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. Save or pay off debt?
2. Friends burdened by my frugality
3. Motorcycle questions
4. Basic tax questions
5. What’s next after debt payments?
6. Writer’s block
7. Tax moves
8. Credit card cancelling maneuver
9. Impact of credit card change
10. YouTube channels
Over the weekend, I posted a presentation video that several people wanted to see, but their browsers or email readers don’t support embedded YouTube videos.
To remedy that, here’s a link to that video.
Q1: Save or pay off debt?
We have a four month emergency fund. I know the rule of thumb is generally six months. We also have some debt but thankfully none of it is credit card debt. We have:
Student loan: 22K @ 3%
HELOC (fixed): 38K @ 3%
Mortgage (fixed): 169K @ 5.625%
My questions is this: We have about $1,000-$2,000 to spare at the end of each month. What should I do with this money? My wife and I both have employer matched 401K’s that we contribute to monthly. I have an IRA already. My wife does not.
I was thinking of aggressively attacking our debt and just dumping every spare penny we can into the student loan to start. What do you think? Or should I save up six months worth of emergency fund money? Or maybe get an IRA going for my wife? Or 529K’s for my two daughters? Or maybe just blow it on a shopping spree???? (just kidding)
At this stage, it’s really more about personal goals than anything else. None of the routes you named are particularly bad, nor are any of them clearly financially superior to the others. The route that should be on top is the route that best matches what you hope to do in the future.
If I were you, I’d spend some time thinking about your goals. Don’t just devote a few minutes to it. Return to the idea regularly and talk to your wife about it. Figure out what you want to be doing in the future. What’s more important to you? Do you have dreams of a small business? Do you want to retire early? Would one of you like to try a completely different career path?
While deciding that, I would simply sock the excess cash away in a savings account and sit on it.
Q2: Friends burdened by my frugality
In the spirit of a lot of the challenges I read about on a lot of personal finance blogs, I decided to create a challenge for me and my live-in girlfriend. Just seven months ago, we were spending nearly $1000 a month on food (eating out and at home). Since then, we have cut dramaticaly and are down to $300 a month. Starting Feb 10th, we challenged ourselves to eat for $100 a month. We weren’t looking to post it online or make it impossible, so we didnt put crazy stipulations on the challenge. We had access to a full pantry, a freezer stocked with hundreds of pounds of free-range beef, plus any giftcards we had to restaurants. Its been going fantastic and we are on track to beat our $100 goal. We are going to continue the challenge for another month or so.
The problem from all of this is that our friends and family members have started footing the bill so that we will go out with them. Im torn because I dont want to become anti-social and unfortunately a large part of our socialization has traditionally been food related. I have tried making suggestions like a pot luck or cookout, but they are stubbornly sticking with restaurants. Shoud we just let them pay for us and thank them, or should we refuse? Im not sure making personal finance headway at the expense of others really “counts” (not that anyone is keeping score).
The solution here is to sit down and have a chat with these people about it. Clearly, you enjoy each other’s company – they’re willing to pay for you to go out with them. You shouldn’t let go of a social bond like that.
My suggestion is that you talk to the people you’re currently spending time with and suggest some sort of rotation of hosting. When they host, you could go out to eat and they would pay for you. When you host, you could prepare a meal at home for them. Each of you would have the option of doing whatever you wanted when you host, including the choice of menu, restaurant, and so on.
If you’re talking about a group of three or four couples, you might talk to all of them about this arrangement. This way, there’s no more quibbling over bills or anything like that. The host just grabs the bill for everyone at the end of the meal.
I actually did this with some friends in college for a while, where we mixed up serving meals at our apartments and eating out at various ethnic restaurants. If the person was energetic and confident in the kitchen, we’d eat at their place; otherwise, we’d eat out.
Q3: Motorcycle questions
I had a question regarding mopeds vs motorcycles as a means of frugality. My husbands commute has changed significantly since he had purchased a truck several years ago — now that he is nearing payoff, we are looking to make efficient use of our vehicles. We will be ‘trading’ where he can drive my 2-door car and I will use the truck for my commute (1/4 the drive) to save on gas. His truck is about double the cost of my car to fill. Initially, we talked about the two of us simply trading and/or getting another small used car but now, especially with gas prices and summer approaching, we were contemplating a moped or motorcycle for me to drive when the weather is nice. We can pay cash for a reasonably priced moped or motorcycle.
I ultimately have wanted my motorcycle license for a while but a 49cc moped does not require additional licensing or registration. We live in a rural area that has (mostly) adequate bike lanes for a moped but I have a few reservations. Does it make sense to get the moped that’s immediately cheaper and resign myself to 35mph on the side of a few stretches of posted 55 rural road? Or do I look at used motorcycles that would allow me to ride in the regular flow of traffic but will require additional costs (safety course, license, etc) and more upkeep?
Do you have any resources for selecting the right moped or motorcycle?
Lastly, do you have any insight on how to choose either option in regards to how it may (or will?) alter my professional image? I want to be economical and do what makes personal financial sense but I work in an office with a few direct reports. I dont want to lose credibility. Not many people in this area have mopeds (I’ve seen 3).
I don’t think your questions can be answered with just the information you provided.
For starters, how long is your regular commute? The longer it is, the more a motorcycle makes sense because it allows you to keep pace with traffic. If your commute is ten minutes and a moped turns it into fifteen, it’s not a big deal and I’d go for the moped. If your commute is an hour and a moped would turn it into an hour and thirty minutes, it is a big deal.
As for your professional appearance, it depends on what your profession is. Are you going to be transporting people around town? If so, a moped probably won’t cut it. For an awful lot of professions, though, the vehicle you have in the parking lot has little impact on your impression inside the walls of the business.
Q4: Basic tax questions
I landed in USA in May 2010 for work. I worked in San Francisco for 2 months (May to June 2010) and in Chicago for 4 months (July to Oct 2010) for a total of about 6 months – exactly 180 days.
Lot of tax was deducted as I got my SSN after nearly 1 month, and California taxes were high compared to Chicago taxes.
I returned back to India in Oct 2010 and I want to file my taxes. I got my W2 form from my employer. Should I file taxes in Chicago and California seperately ?
Also can you help me with the some Tax agencies who can help me in filing taxes.
If I understand your situation, you would file California state taxes for the period worked in San Francisco and Illinois taxes for the period worked in Chicago. You would file federal taxes for all of it.
This is, of course, assuming that you worked for two distinct businesses in this period. If you were working for one business and were “on location” part of the time at the other site, you’d be filing state taxes only for where you were actually employed.
Most of the major tax filing businesses in the United States can easily handle this. I have worked with H&R Block in the past with success.
Q5: What’s next after debt payments?
I am currently able to save 45% of my after-tax income (45% = $1,480). All of this money – except for $99 – goes toward paying off my student loans. (The $99 is my contribution to my 401(K) at work, as my employer matches this contribution dollar for dollar up to that amount.)
In a few months, I will have paid off all of my debt (!). I’m wondering: how do I start saving that money? My long-term goal is to be able to afford a piece of land to build a home. With that savings goal in mind, how do I determine what percentage to save for retirement, what percentage to save for the land, and what percentage to invest? Do you have any recommendations?
My back-of-the-envelope math says you’re saving – even with your employer’s contributions – somewhere around 5% of your salary for retirement. I would add to the 401(k) until that amount is around 10% of your total annual salary. Since I don’t have all of your numbers, I can’t say how much that would be.
The rest of your money should be used for whatever future goals you have, which appears to focus heavily on purchasing land and then building a home on it. I would make sure that I had an emergency fund first, one large enough to carry you through at least a few months of unemployment.
Once those things are taken care of, start saving in earnest for your land. Figure out how long, at your current savings rate, it will take to get the amount you need, then invest appropriately. If the timeline is less than ten years, keep it in cash. If it’s more than ten years, put some of it – say, 50% – into an index fund using a major brokerage.
Q6: Writer’s block
What do you do when you get writer’s block?
For starters, I try to have articles in the bank so that if I do have writer’s block, I don’t miss an article here on The Simple Dollar. Sometimes, you’ll read an article and it’s something I’ve written shortly before it’s posted. Other times, it might be something that’s been in the bank for a month or two.
When I have writer’s block, I usually read. I’ll sit down with several books that I know have material inside of them that gets my mind spinning on topics related to personal finance and personal growth and I’ll just re-read them with an open notebook and a pen near me. Sometimes, I’ll engage in activities that produce similar thoughts, like grocery shopping or cleaning out the pantry. Whenever I have the first semblance of an idea, I jot it down. I just keep doing that until I have a good page or two filled with ideas.
I then sit down with each of those ideas and brainstorm and research. Again, I’m not trying to write – just trying to collect ideas. Some of them are non-starters, so I toss them. Others, I grow a bit.
By that point, the juices are flowing enough that I can usually start writing an article. Of course, all of the ideas are out there in front of me already.
Q7: Tax moves
Myself: Earning $83K per year, not currently contributing to 401K because I’m paying off $40K of credit card debt
Husband: Earning $56K per year, also not contributing to 401K because of his student loan
My husband just found this job in July of 2010. Prior to that, he was working part-time making under $20K per year. We have always received a refund during tax time. However, this year, I found out that I have to pay taxes because not enough money was being withheld from my paycheck even though I claimed the same exemptions/deductions (1) on our W-4s as in previous years and even have additional money withheld. I’m trying to understand how this happened: is it because of my husband’s new job, so now we’re in a higher tax bracket? I was playing around with a W-4 calculator and if I completed the questionnaire correctly, it says to claim 0 (which I was planning on doing this year anyway) and have an additional $325 withheld every paycheck! I was stunned. I am now not motivated to make more money because I feel Uncle Sam is taking it all away from us.
We were planning on opening an IRA account – will this help with our tax liability?
I’m almost certain it’s because of your husband’s new job pushing you into a higher tax bracket. Is your husband having anything deducted from his check for taxes? I’d also double-check the tax math just to make sure.
I think the questionaire you filled out is assuming that your husband is not deducting a dime from his paycheck in the coming year and that you’re shouldering the full tax burden for both of you.
An IRA will help just as much as 401(k)s would. In fact, just using your 401(k)s at work will probably be more helpful if your employers offer any sort of matching.
Q8: Credit card cancelling maneuver
I was wondering if signing up for a credit card, getting the reward, and then canceling it will effect my credit score. Right now I have one credit card, which I pay off every month, but I want to sign up for a couple credit cards with good airline miles rewards.
There are some where the annual fee is waved for the first year. Will it effect my score if I just use them enough to get the rewards, then cancel them before the year is up? I’ve never had a late fee and I always pay off my balance, but as I will be looking for a job in a tough economy next year, I wouldn’t want to have a lowered credit score just to get a few thousand miles.
It’ll negatively affect your credit score in the short term, but the impact will be quite small and within a year you’ll be back to normal.
I would read the offer very carefully before I did this, though, to make sure that you are allowed to cancel in this manner. Many introductory offers like this have subtle strings attached, requiring certain uses before cancellation.
Companies aren’t out there to just hand out rewards, after all.
Q9: Impact of credit card change
Last year my US Bank College Rewards VISA was “upgraded” to a US Bank VISA without a rewards program but with an annual fee ($95).
I’ve had the credit card for about 6 years and because the card no longer has a rewards program but does include an annual fee I would like to switch credit cards. Rather than keeping the US Bank VISA I would like to cancel it and open a Delta Skymiles Credit Card.
Can you give me idea of how this change will affect my credit? If I’m looking to make a big purchase soon (car, or home) would it be best to postpone this change?
Do you have any other credit cards? If you do not, then this move will have a mild negative impact on your credit that will last for a few years.
Why? It’s all about the length of your credit history. If that credit card is the oldest form of credit you’ve obtained, cancelling it will reduce the length of your credit history, and the shorter your credit history is, the lower your credit score.
If I were you, I’d get the new card, keep it for a few years while paying the fee on the old card, and cancel the old card in a while.
Q10: YouTube channels
What YouTube channels do you subscribe to?
I subscribe to several, but none of them are strictly money-related. Personal finance doesn’t translate really well to video, as far as I can tell. The ones I do subscribe to generally fall into two categories: food and gaming.
Mostly, I use YouTube for live musical performances, to tell the truth.
Got any questions? Email them to me or leave them in the comments and 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 hundreds of questions per week, so I may not necessarily be able to answer yours.
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