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. Real estate investing 101
2. Frugality and thinking ahead
3. TSP or Roth IRA?
4. “Bang for buck” work clothes?
5. Follow up questions about notes
6. Cheap eggs?
7. Saving for college each month
8. Inexpensive shaving besides safety razors
9. Rejected for a checking account
10. Buying old trading cards
11. Hand soap refill question
12. Cheapest holiday card?
There are days in which the world opens before me like an oyster. Ideas fall from my brain and onto paper like water through a downspout. I have more ideas than I know what to do with. I write and I learn and I write and I have ideas and I lose track of time.
On other days, ideas don’t come. Words don’t come. Everything feels tight and forced and unnatural.
I wish I knew the magic recipe for having more of the former kinds of days than the latter. I know that having a good night of sleep helps, but not too much sleep – my magic number is right around seven hours. I know that coffee and green tea and some protein in my belly, all together, tends to help, too. I also know that some mild deadline stress can help, and getting started early in the morning can help, but sometimes a walk can really help, too. Ambient background noise helps, too, far more than silence.
Still, there is no magic, perfect formula. I can nail all of those things and it still doesn’t happen, or I can do almost none of them and words and ideas still flow. Those things just seem to increase the odds of good outcomes, or maybe they’re just false positives in my head.
On to the questions…
Can you explain how real estate investing works to me, because I don’t understand it unless there’s some kind of bubble going on. From what I can tell, real estate nationwide goes up at a rate a little higher than inflation, about 3% or so. If you have to take out a loan at 4% or 5% to do that, how do you make money?
I loved this question, Max!
Let’s start with an example. Let’s say you buy a $200,000 property that will go up 3% in value per year. You have enough cash for a 20% down payment, so you take out a 30 year mortgage for $160,000 at 4% to cover the rest. Got it?
So, let’s throw that $160,000 mortgage into a mortgage calculator. You’ll be making a monthly payment of $764 on that mortgage.
Let’s roll four years down the road:
+ You’ve made a total of $36,672 in payments.
+ Your remaining balance on that mortgage is $148,022.
+ The house is now worth $225,102 – it’s grown at 3% a year.
+ You sell the house, repay the mortgage, and you’re left with $40,408. Congratulations, you made $408 in profit!
Doesn’t seem impressive? Well, if you’re an investor, you’re looking for better returns than that. Maybe you can get a mortgage at 3.5% by shopping around. Maybe you can find a market where the value is increasing more than 3% a year (maybe you can speculate on property on the edge of a growing city, for example). Maybe you’re making money on the property while it’s sitting there by renting it out – if it’s farmland on the edge of a city, maybe you’re leasing it to a farmer. Maybe you hold it for longer than that (the returns accelerate if you hold it for a while). All of those things increase your returns.
At the same time, there are costs. You’ll likely have property taxes. You may have maintenance costs or other expenses, too.
The point is this: what you’re doing is taking advantage of the fact that you’re only putting 20% down on the property. The amount you’re actually investing is relatively small compared to the total value of the property.
This is also why your primary home isn’t a great investment. By living there, you cut yourself off from the ability to rent out the property to make more money, which is one of the big avenues for really making money in real estate.
Let’s do one final calculation. Let’s use the exact same scenario above, except that you get a 3.5% loan (reducing your monthly payment to $718 a month) and you find someone to lease the land for $2,000 per year. The land also grows in value at 4%.
Let’s roll four years down the road:
+ You’ve made a total of $34,464 in payments.
+ Your remaining balance on that mortgage is $148,022.
+ The house is now worth $233,972 – it’s grown at 4% a year.
+ You made an additional $8,000 from the leases.
+ You sell the house, repay the mortgage, and you’re left with $59,486. Congratulations, you made $19,486 in profit on a $40,000 investment in just 4 years!
That’s what real estate investment is all about. It’s not a complete picture, but it gives you an idea of what’s going on. People are seeking out those edges – a bit lower mortgage rate, a bit better increase in land value, a bit more annual return on the property when you own it.
I appreciate the concepts of frugality but the problem is that they require you to have money up front or at least most of them do. Buying things in bulk and buying clothes in March for next November requires you to have money now to spend a lot less later but it doesn’t help if you don’t have money now. It’s like frugality for people who aren’t struggling.
You’re quite right in identifying that some of the “buy low” frugality strategies aren’t necessarily the first step in the equation for a lot of people. It’s pretty hard to take advantage of those things if you don’t have money now.
That’s why, if you’re in a situation where you don’t have any money to spare, you start small. Very small. You start with things like your dinner table. Tonight, make a really really super cheap dinner. Use whatever you have in your pantry, or if you have to go to the store, get really cheap ingredients. Buy a box of cheap pasta and some tomato sauce and a small jar of Italian seasoning. Make a big batch of spaghetti and eat it with your family. Save the leftovers and eat them for lunch in a day or two.
Right there, you’ve probably reduced the cost of that supper and that lunch by $5.
Instead of buying a cup of coffee somewhere, make some cold brew at home in a pitcher by putting some coffee grounds in a cotton bag (say, half a cup of grounds) and putting that cotton bag in half a gallon of cold water and waiting for a day. Boom – you have ultra-cheap and very good coffee without a coffee maker. Pour yourself a cup of that each morning and microwave it instead of hitting Starbucks. If you want it sweet and creamy, add milk and a bit of sugar and stir. Boom, you’re saving a few bucks.
Do lots of those small little things that save you $1 here and $2 there and $5 there. Then, take that money and use it to buy one of those jumbo packs of toilet paper. Suddenly, you don’t have to buy toilet paper for a long time.
Keep doing that. Take little frugal steps, then translate the small amount you save from that into investing in something a little bigger and a little bigger. What you’ll notice is that your overall grocery bill starts getting smaller and smaller and smaller and smaller.
The key thing here is to make sure you don’t start spending that money elsewhere on unnecessary stuff. If you’re now spending $30 less at the store each week, roll that $120 a month into saving for your next car and make a nice down payment on it, which will get you a better car loan with lower interest and WAY lower payments.
That’s really what it’s all about. You have to do the steps you can do now to fuel some of the other steps later on. You’re not going to ever transform everything overnight.
Start with supper.
New federal employee here. I’m 23 and plan to stick with this job until they eliminate it or I retire. I want to start saving now for retirement so if I need to I can cut back later when I am married and have kids.
My plan is to put away 20% approximately of my income into retirement savings. I have been looking at TSP options and I am wondering what I should be doing. Should I be using it? Roth or Traditional? What about a Roth IRA of my own? It feels like there are infinite options.
Regardless of what other decisions you make, you should be contributing at least 5% to your TSP. The reason for that is employer matching funds. A 5% contribution means that your employer also contributes that same 5% amount as a bonus to you, turning that 5% into 10%. You want to get every dime of that.
So, the question is whether you want to put your money in Traditional TSP (meaning it’s pre-tax) or Roth TSP (meaning it’s post-tax). Pre-tax contributions are ones that reduce your taxes now, but you’ll have to pay income taxes on them with you take the money out in retirement. Post-tax contributions are ones where you pay the taxes now, but you don’t have to pay taxes when you withdraw it in retirement. There are good arguments both ways, but it really comes down to whether taxes will go up in the future and how much you expect to earn now compared to retirement.
If you expect your income level to go up while in the federal employ, meaning you’re going to jump eventually into higher pay grades and slowly move up within your own pay grade, you’re probably better off doing the Roth contributions early on and then switching to Traditional contributions later on, probably at some point when you make a significant pay grade jump. This is because Roth contributions are generally better if you think your tax rate will be lower right now than it will be in retirement, and Traditional is better if you think your tax rate is higher right now than it will be when you’re retired.
Now, how much should you put into TSP versus a Roth IRA? If I were you, I’d follow this basic order. I’d contribute the 5% needed to get full TSP matching, then I would fully fund a Roth IRA, then if I still wanted to contribute more, I’d contribute more to TSP. This is because, with a Roth IRA, you have a lot more control over the investments and you have the option of taking out your contributions early if you so choose without tax penalty.
What is your recommendation for the best “bang for the buck” work clothes? Might seem like a strange question but I am spending more and more time doing outdoor projects. We have lived in the country for years but I mostly just commuted into work and came home. Now I am starting to really appreciate what we have. I want clothes for clearing brush and setting up an outdoor fire pit and tasks like that. I have a couple pairs of jeans from a local farm supply store but they seem to be instantly wearing out. Most of my clothes fall under “business casual.” Also, recommendations online seem to go all over the place.
It depends heavily on your climate. The best answer is going to be different in a warm climate versus a cold one, in a dry climate versus a wet one, and so on.
In general, when I’m working outdoors, I start off wearing layers of clothes, probably more than I expect to need for the weather. I can always remove a layer if I’m hot, or put one back on if I’m cold. In an upper Midwest winter on a cold day when I’m going to be outside for a while, I’ll generally have a short-sleeve tee shirt on top, a long sleeved one on top of that, a hooded sweatshirt, overalls, and a coat on top of that, with a stocking hat and thick gloves. On the bottom, long underwear, then sweatpants, then loose fitting jeans, then overalls. You won’t get cold. In fact, you’ll probably sweat.
What kinds of stuff do I buy? For the outermost layers, I generally trust Carhartt in terms of bang for the buck. I have a green Carhartt winter coat I’ve had for years that I wear all the time outdoors when I’m doing any work or even on non-working casual moments. However, having said that, I generally expect dry conditions. I don’t anticipate being soaked or staying that way for long. If I do, I cover up with an additional layer of something waterproof.
For inner layers, anything works. The inner layers generally don’t receive a ton of wear and tear – the snags and dirt collect on the outer clothing after all.
For pants, which are the clothes that generally receive the most wear and tear when doing lots of outside work, your best routes are cheap denim (which you already have) which can be found very inexpensively but doesn’t last too long, or authentic work pants from somewhere like Duluth Trading Company, which costs significantly more but will last a lot longer. Dickies and LL Bean both also have good reputations.
The thing that wears out clothes the most? Washing. Don’t wash your clothes unless they are genuinely dirty. If you can’t observe that they’re dirty and they smell fine, don’t wash them. I’m completely 100% dead serious about this.
If your area is in a different climate than the Midwest (fairly dry, widely varying temperatures throughout the year with very cold winters and fairly hot summer), I’d suggest talking to people locally who do a lot of outdoor work. They may have different recommendations.
I enjoyed your answer last week about taking notes on thoughtful books. Would you mind filling in some details for me? What exactly do you do with the Post-It notes? Do you stick them right in the book? Do you leave them there? And what about the notes afterward?
So, last week, I described my usual method of digging into a book that I really want to absorb and learn something from. My method is to read such books – ones I’m not reading solely for entertainment, but to grow – slowly and deliberately.
I keep a pack of ordinary Post-It notes nearby and whenever I come across a passage in the book that’s interesting, I write on the Post-It note sideways, with the sticky side either on the left or right. My goal is to be able to stick the note to the page with the non-sticky edge pointing out of the edge of the book so it can easily be found later. I stick this at the top of wherever the section of interest is, and if I have anything extra I want to remember, I jot it down on the Post-It. The size usually doesn’t matter, but I typically use the tiny Post-Its that are about half an inch wide and maybe 3 inches long.
I also stop if I come across terms or concepts I don’t understand and look them up, generally on Wikipedia, until I understand enough that I can keep reasonably moving forward.
When the book is done, I generally let it sit for a few days and then I’ll take a couple of hours and set them aside, maybe in two or three sessions. I go through the book, from Post-It to Post-It, and jot down anything of real importance from those notes. It ends up being a mix of quotes, my own ideas, broader explanations of concepts, and so on.
I find that this process ends up causing most of the content of the book to stick in my head. I remember the book in detail months later, whereas if I just blow through the book, it doesn’t stick like that.
It does take time, but it’s worth it in terms of my personal growth.
Is there any reason not to buy the cheapest eggs at the grocery store? What advantage is there to cage less or omega 3 or organic eggs? Aren’t they just eggs? Can’t get straight answers anywhere.
The number one consideration here is how much value you place on the treatment of the chicken from which the egg was harvested. The absolute best option that you can find in a store in terms of the treatment of the chickens themselves is organic, pasture-raised eggs.
What about the health differences? Omega-3 enriched eggs are simply eggs from chickens that were fed a chicken feed supplemented with extra omega-3 fatty acids, and you’re likely to get more in your own diet by just eating fish and nuts. So, not something to worry about. Egg color is basically meaningless in terms of the nutrition of the egg. Laying hens are rarely given antibiotics to begin with, so antibiotic free doesn’t mean much, either.
In other words, I generally agree with Bon Appetit: “Ideally the best egg is organic, pastured (or free-range), USDA A or AA, stamped with the Certified Humane or Animal Welfare Approved seal.” In general, the other labels and slogans don’t really matter.
What about health, though? It appears as though there’s almost no difference in the nutritional value of eggs, regardless of what features they may have. The differences between eggs mostly boil down to humane chicken treatment.
Your best bet? Try to find someone who sells eggs directly and allows people to check out their operations. That way, you can decide for yourself.
How much do I need to put in a 529 each month to pay for all of college?
I’m going to add a couple of assumptions here, without which it’s impossible to answer this question.
We’re going to assume that this is a monthly amount from birth to age eighteen. We’re also going to assume that this is going into a 529 plan that will have an average annual return of 7% over those years. We’re also going to assume that the cost of a year of education at a good public university will be about $40,000, based on this data, so the total will have to be $160,000.
So, how much would you have to contribute each month to an investment returning 7% per year to have $160,000 at the end of 18 years? My calculation is that you’ll need to put away $371 per month, with those assumptions, to reach your goal.
What if you want to be safe? $400 a month is better. What if you’re thinking private school? Given that private school, on average, costs more than double as much, you should be contributing around $900 a month.
If that number seems painful, that’s because it is, but that’s the reality of the growth of the cost of college education. It’s also why college is becoming less and less of an answer for some students, because there are a lot of students who will never make up that ground if they have to take on that kind of expense via loans.
Want to shave money off of shaving lol but the only ideas I can find are safety razors which make me break out and get lots of nicks. Cheapest way to shave daily without a safety razor?
You’re right – the most inexpensive way to shave is the safety razor, but they are really rough on sensitive skin. Even for non-sensitive skin, safety razors take some time to get used to.
The best solution I’ve found is to use your preferred cartridge razor and couple it with a disposable razor “sharpener.” I prefer the RazorPit Slide for this purpose. Basically, once you’re done shaving and have cleaned the blade, you just run it across the RazorPit a time or two and the blades are honed again. Also, I highly recommend shaving in the shower with excess shampoo from the head or excess soap off the washcloth serving to moisten your face and raise your facial hairs for shaving.
Aside from using an actual safety razor, that’s the cheapest solution I’ve found. It causes cartridges to last and last and last. In my experience it quadruples the life of a cartridge or more, which means that it doesn’t take long to pay off that RazorPit investment.
I tried to open a checking account at two different banks and got rejected. My boss wants to direct deposit my checks and doesn’t believe me that I don’t have a checking account. What can I do?
The first thing you should do is figure out why you were turned down, and you find that out by asking them. Go to one of the banks that turned you down and ask to speak to a banking rep, then ask that person why you were declined. There’s likely a specific reason for it. Your job is to fix that reason.
The most common reason for being denied is that there’s something bad on your checking account history. There is a service that provides a shared checking account history between banks called ChexSystems; if your report on there has a red flag due to earlier banking mistakes, other banks won’t let you get an account without someone else on the account.
If that doesn’t sound like your situation, ask for a copy of the reports that they used to deny your account and see if there are errors on that report. If there are, you’ll have to try to get them corrected, likely by ing whatever institution gave them the false report.
If you’re still stuck, I suggest going to a local credit union, who will likely be more friendly. They may be more willing to let you open an account, and if not, they’re likely to be more helpful in helping you figure out the next steps to take.
In general, is it a good idea to buy old trading cards at a garage sale if you don’t know anything about them? I’ve heard a lot of stories of people buying boxes of Pokemon or Magic cards for a few bucks at a garage sale and flipping them for a nice profit.
That kind of flipping can happen – I’ve actually done it myself with some vintage Magic cards – but it’s pretty rare. Most of the time, the cards you find at a garage sale have been stripped of the valuable cards already by the collection’s original owner, leaving you with the dregs.
In general, if you find Magic cards for less than $5 per 1,000 cards, you can more than break even on theme even if there’s nothing of value in there. For other trading cards, you’ll probably not want to pay more than $1 per 1,000 unless you’re certain individual cards are valuable.
If you go in there and plop down $20 for a box of 500 cards without knowing anything, you’re likely to be disappointed unless you’re wanting to actually play a game with the cards.
Are hand soap refills worth it?
In my experience, it’s far cheaper to buy a giant jug of hand soap and refill the bottles at your sink regularly than to keep buying new little bottles of hand soap. It’s not even close.
Another tip I’ve learned from having kids: make your own foam hand soap. My kids use WAAAAAAAAAAY too much gel hand soap, so it’s way cheaper to just make your own foam soap.
Here’s how to do it. Just buy a bottle of foam soap at the store and use it up, then buy normal gel refill. When you need to refill the foam soap, add about half or three quarters of an inch of the gel soap refill to the bottom of the foam soap dispenser, fill it up with water, and then gently swirl it around with the bottom end of the dispenser for 30 seconds or so. Pop on the cap and you’re good to go – foam soap comes right out of the dispenser!
The thing is, this actually stretches out the soap a lot. If they take four big squeezes of the foam, it’s way cheaper than four big squeezes of straight gel and they’re still getting far more soap than they need to actually get clean.
I want to send out a bunch of holiday cards with a picture of our family on it this year but they’re so expensive! What’s a cheaper way of doing this?
The most inexpensive way to do this is to have someone take a nice family picture of you with a good smartphone camera, get a bunch of very inexpensive prints of that picture at your local drugstore (usually around $0.15 a pop or so), and then buy some very inexpensive basic holiday cards (maybe $0.25 each) and just put a print inside of each one. That way, the total cost of each card you send out, including postage, is under $1.
Compare that to the total cost of some custom-made card with your pictures embedded in it and custom printing. It really, really adds up. Getting 50 of those can often break the $100 mark, even before postage.
The best part? If you send a simple print, they can use it however they want. If your aunt wants to stick it in a picture frame somewhere, she certainly can. If your grandpa wants to put it on his refrigerator all year long, he certainly can, without having to look like he’s hanging onto old holiday cards.
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.