Reader Mailbag: Draft Copies

Over the last few weeks, I’ve been sweating over a lot of the little details of my upcoming book. What will the cover look like exactly? What will the text be on the folds? What will the acknowledgements look like? What about a dedication (it wound up being dedicated to my high school English teacher, by the way)?

It’s time consuming – and fun – to watch as these details come together, transforming a long Microsoft Word document that I sweated over for countless hours into a final product appearing on bookstore shelves.

I’m 24, college grad, working a corporate job. I put 15% into my work 401k with a 7% match. I put 15% direct deposit into my ING savings. My only debt is 5K on my Honda accord (5.7%) 2006 with 40K miles so it will last me a while. I have over 10K saved up to more than cover my emergencies. Should I pay off the car loan? I think it won’t save me a ton (3.5 years left for such a small loan), but I’m only earning 1.1% in ING and don’t have any plans within 3 years to really need that money. Or should I start a share builder account (I read a lot about no or low-load broad index funds and would probably pick one or two and set up a recurring payment) or Roth IRA and start contributing to that?
– Logan

First of all, you’re doing a great job saving 15% of your take home. That’s a fantastic start to financial success, even if you just stick it in a glass jar and bury it in your back yard.

One thing I would make sure, above all, is that you keep at least a couple months’ worth of your spending in that ING account. It needs to be easily available in the event that you lose a job or have another major crisis. You don’t want to have to tap long term investments in these situations, so you’re better off losing a bit of investment income to gain that stability.

Once you’re past that, you have to ask yourself what you’re saving for. What’s the goal here? I can’t answer that for you – that comes from inside of you.

If I went back to my pre-married early professional years and looked at your situation, I would pay off the car first. Instead of banking that 15% into ING Direct, I’d put that money into an extra payment on the car loan, paying it off early. Look at it ias an investment that returns 5.7% guaranteed after taxes, which is pretty solid.

Once the car is paid off, I’d look at where my life was. Do you want a new career? Are you looking towards marriage? Let those types of questions lead your investment plans.

My question to you is why don’t you own rental property? I know that you reviewed Rich Dad, Poor Dad, but I never hear you talk about owning rental property. Do you think it is not an excellent source of “passive” income? I would love to know your thoughts!
– Jeremy

I think there are benefits and drawbacks to having a rental property. It certainly can be a source of steady income, but there are enough drawbacks that I usually don’t recommend it to people.

For starters, it can be wrought with headaches. You can either handle all of the property management yourself, which potentially increases your income but eats up your time, or you can hire a property manager, which decreases your income significantly but also (might) reduce your time investment.

In either case, you’re exchanging headaches and time for money – or the potential to make money.

Rentals tend to do better in strong housing markets. Right now, there aren’t a lot of strong housing markets out there. In a weak market, rentals are often competing in a race to the bottom, meaning that rental owners make less than they would in a hot housing market. Like many other books written in the era, Rich Dad assumes that housing markets will always be going bonkers. As we learned, that’s not true.

You can make money from owning rentals, but if you have the capital to swing that way, there are lower risk and more straightforward ways to spend your money and time, in my opinion.

I am in the military and I am currently debating on my retirement options. I am putting money into both my TSP and a Roth IRA. I have no debt and I’m putting about $300 each into both accounts and I’ve accumulated about $6000 in my TSP and $8500 in the IRA. My question is that I got promoted and I’m trying to decide where I should put the extra money before I get tempted to spend it. I have the TSP money allocated for the 2040 target fund and my IRA is towards the Cornerstone Strategy Fund at USAA. Any advice would be greatly appreciated.
– Joseph

Since we’re not exactly blessed with the gift to see the future, it’s basically impossible to say that one option is better than the other.

The best option, obviously, is to start putting it in one or the other immediately. Don’t be indecisive and wait. Waiting even a month can wipe out the difference between the two accounts, even if you choose wrong.

If I were you, I’d probably max out the Roth IRA first and if you still have some left over, put the rest into the TSP. My reasons why are detailed in my answer to the next question.

I know how you feel in general about Roth IRAs. I’m curious what you think the chances are that withdrawals from a Roth IRA after 59.5 years of age WILL be taxed in the future? I know that the tax code now states that withdrawals aren’t taxed, but that same law doesn’t guarantee that in 40 years. I’m 27 years old and given the state of our national debt and the amount of money invested in Roth IRAs, I can’t imagine the government letting go of all that potential tax revenue. I also think that since people with Roth IRAs are a minority; they’ll be an easy target in 40 years for tax revenue because they won’t have the political clout to stop laws that dis-advantage them. Thoughts?
– Craig

My strong belief is that currently invested Roth IRA money is a sacred cow and it will be left alone. If the government wants to start tapping more income from such individual retirement accounts, they’ll just end further investments in the accounts with a law that says “After 20XX, you won’t be able to put more into your Roth and you won’t be able to start one, either.” There would be far too much backlash against altering already-existing Roth investments – politicians wouldn’t risk it.

The real question about Roths is whether or not they’re a better place to put your money than a 401(k). I argue they are for three reasons.

First, since you fully control the Roth, you have much more power over where your money goes. In a 401(k) or 403(b) or TSP, you have to put your cash into whatever plans your employer makes available to you, no matter how poor the optinos are.

Second, the tax rates are currently at historical lows. Check out this chart. Even during the supposedly great Reagan years, the top tax rate was 50%. There were periods where the top tax rate bumped into the 90% range. Given the debt you mention, these rates have nowhere to go but up.

Third, most people – particularly younger people – are in a lower tax bracket now than they will be at retirement age. I’m almost positive my tax bracket will be higher in retirement than it is now.

Add all of this up and a Roth IRA seems like a clear choice.

Apparently banksimple.net is a new kind of “social” bank.

I wanted to know what you thought of this.
– David

From what I understand of their business model, it’s a bank that doesn’t intend to make money by charging you fees. Instead, they intend to make money by connecting you to services offered by other businesses. Their website talks about continually adding “competitive banking services,” which likely means easy access to brokers, different savings account models (likely backed by other banks who pay them referral fees), and so on.

It’s too early to say how this will work. It has the potential to be very useful. It also has the potential to cause you to be constantly bombarded by “offers” you don’t really want. They have to find the right balance to maximize their profit (meaning the most offers they can put in without alienating customers).

As of yet, there is no compelling reason to switch banks, at least for me. I haven’t been charged a fee in years and I’ve never had even the slightest problem with customer service with ING Direct.

Help me out with a great cheap graduation present.
– Brian

The best gift comes from knowing the graduate well and giving them something that actually meets their needs. If that doesn’t work, I usually tell people to give cash.

I think the reason a lot of people don’t want to do this is that they don’t want to look cheap by giving only $10, but they’re happy giving a gift that might somewhat appear to be more expensive while only costing $10.

The problem there is that if you don’t know the graduate, you’re going to be giving a gift that they probably don’t want or need.

Thus, my encouragement is to either give a thoughtful gift to a graduate you know or simply slip a $10 or a $20 into a card. They’ll appreciate it more.

Briefly, I purchased two items of clothing from a store website using the
store’s credit card last September. Because I had moved since I last used
the card I updated the shipping address and assumed that this also updated
the billing address while I completed the online order. The garments arrived
with no problem, but a bill never followed. So, this past February I
received a call from a collections agency, which has never happened to me
before as I pay off all balances at the end of every billing cycle. I paid
the bill and the fees and made sure the account was closed all in that
initial call. In April, my husband was shopping for a refi on our house and
saw the effect this had on my credit score, low 700s. Thus, I am disputing
the charges because I never received a paperbill or email notice, so I
assumed that I had paid with my general use card.

My question is, is there anything I can do to improve my credit score while
I am waiting to hear from CitiBank Credit Bureau Dispute Dept? Since both
letters I have sent to the address provided, by two different customer
service reps on two different occasions, have been returned to me I am
looking for other ways to improve this situation.

– Leanne

There’s not much you can do to improve your score at this point other than resolve the current complaint. Your score is already in the low 700s even with the complaint, which means that you’ll either still be getting prime rates or just slightly subprime rates.

My suggestion would simply be to wait it out. You’re already doing everything right, it sounds like. Make sure your debt levels are low and avoid carrying a balance on your credit card. Don’t try opening up new lines of credit for a little while.

I actually think your letter is indicative of a much bigger problem – the power credit scores have over so much of one’s financial life. That a score based on a formula that isn’t known to the public can have that much impact is really, really shady and it needs some sunshine on it. Good luck with that, though – the credit agencies and the banks would fight such changes tooth and nail.

Last year my older brother moved back to India from Qatar. My brother, who has been diagnosed with bipolar disorder, has a wife and a son, but he’s made some terrible decisions: he quit a great job in Qatar because he fell in love with a younger woman, eloped with her to Thailand, then was forced to return to his family when the money ran out. When they moved to India, he pretty much squandered all his savings away renting a fancy apartment, buying all sorts of stuff, because he was confident he would find a job soon. He did find one that was not very well paying, but months later he quit saying they were not paying him on time.

Now, months later, he is desperate. He just can’t find a job. All the money has run out, his wife has moved in with her son into a friend’s home, and my brother is penniless and wandering the streets. The last time I spoke with him he told me he’s been sleeping on the streets.

My husband and I have sent him money a few times to help him get back on his feet. The problem is, we don’t know when he’s telling us the truth. I do believe him when he says he’s aged out of the market– in his early 40s, he’s too old in a country filled with 20-year-olds looking for jobs. Unfortunately, he also has a bad drinking habit — when he visited with us a few years back, I found him drinking whiskey at 6 in the morning and he used to spend most afternoons and evenings drinking. His wife has often told me that he used to spend a good deal of his income on alcohol. And although he swears he has given it up, he’s a very skilled liar and I find it hard to believe him.

It breaks my heart to think of him living on the streets– there are no support groups there for alcoholics or for the homeless, like we have here. But it is also really difficult for me– given our shaky jobs situation– to keep sending him money I desperately need to save to secure my own family’s future. There is no one in India I can ask for help, or to keep an eye on him. I’ve even been trying to search for jobs for him back in India, without luck so far.
– Vai

I don’t think financial support is the way you should be helping him at this point. You can write him letters, call him on the phone, help him find work, and the like, but your responsiblity is to your own immediate family, not to a brother who is continually repeating a cycle of poor choices.

IF you continue to help him, he won’t bother to help himself. He is fully capable of finding work – he is healthy and of reasonably sound mind. He chooses not to help himself and sending cash with no strings attached enables those choices.

Offer him help, but only in a form that leads him to helping himself. Gifts of cash don’t do that.

I am struggling with revolving debt and can’t control expenditures. Here’s a glimpse of my money. I bring in typically 1200-1350 (after taxes) every two weeks. My rent is $925. Car payment and insurance is $540. $500/mo in student loans (several with rates ranging from 3% to 7%). 4 credits cards with interesting in the low 20’s% with a total balance of $8400. And a consolidated credit card with a balance of $8600 with a blend of 3%-6% of interest (Some of this money belongs to my parents, but I am paying for it because they have a “Parent loan” for me that they pay for) Finally utilities bills total around $200/mo.

By the time I pay all my bills (at just over the minimum – as I usually round to the next highest hundred) I am left with nothing.

Every time I get money to pay down some bills something happens. (i.e. I got a holiday bonus and then hurt my knee and foot and had doctor bills, then I get my income tax back and throw it down on a credit card and then I had to fly to Florida to be in a wedding so those expenses brought my credit card bill back up)

I just don’t know what to do. Are there consolidation loans available to consolidate the credit cards? Is that even an option? I am so scarred that if something happens one month and I lose some income I will fall behind. I have a great credit score in the low 700’s (well at least prior to buying the car which was when my old lease was up a month ago) I don’t want to ruin things.

This is very frustrating to me because my friends and family are constantly looking to me for financial advice (bachelors in Finance and worked as a financial adviser for a little while) yet I can’t fix my own problems. At 25yrs old I should be enjoying myself and having fun with friends and family, not just hiding away because I cant afford to go out.
– Julian

My alarm bells go off when I see “my rent is $925.” There has to be a way to lower that number. Seek out a roommate or two. Move to a smaller apartment. Do both.

People often balk at this because of a need to “keep up appearances.” Keeping up appearances bankrupts people, leaving them with wage garnishments and broken relationships.

Yes, there’s no problem with “enjoying myself and having fun with friends and family,” but when your rent bill is 35% of your take home and your car payment and insurance gobbles another 20%, you’re not in a position to do that. Your income doesn’t support that kind of lifestyle, so start by adjusting the big things so you can enjoy the little things.

The series finale of Lost is on Sunday. We need your predictions.
– Carrie

I think the “climax” (the “defeat” of fake Locke) will happen about halfway through the episode.

I predict that Jack eventually decides to not be Jacob any more and rounds up some new “candidates,” and among those candidates will be Ji Yeon (Jin and Sun’s daughter) and Aaron.

I also think that Locke will walk again.

No idea about anything else.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.