Posted: 22 Sep 2011 01:00 PM PDT
Shannon writes in with a great question:
This is a great question, one that you spelled out incredibly clearly and one that most of us struggle with to some extent.
Let’s break down your question into multiple pieces.
How exactly do I save for multiple goals at once? The easiest way to do this is to choose a bank that facilitates this process quite easily. I can recommend two banks for this – ING Direct and SmartyPig. I’ve used both of these banks. They both have great customer service and they each have a set of tools to make saving for a lot of goals quite easy.
With ING Direct, you simply open an account there, which will give you a single savings account. Once you’ve done that, it’s quite easy to simply open additional savings accounts and give them each nicknames. Just create an account for each goal.
With SmartyPig, you actually create savings goals within your account. You can create as many as you’d like.
With both of these, you simply link your new account to your regular checking account and set up automatic transfers to fund each of the goals or specific savings accounts. Easy as pie!
But how much do I save for each goal? The key thing to remember with any and all savings goals is that you’re trying to come up with a certain dollar amount at a certain time. Shannon certainly knows what her dollar amounts are, but she’s mostly unclear as to the timeframe.
Let’s come up with some examples of deadlines that Shannon might decide on.
Shannon wants the blender before Christmas, so she has three months to save for the $300 blender.
So, how much does she have to save per month for each goal?
For the blender, she needs to save $100 per month ($300 divided by 3 months).
Now, that seems pretty stiff, doesn’t it? That’s a total of about $2,200 per month to save. What if Shannon can only save $1,000 per month for her goals?
There are two ways to do this. One is to simply prioritize. Is there one goal (or more than one) that can be postponed for a while?
The other is to simply focus on the goals chronologically. In other words, she goes through that list and applies the full $1,000 toward each goal on the list, with the nearer-term goals at the top and the longer term goals at the bottom.
So, during the first month, she’d put $300 toward the first goal, completely fulfilling it. She’d then drop $700 toward the second goal. Over the next two months, the full $1,000 would go toward the second goal. In December, she’d put $300 toward the second goal, fulfilling it, then put $700 toward the trip goal. This will get her pretty close to fulfilling all five of the goals.
In other words, if all of the goals have a high priority, put all of your savings toward the one with the closest deadline. When it’s fulfilled, move on to the next goal.
Good luck, Shannon! You’re definitely on the right path.
Posted: 22 Sep 2011 07:00 AM PDT
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.
One of the benefits (and challenges) of being able to do The Simple Dollar full time is that when a child is sick, I just adjust my schedule so that I can take care of that child. For example, as I write this, my youngest child is home sick with some sort of intestinal bug that requires frequent diaper changes. He’s a bit relaxed, though, so he’s spending a lot of time between those diaper changes either resting on the floor or playing on his toy piano.
Of course, with that little child there, I’m tempted to grab him and read him a book or sing him a song or do something to make him laugh, which means that days when children are sick aren’t exactly productive days.
Upromise is a program where you can earn a small amount of money for future educational spending (think college) by shopping at certain stores (my usual grocery store is in the program) or using coupons from the site. You tie it to a 529 college savings plan and whenever you do one of those things, a small percentage of what you spend is deposited into your 529.
It’s a fine program, but don’t expect it to pay for college. The amount you’d earn before your child goes to college is much more likely to cover a few textbooks, not cover tuition.
The only real drawback I can see is that it’s another source of potential identity theft, as you have to give them your personal information to be in the program.
Q2: Low interest debt payoff strategy
Here is the layout of my student loan debt: 3 out of the 4 loans are at fixed interest rates of only 2.5%. The 4th loan is 6.5% and has a balance of around $4500. (I plan to pay the highest interest rate loan in a few months as soon as I’m finished paying off my credit card.) My question to you is, should I be focused on paying the other 3 low interest rate debts in any hurry? The interest is so low, and I owe about 215 dollars each month for those 3 low interest rate loans. What would you recommend in this situation?
The rates on those loans are so low that I would probably pay them off slowly, as you’re doing. This strategy only really applies if the loans are fixed rate (as yours are) and they have an interest rate that’s below 4% or so. At that rate, you can put the money to better use almost anywhere else (besides simply spending it frivolously, of course).
The only issue with having those loans is that they do pinch your cash flow. You’re paying $215 a month, month in and month out, which reduces your breathing room on other bills and constricts your other life choices.
Thus, if you are ever given a windfall of some kind, I would use it to get rid of that debt. It will help with your monthly cash flow for the remainder of your loan, simply making your day-to-day life easier.
I will appreciate your thoughts on this in a simple dollar post.
The costs of having a child are almost entirely misleading.
For one, such calculations make a ton of assumptions about how you’re going to be spending money with a child. They assume things like buying all new clothes, having a home where each child has their own bedroom, and so on. All three of my children share one bedroom and they often wear clothes bought at consignment shops and secondhand stores.
For another, it assumes that having children will cause no change in your life. In reality, when you have a child, you’re going to go out less. Your entertainment spending will drop. Your “dining out” spending will drop. This isn’t because your money is rerouted to your child. It’s because your time is rerouted. You’re not going to go out every night with a young child at home. Because of that time change, you’re going to be spending your money differently.
Not only that, the amounts they quote cover an eighteen year period. Let’s say you do spend in the frivolous ways mentioned in the article. That’s still $200,000 over eighteen years, barely over $10,000 per year. If you are sensible about your spending at all, it’s less than that. Because of your lifestyle changes due to having a child, you’ll also have more money to put towards it.
Articles like the one you linked to seem to serve no other purpose than to spook potential parents.
Q4: Lawyers and starting a business
If you don’t feel confident in setting up the business correctly, it never hurts to contact a lawyer. The expense of a lawyer in this case is negligible compared to the energy and time costs of constantly second-guessing yourself along the way.
LegalZoom can certainly help you with the paperwork, but they’re not really providing legal advice, either. They’re simply expediting some common legal maneuvers that people execute.
If you’re not confident, it’s “penny wise, pound foolish.”
Q5: Introducing yourself to neighbors
I went over and introduced myself to all of the neighbors. I knocked on their doors and said hello.
Shortly thereafter, I began to plan a small cookout for my neighbors, but before it was set in stone, there was a small block party. We attended it and met lots of people from our block all at once.
I’d probably say hello to them and invite any of them you’d like to know better over for a dinner sometime.
Q6: Pet health insurance
I wonder if, instead of paying for his health insurance monthy, if I put that same amount of money in a savings account to be used if he is ill or gets in an accident, that would be financially wise.
This is the insurance I have heard good things about, and the one I would look into if I were to insure him for illness and accidents, but some banks have a less expensive plan for accident-only.
The purpose of insurance is to mitigate risk. The vast majority of people who buy pet insurance do not receive an equal value of health care as to what they put into the insurance premiums. The reason people buy it is for the exceptional events. If you happen to be in that small minority that has a significant amount of health care costs, then the insurance will pay off for you.
The vast majority of the time, putting the money in a savings account will be better financially than the pet insurance.
The real question is what lengths you’ll go to continue your pet’s life in the case of a severe illness. I can’t answer that for you. That’s something you have to answer for yourself.
Q7: Converting 529s
There’s no “conversion” with a 529. If you make a withdrawal from a 529 for non-educational purposes, you have to pay income tax on the money gained in that account plus an additional 10% tax penalty on the gains in that account. So, if you put in $5,000 over the years and the balance is $6,000, you’ll pay normal income tax plus a 10% penalty on the additional $1,000 earned in the account.
If you’re sure that they’ll never be using these accounts, then feel free to close them out and keep that money. If you think that they might change their mind in a decade or so and you’d like to help them then, leave the money alone. Another option would be to leave the money in place until grandchildren appear, then change the account to benefit the first child.
While the tax penalties are annoying, it’s likely (since your investment period included 2008) that you don’t have significant gains anyway and your tax penalties would be minimal.
Q8: Getting a different car
It honestly sounds like you’ve already decided to buy the truck.
If you haven’t already decided, however, I would simply say that you should ask yourself whether the additional sticker cost and the extra $60 a week in gas is worth it for what you get in a truck over what you get in a car. Obviously, on paper, the car is less expensive, but you feel the truck has extra value in your situation. How much extra value? Would you get more out of the extra $250-300 a month you’d have if you went with the car?
It’s not an easy question and it’s not one that people often really think about with purchases. What would the extra $300 per month get you?
Q9: Early retirement question
If you’re intending to retire that early, a Roth will still work. You can withdraw your contributions without penalty. The penalties come into play when you’re looking at withdrawing the gains on your investments. So, if you have put in $100,000 over the years and you have $150,000 in balances in the account, you can withdraw the first $100,000 without penalty.
Another option is to simply use an ordinary investment account. You’ll be fully taxed on the gains you earn in that account, but there’s never any extra penalties for withdrawal.
Honestly, I would probably use an ordinary account. It gives you the most flexibility. The only drawback is that it will make taxes a bit more tricky in the coming years, but that’s easily mitigated by using TurboTax or a similar package that can easily handle such things.
Q10: Flat income tax
That’s really the fundamental economic question of the day. Should the people who invest their money into businesses (which theoretically create jobs) be rewarded for that investment with a lower tax rate on the income from that investment or not?
There is no easy answer to that question. Anyone who tells you that it’s easy is either far too married to their own political perspective or is feeding you a story.
My answer to that question is actually tied to the financial state of the nation. I think that tax rates should actually be tied to the national debt in some fashion. I would actually lower everyone’s normal tax rates, then have an additional tax that was directly tied to the national debt. That way, cutting spending is directly tied to cutting tax rates, and additional spending directly causes higher tax rates. This makes both political parties responsible for what they actually do rather than the rhetoric they shout to the American people and balancing the budget has a direct economic impact and benefit for all Americans.
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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