Questions About Extra 529 Money, Online Banks, Hoarding, Auto Insurance, and More!

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to summaries of five or fewer words. Click on the number to jump straight down to the question.
1. Trusting online banks
2. What are capital gains?
3. Evaluating a hoarder’s shed
4. Auto liability insurance help
5. 401(k) or 403(b)?
6. Turning weekends into vacations
7. Vegetarian and saving money
8. Extra 529 money
9. Frustration at slow debt repay
10. 90 day challenge question
11. Emergency fund with credit card?
12. College graduate and independence

Over the last few years, I’ve become aware of something that many parents face as their children grow up, something I like to call “May overload.”

Basically, every end of year event for anything your children have been involved with is scheduled at some point during the month of May, often on multiple days.

We’ve had end of the year band concerts, end of the year banquets, end of the year choir concerts, presentations, special dinners, and all kinds of things like this. With three kids in upper elementary and middle school, the last few weeks have been a tangle of scheduling and we don’t really feel like our kids are oversubscribed, something we’ve tried to avoid. Most of the activities they do are in-school things.

It feels like a genuine shift from when I was in school. It seemed like, although there were end of year activities, they generally didn’t involve the parents very much at all, and it didn’t really start until I was in high school.

I fully applaud the idea of parents showing support for their children’s endeavors, but it feels nearly overwhelming at times if you have kids involved in even a few activities. The idea of a “family dinner” basically disappears and you simply prepare slow cooker meals where people eat when they can, often in shifts, because the logistics of the evening activity calendar are so crazy.

Anyway, on with the questions.

Q1: Trusting online banks

I don’t understand how a person can trust an online bank with their money.
– Amy

For me, a bank is a bank. No matter what the bank is, I’m trusting it with my money. Nothing is stopping the brick and mortar bank in my community from just going out of business tomorrow and disappearing with my money except FDIC insurance, and the same is true with an online bank.

The way I look at it, the only difference between an online bank and a brick and mortar bank in my town, provided they’re both FDIC insured, is that one is paying for a building in my town and one isn’t. There are some advantages to having a building that I can just walk into, but for me that doesn’t cause any extra faith in their stability or long term trustworthiness.

My trust in that bank is in the FDIC, which is the insurance on my deposits. As long as I can verify their FDIC insurance, then I feel pretty confident about the safety of my deposits, and that’s true whether it’s an online bank or not. Really, at that point, the only difference is whether the bank owns or is leasing a building in my town.

Q2: What are capital gains?

What are capital gains? I don’t understand?
– Harry

A capital gain occurs when you buy something, it increases in value, and then you sell it. The amount that it increased is your capital gain on that investment.

Let’s say you buy a house for $100,000. You take good care of it and housing prices in your area are going up. A few years later, you sell it for $140,000. With that sale, you have $40,000 in capital gains.

You do have to pay taxes on your capital gains, but the reason capital gains are interesting is that they’re taxed differently than normal income. If you owned the item for just a short amount of time – less than a year – it is considered a short term capital gain and is taxed like normal income. However, if you owned the item for more than a year, it is considered a long term capital gain and is taxed at a significantly lower rate than other income – currently 0%, 10%, or 15%, depending on the level of your other income.

That’s often how wealthy people avoid paying a lot of taxes. Much of their income is often in the form of long term capital gains rather than normal income, so they pay a 15% tax rate on all of it. Compare that to someone earning a healthy normal income – they’re paying an income tax rate between 30% and 40% for much of their income.

Q3: Evaluating a hoarder’s shed

My father was a hoarder. He had an old storage building out behind his house that is just full of stuff, like 40-50 year runs of several magazines, tons of old toys, tons of tools, and all kinds of stuff. It’s all in crates and boxes and tubs. There’s a comprehensible order to it, but there’s just so much stuff here that I have no idea where to even begin and so I haven’t. It’s just kind of sat there while I’ve been renovating the house.

Part of me wants to just throw a match in it, but I think there’s a lot of value in that building. What would you do? My brother thinks I should hire a picker.
– Mark

If you don’t know how to assess the value of all of that stuff yourself and the task is going to be huge, you probably are better off hiring someone to help. However, it is very likely that anyone you hire will be seeking to find valuable items at a bargain price, so they’re at least somewhat likely to lowball you in terms of their estimate of what items are worth. That’s their business model – they’re doing a lot of legwork to find a little value.

So, you have a choice here.

You can start going through all of that stuff yourself, figuring out the actual values of all of the stuff and selling it to the best of your ability. That is going to be a large investment of time, but it will get you the best return on your money and you’ll reap the rewards of any really valuable items you find in there.

You can just trash all of it. That will require the least time investment for you but won’t return you anything. If you hire someone to do it, it will be relatively cheap.

Alternately, you can hire someone to go through all of it, whether it’s a picker who will likely go in there for free (in the sense that you won’t have to pay that person) but they’ll lowball you on the value or actually hiring someone to evaluate all of the stuff for you but you’ll likely have to pay them for the service and you may not break even there if there’s not a lot of value.

My choice would be to either start dealing with it myself or to just hire an antique picker and take what I could get with the understanding that I may be lowballed. If you go with a picker, I’d spend some time looking around for a picker with a good reputation – do your homework here.

Q4: Auto liability insurance help

I carry only liability insurance on my car. On Friday someone smashed into the rear end while it was parked. The car is still drivable but it needs a lot of work that I can’t afford. What can I do?
– David

If you didn’t already do this, I would take a ton of pictures of the damage and then try to find other recent pictures of your car prior to the damage. I would also contact the business that utilizes that parking area and/or the city and see if there is any video of that area during that timeframe so maybe you can see who hit your car. Do that immediately. You should also call the police and explain what happened.

Your only hope here is figuring out who hit you and also being able to demonstrate that you weren’t doing anything wrong and that there was damage done to your car. The best moment to do that would have been right after the accident – you should always start snapping pictures immediately in that situation and then contact nearby businesses and the city immediately after that. A police report will also help.

If you are unable to figure out who hit you, you’re just going to have to make do with what you have and consider this a learning experience. This is a great example of why an emergency fund is a wonderful thing to have.

Q5: 401(k) or 403(b)?

My new job offers a 403(b) but it sounds exactly like a 401(k). What’s the difference? Read some articles but it’s not clear.
– Brianna

The only difference that really matters at all to a worker who has a retirement account is that a 401(k) is offered by a business while a 403(b) is offered by a nonprofit institution. In terms of how they function for the employee, they’re basically identical.

In the past, there used to be some restrictions on the investments offered within a 403(b), but that restriction was lifted many years ago.

The only other difference I know of that matters to the individual is that in some 403(b) plans, there is a provision that allows older workers with more than 15 years of service to have a higher contribution limit, adding $3,000 per year to the limit until you’ve contributed an extra $15,000 under that extra limit, but 401(k) plans don’t allow such a window. This is only meaningful if (a) you have a 403(b), (b) you have more than 15 years of service, (c) you’re contributing enough to be hitting up against the contribution limit (which is $16,500 a year), and (d) your plan allows for it. In other words, it very rarely applies.

So, for your purposes, there is no difference. Treat your new 403(b) at your new workplace just like you treated your old 401(k) at your previous workplace.

Q6: Turning weekends into vacations

I was reading this article and thought that this seemed unrealistic for busy people but then I thought of you and how you “block off” time on weekends for uninterrupted leisure. Do weekends with big blocks of leisure time make Mondays better?
– Andrew

Absolutely. The only time Mondays are miserable is when the weekends are full of chores and obligations. When I intentionally make a weekend into a mini-“vacation” or at least get as many obligations as I can taken care of during the week so that I can have some big blocks of weekend leisure time, Mondays aren’t bad at all. It’s the weekends that are chock full of unwanted tasks and such that are miserable.

My preference is to fill every second I can during the week with something intentional. I don’t sit down and idle during the week, no time spent playing a smartphone game or watching TV unless there’s some other strong reason for doing so. Instead, I do something, whether it’s a household task or a work task or a parenting task or whatever. If I feel too “tired” to do it, then I go take a nap or go to bed so that I can wake up refreshed.

Does that sometimes make the weeks feel really long? Sure, it does, sometimes. However, I go to bed feeling like I got a lot done, and I also feel anticipation for that entire Saturday coming up where I can devote the day to something fun I’m looking forward to.

Q7: Vegetarian and saving money

I understand that if you eat mostly at home and are vegetarian it can be cheaper because buying burgers and steaks at the store is expensive compared to veggies and rice and stuff, but when I eat out it seems at least as expensive to be vegetarian as not and usually more so since there are usually only a few vegetarian items on the menu. You either eat like a side salad or fries or one of two way overpriced entrees.
– Brian

I largely agree with all of that, except that the restaurant situation is changing. This was even more true ten or fifteen years ago.

There’s also the issue that a lot of it has to do with where you choose to eat. For example, if you’re in a situation where fast food is your only option, most “Mexican” fast food places (like Taco Bell) actually cater extremely well to vegetarians, and quite cheaply, too. The last time I ate at Taco Bell, I ate the cheapest of the four people I was with.

If you’re eating at a typical dine-in restaurant, it really depends on where you’re eating. I fully agree that most restaurants in America are meat-focused when it comes to their entree selection, but, again, that seems to be slowly changing, not in that they’re abandoning meat-based meals, but that they’re adding more vegetarian-focused options. Some restaurants and chains are definitely better than others, though; in terms of chains, places like PF Chang’s and the Cheesecake Factory are really good in terms of vegetarian foods.

Still, I agree that it’s cheaper to do it from home, but that’s true for every kind of diet. The only time eating out seems on par with eating at home is when you’re comparing, say, a dollar menu fast food burger to a homemade burger, and that’s not even a fair comparison because the quality of the homemade burger blows away the fast food burger.

Q8: Extra 529 money

What’s the best thing to do with extra 529 money? I am graduating in December and will have about $6,000 left in my 529 when I do. I got several scholarships and finish in under 3 years.
– Mark

I would suggest either spending it on something you can continue to use after college or to hold onto it in case graduate school enters your picture.

If you don’t have a current computer and can see yourself using one in the future, this might be a good time to buy a solid computer that will last you for several years. You can use it for your final semesters in college and then continue to use it after graduation as needed.

If you think there’s any chance of going back to school after graduation, you can hang onto that money for that potential future. Graduate school? Going back for a different degree? 529 money is there for both.

You can also simply sit on it until you have children of your own, then change the beneficiary to your child. This will incur a gift tax situation, but the gift tax exclusion limit is currently $14,000 and will likely go up, so it’s very likely that with $6,000 in the account, the transfer will fall under the gift tax exclusion and not be a problem.

Q9: Frustration at slow debt repay

At the start of the year, I decided to get rid of credit card debt. I had about $9K spread across three cards. I did all of the usual stuff, like moving balances around to get lower interest rates, but it’s now mid May and I live like a hermit and I still have $7.5K in debt. Getting old.
– Violet

Here’s the thing: you’ve already done the hardest portion of the repayment. You’ve covered the first 1/6th of the debt, which may not seem like much, but it’s bigger than you think.

Let’s say your debt, on average, is at a 20% interest rate. Your monthly minimum payment on that debt is going to be about $158, by my back of the envelope math. If you’ve made 5 payments and the balance has dropped to $7.5K, that means you’re making roughly double payments – about $300 a payment.

If you were making normal payments, it would take you fifteen years to pay off that $9K in debt. Because you’ve made double payments and will, in theory, keep making them, your debt will be paid off in about twenty seven months total, or about 21 months from now.

Yes, it seems like a long time, but you’ve cut 15 years of debt payments ahead of you down to less than two years ahead of you. Even if you switched back to just paying the $158 minimum each month right now, the whole thing would be gone in less than 8 years instead of the 15 it would have been if you were making normal payments. That’s how big your impact has been already.

Keep it up. That debt will be gone before you know it.

Q10: 90 day challenge question

Do you line up 90 day challenges with yearly quarters? Also how do you handle vacations or other exceptional situations?
– Anne

So far, that’s exactly what I’ve done. I start 90 day challenges at the start of a calendar quarter, meaning at the start of January, April, July, or October. The first quarter is exactly 90 days in non-leap years, and the other quarters are 91 or 92 days, so they fit really well.

As I discussed in the 90 day challenge article, my focus with a 90 day challenge is intent and effort above all else. If I want, say, healthy eating to become a lifetime habit, that means I need to practice how I’m going to eat healthy while traveling. If keeping my spending low is a lifetime habit, then I need to practice how to do that when travel is involved. This is true for any unusual situation – they’re not “breathers” to let me “cheat.” Rather, they’re opportunities to really master how a permanent lifestyle change is going to work in this situation.

In fact, I find that when my routine is mixed up and I have to really rely on good intent rather than routine, it seems to “set the hook” of the new habit really well for some reason. If I really hammer home that a particular habit is important when life is mixed up, it’s more likely to stick with me, it seems.

Q11: Emergency fund with credit card?

Don’t understand why you would encourage people to have money in a savings account at 1% when they have credit card debt at 18%.
– Mark

Simple: because those credit cards are unreliable in a genuine emergency. In an emergency, cash is king.

Let’s say you have a real disaster in your life and your credit card is suffering identity theft. What happens then? You need cash.

Let’s say that your mother is gravely ill in another state and your credit card is maxed out. What happens then? You need cash.

Let’s say that your credit card is cancelled because the bank decided to purge troubled accounts. What happens then? You need cash.

Cash is king. Cash solves real life problems.

In a bubble where emergencies didn’t happen, I would fully agree with you. In a perfect world where you always have spare breathing room on a credit card and identity theft never occurs, I would fully agree with you. However, that’s not the world we live in.

Q12: College graduate and independence

We have three children – oldest just graduated college, middle in college, youngest finishing up sophomore year in high school. We told the oldest that he could move back home until he finds a job provided he’s consistently looking for one and after that we’d talk about it. He already has a bunch of interviews in the next two months in various places, some nearby and some in other cities. My husband and We are trying to figure out what to do when he gets a job if it’s local. He has about $40K in student debt and is interviewing entry level positions that will pay $50-60K. He should be able to afford rent on his own. I am in favor of allowing him to live here for a while with cheap rent but my husband is strongly in favor of nudging him out the door. Thoughts?
– Mary

I think this is more of a parenting question than a personal finance question. In situations like this, I think the best solution is conversation. I’d just sit down with your son and ask him what he envisions for the future. Ask him what he thinks he’ll be doing in a year. Where will he live? Where does he hope to be working?

There’s a good chance that he intends to move out as soon as he’s settled in a job, in which case this is kind of a non-issue. If he doesn’t intend to move out for a while, that’s when you and your husband need to have some conversations. Are you going to force him to move out? Are you going to charge him rent?

My feeling would be that if you have a good, trusting relationship and he wants to live there for a while as he’s getting used to professional life, you can consider charging him rent and letting him stay for a while. You can also consider putting the money aside when he pays you and then giving it all back to him when he does move out, or you can actually use it for household expenses. It’s really your call.

The much more difficult challenge for you is what you should do if he doesn’t get a job. I would assume you’re planning on letting him stay there until he secures a job and then for a little while after that at least, but what if he doesn’t get a job for months or years?

Sarah and I have already discussed this and our plan is that our children can live here rent free after college provided they’re actively searching for work. If they’re not looking for work in their career path, then they need to find a service job and start paying rent. Our intent is to hold onto it and give it back to them in a lump sum when they move out, as the rent is really just a tool to get them to start making choices. However, this does assume a healthy and trusting relationship will exist with them at that point.

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.

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