Updated on 08.20.11

Reader Mailbag: Painting Figures

Trent Hamm

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.

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.

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  1. Amy says:

    @Q2 – I disagree with Trent’s answer that this won’t effect your 401(k). If the company is no longer in business, there will be no one to administer the fund and pay the fees associated with having it as a benefit. Maybe he meant that you could roll it over into an indidual IRA within the same investment house.

  2. Monica says:

    Re: Q4

    Purging your wife’s belongings while she is away for the week is probably the worst thing you could possibly do. It is a complete betrayal of trust.

    Some people are natural “collectors” of things. I am not one of them, so I know how frustrating this must be for you. But try to be patient and understanding (which it sounds like you are trying to do). Helping her constructively pare down things that are no longer used is the best way to get the results you are seeking.

    Trent’s suggestion is a great example of helping constructively. Another, somewhat similar, idea –get a Rubbermaid plastic tote (one of the mid-size 21 gallon ones) for each hobby/child. Maybe she could pare down her collections to what will fit into the tote for each thing? i.e. one tote for Johnny’s cherished baby clothes and preschool art, one tote for her sewing/craft supplies, etc. Bonus: the totes are stackable and easy to move from place to place.

  3. moom says:

    Q2 – You seem to think that if you cash out your 401k you can use the realised losses to offset your other income. I don’t think this is the case because 401k accounts aren’t liable for capital gains tax in the first place. You only pay tax on them when they make a distribution to the account holder. If you roll over your account into another one, I think they will be able to move the funds or stocks that you have invested in to the new account. If not and the transfer happens relatively quickly you shouldn’t lose much. The problem is only to cash out when the market is low and stay out till the market is high again.

    Q8. 90 day Treasury Bills are paying under 1/4% interest. So the bank isn’t keeping 3% as Trent said. They really are making very little or no money on these accounts now. They aren’t invested in the longer term Treasuries that are paying 2-3% currently.

  4. moom says:

    Q4 – I don’t understand the obsession with reducing clutter and somehow thinking that is frugal. If you move, yes then probably it makes sense to get rid of useless stuff. It isn’t frugal to throw stuff away that you might actually need or want and have to buy again.

  5. valleycat1 says:

    Q4 – Back when I was renting & relocating fairly frequently, it didn’t take many moves before I got serious about getting rid of seldom-used items. Definitely do not take it upon yourself to start getting rid of your wife’s items – you are entirely correct that that is not a good idea.

    If most of the extra stuff is segregated in the basement, you could get a moving company to come give you an estimate on how much it would cost to move it to the next likely spot. Or you could check on the price differential between sizes of rented trucks you’d have to use – that might convince her of the benefit of clearing items out.

    If you go with Trent’s suggestion, be sure she does the boxing up, maybe with your help. This isn’t something you can do for her, if you want her to be invested in the idea.

  6. Adam P says:

    Q6 – 3 adults living in a one bed room apartment? I’m not an expert on this matter but I would think you’re violating your lease and housing codes by doing so. I’m VERY not sure that “saving money” is a sane reason for a couple to live with an adult sibling in a ONE BEDROOM apartment unless the alternative is homeless. This is weird. Really don’t know what you were thinking.

    If you are as “thrifty” as you claim to be why are you carrying debts (you made it sound very much like it’s consumer debt)? Pay that off ASAP!

    The brother who got himself fired should move out ASAP, help him find a cheap studio basement apartment and a job.

  7. Johanna says:

    Q4: I agree with the others that you absolutely should not throw away your wife’s things without asking her. If someone did that to me, I’d be furious.

    It sounds like your wife’s stuff falls mostly into two categories: stuff she’s keeping for sentimental value, and stuff associated with hobbies that she’s not really involved with anymore.

    For the sentimental stuff, there are ways of storing those memories that take up a lot less room. Go through the stuff, talk about all your memories and stories you have, and take lots of pictures and videos. Then see if she’s willing to get rid of some more of the stuff.

    For the hobby stuff, I’d encourage her to make a decision: Either start taking steps now to get involved with the hobby again, or acknowledge that the hobby has run its course and get rid of the stuff. (Or decide that it’s really all “sentimental stuff” after all.) If she’s keeping the stuff with the vague intention that maybe someday she’ll start using it again, she’s likely to find that years will pass and “someday” will never arrive.

  8. Kevin says:

    @Liz (Q5):

    I’ve re-written this comment 4 times, and every time I proofread it, it comes off rude. So I’ll keep this as short and polite as possible.

    Financial aid is for people who really need it and who would not otherwise be able to afford to attend university.

    Your family was denied financial aid because that’s how the system is SUPPOSED to work.

  9. Monica says:

    @#4 – I think the author was stating that he had gotten his wife on board with frugality, and now his next goal was to get her on board with decluttering.

    There’s a difference between useful clutter and wasteful clutter. You’re right — it’s not frugal to throw away stuff you might need — for example, baby things before you’re done having kids. But hanging on to things you don’t use because you “might need it someday” is not frugal. Pretty soon all those butter tubs that are saved to store leftovers turn into … a cabinet full of unused butter tubs.

  10. Courtney20 says:

    AdamP – They’re not necessarily all in the same bedroom together…our first apartment was a “1 Bedroom” but it had a bonus room/den that was our office and ‘guest bedroom’ (with an air mattress) when people came to visit. A quick google search seems to indicate the maximum number of people allowed to live in a place is 2 x (bedrooms) + 1.

  11. valleycat1 says:

    Q4 – another possibility re the decluttering is to take a little time to see what similar items are selling for on ebay. Your wife might be pleasantly surprised at how much more than yard sale prices some of that might bring in. Or suggest donating some of the (I assume outgrown) kids’ stuff to a local organization/shelter that would pass it along to the homeless or abused.

  12. Johanna says:

    @Adam P: For comparison’s sake, although my lease (for a 1BR apartment) does specify that the apartment can be occupied by no more than two people, I think three adults could live in it easily without losing their sanity, if you partitioned off part of the living room to make a second bedroom. Since it sounds like Boyfriend and Brother were living together before Chris came along, it sounds like that might’ve been what they were doing already.

  13. Monica says:

    @#8 Kevin

    Actually, I think that Liz’s question is a good illustration of how the system doesn’t always work.

    **Let’s toss aside the fact that Liz is going to a very expensive school and it seems like her family might be trying too hard to live a lifestyle they can no longer afford.**

    Just because a family has a high income does not mean that they have a college money tree in the backyard.

    It does not take into account factors than can impede the family’s “ability to pay” — such as the fact that there might be one or more siblings in the family attending college at the same time. Or, in Liz’s case, the fact that the inheritance is the parent’s retirement money — not an indication that the family can now afford Harvard.

    Financial Aid is designed to help students afford college — and let’s face it, with the increasing costs of college, most families need help.

    The system needs to take more factors into consideration than just, “does the family income fall below X?”

  14. valleycat1 says:

    Q5 – I agree with #8, & with Trent. You said yourself your family is continuing to live the $120K lifestyle when in reality your dad only brings home $60K. And it appears they were living beyond a $120K lifestyle while your mom had her job, if they have no retirement other than the inheritance.

    It’s been 2 years since your mom lost her job, so it’s time to face facts. If you don’t want to be using the inheritance, then you all have to move beyond the denial & live on what your parents’ income is. Which will require major changes, not just trying to cut back a little. You could get a job to pay your own daily expenses.

  15. Adam P says:

    @Johanna – Youre right. We just don’t know enough except the living conditions are “cramped” per the letter writer. This makes me think it’s not as nice as your place. “Cramped” is not good for a long term situation–never mind for a couple just moving in together for the first time.

    Toss in with that financial stress, resentment from/for the unemployable brother and no money for “treats” for herself… this problem may go away when they break up and she moves out (shortly) anyway!

  16. mjd says:

    Q2: I don’t think anyone actually answered your questions.

    “If I rollover my 401k, how do those losses factor in?”

    They don’t. You’ll pay the penalty plus regular taxes on the distribution amount as ordinary income. Capital gains taxes don’t apply to 401k’s.

    “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?”

    No, since the losses don’t factor in you are choosing between paying a penalty and taxes (cashing out), or not paying anything (rolling over).

    There is zero financial advantage to cashing out – you should definitely roll over!

  17. Johanna says:

    More on Q6: Anyway, it sounds like having the three of them live together seemed like a good idea *before* Brother lost his job, so I’m going to assume that the size of the place is not the main issue.

    Unemployment is tough these days, and “just go out and get another job” is not as straightforward a solution as it used to be. It’s too early to tell how this will pan out, but Chris and Boyfriend should be prepared for the possibility that Brother will be unemployed for a long, long time. And Chris needs to decide how she (or maybe he, but I’ll assume she), as the newest member of the household, feels about providing 2/3 of the household income.

    If Chris and Boyfriend are a committed couple, so that Chris feels the same sense of obligation toward Boyfriend’s family as she does toward her own, then the right thing to do would be to continue to give Brother a place to stay for as long as it takes for him to find a job. (After that, as Trent suggested, they can discuss whether it’s feasible for Brother to pay extra on the rent to pay Chris and Boyfriend back.)

    But if their relationship feels less permanent than that (and it sounds like it might, since Chris says she moved in “to save money,” not because she and Boyfriend are on the verge of setting up a permanent household), then I wouldn’t blame her for feeling resentful that she now has to pay the bills for unemployed Brother, so that her money-saving arrangement isn’t saving her any money after all. And I wouldn’t blame her for walking away from the whole deal, as soon as the lease allows it, and saying “This is not my problem.”

  18. Steven says:

    @13 Monica

    How much your school costs doesn’t factor into how “needy” you are.

    At $60k for the dad, $120k for the mom (when she was working), and a $1 million inheritance, why would you assume you are going to get financial aid? Not to be mean, but I’ve got friends who were denied aid, making less, and without the inheritance.

    Just FYI, if you were thinking need-based aid would cover the rest, it wouldn’t. You’d get ~$12k max, with the rest in loans.

  19. Riki says:

    My comment is in moderation so I’ll try again.

    Liz — if you can’t afford the tuition, choose a cheaper school. I don’t care how “elite” the school is; it sounds like your entire family has an over-inflated sense of lifestyle and honestly, your letter comes off as entitled and greedy.

    Choose a cheaper school. Save yourself the gigantic loans and stress. Your 35-year-old-self will thank you down the road.

  20. christine a says:

    Q4 The best advice I ever read on this topic is in Sheila Chandra’s book Banish Clutter Forever where she says don’t nag and don’t tidy up your partner’s stuff but let the benefits of the system you put in place become obvious.

  21. valleycat1 says:

    @13 Monica – Actually, the FAFSA DOES take into account additional children & how soon they’d be entering college, whether the parents’ money is income or in other types of accounts, etc. It could be that if the parents in this case went ahead and moved the $ into retirement funds, with the dad’s $60K income she might be able to get some financial aid – but it would most likely be in the form of those evil student loans. She didn’t say whether her parents or she have gotten loans.

    Also, a specified portion (not all) of the parents’ income is considered available, divided by the # of years planned to be in college; all $ held by the child is considered available to pay for college. Neither FAFSA nor college financial aid offices look only at income and assets.

  22. Temi says:

    Q2 – To elaborate on your issue: The reason there is no advantage to losses on a 401k is that the money has already effectively been deducted from your income. Instead of showing up on your W2 it will be subtracted. Assuming this is not a Roth 401k. If you take the money out, whatever is left will be taxed, plus the early retirement excise tax of 10 percent. You will never pay taxes on the money you lost because it has already been deducted from your taxable income. If you were to liquidate the 401k, it would not be included in the distribution amount you are taxed on because it is no longer there to distribute. Painful, I know.

    I agree that there is no advantage to taking an early withdrawal. If you are concerned about selling at market lows, simply move the money to an IRA at a brokerage and invest in the same equities immediately.

  23. Mister E says:

    I don’t think that financial aid is intended for people who are trying to maintain an inflated lifestyle after losing their very high paying job.

    The family income is 60K. So, unless Mom has a legitimate reason to believe that she will become reemployed at that same level in the very near future, I would strongly advise that the family adjust to a lifestyle more suited to a family income of 60K or else that million dollar inheritance will vapourize.

    I’m sorry, but you don’t inherently deserve a particular lifestyle.

  24. Katie says:

    Steven, I’m pretty sure the family was making $120k TOTAL when the mom was working, so the mom was making $60k.

    I think the issue here is the cost of college not the need-determining metrics. No, her family probably isn’t particularly needy as those things go and the money should go to the people who need it most. On the other hand, it’s pretty terrible that we have set up a system where middle class families can only send their kids to top schools by either (1) draining their retirement accounts, or (2) having their children indenture themselves to student loan companies. I don’t think it’s long-term sustainable.

    That said, in the meantime, yeah, an individual is probably better off going to a state school. Unless we’re talking Harvard or Yale or something, and even that’s not guaranteed.

  25. Johanna says:

    Q5: Trent’s position on the value of education certainly seems to oscillate wildly. Sometimes (like here) he implies that education’s only value is how much it can increase your salary, and other times he implies that education is infinitely valuable in its own right, and is worth any cost. As with most things, I think the truth is somewhere in the middle.

    Keep in mind that the study that purports to show that students from elite schools earn no more over their careers than equally qualified students who went to less elite schools is based on people who went to college in the 1970s. A lot of things have changed since then. Many fields have gotten much more competitive, so I would not be surprised if a degree from an elite school is more advantageous than it used to be.

    Also, Trent, Liz is not paying $200K more for her education than she would pay at a state school, because she’s only paying $120K total ($50K minus the $20K scholarship), and state school is not free.

    I’m not surprised that nobody seems to be answering Liz’s actual question, because I don’t understand the question. Put the money in “life savings”? What is that? Do you mean life insurance?

    I’m also not clear on the timeline for how the financial aid decision was made. Your mother lost her job in 2009, which was the same year you was applying to colleges. Was the initial financial aid decision made based on a year when your mother still had income? If so, have you asked them to re-evaluate the decision based on the reduced family income?

    I’m very pleased, however, that Trent did not suggest giving the inheritance money to Uncle Phil to invest in bubble gum futures. (Does anyone still remember that thread?)

  26. Johanna says:

    “you was” –> “you were” of course. My elite college degree apparently is not worth the paper it’s printed on. :)

  27. CMT says:

    As others have pointed out, the asker doesn’t seem to understand how tax-sheltered accounts work, and other commenters have addressed this misconception.

    The answer doesn’t adequately address the question of what to do with a small balance 401(k) upon leaving a job, however. It presumes that Mark has a new job lined up, with benefits,so that he can roll his balance into a new 401(k). That could be a good option, if he found a new job – and if he liked the new investment options and wanted to do so.

    The answer tells Mark to just let the money sit in the old 401(k) ad infinitum. However, IRS rules introduced in 2005 allow for employers to automatically roll over 401(k) accounts of less than $5000 to an IRA on behalf of the employee. For balances less than $1000, they can force cash-out the employee, and send the employee a check for the balance after penalties and taxes. Depending on Mark’s future contributions and market fluctuations, he could end up encountering either of these situations.

    Mark needs to contact HR or the plan administrator for information on how small balance 401(k)s are handled. If he is subject to the rules above, he needs to decide what he wants to do with his money before he is laid off. If he does not inform the plan of how to handle his account, he will either receive a check, or have his money transferred to an IRA selected by his plan.

    Plan administrators have the fiduciary responsibility to select an investment in the IRA that is “appropriate” and has reasonable fees. What the IRS considers “reasonable” and “appropriate” may not be at all in line with Mark’s investment strategy. Often, the investments chosen for these “safe-harbor” IRAs are money-market funds. Since Mark says he’s down nearly 30%, he’s almost certainly not in a money-market fund.

    If Mark is not satisfied with the choices offered for the automatic rollover, he can search on his own for an investment that suits his goals, and instruct the plan to roll his money into that account instead. The only caveat is that with such a small balance, he may have trouble meeting minimum balance requirements with several investment houses.

    If I were Mark, I would keep contributing to try to get my balance above $1k to prevent a forced cash-out. If I couldn’t meet the minimum of any investments I liked, I would take the automatic rollover, and wait until I had enough saved to make an additional investment and move the money to my preferred investment.

    One more thing: If Mark finds himself unemployed for the majority of 2012, which I hope he doesn’t, he may be able to take advantage of having a reduced income and therefore lower tax-bracket, and convert that money from a traditional to a Roth IRA, if he can pay the taxes from outside the account.

  28. Monica says:

    Just to clarify re: financial aid. I think my post earlier came across like I was agreeing with Liz, and just want to say that I do not. I agree with the other posters that her family appears to need a reality check in terms of the lifestyle they want to afford vs. the one that they can realistically afford.

    I know that the cost of a school does not determine how “needy” one is — nor should it.

    My point earlier was merely that having a high or above average income does not mean that it’s easy (or sometimes possible) to pay for college.

    Valleycat1 – thank you for the additional, insightful information about FAFSA. I still don’t think that it does the best job of determining ability to pay, but that is just my opinion based on my own experience.

  29. valleycat1 says:

    We are middle class, if not lower middle class, and were able to send our child to a well-known private college in another state. For various reasons, we did not start saving for college very early. The college awarded honor scholarship & grant money, which got the cost down to what we would have paid for an in-state public school (which is what the OP’s school has essentially done); & we had some $ available plus took out some small educational loans to pay the balance. The child worked F/T in summers and P/T during school to pay personal expenses with a little help from us to pad things out.

  30. Arvin says:

    @Q4: I’ve felt this way about my fiancee also, that she has too much stuff; then I took a step back and actually took a look at my stuff, and as far as taking up space, I couldn’t make a convincing argument that my stuff took up less space. It’s easy to overlook your own clutter when judging someone else’s, since intrinsically you’re telling someone that their stuff is junk and yours is not. How much stuff in the garage is yours, and how often do you use those items, for example?

  31. getagrip says:

    Q5 I don’t see a way of shielding the inheritance so that it wouldn’t appear on a FAFSA form nor have I heard of “life savings” (could that be a new annuity product pitch?). Even if you could, with a parent still making $60K a year, I really wonder how much need based aid you’d get? If someone is pitching your parents such a “life savings product”, my recommendation is run the numbers on the potential fincial aid with or without it to see if it really makes a difference (I think you’ll find you’ll just get offered more low interest loans versus getting need based aid). Otherwise I think Trent’s suggestion of a family loan versus an actual loan isn’t a bad idea.

  32. Des says:

    Q5 – Pell grants are capped at $5500 per year, and the aggregate loan limit for a dependent student is $31,000 *TOTAL*. Even if she qualified for both of these and her scholarship, for 4 years she still needs $67k extra to pay for this school. Someone needs to make more money, take private student loans, or admit that this school is simply out of their price range. Even when they were making $120k, this school was still expensive. A six figure salary is great, but it is not infinite.

  33. jim says:

    Q2 : I agree with comment #27 on this one.

    Q3 : Get the card if you will use it responsibly. Check your score before hand then check it a month or two afterwards. If your score drops then maybe get rid of one of your lesser used cards. You can get free score checks at sites like Quizzle or Credit Karma.
    I don’t know if getting another credit card will hurt your credit score or not. I got a new credit card sometime last year and it didn’t impact my credit score at all. I think it depends on if you have ‘too many’ credit cards to begin with but I don’t know how many is too many. I’ve got 5 cards in my name so it seemed going from 4 to 5 didn’t hurt me. A new card might help you since it will increase your total credit limit.

    Q4 Nathan: Don’t start throwing away your wifes stuff. Don’t pressure her to get rid of her stuff. Its sitting harmless in a basement. I don’t see a real reason to get rid of your wifes stuff to begin with. It doesn’t seem to be costing you any money or anything.

    IF/when you DO move then you and your wife might want to get rid of some stuff so you don’t have to spend money to transport or store it. But only if it actually costs you more money to move /store it. If her extra boxes just fill the empty space left in your rented moving ban then thats not extra cost. If her extra boxes just fill the basement or closet in your new rental then thats not costly. But if all the extra stuff requires extra moving costs or storage costs that don’t warrant keeping the stuff then it could make sense to get rid of some of it. But don’t throw away $5000 worth of crafts to save $100 in moving costs. Don’t pressure her to get rid of her keepsakes because the sight of boxes in your basement makes you ‘cringe’ for some reason. Frankly thats your problem not hers. Stuff is not bad inherently. What if she demanded you get rid of most of your stuff cause it annoyed her for no good reason? Thats not reasonable is it? Well thats basically all you’re doing to her.

  34. jim says:

    Q5 Liz : I’m going to go against the grain on this one.

    Of course I don’t think that inheriting a million bucks and having a median level income is any kind of tragedy. I had originally written a sarcastic comment about how life IS fair. I mean “child of millionaire denied government handout” is not a headline that will warrant sympathy.

    But honestly if that $1m was in a retirement account like a 401k then it would NOT be counted to determine financial aid. And nobody plans on having their income cut in half due to a job loss. If they had a $120k income and planned on paying the extra $30k cost when Liz enrolled in that pricey school then thats not too unreasonable really.

    Liz shoudln’t feel entitled to a government handout to go to a fancy private school debt free. But as it is her parents assets do negate any kind of aid she might qualify for. She can’t even get student loans except the awful private loans. She has a honors scholarship so she is a good student. Liz worked hard and got into a good school and got a scholarship. I wouldn’t begrudge her getting a government stafford loan or two so a good student can continue at a good school. And if we could wave a magic wand and make that $1m a 401k account balance it wouldn’t seem like a crime to giver her some non-predatory style student loans.

    If her parents money was in 401k, IRA or life insurance or any similar qualified investment then the financial aid wouldn’t consider it and she’d likely qualify for aid. The reason she is not qualifying for aid is due to how the money is currently invested. If this is really retirement money then the parents should have it in a retirement vehicle. But you can’t just stash $1m into a 401k immediately.

    I hope that when Liz says ‘elite’ private school that she really does mean an Ivy league school and not some fancy snobby over priced school that isn’t actually that good. I also hope that Liz is majoring in something useful to warrant that giant cost.

    I don’t see any way out of this. Her parents have $1m. Theres no reasonable or good way to quickly ‘hide’ that just to get access to better aid which would mostly be student loans anyway.

    I think Trents answer is best that Liz should borrow the money from her parents. It is for their retirement after all. If her school is really ‘elite’ then its worth taking some debt out for. If its not worth the debt… then don’t go there. I would expect the parents could pay in some money. Even with $60k income I think the parents expected contribution would come out around $10k.

    If I were Liz I would also work hard to get myself a useful internship during the summers. That will help her career wise and should hopefully also give her a decent income so she can help pay her own college costs. Working part time during the school year could also be a good idea if she isn’t already.

    OK I’ll stop rambling.

  35. Johanna says:

    @jim: Wait, what government handout? The majority of financial aid at expensive private schools is provided by the schools themselves. (Isn’t it? Or am I way out of the loop here?)

    Also, because this is a pet peeve of mine: “Ivy League” is not synonymous with “top-tier school.” The Ivy League is a group (a sports league, in fact) of eight specific schools: Harvard, Yale, Princeton, Dartmouth, Columbia, Cornell, Brown, and Penn. They’re all very good schools, but there are plenty of other schools (Stanford, Duke, Chicago, Northwestern, MIT, Caltech…) that are at least as good as at least some of the Ivies but are not Ivies themselves.

    When Liz says she’s going to an “elite liberal arts school,” to my mind that suggests something like Haverford or Wesleyan or Williams or Swarthmore, a primarily undergraduate-oriented college (as opposed to the Ivies, which are more research-oriented universities). Not that it matters much.

  36. Nancy says:

    I have a friend that had an only child that attended Wharton. There was ZERO financial aid and they had to pay full freight (this was from 2003-2007). Mom was a school secretary & dad was a middle manager. Total cost: $250,000!

    The parents worked additional jobs during that time and their son worked his fanny off at school. The end result was he now works on Wall Street cleaning up the mess created in 2008.

    He’s getting his MBA at Harvard.

    NOT ONCE did they fuss about financial aid. They did their jobs (twice) and he did his.

    Just sayin’

  37. jim says:


    In general private school kids certainly do get federal aid. Other than perkins grants the students at private non profit schools actually get a higher % of federal aid dollars per student than public schools.

    While ‘most’ of the aid private school students get may come from the school that doesnt’ mean they aren’t getting a $5000 pell grant just like a kid at State U. But the pell grants and other federal aid will cover a higher % of the costs at the public school vs the expensive private schools.

    The very richest elite private schools have fat endowments and can basically give free rides to their students and may not need much if any government money.

    I said that Liz shouldn’t feel entitled to such a handout. I don’t know if she really thought the government should be writing her a check or not. But I think people may perceive “government handout” when they hear financial aid. Thats not often entirely accurate since often times financial aid comes in the form of a tuition waver from a private college or unsubsidized student loans which are hardly free money.

    Whether or not she might have actually gotten any free government money if she had financial need is anyones guess. We don’t know if students at her school get much government aid since I don’t know what school she goes to.

    Yes you’re correct that Ivy League is the proper name for 8 schools and not an official list of the best universities. I certainly think MIT & Stanford etc are great schools and didn’t mean to exclude them. I wish there was a handy way to say “best schools in the country likt the Ivy League schools,, but also including the other great schools like MIT & Stanford, etc. that aren’t officially in the Ivy League sports league” which eveyrone would know would mean the schools at the top. Maybe I should say “top 20 ranking universiites”?

    I didn’t know if “elite liberal arts school” is a commonly used term supposed to mean a certain group of schools.

  38. A Sumner says:

    Q4- Do you want to stay married? Throwing out her things, especially things she’s emotionally attacked to, while she’s not around is a HUGE violation of trust. It also doesn’t make you look like a very good person to decide that your wants are superior to your spouse’s and you’re going to go behind her back to to have your way. It doesn’t matter how much YOU think she can do without. By the way, what does this have to do with getting her on the “frugality bandwagon”? You got her do change in one way so now you’ve emboldened yourself to think you can mold her into the perfect woman? Love her for the clutterbug she is and help her when SHE decides she doesn’t need her stuff anymore.

    Q7- Gamefly doesn’t meet my needs anymore. It was great for trying out a game and decided whether I wanted to buy it, but when I started up again this year in hopes of playing games for less than they cost, I felt more like I had a time limit to play the game. I also like to go back to a game weeks or months later. With gamefly, I can’t pick up where I left off. Sure, I could rent it again, but what are the odds it will be the same DS cartridge with my old save file? Not so good.

  39. deRuiter says:

    Mark, Q2, How about Rolling over your 401 K into a self directed, traditional IRA? See if they can transfer whatever stocks you have without liquidating them. Once you take the money out of the retirement account, you pay taxes, penalty, and you lose the opportunity for the money to grow over time, you can’t get back the opportunity.

  40. kristine says:

    Q5- We dropped my daughter off at MIT yesterday. For top tier schools the FAFSA is mere appetizer- you now have to fill out a financial aid form called “PROFILE”. It is so in depth, you have to include the make and model of your cars, and the year you bought them, and on the last page, I am pretty sure they asked what brand of underwear I wear and cereal I eat! The form took 2 full days to gather info and to fill out.

    Why? Because in the past, savvy people would last minute “hide” money by buying expensive items they would then sell-off after the child graduated. It deflated the bank account, but kept the wealth. PROFILE includes information on what you have contributed for retirement for the last several years. This is to discover if he parents have grossly inflated recent retirement funds to avoid having their savings tapped for college.

    to be continued…

  41. kristine says:

    There is NO way to hide this money from a top tier school. 50K plus schools will see it, wherever it is. Low/no interest loan from parents is an excellent idea. I tend to agree with Kevin on government grants, but they are tiny anyway (and the loans are not handouts). Johanna is right, the majority of aid comes from the school itself. My daughter is eligible for only 5500 in gov loans, but MIT gave her scholarships/workstudy that covers her entire tuition. MIT insider scoop- if you get in, they make sure you can go. They will never ask for more than 10% of the parents gross income. Room/board/books is still 15k/year.

    As far as the value of the expensive education? It varies wildly based on profession. If you want to be a professor at a top tier school someday, then it is best to study at a top tier school- there is a strong bias in hiring. If you want to be a bio-engineer- then you can just as easily go to Univ of Pittsburg as MIT. My daughter got an all-inclusive free ride to Pitt, but chose MIT, because she felt the brand name was worth the room and board. She will graduate with 24K total gov. loans, no private loans. Me? I would have gone to UPitt. But her fast-growing field has an average starting salary of 65K, and she is frugal, so she should be fine.

  42. kristine says:

    Q%- Oh, but yes, that family has to downsize big time. Change residence and lifestyle to accommodate a 60K income, or maybe 85, assuming the spouse can find at least part time. I would not count on regaining that 120k total anytime soon as real wages continue to decline. They can run through that inheritance pretty quickly trying to supplement living beyond the current means, if not careful.

  43. Bill says:


    Discuss the mechanics of financial aid and the merits and costs of private education all you want. This post can be distilled down to the phrase “desperate need”.

    It is not possible for financial assistance to attend college, especially a high priced one such as this, to be a “desperate need”. Post secondary education is not a necessity nor an entitlement. Far too many people believe they “desperately need” to attend college when it is actually only a “desperate want”.

  44. Tom says:

    I actually think Trent’s family loan advice to Q5 is pretty smart, but Liz, if you’re reading this, I think you need to go have a heart-to-heart with a financial aid officer. If you can inform them of changes to your parents income status, tell them you receive nothing from FAFSA, and that you’re worried about being able to afford the cost and are considering transferring to save money, then they may be able to offer you a larger scholarship. You should be aware and grateful of the $20k off of the ticket price the school gives you already, but it wouldn’t hurt to inquire about any additional funds they might have.
    If I remember correctly, sometimes money frees up in September or October if students drop out or don’t need to accept aid that was being offered from the school (ie, tuition covered from an external scholarship).

  45. socalgal says:

    Q9 (Judy) and her late start for retirement: I do not know what you do for a living, but working past 65 does seems like the only thing you can plan on. You also state that your son is mentally disabled & does not work. Are you sure he cannot work at Goodwill or the like? If he is having children, he needs to support them.And Judy will not be around forever, so son needs to survive on his own (or at least know how).

  46. jim says:

    Kristine, congratulations to your daughter for getting into MIT. She must be very smart.

  47. Lindsey says:

    Q2: If you rollover a 401k to either a new 401k or a Traditional IRA, there are no penalties other than what your current administrator may charge (I don’t think I’ve ever seen this). If you find a good, commission-based financial advisor, they will facilitate the entire rollover process. You’ll have to sign a few forms, get the forms from your 401k Administrator, and then forward the rollover distribution check to the advisor for processing. All this is easily done in the required time frame to avoid penalties.
    A IRA will typically give you more options & a better return for lower fees, depending on the company you go with.

    Source: Work experience
    Disclaimer: I am not a financial advisor of any type. You can get this same information by visiting with a financial professional in your area.

  48. Jackowick says:


    I bought a house. I have great credit. After buying the house, my card, from high school, which was unused for a long period, was cancelled by the issuer. It was THE CORNERSTONE of my credit report. If I did not have that card, I can’t imagine what the ripple effect would have been.

    I now make sure that I have some autobilling item on each card, such as one having EZPass, one having Netflix, and the 3rd card is the actual realtime card.

    Yes, to the naysayers, you may get cancelled/pulled at any point by those wacky companies, but being cancelled for zero use is directly in your hands.

  49. kristine says:

    jim- thank you! I have just come up for air, having cried pathetically into my cereal the last 2 days. No one tells you how hard it will be when they leave. Yes, she’s pretty darn smart. But moreso, she’s an incredibly driven young lady and hard worker. Her much loved cousin died of breast cancer, and she is determined to help find a cure. I am rooting for her!

  50. Maggie says:

    Do not toss out anything that belongs to your spouse. My husband and I nearly came to blows because he threw out some magazines that I had been saving for a project. Yes, I know, they were just magazines but they were mine. I went to visit our daughter and while I was away, he decided to clean up a few things. The only things he tossed belonged to me because he thought I was too messy. We still fight about my cluttering but as one other commenter said, the other person doesn’t easily see their mess. Somedays when I am at work, I wonder when he will get a wild streak and start tossing my books and projects. It could happen any day. His view of our house is different than mine. I see projects, he sees clutter.

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