Reader Mailbag #99

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.

Do you get involved when someone you care about (sibling/friend) is heading down the road to financial ruin. If yes, how would you get involved, and to what extent?

Without getting into too much detail, my sister/husband/children are all living way beyond their means. His income from a construction business has dropped considerably, but they continue to spend like he is making a six figure income. We know they are already having some financial trouble, but they seem unwilling or unable to adjust to their new situation.
– John

This is a situation that requires a lot of care. Quite often, when one person in a friendship sincerely feels that the way they live their life is in some way better than the way their friend lives their life, it can very easily put some sand in the oil and really damage the friendship. The person thinks they’re helping their friend, while the friend feels looked down upon and resentful.

Rather than being heavy-handed about it, just have a casual talk with your friend. Tell them that you went through a financial hard time yourself in the past and give them a copy of a simple personal finance book that can help them with their problems – then let it drop. Do not hammer the person. Do not insist that they change their ways. They have to find the path to financial freedom themselves – you can lead a horse to water, but you can’t make it drink, and if you try to force the horse to drink, you’ll find yourself kicked.

I would probably recommend Dave Ramsey’s book The Total Money Makeover for this very situation, but it somewhat depends on the personality of the friend.

I’d like your opinion on my current predicament.

I’m in the military, I don’t like my job, and I’m in a lot of debt. My options from this point are: 1. Continue serving the two years I owe, create a budget that will eliminate my credit card debt ($23K) by my separation date, making the huge pay cut more manageable, and be incredibly unhappy until then. 2. Petition to separate within the next 6 months, use the GI Bill to begin my Masters and cover minimum credit card payments (unless I find a job), and be MUCH happier. I have been in the military for 5 years now and knew since the beginning that it was not my passion. I tried separating last May, couldn’t find a job a month out, then withdrew my separation from fear that I wouldn’t be able to pay my bills. Of course, I didn’t consider then as I am now moving back home to eliminate the lodging expense and using the GI Bill for school and other bills. I have nothing in savings or investments.
– Cassie

The most financially sound choice is to stay in the military for now – that’s fairly clear.

What’s not as clear is what exactly “incredibly unhappy” means. There’s an enormous difference between “I don’t like my job” unhappy and “I’m going to kill myself if this goes on another day” unhappy.

If it’s the latter, the situation is truly untenable and you should get out as soon as you can. However, if it’s the former, I would encourage you to stay in the military and get yourself in a much better position before leaping into a different life.

My suggestion would be to put off your separation for a month. During that month, dig deep into the aspects of your life that bring you happiness. You might just find that your current situation is more tenable than you think right now, and if that’s the case, the choice is clear.

I am 25 years old and have a steady job in California. My parents live in Ohio and want me to buy an income property near them. The house rents for $700/ month. There is also a small apartment above the garage that rents for $300/ month. Both units are currently occupied and the renters want to stay.

The house is listed at $115,000. I can have close to 25% down if I clean out most of my savings, not counting IRA’s and 401k. I am thinking that the mortage will be aroud $600/ month, if the units were vacant I could still handle the monthly payment.

This seems almost too good to be true. What are your thoughts?
– Stephen

You’re missing more than a few costs. Property insurance, property taxes, landlord insurance, and landlord-related (read: higher than usual) maintenance costs are all going to go right on top of the pile here, meaning your costs are going to be significantly higher than just the $600 a month for the mortgage if you choose to go this route.

I would also be concerned about what a property inspection might reveal. A house big enough for two rental units selling for $115,000 sets off my alarm bells as being a bit on the low side, especially given the rents that people are paying, which indicates that it’s not in the least expensive neighborhood (such a house in my hometown, for instance, would rent for less).

Don’t jump into this feet first or you might regret it. Get quotes on the insurance you’ll need. Get a property inspection and also calculate what it’ll cost to get things up to snuff. Find out what the annual taxes are on the property. Then, take a serious look at whether or not you can really swing it.

Do you have any recommendations for billing related tracking? I have accrued multiple clients in a side business I run, and most of the payments I receive are to be recurring, and each varies by client. I am looking for something (maybe a spreadsheet) that will make it easy to track recurring payments for each client, including the amounts, and the time frame for which they have already paid.
– Seth

It sounds like you’ve got a very small business that’s nowhere near the level of needing an industrial-strength accounting package but is busy enough to stretch your ability to keep track of things. If that’s the case, the first place I would start looking is the accounting and billing software category at Download.com.

After reading through the reviews of several of the packages, my pick for you would probably be Microsoft Office Accounting Express. It’s free, integrates well with other Office products, and upgrades to a more full-fledged package when you need it later on (like Dynamics GP.

If you don’t like the Microsoft route, I’d look at Quickbooks Simple Start free edition. Again, it provides a nice upgrade path when you need more horsepower, but gives you what you need today.

What health insurance do you have if you’re self employed?
– Bob

Right now, our entire family uses my wife’s health care benefits, but that was the case already before I switched careers because her health care has always been better than mine.

We’ve done some research into what it would take for us to self-insure (in the event that my wife chooses to switch careers or something to that effect) and we found some good things and some bad things. The good: even if you can’t find insurance because of a pre-existing condition, you can usually find some insurance in many states thanks to the existence of high risk pools; in those states, which bargain collectively for policies. The bad: almost every option is painfully expensive. You’re either going to have to be earning a lot or you’re going to have to live with high deductibles.

If you want to know more about it, the place to start is HealthInsurance.org, which has a truckload of information.

my family of 4 is planning a trip to Walt Disney World this year. Of course I want the best experience possible without leaving a major hole in my pocket book… any tips or suggestions?
– Michelle

Five suggestions:

1. Shop around for tickets. There is no “best” place for airline tickets – they’re all roughly equal, but some sites seem to have better rates with some specific airlines and some specific routes. Look at lots of options before you buy.

2. Compare flying to driving and even to using a train to get there. Amtrak does go to Orlando, after all.

3. Consider camping when you arrive. This works well for some people (like us, who love camping) but not so well for others.

4. Consider buying an Entertainment book for Orlando. Since you’ll likely be hitting lots of sites in that area and eating out some, it will probably pay for itself on the trip. If you wait until close to your departure, you’ll probably get a further discount on the book.

5. Make as many meals for yourself as possible. Get sandwich supplies and make them yourself. Fill up backpacks with food and take them with you where you go. Don’t pay high prices for food if you don’t have to.

I’m curious what you think about having a set budget for charity when a crisis such as the one in Haiti occurs. Should you have an “emergency fund” for charity, so you can make an immediate contribution without busting your budget? “Borrow” money from next year’s charity budget and donate now? Not do anything, but perhaps re-evaluate the charities you donate to, and next year give more to ones that help in crisis such as this?
– Joseph

I have an annual amount that I plan to give to charity each year. With a few exceptions (where I’m dead certain we will be giving a certain amount to a charity, like Iowa Public Radio), we let this roll until the end of the year and then give of what’s left in the last week of the year.

Thus, if something like Haiti happens, we can give within this charity budget and not have to worry about it. We just keep the receipt and use it when we total up at the end of the year.

It’s much easier if you just keep a running tally of your charity spending somewhere, like in a spreadsheet.

I have $3000 that I rolled over many years ago from a 401K to a traditional IRA. I would like to roll that money into my Vanguard Roth IRA just to have less institutions that I do business with. What are the rules for converting from a traditional to a Roth IRA? What things do I need to consider before doing so?
– Stephanie

The big thing is that you’re going to have to pay income taxes on the amount you roll over into the Roth IRA now (once it’s rolled over, you won’t have to pay those taxes later on, of course). Depending on your tax bracket, that means Uncle Sam will eat somewhere around 25% of the money. However, you’ll effectively get it back in retirement – and, if your investment options are better at Vanguard, you’ll probably earn more, too.

One big thing to think about: what do you expect your income tax rate to be in retirement? Do you expect it to be lower than it is now? It’s hard to judge this, but I would expect that if my income in retirement is going to be a lot lower than it is right now, my rate in retirement will be lower. If it’s about the same, I would expect my rate in retirement to be higher.

Now, if your rate in retirement will probably be lower than it is now, it’s not a great move to roll things over, because you’ll pay more taxes on it now than you will then. Only make this move if you think your retirement income will be somewhat comparable to what you’re making now.

I graduated from college 1 year ago and have been able to save about $30,000 from working and living at home. Now I am ready to move out and have contemplated either purchasing a home in downtown Baltimore (however, the median house price for my desired location/amenities is about $300,000 and I would definitely have at least 1 roommate) or renting with some roommates for about $600/month rent. My question is, would it make sense for me to try to purchase a house or rent? And, if I choose to rent, what should I do with my savings? Right now I have it in an online savings account earning 1.55% APR just because I want it easily accessible if I choose to purchase a home.
– Joe

First of all, 10% down on a 30 year mortgage means you’re either going to be paying PMI or paying a higher rate because you don’t have that 20% down. So, if nothing else, I’d say to wait until you have at least 20% down before buying.

Let’s say you did have 20% down. You’d then be taking out a 30 year fixed rate mortgage for $240,000 at, say, 5%. Your monthly payment would be $1,638.37, and that wouldn’t include property taxes or homeowners’ insurance. Alternately, you could rent at $600 a month.

If I were you, until there were additional reasons to buy (familial or otherwise), I would continue to rent. Save until you have at least a 20% down payment, then make the move when you’re ready.

As for saving it, if you must have it liquid, a savings account is probably the best choice for you. However, if you’re going to save for that 20% down payment, that gives you at least a year or two in which you won’t be spending the money. In that time frame, a CD is probably the best choice for you, but if the timeframe is longer, you may want to look at putting at least a small percentage into stocks or some other investment.

With the economy in such turmoil, I’m thinking that we may be headed for another Great Depression. There a lot of people who believe this. Do you have any tips from your grandparents or other sources for living on practically nothing? I bookmarked the recipes from that lady Clara whom you highlighted in the Simple Dollar last year who told about what her mother cooked for the bleak depression years, but I wanted something I could print and save for when I will need it.

Thinking this way has made me re-evaluate how I live, what I’m spending my money on, and what’s important. I realize that I’ve accumulated things to make my life more convenient and enjoyable without much thought as to what I really need. Now I’m faced with the situation of getting rid of gobs of “stuff” , and feeling remorse that I’ve wasted money over the years on such unimportant things.

How independent and self sufficient can we really become? I’d be most interested on your comments and suggestions.
– Junia

It’s very possible today to live a completely self-sufficient lifestyle without reliance on any external sources at all. The big question is what type of quality of life are you looking for?

Do you want electricity? In that case, you’ll probably need some sort of generating capacity. If you live in the Midwest, as I do, a wind turbine is one possibility, but to be self-sufficient, you would also need to know how to repair it and maintain it. Do you want water? That means you’d have to dig a well – or have it dug for you. If you want sustainable food, you’re going to have to get into some degree of agriculture, raising livestock and plants from non-hybridized seed sources. These things are all possible. These things all have significant startup costs, but once they’re running, there’s not much cost other than work.

An alternate question would be what do you consider an acceptable level of self-sustainability? Recipes like Clara’s are great, but they still rely on sources for all of those food items. If that’s the kind of thing you’re looking for – merely tips for how to live if we were suddenly whisked back to the 1930s – there are many, many internet sites devoted to such things. This page, for example, has a ton of Depression-era recipes.

The real concern, I think, is that you have a sense that your current skill set would not function well in an economic depression. If this is a genuine concern for you, spend some time developing the skills. Start a garden. Make recipes with very basic foodstuffs. Take control of your own home repairs. Go as far down that path as you’d like, so that you know how to do these things. Not only are they useful life skills, they save money and they often teach you a lot about yourself as you’re learning them.

Got any questions? Ask them in the comments and I’ll try to include them in a future reader mailbag.