Ask the grumpies: Socially responsible investing

Linda asks:

So many times I read/hear about “greedy corporations” doing bad things, but then I start to think about the following.

Public companies (which are mostly what people mean when they call out corporate greed) are owned by shareholders. The executives of those companies have a responsibility to earn money for those shareholders, which is why so many of these “greedy things” happen: execs make decisions based on the bottom line. (Yeah, those execs are also earning money (a LOT of money) for themselves, as well. They are hired to make money for the company (a.ka. the shareholders) and if they meet the goals/targets for sales, etc. they get lots of money and bonuses. But that’s a sideline here.)

However, just who are these shareholders who are ultimately behind this drive for making profits and increasing the value of their shares? Why…it’s us! We’re the ones putting money in our 401(k)s, 403(b)s, and/or state and private pension funds, which are comprised of shares in these “greedy corporations.” Right?

And if I’m not misunderstanding it…holy hell, isn’t this a moral dilemma for people who care about values and issues, such as the environment, human rights, and social justice? How many of us who say (for example) we abhor Walmart’s employment practices and/or boycott shopping there, are actually shareholders in Walmart? Or if we hate frakking, yet are also shareholders in companies that do so?

Ethical investing is HARD when you have a limited set of funds to choose from. I’ve poured over the prospectuses of my Vanguard 401(k) funds and shut that information away in my brain so I can pretend I don’t know what’s in those funds and that life is all sunshine, blue skies, kittens, and puppies.

Am I totally misunderstanding how my 401(k) works? Or is there really a utopia of steady investment growth for a comfortable retirement (one where I don’t have to live in a box and eat cat food) that doesn’t exploit others?

You would probably be interested in looking into SRIs (Socially Responsible Indices) within your retirement plan.

For the most part though, those of us doing broad-based index investing aren’t paid attention to by companies.  We’re neutral– sinning by omission, not by commission.  We’re not forcing them to change their behavior and we’re not causing them to have the bad behavior.  We’re not the people who move the markets because we’re not paying attention to individual companies.  Yes, we could do better by doing as you say, picking funds that are socially conscious companies and when we do that we miss out on Exxon’s growth or Phillips 66’s dividends.  We could do even better, if we’re wealthy, by buying huge amounts of stock and going to share-holder meetings to make our social justice positions known.  But of course that adds risk, and most of us aren’t that wealthy.

An alternative, of course, is to keep your money in the broad-based indices and invest your extra returns in charities that you care about.

We have a new washer!

After most of the year having a crappy washer and DH fixing it once when it wouldn’t drain (an experience which will be giving him nightmares for decades), it stopped agitating.  So we emailed the landlord and zie emailed back a day or two later telling us to buy a specific model at a specific store and to deduct the cost from next month’s rent.  (The specific store didn’t take credit cards over the phone or online and was far away so I asked if we could just get the same model at the same price from home depot and zie said that was ok, so yay.)

This is very different from #2’s experience wherein when her appliance breaks, the apartment manager sends someone to fix it right away and then takes care of everything, but #2 lives in a really nice apartment building and we have a somewhat scattered landlord who sometimes takes months to cash our checks (which are still being made out to, “The estate of” the previous landlord because zie hasn’t told us to do otherwise).

The new washer actually gets clothing clean.  It’s pretty amazing.

What do you do when a major appliance breaks?

Ask the grumpies: Intra-family mortgage or wait to buy?

Sapience asks

Do you have any thoughts or recommendations for dealing with intra-family mortgages? I’m up for an academic job at a relatively stable school in a part of the country where I could afford to borrow the entire cost of a (very modest) house from my parents. My parents have offered to the possibility of doing an intrafamily mortgage so I don’t have to worry about as big of a down payment (probably what would happen is I wouldn’t do any down payment, but would use some of the money I would have spent on the down payment on renovations, furnishings that I don’t really have right now, etc.). I know it has to be registered and that there’s the minimum interest rate required in order for it to be taxes as a mortgage, but are there any other benefits or pitfalls that I should be aware of if we go this route?

I’ve got the 20% for a downpayment, but was planning on putting off any renovation until I had more cash. My parents were the ones saying that instead of delaying renovations till I have the additional money saved up I should just do it all at once before I actually move in.

If you don’t have a 20% downpayment, don’t buy a house. Period. Don’t borrow for furnishings. Include the cost of renovations in the cost of the house when you’re doing your budgeting (meaning you need more money rather than less money to get 20% down).

It’s very nice of them to offer, but I’ve been seeing so many people (online mostly) with really good incomes hurt by not doing the recommended thing when it comes to housebuying and renovating.  What happens is they get crunched on cashflow from the monthly cost of the mortgage added to the unexpected additional costs of homeownership, which means they can’t live on >100K in, say, Indianapolis or on 175K in San Francisco.

There are definitely benefits to doing renovations right when you move in (see: living with carpet in the kids’ bathroom for 10 years), but that would argue for putting off buying until you can afford them rather than having too much debt servicing during home-ownership. Because home ownership really does bring in a lot of additional required spending over renting that people just don’t expect. A little more hassle from renovating later (if you buy) is better than having to worry about your cashflow on a regular basis, just in terms of stress levels.

Also, as Rosa notes:  “there are also downsides to doing all the renovations up front. You might not like them as much, since you haven’t actually lived with the space to see the real deficiencies. You will probably still need to redo them in 10 or 15 years. And you may find other priorities that you didn’t see before you moved in, but have already spent your reno budget.”

Stocks and bonds, Writing and outreach

I had an idea.  Follow me, here:

For academic careers, writing is like investing in stocks.  Outreach and translational research are like investing in bonds.

Stocks and writing:  Get lots while you’re young.  You need to write prolifically enough to get tenure, and gain the national or international reputation you need for those outside letters.  Spread your name, become known in your field.  Start early.  Because the return is uncertain, put a lot of writing out there in the world (and buy stocks).  Stocks are a good investment when you have a long timeline until retirement; you have time to weather the ups-and-downs of the market and can have a higher tolerance for risk, in exchange for possibly higher returns.

Bonds and outreach/translation:  These are more effective when you’re older.  When you’re more experienced in your field, you have more experience and a reputation that you can leverage for influence.  Research-wise, you’ve got a better idea of what works and what’s worth developing further, as well as potential pitfalls and objections.  You also know people who can help spread your ideas.  You may have more time to devote to making the world a better place.  When you’re closer to retirement, you also want the safety and security of bonds: potentially lower return, but steady.

In financial investing, as in an academic career, you’ll need a balance and variety throughout your life.  You might want to be doing both of these things (and more!) at all times, but in varying ratios.  Diversify and rebalance your portfolio and life.

This idea: off the wall, or right on target?  Tell me, Grumpeteers.

When economists prefer tossing economic theory to being woke

I seriously do not understand how so many economists (white male etc.) think that “cultural differences” explain things that are easier explained by “different constraints.”

As if we’re not all rational actors, only the white guys are.  Everyone else is doing worse because they are worse.  They’re either low quality or have bad culture.  If everyone acted like a white guy, then everybody would be doing as well as white guys.  As if.

It’s like, do you not listen to your own theory? How is it that when someone who isn’t a rich white guy is involved, all of a sudden you become a poor quality sociologist (who doesn’t really understand sociology)?

April mortgage update: Living in a 1200 sq foot 2br/2ba for a year as a family of 4

Last month (March):
Years left: 1
P =$1,157.03, I =$57.37, Escrow =$809.48

Last month (April):
Years left: 0.91666666667
P =$1,161.61, I =$52.79, Escrow =$809.48

Amount saved from prepayment:  $0

… instead of our usual 3000 sq ft ~5br/3ba.

Honestly, it hasn’t been so bad.  At some point, the kids may need to stop sharing a room or may need more space for their clothes, but not yet.

We use every part of the house instead of just a third of it.  I spend more time in our bedroom hiding out from everyone (DH spends about the same amount of time in our bathroom hiding).  I pretty much only use our bedroom at home for sleep (and activities involving the removal and/or putting on of clothing), even though it is comparatively ginormous.

Having people visit has been difficult.  If it’s my sister visiting, DC1 sleeps on the couch and she sleeps on the top bunk.  If it’s a parent, DC2 sleeps with us and the grandparent sleeps in hir bed.  We cannot accommodate couples unless a pair of people sleeps in the living room.  In our usual home place, visitors get an entire guest bedroom suite to themselves.  But… hardly anybody wants to visit us back home.

As with our graduate school days, it has been difficult to spend money accumulating stuff.  The first question is again not, “how much does this cost?” but “where would we put it?”  Only after we decide there’s room can we think about whether something is worth buying.  (Though DH and DC1 have been testing this proposition with their growing board game collection.)  But since the library system is so great and a short walk away, I don’t need so many books at home.

All in all, it’s been much easier to live here than I had expected.  (1200 sq ft is bigger than our grad school apartments, but there were only two of us then!)

Now, we’re not going to sell our monstrous house and move into a smaller place when we get back.  Why not?  Well, part of the reason it’s so easy to deal with a small space here is because everything is in walking distance.  A big park with playground, restaurants, the library.  And the weather is generally nice.  We don’t need to spend as much of our free time inside the house.  Back home, there’s really none of that, especially not near smaller houses; home owners associations are much more likely to have amenities like parks and playgrounds.

Another reason is that the neighborhood here is relatively safe and entirely free from college students.  Smaller places back where we usually live are either rural and away from everything, in high crime/bad school areas, and/or surrounded by students.  Home owners associations, though horrible, seem to be a way to get away from students.  We could downsize to probably 2200 sq ft and still be away from college students and coyotes and snakes, but the price differential doesn’t seem worth the hassle.  We can afford what we’ve got (as you can see from our mortgage update!).

And, I can’t lie– it is a bit easier to live in a small place that’s not in the best shape when everybody else is also living in small places that aren’t in the best shape.  Our standards are a lot higher where the housing is cheaper.  We wouldn’t put up with a lot of stuff in the small town that just doesn’t seem like a big deal here in the city.  The same was true when we moved from graduate school– peeling paint and uncovered radiators aren’t a big deal when you’re in an amazing location, but the new rural house has to be perfect and move-in ready.

How small a place are you comfortable living?  Is bigger always better?

Ask the grumpies: Save in a 401k on a low income?

Leah asks:

When can you start using a 401(k)? On a smaller salary, isn’t it better to save liquid cash or in another vehicle? When is it possible to save TOO much for retirement?

Tip:  If you are matched, you should *always* contribute up to the match.  Why?  Because if you’re strapped for cash, you can take that money (and the match) out now with a 10% penalty.  You’re still better off.  A lot of places giving you the advice to contribute to the match as your first step don’t mention this option, but it is an important one if you are low income.  They don’t mention it because they don’t want people to get into the habit of draining retirement savings.  But it’s still free money with the penalty, just less free money.

If you have a truly small salary, chances are you also don’t *have* 401(k) options.  But if you do, at what point should you not save at all?  If you’re in a situation where social security will be replacing most of your income.  In that situation your spending is already really low and you are probably talking serious (health, safety, etc.) risks for cutting it more because you are already living in poverty.

Sidenote:  If you do have extra each month because your salary is small but not at poverty levels, the Roth IRA is a good place for a longer-term emergency fund because you can take out the principal without penalty.  There are also some pretty nice tax credits for low income people who put money away for retirement,  which could mean up to a 50% return on up to $2-4K of your savings at tax time depending on your situation.  (Note it might be worth getting the match for the credit, but not completely maxing out the IRA/401K depending on your situation.)

Is it possible to save too much for retirement?  Of course.  That happens when you’re hurting your consumption today in unhealthy ways in order to save huge amounts for you don’t know what tomorrow.  For example, back when DH and I both had university jobs, we were saving 12% of our incomes mandatory, then we had room to save an additional 17.5K each in 403(b) and an additional 17.5K each in 457(b) and whatever the max was each for IRAs (maybe 4K?).  We didn’t use that room.  We have no plans for early retirement and were living with one car in a house without important furniture like a washer/dryer and there was a baby on the way.  We needed the income more than we needed to max out our retirement spending.

Now we wish we had more space to save for retirement (coincident with us having less room to save since DH no longer has access to a 457 and his 401k sucks).  That’s because we’re making more money now and it doesn’t really hurt us today to put more money away for tomorrow.  Looking ahead, whether or not our kids are eligible for financial aid will depend a lot on how much we have in non-retirement savings.  The more we hide in retirement savings and our house the less we’ll have to give to a private university with a huge endowment.

So what do I recommend one’s savings strategy be (as always, I’m not an expert– consult with a real expert before making important monetary decisions)?

  1. Contribute your 401k up to the match.  Take the money out at a 10% penalty if (2) or (3) are problems.
  2. Pay off your high interest debt and do not create any more of it.
  3. Get a small emergency fund that will help you not accrue the kinds of fees you get hit with when you don’t have liquidity (ex. work reimbursements being slow, a paycheck snafu, etc.)
  4. Contribute 15-20% of your income to retirement using 401K or IRA or a combination thereof.
  5. Ease up on your not-spending some.
  6. Get a bigger emergency fund that will cover you in case of a job loss.  Feel free to invest this in IRA Roths since you can withdraw principal without penalty (it doesn’t need to be in stocks!).
  7. Pay off some of your other debt if there’s a lot of it, especially if your monthly payments are high.  (This helps your cash-flow.)
  8. Ease up on your not-spending to more middle-class levels.
  9. Get a secondary taxable emergency fund that will cover you for a while in case you want to find yourself one of these days.  (Again, IRA Roths are a good choice for starting.)
  10. Start stuffing money into easy retirement advantaged vehicles, like your 401k/403b/457/IRA
  11. If you have kids and will need to pay some of their college expenses, 529s are nice.
  12. Start looking into fancier vehicles like backdoor Roths (because at this point you’re probably unable to contribute to a regular IRA) or super-mega-backdoor Roths.
  13. Hire a tax adviser to tax advantage your assets in ways that legally cheat the government.



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