Is This Frugal Idea Worth It for Me and My Family?

Often, when I try out a frugal idea and it ends up being a post on The Simple Dollar, I struggle with the question of whether or not this is actually a really good frugal idea, both for my family and for the families of the people reading the post.

I’m in a situation where time is really at a premium. Most evenings end not with a couple hours of casually watching television, but with a collapse into a heap of exhaustion. I’m often up by 6 AM and I’m still loading dishes in the dishwasher at 10:30 that evening. We have three young children, my wife works in a demanding career path, and I’m running a small business that demands a significant amount of creative focus. Time is the element that is at a premium at our house.

In other households, it’s money that’s at a premium. They’re limited by their economic situation, but they have at least some amount of time on their hands. Still others find themselves pinched by other factors (like disability or energy) or by combinations of the above factors.

There’s also a wide variety of living situations and interests. I have single readers, married readers, readers with houses full of children, readers in tiny apartments, readers with huge gardens and readers with none, readers with three cars and readers with none. Different frugal ideas work differently in each of these situations.

How do you really know if an idea will work for you? In all likelihood, the person giving the tip is in a different life situation than you are, whether you read the tip here or on another site. Is it relevant? Is it useful to your life?

Here are some specific things that I look out for when deciding whether or not a frugal tip is really going to fit into our lives.

Does it require a lot of time, particularly time all in one block? If something is going to require me to plunk down a couple hours of time all at once, it had better save a lot of money or it’s not going to be worth it for me. Six years ago, before I had children, that might not have necessarily been true. Today, with three children running around and a small business to manage, time is something that’s really valuable to me.

Is the savings rate per hour enough to entice me to invest my time? If I’m investing an hour just to save $0.50, it’s not going to seem compelling to me. I can easily earn way more than that in another frugal activity or in some work task. My usual threshold for attracting my interest based soley on the savings rate is somewhere around $10 per hour of time invested. If it’s much less than that, it’s going to take something else to get me into it. Your rate may be more – or it may be less than that.

Is it something that seems fun? If something looks like it’s an interesting activity, I’m much more likely to try it even if it returns very little. Usually, this means a project that I can get the entire family involved with or something that’s in line with a personal interest of mine, like soapmaking.

Is this something that’s in line with another value of mine? I’m a big fan of things that cut my personal energy use, not just because it saves me money, but because of the positive energy use impact of that decision.

Is this something that’s permanent? I tend to be more interested in frugal options if the positive consequences of that action are permanent or just completely replaces a previous activity. In other words, it adds no additional time demands to my life beyond the initial change. For example, air sealing my home is a permanent change that requires no additional continuous activity. Using LED light bulbs is a change that doesn’t require me to do anything different over the long haul.

The key thing to note here is that the reasoning for various frugal activities varies from person to person. Your reasons are going to be different than my own. Another reader’s reasoning is going to be different than you or I. There is no right or wrong here, just different lives.

Instead, it’s important to recognize what makes a good frugal tactic for you. When you look at a list of tactics, not all of them are going to match your life. The key thing is to know what exactly you’re looking for so that you can easily go through that list and pull out the ones that have potential for you. Remember, if you pull out two things out of a list of a hundred and those two things actually save you money, then the list of a hundred ideas was worthwhile for you.

View the original article here

Reader Mailbag: Family and Friends

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. Pets, roommates, and repair costs
2. Gift receipts
3. Why get married?
4. Lonely Christmas
5. College athletic compensation
6. Preparing for a layoff
7. Why Christmas?
8. Diversifying retirement savings
9. Career in music industry
10. Christmas carols

The biggest highlight of this time of the year is the opportunity to spend time with people that you just don’t get to see that often during the year.

We have some friends that we rarely are able to see during the year because of conflicting schedules. Today, we’re going to have lunch with them.

Over the next few days, I’m going to see several other people that I see maybe once or twice a year and really look forward to seeing again.

That’s the point of this season, and that’s why I love it so much.

Q1: Pets, roommates, and repair costs
I have a question for you that you may or may not be able (or want) to answer. I’m 25 years old and about two years ago, I saved up and bought my first piece of furniture–a couch from a local upholstery store. I chose the couch from this store because my parents had bought one from the same store when they were first starting out and STILL have it now 23 years later–good quality if you ask me. Fast forward to February of this year and I’m living with a roommate who had just adopted a dog. Over the course of a few months, the dog started to chew on things around the house and I noticed that he started to work on the hem of my couch. I asked my roommate if she would mind keeping the dog in the crate when we weren’t around the house because I was worried that he might destroy my couch. For a while she did this. Then one day as we were both leaving for work, she decided to leave him out and put a throw over the couch saying that it would prevent him from chewing on the couch, even though I expressed concern. When we returned from work that evening, the dog had shredded the arm of the couch all the way down to the frame.

When I went back to the store to inquire about fixing this, I was told that if they had the same fabric in stock, it would only cost about $100. However, they no longer carried the fabric or could find any of the same fabric. The next option I was given was to remove the fabric from the back of my couch and use that to replace the arm, and just pick some random fabric to go on the back. The third option was to completely reupholster the couch, which would cost $500 for labor plus however much the fabric costs (anywhere from $15-25/yard).

My question is this: I feel like I’m stuck between a rock and a hard place. I saved up and used my hard earned money to buy a couch (it cost $1600) with the expectation that I would have the couch for years and years to come. I bought it new and am not really interested in having it look like a patchwork couch, otherwise I would have bought a used couch and fixed it up. I ideally would like to have been able to find the same fabric. Is it unreasonable for me to ask my roommate to pay for the cost to completely reupholster the couch since her dog destroyed it? If I had had the couch for longer, I would have maybe been willing to pay for the cost of a new fabric with her paying the cost of repair, but since I had the couch for less than two years, it was nowhere near being ready for new fabric. What’s your opinion? If my dog had destroyed something of hers, I expect that I would be responsible for cost of replacement (because my dog is my responsibility). But it makes me uncomfortable to ask her to pay close to $1,000. We’ve kind of tiptoed around the issue for a while now, but I’d like to address this sooner rather than later, and definitely before our lease winds down.
- Courtney

You are not out of line at all to ask her to pay to repair the couch. However, unless your roommate is a very good person, be aware that your request will likely have a negative impact on your roommate relationship.

Her objection likely won’t be to paying you for the repair. The objection will probably come in the high cost of the repair.

For example, I don’t think the total cost of every couch I’ve ever owned in my life adds up to $1,000. I would be scared to own such a couch because of the possibility of damaging it. I have actually not sat on the couches and chairs of friends because of the cost of it and the implication that I would be liable if I inadvertently damaged the couch.

Those types of feelings have a very strong chance of popping out in this conversation – that the presence of such an expensive couch made your roommate uncomfortable. How do you respond to that? It depends heavily on your roommate, but it’s something I’d think about before having the discussion.

Q2: Gift receipts
What do you think about taping gift receipts to the bottom of items given as gifts?
- Annie

I encourage it whenever possible. If you’re buying that person an item that comes from a store where it can easily be returned (like a department store), then you should give that person the option to do so.

For example, if I buy a DVD for a friend, I usually look at it as, “I bought them this DVD because I think they’ll like it. If they already have it, though, I do want them to have some DVD they would like.” Thus, it makes perfect sense to tape the receipt.

I extend a similar feeling to matters of taste. If I buy someone a vase because I think they’ll like it, I know that I might be pushing my tastes on them, so I’ll attach a receipt so they can pick out a home decor item that they would like.

I have absolutely no problem with someone returning a gift that I’ve purchased for them.

Q3: Why get married?
I am 25/f, never married, not in a relationship, no kids.

I am wondering about the nature of marriage. It seems to me that marriage is not about love – at least not ALL about love.

I have been thinking that marriage is about finding a suitable partner that you LIKE and see fit for the long term familywise. Am I wrong to think that, with regards to marriage, love is not the essence? As I get older and more experienced I find it harder and harder to “fall” in love – instead, there are many more other feelings – respect, security, help.

I am asking myself – is marriage like a business-contract in personal life? Like, you find a partner you can “work with” when it comes to creating a family, a person you can rely on and who can rely on you, but who you are not in love with – maybe someone you really like, someone to share your views on the world, someone to help you make your children happy?

I don’t want to sound like a person who doesn’t believe in love, but really, is a marriage based mainly on love? Can you really have love if you don’t have respect for your partner or if you are financially strained or if you and your partner are looking in different directions?
- Nona

I can’t comment on other people’s marriages, but I can comment on my own.

Sarah is the one person in my life that I can rely on completely. There is nothing in my life that I think or feel that I can’t or won’t tell her. Nothing. Because of that, she’s a constant part of my thought process on everything I do, from decisions about The Simple Dollar to who we’ll visit this Christmas season. The closest description I can give is that of a best friend, but it goes so far beyond any “best friend” I have had prior to her in my life that such comparisons are like comparing the moon and the sun.

Because of that deep reliance, I am quite willing (as is she) to incorporate her as a deep part of everything I want for my future. Simply put, my future isn’t a future I want if she’s not in it.

Marriage, to me, is simply a public way of saying that to everyone. I’m publicly telling others that Sarah is someone I trust that deeply and intend to spend the rest of my life with, for better or worse. I don’t take that pledge lightly, and I don’t intend to ever break it.

I think there are a lot of people who do not take it that seriously. I don’t know what marriage means for them.

Q4: Lonely Christmas
I’m going to be spending Christmas Day alone. While this does have a good side – no Christmas gifts to buy! – I am left feeling rather lonely and depressed about this state of affairs. Do you have any suggestions for making this day go any better?
- Marcus

It sounds like you want the “people” part of Christmas without the “gift” part of Christmas (at least in part).

If that’s the case, make the “people” part of Christmas part of your day as much as you can. Place a call to the people you care about most that day and wish each of them a wonderful Christmas.

Often, the reason people give gifts is to express that they care for someone in a way that they have difficulty expressing with words. I don’t think that’s an entirely bad thing, as long as the gift genuinely comes from the heart and doesn’t come from the Wal-Mart discount rack. If this causes you to re-think Christmas gifts, go get a few small items and then distribute them quietly and anonymously on the doorsteps or mail slots of people you care about on Christmas day, just to remind them that you care for them.

Another idea: spend Christmas day helping out at a soup kitchen or some other type of volunteer work. Every time I do such work, I find it very deeply fulfilling.

Q5: College athletic compensation
Do you think college athletes should be directly compensated beyond their scholarship?
- Rodney

I believe that the NCAA should not allow direct compensation of athletes for their play at the university.

However, I believe the NCAA should allow schools to sign athletes to personal service contracts that become valid when they graduate, enabling them to receive whatever compensation the university sees as being fair for promoting the university, appearing in university advertising, and helping with future recruiting.

So, for example, a prized athlete is considering going to school A. That player would receive a scholarship, but they might also recieve a contract from the school for the time after they graduate for personal services such as recruiting and school promotion.

This serves a lot of purposes. One, it helps to push away some of the underhanded dealing in college sports. Two, it does allow the player to receive compensation for their school using their likeness in future promotion after they’re no longer a student-athlete. Three, it encourages students to actually graduate instead of just leaving school and turning pro in their sport of choice, which is somewhat the point of college athletics (at least on paper). Four, it gives those kids some insurance on their talent – if you’re a great athlete, go to college, and get hurt because of that choice, you’ve just lost a huge portion of your financial future.

Yes, I’m sure top athletes would get ridiculous personal service contract offers from universities who want top-notch programs. On the other hand, those athletes will help sell expensive seats at the sports stadiums, help drive university merchandise sales, and aid in recruiting at a later time.

Q6: Preparing for a layoff
I’m looking at a potential layoff in the next few weeks and can’t help but feeling panicked about it, though looking at things on paper has part of me thinking we should be “fine”. I thought I’d send our basic numbers to you, in hopes that you could serve as an impartial judge of if I’m crazy to be nervous and panicked. Our combined income is 175K, 95K for my husband and 80K for myself. Our take home pay falls a little over 8K a month, and my husband contributes the full $16,500 to his 401K each year. (I had been contributing 10% but dropped to 1% when I learned of the likely layoff). The remaining balance on our mortgage is right at 290K and the monthly payment (PITI) is $2146. (Our original mortgage was 332K, we have been here 2 years, and our interest rate is 5.625% – best available at the time. No PMI as we did a buyout as we put 10% down.). Our total monthly expenses, including the mortgage but not including food, falls in around $3200 a month (includes things such as cable tv, xm radio, that I know we could cut if needed). We have no credit card debt, and our cars (a 2007 and a 2009) are completely paid off. I should also mention that we have 60K in savings, 20K in IRA’s, and my husband has at least 80K in his 401K, probably more.

The way I’m working things out on paper, even without changing his 401K contributions my husband’s take home should be a little over 4K a month, which would cover our $3200 a month in bills, which could be less if we cut some non-needed things such as XM radio. We wouldn’t be able to eat out a lot, or buy expensive groceries, but as long as he is employed we should be “fine” right? Plus I should be able to bring in $1200 a month in unemployment benefits as well.

I am actively job seeking and have gone on several interviews, though each company was promising they did tell me that despite the interview they actually don’t have positions available, just that they are looking to hire when they work out their 2011 budgets. That was discouraging as I was not aware of that going into either interview.

I am also able to move from my health insurance plan to my husband’s at a reasonable rate (essentially the same amount I pay with my company now) once the layoff occurs.

I realize many people are in worse situations and on paper this seems like it should work, but I can’t help feeling like this is going to be awful. I did go through my father being laid off in my early teens which was devastating for our family and probably the reason I am so panicked over this that I feel like things will never get better.
- Jennifer

It is going to be awful, but you’re in pretty good shape to handle it right now.

Job loss is never easy, no matter how much you prepare for it. It sounds as if you and your husband are in pretty good shape with regards to planning for it.

If I were you, I would cut those nonessentials. You’re not going to want to dip into that savings unless you have to, so I would ask myself, for each expense, whether that expense is really worth digging into your savings. Is XM radio really worth digging into your savings?

Remember, even in this situation, inevitable negative things will happen. A car will break down. A hot water heater will need repair. You’ll still need to be able to cover those things, and the best way to handle that is to trim the non-essentials for now.

Q7: Why Christmas?
I don’t understand Christmas at all. I mean, I understand it from the sense of giving things to your loved ones to show how much you care for them and I understand on some level the whole birth of Jesus thing, but why do we have a Christmas tree? Why do people put up lights outside their home?
- Erin

The Christmas tree’s origins are shrouded in the mists of time, but it’s fairly clear from what we do know that, like a lot of other pieces of “tradition,” it was incorporated into Christmas from cultural elements already existing in an area. There are indications of this in medieval Russia and Germany, plus there are stories of St. Boniface cutting down a tree in the Christmas season in “defiance” of Thor (a Norse god) sometime in the 700s. It’s more of a cultural heritage thing than a Christmas thing, though they are amalgamated together.

The idea of Christmas lights actually has a religious root, harkening back to early Christianity when a worshipper would place a candle in the window to signify that there was some service going on in this building. Over time, as the Christmas tree came into prevalence, the candles were moved to the trees. Electric lighting transformed that tradition into the modern one with lights.

In a modern sense, I view Christmas lights as a greeting, a way to say “happy holidays” or “merry Christmas” to anyone who passes by.

If you look at any mass social event, you’ll start realizing that the rituals are fairly odd and usually peppered with a very long history.

Q8: Diversifying retirement savings
When considering diversification of retirement funds, should I spread my retirement funds across separate investment banks, or is simply buying into a set of diversified mutual funds at one institution enough?

I have a retirement account at Vanguard, and I’m considering moving my fiancee’s retirement funds over there as well. Is having all of our eggs in one investment bank basket risking anything significant?
- Stephen

It’s not a bad idea to do this if you easily can.

Here’s why: if your investment house goes under (like, for example, Vanguard) and that house is protected by SIPC insurance (as most of them are), you’ll get up to $250,000 of your investment returned to you, most likely in the form of an account at another institution. Anything above $250,000 is likely lost. Note that this does not protect you against investment losses, just against the failure of your investment house.

For the end user, it’s much like FDIC insurance.

In the end, your best bet is always to diversify. Too many eggs in one basket is never a good idea.

Q9: Career in music industry
I graduated college with my bachelor’s in May of 2009, majoring in finance. Despite my education, I have made terribly poor financial decisions. I have $6000 of credit card debt, $20,000 in student loans, and $8,000 principal left on a 2003 Subaru Forester I bought used. I have been working for a year and half in Commercial Real Estate doing accounting, making a salary of $28,500. I lived with friends for a year and just moved home in September (the first smart decision I have made in years!). I am working to pay my credit card balance down as quickly as possible.

Now, relating this to your article… I currently have a job, but if I had a career, it would be in music licensing. I am fascinated with the concept of music as intellectual property and learning about digital copyright law. I have always been too afraid to pursue this and for the first time in my life, I have realized it is okay to learn about and enjoy what you like!

I have an opportunity to interview for an internal wholesaler position at a company in Nashville. My cousin works at the company and she offered to be a reference. However, she knows my ambitions are not long term. This is her career and I do not want my ambitions for change to affect her negatively in anyway.

I would much rather move to Nashville and work an entry level position at BMI, Sony, or another company then work in insurance. However, I am nervous about applying for these positions from Cleveland. I have often heard of HR representatives not considering resumes out of state.

As I see it, I have the following options:

· Take a job with the insurance company and relocate to Nashville, while network and looking for opportunities career wise.

· Pay off my credit card, save $6-7,000, quit my job, and move to Nashville to look for a career position.

· Pay off my credit card, and try looking for my career in Nashville from Cleveland.
- Jenny

Think about it this way: if your company is in Nashville and there are lots of good candidates in Nashville, why would you pay for someone to relocate from Cleveland? Why would you pay for an interviewee to fly in from there?

If I were you, I’d relocate to Nashville with a job in hand – your first option. You can then spend your extra time seeking out your dream job. I don’t think I would move there with no job opportunities in hand.

Chase your dream. You’ll never regret it, even if you don’t completely grab the brass ring.

Q10: Christmas carols
What’s your favorite Christmas carol?
- Amy

Let me put it this way: for most of December, the soundtrack to “A Charlie Brown Christmas” is pretty much on constant play around here.

I don’t have any particular favorite carols to sing, however. I am learning to play quite a few on the piano right now.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

View the original article here

Reader Mailbag: Family Visit

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. Selling off items
2. High-interest foreign accounts
3. Putting off home ownership
4. 401(k) leftovers
5. Early payments on 0% loan
6. Vegan snacks
7. Using a windfall
8. Self-employment and taxes
9. Paying down credit card debt
10. Reference books

My parents visited us this past weekend. I love it when they come to visit us, yet I also sometimes feel some relief when they’re gone. I feel the same way with almost any guest – I’m glad they’re here, yet I also feel glad after they leave.

It’s just the natural stress of houseguests. A guest in my home for an afternoon isn’t stressful, but once someone is here for several days, I almost always find myself getting stressed out.

Q1: Selling off items
When you said the first thing you did was to sell all your media (DVD’s, CD’s, etc.), where did you sell? I have a hunch it was eBay or Amazon, but I’m not certain, and I would like to know the best way to go about selling media. I find eBay and Amazon very time consuming to use for selling. We have a local buyback store, although I’m not sure they offer a respectful amount of money for items. In a nutshell, where is it worth it and what makes it worth it?
- Sandra

I did not sell all of my media online when I first hit my financial bottom. I did use eBay for some items, but I was very selective about what items I sold (particularly after the first batch), focusing on ones where I felt the return would be worth the time investment.

What I actually did was sell a handful of items online, then sell most of the rest at a used media store. The few that were left wound up at a yard sale, and the unsold ones there wound up at a Goodwill store.

I was pretty happy with the financial return here compared to the time invested. That money went a long way in helping me deal with my initial debt load.

Q2: High-interest foreign accounts
I am a long-time reader of your blog and have loved your insights. I was wondering if you could provide some insights into how I could profit from the extremely high interest rates available in countries like Brazil or Turkey? It would seem prudent to park our money in a cash-deposit or savings account in a foreign bank paying high interest for a while… then move it back to the US.
- Tim

There are several concerns I would have here. First, in order to use the money, you’re going to be converting your currency twice and paying a fee on that conversion twice. This will eat up a significant amount of your gain.

Another concern is that, to an extent, you’re playing the foreign currency market. If the exchange rate moves in favor of the U.S. dollar while your money is in the Brazilian or Turkish bank, you’re going to see most of your gains eaten up.

Yet another concern has to do with the banking industry in those nations. I’m not clear on how stable the banks are there and how protected ordinary depositor accounts are.

There are enough uncertainties and risks in this that I wouldn’t try it unless I was actually from one of those nations and very familiar with the risks and concerns involved.

Q3: Putting off home ownership
My husband has a stable job at which he excels. I have an office job that I was happy to accept in the depth of the recession (after a two-year low-paying but freelance blogging gig) but that I don’t love. We were married in May 2008, and started our life together with $43,000 in credit card, car and student loan debt.

In just over 2.5 years, we’ve reduced that debt to about $7,500, which we are on track to pay off by the end of this year, using monthly automated payments. On January 1, we began weekly automatic savings of $230 per week to an emergency fund (we began with Dave Ramsey’s $1,000 mini-fund back in 2008).

Our gross income in 2010 was about $120,000, and in 2009 it was $96,000. However, due to our aggressive debt repayment, our entire savings consists of $2,000 in our emergency fund. I do have $3,200 in a retirement account from an old job, and I just started contributing to my current company-matched 401k in January. My husband (who earns about 70% of our combined income) is not contributing to retirement.

Here’s the quandary: we both dream of owning our own house. We are currently renting a house for $1,400 (a great deal in our area) from a family friend who would like to sell it to us. She has offered owner financing (not sure if we need this — we have good credit, but understand that lending is tight and we have no down payment), but won’t name a price range. We’re a bit concerned about this, as she previously listed the house for a price that was aspirational to the tune of $100-$150K over market value (needless to say, she received nary an offer, not even a low-ball one).

Our lease is up in June. I would like to quit my job next year to explore a new career, travel and raise children (we are in our early 30s, no kids yet). With only my husband’s salary we can afford mortgage payments up to $2,500, which, depending on what calculator we use, seems to put us in a $375,000 home. This is about the value of the house we are renting, and an average price for a “starter home” where we live. We keep and stick to a meticulous budget.

I feel like conventional wisdom would tell me to stay in my current job until the emergency fund is built, the debt is completely paid off, max out retirement, and then and only then, start saving for a 20% down payment on a home. But that might take us another 3 years or more, and involves asking to extend our lease on a property we know our landlord wants to sell, or moving to another rental that could be more expensive or far less comfortable and convenient in the meantime. Also, home prices are temptingly low right now, and while we have little savings, our income is healthy, and would still be without my income, though we’d probably qualify for a smaller mortgage (that wouldn’t be enough for a house in our area).

So what do you think? Should we ask to extend our lease? Should I plan on staying in my job longer than I’d like? Is there any good reason to halt our debt repayment and emergency fund savings to redirect towards buying a house?
- Johanna

I think you should sit down with your landlord and try to get a bead on what kind of arrangement she’s wanting for the sale. What’s the price? How does the financing work? You need more information with which to make a decision here.

If that’s a non-starter, I would try to extend the lease and then get your financial house as solid as you can. You have the right ideas – pay off your debts, build your emergency fund, contribute to your retirement.

As for your wish to take a year off, I think it’s fairly incompatible with the other things you’re mentioning. While I’m not opposed to the idea, you have to reconcile yourself to the fact that you can’t have everything. You can’t have jobless freedom while also paying off your debts and building up your down payment. You’re going to have to make a choice there.

Q4: 401(k) leftovers
I’m a 24-year-old writer who graduated from college in 2008. I was lucky (and hardworking) enough to graduate with zero dollars in student loans. But thanks to the terrible economy of the summer of 2008, I haven’t exactly had much career success. Just out of college, I had a paid internship that afforded me a 401(k) and matching funds. I contributed as much as I could, but my small intern salary for the summer left me with just around $500 in the 401(k).

Since then, I’ve been working, but not contributing to a retirement fund. I make a very modest salary as a receptionist, combined with some side money from freelance writing. The writing is my passion, though, and with my networking contacts, I’m considering making the move to be a full-time Freelancer in the upcoming year (As soon as I have my $900 credit card bill, my only debt, paid off).

But now I’m ready to start modestly (only around $100 per month) contributing to a retirement fund again; I know it’s important to sock away as much as I can while I’m young. I’m considering opening up a Roth IRA to take advantage of the tax benefits later on in life (when I hope my income and tax bracket may be higher), as well as the flexibility to take out my capital contributions if times get really tough (Journalism is a fickle industry).

But my problem is that I have no idea what to do with that 401(k). Should I take the money out and put it in my (eventual) Roth IRA? Wouldn’t that leave me with pennies after the early withdrawal fees? Should I roll it over into a Traditional IRA? If that’s the case, should I keep both a Traditional and a Roth IRA? Just the Traditional? Can freelance contractors make tax-deductable contributions to a Traditional IRA? Would that be a better idea for a self-employed person? Should I leave it in the 401(k) for simplicity’s sake? I would jump at the chance to re-join the non-Freelance workforce if the right opportunity presents itself, so perhaps I’ll have another 401(k) down the road.
- Evelyn

The usual process is to roll a 401(k) into a Traditional IRA, then convert that Traditional IRA into a Roth IRA. That’s the type of thing that a fee-based financial planner (do not use a commission-based financial planner for this – ask them if they operate on commission before using them) can help with. This usually doesn’t incur early withdrawal or other fees. However, the conversion from a Traditional to a Roth IRA will cause a taxation event because you’re moving from pre-tax to post-tax dollars. You’ll have to pay income tax on that money. If you can’t do that, leave it in the Traditional IRA.

You can certainly have a Traditional IRA and actively contribute to a new Roth IRA, just as you can have a 401(k) and a Roth.

I like IRAs because you have more control over how your money is invested. You pick the investment house and you usually get a much wider and richer range of investment options.

Q5: Early payments on 0% loan
What do you think about making early payments on a car loan that has 0% interest?

I’m torn between reducing the car loan debt (about $28k), opening a Roth IRA, or starting another account to save for a house. I already contribute 10% of my salary to a 401k which my company matches 50%, so the Roth IRA doesn’t seem urgent. I’m a few years away from wanting to buy a house, but I’d be able to pay for a mortgage a lot easier if I’m not spending $500/month on car payments (there’s about 57 months left to go!).

Selling the car to buy a “reliable, used car” instead is not in my interest, despite that being the typical finance blog approach.
- Charlotte

The reason the “typical finance blog approach” involves buying a reliable used car is because it provides the most driving bang for your buck. If you choose not to do that, you’re simply choosing to redirect money from other financial goals into having a shinier car, which pretty much opposes most financial sense. If a “typical financial blog” advocated buying a new car on a loan, then that “typical financial blog” would pretty much constantly be ridiculed for offering dodgy advice.

If you’re committed to your current car, that means you’re committed to it above your other goals, which is good – you’ve assessed your goals and figured out what you want. The advantage to paying off the loan early in this case isn’t to avoid interest, but to maximize your cash flow as soon as possible.

However, if your loan really is 0% interest for the entire life of the loan, you’re better off making extra payments into a savings account, waiting until that savings account matches the balance of your loan, and then either paying it off right then or simply using that savings account for all remaining car payments. This takes financial willpower, but it’ll put you ahead financially, perhaps saving you the equivalent of a car payment or so in interest earned.

Q6: Vegan snacks
On your diet, what kinds of snack foods do you eat? I’m amazed at how much stuff has milk or eggs in it!
- Jeff

I eat nuts. I eat fruit (I love dried apricots). I eat mushrooms that have soaked in olive oil, a touch of vinegar, and spices. I eat crackers. I eat pretzels dipped in hummus.

You just have to look around your grocery store for options. The best place to start is usually in the produce section. Look for things that look like you could munch them. Hummus is a great thing to dip these vegetables in.

Pick up some nuts and try them. Try out a variety of dried fruits. You’ll be shocked how many good things are out there once you start looking in the right places.

Q7: Using a windfall
After a year of unemployment I am now gainfully employed. I have cut my budget down to bare bones (no extra spending of any kind, no cable, no shopping, no…anything) in order to be able to save $1000 each month.
15% of my salary goes to my 401k/Roth401k
$200 a month goes to my RothIRA
I save $1000 a month (starting this month)
I have $8000 in savings
I have $9000 in debt. I pay this off at $300 a month, and there is 0% interest (praise God)
At this rate, I will be paying this debt off until December 2013.
We are planning on having a baby in Summer of 2012 and that is what we are saving up for.
We currently rent, and are not looking to purchase a home for another 5 or so years.

I am starting a certification program that will allow me to start my own business by the end of the year. The program costs $7000 and I am paying out of pocket, from my savings and replenishing my savings at a rate of $1000 a month. I am getting $1600 windfall shortly, and at my new job there are two bonuses this year. I was told I can expect to take home $2000 for each.

What do you suggest I do with those $5600 in extra funds? Should I put them to savings to replenish what I take out for the certification program? Should I put them to debt so I can pay it off faster and have that additional $300/month to go towards savings instead of debt sooner?
- Danielle

I’m not sure how much your monthly expenses are, but if you’re a permanent couple with a baby on the way, I’d make sure that my emergency fund covered at least four months of living expenses, and preferably more. With two adults and a baby, the potential for emergencies is huge.

For you, that probably means banking most of your windfall right back into that savings account and sitting on that egg until you need it.

It’s not exciting or glamorous, but it’ll take care of you when you really need it.

Q8: Self-employment and taxes
I know you previously wrote about the difficulty of being newly self employed and the taxes that come with it. Since you’ve been in that situation for a few years now, I’m wondering if you have any tips (or lessons learned from experience) for those of us facing that situation?

Our personal tax situation is this (though it isn’t really relevant): In the past, I was an employee and my husband was self-employed, so we withheld more from my paycheck to cover what little tax he owed. Unfortunately, this past year, I made partner and became self-employed and my husband’s business is starting to take off. We tried to pay quarterly estimates throughout the year, but still ended up owing a big chunk at the end. In fact, so much that we might have to take a loan to pay it (in our defense, our taxes tripled from a year ago). I’m trying to figure out how to avoid this situation next year–create an account and put money in it every week and send that in quarterly? Do something else? Our accountant advises writing the equal checks quarterly, but I don’t see how we can do that, especially with owing what we owe this year.
- Dawn

The idea of equal checks only works if you can make a really good estimate of how much you’re going to earn in the coming year, which is pretty challenging for many self-employed people (myself included).

My solution has been to just take every single drop of income I bring in from my self-employment and put half of it aside. Every three months, I cut a check to Uncle Sam for about half of what I added to the account over the last quarter, plus a check to the state of Iowa for about half that much.

This gets me pretty close to what I owe (usually). The amount that remains in that account helps me to cover any additional taxes I owe. If there’s any left over, I move that back into my normal checking account.

Q9: Paying down credit card debt
I received an 18% cut in my pay for 2011. I am an independent contractor doing medical transcription at home and because I love my job, have flexible hours, and make pretty good money, albeit less by 18% now, I do not want to look for another job. I live in a small town with no job opportunities too. My question is, I am trying to pay down 3 credit cards that are all roughly the same balance, approximately $4200-$4500 range each. Two of these are at exact same interest rate of 12.24% and one at 9.99%. Rather than snowball I want to pay all down within a 36 month time range at the very least, and more when I can throw money at them. For the next three months (while paying off a medical bill) I plan on making the minimum payments plus the interest. For example, one bill is minimum of $91 plus finance charge of $46 with total payment of and some change I will round up payment to $140. Is this a smart way to do it for short term until I pay off the medical bill? After the medical bill I will be able to pay total of $450 per month prorated to each bill and I want to continue to pay the finance charge on top of that.
- Ronnie

It depends on the interest on the medical bill. Your best approach is to make minimum payments on all of the debts, then make the largest additional payment you can on the debt that has the highest interest rate. This will pay off all of your debts in the fastest possible way.

The medical bill seems to be somewhat thrown into the mix here. I’m assuming it has some sort of payment plan involved. If that’s the case, you’re likely facing a 0% interest on that debt, so I would just make the payments on that one and hammer the credit cards.

If your goal is to get debt free as quickly as you can, this is the way to go.

Q10: Reference books
You mentioned before that you buy books for reference, not for entertainment. What kinds of books do you buy for reference?
- Angie

Mostly, I buy books for reference when I know I’ll return to them in the future for facts, inspiration, or other materials. I’ll also buy books when I know I’ll get greater value out of them if I’m able to hand-annotate the pages or highlight certain parts.

Another exception are books that I’m sure I’ll re-read again, which includes my favorite novels. We have copies of the entire Song of Ice and Fire series, for example, because my wife and I both love them.

If a book doesn’t fall under these conditions, I’m fairly hesitant to purchase it. I’ll pick other books up at sales sometimes or I’ll use gift certificates on them.

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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