Reader Mailbag: Painting Figures

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. Following other blogs
2. Unrealized losses and 401(k) rollovers
3. Multiple rewards cards
4. Spouses and frugality
5. Inheritance and financial aid
6. Handling a non-paying roommate
7. Cost-effectiveness of Gamefly
8. Money market account basics
9. Over 50 with retirement worries
10. Self-publishing

This past weekend, I tried out a new hobby. A friend of mine gave me a set of acrylic paints, some paint-on primer, some paintbrushes, and spray-on varnish as a gift, so I decided to put them to work painting a handful of my son’s plastic soldiers and cowboys.

While they turned out okay in the end (and the experience was fun enough that I intend to paint other things in the future), the memorable part was how involved everyone in the family got in the project. It turned into something of a family “arts and crafts” day, with me painting figures, the children drawing, and Sarah crocheting.

Q1: Following other blogs
How many blogs do you follow? How much time do you spend reading them every day? Do you use any method of filtering out what is worth a read?

– Sudhir

I follow about 100 blogs, about half of which are directly connected to personal finance or personal growth. I spend perhaps an hour a day just reading blog postings.

About half of those blogs are permanent fixtures. I follow them even if they don’t post for a while or if the posting quality goes up and down a bit. I’ve read many of them for a while and I have a bit of a relationship of sorts with the blog where I want to know what happens next.

I filter them using Google Reader.

Q2:
Today our company informed us that we would all be losing our jobs by November 1st.

I have a small emergency fund and should be eligible for unemployment, so my most pressing concern is what to do with my 401k.

I’ve been there for less than a year at this point, and when my employment comes to an end my total contributions will be ~$1200 (assuming I continue to contribute at the same rate). However, with the market what it’s been, I’m currently sitting at 28.8% in unrealized losses.

If I rollover my 401k, how do those losses factor in? Effectively, the assets in my 401k are being sold, but if I it were in a non-401k investment, I could use those losses to minimize my tax obligation, right? But, if I rollover my 401k, it won’t trigger a similar tax event, will it?

At this rate, it’s very likely that the taxes which would be owed if I were to cash out my 401k (including the early withdrawal penalty) will actually be less than my losses. If that’s the case, would it make sense to cash out my 401k, taking the penalties, and then re-invest the monies? (Would I need to hang on to the money for 60+ days to keep it from being treated like a rollover for tax purposes?) It seems to make sense, but I don’t trust my back of the envelope math. If my losses are greater than the taxes I pay for cashing out my 401k, wouldn’t it make more sense to cash out than to rollover?

I’m practically being forced to sell low after I’ve bought high, which isn’t an awesome feeling, especially when I’m young and could wait out the market. I want to make sure I’m handling my 401k in the way that makes the most sense financially.
– Mark

For starters, I don’t see any reason at all why you would need to clear out your 401(k) account. Even if your employer closes up shop, this shouldn’t impact your 401(k) at the least.

If you do want to move it, the best move for you by far would be to simply do a direct rollover from this 401(k) account to your new 401(k) account at your old job. This would keep you from having any sort of tax burden and would allow you to manage that money in a single place.

I would only do that rollover if you think that, at the very least, the investment choices at your new place of employment match those at the old place of employment.

Q3: Multiple rewards cards
I recently graduated college and moved out on my own. I have job were I make around 65K a year. I currently have no debt other then monthly credit card bills that I always pay in full at the end of the month. I currently have 3 personal cards (1 I got in high school that I never use anymore but keep it just because its the one I’ve had the longest, a chase freedom that I have had for around 2 and half years and has been my main card, and finally I just got a Amex Cash Blue prefered card that I use for grocery store, gas, and dept. store purchases) and 1 corporate card.

So far I have been very pleased with my new Amex card and have been looking into getting a charge card because it captures some things I spend on but don’t get rewards with currently. My general phylosopy with all my cards is to use them as much as I can to make sure I get at lest 1% or better on everything I buy (I basically view using cash as loosing money), and because of this I never get in trouble with spending beyond my means because I always watch my account like a hawk.

My question to you is would it be a bad idea to get another card to get some more rewards if it will cost me some credit score point?
– Angel

If you got a new card that you intended to use for most purchases, I would probably just close one of the old cards (but not your oldest one).

The net impact from this switch on your credit should be minimal, as you’re not really changing your debt-to-credit ratio and you’re not altering the length of your credit history, either.

My only concern would involve “card-hopping” in search of ever-beter rewards programs, which oftentimes are scarcely better than what you already have. This often gets users into situations where their personal data is spread across lots of companies, widening the door for their identity to be stolen.

Q4: Spouses and frugality
My wife took a while to come around on the frugality thing, but after several months, she started doing a pretty good job and has been for about a year now. She hasn’t gone all out like I would have hoped, but I’ve concluded that we’ve reached a good balance between our budget and our sanity.

The next thing I would like to tackle is getting rid of unnecessary stuff. In the grand scheme of things, we don’t have that much stuff, but we’re at a point where we’re going to be renters for a while and are likely going to move around a bit exploring different areas of the country. With frequent moves, I think it makes a lot of sense to purge a large percentage of our infrequently used stuff. We’ve had a yard sale each of the last two years and gotten rid of a lot of stuff, but it seems to have hardly made a dent. I look in our basement where we keep all of our infrequently used things and I’d like to get rid of literally half of it. I don’t think this is unreasonable either. The problem is that very little of it is “my” stuff. I’ve purged nearly everything that is exclusively mine and am down to one box of keepsakes and another box of out of season clothes that I swap out every fall and spring.

I look at the amount of stuff that is my wife’s and a cringe. Two large tables covered with scrapbooking and sewing stuff that rarely gets used, boxes of goofy old clothes for theme parties (she hasn’t been to one in the 6+ years that we’ve known each other), old papers and books from college, etc. I don’t want her to get rid of everything, but I think she could easily get rid of 75% of this stuff without really even noticing it. Not to mention all of the clothes and toys for the kids, which she basically refuses to even touch. I’m grateful that she’s agreed to the yard sales and the stuff that we have gotten rid of, but there’s so much more that is really completely unecessary to keep.

Any ideas on how to get her on board? I’m tempted to just purge things without asking when she’s gone for a week to visit family next month, but that’s not really a good idea.
– Nathan

Propose a “one year” or “two year” rule. Put everything in the basement in boxes and tape the top of them. Put a note on the box identifying the contents and the date when the box is sealed.

In one or two years (depending on what you’ve agreed on), go down there and get rid of everything that’s got a date more than one or two years old (again, depending on what you’ve agreed on) that hasn’t been opened.

Stuff that just sits around for that long is no longer any sort of active part of your life. It’s fine to keep a small memento or two, but when your life has clearly moved on, keeping large quantities of items from that era is a move that costs you over and over again in terms of living space, storage space, and so on.

Q5: Inheritance and financial aid
I’m going into my sophomore year at an elite liberal arts school that costs $50,000+ a year. Although I’m getting a generous $20,000/year honors scholarship, my family was denied financial aid that we desperately need. From the college’s perspective, we should easily be able to pay for my education because my mom received around $1,000,000 inheritance a few years ago. The problem is: that’s basically all my parents have for retirement. My mom was starting to put it into her 401k…but then she got laid off in 2009. Currently we’re living almost entirely off of my dad’s salary of $60,000….which means half of our annual income is going to my tuition. We’re still drawing from my mom’s inheritance quite frequently in order to continue living the lifestyle we’re used to (when my mom was working we made ~ $120,000+/year), although we’re obviously trying to cut back. My parents have considered putting their money into life savings in order to qualify for more aid…do you think this is a good idea? How would you suggest getting around our significant inheritance money so that I can qualify for financial aid?

– Liz

There’s no “getting around” that type of inheritance money. You can’t hide it.

If I were in your shoes, I would probably suggest that your parents loan you the money from the inheritance to pay for your schooling, then you repay it when you start working. I would have this legally drawn up if you go this route, because if it’s just a handshake arrangement, then you open the door to the possibility of hard feelings and broken relationships.

Even more than that, you might want to consider going to a different school. More than $50,000 a year? Unless you’re getting an education that will guarantee you a far higher salary than someone going to a state school, go to a state school. If it costs you $200,000 more to attend that expensive school over the course of your schooling than it does to attend a state school, you have to be making more than $10,000 per year more for the rest of your life to recoup that extra cost with inflation and interest taken into account.

School doesn’t make the person. The person makes the person. I’ve met people who never graduated high school that are running impressive businesses today and I know one person who never went to college who has a great career in the arts. At the same time, I once met a homeless person who went to the Wharton School of Business.

Q6: Handling a non-paying roommate
A few months ago, I moved in with my boyfriend and his brother into their one-bedroom apartment, figuring that this would be a way for us all to save money. The rent for the apartment is $1050, and I rented a large storage unit for $120 for my overflow items (I’d been living by myself, so I had a lot of stuff, even after the yard sale!). We decided the breakdown would be that I pay $300 in rent and the $120 for the storage unit, and they pay the remaining $375 each.

The day before I moved in, Brother lost his job. He did not qualify for unemployment, and has not yet found another job. We covered Brother’s first six weeks of rent by taking over his deposit, but he still has not paid us half of his rent from last month or anything this month (he hasn’t had the means to).

We have no interest in kicking Brother out, but we are living in cramped quarters and paying more than we would if it were just Boyfriend and me (since I wouldn’t need the storage unit). Because we are covering his rent, I can’t afford to put as much away for retirement or have special treats like eating out… But I *can* afford to cover his rent, as I make about $2400/month (Boyfriend is on disability, and receives $1200/month). I do have some debt, which makes my income look more significant than it actually is.

We have tried to think of ways that Brother could work off his rent– like house chores, etc– but we don’t have any needs like that since we are all clean and handy. We are already incredibly thrifty and do not pay for any services that he could perform for us. We don’t even have cars, or television, or internet.

How would you recommend that we handle this situation? Do you have any ideas?
– Chris

If he doesn’t have an income, your choices are simple. You either evict him or you let him live there without paying his portion of the rent. There isn’t going to be magical money falling from the sky here if he doesn’t have a job.

Also, I would probably seriously consider kicking him out if he’s not bothering to look for work. If he’s actively looking, I’d probably just let it go as long as the active job search continues.

If I were you guys, I’d probably propose some sort of arrangement where he takes on more than a third of the rent when he finally gets a job to pay you guys back for this time.

Q7: Cost-effectiveness of Gamefly
I was wondering if you might do an analysis on the cost-effectiveness of Gamefly for a casual gamer. Some background on my gaming habits: I’ve had my XBox 360 for just over a year now. During that time, I’ve played six games (Batman: Arkham Asylum, Alan Wake, Red Dead Redemption, Assassin’s Creed II, Assassin’s Creed Brotherhood, and LA Noire. Included titles for cost purposes). I buy one game at a time, and trade it in at GameStop when I purchase the next game. Would Gamefly be a better value if I picked up the $15.95/month membership? Thanks for the help.

– Ryan

If that’s your gameplaying habits, Gamefly probably wouldn’t be worthwhile for you. You would drop $200 into Gamefly over the course of a year doing things this way.

I’m assuming that your cost for a “new” game at Gamestop minus the value of your trade-in is less than $33 a pop. Even if you’re buying new, if you’re trading in a fairly recent game for trade-in, you should get some additional value out of it. Given your list of games, I’m guessing that you’re trading for some older titles that they have already on their used rack, which means you’re shelling out far less than $33 on average per game swap.

Gamefly works if you’re a very heavy player of games – a person that shells out more than $30-40 a month on video games – and you’re willing to give up the desire to actually buy the games. If not, Gamefly’s not worth it.

Q8: Money market account basics
I used to have money in a Fidelity money market acct that had super great interest rates– way higher than my regular bank. Then it went waaay lower– now it is like .01!! Can you explain why it was so much higher, and now why it is so much lower? I guess I don’t understand money market accounts.

– Beth

Typically, money market accounts offer good returns when the economy is strong and poor returns when the economy is weak. Since the economy is very weak right now, money market accounts are returning very poorly.

Usually, money market accounts make their returns by buying treasury notes from the federal government. The bank takes the money that you and other depositors have put into the accounts and buy treasury notes. Notes usually return a few percentage points higher than the return you get on the money market account, but you have the freedom to withdraw money when you choose while the banks have to sit on those treasury notes.

(I’m simplifying economics here.) When the economy is good, the federal government has to offer a higher interest rate on the treasury notes they sell to get investors. If they don’t, investors will buy other things that are flying high, like stocks. When that happens, the treasury note returns something like 6%, the bank keeps about 3%, and the other 3% goes to the money market account holders.

When the economy is bad, the goverment drops rates on the treasury notes, meaning that the bank still makes their 2-3% but the people in the money market account make much less – often nothing, which is what you’re seeing now. The government offers a treasury note at 3%, the bank keeps their 3%, leaving you with almost nothing as a return.

Q9: Over 50 with retirement worries
I’m 52 years old, single, rent my apartment and have no investments. I live paycheck to paycheck and have now taken on a second job to increase my income just to keep my head above water. I support my mentally handicapped 28 year old son who cannot keep a job and who has 2 children that stay with us many times during the week.

I have tried to look to the future with regards to retirement. I don’t think I am going to have anything to live on besides social security.

Do you have any ideas of what to do for late lifers who are looking at retirement in 10 years with nothing to show for it?
– Judy

I would suggest that you not retire at 65.

For one thing, people tend to have longer lifespans today than their parents did. You’re likely to have good health into your seventies or eighties. If you’re healthy and trying to make ends meet on Social Security, you’re going to go stir crazy. I would expect to work for a while longer.

The added benefit is that you can wait to start your Social Security benefits until you can get the highest level of benefits. It will also give you more years to save for retirement, which will supplement that higher level of Social Security.

In other words, don’t retire at 62 and live on Alpo. Instead, bet on retiring at 70 and live pretty well.

Q10: Self-publishing
You offer your books for sale as e-books. Did you self publish? If so, what site(s) would you recommend? I’m in the process of writing a book, but I wanted your input.

– Daniel

I have never self-published original works. For the PDFs I sell on The Simple Dollar, I just repackaged and edited collections of older posts for convenient reading. I sell these through a service called e-junkie which handles all of the e-commerce for a small monthly fee.

That being said, I am considering self-publishing some other things I’m working on. There are a multitude of options I’m exploring for this, but I will definitely publish electronic versions of the book for e-readers such as the Kindle and the Nook. I will probably publish digitally first and then look for interest in print versions later on.

If you’re self-publishing, though, don’t invest a lot of your money in printing lots of copies in advance. Instead, make sure that there’s actually demand for what you’re doing. Do you see lots of situations where you could sell your book right now? If not, self-publishing will be a trick. I’m lucky in that I have The Simple Dollar as something of a platform. If I were to self-publish something, I would have an audience that would be interested in the book. If you don’t have an audience, be careful especially in terms of investing money up front.

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.