Questions About Boots, Roth IRAs, Expense Ratios, and More!

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. Car buying dilemma
2. Buying a home with inheritance
3. Expense ratio basics
4. Daily checklist example
5. Buy it for life: boots
6. Roth IRA strategy
7. Personal finance and greed
8. Finding decent free books
9. Martial arts and children
10. Why I want financial independence
11. 529 for future children
12. Thought provoking books
13. Loans or investing first
14. Why pay for subscription music?
15. Creative projects for older kids

My children have been playing a game called Cookie Clicker lately and there are currently two different browsers running the game on our family computer.

Normally, I wouldn’t mention this game, but I’ve had fun using it for a lot of math lessons for them, talking about how different upgrades were mathematically better than others by using the numbers in the game and some basic multiplication.

This has really intrigued my oldest son, who has been exploring this on a surprisingly deep level for his age. I don’t mind him playing a game if it’s making him work this hard at crunching numbers. He’s learning some good math skills, I think.

Q1: Car buying dilemma

My step-mom has offered for us to purchase her fairly new car for the total debt left on the vehicle, which will be $8000 at the time she is proposing.

The vehicle is a 2012 Hyundai Elantra, 4 doors, extremely well maintained, low mileage (65,000 km) and would be an ideal car for our city lifestyle. Looking online other used cars of similar milage and age they are listed for about $12,500-$15,000.

So what’s the issue? Seems like a great deal right? What is holding me back is that we sold my car about 2 years ago and scrapped my boyfriends old van about 1 year ago – and we haven’t missed having a vehicle! We live in downtown Toronto and either take public transportation, bike or walk for almost everything we do. So the question is do we even NEED a car?

One point pushing me in the direction of buying the car is that housing costs in our city are extremely high so our first house/condo purchase will definitely happen outside of our current neighborhood and will probably be outside of the range of biking or even convenient public transportation. We may need a car for traveling to the train to get into the city and for grocery shopping and other suburban needs. Of course, we could purchase a car at this time if we decide we need one, but it wouldn’t be for the ‘deal’ we could be getting for my step-mom’s car. We are looking to purchase our first home/condo in the next 1-2 years.

In our current situation I could see the car sitting on the curb during the week (neither of us have parking at work) and we would drive it up to my cottage on weekends in the summer or to visit out of town friends. We have been relying on friends and family for these kinds of rides and it has been working out fine but it is inconvenient to rely on others for this. We could also rent a car for under $150 a weekend.

Insurance on the car would be about $180 per month for myself or $130 per month for my boyfriend. Street parking at our current rental would be $200 per year. I have a large emergency fund and we are actively saving for a down payment. The $8000 would come out our house savings account which puts us further back from that purchase.

Does it make sense to pass up such a great offer for the car?
– Kelly

It really depends on whether you’re going to use the car at all in the next year or two.

Remember, you’re going to be dropping a total of about $2,000 a year for registration, insurance, and parking just to have that car sitting there. In two years, that means you’ve sunk $4,000 into that car, which is about the difference between what you’d be paying for it now and what it would be worth (remember, it will depreciate over that time, even if it’s just sitting there).

If you are strongly planning on buying a house in the next two years, then it’s probably worth it. If you’re looking at a target date that’s more than eighteen months to two years out, it’s not cost-effective to buy it. This assumes that you’re not using the car at all.

However, if the car will prove useful and will eliminate some weekend car rentals for you, then it’s probably a worthwhile purchase.

Q2: Buying a home with inheritance

My grandfather started a very well known construction business in the southeast in the 1960s and ran it until the mid 2000s when he sold the company to a group of investors. When he passed away, all of his children and grandchildren received a nice inheritance. Mine was about $300K after paying off all my debts.

Right now, I am debt free. I have a college education and make about $50K a year at a government job that’s about as stable as a job can be. I am getting married this summer to a woman that has about $30K in student loans remaining and no other debts and she earns about $38K as a teacher which is also a relatively stable job. Our credit is excellent.

Our question is how much should we spend on a house. We live in a fairly expensive real estate area so we wouldn’t be buying a mansion.
– Ronald

Here’s what I would do. I’d add up what the two of you are paying in rent right now, plus your renter’s insurance. I’d then halve that. Then, I’d head to a mortgage calculator like this one, change the term to thirty years, change the rate to 3.5%, and then play with the mortgage balance until you find a monthly payment that’s equal to that number you calculated first (half of your combined rent and renter’s insurance). Add $270,000 to that (that’s your down payment after you paid off her $30K in debt). That’s the ceiling on how much I’d spend on a house together.

Why half of the combined rent and renter’s insurance? That is the money you’ll be spending on things like homeowners insurance, property taxes, homeowners association fees, and so on. They’ll probably add up to at least half of your current rent and insurance costs.

I don’t know what your exact numbers are like, but I think that a home in the $350K range will probably be your ceiling. If you can find something that works well for you for less than that, go for the less expensive option.

Q3: Expense ratios work

Can you explain to me how expense ratios work? I don’t undertand them. Are they paid out like dividends to the company that owns the investment?
– Marcus

The company that runs your investment withdraws a tiny amount from your fund each business day to pay for the cost of running it and to earn a small profit. That withdrawal is factored into the gains and losses you see for that fund on that given day.

For example, let’s say you have a fund with an expense ratio of 0.2%. That means over the course of a year, it’s going to be withdrawing 0.2% of the fund’s value in those little withdrawals. Let’s also say that the stock market operates 250 days a year. 0.2% divided by 250 gives you 0.0008%. That’s how much the fund is withdrawing each day.

Let’s say a share of the fund is $200 and there are a million shares in existence, giving a total value of $200 million. That means that 0.0008% of that total value is $1,600. Thus, as part of the day’s gains and losses for that fund, the company will pull $1,600 out of that fund that day. That loss is spread over the million shares, so each share is actually paying a fraction of a penny in expenses.

You won’t see a big withdrawal, in other words. It’s a ton of little tiny withdrawals that are rolled into the day’s gains and losses.

Q4: Daily checklist example

Can you give us an example of what your “daily checklist” looks like? I guess I don’t understand what it’s useful for if you’re not putting stuff on it like “take a shower” or “brush your teeth.”
– Sara

My daily to-do list is made up of things I actually need to do each day plus things I want to check on each day. My current list is about 18 items; here are eight of them.

DDP Yoga (this is a form of dynamic resistance yoga that helps my back pain tremendously; I just do whatever’s scheduled for that day)
Check laundry (I see if a full load of my laundry is ready to be done)
Write 500 words fiction
Walk (this is my usual walking loop, which is 3 miles – sometimes I do other loops)
Lifetime Fitness Ladder (on days without DDP Yoga)
Brainstorm 5 article ideas
30 minutes learning (I spend 30 minutes a day learning about a single new topic)
Conversation with each child (this is actually three items; it’s a reminder to have a one-on-one conversation with each of my children each day about their lives, thoughts, worries, etc.)

It’s pretty straightforward stuff. Some of the items I do naturally, like the conversation with each child. Others are challenging, like the exercise. I find that the things on this list help ensure that I have a complete life.

Q5: Buy it for life: boots

Do you have any suggestions for long lasting boots for use in construction work? I have bought two pairs of boots that have lasted less than a year. I asked some of the other guys and they have said the same thing – the boots just wear out quick. Surely there is a better solution out there.
– Dan

I sent this question to three of my friends who have worked or currently work in construction. Two of them said that they basically did what you do – buy cheap boots that wore out.

The other one gave an interesting suggestion. He said he’s owned a pair of Red Wing boots that have lasted for four years now. He has extremely steady work in construction.

I looked at some of the boots there that seemed like they’d be good for construction (8″ boots with steel toes) and they are pricy. However, there are construction workers that have claimed lifespans of ten years or more from these boots.

I’d take a serious look at Red Wings.

Q6: Roth IRA strategy

Is it a good strategy for me to max out my Roth IRA through Vanguard by putting all $5500 in one index fund each year (such as Target 2045), or better to split the money up into different ones (like putting smaller amounts in an array of funds)?
– Robert

If you’re using a Target fund, you’re effectively already splitting up your money. If you look at the specifics of a Target Retirement fund, it’s simply a mix of different funds within that fund. Putting your money into Vanguard Target Retirement 2045, for example, is the same as putting 62.2% of your money into Vanguard Total Stock Market Index Fund, 27.6% into Vanguard Total International Stock Index Fund, 8% into Vanguard Total Bond Market II Index Fund, and 2.2% into Vanguard Total International Bond Index Fund. It’s already balanced.

The only reason not to use a Target Retirement fund is if you have legitimate reasons not to agree with how they balanced it.

Personally, I think it’s a pretty good balance for a retirement date that’s 30 years down the road. It’s a 90/10 split between stocks and bonds, which is pretty aggressive, but that’s how it should be this far out.

Q7: Personal finance and greed

Whenever I read personal finance sites like yours I can’t help but get a sense that it’s all about greed and accumulating as much money as possible. What about charitable giving and not living like Scrooge McDuck with a big swimming pool full of money?
– Tessa

Let’s say you make $40,000 a year. You could either spend all of that $40,000 a year, or you could live on $30,000 a year and bank the extra $10,000 for the future.

If you keep doing this year after year, if you spend your full $40,000, you’ll have nothing in the bank. If you keep saving $10,000 of it, you’re going to have hundreds of thousands of dollars in the bank.

You might come up with that $10,000 a year by driving an old car and living in a smaller house and eating most of your meals at home. In exchange for that, you get a lot of financial stability in your life and maybe, eventually, the ability to retire early.

To me, that’s not greedy in the least. No one is ripping anyone off or taking money from anyone else. It’s all about being smart with your choices and choosing things that reflect what you want for the future.

Q8: Finding decent free books

How do you find good free books for your Kindle? I sometimes look at the free books on the Kindle Store and most of them are just awful garbage. Most of the books I’m interested in reading are new releases that are really pricy.
– Alison

It’s hard to find a lot of good free books for the Kindle. Honestly, most of my Kindle books were purchased from the Kindle Daily Deal, which occasionally shows some great books for cheap.

Another useful source for good free Kindle books is your local library. My library has the ability to check out books that are readable on the Kindle, which has been really nice.

Most of the best free books for the Kindle are offerings from established authors who chose to give away one of their books for free to attract even more readers, or are older books that are now in the public domain. Here’s a good list of some of those.

Q9: Martial arts and children

You have mentioned before that you have enrolled your children in taekwondo. What are your thoughts on it as an activity for children? Did you get them into it so that they could learn self defense? Are you concerned that they might get into playground fights?
– Edward

The biggest reason our children are involved in taekwondo is that our oldest son’s best friend was involved and he invited our oldest son to a session with him. Our oldest son loved it and practically begged to start lessons. His younger siblings wanted to try it and they enjoy it too.

I think that many people imagine martial arts classes as being like the Cobra Kai dojo in The Karate Kid. Their classes are nothing like it. A lot of it is general physical fitness and activities that require lots of mental focus. They do a bit of sparring, but only with more safety gear than I think is necessary, and it’s made very clear that you shouldn’t use this stuff unless it’s purely for self-defense or in a tournament sparring setting.

More than anything, I think it’s teaching them focus and self-discipline while giving them some exercise. I’m pretty happy with that.

Q10: Why I want financial independence

There’s a very simple reason why I want financial independence. Right now, I am chained to my desk for fifty hours a week. I can’t even tell you all of the things I’d like ot be doing with that time. I’ve love to spend hours doing things like learning a new language and exploring the woods and working in my woodshop. But I can’t because I have to work. What junk am I buying that is worth having to spend 45-50 more hours at work each week and 45-50 less hours not doing those things I really want to be doing?! Each week!! That’s like 2500 hours a year I could be doing stuff I love instead of stuff I just kind of put up with! My life would be so much better!!
– Jeff

This is exactly why I am chasing financial independence, too.

As I’m writing this, I would love to instead be outside exploring a park or doing other things like that. However, writing supports my family (in part), so I need to continue to do that instead of shirking my duties. That means I’m sitting here at a desk writing.

Financial independence means I don’t have to make that choice. If I feel like writing today, I can write; if I don’t, I can do something else.

That sounds amazing. That sounds better than pretty much anything I could be spending my money on.

Q11: 529 for future children

What do you think of opening a 529 for our future children? Background: we’re debt-free (partially thanks to motivation from you!), frugal, fully funding our retirement accounts (maxing out company match and Roth IRA’s), and have a number of other savings buckets, like car, down payment, travel, even a “baby start-up” fund. We are in the extremely fortunate situation of having excess income each month, and plan to start a family in the next few years. Our financial situation will obviously change when we do have children – one of us will stop working or we’ll need to pay for daycare – so we won’t be in this situation forever. I think it’ll be more of a stretch to save for college once children are here, and am considering opening a 529 in our names so we can get a head-start. We definitely plan to have children, whether biological or adopted, so we feel confident that someone would be able to use it… The alternative is to direct the excess to a general investment fund (Vanguard total stock market fund) that really isn’t tied to a specific goal… But since we live in CT, we’d get a slight tax break on any contributions to a 529, so I’m very interested. Would love your thoughts on this idea.
– Lauren

You can’t really start a 529 for your future children. What you can do is start one with yourself as the beneficiary, then change the beneficiary later when you have a child.

The only catch with this is that if you don’t have a child, you’re going to need to spend that money in that account on educational expenses or else you’re going to take a big hit when you withdraw that money – usually a 10% penalty on the gains.

I would do this only if you could realistically see yourself going back to school at some point if you don’t have children. If that’s absolutely not in your plans, I’d invest elsewhere until you are certain that a child is coming.

Q12: Thought provoking books

The question I always love to ask people is: what books have you read that changed how you thought about the world and left you thinking for a long time? I usually turn these book ideas from people into my “to be read” list!
– Doug

The easy answer is Your Money or Your Life, a book I’ve lauded countless times on The Simple Dollar. It completely rebooted my perspectives on money and how it shapes how I live my day to day life.

I’ve read the holy books of almost every major religion and I found all of them incredibly enlightening, not just because of what they taught, but how they influenced human culture. Even more, I was struck by how similar most of them were, as they tended to break down into similar ideas and lessons. I find it amazing that any two major religions on earth can be in such serious conflict given how similar the core messages of their holy books are.

I was blown away by The Shock Doctrine by Naomi Klein, which is probably the most clear and sensible explanation of the last fifty years of world history that I’ve ever read. It altered my political and social views more than anything I’ve read.

I could list these all day, but those were the first ones that came to mind.

Q13: Loans or investing first?

I graduated from college in December and now have my first real job making $41K per year. I have decided to try to save 50% of my take-home pay for the future and live off of the rest. I get a paycheck every two weeks that has about $1,050 in it.

That means I would be putting $525 out of that paycheck into investments and savings and living off of $525 every other week. I have actually figured out how to do that fairly well, as I live with two other guys in a house that we rent from one of their fathers and so my rent is $440 a month with utilities. That leaves me with about $600 a month to eat ($150 or so a month), get back and forth to work ($50 on mass transit), buy toiletries and some household supplies (maybe $40 a month), pay for my student loan payment ($220 a month), my cell phone ($50 a month), and still have a bit left over to spend.

OK, so what should I be doing with that extra $525 a month? Is it better to start investing now or to pay off my student loans quickly first?
– Sam

There’s kind of a catch here: if you pay off that student loan, you’re suddenly going to have an extra $220 a month to live off of while still putting aside $525 for the future.

So, the real question is what will you do at that point? If you would just incorporate that $220 into your living expenses, the best mathematical approach is to not pay off your student loans early and instead invest that full $525 per paycheck. If you would add that $220 to your investment amount, then it depends entirely on the interest rate of your loan. If it’s more than about 6%, I’d pay off the loan early; otherwise, I’d invest.

There is no right or wrong path here. With this much commitment to saving and investing, you almost can’t fail to hit financial independence sooner rather than later.

Q14: Why pay for subscription music?

I don’t understand why someone would pay for Spotify or Rdio or Pandora when you can just listen to whatever music you want to for free using Youtube. I usually just load up autoplay and it just plays music all day. What’s the value in those services that’s worth $10 a month or whatever?
– Kellen

There are a lot of reasons.

For one, subscription services often function as a great music discovery tool. They do a great job of exposing you to new musicians that are similar to ones you already like. This is something that Youtube does very poorly.

For another, many artists have their full catalogs on streaming services, meaning you aren’t just stuck with singles or with whatever haphazard things have been uploaded to Youtube.

For another, it uses a lot less bandwidth, which can be vital to people with any kind of data cap.

For me, the first reason is the most compelling one. I’ve found lots of new music thanks to Pandora and Rdio. I have no idea how I would have found them without those services.

Q15: Creative projects for older kids

My kids are in that middle period where they don’t want to do things like color any more but they’re not really teenagers either. I think your oldest at least is in that age. What do you do to keep him occupied and creative?
– Claire

We encourage a lot of storytelling. Quite often, in the evenings, we encourage our children to make up stories. It’s become a regular part of the bedtime routine for me.

I play some roleplaying games with my two oldest children. While some of it is fantasy-themed, we also play other games that almost break down into collaborative storytelling. I use a homebrewed family version of Fiasco for this.

My oldest children still love LEGOs, too, and seem to be building things a few times a week with them.

Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. 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.