The Weekly Mailbag: Never Boring!
One of the most satisfying parts of my job is to answer the emails that show up in my figurative mailbag. I’m always impressed by the sheer variety of topics. You come from all walks of life, with investment skills that range from novice to sophisticated.
All too often, financial editors provide advice according to preconceived notions that are disconnected from the real needs of their followers. Your feedback helps me keep this newsletter in touch with your actual investment goals.
Friday is a good time to answer some of your latest letters. Let’s dive in.
The rich are different…
“How do I invest and whom do I trust? How does an individual like me, who is middle class and working paycheck to paycheck, begin to invest and buy-and-sell the little money that I have saved? Can I do it on my own over the Internet, or do I have to have a broker? I want to avoid the middleman but I am not well versed in investing and need some trustworthy help. Rich people have different skills, I guess.” — Margaret K.
Your letter reminds me of a famous exchange between two great novelists.
F. Scott Fitzgerald once remarked to his fellow writer and drinking buddy Ernest Hemingway: “The rich are different than you and me.” To which Papa Hemingway replied: “Yes, they have more money.”
Margaret, let’s make you more money.
First, you’ll need to find a suitable broker. There’s a wide range of brokers, from full service who offer advice and hand-holding to deep discounters who are bare bones and leave you on your own. Before choosing, you must gauge your degree of confidence in making your own investment decisions against how much you’re willing to pay. As with everything in life, you get what you pay for.
The largest, best-known brokers charge on average $8.99 per trade (whether it’s a buy or sell order), while some of the smaller discount services charge as low as $2.50 per trade. The discounters are online-based platforms; the full-service brokers offer both online trading as well as polite and knowledgeable assistance over the phone.
For beginners such as you, customer service is important because you’ll doubtless need to speak with an actual human being to get urgent questions answered. A simple Google search will unearth the names of the big brand name brokers you can trust.
Once you’ve found a broker who meets your needs, the fun starts: picking investments. Start investing amounts that you can afford, while continuing to read our investment advice. We’ll guide you every step of the way. And feel free to drop me a line now and then, as you have questions.
Blaming Rosie the Riveter…
Concerning my issue headlined “A Tale of Two Paychecks” (January 19), I received this comment:
“You missed the fact that most people don’t even earn 50k, that the average income includes a whole lot of people who earn only 18k to 30k as opposed to the super earners. And further, women who had worked during World War II realized they could earn their own money and wanted to continue working once the war was over. Industry realized that it could get women cheaper than men and thus the unwatched “latch key kid” became a thing.” — Gordon C.
Thanks for your perspective, Gordon. That’s one way to interpret the post-war entry of women into the workforce. I invite other readers to weigh in.
Fearing God and the IRS…
Commenting on the same article, this reader wrote:
“As long as you mentioned tax credits, it might have been good to explain the difference between refundable and non-refundable tax credits. I’m always afraid to get these tax things wrong.” — Jim T.
American record producer Dr. Dre (net worth: $801 million) once said: “The only two things that scare me are God and the IRS.” Always understand the tax code as it applies to you.
A non-refundable tax credit means that your credit can’t be used to increase your tax refund or to create a tax refund when you wouldn’t have already received one.
Refundable tax credits are called “refundable” because they can reduce your tax liability below zero and entitle you to a tax refund. If you qualify for a refundable credit and the amount of the credit is larger than the tax you owe, the IRS will send you a refund for the difference.
To make this distinction fit the context of my article: Let’s say the only tax credit you’re eligible for is a $700 Child and Dependent Care Expenses credit, but the tax you owe is only $300. The $400 excess is nonrefundable. The $300 owed will get wiped out, but you won’t get refunded for the remaining $400.
Paychecks for life…
Regarding my article (January 18) “Rental Property Investing: Your Paycheck For Life:”
“Can you go over depreciation, and how it helps and becomes an adjustment upon property disposal or selling? I am wondering how to account for it in evaluating potential income rentals… a BIG thank you. PS: I think the term I want covered is ‘re-capture’ at the end of the rental property.” — Richard B.
Capital assets can be depreciated on your taxes, spreading the cost of an asset over a period of time to generate tax deductions. Accordingly, depreciation lowers the asset’s adjusted cost basis. When the asset is subsequently sold, the gain on the sale will be more because its basis is now lower. How the gain is treated depends on the type of asset in question.
When you sell a residential rental property, depreciation recapture can exert a significant tax effect. Part of the gain is taxed as a capital gain and may qualify for the maximum 15% rate on long-term gains, but the part that is related to depreciation is taxed at a maximum 25% rate.
Good debt versus bad debt…
My article about rental property really struck a chord, an indication that many of you are hungry for income. Here’s another question on the topic:
“I am considering building a small rental cottage behind my house to help finance my retirement. My house is paid for and I would have to take out a second mortgage loan to finance building the cottage. This is a high rent area and I could pay off the new loan in 4 – 5 years or I could let the loan run its course. What is your opinion?” — Patti F.
Patti, building a cottage for renters is an excellent plan for generating steady income under any economic conditions. Fewer people can afford homes these days, which is increasing the population of renters while at the same time propelling rents ever higher. As for paying off the second mortgage sooner rather than later, the answer depends on your other financial goals.
Paying off debt early can be a good idea. However, there’s “good” debt (such as low interest rate mortgages which also confer the mortgage interest deduction) and “bad” debt (e.g., high interest rate credit cards). If you make it your main goal to pay off good debt early, you might end up sacrificing other goals. Examine and rank your financial priorities; being debt free is only one of them. Financial leverage in the form of debt can be a useful tool.
Got any questions? Drop me a line: email@example.com. I’ll answer more of your letters next Friday. — John Persinos