Reader Mailbag: Writing in Silence

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. Investing for a down payment
2. Finding the right investment option
3. Saving too much for retirement?
4. Bank or credit union?
5. ACN
6. Helping nephew for college
7. Emergency fund for single mom
8. Scheduling fun?
9. Refinance or not?
10. Replacing cable

Sometimes when I’m writing, I prefer silence.

Other times, I prefer music, usually albums I’m very familiar with or instrumental music.

At yet other times, I like listening to podcasts. Ideas trickle into the back of my head even though I’m not focused on the audio.

If I find I’m stuck under one of these environments, I change it. If I’m in silence, I’ll turn on some music. If music isn’t doing it, I’ll flip on a podcast. If a podcast isn’t clicking with me, I’ll switch to silence.

Often, that little change is enough to unlock the floodgates.

Q1: Investing for a down payment
I am married and 24. I don’t have any investments, but I recently inherited $40,000. I’ve thought of using it for a downpayment on a house. I don’t just want it to sit around in my checking or savings account. What would you suggest I invest it in?

– Roland

It’s not as easy as that. If you let it sit in your savings account, it’s going to earn a steady return and you’re simply not going to lose the balance. If it’s a 1% annual return, you will have $40,400 in there at the end of the year.

If you switch to most other investments, you’re going to start taking on risk in the hopes of scoring a better return. Some investments, like stocks, are really volatile, but have a very nice long term trend of a 7% return (roughly). Other investments, like real estate, are a little less volatile, but don’t return at quite the same rate (especially after the housing bubble burst).

What does that mean for you? It means that a year from now, your investments in stock might have gained 15% … but they might have lost 40%. Over a long period – well over ten years – the stock market settles into an average of a 7% return for a very broad-based investment. Individual stocks are even more volatile than that. If bad news hits a company, that stock price can drop by 50% before you can hardly blink. On the other hand, if you hit a company on the rise, it can bust through the ceiling in a very short time.

The question you always have to ask yourself is how much do you need a certain balance at a certain time. If you need to have $42,000 in 2015, then you should leave it in your savings account. If your time horizon is further out and you don’t specifically need a certain dollar amount by a certain date and can stomach losing some of it in the short term if there’s a good chance of getting it back over a bit longer term, then other investments make more sense.

The right choice starts with you and with what you need out of your money.

Q2: Finding the right investment option
The more I read about investing the more confused I am. Roth? 401(k)? Investment account? What investments? All of them seem good but I don’t know what’s best.

– Jerry

Much as I answered above, there is no “best.” It really depends on your timeframe and how much risk you can tolerate.

Your concern is a bit different than Roland’s, though, as you’re wondering whether to put money in various retirement options. Both the 401(k) and a Roth (whether a Roth IRA or a Roth 401(k)) restrict your withdrawals until you reach age 59 1/2.

My suggestion to you, Jerry, is to pick out a strong investment handbook, like The Bogleheads’ Guide to Investing by Larimore, Lindauer, and LeBoeuf, and read through it.

More important than that, start saving now regardless of whether you’re uncertain about what to invest in. Put your investing money in a savings account for the time being. Do it now. If you wait a year to start because you’re uncertain, almost no choice you make will make up for the year you lost. If you put that money in a savings account, you can invest it in a year in whatever you think is the right thing.

The single most important element in investing is actually putting as much money away as you can. $200 a month earning 1% is a far better investment than $0 a month earning 500%.

Q3: Saving too much for retirement?
I just went and made myself a summary of my 2012 finances. It was my first full year of work out of college: graduated May 2011, job October 2011. I’m 23 years old.

Upon crunching the numbers, I realized that I saved about 20% of my income to retirement in 2012.

I contributed 5K to a Roth IRA for each 2011 and 2012 this past year.
Through work I’ve been contributing 4% to a regular 401(k) AND 7% to a 401(k) Roth. I have no company match.

Is this too much? I do have other goals, such as wanting to go to graduate school in maybe 4-5 years and buy a house as soon as I could afford it. The Roth could be used to purchase a first home, so I don’t feel any regret about that. Should I cut down the work contributions? The account also made an auto increase to 5% to the regular 401(k) AND 8% to the 401(k) Roth for 2013.
– Jennifer

20% is a very healthy percentage for anyone, particularly a younger person who likely has many non-retirement goals for the years ahead.

You’ll be completely fine if you trim your overall contributions down to about 12%. If I were in your shoes, I’d trim the Roth 401(k), as you already have Roth contributions in your IRA and you’re not getting matching from your employer.

Take that money you’re not putting into the Roth and start saving it for your other goals. I’d spend some time clearly establishing what goals you have for the future, then research the best way to invest to achieve those goals.

Q4: Bank or credit union?
After living for 31 years in the same town, I moved to a new city. I used to do all of my banking with the local bank in my hometown so I need to start over with a new bank. I’m trying to decide whether a bank or a credit union is better.

– Harold

In the past, credit unions and banks functioned somewhat differently in terms of what they offer, but today, there’s not a huge amount of difference, particularly when you’re comparing credit unions to local community banks.

If I were you, I’d just gather information from the banks and credit unions available in your area. What do their checking and savings account offerings look like? Do they have minimum balance thresholds? Do the accounts have a reasonable interest rate? What are their hours like?

If you have social connections in your new area, ask them about it. Tell them you’re shopping for a bank and ask what they think. Are there some banks or credit unions that have known customer service problems? Are there other institutions that do well by their customers?

Q5: ACN
What do you think about being an independent business owner for ACN?

– Sandra

ACN, like many other businesses that offer the ability to become an “independent business owner,” is a network marketing organization. There are lots of variations on the idea, but here’s how it generally works.

Within such organizations, people sell products to earn a commission from the sales, but the only way to do well with the end sales is if you are an exceptional salesperson – and those people usually find much higher paying jobs selling for other corporations.

The way most of the money is made with network marketing is by convincing other people to join up as salespeople, marking you as their referral. That way, whenever they sell anything, you earn some fraction of the sale. If you’re effective at getting lots of people to sign up and they each sell at least some product, you’ll earn a fair amount of money, at least for a while.

In other words, the people on the end – those who are doing the sales and don’t have many referrals – don’t earn a lot of money. However, the people who have lots of referrals tend to do reasonably well and they’re the ones who are usually the ones touting how much you can earn from the system.

I don’t like these kinds of systems. They often result in people tapping their social network for sales and sometimes for referrals. I often feel as though this takes advantage of friendships, as friends will feel as though they should support you in what you’re doing, even if they don’t feel strongly about your product.

Q6: Helping nephew for college
My nephew is going to MIT in the fall. He’s the first person in our family to go to a really prestigious school so I’m really proud of him. I have about $100 I’m planning on spending on him as a graduation gift but I would like to choose an item that would actually be useful for him in college and I am not going to just give him cash.

– Victor

One good place to start is to look at what MIT suggests that people bring when they arrive. There are a lot of items on there that would make a reasonable gift idea.

For example, you could give him some of the following: alarm clock, small fan, umbrella, soap, shampoo, and other toiletries, a heavy winter coat, snow boots, a good bicycle lock (if he’s a bicyclist), a nice messagebaord, dishes, silverware, cups, a rug, a stereo system, a calendar, and desk supplies. Those all come from that list.

Toss in a thoughtful book that inspired you at that age and there’s a great gift. I’d suggest making a printout of that page and cross off the items you’re giving to him in your gift. Include receipts, too, in case others do something similar.

Q7: Emergency fund for single mom
I’m a single mom with a 7 year old daughter. I make about $48,000 a year. I am renting at the moment and am borrowing a car from my parents until I can afford to buy one of my own. (Side note – I got divorced last year after a 1 year separation. I had to sell my mini van at a loss last January in order to get away from the payments which I could no longer afford). I have two loans that I am working to pay off and no credit cards. Loan #1 – a signature loan with a balance of $11,500 at 12% with a biweekly payment of $180. Loan #2 – student loan with a balance of about $16,300 at 5.625% with a monthly payment of $268.

I am working to pay off the signature loan first due to the high interest rate. At the moment, I have just under $500 in my savings account. I know that people like Dave Ramsey recommend an emergency fund of at least $1,000 before you start working to pay off debt. Since I don’t own my home or my car (and therefore don’t have to plan for home or car repairs) and there are only two of us in the family, I’m wondering if it is smart to stay at this lower amount for now and start throwing extra money at my loan (I plan to pay an extra $100 a month towards loan #1). If I wait until I have $1,000 in my savings account, it will be several more months. I have to admit I am chomping at the bit to get this first loan paid off so that I can give my dad back his car.
– Sloane

First of all, I’m not so sure you don’t have to worry about car repairs. What exactly happens to you if the car you’re driving breaks down? Is someone else going to repair it and provide you with another car to drive – and you’re sure about this? If that’s not an absolute yes, then you have car worries.

Also, if I interpret your story correctly, you’re planning on buying your own car once the first loan is paid off. Are you going to buy that car without the $1,000 emergency fund?

The reason the $1,000 emergency fund is such a great idea is that it protects you against the disasters you don’t expect. Being a single mom with two kids, you’re primed for a lot of unexpected problems, and that emergency fund is going to make all of the difference in the world.

Q8: Scheduling fun?
I’ve been trying to balance a full time job and a girlfriend and a side business and it really seems overwhelming keeping everything afloat. I feel like the only time I get to have fun is if I schedule it in. “Here, from 10 AM to noon on Saturday, I’m free to have fun.” How can that be a good way to live?

– Marcus

To be honest, that’s more or less what I do. I pencil in family time and I also pencil in recreation time. This is particularly true during the week, where recreation time is extremely limited (basically one evening a week), giving my weekends more flexibility.

During the week, I mostly have a big block of family time (from when the children arrive home from school until they’re falling asleep, and then usually an hour or so with just Sarah) and a relatively small block of recreation time, which I intersperse based on the schedule of others. My work requirements flow around these blocks as needed, which I know isn’t an option for some, but it’s why I chose the professional path that I have.

I think that it’s something that most people do if they’re striving for some degree of personal success. You have to budget your time effectively. If you don’t, you’re going to start letting down big parts of your life.

Q9: Refinance or not?
Quite some time ago my wife and I set out to get out of debt. We paid down everything except the house and now find ourselves on the verge of having enough to pay off the house with savings. We are now having trouble deciding if that is the right thing to do. It is hard to let go of that money when it took so long to save. We contribute like we should to retirement savings and have a six-month emergency fund left if we pay the house off. The “financial gurus” out there tell you to not pay off the house but to keep the money invested as you can make more in the market. While I understand that, I also see keeping a mortgage as keeping some additional risk in your life. We could just refinance and invest the money we have put away. What is your opinion and what would you do?

– Leon

I’m in favor of paying off the house rather than putting that money in the stock market, all things told. Both sides of the equation are reasonable, but here’s why I side with that angle.

First, if you put money into the stock market or other investments, you expose it to volatility. Let’s say you put it into the stock market and some devastating news hits, as with, say, 9/11. Your investment goes into a rapid tailspin and you lose 10% of it pretty rapidly. It’s at that point that you realize you actually need the money – one of you lost a job or something. The volatility of the job has cost you.

Second, not having a mortgage payment drastically improves your monthly cash flow. You’re suddenly facing far fewer bills than before. If one of you decides to change careers or you choose another life move or life hands you a difficult decision, it’s not going to have a devastating impact and you’re not reliant on the stock market to time that decision. You’re also able to start saving again, but your monthly rate of savings will be much higher than before.

The way I feel about it is this: putting it in the stock market has a bigger potential upside, but it also has a bigger potential downside. Paying off the mortgage lops off the potential peak (a big stock return) but also lops off the potential valley (a big stock drop at an inopportune time). I prefer the latter road, because the downside would put me in a place that I never, ever want to return to.

Q10: Replacing cable
I like your idea to get rid of cable but most of the shows I watch are on basic cable so I think that’s a pointless tip. Alot of people feel the same as me because millions watch these shows.

– Jeff

If cable television is your chief form of entertainment, then it’s a reasonable entertainment expense.

The reason I advocate that people consider cutting their cable is for two reasons. One, people often never even consider it when they start thinking about frugality. They just pay the cable bill and focus purely on things like groceries. I have personally witnessed this phenomenon in the financial lives of many people.

Two, people often use television as the “default” time filler in their lives and it causes them to miss out on a lot of other things in life. There are many, many things I would rather fill my hours with than television – reading books, getting exercise, exploring the woods, and playing games with friends, just to name a few. All of these are less expensive than the monthly cable bill and, for me at least, deeply fulfilling.

Never put yourself where you won’t consider a life change that involves something non-essential, like television. When you start putting things off limits, it becomes harder and harder to achieve long-term meaningful change in your life.

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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