Reader Mailbag: Saint Bernards

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. Vacuum sealed bags
2. Boardgame with new couple friends
3. Investing for house down payment
4. Roth IRA versus Roth 401(k)
5. Hedging bets for retirement
6. Multiple savings “funds”
7. Extra mortgage payment impact
8. Car selling advice
9. Dodgy mortgage lender behavior
10. Going back to school

Sarah and I attended a Super Bowl party yesterday hosted by a couple who have two giant Saint Bernards as pets.

I love the dogs. They’re like children in a very big body. They want to hug you and play with you and they wear themselves out from all the excitement.

Q1: Vacuum sealed bags
I was wondering what your take on vacuum seal bags is. We have 2 freezers and stock way up on meat and frozen vegetables when we catch a really good sale. Especially since we live way out in the boonies with the closest store being 17 miles away. My question is, with the price of the vacuum seal rolls (we make our own bags) how much are really saving by doing this. I do wash, sanitize and re-use the bags until they get too small to use. So, I get 3-5 uses out of each bag depending on what the size of it was to begin with.

– Megan

I used a vacuum sealing system for a while. I found that they merely make it possible to store food in the freezer for just a little while longer than ordinary Ziplocs. Eventually, the freezer burn gets to the vacuum sealed stuff, too.

Dollar for dollar, I’m pretty happy with the gallon freezer Ziploc bags that we use. We get at least a dozen uses out of them (using masking tape for the labeling) and there’s no equipment.

The only disadvantage with freezer Ziplocs is that the food doesn’t stay protected from the freezer burn for quite as long, but if you’re reasonably consistent about eating your frozen goods, it’s not a big deal.

Q2: Boardgame with new couple friends
You’ve probably run into this, so I figure I would ask you. My wife and I play board games and card games with each other quite a lot and we also play with other friends. We’re going to have a couple over soon that’s open to trying some games, but have never played anything other than things like Monopoly when they were kids. Do you have any “go to” games for this situation?

– Shawn

My default games for these situations is either Ticket to Ride or Settlers of Catan. I usually bring them both out and give a one-sentence explanation of each, then let them decide.

However, I throw that out the window if I know there’s a game that will really fit the other interests of the people involved. For example, my wife has a friend who is really into the “zombie apocalypse” subgenre, as is the friend’s husband. We’re already planning on inviting them over to play Last Night on Earth after dinner.

Remember that you never want to overwhelm someone with a game if they’ve never played many games. Some games are just more complicated than others, and when in doubt, go for the one with simpler rules.

Q3: Investing for house down payment
I am 26 and my soon to be fiancee and I want to buy a house in 5 years. We are debt free, already have an adequate emergency fund, and I recently got a raise from 62k/yr to 85k/yr. I had been saving $100/month for the down payment, but that’s not nearly enough and I intend to take the difference in my paychecks and put it all to saving for this goal. I have been using SmartyPig to save for this, but the interest rate of 0.7% is bumming me out. Would you recommend investing in bonds? I know bond duration should be less than my investment time frame, but I’m also concerned about the tax implications (as I’ve never invested in bonds, and only know that they are less tax efficient than stocks). I already max out my Roth IRA contribution in an aggressive portfolio, and I contribute another 5k/yr to a similarly aggressive portfolio at my employer (no match there, sadly). Is there any tax sheltering I can do for my house down payment saving? I know IRAs allow you to withdraw for a first time home purchase, but I’m concerned about losing out on my retirement goals if I do that (plus 5k/yr is not enough to get me where I need to be for this down payment). Am I worrying too much about taxes and should just go for a short- to intermediate-term bond index fund at Vanguard (where my Roth IRA is)?

– Rick

I think you’re worrying far too much about the taxes here.

The real reason people worry about tax sheltering is that they’re trying to minimize their total tax bill taking into account a lot of years. For example, they might want to pay minimal taxes on their investments in a year where they earn a lot of income from other sources, and pay more of the tax load in a year where they earn little income from other sources. Eventually, you do have to pay the income tax on your investments – and it’s only on the gains, anyway. If you invest $100,000 and earn a 2% gain on that investment and find yourself in the 25% tax bracket, you’re talking about only $500 in taxes.

It sounds like you’re looking at a fairly short term period where you’re worrying about this, and it doesn’t sound like you’re expecting significant changes in income during that period. The only real advantage that such tax manipulations might get you is if you think you won’t be prepared to pay such an amount one year, you expect huge changes in how income taxes are assessed, or you think you might see a big income bump. If neither of those is true, you have very, very little to be worrying about.

Q4: Roth IRA versus Roth 401(k)
My employer gives the option to contribute to a regular 401K and/or a Roth 401K. I currently contribute 14% to the Roth 401K, 0% to the regular 401K, with my employer matching the a percentage of the first 6%. My employer matches the first 4% and I currently do not contribute to a Roth IRA. My yearly contribution comes out to about 12,000.

Should I instead be contributing in the Roth 401K up to what my company matches, then maxing out the Roth IRA at 5,000, and then anything leftover going back into the Roth 401K?

The past couple of years I have put any increases in my salary straight to retirement contributions. I should be on pace to be able to max out the Roth 401K and Roth IRA contributions within the next 4 years so it’s more of a short term problem for me.
– Sully

The first thing I’d do is make sure I was milking every single drop of possible employee matching, as the value of that blows away any tax benefits you might get.

Once that’s covered, I would max out the Roth at $5,000 and contribute the rest to the normal account. This diversifies you in both pre- and post-tax retirement savings, which hedges your bets against whatever may come in terms of taxation changes.

You seem to be completely on the right path here. Good work.

Q5: Hedging bets for retirement
My husband (31) makes $120,000 and I (26) make $70,000 per year, so we are well over the income limit to contribute to a Roth IRA. We would like to take advantage of the Roth accounts at least in part to hedge our tax burden in the future. Currently my husband contributes the max in a non-deductible, traditional IRA and I contribute 5% of my income to my Roth 401k. My employer matches that 5% dollar for dollar and has a discretionary extra contribution which has been 10% of my salary per year for a number of years. Since all of my employer’s contributions are pre-tax and we are not eligible for Roth IRA or deductible traditional IRA accounts as it stands now we are only contributing 5% of my income on a Roth basis.

Should we put more money in the Roth 401k or convert some of the money in the traditional IRA to a Roth in order to hedge our tax bets for retirement? Additionally, would it make sense at all to convert the traditional IRA to Roth since we are already using after tax money to fund it, even though it is treated as pre-tax? That seems like we’d be paying taxes twice on the money.
– Kendra

Converting a traditional IRA to a Roth IRA more or less means that you’re paying the income taxes on the money now rather than at retirement age.

By paying now, you’re providing yourself some level of tax-free income in retirement. If you can shoulder that tax hit now, it can be a good idea.

I usually recommend that people do as you suggested and hedge their bets between pre-tax and post-tax (Roth) retirement investments. This way, you’re spreading out your taxes between now and retirement since you don’t know for sure which point will have the higher tax rate.

Q6: Multiple savings “funds”
One thing that I’ve noticed through reading your posts is that you mention you several ‘funds’ that you put money back into. Savings, emergency, appliance replacement, etc. My question is: how do you manage these various funds? Do you have multiple bank accounts, one bank account and a spreadsheet showing the balance on each fund, multiple piggy banks, etc? That’s one of the biggest problems we’ve had when it comes to allocating money to specific funds. No matter what method we try, it takes more time to put money in each one, or maintain the balance in each one.

– Calista

I do use multiple savings accounts for this. I handle all of the transfers automatically from one bank which makes the automatic transfers really easy from their online banking servies.

ING Direct, to name one specific bank, also allows you to open as many savings accounts as you wish under your name and handle them all through one login. You can set up all kinds of transfers using their service – it’s one I’ve used for years.

It really comes down to how convenient your bank’s online services make such tasks. If you have great online services, this type of thing can be really easy.

Q7: Extra mortgage payment impact
I have a $107,895 mortgage that I have 23 years left to pay on (it is a 30 yr mortgage) at 5.5% interest. If I make two extra payments a year (that go to principle only) how quickly can I get it paid off?

– Leona

For starters, I’d highly suggest playing around with a mortgage calculator like this great one at Bankrate.

As for your specific situation, the exact answer depends on when exactly you started paying your mortgage off and exactly how long ago that was. I guesstimated that your original mortgage was for $120,000 and you’re just a little over seven years into the mortgage.

Given that, making two extra payments a year would shave just a bit under six years off the end of your mortgage. For just making 17% in extra payments, you’re shaving about 25% off the length of your mortgage. That’s money ahead, no matter how you slice it.

Q8: Car selling advice
My husband recently bought a new car, and now we’re in the process of getting his old car ready to sell. We’ve checked the Kelly Blue Book value for it, which says in its condition, we should be able to fetch about $3,500 for it in a private sale. Neither one of us has sold a car before, and we’re not sure how to go about doing it. What would be the best places to list it? How should we go about negotiating? Should we start at $3,500, higher or lower? We both find it hard to believe we could sell it for so much just because it has so many miles, but it’s in pretty good condition otherwise. Plus, we have proof for why we would ask that much; it’s not like we pulled a number out of nowhere. We need to get at least $2,000 out of it because our emergency savings recently took a hit when we had a plumbing emergency, and that will get us back to where the savings needs to be at, but is going down all the way to $2,000 ridiculous when supposedly we can get $3,500 for it?

– Tessa

First of all, the Blue Book value of a car is what you should consider a reasonable selling price for the car. It’s not a guarantee or anything at all. In order to sell a car, you have to have a willing buyer for the price.

My suggestion would be to define what you consider to be the minimum amount you’d sell the car for, then add at least 25% of that price to the car without exceeding 10% more than Blue Book value. If you exceed Blue Book value by too much, very few shoppers will bother looking at your car.

Pricing a car fairly high gives you plenty of room for negotiation, and buyers that can negotiate the price of a car down some is more likely to buy it. Just don’t put it so high that you scare away people to begin with.

Q9: Dodgy mortgage lender behavior
A few years ago I fell behind on my mortgage. My mortgage company was “good” enough to restructure the mortgage even though it took almost 2 years to get everything settled with them. The initial lapse was my fault, but it took them 9 months between 2 separate decisions to let me restructure the mortgage. The whole time they’re adding fees. The original loan amount was $169,000. I had paid on it for 2 years when this happened. Now the loan amount is $203,000 and I can’t get any information from them about why this is. I’ve called a number of times over the past 6 months, each time they promise to send me all the information, and I never get it. Is this illegal what they are doing since they can not provide me with the information?

– Mark

If I were you, I’d contact a lawyer.

My initial impression is that you’re dealing with a financial institution that’s struggling in some fashion or another. The current climate of the real estate lending market is a mess, and some companies are not handling it well.

$35,000 is a significant amount of money. A decent lawyer should be able to help you resolve this situation.

Q10: Going back to school
I currently have a student loan of $14,700 at 4.5% fixed interest rate. I have a master’s degree in marine biology and work in my field, but my salary is quite low. I’m playing with the idea of going to nursing school in the fall of 2013, which would give me job security and a better income (very important in my rural area). I love my job, but I want to go in a different direction. Nursing school tuition would be about $11,000 (3 semester program, since I already have a degree), would require increased use of my car, and because it’s an accelerated program, I would not be working. Of course there will be books, and normal living costs as well. I’m wondering if I should save every penny for nursing school, or pay as much of my loan down as possible?

I pay $200/month to my IRA. My minimum student loan payment is $132 (I have no other debt). Right now, I can probably pay about $350 towards that loan monthly. Is it best to pay off this loan, or save for school, and thus decrease the amount of a second student loan that I will need in the future? Should I decrease my IRA contribution and put it towards my loan?
– Erin

If I were in your shoes, I would continue the IRA payments and the minimum student loan payments for now and save as much as I possibly could to have a fat chushon in your savings account for when you start school.

Having that cash in your savings account will make it much easier to make ends meet during this period of reduced income. That’s really the key – you need to make sure you’re still paying your monthly bills. Your best friend is improved cash flow and access to an easy cash reserve, and since the first doesn’t really seem possible, your best bet is to maximize the second.

I would also look into forbearance on that student loan for any period where you return to school. If you can eliminate that monthly payment during your crunch time, all the better.

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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