Reader Mailbag: Graduation Season

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. Difficulty estimating freelance income
2. Graduation gift
3. Never wanting retirement
4. Why buy a premium car?
5. Prenupital agreement
6. Road trip dining
7. Low interest and minimum payments
8. Does college choice matter?
9. Interest rate first?
10. Student loan question

For us, May often means graduations, which means going to a ceremony and watching young people celebrate the end of one chapter in their life and the start of another, one that will often go in a very different direction than they expect.

Most of the time, when lives reach a crossroads, we don’t see the opportunity to shift paths until the opportunity is gone. Graduation is one of those chances to shift directions where the opportunity sits right there in front of us.

There are moments when I wish I could find myself at that kind of crossroads in life again, with that many open highways in front of me. There are so many different directions to choose from.

Q1: Difficulty estimating freelance income
I have a full time job but I also do some freelancing gigs on the side. They’re kind of consistent – I probably do fifteen a year – but they’re really unpredictable in terms of pay and in terms of frequency. I might do five in a month and then do nothing for half a year. Anyway, I’m supposed to pay estimated taxes on this income but I have a hard time estimating how much I’m making a year. How can I do this?

– Roger

It’s pretty easy. Just figure out how much you’d owe in income taxes on the amount you’ve earned in the last three months, then pay that. Just repeat that pattern each time you have to pay estimated taxes.

It’s pretty much impossible to do this perfectly because of uncertainty in your income for the rest of the year, but the IRS actually gives quite a bit of leeway in doing this provided you’re making a reasonable attempt at doing so.

Not paying those quarterly estimates will do nothing more than ensure that you have to pay extra fees and interest when you do file your taxes, so your best approach is to just give it your best possible shot.

Q2: Graduation gift
It seems so meaningless to put $20 inside of a card and give it to a graduate. What does that $20 even mean? They forget about it before the ink is dry on the thank you note.

– Barry

If you don’t feel as though your gift has meaning, seek out something that does have meaning. There are many, many things you can give as a graduation gift. It does not have to be cash.

If you want a gift to have meaning, the best route is to put some serious thought into the gift, pick something that would actually mean something to the recipient, and include a handwritten note explaining it.

Virtually anyone with a thoughtful bone in their body would appreciate that type of thoughtful gift. The challenge is that it doesn’t come ready-made. It requires thought and effort on your part, which is what creates the meaningfulness of the gift.

Q3: Never wanting retirement
I love my job and I fully intend to keep doing it until I can no longer do it. If I am not functionally capable of doing anything of value, I don’t want to live. I know enough of myself to know that I would quickly become massively depressed and would probably not live much longer beyond that point as my motivation to thrive would be gone.

I don’t know why I would ever save for retirement. Why should I be socking away money for that situation?
– Adam

Picture this scenario: you’re sixty eight and your company decides that they no longer require your services. They give you a retirement party and a golden watch. What do you do then? You’re still of able body and mind but your employment window is likely closed. How do you make it?

If you save for retirement now, all you’re doing is creating a nice insurance policy against that. If it turns out you don’t need it, use your retirement savings for travel or whatever else you might want to do in your sixties and seventies and beyond when you’re not in the office.

It is never a bad idea to have money in the bank to protect you against the unknown.

Q4: Why buy a premium car?
Most of the time, when you pay extra money for a high-end version of something, I understand what you’re getting for it. When you buy a high-end car, though, I don’t really understand what you get. The reliability data on many of the most expensive cars is pretty bad, as is the fuel economy (except for something like a Tesla I suppose). The interiors are really nice but still it’s just something that takes you where you want to go. Why does someone pay $100,000 or more for a car?

– Edward

For some, driving a car with a certain label on it can make them feel more empowered and confident, and there are some people who are quite wowed by an expensive car. The interior is usually pretty nice. Many expensive cars really accelerate beautifully when you’re driving them.

But is that worth an $80,000 premium? For me, it’s not worth it at all.

I think it has a lot to do with what you value about a car. If it’s just something to convey you from one place to another, then a lot of those elements are pretty secondary and not worth paying a lot for.

In my eyes, it’s no different than asking someone why they wear a necklace with a bunch of precious gems in it. There’s a lot of money invested into an object that looks good and potentially boosts the confidence of the wearer, but what value is actually there? How does that necklace improve your day to day life?

Q5: Prenupital agreement
I am about to marry someone who has a net worth of roughly fifty times my own. When I discovered it, I was shocked because he didn’t seem rich at all. He has asked me to sign a prenupital agreement that states exactly what I would receive in the event of the end of our marriage. I am fine with the terms of it but I feel almost insulted by it, as though he expects the marriage to end down the road and as though I’m just a passing fancy. What do you think?

– Darcy

A prenupital agreement is kind of a “worst case scenario” protection, not too different than an insurance policy, really. My perception of such an agreement is that it’s usually just protection against a marriage turning bad, but that doesn’t mean that anyone involved wants the marriage to become bad.

Reverse the situation here. Let’s say you had worked very hard to build a net worth that was fifty times the person you were about to marry. Although you deeply love this person and want to spend the rest of your life with that person, the reality is that a lot of marriages that begin with the best of intentions end in divorce. Do you want to lose a significant chunk of that net worth you had worked so hard to build in that scenario?

If you’re fine with the terms, sign it and forget about it. You might want to have a lawyer check it over, just to be sure. If you’re troubled by it, ask yourself this: do you consider someone who buys life insurance to be a person with a death wish?

Q6: Road trip dining
I really enjoyed your recent post about saving money on commutes and I wanted your thoughts on saving money on another driving cost.

About once a month, I make a five hour road trip with my two children. I usually pick them up after school and we get to our destination about 10 PM or so and then we drive back in a few days. On the trip, we usually eat a meal and also usually eat another snack, too.

This cost really adds up over the course of a year. What can I do to trim this back?
– Adrienne

Sarah and I actually do something similar to this pretty often, as our children’s grandparents all live about four hours away from us. When we visit them for a weekend, it goes a lot like the trip you describe.

Our best solution is to just pack a cooler in advance of leaving with our meals in it. In the morning before our trip, we’ll prepare a picnic – sandwiches, finger-friendly sides, and so on – and put everything that needs to be chilled in the refrigerator in one place and put everything else in a canvas bag. When we get home and do our final packing, we dump some ice in a cooler along with the things that need to be chilled. Along the way, that’s our dinner.

Q7: Low interest and minimum payments
How low should an interest rate be before I’m happy just making minimum payments on it? I have a 0.0% debt that will never adjust along with a 2.9% interest debt that will never adjust. Should I be paying anything beyond the minimum on these?

– Walt

With the 0.0% interest debt, I wouldn’t pay anything more than the minimum. Instead, what I would do is set up an interest-bearing checking account at an online bank. I’d then set up a monthly recurring transfer from your current checking into that new checking account that’s equal to just a bit more than your monthly payment – probably rounded up to the nearest $10. Then, I’d set up an automatic bill payment from that new account to your lender that recurs each month for your minimum payment. When your loan is paid off, you’ll have some cash built up in that account.

As for the 2.9% debt, it really depends on what kinds of interest rates and investment returns you can easily get with your money. Five years ago, I would have told you to put your money in a high-interest savings account and do much the same thing as above, because such accounts were earning much more than 2.9%. Today, that’s not the case.

Even so, with ultra-low interest rates below 3%, I would probably lean toward paying the minimum payment provided you were also saving and investing elsewhere. If you’re just making minimum payments and then also struggling to save anything at all, any extra payment you made on that debt would be a positive.

Q8: Does college choice matter?
My daughter is just finishing her junior year in high school and we’re working through the process of figuring out which school to attend. The question I have that no one ever seems to give us a straight answer on is how important the undergraduate school is. Does it matter that much whether someone goes to a state university or a private school or even a community college? How much does it matter?

– Joan

My honest take is that it matters some, but what matters more is getting strong grades and filling out your resume with other achievements, internships, and so on.

Obviously, I think an employer is going to pay more attention to an undergraduate from an Ivy League school than someone who went to a community college, but I think the differences between the institutions in the middle of that sandwich really aren’t all that big. If you’re comparing one state university to another and neither of them are really exceptional ones, it’s probably not going to make much difference at all.

Your daughter’s focus should be on seeking out any and all extra opportunities related to her major and to leadership and personal growth opportunities. Those types of resume boosters do make a difference when hiring. It shows that the person is in this for more than just a degree and is willing to work very hard.

Q9: Interest rate first?
I have two loans outstanding. One is a $1,000 loan with a 8.9% interest rate. The other one is a $22,000 loan with a 9.9% interest rate. Which one should I pay off first?

– Jenny

You can make a good argument either way.

If the goal is to minimize the total amont you’re going to pay over the course of the next several years, you should start on the $22,000 loan. Making extra payments on the highest interest loan is always the best route to minimizing the total interest you’ll pay. In this case, the difference isn’t going to be too much, but it will be measurable.

If the goal is to minimize your monthly bills as fast as you can, you should start on the small loan. You’ll eliminate it pretty quickly and find yourself with one less monthly bill to worry about, which might be very helpful if you have uncertain income and employment in the future.

Given the very small size of the smaller loan and the very small difference in interest rates, I’d probably pay off the small one first to improve my monthly cash flow. If it were much larger or the interest rate were much lower, I wouldn’t bother.

Q10: Student loan question
How much extra should a college student take out on their student loans in order to cover living expenses and books? The student loan I have lets us take out a lot more than our tuition to cover those extra expenses, but doing that makes for a very big student loan after graduation.

– Jeff

The answer to this isn’t the same for everyone. It really depends on what your own expenses are and whether you’re earning any income to cover those expenses.

Ideally, as a college student, you should be doing everything in your power to minimize your expenses at the very least. Many students work to earn additional income.

If I were you, I’d probably live in the dorms for the first year and take out just enough in loans to cover all of it. If you want spending money beyond that, I’d find a job (preferably an on-campus one).

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.

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