Reader Mailbag: Graduation

In the last week, four of the best young people I know (I’ll refer to them by first name: Brittany, Cody, Vicky, and Amanda) have donned caps and gowns and strolled across a stage in celebration of the ending of one stage of their life and the beginning of another.

If they live up to even a fraction of their potential, the world will be a much better place. I have a ton of optimism and hope for these guys (and the millennials as a whole, for that matter).

I recently opened a charles schwab brokerage account. I had $1000 saved up to start and plan on adding $100 per month. I bought $500 worth of IVV & $500 worth of SPY. Even though it’s an index fund, there is a $8.95 charge per trade. Given that I plan to add a small deposit every month, is there another fund I should buy that won’t eat up my money by charging me for every trade?
– Joe

Schwab’s prices aren’t terrible, especially considering the research tools they have. They’re not cheapest, either, though.

Zecco offers trades for $4.50 a month (if you do more than 25 trades or have a balance of $25,000 or more, you get 10 of them free). That’s the best brokerage bang for the buck that I’ve found.

For what you’re doing, Sharebuilder might be slightly better. You can make a trade for $4 per investment (or $2 per investment if you do 6 or more, or $1 per investment if you do 20 or more). The drawback here is that these investments are completely automatic market buys that are executed on a firm schedule once a week or once a month. If you don’t care about that, then Sharebuilder is cheaper.

Your best bet might be to just buy in every three months or so and save up in your savings account for these buys, then use Zecco or Schwab.

How should we be saving for our children’s college education? Ideally, our children would attend college in Colombia and pursue (if they wish) advanced degrees in the US. I currently have a 529 and an ESA open for both of them, as well as putting money in a savings account for them. It appears that only certain foreign universities are considered eligible for the 529 and ESA plans and I have not seen a Colombian university on that list. My target is to save approximately $20k for each child by the time they are 5 years old and then maybe an additional $50/month after that.
– Christina

If you want them to attend college in Colombia, then you should be saving using investment tools that can be used at a lot of universities in Colombia. I don’t know what’s available there, but from my quick research, there’s nothing really comparable to a 529.

Besides, the real reason to use a 529 is the tax advantages offered. If you’re not getting those tax advantages, you might as well just use a normal brokerage account, as you’ll get more (and better) investment options.

In your situation (assuming I haven’t missed anything), I’d probably just open a normal account with Vanguard and keep the cash in there for them, investing in aggressive stuff when they’re young and scaling back as they get older.

Christina has a second question….

How should we be saving for retirement? My husband currently maxes out his 401(k) and we also have a Roth IRA open. However, we are on the threshhold of being able to contribute to the Roth IRA and this year we are ineligible due to a larger bonus that he is receiving. I anticipate that in 2 years his salary will be over the contribution limits. I had someone advise me to go ahead and make contributions to the Roth this year, recharacterize it as a traditional IRA, and then convert it back to a Roth IRA (not having to pay anything since I will have contributed after tax money). My husband also has a retirement account in Colombia that we may contribute to if we wish.
– Christina

That’s a great short term solution, but the IRA to Roth IRA conversion rules are always fluid. I would do that in 2010, but I would not necessarily use that as a long-term solution to repeat each year unless the rules do not change.

Eventually, yes, a normal IRA will probably be your best solution. My suggestion would be to treat all of your retirement as one single giant portfolio, That way, when you scale back into more conservative stuff later on, you scale all accounts back (or scale back one account at a time very rapidly).

Good luck with your financial situation, Christina.

My husband and I purchased a 3000 sq feet home in the suburb of San Diego 2 years ago. We love the home and can afford the payments, but we don’t use a lot of it. We have 2 big dogs and no kids so 3 of the bedrooms are empty most of the time. Do you have any creative ideas about how to turn the extra space into a small monthly cash stream without renting out the rooms? We’d like to start a family in 2 years and the cash stream would make a nice baby fund.
– Monica

Without renting out the rooms, there’s no immediate direct way to use those rooms as a cash stream.

My idea, however, would be to use those rooms for serious bulk storage of the stuff you use all the time. Look for tremendous deals on, say, toilet paper, then stock up a ridiculous amount when it’s ten cents a roll (or free). Do the same with all of your other household basics – watch out for enormous sales, then stock up to an enormous degree when you hit one.

That way, you’re utilizing the space to store extremely cheap household goods that you’ll use over time. As you use them, the storage space of the rooms is effectively reducing your monthly grocery and household bills.

This spring my coworker had a second child. She still has lots of baby stuff from her first child. Not having lots to spend, I went to a friend’s second grade class (the perfect age for this) with pieces of blue paper (the baby is a boy) and asked them to give advice to the mother and baby. They wrote their advice, and we made it into a book for the new mom. It is touching and funny. Everyone wants a copy. One of the best ones is “Dont give the babe (sic) everything it wants. Its not goode for them.”
– Susan

This is actually a really good idea that can be done with lots of variations.

At our wedding shower, my mother gave my wife a homemade recipe box with handwritten recipes from tons of different family members in it. Each person contributed a few recipes so that, all together, the box was loaded with tons of familiar family recipes.

I’ve also seen baby tip books along these lines, where a person assembled a book with baby advice from every mother in the life of the expectant mother.

These gifts are really wonderful heirlooms and they stand out in their uniqueness. Plus, they mostly just take time to put together – they’re not expensive.

I’m currently 19 years old and live in an apartment with my girlfriend. Things are very affordable right now and I need a little guidance with my money. In the beginning it was fun and a little understandable to us to splurge a little bit getting a couple things we didn’t really need but wanted. But now I understand the sooner we get saving the better. We make a considerable amount more than we spend on our bills with a comfortable amount of pocket money. But my question comes down to what next? I have read save and invest from soo many people. I get saving that one is pretty easy. But I have no clue how to go about investing. I don’t know what any of the terms I read mean besides 401k. I’m also in college right now (enjoying the summer off) and we need to work on a plan to pay that off as well.
– Chase

It really, truly depends on your goals.

If you’re saving for something that will be purchased in the next year or so, a savings account is probably the best place to keep the cash.

If you’re looking at a timeframe that’s longer than a year but less than, say, ten years, leave your money in a savings account, but look at certificates of deposit for some of the money. A certificate of deposit (or CD) is offered by your bank (and many other banks). It’s basically the same as a savings account, except that you agree not to touch the money for some certain period of time – six months, a year, whatever. In exchange, you get a better interest rate. It’s usually worthwhile to shop around for these. I wouldn’t recommend getting a long term one right now because interest rates are really, really low – you’re better off getting a six month one or a year long one and then doing it again after that period ends when rates might be higher.

If you’re looking at a timeframe that’s ten years or more, I would open an account with a stable brokerage that offers index fund investments. An index fund simply means that you’re buying tiny amounts of tons and tons of stocks all at once. For example, buying the Vanguard 500 index fund means you’re buying a sliver of each of the 500 stocks listed in the Standard and Poors 500 (a list of most of the large American companies). Rather than managing 500 separate stock investments, you just manage one. A brokerage is simply a company that provides such investments, much like a bank provides a savings account. For example, I use Vanguard for my investments and invest mostly in the Vanguard Total Stock Market Index. I just put money into the Vanguard Total Stock Market Index regularly and that effectively translates into owning a tiny sliver of every stock publicly traded in the United States.

If you’re looking at retirement, your best option is probably a Roth IRA, which is basically the same as a brokerage account, except that it has a few special rules and some extra benefits (namely, that you don’t have to pay taxes on your earnings if you wait until age 59 1/2 to withdraw those earnings).

It all depends on what you want to do with that money. If you don’t know, sit tight with it in your savings account, think about it, and talk it over with your girlfriend.

I am about to embark on a new journey: marriage! My fiancee and I have gone over the details and have had good communication in what our goals are, but I am pondering what is perhaps a wise step to take at this point. After we are married and we both move in together, we both will have student loans (appx. $30,000 total or $400 a month), $850/mth rent., about $1000 tucked in savings and another $1500 that is very fluid at this point for purchases like furniture, and appx. $3200 a month in income. My question is, what sort of steps can we take at this point to get started with an introductory investment situation. We have savings, and thats pretty fluid, but I’ve pondered over Roths, CD ladders, and even Mutual Funds. I think Mutual Funds aren’t quite for us yet, but perhaps you would say otherwise. Should I just focus on getting our savings established, or set aside an amount for longer term accounts. I keep reading how its important to start retirment funds now rather than later, but should I even consider those given our situation. We figure to be able to save $200 a month. Any thoughts would be welcomed!
– Tony

As with my answer to Chase above, it really depends on what your goals are.

If you want to buy a house in five years, keep the money in cash. Just leave it in your savings account or maybe buy some short-term CDs.

If you have no long term savings goals besides retirement, look at a Roth IRA.

Your goals lead everything. Spend some time talking things over with your future spouse. Where do the two of you want to be in five years? Ten years? The ideas you come up with don’t have to be set in stone, but they’ll give you a big clue as to where you should be going.

I have some friends who are getting married. It’s a second marriage for both of them, so they both have household goods already, I figure the last thing they need is a third toaster. They haven’t registered anywhere for gifts. We are friends through a gaming group. Most of us live in different states, but about once a quarter or so we all travel to someone’s house and just play games (mostly Fluxx) for most of a weekend. So, this next Fluxx gathering is going to be at my house, and is really a surprise wedding shower for the couple. We’ve all talked about giving them games as wedding presents, so I’m looking for suggestions of games that scale well. I’d like them to work for 2 people, so the newlyweds can have games they can play alone together, but also be options we can all join in on, for future Fluxx gatherings. One example of this is Bohnanza, that game is just as much fun for 2 people as it is for 6. Do you know of any other games that would work well? Or other games that work great just for couples?
– Keri

I know exactly where you’re coming from, but I came at this very problem from a different angle. Our group played a lot of Fluxx about ten years ago, but after a while, we become somewhat bored with it. At its heart, Fluxx is a lot like War – it’s really just about the luck of the draw.

Here are a few games we discovered that we still enjoy that capture the simplicity and convenience of Fluxx while having a lot more replayabilty.

Guillotine is a card game set in the French Revolution. The idea is that there is a “line” of French nobles waiting for the guillotine (a line of cards depicting nobles with a point value in the lower right corner) and you want to “collect” the most valuable ones (like Marie Antoinette, for example, who is worth 5, versus an errand boy, who is worth only 1). Each turn, you can play a card from your hand that modifies the order of the line (moving someone forward, moving someone backward, etc.), then you take the first noble in line. When the line runs out, you replenish it twice. The game ends after the third time through the line, when everyone counts up their nobles. It handles two to five players and plays really quickly (fifteen minutes or so).

Citadels is a card game for two to seven players. You’re trying to build a small town of eight buildings (the cards in the game represent buildings) worth the most number of points (each building is worth some number of points, with the higher point buildings being harder to build) before someone else builds a town of eight buildings. You do this by taking on one of nine “roles” each turn, each of which has a different ability. These “roles” are a special set of nine cards, and the neat part is that you pass the “role” cards around each turn, picking one and passing the rest on (with the first chooser rotating over time). It’s a blast, with a lot of reading other players and guessing involved, and the rules are really simple. We love this one.

Dominion is a card game for two to four players (that can expand to six). In the game, each player has their own deck of cards and they use the cards to “buy” more cards for their deck from a shared supply of cards. Most of the cards you have are “coins” that you use to buy more cards for your deck; other cards either have special abilities or count for “victory points” for your deck. The game ends when you run out of victory point cards in the shared supply, at which point all players count up the victory point cards in their deck and the person with the most points is the winner. We love this one, too.

Try one of these three – you can’t go wrong.

My husband and I are currently at a point where we are saving for a house. We stay in San Diego and both of us are in full-time jobs. We have maxed out our retirement savings. We have a nice emergency fund which will serve us at least 6 months. We have no debt (we just don’t buy anything if we need to borrow money for it). We do have a mortgage for a condo in India but we found a renter who is reliable and the rent pays for the mortgage. We recently got a lump-sum of money (a gift from my father-in-law) which we promptly used to pay off part of the mortgage. My parents also recently set up a college fund for our kids (2 toddlers), to which they said they would contribute every year (we hope to take over this cost in the future).

So, we now have $15,000 saved up. We hope, with a stringent budget and only necessary expenses (such as childcare, rent etc), to save up to buy a house in 3 years with at least 20% down payment (more, if the new financial reform bill requires it). We want to stash this initial lump sum in a high yielding but safe account. However, we are not sure where! Our bank (SDCCU) is very good and I am not inclined to change it but its possible we may open a separate savings account just for this money in another bank. Or, we may open a CD. I would really like to know what you would recommend.

We rent now but we have set our mind to owning a house; not as an investment but as a place where we will live and bring up our kids.
– Roshni

If you’re going to buy in three years, a savings account is probably the best place to be because you’re not exposed to the rapid fluctuations of the stock market (a bad one would seriously derail your plans).

I would shop around a bit for a high interest savings account. I use SmartyPig for specific savings goals – they have a very nice rate, but their accounts have some special rules applied to them (you have to have an automated savings plan to put money in after the first deposit).

You’ve got the right idea (from my perspective), though, about viewing your home not as an investment. For most people, their primary residence isn’t very liquid at all and (as we’ve learned recently) housing markets aren’t reliable places to invest.

I am currently in a very confused professional place. I don’t love what I am doing, but I don’t really know what else I want to do. I have an event coming up, a college reunion, where lots of different types of people are going to be in one area. I see this as a great opportunity to network with people of all ages and professions for job opportunities, but more importantly for ideas of things I might want to do. What kind of advice would you give me for this situation, especially knowing that I am a pretty shy person and don’t really feel super comfortable just walking up to random people and introducing myself?
– Christine

I think this is a great idea.

People that tend to go to reunions are often extroverts, which makes the process easier. They’re coming to see people and often to network, just as you are.

If I were you, I’d do two things. First, I’d hone my small talk skills. Look for events now where you’re going to be surrounded by people you don’t know and practice meeting them and learning more about them. For me, I find that asking gentle questions is almost always a great way to get people to open up and talk about themselves, and you can learn a lot from that.

Second, I’d get involved with the event. Contact the people running it and ask if they need some help. Offer to speak if there are opportunities – that’s a great way to get people’s eyes on you and get known. Get ahold of a list of attendees and research them a bit, identifying people you’d like to meet.

Good luck!

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.

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