Reader Mailbag: January Resolution Review

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. Basic tax prep conundrum
2. Debt disaster and recovery
3. Capital gains and gifts
4. Mortgage less than rent
5. Frugal fatigue
6. Child discipline
7. Is “free” Tax Act good?
8. Solo games
9. Budgeting with fluctuating income
10. Sharing accounts with a spender

I’ve decided that once a month, I’ll take a step back and evaluate the goals I’ve set for myself in 2011.

Get fit This resolution started out very well, with regular gym visits early in the month. Since then, there hasn’t been a day where one of our children hasn’t been sick, making gym trips much more difficult. When we reached the end of the month and all three kids were suffering from a sinus infection, I gave up and developed an equipment-free home routine consisting of pushups, situps, squats, and yoga, which are all things I can do downstairs while the kids are resting. I’m still slowly losing weight, but that’s mostly thanks to diet.

Play music I’ve had the biggest success with this goal, as I’ve got sheet music for all four pieces I’m trying to learn to play this year. In the Hall of the Mountain King and Clocks are both coming along well enough that I’m very happy with my progress.

Read 100 unread books I’ve knocked only two books off my list, though I’m more than halfway through two more on the list. Thankfully, one of the thickest ones on the list – Quicksilver by Neal Stephenson – is one of the ones nearing completion. I expect February to be a very good month in terms of knocking books off of my list.

Q1: Basic tax prep conundrum
I have a question about your opinion on the different tax preparation options out there. For the last several years, I have used TurboTax Online. I am always somewhat disappointed in the amount of my refund when compared to what other acquaintances are getting.

I want to make sure I am not missing out on something, but I feel like if I go to H&R Block or somewhere like that, that they will charge me a huge fee and that I might not be any better off than what I figured on TurboTax myself.

I am married with a mortgage, etc. I have a son but switch off every other year with his father as to who gets to claim him (for 2010, I do not get to claim him). Our combined income is slightly over $100k. Do you think it is worth it to spend the money for a professional tax preparation or should I have faith that TurboTax is sufficient?
– Nicole

I’ve used TurboTax almost every year for my personal and business taxes without any sort of problems.

When you take your taxes to a preparer like H&R Block, they’re essentially just using a computer program much like Turbo Tax to prepare your taxes for you. You just get a human face and a handshake and some reassurance to go along with the package, plus you don’t have to spend your time typing. For those services, you pay extra.

If you’re comfortable using computer software, I’d encourage you to use TurboTax.

Q2: Debt disaster and recovery
I am 32 and got out of a 5 year relationship two years ago. Since that time, I have racked up credit card debt to the tune of about $10,000 on various credit cards and have been ignoring it for two years. I have no good excuse other than between student loans, car lease payment and rent, I simply cannot stretch my money to pay all my bills. I have ignored all of the collections calls and at this point, only get about one call a week. I ran my credit report to try and begin to get back on track and plan ahead for what to do when my car lease is up in December since I have completely ruined my credit score, but I honestly do not even know where to begin. Is bankruptcy my only option or can I negotiate a payment schedule with collections agencies? And if so, how do I even find out where my accounts are now? I have reached out to credit counseling three times and never heard anything back so at this point I am incredibly frustrated and not sure what to do.

– Hayley

I’m not sure what you mean by “reached out to credit counseling three times and never heard anything back”. How did you contact them? Was it just an email? Did you call them? I’m mostly trying to figure out if you actually had anyone at a credit counseling service review your situation or whether it was just an email that went into a black hole somewhere.

In either case, I think you have a big overall decision to make. You can try to repay your debts, which is the honorable thing to do. It will require some footwork and some negotiation on your behalf, but it will likely result in a better credit rating if you can negotiate that the agencies mark the debts as paid in full on your credit report. Of course, if you don’t have the means to pay those debts, this avenue will likely be worse than doing nothing at all.

On the other hand, doing nothing means that your credit will be in the tank for a few more years, then those unpaid debts will disappear and you’ll go back to having good credit. Of course, this is the dishonest thing to do.

What’s really warped about the way credit reports and credit scores are handled is that it encourages people who get behind on their bills to just walk away from them and never pay them. If you try to get a handle on your old debts, it causes new entries to appear on your credit report, which means that these old debts stick around for a lot longer than if you’ve never paid them at all. That’s frankly wrong – it rewards dishonesty when it comes to debt. Unfortunately, that’s the way the game is played.

Q3: Capital gains and gifts
For a wedding gift, and for the birth of each of our children, we have been given one company’s stock as a gift (around 100 shares for each of the 4 accounts). While the stock has done well and pays dividends, we are looking to diversify and simplify. You have me convinced on index funds, I just have no idea where to start, or what the tax implications are. The stock is currently with the bank (BNY Mellon) that issues the stock – we’d like to use half of it to buy index funds and keep the other half in the company stock, and ideally we’d like to have them in the same place for convenience. Do you have any advice on how to go about doing this, and if there would be any capital gains tax we would need to budget for? The total investment is around $30,000 or so.

– Kenny

When you sell the stock, you’ll most likely have a capital gains of some sort. The capital gains is the difference in value between what they were worth when you received them compared to the value they’re worth when you sell them. So, if you received $20,000 in stock and then sold them for $30,000, you’re facing $10,000 worth of capital gains. You have to pay capital gains taxes on that amount. Since this is a long term capital gains (meaning you held it more than a year), the tax rate would be 15%, so you’d owe $1,500 in taxes from that sale. Ideally, you’ll be able to pay those taxes out of pocket.

Some people might respond with, “Well, then I just won’t sell” because they don’t want to deal with the capital gains. The problem there is that eventually you will have to deal with those capital gains – and you’re better off having the investment in whatever form will give you the best or safest returns in the future. If you move it now, you’ll pay some capital gains now, but you won’t pay as much later on when you cash in for good.

So, how should you invest what you sell? I’d probably put it in a 529 if it’s for your children. A 529 offers tax benefits if you use the money in the account for educational purposes – other than that, it’s largely a normal investment account. I use College Savings Iowa (which is actually open nationwide, though only Iowans get the state tax benefits) for our children’s 529 accounts, which is managed by Vanguard.

Q4: Mortgage less than rent
My current lease is getting ready to end and I wanted to move somewhere closer to where I work? I currently pay $650 and found a place to rent (condo). I was browsing houses and condos and found a unit in the exact same development I was looking to rent that was selling for $32,000. I did a few calculations and the mortgage would be significantly less ($200-300/month) than what I would be paying to rent. Does it make sense to move forward buying the condo with my financial picture?

– Aaron

Are there any costs besides the mortgage? Are you going to have to pay more utilities, association fees, and things like that for the condo?

My opinion is that after you calculate in such additional costs and the numbers are still comparable, I’d make the move. However, those extra costs might be more than you realize. If you’re suddenly now covering your energy bill and your garbage bill and your water bill and you’re also paying some new property management bill, the condo could easily be more expensive than your apartment. Plus, you’ll now be responsible for your own maintenance, as there won’t be a landlord to call.

It’s not just like moving into another apartment. Owning your own without a landlord can be really expensive.

Q5: Frugal fatigue
I’m currious about your thoughts on “frugal fatigue” as discussed in this newspaper article.

– Patty

Frugal fatigue happens when the “honeymoon period” wears off. It happens with any new thing that requires some significant change in personal behavior.

At first, it’s a fun adventure and it seems exciting. After a while, the new wears off and you begin to miss your old routines and habits. Many people’s great new initiatives die in that period, because that’s the hard period.

If you can push through that hard period, these new habits start to become routine. They become the new normal in your life. This can take months, but I generally find that about a month in, a single new routine becomes normal. The problem is that becoming “frugal” usually means lots of new routines at once, which means it can take longer and be harder to adjust to.

Q6: Child discipline
Do you believe in spanking your children?

– Laurie

Not really. I think back to my own childhood and my memory of spanking is that the actual spanking didn’t really mean anything at all. It was just something painful that you shed a few quick tears over and then moved on with life. The same was true with yelling that was never really followed up with any lasting discipline – I learned to ignore it.

What really drove me to be a better child was when my parents or my teachers were obviously disappointed in me, and it was the longer-term punishments (like when the Nintendo would be disconnected and put away for a week) that would really bother me, as they served as continual reminders of the mistakes I had made. The problem as a parent with such punishments is that they require significant involvement in your child’s life as well as parental willpower to leave the Nintendo

Now, am I going to call someone a child abuser because they choose to spank their children? No, not for just giving them a whack or two on the behind for a seriously bad choice. It’s a different discipline philosophy than I have, but that’s not child abuse. Child abuse is a desire to hurt your child; a spanking is a desire to raise your children to better behavioral standards. I just don’t think it’s a choice that works really well.

Q7: Is “free” Tax Act good?
My husband and I have been married for 4 years and I am the “CFO” of the household. Each year I do our taxes by hand. Literally with a pencil, calculator and the printed forms. In the past, I tried using TurboTax, but it didn’t seem to work out right when I got to the state forms. There would always be a hiccup since I was working New York and living in New Jersey. Then I began to appreciate learning so much about the tax system and have stuck with it (even though I now live in New York and don’t have the dual state issue). I also have an issue paying for a service to figure out how much I owe the government! Anyhow, my husband is self-employed so we have deductions to deal with. We also own our home. I just saw a commercial for TaxAct.com and was wondering if you were familiar with it. If so, what are your thoughts on it? Can it handle itemized deductions? It is advertised as free so it peeked my interest.

– Sandra

For starters, both TaxAct and Turbo Tax offer free federal tax returns in most cases. The vast majority of people doing their taxes will have no problems using either offering to file their federal tax returns for free. Of course, both go on to charge you for your state income tax filing.

Last year, as I was preparing a post on tax software, I tried both and found Turbo Tax to be easier to use. I got my taxes done quicker with Turbo Tax than with TaxAct and the tax forms, in the end, were virtually identical.

If you’re doing a simple filing, then I’d just use the free filing at either TaxAct or Turbo Tax. Both are going to work for you.

If you’re in that 5% of the populace that has a fairly complicated tax situation (with lots of income streams, business income, etc.), then I’d just pick up a full copy of Turbo Tax.

Q8: Solo games
You’ve mentioned that sometimes you play board games solo when others are asleep. Are you serious?!!?

– Kelly

Absolutely.

For starters, think about solitaire card games – Klondike, FreeCell, Forty Thieves, whatever one(s) you enjoy. Many people have played the free Solitaire and FreeCell that come with their computers, and many others have played those types of games with decks of cards.

There are many board games that have similar solitaire options, creating a puzzle-like situation that provides a good hour or two of entertainment.

My personal favorites of this type include At the Gates of Loyang, Space Alert, Race for the Galaxy, and Le Havre. Each of these lasts from 20 minutes to an hour as a solo game. Each one makes you stretch your mind in different ways. Each one also improves your understanding of how to play the multiplayer game, which means that I’ll often learn how to play a game solo before playing it with and/or teaching it to others.

It’s a great way to eke more value out of a board game collection, and it can certainly be a good way to burn a winter evening.

Q9: Budgeting with fluctuating income
I have recently started a minimum wage job ($8.25) where I earn tips. I have only been working there 2 weeks and have ranged between bringing in $70-$110 a night. My co-workers say that the busy season is coming up and we should be making really good tips. I am not sure what they mean by really good tips though. So I am not sure exactly how to budget with numbers that fluctuate. I have $2,000 in credit card debt that I want to pay off ASAP. $400 in rent and $60 utilities as monthly payments. My car is payed off but I also need to start getting aggressive on saving for a more reliable ride. I would like to be able to save enough so I can put a huge down payment, or buy something outright and not be strapped down with payments for years on end. I just am having a really hard time trying to figure out the best way to plan with such a fluctuating income.

– Amanda

What I would do is budget as though you’re not getting any tips at all. Survive on that. Make your bill payments on that.

Then, when the tips do come in, bundle all of those up and make big extra payments on your debts. If you’re debt free, take those tips and stick them right in a savings account and sit on them for the future, when you may want to buy a house, buy a new car, or something like that.

Survive day-to-day on your normal pay. Use your tips to clean up your debts and prepare for the future.

Q10: Sharing accounts with a spender
I am at my wits-end with my husband. I scrape and save to put $1000.00 in an emergency fund as a cushion (ala Dave Ramsey), but my husband uses it as his personal account, buying lavish gifts for me (his excuse is that he wants to buy me nice things) or for himself. We also have an account specifically to save up for large purchases like car replacement or Christmas. That is cleaned out regularly, too. He just completely shuts down when I ask him to stop and it is ruining our marriage! Is it wrong of me to open my own account to save up an emergency fund and sinking fund for a replacement car that he won’t know about? When he found out that there is an equity line on the house, he said we could just use that to buy what we wanted or to replace what he spent on stuff. I lied and told him the equity line was dried up. He has refused to go to counseling with me. At this point I am setting money aside in my sock drawer to pay for an attorney if it comes to that.

– Janet

First and foremost, you guys need to get some counseling. There are lies, destruction of financial plans, and threats of divorce on the table here. Your marriage is in real trouble.

Sit down with a counselor. Go through your marital issues and air all of the dirty laundry. If you can’t do that, you’re just asking for it to sit there and fester and make your lives together poisonous. Don’t let that happen.

Issue your husband an ultimatum about counseling. If he won’t go, you’ll walk.

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.