What's inside? Here are the questions answered in today's reader mailbag, boiled down to summaries of five or fewer words. Click on the number to jump straight down to the question.
1. Early 401(k) withdrawal?
2. Preparing children for success
3. Velocity banking
4. When is it "good enough"?
5. Tipping question
6. Financial outpatient care and choices
7. Freezing and reheating soup
8. Questions about the "notebook system"
9. Tax return less than expected
10. Rental success story
11. How long should retirement last?
12. How to listen to podcasts
When I get out of bed, the first thing I do most days (after going to the restroom, of course) is to drink a big glass of water, stretch for about five minutes, and drink another big glass of water. I am constantly amazed how this little six minute routine wakes me up in the morning and makes me feel ready to deal with the day.
If I don't do this, my morning is incredibly "blah" for the first hour. I'm not productive. I still feel sleepy, like I'm not quite fully awake yet.
On the other hand, if I do other things in the morning, like a vigorous exercise right after waking up, I end up sacrificing the part of the day where focus comes easiest, which is the hour or two right after I wake up.
Each day, I get up. I drink some water. I stretch. I drink some more water. And I'm ready to go.
Let's get into the questions.
I'm 29 and have a good job. I'm getting married this summer to a 26 year old. When she was 23, just before we started dating, she lost her first job after college and went through an eight month job search where she lived off of credit cards. Between the credit cards and her student loans she is packing a lot of debt. She has paid off about half of her credit card balances since then and kept up with her student loans. We have not combined finances but we have looked at each others and we each are responsible for some bills. When we are married, is it a good idea to take money from my 401(k) to pay off her credit cards at least? It seems like the 24.9% interest on the cards blows away what I get in my 401(k).
Nope! Leave that 401(k) money right where it is. When you're married, work together to pay it off out of your take-home pay. With both of you working together on it, it shouldn't take you that long to knock it out of the park provided you don't inflate your lifestyle.
If you feel it's absolutely necessary to get rid of that credit card debt as soon as you combine finances, one thing you could do - though I don't recommend it - is cut back on your 401(k) contributions for several months, put that extra money in your paycheck aside, and then use that for a big payment on the credit cards once you're married. Obviously, you should restore your 401(k) contribution once the high interest debt is gone.
Still, my main recommendation is to simply work together to eliminate that debt through better lifestyle choices. Once you're married, that debt becomes a weight around your shared future plans, so you're going to want to be rid of it... but cashing in your 401(k) is also a big negative hit against your future financial plans, and it's a hit that's not worth it, in my opinion.
This week you did an answer to a single mother. From my perspective she also needs to focus on setting up her children to be more financially secure too. I teach and see kids totally unprepared for their school day. Are her kids in that category? Well...that’s an additional financial weight when the kids don’t launch well. At my school it doesn’t take much to be an excellent student-but less than 10% (my guess) really try. Anyway, I see you gave a short term answer, I’m just suggesting a longer view. 2 years becomes 20 years in a flash.
The question Jenny refers to is this one, which involves a single mother of two daughters trying to cut costs.
I agree with you wholeheartedly that having her daughters prepped for school each day is a key step to setting them up for success later in life. However, at the same time, I know the struggles of single parents, particularly those without any family support around them. They're working to keep food on the table and trying to juggle an awful lot of parenting and household tasks by themselves and they're having to make hard choices almost constantly.
My best advice for this is to make everything into a routine, even using checklists if you can. One of the advantages of making checklists for everything is that you can just hand a child a checklist and have them go through it on their own while you're doing other things.
Can you explain how velocity banking works? It seems like a good idea for getting rid of your debts quickly.
Velocity banking is an idea that seems to become popular once every few years, usually because some financial guru is pushing the idea. It's an old concept with a new name. I've heard it called the "Australian mortgage" and "mortgage accelerator," among other names.
Basically, the idea is that you turn your entire mortgage into a line of credit that you can draw from freely, like a bank account. When you withdraw money, the balance goes up, meaning you have more to repay over the long run.
Then, you have your entire paycheck deposited into that line of credit, knocking the balance down by your full paycheck, and you then live off of that line of credit, with the balance creeping upward as you spend money.
Initially, you could use that line of credit to pay off a bunch of high interest debts, effectively reducing their interest rate. After that, you can just make all of your purchases right from that line of credit. The only problem with this scheme is that now your house is the collateral for everything, so if you run into job troubles, you have an enormous mortgage and no way to keep paying it off.
I generally don't recommend this system as it can go very bad very quickly. It only works well if you have a very stable job and you're genuinely committed to spending less than you earn even when you have an enormous credit line sitting there for your convenient use.
When you're researching an item, how do you decide if a particular item is "good enough"? When do you stop doing more research?
Honestly, for most products, I usually just trust the Consumer Reports Best Buy. I'll do a little bit of additional checking just to verify that CR is on the money - they usually are - and then I look for the three or four items that I've identified as good buys from the Consumer Reports article, trying to find the best bargain amongst them.
If I'm looking at something that's not in Consumer Reports, I usually just make a brief list of features I want from the item before even looking at reviews, then I just make a list of items that get a good review while having all of the features I want. I put an X by an item if I find another good review for an item I already have listed, and I put a - by it if I find a negative review. For almost every product type, a few products end up floating to the top, and then I start price checking those items.
For me, research stops when I clearly have three or four items that are good "best buys" for that product type that have the features I want. At that point, I start price checking them, looking for a bargain. In general, unless something's urgent, I'll want to find a price that's 50% off during the first month of searching, then I knock off 10% each time (40% off during the second month and so on). The first time I find an item on my list at that discount, I just go for it.
I don't mind tipping 20% if the service at a restaurant is good but why should I tip if the service is awful? I went to a restaurant last week and the waitress never brought our drinks and let our meals sit on the counter for more than ten minutes. I didn't want to tip but my sister insisted on it and then when I wrote zero on the receipt she put cash under her plate.
My feeling on tipping low for bad service is that you're often punishing the waitstaff for issues beyond their control, and the waitstaff relies on that tip as many restaurants pay the waitstaff only $2-3 per hour with the assumption that tips will cover the rest of their income.
Imagine you're a waiter or waitress and you're working a table but your manager has given you some kind of unusual request, like a request to bus some other tables or to clean out a restroom or something like that. Obviously, while you're doing that other task, the table you're supposed to be working is getting bad service. At one restaurant I was at recently, I overheard a manager lecturing the waitstaff about not going to the tables too often.
What ends up happening is that your expectation of service is not met by the restaurant as a whole, and often primarily the manager, while the actual waitstaff is caught in the middle.
My solution is, if the service is bad, I tip as normal and then contact the management directly about the situation. I try to explain the problem without blaming the waitstaff - "I had to wait over ten minutes for a drink" rather than "My waiter didn't bring me a drink for almost fifteen minutes!"
Such situations do make me not want to go back to that restaurant that provided bad service.
I read your financial outpatient care article and thought it was well-done. I think that one thing this underscores is the importance of college major. I have a STEM degree, (Math) and 10 years after graduating, I made 90k/year, and now at 18 years after graduating, I'm closer to 160. It was a harder degree program, but it really opened doors for me. I found it interesting that the people profiled are performing lower-paid jobs than their skills could earn. Ms. Palmer, with 15 years of experience as a financial adviser/life insurance rep could easily make northwards of 100k/year, and instead works for a tech advisory firm. Ms. Ho and Ms. Alvarez both work for non-profits, which typically pay less than for-profits. Mr. Quesada is earning 6 figures at 34, which is laudable, and I'm sure some of your techniques would help him get rid of the 65k in loans in a few years. A lot of this seems to be their own lifestyle choices, and I applaud you for calling out the negative consequences those choice could have on others!
The article Adam is referring to is Financial Outpatient Care: When Parents Financially Support Their Children Into Their 30s (and Beyond), which appeared a few days ago on The Simple Dollar.
Almost everyone gets into financial trouble because of their lifestyle choices. Yes, there are some people who get into trouble because they've never had anything and can't get anything that pays more than a minimum wage job and have no family or friends they can cohabitate with, but outside of those corner cases, it comes down to lifestyle choices.
The thing is, after a while, you're either carrying the weight of your past choices or you're riding high because of them. That's usually the result of a lot of lifestyle choices, from how you spend your money to how you choose to live to how seriously you take your career and your jobs.
One should never forget that how you spend money over the course of a year changes your financial state drastically. How you spend money over the course of a month changes the outcome of your year financially. How you spend money over the course of a week drastically changes the course of your month financially. How you spend money today changes the financial outcome of your week drastically. Your choices today are the foundation of everything, and if they're bad choices that you know go against your principles and common sense, you're going to struggle to ever get ahead.
I made a bunch of chicken noodle soup and froze it. Tried reheating it and it was awful! Noodles basically disintegrated and it was kind of mushy all throughout. How do you freeze and reheat soup without it being [bad]?
Soup with noodles in it do not freeze and thaw very well - as you noted, the noodles go through some pretty bad transformation.
If you want to freeze and reheat some chicken noodle soup, save what you want to freeze before adding the noodles, then freeze the chicken soup without noodles in it. After you thaw it, bring it to a simmer and add noodles to your liking, letting them cook then.
Most soups freeze just fine - it's the noodles that are the problem. If you have a noodle soup that you want to freeze, just keep a bag of dry egg noodles in the cupboard and freeze the soup without noodles. It's not hard to thaw some soup, bring it to a boil, add dry noodles, and wait ten minutes!
I have a few questions about the "notebook system" you mentioned in your last inspiration post. What kind of notebook does he use? How does he keep track of projects that are like big lists of tasks? Does he use it for groceries?
Here's what I originally wrote about the "notebook system" which is a friend's method of keeping his to-do list straight:
His system is just a notebook. When it’s opened flat, it shows two pages. Those pages are covered in what looks like a giant to-do list. Whenever he has something on his mind that he needs to do or needs to remember later, he writes it down as a “to-do” on those two pages. When he takes care of something or moves a piece of information to where it should be, he checks it off his list.
Then, when those two pages get full, he stops for 30 minutes or an hour and just tries to take care of as many unchecked items as he can. With the rest that he can’t take care of right then, he decides whether each one is actually important or not. If it’s not important, he just checks it off. Everything else is moved forward to the next page – he literally recopies all of them – and then he checks them off on the previous page with a special check (a backwards checkmark, meaning he moved it forward).
That’s it. That’s his whole system. It kind of combines what I use a pocket notebook for with what I use a checklist manager for into one analog system, and it works pretty well for him.
I asked my friend your questions and here's what he had to say.
First, he uses ordinary college-ruled notebooks you can buy at the dollar store. He'll use fancier ones if he has them but ordinary dollar store notebooks are just fine. If they get raggy, he'll just replace them by moving over to a new notebook.
If he has a project, he usually thinks it out using Google Docs on his computer or a piece of scratch paper that he types into Google Docs. Then he just keeps the next task in the project in his notebook. He uses a "tag" system where, if something's part of a project, he'll write the name of that project in a box at the start of writing down that task, like [novel] Edit chapter 3. That way, if he checks off a [novel] task, he might want to add the next one in the project to his to-do list.
He uses it to add a reminder to go to the grocery store sometimes, but he does his grocery list separately. He says he usually uses a junk mail envelope for that.
In January, we bought a new couch because the old one was ruined over the holidays. We spent $1200 and put it on the credit card figuring our tax return would cover it as we usually get about $1700-$2000. This year our tax return was $200. What a rip off!
The thing to remember about a small tax return is that the tax return was actually paid out to you in small amounts in each paycheck throughout the previous year. In 2018, due to less taxes being taken out of your pay, each weekly check would have been about $30 more than it was in 2017.
Of course, the problem is that the $30 in each paycheck often just disappears into people's weekly spending, as it probably did for you. It probably felt like a little more breathing room throughout the year, but nothing life-changing.
There may have been a small change in your actual total taxes, but for most people, that change is actually pretty small.
Wanted to share my story of success with renting. I bought a 3br2b house as I intended to live in that area for a long time. About 9 months after I bought it my job moved three hours away. I considered selling the house but decided to keep it and hired a property manager to take care of it while still making mortgage payments. Had three renters over the last 8 years, income after property management fees and other expenses usually covered most of mortgage each month. I live in an apartment now but I have this house half paid for and most months I'm only paying $200 on the mortgage and the renters are paying the rest. Best move I ever made. I'll own the house in about 5 years free and clear and then I can just pocket the rent money.
This is a great example of the kind of successful situation one can have from owning a rental property. Most rental properties aren't quite this successful, but aren't complete failures, either; they're somewhere in the middle.
My experience has been that most of the stories you hear about rentals are either the 10% best experiences or the 10% worst experiences. Most of the "in the middle" experiences are the ones we don't hear about. They're the ones where the person renting out the property is either making enough to be mostly worth the headache, but it's not a killing. The stories you hear about are the ones where the people make a ton of money or they lose significant money.
Personally, I'd rather invest in something more passive, but that's my own choice. I don't particularly like property management tasks.
How long should a person expect to be retired these days? If a person retires at 65 and the average person lives until 85, that's 20 years. But what if a person has a really long life and lives to 105? That's 40 years and that's a very different goal. Should a person choose to save for 40-50 years of retirement even if there's only a 5-10% chance of living that long?
There is no easy answer to that question, especially when you consider life extension technology. What exactly will be technologically possible by the time you're 85?
That's why I usually encourage people to have enough in retirement savings so that they can live in perpetuity, even with reasonable inflation.
An easy way to calculate that number is to take your average annual expenditures, subtract from that your expected Social Security benefit, and multiply that result by 35. That's a good target number to aim for if you want to live in perpetuity without really changing your lifestyle. So, if you can live on $40K a year (including Medicare) and will be bringing in $25K off of Social Security, just take $15K and multiply that by 35, giving you $525,000 as a target number. That number will go up with inflation, but your investment returns should do much better than that.
How does someone listen to podcasts? I hear about them all the time and have visited some web pages where you can listen to one by tapping a button.
People often listen to podcasts on their phone, either through headphones or on their car stereo or through speakers in their home. I usually listen through a speaker when I'm doing something like washing dishes, and sometimes I'll listen in the car.
There are a lot of smartphone apps that will automatically download episodes of a podcast you subscribe to when a new episode comes out. So, you might subscribe to, say, Serial or This American Life and then, when a new episode comes out, the app automatically finds the episode and puts it on your phone for you. Then, when you want to listen to podcasts, you just open up your podcast app and pick the one you want to listen to and hit play.
My preferred podcast app is Overcast. However, for iPhone, the default podcast app that comes with your phone is pretty good, and if you have an Android phone, you can check the app store for an app called Pocket Casts.
When you launch a podcast app, you'll have to find some podcasts to subscribe to. All of the apps mentioned above have a directory of podcasts and a lot of recommendations, so it's easy to find some interesting stuff to listen to! Most podcasts have their old episodes available and your podcast app will let you download those, too.
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.