Reader Mailbag: Sick Child

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. Upromise
2. Low interest debt payoff strategy
3. Costs of raising a child
4. Lawyers and starting a business
5. Introducing yourself to neighbors
6. Pet health insurance
7. Converting 529s
8. Getting a different car
9. Early retirement question
10. Flat income tax

One of the benefits (and challenges) of being able to do The Simple Dollar full time is that when a child is sick, I just adjust my schedule so that I can take care of that child. For example, as I write this, my youngest child is home sick with some sort of intestinal bug that requires frequent diaper changes. He’s a bit relaxed, though, so he’s spending a lot of time between those diaper changes either resting on the floor or playing on his toy piano.

Of course, with that little child there, I’m tempted to grab him and read him a book or sing him a song or do something to make him laugh, which means that days when children are sick aren’t exactly productive days.

Q1: Upromise
I’m not sure if you covered this before but I would like to get your thoughts on Upromise.

– Tanya

Upromise is a program where you can earn a small amount of money for future educational spending (think college) by shopping at certain stores (my usual grocery store is in the program) or using coupons from the site. You tie it to a 529 college savings plan and whenever you do one of those things, a small percentage of what you spend is deposited into your 529.

It’s a fine program, but don’t expect it to pay for college. The amount you’d earn before your child goes to college is much more likely to cover a few textbooks, not cover tuition.

The only real drawback I can see is that it’s another source of potential identity theft, as you have to give them your personal information to be in the program.

Q2: Low interest debt payoff strategy
Like you, I also accumulated a lot of student loan debt during undergraduate and graduate school. My total student loan debt is around 35,000. My only other debts is my mortgage and 1 credit card that I’ll have paid off completely by December.

Here is the layout of my student loan debt: 3 out of the 4 loans are at fixed interest rates of only 2.5%. The 4th loan is 6.5% and has a balance of around $4500. (I plan to pay the highest interest rate loan in a few months as soon as I’m finished paying off my credit card.) My question to you is, should I be focused on paying the other 3 low interest rate debts in any hurry? The interest is so low, and I owe about 215 dollars each month for those 3 low interest rate loans. What would you recommend in this situation?
– Lacey

The rates on those loans are so low that I would probably pay them off slowly, as you’re doing. This strategy only really applies if the loans are fixed rate (as yours are) and they have an interest rate that’s below 4% or so. At that rate, you can put the money to better use almost anywhere else (besides simply spending it frivolously, of course).

The only issue with having those loans is that they do pinch your cash flow. You’re paying $215 a month, month in and month out, which reduces your breathing room on other bills and constricts your other life choices.

Thus, if you are ever given a windfall of some kind, I would use it to get rid of that debt. It will help with your monthly cash flow for the remainder of your loan, simply making your day-to-day life easier.

Q3: Costs of raising a child
We are planning to have a kid soon but the following article makes me think about having a kid twice. I can never come up with this kind of money to raise a kid.

http://money.cnn.com/2011/09/21/pf/cost_raising_child/index.htm

I will appreciate your thoughts on this in a simple dollar post.
– Andy

The costs of having a child are almost entirely misleading.

For one, such calculations make a ton of assumptions about how you’re going to be spending money with a child. They assume things like buying all new clothes, having a home where each child has their own bedroom, and so on. All three of my children share one bedroom and they often wear clothes bought at consignment shops and secondhand stores.

For another, it assumes that having children will cause no change in your life. In reality, when you have a child, you’re going to go out less. Your entertainment spending will drop. Your “dining out” spending will drop. This isn’t because your money is rerouted to your child. It’s because your time is rerouted. You’re not going to go out every night with a young child at home. Because of that time change, you’re going to be spending your money differently.

Not only that, the amounts they quote cover an eighteen year period. Let’s say you do spend in the frivolous ways mentioned in the article. That’s still $200,000 over eighteen years, barely over $10,000 per year. If you are sensible about your spending at all, it’s less than that. Because of your lifestyle changes due to having a child, you’ll also have more money to put towards it.

Articles like the one you linked to seem to serve no other purpose than to spook potential parents.

Q4: Lawyers and starting a business
I am considering starting a small staffing business (permanent placement of advanced practice healthcare professionals). I have already filed papers with the state to form an LLC and register the business name. Now I am moving on to dealing with the federal government. I don’t plan on having employees or paying wages initially. But I understand I may still need file for an tax ID # etc. My question for you is whether you think it is worth it to use a lawyer or legal site (legalzoom, etc.) when starting your own business. There are certainly government sites that make forms available to business owners, but all these sites have cautions that they are not offering legal advice. I guess I am nervous that, despite being diligent about looking into filing and registering requirements, something falls through the cracks. Is avoiding the cost of legal assistance at the start a case of being “penny wise, pound foolish” or am I just being paranoid. I’d appreciate your thoughts.

– Elizabeth

If you don’t feel confident in setting up the business correctly, it never hurts to contact a lawyer. The expense of a lawyer in this case is negligible compared to the energy and time costs of constantly second-guessing yourself along the way.

LegalZoom can certainly help you with the paperwork, but they’re not really providing legal advice, either. They’re simply expediting some common legal maneuvers that people execute.

If you’re not confident, it’s “penny wise, pound foolish.”

Q5: Introducing yourself to neighbors
I’m a single male (my wife recently passed away) who just bought a house in a new neighborhood. I’d like to get to meet my neighbors but I’m not sure what a good first step is. How did you do this when you moved into the neighborhood?

– Leonard

I went over and introduced myself to all of the neighbors. I knocked on their doors and said hello.

Shortly thereafter, I began to plan a small cookout for my neighbors, but before it was set in stone, there was a small block party. We attended it and met lots of people from our block all at once.

I’d probably say hello to them and invite any of them you’d like to know better over for a dinner sometime.

Q6: Pet health insurance
I have a question about pet health insurance vs. building up a section of the emergency fund for the dog. I have a lhasa apso puppy, and they are a resilient breed with few illnesses. I plan on taking him for yearly checkups/shots regardless (not covered by pet insurance) and I feed him good quality food (royal canine). He requires a lot of grooming that I do myself for the most part and I strive to learn as much as possible from people I meet in my dog club who also groom themselves. He is neutered.

I wonder if, instead of paying for his health insurance monthy, if I put that same amount of money in a savings account to be used if he is ill or gets in an accident, that would be financially wise.

This is the insurance I have heard good things about, and the one I would look into if I were to insure him for illness and accidents, but some banks have a less expensive plan for accident-only.
– Alexandra

The purpose of insurance is to mitigate risk. The vast majority of people who buy pet insurance do not receive an equal value of health care as to what they put into the insurance premiums. The reason people buy it is for the exceptional events. If you happen to be in that small minority that has a significant amount of health care costs, then the insurance will pay off for you.

The vast majority of the time, putting the money in a savings account will be better financially than the pet insurance.

The real question is what lengths you’ll go to continue your pet’s life in the case of a severe illness. I can’t answer that for you. That’s something you have to answer for yourself.

Q7: Converting 529s
Several years ago, I set up 529 plans for my two sons. Each had roughly $5000 each. One son went to community college for about two weeks, another for one year. Neither are interested in going back to school and have recently moved out together. My question is what to do with the 529’s now. Financially, hubby & I are fine and won’t “need” the money in an emergency. How can I convert this money (to Roth or mutual funds?) with the least amount of penalty?

– Alison

There’s no “conversion” with a 529. If you make a withdrawal from a 529 for non-educational purposes, you have to pay income tax on the money gained in that account plus an additional 10% tax penalty on the gains in that account. So, if you put in $5,000 over the years and the balance is $6,000, you’ll pay normal income tax plus a 10% penalty on the additional $1,000 earned in the account.

If you’re sure that they’ll never be using these accounts, then feel free to close them out and keep that money. If you think that they might change their mind in a decade or so and you’d like to help them then, leave the money alone. Another option would be to leave the money in place until grandchildren appear, then change the account to benefit the first child.

While the tax penalties are annoying, it’s likely (since your investment period included 2008) that you don’t have significant gains anyway and your tax penalties would be minimal.

Q8: Getting a different car
I am faced with either getting a car to save gas money or a truck which I would enjoy and benefit from more. I have to drive about 70 miles one way to work and my current car gets about 20 mpg. The road I drive on is a country road with high traffic of large trucks and tractors which lends to requiring a safe vehicle. I often have to move around from rental to rental about once every year or so, which having a truck would make more easy. In this case is frugality worth the cost of giving up the desire for a truck given the cost of gas. From my estimates I would spend about $120 on gas a week with a truck and about $60 with the car. Also I cannot move closer at this time due to a lease agreement.

– Tyler

It honestly sounds like you’ve already decided to buy the truck.

If you haven’t already decided, however, I would simply say that you should ask yourself whether the additional sticker cost and the extra $60 a week in gas is worth it for what you get in a truck over what you get in a car. Obviously, on paper, the car is less expensive, but you feel the truck has extra value in your situation. How much extra value? Would you get more out of the extra $250-300 a month you’d have if you went with the car?

It’s not an easy question and it’s not one that people often really think about with purchases. What would the extra $300 per month get you?

Q9: Early retirement question
I’m looking to retire early, hopefully around the age of 55 (I will be able to retire with 32 years company senority, and my house will be paid off) . I see a lot of information about 401ks and Roth IRAs ( i do love my 401k my employer matches up to 6% of my pay) but both of these options have fees to withdraw money before the age of 60. Could you please tell me what the best way to save for an early retirement would be? I’m great at saving.. I just want to make sure I’m maximizing my funds.

– Jim

If you’re intending to retire that early, a Roth will still work. You can withdraw your contributions without penalty. The penalties come into play when you’re looking at withdrawing the gains on your investments. So, if you have put in $100,000 over the years and you have $150,000 in balances in the account, you can withdraw the first $100,000 without penalty.

Another option is to simply use an ordinary investment account. You’ll be fully taxed on the gains you earn in that account, but there’s never any extra penalties for withdrawal.

Honestly, I would probably use an ordinary account. It gives you the most flexibility. The only drawback is that it will make taxes a bit more tricky in the coming years, but that’s easily mitigated by using TurboTax or a similar package that can easily handle such things.

Q10: Flat income tax
I recently read an article saying that our country is in as bad a financial state as Greece. What would happen if our government eliminated all current income tax laws, loop holes, and deductions, and legislated an across the board % of income tax rate for all? What % would the tax rate have to be for the US to get out of debt in 10 – 20 years? I’m thinking everyone could be required to pay the same percentage of their income over, say $30K for a married couple, or $20K for individuals. The more you earn, the more you have to invest, spend or leave to your children, live at a higher standard of living, etc. Allowing loop hole benefits for the wealthy allows them more money to invest in their and other’s companies, which I understand feeds the economy, but it also allows them special treatment to make more money for themselves. Those who live frugally paycheck to paycheck, able to earn just enough to get by and put food on the table and shoes on their kids, but don’t have spare money to invest to earn the special loop holes that the wealthy do are penalized. Aren’t they already penalized by living at a much lower standard of living? I know that’s life as we live it in the US, but is it really the right way? Is it fair for the government of “WE THE PEOPLE” to give preferential treatment to the wealthy?

– Dorothy

That’s really the fundamental economic question of the day. Should the people who invest their money into businesses (which theoretically create jobs) be rewarded for that investment with a lower tax rate on the income from that investment or not?

There is no easy answer to that question. Anyone who tells you that it’s easy is either far too married to their own political perspective or is feeding you a story.

My answer to that question is actually tied to the financial state of the nation. I think that tax rates should actually be tied to the national debt in some fashion. I would actually lower everyone’s normal tax rates, then have an additional tax that was directly tied to the national debt. That way, cutting spending is directly tied to cutting tax rates, and additional spending directly causes higher tax rates. This makes both political parties responsible for what they actually do rather than the rhetoric they shout to the American people and balancing the budget has a direct economic impact and benefit for all Americans.

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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