Reader Mailbag: Rereading

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. IRA contributions and taxes
2. Buying on credit
3. Biggest weakness
4. Using IRA for other purposes
5. Kids and memorable experiences
6. Approaching a pastor
7. Vacation rules of thumb
8. Retirement money for housing help
9. House repairs and debt
10. Insomnia

Over the last few weeks, I’ve been re-reading some of the books that really got me excited about personal finance to begin with, like Your Money or Your Life and The Total Money Makeover. I’m really trying to see what elements of these books speak to me in the completely different personal finance situation that I’m in now compared to five years ago.

Guess what? Most of them are still enlightening and thought-provoking, just in different ways.

This will undoubtedly be fodder for posts over the next few months.

Q1: IRA contributions and taxes
As I understand it, I will have until April 15, 2012 to contribute the maximum $5000 to a Roth IRA for the 2011 tax year. How is the “tax year” determined for these purposes? What I’d like to do is up my savings (I have $0 currently designated for a ROTH IRA) and contribute $5000 by December 31, 2011 because I like using the new year to set my financial goals benchmarks and then “start over” in a sense for the new year. Would any contributions made in February of 2012 automatically count towards the 2011 tax year or would it count towards the 2012 tax year? Or do I specify these things when I make a contribution?

– John

The tax year is still January 1 to December 31. You’re allowed to apply contributions until April 15 to the previous year’s contribution totals. This makes sure that people are able to put bonus money and final paychecks that might have been taxed in the previous year toward the previous year’s retirement contributions.

You can essentially choose which year you wish to designate a contribution in that January 1 to April 15 window. You just have to appropriately label it on your tax return for that year.

It’s a messy situation, I know, but there’s not really a better way to do it that allows fairness for all.

Q2: Buying on credit
My husband and I are considering buying a second TV. The one we want costs around $750 at Sam’s Club.

There’s more than enough money in the bank to pay for this, but we really don’t want to dip into our savings. Sam’s Club has a deal where you can buy the TV with a credit card at 12 months with no interest.

We feel like it would be smarter to invest this money over the next year (as planned) and pay off the TV with the credit card little by little. I don’t see the downside since there’s no interest, but all the personal finance blogs recommend targeted saving for big purchases to avoid buying on credit.

We have zero debt and we currently save about 60% of our income.
– Monica

This is the pitfall of debt. When people look at the future, they assume that it will go along smoothly. They believe that it will always be easy for them to meet their obligations if it’s easy to meet them now and that it will always be hard for them to meet their obligations if it’s hard to meet them now.

Because of that, people in a good situation at the moment tend to burden down their future self with debts because they can’t imagine a future where it’s difficult to make ends meet. I know I certainly fell into that trap once upon a time.

In short, if I were you, I wouldn’t follow either of these plans. Instead, I would start a new savings account and start contributing some amount to it per week or month. When that account has enough cash in it to buy the television, buy it.

Q3: Biggest weakness
What is your single biggest weakness when it comes to overspending?

– Lisa

This is going to sound completely strange. My biggest weakness is startup companies, particularly ones in my areas of interest (particularly gaming).

When a small business is just starting out and I see that they’re doing something of value, I have this innate drive to want to support that business. I’ve really got a weakness for this.

I think it’s because, far beyond the item that my dollar is buying, I see how the money is really helping a real person make a go of their dreams. That’s a very heady icing on the cake for me.

The most dangerous website in the world for me right now is Kickstarter, for that reason.

Q4: Using IRA for other purposes
I have almost $39k in an IRA (it was a 401k rolled over to an IRA) and I have been considering pulling some/all of it out to do a couple things:

1) Pay off a second mortgage (I owe $16,750 and the interest rate is 13% – I know ouch and bad for even taking it.) The second mortgage is $265/month.
2) Catch up on primary mortgage (about 3 weeks behind consistently.) Total is $1050/month, but at 3.375% right now (ARM, 1% max in any direction each year.)
3) Set aside money for an emergency fund (2 paid off vehicles that occasionally need repairs, potentially need to replace 1 in the next 6 months.)

The goal is to reduce expenses to bring our income/expenses in line. While I am not super concerned about the ARM right now, if interest rates start climbing, I want to be in a position to refinance, and we cannot do that with the 2nd mortgage (value of the house is appx. equal to the first mortgage now.) Our household income is about 70K (gross), and part of that is a 2nd job I work that brings in $1600/month that I would like to find a way to quit because I would like to start my own business but find there is very little time after both jobs. So realistically we are looking about about $50k income is what we want to work with. My wife has a chronic illness which limits her ability to work more than she already is and there are medical bills every month that we pay out of pocket. We were over our heads for a bit due to job loss where I was making more money, and have been cutting back a little more every month.

Does the high interest rate of the 2nd mortgage in any way offset the 10% penalty the gov’t is going to charge? (I know there will be taxes as well as lost opportunity costs.) We are not currently adding anything to any retirement accounts as we have been paying off our debts (almost done, about 1 or 2k to go except for the 2 mortgages.)
– Andrew

Even with that high interest rate, I wouldn’t pull the money out of the IRA. The penalty is more devastating than the debt, because not only are you losing 10% right off the bat by taking money out, you’re also, as you mention, losing a ton on the opportunity costs and depleting your IRA. I would only touch it if it comes down to losing your house.

If I were you, I’d just stick to your plan like a bulldog. Get rid of that first debt as fast as you possibly can, even if it means getting rid of some creature comforts. Look at every extra thing you do as part of buying and securing your house. “I’m doing this for this house that I live in and love.”

Throw everything but the kitchen sink at it. You’ll feel incredible when that debt goes away because of your own hard work.

Q5: Kids and memorable experiences
Per your recent mailbag post on taking your kids to an art museum, I was reminded that you are the kind of level-headed parent whose thoughts on raising kids I respect. I don’t have any kids yet, and am hoping to start a family in the next year, and this is a question that’s been on my mind the last few days. I spent the weekend doing a number of tourist attractions, and I was really surprised by the number of children, from infants up. This isn’t a question about badly behaved kids wreaking havoc in public, though! My question actually concerns the well-behaved children – I know my own memories of family trips or visits to museums and whatnot is almost nonexistent before age 6 and even up until age 10 is pretty fuzzy. I don’t remember my first trip to Disney World or Washington DC or the natural history museum. I know that I was there – I’ve seen pictures. But the fact that it happened has little meaning to me.

So why are parents taking their kids on adventures that they won’t remember? It seems kind of pointless to me to take children to see things they probably aren’t all that interested in yet, spending money on tickets and snacks and wrangling strollers and diaper bags, taking pictures that someday the kid can look at without remembering, when if the parents waited just a few years, the kid might actually get something out of the trip.

Is this just about the value of the experience for the kid at their current age, even if they won’t remember it? Is it about the parents wanting to do something and taking the kids along is just how it works now? What age do you think is appropriate to take kids to places like museums or historical sites? What about places geared towards children like Disney World?
– Rachel

Before I get started, I’ll mention that the Art Institute of Chicago is free for children under the age of 14. All three of our children didn’t have to pay a dime to go there. We were also visiting family in the area and staying with them, so there was no lodging expense, either.

The biggest reason we take our children on trips like this isn’t because we think they’ll remember it in detail as adults. It’s so that next summer, we can talk about how much fun the trip to the Art Insitute was (“Do you remember when we leaned in close on those paintings? Do you remember how neat it was to see “Bedroom at Arles”? Let’s look at these vacation pictures where you’re having fun at this museum!”) and easily convince them to go to another museum.

It’s establishing a long history of positive memories, one that will encourage them to go to such things throughout their life. It’s establishing the idea that activities that provide educational benefits can be fun and enjoyable.

As for things that they’ll actually remember – really big things, like international trips – we’re waiting until they’re significantly older. We have three or four big ideas for international trips, but they’re going to wait until our oldest is in high school (at least).

Q6: Approaching a pastor
You’ve mentioned before on The Simple Dollar that if you were in a dire financial situation, one person you would talk to is a pastor at a local church.

How would you even really go about that? What would you go to a pastor for?
– Evan

I would simply go visit a church in my area of the denomination I was most familiar with (and if I wasn’t familiar with one, I’d pick one at random) and ask to meet the pastor. I’d lay out my full situation to that pastor and ask for help on what I should do next.

I have witnessed, over and over again, how local pastors tend to provide incredible help to the needy. If you have true needs and talk to a pastor, they’ll go a long way toward helping you provided you’re willing to do something to help yourself.

People often hold themselves back from this due to pride. Don’t. We all find ourselves in difficult positions at some point in our lives.

Q7: Vacation rules of thumb
How much should I spend for vacation? Do you have a rule of thumb (like 1/12th of yearly net income)?

Until now I haven’t spend much money on vacation, I usually only visit my family twice a year. But I’m plannnig bigger holidays (visiting foreign countries) and I’m wondering how much I could spend. I neither have credit card debts, nor a mortgage.
– Valerie

It depends entirely on how much you value vacations.

If I were you, I would set a budget for the year and identify a certain percentage that I was spending on non-essentials. One plan that’s often mentioned is the 40/30/30 plan – 40% on required bills (like a mortgage, electricity, basic food, and so on), 30% on things I want (like a cell phone bill, vacations, magazine subscriptions, nights out on the town), and 30% for the future (retirement savings, early debt repayment, and so on). Your vacation would come out of that 30%. If your 40% exceeds its boundaries, it should eat from the “things I want” part first.

Within that 30% you can spend on wants, you simply have to decide how important vacations are compared to the other things you want. I can’t answer that for you.

Q8: Retirement money for housing help
My husband and are are 48 and 53 and currently live in a huge 4200+ square foot old Victorian house. We are empty-nesters with our youngest still in college. Our home has 14 rooms but we are only really using about 5 of them. The rest are closed off and used for storage or are just sitting there. It is located on a busy street and a corner lot with very little yard and no garage. We have about 50% equity in our home right now based on current market value. My husband also co-owns his late mother’s home with his 2 siblings and that house is for sale but in this market, we’ve had very few people looking at it. That house is much smaller than ours and a better size for us as we move toward retirement. It is in a more residential neighborhood, has a garage and a large back yard. Our house is only about 3 blocks from his mother’s house.

We are considering buying his mother’s house from his siblings so we own it ourselves. We would then continue to live in our home while doing some repairs/remodeling in the smaller home–maybe over the course of several years. Then we would move to that house and do any repairs/whatever needs to be done to our large home and then sell it. If we did this, not only would we not have a mortgage, but because of the significant difference in prices of the two homes, we’d have a substantial amount of money to put into retirement.

Here’s the downside–first, we really like our current home but it’s a lot of work on upkeep and it seems silly to have so many unused rooms. Second, the only way we could buy his mother’s home while keeping our current home is to tap into his retirement account which I KNOW is a no-no in the financial planning world. We would need about $20,000 to buy the house outright with no mortgage. We do not want a mortgage on 2 homes at the same time.

We’d like some input from you and your readers on if this is a good idea or not. We do know about the tax implications of using retirement money. We just want to know if we’re crazy to even think about this or if anyone has any other ideas we’re not seeing. By the way, we did have some people renting his mother’s home. They moved out and now we are spending a lot of time fixing their “improvements” so we really don’t want to rent it again.
– Monica

I would sit down and talk about this plan with the siblings and see if you can reach an agreement that doesn’t involve multiple mortgages.

One approach might be that you could live in the house rent free for, say, a year, but you would cover the property taxes for the year and shift ownership of that house to 35/35/30, with you having the smaller portion. This would be in lieu of rent, of course. During that year, you could pay down your mortgage on the bigger house while spending your free time repairing it.

At the end of that period, you could sell off the big house that you’ve repaired and use the proceeds to buy the small one.

This is the approach I’d take on that situation. Get the siblings involved in the discussion and see if you can’t come up with a plan that makes you all happy.

Q9: House repairs and debt
About 4 years a go, my husband and I bought an old house (circa early 1900’s). The house was liveable but needed some upgrades to plumbing, electric, central A/C, the list goes on and on. At the time we did not have any children and had minimal credit card debt. Since then we have had two children and have had to do quite a bit of work on the house, adding to our already existing debt. We now have about $35K in credit card bills, school loan payments, car payment (I was driving my grandmothers car before), and childcare costs. Every month we seem to be spending our entire paycheck paying off debt, leaving us little to no money for even our groceries and day to day living, let alone any savings for future home renovations. Our house still requires quite a bit of work – new bathrooms, new pipe, new support beams for first floor to name a few..one job ties into the next and starting one will most definitly snowball into a huge project costing us thousands of dollars – adding MORE debt. I have since taken on a new plan of action and am following a bill payment plan as directed on mint.com to reduce credit card debt. We are going to see how things go for the next 6 months and not do any work on the house until we see if we can reduce our debt with my new plan. If we had kids at the time we bought the house we would have never bought it in the first place…it needs too much work and costs too much money. But now my question is, does it make sense to stick it out and keep the house and make it into our dream home if it means going further into debt – with the goal of it benefiting us down the line? (Maybe use as rental property in the future or sell 10 years from now when housing market will hopefully be better than it is today)Or should we just sell as is now – stop spending money on it and live in a smaller more manageable house in a differnet neihborhood.

We love this house and the area and the neighborhood is really regentrifying every year – new stores and schools and restaurants, we love our neighbors and we’ve just put so much into the house already. My husband is dabbling with the idea of moving in with his mother and renting out our home until we can get back on our feet – which I DO NOT want to do for reasons I need not explain.

I feel like we have hit a dead end – we have debt, yet we need to spend more money…how then, are we ever going to get out of debt?? Unless we make more money – but it would have to be A LOT.
– Laura

This sounds like a situation where you have to make some tough decisions about how you spend your money, and I’m not talking about the house. You have to sit down and decide whether you want to keep that house or whether you want to continue having many of the perks you have in life.

Do you have a cell phone? Do you ever eat out? Do you have internet access? Do you do grocery shopping without planning and without using resources like food pantries? Do you have Netflix? Do you have a car payment when an old beater would do the trick for commuting? Do you use public transportation or avoid it? The list goes on and on.

If you find yourself saying, “Well, yeah, I have that, but I need that,” then you’re choosing that desire over your house. This isn’t judging you – everyone has a different set of priorities. However, if you find yourself not wanting to give something up in your current situation, the only result is bankruptcy. You have to decide what to give up.

Q10: Insomnia
Have you solved your insomnia problem yet?

– Aimee

Thanks to the many readers who emailed me about my insomnia problems.

I finally had a good night of sleep. How did I do it? I took a three hour walk. I followed that with basic steps to avoid cramping, such as eating two bananas and drinking a lot of water. That evening, I found myself so physically tired after the long walk and the lack of sleep that I just passed out at about 8 PM.

I don’t know if that was the perfect solution, but it seems to have done the trick and somewhat reset my sleep cycle.

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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