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. Handling a massive pay cut
2. Balance transfer concerns
3. Saving for down payment
4. Moving or staying put?
5. What about TSP?
6. 403(b) rollover to Roth IRA
7. Checking account sign-up bonuses
8. Student loan versus down payment
9. What is an ESOP?
10. Disguising questions
Over the last few weeks, I’ve been using stevia as a sweetener in some foods as a replacement for sugar. A teaspoon of stevia in a quart of iced tea. A bit of stevia in a cookie recipe. You get the idea.
At first, I didn’t like it. It didn’t taste like sugar to me. What I found, though, was that the more I used it, the more “normal” it seemed. The “different” taste didn’t bother me any more and I appreciated what it added to the food.
This is true of almost any change you try to make. We’re so routine oriented that the change seems bad at first, but quite often, when we give ourselves a chance to become acclimated to the change, everything turns out fine.
Q1: Handling a massive pay cut
I’m in my early 30s and I’ve not yet begun saving for retirement. There are several reasons for this. I’m not originally from here so I don’t know where I plan to settle down. Also, I’ve taken a massive pay cut. I used to earn $37,740 but I’m not even scraping the $20,000 mark now. My partner pays the rent, so I can manage with smaller expenses. I plan to go back to graduate school soon (which will be paid for so no student loans). I have about 4 months worth of emergency savings and no significant credit card debt. I take good care of my 2003 car so I plan to keep it for another few years. My pay rate should increase starting next month, taking me to about $28,000 per year. Should I worry or just continue putting whatever money I can in to savings account for emergencies? Other than spending far less than I earn, I’m a novice when it comes to financial matters.
I think your emergency fund is more than adequate for your life situation. You have an adequately large emergency fund and if you’re going back to school on scholarship, that’s another positive.
My concern would be living expenses while you’re in school again. If I were you, I’d start saving up so that when you return to school, you’ll have plenty of money to cover your life expenses so that you can focus on studying and building relationships with other graduate students.
So, yes, I would keep shoving money into savings, but I wouldn’t think of anything beyond a few months of living expenses as an emergency fund. Think of it instead as a “life during graduate school” fund.
Q2: Balance transfer concerns
I have a credit card with a balance of $3200. (Not exact, I rounded up). I am paying about $54 in interest monthly, my interest is 18%. I pay $500 a month on this, but a good chunk is vanishing in interest.
I have an offer of 0% interest for 21 months on another card. I am considering doing a balance transfer, and I would save a good chunk in interest and pay the balance sooner. (The new card would never otherwise be used).
But I like the card I have (amazon rewards). If I do a balance transfer, will I have to close the card I have, or can I keep it and continue to use it?
Typically, you don’t have to close the card you already have to do a balance transfer to a new card. Often, the new card will just issue a check or an electronic payment on your behalf to the old card, eliminating the balance, then creating that same balance on the new card at 0%.
The end result is that your old card has a $0 balance, while your new card now has the balance of the old card.
Be careful with this, though. Knowing that a card you often use has a $0 balance can be a temptation to use it more on things you don’t need and quickly rack up an additional balance. Don’t bury your future in debt.
Q3: Saving for down payment
My husband and I (both around 30 years old) spent the last 1.5 years aggressively chipping away at our student loans, and all of those loans are now paid off. We’re now trying to figure out what makes the most sense to do with our money (our combined annual income is over $160,000, and so we have a fair amount that we can put away each month). We have the following constraints/goals:
-In about 12 months, we will very likely be moving to a new region (with relocation $) and hope to buy a home within a year of moving
-We’ll also likely want or possibly need to either replace our current car or purchase a new-to-us car in addition to our current car
-Right now, we currently rent a home; we have at least 3 months of emergency funds ($10,000) in a savings account; another $5,000 in our checking account; no debt (credit card or otherwise); about $6,500 in a Roth IRA (which we may eventually use toward a down payment), and about $20,000 in a 403b.
Now that our student loans are paid off, I will return to putting as much money into a 403b as I can get matched by my employer (for the time being, my husband cannot receive matching through his employer). Our top priority is saving up for a down payment (we may have some sort of assistance on this from a future employer when we move, but cannot be sure), and we plan to save the $$ that we had been using to pay off student loans for this purpose. But we’re unsure where it makes sense to keep the money that we’re saving for a down payment. We could keep it in a savings account, but aren’t really sure what our other options are (we would like to be able to take out the money we save as early as 12 months from now).
If you’re looking at a timeframe as short as a year (and without a clear resolution date), a savings account probably is your best option. It’s very liquid (meaning you can get your money out easy), extremely stable (you won’t lose money in it), and does earn a return, albeit a small one. It’s a great place for short term saving when you can’t afford to lose any of the saved money.
If I were you, I would not bank on any sort of assistance for moving from a future employer. Never, ever manage your finances assuming something that may or may not ever happen. Assume no help and then, if you do get assistance, consider it a windfall, because that’s what it amounts to.
Just keep dropping money into your savings account as rapidly as you can and see what the near-term future holds for you.
Q4: Moving or staying put?
My wife and I are selling our house (at this moment we are waiting to hear on a counter-offer) and we are struggling with a decision. We have decided on two locations where we would like to live. The first one, Henrietta, is where we live now and I work. The second, Victor, is about 25 minutes away. Victor is where we grew up and have friends and family back that way. We are struggling because Victor is more expensive. We would have to pay 20-40K more for a comparable house. That county’s taxes are a little lower (typically 500-800 dollars).
So we know that staying here in Henrietta is much more practical. I have no commute, we could get the same type of house for much less and we like if not love the school district for our daughter. Conversely, Victor holds emotional appeal. We WANT to be there, know that we received great educations and would love for our daughter to graduate from there. A short term benefit is that they have full day kindergarten instead of 1/2 day for next year.
Quick financial snapshot is that we carry little debt (only mortgage and student loan), have 20% to put down on houses in our price range, and our frugal in every day life. We know we can afford the higher prices in Victor, but it just goes against our frugal nature.
I know you can not make this decision for us, but I thought you might be able to talk about whether an emotional appeal can ever overshadow a practical decision and how you and your wife would work through a situation like this. We have done T charts, pros and cons and bascially ran around in circles mentally.
It’s not a decision I can make for you. You have to decide which factors are more important for you personally.
Given that the two locations are less than a half an hour apart, I would probably live in the more cost-conscious area. Several of my closest friends live about half an hour away from me, yet I manage to see them several times a month. We take turns going to each other’s homes and also doing things at midway points (like state parks and the like).
If I were you, I’d ask yourself what you’d actually gain by having a 25 minute daily commute to work versus a 25 minute drive on the weekends to spend the day with friends and family. I’d rather have a weekend drive than a daily one, when it comes right down to it.
Q5: What about TSP?
I know you recently reviewed IRA’s and 401k’s, but I was wondering if you could take a moment to review TSP (https://www.tsp.gov/index.shtml). It’s meant for Federal employees, but I’d love to hear how you rate it in comparison to the other options out there.
I’m an active duty military service member who donates 5% of every paycheck into my TSP account. I’m set up for the 2040 Lifecycle fund (https://www.tsp.gov/investmentfunds/lfundsheet/fundPerformance_L.shtml). I am currently 24 years old…and my plan for the moment is to serve 20 years, retire from the military, then take up a second job for another 20 years or so and get double retirement. Do you think that I should continue to put 5% into my TSP (which I believe does not get taxed right now like a Traditional IRA), or should I stop that and focus on putting the 5% into a ROTH IRA?
TSP is essentially comparable to a 401(k) for U.S. government employees. This means that taxes are deferred, much like a Traditional IRA. The investment choices in TSP are pretty solid.
If you’re getting any form of matching from the government in your position, I would use the TSP and get every drop of matching I could. The value of the matching blows away any other factor.
If you’re not getting any form of matching, I would probably focus instead on the Roth IRA, because it provides post-tax income later on that will balance with the pre-tax income you have.
Q6: 403(b) rollover to Roth IRA
I am a 36 year old teacher and have been contributing to a retirement plan (403b) for 4 years with full employer match. I am fully vested in my 403b, meaning I am entitled to a small pension when I reach retirement age. I am now leaving the profession, but am at a loss as to what to do with that money. I have my own Roth IRA, and I thought of rolling over my 403(b) funds into my Roth IRA, but the catch is this: I would only be able to rollover my contributions, which are about 10,000 (essentially losing all of the past employer match) which would be taxed before going into my IRA. So my question is: should I rollover my 403(b) into my Roth IRA and lose the employer match or should I just let it sit for the next 30 years and receive a small pension check every month?
You may already know this, but if you roll over your 403(b) into your Roth IRA, you’re going to take an immediate tax hit, as you’re moving pre-tax money into a post-tax account. You’ll have to pay income taxes on the money you move out of the 403(b), which could be a few thousand dollars, and you’ll have to cover it out of pocket.
While having the money in the Roth IRA is probably better long term (because you won’t have to face those tax bills later, which you’ll eventually have to do with a 403(b)), the tax hit is often painful for people, particularly on a low salary.
If you can easily handle the $3,000 (or so) tax bill, I’d roll it over. Otherwise, I’d just leave it sit.
Q7: Checking account sign-up bonuses
There are lots of offers out there to open checking or savings accounts at banks that offer you a sign up bonus for opening an account and establishing direct deposit. I was wondering if there was any actual downside to opening these accounts, making a few direct deposits, collecting the bonus, then transferring the money to my normal account and closing the account. My work makes it very easy for me to take part of my paycheck and allocate it towards direct deposit, so this is not an issue. I’m also aware that these bonuses would be considered as taxable interest income in most cases. I am more concerned about whether or not there are any hidden fees surrounding this, and then of course the moral implications of tricking the banks. Have you ever done this? Do you know if there really are any actual down sides legally or financially? As far as moral implications go, I suppose that is up to the individual if there aren’t any laws or regulations that are being broken.
Most banks are wise to this “strategy” and put some caveats on the offer, such as maintaining a minimum balance for some period of time. Usually, the penalty for violating the terms of the offer is worse than the “bonus” you get for signing up.
If you can find a plan that doesn’t offer such caveats, then take advantage of it, by all means. The odds are, though, that you won’t find one.
Very rarely are the bonuses on an account worth the hassle, at least from my view. They’re worthwhile if you’re actually switching banks, but if you’re jumping through the hoops just to get a small bonus, it really doesn’t add up with the time investment and the risk of messing up the terms of the agreement.
Q8: Student loan versus down payment
I have a question and want to get your opinion on it. I am 28 years old and I still live at home. I want to move out but my mom says that I should hold off a little longer and save to buy my own place. She said that if I go rent I will be trapped and never have the chance to save for my own place. I live in the DC area and rent is extremely high here. It would cost me about $1000.00 a month to share an apartment.
I got finished paying my car off a little while ago ($250.00 a month). I have about 25K in student loans. To help pay these down quicker, I have been paying an extra $100.00 on them a month and saving the $150.00 for a new car.
The extra $100.00 a month goes to the smaller of the two student loans. It is about 5K. I have been paying on it for about 2 years now ($61.11 for ten years). I calculated that by putting this extra $100.00 amonth that I can have this loan paid off in three years verses eight more years! That would increase my cash flow by $161.11 a month after the three years.
I know that paying my student loans quicker does not save me any interest but it gives me peace of mind. So, my question is what would you do? Would you put that extra $100.00 on the loan or put it away to save for my own place.
Why wouldn’t paying your loans quicker save you any interest? Unless you have a loan arrangement that specifies this in some fashion (which none of my loans nor my wife’s loans had, nor did the loans of any of my close friends), early payments should reduce your loan’s balance, which would then reduce the subsequent amount of interest charged to your account. Even if you have a set monthly payment, it’s likely that extra payments are reducing your balance and thus your interest.
If I were you, I would try to get rid of that loan as fast as possible in my current situation. If the loan is gone and you’re still able to live with such low costs, I’d start saving as fast as possible for a down payment.
Similarly, I’d keep my eye out for work outside of the DC area where the cost of housing isn’t so back-breaking.
Q9: What is an ESOP?
The company that I worker has a 401(k) plan. I make contributions of 8% of my salary to my 401(K) plan. The company does not make a matching contribution to the 401(K) but instead makes contributions to an ESOP account (i.e. safe harbor contributions of 3% in which I am fully vested). I would like to know long-term if the ESOP would be as beneficial to me, than if the employer otherwise made contributions directly to the 401(K) account. What benefit does the company have in maintaining an ESOP plan? What exactly does an ESOP do?
An ESOP is an Employee Share Option Plan. Essentially, instead of contributing to your 401(k), your company is giving you shares in themselves at some rate (3% of your salary, apparently). When you leave the company, you receive the shares and the company usually buys them back from you immediately (this is probably specified in the paperwork with the ESOP).
I would not view this as a retirement plan. Instead, I’d view it more as a severance bonus for when you eventually leave the company. This may be at retirement or it may be earlier (if you find another job).
The danger with an ESOP – and a big reason why I encourage people to not bank their futures on it – is that it’s not diversified. If your company suddenly starts struggling and collapses (like Enron, Worldcom, Lehman Brothers, Bear Stearns, etc.), your ESOP will have almost no value. If your company’s stock drops through the floor and then you’re let go, you’re going to get pennies on the dollar. That’s an enormous risk, and not one I’d ever bank my future on.
View this as a perk and plan your retirement as though it has no value. You’ll be a lot safer that way. Who knows? You might wind up with a very nice severance bonus some day because of your ESOP.
I often change personal information and other specifics in reader questions, from names to personal details. Often, when you hear a question discussing something that seems a bit vague, I’ve eliminated a specific element from the question.
Sometimes, readers ask me to change stuff after it’s published and I do that to the best of my ability, though it often changes the answer I give to their question. This has gotten me into trouble more than once, because I place a higher priority on protecting identity information for readers than on my own “need” to look perfect.
When I’m really unsure, I often don’t publish the question at all.
Got any questions? Email them to me or leave them in the comments and 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 hundreds of questions per week, so I may not necessarily be able to answer yours.