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. Child investing with tiny amounts
2. 25% not enough?
3. Combine retirement accounts or not?
4. Identity theft and online accounts
5. Eyeglass help
6. Do savings devalue?
7. Selling an underwater house gracefully
8. Overinvested in silver
9. Emergency fund concerns
10. Focusing at work
I’ve been trying to figure out which one is the “best,” but you know what? They’re all pretty similar when it comes to their forecasts. I’ve been watching a ton of services and so far I haven’t seen any of them stand out from the pack because they’re all more or less saying the same thing.
My advice? Stick with the one that has the interface you like and you’re used to. There isn’t one that has a sizeable advantage over the others in terms of the data.
Q1: Child investing with tiny amounts
You recently wrote about teaching your kids how to handle money, giving them an allowance and having them invest 20%. What do you have them invest in? How do you have them invest with such limited funds?
It depends on how old they are. Before they’re eight or so, the idea of a savings account is pretty abstract, so they’re mostly just saving their quarters in a jar and watching it build. They really appreciate the amount of money they’ve slowly built up.
At age eight, I plan on bringing in the idea of earning a return on your money via a savings account. We’ll go sign them up for a savings account, deposit their collection of quarters into the account, and watch the money “appear” out of nowhere in the form of interest. I can get them into an account that earns just shy of 1%.
In a couple of years, I’ll start teaching them about other investment options and I’ll let them make some of the decisions. We’ll look at stocks and bonds and other such things. Prior to that age, I don’t think the idea of investment risk really clicks with them. I know my oldest child would feel like someone stole from him if he invested in something and the value dropped.
Q2: 25% not enough?
My wife and I have been putting 25% of our take-home income each month into a savings account – about $900 a month. We’re trying to save for a down payment but the level is just going up so slowly. Should we go ahead and lock in a mortgage now while rates are low even though we’d have to get a second loan to cover the down payment?
I wouldn’t, unless you see a clear sign that mortgage rates are about to rise significantly. I don’t see any such sign on the near-term horizon.
This seems to be more of a matter of being impatient and wanting a house now. The only problem with doing that is that it will cost you a significant amount of extra money to have it now rather than when you’re financially ready for it. A second loan is simply a giant money leak.
Be patient. You’ll be in much better shape over the long haul if you do.
Q3: Combine retirement accounts or not?
I have two 403(b) plans from a job I left 6 years ago, containing a total of about $7000. When I moved to my current job, I started a new 401(k) and left the old plans alone. The totals in those accounts fell during the recession, but they’ve finally started to show some growth again.
I expect to work for at least another 30 years. Throughout my 20s, I followed the usual advice to put away something each month for retirement; the type of account didn’t seem to matter much. Lately, though, I’ve been wondering if there’s any benefit in either combining the two 403(b)s into the 401(k) I’m funding regularly through my current job (which now contains about $35,000) or rolling them over into a brand new Roth IRA. What would you recommend?
Rolling from a 401(k) into a Roth IRA is a taxable event, so if you do that, you need to be prepared for the tax bill that will hit you. Figure that it will be a significant portion of the balances of your old account.
That being said, the rollover into a Roth IRA is probably your best long-term bet because of the control you get over the Roth IRA (you can choose the investment house and have a lot more flexibility in terms of investment choices), plus you’ll now have a significant chunk of post-tax money for retirement.
If you’re trying to figure out whether to roll over your old accounts, compare them. Look at the fee ratios for the investments you have in each account and, if the old one is better, stick with that. If the new one is better, roll it over.
Every single time you give out your personal information or data concerning your accounts to anyone, no matter how secure they are, you bump up your risk of identity theft a little bit. No matter how many guarantees are offered, there is never a 100% assurance that anyone will be truly secure with your data. There are always unethical employees.
So, for me, the question becomes whether or not the service is offering me something that’s worth enough to warrant bumping up my identity theft risk a little bit. Given my use of spreadsheets and You Need A Budget, I just don’t see what Mint provides me that’s worth that identity theft bump.
It seems strange that you would call someone “foolish” for not using a product that adds identity theft risk without giving them anything that they find useful in return.
Q5: Eyeglass help
I have recently become a eyeglass wearer. What’s the best way to clean them? I have bought the little premoistened wipes, but they are expensive and adding up. I bought a cloth thing, but it really did not work as well as I’d like. I am assuming that you have been a long time glass wearer.
It depends entirely on the lens material and any coatings you had applied to them. You’d really want to ask an eyeglass specialist for advice regarding your particular glasses.
For my own, I generally use a soft cloth for quick wipes and then thoroughly wash them a time or two a day with soap and water. I haven’t had any significant problem with scratching while doing this.
It really depends on what your glasses are made from, though. My previous pair was very hard to clean due to an awful lens coating that was supposed to prevent glare.
Q6: Do savings devalue?
A friend of mine told me that putting money in a savings account is useless because the money is actually getting less valuable in there. Inflation means that every dollar buys less than it did the year before and the interest on a savings account doesn’t keep up with that. Is he right?
He’s right in that the rate of inflation is higher than the return you’ll get out of a savings account, meaning that the real value of the money, even with the interest, is going down slowly over time.
Where he’s wrong is with the implication that you’re better off not doing anything with it. The value is going to go down faster if it’s sitting in a no-interest checking account or under your mattress.
There are investments that beat inflation over the long haul (based on past performance), but they often have serious short-term hiccups where the face value of the investment drops over the course of a year. Inflation makes that drop even worse.
Q7: Selling an underwater house gracefully
We have a home that is underwater. The mortgage owed is $180,000 and what the house might sell for is $150-170,000. We live in a bad neighborhood, which we were unaware of when we moved in. For eight years, we’ve wanted to get out of this house and move to a better neighborhood. The market tanked, and at one point our house was only worth $100,000.
We are at our wits end and feel it’s the right time to get out. We are growing our family in another year, but don’t want to be on a time limit to leave. We can stay with my mom for a few months to save up and either rent or buy a home in another town.
We would like to consider the idea of selling our home at say, $160,000 and then bringing $20,000 plus fees and commissions to the closing to be done with the house.
We have some money saved and family might help us make up the difference if the chips fall outside our means. Then we’d make a plan to pay them back immediately.
What my question to you is, what type of sale is this or is it just a regular sale? Since we’d be paying the difference, not doing a short sale or short pay-off of the home, but closing with a check to pay the balances – what might this type of sale be called, if anything?
Do people do this? I realize in this economy, most people are selling for what they owe or doing a short sale. We don’t want to take a hit on our credit for two years, plus we have no hardship. We just cannot live in this area any longer and now that units are selling, we just feel we need to commit to getting out.
In another year or two it’ll probably be the same situation, we’d just have a little more savings buffer to do it.
Have you heard of this type of thing before? Or of people doing this to just get out at all costs and start over?
It’s a short sale, but unlike many short sales, you’ll have the means to make up the difference, so in the eyes of the bank, it’ll be the same as a normal sale.
A short sale is when you sell an item with collateralized debt on it where the value of the item doesn’t match the balance of the debt. That’s true here.
Many times, when people say they’re doing a short sale, they don’t intend to come up with the rest of the money. This leaves the lender holding the bag on the loss and usually ruins that person’s credit. This won’t be true with you.
I’d just call it a normal sale if I were talking to anyone else about it.
Q8: Overinvested in silver
My father invested a ton of money in silver when it was between $30 and $35 an ounce. It’s now below $20. I know he put a lot of his retirement savings into silver. He’s not talking about it at all and has kind of gone into “lockdown mode.” What do you think is the best thing for him to do?
Your father made a very poor financial move. By buying a lot of silver, he simultaneously ensured that his investments weren’t diversfied and that his singular investment was very, very volatile.
He should speak to a reputable fee-based financial advisor about this. Since I don’t know his full financial situation, I can’t advise him on what to do here.
I will say this: never take your financial advice from a commercial on talk radio, particularly when they’re trying to get you to invest in just one commodity. Don’t do it. It’s a bad idea, no matter how “hot” the commodity is.
Q9: Emergency fund concerns
I am just at a point of saving some money for an emergency fund, while also paying off my debt. I have $2,000. saved in an emergency fund and I want to keep saving; I don’t want to spend it (I guess I like seeing the number increase!). But come next month there are a couple of graduations for nieces and nephews and my husband and I would like to help them get on their way; not too much money, but they are special people to us, so a generous gift is in order. Unfortunately, the upcoming bills for next month will be just covered by our pay and I won’t have any spare money out of our regular pay to give these gifts. But I could take the money from the emergency fund. I just don’t want to take out of the emergency fund when I’ve been working very hard at building it up. How can I get over this feeling that it’s OK to take money out of the emergency fund? Even if an appliance broke or something else happened, I don’t think I’d want to take money out the emergency fund either. But that’s what its there for, right?
This isn’t an emergency. Instead, it’s a sign that you need to rethink how you do personal financial planning.
If you know an irregular expense is coming up in the next year, you need to start saving for it now. For example, if you know a $500 insurance bill will be due in a year, save $40 a month and you’ll have that money when it comes due. Want to give $100 to a niece for graduation? Save $8 a month and you’ll be there.
As for the pickle you’re in, treat it like an emergency, but refill that emergency fund as fast as you can.
Q10: Focusing at work
I can’t even imagine telecommuting or working at home. I’d get nothing done. I can’t even focus at work. Every few minutes I want to look at a website or check my cell phone or go talk to someone.
I sometimes have this problem, too.
My solution is to turn off every possible distraction. I completely turn off my cell phone. I close all programs that aren’t related to my work and hide the shortcuts to them. Sometimes, I even switch off internet access. I close the door to my office. I make sure there’s nothing that will distract me in my office.
Then, I work. If I feel my attention wandering, I remind myself that I need to stay on focus. After a while, I’ll slip into a “zone” where I get really productive and don’t even notice the time flying by.
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.