Summertime Reading

Reader Mailbag

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. Moving in together
2. Paying no-interest bills ahead
3. Extra car keys?
4. Retirement basics
5. Do I need financial advice?
6. Home ownership questions
7. Home with expensive maintenance
8. Personal car use at work
9. Youth sports equipment
10. Savings bonds and credit cards
11. Best one-shot tip for saving?
12. Betterment question
13. Negative view of affluent
14. Wedding question
15. Considering suicide

During the colder months, I tend to read heavier books. I dive into a lot of dense nonfiction and literary fiction. During the warmer months, I usually read lighter books – genre fiction (like science fiction and fantasy) and nonfiction that’s simply fun.

Over the years, I’ve learned that my readers tend to enjoy lists of my summer reads rather than my winter reads, so I thought I’d share a little list of twelve books or so I’ve either already read or plan on reading in the warm months this year, from May to September. Please, check these out – I think many of you will enjoy them. First, the fiction:

Mr. Penumbra’s 24 Hour Bookstore by Robin Sloan
You by Austin Grossman
Life After Life by Kate Atkinson
The Bees by Laline Paull
The Lives of Tao by Wesley Chu
Fuzzy Nation by John Scalzi
The Quantum Thief by Hannu Rajaniemi

And here’s the nonfiction:

Tune In by Mark Lewisohn
Take This Bread by Sara Miles
Present Shock by Douglas Rushkoff
A Million Miles in a Thousand Years by Donald Miller
Hatching Twitter by Nick Bilton

Hopefully you’ll find something to enjoy here!

Q1: Moving in together

I have purchased a 3 bedroom house last year and I rented out two of the rooms for $500 each. I recently got engaged and my fiancee will be moving in with me soon and we are not planning on having any renters. As she is a University Student for two more years she will not be providing much help financially. And I have not saved up enough emergency fund yet either. I was wondering where I should take the extra money from, should I reduce my savings, which is 15% of my income or should I reduce spending on life like going out, having dinner out etc.

If I reduce from savings how much should I reduce it to. And if I reduce spending on life will that negatively affect the relationship because we both love going out, having dinner etc.
- Sam

You have to decide what’s important to you. No choice is without consequences.

It’s also not entirely an either-or choice. How often do you go out to eat now? What happens if you reduce that by, say, twice a month? Intentionally “eat in,” having something cheap, then intentionally bank the money.

What I found when reducing my own treats is that the more I reduced them, the more special each treat became. I now actually prefer eating out less often, going to bookstores less often, and going to coffee shops less often because the occasion now feels much more special and I appreciate it more. I get way more out of my dollar that way.

Q2: Paying no-interest bills ahead

Recently my hubby and I have began the slow climb out of our debt mess. We have an emergency savings and our bills are being paid on time. We are working on our debt of medical bills and have very little credit debt. While I would like to continue our focus of working on debt, my husband feels we should pay forward on our rent, auto insurance and utilities. My concern is that we would be using non banking institutions responsible for our money. Should something happen to our home and we must move, we could be left waiting on money owed to us. Which of us is correct?
- Stephanie

While it’s a good idea to pay ahead on debts where you can reduce the total interest paid and perhaps actually eliminate a monthly bill, it doesn’t make financial sense to pay ahead on your bills.

A much better approach is to simply save your money in a savings account if nothing else.

Not only does that money constitute a “bonus” emergency fund, it’s now earning interest which will help you. If you’re paying $1,000 a month in rent and instead put that in a savings account for a month instead of “paying ahead,” the bank will give you a dollar or so in interest plus you’ll have the flexibility of using it for something else if it comes up. If you pay ahead, you get neither of those benefits.

I’m on your side on this one, Stephanie.

Q3: Extra car keys?

Is it a good idea to have an extra set of car keys around the house for emergencies? It seems like it would be a good idea if I lose my keys but couldn’t they be stolen?
- Denise

This is one of those things that has benefits and drawbacks on both sides of the coin.

We have duplicates of our car keys in a hidden place in our home that Sarah and I can access in a pinch. It has really only helped us once (that I know of) but it does provide some ease of mind.

I think the odds that someone would break into our home, find those keys, and then use them to steal our car while it’s sitting in the driveway is extremely limited.

Q4: Retirement basics

I’m a young professional working for a small company in a rather high cost of living area. When I joined the company, I opened a Roth IRA through Schwab and contributed to that irregularly. In my third year with the company, I became eligible for their retirement plan (a SAR-SEP) and signed up for it. I defer about 10% of my paycheck each month, and (the way I understand it) every year the company contributes at least 3% of my salary. Through the plan, I have access to an advisor who uses American Funds.

I still have the Roth, but haven’t contributed much to it lately. I’m wondering what would be the best way to handle the two accounts. Merging them seems to make the most sense, but I don’t know how easy that would be and what it would cost. Furthermore, rolling everything into my company’s plan would take away the simplicity and accessibility of Schwab’s system. (The former doesn’t have many online tools.) What do you think is the best way to handle the two accounts?
- Shawn

I would actually just leave them as they are. A SAR-SEP is basically equivalent to a traditional IRA, which means that it’s holding pre-tax money. Your Roth is holding post-tax money. They’re both useful to have.

I’m not a big fan of either of the two investing houses you mention – I’m a bit of a Vanguard fan – with only a slight preference toward Schwab because, as you mention, they have pretty solid online tools.

I don’t think you gain anything by merging the accounts. I think most people are better off with a mix of pre-tax and post-tax retirement savings. So, I’d just leave things as they are.

Shawn has a second question.

Q5: Do I need financial advice?

My second question is more related to financial advice in general. I don’t have any debt, so I’m interested in getting the most out of investing – both for retirement and as a way to grow wealth in general. I’d like to talk with a financial advisor about my goals and get some advice, but I doubt any of them would be interested in talking with me because I’m young and don’t have a lot of money. How can I find someone who can help guide my financial decisions?
- Shawn

If you don’t have a lot of assets, a financial advisor really isn’t going to help that much. I’m not sure what you’re hoping to get out of the meeting that will make the cost of the meeting worthwhile.

Your best approach is to simply learn as much as you can and keep building up your assets. The exact investment is less important at this point than simply maximizing savings.

When you reach a point where a 2-3% difference in annual returns on your investment makes a difference that’s more than a paycheck or two, then you should start looking for an advisor. I suggest finding one that’s a fee-only advisor to start.

Q6: Home ownership questions

The standard down payment is 20% of the purchase price. I always assumed the bigger the down payment the smaller the loan so why is it not recommended more often to put a larger percentage down? Almost all the info I read on mortgages only mentions the 20% down or the lower options of 5% with a FHA loan and etc.

I understand you don’t want to tie up all your money into your home so is it best, even if a person has 30% or 40% to put down, to only put the minimum 20% down and save the extra 10% or 20% for emergencies or in savings?

I was looking into purchasing a condo at about $300,000 max.

With the current interest rates on mortgages being still fairly low, would it be best to put the 20% down on home now while the rates are low? Is it better to wait another year or longer to save up a bigger down payment of 30% or more but possibly risk a higher interest rate?

In the long run it seems to make more sense to borrow less money at a higher interest rate but I wasn’t sure if my math was correct. My finances in all other parts of my budget are good (emergency fund, retirement and etc are funded well).

One last question, when I read that the mortgage should not be more than 28-30% of your pay. Does that mean on the net or gross pay? If it’s on net pay, it would seem the figure would be very misleading because after taxes gross pay can be quite small. Also, does that figure include taxes, fees, insurance and other homeowners fees involved (like maintenance fees on a condo)?
- Stephen

If you already have that 20%, you’re in better shape than most. Unless you can do it without completely depleting your savings, you should stop at a 20% down payment. Don’t push it to 35% and leave yourself without savings.

I’d far rather just pay 20% down and have a very healthy emergency fund. If you can make the 20% down and also keep an emergency fund, you’re probably ready to buy.

That 28% target means that 28% of your monthly income would be going toward a mortgage payment. I would use net pay when figuring that out.

Q7: Home with expensive maintenance

My husband and I (no kids) are having an ongoing dispute about our house. We purchased at the low in the market (2009) and refinanced a year ago into a 15 year mortgage at 2.8%. Because the market in our area has rebounded, we have about $200K in equity. However, since we refinanced, our mortgage payment has increased. We are able to pay it, but we could rent a smaller apartment for about $1,000 less than our current mortgage payment. I am of the belief we should sell the house and invest the proceeds and rent until we are able to buy again. My husband wants to stay in the house until we retire in 30 years. He wants to raise kids in this house. I see it as a place for shelter, which we can get for less by renting and have liquid investments and stable emergency fund. My husband sees this as a good long term investment that still costs less than renting. Right now we’re still saving about $2,000 each month into an emergency fund, but the house is 70 years old and ongoing maintenance is becoming a burden. My husband sees this as the price of owning a home, but also wants the emergency fund to pay for it. Each year I have on my list to finally get 6 months of expenses in an emergency fund, but each year, we never reach that goal because of this or that related to the house. Additionally, we cannot do any major work on the house because the major systems are not up to current code. Thus, in the next 7 years, we’re going to have to overhaul every system in the house: electrical (original knob and tube); plumbing (lead pipes); roof; HVAC; siding (asbestos).
- Marsha

It’s not an emergency if you know those expenses are coming up. If you can see an expense coming four or five years down the road, that doesn’t constitute an emergency in any way. It’s a goal you should be saving for.

If saving for that goal is burdensome for you, then you’re probably not financially equipped to own a fixer-upper. That’s the “catch” of owning a fixer-upper – the initial price is low, but it’s going to absorb a lot of your money in fixing it up so that it’s livable. People who buy an expensive home are essentially avoiding all of that.

If you’re struggling with the mortgage and the repairs that are needed, you probably should downgrade, either to a smaller house or to an apartment. Whether you choose to rent or mortgage is up to you, but you need to reduce your monthly expenses.

Q8: Personal car use at work

At work, we have a policy where if we use a car for work purposes, we’re supposed to fill up the tank first, then do the work, then fill it up again and turn in the gas receipt for reimbursement. This seems really cheap because it doesn’t include other costs like oil changes and wear and tear. What should I do here?
- Adam

Ideally, your employer should be reimbursing you for personal car use using the IRS mileage rates. However, it’s at their discretion as to what to do here.

In your situation, you should save information on their reimbursements and your mileage. You should be able to deduct the actual costs to you on your taxes, recouping at least some of the difference.

Businesses can choose to reimburse however they choose, but this basically offloads some of their business expense to you. If it’s low mileage, it’s not very much, but it’s the principle of the matter.

Q9: Youth sports equipment

Do you have any experience buying secondhand youth sports equipment? My five year old is in a summer soccer league and needs shin guards. The local secondhand sports store sells them but I have no idea of the quality.
- Amy

I would not hesitate to buy secondhand shin guards for a five year old. At that level, shin guards are all more or less plastic with a bit of foam rubber padding with an elastic or Velcro band to hold them in place, which is all they need to protect their shins. I speak from experience as someone who has coached a five and six year old soccer team.

For other sports equipment, I shop first at secondhand sports stores, just to see what they have in stock. Most youth sports equipment is not very worn at all and works perfectly fine for a youth-level sports league. Things may change as they reach high school and sports become more competitive, but at that level, secondhand gear works fine.

I’ve never skipped on a secondhand piece when I’ve found one and I’ve never experienced a problem with them. This goes for both youth and adult used sports equipment.

Q10: Credit cards and savings bonds

My husband and I were previously rather frivolous with our money. As a result, we have a maxed out home equity line plus $30,000 in credit card debt on one card, at a 25% interest rate. I have tried without success to get the interest rate lowered on the credit card. Our credit score is good; we have always and we continue to pay all bills on time from our checking account.

For the past 4 years, we have put nothing on this card except in absolute emergencies (unavoidable dentist bills, new glasses, emergency vet bills, emergency car repairs). However, it seems as if it will never get paid off. Due to a significant income cut (40%) 4 years ago, we are only able to pay about $500 month in addition to the interest on this card monthly.

We have a bunch of savings bonds purchased in 1992, that could be redeemed at any time. They earn 4% interest, and are worth approximately $10,000 total. We consider these savings bonds our “last financial stand” and are really afraid to let them go.

But I’m wondering if we should use the savings bonds to pay down the credit card debt. If we do that, that would mean less monthly interest on the credit card. But it would also mean if there were an emergency, we would be forced to use the credit card — or get into our 401K.
- Susan

Compare the interest rates. You’ll get a 25% “return” on your money if you cash out those bonds and apply the money to the credit card bill because of the balance that will disappear, which will no longer accumulate interest. You’ll get a 4% return by leaving them alone.

Now, when your card is paid off, you should “pay back” that savings in some form or another. I usually recommend that people start saving for retirement when all of their high-interest debt is paid off. When you reach that point, that’s what I would recommend for you. You can breathe a little, but don’t just rebound to the previous levels of spending.

You’re in the type of situation that a savings bond was made for. You left it alone until you really needed it. Now it’s time to put it to work.

Q11: Best one-shot tip for saving?

What is your single best money-saving tip?
- Grant

Quit smoking. Bar none. If you’re a smoker, nothing else will help your finances like giving up the cigarettes.

If you’re not a smoker, my best tip is to make as many of your meals at home as you can. Even if you shop at Whole Foods, family meals at home are going to be cheaper than eating out. You can make this even better by doing most of your food shopping at a discount grocer like Aldi or Fareway.

Another really good tip if you drive a lot is to air up your tires to the recommended maximum pressure listed in your owner’s manual and then, when you’re driving, accelerate slowly out of stop signs and stoplights. Acceleration is where your gas goes. These two little changes will improve most people’s fuel efficiency by at least 20%.

Q12: Betterment question

In a recent reader mailbag there was a question from Eric asking about your opinion on Betterment as an investment management service. You answered the question as if you were talking about a traditional investment manager, referring to how it doesn’t make sense to “hire someone to manage your investments”. Betterment and similar services like WealthFront and Personal Capital are doing a sort of computerized investment management model with pretty low fees (0.35% and under annually on assets). I opened an account back in February, and it does seem like a good fit for someone who isn’t interested in constantly manually rebalancing a portfolio and paying trading fees, especially if you’re investing a relatively small amount. They also let you manage your general asset class allocation so you get a say in your risk tolerance. What do you think are the drawbacks of programs like this for small, passive investors who still want a bit of control over their risk tolerance?
- Randall

What do you mean by “constantly manually rebalancing a portfolio”? I’ve been investing for most of a decade and the only time I’ve “rebalanced” anything is by changing my contributions, which I’ve done once in an eight year period. If I were to “constantly manually rebalance” my portfolio, I’d lose a truckload of money to taxes. No one does this besides day traders.

To me, the advantage of services like Betterment is pretty graphics. I don’t actually think they offer convenience at all because you’re still picking and choosing which investments you want. You start off by choosing your allocation, which is exactly what you’d do at other investment houses. For example, I invest in three funds at Vanguard, with a percentage of my monthly money going into each one. That’s the same exact thing that you’re doing with Betterment. The difference? None of those funds have an expense ratio above 0.10%.

I’ve tried using several of the “algorithm-based investment” services. Each time, I walk away thinking that the website looks pretty but not understanding in the least what I’m getting by bumping my fees from 0.08% to 0.30%. It is just not clear to me what they provide that you don’t get by picking your own asset allocation elsewhere using index funds.

Q13: Negative view of affluent

One big change I’ve noticed that bothers me is that I have started to have a really negative view of people who flaunt their money especially when there’s evidence that they’re not super wealthy. When I see someone I know isn’t earning a ton driving a new car and talking on an iPhone and wearing amazing clothes, I get a negative feeling about them. I basically think they’re making dumb money decisions so how can I trust their moves in other aspects of life?
- Andrea

The choice of how to spend money isn’t a “right” or “wrong” thing. It’s simply a reflection of what matters to you.

What you’re really seeing when you see someone who spends in a different way than you is someone whose value system is different than yours. That makes you uncomfortable in some ways.

It’s often hard to say whether their value system will match yours in other areas of life. I can’t assess that. However, someone who is spending affluently is just choosing different values.

When I see someone who spends beyond their means, I don’t really think less of them, but I do reflect on how happy I am that I have no debt and some cash in the bank. I feel good about me rather than bad about them.

Q14: Wedding question

Within the next year/year and a half, I will be getting married. This August, I’m starting a PhD program (which happens to be the biggest dream/goal I’ve had for myself, ever, and I couldn’t be more thrilled). My income will be 16,300 before North Carolina taxes for (at least) the next 4 years. I have no personal debt, though my husband-to-be has a modest amount (around 6,000) that he will be paying off within the year per a repayment plan I help him set up. His income is fairly low, and is primarily commission-based.

My parents have generously offered to contribute to our “wedding fund” at the sum of $10,000, but this doesn’t stretch far in the wedding planning world. It DOES stretch far in the “real” world. With a cross-country move, two small (and one unreliable) incomes, a new apartment that needs furniture (pretty much everything besides a bed, which we have already), the thought of spending that much on one day has made me break out in hives many times.

Everyone, including my significant other, keeps telling me this is my ONE CHANCE to have a wedding and I’ll totally regret it if I don’t. They’re almost certainly right; I do WANT one. But at 28 and 29, I feel like we need to be focused on the future more aggressively if we ever want to own a home, have the opportunity to travel, or even entertain the idea of having children. Or simply know what it feels like to not have to constantly worry about money.

Given our circumstances, a wedding seems wildly selfish, indulgent, shortsighted, and the exact opposite of what being a married adult should look like. Am I being irrational in some way that I don’t recognize? Shouldn’t that large a sum of money be put towards practical uses, considering our budget has 0 room to save as it is?
- Susan

As always, it depends heavily on what you and your soon-to-be-spouse truly care about. I can’t tell you what’s right or wrong, but I can share what Sarah and I did.

We had a pretty modest wedding. We convinced a number of family members to give us wedding “gifts” in the form of help for our wedding and our reception. One family member got us an enormous discount on our reception location. A few others prepared the food. An old family friend made the cake. We worked together to decorate things. Sarah and I made our wedding invitations by hand together using an amazing laser printer that my old boss let us use for making the invitations.

We didn’t do it in a country club. We didn’t have a live band. Sarah didn’t wear a $5,000 dress and I certainly didn’t wear an expensive tuxedo.

But when I look back, it doesn’t matter. What mattered is that Sarah was beautiful and that we enjoyed that day a lot. Virtually everyone we deeply cared about was there. People laughed and danced at the reception. That’s what I remember.

Those things would have been the core of my memories regardless of whether we had the reception at a country club or if we had a live band or if we had the most beautiful custom-made invitations. They would have been huge expenses that didn’t really add much at all to my memory of the day.

If I had it to do all over again, I could afford the country club and I could afford the amazing dress… but why? They wouldn’t change the biggest memories. Sarah’s smile. The tables of people laughing and dancing. One of my oldest friends that I hadn’t seen in almost a decade showing up unexpectedly. Those are the things that stuck with me.

Q15: Considering suicide

I am in so far over my head that I am never going to get out of this. I can’t find work and I have $160,000 in student loan debt that will follow me forever. I have been living off of credit cards and now they’re all at their limit and I am going to soon be homeless. I don’t want to live like this any more.
- Arnie

I get a few emails a month along these lines. They’re very painful to read, but I make an effort to answer them personally with the best advice I can give.

The best thing I can suggest for Arnie and anyone else that feels that way is to talk to someone. If you don’t know where to start, visit Seven Cups of Tea, which is an amazing service for people who simply need someone to talk to. Having someone actually listen to your problems can make a tremendous difference in bringing light into a dark situation.

I can also tell them that they can do this. There is no financial problem that’s unsolvable. In the end, it’s just money. As long as you’re willing to open your eyes and work every day, you can dig yourself out of any hole. I’ve never been in a hole as deep as some readers, but I have certainly been in a hole where it felt more or less hopeless and I was able to dig out primarily due to hard work and not giving up. Those are the key ingredients.

It’s just money. Don’t let it rule you.

Got any questions? The best way to ask is to email me – trent at thesimpledollar dot com. IĆ­ll 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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