Questions About Self-Directed IRAs, Prosper, Behavioral Finance, Quicken 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. Trade or pay off car?
2. Getting a Prosper loan
3. Advice on cutting the cable
4. Finding a new career
5. “Next level” personal finance writing
6. Credit score and old bills
7. Finding individual health care plan
8. Basics of self-directed IRAs
9. The danger of falling prices
10. Quicken upgrade worries
11. What qualifies for 529?
12. Foreign stocks and taxes

What things do I need to do today to ensure the life I want to have five years from now?

I can’t even tell you how much that question drives my life these days. It drives it in terms of finances, in terms of health, in terms of the personal relationships that I have and am building. It drives my entrepreneurial bent. It drives my intellectual growth. It even drives my hobbies.

It starts off by simply asking what I want to change between now and then in my life, at least in terms of the things that I actually have some control over. What is actually different between my life today and my vision of where I want to be in five years?

Then, the next question is simply asking myself what kinds of things I can do today to facilitate that change. If I’m going to move from where I’m at now to where I want to be, what needs to happen today that doesn’t typically happen on a typical day?

Exercise? Study? Work on an open-ended entrepreneurial project? Real time spent building relationships? Those are all key elements.

I try to make several of those things part of my day every day for a month or so, then I re-evaluate by starting all of this over again. What do I want my life to be like in five years? What do I need to do today to make my life more like that?

It’s amazing what you can do if you use that mindset day in and day out.

Q1: Trade or pay off car?

I have a 2007 Chevy car. I got it two years ago on a small loan at a very low interest rate. I currently owe $1,800 left to pay. I have recently been told to trade it in for a lease and not deal with the future costs of maintenance. I love my car but it seems like it’s getting old and requires a lot more maintenance now. Is it better to trade or keep driving it and payoff the loan in full?
– Angela

The first thing I would do is take the car to a trusted mechanic and get an assessment as to the state of the car. Are there any major repairs coming down the road? Or is the car in pretty good shape? That’s something a mechanic can tell you pretty quickly. (It’s also a good way to “test” a mechanic.)

If it’s in good shape, hold onto it and keep driving it. If there are a bunch of problems coming up, sell it. A good mechanic will advise you well here.

Since you still owe money on the car, you’re going to ideally want to pay it off before getting rid of it or else some of the money you earn on selling that car is going to be immediately eaten by paying off the loan. Trying to sell a car without revealing the loan you still have on it is fraud.

Basically, unless the car is on the verge of total disaster, I’d stick with the car.

Q2: Getting a Prosper loan

I am considering getting a personal loan online and I was referred to Prosper.com. I checked whether I would qualify for the personal loan with them and they actually approved me for what I asked for and with 16.67% APR I guess my credit score is ok. I am hesitant though, it would be my first time and I am not trying to get myself in more trouble than I already am with credit card debt. Any advice on Prosper.com and to me as first time borrower?
– Natasha

That is actually a pretty rough interest rate. It’s comparable to a credit card interest rate, honestly, as many credit cards have a 14.9% or 19.9% APR and this falls in between those numbers. Your credit score is probably not disastrous, but not great.

I would not take this loan unless it is to fulfill a genuine need. For example, if you need a mode of transportation to get to work and one isn’t available to you and you can’t get any other kind of loan, this loan might be okay.

I generally tell people to avoid ANY loan that has a double digit interest rate as such a rate will devour your money and should be avoided. That’s absolutely true with this loan.

Q3: Advice on cutting the cable

I want to dump cable but we enjoy HGTV, Food Network, USA, SyFy. Are or is there a box for me? How about Dragon…. why so expensive and is it worth it? I have Amazon Prime and like their content and two 3D TVs. We have my desktop PC running to my 3D with a Bluray burner and Nero 2015 platinum running Windows 10. My girlfriend gas a slower Lenovo laptop to her TV but she needs a set box.
– Daniel

A Dragon is essentially a PC running XBox Media Center on it that’s already set up for you – you just plug it in and use it. In my opinion, it does not add enough value to the smaller boxes like Roku or Amazon Fire to make it worth the much higher price tag.

The streaming options for the networks you mention specifically are usually either tied to a cable provider (meaning you need to have an account with a cable provider that gives you that channel already in order to stream the shows) or are on other streaming services on a program-by-program basis or, in some cases, have recent episodes on the network’s website, like this offering from USA Network. A $20/month Sling TV subscription is cheaper than most cable packages and would allow you to stream some of the networks you mention, such as HGTV and Food Network, in real time.

A home streaming setup usually isn’t going to match the convenience of channel surfing, settling on a channel, and just watching whatever that channel throws up on the screen. Streaming is more about individual programs and watching them on demand, often setting up a queue of them so you can watch for long stretches if you like. It’s more like a channel that you control, except that the content available for you to put on that channel isn’t completely unlimited.

Q4: Finding a new career

I’m a 48-year-old male , that has been self employed. I’m looking for guidance for the right fit in a new career. Elevator technician looks interesting.
– Kevin

If you’re considering a new career, I would very strongly encourage you to give the book What Color Is Your Parachute? by Richard Bolles a try. It’s basically written for the situation you find yourself in – you’re leaving one job or career path and searching for another one – and is written in a very approachable way.

One of the worst moves you can make, especially at this point in your life, is to jump to a new career and pay for all the training only to find that you hate it. Even a year or two lost eats up a significant percentage of your years remaining in the workforce. You don’t have the time or resources to make a jump that won’t work out (unless you’re in stellar financial shape).

You’re much better off spending some time right now figuring out a path that will click for you and that you can stay with until you retire, and that’s what that book is for. It does a great job helping you figure out a career that will work well for you, not just one that sounds good on paper.

Q5: ‘Next level’ personal finance writing

Are there any good personal finance journals out there? I feel like I understand and practice what you and other similar blogs/sites advise. I’m just wondering if there is a “next-level” of advice, so to speak.

And when I say journals, I mean like those professional, peer-reviewed journal type publications that other professions have.
– Ronald

Personal finance as a standalone subject isn’t something that’s often written about in academic circles. Generally, the topics of personal finance are spread across a lot of areas like behavioral finance, behavioral economics, psychology, and so on.

The articles that really matter in terms of a person’s individual finances really tend to be spread widely across all of those areas and thus across a lot of different journals and publications. There simply isn’t a one stop shop for academic publication on personal finance.

If you have access to an academic library, you can try browsing through some of the journals that cater to those field. Journal of Behavioral and Experimental Economics is one good place to start, as is Econometrica.

A better approach is to find specific researchers that you might be interested in, like Daniel Kahneman, and find their CV or publication list (here’s Kahneman’s list) and read through those publications, using them as a starting point to find more.

Q6: Credit score and old bills

I see where I have some small bills left on my credit report, all under $200. I guess the companies just stopped sending me the bills. How do I go about getting them paid, and hopefully getting my credit score up?
– Sandra

The truth is that if you pay these bills, it’s actually going to make your credit score worse in the short term, believe it or not.

The reason for that is that unpaid bills, as bad as they are, tend to “fade” in terms of their impact on your credit score over time. When they reach the seven-year mark without having been paid, they disappear from your credit report.

The problem is that if you go back to an old debt and pay it off now, it resurrects that bill on your credit report. Paying it off means that it’s not nearly as bad as it once was, but it’s now a current issue rather than an old one, meaning it actually has a stronger negative impact than a debt that has fallen off your credit report (or one that’s close to doing so).

If the companies are no longer billing you, they’re either sending the bill to a collection agency (and you’re going to start getting bugged about it pretty hard) or they (and/or the collection agencies) have just given up on you.

If you want to repay these debts, which is the honest thing to do, your best approach is to save up until you have plenty with which to pay off one of those debts, then call up the debt holder and negotiate with them to pay it off in full all at once. Then repeat this process for each of those debts that you have.

Q7: Finding individual health care plan

I am seriously considering joining a Christian based Healthcare sharing program. With the conventional insurance anytime my family has had anything medical happen we have walked away with a $2k or more expense. I now have a 5 month old, had BCBS insurance, and walked away owing $500 for my doctor’s office visits, and over $3,500 in medical bills. Not to mention because I decided not to return to work my daughter’s expenses after birth in the hospital are now ours to handle. Do you know if I change to this type of program her shots will be covered? She has had her first set and now is due for the 2nd set. I believe without insurance they are around $800 but with conventional insurance they are covered. Thank you for any assistance/advice.
– Thomas

Your best bet is to check out the health care exchange that’s available in your state and find the best plan for your situation. You can find your exchange using Google by simply searching for your state’s name and “health care exchange.” The exact rules and offerings vary from state to state.

I’m not entirely sure what you mean by a Christian-based plan. I assume that you mean you wish to buy it through a company that espouses Christian values or uses some of the income for faith-based purposes. That’s completely your choice, but the end result will be paying more for your coverage while someone else makes the decisions about your charity. If you want to give, a better approach would be to find the cheapest plan you can and then actually make a regular donation to the specific cause you care about, whether it’s your local church or something else.

Your coverage date for your new policy and the exact coverage offered will tell you whether or not the specific treatment on a specific date is insured. Almost every plan offers some kind of coverage for normal immunizations.

Q8: Basics of self-directed IRAs

I’d like to have you address the subject of self-directed IRAs; how to arrange for one to invest in say, real estate, or even collectibles.
– Lana

A self-directed IRA is an investment tool managed by a “custodian” (usually a large financial institution unless you want to run some significant fraud risk, as self-directed IRAs are ripe for the possibility of fraud) where the account holder can add a wide range of investments to the IRA. In general, collectibles aren’t allowed in self-directed IRAs except for specific exceptions, like some coins issued by the U.S. Mint. You won’t be putting your Pokemon cards in there, for example.

The problem with a self-directed IRA is that it puts much more of the onus on you to make sure that you understand the risks involved in what you’re doing and the tax implications of what you’re doing. A custodian for this type of account is usually going to still charge you a fee, but they’re not going to give you any additional guidance in those areas. You’re going to have to figure all of that out on your own.

Most of the time, self-directed IRAs are used for situations where people want to invest in something unusual, like silver. However, almost everything you might want to invest in within a self-directed IRA already exists as an ordinary ETF, which almost every traditional or Roth IRA allows you to invest in already.

If I were you, I’d look for an ETF that matches whatever it is you want to invest in. Likely, that ETF exists and you would be able to just invest in that anyway within a normal IRA, in which case a normal IRA makes much more sense.

Q9: The danger of falling prices

Macroeconomic question: Why should we worry about falling prices in the long term? Isn’t good for all of us to pay less for things?
– Carl

When prices start to fall, that’s referred to as deflation. Think of it as the opposite of inflation. Prices are going down, like a deflating balloon.

So why is deflation bad? The first problem is that when prices begin to fall regularly, people begin to expect that prices will keep falling and stop spending money because they expect prices to be even better tomorrow. Why would you spend $50 on something today if it will be $40 in a little while if you just sit on that cash? It basically creates the sense that everything will be on sale before very long so people start holding out for that sale. That creates big economic problems.

The second problem is that it makes debt even more painful. Let’s say you have a $100 debt at 10% annual interest. In a normal time, where 3% inflation is happening, you would owe $110 in a year, but that $110 really only has the buying power of $106.80 because inflation is making the dollar cheaper. Now, let’s say there’s 3% deflation. In that case, your $110 has the buying power of $113.40. What’s happening is that debt becomes even more punishing in terms of the purchasing power of your money and thus people and businesses avoid it, meaning that there is less cash being spent. That’s also going to slow the economy down.

So, people hold onto money because they think there’s a sale and debt is more painful so people don’t borrow money to spend. That adds up to a big economic slowdown.

But there’s a third problem, too. Let’s say you make $10 an hour in this deflationary economy. After a year, your $10 an hour now has the purchasing power of $10.31. Even without a raise, your income is going to be able to buy more stuff. However, it’s also going to cost your employer more (in terms of the actual buying power of the money) and that’s happening in the midst of a big economic downturn. When people are buying less stuff and wages are basically going up at the same time, businesses are going to have to fire lots of people and many will go out of business.

Deflation ends up creating a giant mess that no one wants anything to do with. It sounds awesome on the surface in the sense that your dollars are worth more, but it ends up being a disaster.

Q10: Quicken upgrade worries

I have Quicken 2003 Basic now and would like to move it to Quick Books 2016. How challenging will it be to transfer our records this way?
– Tony

You can, but you actually have to use an intermediate version first. This article explains the process which involves using a free download of Quicken 2004 as a “middle man” of sorts to help the conversion happen. This is how you get to a current version of Quicken.

Now, you’re mentioning Quickbooks here. Before you jump from Quicken to Quickbooks, you need to realize that they’re not the same product. Quicken is a personal finance software package, whereas Quickbooks is for full-fledged accounting, something you may not want to be doing.

Having said that, you can also convert from that intermediate version of Quicken described above into Quickbooks using this process.

Before you do any of this, back up ALL of your data. You should never, ever, ever upgrade any software without a data backup, period.

Q11: What qualifies for 529?

I’m setting up a 529 plan for my two sons. I have a question in regards to the plan. If my son where to get a full ride scholarship could he use his funds for rent, food, books for the school year or is it very specific on what it goes towards?
– Nadine

Expenses that are considered acceptable in 529 plans are spelled out in IRS Publication 970. Some of the things you listed there (such as textbooks) are acceptable expenses, but other things (like rent and food) are not. (Obviously, tuition is an acceptable expense.)

The nice thing is that any gifts, inheritances, or loans that the student receives do not lower the acceptable expenses in any way. So, if your student receives a gift from a grandparent to cover the rest of their tuition after scholarships and the student has 529 money, that student can use the 529 money toward tuition and then use the gift for things like a computer or room and board.

That ends up being how many people use a 529 for college. They’ll use the 529 itself to pay for tuition, then use other gifts they’ve received to pay for the other expenses.

Q12: Foreign stocks and taxes

I invested in some USA penny stocks, about $25,000. I made $12,000 but over time lost almost all of it with bad “luck.” I’ve been basically unemployed for much of the year and I’m wondering whether I will be charged tax on that lost money. I’m not an American citizen, never been to the usa in over 15 years, just a regular Canadian who tried his hand at buying some American penny stocks.
– Frank

You’ll likely have to pay Canadian capital gains taxes, but not US taxes. From what I’ve been able to find, by not being a US national, you won’t have to pay taxes on those amounts for the US, but Canada will view this as a form of Canadian income and tax accordingly.

You should read this IRS publication for basic guidance on the issue from the US perspective, and this document for the Canadian perspective.

As always with tax issues like this, you should consult a tax preparer or, at the very least, trusted tax software to make all of the calculations and figure out exactly what you will owe.

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.