find more companies to invest in? We’re looking for stable companies that we can research a bit to find out if they match our ethical needs. Do you have any other advice?
- Margie

I strongly agree with you that if you’re investing in individual companies, you should invest in more than just six of them.

I’m guessing that if you’re looking for stable companies, you’re probably going to want large-cap stocks. If I were you, I’d start with a list of the companies in the S&P 500, which you can find here. If you’d like it broken down further, you can look at the 100 companies with the largest market capitalization.

Take those companies and start researching them. Toss out ones that don’t match your ethical needs and invest in some of what’s left. I would try to invest in companies that are in different fields, and I would lean toward ones with good bond ratings and a consistent dividend.

Q6: Church as social group?
My wife and I just moved to a small town. Our neighbors are friendly but we’d like to meet a lot of people in the community. Local sports were the big thing where we are from but here it seems to be the church. My wife and I are agnostic so we feel really weird about going to church if we don’t believe in what they’re saying, but we’d like to become a part of the community. What do you think about all this?

- Ronald

I don’t think there’s any real problem with attending the services of a church that you’re unsure about or don’t necessarily believe in as long as you’re doing it respectfully and with the goal of understanding what’s going on. Use that time as a chance to try to really understand why people are there and what the core ideas really are.

Even in my own church, I don’t fully agree with everything the pastor says, but I do take the ideas with me and think about them and try to challenge myself with them. You can’t build something strong if you don’t regularly test it.

If you’re doing that, then becoming part of the community is pretty much second nature. Just find activities associated with the church to participate in and you’ll quickly build up some relationships.

Q7: Best place for extra income?
Background: About 12k left in student loan (projected pay off July 2013). Currently investing 0 in retirement (Dave Ramsey Plan), but will be contributing what I’m currently contributing to pay off my debt when I pay off my debt. My current home loan is 3.875%/20 years (only 6 months in, refinanced earlier this year), with a balance of 153k.

I squeezed $100 out of my budget this month, and given the current current mortgage rates, I’m at a dilemma.

I can currently get refinance to 2.75%/15 year, that would cost about $100 extra per month, but add about an extra $100 in equity per month, for a given difference of about 13k extra in equity over 5 years.

Should I put the extra $100 in my debt repayment, and then eventually into retirement; or put the $100 into my house equity via the refinance?

Edit 1: I do have an emergency fund (about 30k), and have some retirement (about 30k).

Edit 2: Re the refinance, the closing costs would be about $900, thus the total cost over 5 years (including closing costs, and extra payments), would be about 7k, but I would have about 13k more in equity. The way I view it is I’m spending 7k to get 6k in returns, almost doubling my money.

Edit 3: Re my student loan, it is at the typical 6% interest rate, but I’m projected to pay it off in about 9 months, so they extra $900 ($100 per month over 9 months) towards it wouldn’t make too much of a difference in the long run (e.g., pay the debt 1 month faster)

Edit 4: I’m really reluctant to pay down my student loan with my e-fund. I really like the e-fund in place, and by not using it, it forces me to pay down my debt faster.

Edit 5: The only reason I’m considering refianncing is how low the mortgage rates have gotten. 3 years ago (when I bought the house), I got a 5.875%/30; refinance 6 months ago to a 3.875%/20; and now I can get a 2.75%/15. In theory, I would like to refinance after I pay off my debt, but the driving force is i) how low the rate is now and ii) what will the rates be in summery 2013 when I projected to pay off my debts.
- Nathan

Given what you’re describing here, I would put the extra $100 toward my student loan and make it disappear, assuming that you’re sticking with the Ramsey plan (which is totally reasonable).

Before I did that additional refinancing, I would make sure that I could handle the payments on a 2.75% loan over fifteen years. Since you said you “squeezed” the $100 out of your budget, I would not add it to a required monthly bill until I was certain it was something I could regularly do.

In other words, I’d largely stay put and stick on the path you are on.

Q8: Interest-free loan from grandpa
My grandpa gave me a $5000 interest free loan to buy a car so that I can commute to work. He says to pay me back when I can afford it. I am really struggling to make ends meet and I’m finding it really hard to pay him back anything, but I feel really guilty whenever I see him. He says not to worry about it, but I can’t help it. What can I do here?

- Bailey

You need to sit down and have a long chat with your grandpa about all of this. He obviously cares deeply for you, or else he would have never given you the loan.

I would keep it private, between the two of you, and I would also bring along a full picture of my financial situation and ask him for some help in organizing it and figuring out what to do. I think that if you approach it from this angle, you won’t be asking for a reprieve from repaying the loan.

I’ll be honest: knowing what I know about parenting and grandparenting, there’s some chance that your grandfather gifted you this money and told you the loan story to make you feel better about it or to help with family appearances. However, it might also be a legitimate loan. It’s really hard to tell. In either case, I don’t think he would have ever intended you to feel badly about it, and I think it’s worth a chat with him.

Q9: Wrong SSN
My employer somehow recorded the wrong Social Security number when I started my new job. I’ve now been here four months and I just discovered it. I talked to HR and they fixed it but what else should I be worried about?

- Martin

I would contact HR and ask whether or not they contacted the government to correct the mispayment of the taxes. If not, you really need to encourage them to do so.

What do they need to do? They need to file forms W2C and W3C with the IRS, the sooner, the better.

If you work for a large company, they’ve likely already done this, but with a smaller company, you need to make absolutely sure this has been done.

Q10: A day in the life
Can you chronicle a day in your life and all you do to save money? Sometimes I feel overwhelmed with the huge number of ways to save money and think if I could see how you do just one day it might help.

- Victor

It’s very difficult for this to be of any value because my days are each fairly different from each other, plus my days are going to be far different from your own. For example, I work from home, so one of my big cost-cutting measures is to run the temperature very high in the summer (minimizing air conditioning) and very low in the winter (minimizing heating). I compensate by wearing very little when I work in the summer and bundling up when I work in the winter.

Most days, I simply try to have a routine that actively minimizes or avoids spending money. I eat leftovers most days for lunch and some days for breakfast. We make a meal at home most evenings. We rarely go out in the evenings, as we prefer to find family things to do at home.

The key to frugal success isn’t to try to apply every tip to your life. It’s to look at what you’re already doing and ask yourself if there are ways to cut the cost of what you’re doing without eliminating what it is that you find valuable there. Since everyone does different things, everyone thrives on different tactics.

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.

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