AskDong

Normally I wouldn’t have occasion to link back to Cary of “Ask Cary” on salon.com, but today he answers a question that is actually quite related to personal finances. For those who don’t know me personally, I actually started this blog in homage to Cary, hence the ever so creative name AskDong.  I also wanted to answer relationship questions, but that’s a story for another day.

If you get a chance, read the actual letter, Cary’s response, and comments.  All three usually make a good read.  However, in synopsis; the letter writer is a 50 year old jazz pianist, accomplished but not a success, and barely scraping by. He’s been doing what he loves, but wants to at this point in his life to make some money. Who can blame him, the life of a musician is hard. The industry is super competitive, and the pay generally stinks unless you’re famous.

I know I often like to say, “Do what you love, and financial success will find you.” However, if I had complete faith in that I probably would’ve studied something else other than economics in college.  I value a measure of a security, and I realize there are tradeoffs for many people between financial rewards and personal job satisfaction.  The lucky few have both. Finacial Zen discusses at his blog his own career path and job choices and doing what you love (and how one can kill the other).  But the question remains, do you believe if you do what you love, enough rewards will come?

p.s. If you get a chance comment on Salon, the letter writers often read the comments, and are generally appreciative of good advice.

RK asks,

I need to roll over a state educator’s retirement fund of $18,000 into an IRA when I move from MS to CO. Should I roll over this money in a traditional or Roth IRA? Which one makes the most money?! How much should I contribute each year? What investment company do you recommend?

I believe you are only eligible rollover your state plan into a traditional rollover IRA.   You can later choose to rollover that money into Roth IRA, but would have to pay income taxes at that point.  Currently if you make more than 100k, adjusted gross, you would be ineligble to rollover to a Roth IRA, however that requirement will be dissapearing in a few years.  The contributions to your state retirement fund were untaxed. A traditional rollover IRA allows keep your money in its untaxed state.

As for which one makes more money, it’s a matter of what investment you purchase within the IRA account. The IRA account is just holding account in which you can choose to invest in anything you want. Stocks, CDs, Mutual Funds, Bonds, and even Real Estate (though it gets complicated investing non traditional investments). What an IRA allows you to do is avoid some taxes. In a traditional deductible IRA, you’ve avoided paying taxes on the outset but do need to pay taxes at withdrawal.  With a Roth IRA, you pay taxes on the outset since it’s funded with post income tax money, but avoid paying taxes at withdrawal.  During the time investments are held in either type of IRA, there’s no need to pay taxes on earnings within the account.  Typically in a taxable account, you would have to pay taxes every year on interest payments, dividends, and other periodic incomes which then reduces what you have available to reinvest.  IRAs allows you to avoid that yearly skim and therefore increase your overall return. That tax deferral can make a large difference over extended time period.  Assuming a 6% rate of rate return, a marginal income tax rate of 30%, and 30 year time frame that $18,000 would grow into $77,768 after paying taxes in a tax deferred account like a rollover IRA vs. $61,845 in a regular taxable account.  In reality the tax benefits are more complicated depending on the types of investments you held in the account.  I have posts here and here that discusses what types of investments are best held in different holding accounts for tax reasons.

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The Frugal Guy over at Frugal Living started a meme about you guessed it, frugal living. Actually his post is about one thing that one does well, and another that one does poorly in relation to frugalness. It’s an interesting question, at least for me, because relatively speaking I’m not all that frugal. My friends think I am, but in the personal finance blogsphere I feel outright decadent. So it was rather tough for me to think of something I’m really frugal with. I would’ve said clothes, but I realize just because I don’t buy any clothes doesn’t mean clothes don’t get brought for me.

I think I do good job when it comes to my transportation expenses. I’ve never purchased a new car. I’ve only gotten hand me down cars, and only in the last couple years. I didn’t have a car for the first 6 years out of school. I’m lucky because I live in Boston, and you can get away without having a car. Even now that I do have I car, I still don’t drive very much and take public transportation or walk when I can. I probably spend less than $300 a year on gas.

I’ve got plenty of things that I’m bad at, but the one that actually upsets me is that I spend too much money on Lunch. I pretty much go out everyday and spend between $5-$8 on buying lunch. I justify it because I never have leftovers because I don’t really cook, but in reality how difficult would it be for me to make a sandwhich? At the end of the day I rather take that money I could save at Lunch and blow it at a nice dinner

Yesterday, I made three loans. My first prosper loan bid was accepted, but to be honest I’m not really sure what I’m doing.  This is probably a bad thing given a) I might lose money  b) I am suppose to be writing about prosper as a part of my series on earning money.  I promise I’ll get my act together and do some research ahead of my post on Propser.  I made a $50 loan for C credit rated borrower at rate of 13.95%.   Prosper effectively will take 1% off the top, so net I’ll receive 12.95% if the guy doesn’t default.   I have a few other bids on which the bidding period will end soon.  I’ll see what happens, and keep everyone updated.

The other two loans I’m much more pleased with.   I made two loans on Kiva.org one for $25, and one for $50.  For those who haven’t heard of Kiva, it’s in the microfinance space.  Grameen bank is probably the most commonly known microfinance institution given the founder Muhammad Yunus was given a Nobel Peace Prize in 2005 for his work.  Kiva partners with existing organizations such as Norwegian Micro Credit and Action Kenya to deliver financial capital to individuals. 

These loans do not pay interest, so if I break even financially that would be the best possible outcome.   The point of these loans is not to make money, but help individuals in developing countries who are already helping themselves.  The people who apply for these loans typically have small businesses that need capital to expand or allow them ride past hard times.   As the old proverb goes, give a man a fish he’ll eat for one day, but teach him to fish and he’ll eat for the rest of his life.  I’m a fan of this bottom up approach towards helping the developing world.  And there are no more deserving individuals than those who actively work to improve their own lives.   I also like fact the aid is structured as a loan.  I actually think when Aid is meant to be repaid it empowers individuals.  Pay kiva.org a visit, and make a loan or donation (I donated $25 to the organization on top of the loans).

No one lives forever as I was reminded by Kurt Vonnegut’s death.  Given the wide accounts of Warren Buffet’s love for Red Meat, and Coke, it’s unlikely I would sell him life insurance policy at this stage in his life.   I also think it unlikely he would need it.  I hope he has many years left, but if he doesn’t, I want to attend at least one annual Berkshire Hathaway Annual meeting over which he’ll preside.   So today, I’ve decided to put in a order for 2 shares of Berkshire Hathaway B.   Many years ago it was my goal to buy 1 share of the daddy Berkshire shares, but I realize now I think it’s going to be long time before I can do that without making that holding the bulk of my portfolio.  Berkshire A trades at 109,750 as Apr 13th, just ever so slightly out my price range.  Berkshire B shares trade at 3,656 which still makes GOOG look cheap.  The problem with the baby Berk shares is that each share only has 1/200th of the voting right of the A shares even though in terms of value they are 1/30th.  But, I’ll still be able to attend the meeting and vote my 1/200th of a vote.

True, I’ll feel like a cheap wannabe as I attend the annual meeting, but I can always lie about how many shares I own.   In the end the Cult of Buffet (like any cult of personality) turns me off somewhat (even though it could be easily argued I fall under that trance) so I’m not sure if I care all that much that people see me for what I am, a wannabe.   I might be better off buying 1 share.  Buying 2 shares is like ordering the second cheapest wine on the wine list.  Wish me luck on executing my limit order (I put it in for 3654).  I’m not sure why I’m worrying about a couple dollars, but I guess I’m just somewhat uncomfortable putting a market order for something so expensive when I’m trading odd lot shares.