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. Projecting stock market returns
2. Thoughts on MtGox and Bitcoin?
3. Frugal furniture
4. Paid debts and credit reports
5. Kicking out child
6. Shopping for organic items
7. Figuring out state retirement plan
8. What good is chicken stock?
9. Old computer parts
10. Expensive diet costs?
Over the last few weeks, I’ve been slowly going through our filing cabinet full of documents and determining what needs to stay, what needs to go, and how to organize this stuff.
I’m converting as much of it as possible to a digital form, which is itself a learning experience. I already have a healthy collection of documents in digital form and this is just increasing it drastically.
It’s a slow experience, from sorting and organizing to scanning and shredding. The reward? I’ll soon be able to find everything I need really easily and our filing cabinet will have a lot more space.
Also is my understanding of the following based on that 7% figure correct. Let’s say that I invest $600 into stocks and shares per year. In the first year 7% would be $42 so the total for Year 1 would be $642. Is that correct?
If so, does that mean in year 2 I would add another $600 onto the $642 giving me $1242. So, 7% for year 2 would be $86.94 ($1328.94 in total)
Year 3 total would be $1328.94 + $600 = $1928.94. And 7% for year 3 would be $135.03 ($2063.97)
So, in theory if I invest $600 a year would I be correct in saying that I would be looking for a return of:
$42 in the 1st year
$86.94 by year 2, and
$135.03 by year 3
So based on the 7% principle I would be looking for at least a return of $135.03 in 3 years to know that my investment was worthwhile for the future. Is that correct? I understand that this is all hypothetical because of fluctuations in the stock market, but is this how I work out if my investment and the time period of my investment has been worth it, or have I misunderstood how to work it out?
You’ve got the right idea in terms of the math, but not of the concept.
First of all, the idea of a 7% annual return over the long term in the stock market comes from Warren Buffett. I explain it in detail here.
The important thing to note is that the 7% Buffett is quoting isn’t an annual guarantee. Over a large number of years, he would expect the average annual return to approach something close to 7%, but over a single year, you might see returns as high as 20% or as low as -40%. It’s only over a lot of years that the average begins to move toward 7% as the peaks and the valleys begin to balance each other out.
You should not expect to put a certain amount into the stock market and receive exactly 7% in return each year. It’s just an approximation that’s useful for long-term calculation.
For those unaware, Bitcoin – which is a digital currency – has been riding through what I think everyone would call an investment bubble right now, where the number of people wanting to buy far exceed the number of people wanting to sell. This has caused prices to inflate to an extraordinary degree.
Bitcoin is traded online, often through “exchanges,” of which MtGox was one of the largest. In recent weeks, MtGox went through some significant technical difficulties and some people may have lost their Bitcoins there.
I think Bitcoin is going through expected growing pains. What will exist on the other side? Honestly, I don’t know. I think the idea of a digital cryptocurrency is a powerful one that will last, but I’m not sure if Bitcoin is the “end goal” here. A currency doesn’t really work without a level of stability that Bitcoin has yet to achieve and situations like MtGox show off some of the difficulty with Bitcoin reaching that stability.
If you want to invest in Bitcoin, only use money that you’d feel okay losing.
It depends entirely on your definition of “good furniture.” What do you mean by that? Everyone has a different definition.
Your best approach is to start at the lowest end and keep working upward until you find appropriate furniture. I would start with sources for used furniture, like Craigslist, thrift shops, and consignment shops.
If you’re wanting to buy new furniture, wander around a low-cost place like IKEA and see if anything there works for you. If it doesn’t, slowly move upward in cost.
When you find something that works, then your search is over.
Q4: Paid debts and credit reports
I recently went through my credit reports and paid off a creditor and have the paperwork from the debt collection agency saying it was paid but it still shows up on my credit files as a bad debt (experian). I have asked that they review it and they wont take it off they only allow me to put a comment on there stating that i paid it. I thought that once a debt had been paid it should be completely removed.
The organization that placed the entry on your credit report has to tell the credit bureau to make changes to that entry.
Your next step should be to whatever company made that entry on your credit report and ask that they tell the credit bureau that you paid the debt.
You can’t make them do this, of course. In my experience, some debt collectors will do this type of reporting easily, some will do it after nagging, and others just won’t bother.
Q5: Kicking out child
Our daughter graduated from university in spring 2011. Since then, she has lived with us. We converted half of our basement into an apartment so that she could use the basement entrance as a front door. After almost three years of living there rent and utility-free, we think it’s time for her to move on but she only has a part-time job. Sometimes it seems like she’s looking for more work but at other times it seems like she’s just partying. We don’t mind things so much when she is trying to get a better job but for the last few months it mostly seems like she works her job to make spending money and goes out all the time. We don’t want to just support her spinning her wheels. What should we do?
You seem to want to give her a career launching pad, but not a place to just sit and coast through life without improving herself. My suggestion would be to put some limits on continuing to provide free housing and utilities. Her “rent” should be to spend some time each day or week applying for jobs or improving her professional skill set.
The number one thing you need to do is to figure out your plan with your husband, make sure you’re both completely on the same page, then talk to your daughter.
Another question I’d talk about with your husband is whether or not you want to move to a true “renting” situation with your daughter. Do you want to be an actual landlord or not?
Q6: Shopping for organic items
I only buy organic and pesticide-free food items for my home. If I can’t determine how it was raised, I don’t want to eat it. Given that requirement, do you have any food shopping tips?
You use the same principles you would use when shopping without those requirements.
Go to the various stores in your area that sell the kinds of organic and pesticide-free foods that you want and compare their prices. Shop at the store that has the best prices.
Surprisingly, I’ve found that Whole Foods is actually pretty competitive if you set these types of food requirements as a baseline. Whole Foods seems really expensive if you don’t have these kinds of food requirements, though.
Q7: Figuring out state retirement plan
I am 29 and currently work for the state government. I have long been concerned about my retirement capabilities, and have found it hard to get any advice that is applicable to my situation – most seems aimed at the private sector. I am working for less than what my skills command, on average, in the private sector, and I am taking stock in whether the benefits offset that difference. I am currently in the process of building up a year’s worth of emergency savings, but have no retirement savings outside of what I have contributed to the state retirement system. I have plans to start investing and saving further after the emergency funds are built up, but that is likely some ways off.
According to their calculator (estimate) I will receive:
$18,600 annually if retired at age 50
$39,000 annually if retired at age 52
$60,600 annually if retired at age 65
With that information, I have two concerns about my situation:
1. Is it foolish of me to assume that I will have this money accessible in the future? I am not sure if what I have is “officially” a pension, but with what is happening in Detroit I am worried that I will end up counting on these savings only to discover it was pulled from underneath me.
2. Is this enough assuming that I never invest/save further?
No pension is 100% reliable, but neither is cash in your hand. At some point, you do have to accept a small amount of risk. I would consider a state-run pension plan to be a pretty low risk source for retirement income because if we’re ever in a situation where such plans are going bankrupt, we’re going to have much bigger economic and social problems.
As to whether that’s enough to retire on, it really depends on what happens in the future. If inflation continues at roughly 3% per year, that $60,600 will have the purchasing power of what $20,000 does today. Will that be enough for you to get by? Are you also getting Social Security?
A key part of knowing whether you can survive in retirement is also knowing what your spending is like. Will you be spending more than $25,000 a year at that point (in today’s dollars)? If you think you will, I’d save more.
Q8: What good is chicken stock?
On a few food posts, you’ve talked about using the scraps like leftover chicken parts or vegetables and making stock out of them which mostly sounds like letting them simmer in water for hours and straining it. Aren’t you burning a lot of energy doing this?
Sure. You’re probably burning $0.50 in electricity if you make a large batch of stock.
However, compare that to the cost of buying lower-quality stock at the store. I can’t find stock that’s any good for less than a couple dollars per quart.
If I save my scraps, I can make several quarts at once for $0.50 in energy and maybe a penny’s worth of water.
Considering I use stock in lots of things – particularly soups – this seems like a good idea for us.
Q9: Old computer parts
Is there any reason to save old computer parts? I have pieces of computers from the 1990s in my closet that I haven’t touched in years but I can’t bear to throw them away.
Computer parts of that vintage generally aren’t worth very much money because they can’t handle current software and the software you could use isn’t very secure in terms of internet use.
Unless you actually have a use for this stuff, I’d make sure that all hard drives have no data on them and list them on Craigslist for a very low price – just a few bucks. You’ll often find someone that wants the items.
It’s generally not worthwhile to hold onto stuff that you have no use for, and if these items have just sat in the closet for years, then you should clean that closet out.
Q10: Expensive diet costs?
How can I remain frugal when I have to maintain a food supply that is much more expensive than food for an ordinary menu? I have done a cost benefit analysis involving future medical costs if I don’t change my diet. My expensive food bills are far less challenging when I think of the cost of diabetes, migraine treatments, heart disease and peripheral neuropathy.
The attendant weight loss and a more efficient immune system also prevents present and future expenses for over the counter medication and weight loss management schemes. However, I would like to live and eat well with in a reasonable food budget. How can this be done?
As I mentioned above, once you’ve settled on what restrictions you’re putting on your food, you essentially do the same thing as you would do without those restrictions. You check prices at a number of stores and shop where the prices are best.
The real question for you is deciding on those restrictions. Let’s assume you have empty cupboards. The best thing you can do is fill them with just healthy items. The trick for you is defining healthy.
A good approach is to buy almost entirely produce and, if you’re an omnivore, fresh meats. Don’t even go down the aisles in your store except for very specific things (like nuts). You can also use flash-frozen fruits and vegetables. Try to prepare everything from fresh ingredients and you’ll find yourself feeling pretty healthy.
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.