Updated on 06.05.14

Reader Mailbag: Television

Trent Hamm

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. Employee Stock Purchase Program help
2. Divorce mess (and follow up)
3. Unsure about next steps
4. Understanding tax brackets
5. A big mess of debt
6. Student loans or mortgage
7. Retirement path
8. A Game of Thrones
9. Self-employment questions
10. College student with some debt

Many people seem to think I have a thing against television. I don’t. In fact, I think that a well-constructed television series is one of the best forms of entertainment for telling a complex story with well-defined characters.

There are two things I dislike about television, though. One is the advertising, not just during the commercial breaks, but during the programs in the form of product placement. The second is the convenience of using television channel surfing to fill downtime in our lives with nothing valuable or productive. Those two things add up to enough to keep me from turning on the television without clear purpose.

I’m all in favor of scheduling a date night once or twice a week and watching a few episodes of a great television series without commercial interruption off of a DVD or off of a streaming service. That can be fulfilling in a lot of ways.

Q1: Employee Stock Purchase Program help
For the past 3 or 4 years I have been working through the debt snowball method of debt elimination. I am now free of all debts other than my mortgage, have about 3 months of emergency savings (working on getting that to 6), and am funding my company-provided 401k at 6% (working on getting that to 10 or moving to a Roth IRA). For the 401k the company match is 2%. I feel like I finally turned a corner on my financial situation and have gone from being a slave to the banking industry to slowly starting to build wealth and plan for my retirement.

I am now debating on whether it makes sense to participate in my employer’s Employee Stock Purchase Program (ESPP). It works like this: there are two enrollment periods per year, and during an enrollment period I can elect to have a percentage of my gross income deducted from my paycheck (on a post-tax basis, of course) to buy company stock. At the end of each 6-month period they add up the payroll contributions made during that period and buy the appropriate amount of shares at the price at which the stock traded on the first day of the period or the last day of the period (whichever is lower). Shares are purchased at a 15% discount and are fully vested.

Every piece of investment advice I’ve read so far (including your blog) generally suggests that the beginning investor stick to index funds, and/or highly-diversified holdings. So my question is this: as a beginning investor, does it make sense for me to take advantage of the discount the ESPP provides and contribute aggressively to buying company stock, or would I be better suited to putting that money in an index fund or other diversified holding? In other words, does the discount provided by the ESPP outweigh the risk of holding one specific stock in my portfolio? I am fairly young (34), unmarried, and currently own a home that will meet my needs for at least 10 years, so I have no immediate goals other than to continue to build wealth. I have a fairly high tolerance for risk, so seeing the value of company shares fluctuate day to day wouldn’t bother me too much as long as they were generally trending upward. Also, I’m not sure if this should factor in, but my company is very successful in its market, and has an earnings growth projection of 22.5% for the next five years.
– Brian

If the stocks are purchased at a discount and you’re fully vested, you could theoretically immediately sell the stocks and earn a profit each time, which seems like a good move.

The question you’re really asking, I think, is whether it makes sense to buy and hold the stocks of a company that you work for. Because you work for that company, you have some intimate knowledge about how the company is doing. If you feel good about that company, by all means, hold the stock.

When should you diversify? I would just sit on your investment until the amount of stocks you hold reach a point where you would feel devastated if those stocks were suddenly worthless. At that point, sell off some portion of your holdings and diversify widely with them, probably through an index fund.

Your intimate knowledge of this company means that you have good reason to invest in them. It makes sense to maintain stocks in that company as a significant part of your portfolio. It’s just foolish, though, to have all of your investments (or even the majority of them) tied up in the stock of one company.

Q2: Divorce mess (and follow up)
A while back I asked you how to get my husband on board with cleaning up our finances. He was refusing to talk about anything and you suggested counseling ASAP. Well, he refused to go to counseling. Then I found where he had taken out title loans on one of our vehicles and that same month he spent our entire emergency fund ($1,000) on one dinner out with his friends and a new TV. When I asked him about the title loans, he said it was none of my business what he did with “his” money and he left…for good. My hours have been cut at work and I do not meet my basic living expenses without child support.

Fast forward a month or so. I am in the process of filing for divorce. Two cars are in my name and that brings me to my question. They are both older cars (a 2000 Nissan Maxima and a 2001 Dodge Caravan) and have substantial mileage on them (90,000 and 120,000). The insurance on them isn’t too bad, under $100 per month for both. I have a teenage daughter who will have her driver’s license before the end of the year and wants to get a job. Should I keep both cars so she will have one to drive and we will have a spare in the event one breaks down, or should I sell one (my mechanic says to sell the Nissan – higher upkeep costs)? The Kelly Blue Book value on the Nissan in its present condition is between $4,000 and $4,500, which could fund my emergency fund, plus pay some upcoming expenses.
– Jill

That sounds like a relationship that it was good for you to get out of now rather than later on. Eventually, the situation would have collapsed, and it might have collapsed with you in a much worse financial state.

As for the cars, you should absolutely sell one of them, and I’d likely sell the one your mechanic recommends that you sell. Upkeep costs are a major factor in this decision, and if you’re minimizing costs, losing the vehicle with higher upkeep costs is the best move.

Take the money you earn and bank it. You’ll be glad you did.

Q3: Unsure about next steps
After our credit cards are done being paid off estimated at the end of this year here is what we have left to tackle (numbers are very close guesses to the balance in January of 2012):

Mortgage: Approx. $282,500 – Payment is rounded up to $2,280 – 5%
Car Loan: Approx. $22,000 – Payment is $507 – 2.89%
Student Loans: Approx. $38,000 – Payment is $305 – rates vary from 2.75% to 4.25%

The question I have is, what do I tackle next? I see from the math, the Mortgage is the highest interest rate and should be next. I guess the issue I have is that since it is so underwater, is that still my best bet? Or do I really start contributing the max to my Roth IRA and open one in my husband’s name too?

We were hoping to be moving out of NJ to NC next year, but it’s not realistic with the housing market (the house across the street, with one less bath, just sold for $216,000 – or about $60,000 less than what we paid, not to mentioned what we’ve put into the house). We are hoping to be moving in 3 years, and I’m not sure I want to buy another house after what we’ve experienced with this one and the market being what it is. I’m not sure I’m willing to tie my money to an asset (depreciated asset in my case) again. IF that is the case, I understand that I am liable for the difference between my mortgage and what my home eventually sells for. Does it make sense to mitigate any potential loss there, or am I missing something?
– Diane

You’re correct in that if you sell your house, you’ll be responsible for the difference between what you owe and what you sell the house for (assuming you’re underwater).

You can discuss a short sale with your lender, but they’ll generally only be interested in your request if it looks like you’re heading toward foreclosure.

Assuming you’re not looking at just walking away from the house, your best bet is to just start paying down that mortgage as fast as you can. At some point, you’ll no longer be underwater and can sell it if you so choose.

Q4: Understanding tax brackets
Can you help me understand tax brackets? According to bankrate.com, the 2011 tax rate for my gross income ($43,260) as HOH should be 15%. Today, I asked my payroll dept for a tax deduction breakdown for what the company deducts from my salary. This is the breakdown I received:

8.7% – Federal
4.2% – State
4.2% – Social Security
1.45% – Medicare

Along with my 3 exemptions, how does this align with the 15% tax bracket I supposedly fall into? I do have a 6% pre-tax contribution & $1000 pre-tax deduction for my medical flex spending account.
– Lacey

If your gross income is $43,260 and you’re filing as head of household, you’ll be paying 5% of your income for all income you earn between $0 and $12,150, and 15% of your income between $12,150 and $46,250. So, for the first $12,150 of your income, you’ll pay $607.50 (that’s 5%), and then for the next $31,110 of your income ($12,150 up to $43,260), you’ll pay $4,666.50. Your total tax will be $5,274.

Now, that amount changes depending on how many dependents you’ve stated on your W-2. If you listed, say, four dependents, they’ll subtract $3,750 times 4 from your initial salary, changing how much is taken from your paycheck. In this case, you’d pay $607.50 on the first portion of your income and $2,416.50 on the second portion. This adds up to $3,024, which is right around 7%.

I’m guessing that you have three dependents or so – you, your spouse, and a child. That’d get you pretty close to the 8.7% you see here.

Q5: A big mess of debt
I graduated from college in 2007. My student loan payments started in late 2007. I could not find a full time job until March 2008, although I was paying the minimum on my student loans, which is all I could afford. In March 2008 I got a full time job, but still could barely afford to pay all my bills (about 1,100 a month which includes cell phone, rent, student loans, 2 credit cards (one is now completely paid off), car insurance, but does not include gas/car maintenance, or food, or clothing, or entertainment of any sort). I was making about $1,400/month (after taxes, health insurance, and at the time, a 401k), so after necessary expenses, food and gas, etc. I never made it to the end of the month with any money in my bank account. Needless to say, I couldn’t save anything, and couldn’t afford to pay more than the minimum on my student loans (which looks like it’s JUST interest). I should mention that I only get paid once a month

I stopped paying into my 401k in the beginning of 2010 because of furlough days, and haven’t contributed to it since (which I REALLY want to start again since my employer matches up to 4%). In May of 2010 I got a raise, so that I was bringing home about $1,600 a month (after taxes and health insurance and furlough days). At the time I had just purchased a high end camera (about $1,500) which I used financing for through Best Buy (photography is my favorite hobby, so I felt justified in using financing to buy the camera). That was paid off in February 2011, after which I then decided to go after my other credit card (which I describe below) and I’m sure was the wrong decision, but I don’t have a choice now.

I have one credit card paid off leaving about $1,900 on another that I am working on (I recently transferred the balance of this card from my oldest credit card (which I kept open for my credits sake) and put it on a 0%-interest-for-12-months card so that I could aggressively pay it off without wasting money on interest. That should be paid off by January 2012 and I plan on cancelling that card, unless I can talk them into giving me as good of an interest rate as my current oldest card which is about 9%.

Anyways, my big problem are these student loans. Here is a breakdown:
Private loan (not able to consolidate with any other loan) from Sallie Mae (9.25% interest rate):
– Original loan amount= $10,500/Outstanding principal= $10,326.17.
Consolidated loan from Sallie Mae (5.625% interest rate):
– Original (combined) Loan amount = $23,096.91/ Outstanding principal (combined) = $22,337.76.

These numbers make me want to cry since I have been putting so much money from my tiny salary toward these payments for almost 4 years and they’ve only gone down by a tiny tiny bit! I’ve been keeping up with your blog about loan situations and I know that I should save a small emergency fund (which I have about $430 in so far) then throw everything extra at the highest interest loan and only pay minimums on everything else until I pay that one off, then move onto the next highest interest loan etc.

My problem is I barely have enough money to get me through the end of the month let alone throw more at this student loan, which is also hard to think about since it seems I am getting NOWHERE even though $300/mo of my paycheck gets thrown at Sallie Mae just to cover the MINIMUM payment. I feel like I have no ability whatsoever to get ahead on these student loans. I think I should have avoided transferring my credit card balance to a low interest credit card (0%), because now I am spending about $90/mo more on that payment just to avoid pay interest on that amount.

I guess I’m wondering what you would do in my situation? Come January when my credit card is paid off and I will have an extra $190/mo, should I put it ALL toward the high interest student loan (which still won’t make that much of a difference in my mind), or should I put that money into my 401k? Or should I save it? Or should I split it somehow?
– Lisa

If I were you, I’d keep doing what you’re doing for the time being. In January, I’d get your emergency fund up to a point that’s equal to two months of living expenses, then I would start retirement contributions and focus on that higher interest loan with what’s left.

When you’ve got so much of your monthly income accounted for, you don’t have much room for an emergency. An emergency fund is a must-have, even if it feels like it’s keeping you from really knocking down the debts.

Yes, this is a frustrating path to follow. Yes, it feels like you’ll never get out of it. The things in life worth having are never, ever easy.

Q6: Student loans or mortgage
My wife and I do ok with managing our money. We don’t carry consumer debt but never seem to do much better than breaking even each month. Lately we’ve decided to try to really get in to good financial shape. We’re establishing an emergency fund and are hoping to start saving more towards retirement and general savings (I currently contribute to a 401k at work for the matching benefits, but that is it.)

My wife and I bought our house two years ago. When we bought it we figured that if we made one extra house payment a year we would knock ~7 years off of our mortgage. Now we’re trying to decide if it is better to do that or to pay down our student loans. We know that we aren’t going to be in this house more than another year or two. We will probably sell it when we move, but we have considered renting it out instead.

My wife’s loans are about $11k and mine are about $21k. Our only other debt is a personal loan I’m paying off at the end of this month. We use our credit card to pay bills (so we can build rewards points), but never carry a balance. We always pay it off every month.

Do you think it makes more sense to make the extra house payment each year, or to use that money to pay down the student loans?
– Aaron

I would look first and foremost at interest rates. What has the highest interest rate among your student loans and your mortgage? That’s the debt I would focus on.

If you pay down your mortgage fast, when you sell it, you’ll have more proceeds than you would have otherwise, which you can then apply to the other loans. If the mortgage interest rate is higher, you’ll save more over the year or two you still have the mortgage than you would by putting that money into a lower interest student loan.

Of course, another vital question to ask is whether you’re underwater on the mortgage. If you are, I would strongly suggest hitting the mortgage as hard as you can.

Q7: Retirement path
I am a married attorney in Seattle. We have a home with about $250,000 in equity. We have 22 years left on the mortgage. I am 37. I’ve been at a company with great retirement for the past 5 years: 4.5% match for my 6% in the 401k and 4.0% cash balance plan. I only contribute 6% and have been doing so for 5 years. Would you make any changes?

– Chris

The first thing I’d do is run all my numbers through a retirement planning calculator and see what it suggests. Assume that investment returns will be the worst they possibly can – don’t get optimistic with your projections.

I can’t tell for sure if you’ll be all right. If I were to guess based on the information you’ve provided here, I’d say you’re on the low end of being all right, but you’re not in devastating shape.

Run the numbers.

Q8: A Game of Thrones
I saw that you really liked the novel A Game of Thrones by George R. R. Martin. Have you read the rest of the books in the series? Are you watching the T.V. series?

– Roger

I’ve read all of the books in the series. I’ve read A Game of Thrones three times, and I’m currently reading it a fourth time with the intent of re-reading the entire series.

I watched the first episode of the series and it seemed to duplicate the first ten chapters or so of the book with only minor changes. The characters didn’t look quite like I envisioned them but the heartbeat of a very strong story was still there.

The series is fantastic. The only thing I’d say about it is that it can get bogged down in too many characters, especially later on.

Q9: Self-employment questions
My husband just started his own trucking company. He’s the only employee as an owner-operator of an 18 wheeler. We are both co-owners of the business. I have a full time job making about $32,000 a year. We expect our company to gross about $90,000 a year. That would put us in the 25% tax bracket. How much money should we be putting aside for taxes? I know we have to pay them quarterly, but do not want to end up owing a lot of money next year when we file. We do not have any children together, but he has two kids with his ex-wife. The divorce decree says she gets to claim them, but may let us claim them like we did last year beacuse she doesn’t work, isn’t married and doesn’t file taxes. I have been put 30% of his check aside to pay the quarterly taxes. As a small business, I know we can claim a lot of business expsenses. Do you think I am putting emough aside? We both contribute to Roth IRAs so that will not bring our taxable income down like a traditional IRA would.

– Rebecca

My strong suggestion to you is to use IRS form 1040-ES and run the numbers with the attached worksheet. I think that 30% will be plenty for what you describe, but you’re better off running the numbers.

I will say that I find the methods for tax collection and calculation to be particularly burdensome for the self-employed and people who run very small businesses. The IRS seems designed to discourage self-employment and encourage just working for an employer, sadly enough.

Where’s the entrepreneurial spirit that made America great?

Q10: College student with some debt
I am a senior in college graduating next month with my BS in civil engineering. This summer, I will continue with my education in pursuit of an MEng in civil engineering. After graduation, I expect to have a starting salary anywhere from 45k to 60k (depends on market and field). However, during my time at school I made a few bad decisions. I opted to focus on my grades and extracurricular activities while working as little as possible. In doing so, I will graduate with a 3.8 GPA and numerous awards and leadership roles for my resume, but at a cost. So far I have accumulated 12k in student loans and around 6k in credit card debt (APR > 20% on each). This summer I will try to find a part time job since I will only have 6 credit hours divided into 2 days. As well, I secured a teaching assistant position this coming fall. My projected income from teaching assistantships and scholarships for the fall is $2000/mo and spring is $800/mo (without considering additional student loans and possible additional part time jobs).

I am having a hard time deciding what set of actions will put me in the best position after college. I could either continue to pay the credit card payments at roughly 300.00/mo (currently, I pay more than the minimum) or I could consider taking out a non-federal loan at an interest rate below 12% and using that to pay off the credit card bills. This will also give me a little more wiggle room with my monthly expenses. Both options will have me finding part time jobs for the summer and spring (since I have a job lined up for the spring). Do you think applying for a loan just to pay off my credit cards for good is a good idea since my interest rates are so high?
– Adam

I would never consolidate credit card debt into a student loan. Student loans exist under different regulations than credit cards and can follow you no matter what happens in your life. It is much easier to resolve a credit card debt than it is to resolve a student loan debt.

I would seek out other methods of reducing the rate on that credit card debt. You may want to consider a 0% balance transfer offer to another card if you’re eligible. You may also want to try directly contacting the credit card issuer and requesting a rate reduction, though there is a risk that they may reduce your line of credit.

I wouldn’t panic about it, though. Just make sure that it doesn’t get worse and keep your credit report in the best shape possible.

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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  1. Jonathan says:

    @Q1 – You may want to be careful about the stock purchase program. I have heard of several cases of executives in a company using the timing of the stock purchase from the ESPP to buy or sale their stock, maximizing their profits while potentially pushing up the stock price (in the case of smaller companies) just when the ESPP purchase happens. In this case, you might find that the stock price goes up as the purchase time near, then drops immediately after the purchase. The 15% discount you’re getting might be eaten up by market fluctuations if people are using the timing of the ESPP purchase to their advantage in this way.

    @Q3 – While Trent’s suggestion make sense (tackle the highest interest rate first) I would actually suggest paying off the car first in your situation. It is the lowest amount (making it the next candidate in the Dave Ramsey snowball plan), but more importantly it is your highest payment. If you are able to knock that debt our fairly quickly you’ll see much better cash flow than if you put the extra towards your mortgage (or even the student loan).

    #Q5 – I realize that now its too late, but buying that camera was probably not a good financial move. I am also a photography enthusiast, so I know very well how easy it is to convince yourself to buy new equipment. I am guilty of buying equipment when I really did not need to. Without knowing which camera brand you use I can’t make specific suggestions, but I’m certain that you could have purchased a used version of a slightly older model (maybe a couple of years old) and saved a significant amount of money. From what I’ve seen the biggest thing to be added to DSLRs lately is the HD video capability, which isn’t necessary for phtography. I suspect that you could have easily gotten a good used camera for under $1000 that would have served you well. Again, without knowing the details its hard to say, but its even possible that you could sell your existing camera and replace it with an older used model to get a few extra hundred dollars, although since it was purchased in May of 2010 it likely isn’t the most recent version available, so may not be worth enough to try to sale at this point.

  2. #Q5 – You should contribute to your 401k, and then take an early distribution. Say you are making $25,000 and 4% of your salary is $1,000. Your employer would match another $1,000, so you’d have $2,000 total.

    Then you could take that money out and use it to pay off your loans. Sure you’ll pay income tax at 15% ($300) and a 10% penalty ($200), but you’ll still end up with $1,500. That’s $500 more than you had if you didn’t use the 401k. Don’t leave free money on the table.

  3. Actually, it’s $650 more than you would have had if you didn’t contribute to the 401k. Your original $1,000 would have been taxed at 15%, so it would have really been only $850. Also, you could be eligible for the Savers Credit, which will save you even more on taxes if you contribute to the 401k. Yay for more free money!

  4. valleycat1 says:

    Q6 – It might make you feel a little better to know that the earlier payments on loans are almost all interest; as you progress through the years, the portion of the payment that is principal steadily (slowly!) increases. Hang in there!

    Q9 – Self-employment – don’t forget that the self-employment taxes include income tax on the profits plus a huge chunk for his social security/medicare obligations. I agree with Trent that you would benefit from doing a trial run of next year’s tax return based on your estimates, or talk with a CPA.

    Q4 – Remember that your tax owed is based on the AGI, not your full gross pay, so the tax withholding tables your employer uses take that into account. Also, if you’re concerned you aren’t withholding enough, you can always declare fewer dependents or request a fixed added amount to be taken out of each paycheck by your employer on the W-4.

  5. Tom says:

    Q1 If you sell your ESPP shares immediately, you could think of your ESPP as a 15% CD. You can’t lose money on this deal, so its a no brainer.

    The only reason to hold longer would be long term capital gains tax being lower than short term, and then you begin to worry about diversification and daily price fluctuations. But effectively 8% of your salary is going towards mutual funds in your 401k, so you should have a moderate amount of diversification there.

    The company I work for offered a same deal when I first started, and everyone I know who participated were happy they did. A lot of people sold immediately like I described above. Then are company was bought by another company at a significant premium, so the people that held on made a boatload. I was a new employee at the time and unfortunately not eligible for the program. Our current ESPP is not as nice (3 year holding period before we receive a matching share for every 3 that we buy), but I do have some nice gains right now on paper (who knew November 2008 would be the best time ever to buy my companies stock?)

  6. graytham says:

    I’m all in favor of quality television programs, but I don’t see anything wrong with watching mindless drivel sometimes, either. Obviously, spending hours upon hours watching crap every day isn’t a good idea, but sometimes you need an escape- I call it chewing gum for the mind.

  7. Beth says:

    Q1 – In investment theory, it’s a known bias that employees always think their company is doing better than the market because they know it. Think of it this way – in case of things going badly for the company, you’re out of a job AND your assets lose value at the same time.

  8. valleycat1 says:

    RE TV – the programs are created to sell advertising space, not the other way around. Linda Ellerbee had an excellent show about this years ago on Nick at Nite, during one of the early uproars about tv marketing to children.

  9. Johanna says:

    Q5: What were you thinking when you bought that camera? I’m all for making room in your budget for the things you enjoy, but from what you say, you basically don’t *have* any room in your budget, and then you go and spend an entire month’s worth of income on a camera? Can’t you enjoy your hobby with a less expensive camera? (If you really, truly can’t, maybe you should consider a different hobby.)

    It may be too late to sell the camera now (I’ll defer to Jonathan on this), but I’m wondering if we’re just seeing the tip of the iceberg. Are you buying a lot of other stuff that you can’t really afford, and trying to rationalize the purchases to yourself somehow? Only you can answer that, but you should give it some serious thought.

  10. todo es bien says:

    Q5- Please figure out some way to get the 4% match in 401k from company. In essence, every dollar you put in has an instant 100% ROI AND is tax deferred!!! Believe it or not, in a one year scenario, you would be better off putting money on a credit card so you could get the match!!! (example, you put in 1000 to company and run balance on credit card… they match… you have 2 grand.. at end of year, and have paid =- $150 in interest!!!) I use this as an example, in reality find some other way to do it! But do it…
    A fun story about holding company stock: My sister graduated with MBA in about 1987 – she went to work and began to accumulate stock options. Being prudent, she sold almost all of the company stock to remain well diversified… Naturally, that company was Microsoft…. So, she missed out on 5 million or so in stock appreciation. (fortunately, she hung on to enough so that she is doing fine). Just an anecdote, not a recommendation. When it comes to risk, try to be on the side of the outsized odds. W. Buffett of course is the master of this.

  11. Des says:

    Q1 – We enroll in DH’s ESPP and love it. We cash out the stock as soon as we get it and move the money into our ROTH IRAs. That let’s us, effectively, contribute to our IRAs via payroll deduction, which helps.

    Q3 – I would pay the car first, not only because it is the smallest loan, but because you can then save money on insurance. Most loan companies have requirements about the insurance you carry and how high your deductible can be. If you pay this off and raise your deductible, it could save enough to offset the interest rate difference (for us, this was much cheaper.)

    Q4 – I think Trent may have missed the Standard Deduction as well. For HOH, that is $8,500, so your first $8,500 of income is not taxed federally at all.

  12. Riki says:

    Q5: Let me chime in here — WHAT where you thinking when you bought that camera? I agree with Johanna. Are you *really* being honest with yourself about your spending?

    Listen, I understand the lure of camera gear. I have spent over $5000 in the last 12 months on my gear. But I shoot (almost) professionally and make 30% of my income with my camera in my hands. There is no reason for a non-pro to have a camera that costs $1500. None. In fact, for my first year of paid gigs, I shot with a camera that cost less than $600. I totally get that you wanted it, but you certainly didn’t need it.

    My point is that your letter leads me to wonder about your real spending patterns. I suggest you take a really careful, hard look at your expenses and maybe make some decisions about how you spend your money. I won’t encourage you to sell the camera (like I said, I get why you bought it) but do NOT get in the trap of buying more gear!

  13. Kyron says:

    In response to Brian / Q1:
    Yes, you will see smaller take-home pay but it is a good way to make some extra money.
    Note: the 15% discount you get is treated as compensation income taxed at your marginal rate.

    Im not giving you all the ins and outs but google the following items so you understand them:
    1. SPP qualifying disposition
    2. SPP disqualifying disposition

    When you sell, any gains / losses on top of that 15% discount need to be reported as some combination of:
    1. compensation income (depending on qualifying or disqualifying disposition) taxed at marginal rate
    2. either short term or long term cap gains (depending on whether you hold it for 1yr) taxed at marginal or long term rate respectively

    Lowest risk/hassle-free option = sell immediately for a 15% instant profit (minus marginal rate tax you need to pay for this compensation income).

    There are cases when stock is high on grant date (start of purchase period), even higher on purchase date (end of purchase period) and sold as a disqualifying disposition (<2yrs of grant date) at lower than grant date price where you will have to declare a lot of phantom gains (and pay a hefty compensation income tax on these phantom gains for the 15% discount) and record a capital loss (that will be stunted by an upper limit) so you’ll owe a lot of money to IRS without making any money.

    But overall advice: Maximize the SPP. Hell of a lot more upsides than downsides.

  14. kristine says:

    Q5- “At the time I had just purchased a high end camera (about $1,500) which I used financing for through Best Buy (photography is my favorite hobby, so I felt justified in using financing to buy the camera).”

    Please, please, do not be so foolish again! I have exhibited at the Salmagundi Club in NYC, and won awards, using my point and shoot that cost 300 at the time- it would be about 120 now. Concentrate on your expertise with composition (rule of thirds, diagonal, pyramid, and dynamic asymmetry) instead of F-stop and white point. It’s cheaper, and your photos will be much better!

  15. Amanda says:

    Q4. You start with AGI less standard or itemized deductions less exemptions. Then that amount is taxed…

  16. Des says:

    Q5 – I’m really surprised no one, including Trent, has mentioned getting a PART TIME JOB! Compared to most, your debts are not that large ($1900 credit card and $22k student loans). You have a serious income problem, not a debt problem. Get a paper route, deliver pizzas, mow lawns, do something! There are a million ways to earn a few extra bucks on the side, and for you a few will go a long way to easing some on this financial strain. It doesn’t have to be forever, but you do need to “man-up” so-to-speak and do something about your income.

  17. Tom says:

    Married people don’t file Head of Household Trent!!! It is specifically for unmarried people with a dependent. So Lacey’s 3 exemptions (NOT dependents) do not include a spouse.

  18. TC says:

    Q1 – Your plan may be different, but mine requires that employees hold the stock for 2 years, or otherwise pay capital gains or some other tax on that 15% off if it is sold. After that period, capital gains are treated as if the stock were purchased at full price. This may affect your conclusions about how to invest.

  19. Petunia says:

    Q4 – There is a 5% income tax bracket? The IRS will be so surprised, they think that the first bracket is 0% and the second bracket is 10%.

    Lacey – think of brackets as buckets, you fill up one bucket completely before moving on to the next. First your income goes into your 0% bucket until it is full, then you move on to your 10% bucket, then your 15% bucket, and so on until you have run out of income. So even though you are in the 15% bracket, you do not pay 15% income tax on every dollar you earn, only on the dollars in your 15% bucket.

    SS taxes, Medicare taxes, and state income taxes are not part of the 15% bracket.

  20. Johanna says:

    @Petunia: That’s a really good way of explaining it.

  21. Finance Nerd says:

    @Q1 — Also note that some companies will restrict you from participating in the future if you immediately sell the stock.

    My employer has a similar plan, but if you sell immediately, you can’t participate for another year.

  22. Honey says:

    @Q5 – While I agree that buying the camera was a terrible idea, I am also surprised at the lack of advice telling you to get a part-time job. There are evenings and weekends, and from the sound of it you have furlough days that you should be able to plan around fairly reliably. You could easily be pulling in $500 more/month, which would solve a lot of problems (provided you are not justifying the purchase of lots of other items you can’t afford, which I and others seem to suspect may be an issue here).

  23. Dan says:


    Completely unrelated topic:

    You’ve mentioned that withdrawals from the 401k are not taxed at the marginal rate, but at the overall tax rate?

    Do you have a link or source with further information? A lot of 401k sources talk about the tax deferring but not the tax at withdrawal.


  24. Johanna says:

    @Dan: Well, the tax bracket structure applies to 401(k) withdrawals just like it applies to any other income. You get some amount that is taxed at 0% (your deductions and exemptions), then some amount is taxed at 10%, then 15% (or whatever the tax brackets turn out to be when you retire), and so on. So even if the amount of your withdrawal puts you in the 25% tax bracket, you actually pay much less than 25% in taxes.

  25. Interested Reader says:

    TV is all about advertisements because that’s what it’s built on. Soap operas are financed (or were since they are getting cancelled) by advertisers to sell — soap!

    The biggest owner for soap operas was P & G. It used to be radio and then it changed to tv, and now with delayed tv watching and more of the traditional target (women) working out of the house viewer ship has fallen (although plenty of men watch soaps) so it’s no longer bringing in the money for the advertisers.

    To be really basic and simplified the viewers are really what’s being sold. The networks and cable channels work to make sure the right product (demographic) gets to their client. Lots of times shows are tweak because for whatever reason the appeal to different demographic and the advertisers feel like they are wasting their money and not getting a good deal.

    For example if a show is suppposed to pull a male 18-24 demographic and ad space is sold on that but then the viewership skews to women 30-40 the advertisers don’t like it because all that money being spent pushing Axe body sprays is wasted. Although I don’t think the gaming and electronics ads are wasted but the advertisers probably think that.

  26. Snowy Heron says:

    Q5 -Des & Honey are right – why hasn’t anyone suggested that Lisa get a part time job on weekends? Even better, maybe she could get a part time job as a photographer with that very expensive camera she bought? Kill two birds with one stone!

  27. Johanna says:

    Q5: A part time job for Lisa might help, if she can find one, but only if she figures out how to live within her means and not buy stuff she can’t afford. If she starts bringing in an additional $500/month, but she spends it all on expensive camera equipment and who knows what else, then financially she’ll be no better off than before.

  28. JS says:

    @Q10: Trent’s response: “I would never consolidate credit card debt into a student loan. Student loans exist under different regulations than credit cards and can follow you no matter what happens in your life.”

    This is true, and I would agree with your advice for most people, but Adam seems less likely to run into problems with his student loans than others might be. Adam already has a degree with excellent job prospects, especially once the economy improves. His $12K student loan balance is much lower than the average undergrad’s, and an extra $6K, while a lot of money, is still something he’ll be able to tackle once he’s out of school. It’s a risk for sure, but given the high interest rate on the CC debt, I think it might be a risk worth taking if he takes the $300/month he’s paying to the credit card companies and applies it all to the student loan instead of spending it on living expenses.

  29. Mike says:

    Q1! anyone remember ENRON. You can get lucky with a SPP but participating in it fails the diversification test. All your eggs in one basket.
    Only the guys in the Board room Really know what’s going on in a company. You say that the company is willing to backdate the options which I think might be illegal. Eventually SEC and IRS might want to take a look. And being as ill gotten gains you might be targetted for clawbacks. best of luck.

  30. jim says:

    Q1 Brian : The answer depends on if there are rules about how long you have to hold the stock. Some programs let you sell them almost immediately. Other programs require you to keep the stock 1-2 years. If you can sell it fast then do the ESPP and then sell the stock immediately. That will give you a guaranteed 15% return. DO not accumulate large amounts of your employers stock for any longer term periods. Investing substantially in your employers stock makes you doubly dependent on that company both for your employment and their well being. Holding say 5-10% of your assets in your employer stock isn’t a large risk, but more than that should be avoided.

    Q2 Jill : You said “I do not meet my basic living expenses” You don’t have the money to pay for a car for your daughter. Your teenage daughter can ride the bus, get rides or borrow your car until she saves enough money to buy her own car.

    Q4 Lacey: If you have income of $43,260 and file as head of household with 3 exemptions then : You start by subtracting the standard deduction. Standard deduction for HOH in 2011 is $8,500. You then subtract $3700 for each exemption. 3 x $3700 = $11,100. Your gross income minus your standard deduction less the exemptions is your taxable income. So for you that is =
    $43,260 – $8500 – (3 x $3700) = $23,660

    So while you have $43,260 in income you don’t pay taxes on the first $19,600. You only pay taxes on that taxable $23,660.

    This $23,660 taxable amount is where you start to apply the tax rates. The first $12,150 is taxed at 10% and the rest is taxed at 15%.

    $43,260 =
    $19,600 stand deduction & 3 exemptions = 0% tax
    $12,150 = 10% tax
    $11,510 = 15% tax

    Your taxes are then :
    19600 x 0 = 0
    12150 x 10% = 1,215
    11510 x 15% = 1,726.50

    0 + 1215 + 1726.5 = $2,941.50

    That is the basic explanation for a standard deduction.

    You may have other tax deductions or credits. If you have kids you may qualify for child tax credits which will cut you actual tax bill further. If you have a house with mortgage payments and other items you can deduct then you may itemize and have a higher deductible than the standard. If you have child support that is also counted separately.

    Your employer doesn’t really know all the details of your situation. They just know you make $43,260 and you may have reported your exemptions in your W4 when you were hired. So they make a generic guess about your actual tax bill and withold that amount from your check. Then when you go and actually file your taxes with the IRS that is when you figure your real tax bill. If hte amount your employer withheld from your pay is more than the actual bill you get a refund. If the actual tax bill is more than what the

    Q10 Adam : Good job on the 3.8 GPA. CivE is a good career choice. I would highly recommend that you focus on finding some employment within the field of civil engineering. Any kind of internships or jobs that are in the field would be very useful. That is more important in the long run than paying off debt before graduation. Plus engineering internships usually pay fairly good wages. You’ll be better off with a job in your field on your resume at graduation. Its good that you take the debt serious but $18k of credit card / student loan debt is not burdensome for someone expecting to make $45-60k at graduation in engineering. I don’t want to claim debt is good or anything, but putting too much effort in being debt free at any cost is counter productive. Even at 10% a student loan debt of $12k is less than $200 monthly payments.

  31. deRuiter says:

    #16 and #22 nailed it! Lisa, get a part time job. It will increase your income and keep you too busy to spend money on items you don’t need like the camera. You may have the same problem our federal government does, spending more than you take in, much of it on superfluos things. STOP SPNDING ON ANYTHING BUT FOOD, SHELTER, BSIC TRANSPORTATION AND DEBT REDUCTION. It appears you and the feds don’t have an income problem, you have a spending problem.

  32. GayleRN says:

    @Q1 Make very sure you understand the program fully before you invest in company stock. There are often quite onerous restrictions on selling that are not well advertised, to say the least. I have been involved in 2 such programs, one successful and one spectacularly unsuccessful. The unsuccessful one involved selling restrictions which were not a problem until the day the Wall Street Journal announced the company’s bankruptcy, which is how we found out. The company management denied it to us even at that point. Short story is that it went from being worth $70K to $700 in one day.

    I would put some token amount in as a way to keep the company under the impression that you believe in them, but only as part of your well thought out total investment plan.

  33. kjc says:

    Is there just a touch of irony in the fact that Trent seems to hate advertising, yet this site is littered with ads?

  34. Courtney20 says:

    deRuiter – you claim at the end, in order to make a political statement, that Lisa doesn’t have an income problem…but your first piece of advice to her was to get a part time job and increase her income :-)

  35. Katia says:

    Q-2–I don’t think the question of the price of the car is as important as how much the price of insurance will be once your daughter gets her license! At least in my state (MI) I was shocked at how much insurance was when my children got their licenses. My husband has a 2005 sebring convertible; I have a 2004 ford explorer-both fully covered. In 2007, we got a 1997 mercury sable when my son got his license and his insurance (no collision) was almost as much as ours combined! So check into the price of insurance before you get rid of one car…it was cheaper for us to have a junker car that wasn’t driven much for our second driver, than to have her put on one of ours.

  36. mary m says:

    @Jill: please do some research before you decide which car to sell. Maxima’s are great cars and often get upwards of 200,000 miles. Caravans? Well that would be rare. Did your mechanic also offer to buy the maxima from you? Sure sign to run the other way with the keys.

  37. AnnJo says:

    Q3, Diane,

    Pay off the car loan first. As @Jonathan said, it has the greatest effect on your cash flow, because once it is paid off, your monthly spending will drop. Extra payments on your mortgage won’t have the same effect, since your mortgage payment will remain the same for the term of the mortgage.

    Also, when comparing interest rates, keep in mind that your mortgage interest is deductible, while your car loan interest is not. This difference means that, after tax effects, your mortgage interest rate is more like 3.75%.

    Finally and sadly, there is ample reason to believe the housing market will continue to decline for the next few years. Your house value may well go lower. The option of needing to do a short sale or walking away from it may be distasteful today, but may become necessary down the road, so any extra money thrown at your mortgage will only make that eventuality more painful.

    If moving to NC is an important goal, you might want to look at a short sale sooner rather than later. It will trash your credit for several years, but if moving to NC shaves $1000+ off your monthly expenses for the next several years, that might be a worthwhile trade-off. My understanding is that home prices, property taxes and income taxes are much lower in NC than in NJ.

  38. Sarah says:

    Q2: I’m sorry to hear about your situation – it’s very hard. You may want to double-check the rules in your State before you sell either car – depending upon where you are, it could cause complications for finalizing your divorce if you “dispose of assets” before the process is completed.
    Good luck.

  39. Sharon says:

    Q2. I would also get a second opinion about which car to sell and do research on the internet. Your mechanic has a financial interest in keeping your business so his advice should be taken with a grain of salt.

  40. Shannon says:

    Hi Trent,
    I love TV and hate the commercials too. However, I know that it costs A LOT of money to produce a show and they have to get paid somehow. It’s precisely because of DVR and other mechanisms designed to help us skip commercials that product placement is now part of the program. TV ain’t free, as much as we like to think that it’s our right that it should be.

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