Legend has it that there was once a time when gasoline cost 35 cents a gallon, mortgage payments were $200 a month, and people pursued a career by getting an education or training in a field, finding a job with a good employer, and staying there for 30 or 40 years until they retired with a pension and a watch. Some of the legend is true--gasoline once did cost 35 cents a gallon and mortgage payments for many people were $200 a month, or even less (but they had to watch flickering black and white TVs). Spending one's entire working life at one employer was, in those days, probably more the exception than the rule. But the availability of defined benefit pensions (which promised a predictable amount of money in retirement) made doing so worthwhile.
Today, most people work for a half-dozen or more employers during their working lives, and the defined benefit pension is about as common as the brontosaurus. They usually don't work long enough at any one employer to qualify for a pension, and if they do, it generally isn't much of a pension. (Some companies have changed traditional defined benefit pensions to "cash balance" plans that supposedly favor newer employees but hurt the interests of long time employees; so don't think loyal and faithful service mean much.)
Today's way of funding retirement is the retirement savings account, such as 401(k) plans, IRAs, etc. Originally, these accounts were meant to supplement traditional pensions. But now, with defined benefit pensions going the way of the carrier pigeon, retirement savings accounts--especially the 401(k)--have morphed into the only show in town for a lot of workers. They have tax advantages (see Uncle Leo's Den at www.uncleleosden.com/Step12RetirementAccounts.html for a discussion of these accounts). But you can wreck your retirement plan every time you change jobs.
That's because every job change gives you an opportunity to withdraw the money in your 401(k) account. If you do, you'll have to pay federal and state income taxes on the amount withdrawn and also a penalty of 10% if you're younger than 59 and 1/2. Depending on where you live, you could lose half or more of the funds withdrawn. Even if you put the remainder in a taxable savings or investment account, its earnings will be taxed currently. So you lose the boost to your savings from compounding earnings on a tax deferred basis. Of course, if you spend the money, it's gone forever.
When you change jobs, don't withdraw the money in your 401(k) account. You'll have one or more of these options: (a) leave it in your old employer's 401(k); (b) roll it over into an IRA; or (c) roll it over into a 401(k) plan offered by your new employer). Compare the fees and expenses of these options, and the investment alternatives. Then pick the option that gives you the best combination of low fees and expenses, and good investment alternatives. If you have a small 401(k) balance with your old employer, it may not allow you to stay in its plan and may issue you a check for the balance. Be sure to contribute that money into an IRA or your new employer's 401(k) plan within 60 days. If you meet the 60 day deadline, you won't have to pay taxes or a penalty.
Let's say you change jobs 8 times during your adult working years. If you withdraw your 401(k) money each time, you'll have only Social Security and whatever savings you've accumulated in taxable accounts. If you keep the money in one retirement account or another, you'll have compounded your way to what will probably be a nice supplement to your retirement. (We discuss the power of compounding at http://blogger.uncleleosden.com/2007/04/love-in-time-of-financial-planning-part.html.) Resist the temptation to spend retirement savings just because you can. All of your retirement days will be long if you're trying to make a go of it on just Social Security.
Tech News: A new use for ring tones: attracting leopards. Just don't leave your cell phone on in the jungle. http://www.wtop.com/?nid=456&sid=1159321.
Showing posts with label retirement accounts. Show all posts
Showing posts with label retirement accounts. Show all posts
Thursday, June 7, 2007
Monday, May 28, 2007
Buy a New Car Without Haggling and Save
There’s a way to buy a new car without negotiating and get a price that might be better than what you could get from hours of old-fashioned haggling. Try purchasing your new car through the dealership’s Internet department.
Here’s the process. If you know what vehicle you want, contact the dealer by e-mail and describe what you’re interested in. If they have it in stock, they’ll get back to you. The prices they quote may be surprisingly low. Word has it that Internet departments are compensated based on the volume of vehicles they sell, rather than the markup on each sale. By contrast, the salesperson on the showroom floor is paid a commission, so the dealership will be less enthusiastic about discounting a vehicle you buy through the showroom floor.
If you want to try the Internet route, start by researching the makes and models you’re interested in. Consider features, capabilities, mileage, safety, insurance costs and resale value. Decide what you want, preferably in detail. Your chances of getting a good deal are better if you can specify the make, model, features, colors and even the frilly options. Okay, a DVD player for the second row seats isn’t a frill; it’s a necessity when you have hyperactive kids. But you know what we mean.
Then, research prices. Go to sites like Edmunds.com (free, with ads) or Consumer Reports (no ads, but you need to subscribe) to get an idea of the dealer’s costs and what other buyers have been paying for the same vehicle in your zip code. Be sure to research total costs of ownership as well as sales prices. (Total cost of ownership, sometimes called “true cost to own,” is a five-year tally of the major expenses of owning a car, like depreciation, financing costs, insurance premiums, maintenance and repair costs, taxes and fees, and fuel expenses.)
Next, go to the showroom. No, we’re not kidding. You should test drive all vehicles that you’re interested in. Another reason for going to the showroom floor is that you’ll be able to ask to any questions you have. You might even get an idea of the price the dealership would ask if you went the traditional haggling route.
Line up your financing before you start shopping. Trying to get financing through the dealer may not be the lowest cost option. If you arrange your financing in advance, you'll very possibly get a better deal. (Hint: try a credit union.)
Now, prioritize your choice of vehicles. Identify the dealers nearby that sell your top choice. Send them an e-mail describing in detail what you want. American manufacturers offer a large variety of options, so your description could get lengthy. Still, it’s better to be specific because you’ll be more likely to get what you want. Foreign manufacturers are more likely to offer a choice of styles with largely fixed options packages—although this is less flexible, it makes shopping by e-mail easier.
The dealers that have your preferred car in stock will get back to you quickly. You may be pleasantly surprised by the prices they quote. If you see a deal you want, call and let them know you’re coming.
Last September, we tried this. Not every dealer had our top choice in stock. The first dealer to respond offered a price that was 8% lower than the best price advertised in the local newspaper. The second dealer offered a price 10% lower than the best newspaper price. The second dealer made a sale about three hours later. When you consider that the average price of a new car is somewhere around $28,000, discounts like these can fund half your annual contribution to an IRA. (For more information about IRAs, read the discussion of retirement accounts in Uncle Leo's Den.)
Of course, the price advantage you might get would depend on supply and demand. If you want the hottest car in the market, the Internet department won’t be selling it. But if you want something that's in lower demand, perhaps at the end of the model year when the dealer hopes to clear out old inventory, you might pocket a fair amount of dinero. Can you haggle with the Internet department? It’s a free country and you can try. But if they’ve offered you a very good deal to begin with, they may not be able to do much more (or anything). Even so, you could still have a very good deal.
Not everything is improved when you buy through the Internet department. If you have a vehicle to trade in, you’ll end up dealing with the same old bluster, bluffing and snake oil nonsense that you wanted to avoid. But if you get a good price on the new car, this is more tolerable. Another annoyance is that if a dealer doesn’t have the make and model you want, they’ll probably try to interest you in something else they have in stock. But it’s up to you whether you follow up. Since you’re probably e-mailing from the comfort of your home, you’re only under the pressure you place on yourself. A third annoyance is that if you send an e-mail to a dealership, they’ll put you in their customer address book and e-mail you for months about every car you didn’t want to buy. Just remember that you control the delete button.
It’s harder to use the e-mail technique to buy a used car. One used car won’t be strictly comparable to another used car, and each needs to be individually researched and checked out. But if you’re in the market for a new car, think about buying through the Internet department.
Crime News: A caper with toilet paper. http://www.wtop.com/?nid=456&sid=1150769.
For more shopping ideas, visit the blog carnival of shopping: http://www.become.com/pocketchange/2007/06/carnival_of_shopping_16.html
Here’s the process. If you know what vehicle you want, contact the dealer by e-mail and describe what you’re interested in. If they have it in stock, they’ll get back to you. The prices they quote may be surprisingly low. Word has it that Internet departments are compensated based on the volume of vehicles they sell, rather than the markup on each sale. By contrast, the salesperson on the showroom floor is paid a commission, so the dealership will be less enthusiastic about discounting a vehicle you buy through the showroom floor.
If you want to try the Internet route, start by researching the makes and models you’re interested in. Consider features, capabilities, mileage, safety, insurance costs and resale value. Decide what you want, preferably in detail. Your chances of getting a good deal are better if you can specify the make, model, features, colors and even the frilly options. Okay, a DVD player for the second row seats isn’t a frill; it’s a necessity when you have hyperactive kids. But you know what we mean.
Then, research prices. Go to sites like Edmunds.com (free, with ads) or Consumer Reports (no ads, but you need to subscribe) to get an idea of the dealer’s costs and what other buyers have been paying for the same vehicle in your zip code. Be sure to research total costs of ownership as well as sales prices. (Total cost of ownership, sometimes called “true cost to own,” is a five-year tally of the major expenses of owning a car, like depreciation, financing costs, insurance premiums, maintenance and repair costs, taxes and fees, and fuel expenses.)
Next, go to the showroom. No, we’re not kidding. You should test drive all vehicles that you’re interested in. Another reason for going to the showroom floor is that you’ll be able to ask to any questions you have. You might even get an idea of the price the dealership would ask if you went the traditional haggling route.
Line up your financing before you start shopping. Trying to get financing through the dealer may not be the lowest cost option. If you arrange your financing in advance, you'll very possibly get a better deal. (Hint: try a credit union.)
Now, prioritize your choice of vehicles. Identify the dealers nearby that sell your top choice. Send them an e-mail describing in detail what you want. American manufacturers offer a large variety of options, so your description could get lengthy. Still, it’s better to be specific because you’ll be more likely to get what you want. Foreign manufacturers are more likely to offer a choice of styles with largely fixed options packages—although this is less flexible, it makes shopping by e-mail easier.
The dealers that have your preferred car in stock will get back to you quickly. You may be pleasantly surprised by the prices they quote. If you see a deal you want, call and let them know you’re coming.
Last September, we tried this. Not every dealer had our top choice in stock. The first dealer to respond offered a price that was 8% lower than the best price advertised in the local newspaper. The second dealer offered a price 10% lower than the best newspaper price. The second dealer made a sale about three hours later. When you consider that the average price of a new car is somewhere around $28,000, discounts like these can fund half your annual contribution to an IRA. (For more information about IRAs, read the discussion of retirement accounts in Uncle Leo's Den.)
Of course, the price advantage you might get would depend on supply and demand. If you want the hottest car in the market, the Internet department won’t be selling it. But if you want something that's in lower demand, perhaps at the end of the model year when the dealer hopes to clear out old inventory, you might pocket a fair amount of dinero. Can you haggle with the Internet department? It’s a free country and you can try. But if they’ve offered you a very good deal to begin with, they may not be able to do much more (or anything). Even so, you could still have a very good deal.
Not everything is improved when you buy through the Internet department. If you have a vehicle to trade in, you’ll end up dealing with the same old bluster, bluffing and snake oil nonsense that you wanted to avoid. But if you get a good price on the new car, this is more tolerable. Another annoyance is that if a dealer doesn’t have the make and model you want, they’ll probably try to interest you in something else they have in stock. But it’s up to you whether you follow up. Since you’re probably e-mailing from the comfort of your home, you’re only under the pressure you place on yourself. A third annoyance is that if you send an e-mail to a dealership, they’ll put you in their customer address book and e-mail you for months about every car you didn’t want to buy. Just remember that you control the delete button.
It’s harder to use the e-mail technique to buy a used car. One used car won’t be strictly comparable to another used car, and each needs to be individually researched and checked out. But if you’re in the market for a new car, think about buying through the Internet department.
Crime News: A caper with toilet paper. http://www.wtop.com/?nid=456&sid=1150769.
For more shopping ideas, visit the blog carnival of shopping: http://www.become.com/pocketchange/2007/06/carnival_of_shopping_16.html
Wednesday, May 23, 2007
Get Some Fast Money: The Employer Match
There is a way you can get fast money, for real and you won't have to do any extra work. It's the employer match in a 401(k) account. Employer sponsored retirement savings plans, like 401(k)s and their equivalents (such as the federal government's Thrift Savings Plan) often have a feature where your employer matches your contributions up to a certain percentage. For example, an employer might match up to 3% of your salary or wages that you contribute to the plan. The match is equivalent to an immediate 100% return on your investment. There's nothing in the financial markets that an ordinary investor can get which would be better.
With some 401(k) plans, the employer match may not "vest" (meaning, truly belong to you) unless you stay with the company for a minimum period of time, such as 3 years. Even so, the employer match is a great deal and you should get it.
What if you have high interest rate credit card debt and would like to pay it off? Should you do that before investing in 401(k) to get the employer match? No. The return on the employer match is better. Cut back on your spending in order to pay off the credit card debt.
What if you want to save up money outside a 401(k) in order to accumulate a downpayment for a house? It's good if you're trying to put a downpayment together, because these days, with the messy state of the mortgage market, people who have a downpayment are more likely to be approved for a mortgage. But the employer match pays a better return than buying a home. So get the employer match; and try to save a downpayment some other way.
What if school loans are like thunderclouds hanging over your head and you want to get rid of them as soon as possible? You'd get more value from obtaining the employer match than from paying down school loans a little faster. If the school loans are driving you crazy, ease up on unnecessary spending. But don't cut back on the best retirement financing deal most people will ever get.
We discuss the employer match and other retirement account questions in Uncle Leo's Den at www.uncleleosden.com/Step12RetirementAccounts.html. The employer match is about as close as most of us will ever get to free money. Don't pass it up. If you have access to a retirement account with one, contribute at least enough to get the match; and more if you can, since retirement isn't getting cheaper.
Strange News: Drilling for natural gas begins at Dallas-Fort Worth International Airport--http://news.yahoo.com/s/nm/20070523/od_uk_nm/oukoe_uk_energy_drilling_airport. But will they share the wealth with the passengers? How 'bout some free peanuts, at least?
With some 401(k) plans, the employer match may not "vest" (meaning, truly belong to you) unless you stay with the company for a minimum period of time, such as 3 years. Even so, the employer match is a great deal and you should get it.
What if you have high interest rate credit card debt and would like to pay it off? Should you do that before investing in 401(k) to get the employer match? No. The return on the employer match is better. Cut back on your spending in order to pay off the credit card debt.
What if you want to save up money outside a 401(k) in order to accumulate a downpayment for a house? It's good if you're trying to put a downpayment together, because these days, with the messy state of the mortgage market, people who have a downpayment are more likely to be approved for a mortgage. But the employer match pays a better return than buying a home. So get the employer match; and try to save a downpayment some other way.
What if school loans are like thunderclouds hanging over your head and you want to get rid of them as soon as possible? You'd get more value from obtaining the employer match than from paying down school loans a little faster. If the school loans are driving you crazy, ease up on unnecessary spending. But don't cut back on the best retirement financing deal most people will ever get.
We discuss the employer match and other retirement account questions in Uncle Leo's Den at www.uncleleosden.com/Step12RetirementAccounts.html. The employer match is about as close as most of us will ever get to free money. Don't pass it up. If you have access to a retirement account with one, contribute at least enough to get the match; and more if you can, since retirement isn't getting cheaper.
Strange News: Drilling for natural gas begins at Dallas-Fort Worth International Airport--http://news.yahoo.com/s/nm/20070523/od_uk_nm/oukoe_uk_energy_drilling_airport. But will they share the wealth with the passengers? How 'bout some free peanuts, at least?
Monday, May 7, 2007
A Financial Checklist for Job Loss
Losing a job is one of the stressful things that can happen. You know you are in financial peril, but may find it hard to think straight and remember things that might be helpful. Here's our list of suggestions for softening the blow.
(a) negotiate for as many weeks or months of termination pay as you can get;
(b) ask for payment of any bonuses, awards or commissions you’ve earned or accrued, or which you can reasonably expect based on your job performance to date (if the award was in non-monetary form, like a trip to Hawaii, ask for the monetary value of the trip);
(c) request payment for accrued vacation and sick days, and any other time off you've earned or been awarded;
(d) ask for continuation of health insurance benefits (remember that you have COBRA rights to retain your employer’s health insurance for 18 months even if your employer doesn’t offer anything else; even though you’d have to pay the entire cost of COBRA coverage yourself, it's still worthwhile);
(e) ask for continuation of other insurance benefits, such as dental coverage or life insurance;
(f) obtain a written statement of the balance in your 401(k) account and any other retirement accounts you might have with the employer, such as an employee stock option plan--the assets in these accounts are yours (except possibly for matching funds from your employer if you haven’t had the job all that long) and you don’t have to negotiate for them; but you should make sure you know how much is there;
(g) claim any stock options, restricted stock and similar incentive compensation benefits that you have earned or are entitled to;
(h) ask about retaining any employer provided equipment, such as a laptop computer or a car, if this equipment is important to you;
(i) ask for the employer’s agreement not to contest your claim for unemployment compensation (if it looks like you’d qualify for unemployment comp);
(j) ask for your employer’s agreement to give you a good reference (or at least a neutral reference such as only a confirmation of dates of employment and positions held); and
(k) ask your employer for assistance from an outplacement or headhunter firm (that the employer pays for).
Your ability to obtain these benefits will depend on the circumstances of the situation, but they are something for you to think about. Certainly, if you don't ask for them, you probably won't get them. If you are represented by a union, consult with a union representative about your rights and options.
Some people try to negotiate for a temporary continuation of employment while they search for a new job, on the theory that it’s easier to find work if you are employed. Others may aim for the use of an office and telephone line at the old employer’s office while they search for a job, to maintain the appearance of being employed. You may want to consider these possibilities. But don’t lie to a prospective employer about your actual employment situation.
Carefully read anything your employer asks you to sign in connection with your termination. Almost always, an employer offering termination benefits will ask you to waive your rights to sue for discrimination, wrongful discharge and other potential legal claims or rights. If you’re seriously considering a lawsuit, don’t sign anything even if that means losing some of the termination benefits. You should be able to use COBRA rights to maintain your health insurance (unless you’ve engaged in “gross misconduct”). If you sign a document that waives your COBRA rights, you can still revoke that waiver for a limited period of time (which should be at least 60 days after your regular employer sponsored health insurance plan’s coverage ends). The assets in your 401(k) or other retirement accounts are yours in any event, so you don’t have to waive any rights to get them.
You may be able to get unemployment compensation. Do so if possible because unemployment comp will help to extend your financial resources.
Of course, start looking for another job as soon as you can. You can't build wealth for retirement unless you keep working. Losing a job can be one of the most emotionally difficult events of your life. But remember that it happens to large numbers of people every year; you are hardly alone. Don't lose faith in yourself. You'll have sunny days as well as cloudy ones. Hang in there and wait for the clouds to blow away.
Strange News: A Brazilian court has ordered a brewery to pay one of its beer tasters compensation for facilitating his alcoholism. See www.wtop.com/?nid=456&sid=1133982. Hmmmmm. They paid him to drink so now they have to pay him for drinking. What's his incentive to stop drinking?
(a) negotiate for as many weeks or months of termination pay as you can get;
(b) ask for payment of any bonuses, awards or commissions you’ve earned or accrued, or which you can reasonably expect based on your job performance to date (if the award was in non-monetary form, like a trip to Hawaii, ask for the monetary value of the trip);
(c) request payment for accrued vacation and sick days, and any other time off you've earned or been awarded;
(d) ask for continuation of health insurance benefits (remember that you have COBRA rights to retain your employer’s health insurance for 18 months even if your employer doesn’t offer anything else; even though you’d have to pay the entire cost of COBRA coverage yourself, it's still worthwhile);
(e) ask for continuation of other insurance benefits, such as dental coverage or life insurance;
(f) obtain a written statement of the balance in your 401(k) account and any other retirement accounts you might have with the employer, such as an employee stock option plan--the assets in these accounts are yours (except possibly for matching funds from your employer if you haven’t had the job all that long) and you don’t have to negotiate for them; but you should make sure you know how much is there;
(g) claim any stock options, restricted stock and similar incentive compensation benefits that you have earned or are entitled to;
(h) ask about retaining any employer provided equipment, such as a laptop computer or a car, if this equipment is important to you;
(i) ask for the employer’s agreement not to contest your claim for unemployment compensation (if it looks like you’d qualify for unemployment comp);
(j) ask for your employer’s agreement to give you a good reference (or at least a neutral reference such as only a confirmation of dates of employment and positions held); and
(k) ask your employer for assistance from an outplacement or headhunter firm (that the employer pays for).
Your ability to obtain these benefits will depend on the circumstances of the situation, but they are something for you to think about. Certainly, if you don't ask for them, you probably won't get them. If you are represented by a union, consult with a union representative about your rights and options.
Some people try to negotiate for a temporary continuation of employment while they search for a new job, on the theory that it’s easier to find work if you are employed. Others may aim for the use of an office and telephone line at the old employer’s office while they search for a job, to maintain the appearance of being employed. You may want to consider these possibilities. But don’t lie to a prospective employer about your actual employment situation.
Carefully read anything your employer asks you to sign in connection with your termination. Almost always, an employer offering termination benefits will ask you to waive your rights to sue for discrimination, wrongful discharge and other potential legal claims or rights. If you’re seriously considering a lawsuit, don’t sign anything even if that means losing some of the termination benefits. You should be able to use COBRA rights to maintain your health insurance (unless you’ve engaged in “gross misconduct”). If you sign a document that waives your COBRA rights, you can still revoke that waiver for a limited period of time (which should be at least 60 days after your regular employer sponsored health insurance plan’s coverage ends). The assets in your 401(k) or other retirement accounts are yours in any event, so you don’t have to waive any rights to get them.
You may be able to get unemployment compensation. Do so if possible because unemployment comp will help to extend your financial resources.
Of course, start looking for another job as soon as you can. You can't build wealth for retirement unless you keep working. Losing a job can be one of the most emotionally difficult events of your life. But remember that it happens to large numbers of people every year; you are hardly alone. Don't lose faith in yourself. You'll have sunny days as well as cloudy ones. Hang in there and wait for the clouds to blow away.
Strange News: A Brazilian court has ordered a brewery to pay one of its beer tasters compensation for facilitating his alcoholism. See www.wtop.com/?nid=456&sid=1133982. Hmmmmm. They paid him to drink so now they have to pay him for drinking. What's his incentive to stop drinking?
Sunday, May 6, 2007
In Your 20's: Money Matters When Time is Your Friend
When you’ve finished your education and are starting out in the work force, you have perhaps the best opportunity of your life to put your finances on a solid footing. Time is very much on your side. If you control your spending and start a savings program when you’re young enough to benefit from 40 years of compounding investment earnings, you’ll find retirement a lot easier to finance. If you’re like many people, you may not think much about next year, let alone your 60’s. Remember, however, that you’ll probably reach your 60’s (and the alternative is worse if you don’t). You’ll be happier then if you do some advance planning now. Take a few basic steps and you’ll be off to a good start.
1. Live within your means. Don’t try to emulate friends who can lease BMWs because they’ve moved back in with their parents after college. It’s easy to maintain a fancy lifestyle if someone is subsidizing you. But if you’re on your own, live carefully. You’ll become self-reliant, and in the end that will be worth much more than parental subsidies.
2. Build up an emergency cash fund of 3 to 6 months expenses. The emergency cash fund serves as a personal insurance policy against all the bad things that might happen to you which aren’t otherwise insured. For example, if you have a serious car accident, or a rock climbing accident, and can’t work for three months, where will you get money to live on? If you have health insurance (and you should get it, even if you have to pay for it personally), your medical costs will be covered. But you’ll still need money for deductibles and co-pays, food, rent, utilities, car payments, etc. An emergency cash fund may be $10,000, $15,000 or more. That looks like an awful lot of money to have sitting around. But all insurance looks like a waste until you need it. Then, you’ll be very glad you have it. Put the emergency cash fund in an account that is separate from your regular checking account, so that it’s not easy to spend. Good places include a bank or credit union money market account (preferably one that pays a decent interest rate) or a money market fund. Money market funds are actually pretty safe, especially ones that invest exclusively in U.S. Treasury securities, and tend to pay better interest rates than most bank accounts. Some online banks pay relatively high interest rates.
3. Start saving in a retirement account. Open a 401(k) account or other retirement account if your employer offers one. Otherwise, open an IRA. A Roth IRA is probably best if you’re young. We discuss retirement accounts in Uncle Leo’s Den at http://www.uncleleosden.com/Step12RetirementAccounts.html. These accounts are the best legal tax shelters available to most Americans, so be sure to have one.
4. Don’t run up your credit card debt and pay off any balance you’ve been carrying over from month to month. Credit card debt is expensive because the interest rates are high. Try to stick with just one or two credit cards. Bouncing from one card to another to another isn’t good for your credit rating. Keeping one or two cards for a longer period of time is better. If you consolidate your debt, use the cash flow you free up to pay down debt. Don’t use it for more lifestyle enhancement. The problem with debt is that it is supposed to be repaid, and the interest charges will eventually crimp your lifestyle. Why enrich banks? Pay off your debts and enrich yourself.
Strange News: Apparently the reason why Paris Hilton is going to jail is because she took legal advice from her publicist: http://www.reuters.com/article/wtMostRead/idUSN0339694420070506. Okay. Maybe in La La Land this makes sense. Have you ever heard the joke about asking two publicists the same question and getting three answers . . .
More money hints for those under 30 can be found at this blog carnival: http://howtomakeamilliondollars.blogspot.com/2007/05/festival-of-under-30-finances-june-1.html.
1. Live within your means. Don’t try to emulate friends who can lease BMWs because they’ve moved back in with their parents after college. It’s easy to maintain a fancy lifestyle if someone is subsidizing you. But if you’re on your own, live carefully. You’ll become self-reliant, and in the end that will be worth much more than parental subsidies.
2. Build up an emergency cash fund of 3 to 6 months expenses. The emergency cash fund serves as a personal insurance policy against all the bad things that might happen to you which aren’t otherwise insured. For example, if you have a serious car accident, or a rock climbing accident, and can’t work for three months, where will you get money to live on? If you have health insurance (and you should get it, even if you have to pay for it personally), your medical costs will be covered. But you’ll still need money for deductibles and co-pays, food, rent, utilities, car payments, etc. An emergency cash fund may be $10,000, $15,000 or more. That looks like an awful lot of money to have sitting around. But all insurance looks like a waste until you need it. Then, you’ll be very glad you have it. Put the emergency cash fund in an account that is separate from your regular checking account, so that it’s not easy to spend. Good places include a bank or credit union money market account (preferably one that pays a decent interest rate) or a money market fund. Money market funds are actually pretty safe, especially ones that invest exclusively in U.S. Treasury securities, and tend to pay better interest rates than most bank accounts. Some online banks pay relatively high interest rates.
3. Start saving in a retirement account. Open a 401(k) account or other retirement account if your employer offers one. Otherwise, open an IRA. A Roth IRA is probably best if you’re young. We discuss retirement accounts in Uncle Leo’s Den at http://www.uncleleosden.com/Step12RetirementAccounts.html. These accounts are the best legal tax shelters available to most Americans, so be sure to have one.
4. Don’t run up your credit card debt and pay off any balance you’ve been carrying over from month to month. Credit card debt is expensive because the interest rates are high. Try to stick with just one or two credit cards. Bouncing from one card to another to another isn’t good for your credit rating. Keeping one or two cards for a longer period of time is better. If you consolidate your debt, use the cash flow you free up to pay down debt. Don’t use it for more lifestyle enhancement. The problem with debt is that it is supposed to be repaid, and the interest charges will eventually crimp your lifestyle. Why enrich banks? Pay off your debts and enrich yourself.
Strange News: Apparently the reason why Paris Hilton is going to jail is because she took legal advice from her publicist: http://www.reuters.com/article/wtMostRead/idUSN0339694420070506. Okay. Maybe in La La Land this makes sense. Have you ever heard the joke about asking two publicists the same question and getting three answers . . .
More money hints for those under 30 can be found at this blog carnival: http://howtomakeamilliondollars.blogspot.com/2007/05/festival-of-under-30-finances-june-1.html.
Monday, April 30, 2007
How to whip inflation now and retire happier.
Inflation has a corrosive effect on retirement savings. To illustrate, let's assume you are diligently saving $10,000 a year in a retirement account like a 401(k), and your retirement savings earn 7% a year. After 30 years, you'll have a bit more than $944,000--almost millionaire territory. If you can stand another year in the work force, you'll be a millionaire. (We're using the calculators at money.cnn.com to get our numbers.)
But let's assume that over those 30 years, inflation runs at 3% a year (which is about its historical average for much of the 20th century). In that case, your savings would have a value of almost $379,000 on an inflation-adjusted basis. That's better than soggy fries with your burger, but you're a long way from being a millionaire measured by today's dollar.
Inflation was once an episodic event in America, and tended to coincide with exceptional economic stresses like wars. We actually had price deflation after the Civil War, again after World War I and yet again in the 1930's during much of the Great Depression. Since World War II, however, inflation has become virtually endemic. While its causes are much-debated, the fact is that inflation has, like an infestation of termites, taken up residence in our lives.
So how do you prevent inflation from eroding the foundation of your finances? Think judo. In judo, you use an adversary's momentum as your weapon. When an attacker charges at you, you slip to one side and flip him over your leg or hip.
Inflation creates price momentum. It pushes upwards the prices of goods and services you buy. But it also exerts upward pressure on the price of labor (i.e., wages and salaries). As the prices of goods and services go up, employees demand higher compensation to cover their increased costs of living. Much is discussed today about how the distribution of wealth is becoming more unequal and how median household income in America has stagnated, and perhaps even dropped. Nevertheless, household incomes for most workers tend to keep approximate pace with inflation.
To protect against inflation, boost the amount you save for retirement by the rate of inflation. Your rising income allows you to finance these increases. Your retirement portfolio will grow correspondingly faster, to give you a buffer you'll need. Following the example used above, save $10,300 in the second year of your retirement savings plan (i.e., 3% more than year one), $10,609 in the third year (i.e., 3% more than year two), $10,927.27 the fourth year (i.e., 3% more than year three), and so on. Even if your income doesn't always keep pace with inflation, accept a minor reduction in your current lifestyle, and continue to increase your savings in line with inflation. Start this process now, keep it up as long as you work, and you'll sleep better for many years.
Sometimes, the IRS's limits on contributions to retirement accounts (like 401(k)s and IRAs) don't always increase as fast as inflation. In that case, save more in taxable accounts. The retirement account contribution limits simply define the amount of tax sheltering effect you'll get and don't have any necessary relationship to your financial needs or goals. Don't let government tax policies dictate how much you'll have in your golden years.
Strange News: Even though we can explain how to protect yourself against inflation, we can't explain Phil Spector's wig: http://www.cnn.com/2007/LAW/04/26/spector.trial.ap/index.html.
For more personal finance ideas, check out this blog carnival: http://www.marketmatador.com/2007/06/11/the-personal-finance-and-investment-round-up-festival-2/
But let's assume that over those 30 years, inflation runs at 3% a year (which is about its historical average for much of the 20th century). In that case, your savings would have a value of almost $379,000 on an inflation-adjusted basis. That's better than soggy fries with your burger, but you're a long way from being a millionaire measured by today's dollar.
Inflation was once an episodic event in America, and tended to coincide with exceptional economic stresses like wars. We actually had price deflation after the Civil War, again after World War I and yet again in the 1930's during much of the Great Depression. Since World War II, however, inflation has become virtually endemic. While its causes are much-debated, the fact is that inflation has, like an infestation of termites, taken up residence in our lives.
So how do you prevent inflation from eroding the foundation of your finances? Think judo. In judo, you use an adversary's momentum as your weapon. When an attacker charges at you, you slip to one side and flip him over your leg or hip.
Inflation creates price momentum. It pushes upwards the prices of goods and services you buy. But it also exerts upward pressure on the price of labor (i.e., wages and salaries). As the prices of goods and services go up, employees demand higher compensation to cover their increased costs of living. Much is discussed today about how the distribution of wealth is becoming more unequal and how median household income in America has stagnated, and perhaps even dropped. Nevertheless, household incomes for most workers tend to keep approximate pace with inflation.
To protect against inflation, boost the amount you save for retirement by the rate of inflation. Your rising income allows you to finance these increases. Your retirement portfolio will grow correspondingly faster, to give you a buffer you'll need. Following the example used above, save $10,300 in the second year of your retirement savings plan (i.e., 3% more than year one), $10,609 in the third year (i.e., 3% more than year two), $10,927.27 the fourth year (i.e., 3% more than year three), and so on. Even if your income doesn't always keep pace with inflation, accept a minor reduction in your current lifestyle, and continue to increase your savings in line with inflation. Start this process now, keep it up as long as you work, and you'll sleep better for many years.
Sometimes, the IRS's limits on contributions to retirement accounts (like 401(k)s and IRAs) don't always increase as fast as inflation. In that case, save more in taxable accounts. The retirement account contribution limits simply define the amount of tax sheltering effect you'll get and don't have any necessary relationship to your financial needs or goals. Don't let government tax policies dictate how much you'll have in your golden years.
Strange News: Even though we can explain how to protect yourself against inflation, we can't explain Phil Spector's wig: http://www.cnn.com/2007/LAW/04/26/spector.trial.ap/index.html.
For more personal finance ideas, check out this blog carnival: http://www.marketmatador.com/2007/06/11/the-personal-finance-and-investment-round-up-festival-2/
Sunday, April 29, 2007
Automate to Accumulate Wealth
To get to work on time, you probably set the alarm on your clock radio and let yourself hit the snooze button no more than three times. This automates the process of waking up. That makes you a more reliable, and therefore valuable, employee.
It's a good idea to automate the process of building wealth. Don't make saving something that you have to remember to do. If you automatically send part of each pay check into a retirement, investment, or savings account, the process of building wealth becomes much more reliable, and eventually, rewarding. You are paying yourself first. By making saving a priority, you are more likely to accumulate wealth.
Automating the wealth building process can be done a number of ways:
1. Payroll Deduction. Retirement accounts sponsored by your employer, such as a 401(k) account, will typically be funded through payroll deduction from your salary or wages. People who are 50 or over and want to make "catch up" contributions will have to separately authorize them; do so if you can afford them. For more information about retirement accounts, go to Uncle Leo's Den at www.uncleleosden.com/Step12RetirementAccounts.html. You may also be able to buy other investments, such as U.S. Savings Bonds, through payroll deduction.
2. Automatic Transfers. You can arrange to have money automatically transferred from your checking account to another account at a specified time, such as the first of the month. The other account can be an IRA, a savings or money market account, an investment account, a mutual fund, a money market fund, or a variety of other accounts. It can be at a different financial institution than the one where you maintain your checking account. All you need to do is a little bit of paperwork (or online authorization), and the process will begin.
3. Extra Mortgage Payments. One way to reduce your housing costs is to prepay your mortgage bit by bit. In other words, if your mortgage payment is $3,000 a month, add a little bit more to each month's payment. Even an extra $100 or $200 a month is helpful. Your mortgage payment coupon may even include a line for adding an extra payment (but make sure you won't be charged a prepayment penalty). The extra payment will be used to reduce the principal balance of your mortgage. As a result, you'll repay the loan sooner and build equity in your house faster. Building equity matters. The real estate markets in many parts of the country are backsliding by day and by night. But extra mortgage payments remain a reliable way to build equity in your house. It doesn't matter that you might plan to live in this house only a few years. This method builds equity even if you stay in your current house only a short while.
One way to prepay your mortgage gradually is to make payments every two weeks. The amount of each biweekly payment would be half your monthly payment. You'd make 26 biweekly payments a year, or the equivalent of 13 month payments annually. You could repay the mortgage several years early this way and save tens of thousands of dollars or more. If you're interested in this idea, see if your bank will automatically deduct the payments from your checking account every two weeks. If not, you might have to pay a service company to make the biweekly payments, and that will involve fees that make the idea less attractive (although not necessarily a bad idea).
Once you routinize the process of building wealth, it will become largely painless. Even more important, it will become reliable. That takes you down the path toward champagne and caviar.
Weird news: do you think you can guess who was and wasn't a cheerleader? Think again: http://www.nbc4.com/slideshow/entertainment/13010870/detail.html.
It's a good idea to automate the process of building wealth. Don't make saving something that you have to remember to do. If you automatically send part of each pay check into a retirement, investment, or savings account, the process of building wealth becomes much more reliable, and eventually, rewarding. You are paying yourself first. By making saving a priority, you are more likely to accumulate wealth.
Automating the wealth building process can be done a number of ways:
1. Payroll Deduction. Retirement accounts sponsored by your employer, such as a 401(k) account, will typically be funded through payroll deduction from your salary or wages. People who are 50 or over and want to make "catch up" contributions will have to separately authorize them; do so if you can afford them. For more information about retirement accounts, go to Uncle Leo's Den at www.uncleleosden.com/Step12RetirementAccounts.html. You may also be able to buy other investments, such as U.S. Savings Bonds, through payroll deduction.
2. Automatic Transfers. You can arrange to have money automatically transferred from your checking account to another account at a specified time, such as the first of the month. The other account can be an IRA, a savings or money market account, an investment account, a mutual fund, a money market fund, or a variety of other accounts. It can be at a different financial institution than the one where you maintain your checking account. All you need to do is a little bit of paperwork (or online authorization), and the process will begin.
3. Extra Mortgage Payments. One way to reduce your housing costs is to prepay your mortgage bit by bit. In other words, if your mortgage payment is $3,000 a month, add a little bit more to each month's payment. Even an extra $100 or $200 a month is helpful. Your mortgage payment coupon may even include a line for adding an extra payment (but make sure you won't be charged a prepayment penalty). The extra payment will be used to reduce the principal balance of your mortgage. As a result, you'll repay the loan sooner and build equity in your house faster. Building equity matters. The real estate markets in many parts of the country are backsliding by day and by night. But extra mortgage payments remain a reliable way to build equity in your house. It doesn't matter that you might plan to live in this house only a few years. This method builds equity even if you stay in your current house only a short while.
One way to prepay your mortgage gradually is to make payments every two weeks. The amount of each biweekly payment would be half your monthly payment. You'd make 26 biweekly payments a year, or the equivalent of 13 month payments annually. You could repay the mortgage several years early this way and save tens of thousands of dollars or more. If you're interested in this idea, see if your bank will automatically deduct the payments from your checking account every two weeks. If not, you might have to pay a service company to make the biweekly payments, and that will involve fees that make the idea less attractive (although not necessarily a bad idea).
Once you routinize the process of building wealth, it will become largely painless. Even more important, it will become reliable. That takes you down the path toward champagne and caviar.
Weird news: do you think you can guess who was and wasn't a cheerleader? Think again: http://www.nbc4.com/slideshow/entertainment/13010870/detail.html.
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