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. Unknown banks
2. Roth conversion with low income
3. Bone broth and stock?
4. TaxAct basic version question
5. Credit card with bad credit
6. Dollar cost averaging
7. Abject poverty?
8. When to buy a book?
9. “Getting through” a cold
10. Can’t see a way out
11. Cheap but comfortable desk chair
12. Throwing stuff away?
This past week (and this week and the week to come), I’m digging into something of a theme on The Simple Dollar: persevering through long challenges after the “honeymoon period” has worn off. Not every post is or will be directly on this topic, but many will touch on it.
Why? Mid-to-late January is a period in which many people who started off with great resolutions for the year start to slag off. The “newness” of the challenge is starting to wear off, and they’re starting to fall off the wagon.
My goal with this “theme” is to try to reach people who are hitting that tough period and share tools I’ve learned and used to persevere and turn new life practices that you’ve started due to a personal goal into permanent life changes.
This involves sometimes reiterating a few tactics, but trying to look at them in different ways. The reason is that different perspectives tend to help different people. I know I’ve read advice that was life-changing to some that just didn’t resonate with me, but other advice on the same topic really hit home for me.
Find what works for you. Not everything will, nor should it. Remember, also, that there are a lot of people (myself included) who genuinely want you to succeed at your goals that lead you to a better life in whatever way “better” means for you.
On with some mailbag questions. Note that I’m somewhat behind on mailbag questions lately because I’ve not only received a lot of them lately, but I’ve received a lot of interesting ones, too. I honestly could do two mailbags a week for a while… or else I need to get better at filtering them.
Q1: Unknown banks
I googled to find a bank with the highest interest rate on a savings account. The bank that came up #1 on Bankrate, CIBC, I’ve never heard of. Many of the other banks named are unknown to me. Can I trust this information?
Often, Bankrate and The Simple Dollar and other interest rate comparison sites will include smaller regional banks in their comparisons. Likely, CIBC simply doesn’t operate in your area, though they seem to have online banking available to people across the United States. That explains why you’re unfamiliar with them – typically, most people are familiar just with banks that do business in their area or advertise in their area.
It’s much like grocery stores. Ever gone on a road trip to another part of the country and seen grocery stores that you’ve never heard of before? It doesn’t mean that those stores are “bad” or “untrustworthy” – they’re just regional stores that don’t happen to operate in your area.
You should always investigate banks before doing business with them, but not having heard of a bank at all isn’t a reason to avoid them. Some banks are simply regional banks that are smaller than, say, Bank of America or Chase or Citi.
Q2: Roth conversion with low income
There is another use of the back-door Roth IRA (converting a regular or SEP IRA to a Roth IRA) that may be relevant for many more readers beyond just those in the top 10% of income, and in particular some readers of this blog, who may have both IRA savings and non-super-high incomes.
This happens when (a) You have money in a regular or SEP IRA, and (b) You have unusually low income (for example, if you have been out of work, or are self-employed and had a “down” year, or whatever) compared to what you earned in the past and expect to earn in the future.
In this case, you might want to convert to the Roth IRA because you will pay very low taxes (perhaps even no taxes) on the conversion. This is a benefit because those taxes might be lower than what you would pay in the future, or (as happened in my case) you want to build up the balance in your Roth IRA because you may need to use it as your “emergency fund”.
Readers who are interested can see if this is a good idea for them by “doing their taxes” with a software package, and then setting up, say, a $1,000 Roth conversion and seeing how their tax owed (or refund due changes). This change is the tax on the Roth conversion. Then play with higher or lower amounts—I have seen one case where someone was able to convert $27K to the Roth without paying any additional tax.
This happens if the household has low income (or middle income with many deductions) and (non-refundable) tax credits (for example, child credits and earned income credit). They can convert several thousand dollars from the regular IRA to the Roth IRA paying low (or no) additional tax. The conversion increases their MAGI, which normally would increase their tax. If there are non-refunded tax credits, then the increase in tax is covered by the now-refunded/previous-no-refunded tax credits that otherwise would not have been refunded. In effect, this allows you to have income that you (1) at some point put in a regular or SEP IRA without paying income tax in it, (2) convert to a Roth IRA paying low (or no) income tax on it, and (3) eventually (sooner or later) withdrawing from the Roth without paying tax on it. In effect, completely shielding the money from income tax.
Of course, this is a fairly specific situation: You have money in an IRA, and you have in the current tax year unused, non-refundable tax credits. But it has already happened to me personally twice. And the benefit is not just having more tax-free money for retirement, it is also being able to tap (tax-free) money now (if needed) that if instead you withdrew from a regular IRA would cost you both regular income tax as well as a 10% penalty.
Maybe you are thinking: this is too narrow and complex a case for my readership. Maybe it is, I agree. At the same time, a lot who aspire to FIRE may fit this situation, and this gives you a concrete opportunity to save some (small) share of your readership a lot of tax—you’d be putting a lot of money (legally) in a lot of people’s pockets.
Or try it out when you do your taxes your tax software. I suspect your income is high enough it would not be worth it, but just enter a hypothetical lower income and see what point you can start making Roth conversions with little or no tax.
If you (one, that is “you” third person impersonal) simultaneously make contributions to an SEP IRA (as I can, as both my wife and I are self-employed), you reduce MAGI equivalently, increasing the amount you can put tax-free through the Roth back-door.
And if your income is low enough, your contribution to the regular or Roth IRA will trigger up to $2000 in the Saver’s credit.
Basically, the designers of the tax system did not anticipate that people would have both (a) Regular IRA savings, and (b) low income. But it happens, and not necessarily rarely.
As Max noted, this gets a bit too much into a specific situation than I typically cover on The Simple Dollar, but it’s so well written and thoughtful that I wanted to share it.
In short, Max is recommending that people consider rolling over their retirement savings into a Roth IRA during years in which their income is low so that they don’t have to pay many taxes on the rollover. You have to pay income taxes on the amount that you roll over, so if you wait and do this in a year where your income is low – say you had a long unemployment period during the year – your taxes will also be low, and then all of that money is in a Roth, where it won’t be hit with further taxes for the rest of your days.
Tuck this idea away in the back of your head so that if you do ever have a year where you don’t make a lot of money for some reason, you can take advantage of this.
Q3: Bone broth and stock?
What’s the difference between bone broth and stock?
Nothing, really. Bone broth obviously implies that you’re boiling some sort of meat, but that’s about it.
The biggest difference is that in practice, stock tends to be a little thicker than bone broth. That’s because with bone broth, the bones are usually stripped down to just the bare bones before boiling, which means that most of the flavor comes from the bone marrow, whereas in stock, bones are often thrown in with cartilage and collagen still attached, which provides flavor but results in a bit thicker liquid. Aside from that, there’s no difference, and stock usually tastes better and is easier to make.
In both cases, you just fill up a pot with leftover bones (and any other remnants, like bits left on the bone, if you prefer stock – and I certainly do), fill it with water until the bones are covered with a couple of inches of water, and boil it all day long. If you want, you can add additional things for flavor, like salt, peppercorns, a diced onion, whatever. You can make vegetable stock much the same way by just using a bunch of chopped vegetable scraps instead of the bones.
At the end, just strain it and save the liquid. Boom! It’s stock! Or bone broth! They’re basically the same thing!
Q4: TaxAct basic version question
Hi, I’d like to know where your guy who wrote the article about the top five tax software providers this year got his information regarding TaxAct. He said that TaxAct had the cheapest desktop (i.e. downloadable) version at fifteen dollars but the cheapest downloadable version I can find on their website costs $24.95. So if he knows some secret to finding that fifteen dollar version I’d sure appreciate him sharing it.
I did some investigating into this and it seems as though TaxAct pricing – beyond their free filing service – seems to vary a lot, and I’m not sure why. For example, within 10 minutes, I found that their Basic+ Online product was listed at $9.95 and $5.97, depending on when I visited the site.
Furthermore, I found several articles written in the past few weeks on a number of sites giving prices for both the TaxAct online and downloadable versions that I simply could not find on TaxAct’s website.
My best guess is that TaxAct is running a number of promotions and sales that are starting and ending at various times and that the earlier article was quoting a price from an earlier promotion. I tried to contact them but got no response.
My best advice to you is to simply search for discount codes when you’re ready to use it, see if you can find anything, and then download the product you want.
Q5: Credit card with bad credit
How do I get a credit card with bad credit?
You don’t, not without improving your credit at least a little. Banks do not want to lend money to people that they don’t believe will pay them back, and that’s exactly what’s happening when someone with a bad credit report applies for a credit card.
So, how do you do fix your credit? The easiest way for most people is to simply keep their bills paid and up to date for a while. Don’t miss a bill of any kind.
Another good step is to get a secured credit card, which you can do through many credit unions. A secured credit card is a credit card that essentially requires a deposit, much like a person would make on an apartment. That deposit guarantees the bank against the risk that you won’t pay your bills. If you do pay your bills, your credit will recover fairly quickly and you should be able to get an unsecured card within a year, at which point you can close the secured card and get your deposit back.
Q6: Dollar cost averaging
A lot of personal finance sites talk about dollar cost averaging (DCA) and include an explanation along the lines of “you buy more shares when the price is low and less shares when the price is high.” This seems like a bit of circular logic to me that doesn’t make sense. Nobody gets a medal in retirement for owning the most number of shares, it’s the underlying value of what you own that is pertinent. There appears to be an implicit assumption that whenever a stock goes down it is a “value” or “cheap”, and the opposite is true for when the price goes up. Random walks aside, that’s not always the case. In a perfect world, you would buy as many shares as possible when you know the security is underpriced, and literally no shares when you know the stock is a penny overpriced. DCA should instead boil down to “you can’t time the market so don’t try”, or “we live in a world of imperfect information, so don’t try to determine the exact value of every stock you trade in.” This line about buying “more” and “less” shares just seems to be extra fluff on top of existing sound financial advice. But I see it repeated so many different places I can’t tell if I am just not understanding something or if nobody thinks that hard about it. Any thoughts?
You’ve got the general idea right. The point of dollar cost averaging is to basically spread out the risk of buying when the market is at its peak and give you at least some buy-in when the market is at its lowest. Dollar cost averaging tends to work best when the market is on a general downward trend, because it essentially means that you’re taking a lot of shots at buying at the very bottom of the market and even if you miss you’re still buying a lot of cheap shares. It doesn’t work as well if the stock market is doing well because you’re buying a lot of expensive stocks.
Most people who contribute to the stock market via their 401(k) plan with a small amount taken out of each check are doing dollar cost averaging by default. They’re buying stocks every few weeks like clockwork each time money is removed from their checks.
Honestly, I don’t think any sort of market timing works very well at all. I don’t think anyone possesses a crystal ball to predict what the market is going to do in the future. My belief is that you shouldn’t invest in stocks unless it’s a long term investment, meaning you don’t intend to touch that money for more than ten years. If that’s the case, it doesn’t really matter when you buy in as you’ll likely make money on that investment – and probably very good money. I believe the market is too volatile and unpredictable in the short term to invest in it with money you’re going to need in less than ten years.
Q7: Abject poverty?
How can you feel happy living in abject poverty?
For one, I don’t think my life is anything like abject poverty. I live in a four bedroom home. We have two cars. We eat a lot of good from-scratch food. We have a great social life with a ton of friends and a handful of truly close lifelong friends. We both have a lot of hobbies that we each enjoy. This doesn’t seem like poverty to me.
If your idea of “abject poverty” is that we buy store brand toilet paper and that we eat most of our family dinners around the dinner table and that we don’t blow every dime we have on expensive trips, I’m not really sure what to say to that.
The truth is that being happy with one’s life comes from within. Stuff won’t make you happy in any lasting way. Some experiences can, but they’re usually not the ones you have to shell out tons of money for. Living paycheck to paycheck makes you stressed, which erodes happiness faster than anything, and what exactly are you getting from living paycheck to paycheck? Stuff that doesn’t make you happy in any lasting way? Experiences that don’t bring you lasting happiness either?
I did that for years. I’ll pass.
Q8: When to buy a book?
When do you decide that it’s a good idea to buy a book rather than check it out from the library?
For me, it’s mostly a question of whether I believe I’ll ever want to read this book again or turn to it again for reference.
For nonfiction, if I think I have the main ideas of the book absorbed and won’t need to return to it, I won’t buy it. I have a method for taking notes on books that I read and I usually have a good sense as to whether the book will be valuable again for me. If I think that it will, then I consider buying it.
For fiction, I simply ask myself if I think I’ll ever read it again. It’s “no” much more often than “yes,” simply because I know how many great works of fiction there are out there yet unread by me. It has to be really good for me to want to buy it at this point.
Q9: “Getting through” a cold
Do you have any tips for getting through a cold without visiting the doctor (expensive) and getting prescriptions (also expensive)?
If you have an ordinary cold, visiting the doctor isn’t very useful and most of the time prescriptions won’t be, either. A doctor can help if you have the flu or something like that, but for an ordinary cold, it’s usually caused by a virus and a doctor’s not going to give you an antiviral medication for that.
When I have a cold but I still need to get stuff done, I usually take Dayquil and zinc supplements and eat a lot of soup and drink a lot of tea with extra honey in it. I usually dress extra warm, too, because I usually feel cold when I have a cold.
There’s no magic fix for the blah feeling of having a cold, but those things seem to help me.
Q10: Can’t see a way out
28F working two waitressing jobs. I basically make enough to keep the bills paid and the lights on. Wasted four years in college for a degree that never got me a job and now buried under student loans. Don’t see a way out.
I don’t have enough info about your situation to give specific advice, but I’d start by looking at your big expenses. Where do you live? Do you have a roommate? If not, consider finding a roommate or two or three. Remember, it’s just a place to lay your head and do basic hygiene and keep a few possessions, especially if you’re working a lot.
Do you own a car? Do you really need it to get to work? If not, get rid of that money pit. It’ll save you on insurance, registration, gas, etc. Use the bus or subway to get to work, or a bicycle or your feet if you’re close enough.
Do you eat out at all? If you eat at home, is it cheap? My favorite cheap eating strategy from those days was to eat the same meal several times in a week so that I can just make a huge batch of it early in the week. I’d make myself a pan of lasagna or something and eat it 5-6 times throughout the week. I’d cook up a huge batch of rice and beans and eat it for lots of lunches and dinners. It gets the cost of a meal down in the $0.50 range, if not lower.
As you’re doing this, keep the goal in mind all the time. The less you spend in a month, the more you can chip off of one of those student loans. When you knock down one of those loans, you’ve got a bit more breathing room and you can chip even bigger pieces off of the next one.
It’s not going to be easy but it’s not impossible unless you choose to believe that it is.
Q11: Cheap but comfortable desk chair
Do you have a suggestion for a cheap and comfortable desk chair that won’t hurt my back? Last two have made my lower back really hurt. Had a $200 one before that that was great.
If you’re aiming for well under $100, I’d get this Amazon Basics desk chair and, if needed, get a lumbar pillow for it. That’s probably your best bet if you’re spending less than $100.
The reality is that cheap desk chairs just aren’t made to support the lower back very well. They provide a place to sit that rolls around, nothing more, nothing less. If you want lower back support but aren’t willing to buy a higher end chair, your best bet is to just add a pillow.
Personally, I’d spring for the better chair, especially if you’re going to use it for years. This is one of those “essential” purchases if you’re going to be sitting in this chair for hours a day for years.
Q12: Throwing stuff away?
Trying to get rid of a lot of stuff as I’m probably moving to a smaller apartment near work as per your suggestion which I think is really wise as I’ll be saving about $1200 a month on rent and on commute expenses. Selling off a lot of stuff on FB marketplace but how do you decide when to just give up and throw stuff away?
I don’t like to throw things away if I can help it. They just wind up in a landfill somewhere. I’d rather give something to someone if they can use it than throw it away.
When I moved out of an apartment many years ago, there was a common room of sorts and I left a lot of stuff in there on a table that said “Free to good home” on it.
Sarah and I, when we’re downsizing our possessions, tend to take a lot of things to Goodwill. Sarah drives right by one on her work commute, so she’ll often drop off a box or two on her way home from work.
I stick stuff in the little free libraries around here all the time. I’ll walk around town with a backpack that has 6-8 books on it that I want to pass along and each one nearby gets a new book or two in it.
You could also just occasionally share a picture of a big pile of stuff you’re about to get rid of with your friends, asking if anyone wants any of it.
The trash should be your last option, used when you’re in an urgent time crunch or when all other options fail. Even if you give the item away, you’re still getting more value out of it than just throwing it in the trash.
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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