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. Qualified dividends
2. Finding a second job
3. 401(k) and early retirement
4. EE bonds?
5. Interesting lunch routine
6. Mint syncing
7. Borrowing money to make money
8. Board games for children
9. Tool for early retirement date
10. What is “tax loss harvesting”?
11. Long term stock market collapse
12. Is Google Docs secure?
December is my least favorite month of the year. Yes, Christmas is a lot of fun and it’s part of December, but I don’t like December because it is the month full of the shortest days of the year. The two weeks from December 14th to December 28th include the 15 days with the least amount of daylight.
I’m mildly affected by seasonal affective disorder, which means that during December I feel tired a lot of the time. I fight it by going outside as much as I can and taking vitamin D and so on, but I still feel exhausted during much of December.
The nice part for me is that Christmas signifies the start of six consecutive months of gradually longer days. Sure, there are a couple more months of winter after that, but then spring starts appearing and I almost can’t stand to stay inside for a while.
But, for now, I need to tackle December, and I’ll tackle it one day at a time.
What are qualified dividends? What are non-qualified dividends? What’s the difference?
Dividends are simply small payments that companies pay out to each of their shareholders, usually on a quarterly basis. Usually, they pay out a tiny amount – a few cents, usually – per share, meaning that if you own, say, 20 shares in a company that pays out a dividend of $0.05 each quarter, you’re going to be earning $1 in dividends every three months. Dividends are considered income and you have to pay taxes on them just like other forms of income.
Qualified dividends are just dividends that meet specific criteria so that they’re taxed at a lower tax rate. For qualified dividends, the long-term capital gains rate is used rather than the ordinary rate. For anyone who is in the 25% tax bracket or higher, it’s going to be a noticeable difference.
The big factor that turns an ordinary dividend into a qualified dividend is how long you’ve been holding the shares. In general, if you’ve held the shares for six months or longer, the dividends will be qualified, and there are a few situations where somewhat shorter periods will also qualify.
In general, if you just buy and hold stocks or index funds or other mutual funds, you’ll mostly be receiving qualified dividends, which means you’ll be paying a lower tax rate on that income than you do on your normal income.
I have a very steady job where I work eight hours a day, five days a week like clockwork. It’s a job where you can kind of mentally check out all day long and just do the work, but it’s not real stressful or anything. All good – I don’t want to lose that job.
Most weekends though I don’t do much of anything during the day. I usually just get up around 9 and play videogames until the evening when I do something with friends.
I want to start a second job during the day on weekends but I am doubtful I can find anything that makes more than minimum wage which doesn’t feel worth it.
Basically I just want to convert those hours into income without too much stress.
There are a lot of things you can do with those hours to earn more income. As you mentioned, a second job is definitely one way to earn some income, but typically part-time jobs earn minimum wage or just a little more. That money is useful but it’s often not life changing.
Another avenue is to use the weekends to train for better pay at your current job by taking classes or getting certifications. I don’t know what it is that you currently do, but if there are any reasonable avenues for advancement, you could put the pieces in place for advancement on the weekends.
Yet another avenue is to start a little side gig of your own. Look at the skills you have and ask yourself if there’s anything you could do in your spare time to earn money. You can do anything from starting a small lawn care business to launching a YouTube channel and hundreds of options in between. The catch here is that the income is usually pretty slow at the start and builds up slowly over time – it’s not going to convert time to money immediately like a second job will.
Any of those options would be a great way to spend your spare hours on the weekends.
With a 401(k) you have to be 60 before you can start taking withdrawals from it without a big tax penalty. What do you do if you have a lot of money in your 401(k) but you want to retire earlier than that? Are you forced to work until 60 if your 401(k) is where most of your savings are?
There are actually a number of things you can do if most of your money is stowed away in a 401(k) and you want to retire before the magical age of 59 1/2 (which is when you can start taking penalty-free withdrawals).
The most popular route is to use rule 72(t), which allows people to start taking “substantially equal periodic payments” at an earlier age. To do this, you have to agree to start taking annual payments from your 401(k) at a set amount (the government provides a formula) until age 59 1/2. You can’t change the amount or stop the payments until you reach that age, and the amount isn’t large, but it is something.
Another avenue is to do a series of rollovers to convert your 401(k) into some other form of investment vehicle. This is a process that many investment firms will help you with. You may end up facing some taxes during this conversion process, but after the conversion your money will be in something much more flexible, like a Roth IRA.
Of course, you can always treat 401(k) money as “old money,” meaning that you live on other resources until 59 1/2 and then start tapping the 401(k). That’s more or less the plan that Sarah and I are following.
Do you think it is a good idea to buy EE series savings bonds? The government guarantees the value will double in 20 years so I did the math on that and it looks like that is a guaranteed 3.5% annual return if you sit on it for 20 years. Good deal or not?
It’s not a bad deal. That’s probably enough to beat inflation over the next 20 years, which is better than you’ll get in your savings account.
What’s the drawback? It’s extremely rare to find a 20-year period where you will do worse than an EE bond by investing in the stock market instead. If you’re looking at a 20-year time frame, the stock market is a pretty solid investment over the last 150 years or so.
There’s also the drawback that if you cash in the bond early, it’s going to provide a terrible return for you. Right now, the bond is offering a 0.1% annual rate of return. What happens with an EE bond is that at the 20-year mark, they adjust the value so that it’s worth twice the face value. Let’s say you buy $10,000 worth of EE bonds. At the 20-year mark, they’ll be worth double their face value – $20,000 – but at the 19-year mark, they’re only worth $10,192. That’s not a very good return on your money. You have to lock in your money for 20 years to make those bonds decent.
If you wanted to buy some EE bonds and put them in your safe deposit box for 20 years, it’s not a terrible thing to do with your money, but there are probably other options that are more flexible and offer better returns. In other words, EEs are a good choice and strictly better than some options (like a long-term CD right now) but probably not as good as others.
Just wanted to share with you my lunch routine. I make my lunches for work once every four weeks and make 20 of them at once. I basically make two or three variations on the same meal and will make a different set each month.
So what I do is I get out 20 freezer containers and in each one I assemble an individual lunch. Let’s say I am making red beans and rice and varying it a few times. I will make a ton of beans, like starting with two pounds of dry beans, and also a ton of rice, remembering that I will be making 20 servings of each. Then I will add sausage to some of the containers and maybe a chicken wing to some of the containers.
Once they are all done I freeze them all then I just grab one each morning before I leave for work. It thaws at work and heats up in the microwave.
The meals are usually really cheap and way less than $1 each. It just takes an hour or two on a weekend once a month and it makes you a month of lunches for like $15.
This is a really good idea. It creates some cheap and convenient lunches. These meals are going to be way more hearty and tasty than most frozen lunches and probably a lot cheaper to boot.
We do a similar thing in our own home by making full family meals in advance and freezing them, usually making a bunch of copies at once. We make slow cooker meals and full pans of lasagna and freeze several of each so we can easily pull them out for full family meals as we need them.
One good tip that you might want to try is using your extra ingredients to make your own dinner on the day you make these. For instance, you could take the leftover red beans and rice and maybe use that mix to stuff some green peppers for supper, or maybe you could mix in some okra. The goal would be to just make it a hearty variation on the simple lunches you’ve made so you can also have a dinner or two, too.
This is the kind of frugality that I love. It saves money, it saves time over the long haul, and it also produces some very tasty meals.
I have been using Mint for a few years now and I’m getting really frustrated with it. When it works it is amazing but it seems like every other week one of my accounts will stop syncing with Mint and I have to futz around with it. Sometimes accounts just don’t sync at all. Is there a trick to making account syncing work or is Mint just awful?
No, there isn’t a trick, but that doesn’t mean Mint is awful.
Here’s the problem. Mint’s syncing relies on the accounts of financial providers to continue to work in a certain way. Whenever providers make any change to the functionality of their account, Mint’s syncing with that account breaks until either Mint fixes it or the account provider rolls back their change.
Now, the problem is that there are LOTS of financial institutions out there. Let’s say Mint works with 5,000 financial institutions, and let’s say that on average each one makes an account change once a year. That means, like it or not, Mint’s syncing with about 14 financial institutions breaks every day. (The number is likely much higher than that, as I’m betting they sync with more than 5,000 institutions and the average institution changes more than once a year.)
In other words, Mint ends up spending a lot of time playing “financial institution Whack-a-Mole,” jumping from broken thing to broken thing and fixing it.
To me, the fact that Mint works at all is pretty impressive. Yes, sometimes an account is going to stop syncing, but it’s usually the bank’s fault, not Mint, and they’re usually fairly quick at fixing it when they can.
- Related: Alternatives to Mint.com
I found this video that explains economics in 30 minutes and found it really interesting and insightful. During the part where the video touches on personal finance, it recommends that people only borrow money for things that make them money, like borrowing money for a car to get to work, and never borrowing money for things that don’t make money like most crap you would put on a credit card. You’re pretty anti-debt but does that seem like a good idea to you?
If you’re going to go into debt at all, going into debt for something that is going to help you to earn money is one of the few things that’s ever worth considering (along with very basic human needs like food, clothing, and shelter – and not because you spent your money on other stuff or are buying an expensive version of those things).
That’s why I’m usually on board with student loans. I’m also usually on board with car loans, especially for one’s first car as people often need work transportation before they’re in a good enough financial state to just buy a car outright.
I watched that video and some of what they’re talking about is actually small business loans, which are a different ball of wax. Small business loans often make sense, but you need to very carefully wall off the business from your personal finances.
I’ve seen several posts from the Simple Dollar regarding games. We also love playing games, and are looking for additional games that we can play as a family. I have a 7 year old, 4 year old, and a 2 year old. Do you have any recommendations?
For your situation, almost any game made by HABA is a good choice. HABA is a company that makes wonderful games for families with younger children. We’ve owned several of their titles over the years and some of them are still popular with our children who are about three years older than your own.
Our family’s favorite HABA title is Animal Upon Animal, which is a game in which you stack these wonderfully painted wooden animals on top of each other without the stack falling over. It’s reminiscent of a colorful version of Jenga with a variety of shapes in the pieces.
Monza is a car-racing game with multi-colored dice. This one is kind of like Candy Land except that you roll dice for the colors and the children actually get to choose which paths they take on the board rather than just following a single path.
Another good HABA game is Orchard, which is a cooperative game that is actually a great way to get a 7 year old and a 2 year old to play together. It’s a little more expensive than the others, but the pieces are incredibly well made and absolutely gorgeous.
You should really check out this tool:
It shows you based on your financial situation right now and what you are doing with your money when you will be able to retire.
That’s a pretty sweet tool. According to that tool, Sarah and I should be able to retire right about the time we planned on retiring – 12 years from now, when our children are all freshly out the door.
Like a lot of well-designed financial tools, it’s pretty interesting to start plugging in numbers and changing assumptions to see what happens. What will my financial future look like if I start doing X? What if I changed it to Y? How will things work if I saved $50 a week ($2,600 a year)? What about $100 a week – or more?
It starts to give you a clear picture of what you really need to do to retire early – or even just to retire on time with a reasonable level of comfort.
Can you explain this idea to me in “simple” terms? I see the phrase come up sometimes when I am reading financial stuff but whenever I look up that term I end up really confused.
Let’s imagine you bought an investment of some kind – real estate, stocks, whatever – two years ago for $20,000. Today, that investment is only worth $18,000 – it lost $2,000 of value in the last two years. If you sell it today, you will have lost $2,000.
That’s not a good thing, of course, but it does have a silver lining. If you sell it, your taxable income on your income taxes will go down by $2,000. If you’re in the 25% tax bracket, that means that you’ll actually pay $500 less in taxes. It makes the sting of the loss quite a bit less than before.
Now, there are some limitations on it. You can only reduce your normal income by $3,000 a year due to tax loss harvesting – if you lost more than $3,000, you’re out of luck. However, you can offset capital gains as much as you’d like.
Let’s say you have a dog of an investment that lost $10,000 since you bought it. Ouch. However, another investment – say, a good piece of real estate – gained $10,000 since you bought it. If you sell them both at the same time, your total capital gains will be $0. No taxes at all. Now, you can reinvest all of that money into something else that will ideally earn you more money. You can read a ton of details in this article, which I think is written in pretty good layman’s terms.
Basically, tax-loss harvesting is a way to make the sting out of losing money on an investment a little less painful than before.
What makes you so confident that the stock market won’t completely collapse in the future? If “past performance is no indication of future returns,” what’s exactly keeping this house of cards afloat? Companies have stock market valuations that are beyond all reason.
I think that individual stocks will most definitely collapse in the future. Individual stocks often become overvalued because of hype and there’s always a correction when that happens.
I also don’t think that a complete stock market collapse is impossible, but I think that if it does happen, no investments are going to be worth anything as the United States will be collapsing as a whole. Your land ownership is probably worthless, too. Your money will be about as good as kindling. However, I think that this kind of scenario is very unlikely to happen in our lifetimes. I don’t think any nation with as many trade agreements in place and natural resources in the ground as we have would be able to collapse like that.
I think that the stock market will continue generally going up because of human ingenuity. Humans are very good at developing better and better solutions to life’s problems and coming up with more and more useful ideas. Over time, that makes us more and more efficient as workers and helps us to develop more and better products. The result of that is that the stock market as a whole – which represents the financial health of a lot of businesses at once – will continue to grow and thrive. There are always new markets and new frontiers and new ideas.
Do you think Google Docs is secure? Would you keep important documents there?
That’s a tricky question. I feel secure putting most of my creative work on there while saving offline backups. I wouldn’t feel secure putting things like passwords and such on there.
For me, a big part of the equation is making sure that Google Docs is secure. I do that by having a really long password with a bunch of characters in it and using 2 Step Verification. While it’s never a guarantee, I do feel like my account is pretty secure using those methods.
Do I trust Google with this data? Well, as I said, I’m okay with having my creative work on there, but I’m not going to keep passwords and personal data on there. I try to keep that stuff out of the cloud as much as I can.
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.