What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to summaries of five or fewer words. Click on the number to jump straight down to the question.
1. Planning around low interest loans
2. Worried about financial crisis
3. Figuring out cremation costs
4. CPAs and taxes
5. Status symbols and real estate
6. Credit card balance transfer problems
7. Driving without shoes
8. Status symbols and workplace information
9. Simple and quick skillet meal
10. Help with estate sale
11. Conflicting priorities
12. Tax breaks and parenthood
Most people in the Western world live lives that are long strings of little pleasures. Think about your life. Even when you might be working, there’s still a lot of pleasure in it, from a frankly delicious and nutritious lunch to a comfortable place to be to climate control to the constant access to data on your cell phone and on and on and on.
That constant stream of pleasure isn’t itself bad. Many humans throughout history, once their most basic needs were covered, have enjoyed some variation of that. The difference is that throughout most of human history, those pleasures were more simple.
One of the best books I’ve ever read was A Midwife’s Tale by Martha Ballard and edited/annotated by Laurel Thatcher Ulrich. Martha Ballard was a midwife in Revolutionary-era America and she kept a very detailed diary for more than three decades. Ulrich, a modern historian, edited and organized the entries a bit for publication into that book.
One of the many things that I took away from that book was that, in many ways, this life of a frontier midwife had some grand themes in common with my own. She faced mountains of struggle in many dimensions of her life, yet it was those little simple pleasures, things she mentioned enjoying, that seemed to make life worth living, like the simple pleasures of weaving.
The challenge today isn’t that we subject ourselves to a constant stream of pleasure – humans with the opportunity have always done that – but that we choose pleasures that cost money and drain us of freedom. Why not find those pleasures in simple and free things, like the feel of warm sun on your skin, the smell of the first growth of spring, the joy of reading a borrowed book, the pleasure of holding your wife’s hand, even things like the feel of writing down your thoughts on paper? Does life need to be full of a string of expensive treats and entertainment to be a great life?
Q1: Planning around low interest loans
I have been aggressively paying down a ~$60K undergraduate student loan. During that time I also got an associate’s degree and most recently a master’s degree, both of which were mostly paid for by my employer at the time and no additional loans were needed. I expect to make my final payment on the loan in June. Even though I consolidated them and moved them to a private, low variable rate (2%) loan, paying it off aggressively is a huge psychological milestone for me.
Other than our mortgage, this undergraduate loan was by far our biggest debt. Once it is officially paid off, where should the extra cash flow go? Current debt is a $20K car loan @ 1.74% and an $18K car loan at 1.99%. We plan on selling our house this summer or next and buying another, with the sale netting us enough to cover the 20% down payment. Should we try to pay down the car loans, current mortgage, save for a larger down payment on the next house, or build on our savings?
We currently have ~$35K in a savings account at 0.74%. Our retirement accounts are pretty much maxed out and we contribute $100/month to each of our children’s 529s.
– David
If you’re going to have enough on hand to have that 20% down payment, then saving for a larger down payment isn’t particularly helpful, so I’d put that aside. Your real question is whether you pay down your current debts or save for some other future goal, and honestly, with the interest rates you describe on those car loans, there really isn’t a big advantage to paying them off other than securing cash flow.
What I would do in your shoes is sit down and have a long conversation about goals. What are your goals for the future? What do you see yourself doing in five years?
If your goals are oriented around career changes and potentially doing things like going back to school or stepping out of the workforce to be a stay at home parent, your best bet is to clear debt. The less debt you have, the easier it will be to keep up with bills as you move forward. I would prioritize clearing out that debt.
Otherwise, as long as you’re spending less than you earn, you almost can’t go wrong here. The advantage of paying off debt is that it’s going to rapidly increase your cash flow sooner when the debts disappear. The advantage of saving money is that it’s available to you in the event of a major expense or other life plans. Neither one is wrong. It has more to do with you and your goals than anything.
Q2: Worried about financial crisis
my wife and I have finally reached a point, after a lot of financial struggles, where we can invest a good amount of money (for us) in our kids’ college funds. We’re really proud of getting to this point, but also scared. I’m genuinely concerned about another financial crisis happening in the 12-15 year window we’d be investing. Long story short, I just think the trend of deregulation in the U.S. is going to cause big problems. And seeing our hard earned money, and our kids’ education funds, go up in smoke terrifies me. I’m tempted to just put it all in CD’s and settle for a much lower interest rate. BONUS QUESTION – we’re looking into 529 funds for college savings, and if those are still the smartest choice, where would you start in picking one? We were just going to go with Fidelity because that’s where our 401k is.
– Adam
There will likely be a bear market sometime in the fairly near future. The stock market has been going up almost without cease for eight years now, which is one of the longest bull markets in American history. Since I don’t believe we’ve magically discovered some new paradigm where the stock market never ever gets overinflated, at some point it will overinflate and the stock market will correct itself.
The thing is, if you’re invested for an adequate long term period in the stock market, it doesn’t matter. The stock market shouldn’t be used for investments spanning less than ten years. If you’re putting your money in and you anticipate pulling it out in less than ten years, stocks are not where you should be putting that money.
I have nothing bad to say about Fidelity. They offer a great mix of investments and a lot of low-cost index funds there. They’re one of the good investment houses, in my opinion, and I’d have no problem having my child’s 529 plan there.
Q3: Figuring out cremation costs
With an income of $1,170 a month, do fairly well for myself. Am frugal, too much stuff, which I am correcting, but figuring out a way to have enough to pay for cremation or burial is befuddling me. Have read some of Oregon’s laws and know what I am able to do that costs the least, but don’t know where to start. Would love some in depth information and the discussion that goes with it.
– Mara
From what I understand, you are interested in pre-paying for a cremation in order to not burden your family and friends when you pass, and you’re hoping to find the least expensive option for doing so.
Your best bet, honestly, is to contact some crematoriums in the area and talk about their preplanned cremation services. With those services, you enter into a contract with the crematorium for their services and pay them while you are still living for a service that would be rendered immediately after your passing. Generally, you would involve the executor of your will in this contract as the executor would be the one to ensure that the contract is fulfilled.
So, your first step, I would think, would be to talk to your executor about your plans and then start shopping around amongst local crematoriums to find out where the best deal is. Pick one that has been in business for a while so that you can have some confidence in their stability, but don’t be afraid to bargain hunt. Contact lots of places and find the best price. When you do enter into an agreement, make sure that your executor has all of the documentation, including the contract and proof of your payments and receipts and statements. If you or your executor have any questions at all, don’t hesitate to contact a contract lawyer to review the contract before it is signed.
It’s hard to find accurate information about things like this because so much of the information written about it seems to have been written by people within the cremation industry.
Q4: CPAs and taxes
I read your article this morning before tackling today’s stash of tax returns. Please allow me to express both appreciation and dismay at the content.
I was pleased that you at least acknowledge that Enrolled Agents exist. I spend more time trying to explain the credential than anything else when meeting with a prospective client. This dovetails with my complaint this morning…the ongoing presumption that being a Certified Public Accountant ranks higher in the world of taxes than being an Enrolled Agent.
Please take the time to review the contents of the typical exam for each certification. The CPA exam, hellacious as it is, contains very little in the way of tax content, compared to the other, important areas, such a financial accounting, financial statements, business law, etc. Conversely, the IRS Special Enrollment exam is 100% tax based, including sections on individual taxes, business entity taxes and IRS Practice and Procedure.
All fifty-one jurisdictions have continuing education requirements to maintain one’s CPA license. Nowhere (that I am aware of) does any state, or DC, have a minimum hour requirement of continuing education in tax. In other words, one can completely meet his/her jurisdiction’s CPE mandate for the renewal period, and not attend a single hour of CPE in tax. This is while EVERY hour of CPE attended by an Enrolled agent must be approved by the IRS as meeting its criteria for continuing education in tax in order to maintain the EA credential.
That said, I fully acknowledge that many CPAs have devoted their careers to tax practice. They are committed and devoted to their work, and are often brilliant at what they do. But you must understand that there are fully licensed, totally competent CPA’s out there who should not even be taking on a 1040EZ, much less a complicated individual, partnership, corporate (C or S), or fiduciary return. For your article to imply that the CPA credential is automatically “superior” to the Enrolled Agent certification is a disservice to both professions, and, the taxpaying public.
– Nathan
If a person comes to tax season with a lot of different accounts and investments and purchases and is completely unsure as to what they should even do with this collection of mishmashed information, then taking all of those things to an enrolled agent is only a temporary fix to a permanent problem. The problem in that situation isn’t taxes, it’s accounting. It’s getting yourself in a situation where you’re keeping your papers organized and keeping track of what you’ve spent that might have a tax benefit.
That’s where a CPA is really useful. The purpose of going to a CPA at that point isn’t to prepare tax returns. It’s to get you in a situation where you can sensibly prepare your own taxes going forward or at least have your documents and data in some sense of order so that someone else can prepare them going forward.
Going just to an Enrolled Agent here might take care of the problem temporarily, because that Enrolled Agent could go through the papers and come up with something worthwhile, but unless that Agent is going far beyond their mandate, it’s not going to help permanently. The underlying issues are still going to be there.
That’s why I explicitly encourage people who are in way over their heads with a lot of different accounts and a lack of clarity as to what’s what in their lives talk to a CPA and get themselves in a position where things are organized and there is clarity. At that point, an Enrolled Agent can be very helpful.
You’re calling in two different specialists for very different purposes, in other words. The CPA’s purpose is to get your systems organized so that you know what’s what. The Enrolled Agent’s purpose is to take the output of those systems and prepare a tax return of maximum value for you. If you’re drowning in chaos, the CPA is the right person to go to first.
Q5: Status symbols and real estate
[Status symbols are heavily used] in real estate. People often make assumptions about how successful you are, and therefore by definition how GOOD you are, by what you drive. Even people who are not into fancy things themselves will make subtle assumptions about things like this. It seems to provide some assurance to them. I think it is human nature to some extent.
– Chris
There are definitely some career paths where certain status symbols will help you find success in that field, and sales is definitely one of them. It undoubtedly tweaks the mindset of the person on the other side of the table when you’re presenting some air of success.
The thing is, this isn’t true in all fields or even most fields. I rarely find it true in the community, where the most reliable and helpful people are often wearing sweatshirts. I definitely didn’t find it in the research field that I was once in. My father-in-law is an engineer where there is something of a “standard mode” of dress, but anything beyond that isn’t really met with any extra prestige.
I don’t have any issue with status symbols as long as they’re being applied with a purpose. If you’re an employee that almost exclusively telecommutes and mostly is involved in community activities, there’s not a lot of need to drive an expensive car or wear an expensive watch.
Q6: Credit card balance transfer problems
Like many people with a high credit card balance, I decided to do a balance transfer and used your recommendation to apply for a Discover card.
When I got the card, I was given a $1,000 credit limit, far lower than any credit limit I’ve ever had, and completely insufficient to take my balance transfer. I was told that they could not raise the credit limit until three cycles had passed, showing that I was a good customer (though they already had my credit report). The balance transfer promotion was only for 3 months, so I would not have been able to use the card for that purpose if I had to wait.
I closed my account and will not be working with Discover again.
– Frank
Discover has a pretty established reputation as being pretty conservative with credit limits. They don’t like to issue large credit limits to new customers, especially those carrying a high credit card balance on other cards. They tend to see that as someone who is heading down a spiral toward bankruptcy and they’re hesitant to get caught in the spiral.
Discover works really well for balance transfers if your credit utilization is really low, meaning that you have a relatively low balance on your other cards compared to the credit limit. Someone who has a $2,000 balance on a card with a $10,000 credit limit and keeps up with their bills is far more likely to get a good initial credit limit than someone with a $9,500 balance on a $10,000 credit limit.
If you’re pushing your credit limit and your limit is already large, Discover probably won’t help. It’s better if you’re just looking to cut your interest rate on a moderate credit card balance.
Q7: Driving without shoes
Isn’t driving without shoes illegal?
– Philip
Driving without shoes is legal everywhere. Some states offer guidance recommending against it, but mostly those recommendations center around concerns about having loose shoes on the floor near the pedals, which is a real concern.
Whenever I drive without my shoes on, I usually put them on the seat behind me so I can reach back and grab them when I need to put them on to get gas or something like that.
Why drive without shoes? Your feet are much more sensitive on the pedals and you can “feel” slight changes in pedal pressure much more clearly. That’s why I do it – everything feels “dull” through the soles of my shoes.
Q8: Status symbols and workplace information
When I teach about practical aspects of conducting a person’s job life, I frequently point out the value of under-sharing personal challenges in the work place. This is a delicate balance, because you often spend the major part of waking hours in the presence of co-workers and it may be difficult to keep them at arm’s length separated from your personal life. Why do this? Why be careful about sharing life’s challenges? It is a matter of self-preservation.
We humans aren’t separated from other animals by much. The one individual who is perceived to be weaker than the rest often is picked on more [a la chicken pecking order] or forced to accept last place in the feeding chain [wolves at the kill]. The weaker individual is perceived to have less value to the group, whether or not this is actually true. Others assume dominance and behave accordingly, whether or not they are actually worth more. So, what does this mean for us humans? If others perceive we are successful, we will be treated better; if we appear weaker or more vulnerable, we will be treated worse. Ironically, when layoffs are coming, who is chosen first to get the axe? I can assure you it is often the person who is actually doing more work, or more competent, while the person retained is more likely to be the one who appears to be better able to weather the storm. The one who desperately needs to work, due to unfortunate life circumstances, is often the one let go first. LIFE IS NOT FAIR OR JUST.
This is why I advise people to not share their challenges in detail with co-workers or a boss until their backs are against the wall. Maintain an appearance of not truly needing a job, perhaps of independent wealth, or a substantial alternate income stream, and you will get more respect. Of course, you always need to do an excellent, competent job, but do not undermine your status by letting your challenges/vulnerabilities become common knowledge. Why?–because when you appear weaker, you will be less esteemed, and let go faster than others who do not do the same quality job you do. You will also find that others will make increasingly unreasonable demands of the person who appears to be weaker or less successful.
To reinforce your already good advice [about status symbols], wear nicer clothing if you are a lawyer, financial professional, etc. If everyone else at your level drives a Lexus, don’t run out and buy one, but sit back and observe what car would give the same illusion [perhaps a 7 yr. old model] Those Italian custom-cut shoes may be re-soled many times. Females might swap Coach purses, or even outfits [if they are same sized] if they work in different cities. You only become truly free once you reach the very high levels in any company. Then you can choose to drive an old rust bucket VW, or wear walmart jeans to work–but only because everyone already KNOWS you don’t have to–you are simply eccentric and choose to… On the other hand, a rust bucket may lend status in a group of mechanical engineers…
– Momma Maida
I think, as I mentioned earlier, that status symbols have a lot to do with the nature of the community you’re involved with. In a community of real estate professionals, dressing in an expensive suit with expensive shoes is going to have value. In a community of Division I college football and basketball coaches, the same is true.
However, as you mention, mechanical engineers value different things and put “status” in different traits. They’re much more impressed by someone who can solve a problem well. I think this is generally true in all of the STEAM fields, as I immediately recall that one of the most respected people in the field that I used to be involved with often wore t-shirts and was very reminiscent of Jerry Garcia. I think it’s also true in many communities, where merit in the community organization has a lot more to do with the time and effort that you give.
Figuring out what is actually valued in your career path and how you can represent that is very important. It isn’t as simple as a great suit and a great watch.
Q9: Simple and quick skillet meal
One great easy meal you can change with using different beans, veggies and spices. I also don’t measure. Fry onions and any veggies and stir fry for a few minutes, add canned beans or lentils with a little water and any kind of spices. I like garlic, red pepper flakes or OLD BAY seasoning. Simmer for about 15-20 minutes. Great served with rice or quinoa, side salad. and to eat as leftovers and to freeze. One of my favorite go to meals, it’s easy, quick, cheap, nutrittous and with such a variety of ways to change it. Also you can make small or large quanities.
– Anna
That’s a delicious backbone of a meal right there. In fact, I went through a phase with Old Bay seasoning where I used it in so many things that my wife actually asked me to cut it out.
Frying up some onions (along with perhaps some green peppers and garlic) is the basis of so many delicious things. Just toss a bit of liquid in the skillet after that stuff has caramelized and literally anything savory tastes good, and it’s pretty healthy, too.
This, to me, is the essence of frugal cooking. It doesn’t have to be expensive to be really, really tasty.
Q10: Help with estate sale
I have some friends who are both in bad financial difficulty, they are both elderly and in poor health. I’m looking for someone to come into there home, look over all the items (collectibles and such and be able to help sell them. Don’t know where to go to find someone, an agency, or anyone to help. Can you make any suggestions.
– Cindy
First, let’s start with estate sales. Typically, in an estate sale, someone will come in, organize all of the stuff on the property that you want to sell, and then sell all of it at auction. They’ll announce and promote your estate sale, then an auctioneer from the auction house will come and auction all of the items for sale off at once.
Of course, this does usually happen after a “first pass.” That would happen first, where you would go through all of the possessions of your friend, identify specific items that you or others may want to keep and other items that you might be able to sell individually, and then remove them from the property first.
That’s the general route I’d suggest. Go in there yourself, get everything cleaned up, go through the items yourself, remove things of sentimental value that you or others may want to keep or that you know you can sell on your own, and then hire an estate auction business to help you sell off all of the rest.
Q11: Conflicting priorities
I’m in the middle of committing to sell our house and buy a larger home in a fancier neighborhood, which is something I never, ever thought I would do. Our current house is fairly small for our family – 4 small bedrooms and small family spaces for a family of 2 parents, 2 toddler, 1 adult child plus her boyfriend (and a total of 3 cats, 2 dogs). But we were making it work and had no plans to move (we bought just before the market recovered, have a super low interest rate and a 15-year mortgage!) until we had an opportunity to pool our equity (pretty good) with my mom’s (really good) and move in together.
This is an outstanding idea, since it will bring our family closer together, allow mom to spend more time with her grandkids, and avoid concerns about her ability to age in place in her current townhome (not to mention, give us way more/better space, better schools, etc etc etc).
So my internal rule about taking actions that strengthen our family (and especially, than strengthen our kids’ family connections, which I didn’t really have growing up) says this is an amazing choice. But my internal rule about long-term financial planning says it’s crazy to take on higher property taxes, a somewhat longer commute and a slightly bigger mortgage (our equity will allow us to make a 60% down payment) when we don’t *have* to. Plus, we didn’t shop around much for the new house – we found a new construction home (also something I never thought I’d sign on for!) with a totally separate in-law apartment on the ground floor (a must for my mom) and realized it would be almost impossible to find that kind of separate ground-floor-only space for my mom in any older home – existing MIL units all seem to be basements or over the garage.
So I had to do some serious thinking about what it meant to prioritize some touchy-feely family things over my financial instincts (even though the new home is affordable, we would never have chosen to afford it for any other reason). I think it’s worth it, but it is psychologically exhausting and I’m going to lose my mind if we don’t get the whole thing locked in and done pretty soon! […] [S]ometimes priorities conflict and you have to get comfortable with a choice that pits your values against each other.
– Maggie
Situations where you have two major values in conflict are hard to parse out. It usually takes some serious soul searching and even when you do make a call there’s often a great deal of doubt and wondering if you made the right choice.
This sounds like a solid choice for your family now. Just be aware that down the line, you will probably undo this choice. Roll forward ten to fifteen years and your need for all of that space will evaporate. There will come a point in the next decade or two where you’re suddenly down to just the two of you and, at that point, you should very strongly consider selling that house and moving back into something smaller. At that point, such a huge house becomes a giant financial albatross around your neck.
View this house as a temporary fix to a temporary (relatively) happy situation and you’ll be in good shape.
Q12: Tax breaks and parenthood
2016 was a year of big changes for us, we bought our first home (closed in January) and our first child was born (a beautiful daughter in September). Through both these experiences, my wife and I can both vividly remember hearing throwaway references to the “big tax breaks” we would receive when we filed our return in 2017, especially since both these things happened in the same year.
However, when we sat down to file our return using an online service (we’ve used Turbotax for years without any apparent issues), we find that although we qualify for these deductions, the total deduction amount is less than the standard deduction for us filing jointly ($12,600 if I have the numbers right) and that therefore we seem to basically qualify for no real tax benefit from either the house purchase or the birth of our child (of course the other, non-tax related benefits of being able to afford a house and to have a child are invaluable). After hearing so much for years about the financial benefits of taking these grown-up steps, it was something of a rude awakening to learn that it had apparently been just so much hype.
Turning to Google (as one does) as a recourse for finding out what we could have missed, I stumbled upon an older article from the Simple Dollar, “The Myth of the Tax Deduction” (http://ift.tt/2msYxVT), which clarified a lot of the issues we didn’t understand (for instance I now understand what happened well enough to have written the above paragraph concerning the standard deduction, I think), and even helped make some sense of why people would talk up these benefits so much even if they often won’t really work out (it benefits lenders for you to take on more debt, etc.).
Having read the article through we have three quick questions.
First, is this information still accurate and relevant? I can’t find anything online that contradicts what you’ve said, but since it’s now pushing seven years old I wanted to make sure I wasn’t missing anything. (Fingers crossed that there’s loophole somewhere, but not holding breath.)
Second, should we consider itemizing our return instead of taking the standard deduction, or even taking our parent’s advice and filing separately instead of jointly? The problem is I honestly don’t think we qualify for deductions totaling more than the $12,600 mark, and if we were to file separately we don’t even know where to begin dividing up the expenses between the two of us — it’s just not how we think about our finances anymore. We had some heavy out-of-pocket medical expenses in 2016 (baby), but they certainly didn’t exceed 10% of our income. Normally we make low-three figure contributions to several charities each year, but we didn’t in 2016 for a simple reason: we spent our money on buying a house and having a baby instead. We’ve run down the list of possible deductions and don’t really see any other options that are open to us; I’m beginning to think that simply not planning ahead with itemizing deductions may have been a mistake if we were counting on “big tax breaks” at all.
Third, should we pull our return down from Turbotax and take it to a professional? As I mentioned above we didn’t really have the deductible expenses in 2016 to exceed the standard deduction amount, but we’ve had some sudden unexpected expenses recently and we were hoping to push the “big tax breaks” towards easing the pull they’ll have on our emergency fund. I’m thinking at this point that taking the standard deduction refund and calling it a day will be cheapest option overall, since a professional might help us itemize and find out we come up short anyway. It just seems like we’re struggling for a sense of certainty in an essentially uncertain business here.
All of this seems like a serious wake-up call to us that we never really understood the rules of the game as well as we thought we did. It’s also pointed out that unless we find some way to significantly boost our income in the near future, these rules will pretty much be stacked against us for the time being. I don’t mean to wax political, but it seems like the further I look into this the more your 2010 article rings true: unless we have the disposable income to throw at tax-deductible expenses in the first place, there’s no real point in counting on tax breaks at all.
– Timothy
That article is accurate excepting minor changes in dollar amounts. It’s still true that for most people who aren’t exceptionally wealthy, the standard deduction that they get by default is going to be a larger deduction than all of their other deductions combined unless they happen to be paying off a mortgage. There are exceptions, of course, but they’re pretty infrequent.
Unless there’s something really complicated with your taxes – and nothing you’ve described here is really complicated – your best strategy is to use TurboTax and try a bunch of different approaches to filing. In general, TurboTax does a pretty good job of recommending which approach is best – filing separately, filing jointly, and so on. It figures out which one provides the lowest tax bill and uses that model.
As alluded to above, I generally don’t recommend hiring a tax preparer unless you’re quite wealthy, very afraid of computers, or have baskets of deductions of varying degrees of questionable legality. I don’t think any of those really apply to you.
Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. 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 many, many questions per week, so I may not necessarily be able to answer yours.
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