Reader Mailbag: Word Processing Middle Ground

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. Mess of debt and taxes
2. Renting out a room
3. Settling on retirement philosophy
4. Long games
5. Hotel disappointment
6. Future state retirement benefits
7. Lacking the “spark” for change
8. Taxes and online work
9. Renting for long road trip
10. Caucus thoughts

When I’m writing, sometimes I write in Microsoft Word and other times I write in a normal text editor. There are things about both that I do not like – Word often interferes too much, and the text editor interferes too little.

I’ve tried lots of writing programs over the years and they all fall on one side or the other of that fine line I’m always looking for. There are some online text editors that are very close, but there are a lot of things I write that I don’t feel good saving online.

One day, I’ll find the perfect program. Until then, I’ll just switch back and forth between the two options I have now, depending on my task.

Q1: Mess of debt and taxes
I’m a 29 year old woman. I was in a relationship for a number of years with someone who was horrible with finances. There are a few issues regarding some financial decisions that I made that will result in my tax bill being quite large. The first thing was, I let my desire to make him happy overshadow my common sense and acquired a large amount of credit card debt in my name. I broke things off and he, of course, left me high and dry to handle the large credit card bills alone. I just didn’t make enough money to pay off all of the debt on my own.

There were quite a few credit cards, so I made the decision to stop making payments to the larger cards and paid off the smaller balance cards one by one. Then I reached settlement agreements with the few larger cards. I’m going to have to pay taxes on the forgiven amount, around $17,500 in total, which is the first item that will affect my tax bill.

The second issue is I bought a house, ugh, if only I could go back. Anyway, I ended up doing a short sale and roughly $10K was forgiven by the lender. Also, I got the $8K tax credit and didn’t live in the house for 3 years, so I believe I will be required to pay that back as well. The last piece of the puzzle was a 401K loan. I took it out for the down payment on the house, because I thought my job was secure (I had worked for the same company for 7 years). Then in October my company decided that they no longer wanted me to work remotely and asked me to move back to San Diego, I live in Milwaukee. I respectfully declined, since the reason I moved was to reduce my living expenses and to be closer to family.

No longer working for the company meant I either had to pay back the 401K loan, which I didn’t have the savings to do after dealing with all of the credit card debt and the expenses associated with keeping my house and property in shape while I was trying to sell it. I transferred my 401K into a Fidelity account, the loan was paid back but I’ll still have to pay taxes on the $13K that I still owed on the loan.

In summary, I have to pay taxes on the $17,500 in credit card debt that was forgiven, the $10K that was forgiven by the mortgage lender, the $8K tax credit and the $13K 401K loan. Obviously, this is not a pretty picture but it’s the last financial hurdle leftover from my previous poor financial choices. I’m planning to hire a tax accountant to help me make sure I get every possible deduction, but I know it’s still going to be a hefty bill. I’m still unemployed, so paying it back won’t really be possible currently but I’m hopeful I’ll get a new job before I file my taxes.

My question is about whether you think I should use the money I rolled over into a Fidelity account to pay off as much of my tax bill as I can. I only have about $13K, so it would wipe out all of my retirement savings and I’d still owe more. Obviously, I won’t use the money in my 401K if I’m still unemployed, but assuming I’m employed and I’m able to get some savings together would you recommend I use my 401K money to pay down my tax bill? Or should I just set up a payment plan and not touch my 401K? I recently began a new relationship with someone who makes much smarter financial decisions, luckily, and I want to take care of my financial issues sooner rather than later so they don’t hinder the progress of our relationship (he’s aware of my pending tax issues and the past poor financial choices I made). I just want to make a smart decision in handling this last issue and would like some advice. What do you think I should do?
– Monica

If I were you, I would set up a payment plan as soon as possible so that you’re not paying anything late. The EFTPS program actually makes this pretty easy. You can get started with EFTPS here.

Believe it or not, even though they have a bad reputation, the IRS is often willing to work with taxpayers if they’re also willing to play ball.

It sounds like you’re trying to make this right and being proactive about it. You’ll be fine.

Q2: Renting out a room
I bought my home 2.5 years ago and have rented a room to a friend for most of that time. I anticipate that my friend/roommate may want her boyfriend to move in with her sometime soon. I’m not opposed to this as it would be another person to split bills with and he is a nice guy. What might be an appropriate way to think about how to charge them? The current deal is $500/m plus 1/2 utilities (up to about $120 per person in winter or summer, more like $60 per person the rest of the year). He would be living with her in the room she’s in now, so not really taking up more space in the house but it doesn’t feel right to have him live there for the same rent that just she pays. On the other hand double the rent to $1000 plus 2/3 of utilities seems overly harsh. What should I consider when trying to find a fair middle ground here?

– Jill

I am always uncomfortable with situations where there’s money and friendship involved, particularly when one person is the lender (you, here, in essence) and another the borrower (your friend, in essence). You always have to tread carefully in these situations.

If I were you, I would not double the rent. Are they going to be using any more real estate than they were using when it was just her? How much more? I’d think about that and raise the rent proportionately, if at all. You may also want to think about property taxes and such – if they’ve gone up a little, a slight bump in rent might be appropriate.

If you do raise the rent, I’d explain exactly why in very clear terms. If you’re clear about why you’re raising it, particularly when there’s now an additional renter in the equation, you should be fine.

As for the utilities, I think equal shares among all of you is fair. All of you are going to be using energy, heating, cooling and so forth. Those bills will go up.

Q3: Settling on retirement philosophy
I am having somewhat of a philosophical crisis with regard to saving for retirement in general as well as the specifics involved with being overseas.

First the general: In reading many of your mailbags, you often praise the tax-advantaged instruments (either tax-deferred or those with reduced or no tax on withdrawal) for retirement savings while at the same time pointing out the inherent problem with trying to guess future tax rates, future income and other conditions which would affect the choice. Also complicated the thought process are the various options for actually investing the retirement money: funds, bank accounts, pension plans incl. annuities etc. I was feeling confident with my choice but I feel like the fees are too high to justify the continued investment in front-load mutual funds, not to mention the fact that active funds rarely beat the market. Finding ETFs for retirement funding is next to impossible here. Maybe the correct path would be retirement insurance/pension plan, but they may be too conservative.

The path I am on now is investing in a fund-based “Riester-Rente”, which to summarize is a grant-aided annuity plan. The grant essentially acts as an alternate tax deferment mechanism, but is otherwise similar to a traditional IRA in most respects. The major problem, though, is that if one is not taxed in Germany during retirement, any grants and additional tax deductions provided must be paid back. Since I can’t even guarantee that my family will be in Germany much longer than another 5 years or so (gotta go where the work is ;-) ), I cannot see investing 30 years into a tax deferred instrument only to lose that significant advantage in the end. The other issue is that the invested capital is simply lost if I were to die after retirement, similar to many annuities in the US.

I think, in the end, the major problem is information. I try to approach things empirically and I think this may not be an empirical question, but rather an emotional question about motivation. I am just unsure of the correct way to go. What is the correct general philosophy when planning for the future?
– Carl

I agree with you that the major problem is information, both in the sense that we have imperfect information concerning the world around us and no information concerning what unexpected events will happen in the future.

For my own retirement, I’m hedging my bets. I have money both in pre-tax investments (401(k)s and the like) and post-tax investments (Roth IRAs).

We don’t know what the future holds, so I think that diversity is the best option. If you have retirement money in both pre- and post-tax investments, you’re doing the right thing, in my opinion.

Q4: Long games
Over Christmas break, one of my brothers brought home a board game called Twilight Imperium. We usually play a few games of Risk over break, but he told us that Twilight Imperium was way better. And he was right. It was awesome.

The only thing is that the games took about six or seven hours to play. Most of the time, I don’t have that much time to put aside for a game like that.

Have you played Twilight Imperium or any other game that long? How do you find time for it?
– Luke

I’m in a weekly gaming group that meets at the house of a close friend of mine. He has a spare table in one room of his home that he allows us to leave games on during idle weeks.

Thus, if we were to meet at 6:30 or 7 (which is our usual meeting time) and play Twilight Imperium (for example) for four hours, we could just leave the game on the table and return to it next week, finishing it up.

You could do this in your own home if you have an extra table to spare for a while. Set up a game, play it for a while, and leave it. Once upon a time, my roommate and I would do this with a chess board, leaving an ongoing game in the living room all the time and making moves after giving them sufficient thought.

Q5: Hotel disappointment
The recent new years eve my wife and I went to Disney World at the request of our son. I searched out a room online based on price, location, and reviews. When we got there the room turned out to be less than we had hoped for but served the purpose. We definitely would not recommend it to any of our friends. If we go again I will probably spend the $ and stay at one of Disney’s “value” resorts unless you or your readers have a better suggestion?

– Andrew

Any time you stay in a hotel without having actually visited it first, you’re taking your chances. A hotel might be beautiful in January, be sold in February, and be sort of run down by May if the new owners aren’t committed to it.

I generally give lower value to hotel reviews that are older than about three to six months. There is ownership turnover, staff turnover, and countless other things that can change a hotel’s standards and conditions in that timeframe.

How do you protect yourself against it? We usually chase price, but there have been times where we’ve either just refused to stay at a place or deeply regretted it.

Q6: Future state retirement benefits
I’m vested in the Florida Retirement System (FRS) for government employees. I no longer live in Florida, and am not contributing to the system or earning additional benefits.

I’m entitled to a small monthly pension. I intended to wait until age 62 before collecting it. At my current age (57), I could claim early retirement and receive a reduced pension. (The benefit amount is reduced 5% for each year my age at retirement is under normal retirement age, which is 62. Retiring at age 57 would reduce the benefit by 25% [5% multiplied by 5 years].)

I’m self-employed and don’t need the money for current living expenses. I’m in good health. However, FRS is not completely funded, and its website warns that the legislature may reduce future benefits.

I’ve asked friends in Florida (FRS retirees) whether they think this is likely to happen. One says she doesn’t believe so; the other urged me to file for retirement benefits now to lock them in. I’ve done some searching online but don’t have a good sense of the political climate in Florida.
– Marjorie

If I were you, I’d ask about the statements on that website in more detail. Their phrasing makes it unclear whether or not they would just deny new beneficiaries or they would cut benefits from applicants or both. I would clarify the possibilities of what they could do and then make a decision based on that.

One thing I’ve learned about government is that, if they think they can get away with it and be re-elected, they’ll tap any source of money they can find for their pork projects. I have found it best to never rely on something that is promised to me as a benefit by the government. If I get that benefit, great – it’s a wonderful perk. I plan as though it’s not happening, though.

You’re lucky enough to be in a situation where it won’t break you one way or another, but an awful lot of people aren’t that lucky. My advice is that if you’re older and reliant on such government services, live lean and get yourself in a situation so that you’re as independent from the money as you can be through savings. If you’re younger, fund your retirement.

Q7: Lacking the “spark” for change
I enjoyed your article this week on the motivation to improve one’s situation. In the article, you take the perspective of an individual who is attempting to help or motivate a third party. My question comes at this issue from the point of view of the individual being motivated.

Personally, I feel that I lack the ‘spark’ that you speak of, to instigate lasting change and yet there are changes that I wish to make in my life. I am seeking that spark.

How would you recommend capturing this energy for someone that does not come by it naturally, but wants to make changes?
– Nate

I think there’s a difference between something you’d really like to do and something that’s a life-changing situation.

I struggle with this myself. There are a lot of things that I’d love to be able to do with my life, but when the rubber hits the road, I can see clear separation between the goals that are just ones I’d like to do and the ones that I feel are really central to my life.

The ones that are life-changing don’t come along nearly as often as the others. I usually find that they burst into my life when I finally hit some sort of “bottom” related to that thing, where life grabs me by the chest and demands that I make a change.

Keep doing things and living life. Eventually, the important things will reveal themselves.

Q8: Taxes and online work
I’m trying to pay off my credit card debt and save a large chunk of money this year. I feel like I’ve cut all I realistically can at this point, so I’ve been searching online for ways to make extra money – even an extra $100-200 per month would help out immensely. I’ve come across options like MTurk and usability testing like usertesting.com which seem like they can provide the possibility for some additional income. My question is not around these two examples specifically, but online endeavors like this in general in relation to taxes. Most places put the burden on you to file your taxes, and I’m wondering if you think there is a specific threshold where it actually makes sense to invest the time into these things to make the extra money, or if the tax part of it is not worth the potential of a few extra bucks?

– Jeff

The tax part of it is pretty simple, especially if you use something like TurboTax. You usually enter one line on one form, your total taxes go up by some percentage of what you earned from the endeavor, and you either get a bit smaller refund or have to pay in a bit more.

The challenge with endeavors like MTurk is to recognize that you’re going to – at best – earn minimum wage for the time you invest. The advantage is that you can do it irregularly. You can do it during commercial breaks or when you have insomnia or when you’re using the restroom.

In some situations, I think things like MTurk can be a real help to people who need some extra income very quickly.

Q9: Renting for long road trip
Trent, just read a piece you wrote about renting a car for a long road trip a couple of years back. I liked the math, but how did you convince a rental car company to let you make that long trip? I am planning a trip from Missouri to Florida, where the car will set in a lot for a week while we take a cruise.

– Andy

It was fairly expensive, but the advantage was that it enabled us to take only one vehicle on the trip, whereas without the rental we would have had to take two vehicles. Once we did the math on the gas, maintenance, and wear on two cars, the single rental became the better option.

There really wasn’t much convincing with regards to the long-distance drive and the rental agency. They said “sure” and tacked on another fee.

In your situation, I would run the numbers and see if a flight wouldn’t be a comparable option. In our situation, we had a group of seven uf us traveling from Iowa to Texas, so flights from Des Moines to Dallas for seven would have been cost prohibitive. For two or even three people, the equation may be different.

Q10: Caucus thoughts
You’ve mentioned a few times that you attend the caucuses in Iowa. What is that experience even like? I know that the candidates campaign in Iowa for a long time before the caucus. What are your thoughts on that whole process?

– Will

It depends on whether you’re attending a Republican caucus or a Democratic caucus in Iowa. I’ve attended both.

With a Republican caucus, it’s pretty straightforward. All of the attendees sit in the same room. They announce the candidates, then volunteers are able to speak for five minutes on behalf of each candidate. After that, there’s just a ballot vote, followed by a very open counting of the ballots.

With a Democratic caucus, things are different – and much more entertaining. At a Democratic event, there are no chairs. Instead, everyone stands around while a representative from each candidate gets to speak for a few minutes. After that, you simply go stand beside the representative of your preferred candidate. Then, they dissolve all groups that have less than 15% of the people in the room and those people have to pick another candidate. During this process, there’s usually a lot of politicking and pleading and the room can get quite loud.

The process is really fun, though it does usually feel like the culmination of several months of craziness. If you’re registered for a party that is having a contested caucus, you’re absolutely inundated with political mailers, robo-calls, push polls, and other such things. That’s been our experience, anyway.

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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