Reader Mailbag: Wisconsin Emails

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. Regular or Roth IRA?
2. Setting long-term goals
3. “Free” texting and phone service
4. Saving for a laptop
5. Paying for taxes
6. Buy or rent?
7. Are protective sleeves worthwhile?
8. Reading 100 books
9. Small business questions
10. Homemade dish washing detergent

About a week and a half ago, I suggested that the best resolution to the protests in Wisconsin would be to have both sides sit down at a table and come up with a reasonable compromise, but I also suggested that wouldn’t happen because there are too many political points to score by not negotiating.

Of course, almost as soon as I sent that out, I got emails from both lefties and righties complaining about what I suggested, decrying the other side as not playing fair and standing up for false ideas.

I figure that if both people on the left and people on the right disagree with me, I must be saying something sensible.

Q1: Regular or Roth IRA?
I am a 23-year-old, recent college graduate who was lucky enough to graduate debt-free from a good school. Thanks to great in-school work experience, the longest I’ve ever been unemployed has been about one month, and that was when I quit my job to move across the country and out of my parents’ house. I only make about $27k a year, plus a small bonus, at a job I love—though I’m hoping this will increase (at least a bit) when I renew my contract this summer. I no longer have a car, and my work helps pay for my transportation pass. I still use the small, local credit union from my home state for my checking and savings account (there’s a credit union close to where I live now at which I’m able to deposit checks, so I have so far no incentive to switch banks as the interest rate is better than others I’ve looked into, and the checking is free). I have $10k in a savings account, and to this I add a 10% contribution from every paycheck. I have two credit cards that I pay off in full every billing period. I try to limit the amount of money I spend on superfluous things without depriving myself unnecessarily, and am definitely living within my means.

I have a few questions. The first is that my previous job had a state-employee retirement benefit program that I was enrolled in, and since I’ve moved out of state I have yet to move the money I accrued while I was there. I was told that I only have to call them and ask for it to be rolled over into an IRA, but I’ve read on your site about the Roth IRA, and I understand the difference but have no concept of what would be better for myself. I also don’t even know where to begin in terms of finding a company to do it through, especially since I don’t know how long I will be staying in this state. My current job does not have a retirement benefit program. If I were to do this, would I pick a company to set up the Roth/IRA account through, then call to roll over the money? How does one choose a company? Should I be contributing to this account, once I start it? I’m not sure how much money I could be able to contribute on a regular basis, unless I started putting some/all of the 10% I’m currently giving to savings to this account.
– Kendall

For reference’s sake, the big difference between a regular IRA and a Roth IRA is whether or not the money is pre-tax (a regular IRA) or post-tax (a Roth IRA). In a regular IRA, you contribute money out of your income before income taxes are collected (meaning the amount of your income that you need to pay income taxes on right now is lowered), but when you actually take out the money when you’re older, you’ll have to pay the income taxes then. With a Roth IRA, the reverse is true – you pay into that account with money you’ve already paid income taxes on, but when you withdraw from it (with a few small restrictions), you don’t have to pay income taxes on what you withdraw.

So, which is better? By default, I usually point to a Roth being better, because my opinion is that it’s inevitable for taxes to go up from where they’re at right now. The exception to that, of course, would be if you have an enormous income right now – but, in that case, you’d be ineligible for a Roth IRA anyway. Simply put, if you’re eligible for a Roth, I’d use that.

As for picking a company for your Roth, you really need to research that. I’ll just say that Vanguard hosts my own Roth IRA, and I’ve been happy with them. To handle rollovers, you’d want to contact your new brokerage.

Kendall had a follow-up question.

Q2: Setting long-term goals
Additionally, I know you make a big point about having long-term goals for one’s money, but I’m not quite sure what mine are. I would like to be able to travel, but I don’t envision any big trips in my near future. This is mostly because my boyfriend still lives in the state I moved away from, and almost all of my vacation time/extra monthly income goes to planning and paying for trips to visit him. He is currently in school, and we plan to eventually find a way to be together once he is finished (most likely, he will move here), but that is over a year away. Other things I am thinking about for the next few years are possibly going to graduate school (I am browsing programs, but am not looking to apply for another year or more, or when I’m completely confident about my choice in programs), and getting married and having children (at the very minimum, two or more years away). I’m not sure what to do in terms of working towards these goals, because none of them feel very defined. It also seems as though I have enough money to begin investing at least a little bit, but I am not very interested in financial dealings and am not sure what kind of investments I would feel comfortable with making and maintaining. If I did something of the investing sort, I’d prefer for it to be something I don’t have to spend much time thinking about. Would something like a CD be worth it? What are the options? I saw a recent review you did for a book about “passive investing,” and I was planning to look into reading that. Alternatively, is there anything that I’m not thinking about that I should be?

– Kendall

I would suggest that you sit down and make a detailed picture of what you would like your life to look like in, say, five years. Think about what your life would look like if you succeeded in all of the little things you’d need to do to get you there (within some level of reality, of course). Make that picture detailed. What are you doing with your time? Where would you live? Where would you work? Who would you be with? Would you be married? Would you have kids? Would you have a car?

Make that sketch, then figure out what needs to be done to get there. Once you have that plan in place, start throwing your resources into that plan. Your time. Your money. Your energy.

Even if your path changes a little and you end up aiming for something else, the effort you’ve put in will still likely be a positive one, because most of those efforts are done in an effort to improve yourself. You’ve learned how to spend less. You’ve learned how to set goals. You’ve probably built up some useful experiences and a better resume. Those are all good things.

Q3: “Free” texting and phone service
I am writing you this because I recently saw that there are several ways of using a phone for calling and texting without being on a monthly payment plan, and I thought it would be nice if more people would know about it. You have the means of letting them know this and I don’t remember reading something about this on your blog.

There are applications which enable this on several devices (iPhone, Android, …), the application I know about is Textfree with voice.

My understanding is that you have to have Wi-Fi access for the applications to work, but other than that, you’re good to go, you can call and text and all that and I believe you don’t have to pay anything. It seems to be a pretty cool idea and maybe some people will save money using these kinds of applications.
– Florin

Yes, these apps exist, but they have tons of drawbacks.

Such applications require you to already have a data plan for your cell phone to use them. Without such a data plan, you simply can’t use them.

Depending on the specific app, there’s going to be some sort of drawback. The one you mention, Textfree, requires you to install apps on your phone to earn calling minutes. The vast majority of the apps are paid apps. Unless you have truly unlimited data, you might end up paying more for the free app than you would pay for the minutes you earn by downloading it.

Yes, if you have a device that runs iOS or Android that also works via wireless, you can use these apps without having a cell plan. However, you’re then in a situation where it only works when you’re around wireless access. At which point, why not just use Skype?

The situation where these apps are a big winner seem pretty narrow to me.

Q4: Saving for a laptop
I’m a 26 year old student and have a part-time job which pays me 6,50€ (~$9,10) per hour. My bachelor thesis is coming up in April and I’m thinking about buying a new laptop for research and writting. Right now, my Girlfriend shares her Laptop with me but I got the impression that I won’t be able to work in peace with hers, because she comes bumping in and wants to use it for useless things like checking facebook. We could make an agreement on which we agree who can use it when but doesn’t fit my needs when I’m researching and writting. That takes a lot of time and I’m not very good at sitting down doing such things, so I think I need my own laptop so I can work when ever I want to. You said more than once on your blog that you recommend buying used products but when it comes to electronic devices I disagree with you because you never know what you get and more importantly you might end up with no warranty.

I’m working a lot to pay my rent and bills – added up: 550€ (~$760) – and if things go the right way, I have some money left at the end of the month. So, I’m thinking on saving it to buy a new laptop. But for over two years I’m in need for money every month for rent and bills. What would you advise?
– Oliver

You’re right that you need a laptop. However, for your use case, you don’t need a very high-powered one. You can easily go low-end if you’re just running a word processing program and a web browser.

I don’t know what the computer market is in your area, but one could easily be found here for $500 or less that would meet the needs you describe quite well.

Don’t overbuy for some imagined situation that overshoots your needs, especially when money is tight.

Q5: Paying for taxes
I am self employed, and this year earned more than I did last year. So the estimated taxes I paid throughout the year came a few thousand dollars short of what I owe. By April 15th, I need to come up with around $3000 for last years tax bill, plus $1000 more for my first quarterly payment. I am trying to save to pay as much as possible, but I know I’m going to come up short.

I also have $4200 in credit card debt (interest rate 10-12%) which I have been working really hard to pay down over the last several years. It pains me to put a few grand on my credit card for taxes– especially because this exact same thing happened last year and I ended up putting over $1000 of my tax bill on my credit card. (I saved more for taxes this year and paid quarterly but it still didn’t end up being enough).

I currently have nothing in savings. I try to have an emergency fund, but when I have a car repair or slower than usual month, the fund disappears.

So my question is, should I use my credit card to pay the tax man? Is there any strategy for what I should pay first or pay late (State, federal, estimated tax). Or Is it better to set up payments with the IRS? Or pay as much as I can on April 15th then wait for them to come find me and hope I have more money to pay then?

I know I’m going to have to save a lot more of my income in order to avoid this problem in the future…. It’s difficult having to set aside my own tax money, rather than having an employer do it for me.
– April

My first suggestion to you would be to file for a time extension from the IRS that would allow you until August 15 to file your taxes. You can get the forms for that quite easily.

This would give you additional time to make sure you can cover what you owe to the IRS.

I agree that it’s difficult to set aside tax money. What I usually do is have a tax savings account. Whenever I receive any sort of income, I immediately put half of it into the tax account. At the end of the year, when I do taxes, I have far more than enough in that account to cover all my taxes.

Q6: Buy or rent?
I am 24 years old. I currently live at home rent-free with my parents (thanks, parents!). I’ve been working at my current job for a little over a year and my income from last year was 50,000+. The following is a breakdown of my major bills:
Car loan: $12,175
Student loans: $57,200.38 (a small loan from undergraduate and then the rest are from one year in law school that did not work out)
Credit car debt: $841.72 (this will be paid off at the end of march/april 2011)

This reason I am contacting you is because I am interested in purchasing a home in the city where I currently live (Baltimore, MD). The current asking price for the home is $55,000. It is a four-bedroom home with one bath. It is, however, under short sale. I’ve heard that short sales can take some time depending on the lender and how much time it takes to get a reply. This home is in an area that is being targeted for revitalization, so there are some incentive programs such as forgivable loans and grants that can be used towards this property. I just recently started thinking about purchasing a home because I originally planned on moving out soon. I would like to know if it would be a good idea to try to purchase this home given my current financial situation. Should I buy now or should I rent? Also, I hadn’t originally saved any money towards a down payment for a home, but at the very moment, I would probably have about $1500 to start off with.
– Charlotte

You have debt already that exceeds your annual income. I would not add significantly to that debt unless absolutely necessary.

If I were you, I would rent. I’d use every extra dime of income to get rid of the debts I already had, and then I’d save for a down payment on my home. Yes, this will take a few years, but not going that route is not only far more expensive (because of the additional interest you’ll have to pay on loans because you weren’t paying them down quickly), but it’s also far more risky (because of the situation you’d be in if you lost your job, etc.).

I’d rent for a while until my finances were in better order if I were you. Buying now isn’t worth the risk.

Q7: Are protective sleeves worthwhile?
Based on your recommendation, my wife got me a copy of the card game Dominion for Christmas. Since then, I’ve played it a lot and some of the cards are starting to show some wear. I’m not worried about them completely wearing out, but I’m starting to worry about marked cards. A friend suggested sleeving them – putting all the cards in protective sleeves. Do you think that’s worth it?

– Kevin

I sleeved my own copy of Dominion when I was in your situation. My feeling was that if I was playing the game enough to wear down some of the key cards, that wear would continue, and buying sleeves was less expensive than purchasing a new copy of the game. I used Fantasy Flight Standard Euro sleeves – they’re pricy, but they work well.

However, I only used those sleeves because I got a great discount on a case of them, which enabled me to put a few other card games into sleeves.

If I had not found that great deal, I would have used “penny sleeves”, which are very inexpensive, but flimsy. They do the job of protecting the cards, but the sleeves themselves wear out and split really easily. You’ll be replacing them fairly frequently, but the cost per sleeve is low.

Q8: Reading 100 books
I came across your list of reading 100 books this year. That’s quite a challenge. How has it been going so far?

– Eugene

I’m currently about fourteen books in out of the hundred.

I’ll admit, though, that I’ve had a hard time sticking with the list because of the Kindle my wife gave me for Valentine’s Day. I’ve been reading a number of free downloaded books on the Kindle, some of which are on my list (like The Count of Monte Cristo unabridged), and some of which are not.

I’m not sure whether I’ll get through the full list, but I think I’m reading more books right now than I ever have.

Q9: Small business questions
My husband is in the process of starting his own business (a tutoring company, an LLC) and we have been looking for some resources and guidance about the nitty-gritty business stuff. We’re getting small business accounting software and I picked up a copy of “Small Business for Dummies” but neither of those answer all the questions we have. Do you have any cheap or free resources that we could go to to answer our small business questions? In particular, we’re curious about how we pay ourselves once we start bringing in money. Do we just dip into the kitty or do we have to establish a pay scale/salary? At this point he is the only employee and likely will be for some time in the future. Any guidance you could give would be appreciated.

– Rachel

You named the book I consider to be the best “starter” book on small businesses. I don’t have any specific recommendations beyond that one.

You have to pay yourself from your small business the same way you pay any other employee from that business. If you’re trying to determine how much to pay yourself, start low and keep the money in the business. If you are doing well and need more, give yourself a raise.

If he’s the only employee and you’re trying to figure out what to pay him, it really depends on what your overall budget looks like. What money needs to go into the business for other expenses? What about marketing? What about supplies? You’ll also want to reserve a bit in the business for opportunities.

I don’t know what that looks like, but I don’t think I would exceed 50% of the billable rate that you’re charging customers until you’ve got a firm grip on how the business works.

Q10: Homemade dish washing detergent
i waould like to know how to make my own liquid dish detergent, not for the dishwasher but for hand washing.

– Ted

The single best soap for washing dishes that I’ve found is a little strange, but it works.

Just shred two bars of soap into flakes (using a cheese grating box). Put the flakes slowly into five cups of water, then boil that water on the stove and stir it for a few minutes, slowly. Add one cup of baking soda, 1/4 cup washing soda, and 1/4 cup lemon juice, slowly, stir for another minute, and let it cool. Be aware that when you add the other ingredients, it will foam, so I recommend using a large pot for this.

The stuff you wind up with is pretty thick. Keep it in a container under the sink and when you want to use it, put some of the soap on your sponge, then rub whatever you’re cleaning with the sponge.

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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