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. Roth rollover worth it?
2. Exercise motivation in northern climate
3. Startup money for side business
4. Savings or debt repayment?
5. Inflation and old financial advice
6. Crushing child support
7. Saving for retirement
8. Partner too finance obsessed?
9. Worth paying for credit score?
10. Selling a second car
We allowed our children to stay up until midnight on New Year’s Eve for the first time this year. We let them have a movie marathon in the evening in their pajamas in the family room with the lights fairly low.
Sarah and I both expected that they would fall asleep well before midnight, but the two oldest children easily made it and the youngest one was awake at midnight after some dozing (his siblings made sure he was awake).
We had a small New Year’s Eve party in the next room with a few friends. Our children outlasted the New Year’s Eve guests.
I suppose when your children start staying up later than you on New Year’s Eve, it’s a sign that you’re getting older.
Q1: Roth rollover worth it?
I’m 30, and I’ve saved $50,000 for retirement. But I’m worried that I’ve done it wrong, because most of it is in 403B and tradditional IRAs. I only started contributing to my Roth IRA this year.
People kept mentioning how awesome Roth IRAs were, but I never really got it until I started reading finance blogs, including yours, in the last few months. My relationship with money has always been an anxious one, I worry most about keeping the most dollars, and thus made retirement savings decisions based on immediate tax benefits.
So…what now? Should I roll the 403B from my previous employer, about $30,000 in to a traditional and then a Roth IRA, though in the short term, it will really increase my taxes for a year? Or should I just be proud of what I’ve accomplished, and be diligent in building my Roth over the next 30 years.
You’ll have to pay taxes on that $30,000 during the rollover process, since you’re moving money from a pre-tax retirement savings account to a post-tax retirement savings account. However, once you do that and it’s all in a Roth IRA, you won’t owe taxes on any future gains on that money.
If that tax bump is a major problem for you, then leave it where it is. It’s still going to grow and it’s still going to be a big help with your retirement.
Going forward, however, I would fund a Roth IRA if I was eligible for it rather than a Traditional IRA, especially if I am also funding a 401(k) or 403(b).
Q2: Exercise motivation in northern climate
This past summer, I moved from just outside Dallas, TX to Madison, WI for professional reasons. In Dallas, I used to get exercise by jogging every day. Even in the worst part of winter, I might miss only a day or two of jogging due to weather each year. It’s been basically impossible to jog here for a month. How do you stay in shape frugally during the winter in the north? You’re in Iowa which isn’t much different than Wisconsin so I thought you might have some insights.
I find it most efficient to do lots of indoor body weight exercises, like planks and squats or jumping jacks or things like that. There are a lot of exercises and routines you can easily find online for this.
Another solution is a treadmill, if you have space for one. This is an expensive initial investment, but it can pay for itself if you are staying in the area for a long time and have an established daily jogging or walking routine. This is an item that you should really shop for used, using Craigslist.
Another option is to join a gym for the winter months. You can price out some options for monthly memberships that can provide you with what you need.
Q3: Startup money for side business
I am working on a business plan for launching a side business for small woodworking projects. I want to thank you for the suggestion of making a business plan before anything else as it has made me think about a lot of aspects of the business before putting in money. My question is whether or not I should invest money up front on advertising. Since this is just a side business, is this even worth it?
It depends specifically on what you’re doing. I would assume that at some point you’ll have to invest some money to show off your work, but I wouldn’t do that until you have work to show off.
I guess this leads to the question of whether or not you already have finished pieces that you’re hoping to sell or at least show to others. I would consider that a much higher priority than advertising at this point.
Once you have some pieces, I’d look at your business model. Are you focusing on local business or internet business? If you’re focusing on local business, I would focus on showing people your work as your main method of promotion to get the ball rolling. Take your pieces to as many community events as you can. If you’re doing things online, advertisement will have to be a part of your plan, I would think.
I just wouldn’t advertise until you have something to advertise.
Q4: Savings or debt repayment?
I make around $40,000 a year and have around $40,000 of student loans consolidated over the next 24 years or so at 4.5%. I’m starting to think seriously about trying to save more; I have no credit card debt, contribute to a matched 403(b), and have a couple months living expenses in an emergency fund. Would you recommend trying to get rid of the loan as quickly as possible (which for me would mean throwing an extra $500/month at it) or using that money to make additional retirement contributions?
When you’re comparing paying off debts below 6% or 7% or so to investing more, you’re comparing two positive financial moves. You’re not making a bad move no matter which one you do.
Having said that, they do each bring advantages and disadvantages. Paying off debt improves your cash flow, as it reduces your stack of required bills each month. On the other hand, saving/investing moves you toward a goal much more quickly.
If you have a specific purpose with your saving/investing, I would do that first. If you’re just trying to “build wealth” and “maximize financial flexibility,” I’d always lean toward debt elimination because of the cash flow improvement, but you can’t go wrong either way.
Q5: Inflation and old financial advice
How do you adjust old financial advice for inflation? I just read The Millionaire Next Door and while it was really good, it did come out in 1996. How can I adjust the numbers for today?
You really can’t. In fact, I would avoid using financial advice that relies on specific numbers that’s more than a few years old because it’s almost entirely based on markets and situations that don’t exist today.
That doesn’t mean that such older books are useless. Many of the best ones – like the one you named – are loaded with principles that make a lot of sense regardless of the financial situation of the moment.
If you wanted to use a very simple tool just to compare dollar amounts, though, I’d use something like this little tool.
Q6: Crushing child support
I make $40,000 a year. After I pay my child support I barely keep more than my brother who is working at McDonalds. I want to help my kids but when they come to see me they wonder why dad lives in a tiny apartment and doesn’t have anything. What can I do here?
Divorces are difficult. I’ve been an eyewitness to a few divorces involving children and it seems like it is never, ever easy.
Having said that, the one thing you have to do is be unwavering in your love and support and commitment to those children. This situation is not their choice, while, at the same time, they are your responsibility.
Don’t worry too much about what your children think of your financial situation. Instead, try to think of things that they enjoy doing that won’t cost you very much. Pay attention to them when you have them and find out what they enjoy doing, then work to find ways of doing those things without great expense.
They’ll remember the experiences, not the fact that you lived in a cheap apartment. When I was growing up, I had relatives that lived in low-rent areas, but my memories revolve much more around the things I did with them, not whether their living quarters were cheap.
Q7: Saving for retirement
I have a question about your post on calculating your retirement number. I love the simple approach that accounts for inflation. However, it seems that inflation is covered only during the earning years. Why wouldn’t it factor into the post retirement-years too?
Also, do you know if the SSA statement accounts for inflation? It indicated my estimated monthly benefit, but there’s no explanation or account for inflation that I can find in the document. I assume that they haven’t accounted for it, which also seems important (in my case my target number drops about 40%).
In retirement, your retirement savings should take care of the inflation question if you’re withdrawing at a reasonable rate. Remember, your retirement will continue to grow after you retire, so if you have it invested at 7% and only withdraw 4% of the total balance, it will still be larger than the year before – about 3% larger. This roughly takes care of inflation.
Social Security benefits have annual cost of living adjustments built right in. Here’s a full table of those benefits.
In short, once you hit your retirement “number,” you should be reasonably okay for future years.
Q8: Partner too finance obsessed?
About three years ago, my husband and I attended Financial Peace University because we were really struggling with our money. Thanks to the class and some blogs we’ve found like The Simple Dollar, we’ve turned things around really well. Maybe too well.
My husband has become obsessive with our finances. He keeps track of every single dime we spend and we have these weekly budget meetings where we talk about every expense. It’s become uncomfortable to me. I don’t want to ever dig ourselves into a hole like we used to but I also don’t want to feel persecuted because I spent a dollar on a pack of gum.
What should I do?
You need to sit down with your husband and talk about this. Communication is the key to relationship issues.
What you both need is a “free spending” amount each week or month from which you can spend without question. You can even withdraw it from an ATM to have it in cash form at the start of each month.
Let’s say it’s $100. That way, you can have your pack of gum – out of that $100 – with no questions asked. Your husband can also remain vigilant about your finances, which, while a little bit strong, is causing more benefit than harm if it’s paired with some breathing room as suggested above.
I’m not sure what it really gains you. You don’t know what guidelines the people that are actually using your score are going to use when they’re evaluating you. You’re just getting a number without context.
You’re a lot better off – in my opinion – just getting your credit report every four months. You’re entitled by the federal government to a free credit report from each of the three credit bureaus each year – one from Trans Union, one from Experian, and one from Equifax. If you stagger then at four month intervals, you can get a good look at your credit situation pretty frequently. You can then use that report and some common sense – paying down your debts, not being late on payments – to get your credit in better shape.
You can get these free reports directly from the Federal Trade Commission via their portal site for the service, http://www.annualcreditreport.com/.
Q10: Selling a second car
My husband and I are hoping to become a one-income family next year so that I can stay home full-time with our toddler. In reading about going from two incomes to one, I often see the suggestion to sell a second car. However, the car that we’d have to sell (a two door compact hatchback) is the one that we own outright. I suspect that we’d get around $3000 for it. We owe around $10,000 on our other car. Insurance for the car that we’d be getting rid of is around $30 a month. It would be sometimes inconvenient to only have one car, but we could certainly manage. Is there a source of savings that I’m not thinking of here, other than the reduction of principal on our car loan and the $30 reduction in car insurance? I’m not sure if the inconvenience of having a single car would outweigh the money we would save.
From your description, you have one rather old car and one really new car. In that situation, the relative savings from getting rid of the old car isn’t incredibly advantageous, as you point out.
In your situation, I would probably hang on to the second car for flexibility for now, then see how things work out once you have the child.
If you later find that money is tight, selling that second car can reduce your bills a bit and give you another windfall.
Got any questions? The best way to ask is to email me – trent at thesimpledollar dot com. Iíll 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.