What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Traditional or Roth 401(k)?
2. Anticipation with letdown
3. Invest or pay off debt?
4. Weird allowance problem
5. Which loan first?
6. Online spending habits
7. Children sharing a bedroom
8. Freebies from conventions
9. Bad advice?
10. Finding a partner
It is often frustrating building new relationships in the community when you have children. Your schedule is by nature a lot less flexible than people without children, as you’re checking your calendar for things like taekwondo practice and piano lessons when finding a time for a dinner together.
It’s a bit easier with other parents… assuming your children get along at all, which is never a given.
Thankfully, my closest friends without children do a great job of working around the conflicts with us. I really appreciate that – and that’s why I value those friends so highly.
Q1: Traditional or Roth 401(k)?
I got a new job, and my employer offers a great match of my retirement contributions, in fact to my 5% it will add an additional 9%. This match is offered on both a tax-deferred or after-tax basis, it’s up to me decide which one. Typically in the past the suggestion was to go for a traditional 401, my understanding is that it was the only way to benefit from this employer-match. What about it today? Having the choice for both, what would you suggest doing?
Can you get both? If you contribute 5% to each, will they add 9% to each? If that’s the case, get both!
If it’s an either-or proposition and the investment choices are the same in either one, it’s really all about whether or not taxes will be higher for you now or in retirement. Given that, as far as I can tell, taxes are pretty much at historic lows right now and have nowhere to go but up, I’d bet on higher taxes down the road.
Thus, if I were doing this myself, I’d put my money into a Roth 401(k) rather than a regular one. If you have an option to do so, though, I’d split it up pretty equally.
Q2: Anticipation with letdown
I really like the concept you’ve mentioned about letting anticipation build for something, but what do you do if you anticipate something for a really long time and then it’s a complete letdown? My family did this this summer with a family vacation and I felt horrible and we ended up buying a new family computer later because I felt so guilty about the terrible vacation.
Don’t feel guilty about something not turning out as planned. Regardless of how the actual event turns out, you still had the joy of all of the anticipation, which is fun.
Sure, sometimes things don’t turn out, but there’s also some joy in a shared bad experience. I went on vacation with my in-laws once and we were planning on staying at a beautiful hotel. Turns out that hotel was in the process of being gutted when we stayed there and the whole hotel gave the vibe of a dump with a “Scooby-Doo Mysteries” vibe to it.
It wasn’t a good experience, but we still joke about it ten years later. We wouldn’t be mentioning an ordinary hotel, but the “Scooby-Doo Mysteries hotel with the paintings that had eyeholes cut out of them” gets referenced even now.
Our current financial situation is such:
Bought home for $135,000 end of 2011 with 30,000 down. Have made some extra payments so current balance is about $97,000.
We have approximately $90,000 in checking and savings.
We have about $220,000 in IRAs and mutual funds. Mutual funds are performing well so far.
Property (including house) is about $66,000. This includes two older cars; 2002 Lincoln Continental and we just bought a 2003 BMW 330xi. We only drive 3-5,000 miles a year so older cars are fine for us.
Net worth around $375,000.
Our income is about $100,00 a year.
I received a small inheritance of $18,000 a few months ago which part went to pay for the BMW. I am also getting another inheritance soon in the range of $200-250,000.
My question is this. Should I pay off the house and then invest the rest? My mortgage is 30 years at 4.375%. I feel like we could make a bit more by investing, but who knows. Markets are a bit overpriced right now.
You’re certainly going to get a better return paying down your mortgage than putting your money into a savings account or into treasuries or into low-risk bonds.
The only way you’re going to have a shot at beating the return on early house payments is via investments with significant risk and volatility – things that might show a significant loss one year, only to show impressive growth the next year, averaging out to a rate over the long run that’s higher than 4.375%.
The question is whether you can deal with that volatility. Is it acceptable for you to have a significant loss one year? What if it happens to be the year before you intend to withdraw the money? Also, the volatility can mean that you won’t hit an annual rate of return higher than your mortgage for quite a few years.
Many people in your situation don’t want this kind of volatility. If it’s acceptable to you, go for it. If it’s not, then pay down your mortgage.
Q4: Weird allowance problem
We set up a system where my son can earn an allowance by doing some simple chores around the house. We made it optional of course but he doesn’t want to do it. We tried slowly taking away his toys but he just finds something else to do. Any thoughts?
Leave the option open to him, but don’t buy him extra things outside of normal gift-giving occasions. If he wants something, he’ll come around to it.
My oldest son is often this way. He’s good at setting long-term goals if he wants something, but most of the time he doesn’t have an overarching want, so he doesn’t feel a burning need to work for extra money.
I’m glad that he doesn’t have nonstop material desires, so I just take pride in that.
Q5: Which loan first?
I have read/heard a lot something that sounds like this “Pay the highest interest loan first”. I like the idea of this but what do you think about this situation I am in. (A bit of info. about me I am single, with consistent paycheck, putting away 10% for retirement, and have an e-fund in place)
I am paying back student loans all with fixed interest rates and amounts of:
1) 5.25%, $5,409
2) 6.55%, $19,954
3) 6.55%, $14,063
Currently, I pay 504.73 per month via auto-pay. I have the opportunity to reduce my payment to $271 a month. I’m thinking about doing this and then make an “extra” payment of $226 (505-271 = 226) towards the highest interest loan- in this case the 6.55% @14k.
Does this make sense? I figure that I will be saving a good chunk in interest over the long haul and I will pay down the 6.55% loan(s) faster this way. Plus, I won’t be breaking the bank by making these “extra payments” because they are already part of my established budget. This seems like a no-brainer … Am I correct or over thinking it?
Of course, this plan only works if A) I stick to the commitment of paying the difference each month and B) I am financially able to continue to pay the $505 (which I believe will be able to).
Yes, that makes sense. Over the long run, you will pay less total interest if you switch to doing things that way.
The thing you have to do to make this work, though, is to keep making that extra payment. If you stop doing that, then the benefits you’re getting from doing this dissipate very quickly and you’ll actually end up paying more over the long run (because the smaller payments are almost assuredly extending the term of your loan).
If you’re confident you can keep it up, then this is the best way to do it.
Q6: Online spending habits
My biggest problem is websites where I’m really tempted to buy stuff. For me the weakness site is classicshaving.com. I’ll be sitting around in the evening browsing while not in my strongest mindset and the next thing I know a new box of stuff from them is on my front step. Ideas?
Block that site, then. If something presents a constant temptation to you, then you need to block that temptation.
How do you block it? Many internet routers can do this, so if you know how to set that up, just block classicshaving.com at the router. If not, there are software packages that will block specific sites on your computer.
Better yet, find something else to do in the evenings. Do some housework or exercise when you’re in that “not really focused” state – things that don’t require optimum focus.
Q7: Children sharing a bedroom
I’ve been following your blog for the past few months (linked through Lifehacker), and I’ve been a huge fan of how you’re constantly thinking about the choices you make and actively doing something that helps you save / mitigate spending.
A question though: you mention in one of your posts that all three of your children live in the same bedroom, so…
i) Will they continue to live in the same bedroom until they move out?
ii) If you plan to split up bedrooms at some point, how would that be handled?
iii) Is privacy an issue for them?
iv) I’m supposing there’s a joint workspace for them elsewhere in the house?
v) What is the set-up in their room? Bunk beds? Bed-on-top-of-a-desk?
Eventually, our oldest child will take over the guest room, then abdicate it when guests come to visit. Eventually, we would like to move to a home with more bedrooms, if possible, but for now this works fine.
Privacy is largely fine, but one of our children tends to take a long time to get to sleep and the tossing and turning and other things can keep the others awake in the evenings.
They use the family room as a joint playroom/workspace. Their bedroom consists of a twin bed on one side and a bunk bed on the other side.
For now, it works. Will it work in five years? Who knows.
Q8: Freebies from conventions
I go to a lot of conventions for work so I end up picking up a lot of freebies – pens, t-shirts, notebooks, buttons, and so on. I have several boxes of this stuff! It seems like a good idea to pick this stuff up when I’m there, but I don’t really have a use for it, but I also don’t want to chuck it. Ideas?
Use what you can use and toss the rest.
I used to go to a lot of conventions, too. I’d just wear the t-shirts on the weekends, put the pens in the family pen cup, leave the notebooks out for family notes, and so on. This would keep me from actually buying such things.
Quite a lot of the stuff doesn’t really have a functional use at home, though, so I just chucked it if I realized I would never be using that product.
Q9: Bad advice?
I complained to a financial advisor friend of mine about the fees I was paying on my Roth IRA. I was charged $65 per year to have the account plus $10 for every $100 I deposited into the account. My financial advisor friend told me to switch the Roth to a Traditional IRA. Instead of studying up on this I just took his advice and changed the account. I’ve done some reading and so far I don’t understand how putting my after tax dollars into this account is better than the fees I was paying to the Roth. Did I get bad advice or are there still benefits to this? Should I wait until 2014 to move it back to a Roth?
Those fees are absolutely absurd. That’s a lot of money – significantly more than 10%. You can easily do better than that almost anywhere, particularly if you just open an account online with an investment house.
I have no idea why your advisor said to make this switch. My only guess is that your income level is rising significantly and you’re not eligible for a Roth any more. Other than that… I have no idea without seeing a very full picture of your finances.
By “moving back,” I assume you mean switching your contributions? If so, I’d do that immediately. As for converting your traditional IRA to a Roth IRA, you can read into that and make up your own mind.
In any case, I’d get away from this advisor.
Sarah and I attended the same elementary and secondary school growing up. We were not in the same grade and didn’t have much class overlap, though in high school we were in some of the same extracurricular activities.
When I went away to college, it wasn’t long afterwards that Sarah made a campus visit there and then eventually applied to go there. We started communicating a lot at that point and we started dating during the summer between the end of her high school experience and the start of her college experience – after my first year of college.
We dated for more than six years before marrying.
Got any questions? The best way to ask is to email me – trent at thesimpledollar dot com. I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.