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. Finding new financial goals
2. Investment Policy Statement
3. Amy Dacyczyn update
4. Using a Roth for college
5. Indoor temperatures?
6. Supporting sibling with low-paying career
7. “Dead” vacuum cleaner?
8. Suggestion: day old bread
9. Credit cards and emergency funds
10. Finding a local Facebook group
11. Savings rate question
12. Why is financial responsibility hard?
This past week, I got hammered with a cold worse than any I’ve had in a very long time. I actually stayed in bed for almost three straight days because I felt dizzy standing up and had virtually no energy.
I’m half-recovered as I write this. I can at least get out of bed now and it doesn’t hurt to eat a little bit of food, but I still feel exhausted.
A cold really takes it out of you. If you’ve noticed that some of my posts have been a bit… off in the last week, that’s why. My cold-influenced tired brain perhaps isn’t the best at keeping up with writing!
On with the questions!
Q1: Finding new financial goals
I’m asking for advice regarding where I should put my money. I spend less than I earn and my only debt is my mortgage. However, since paying off my other debts, I feel like I haven’t made much progress on any one front. I paid off my debts using the ‘snowball’ method. Knocking off one debt at a time gave me a satisfying feeling.. like I was really improving my situation one step at a time. Without such easily defined goals, my focus has evaporated.
I’m single, 32, with a stable full-time job (10 yrs) in the medical field. I bought a place three years ago and I pay $200 extra on my mortgage every month; I owe about 81% (with PMI) of the total mortgage and my rate is 4.25%. I contribute 12% (match is 6%) to my 403(b). My 403(b) balance is 1.5x my yearly wages. I’m a cord cutter, my car is paid off, and while my spending has inflated a little bit, I’m still pretty frugal.
Here’s the problem: I don’t have much in the way of savings.. only a few thousand. My house is good now but needs some work (replace A/C, garage door, windows). I want to start contributing more money to my savings account but I’m not sure where to take it from. Stop the extra payments on my mortgage? Should I wait until I get rid of my PMI? I’d hate to back off on my retirement contribution.
– Julie
If I were you, I’d keep your retirement contribution where it is, and then I’d set up a number of goals for yourself beyond that.
The first one would probably be the PMI. It sounds like you’re close to getting rid of it, so aim for deleting that PMI. That will knock a portion off of your mortgage payment, just like that.
The second thing I’d do is aim for having some level of cash savings for emergencies. It sounds like you have a small amount for small emergencies. Aim for a larger amount – a few months of living expenses so you can just roll through any big crises that occur (like a sudden job loss, for example).
After that, I’d start knocking down the home repair issues you mention, one at a time.
None of these goals should take you that long to achieve – a few months to a year, given your current state. Good luck!
Q2: Investment Policy Statement
I recently read about the idea of a Investment Policy Statement (https://www.bogleheads.org/wiki/Investment_policy_statement) which defines your investment goals to keep the course during times of market volatility. Do you have one of these, either formally or informally?
– Karen
I think it is a good idea to actually write down your investment goals regularly and your approaches for meeting those goals and your reasoning for doing so. The Investment Policy Statement you shared here is just a nice formalized way of doing that.
It’s pretty formal. It has a lot of structure already in place, which is great for people who want to walk through it and have someone fill in the blanks for them, but it might be overkill for some.
I have an investment statement of sorts, not as formalized as this, but a description of my own goals, how I’m approaching them, and why I’m using that approach. I’m a writer, though – it wasn’t hard to come up with a good structure that fit what I wanted. For non-writers, a structure like this one might really be useful.
Q3: Amy Dacyczyn update
Hey Trent, where are Amy Dacyczyn and The Tightwad Gazette nowadays? Oh, I realize she stopped publishing years ago. But she was one of the defining financial figures in the 1990s world.
I think my larger question is, do the leaders in any time frame in the frugality field stay with it? Are they now, in the years approaching retirement age, still committed to and living out what they learned and published 25-30 years ago?
I followed her closely back in those days. She was similar in age to me and an absolute inspiration. But now, 25 years later, I realize that all the financial writers I follow closely (like you) are more the ages of my children, and many have only been writing for a few years. Is there staying power to this philosophy?
Even when, due to having “done” it, someone’s life turns out prosperously? Do such people keep on the same track for decades? It’s too soon to say for many of the current writers who aren’t even out of their thirties yet. But what about Amy? Plus, I missed her. Over time one felt really connected to her family. I’ve always wondered how they all turned out.
– Nina
A few years back, I actually had the chance to talk to Amy, and my conclusion from talking with her is that the stress of having to write a steady stream of material for so many years eventually burned her out on it, and when she retired from The Tightwad Gazette, she retired for good.
I’ll be honest: it is really, really hard to come up with good content day in and day out. There’s a balance of wanting to find new angles but also hammer home fundamental concepts without getting (too) repetitive. There’s a balance of writing personal stuff without it becoming a personal newsletter, and trying to make sure things stay useful. There’s the sheer time spent researching and filtering ideas and trying things out and actually writing the articles. And then the cycle repeats itself.
A few times over the course of The Simple Dollar, I’ve had to significantly change things up to avoid that kind of burnout. It doesn’t matter how much you love a topic, it’s going to eventually happen. I think I have a good balance right now, but will it be a good balance in a year or two? Who knows?
The thing is, when I step away from this, whenever that might be, I’m going to want to take a long break from it.
This is almost exactly the sentiment Amy shared with me when I talked with her. She did it for a long time, decided to retire, and stuck with that retirement. It was almost definitely the right move for her own well being.
Q4: Using a Roth for college
I’ve followed your blog for years. I just stumbled upon an article about how to pay for college. What are your thoughts on converting a conventional IRA to a Roth IRA to use as a college fund? We would have it in the Roth for the 5 years prior as the rules state. I gather taxes are paid upfront… so I plan to consult an accountant about how that would be for us specifically. I have to add that we are on track for retirement from my husband’s accounts. This is one I had from working may years ago. So far our plan is 2 years of community college, then using the Roth to send our child away to finish the degree.
– Jenna
Provided that retirement is already accounted for even without that IRA, I don’t think this is an unreasonable plan. However, I can’t give it full-throated approval because I don’t know your full financial state.
I think your approach of consulting an accountant with this is a wise move. A CPA should know the rules regarding these matters and can ensure you’re following them appropriately.
Q5: Indoor temperatures?
What do you keep the indoor temperatures set at in your home during the winter and summer?
– Julie
During the winter, we let the temperature go down to about 55 F at night. When the whole family is home, the home temperature is usually around 65 F. During the workday, when I’m the only person at home, I usually turn it down to about 60 F and wear a long sleeve shirt and slippers. I personally would allow it to get colder than this, but these temperatures are a compromise.
During the summer, we leave the air conditioning off until the indoor temperature hits around 80 F, at which point we close the windows and kick on the air with a thermostat setting of around 74 or 76 F (depending on humidity). Again, a wider temperature range really doesn’t bother me, but this is a compromise.
During a typical Iowa year, our furnace and air conditioning don’t run very much except during the most extreme peaks of summer and winter. One of our neighbors literally did not believe us when we said our energy bill during a prime winter month was about 1/3 of theirs, and we have similar sized houses.
Q6: Supporting sibling with low-paying career
Hi! I’m 28 years old, single, earn about $110K per year as a software engineer. I have been responsible for raising my younger sister (now 18) for the last five years since our parents died. She is considering pursuing a degree in social work. I have told her that if she does I will support her but she wisely made the point that such support is tenuous and creates a difficult relationship between us. I feel obligated to help because I used the vast majority of our parents’ estate after they died paying off my own student loans and buying a house but there is no legal obligation for me to help. Do you have any suggestions?
– Danny
My best idea is that you pay for her education in full, guaranteeing that she leaves school with no debt and thus making the social work path much easier to follow. In other words, you’re putting your money where your mouth is right away.
If she already has education handled, start contributing to a post-graduation fund solely in her name and do it now.
In other words, the best thing you can do is speak with your actual money actions NOW in non-rescindable ways.
Another option would be to draw up a contract of sorts between the two of you, in which case you should consult a contract lawyer.
This might seem like a trust issue on the surface, but I think that it is a good layer of security for her to have regardless of how much she trusts you.
Q7: “Dead” vacuum cleaner?
Have had a vacuum for the last 15 years. It barely sucks up anything any more. How do I know when to replace it?
– Juliet
The absolute first thing you should do is thoroughly clean it, top to bottom, inside and out. Most of the time, suction problems in a vacuum cleaner come down to some kind of obstruction, usually caused by many years of buildup of dust and hair and other things.
If you have no idea how to do this, the manual will give you clear directions… but finding the manual might be a trick, too. I suggest Google – that’s how I found our vacuum manual, to be honest.
If you haven’t ever done this before, you’re probably going to pull out a lot of dust and hair and gigantic dust bunnies and other things from your vacuum, clearly answering the question of why it won’t suck up dirt as well any more. Just follow the disassembly and assembly directions in the manual and clean everything thoroughly as you go.
Q8: Suggestion: day old bread
Another idea you should use: go to the bakery or the bakery part of the grocery store and see if they have any old bread on discount. It makes the best toast! And you can turn it into bread crumbs and croutons because the bread is already dry for that!
– Angela
Angela sent in a list of food tips and this one was my favorite of all of them. It’s something we do sometimes – if I see a day old loaf of bakery bread at a discount it’ll often wind up in our cart.
I like to use it in making French onion soup, as a piece of stale bread soaks up the wonderful broth so well. Old bread is great at the holiday season when you can use it to make a great dressing.
Another tip: I absolutely prefer using day-old bakery bread to fresher bread when I’m making a grilled cheese sandwich. It adds just a little crunch to the sandwich that’s just amazing!
Considering the bread is often cheap, it’s a good deal, in my opinion. If nothing else, you can just dry it in the oven just a little more, toss it in a blender, and have a super cheap source of bread crumbs.
Q9: Credit cards and emergency funds
I don’t understand why I don’t just use a credit card for my emergency fund. Seems to me that using cash just ties it up.
– Dave
The purpose of cash in an emergency fund isn’t to earn a return, but protect you from having to go into debt due to an emergency.
Furthermore, there are many, many emergencies that a credit card won’t help with. It doesn’t help in any situation where you’ve lost your wallet. It doesn’t help in identity theft situations. It doesn’t help if the bank decides to revoke your line of credit. Cash, however, does fine in those situations.
Not only that, in a large emergency, you’ve just put yourself right back into debt, because it’s likely enough of a pull on your credit card that you’re going to be carrying a balance on that card for a while and thus losing everything you “gained” to credit card interest – and more.
Cash is king.
Q10: Finding a local Facebook group
You mentioned finding a local Facebook group for buying and selling and asking for items locally. How do you find such a group?
– Adam
Facebook doesn’t make this immediately intuitive, unfortunately. Most such groups are started by local people just want a swap group like this. You can usually find it by searching for the name of your town and state in Facebook, if there is such a group. Try also searching for the largest nearby town.
If there doesn’t seem to be one for your town, start one and invite everyone local you know of to join it and encourage them to invite friends to it, too.
I’m in my local community group and it’s mostly used like a classified ad section or Craigslist. People mostly list things at a pretty reasonable price and there are often requests in there from people looking for items.
Q11: Savings rate question
I was reading an older article of yours where you talked about how important savings rate is but you lost me on the math. Could you explain it a little better? What is savings rate and why is it so important?
– Charlie
A person’s savings rate is the amount of income that a person saves for the future divided by their total income after income taxes.
So, let’s say a person makes $55,000 a year and pays $5,000 total in income tax, leaving them with $50,000 a year. That person puts $4,500 a year into their 401(k) at work and $5,500 a year into their Roth IRA, adding up to a total of $10,000. Thus, their savings rate is $10,000 divided by $50,000, or 20%.
Savings rate is vital for two reasons. One, the higher it is, the more you’re saving for the future. Two, the higher it is, the lower your cost of living, which means that you’ll withdraw less each year upon retiring.
In that example above, the person is living on $40,000 per year ($50,000 in after-tax income minus the $10,000 they’re saving). Thus, if they retire and choose to withdraw 2.5% of their retirement savings a year to live on, they’ll need $1.6 million (this assumes no Social Security and no change in lifestyle), which they’d reach in 37 years.
On the other hand, if that person downshifts to living on $35,000 a year ($50,000 in after-tax income minus the $15,000 they’re saving), that represents a 30% savings rate. Thus, if they retire and choose to withdraw 2.5% of their retirement savings a year to live on, they’ll need only $1.4 million (again, assuming no Social Security at all), which they’d reach in 30 years. Jumping from 20% to 30% shaves off about a fifth of the total saving time.
Now, naturally, a person’s probably going to get some Social Security benefit and they’ll probably withdraw at a 3% rate or maybe even higher – 2.5% is very, very safe – and they’ll also probably spend a little less in retirement than when they’re working, so the real world numbers here would actually be far more optimistic, with only 20 years or so of savings at a 30% rate to get there.
Q12: Why is financial responsibility hard?
Why do you think it is so hard to be financially responsible?
– Kevin
I think our culture discourages financial responsibility and encourages spending. Almost every aspect of it glorifies spending every dime you bring in, and much of the media presents a nonstop array of things to buy and desire.
The amount of media depicting people spending money on all sorts of unnecessary stuff blows away the amount of media depicting people making financially responsible choices.
That rubs off on how people talk to and interact with each other. People go shopping as a social occasion. People are wired to “feel good” when they buy, and if you have money in your checking account, why not feel good? That’s a powerful, powerful draw.
It takes a lot of self-control to buck what’s considered “normal” especially when there are positive feelings tied to that normalcy. Self-control isn’t easy to generate unless you can convince yourself there’s a deeper problem.
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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