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. Saving on gym membership
2. Worst case scenario?
3. Job offer too good?
4. Ordering debts
5. Thanking “past self”
6. Market timing or house payoff?
7. Bored at work
8. Used or new lawnmowers
9. Netflix or Amazon Prime
10. Frugal holiday gift ideas
11. 4% withdrawal rate explained
12. Tax exposure
For readers in the United States, this week is Thanksgiving week, which means that many people have days off of work (especially in the latter half of the week), children don’t go to school (again, especially in the latter half of the week), and many families spend time together and usually have an extra special meal of some kind, often centered around a traditional turkey (but not always).
This week also often kicks off the holiday shopping season for many folks, with many people buying gifts on Black Friday and many others staying at home and preparing for the holidays in other ways.
No matter how you choose to spend this week, make sure that you spend a little of it giving your full and undivided attention to some of the people that you love. Turn off your cell phone. Listen to what those people are saying instead of simply pausing to think up what you’re going to say next.
You’ll find that over the long run, those are the moments you wind up being the most thankful for.
Do you have a gym membership? If not what do you do to stay in shape besides just running?
I do not currently have a gym membership. I have tried them in the past but they honestly don’t fit into my daily routine very well since I work from home. I have to leave home with the intent of going to the gym rather than stopping off on my way to work or my way home.
At home, I mostly use my own homemade variation of the “lifetime fitness ladder” that I track myself. The “lifetime fitness ladder,” at least the way I do it, prescribes a number of exercises that a person can do at home – pushups, squats, sit-ups, jumping jacks, burpees, and so on. What you do is start by figuring out how many of each of those you can do in a session with reasonable ease – not killing yourself, but getting sweaty and a bit out of breath. Write those numbers down and make that your first day’s routine. Then, for the next day, raise two numbers by 1. Then, raise two more numbers by 1. The only restriction I use is that I need to raise each number by at least 1 each week.
That routine works really well for my needs. While I’m not hitting strength training goals, most of those exercises are using my body weight to engage various muscles in my body and you can definitely feel a big difference over time.
Read this article recently about worst-case scenarios for people trying to be financially independent. What would you do if you were financially independent and disaster struck?
Honestly, I’d work at whatever job I could get. If I ever found myself in a situation where it didn’t look like I was going to be able to live for the rest of my life on my current standard of living, the first thing I’d do is try to find my way back into the workplace at some level, even if it meant an entry-level job.
Sometimes things just aren’t going to go like you expect them to go in your life. All of the planning in the world won’t protect you from every single possible contingency out there.
For me, at least, I’m not going to stop working on the first day I think that we’re ready for financial independence. I want to have some buffer room for financial independence for my own peace of mind.
Recently I was asked by a friend to apply for a job in his company that was really short on IT staff. I currently work in IT for a company about 40 minutes from my home and make a median salary for workers of my experience in my area. This other company is about 10 minutes away from my home and is offering a 20% pay increase and very similar benefits. My friend seems to like working there. I am hesitant to switch because I like my current job in every aspect except for the 40 minute drive, but the job offer seems like my current job but better and almost too good to be true honestly, which makes me feel like there are surely some negatives that I’m not seeing. Suggestions?
The first thing I’d do is discuss the company in detail with your friend. What are the bad things about the company? Why exactly is there a shortage of IT staff right now? Don’t just focus on the positives and how great the company is.
If you have anyone else in your extended social network that works there or worked there in the past, talk to them, too. Ask about working conditions, manangement, benefits, and so on.
The next thing I would do is research that company thoroughly online. Look for any and all discussions about the company publicly, as well as any places where employees may have criticized the company on sites like Glassdoor. Do people like working there? Do they hate it? Remember that sometimes sites like Glassdoor become a place for angry people to just rant for no good reason, but there are also some good pieces of information there, too.
If you add all of those things together, you can get a pretty good profile of what working at that company would be like.
My wife and I (both late 30s) are finding ourselves in a bit of a quandary over which potential debt we should take on first. Our situation is a bit uncommon in that she is employed full time and I am currently “unemployed” but I act as caregiver to a family member. Our goal is to own a home sooner than later. We have a decent nest egg of $14,000 set aside thus far. We also plan to continue our educations and would need to take on student loan debt. What has us frozen at the moment from pulling the trigger on either is that we aren’t sure if taking on student debt would prevent us from getting a mortgage. We may have an upcoming opportunity to get in on a first-time, low-income home ownership program and are leaning heavily on home ownership first. Then again we aren’t getting younger and would like to make a play for better paying jobs. Is there any advice you could send our way for what would be the best plan of attack or even a way to maybe have our cake and eat it too?
For me, it would depend on the type of degree that you’re trying to earn and how it would actually impact your job prospects. Some degrees really help, while some do not. Spend some time figuring out the actual return on investment for that higher degree over the rest of your working life and see if it will actually make a good return for you. Don’t just trust the idea that all college degrees will end up earning you money, especially given that you’re probably only going to be in the workplace for another 25 years or so.
If you’re only earning $10,000 more a year but it’s costing you $75,000 to get that degree, once you start eliminating things like taxes on your income and start factoring in interest on your student loans as well as any income lost during the years spent in college… it’s probably not worth it.
If you determine that the degree is worth it, I’d make that the higher priority than the house right now, as the value of the degree goes down every year you wait on it.
You write a lot about “future self” so I wanted to give a shout out to “past self” here. About a year ago I started reading Money360 and making improvements to my finances. I built up a $2,000 emergency fund by saving $50 a week out of my check. Well, this week my car’s brakes started stuttering whenever I hit them and I took the car into the mechanic for some expensive repair work ($1,200). In the olden days this would have been devastating but because of my “past self” for the last year this was easy to handle. It honestly felt like my “past self” was stepping up to the plate to help out with a crisis and it felt really good. You should write about this!
Thinking of your “past self” as being a tag team partner for today’s problems is a great way to look at saving for the future! I think we’ve all dreamed of having a “rich uncle” who could jump in and help us out with our current life problems. Saving for the future right now means that when that event happens down the road, your past self becomes that “rich uncle.”
It’s all about perspective and how you look at things. I constantly find new angles on the benefits of being smart about your personal finances – some personally inspiring and some that don’t click with me but could click with others.
The thing is, there are so many benefits that it’s easy to see how it would help, and it doesn’t really cost you that much to get on track.
For the last five years, I have been putting $250 a week into an index fund to fund my dream of starting a small business. That has turned out well and I have a nice nest egg in there but the goal isn’t an immediate one. What I have been more concerned about lately is my mortgage, for two reasons. One, I just want to get it paid off so I have more cash flow each month. Two, I am worried about the stock market as it feels like it’s floundering around a peak. I don’t want to pull my money out of stocks but instead just move my “contributions” to an early mortgage payoff. Is that market timing? What do you think?
I wouldn’t consider the market correction aspect. It is really really hard to say what the stock market will be doing in the future. The truth is that we simply don’t know what the future holds for the stock market because past performance never indicates future returns. I generally believe it will go up over the long term because I believe in human ingenuity and that humans will invent more and more efficient ways to do work, but in the short term, I frankly have no idea (nor does anyone else other than possibly a few HUGE investors that can swing the market by themselves).
In my opinion, the best way to think about your mortgage is that, given it’s already in place, extra payments toward it are akin to saving money at an interest rate equal to your mortgage interest rate. If you make a $250 extra payment now, it’s going to add up to a significant drop – much more than $250 – on the final payment of your mortgage. So, if your mortgage is at 4%, for example, your extra payment is “earning” a steady 4% per year which will be returned to you in the form of less payments at the end of your mortgage.
That’s a perfectly reasonable way to use your money. The stock market might have better long term returns, but it certainly isn’t a guarantee of 4%, having your mortgage paid off puts a great ease on your mind and on your cash flow.
I currently work at a really well paying job with great benefits that’s just boring. I basically do the same four or five procedures over and over again every single day, with only rare exceptions to this. There are days when I absolutely dread going to work because of it. My performance reviews are always great. I have considered asking my boss for some new challenges but I’m pretty sure he wouldn’t have anything different for me to do. The problem is that if I quit I don’t have any other jobs lined up.
Here’s my honest suggestion for you. The first thing you should do is look at your job and your company and ask yourself what the biggest unsolved problems that you face or touch upon regularly at work. What kinds of inefficiencies are in place that cause you to do these same routines over and over? How could these routines be made more efficient?
Once you figure out some things that could be done, identify the most beneficial few in terms of how much of an impact they could have on things, then describe what would need to be done to make them happen. So, let’s say you know how you could cut ten minutes off of a normal routine with a particular piece of equipment or with some different software or with some different training.
Then, propose that kind of change to your boss. Offer to spend a portion of your week implementing that change, which might slow down your productivity some in the short term but will speed it up over the long term.
Those kinds of “special projects” often are what makes a job enjoyable because of the variety they provide. Employers are often open to the best of those ideas because they make things more efficient, they keep employees happy. I did it myself many, many times back in my office worker days.
Is it better to buy cheap used garage sale pushmowers that only last for a year or two (usually after a few repairs) or to buy a decent one that will last a couple of decades? I usually just buy garage sale lawnmowers for $10-20 and fix them up but they’re usually in such bad shape after a few years that it’s cheaper to buy another used lawnmower than repair the one I have. The way I figure it I buy a mower for $10 and put $20 worth of parts and oil in it to get it running and it works well for 2-3 years, then I scrap it for parts (blades and so on) and throw it away and buy a new garage sale mower. On the other hand I could spend $300 on a new mower and keep it running for 15-20 years with good maintenance.
Given the numbers you’re stating here, it’s pretty much a wash in terms of cost.
I think that if you have $300-400 to easily spare for a new mower, then buying one up front is probably somewhat better because you’ll not need to invest as much time in it for many years. Yes, there’s maintenance to be done, but you won’t have to do any major work on it for a while.
If you don’t have that cash up front, then buying used mowers will certainly work out well.
We actually started out on the used mower bandwagon when we first became homeowners. We bought a garage sale mower just before we moved into our current home in 2007, then replaced it with another garage sale mower in 2009. We then bought a new mower in 2011 which has served us very well ever since.
My wife and I have decided to “cut the cable” and get rid of our satellite service at the end of our contract in February. We have been looking at both Netflix and Amazon Prime as streaming services to replace cable. You often recommend Netflix, but isn’t Amazon Prime better as it comes with the free Amazon shipping?
Netflix is hands-down the better service for video streaming. They offer more programming and, in my opinion, a better selection of programming and their interface is better. At home, Netflix seems to have fewer buffering issues, too.
Amazon Prime offers a streaming service, but with less selection. I’d describe Prime as having about 70%-75% of the quality and selection of Netflix. However, Prime does add in other benefits as you mention, such as the free two day shipping. For me, that has turned Amazon into a full price comparison tool on pretty much all nonperishable items.
The real question is whether you value the streaming a lot more than the other services or not. If you’re okay with a lower quality (but still pretty good) streaming service and get the shipping benefit too, then Prime is better. If you just want the best streaming service, then Netflix is better.
What are some really good inexpensive gift ideas? I’m not interested in homemade gifts as I don’t have much spare time these days.
I usually recommend giving people consumable gifts by default, things that they can eat and drink and not have to store. Giving people items that are permanent usually means that the items wind up in a closet somewhere.
So find out more about that person. What do they like? Take a bit of time to read through their Facebook page, for example, or see if they post on Twitter and find out what they enjoy. A variety pack of craft beer can be a great gift, as can a few bars of really good chocolate.
If you’re going to give someone a more permanent gift, I’d suggest something small and something that’s clearly tied into one of their interests. A good example of this is an external smart phone battery for someone who uses their smart phone a lot.
This needs to become a post all on its own…
I’m trying to understand what you mean when you talk about a 4% withdrawal rate. Do you mean that you can take out 4% of the balance of an investment in a stock market every year and it will last forever?
Given the way that you describe it, you’re completely correct that it would last forever. If you went to your investment balance each year on January 1 and withdrew 4% of that balance and then never touched it for the rest of the year, that account would last forever.
The problem is that as the market went up and down, the amount you could withdraw on January 1 would go up and down quite a bit. Let’s say you have $1,000,000 in the account on January 1. You withdraw 4% – $40,000 – leaving you with $960,000 in the account. Then, during that year, the market goes down 30%. That would leave $672,000 in the account on the following January 1. You would only be able to withdraw $28,800 if you followed the 4% rule, which might be mighty difficult for your lifestyle.
Usually, when people talk about a 4% rate, they’re saying that you write down the total on the day you start withdrawing at that rate – $1,000,000 in the example above – and then withdraw 4% of that amount – $40,000 – each year. So in the example above, you’d have $672,000 in your account at the start of the second year, but you’d still withdraw $40,000, leaving you $632,000.
The problem with a 4% withdrawal rate is that unless the market is going up very steadily over a very long period, you’re going to go broke. The Trinity study says that there is a very, very high likelihood that the stock market will keep going up enough over the long haul for your investment to be almost certain to have a balance above $0 after 30 years at a 4% withdrawal rate. That’s good enough for most people in retirement.
The problem is that it’s not good enough for people shooting for early retirement. If you need to withdraw steadily for more than 30 years, if you withdraw at 4% there’s a steadily climbing chance that your account will be empty at some point. Most studies seem to indicate that a 3% withdrawal rate is pretty safe for a human lifetime.
So, a 4% withdrawal rate is good for people at a traditional retirement age, while a 3% rate is better for people who want to retire early.
I sometimes read websites about investing and saving for the future and they seem to all be obsessed over tax exposure. What’s the big deal?
In simplest terms, tax exposure refers to the amount of your income that you’ll have to pay income taxes on. You can make a lot of choices, such as putting money into a 401(k), that reduces your tax exposure in a given year, but many strategies often delay that exposure to future years.
So why is this important? Let’s say, right now, you’re making $100,000 a year as a single person. That means all of your income between $37,451 and $90,750 is being taxed at a 25% federal income tax rate and everything from $90,751 on up is being taxed at a 28% rate.
Now let’s say you’re going to retire next year and you hope to withdraw $50,000 from your 401(k) each year.
Right now, if you put $9,250 into your 401(k), what would happen is that your taxable income would go down to $90,750, which means that none of your income would be taxed at that 28% rate. Instead, you’d have more money in your retirement savings.
When you’re in retirement and withdrawing $50,000 per year, let’s say you then decide to withdraw that extra $9,250 you socked away the previous year. That means your total taxable income is now $59,250 for that year, which is still in the 25% tax bracket. In other words, you reduced the taxes you pay on that $9,250 from 28% to 25% just by that simple move.
That’s a very simple example, but it gives you the idea of what can happen. The savings can sometimes be quite dramatic.
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.