Reader Mailbag #61

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. Several people have asked questions about my childhood lately and how those earliest lessons have applied to my life. I’ve written about this extensively in the past – here are three of my favorites.
Remembering A Painful Childhood Experience – And Trying To Apply What It Means
The Road To Financial Armageddon #1: The Earliest Mistakes
Lessons From My Grandfather In The Garden

And now, some great reader questions!

I’m starting to think about life insurance. Where do I start looking and how much do I need? Is now a good time to buy some with the economy how it is? what is required to get it medical exams?
– Katie

Life insurance is a pretty intense subject, with lots of material out there. Here are some things you should think about (that address your questions).

First, figure out how much coverage you need. If you’re single, you don’t need much – you’re not leaving behind people who are dependent on you. If you’re married, you’ll need more. If you’ve got children, you need a lot more – maybe five times your annual salary (or even more than that). Also, stick with term insurance. Keep your investments and your insurance separate – hybrid plans like whole life insurance aren’t a great deal, particularly if you’re not starting the plan in early childhood.

You can shop around by getting quotes from various insurance companies. You should also investigate those companies by checking out their ratings with independent rating companies like Standard and Poors – don’t even bother with a company if it doesn’t have a good rating. IntelliQuote (http://www.intelliquote.com) is a great place to start gathering quotes.

Most policies will require you to have a physical – policies that don’t require one are prohibitively expensive. Also, life insurance rates are largely unaffected by the current state of the economy.

I want to start investing in some Vanguard Index funds – however I’m unsure whether to go with several individual funds (Shares, Bonds, Property, Cash), or the single diversified ‘LifeStrategy’ fund?

I have about $5000 to invest, which is the minimum balance for any of the funds – so if I go with the LifeStrategy, I would be immediately diversified, however if I go with the individual funds I could only get one now, and have to wait until I save more money to get into the others.

What would you suggest?
– Matt

It depends entirely on whether you’re investing in a tax-free or tax-deferred account (like a Roth IRA) or just investing in a taxable account for other goals.

If you’re using a tax-free or tax-deferred account, put your money in the LifeStrategy fund, contribute to that regularly, then diversify if you want by emptying out that fund and moving it into other funds. Since there’s no tax penalty for doing this, you can move things around as you wish.

If you’re going the taxable route, you need to be a bit more careful so you don’t incur unnecessary tax bills. You want your gains to be long term gains (meaning the money sat there for more than a year) so you can pay a lower tax rate on your earnings. So, you need to decide up front whether you want to go for a diversified portfolio or just want to go with the LifeStrategy fund for good. If you want to go diversified, just buy into each fund you want with the minimum needed to get in, then keep contributing to a savings account and buying into more funds until you have the diversity you want. After that, don’t rebalance – just contribute more to individual funds until you have the allocation you want.

For now, I’m just investing in Vanguard Total Stock Market and Vanguard Total International, keeping them at a 50/50 split. At some point, I will likely diversify this somewhat, but I’ll do it all at once when both have very nice balances and most of the taxes I would pay would be long term taxes.

A new question: Do you recommend using a dealer for car maintenance and repairs or a garage you trust? I have a 2005 Honda Pilot and because it is a “certified” used car, I’ve been using a dealer but I feel like I’m throwing money out the window and possibly getting taken for a ride. Same deal with the last dealer I used (last car).
– Sara

I tend to agree with the Car Talk guys – the best route is finding a good independent shop to work with. Dealers do solid work, but they have very high labor rates and insist on OEM parts, which are typically more expensive than aftermarket parts. On the other hand, independent garages can be of varying quality.

So how do you find a good garage? Your best bet is to ask your friends and family and coworkers. What garage(s) do they use? Are they happy with the work? Have they heard of any good garages?

Almost always, one’s social network is the best source for good answers on questions like this.

I am starting a new business and will soon be having some income from it, hopefully. I want to find a good (preferably free or inexpensive) program to track my income and expenses, but don’t know what to look for. I don’t anticipate I’ll need anything very complicated, at least not right away. Do you have any tips?
– Dave

It depends on your business and your personal experience. If you know how to use spreadsheets, I would probably just use OpenOffice – the spreadsheets in the package will do the job and provide some solid templates for you to start with.

If I didn’t know anything about spreadsheets, though, I’d probably start with QuickBooks Simple Start Free Edition. It’s a very basic entry-level accounting software, intended for very small businesses that are just getting started. For what you seem to be describing, this might be perfect for you.

Personally, I use spreadsheets to track all my stuff, but I’ve spent more than a decade using spreadsheets in various capacities (starting with Excel 4.0 on a Windows 3.1 machine).

My current company doesn’t offer a 401(k) plan, matching or otherwise. We’re currently maxing out our Roth IRAs, but are there other ways to build tax-deferred retirement funds like a 401(k) would?
– Tim

I see several options for you (beyond petitioning your employer to get a 401(k) plan going):

One, start a simple side business and contribute all of the income from it to an Individual 401(k) or other retirement plan for self-employed people. This, of course, requires you to actually start and build a side business.

Two, buy a variable annuity or another investment-type product. The drawback here is that the fees are usually crushing.

Three, don’t worry about the taxes and invest in a taxable account. Quite honestly, this is what I would do.

Four, invest in other areas that have tax benefits, like making your home more energy efficient.

Any updates on the podcast?
– Jim

My problem is perfectionism, I think. I keep thinking up and recording episodes, then I listen to them a few days later and I’m just really unhappy with them.

What’s wrong with them? I find some of them boring. In other ones, I don’t like the way my voice sounds – I’m focusing on lowering my voice so that it’s a more pleasing “radio” voice. In still other ones, I feel like the idea I have goes off the rails.

My goal is to record several good episodes before launching it, so that I’m not in a situation where deadlines are requiring me to post poor podcasts.

When I hit upon a formula that really works, I’ll be the first to let you know.

You mention you keep an electronic journal or diary. What software do you use to do that?
– Lily

I just use a simple text editor, to tell the truth.

I save the entries in a folder hierarchy by date. I have year folders, then month folders. Within the month folders, I have text files named 1.txt, 2.txt, and so on. I have them archived in a pretty hidden place, and I add an entry almost every day.

I have thought about posting them somewhere anonymously in a blog-like format, simply to make searching them a bit easier. The problem with this is I would have to change some names and other elements, and it always felt like more work than it would be worth.

You always talk about never giving up your dreams, but everyone has to give up dreams sometime. I’m sure you dreamed of some things that were never going to come true.
– Max

Of course I have.

When I was a child, I really wanted to be an astronaut. I dreamed of it for years, until I realized that my vision was too poor to ever allow me to be an astronaut. My vision (and subpar athletic skills) also killed my dreams of being a baseball player and a basketball player.

All throughout my life, I’ve fallen into various passions and thought that this is what I should be doing with my life. Inevitably, though, the glow of that interest would fade and I’d find myself moving on to something else.

Writing is the one thing that has been a constant for a long time. The glow never really faded from it – I would find myself coming back to it time and time again, only taking breaks to let my mind recharge a bit. That was the difference – it was a passion that never really faded.

What movies are you looking forward to seeing this summer?
– Sarah

Five 2009 films really stand out to me: Up, Where the Wild Things Are, The Imaginarium of Doctor Parnassus, A Serious Man, and Inglourious Basterds. I think only three of them actually qualify as “summer movies,” but those are the ones I’m looking forward to this year.

Most likely, something I’m not expecting at all will come along and really interest me, but it’s hard to tell what that will be.

I showed a friend this list and he said, “You like kids’ movies and weird movies.” That’s actually pretty apt, I think.

Do you intentionally write things to be controversial sometimes?
– Rachel

I don’t intentionally write things for the sake of controversy. That being said, I do look for topics that I’m confident will generate a lot of discussion.

To me, a great post is one that gets people talking and shows that people can have a lot of takes on the same idea. If I look at something and can quickly see two or three or four different angles on it, that says to me that it’s worth talking about.

What’s often seen as “controversial” is that I’ll take just one or two sides on the issue when there are many more angles to look at – I usually stick with the elements that interest me the most. This usually gets people quite whipped up, as they point out my “error” or staunchly defend some different angle on the issue.

Along the way, we all learn something. That’s what it’s about.

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

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