Reader Mailbag: Paper Search

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. Refinancing into extremely low ARM
2. Over the Roth cap
3. Dealing with well-meaning family
4. Value of supporting local businesses
5. Walking away from great employer
6. Investing fluctuating income
7. Painlessly ending friendship with overspender
8. Roth or not?
9. Retirement savings without 401(k)
10. Mythology help

Have you ever had one semi-important document just seemingly vanish from the place where you expect it to be?

Sarah and I spent most of the weekend on a document hunt, looking for one single sheet of signed paper that isn’t where we thought it should be. The location makes complete sense and every other document we thought should be in that location was there save one.

Thankfully, we can get a replacement for the document, but I can’t help wondering to myself where this single piece of paper went.

Q1: Refinancing into extremely low ARM?
I hold a mortgage at 4.375% on a 15 year. My wife and I usually pay a good amount toward principle each month also. We have significantly reduced our balance in a short time.

With interest rates being even lower, should I refinance with a 5/1 ARM at 2.85% (3.15% APR)? While we are at it… I wonder if you know if the APR includes all fees (closing and otherwise in the rate?). I just don’t know if it would be worth it, given the closing costs, appraisal for the loan, and all the other fees involved with a refi. We are very good with money and know we have more than a good chance of paying off the amount in 5 years. What are your thoughts?
– Don

I would never put my home mortgage into an ARM, no matter how good the rate is. An adjustable rate mortgage is just begging for the unexpected to happen, leaving you in a situation where your home is held hostage to a rapidly rising interest rate.

This exact story happened to a lot of people during the housing crisis, particularly in 2007 as the first wave of adjustments really hit the market and people were caught unprepared. Countless foreclosures happened to people who thought they could pay it off, only to find out that life had intervened along the way.

If you find a better fixed rate mortgage, refinancing can be a great idea. An adjustable rate mortgage, though, is akin to gambling with your home. You’re hoping your future self can pay it off quickly, and if not, you’re also hoping that interest rates don’t rebound. Your future self is unreliable, as are future interest rates.

Q2: Over the Roth cap
I came in above the Roth ira limit and Turbo Tax says I need to take the money out of the Roth or pay a fine. What should I do?

– Kevin

If this year’s income is unusually high and you expect it to be lower next year, I would just pay the 6% tax and keep the Roth as it is. The 6% tax is probably worth it if it’s a one-time incident. It will add up to about $350.

Another option is to convert your contributions into a traditional IRA, which the IRS identifies as a recharacterization. This saves you the penalty, but now it’s a pre-tax savings. The contribution may or may not be tax-deductible, depending on exactly how high your income is.

Those are really your two options worth considering. For more details, IRS Publication 590 spells it all out.

Q3: Dealing with well-meaning family
I’m very familiar with the book, Your Money or Your Life, which you mention in your rule “Stop trying to impress other people”. A few years ago, my husband and I started down the path to financial freedom, and this rule has played a big part in our journey. We’ve found a great deal of pleasure and freedom in letting go of the material expectations of others, and have been carving out a nice life for ourselves. Prioritizing finances based on our core values is greatly rewarding. However, we keep finding ourselves in situations with certain well-meaning immediate family members, who don’t quite understand that we really are happy with where we are at. We often get looks of pity, sad faces, over how we haven’t “been able” to take fancy trips to Hawaii, or that we have such a “small” house with so much that needs to be done – or we get the “we really wish you guys could have…”. We don’t complain, or lead on that we’re “missing out” on anything, because we don’t feel we are – we’re making choices we can afford, rather than ones that will put us into debt. As much as we’ve tried to acknowledge their wishes, and explain what makes us happy, we still get these types of responses that imply we’re suffering on some level. We are now expecting our first baby, and I know that more discussions of money and “things” will be on the table. I feel it’s more important now that ever before, that we can figure out a way to effectively communicate our values and goals, and discuss money with our family. I’m wondering if you or your other readers have ever run into this type of situation, and how it may have been dealt with?

– Kelly

I usually just grin and nod and change the subject in situations like these.

If they continue to pry, I just simply say something along the lines of “I don’t really want a vacation to Hawaii, at least not in comparison to financial security… it’s just not something, on the whole, I want to spend my money or time on” or “I like having a fixer-upper because it gives me something to do that I enjoy in my spare time, plus I’ll turn a profit on it.”

When they make statements like the ones they’re making, they’re passing a value judgment on what you do. You can simply respond by making it clear you’re operating on a different set of values. That changes the nature of the exchange.

Q4: Value of supporting local businesses
Our town has had a local independent grocery store since before I was born. A few years ago, a Super Wal-Mart opened up about ten miles away, and since then the local grocery store has been struggling mightily. They’ve tried all kinds of things to keep the doors open and keep customers coming in, but so many of the store’s old customers now just go to the Wal-Mart because of the lower prices.

I’m having difficulty convincing people – and convincing myself – to continue to shop at the local store. The prices on a lot of things are higher than the Wal-Mart and the selection there isn’t as good though there are some unusual items for sale there. You’ve talked a lot about supporting local businesses, but what’s the value in it if they offer bad selection and prices?
– Amanda

The biggest reason to support a local business – all things being equal – is that the profit from that local business is likely to stay local. The people who benefit from it will receive it as income, and that income will be taxed on a local and state basis, improving public services in the community. The owners will also often support other local businesses with the money they earn from that business. That is often not true when a chain comes to town.

So, what value does that have directly for you? It’s difficult to judge it without knowing your situation and the state of the town you live in. If you live in a bedroom community or a community with little or no thriving local business, then you have reduced value in supporting local business. If you have children and use things like the local parks or the local library, then you have improved value from supporting local business.

There is no right or wrong answer here because the situations and values are as varied as the colors in the rainbow.

Q5: Walking away from great employer
My girlfriend and I have planned to move to San Francisco once she graduates college this June. We’ve both been applying for jobs, and I just got an offer for a great job that pays well in SF, and I’m set to start in August. I’d love to pick your brain on SO MANY issues here like living costs and moving cities and living with 0,1, or 2 cars in a city, but I’ll hold off, because there is one very important question that looms above them all.

I really don’t know what to say to my current employer. I work for a large public university, which comes with a lot of bureaucracy. My gut reaction is to tell my boss now that I plan to leave in July because I will be moving, so they can plan to replace me (hiring takes a long time at my university) and I can help train. However, my coworkers (I’ve told my 3 closest coworkers) suggest that I don’t say anything until 2 weeks to a month before I leave. They think it will be awkward if everyone knows I’m leaving and I tell them 5 months ahead of time.

What do you think? Is my gut instinct solid – it’s a nice thing to do and it won’t negatively impact my relationship with my work? Or should I go with protocol and wait until the date is closer.
– Shawn

I think there are valid concerns on both sides here. On the one side, a lot of advance notice gives the employer more time to plan for a future without you and makes the transition as seamless as possible. On the other hand, it makes future planning awkward and can throw a strange kink into workplace relationships.

My solution would be to talk to my supervisor about it, but tell him that the discussion does not need to leave the room for the time being. This allows your supervisor to make the personnel moves necessary while giving the office environment another month or two of normalcy before your news drops.

This only works, of course, if your supervisor doesn’t tell everyone the news anyway. That is, of course, an option that your supervisor has, but I would think a good supervisor would handle this well.

Q6: Investing fluctuating income
We have several goals:

1. paying off my student loan
2. paying a wedding of around 15000 euros
3. saving for retirement because both our obligated retirement funds will cover about half our yearly income now which is not enough in our opinion.

In the Netherlands we have an equivalent of your 401K but you have to open that account in a bank. I want to open a target fund with a retirement age around 65 because I love my work and hope to be doing it at least till that age.

I would like to ask you how to divide the surplus money I make every month which will highly fluctuate. In the summer months it will be as much as 3000 euro extra on top of the 2200 euros since I have work lined up for every day those months. I think we should both contribute 200 euros to the ´401K´ monthly since this is 10% of both our fixed incomes. Concerning saving for the wedding I guess we should speed up since it will be in aprox 1 year but what of my student loan. How would you divide payments?
– Linda

If you have a fluctuating income, the first thing you need to do is to build up a very healthy emergency fund. This will allow you to somewhat assume a stable salary instead of a highly fluctuating salary, because the emergency fund will grow a bit on months when you earn a lot, and shrink a bit on low-earning months.

I suggest planning things based on the income you earn on one of your lowest months during the year. Base your monthly budget on that, then figure out what you can contribute based on that monthly budget.

During the months when you’re earning a lot more, you can feel free to make extra contributions if you wish.

Q7: Painlessly ending friendship with overspender
I’ve been friends with a woman for about ten years. She and I used to go clothes shopping together at least twice a month and we’d go out to eat together at an expensive restaurant once a week or so. Everything we do together ends up costing a lot of money.

She has a husband that makes a lot of money. I am recently divorced and I simply don’t have the money to keep up with the way she spends. I don’t want to tell her that because I think she’ll either start going to cheap places with me out of sympathy or start footing the bill, both of which will make me feel miserable.

What should I do here? My gut is to just end the friendship painlessly but I do not know how to do that well.
– Monica

Your best approach is an honest conversation with this friend. If you’ve spent that much time together over the last decade, your friend at least deserves that much.

Besides, there may be a solution to the problem that you’re not seeing here. Perhaps you could have each over for that weekly meal, cutting down the going out to once a month. Maybe you could find another regular activity besides clothes shopping that you share.

The question you need to answer is whether or not the basis of the relationship is the shopping and spending or whether it’s each other. You seem to have assumed it’s the shopping and spending, but that might not be the case. It might just be your own mixed feelings talking.

Q8: Roth or not?
When considering Roth vs Traditional IRA (or roth 401k vs 401k) it seems to me that nobody asks a simple but seemingly relevant question. In my case we have a lot of cash (thanks to good planning/no children and some luck) in CD and Stocks (no debt including our house that is paid off).

Knowing this and the fact that we are saving cash and fully funding 401k which can go to regular 401k or roth 401k. What is your opinion as to where the money should go? My thinking is since (hopefully) we will have cash (or access to cash) that we will be able to pull money out of the 401k and ira at a much lower rate than if we didn’t have cash/stocks so it would be a bad idea to go with roth.

Now if we didn’t have the cash and were going to need to be pulling money out for all expenses at retirement then the roth based 401k would be the way to go.

Does this sound correct or am I missing something?
– Mark

Your general assessment is correct. If you’re going to be pulling out at a low rate, a traditional 401(k) will result in a very low tax bill for you, so given that you have a large amount of cash, a traditional 401(k) is probably your best bet.

Usually, choosing between a traditional 401(k) and a Roth 401(k) is mostly guesswork. The “right” answer depends entirely on what tax rates will be like when you’re retired, and no one can accurately predict what they will be.

My usual suggestion is that people hedge their bets by having some money in a Roth and some money in a traditional retirement investment. That way, you’re paying some of the taxes now and some of them later. In your situation, though, a traditional one is probably the best way to go.

Q9: Retirement savings without 401(k)
I just got my first salaried job, and it’s for a 3 person non-profit. We don’t have 403(b) as an option. I qualify for a Roth IRA and plan to fully fund that, but where do I put the rest of my retirement savings?? I certainly hope to put away more than 5k a year, but I’m not aware of any account with a similar tax-benefit (or “hands-off” motivational mechanisms) as the IRA or 401k to put it in. (I guess this question would also apply to people, especially older people, who want to save more than the approximately $20k an IRA and 401k would allow.)

– Robert

First question: are you married? If you are, you should be maxing out both of your Roth IRAs.

Second question: do you have any self-employment income? If you do, you may able to contribute up to $50,000 to a SEP-IRA or solo 401(k) plan. These two options have some specific rules, but they provide a great way for the self-employed to sock away retirement savings.

If neither of these are true, your best route is probably to simply save money in a normal investment account. I suggest simply opening up an account with a trusted investment house (I use Vanguard) and looking for tax-efficient investments that they have, then investing in those directly.

Q10: Mythology help
I’ve recently become interested in myths, legends, tales, folklore that have some kind of message or moral. But I have no idea how to go about finding good ones. I’m not looking for children stories but something more for teenage to adult. Not sure if you’re into this kind of stuff but I figure maybe you’ve come accross a book or resource that might be helpful?

– Will

The best single volume you’ll probably ever find on mythology is Edith Hamilton’s Mythology, which is just a wonderful and thorough coverage of the traditional Greek and Roman mythology, with some smaller sections focusing on other mythological traditions (such as the Norse).

If you’re looking for more, an unedited collection of the fairy tales of the brothers Grimm is probably appropriate here. The original unedited tales are decidedly not for children, neither in content nor for the audience they were written for. Many have been edited for consumption for children, often distorting or eliminating the point. I actually read these in college; it became a running joke among a few friends that these were my “bedtime stories,” but they were actually quite thought-provoking.

I can’t recommend these two highly enough.

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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