Reader Mailbag: Baseball Season

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. Inheritance concerns
2. Emergency fund size
3. Using Roth as emergency fund
4. Frugal odor elimination
5. Home warranty
6. Estimating child costs
7. Maxing out IRA contributions
8. Board games worth it?
9. Student loan woes
10. Giving up hobbies

Opening Day for Major League Baseball is this week. I’ve been a baseball fan since I was in diapers and some of my best memories of childhood involve listening to baseball games on the radio with my dad or watching them on television with my family and friends. Baseball and basketball are the two sports I truly enjoy (yes, I’m an American who isn’t a big fan of football).

Most days, you’ll find me listening to baseball day games on the radio, particularly during the week. If the Chicago Cubs have a 1:20 start time during the week, you can almost be sure that I’m listening to that game here in Iowa.

(Last year, I had a fantasy baseball league with several readers. I’m not going to repeat that this year – one league is enough for me to focus on. I came in the middle of the pack, by the way.)

Q1: Inheritance concerns
My grandparents have always been savers and despite never making $50,000/year combined, have invested well and now have a sizable sum saved (somewhere over $3 million).

My grandfather passed away last summer and left everything to my grandmother. Since that time, my grandmother has written her will to give each of the grandchildren $10K in cash and $50K in stocks/bonds.

When my grandmother passes (which, thankfully, will be a long ways off, she’s in the best health I’ve ever seen her in) and I receive this inheritance, I want to be prepared for what to do with it. I’m 27, have no debt and am in great financial shape, so the vast majority (if not all of it) will go to my retirement fund. The part I’m worried about is the stock/bonds. It’s in accounts that are appropriate for an 80 year old, but not for a 27 year old. My question is should I cash this stock out (and take the tax hit) and reinvest it in my portfolio or should I leave it in the stocks/bonds she has it in? I realize that asking her for the inheritance now makes more sense tax-wise, but it’s absolutely not an option due to family dynamics.
– Joe

You’re going to take the tax hit either sooner or later. You’re probably better off getting the money under your control and into your portfolio as you would like to have it sooner rather than later.

Thus, if I were in your shoes, I’d sell the stocks and bonds as soon as I inherited them, pay the taxes on it, then incorporate what remains of the $50,000 into your portfolio as you see fit.

Of course, tax laws may change by then, but my understanding is that the taxes on inherited stocks are based on the day your grandparent dies and, when sold, generate long term capital gains. In other words, the tax on the investments shouldn’t be too enormous.

Q2: Emergency fund size
I have a question for you and your lovely readers about how much money to keep in an emergency fund. I’m well aware that this is a personal decision, and one that is the result of many factors. I’m 26 and living in a large metropolitan city without any family around me. I’ve already decided that my goal is to have 6 months worth of money in an account to use in case of a catastrophic event (I have to pay large hospital bills, I lose my job, etc.). I’m very close!!

My question is this – my 6 months savings value fluctuates by $3,000 (less than the available credit on my paid off credit card) depending on which bills I decide to cut. The higher value represents what I spend currently, while the lower represents my “cut back” version. If you were to suggest things to cut from your expenses if you were to suffer a loss of work or somehow had to live off of your savings – where would you start?

Also, would you suggest using the available credit on your paid off credit card as “part” of your emergency fund?

I’m not sure if this adds anything, but I currently put $1,000/month into this fund, and I’m looking to move apartments next year (which will require about $5,000-6,000 to move if I choose to do so upfront – moving is expensive in my area!). Whatever value I end up with, I’d want the moving fee in my savings account on top of that cushion so that when I move, I still have 6 months worth of $$ in savings.
– Katie

I would use your “cut-back” number, simply because it reflects how you would live in a situation where you were living off of your emergency fund. If you lost your job, you wouldn’t be going out to eat with coworkers a few times a week, after all.

Sometimes, yes, your “cut-back” number will change. When it does, adjust your emergency fund accordingly. I wouldn’t withdraw from it if your “cut-back” number goes down, though.

Either way, you’re in very good shape to tackle whatever may come.

Q3: Using Roth as emergency fund
Here is my situation. I currently have about $60,000 of credit card debt because of a failed business years ago and no emergency fund. My interest rates are relatively low because I have good credit. I have a very secure job with excellent health insurance, short and long term disability insurance and the organization contributes 10% of my salary into a 403B plan (the older I get, the more they will contribute). I am currently renting and have no desire to buy property because of the high prices in the DC area. Because of these factors, the chances of me needed an emergency fund are pretty low, but I would still like to start one with a goal of at least 6 months of expenses.

I currently have around $1,200 extra a month after expenses and minimum credit card payments which I’m currently putting towards my debt. My question is this. Would it make sense to open a Roth IRA and contribute part of my extra money to that each month? Since you can withdrawal any amount up to the principal without taxes and penalty, I figure I can be accomplishing saving for retirement AND building an emergency fund at the same time while paying on my debt. If there is an emergency I can use that money, if not, it’s growing tax-free for retirement.

Can you see any drawbacks to this plan?
– Shawn

If your Roth is not part of your current retirement planning, it does make some sense. However, there are a few drawbacks with this plan worth noting.

First, your savings in the roth is going to be capped at the annual Roth limit, which is currently $5,500. If you’re going to sock away $1,200 a month, you’re going to have your Roth IRA full in about four or five months, at which point you’ll be saving in another vehicle.

Second, the earnings you gain on this savings plan will not be usable by you right now. It will basically be untouchable until retirement.

My suggestion, honestly, would be to just open up a normal investment account through an investment house you trust and invest directly, not through a Roth. That way, you have immediate access to the gains, though you will have to pay taxes on them.

Q4: Frugal odor elimination
I was wondering if you had any frugal, diy suggestions on home odor control. I have a dog and two cats and a six-month-old baby, and I’ve recently declared war on the bad smells around here! Also, my husband can’t smell, so it’s totally a one-woman battle :-) I’ve been using coupons to buy plug-in oil warmers (Febreeze, Air Wick brands), which I love but I realize once you get the plug-in for free with the coupons, you’re on the hook for the oil refills, which run $2-$3 a piece and last about a month. I already have three in the house, and want add two more, but that’s a cost of around $15/month. I also use Febreeze-type sprays on furniture and carpet foam on the rugsl. Any ideas on cheaper ways to keep my house smelling fresh?

– Sarah

Baking soda is your answer.

One solution is to simply spread a bit of baking soda onto a saucer, then sit that saucer in an area where smells are very strong and leave it there overnight. You can also put some baking soda into shoes with a heavy odor.

To replace a Febreze spray, just add 1 1/2 cups of water to a spray bottle and 1 teaspoon of baking soda, then shake it thoroughly before re-inserting the trigger so that all of the soda is dissolved into the water.

Weirdly, that same formula works really well for curing upset stomachs.

Q5: Home warranty
My husband and I purchased a home a little over a year ago, and as a “closing gift” our realtor gave us a 1 year home warranty with a large national company. We went ahead and renewed the policy when it came due a few months ago. Mainly because our home is older with a furnace and water heater towards the end of their lifespans… and if they were to fail our warranty company would cover the replacements. Over the course of the last 16 months we’ve used the benefits 4 times for minor items. I am wondering if it is even worth paying the yearly premium of $560 on the chance that we will even use the benefits to the fullest.

– Lindsey

Home warranties are, on the average, never going to be worth what you pay for them. If they were, the companies wouldn’t sell them – it wouldn’t make any sense for them to be paying out more than they’re bringing in.

A much better approach is to take that yearly premium, subtract about 20% off of it, and put it each year into a savings account. Forget about that savings account until you need a major home replacement that you can’t afford out of pocket, then dip into that savings for that new furnace or central air unit or whatever it is you need.

This way, you’re not spending as much, you’re gaining interest on what you save, and you don’t have to play paperwork games when something does go wrong.

Q6: Estimating child costs
My wife and I are beginning to think about having children, but I have no idea how to estimate what having a kid costs. Beyond knowing that the medical expenses associated with the birth aren’t cheap (and that kids cost money to feed/clothe/house/etc), I don’t know a thing. What should I expect it to cost, both in terms of more or less up-front medical (and maternity clothing) costs associated with pregnancy, as well as an estimate of how much I should expect my annual expenses to go up? Are there any good resources you’d recommend to help me inform myself?

– Andy

The numbers you get are going to wildly vary depending on the assumptions the people involved are making.

Are you going to a secondhand maternity shop for clothes or to a boutique retailer? Are you buying a $1,000 custom made crib or a $50 one at a department store? Are you hitting yard sales for children’s clothes or are you making Baby Gap your go-to place? Is your wife choosing to directly feed the child, or are you going to be buying lots of formula? Are you going to cloth diaper or are you going to go through Pampers by the case? Do you expect to continue your same dining patterns except with a child in tow or are you going to eat more at home with healthy options? Do you need additional room in your home for the baby or does your current domicile provide what you need?

There are countless questions involved in such a model. Certainly, there are costs involved with having a child. Whether or not those costs are backbreaking or whether they’re absorbed easily into your changing lifestyle has a lot more to do with what you value than the child itself.

Your best approach is to start thinking about these questions now and start looking at the actual prices involved.

Q7: Maxing out IRA contributions
I am interested in opening up a Roth IRA and I know the cutoff for making a maximum contribution this year is coming up with the tax deadline. Is the benefit to maxing this years contribution enough to warrant taking some extra money out of my savings to make it happen? I can do this and still maintain my 6mo emergency fund. But if there isn’t a big benefit, I can just open the IRA in a few months and work on maxing out next years contributions.

– Jim

It depends on whether you’re in good shape with other aspects of retirement savings or not. Do you have a well-funded 401(k) at work? Have you been saving at a good rate for a long time?

The more tenuous your retirement savings is, the more I’d lean towards using cash savings to bolster your Roth.

Of course, no matter what, I wouldn’t let that emergency fund get below $1,000 at the lowest, and preferably I’d keep it a bit higher than that.

Q8: Board games worth it?
I’ve been looking at some of the board games you’ve mentioned before, but the price seems crazy. $40? If I play it once for an hour, that’s not a good bargain. Please tell me how this is frugal.

– Evan

For starters, many of the games in my collection cost far less than $40 new. My best estimate, using online tools of various kinds, is that the average new cost of a game in my collection is somewhere around $18.

For another factor, many of the games I own were picked up at thrift stores, acquired by trades, purchased only during sales, and so forth, further lowering the average cost per game. Beyond that, many of the games I own were gifts from friends and family.

Add on top of that the fact that a single game is entertaining a table of people for hours, and that when I visit my friends I’m usually playing their games, the actual cost per hour of entertainment per person is quite low.

When the average cost per game gets down in the $8 range, I’m pretty happy. I’ll usually not pick up a game unless I’m pretty confident it’ll hit our table several times (at least).

If you’re not certain about whether you’d like a game, visit a gaming store in your local area and ask to try some of the games. Many such stores have weekly demo days where they’ll show you how to play a game and then you can make up your own mind about it.

Q9: Student loan woes
I have a student loan of 40K at 6%, when I returned to school after many years of working. After I graduated, the first year, I deferred payment. I am now in my second year and in forbearance, paying approx. 250/month. That covers only the monthly interest. Next year, I need to start paying $452 per month, full amount. Our kids goes to college in less than 2 years and I am paying for a state college fund/plan for him, monthly. I should have about 1.5 year’s of college credit paid for, by the time he starts college. My spouse works part time, because he lost his permanent job, several years ago. He’s not highly employable (chronic depression and PTSD, with medication), so I am the primary earner, and have been for many years. We all have medical benefits through my job, and they withdraw from my paycheck: I pay dearly at $700 per month. We have ONE $4000 credit card debt at 14%, no others. We refinanced our mortgage recently, saving us about $200 per month, with a 200K mortgage balance. I participate in my employers retirement plan. Our savings account is about $700. No cable, no cell, no entertainment, one car paid, groceries bought from outlet, clothes bought at Goodwill. We pay about $500 per month for private school tuition for our son.

Question #1: should I opt for Income Reduction plan for my student loan? I have serious anxiety about my student loan balance. I do not want our son to have a student loan, if possible. Because I work at a higher institution, they offer tuition benefits for dependents. He does not want to opt for this. He wants to apply out of state and seek scholarships. He’s got a GPA of 3.7 and thinks he can do it. I reminded him about the hidden costs of college.

Question #2: How do we convince him to apply in our hometown, so he cannot be straddled with any education debts, like me? My fear is that he will be wooed by a student loan debt that I will have to help him pay for. I cannot. I have my own student debt and cannot rely on my spouse’s future income. By the way, I used part of my student loan to help pay for our family living expenses at the time I was a grad student, because we were short on funds. I did not see the train coming. I should have bitten the bullet and REJECTED the excess loan amount offered to me from financial aid. PLEASE HELP me to see that there is HOPE. I’ve tried applying for higher paying jobs but they are scarce and very competitive. Taking deep breaths!
– Mary

For your first question, I’m not entirely sure what you mean. Do you mean that you want to set aside money from your check automatically to cover your student loan payment? Or are you wanting to somehow apply portions of your pay to your child’s education if he attends that university? If you’re having trouble consistently paying your student loan, having it automatically withdrawn is probably a good choice as it will force financial discipline on you.

For the second question, why would you help him with his student loans? There’s no reason for you to do so. My parents didn’t help me with my loans, and my wife’s parents only helped in that they took out a few loans themselves to help pay for her college education – they didn’t make payments for us later on. This is his decision and those are his consequences, so you shouldn’t be tied down by them.

I think you’re just in a routine right now where you handle everything for everyone in your life. You’re clearly handling things for your husband and you’ve been a parent, too. It’s hard to imagine not handling things, but that’s where your path is headed with your son. Let him take the reins.

Q10: Giving up hobbies
How can you just decide to give up a hobby if it’s something you love? You’ve talked before about how you tore things down to just focusing on as a hobby. That would be boring.

– Ed

If you think that focusing on one hobby is boring, that’s fine. However, that means that your spare time is going to be split among a number of activities and you’ll never gain the momentum with any one of them that you would need to find a career related to it.

I chose to focus on my writing and for two reasons. First, and this was the big one, I enjoyed it. I loved to write and I wanted to get better at it. I knew the only way I would improve is with some intense focus. Second, I did have dreams of making it work professionally, and without a lot of work, I knew that would never happen.

It’s not a choice that everyone would make, but it’s a choice that worked for me.

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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