Reader Mailbag #91

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 30 years old and my wife and I are in the market for a new car. Combined, we earn roughly $150K a year and have about the same in savings. Both of our current cars are paid off, worth about $15K each, and we would be selling one of them. We are also completely debt free other than a mortgage on a rental property. A friend of mine recently starting talking about the Time Value of Money and says that it is better in the long run to take out a loan for the ~$30K car instead of paying cash for it up front. What is best in my situation? Pay cash or take out a loan?
– Jon

Let’s back up a minute to clarify what Jon is talking about. The “time value of money” idea is an argument that money today is worth an equal amount to a higher sum of money tomorrow. So, for example, let’s say you have an account that earns a 5% return. $1,000 in that account today is exactly the same as $1,050 in that account tomorrow.

The friend is basically arguing that your $30,000 in savings will earn more over the next few years than the interest on your car loan. Now, if you can get a 0% interest loan or an extremely low interest loan, that’s probably true. We did this on our own car loan for our Prius and chose to keep the money in the bank because, after four years, we would have more money by just sitting on our savings than we would by paying the entire bill up front.

The problems with this are twofold. One, savings accounts aren’t earning much interest right now, nor are freshly-bought CDs. We were able to do well because we had a lot of our money in longer-term CDs that did carry a higher interest rate. Two, even if it’s close, there’s a psychological risk in keeping the cash because you become tempted to spend it. When you’re in debt without the money in hand to pay it off, that’s a risk (one that a lot of people underestimate).

Unless you can get full 0% financing, I would pay cash for the car. If you can get full 0% financing, it makes sense to me to hold onto the money and just make payments out of that savings account, because you’ll likely earn $100 in interest (or so) for your efforts.

Have you ever felt like just walking away from everything in your life and starting over? The cover story in the December issue of Wired is really making me think about doing it.
– Sarah

I can fully understand the temptation for doing this. Once a person’s life hits a certain threshold of trouble (particularly when it seems that the positives outweigh the negatives), it’s often very tempting to walk away from it.

What I’ve found, though, is that often the negative things are temporary, while the positive things last much longer. Bad jobs, bad relationships, bad debts, and so on can be eliminated with time and effort. Loved ones, on the other hand, are often there for the very long haul.

Instead of running away, try to tackle some of the negative things in your life head-on. You might be surprised at what you can solve.

I am trying to decide which is the better option in terms of what to do with $200 extra dollars a month that I have. Currently, I am putting that extra money towards my mortgage to work on getting it paid off. However, I don’t currently have any type of retirement plan. Would I be better off starting an IRA and putting the extra money towards that? As a note, I am 24 years old.
– jtenman

I would definitely put that extra $200 a month towards retirement. As young as you are, a dollar put away for retirement today will have an enormous value later on.

I would probably encourage you to open a Roth IRA. A Roth IRA lets you put in post-tax money (the money in your paycheck), but if you wait until you’re 59 1/2 to touch the interest, you can withdraw the interest tax-free. Not only that, you can take your contributions back out at any time without penalty.

Thus, if you do make the decision to do something differently in the future, you can access your contributions without penalty, but you don’t lose the interest you’ve accumulated in any way.

I would like to know how you are able to sit in on a class at the university? Do you just go to the class you’d like visit or do you make arrangements with the professor?
– Maranda

For the large lectures (100+ people), I’ve just gone in, sat down, and listened to the lecture. No one has ever said a word to me.

For smaller ones, I have asked the professor whether he/she minded if I sat in on their class. None of them minded in the least, though a few asked that I give up my seat to actual students if there was an overflow.

I think most college professors believe that students are mostly paying the fees to earn the credits and the feedback on their work, but that their lectures are essentially free to everyone. This may not be universally true, but it has been true in my own experience.

Have you ever tried to make your own lotion and chapstick? I find I go through a ton of the stuff during the winter, and good lotion is kind of expensive.
– Chelsea

I’ve never had any success making either one of these items with any level of quality.

There are just simply some things that are difficult to make in a home environment. Truly moisturizing hand lotion is one of them (I believe). I think lip moisturizer would be possible to make, but compared to the cost of just buying a tube of it, I don’t believe it’s worth it.

If I actually use something a lot and it provides a lot of value to my life (as hand lotion seems to add to yours), I don’t mind paying for the good stuff.

I know you keep notes on lots of different areas of your life, but I’m interested in a particular area: Work-related ideas. I take so many notes at work (in meetings, requests from my boss, things to follow up on, etc.) and sometimes, I have ideas for things to pursue that I can’t necessarily work on right now, but want to keep in mind for the future.

Do you keep notes on “big ideas” for your blog, and if so, how do you keep those ideas from getting lost in the day-to-day shuffle? Do you have any suggestions on how to budget “big idea cultivation” into work time?
– Jenny

I keep a “work notebook” in Microsoft OneNote 2007. In that, I have a lot of different things and, yes, one of them is a “big ideas” list. Mostly, these are the large-scale projects that I want to accomplish with The Simple Dollar.

Each day, I set aside two hours to work on such projects. Sometimes, if I’m well ahead on my writing, I’ll set aside full days to work on such projects.

The big challenge for me is separating the “urgent but not important” and putting them aside, something I’m going to write about in detail soon.

One of the problems I’m facing these days in trying to restart my own career is reading overload. This is made worse because my reading speed has decreased over the years, due to a couple of medical issues.

What’s your approximate reading speed? How long (in hours) would it take you to finish reading a three hundred page novel? A New York Times editorial?

And if you ever feel overwhelmed by the reading load, how do you triage for selecting which things to read?
– Kate

I read at different speeds depending on my purpose. I can read extremely quickly, but it doesn’t provide a whole lot of enjoyment for me. Such speedreading feels like work, not pleasure. So, when I need to absorb something quickly, I can. I can blow through a 300 page book in a couple hours.

When I read for enjoyment, I tend to read much more slowly. It can take me several hours to get through a 300 page book if I’m reading it for personal enrichment.

I never feel overwhelmed by reading. I enjoy reading quite a bit and I take time for it. Sometimes, my allowance for reading time makes me feel overloaded in other areas, though.

Trent does have some trolls as well as some others who verge on trollish behavior. But I’m pretty sure he can tell the difference between a troll and someone who disagrees with him.
– Shevy

Actually, I often can’t tell the difference between a well-meaning person with a somewhat aggressive tone and a clever troll.

The big problem is that many trolls do what is called “concern trolling.” They go onto comment fields or messageboards, try to find some area where they can possibly stir up disagreement, then make an effort to write something that seems like a legitimate concern but is there to do nothing more than to stir people up because they enjoy conflict and disharmony. It happens a lot. Several regular commenters on The Simple Dollar are concern trolls – they only post “concerns” about what I’m writing, then they sit back and try to encourage a feeding frenzy.

The problem with concern trolls is that sometimes their concerns are legitimate – but quite often they’re not. It’s often impossible for me to tell which is which, and I’ve guessed wrong in the past. It’s one of many reasons where I don’t like participating in comments, because I’ll see a concern troll at work and I know it’s a “no win” battle to get involved. Of course, clever concern trolls often demand that I get involved in the discussion and use my non-involvement as “proof” that I’m not paying attention – but why would I want to be involved?

I usually filter out the blatant trolling – the people who issue very personal and specific threats towards me and my children (yes, I get these kinds of things regularly), the foul language, obvious hate speech, name-calling, and so on. It gets much more difficult to filter it out in the grey areas – “concern trolling” and the like.

Hopefully, now you see one of the very un-fun parts of doing The Simple Dollar.

Do you and your wife have any differences of opionion on finances/frugality/etc. where you’ve had to compromise? I know my husband and I both have different things we wish the other was more and less frugal about.
– Chelsea

Yes, we often disagree on some areas. My wife tends to be a big “saver” of things, because she sees that items often have a potential second use and it’s wasteful to throw them out. On the other hand, I’d prefer to be a minimalist and get rid of lots of stuff. We often clash over this and the end result has been days where I do nothing but get rid of things while my wife is at work (with her knowing fully that I’m going to spend the day doing it, of course).

Most of the time, though, we’re in agreement on frugal choices. We both like to eat at home. We both are willing to try generics, but abandon them if they don’t do the job well enough. We both like making homemade solutions – like laundry detergent.

If there’s something we disagree on – for example, if one of us thinks the generic is “good enough” while the other is frustrated – we usually talk it out and reach some sort of compromise. Often, with such situations above, we’ll either buy a higher quality brand or leave one of us responsible for “incidents” with the generics (like a ripped bag).

I have about $5k in self employed income for 2009. Through income earned from my regular job I have already maxed out my Roth IRA and will max out my 401k by the end of the year. Am I eligible to contribute a portion of my self-employed income to a SEP IRA?
– Jo

Yes. The only requirements are that you’re at least 21 years old, that you’ve been involved in that type of self-employment for three years or more, and that you’ve earned more than $500. I’d contact Vanguard (they’re who I use) and get one set up.

I’m wondering, though, why you would want to contribute more toward retirement if you’ve already maxed out a Roth IRA and a 401(k). I guess this would be okay if you’re trying to make up for a lot of lost time, but if you’re in a solid place with your retirement savings, you might want to take that money and use it elsewhere in your life – paying off debts and so on.

One way I would strongly consider investing that $5,000 is in energy efficiency improvements for your home. Installing better windows, improving your insulation, installing a programmable thermostat, and maybe even putting solar panels on your roof are all well within the $5,000 you have. That investment reduces your energy bills, improves the resale value of your home, and might even make you eligible for tax breaks.

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

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