Reader Mailbag: The Discarded Dreams

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. Starting a business
2. Spreading hobby costs socially
3. General life insurance question
4. Making major financial decisions
5. St. Patrick’s Day frugality
6. Buy it for life?
7. Using Roth for child’s education
8. Durable containers?
9. Why am I saving?
10. Taking advantage of low-tax year

For a few years (from around 2009 to about 2012), I harbored this hidden dream of going to culinary school. As I learned how to cook at home in the middle part of the 2000s, I fell in love with it and I kept wanting to carry it further. I actually researched schools that were near where we lived.

As appealing as that dream might have been, when I sat down and thought about what I might actually do with that education, I realized it was pretty limited. In reality, the reason for going would be to make better food at home to entertain friends and family. I can’t actually conceive that I would actually wind up in a restaurant kitchen.

My solution instead is to just teach myself as much as I can in my home kitchen using books and videos that focus on techniques. When I’m in the kitchen preparing something new and delicious and it turns out perfectly, I realize that I’m actually reaching the goal that I wanted to reach.

Culinary school was a nice dream, but when I broke it down into what I actually wanted out of it, I get that same joy out of a great meal prepared at home – and I don’t have to invest mountains of money in schooling and spend time away from my family.

When you have a dream, spend some time really digging into what you want out of that dream. In the words of Mick Jagger, you can’t always get what you want, but sometimes, you might find you get what you need.

Q1: Starting a business
Hey Trent, I absolutely love The Simple Dollar! I had a quick question for you. I’ve finally decided to get off my duff and use the programming skills I have to create some apps for Android, and later iOS. When I got my first app out there which I actually charged $0.99 for, Google wanted my W-9 tax information and I wasn’t sure if I should try and register and get a tax ID, LLC, etc, or just run it under my name with my social security number. What are your thoughts?

– Daniel

If you use your own name and SSN for the business, you’re acting as a sole proprietorship. There are many advantages to doing that – no corporate taxes, for one, and it’s very simple. There are a few disadvantages, too, but I don’t think they apply to your situation very much. See this New York Times article for an in-depth look at this dilemma.

In your shoes, since it’s just a one man shop and it’s not your full-time gig, I’d lean toward a sole proprietorship unless your app handles a large deal of sensitive personal data. If it’s just a game or it never actually accesses passwords or anything like that, I’d feel fine about it.

This might change. If you have dreams of scaling this business up to something bigger with employees and such, you’ll eventually want to form a stronger business structure.

Q2: Spreading hobby costs socially
My friends and I have a game night once a week on Mondays and a game day every other Saturday at someone’s house. Since we’re all into this hobby, it is really easy to spread out the costs. We’ll buy games together all at once from a discount retailer and get free shipping and really low prices, plus since we all game together we all get to play the games regardless of who buys them. So, I might spend $20 on a game once every few months, but there are interesting games to play almost every time we play, both new and old games. It’s worth your while to find social groups to share your hobbies.

– Andrew

In my game group, I’m the one who acquires most of the games, but not all of them. I tend to be the one that acquires them because I find it something of a hobby to search for bargains. I hit thrift shops and trade games online to keep costs low.

As for your point, I completely agree. If you can find friends who share a hobby with you, it opens the door to sharing items. Even if it doesn’t make sense to share the items, it can make sense to share bargains and discoveries.

One cautionary point, though: having friends that share an expensive hobby with you can sometimes make things really expensive. A social hobby makes you more involved, so if you’re doing things like golfing, you might save money on things like bulk purchases of balls, but your greens fees are going to go way up because you’ll be golfing more – and golfing is not cheap. I speak from personal experience.

Q3: General life insurance question
When is it worthwhile to get insurance? Right now I am single and my net worth is -$75,000 (thanks, student loans). I don’t know why I would ever get insurance. But if I had a net worth of $500,000 and some children I think insurance would be pretty much required. Where is the line that you cross where insurance is best?

– Micah

You cross that line the moment you have dependents. Income doesn’t really matter. (I am assuming you’re talking about life insurance.)

Without dependents, you don’t have anyone relying on your income. If you pass away, then no one’s life is really adversely affected from a financial perspective.

When you have a spouse and particularly when you have children, that changes. If you pass away, there’s at least one life that’s significantly affected in a bad way by the loss of your income.

I think every parent should have some form of life insurance.

Q4: Making major financial decisions
We are contemplating a move to another city within 5 years. One where we both would love to live, work, and raise our two small kids. The city does have a slightly higher cost of living than our current location, but we would live in a smaller more affordable surrounding town. We would rent until we found the right town and house.

Last year I started working again, after a lay off, as a freelance wedding photographer and 95% of the weddings are 3 hours away. The company I work for is owned by a close friend and we have a very good working relationship as well as a 10+ year friendship. We both want this arrangement to last for many years. I also have the opportunity to start my own photography business if I choose. The only expense associated with each wedding is more mileage (300-400 added each wedding) on a 133k mile truck and gas money, the vehicle gets 16-18MPG. My friend allows me to stay with her.

My husband works for a big box retail store and there is a store in the other town where we would like to relocate. He would have to wait for an open position in that store to transfer, but it would be possible. He was promoted right before the holidays, but wouldn’t be guaranteed the same position or salary at the other store.

I am 37, my husband is 34, and we have a 2.5yr old and 1.5yr old. Here’s our financial info:
2yr ARM @ 4.75% $684/month (rate change Aug 2014)
House appraised at $111,000
Still owe $98,000
Lived here 7 years, refinanced to ARM in 2012 to lower monthly payment following a lay off & birth of 1st child.
Own 2 vehicles, the Accord should last a couple more years (over 200k, good MPG, not reliable out of town) and the Xterra several years
(133k, bad MPG).

Two loans, both were for necessary home repairs:
$1400 @ 0%, $100/month for 14 more months (home projects Visa)
$6500 @ 0%, payment varies but at least $100/month (in law loan)

We try to keep $1500-1000 in an emergency fund for car repairs, large medical bills, and such. We add $40/week to the emergency fund. We have about $650 in various targeted savings accounts.
My husband contributes the match to his 401(k). His total = $23k
I have $5500 in savings to possibly contribute to my traditional IRA
(1.5% at the credit union) before tax time. My 2 IRA totals = $18k
We are able to pay all our monthly living expenses from my husband’s
pay checks, he grosses about $23k/yr.
My income is used to pay medical bills, home repairs, self employment
taxes, & unexpected expenses, I grossed $20k last year.
I didn’t have to pay estimated taxes last year, but may this year.
Both kids are on the WIC program.
Mother in law has set up an investment account (in her name) for the kids’ college expenses.

Our big question is what to do about the house and mortgage. We would need to make some more repairs (a few thousand $) and cosmetic touch ups before we could sell it. We plan to start those this spring and pay cash for everything as we go, but it will take a few years to do this.

Should we not worry about the interest rate change in August and go with the plan or should we sell as is and move as soon as we can? Should we switch to a biweekly payment even though we hope to move within 5 years? Wouldn’t it lower our principle faster so we could make some money when we sell? Any recommendations for an IRA investment account for someone self employed?

Should I contribute $5500 to my IRA this year (It will give us $300 more on our refund if I do) or put it toward our 2 home repair loans or in the emergency fund? Side note: I withdrew $5500 from my IRA last year to pay off medical bills. Any other advice from an outside perspective?
– Kelly

It depends on how good your credit is. If you have good credit, you should strongly consider converting that ARM into a fixed-rate mortgage. Right now, fixed rate mortgages can be found with interest rates lower than your ARM. Doing that would probably lower your monthly payments even more.

If I were in your shoes, the first thing I’d do is look at another refinancing, but in this case, you’re not trying to get money out of your home. You just want to convert your mortgage into a 30 year fixed mortgage with an interest rate that’s as low as possible. If you can get a mortgage with a rate that’s lower than 4.75% – even if that means a small monthly payment bump (it probably won’t but I don’t know for sure) – then you should convert to that.

Once you’ve done that, you should have plenty of time to fix up the house to sell it. As for the IRA contribution, I’d contribute to the IRA unless that Visa loan might adjust in interest. If that’s the case, get rid of that loan first.

Q5: St. Patrick’s Day frugality
I always make sauerkraut in March because cabbage is always really cheap because of St. Patrick’s Day. Cabbage farmers tend to grow it so that lots of cabbage comes of age in March and stores always overstock it and use it as a loss leader in the middle of the month. I don’t like the usual cabbage and corned beef meals, but I love sauerkraut.

– John

I love sauerkraut. It actually freezes really well, so it’s a good thing to make in bulk, so it makes sense to make it when sauerkraut is cheap.

Here’s my favorite sauerkraut recipe. It is actually salt free, but it ends up making some delicious sauerkraut.

I’m going to have to get my crock out. This is a great idea.

Q6: Buy it for life?
I like the idea of buying it for life but when you start really applying it things get expensive fast. How do you manage to balance a budget while replacing your stuff with long lasting stuff?

– Danielle

I practice a “buy it for life” approach where I can. I do it by simply buying highly reliable replacements when the original item breaks.

Right now, I have a skillet in my kitchen that has a Teflon non-stick coating on it. As soon as I see any sign of wear on that coating, I’m going to replace it with a seasoned cast iron skillet, but for now, I’m going to keep using the Teflon skillet.

When something does need to be replaced, the replacement cost is usually fairly high if I’m buying it for life, but since I’m not buying many of these kinds of items at once, I don’t sweat it. This is particularly true as time goes on as you’ll have longer and longer replacement cycles on your items.

Q7: Using Roth for child’s education
I’m getting married next year and plan to start a family right away, which means my first child of hopefully two will be born when I am 40.

My future husband, who will be 32 when first child is born, and I are toying with the idea of plowing more money into my retirement investments instead of a 529 plan, with maybe just a little put into 529 for Child 1’s first year of college. The justification is that Child 1 will be 19 years old when I am able to start taking money out of retirement, tax free if Roth or with taxes if not, without penalties. Child 2 will be able to take advantage from the very start of college. Another benefit is that I can use the money for programs to advance their careers if they don’t choose a traditional college setting. I figure the money I allocate for my retirement will still be there, along with savings for children, and I can separate based on percentages and growth. We’re wondering if there is a difference in the two methods for saving for child’s education that we haven’t thought of or something that is glaringly wrong we have missed.

On a separate but sort of related note, we hope to also open our home to a foster child at some point. The state pays you money to offset the cost of raising the child. What would be the best way to put away a portion of that money for their future education or just so he/she has some savings as an adult, just in case the child returns to their family or whatever may happen, so that it is protected? Or is that not the point of the money the state provides?
– Angie

That seems like a reasonable plan.

My only concern would be that you would drain your Roth at the start of your retirement, leaving you on weaker ground for retirement later on. Be sure to keep an eye on that.

You can start a 529 account for any child. My only concern in a foster situation would be keeping track of the child so that they know they have this account. Many children in the foster system move around a lot, so making sure the account sticks with them might be tricky. Your initiative is awesome, though.

Q8: Durable containers?
Do you have a recommendation for good durable containers that you can both freeze and microwave?

– Vernon

If you’re taking a “buy it for life” approach, I highly recommend these Snapware Glasslock containers. They’re freezer and microwave safe and the containers themselves (not the lids) are oven safe at lower temperatures (up to 450 F). They’re made of heat-resistant glass, so you don’t have to worry about chemical leakage if that’s a concern.

I generally don’t recommend freezing food in plastic containers. BPA is a real problem and even BPA-free items have leakage issues, so I don’t really recommend plastic containers any more for this use.

Q9: Why am I saving?
I am a 23 year old single female working as an electrician. I live in an apartment and have little interest in home ownership. My parents have suggested that I should be saving for the future but I honestly don’t know why I should save other than for retirement and I already save 10% for that. Why should I save?

– Kendra

There are a lot of reasons for you to be saving for the future, even if home ownership isn’t your goal.

Do you own a car? You should be saving for a replacement. Are you ever going to want to start your own electrician company? You’ll want money to seed that business with. Will you need more education or training in the future? Money in the bank will solve that problem. You also might end up deciding on a major lifestyle change, like a career shift or a move to another part of the country. Those changes are far easier with some cash in the bank.

Home ownership isn’t the only reason to save money. We all have lots of life goals.

Q10: Taking advantage of low-tax year
I am consolidating two retirement accounts into one Traditional IRA at a new company (Vanguard). When merged, I will have enough in the one account (about $13,000) to qualify for their Admiral Shares, with an expense ratio of .05%, which I know is very low.

1. I had low enough income in 2013 to have no federal income tax. Does this mean I can rollover a portion of my Traditional IRA to a Roth before April and not pay any taxes on it? I plan to rollover the max, $5,500.
2. If I do this, the balance in Traditional IRA will drop below $10,000, the cutoff for Admiral Shares. Then my expense ration will be around 0.17-0.19%, still very good. But there is also a $20/year charge too. Still a good idea?

– Marvin

When you do a rollover, the amount that you roll over will be added to your income for the year. This might push you up to the level of having to pay taxes for the year, but you’ll be in the lowest income bracket. Your tax bill won’t be too high.

You can roll the whole balance over at once. The $5,500 limit is on annual contributions. That doesn’t include rollovers. Read this article for a full explanation of how a rollover works.

If you roll over the whole balance, you shouldn’t have to worry about losing out on the better Admiral Funds.

Got any questions? The best way to ask is to email me – trent at thesimpledollar dot com. IĆ­ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.

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