Questions About Grad School, Bottled Water, Roth Conversions, Books and More!

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. Planning ahead for second home
2. Going back to grad school
3. Waiting on a Roth conversion
4. Electronic price book help
5. Problems with untrustworthy tax preparer
6. Depressed by long payoff time
7. Poor career choices
8. Vegetarian future proof for cheapness?
9. Unfair pay
10. Bottled water conflict
11. First time renter advice
12. 2016 books to reserve

The holidays have come and gone, leaving us at the start of a new year and a completely new set of choices and priorities. May 2016 fulfill everything you hope for.

I, for one, have this feeling that 2016 is going to be one of the most memorable years of my lifetime, both in terms of personal and world events. I hope to see you again on the other side of it.

Q1: Planning ahead for second home

My wife and I bought a condo about a year ago (20% down, 30-year mortgage @ 3.875%, currently making standard payments, though we are capable of paying more per month). We know this is not our “forever” home, and I am interested in maybe becoming a landlord of our current place when we buy a new one (recognizing there’s a lot of work in being a landlord). What’s the best way for us to prepare to buy a new home in the next 5-10 years? Pre-pay our mortgage? Set aside funds for a new downpayment as if we were first-time buyers? I assume that if we decide not to keep our current place when buying a new one, that this situation becomes far easier? We’re looking at an increase in housing cost of somewhere from 25-50% more than what we are in now, mostly to accommodate eventual kids room(s) and a better school district.
– Darren

So, let’s figure out what things will look like in 10 years. In your vision as described here, you would still own your current home and also a newer home in a nicer area (and theoretically with a higher price tag on it). You’re going to have some kind of mortgage between the two homes, possibly with mortgages on both.

There are two things that make it very difficult to tell you what the true best path is. First, it’s really hard to know where the economy is headed in the next 10 years. What will the housing market do? What will interest rates do? It’s really hard to tell. Second, it’s also hard to tell where your finances will be in 10 years. Will you be earning more? Earning less? Will your life be in a great state?

Given all the levels of uncertainty and also given the low interest rate on your current mortgage, I would probably lean towards investing for the long term rather than pre-paying the mortgage. If I were doing this personally, I’d probably schedule an automated transfer each month into a Vanguard account where it would automatically buy into the Vanguard Total Stock Market Index, at least for now. (This isn’t hard at all. Check out Vanguard to get started.) As you feel you’re getting closer to your goal, I’d turn that automatic transfer into saving cash in a savings account to start cutting your risk of a bear stock market as you get close to buying.

Q2: Going back to grad school

Do you have any financial tips for preparing for a family member to go back to grad school? My husband will be going back to school this September and will not be able to work. We will be losing half our income. We have two young children ages 2 and 4. We are remortgaging our house to drop our monthly payment, and have paid off all our previous debt including student debt, cars, etc… But with 6 months until he starts, I wonder if there is anything else we could be doing other than big savings to prepare for 2.5 years of school.
– Maryse

Saving is obviously a big part of the equation here and you’ve correctly identified that.

I would suggest also trying as hard as you can to live off of one income now. Make sure you can do this and you know how to do this. Consider these next six months your “training wheels” for living on one income and completely bank the other income, because you’re going to want to be ready when the training wheels come off.

I would also suggest buying things in bulk right now if you have space so that you’re not buying them later on. Purchase nonperishable goods in large bulk now while you have the extra income and can afford to go “over” your “training wheels” budget a little bit. That way, you’re paying less per item overall and you can coast on using those pre-bought bulk items during the first few months of his graduate studies. Obviously, that won’t hold up over the long haul, but then you can space out bulk purchases as needed.

Q3: Waiting on a Roth conversion

How would the numbers run on waiting until you are unemployed/underemployed for converting a 401k to a Roth 401k? For example, lets say my income varies from $30k-39k/yr. Since I’m on the edge of a tax bracket, I have incentive to put away an extra 2k a year in my 401k so I don’t get taxed at 25%. How does the rollover work? If I roll over on a bad year, do I pay less taxes then on a good year?
– Janine

You’re absolutely right that you’ll pay less taxes in a year where you have less income from other sources. However, there are a few things to keep in mind.

First of all, when you say that you “put away an extra 2k a year in my 401k so I don’t get taxed at 25%,” I worry that you may not understand tax brackets. Putting that $2,000 a year into your 401(k) does not change the taxes you pay on the rest of your income. The only thing that’s happening is that you would be paying a 25% rate on just that $2,000 and by putting that $2,000 in your 401(k), you’re delaying paying taxes on it until a later date in retirement when, in theory, you’ll be paying a lower tax rate on it.

Doing a Roth conversion when your income is low just means that some of the value of that conversion will be covered at a lower tax rate. Let’s say your 401(k) has $50,000 in it and you’re making $50,000 this year, and you’re single. If you do the conversion this year, that essentially pushes your income up to $100,000. That means that the first $9,275 of your income gets taxed at 10%, the next $28,375 gets taxed at 15%, the next $53,500 gets taxed at 25%, and the last $8,850 gets taxed at 28%. Your effective tax rate would be 21%, as your total tax bill would be $21,036.75. However, any deductions you may have would first reduce that $8,850 number, and if it eliminates that, then it would start chipping away at the $53,500 number.

If you wait until a year where you only make $20,000 and you’re converting $50,000, the first $9,275 of your income gets taxed at 10%, the next $28,375 gets taxed at 15%, and the remainder of your $70,000 income gets taxed at 25%. Here, your effective tax rate is 18.9% – a better rate – and it gets lower with every deduction you can come up with.

In other words, you’ll save some on your effective tax rate by waiting until a low income year to convert, but it won’t be a huge, life-changing amount. You’ll also need to pay all of that extra tax out of pocket, so you’ll want to have some serious money in savings when you do decide to convert.

Q4: Electronic price book help

My bf and I LOVE your idea for a shared price book via Google docs. We just made one and are having trouble figuring out how to create a total line that will give a sum for prices per store. Can you offer some help for the formula we would need to use?
– Jane

This is a basic spreadsheet technique that you’ll find comes in real handy over and over again if you start playing with your financial numbers in any real way.

First of all, I’d use Google Sheets for this. For the first column, I’d just make a list of all of the things you want to have in the price book. Make the first entry in the column something like “ITEMS” and everything under it should be the specific items you want to compare. Make these descriptions fairly specific so you’re sure you’re comparing the right things.

Then, start columns to the right with the first row in that column being the name of the store and then each item below that being the value of the specific item for that row (from the first column). Easy enough.

At the bottom of each column, type in =SUM(B2:BX), where B is the letter of that column and X is the number of the last item in that column. So, if your price book has a bunch of rows and the last one is row 26, you would type in =SUM(B2:B26) to get the total of items in column B, or =SUM(C2:C26) to get the total of items in column C. Once you type this in, it will automatically recalculate when you change prices up above.

That’s all you need to do!

Q5: Problems with untrustworthy tax preparer

I write to you because I’ve fallen into an impossible situation. Long story short for a couple years I was trusting a friend to do my taxes and paying him but unfortunately he was just taking the money and not filing or paying my taxes. So I recently filed all my back taxes and now I owe the IRS $170k. I am completely overwhelmed. I have set up a monthly payment plan with the IRS and they just filed the lien. I don’t have any assets currently but what do I do now? I have tons of mailings from companies offering loans to settle with the IRS. Would this be a good route to go down? I feel like I’d rather be paying a private company loan payments and get the IRS tax lien removed. Is there a trusted company I can speak with? Like I said I’m totally overwhelmed and just want to speak with someone who will have my best interest in mind.
– Thomas

I basically agree with Investopedia’s great article on IRS tax settlement firms:

“Most tax settlement firms promise to send their experts to the IRS to negotiate on behalf of the client, where they can presumably persuade the IRS to accept a much smaller amount, such as for pennies on the dollar. In reality, this is virtually impossible to do, and the IRS very, very seldom accepts any real reduction in the amount of tax owed unless the taxpayer is near death or totally unable to obtain any type of gainful employment and has absolutely no assets whatsoever that could be used in a meaningful way to cover the required tax liabilities. The best that everyone else can hope for is perhaps an extension of time to pay their taxes.”

Once you’ve entered into an agreement with the IRS to pay a certain amount, the only route available to you to reduce that amount (besides actually paying it) is to make an offer to the IRS as a compromise. They have a standard procedure for doing this and it involves a lot of documentation. It also usually ends with rejection unless you’re on your deathbed or in a financial state where you essentially have no assets and poverty-level income. However, you can actually do this on your own without a firm helping you.

In short, tax settlement firms don’t really offer you anything you can’t do yourself. You might feel better getting a loan from one of those firms to help you pay off the IRS earlier, but their interest rates are usually pretty high. You’re essentially trading one problem for another and the new one has a higher interest rate. Those companies offer loans because they make a small profit if they can’t work out a reduction with the IRS and a big profit if they can, and people sign up out of fear of the IRS. The truth is that the IRS isn’t that different than any other lender other than the fact that they can make you stick to the payment arrangement through wage garnishment or liens.

Honestly, unless you’re planning on trying to skip out on paying back the debt to a private company, I’d just stick with what you have now and not bother with them.

Q6: Depressed by long payoff time

I currently make $41,000 per year and have $126,000 in student loans. My monthly loan payments are $1,300 a month and I won’t have the loans paid off for over nine years. I sometimes manage to pay a little extra on that loan but it’s not really reducing the payoff time. I feel like I am basically in debtor’s prison for the next nine years and there is no way out.
– Charles

Unfortunately, there isn’t some magic recipe that will easily get you out of this situation. It’s just going to take time and patience.

If I were you, I would probably look toward earning more in my spare time. What do you do in the evenings and weekends? Are you doing things that cost money or earn money? At the very least, you shouldn’t be doing too much that costs money, but if you can find things to do that earn money, that’s much better.

I’d also look seriously about what you need to do to move up in your career. What is the next step for you? What do you need to do to get there? Every step you take increases your income or your short-term earnings potential.

Good luck.

Q7: Poor career choices

I made the mistake of letting my family choose my future. I got a communications degree because my brother wanted me too and then I got an MBA because my parents wanted to me to. Now I can’t find a job I like or would enjoy and I keep thinking I should just start over and go back to college and get an interior design degree. Something I actually enjoy. But I’m 26 and that’s a lot of money that I don’t necessarily have. I took a Meyers Briggs test and I am an INFJ and I have read that something where I felt I was making a difference would be best and I completely agree. I feel lost and I hate my current job. What should I do?
– Erin

Unless you have a specific goal in mind and are very, very confident in that goal – for example, you know exactly what you want to study and have a very clear plan that leads to work in that field – you shouldn’t go back to school. It’s incredibly costly to do that.

Instead, you should look for ways to leverage the degree and skills you already have toward something you care about. You’re right in that people who get an INFJ result on a Meyers-Briggs test tend to do better in fields where they feel like they’re making a difference.

So, I guess the question is what is it that you care about in the world? What types of organizations and businesses do you feel are making the kind of difference in the world that you want to be involved with? What I would do in your shoes is try to take the skills and degrees you already have and use them to further those causes. Look for organizations furthering things you believe in and then find ones looking for people with your skills.

You mention an interest in interior design. Although a degree can help in a field like that and it’s likely the right place to start for someone fresh out of high school, it’s also a field driven heavily by portfolios and personal connections more so than degrees. If this were a serious interest of yours, I’d change my perspective on my current job. Look at it as a way to keep money flowing in while you build up a great interior design portfolio. Spend every spare moment you can learning as much as you can on your own about interior design, then take on jobs for family and friends at a very low cost or for free in order to build up a portfolio that you can start using to show others and perhaps get clients. Do that in your spare time and use your main job as simply an income generator – that’s what a lot of people do who try to launch more creative careers.

Good luck!

Q8: Vegetarian future proof for cheapness?

My husband and I have been vegetarians for many years for health reasons. I’m always stumped why people claim that being vegetarian is so expensive. It’s actually pretty cheap. We just don’t go to the meat counter ever, and I’m always stunned by the high prices there. Since animals require a lot of various vegetables and grains to grow and they waste alot of those calories on waste and exercise, it seems to me that vegetables and grains should always be cheaper per calorie than animals.
– Mary

You’re absolutely right on why vegetables and grains should be cheaper per calorie than meats, but that’s not always 100% the case, for a few reasons.

For one, the USDA subsidizes a lot of the agricultural market, artificially reducing prices on lots of things. Depending on their current policies, this can cause meat prices to be artificially low or vegetable and grain prices to be higher than usual. There’s also the free market at work, which can cause prices to go up and go down.

For another, animals are often raised under the most cost-effective conditions possible. All you have to do is watch a documentary or two about how animals are raised in confinements and other situations to see how every penny is squeezed out of the cost of raising animals, often to the detriment of the animals themselves.

Add those two together and the gap isn’t always as big as you might expect. I do agree that a vegetarian diet can be pretty cheap, but there are factors keeping the costs of meat fairly low, too.

Q9: Unfair pay

I am a 50+ white female with over 30 years experience in various office settings. Last year I was hired initially as an executive assistant for a construction company. After I had been here for a month I was trained by the outgoing HR director and was advised that I was take over the HR duties. 6 months later the company hired a 20+ white male that had just graduated college. They wanted to fill a compliance officer position. Our parent company wouldn’t let them hire just a compliance officer so our management decided that they would hire a Compliance/HR person. This man makes $1.00 more an hour than I do as well as the fact that he got a weeks vacation that he could start taking immediately (rather than the year I had to wait) and will be awarded 2 weeks on his anniversary date. He does absolutely no HR duties, has no training in HR at all other than the little bit that I’ve talked with him about. I have been told that no one at the parent company has any idea that I do all of the HR for this company. Do I have a discrimination case? I have talked with our vice president about this and was told that he didn’t see the problem. What should I do? I just want to get credit for the job I do (especially helpful when it comes time for raises) and I want to be paid fairly.
– Jill

The first question I would ask is whether the compliance officer position had additional requirements that go beyond the requirements of the HR position that you have. Was this new compliance hire required to have certain degrees or certifications beyond what you were required to have?

To me, that’s what all of this really comes down to. If the compliance job had additional requirements, then it’s completely understandable that it would offer more pay and benefits. If it did not have additional requirements, then you might have a case, but I don’t know nearly enough about the ins and outs of your situation to know for sure. You would want to talk to a local lawyer.

Before you do that, though, I’d really think through your situation. Were you eligible for the compliance officer job? Was it offered publicly at a higher rate than you were making? Could you have applied for it? Is your current hourly rate what you initially earned with the company? Have you asked for a raise or done enough to warrant one? I don’t know these things at all, but I do know that you need to have all of your ducks in a row before even having a legal consultation is worth your time.

Q10: Bottled water conflict

My wife refuses to drink water from the tap and insists on bottled water. She buys it by the case at the warehouse club. I don’t have any problem drinking it from the tap and consider it wasteful. So I suggested to her that we consider the bottled water to come out of our fun money and she absolutely blew up at me saying that I was trying to count basic needs as fun money. Help?
– Mike

No budget between two married people is going to ever be perfect. There are going to be disagreements on spending priorities and this is clearly one of them.

What I would suggest for you is consider a food upgrade of some kind that you enjoy that maybe your wife does not and start including that as part of your normal food budget. I really don’t know what you eat or drink, but there’s probably something where you buy a low-cost version but would, with all else being equal, prefer a different version. Start choosing that different version for a while.

That way, if she complains about it, just say that you drink water from the tap and she drinks “premium” bottled water, so you’re enjoying a “premium” item, too.

Q11: First-time renter advice

I’m looking for some information about how much money I should be spending on renting a house. I start my ‘real’ first job in June and just wanted some pointers about how to figure out a good budget.
– Marvin

The easiest place to get a sense of what you should be paying in rent is probably Rent-O-Meter. It’s not perfectly accurate, but it will give you a good ballpark figure of what you would be paying in rent in a certain specific area.

One key thing to remember is that if you have a job in a large city, you can probably live anywhere on the mass transit lines and be just fine by using the transit lines to get to work. So, if you know your metro area, explore that city’s metro system and find out some of the various areas you might be able to live safely and spend a little less on housing.

This article at ApartmentGuide also offers some good advice on how to budget for renting. It’s not just rent itself that you need to budget for as you’ll have utility bills, insurance, and so on.

Q12: 2016 books to reserve

You mention that you sometimes reserve upcoming books from the library. What upcoming books do you have reserved right now? And how do you find out about them?
– Sarah

My primary method of finding out about new books is by reading several different book blogs and publications. I read Omnivoracious, io9 books, NYR Daily, and several others, plus I often read book reviews that pop up in places like The Atlantic. I discover all kinds of books through these sources.

The books I’m looking forward to most in 2016 are The Throwback Special by Chris Bachelder (a novel about 22 men who get together each fall to re-enact a famous football play), City of Mirrors by Justin Cronin (the conclusion to a trilogy of incredibly good post-apocalyptic novels), Barkskins by Annie Proulx (a huge, epic novel by one of my favorite writers about the destruction of a forest and the lives connected to it over three centuries), and Let the People Rule by Geoffrey Cowan (about how political primaries were born out of the 19th century era of political bosses picking nominees).

I could actually write a much longer list, but those are the four that I’m truly the most excited to read out of the dozen or so upcoming releases I have reserved.

Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. 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 many, many questions per week, so I may not necessarily be able to answer yours.

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