Reader Mailbag #70

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.

I’m getting married in September to a woman who just started a Master’s degree program. We have a fair amount in savings and have set some of it aside for the next 2 years of her college expenses. You’ve discussed 529 plans before, and that got me thinking about a possibility. Could I start maxxing a 529 plan and live out of that savings, then use the 529 to pay for her last year of college? I don’t like living out of savings, but that money has already been taxed. Say her last year of school costs $5,000; I’d be saving about $500 in federal taxes by utilizing a 529 plan. But can you put that much in a 529 in a year? Can you turn around and use the money that soon? We live in Missouri, if the state’s plan types are different.
– Michael the Dumb Tech Geek

There’s no limit to the amount you can contribute to a 529 for you or your spouse (provided you’re filing your taxes jointly). An aside: the only limit is that such contributions are seen as gifts in the eyes of the federal government and thus if anyone else contributes, their contribution must stay under the gift tax exclusion ($12,000 this year, $13,000 this year) or be a one-time gift that isn’t repeated over the next five years (allowing up to a $60,000 contribution). Anything over that would be taxable.

However, if you’re saving over that short of a term, putting your money into any sort of risky investment is extremely risky. You sure can contribute to a 529 as you suggest, but you should choose a really conservative option. In that situation, it basically becomes a bank account where you don’t have to pay taxes on the interest earned if you spend it all on schooling.

No matter what you do at this point, you’re not going to earn any major gains either way unless you’re extremely lucky or take on a large amount of risk.

I believe you owe it to your readers to point out that 529s are a big gamble because if your children get a full scholarship or decide not to go to college you could end up paying income tax on the 529 earnings PLUS sometimes a 10% penalty. Whereas the funds you choose to invest in the Roth IRA are guaranteed to retain all the benefits, tax breaks, and flexibility of the Roth no matter what happens with your child.
– Sophie

The only way that occurs is if you have a child that earns more than full tuition, room, and board scholarships for their undergraduate work, doesn’t attend graduate school, and is an only child. Read the details here. If any of those details are untrue, then the 529 works quite well.

On the other hand, when you use a Roth IRA for education expenses, you have to pay income tax on any gains used for education – using a Roth IRA for educational expenses only avoids the 10% penalty. On the other hand, for education expenses, a 529 is tax free.

So, a Roth IRA is preferable for education expenses if you have a child that earns more than full tuition, room, and board scholarships for their undergraduate work, doesn’t attend graduate school, and is an only child, because in that case, the child would have to pay income tax and a 10% penalty to get the money out of the account. Otherwise, the 529 is preferable, because you don’t have to pay income tax at all for education expenses.

I think, for my kids, I’ll stick with the 529.

*Everyone* told me that I would eventually grow apart from my high school friends when I was graduating high school.

They are still my closest friends. Two of them live with their husbands and children within blocks of my house. I see them multiple times each week.

I graduated high school in 1992.

I know it’s unusual, but it’s NOT a given that you will lose your high school friends. Maybe likely, but not guaranteed.
– Heather

Here’s a better way of stating it. There are two types of friends people have in life: friends based on the overlap of interests and experiences and friends based on true caring for each other.

Most friends people find in a high school environment are of the former type – you’re friends because you know the same people, go to the same school, attend the same classes, and so on. When those touchstones go away, so do most friendships.

Now, in some cases, those touchstones get replaced by other ones. You stay in the same town, live near each other, work in similar jobs, and stay in similar social circles. If that happens, you’re keeping those touchstone-based friends, it’s just that the touchstones have changed.

My oldest brother is a great example of this. After he graduated, he more or less stayed in the same area where he grew up, and at least some of the group of friends he had in high school did the same. Those guys remain friends to this day. If he moved away, would they remain friends? I’d bet against it – he might stay in touch with one or two of them, but he’d find a new social circle based on common interests wherever he moved.

It’s healthy to have both types of friends – some transient, some permanent. Disappointment comes in when one group is confused with the other.

In Your Money or Your Life long term treasury bonds are suggested as the ideal retirement investment. Their logic supporting that seems to make sense- the returns are predictable (which is important when you’re living off of them) and the principal investment is perfectly safe. Why do you find the stock market to be the better option? Is it just because of the higher rate of returns? Do you worry that the market will fall while you’re “living off the interest” and cut your income?
– Ariel

Your Money or Your Life offers great investment advice for when you’ve actually reached the point when you’re living off the interest – you want the money to be safe.

However, when you’re trying to reach that point, there’s no reason to restrict yourself to ultra-safe investment opportunities. If you’re still employed, you can afford some risk, particularly if the point of living off the interest is a long way off.

So, let’s say you need $25,000 in expenses a year to survive and you figure that your bond investments will return 3%. That means you need to own about $850,000 in bonds – and ideally more than that, so you have some protection against inflation. That’s a daunting number – it’ll take you many years to save it.

During those years, you may (depending on your risk tolerance) find it worthwhile to invest in higher risk, higher reward things. If they pay off, you’ll move that date a little closer. If they don’t, you just delay it a little longer. Over longer periods of time (ten years or more), the stock market tends to return around 7% a year – including dividends and increases in stock value. So, if you have that much time, it’s worthwhile to put some of your money into stocks.

Then, when you get closer, start investing your newer savings wholly into bonds and slowly start moving that stock investment into bonds as well. This way, if you’re getting close, a sudden market downturn won’t hurt you.

When you’ve finally made it, everything is safe and secure in bonds.

here’s a tip that really helped me and my family – RENTING BOOKS. We found the Netflix of books, Bookswim, and it’s been amazing to save money for required school reading in addition to my personal reading. we rent instead of buy – genius!
– Jennie

I hear you can also rent books at your local library! For free!

Okay, enough snark. Jennie does have a great point. Bookswim is basically Netflix for books, meaning you can keep them as long as you want and mail them back and forth for free, only paying the subscription. It’s a reasonable alternative to the library, especially if you’re a slow reader and find yourself always accruing late fees at the library.

However, there are some problems. If I find a book personally useful, I tend to write a lot in the margins – and that’s a big no-no with Bookswim and with the library. I tend to use PaperBackSwap for my book habits. No monthly fee at all. Roughly $2 to send out a book you’ve already read and get another book in exchange for it in your mailbox. If you want to keep a book – say, a copy of a business book that you’ve scribbled all over – you sure can, no problem, no cost.

I think Bookswim does hit a particular niche quite well, one that isn’t met by the library (late fees, long wait lists) or by PaperBackSwap (sometimes limited selection, cost-per-book instead of per month). If you’re an avid reader, it’s probably worth considering.

My high efficiency washer requires HE detergent, so I don’t know if I can use your recipe. What’s the difference?
– Richard Potts

I do not have any direct experience using my homemade laundry soap in a high-efficiency washer.

However, the laundry soap made in that recipe is a formula that does not produce excessive suds, which is the real danger with HE washing machines. It’s also pretty potent.

Thus, the general recommendation I have is to try half a cup of the homemade detergent in a HE load and see how that works for your clothes cleanliness needs.

Do “The Simple Dollar Artists” cater their work for your posts, or do they have a portfolio that always has what you are looking for? Or something else?
– Mol

“The Simple Dollar Artists” refers to a sidebar section on The Simple Dollar where I highlight two artists that contributed a lot of photography and other stock images to The Simple Dollar early on. I wanted some small, interesting items to use as accent pieces for posts – I wasn’t too picky – and so I asked for it. I wasn’t looking for commissioned stuff – I intended it as just a way for people to show off some of their portfolio work, stuff they’d already made that they wouldn’t mind being used on The Simple Dollar.

I was blasted for this and was roundly accused of trying to “rip off” artists, but two loyal readers – Daizy H. and David Herring – stepped up with contributions. All they did was help out a blog that they liked by digging through their collections of their own art, finding five little pieces, and allowing me to use them in posts. In exchange, they both received permanent thanks on the sidebar of The Simple Dollar.

For being kind and helpful, they’ve both had links to their sites that have generated several clicks a day for years, the Google boost that comes from being linked on every page of The Simple Dollar, and a page on The Simple Dollar highlighting their art contributions. Though David’s site is no longer updated, Daizy’s site is actually pretty interesting and I stop in regularly.

In fact, “Daizy” actually asked me to begin using a pseudonym for her because the link was attracting more attention than she wanted. If she’s still reading, I wonder if she considers the deal to be a “rip off”…

Just came across this article on LifeHacker – http://lifehacker.com/5280491/the-road-to-happiness-in-your-work-lies-in-the-hooray-zone – and couldn’t help but think that this is exactly what you’ve done with your writing. What are your thoughts on this diagram?
– Dave

I agree wholeheartedly with that image. With my current job, I think I’m firmly in the “Hooray!” part of the picture. I think I started off in the “what we want to do” circle, moved gradually into the “learn to do it better” part, and eventually moved into “Hooray!” (though I’m still learning).

With my former job, I think I started in the “Hooray!” part of the picture but gradually moved into the “Learn to say ‘no'” part and failed to escape from it. I found myself responsible for stuff that I simply didn’t want to be responsible for that ran contrary to what I loved about the job in the first place and that hurt my enthusiasm for the work quite a bit.

That’s a very good image – a great way of summing up a lot of the ideas I have about work.

Here’s a question for a future reader mailbag; what to do about failed frugal experiments? Or maybe stories of repurposing frugal moves that don’t work into stuff that does.

Tonight’s example: I have a $1.88 packages of noodles, cream of mushroom soup + lox casserole experiment in the crock pot that for various reasons, is not edible. I’m not out a lot of money as these were all pretty much on sale, but i feel the guilt of waste as I scraped stuff into the garbage.
– Betsy

I simply chalk those up to experience.

The way we look at meals is this: if it’s terrible, we’ve learned never to prepare it again. However, it’s still a meal, even if it’s one we didn’t enjoy. It still provided nutrition and sustenance, even if it didn’t provide enjoyment.

I look at it the same way if I try a generic version of a product. It’s a trial run at a low cost. If it works out, great – I’ve found a good long-term solution. If it doesn’t work out, I’m not out too much and I’ve usually been able to use at least some of the product.

Some experiments are going to succeed. Others are going to fail. But those are short term failures – and long term successes. If you have a bad meal or use a bad product, it doesn’t have to ever be repeated – you can go back to what worked before with only a small loss. If it works, though, you’ve found a new routine, likely one that requires less regular spending on your behalf.

One success – because it’s a long term success – is well worth ten failures, in my eyes.

One of our favorite restaurants is cafeteria-style, but they have bus-staff to clear the tables when done. Clearly they’re not providing the same level of service as a sit-down restaurant, but there’s some sort of service. We’d like to leave a little something, but don’t know an “appropriate” amount…something more than 0% but less than 15%. Do you or your other readers have a suggestion?
– Gumnos

I really don’t worry that much about “guidelines” for tipping. Tip whatever you feel like the service was worth.

By “service,” I do mean the whole package. Many people focus really heavily on the table service, but that’s only one part of the experience. If you get no table service but believe you’re getting exceptional value from the food, there’s no reason not to tip a little in any situation.

If you spend $7.95 at a cafeteria and the food was great, I see no problem tipping a dollar. Just make sure that you do it in such a way that it’s not accidentally thrown away – and also be aware that it’s likely to just vanish into the pocket of the first employee that finds it.

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

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