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. College savings as gift?
2. Bullet journal
3. Company stocks
4. Unemployed; what’s next?
5. “Sell by” date on food
6. Will I need it later?
7. Roth IRA advantages?
8. Losing an income
9. Fuel efficiency savings
10. Day-to-day credit card use?
I use texting as a convenience. I absolutely hate texting as a means for conveying anything genuinely important beyond the simplest facts.
Why? Communicating with friends and loved ones when you’re not face to face with them loses a big part of communication. I can’t see people’s smiles or their responses to things that I say. With a text, I’m left in the dark.
To me, a text just serves as a way to ensure that I meet up with a friend, not as a communication replacement.
Q1: College savings as gift?
So my niece has a first communion coming up, and we would like to give her money earmarked towards college. In the past we have given my sister cash for her to put into her 529, but she inevitably tells us it went towards paying for the party, which we find to be unacceptable as the money was not meant for her. My sister is not very good with money, so to ensure that our gift goes to where it was intended, we would like to open a college savings account of some sort for her. And beyond that, we would like to use this as an opportunity to teach her about the power of saving for things. Is there an account you would recommend for this? Options we have thought of include a 529, ESA, UTMA/UGMA, basic savings account, etc. we would like to fund it from time to time over the next ten years as she approaches college. It likely won’t crack a dent in her overall college costs, but it is a start. Any advice on where to put this money?
It’s really hard to say which one is best for your niece without knowing what her future trajectory looks like. If you assume that she’s heading toward some sort of postsecondary education in her life, the best move is to start a 529 for her.
Before you do that, though, you might want to check with her parents and see whether or not a 529 already exists. If it does, I’d contribute to that 529 in order to keep everything simple for her and her family.
The other plans have various drawbacks and benefits that are good in certain situations, but 529s work best as a default choice if you don’t know all of the specifics of a situation. You really can’t go wrong with a 529.
Yes, I have, and I think it actually works well as a way to combine a to-do list and a journal/diary.
The only drawback – for me – is that it really works best with a large journal. A full-sized notebook with grid paper is just about perfect. The problem is that such journals aren’t portable in your hip pocket. They’re great in a backpack or even a purse.
I never really got used to using the system in conjunction with a hip pocket notebook. However, for the two months or so I used it, I actually had a great little functional journal that I wanted to keep with me and jot down observations in.
Q3: Company stocks
For most of my twenties, the company I worked for paid me partially in stock options. I basically made minimum wage with a ton of stock options for when the company went public. They went public in 2012 so I borrowed money to exercise all of those options so now I have a bunch of stock in my company and not much else. This seems undiverse. Should I sell some of the stock and buy other stocks?
I would. I’d buy stocks in big companies that are in completely different industries than your own.
How much should you sell? It comes down to this – how upset would you be if your company went defunct and all of the stock was worthless? I wouldn’t sell nearly all of it, especially if you feel confident in the company’s future. The purpose of this sale is diversification, not to get away from the company. If you feel good about your company’s future, I’d hold on to about 25% of your stock and hold it until my feelings changed.
So, I’d sell somewhere between 75% and 95% of the stocks you have in your company, tending toward the lower number if you feel your company is amazing. I’d take that money and re-invest it elsewhere, preferably in big healthy blue chip stocks. I’d try to buy shares in at least 20 different companies or, even better, I’d buy into an index fund like the Vanguard Total Stock Market Index.
Q4: Unemployed; what’s next?
I ran out of state unemployment benefits, and the federal emergency unemployment hasn’t been extended. I have $4000 in liquid savings, a 401(k) ($10,000), Apple stock ($1500), an IRA with my bank ($4000), and a rolled over IRA at Fidelity ($61,000). I have $1500 in medical bills and $12,000 in credit card debt. I’ve been transferring balances among four cards to keep the interest at zero and haven’t used them for 10 months. My monthly expenses are about $3000. I’ve considered a home equity loan, but I don’t think I have enough equity. I’ve cut back wherever possible and am considering food banks and trying to get food stamps. I have a job with very intermittent hours that I can’t rely on (less than 30 hours a month). I’m 43 and single. What account do you think I should tap first? After I get a job, what should my step-by-step plan be to improve my situation? Thanks so much!
There’s nothing wrong with getting assistance in the situation you’re in. You’re basically describing exactly why these assistance programs exist.
If you’re going to start tapping accounts, I’d start with the Apple stock. That would be sold almost immediately.
The next thing I would check is if your various retirement accounts make hardship loans available. Just the companies managing your accounts to find out. I’d start with the largest one, just for convenience.
No! The “sell by” date is a date put on there by the manufacturer. It’s usually just a date that describes how long their “freshness guarantee” lasts. If you use a product after that date, the guarantee doesn’t really apply any more.
Almost always, food with an expiration date or sell-by date is good for a while after that date. You need to know how to check if food is good on your own, even before the sell-by date.
This is a for checking whether or not many common foods are still perfectly fine to eat.
My solution is simple. I get a giant box and put all of that uncertain stuff in it. I put a giant date on the front – let’s say April 7, 2015, a year from now. I usually tape a list of the box contents to the outside.
If I find that I need the item, I get into that box, pull it out, use it, and keep it out of the box.
At the end of that year, when that date passes, I know I can get rid of everything in that box. If I don’t use it in a year, then I know I likely won’t ever use it – or I’ll use it so rarely that I can just borrow it.
Q7: Roth IRA advantages?
First off, thanks for all you do at Money360. I really enjoy reading it. My comment is about the advantages/disadvantages of Roth IRAs vs. traditional IRAs. One thing I never see considered is the certainty that a Roth IRA gives you because you know you’ve already paid taxes on that money. Given how much of anyone’s retirement future is uncertain (especially 40 years down the line like it is for me), that seems like a nice pro for Roth IRAs as it takes some of the guesswork out of the equation. Not saying that completely swings me one way or the other, but it doesn’t seem like an angle I see mentioned in any of the discussions I’ve read about it. Just curious if you had any thoughts about that.
That’s actually one of the big reasons for using a Roth IRA. You know that tax rates are low right now (historically, they’re very low compared to tax history since the ’30s), so by using a Roth, you’re paying taxes at that relatively low rate so you won’t have to pay them later.
The only drawback there is that it assumes rates will go up in the future. If rates stay exactly the same, then you’re better off using a 401(k) because it’s extremely likely that you’ll be in a lower tax bracket in retirement.
Overall, though, I think Roths are a good choice for tax management if you are eligible for one. The money in a Roth is tax-free money – all of it – when you retire.
Q8: Losing an income
My wife just lost her job. We were planning on trying to have a child this year and she was planning to be a stay-at-home mom, but we aren’t financially ready for that switch yet. Is it better to just try for a child starting right now and have her spend her time on home economy or should she try to get another job that she’ll quit in a year or so?
It depends on her career prospects. Can she realistically get a good paying job that offers plenty of hours in the next month or so? If so, she should probably head back to work. If that’s not realistic, then she should stay at home and focus on cheap-ifying your house.
The catch is that staying home to focus on home economy requires self-motivation or else it won’t work. There are a lot of distractions in modern life. If you’re easily distracted, staying at home can turn into a disaster.
I’d really lean toward the job at this point if it’s possible.
Q9: Fuel efficiency savings
My father always told me that once you get away from the huge gas guzzlers that fuel efficiency doesn’t really save you much. You’re better off buying a car with average gas mileage a little cheaper than one with great gas mileage. Is that true?
It depends on how long you’re going to drive it. If you buy into “driving it into the ground” like I do, the fuel efficiency will pay off and you should pay a little more for it.
Let’s say you’re going to drive this car you’re buying for another 100,000 miles. You can spend $7K on a car that gets 25 miles per gallon. If you do that, you’re going to be spending $16K on gas over the life of the car (at $4 per gallon). That’s a total cost of $23K. Now, if you had a car that got 35 miles per gallon, you’d only be spending $11.5K on gas. That would allow you to spend up to $11.5K on a car and still break even with the “cheaper” car.
That “gap” gets smaller if you’re buying a car with a smaller mileage goal. So, if you’re buying it for a long period, it’s worth paying $2-3K more to get a car with great gas mileage.
Q10: Day-to-day credit card use?
At the current moment, I’m still working on building up a credit history (I’m in my early 20s).To do this, I basically got a credit card. Instead of buying my groceries/gas/etc on the debit, I buy it on the credit card, and pay it off immediately.
This does mean that most of my purchases go through this card.
Recently, though, my bank decided to “reward” my good bill-paying by upping my credit limit on that card – to a whooping 10,000! Now, given that at most, in a month, I average spending less than 1,000 on that card, 10,000 seems like an extremely high number!
My question is this – I see the value in perhaps having a high-limit credit card that’s stashed away somewhere in a safe at home. But given the recent “hacks” of cards, and Target’s fiasco, what’s a good value to carry around day-to-day?
Your credit limit shouldn’t change the amount you use the card. You have a good routine here. Don’t change it.
The best thing you can do – and you should do this regardless of your credit limit – is to always go through your credit card statement and make sure you know what every single purchase is. If you don’t know, put in the time to figure it out.
It’s those unknown purchases that could be a sign of identity theft. If you discover it quickly and take action (ing your company, for starters), it won’t cost you at all.
All of that is true regardless of your credit limit. It’s just smart credit card use.
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.