Updated on 06.09.08

Reader Mailbag #14

Trent Hamm

Each Monday, The Simple Dollar opens up the reader mailbags and answers ten to twenty simple questions offered up by the readers on personal finance topics and many other things. Got a question? Ask it in the comments. You might also enjoy the archive of earlier reader mailbags.

As usual, we’ll start things off with a few links to older articles that directly answer questions I’ve heard recently.
A primer on once-a-month cooking
An excellent book about Warren Buffett
How to break down big dreams into little steps

And now for some great reader questions!

Now that you don’t have to report to a full time job at a certain time, what has changed about your daily working schedule?
– Frugal Dad

The biggest change is the flexibility of everything. I have moved into a situation where I basically write when I’m in the writing zone – if it gets to where I’m pulling teeth to write during the day, I go do something else, like grocery shopping or mowing the yard or taking my kids to the park or something like that.

I generally try to maintain a normal workday – 7:30 to 12 and 12:45 to about 4:45 most days – but I’ll often transfer an hour or two of that to the late evening so that I’m not just sitting there spinning my wheels.

This lets me do things like mow the lawn, prepare great meals, get groceries, clean the house, and other such tasks when I’m not writing but during the time borders of my workday, which means when they are there, I can give them my full attention in a clean house with a nutritious, home-prepared meal.

Right now, my wife is at home and my daughter isn’t attending daycare at all (my son attends two to three days a week because he misses his friends). This actually hasn’t proven to be a distraction at all – when I need to focus, I just sequester myself in my office and focus. It’s almost reached a point where that office is the place where I flip that mental switch on – I go from being a husband/father to being a writer when I step through that doorway and close the door.

I notice you talk a lot about a well funded emergency fund (up to 6 months.) I am wondering if you think that you would need that much if you had a really stable job (ie teacher with tenure and a lot of experience) and good life insurance? We have several months of income saved but I kind of feel like any more would be better diverted to our Roth IRAs or something like that. What do you think?
– Mandi

A wise man once told me that you’re only a single mistake away from losing any job, and from what I’ve seen, that’s true. The moment you start believing you’re untouchable at work is the moment you’re most likely to get fired.

In other words, I don’t believe it’s safe to start making big assumptions. The point of an emergency fund is to protect yourself against the big emergencies, and the very moment at which you justify a small one because “that just won’t happen to me” is the moment that it does happen to you.

I wouldn’t touch it, though it might be a good idea to make sure that Roth IRA is funded before you make any more contributions to your emergency fund.

You mention RSS feeds once in a while. What’s an RSS feed?
– Kelly

RSS stands for Really Simple Syndication. Many sites (including The Simple Dollar) provide an “RSS feed,” which makes it easy for people to read The Simple Dollar in other formats.

What other formats? Well, I have about 12,000 people who subscribe to The Simple Dollar by email – they put their address into the email subscription form found on any page on the site. Those people receive an email that just includes the articles from the previous day – and that email is constructed from my RSS feed.

Many other people (21,000 or so) read the site using a RSS feed reader, like Google Reader. A feed reader basically just collects the RSS feeds of a bunch of different sites and collects them together in one place, so a person can effectively read all the articles from a bunch of blogs all at once. I use it to keep up with a lot of blogs myself.

For the most part, these readers never visit The Simple Dollar website itself – and I’m fine with that. I’m just happy that they’re reading.

How big is your current emergency fund? Would you like to have more or less in it? Why?
– Lukas

Our current cash emergency fund covers about six months’ worth of living expenses. I would like for it to be slightly higher, but that amount is pretty close to right for our family.

We do have substantially more savings than that, but it’s in other investments. In a desperate pinch, we could tap some of those investments, but my wife and I both believe that six months’ worth of living expenses is a pretty healthy fund for us to pinch when we need to.

I’m really confused by several descriptions of what you have for computers. What’s your home computer setup like?
– Paul

My main workstation – the one I do most of The Simple Dollar on – is a Mac Mini with 2 GB of RAM and an Intel Core Duo chip under the hood. I love it – I can’t conceive of myself using anything other than a Mac again for my main work for a long time. The many, many, many little things that Mac OS does well add up to a huge difference between using it over Windows. The individual things seem small when you describe them, but when you add them all up over time, it’s a pretty big gulf.

I also have a Dell laptop that I use when I’m on the road, running Windows Vista. It’s about two years old and is quite beat up, actually. My wife has a Sony Vaio laptop that’s also running Windows Vista.

Under my desk is a very old PC that’s currently being used as a house file server (that PC is mostly made of vintage 2001 parts). On the Mac and on both Windows laptops, it shows up as a shared drive where you can dump files and such. That PC is running Ubuntu Linux. It allows us to share data (music files, photos, home movies, etc.) really easily.

I can’t foresee any upgrades or changes for a long while, at least not until a machine goes kaput. Given the amount of writing I do and expected travel in the future, I’ll probably always keep a desktop and a laptop for redundancy’s sake.

You have mentioned financial advice for families and for singles several times, but what about a child free or childless couple?

How much would a childfree or childless couple need to provide to the other in life insurance if one of us was to die?
– Star

It really depends on your exact situation. In a childless couple, it mostly just needs to provide a platform so that the remaining spouse can get on with a reasonable life without being buried with financial burdens. Thus, I’d usually recommend that a life insurance policy would get the surviving spouse into a completely debt-free situation and also contribute to their living expenses for a few years.

The exact number you need is something you need to sit down with your spouse and discuss. Generally, the lower earning spouse should have a lower total insurance policy, as the higher earning spouse will have an easier time reaching financial stability in the event of a disaster.

What’s your opinion on an appropriate allowance value for children?
– Flo

There are too many variables to consider to give just a one shot answer, so I’ll just describe our plan for an allowance.

We plan on giving a very small basic allowance, something akin to one dollar a week for each year old the child is (up until age sixteen or so, when the allowance stops). Beyond that, there will be “bonus” amounts that the child can earn for tasks above and beyond the normal – a certain amount for scooping snow, an amount for mowing the grass, and an amount for other things, too. Again, we haven’t cemented these amounts or tasks, just the idea behind them.

As I’ve mentioned before, the weekly allowance will be divided into four pieces – spend now, spend later, spend on others (Christmas presents and the like), and give to charity.

That’s more or less our allowance plan.

I’m about to receive a very large inheritance – more money than I’ve ever seen in my life. What should I do with it?
– Malik

The first thing is don’t spend any of it immediately. The second you have your hands on it, put the entire amount in a six month certificate of deposit so you have time to cool your heels, think rationally about the money, and make sure you understand and have planned for all tax consequences.

During the cooling off period, think about the big things you really want from life. Debt freedom? Your own house? A very secure retirement? These are all good goals – your own goal may be something different, like opening a small business. Spend some time thinking about what you really want from life, and then when the certificate opens up, have a plan in place to use that money to make your dream come true.

It’s so tempting when we have a big lump of money to go spend some of it on something silly. Don’t – at least not immediately. Put it in a certificate of deposit for a while and cool your heels. You’ll be glad you did.

What have you been reading lately (besides the personal finance and productivity stuff)?
– Jaime

As I write this, I’m reading The Joy Luck Club by Amy Tan. I honestly can’t even recall what the last book I read before that one was that wasn’t related to The Simple Dollar, as much of my spare time lately has been eaten up with crunch time finishing up my book and also writing for The Simple Dollar, plus some other responsibilities that have cropped up.

I have a big stack of books on my bedside table that I can’t wait to dig into. Starting today, I’m trying to pencil in an hour worth of free reading a day just so I can be exposed to more and more writing, which I think is key to my development as a writer. I’ve come to view reading as something that is not only a personal pleasure, but a growth opportunity for the career I’ve chosen to pursue. I’ll keep my Twitter updated with the things I’m reading that are outside the realm of books I review here.

How can I know whether or not I can trust a source of information?
– Will

This is a follow-up question to my earlier comments about knowing the hidden agenda of writers.

It’s really hard to tell whether or not you can trust a source of information. I have very few sources that I trust all by themselves. Most of the time, I try to find multiple sources for any piece of information that I personally trust.

But what about evaluating the ideas of an individual person? I like the advice that Michael Mihalik gives in the foreword to Debt is Slavery. He advises asking two questions of someone that you hope to learn from: have they done what they are teaching, and do they have your best interest at heart? The first one somewhat relies on their story – if someone is just out there spouting out advice, you have no idea where they come from. The second one relies on that hidden agenda I talked about before. Try to figure out why a person is giving you this advice. If there’s a reason that would cause them to benefit from giving you bad advice, don’t trust it. Similarly, if that person would be damaged by giving you bad advice, then you can give it a little more trust. If you can’t discern either way, then I say give it minimal trust – there’s usually something hidden there.

If it doesn’t smell right, don’t trust it. Get at least a second opinion on the idea. That’s my advice.

Got any questions? Ask them in the comments and I’ll use them in future mailbags.

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  1. Kevin says:

    Seriously, take this advice as gospel:
    “A wise man once told me that you’re only a single mistake away from losing any job, and from what I’ve seen, that’s true.”

    I used to work at Ford Motor Company. I left on my own terms but 95% of the people that worked at Ford worked there for life and thought they would NEVER be let go or fired. People would call FMC “the retirement home” because went there to finish up their careers – 30 years worth. Just read the headlines and you can see that those days are over. FMC is a great company, but the days of lifetime employment and loyalty is OVER. If you think that it exists, STOP what you are doing right now, go down to your local unemployment office and sit there for an hour or so. This will should snap you back into reality and put things in perspective.

    Great piece of advice Trent!

  2. Frugal Dad says:

    Thanks for answering my question, Trent. Sounds like the only thing that has really changed about your schedule is that you are no longer waking at 4:30 to squeeze in writing time. And that’s a good thing! I spend quite a bit of time writing on the weekend, something I would like to see diminish.

    In regards to the size of emergency funds…I’ve talked to a couple people that had a full 12-month emergency fund established and they described it as the “softest pillow available” for helping them sleep at night. Sure, that money could be used to invest, but assuming they are already maximizing retirement contributions, a full one-year cushion must feel awfully good.

  3. Michael says:

    Nice answer to the emergency fund question. You never know when you are going to lose your job, become disabled, or have your car, air conditioner and washer and dryer all quit in a week. I highly doubt anybody is emergency proof. Without that fund your only option is to do without or go into debt. Neither of those options sound better to me than having a little extra money in a retirement account.

    As far as the life insurance for childless couples, I always tell people to imagine what their needs and wants would be after their spouse dies. Do we have enough savings to pay for the funeral? Do we have enough savings or income to pay off our debts? If you want to keep the house or the same lifestyle on one income then maybe you need a little more life insurance. If you just want to sell your house and start over then maybe a little less life insurance is necessary. It’s a hard thing to think of everything, but that’s the best way to do it.

  4. cathmom says:

    My sister and her husband did not have children and also did not have life insurance. Then my bil was diagnosed with malignant melanoma and only lived for a year. During that time, my sister was fired for taking too much time off to care for him. She then worked part-time for a month or so until he needed round-the-clock care and she couldn’t work at all for several months. Thankfully, my sister received a $20,000 death benefit from his employer (but if my bil had lived another 2 weeks or so, she wouldn’t have even gotten that.) After a hellish year like that, the last thing you want to worry about is finding a job ASAP so you don’t lose your house too. So now I tell everyone, even if you don’t have children, you should definitely have some life insurance for your spouse!

  5. Michelle says:

    I have a question about the consequences of filing bankruptcy. I have a friend who is planning to file for bankruptcy and acts like this is no big deal. In fact he is actually buying more things he does not need on credit before he files, saying it will all be wiped out anyways so he might as well spend, spend, spend right now. This just makes me sick to have to budget and forgo things because we are responsible, while he is putting himself deeper in a hole that will just get wiped away where he can start over. So my question is what are the real consequences of bankruptcy besides just the bad credit score? Will he actually have to pay everything back or is it truly forgiven? Will he not be able to get a credit card again after this, or will it be relatively easy like he seems to think? He is also foreclosing on his home right now and moving in to his finace’s house.

  6. Anne says:

    Regarding Mandi’s question: A Roth IRA can serve as an emergency fund. Since contributions can be withdrawn penalty free at any time, for any reason, there’s no reason to fund a bank account while letting the opportunity to fully fund a Roth slip by. Just be sure that the portion of your Roth that you have designated for emergency funds is in a safe investment, such as a money market fund within the Roth account.

  7. Rob Madrid says:

    I can tell you from experience that bankruptcy may wipe out the debt but it won’t solve the problem. You friend may have his debts wiped out but in a few years he’s going to be in much worse shape. CC companies love bankrupts they are the most profitable customers.

  8. Doug says:

    I’m not confident that Anne’s information regarding penalty free withdrawals from Roth IRAs is accurate. According to the Motley Fool, “Unless an exception applies, most distributions from a Roth IRA before the owner reaches age 59 1/2 will be subject to an “early withdrawal penalty” of 10% on the amount of the distribution.” The rules on Roths may have changed since this posting, so please check before setting up a Roth IRA for an emergency fund.

  9. Andy says:

    @ Doug

    Contributions (i.e. after-tax dollars you put into your Roth IRA) can be taken penalty free at any time. Distributions (i.e. interest, capital gains, and other distributions) will have the ‘early withdrawal penalty’ you speak of.

  10. Anne says:

    @Doug: Earnings are subject to the early withdrawal penalty, but contributions are not.


  11. K says:

    Doug – Anne’s information is correct – you can withdrawal your contributions (not interest) at any time without penalty BUT they can only be withdrawn after being in there for 5 years. So unless you have contributed enough money greater than 5 years ago, this is not a good practice.

  12. Anne says:

    @K: I believe you are confusing “qualified distributions” with returns of contributions. Returns of contributions are not “qualified distributions” and thus do not have to meet the 5-year rule. Contributions can be withdrawn at any time, for any reason, without tax or penalty.

  13. Carlos says:

    What are your personal nicknames?

  14. michael says:

    A note about RSS feeds: modern browsers have built-in feed readers. I read The Simple Dollar using a Firefox Live Bookmark. IE7 has a similar feature.

    These are great if you subscribe to only a few feeds.

  15. Lurker Carl says:

    @Michelle – What your friend is doing is kin to theft, acquiring goods with no intention of paying the bills. Most bankruptcies are court ordered debt consolidation and repayment plans in which most of the outstanding debt is not wiped away. Bankruptcy is no big deal unless you want favorable insurance rates, low interest loans or a job that requires a background check. I feel sorry for his fiancée.

  16. Lola says:

    I wish it were that simple: going to another room and impersonating my professional self!
    I have a question: do you agree that, for one to live comfortably without having to work for the rest of his/her life, one needs to calculate how much one spends a month, and then multiply it by 200? Say, if someone lived very frugally and spent only 2,000 a month and had no debts, having 400,000 would be enough, if that person had investments that secured a 10% rate a month? Does this make any sense? Because saving “only” 200 times what one spends doesn’t seem so hard to accomplish.

  17. HippyKidz says:

    My wife and I are ue to come into a large sum of money we hope to use as a down payment on our first home. I have a substansial amount of debt (making me a bad candidate for a good mortgage)that is being taken care of with our budget. My question is what is the best way to make this money “work” for us for say 24-36 months whle we clean up the rest of the mess?

  18. Shan-Oh says:

    Dear Trent,

    I keep hoping to hear more about your cooking site. Any news on that front?

  19. Louise says:

    Why did you stop posting Consumer Reports Magazine overviews? Do you still subscribe?

  20. Louise says:

    It’s theft, and no less wrong than giving a credit card to someone with terrible credit in the hopes that your company can make a killing on fees and interest. If this is the way your friend rolls, he needs to be using his credit card on things that can’t be reclaimed, like utility bills or dining out. If he’s spending it on items like a new TV or computer, he’ll lose the items. My info comes from a friend who went through bankruptcy, and now has much better credit than his wife who was never bankrupt.

  21. gr8whyte says:

    Anne (comment #7) is correct re. Roth distributions but I would suggest not using a Roth IRA as an emergency fund. Money saved for the long term in a Roth IRA should not be used to solve short-term emergencies because money cannot be put back into the Roth IRA after the emergency. A Roth 401(k) with loan privileges might be OK but I wouldn’t want to pull money from a Roth IRA.

  22. Anne says:

    “Money saved for the long term in a Roth IRA should not be used to solve short-term emergencies because money cannot be put back into the Roth IRA after the emergency.”

    This is true, but some people can’t afford to fund an emergency savings account and max out a Roth. (Note that Mandi, who asked the question, is asking whether to keep saving in an emergency fund OR fund her Roth.) In this case, they’re better off just going for the Roth. If they have to pull emergency funds from it, they’ll be no worse off than if they had never contributed to it in the first place. And if the emergency never happens, they’re better off because their money is growing tax-free.

  23. Shari says:

    What are your best frugal tips for hot weather?

  24. DaKine says:

    We have are going through a big financial setback, full of lost jobs, a house sold in a short sale and minimum wage to support a family of four. On top of it we don’t live in a cheap area. We need to get back on track and not spend money (we once had a lot of money and lost all of it) like before, but I have no idea where to start or what to do. Any suggestions for the first few steps?

  25. Melinda says:

    Do you have any suggestions for online software that can track my spending habits?

    I have tried wesabe.com, but I don’t especially like how it works.

    Do you have any other recommendations?


  26. Chiara says:

    De-lurking to thank you for the RSS feed. I’m a regular reader from Sri Lanka. Love your blog although some specifics don’t really apply to my country & situation.

  27. Rita says:

    I don’t know if there is such a thing as a secure job with all the benefits mentioned. College cost nearly $40,000 which I paid off over the years as quickly as I could. Doing without to pay the loan. I have taught for 12 years it took 2 years of living on sub pay to get this job. Now that I have tenure and insurance they are working to take away as much of my insurance as they can. My school corporation is very near bankrupt with many teachers being Riffed this year and no positions available in our area of the country. If the corporation goes bankrupt will I still be working the first grade position that I love or any position at all? There is much concern. I am thankful for what I do and for the $ I have made so far. I make right at $40,000 a year at this point. But as for the future….I have no idea.

  28. Debbie M says:

    To Mandi: I’m like you and don’t have any money saved in case of getting fired or laid off. But I do have so much saved for other things that I could borrow from those funds as I need to.

    That’s probably dumb, though, because Trent is right. All you need is one angry student claiming they were inappropriately touched or propositioned by you, and it’s all over for you.

    That said, I second what Ann said about being able to withdraw all the money you contribute to a Roth IRA at any time without paying a penalty. Any interest, dividends or growth have to be saved. So you could definitely put more money than you think you can afford into a Roth IRA. I haven’t actually tried to take money from my Roth IRA, so I don’t know how many hassles there would be getting it out. I suspect very few. You might have to fill out some forms and wait for a check to be mailed or something.

    To Malik: You might want to look for read advice to lottery winners. It says the same thing as Trent and may give you more ideas.

  29. gr8whyte says:

    @ Anne (comment #22) : I hear what you’re saying. My approach would be to fund the Roth as much as possible and look everywhere else first for cash (including borrowing as might be possible with a Roth 401(k)), before using Roth IRA contributions in an emergency. The Roth IRA would be an absolute last resort and not the next-in-line solution, after immediate cash in hand is used up.

  30. absatpitt says:

    In response to the person who is a teacher and thinks the emergency fund is not as a necessary. I am also a teacher – with several years of experience and tenure. However, I am currently taking a school law course. Now, I am more confident than ever, that I need an emergency fund. At anytime you question this, look into some recent school case law. Even tenured teachers can be dismissed for any number of things – for example driving a student home after a sporting event or discussing personal political opinions. So, I 100% agree that you are one mistake away from losing ANY job.

  31. Francine says:

    Emergecy Fund

    Please have a large one you can access quickly. None of the financial experts I have read suggest the Roth IRA.

    I was working one day and “thrown uder the bus” the next. Short version: I was accused of making 1 mistake that I did not make.

    I had dipped into my $2,000 emergency fund for previous emergencies, and it was down to $300 which went fast.

    My boyfriend & I live together and share expenses. We used our “stimulus checks” for bills. There is more of his check left. I have unemployment, but a Cobra payment of $450 per month. Without this insurance, I would pay more than $450 per month for required medication, so I must pay it.

    Now I am Queen Frugal: store brand products, some grocery shopping at Aldi (bottom of the barrel in Chicago), cashed in change from the change jar ($120), only buy w/coupons and on sale, sold some cds and dvds. Still more cds, dvds, books, furniture to sell.

    We had worked so hard to pay off debts – only car payment left (we rent). We were no longer paycheck to paycheck. Now, money/bills are my last thought beore I go to sleep at night, and the first thought in he morning. A crummy place to be.

    Please, learn from me and have that fund!

    Warm Regards,

  32. Laura G says:

    I’ve got a question for a future mailbag:

    I’ve always been good at saving. I contribute a hefty chunk of my paycheck to my 401k, have a good-sized CD, and I squirrel away extra money into a money market. No worries there.

    Since I’ve now been at my current job a year, my employer has started matching my 401k contributions up to 4%. I’ve been contributing well over 4% up to this point.

    I’ve read a lot of good things about Roth IRAs, and was considering pulling back my 401k contribution slightly (but still contributing well over 4%) and using the extra to fund a Roth IRA.

    However, I’m getting married next year, and my law-student fiance has secured a job (pending passing the bar) that, when you include my salary, puts us over the Roth limit (lucky me, I know!).

    So should I just contribute one year’s worth to a Roth, open a traditional IRA and fund it as long as I can get the deduction, or just leave the higher contribution to my 401k alone (or some combination of the three)?


  33. Kacie says:

    Question: My husband and I are expecting our first child this December. Would it be absolutely insane to attempt to use cloth diapers if you don’t have a washer/dryer in your apartment?

    We have a washer and dryer in our apartment building’s basement, which is $1.25 per load. It’s not so bad to wash clothes/towels/sheets for two adults, but I expect we’ll have a ton of extra laundry once the baby comes.

    Would you recommend we use disposables until we have an in-house W/D unit? Or maybe go 25% cloth, 75% disposable?

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