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. Using Roth to buy house
2. Children and educational tools
3. Is a charity legit?
4. Preparing for higher taxes
5. Shaving expenses
6. Inexpensive board game gifts
7. Investments used for debt repayment
8. Preparing for stay-at-home parenting
9. Graduates: savings or debt repayment?
10. Online alternative to magazine writing
Popcorn, old movies, and a warm blanket. Is there a better way to spend a cold weekend afternoon?
Q1: Using Roth to buy house
My husband and I live in a house that would sell for about $650K. We have a 15-year mortgage on it for $338K at 2.875% ($2314 per month P&I; $336.5K remaining—we very recently refinanced). We purchased the house in November of 2004 for $525K, and we have spent a fair amount of money invested in it in the form of repairs and upgrades. For example, we had to build a completely new garage this year to the tune of $40K.
It is a good house in a great neighborhood, but there are some things about it that I don’t like and I am considering moving to another house. The catch is that I don’t really want to sell our current house, given the great interest rate we have, the costs of selling, and given the money we have spent on repairs and upgrades. If we move (assuming that it’s okay with the lender of our mortgage, since we refinanced so recently as owner-occupied), we will stay in the same neighborhood; it is important to me that our two girls stay in the same elementary school, which is one of the best in our city. I’d estimate (with the help of Zillow and comparative rent listings) that we could rent our house for about $2500, which wouldn’t quite cover our total monthly expenses ($2800 with insurance and taxes). I’ve researched the process of renting quite a bit, and I know there are some drawbacks, but I like the idea of holding onto our house and having someone else pay down the principle. It goes down quickly on our 15-year loan. I also like the idea of having the house available to sell, should we need the money.
There are some houses on the market from time to time that look very attractive. For example, right now, there is one nearby for $699K (but I think it will go for more). I don’t want to pay PMI, so we’d need to come up with at least $140K for a down payment. We’d have to go for a jumbo, 30-year loan.
We earn $200K per year and have saved quite a bit for retirement. Between the two of us, we have about $393K in 401(k)s and $140K in Roths. We contribute the maximum to our 401(k)s every year and have until this year contributed the maximum to the Roth (our income now prevents further contributions). We have $60K in mutual funds (Vanguard), $95K in 529s, $10K in an emergency fund (which we should build higher), and our savings account fluctuates but is usually about $15K. Other than our house, we have no debt.
My question is: Would it make sense to take $80K out of our Roth to combine with our $60K in stocks so that we could make a 20% down payment? I know the general thought is to never, ever take money out of your retirement funds. I estimated that if that $80K made 5% per year for 30 years, it would be worth $357K, which is substantial. However, if we rented our house for only 15 years, we would have paid off a $336.5K mortgage in half the time.
Taking money out of the Roth loses the big advantage of a Roth: the fact that you don’t have to pay income taxes on the gains once you reture.
If you take the money out now, you’re going to immediately owe income taxes on whatever the gains were on that money, as well as an early withdrawal penalty. This can eat up a pretty sizeable portion of the money you made on the Roth. Here’s the full details.
Will you make a return good enough on the real estate investment to make up for that? It’s hard to say, but I’d suggest that you’d have to have a very strong return to make up for it. It relies on you finding renters for the house, that the renters will absolutely be perfect and cause no damage to the home, that you’ll never be without renters, and there will be no repairs on the home. It also seems not to include insurance and property taxes and the other costs that are needed to maintain a home. Overall, I would probably not make this move.
Q2: Children and educational tools
What kinds of tools do you use with your children to teach them things like reading and basic math skills? We’re really struggling with this at home. It seems like there are really three areas that matter – educational value, time investment, and cost. Every option we’ve found is great in two of those areas and fails in the third.
With all else being equal, we choose to invest more time.
We read a lot of books – at least half an hour a day of reading as a family, and usually substantially more than that. This includes reading aloud and sustained silent reading. We use homemade flash cards to work on math skills, since lightning-fast arithmetic is a huge help when it comes to mathematics all the way along. We have conversations about everything from politics and history to science and life skills.
It takes time, sure, but it’s worth it. Every hour you spend on things like this pays off. You can see it in your child. Spend your money on other things – spend your time on your kids.
Q3: Is a charity legit?
Tax deductible charities must be qualified under the tax code in order to deduct donations. The IRS publishes a list. This is not an endorsement and the charity may have high overhead, bad management, etc, but it does allow the individual taxpayer to look up a charity. Individual states may have separate licensing requirements, but for federal tax purposes, this is the list:
This is a very useful database if you’re not sure whether or not the charity you’re looking at is a tax-deductible charity. If you’re not absolutely sure, it’s worth a look.
Of course, for most people, this is a pretty minor issue. You have to itemize your tax deductions in order to be able to claim this and the vast majority of people (aside from homeowners) are going to find the standard deduction to be a better deal for them.
If you’re a homeowner, though, or a person who gives a lot to charity, this can be a valuable link.
Q4: Preparing for higher taxes
Well, it looks like the federal government is headed straight towards higher taxes and there’s nothing that we the voters can do about it. What kind of steps should we take to prepare for the onslaught of taxes coming our way next year?
I think higher taxes are an inevitability, since no one in Washington is actually talking about the level of cuts that would be needed to balance the budget without raising taxes. The amount of cutting that would have to happen to avoid raising taxes is immense. Talking about things like the National Endowment for the Arts or the Corporation for Public Broadcasting are just distractions, since eliminating them entirely would barely scratch the surface of the problem.
So, what can people do once they recognize that higher taxes are an inevitability? Generally, the best tactic is to accelerate income and defer tax-deductible expenses.
How do you do that? You can accelerate income by selling off things right now rather than waiting until next year. If you own any property you’re thinking of selling, you may want to consider doing it now and paying taxes on it now while rates are still quite low.
As for deferring taxes, you can do that by bumping up your 401(k) or your IRA contributions when the tax rates start to go up. Those investments look better when you’re paying a high tax rate now because you’re essentially choosing to pay the taxes on them later on.
Still, unless you’re rich, the moves you might make aren’t going to have any sort of a life-changing impact on your taxes. You’ll see an impact of a few percentage points on whatever moves you make and that’s about all.
I did purchase, and continue to use, a badger hair shaving brush. I also buy home made shaving soap off of eBay at an incredibly low cost. a $3 bar of shaving soap will last me nearly a year! It certainly cuts down on shaving cream expense and it creates just as good of a lather as the cans.
I haven’t found any better razor than the multiple razor blade heads, which cost a fortune. I came across a disposable razor sharpener in one of my favorite catalogs and bought it last year in hopes of saving some money in blade cartridges down the road.
The initial cost has already paid for itself and is saving me money. I am starting month 11 on the same cartridge. Where I would once go through the blade replacement cartridges every two weeks or so, I am now getting months of use out of them.
The shaving brush, shaving soap and razor sharpener have decreased my shaving expenses significantly.
I tend to shave in the shower, which I’ve found saves me even more money. With a constantly wet face and occasional rubdowns with a soapy rag, I can usually shave my face in about a minute or so, which amounts to 1.5 gallons of water used (a fraction of a cent), but means no shaving brush or shaving soap needed.
I tried shaving with an old-school safety razor with replaceable blades, but I must be awfully clumsy because I kept cutting myself terribly bad, to the point that I needed to stop using it lest my face look like a crisscross of scars. If you’re going this route, be careful.
Still, shaving is one of those things where you are consistently leaking money if you’re not mindful of it. Look at what you’re doing, figure out your total cost per shave, and see if there aren’t ways to reduce that cost per shave without making a shave difficult on you. If you can shave off five cents from a daily shave, then you’re saving $18 a year. Trim a quarter off of your daily shave and you’re saving about $91 per year.
Q6: Inexpensive board game gifts
I’m looking for some inexpensive ($20 or less) gift ideas for a few of my friends. I’m thinking of getting them games we can play together. I have some Amazon gift cards so it would be helpful if it wasn’t anything too obscure.
Four quick game suggestions:
Fleet is a card game for two to four players that plays in about forty five minutes regardless of the player count. In the game, you’re the head of a fishing fleet that’s racing with other fishing fleets to see who can get the largest haul out of a particular fishing area. It has surprising depth for a game of that length.
Sleuth is a wonderful deduction/logic game for three to seven players. Sleuth is a lot like Clue, except without the board. There’s a deck of cards that depict certain gem arrangements (such as “red diamond solitaire” or “yellow ruby pair”) with three traits (color, gem, and setting). At the start of the game, one is put aside (the “stolen” gem arrangement that you’re sleuthing for) and the rest are distributed to the players, and the rest of the game involves asking other players about the contents of their hands and using that along with what you know about the cards in your hand to figure out what the “stolen” card is.
The Resistance is a very fun and quick game for five to ten players. At the start of the game, each player is given a hidden card that says whether they’re “loyal” or that they’re a “traitor,” with many more loyal than traitor. Over the course of five rounds, different groups of the players (as elected by all of the players) will go on “missions” where they each lay face down one of two cards – “mission succeeds” or “mission fails.” If three missions fail, the traitors win; otherwise, the loyalists win. It’s very simple, very quick, and very fun.
Summoner Wars is a fantasy tactical card game for two players that takes about thirty minutes or so. Essentially, the two players spend their turns adding units to the battlefield (each unit is represented by a card) and then move their units around on the board (which is just a 6 x 8 grid) so that the units can fight each other (by rolling dice). The player who is able to most effectively position his or her units and use their resources most effectively will win. This game has tons of replayability.
Hopefully, you can find something that clicks among these four games.
Q7: Investments used for debt repayment
I would like your advice on possibly cashing in a mutual fund(s) to pay off some debt. We currently have a little over $80K in mutual and retirement funds. We also have about $15K in debt with a home line-of-credit. The APR is a fixed 4%, and the interest is tax deductable. The monthly interest is about $60, and we pay that plus at least an additional $200 towards the principal, for a monthly payment of around $260. We have a $65K mortgage, no car payments, and we’re able to pay off our credit cards each month. I contribute $160 monthly to a retirement fund, plus I work for a large city which funds a pension and contributes $350 per month to a retirement account, so we’re currently contributing about $500 per month towards retirement. Should I cash out one of my non-retirement mutual funds to pay off the debt? That would free up at least $260 a month that we could use towards retirement investing or building up our savings cushion, but that would obviously knock our savings down to $65K, plus I’m sure we would be paying extra in taxes for any profit made from the sale of a mutual fund. Is it worth doing it? Or should I let the funds grow and pay off that debt slowly but surely since the rate is relatively low and tax deductable? Any advice or info is greatly appreciated.
If it’s just an ordinary mutual fund and you’re not saving for a specific goal in the future and you’ll still have a lot in savings, I would do this.
Essentially, what you’re doing is locking in a 4% return on your money, but you’re also drastically reducing your monthly bills, which will give you a lot more flexibility and freedom. In your current position, a sudden market downturn and a job loss would hobble you greatly, but if you’re debt free, you sail through it. You also have much more freedom to make challenging career choices that aren’t at the whim of the market.
If there’s nothing else standing in the way that you haven’t mentioned, I’d go for it.
Q8: Preparing for stay-at-home parenting
My husband and I have decided that, in three years, we’re going to actively try to have a child and, if we do, I’m going to be a stay-at-home parent for a while for the child (or children). What can we start doing now to prepare for this situation?
Save every dime you can.
Right now is the moment to start engaging in frugality and to set up a savings plan for the future. You now have a very clear goal with a very clear timetable, so you can figure out what you’re going to need financially when you get there and how long it’s going to take you to get there.
Sit down and do these calcuations now. What is a monthly budget going to look like for you when the baby comes? What will be your home’s income level at that time? Use your best estimates, and if you’re not sure, assume low on the income and high on the expenses (you’ll never regret doing that, but you will probably regret miscalculating the other way).
Once you know what you’re going to need, figure out how much per month you’re going to have to start saving right now so that you can do this comfortably and without worry, then aim for that number. In fact, aim a little over that number.
It will be so much easier to handle stay-at-home parenting if you have cash in the bank.
Q9: Graduates: savings or debt repayment?
Currently, my husband and I have a large amount of debt between credit cards and students loans. My husband currently makes the most money by far and if he lost his job we would be in dire straits. We currently have saved about $14K in our bank accounts, but we have about $60K worth of debt with the student loans/credit cards. Our mortgage is $2,200 per month. I work a very small, part-time job right now and hope to get a good, full-time job after I graduate in December. Which do you think is better – paying down more debt and not continue to build up our savings, concentrate on putting more into savings and paying the minimum towards debt, or some type of combination? I’d appreciate any advice you can give.
How crowded is your husband’s field? Would he be re-employed fairly quickly? Or would he be facing a very competitive job market?
The harder it would be for him to find comparable employment, the more I would focus on having an emergency fund. If he’s in a specialized field without much competition and he has a lot of industry contacts, then I’d look more at the debt repayment.
The decision really comes down to your husband’s career situation.
Q10: Online alternative to magazine writing
I love reading well-written in-depth articles. I avidly read magazines like The New Yorker and The Atlantic and so on. The problem is that I get tired of the buildup of magazines around my house. What’s the electronic online alternative to this? I don’t want to buy an iPad or something like that just to read good articles without killing lots of trees. This seems like something you’d know.
I am a huge fan of Longreads, which is a site that posts three or four wonderful links to excellent lengthy magazine pieces each day.
I also use Pocket to save any of these articles that I’d like to go back to in the future. I’ll usually peek at an interesting article when I see it and, if it looks good, I click the “pocket” button on my browser to save it.
If you happen to have a smart phone or a tablet, then you can read your Pocket articles on them, but you can just as easily do it in your browser. For me, it’s a great supplement to (and potential replacement for) many of the magazines that I’ve subscribed to over the years.
Got any questions? The best way to ask is to email me – trent at thesimpledollar dot com. 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 many, many questions per week, so I may not necessarily be able to answer yours.