Questions About Retirement Savings, Distraction, Investments, Zumba 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. How Vanguard makes money
2. Unequal wage cuts
3. Saving for retirement at 50
4. Entrepreneurship ideas
5. Marriages and debt
6. Evicting a horrible tenant
7. Zumba teaching as side gig
8. Distracting websites
9. Income tax deduction question
10. Homemade laundry detergent recipe
11. Worrying about stock market strategy
12. Sitting on future investment money

Over the past week, I’ve been laid low by a very nasty cold, one that left me in bed for multiple days (only getting up long enough to take care of minimal parenting effort) and left me in something of a daze for a few more days beyond that. I still don’t feel perfect, but I feel good enough to get back into the normal routine of work and parenting and household tasks.

This week taught me a few notable things, though.

First, it’s always valuable to have some work done in advance. I have a folder on my computer with a bunch of completed articles for The Simple Dollar sitting in there in case of emergencies. I even call it my “professional emergency fund.” Most of the articles you read last week came from that “emergency fund.” I was able to simply post them and then go back to bed. Some jobs make this kind of “professional emergency fund” possible; others do not.

Second, when that extra work is depleted, then you have to refill it again because another emergency is just around the corner. My folder of extra work is just about empty, so this is going to be a very “nose to the grindstone” week where I use up just about every topic idea I have written down in my topic notebook. (Yes, I keep a topic notebook. Maybe my process for writing The Simple Dollar would make a good post someday regarding how to keep a blog or other regularly updated creative endeavor going and earning money…)

Third, you’re usually better off not working at all than trying to work when you feel awful. Not only do you work at a very slow pace, the work you do produce is of low quality even if you’re trying hard to do a good job. The focus and the energy just isn’t there. A supervisor is really well served by trying to send anyone who shows up for work genuinely sick home for the day and finding someone else to take their spot.

In the end, it’s not good for the employer or the employee to have a sick employee around. They’re not going to work very quickly, they’re not going to do good work, and they’re likely to make other workers sick.

Q1: How Vanguard makes money

If I want to invest in index funds through Vangard, how do they make their money if they don’t charge anything for the service?
– Nancy

You’re correct in that if you invest directly with Vanguard, they do not charge you any transaction fees at all. If you buy into a fund, you’re not charged, nor are you charged if you sell any of your investments.

So, how do they make money? If you take a look at a page for a typical fund at Vanguard, you’ll notice an interesting line under the “Fund facts” section. It’ll say something like “Expense ratio as of 04/28/2015,” followed by a percentage – in this case, 0.17%.

What that essentially means is that each year, Vanguard removes 0.17% of the value of the fund as revenue for themselves to keep the fund going. If you scroll down and look at the characteristics of the fund I linked to above, you’ll find that the fund has $389.8 billion in total assets. That means that, given their expense ratio, they take $662 million out of the fund each year.

That seems like a lot of money – and it is. But that money is how Vanguard stays in business, as it covers all of their employees and many other business expenses. Vanguard employs a lot of people, manages the investments of many people and institutions, and so on. That really adds up quick.

Q2: Unequal wage cuts

I have been on my job for five years. My coworker has fewer years. Now my employer is cutting our wages and we’re all making the same wages. How is this fair to me?
– Eli

It’s probably not fair to you (although I don’t know the full story of what’s happening here). The question is what your response is going to be.

You can certainly go talk to your supervisor about this and try to negotiate to recoup some of your losses from the wage cuts. It may be that they’re willing to give back some of the cuts to some of their longer-lasting employees – or maybe not, it’s hard to tell.

You also should prepare yourself to change jobs, especially if it’s fairly reasonable for you to find a new job in your field with similar or better wages. This might be a good option because, typically, when a company is cutting wages like that, there are some problems going on behind the scenes and you may not have the most secure job anyway.

Q3: Saving for retirement at 50

I just read your article about the differences in 401(k) and 403(b). Thank you, it was very helpful. I am approaching 50 and I am worried about my retirement as I have not been contributing to my 401(k) my work offers. How can I quickly put money into retirement at this late date? I am a teacher and I only have about $200.00 per month to spend on retirement so I want to make the best money on my return.
– Sarah

The truth is that if you’re nearly 50 and are only contributing $200 a month to retirement, you’re not going to build up enough to really make a lasting difference at age 65. Let’s say you put all of it into stocks and you actually earned a 7% long-term annual return on that money. You’ll have $64,000 saved up by age 65. If you then withdraw it at a safe withdrawal rate of 4%, that will give you a steady income of about $220 a month for the next 30 years or so. That’s going to be in addition to your Social Security, of course, and any other retirement plan you may have.

In other words, it doesn’t matter how you invest. Saving $200 a month starting at age 50 is not going to make a mountain of cash for you at retirement.

If you’re simply looking to make the most of what you can save, your best bet is to assume you’re going to work for as many years as possible, which gives you the most years for compound interest to work for you and more years to contribute. That also means you should be contributing your money to investments with greater risk and volatility because you have many more years to recover, so look heavily at stock investments and target retirement investments that target a point 20 years from now.

Q4: Entrepreneurship ideas

I agree that everyone should dabble in entrepreneurship in their free time, in my case that’s ALL I’m doing as I’m currently unemployed and have no luck in the job market.

I want to start drawing my own designs for stationery (I’m good at it!) and sell online and see where it takes me. I just want to start with what I can do and with what I have. If I think too far into the future I get crushed and won’t start anything. I have to start somewhere.

Just wondering if you have any thoughts on this?
– Nadine

The first thing I’d do is figure out who exactly I’m selling to and how I find them. If you’re wanting to sell stationery online, who exactly is going to buy it? And how do you reach those potential customers without annoying them? If you don’t know where your audience is, especially in a niche market like stationery, you’re not going to do well.

For this kind of thing (making and selling your own stationery), Etsy is a great place to start and it will provide a very slow trickle of customers who find you via searching, but it’s not going to help you find a lot of customers. You need to find them.

So, how do you find them? Figure out where people who might buy stationery would hang out online. Stationery fan groups on Facebook, for example. You’ll probably find people who are interested in fountain pen groups as well, for instance. Join those kinds of groups and participate. Figure out the things people like and are looking for and then do your best to fulfill it. That’s how you build customers.

Q5: Marriages and debt

I read an article by you dated 2011. It was “Why Get Married At All” and had to do with financial issues. You wrote about the legally binding financial securities of being married. What I would like to know is when a couple marries in the state of New York, is each person legally responsible for debts the other may have had prior to marriage? Thank you.
– Sam

From my research, New York follows a common law property standard when it comes to debts, which means that if you have an individual debt, it remains yours individually regardless of marriage.

However, having said that, if one member of a marriage is paying off a debt, it naturally affects both partners in the marriage. It’s going to eat through the shared pool of money that you have for expenses and that’s going to affect both of you. Legal responsibility is different than personal responsibility, in other words.

So why not keep all debts individual? For one, many loans are easier to get if you’re both signed to the loan. For another, if only one of you is listed on the debt or on the deed of property that’s shared in practice, it can create real problems if you divorce. If you’re involved with the ownership and payments of something, your name should be on the deed and the debt.

Q6: Evicting a horrible tenant

We recently rented out the other home on our property to a younger couple and after 6 1/2 weeks of hell, we evicted them (10 day notice to pay/quit).

They never paid even after we asked repeatedly, had several police agencies show up looking for both of them, CPS showed up and we had people telling us they were known for doing meth. Needless to say, they left after asking us to just give them more time and us refusing. I went into the home and was devastated at the destruction done in six short weeks. Over 20 holes in the wall (some the size of a head), doors off with holes, blood on wall, writing all over the walls, smoke stains (not sure how) all over the walls, stains all over every carpet (and we just put new carpet in), finger painting all over walls/doors. It was horrible. She is now saying we illegally evicted her and she wants back in. Also that we don’t have the right to rent the house out because it’s an illegal place? She says she’s suing us!!! My head is spinning. We just found out that they have nine evictions on their record (wish I would have done my homework).

Is there something that I was suppose to do in order to make my home a legal residence to rent? This is all new to me. I sure don’t want to lose out on the money that it’s going to cost us in repairs and rent that is owed and I can’t find anything about it online so I figured I’d ask.
– Brenda

It’s really hard to tell from your description whether or not the previous tenant has any legal ground for her claims. It’s also hard to tell if you followed sensible procedures for renting out your property.

In either case, it probably makes sense to get ahold of a lawyer and go through everything that’s happened and what you need to do going forward to protect yourself. You may have grounds for legal action against the tenant, but it’s probably doubtful that you’ll ever be able to collect from them. I’m also unsure as to what your insurance on the property is like.

I’m really sorry that this is the situation you were handed with the first tenant you had, but you are learning a lot of lessons from this experience, ones that will serve you very well in the future.

Q7: Zumba teaching as side gig

I just wanted to share with you and your readers one of the ways that I have increased our family’s income and decreased our expenses (in 3 ways). Last year I became certified in teaching Zumba (dance cardio). The certification costs about $230/year but I teach classes at least three times a week and earn $20-$30 per class. One of the classes is at a community center and by virtue of being an instructor there, I have free access to all the other classes they offer. So we do not have a gym expense. Additionally, with all these exercise, I have reduced potential costs for medical appointments and mental health appointments (seriously). Now I am becoming an instructor for kickboxing, too, which will impact our income further.

The last point I want to make is that I am not the stereotypical thin gym rat. I started this last year and had no previous athletic involvement. I am overweight by at least 40 pounds. The fitness world needs more average people, like myself! I love doing Zumba with others, no matter the weight or fitness level. Hope this encourages someone to try something new – and make a financial step forward because of it!
– Nicole

Going through the certification process for being an instructor for fitness classes can really be a great way to earn a side income and get some exercise at the same time. It’s awesome how well this has worked out for you. Congratulations!

However, before you leap head-first into doing this, make sure of a couple of things. First, is this something you would want to do frequently enough to make money from it? Second, are you really sure you want to be a fitness instructor? Third, and perhaps most important, is there a venue for you to teach these classes? You should be in touch with local gyms to see if they have need for this or would be open to this.

Another route you might want to consider is making some YouTube videos of your routine and then posting them on YouTube. Such videos would launch a small revenue stream for you from the advertisements plus serve as a supplement for your classes, as you could give the YouTube channel to the people in your class if they wanted to work on things while not in the class.

Q8: Distracting websites

In the notes before the Q&A you mentioned websites being a big distraction. Which ones do you read most often? TSD is about the only one I’ve found I read with an real regularity and I know there are other gems out there!
– Talia

Honestly, my biggest distraction is social media. I love reading through sites like Twitter and Facebook and Instagram with a focus on topics that are most interesting to me. I also visit hobby sites focused specifically on my hobbies of interest, such as BoardGameGeek.

With the social media sites, I have honed the people and pages that I follow down to a trim list that’s very much catered to my own personal interests. That takes time and it also takes some effort in checking out lots of different people to see what they’re posting and sharing.

I do visit other sites for long-form reading, such as The Atlantic and The New Yorker and the New York Times, but those visits usually just involve bookmarking stuff to read later. I usually talk myself out of reading long articles when I’m supposed to be doing something else, so I just bookmark the interesting articles using Pocket and look at them later on.

Q9: Income tax deduction question

I was making self payments to Blue Cross health insurance fund that was through my now deceased husband’s union. I always filed with H&R Block, but they never filed this in my returns. Is this a valid deduction; and what options do I have?
– Carla

If you paid for these premiums out of pocket, which it sounds like you did, then it’s very likely that they’re tax deductible. However, unless you have a lot of other deductions, doing so would probably not make much of an impact on your income taxes, as you’d probably take the standard deduction anyway.

So, let’s back up and explain what that means. The federal government essentially gives everyone two options when it comes to deductions on their taxes. They can either submit a list of deductions and then deduct the total of those deductions from their income (and pay taxes only on the remainder of their income) or they can choose to not submit a list at all and take a “standard deduction,” which is a dollar amount around $6,300 for a single person, subtracting that amount from their income and paying taxes only on the remaining income.

So, if your total deductions do not add up to $6,300, you’re better off taking the standard deduction, which is what many people do, especially those without a high income and those without an active mortgage (because mortgage interest is deductible).

Unless your annual premiums that you paid out of pocket added up to that amount and you had lots of other deductions, it probably wouldn’t help with your taxes. If that did describe your situation, you can contact H&R Block about filing an amended return for those years. You have a three year window for doing this, so you can only file an amended return for the previous three years.

Q10: Homemade laundry detergent recipe

I’m just reading your segment regarding buying store brand vs. name brand which led me to explore your recipe for homemade laundry detergent. Have you investigated the “filler” aspects of your ingredients. Last I knew Oxiclean was a no-no.
– Jim

Over the years, my recipe for my homemade laundry soap has changed. Right now, my homemade soap consists of a cup of borax, a cup of washing soda, and a cup of dry soap flakes, which can be obtained either by grating a bar of soap or just buying a bag of soap flakes at the store. I combine those three ingredients in a jar and mix it thoroughly, then just use a tablespoon of this mix with each laundry load.

This recipe seems to have the same effect as the laundry soap I once used. I don’t think the Oxiclean I used to use had much of an effect that I could notice, although I don’t think it was harmful.

I’ve been very happy with this laundry soap for years. It’s very cheap and seems to do a really good job on my clothes.

Q11: Worrying about stock market strategy

How do I stop questioning my stock market investment strategy? We turned it over to a financial guy several years ago and the plan was to go on autopilot with someone who surely was smarter than me in investments. However, his strategy is very conservative and protective of large drops in market. I have been measuring my investments vs. S&P 500 performance and they are off 15% or more. I.e., the S&P is beating my guy my 15%. This bothers me to no end. I turned it over to stop worrying and trusted his recommended strategy. But it’s not working as I’m worrying just as much as when I was picking the strategy.
– Mark

You made the choice to go with a less risky strategy, which means that it’s going to lag behind the S&P 500 when the S&P 500 is doing well, but it should beat the S&P 500 in years when the S&P 500 is doing terribly, like 2008. Imagine that you took your investment money and put half of it in the S&P 500 and half of it in a savings account bearing 1%. In a year where the S&P 500 went up 11%, your overall investments would go up 6% – half would go up 1% and the other half would go up 11%. However, in a year where the S&P 500 lost 19%, your overall investments would only drop by 9% – half would go up 1% and the other half would go down -19%, averaging out at -9%. You’re worse off with an investment like that in good years, but better off in bad years.

Now, which one is “better”? It’s impossible to know because no one knows what the future holds. I don’t know what the stock market will do next year. Neither do you. Neither does the guy running your investments. What he’s doing is simply hedging his bets. If it’s a bad year, it won’t be as bad for you, but if it’s a good year, it won’t be as good for you.

The thing is, your investments will never be “perfect.” I’m pretty sure you can easily find an individual stock that has done way better than the S&P 500 over the past year. Why didn’t you invest in that stock?

The reality is that you have to invest in a way that’s “good enough” and won’t keep you up at night. That means coming to peace with how much risk you can stomach. Could you handle being in the S&P 500 in a year like 2008, where the market drops by 40%? Imagine losing 40% of your investment over the course of a few months. That’s part of what you’d have to accept if you went with the S&P 500 instead of the more conservative route.

Honestly, for me, I don’t really care. I’m in this for the very long haul – 20 or 30 years. Given that, I’m better off staying in more aggressive investments for a very long time. I don’t worry about what it’s doing today or this week or even this year. It doesn’t worry me at all because I’m not going to touch it today or this week or even this year.

Q12: Sitting on future investment money

Let’s say I’ve got $10,000 sitting in a money market account.

I’ve been keeping it there, waiting for a good drop in the market to put it into an index fund.

Then I began wondering, maybe I should just put it in the market because while I may not “earn” anything from stock price increases for a while, I still would earn money from the disbursements of dividends that the mutual fund hands out every year.

So I would be earning a lot more money then just having it sit there in a money market account.

Is my thinking correct or flawed?
– Stan

Your thinking is correct. If you’re going to invest in stocks, you shouldn’t bother with market timing at all and put your money in immediately. That’s the option that has the best long-term prospects, period.

Not only are you missing out on dividends by waiting, you’re also probably missing out on the “best moment” to invest, too. It’s really hard to tell when the market is at a bottom and if you wait around for the perfect moment, you’re going to wait forever.

If you’ve made the decision to invest long term in the stock market, put your money in now, not later.

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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