Reader Mailbag: Local Flavor

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. Investing for five year goals
2. Music career crossroads
3. The price of fame
4. First steps with no credit
5. Buying a foreclosed home
6. Which retirement option is best?
7. Pet allergies and family
8. Budgeting and saving
9. Roll over or pocket?
10. Planning for a big change

I love the local flavor of an area that I’ve never been to before, even in the United States. The word choices. The accent. The local culture. The food. The selection at the grocery store. It’s all similar, but just a bit different, like a different spice hidden in a familiar dish.

My husband and I bought (what we think) is a starter home last year and we think that we’ll want to sell it in 5-7 years since the public school system isn’t great in the area (no kids yet, but trying to think ahead). Anyway, in case we sell the house for around the same price we bought it, I am thinking of ways to make our money work for us in the next 5ish years to help us with a potential larger down payment. I have about $7,000 in a couple of stocks (Johnson & Johnson and Schlumberger) and have about $3,000 in cash that I would like to put in a Vanguard account (and then plan on adding to it monthly). Since most of this is based on speculation and the future, it is tough to plan. All I know is I want to make this $9,000-$10,000 work to its full potential in the next 5-7 years and was wondering what your thoughts were on the matter.
– Krissy

Well, you have a choice. You can either take on a considerable amount of risk and put it into stocks with the potential of a good return (and the potential of returning nothing at all or losing some) or you can put it into something conservative and lock down a small return.

That’s really the investment choice we’re all faced with. There is no “best” answer. It depends on our goals and our needs and our personal risk tolerance.

The longer your timeframe, the better the stock market option is because it gives you more time to make up for the inevitable bad years (like 2008). Five to seven years is just about the perfect time to go through one bear market and one bull market, and depending on how strong the bull is and how strong the bear is, it could be a net gain or a break even or a net loss. If you can invest for longer – fifteen years or longer – you can ride multiple bears and multiple bulls and, over the history of the stock market, the average bull gains more than the average bear loses. It’s just that you can’t bet on that from individual bears and individual bulls.

If I were you, I’d probably put the money someplace conservative and focus on squeezing a few more dollars from my standard of living.

I am twenty four years old, and I just got married back in October 2009. I am by trade what you would call a “Professional Musician” or “Hired Gun” or “Artist”. I’m a drummer, and song writer. This is all I have done since I was a kid. I have had a record deal, had a national release, and some radio success. The difficulty with being a musician, outside the realm of it being a “hobby”, is that work comes then it goes, and success is not solely based in being good or even great, it comes through connections and who-you-know. Not to mention that living in a town like Nashville where there are a lot of other people doing the exact same things, it makes it even more difficult to get in the door, EVEN if you a extremely talented! My wife has been unemployed for almost a year, but is furiously looking for a new job. I have been playing music and working as a server at a restaurant since my wife and I married, but our lack of income is constantly frustrating! The problem is that if I go get a great paying job or go to school to get a better paying job and then an awesome tour comes up, I have to quit. My heart and all my passion surround playing music, but it ain’t paying the bills? We live off a budget, have some emergency savings, and are paying off the remaining 4,000 in debt we have. Do you have any suggestions?
– Caleb

You’re asking about a field that I know little about aside from some friends that have dabbled in the alternative music scene. I asked them what they knew and they gave me a few things to pass along to you.

First, they suggest that you tour, tour, tour. Play as many live shows as you possibly can, even if they’re free. When you’re there, make sure you have t-shirts and copies of your album and bumper stickers to sell to the people that are there. Gigs build a reputation and keep income coming in, so get as many as you possibly can.

Second, if you’re a drummer, seek out at least a singer and a guitarist you can partner with so that you’re in this together. You’re in Nashville – it shouldn’t be too hard to find others who are trying to find a break. Even if you eventually go your separate ways, you’ll have built a resume. Tour with these people and split the proceeds from the t-shirts and albums and bumper stickers among you.

Third, make sure you do have some sort of album recorded so that you can sell it at your shows, even if it’s recorded in your basement using a laptop and a couple cheap microphones. Learn how to use GarageBand (that was their suggestion for software). Give away some tracks online. Do some online promotion, too, like with a Facebook fan page for your band.

They seem to largely think that if your love is music, then you should be focused on that, especially if you’ve seen some degree of success with it already. Just live as lean as possible for now and see where it goes.

The thing that bothers me most is when I see famous people complaining about how hard their life is when they have everything they could ever want.
– Kathy

What you’ve got to keep in mind is that there is no life without problems. There is virtually no one who does not want something different.

People who have financial wealth have often traded other kinds of riches to acquire it. Perhaps they didn’t build a great relationship with their family. Maybe they broke off their friendships with a lot of people to get where they’re at. Maybe they had to abandon a dream. Maybe they had to work in a field that made them feel empty inside. Perhaps their career path led them to fame that they didn’t really expect which restricts their freedom to just walk down the street when they want to.

No one on this earth has the perfect life. They may have elements of their life that you wish you had in your life, but I’m willing to bet there are elements of their life that you would absolutely not want in your own. I would imagine they feel the same way about you.

It could be that the richest person in your neighborhood looks at a poor but close-knit family and thinks to himself that he would trade all of his riches for that. Meanwhile, the close-knit family looks at the rich man’s big house and the shiny car and thinks to themselves that they would give anything for that.

Everyone has riches in different ways and we all sometimes wish we had more in some areas of our life.

I’m a 27yr old married guy with a 6yr old daughter and another on the way any day now. I’ve never borrowed any money from anybody in my life – not a loan, not a credit card, not a pay day cash advance, nothing. I love it this way – my friends and family have paid thousands upon thousands of dollars over the years in interest payments, while my wife and I have lived relatively debt-free. The problem is, I’m a credit ghost. I’ve tried to get some low-limit credit cards or loans to start to raise my credit score, but no one will approve someone my age who has never had a spot of credit in their life. Apparently, being a 27yr old with no credit raises all kinds of flags in banking computer systems due to the high statistical probability of my being a faked identity trying to pull some kind of scam. I even had to bring my ID, Social Security Card, and Birth Certificate to the bank just to be added to my wife’s 15yr old pre-existing checking account! I want to try and build my credit up a bit because I’m interested in buying a house around my 30th birthday. Do you have any suggestions about what I can do to get started down that path?
– Brad

The first place I would start is at my local credit union. Go there, explain your situation, and see what options they have available for you.

Local credit unions typically do manual underwriting for the credit packages they offer. That means they usually interview the person they’re considering loaning to and figure out who they actually are rather than just relying on a credit history.

Large banks rarely (if ever) do this. They typically run a person’s credit report and if they find a 27 year old with nothing, they don’t offer them credit (especially right now, where banks are being pretty careful).

Head down there. You’ll probably want to take similar identification with you, as well as some proof of employment and a copy of your previous tax return.

My girlfriend and I were talking about saving our money for about a year or so to be able to put a down payment on a house. Over the weekend a friend of ours said she saw people cleaning out a house in the same development as hers so she went online and found that the house is foreclosed and now bank owned. My question is, is buying a house that’s been foreclosed any different than buying a house that has not been? What makes this appealing is that the price on the website says its only $46k. Is this how much it would cost us to own it or does this amount mean something different? We are in the process of acquiring more information but I would like to know if this is worthwhile to pursue. If this is the price and assuming the house isn’t a complete disaster, would buying this house be a recommended course of action? Another bit of information is that our friend bought her house about a year ago for about $128k, to give you an idea of how much houses are worth in this development.
– Andrew

The absolute first thing you need to do is search the public records and find out if there is a lien against this home. Call your county’s recorder for starters to see what you need to do.

You also need to find out how foreclosure sales work in your state, because the procedure varies from state to state. Google will help to give you an idea of the process. If you actually decide to go for it, you may want to seek a bit of professional assistance if you’ve never done it before.

You’ll also want to inspect the property carefully. Sometimes, previous tenants in foreclosed homes will do things like strip out all of the wiring and all of the piping and practically gut the house, leaving the buyer with a ton of work. You’ll absolutely want a careful home inspection before you buy.

You may want to seek out a real estate agent who is familar with foreclosures if this is a new experience for you.

I am 26 years old and have no debt besides my mortgage. I work for a state agency. There is a retirement plan automatically set up for me through SERS, the School Employees Retirement System. On top of this, I contribute 6% of my income to a Deferred Compensation Plan, a 457(b), which is a retirement plan for state employees in Washington. I have been at my job for a little over a year and have contributed around $3600. I have an additional retirement account from an old employer (Simple IRA) that has around $2200 in it. Is it better for me to let the Simple IRA sit (I am not allowed to contribute to it on my own because it is employer sponsored), or roll it over into a Roth IRA? Also, would it be better for me to have a Roth rather than a 457(b)?
– Stacy

My belief is that for almost everyone, a Roth IRA is a better choice than any other retirement vehicle. It’s only topped by retirement plans that offer employee matching (because that’s free money).

Why do I love Roth IRAs so much? I love them because you don’t have to pay taxes on any gains you earn in that account. Since, at the same time, I believe income tax rates are going to go way up, that’s a very good thing. I’d rather pay the income taxes now when they’re low (since Roth IRAs have after-tax money in them) than pay the income taxes later when they’ll be higher (and possibly much higher).

If I were you, I’d roll it over to a Roth IRA if you’re allowed to. Also, I would contribute to your 457(b) up to whatever amount the employer will match and, if I wanted to save more, I would put the rest in the Roth IRA.

My husband and I have two cats that I dearly love and have had about for over 5 years. We rescued one from the pound and another from a friend that couldn’t keep the cat.

My sister’s and her husband lived in the same city when we got the cats and we knew at the time my brother-in-law was allergic but it wasn’t a big issue since we always went to their place to visit.

Now 5 years later my young niece is about 4 years old and is also allergic to cats and my sister and her family has moved over 2 hours away.

The problem is my sister wants to come visit with her family with us. She has asked us to find other homes for the cats but I don’t think that’s easily possible since the cats are not declawed and have a tendancy to shred/ruin furniture… I feel guilty and pulled in both ways. We have promised to not get any more pets in the future but I know our cats could live another 10 years.
– Karen

We were in this exact situation several years ago. We took in a stray kitten (it was a six or seven week old that had been abandoned in a park) and the cat left behind by an elderly neighbor who went to a retirement home, only to find out later that my dad was so allergic to the cat dander that he couldn’t visit us any more.

Our solution was, basically, to patiently search for a good home for both of the cats. It took us multiple years to find homes for them (and in one case, it was pretty much a relative being nice to us), but we did.

Reasons like this are why I’m often hesitant to take in a pet at all, even though I enjoy their companionship. I know there are pet allergies among my friends and family.

My suggestion is to just be patient, but also be diligent in your search for a good home for the cats.

I have a question about contributing to student loan payments vs. saving for retirement. I’m a 22-year old graduate student working towards a masters degree in ocean sciences, and between teaching and labwork, my month stipend is ~$1400 (after taxes). I have $8000 in student loans (down from $13000, yay!), which is my only debt. I also have an emergency fund of $2000, which would cover 2 months of living expenses. Last fall I opened a Vanguard Roth IRA account, which currently is at ~$1350. My monthly expenses are:
Rent: $600 (for southern CA, this is actually ridiculously cheap)
Food $100
Household (toilet paper, shampoo, dish soap, etc): $20
Phone: $25
Discretionary: $60
Tithing: $50
Irregular expenses (textbooks, conference fees, etc): $50 (leftovers go into travel fund, and when I have ~$600, I can buy a ticket to visit home (Alaska))
Total: $905

This leaves about $500 for either paying off student loans or contributing to my Roth IRA. Currently, I’m putting $450/month towards student loans, and $50 towards the IRA. This is mostly because I really want to travel for a few years after finishing school, which can’t be done with student loans hanging over my head. However, I also know that contributing to retirement savings when you’re young will pay off more in the long run, so I’m wondering whether I shouldn’t reduce student loan payments and increase the IRA contributions? (because I’m in school, the loans are in deferment, and most are subsidized, so required payments and interest accumulation aren’t really issues). Such a change would probably mean that I could not reach my goal of paying off the student loans by the time I graduate (ideally in one and half years), and so I would need to work for a year or so before setting off to travel. But I have the travel bug really, really bad, and I don’t want to do this… (The travel itself won’t be very expensive; I’m looking at au-pairing, WWOOF-ing, and participating in working holiday programs.) It also might be difficult to find a decent job if employers knew I was only planning on staying for a year. So I was basically wondering what you think? Also, if you have any suggestions about my monthly budget, that would be cool too.
– Shiloh

Your monthly budget looks fine. I also think your goal of traveling for a while after college is fine, too.

Your student loan load is not bone-crushing in the least. However, it will require $100 or so a month in payments (my back-of-the-envelope calculation) after you graduate, and possibly more if you take out more loans.

Since student loans typically have a pretty low interest rate, if I were you, I’d probably just make sure that I had enough in cash savings to cover my loan payments during my travel period, then focus on retirement savings. In forty years, you’ll be incredibly glad that you made that move, because the $5,000 you put in now will grow to quite a lot – and if you take it out at retirement time, you won’t owe a drop of income tax on it. It’ll reduce your retirement savings burden later in your life, in other words, by far more than you’re actually saving now.

My husband and I are in our late 30s. He began a new job in Febrary 2009. A few months later, we found out that our daughter has a serious medical condition requiring many medications and occasional hospitalizations. My husband has a 401(k) and an ESOP account from his old job. The 401(k) has about $70,000 and the ESOP is worth around $25,000 (we also have several other IRAs, totalling around $20,000-$30,000, plus a 401(k) from his current job). In July 2010, his shares from the ESOP will be “cashed out” by his former employer. We had planned to rollover this amount into an IRA.

However, we have been paying thousands of dollars in medical expenses over the last year. This year we have upped the amount in his FSA, but unfortunately we weren’t able to take advantage of that last year since my daughter’s diagnosis happened during the year. We now have a bill of $7000 to pay. We will be getting a large tax return (we are in the process of upping his withholdings so this won’t happen again), and almost all of that will be going towards the bill. We don’t have much savings since we have had to use it to pay for doctor, hospital and prescriptions copays. I wouldn’t say we are living paycheck to paycheck, but we don’t have a lot to set aside each money after our living and medical expenses. Plus, we have our some larger bills coming up in the second half of the year – car insurance, life insurance and property tax.

My question is: instead of rolling over the full amount of the ESOP, should we take some as cash and put it into our savings? I know we’ll have to pay income tax on it, plus some type of penalty, but it sounds like a good idea to me for the piece of mind of having something in savings.
– Natalie

OK, first, I’ll unravel the acronyms for readers who might not know what Natalie is talking about.

ESOP refers to Employee Stock Ownership Plan. There are a lot of varieties of this, but they basically boil down to a employer-run plan that shares some amount of stock with the employees of that company.

FSA refers to Flexible Spending Account. It’s a tax-advantaged account for people to use with certain expenses that have tax implications, like health spending. Health FSAs are the most common kind.

My biggest question would be whether or not Natalie and family have a firm grip on any future medical expenses for their daughter. I also am not sure if they have any cash savings right now.

If it’s a bleak scenario (more expenses and no cash savings), then I would use this opportunity to quickly build some, even though the penalties will be harsh. The alternatives – taking out debt for future medical expenses and whatever unknowns life throws at you – are just too harsh.

Given your comments, I think the “bleak scenario” is probably the right one, given your mention of upcoming bills. I would lean towards paying the taxes (and any penalties, if there are any) and beefing up your savings for the expenses heading your way. You know there are a lot of bills coming – get through this now and focus on retirement savings when the storm is through.

I currently make about $98,000 at a job I hate. Every time I come into the office the project I work on has some sort of drama and chaos going on which I get pulled into immediately. Without all the details, I know this situation is no good for me. My goal is to leave and work my businesses full time. But, like many I do fear not being able to cover my bills. In addition, even though I am working on living a simple life, I still want to be able to travel with my partner and our kids. We have 4 young children (2 living with us). My partner makes just $18K a year and has not been successful in finding a better job despite her even having more education that me. Clearly, we can’t pay the bills on her salary alone as our $1800 mortgage would take her two months to pay.

I will rent out my basement again (which is an apartment, which is one of the reaons I purchased the house 3 years ago) for cheap in exchange for the tenant taking care of the maintenance (don’t want to be bothered with minor details) for $695 (usually rents for $895). I also do some freelance writing in which I can bring in about $600-$800 a month. My car lease is up this month, so I am loosing a car payment and insurance of about $600!. I have a mortgage (1800/mo), credit card debt of about $15K and student loan debt. My goal is to quit at the end of April. By that time I will have just under $6K in an emergency fund and about $14K in a 401K.

Long story short is I can’t stomach my job any longer, my blood pressure has never been high until I began working on this project. The only thing about it is the job is 5 minutes from my house, I can find another job but not this close. I live in the DC area and traffic is a nightmare and spending 3 hours in traffic a day is not a lifestyle I want any longer.

So, I want to strike out on my own fairly soon. But there are a lot of factors keeping me slave to this job. My business is a traveling lingerie boutique for real size women. When I sell, the sales are really great. I am signed up for a few shows so I my goal is to make a great deal over the next few months. But this is sales and I know some months may be high and some may be low. Even when it’s high I hope I can cover my expenses and have a little left over to enjoy. Further, it’s not possible to keep this job and do all the things that I really want to do and with the conditions I work under, I want to walk out the door right now.

Yes, I have a plan. I am paying off some things and making home repairs. In addition, we are getting any medical and dental work that we need done now before I quit. I plan to get a high deductible plan with HSA but I won’t be able to add my partner to my plan like I have her on my current insurance. So she will be uninsured. I hope that my sales cover all my expenses when I quit. I also working to ensure that I work on my business not in it. I think with age I am becoming more risk adverse (I am 30), and making the leap for me isn’t difficult. I just really don’t want my family to go without. Any suggestions?
– Tammy

I think you need to address what your family would actually “go without” if you made this decision? Would they go without food or anything genuinely important? Or is it just a matter of not being able to go on a big trip this summer or next?

If it’s the latter, the value of having a mother that’s not completely stressed out all the time more than makes up for it. Plus, you’ll suddenly have tons of time and energy to devote to making your business work for you.

You have a plan in place. If it’s not going to pull anything truly important – food, school, shelter, clothing – away from your children, go for it. They’ll gain a mother with energy and spark again.

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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