Reader Mailbag #46

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. Here are some thoughts on how a new college student can find a career.
The Difference Between a Job and a Career
Ten Things Any College Student Can Do To Prepare For Success In Life
The Five Ps: Breaking Down Big Dreams Into Little Steps

And now for some reader questions!

This summer I reduced my 401k contribution from 20% to 10% in order to rebuild my emergency fund after some unexpected expenses. I now feel comfortable with the emergency fund and am ready to return my contribution to 20%.

Unfortunately, last week our company sent out a statement that due to the economy, the company would no longer be offering an employer match to the 401k funds. So my question is, should I continue contributing to my 401k at all, and instead move my money to a different investment?
– Wayward

If your employer is no longer matching 401(k) contributions, you may want to consider starting a Roth IRA. A Roth IRA is a plan you set up yourself with an investment house – I set mine up with Vanguard and it was quite easy. You contribute directly from your checking account with after-tax dollars. However, when you start withdrawals (when you reach retirement age – roughly 59 1/2), you don’t have to pay taxes on any of it – the contributions or the earnings.

If you believe that income tax rates are going to go up over the long term – and this is something I adamantly believe – then a Roth IRA is likely a better option than an unmatched 401(k). Instead of returning to 20% contributions on your 401(k), consider using some of that money to start your own Roth IRA.

Who’s going to win the Super Bowl?
– Andy

Football is not a professional sport that I follow. I only specifically follow a few individual players because of personal ties I have to them – and Kurt Warner happens to be one of them. Thus, I’ve been rooting for Arizona all the way along this year because of Warner’s amazing comeback. So, I predict an Arizona win.

In all honesty, though, my sports of preference are baseball, college basketball, and a bit of soccer. I’ll watch the Super Bowl, but in my mind it’s more of a cultural phenomenon than anything else.

Since the markets are doing so badly, I want to withdraw about some money from a traditional IRA (about $12,000 over three semesters) to pay for full-time college tuition at a state school. This IRA has pre-tax and after-tax money in it, mixed together from when I contributed more than the employer match when I worked.
Since I am using it for college tuition, I only will have to pay taxes and not the penalty. I plan to convert the traditional IRA to a Roth IRA when I am done with college, so I think this move will lower my eventual conversion tax bill also. When I get re-employed after graduation, I plan to pay the money back to the IRA.
Does this make sense or is there something I am overlooking? My goal is to finish school with no student loans.

– Kate

Your plan makes sense, but you’re also navigating through a number of different rules and situations here, so you may want to be sure that you’re not overlooking any restrictions against withdrawals and conversions.

Whenever you plan on making a withdrawal from a retirement account for a specific reason like this (college education), make sure you know the rules cold, and if you’re unsure at all, call the investing firm through which you hold such investments. They can make sure that your plan does in fact follow the rules and that you won’t get dinged in the end because of a loophole you forgot to step through.

Lost starts up again this Wednesday. Any predictions for the coming season?
– Kat

Those of you who have read The Simple Dollar for a long while know that I’m a borderline obsessive about Lost – as are several of my readers.

Anyway, here are my predictions about the fifth season.

The island has traveled backwards in time, and I don’t think it’s necessarily going to stay in the same time. I actually think it’s going to hit at least two different times in the past – one will be in the 1700s where it pops up under the Black Rock.

Aside from Michael, I don’t think anyone actually died in the boat explosion – that would mean Jin and Sawyer are still alive, at least.

My wife predicts that Ben and Jack carry around Locke’s corpse with Weekend at Bernie’s-style madcappery, but I think that’s a bit of a stretch.

My husband and I have been working really hard and have paid off out student loan and credit card debt. Our plan was to save up 1,000 as a mini emergency fund and then start paying down our auto loans(a total of about 10,000 which we could have paid off in about 7 months) now Im beginning to wonder with this bad economy if it wouldnt be better to continue saving for a more substantial emergency fund? Our interest rates on the cars are higher then we could get right now on a easy to access savings account.
– Katie

In my opinion, the size of a person’s emergency fund directly relates to how much risk they feel they can tolerate in their life. For example, I don’t like risk much at all, having two young children at home, so I try to keep my emergency fund as large as I possibly can. Others with more risk tolerance, though, might have a much smaller emergency fund.

I’m going to assume that the $1,000 number you’re using is due to the conventional Dave Ramsey wisdom – that’s the magic number he often promotes for a starter emergency fund. However, that single number is not a one-size-fits-all number – it’s merely a healthy starting point.

What I’m trying to say is this: if you don’t feel comfortable with a certain level of emergency fund and feel you need to have a larger one, do so, and don’t worry about giving it a higher priority than paying down debt. You’re simply prioritizing one kind of risk – job loss or other disaster – over another – the risk of holding debt over a long period of time, and that’s a reasonable conclusion to make.

You’ve been hinting time and time again about an upcoming project related to The Simple Dollar that you’re working on. Can you give us a hint?
– Sally

I’ve been working on the outlines of a podcast for The Simple Dollar. There are many issues involved with podcasting I don’t like, however – the inaccessibility to people who want the content but can’t listen in, for one. Another problem is figuring out how to make it cost-effective for me – why not start another blog or something else? A third problem – a lot of podcasts are overly long and rather dull – how can I make this one worthwhile?

So I’m working through the steps of how exactly I want to do this. I have a lot of ideas sketched out and have recorded a few “test” episodes, but I still feel like it’s far from ready to go at this point.

Don’t worry – when I decide to go forward with it, you guys will be the first to know.

I believe I was given a counterfeit $20 bill in change from a local business recently. I didn’t notice it at the time, but under closer inspection, the bill clearly seems fake. What should I do?
– Rod

If you think you received a counterfeit bill, you should report it to appropriate law enforcement agencies. I would call your local police department and tell them about the bill – where and when you believe you received it and so on.

Another thing to do is to write your initials and the date in the white border of the bill. This helps to identify who found the bill and when.

Put the counterfeit bill in an envelope and put it in a safe place for the moment. Eventually, a police officer or a Secret Service agent will collect the counterfeit bill from you – make sure you know who collected it and take note of when it was collected.

Mostly, these measures protect you and also help to ensure that the counterfeit bill is treated appropriately.

Are you still enjoying the iPod touch you received for Christmas?
– Becky

Yes, I use it several times every day.

For those who are unaware and think this is basically a music player, an iPod touch is more like a PDA than a music player (though, of course, it can play music). I use it for keeping my schedule, jotting down notes, checking my email, surfing the web, playing games, and so on. It’s not an item I would have purchased for myself, but I was extremely happy to receive it as a gift.

Anyway, I’ve mostly gotten over the desire to download new stuff for it – I now have it set to do pretty much everything I could want it to do short of it actually being an iPhone. Mostly, I use it for “quick checking” of things like email, Twitter, the weather, road directions, and so on, and occasionally to play a game if I’m twiddling my thumbs in a doctor’s office or something.

It’s a great gift and something I use all the time, but it was also very expensive – I would have likely felt like I had spent too much money on it had I not received it as a gift. That being said, I thoroughly love it.

Is it better to give cash as a gift or a gift card to something you’re sure they’ll like if you can get the gift card cheaply enough that you can get them a higher face value gift card? My younger sister downloads music from iTunes all the time – should I give her a $25 iTunes card or a $20 bill when they both cost me the same amount?
– Ed

I’d give the gift card myself, if you’re quite confident that the person will use the card in the very near future.

I use three basic criteria when trying to decide whether or not a gift card is an appropriate gift. First, am I sure the gift card will get the recipient something they’ll like? Second, can I get the gift card for a lower price than the face value of the card? Finally, is the gift card with a reputable business that’s not likely to go belly-up soon?

If a potential gift card passes all three criteria, I don’t mind giving a gift card as a gift in some situations.

How’s the homebrewing going?
– Lee

The most recent batch we made – bottled on January 8 of this year – tastes almost exactly like Sam Adams Light. I wasn’t actually shooting for that – I was attempting to make something closer to a pilsener, but this turned out to be substantially darker than that.

My wife and I tend to brew a batch about once every two months or so on average. We’ll likely make another batch in late February – most likely, a porter of some kind. We tend to try hard to make a wide variety of beers instead of just making the same thing over and over again – variety is the spice of life, after all.

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

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