Reader Mailbag: Friendship

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. Housing challenges
2. Employer matched IRAs?
3. Paying ahead on credit cards
4. Bus pass math
5. Selling a small business
6. Negotiating a promotion
7. Finding a community group
8. Thrift stores in Des Moines
9. PMI or student loan debt?
10. Pocket change

There are so many times that I’m grateful for the friends and the family that I have. They support me in so many ways, both subtle and obvious.

I don’t know how to express it without sounding mushy other than through my own actions: I try to be a good friend in return. I don’t backstab people or try to hurt them. I try to help them when I can. I try to be an entertaining and fun person to hang out with.

In other words, I try to be the friend or family member that I wish that I had.

Q1: Housing challenges
My wife and I currently live in condo that we have a mortgage on. We purchased 4 years ago, rate is 5%. We purchased for $140,000 and have about $135,000 remaining on the mortgage. When we purchased the condo we took the $7,500 housing grant that we have to pay back over a 15 year time period or when you sell the house. The stipulation is if you do not make a profit then you don’t have to pay this back. We have already paid back $1,000 of this. The purchase price is adjusted for any improvements or commissions you have paid in the process. We put in more than $10,000 of improvements so if we were to sell for anything over $143,500 we wouldn’t have to pay back any of the remaining grant. We could also choose to rent, which is what I would do if we didn’t take out the grant, but if we were to do this we would have to pay the remaining balance of the grant back at that time since it is no longer our primary residence. This was the $7,500 home buyer credit, not the $8,000 that you don’t have to repay and can rent after 3 years.

So our current situation, my wife and I are both 27 have no debt (no credit card, no student loans) besides our mortgage and 2 car loans. Car 1 – 1 year remaining $250/month, Car 2 – 2 year remaining $350/month. We make a combined $115,000/year. We currently put about $1,000 a month in retirement (+ company match) and have a combined $40,000 currently saved in our retirement. We also have $10,000 in our savings for a future down payment on our house. We are expecting our first baby in February and at that time my wife will take off 12 weeks of work, she will get 50% pay during this time. I am going to lower my retirement to just the company match during this time period to make sure we have enough money, although I think we should be fine and and will increase the retirement once she goes back to work. We will be incurring day-care costs once she goes back to work of roughly $800 per month.

Here is our dilemma. We have our condo currently listed at $144,000 however we may only be able to get $135K or even less for it, which after commissions would barely break even on our mortgage and could possibly even take a little loss. We want to continue to save and build our savings account up to around $15K before we buy our new place. For us to do this we can’t really afford to lose that much when we go sell. The condo we are living at will probably be too small once the baby gets to about a year old so we are looking at houses in our area at around $200-$250K, (I realize we wouldn’t have 20% down but this is what we are wanting for now). We also want to take advantage of the lower interest rates that are currently in affect right now (I personally believe they will be low until 2013).

Looking back I now realize we should have probably just rented 4 years ago but hindsight is 20/20. Anyway, I guess our options are stay in the condo until we can get a buyer that is willing to give us a decent offer, take a loss on our condo and not have as much to put in a downpayment, or pay out the remaining grant and rent out the condo ourselves until the market turns around in our area (this would also lower our down payment).

It is frustrating because I feel like we are responsible with our money and didn’t necessarily do anything incorrect yet we may end up losing money on this decision to buy our first place, however I realize this is just the times we are living in and going forward I will think more indepth of our decisions. Any advice would be greatly appreciated.
– Kevin

You didn’t do anything particularly wrong. You were simply caught by the collapsing bubble of the housing market.

If I were in your shoes, what I’d do is investigate rent prices in your area compared to the mortgage payments you’re making on your home. If you can find housing that suits you that’s significantly less than the interest on your mortgage payments, you’re going to be money ahead getting out of that condo and then channeling the money you’ll save each month into your down payment fund for the house you really want.

Once you’ve resolved your condo, I would sit on that savings for as long as you can. Build it and wait until your life changes in such a way that a house of your own is really necessary. You’re going to be in far better shape for the long haul if you have a small apartment for several years now before you buy a home than if you tried to swing into one quickly.

Q2: Employer-matched IRAs?
I have an employer retirement plan with Vanguard that allows me to automatically direct a portion of my paycheck to both Roth and traditional IRAs which they will match to an extent. I also have a separate Roth IRA I set up with extra job money in college that I’d like to add money to. My question is, do I need to count the contributions to the employer sponsored accounts towards my $5000/yr limit on IRA contributions?

– Charlie

I tried to find the specifics for the plan you described, but after thorough searching of the Vanguard site and a few emails to people at Vanguard, I found nothing that seems to match up with what you’re saying here. I’ll admit that I’ve read about thousands of retirement plans and I’ve never heard of employers directly contributing to the Roth IRAs of their employees.

The people to ask about this is Vanguard themselves. They would be able to give you a straightforward answer based on how exactly this IRA matching plan is set up

Contact them with your specific plan information and make sure that you understand the taxes and contribution limit issues before you make any major moves.

Q3: Paying ahead on credit cards
In the questions section people mention often that they pay off the credit card monthly. Do you know people who ‘pay on’ or ‘pay up’ the credit card? DH and I do most of our payments with debit card, but when we need the credit card, we discuss it beforehand, then send the money from our account to the credit card, then pay with the credit card. We have about 150 euro positive on the credit card as a cushion; the credit card company gives us about the same interest as the savings account. I was just wondering if we are the only ones to use the card ‘proactively’.

– Stephen

You absolutely can keep a positive balance on a credit card. The drawback to that is that you’re not able to earn anything from that positive balance. Instead, the credit card company is.

Let’s say you had that 150 euros in a bank account instead of sitting as an extra balance on that credit card. Over the course of a year, that 150 euros would generate 1.5 euros straight into your pocket. If it sits on a credit card, you don’t earn a dime.

Perhaps that relatively small loss is worth it for the peace of mind it gives you, and if that’s the case, stick with it. It’s certainly not hurting anything by doing this.

Q4: Bus pass math
I usually take the bus to work. It costs $1.20 for a round trip fare and it’s about two miles each way from work. Since I have a very old car I had somewhat decided that it would be cheaper for me to drive to work rather than catch the bus each day.

Where the math has thrown me is with the bus passes. You can get a bus pass for a month of unlimited riding for $20 and an annual pass for $175. Do you think that this is now cheaper than driving my car to work?
– Larry

Let’s assume you work five days a week and you work forty eight weeks out of the year. That would mean that paying each day, you’d pay $288 in bus fare. The monthly pass is a bit cheaper than your monthly bus fare, and the annual pass is a tremendous savings.

The real question is how much it costs you to commute every day in that car. You can use an online calculator to estimate this. As you can see, the calculation gets complicated really quickly. After playing around with the numbers, I estimated that in your situation, you’d probably be spending about $0.37 per mile driving your car to work, taking into account all of the factors mentioned there.

In other words, you’re still spending more driving to work each day than you would be just paying for the bus out of pocket at that rate. If you buy the annual pass, it falls even more in favor of the bus.

To get that $0.37, I assumed quite a few things, such as not paying toll, that you’re going to keep up your license and registration and insurance whether you drive it to work or not, and that it’s depreciating very slowly because the car is already very old (I estimated a nickel a mile).

Q5: Selling a small business
I am a software developer, I have traditionally worked as a regular W2 employee but I have recently been doing some freelance side work. I am really unhappy at my current day job and I am leaving as soon as I find the right opportunity. I am very lucky in that respect because the market for my skills is really on fire right now.

An opportunity has come up to work on a very exciting project as a 1099 contractor. I have two things I am trying to work out about this opportunity. First, I am trying to figure out how to compare an hourly rate between a W2 job and a 1099 job. I am paid hourly even at my current W2 job (I get no benefits), and I was offered the same hourly rate for the 1099 job. I know that even at the same rate the 1099 offer is worth less in total because I will have to pay the self employment tax, but I cannot figure out exactly how much less. My understanding is that as a 1099 contractor, I will have to pay an additional 7.65% tax, however I can also deduct half of that tax from my income, which makes the calculation more difficult. I get even more confused when I factor in tax-deductible retirement contributions because as a 1099 contractor, it seems like my tax-deductible contributions are worth approximately 7.65% more because I would not being the SE tax on them. I looked at some online calculators, but I could not tell if they took into account the 50% tax deduction. What I really want is a formula that tells me how much an hourly rate under W2 status is worth under 1099 status.

I have a second, unrelated but interesting question about the same 1099 job. I have an LLC which I try to use for my freelance jobs, and every resource I find says that as an independent contractor, I should use the LLC for all my contracts. With this new opportunity, they asked me to sign the contractor agreement personally, rather than through my LLC. Their reasoning was that my LLC has no assets and is worth nothing (which is true), so I basically have nothing on the line when I sign the contract. They are also concerned that potential future investors would be scared off if they can’t guarantee that the company’s intellectual property (the software I would work on) was not protected by a strong contract, and my contract under the LLC would not provide any real protection to the company’s assets. I offered to purchase professional liability insurance for my LLC, but they still want me to sign personally.

I am not really too concerned about having to sign personally, but I cannot find anyone who has ever encountered this problem before. Do you have any insight? Are they being unreasonable by asking me to put my personal assets on the line, or am I being unreasonable by trying to hide behind what essentially is a shell company?
– Charlie

Their reasoning is correct when it comes to the contract, and it’s also the reason why you’d prefer to sign the contract through the LLC rather than personally. The LLC limits your risk and increases their risk.

I don’t think they’re being unreasonable to request this given the current market. I’m assuming that your field does have some level of competition with a lot of people seeking work. If that’s the case, then the power is more in the hands of the employer and they’re able to make such requests.

If you’re wanting to stick to your guns on the LLC issue, you’ve got to be willing to accept that the company may just find someone else for the position. That’s part of the risk of sticking to your guns here.

If I were you, I’d sit down and do a risk assessment. What is your real risk from signing on the dotted line yourself? What is the worst possible outcome? You may wish to contact a lawyer for assistance in reading through the contract you’re being offered.

Q6: Negotiating a promotion
My responsibilities at work have changed significantly over the past year. I have taken on not only more areas of responsibility, but also higher-level responsibilities such as strategic planning. My boss agrees that I deserve a promotion. Today I received a copy of my new job description, which spells out all the things I have been doing plus what else I’ll be expected to do in my new position. Unfortunately, the position title wasn’t the one I was hoping for. I believe I should be promoted to the manager level, but the job description says “junior manager.” My question is, what is the best way to negotiate for the position and pay I think I deserve?

Here’s what I’m thinking to do:
1. Be straightforward and tell my boss that I was hoping for a manager position, and invite her to explain her reasoning for only promoting me to junior manager. I would then try to counter her reasons with concrete examples from my performance this year and my potential for future growth. (My main weakness is that I have relatively low experience and am slightly underqualified; my counterargument is that my instincts have been spot-on so far, and my ability to think through problems has helped me perform well despite my lack of experience.)
2. If that doesn’t work, I will point out that my responsibilities are on par with what other managers are doing, plus I have been assigned to lead those managers on several team projects despite currently being the lowest-ranking member of the team. Thus, I should be promoted to the manager level if I am expected to do manager-level work.
3. If that doesn’t work, I will ask what steps I would need to take to get a full promotion and when we can meet again to discuss my performance. I will try to get a concrete timeline from my boss. If it is within a year, then I will accept the position and work my butt off to get that full promotion. If it is more than a year or if she refuses to specify the steps or set a timeline, then I will accept the position and work my butt off while keeping my eye open for opportunities at other companies.

What do you think? Is this a good plan for negotiation?

One more thing: I have found an interesting job listing at another company. It is in the same field with the same responsibilities, but with 15% more pay, a full manager title, and the possibility of working from home. These are big incentives, but I have not applied yet. I’m rather torn. I enjoy working for my current employer, I am getting a promotion (just not the one I hoped for), and I don’t know if I can get this other job (I would be more confident with 1 more year of experience under my belt). I don’t have pressing financial obligations that are forcing me to search for higher-paying work. In short, it would be safer to stay with my current employer and work toward a full promotion. On the other hand, I am young, hungry, and ambitious, and that job listing is dangling a lot of carrots.

Should I apply for this position? What if I requested an informational interview instead?
– Sandra

If I were you, I’d stick with the third option. I’d go in there, simply state that I would like to have a certain title, and ask what I would need to do over the next six months to achieve that title.

You already have your answer to the first option, and honestly, the answer to the third option is basically what you stated in the second one. If you talk about a gameplan to get you the title you want and you’re already doing the work for that title, then it’s going to be easy. Plus, sticking to the third option makes it appear as though you’re hungry and an up-and-comer, not someone who demands a reward.

As for the other job, there’s no reason not to feel out other opportunities, particularly if you feel like you’re hitting a glass ceiling at your current job.

Q7: Finding a community group
You talk a lot about finding groups in the community to join and participate in and find people that are potential friends. But how do you even go about finding such groups? I don’t even really know where to start.

– Angie

The best place to start is on the website of the community you live in and on the websites of surrounding communities. Look for their parks and recreation departments, their libraries, and their community calendars. Many communities also maintain a list of community groups of interest.

If you’re looking for opportunities, these resources will likely give you more than you could ever want.

If you have difficulty finding these opportunities, simply go to city hall and ask for assistance in locating such resources in your town. They’ll be glad to help you out.

Q8: Thrift stores in Des Moines
I’m going to be in Des Moines in a couple of weeks for business. Can you recommend any good thrift stores in the area? Thanks!!

– Annie

In the Des Moines area, I’ve had success with three thrift stores in particular.

The Goodwill at 1982 Grand Avenue in West Des Moines usually has a pretty interesting selection of stuff. I’ve had quite a few interesting finds in there, including some clothes that fit me well and some vintage video games.

Once Upon a Child is a great place if you’re a parent looking for items for your children. I’ve found some great clothes and a few toys there at awesome prices.

The best place I’ve found for used larger items in the Des Moines area is Changing Places Consignment. They mostly carry used furniture, lamps, prints, bookcases, and the like. If you’re driving a larger vehicle through the area, this is a place well worth stopping at.

Q9: PMI or student loan debt?
I am having a hard time trying to understand what interest rate is higher, my current student loan interest rates, which are pretty clear – 6.55%, 7.65%, and 6.8%. Or my FHA loan, which is locked in at 4%, but I am also paying PMI. I want to know if I should be making my additional monthly payments to my home loan so that I can remove the PMI by reaching 20% in equity or if I should pay down my loans? What makes more sense? My husband and I owe about $90,000 in student loan debt and our home loan is $220,000. We put down only 3.5% when we purchased in December.

– Richard

Unless it is an egregious amount, the PMI on your loan is likely not boosting the interest rate on your home loan to the point where it compares to the other loans. My experience has been that PMI amounts to an increase of roughly one percentage point in one’s annual rate.

For example, on our original mortgage, we had a 5.875% rate, but when you added in the PMI, our rate went to 6.601%.

My suggestion to you would be to call your lender and ask about the effective rate of your loan including the PMI. My speculation is that it will be somewhere close to 5%. Use that rate when comparing all of your loans.

Q10: Pocket change
What exactly do you do with your pocket change? I don’t accumulate much of it and it mostly just seems to take up space. I’m never really sure what to do with it.

– Ed

I keep all of my pocket change (and loose dollar bills) in a jar on my bedside table.

About once every year or two, I take the contents of that jar down to my local bank, fish out the dollar bills, and have them count the change using their change-sorting equipment. That money is then just deposited into my checking account.

I’m lucky in that my bank accepts change and counts it without skipping a beat. This is apparently a feature that many banks don’t offer. If you don’t have a bank available to you that offers this service, there are change-counting services such as Coinstar, but they take a large fee off of the top.

I’d probably try to seek out a bank that accepts loose change.

Got any questions? Email them to me or leave them in the comments and 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 hundreds of questions per week, so I may not necessarily be able to answer yours.

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