Reader Mailbag: Memorial Day

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. Food pantry dilemma
2. Cheap mortgage, early payoff?
3. Long-lasting soap
4. Job board?
5. Taxes and living off dividends
6. Why no rentals?
7. Dishwashers and lemon?
8. Life in ten years?
9. Paying for impatience
10. Tax withholding question

I could write a great deal about Memorial Day, but I believe nothing I could write captures the spirit of the day like the Gettysburg Address.

It’s a short speech – less than three minutes. You can listen to a great re-enactment of the speech by Jeff Daniels or simply read the text of it here.

Q1: Food pantry dilemma
I’m having a bit of an internal dilemma at the moment. We’re a family of four, with one parent working full time and a stay at home parent, two kids ages 2 and 12. I work in retail and we generally squeak by. Due to several windfalls, we’ve paid down our debt from last year. We’re trying to maintain a position where we go forward using cash only, and refrain from running up a credit card again. We already receive both SNAP and WIC. We established an emergency fund of $1,000 a while ago and we still have it. So we are currently in a temporarily tight position of making the transition to spending cash instead of on credit. I know it will take a little while for us to be able to identify and work to improve our bad spending habits. We’ve made some decisions regarding things like cell phones that will free up some more of our budget in the upcoming months, so we can see relief from the super tight budget coming. So here’s the dilemma. We’ve budgeted out our SNAP, and we have $73 to use every two weeks. We are dividing it up biweekly to line up with paychecks. This week is payday, and after all bills are paid, we will have $80 left with which to purchase gas, and supplement our $73 in SNAP.

So that’s the background, here’s the question. With our financial situation, what would you do? Would you take money from emergency to buy groceries, or look into more resources like food pantries? We have some that are accessible to us, just don’t know if I feel right going to one while we have $1,000 in the bank.
– Marcus

Most food banks have some sort of financial “test” that people have to pass in order to use the food pantry. If you “pass” that test, then you should have no qualms about using that food pantry as it’s intended for you. Stop in and see what the situation is.

I would only tap your emergency fund if you’re genuinely using everything you have available and still can’t make ends meet with the SNAP and WIC resources along with the food pantry. Up until that point, it’s not an emergency.

I’d also check out community organizations that have freewill dinners. The purpose of these dinners (in part, at least) is to provide inexpensive meals for families that are struggling. Attend these and don’t feel bad about just dropping a dollar or two into the freewill jar – just make a point to go back in a few months and make a bigger donation when you can more easily afford it.

It sounds like this is just a tight spot for you. You’ll make it.

Q2: Cheap mortgage, early payoff?
I have a fixed rate mortgage locked in at 3.75%. Why should I make extra payments on it? If the stock market returns 7% over the long term, doesn’t it make more sense to put $500 a month into an index fund?

– Daniel

As long as you’re spending significantly less than you earn, you’re not going to be making a bad move whether you’re paying off the mortgage early or building up stock investments. The simple commitment you’re making blows away the few percentage points difference between these options.

That being said, you’re choosing between a 3.75% guaranteed return or an investment that has a 7% historical average return. Over a given ten year period, that return might be 0% a year or it might be 10% a year – it’s honestly unknown.

It all depends on risk tolerance and how far away your goals are (and what your goals are, for that matter). Unless something very exceptional happens, you’re probably not going to see a huge difference between the two options for quite a long time.

Q3: Long-lasting soap
I usually buy bulk packages of bar soap so that it’s cheap, but it seems like I’ll go through a bar of soap a month. I think it’s because it’s wet when I get out of the shower so some of the soap just drips off. Any tactics for keeping that from happening?

– Andrew

I usually use a giant jug of body wash and use just a few drops per shower. I can make a jumbo jug of body wash last for a very long time that way, so that’s become my solution to shower soap.

If you’re using a bar, the best solution is to make sure that the place you’re storing it can drain really well. A solid tray with a little hole in it probably isn’t adequate. I’d suggest making sure you’re sitting the bar on a wire frame with minimal wires holding it up.

Another approach that I’ve heard about (but not tried myself) is to unwrap a bar of soap and let it sit on a windowsill for several days before you begin to use it. Choose a dry place to do it because the goal is to get the bar as dry as possible. That way, when it’s wet in the shower, some of that water just reabsorbs instead of running off the bar.

Q4: Job board?
Last June you wrote a piece titled “Teaching the Idea of Trading Effort for Money“. Did you ever share an update on how the job board plan was working out? Thanks.

– Susan

Our oldest child exploited it. He would spend all of his time doing every job we could think of listing on the board and earned about $40 in a week. While I was amazed by his entrepreneurship, we couldn’t come up with new things to list on the board. As with anything like that, once focused interest goes away, it dies out.

In other words, it really only works if you have a lot of jobs that make sense to list there and are actually willing to pay for all of them.

I’m not really sure how to “fix” it for our needs. We’ve had some discussions about our children taking on more complex regular chores simply as part of family life.

Q5: Taxes and living off dividends
My long term goal is to reach a point where I can live comfortably off of the dividends that come in from my investments. I’m trying to understand how taxes work in that situation. Can you give a “simple” explanation?

– Randy

Sure. However, this is subject to change; Congress has hinted about changing this several times. This is how it works right now, but it will probably be a little different when you retire.

In the situation you describe, all of your dividends are probably qualified for the long term capital gains tax rate. Basically, you qualify for that rate with your dividends if you’ve held the investment for six months (it’s actually a little more specific than that, but if you’ve held the stock for six months, you’re qualified).

Your rate on dividend income in that case is 0% if your taxable income falls in the 10% or 15% marginal tax brackets; 15% if your taxable income falls in the 25%, 28%, 33%, or 35% marginal tax brackets; and 20% if your taxable income falls in the 39.6% marginal tax bracket. In other words, if your other income is low, you’re not going to be paying much at all in terms of federal income tax.

Note that these are the rules right now. In the future, these rules may change, but I honestly don’t expect them to change drastically.

Q6: Why no rentals?
Why don’t you talk about buying rentals as a way to make money? If you can buy a rental property and have rent income cover most of the mortgage, you’re basically rolling in the dough.

– Charlie

That’s the ideal, but it doesn’t often work out like that. The best way to explain it is to walk through the numbers.

I went and looked at the facts for a home in my area that I know is rented out. I’ve seen a “FOR RENT” sign out in front of it three or four times since I moved here.

According to the tax assessor website and Zillow, the house has a value of about $115,000. It’s assessed annual property taxes around $1,800. That’s $150 a month.

Let’s say I take out a 4.5% thirty year fixed rate mortgage on that house. My monthly mortgage payment is $582.69.

The best rate I’ve seen on insurance for a rental property of this value is about $50 a month, and I’m not convinced that was a legitimate quote. I’ll still give it the benefit of the doubt and use it here.

We’ll also assume maintenance costs on the property are 1% of the home’s value per year – $1,100. That’s $90 per month.

So, each month you’re spending $580 on mortgage, $90 on maintenance, $50 on insurance, and $150 on property taxes – that all adds up to $870 per month. You might cut corners on maintenance to lower that or skimp on insurance, but that wouldn’t be a smart idea.

So, you’d have to charge $870 a month to break even. You’d probably have to charge a bit less than that to attract regular renters, so you’re losing money each month. You’re building equity in the home, but during the early stages, almost all of your mortgage payment is going to interest.

All of this assumes that the home will always have a renter. Every month you go without a renter, you’re taking that $870 on the chin.

Plus, you’re investing lots of time working on the property, too, since you’re doing maintenance work yourself.

I think owning rental properties isn’t a bad idea if you can buy the property up front with cash, but if you need to mortgage it, the math becomes very rough unless you’re dead sure you can always have a renter.

Of course, this is just my math. A person who is an advocate for owning rentals will probably have a great counter-example showing how the math isn’t that bad. The thing is, I’m not cherry-picking with this example. I just chose the first rental in my neighborhood and used the property tax website and Zillow for my numbers on the cost of the mortgage and property taxes, and the 1% of property value per year is a good thumbnail of what your maintenance costs will be. There’s no trickery involved here, but it does show why I’m leery of suggesting buying rentals until you’re firmly established financially.

Q7: Dishwashers and lemon?
I was told many years ago by a dishwasher service man that you should NEVER use anything in your dishwasher that includes lemon in any shape or form. The acid will ruin the inner workings. That’s why so many of the cleaners you see have lemon in them. The makers want you to use it, that way they will sell more dishwashers…

– Juliet

You’re partially correct here. Acidic substances in a dishwasher can damage rubber components if the acid is held against the rubber for an extended period of time, and the more acidic, the worse it is. For example, if you put straight lemon juice in a rubberized compartment in there (say, the place you are supposed to put liquids for the rinse cycle), you probably could damage the rubber if you did it constantly.

However, lower acid stuff is fine, particularly if it’s not in a rubberized compartment. I’d probably avoid vinegar or citric acid with an acid content over 5% in the dishwasher, but below that, I wouldn’t worry about it. A little bit of acid is very useful in terms of both cleaning the dishes and keeping the dishwasher clean.

The problem occurs with high acid and constant with rubber, so just avoid pure lemon juice or vinegar with a high acetic acid content and you’ll be fine.

Q8: Life in ten years?
Where do you see yourself financially in ten years? That will be about the time that your children start graduating and you’ll be hit with college expenses. What will that look like for you guys?

– Larry

Right now, Sarah and I are contributing to 529 plans for each of our children (speaking of which, we’ve been talking about increasing our contributions… I need to do that soon). Our hope is that those accounts make up most of our contribution to their college education. I am not sure what costs will be like for college in ten to fifteen years. I do want them to get a great education so that they can have the life they want.

Assuming that college doesn’t overwhelm us, Sarah and I would like to be able to retire early, ideally not long after our youngest is getting through college. Our financial planning points us toward the earliest possible feasible retirement for Sarah and I plan to parallel that date if I can. Ideally, we want to have enough in investments so that we can live off of the dividends.

Right now, we are living solely off of Sarah’s income and banking every single dime I bring in toward this goal. Every bill we have, including 529 contributions, is coming out of Sarah’s salary. So, right now we live off of Sarah’s income and in the future we’ll live off of what I earned in the past (ideally, anyway).

That’s where we’re headed, at least for the moment.

Q9: Paying for impatience
I wanted to share a little story as a word of caution for your readers.

A few weeks ago I was installing a new television at my mother’s house. I needed a 10′ HDMI cable so I went to the store to buy one. I bought the cheapest one they had for about $25 and it worked perfectly. I felt pretty proud of being “frugal.”

The next day, I found a 12′ HDMI cable online for $7 shipped.

The moral of the story is don’t be impatient. If I had just stopped and looked online, I could have saved $18. My mom could have lived with a somewhat worse (but still very watchable) TV signal over a coax cable for a few days.
– Thomas

You’re absolutely right, Thomas. Impatience costs us all the time.

In situations like this, people will sometimes justify the extra expense as a “convenience cost.” Mostly, it just means they don’t want to wait two days to have HD television when they’ve spent thirty years of their life without it before that. (Feel free to substitute whatever product you want in that description.)

It’s the same reason that fast food restaurants do great business, even though their food is often pretty terrible and their cost is usually pretty high. I bought a black bean burrito from Taco Bell not long ago and while it was reasonably tasty, it cost almost $3. I could have made the same thing at home for about $0.50, as it was mostly black beans, cheese, and taco sauce wrapped in a tortilla. The difference is I wanted it now, and now cost me $2.50.

Q10: Tax withholding question
I’m trying to figure out tax withholding. I just got my first ‘real’ job after grad school! My husband has been working the last three years while I was in school and now has a comfortable salary. We fall into the 25% marginal tax bracket. My new job, though, will have a variable income (based on number of clients, whether they actually pay, etc.).

So my question is, is there a way that I can withhold 25% on my w-4? I don’t want to put a dollar amount on the ‘additional amount withheld’ line because my salary will not be constant. 0 allowances will not be enough withheld because my salary will always be much lower than my husband’s – the maximum amount withheld for me would be closer to 10 or 15%. My old job told me I couldn’t put a percentage number on my w-4 but my husband thinks their HR was wrong.

Other possibly relevant information: we have no children; we have no student loans; we don’t own a house. Basically we have no major deductions.

I just can’t seem to find the answer to this but it seems like it should be simple to withhold a percentage of income.
– Charlotte

There isn’t an easy way to do that. The reason is that your business has a formula that they use (provided by the IRS) where they plug in the numbers provided on your W4 and use that to determine the exact dollar amount to take out of your check. Ideally, the amount taken out is pretty close to what you actually owe.

If I were you, I would simply withhold an extra amount each paycheck. I wouldn’t make it an enormous amount, but a little bit won’t hurt. If you bring home big paychecks, the company will hold out a larger percentage of the check anyway (as they should).

The formula that the IRS gives to your business is actually pretty accurate, even in cases of variable income, so I think you’ll really be okay.

Got any questions? The best way to ask is to email me – trent at thesimpledollar dot com. Iíll 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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