Reader Mailbag: The Fog

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. Pre-conception college fund
2. Using tax refund effectively
3. Ashamed of using aid
4. The four percent rule
5. Dan Ariely
6. Look for job now?
7. Slow cooker oatmeal recipe
8. State income tax
9. Donating unwanted books
10. Focus

I have this minor irrational fear of fog. Whenever a day is foggy, I do not want to go out in it.

I think it’s because my range of vision is so limited in the fog. I can’t see what’s ahead of me or behind me and I have this strong sense that somehow I’ll become lost, even though it’s ludicrous.

This morning is foggy. I guess I’ll write. Inside.

Q1: Pre-conception college fund
My husband and I have two new nephews who are 6 months old and 9 months old. We’ve discussed the idea of starting a college fund for each of them but we are unsure of how to go about it. We want to be able to start them each with a small amount of money (lets say $100 each) and we want to be able to put a small amount into each account each month. We want the account to have stipulations for each of them (for example, they can only use the money for college and if they don’t go to college then they can use the money towards a down payment on a home at a certain age). We realize these accounts will in no way fully fond college for either of them, but we’ve both been bogged down by student loans and know that even little amounts can help out.

We don’t currently have any children of our own, but plan to start a family in the next year or two. We’ve discussed starting a college fund for our future children now, again starting small and adding a small amount each month. I’m thinking the best way to do this would be a CD until we actually have a child.

Any ideas greatly appreciated (types of accounts to use, brokerages to go through, limits on use, etc.). We are also unsure of how to tell their parents that we’re doing this for them. We know one set of parents will be very thankful, but are afraid the other set of parents will find some way to be offended by it.
- Julie

You can start 529s for your nephews. This article can provide full details on how to do this. If this is primarily for education, then that’s the route I would take.

You can also start a 529 now for a child you haven’t had yet. Just name yourself as beneficiary and then, when the child is born, switch the beneficiary to your child, which is completely allowed.

If you’d rather have a more general savings vehicle, you can certainly use savings accounts or CDs instead of a 529, but if the saving is for education, the benefits of a 529 make it the best choice for most people.

Q2: Using tax refund effectively
This year we received about $5000 back from federal and state combined. Below are some details about our financial situation.

I stay home with our son, so we are currently living off of my husband’s income (which ends up being about $4200/month). I have been able to find odd jobs on the side, but nothing that brings in any steady income. Our debts add up to about $15,000; that breaks down to $8k for a car loan with 6.8% interest rate and $7k for two student loans ($2500 @ 4.75% and $4500 @ 6.8%). We have a credit card with a great rewards program that we pay off in full every month, and about $1500 in a savings account.

My husband has a stable job, but recently applied for his dream job (and is waiting to hear back about a second phone interview), meaning we could end up moving in the near future from Denver to either San Francisco or Seattle (both of which have a higher cost of living that our current city).

So…with all that in mind…what do you think would be the wisest use for our tax return?

I was originally in favor of putting it towards to car loan, which would bring the balance down to about $2000, which we could then pay off in six months or less. With a potential move in our future, I’m wondering if it might be a better idea to build up our emergency fund and put it into savings. If he gets the job, the company will pay all costs associated with moving, but I’m a bit anxious about the higher cost of living.

My husband is in favor of buying us each a new phone (ours are each over three years old and are starting to die), and then splitting up the rest between the car loan and savings.
- Margie

If I were in your situation, I’d pay off the higher interest rate student loan.

From what you’ve posted here, it’s your highest interest debt (it’s tied with your car loan, actually) and, although you do get a little bit of tax help from it, it’s a pretty tiny amount. I’d pay it off for one simple reason: it eliminates a monthly bill.

That way, from here on out, you can take the money you used on that monthly bill and use it for other things – paying off other debts, building an emergency fund, and so on.

Q3: Ashamed of using aid
My younger sister is 25 years old. She has two children. Her husband died in an auto accident about a year ago. She’s trying desperately to make ends meet but she refuses to use things like SNAP or food pantries or things like that because she says she’s not poor. Please tell me how I can convince her to take advantage of these things.

- Brian

Those programs are actually made for people like her. The situation you’ve described is the poster child for why SNAP and food pantries exist. They’re made for people who are struggling in their situation and, ideally, will use that help to boost themselves back onto a stronger path.

Yes, some people use those programs as part of a cycle of dependency, but that’s not the purpose of the programs. The purpose is to make sure that no one has to struggle to get food on the table for their children. She should never have to struggle for that, ever.

You can’t make her go, of course, but you need to make it clear to her that the real purpose of such programs is to help people in her exact situation. That’s why they were created.

Q4: The four percent rule
A lot of books seem to quote the 4% rule as fact. Where does it come from?

- Larry

It comes from statistics, actually.

Let’s say you have $1,000,000 in retirement savings and it’s all in a very broad stock market index fund. 4% of that is $40,000. So, let’s say you take out $40,000 a year to live on. If you then look at every single thirty year period in the history of the stock market, you have about a 95% chance of still having money after 30 years of doing this. That’s the 4% rule – it gives you a very nice likelihood of being able to live out the rest of your life in retirement if you just take out 4% of your retirement balance each year.

You can run those numbers for yourself over at FireCalc. Put in $40,000 as your annual spending, $1,000,000 as your total, and 30 years as the length.

Q5: Dan Ariely
More and more when I read your posts I am reminded of the books Dan Ariely has written (such as Predictably Irrational). Are you familiar with his work? I know he does a lot of TED talks and he teaches a free online course through Duke University. If you haven’t checked him out, I think you’d find his work very interesting.

- Susan

I’ve read both of his books and I’ve included some of his TED talks in my “pieces of inspiration” columns. He’s a pretty fascinating guy.

Ariely’s work focuses on why we make decisions that are sometimes “irrational,” meaning they aren’t the most beneficial choice for us in a given situation. Why do we choose to overspend? Why do we choose to eat unhealthy food? Those are irrational choices.

He offers a lot of reasons for those choices. Usually, it comes down to using the wrong cues and the wrong information as the basis for our decisions.

Q6: Look for job now?
My current job is on really shaky ground. Our boss has told us that a big round of layoffs is coming in October and I’m pretty sure my entire department is getting removed. This is a new situation for me and I’m wondering if I should be job hunting now or if I should focus on getting the best possible recommendation and maybe salvaging my current job.

- Mike

You should be job hunting now.

You’re currently employed, so that gives you a leg up in the process. Your company has known issues that will probably lead to your unemployment soon, so any supervisor that isn’t evil will understand why you’re applying elsewhere right now.

You’re in a great situation to find yourself a new position, so I would do it now. You have until October. Good luck.

Q7: Slow cooker oatmeal recipe
I need your oatmeal recipe. Love the stuff. Need more excuses to be able to indulge.

- Angela

Take some butter and coat the inside of your slow cooker with it. You don’t need a bunch, you’re just looking to make sure that the oatmeal doesn’t stick to the inside of the slow cooker.

Add six and a half cups of water, two cups of steel cut oats, two cups of milk, 1/4 cup light brown sugar, and a teaspoon of vanilla extract to the cooker. If you want any fruit, add up to a cup of it. Put your slow cooker on low, leave it on overnight, and you’ll have great oatmeal in the morning.

I’ve noticed that when the air is drier, it’s better to use a bit more water than that, up to about seven and a half cups. Feel free to experiment.

Q8: State income tax
Why would a person ever choose to live in a state with state income tax?

- Robbie

States get their money one way or another, either through state income tax, local income tax, sales tax, property tax, or something else. Virtually every state in the country is within 5% of each other in total tax burden for their citizens, as you can see here.

Those taxes do affect you one way or another unless you literally buy nothing at all and are homeless. If you rent your dwelling, then the property taxes are affecting you in the form of higher rent. If you’re in a high sales tax area, everything you buy costs more.

Some states use a state income tax and thus have lower property taxes and lower sales taxes. Others don’t have an income tax but have various local taxes. The state will get their money.

Q9: Donating unwanted books
On getting rid of books, the local public library is a good place to drop them off.

Either they will add the books to the collection, or if they are not appropriate, the Friends of the Library will sell them and give the proceeds to the library for new books! And they will send a thank you for [the X number of books] for your tax purposes!
- Trevor

If you’re not selling them in a yard sale or swapping them at a used book sale, the library is absolutely a great place for used books.

My local library will pretty much accept any books. If they can’t put them directly on the shelves, then they’ll put them out during the library sale, as you mention.

My only problem is that if I give away fifty books, I wind up bringing home plenty to replace them from the library book sale.

Q10: Focus
How do you focus when working at home? Whenever I work from home, I find myself constantly distracted by things and I can’t get anything done.

- Danielle

I have a spot in my home where I work. That’s what I do there.

When I really need to focus, I turn off my cell phone, unplug my internet service, and bear down on the task at hand. The fewer distractions there are at hand, the easier it is to focus.

There are usually a few household tasks floating around in my head that can distract me. I try to take care of those early in the day so that they’re a non-issue.

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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