Beyond Paycheck to Paycheck

at November 30, 2007 in Debt management. 0 Comments

Although there’s plenty of discussion in the media this morning of possible assistance for some strapped home-buyers, debt will always suck your money away. Here are my favorite three reasons why.

1. Debt makes everything you buy cost more.

Ah, the joy of paying interest on previous purchases. You’ve grown to hate that particularly fun night out. Why? Because you’re still paying it off. And it was five years ago! Too bad we only learn later how those rounds of drinks “on me” will actually cost far more (and for far longer) than you ever expected.

2. Debt enables you to buy things you can’t afford.

Note that it doesn’t say debt “makes” you buy things you can’t afford. If you’ve borrowed more than you can immediately pay back, you’re the one who made the decision. The debt (most likely a credit card) was your tool to do so. That’s why you’re the one who has to make sure that you can afford whatever it is that you are buying. Don’t trust the sales clerk, credit card company, or car salesman to figure out the long-term implications to your financial well-being of the purchase. That’s on you. Always has been.

3. Debt creates a race to the bottom - not to the top.

Many people proudly display their new tech. gadget, fancy new car, and huge McMansion. But they don’t brag about their credit card debt, auto loan, or mortgage balances, do they? That’s why we often think of people with “more stuff than we have” as richer than we are.

It’s just an appearance. Keeping up with the Jones’ has always been hard and, practically speaking, foolish. Today, it’s even more difficult because the Jones’ are in trouble. You just don’t know it. In fact, the Jones’ aren’t even real. But the debt– your’s and their’s–is.

There definitely is such a thing as good debt. But debt you can’t pay back on things that go down in value (a major problem for most people, especially those going to the max during the holidays) is not good debt. It’s not good debt even if it makes you feel good when you buy it.

Come January, you’ll see how bad such debt is and how it’s still sucking your money away from you. Remember, you decide how much debt you’ll have. Not the salesperson or the credit card.

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Annual Enrollment & 401(k) Plans

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at November 28, 2007 in Benefits and Retirement. 0 Comments

Most employers now allow you to make changes to your 401(k) plans throughout the year. Still, annual enrollment is one of the precious few times people tend to review (even if briefly) their benefit decisions.

In addition, it’s also nearly the end of the year.

You: I knew there was a reason I read this blog. That’s real helpful. What gave you the insight? Christmas music?

Okay, okay. I make the point that the year is nearly out because certain opportunities will pass you by if you don’t take advantage soon.

You: The Black Friday sales? Darn it!

No, fortunately, that is not what I’m talking about. Rather, think about your employer match. We’ve talked in the past about the importance of an employer matching program–regardless of the calendar.

Yet December brings up some interesting opportunities. because your employer match is typically capped as a percentage of your pay per year.

You: Huh?

For example, your company may contribute 50 cents to your 401(k) plan for each dollar you contribute, up to the first 6% you contribute of your gross pay each year. In such a case, the most the employer will contribute equates to 3% of your gross pay.

You: That’s it? Just 3%?

Look at it as a 3% raise for no additional effort (i.e, more projects, getting in early, kissing up to the really weird guy in HR, etc.). Just an instantaneous 3% raise. You wouldn’t turn that down.
You: True enough. But where are you going with this? I haven’t been taking advantage of the 401(k) match as much as I could have been so far.

Usually the cap (the maximum matched) is per calendar year. So those who contribute aggressively see their matching contributions stop at some point during the year, not to begin again until the following January.

You: As I said, that’s not me.

I know. But the concept of the cap also presents an end of year opportunity if you have yet to take maximum advantage of your employer’s generosity. You can still receive enormous benefit from your employer’s matching program by aggressively saving between now and the end of the year.

Let’s take an example. Say your gross pay is $50,000 and you have a 50% match, capped at 6%. By contributing 10% of your gross pay for the month of December, you’ll save about $417. Your employer will chip in a matching contribution of $208, so $625 will be added to your 401(k).

You: But I don’t have $417.

You don’t need $417 because this strategy won’t cost you $417.

You: How so?

Remember, a 401(k) contribution saves you taxes, as that $417 contribution would have only been about $313 had taken it in your paycheck. (Perhaps less, depending on your state). So the “cost” is far less, perhaps half, of what you wind up adding to the account?

You: Half?

Half. Your cost is $313, yet $625 is added to the account.

You: Wow.

Keep in mind that the most your employer would have matched all year long is $1,500 (that’s the 3% maximum of your $50,000 salary). While you won’t get that much money for one month’s effort, you’ll actually get 14% of your maximum possible match just by participating aggressively in December.

If you can afford more than 10% for the month, you’d claim even more of that “free money.” So, if you’ve just recently started a job and are thinking about taking care of this retirement planning concept in January, don’t delay! Take some of your 2007 matching money right away.

You: But what about me? How am I going to be able to save 10% when I haven’t been able to save anything so far? Plus, the holidays are coming. Isn’t this the most difficult time of year to save?

You could argue that. It’s also one of the easiest, since more of your expenses this time of year are discretionary (wants) vs. non-discretionary (needs). You choose to spend more this time of the year rather than being truly compelled to. Think of buying tickets for someone to see “Rent” vs. paying rent).

For one thing, look at The Top 10 Saving Strategies if you haven’t already done so. Many people tell me after they understand how much free money they are turning down, saving becomes much easier.

In addition, if you are one of those folks who is always getting a big tax refund, consider temporarily lowering your tax withholdings for the rest of the year. Do so at the same time that you raise your 401(k) contribution. This calculator can help you with your numbers.

You just might find that you can actually increase your net pay, increase your 401(k) contribution, and get the free money a match provides — all at the expense of an income tax refund you shouldn’t want anyway (a dollar today is far better than a dollar a few months from now).

There are so many opportunities at the end of the year — with or without annual enrollment. Take advantage. Choose to live Beyond Paycheck to Paycheck.

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Annual Enrollment & Reimbursement Plans

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at November 26, 2007 in Benefits. 0 Comments

I hope you had as wonderful a Thanksgiving holiday as I did. My immediate family spent much time with my extended family. As you can imagine, it’s always nice for my daughter to spend time with her grandparents, great-grandparents, cousins, aunts and uncles. (From what I gather, they feel the same way). Holidays treated as such mean enjoying much more of that “free stuff” that is far more rewarding that any Black Friday sale.

To continue our previous discussions of annual enrollment considerations, let’s revisit a previous post about reimbursement (sometimes called flexible) spending accounts. Don’t pass these accounts up, as they’re an excellent way to increase your cash-flow without changing your lifestyle. Being fiscally responsible — not cheap — is key to living Beyond Paycheck to Paycheck.

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Annual Enrollment & Disability Insurance

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at November 19, 2007 in Benefits and Insurance. 0 Comments

One of the most overlooked benefits–particularly during the annual enrollment period–is disability insurance. With all the attention paid to health insurance and life insurance, disability insurance often gets the short end of the stick.

While this often surprises people, most folks do need disability insurance. In fact, long-term disability insurance is an important benefit at any age. Don’t skip this one, even if you are young. Not convinced? Read these statistics, from MSN’s Money Central:

“Every year 12 percent of the adult U.S. population suffers a long-term disability. One out of every seven workers will suffer a five-year or longer period of disability before age 65, and if you’re 35 now, your chances of experiencing a three-month or longer disability before you reach age 65 are 50 percent. If you’re 45, the figure is 44 percent.”

Furthermore, when you are young, the odds of dying are far lower than the odds of your becoming disabled. Plus, if there are no survivors depending on your income, the financial burden caused by your death is minimal.

You: Don’t rub it in.

A disability has entirely different financial implications. If you are disabled, an income is required to take care of you, whether or not you have dependents. Your personal needs might actually increase. Absolutely take advantage of a long-term disability option offered through your employer. It’s quite likely far less expensive to purchase such a policy through your employer compared to buying one on your own.

Taking advantage of a group (corporate) long-term disability insurance option is a crucial cost-effective step to living Beyond Paycheck to Paycheck.

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Annual Enrollment & Health Insurance

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at November 15, 2007 in Benefits and Insurance. 0 Comments

It’s that time of the year again.

You: The ides of November?

No. Annual enrollment.

You: Almost as exciting.

As employees with company-provided benefits may recall, you get just one shot a year to make changes to your benefit choices (barring a major life event.) Over the next few postings, I’ll address a few annual enrollment considerations. Most important, make sure you actually spend a few minutes on this.

You: Why? Can’t I just leave everything the way it is now?

Actually, you might be able to. And, if so, it will only take a couple of minutes to be certain that inaction is truly the right financial strategy.

But, it’s also quite possible that doing nothing would be a huge mistake.

You: Huge?

Yes, according to today’s Fiscally Fit Column at the WSJ online. In fact, when it comes to health insurance “companies are asking workers to re-enroll if they want to remain in their current plans.”

You: So doing nothing could mean I would suddenly have no health insurance?

Yes, that’s now possible. And if this should happen to you, it’s likely you’d be SOL (that’s “Sorry, out of luck” for those wondering how the blog keeps it’s ‘G’ rating) for up to a year.

So take a few minutes to read the materials from HR to ensure you retain your current plan if that is your intention.

You: Should that be my intention?

That depends. Unfortunately, health insurance is simultaneously getting both more complicated and more costly. Plus, each company presents different options to its employees. Furthermore, if you’re in a committed relationship, your spouse or partner may have benefit options that the two of you will also need to consider. Ultimately, there’s no “one size fits all” option. But one way or another, you’ll want health insurance.

You: A rule of thumb?

Sure. Again, from today’s WSJ Online article, here’s a great summary of what you should be evaluating when you make decisions concerning your health insurance coverage:

“Picking the right insurance plan depends on your health and your stage in life. If you have children or a chronic medical condition, lean toward flexible plans with low deductibles. If you’re young, childless and generally healthy, you may be better off picking a plan that offers a lower premium in exchange for a high deductible, and then paying for out-of-pocket costs with a health savings account.”

But remember, you need to make the decision. Don’t have the decision made for you. You might not like the result.

You: A year is a long time to be unhappy.

Indeed. And it will feel even longer if you’re uninsured.

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Are you ready for some football?

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at November 14, 2007 in General Financial Planning. 0 Comments

I know it’s only Wednesday, but I recently discovered an online football game you can play–and test your money knowledge in the process. So for those of you who can barely make it until next Sunday or who simply want to assess the level of their financial education, play Financial Football.

Pssst: Turn down the volume if you’re at work!

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How Kids Save You Money

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at November 12, 2007 in Balance, Cash Flow and Saving Strategies. 0 Comments

Numerous articles discuss how expensive it is to raise children. Yet I have not seen any articles about the numerous ways children help you to save your money. In my short-time as a parent, here are some that I’ve discovered:

Your two-year old gets sick, you cancel your evening plans. Savings: babysitter, dinner. The longer the sickness, the bigger the savings!

You’d like to go out, but your spouse already has plans. Someone has to stay home. That someone is you. Cost of an evening reading newspaper or watching TV: $0

Kids love to play games, from roley-poley to catch. Now you do too. Total cost: $0

Playing on the swings.

Playing in the leaves.

Doing something with your child that involves exercise. Your cost $0. Your short-term benefit: you’re off the couch. Long-term benefits (to your health): potentially tremendous (not to mention related health-care cost savings)

Teaching your child the alphabet, nursery rhymes, counting to 10, how to say Matsuzaka, etc. Cost: $0.

There are plenty of expenses related to children of course , including the big one: saving for college education. But, like everything else, there’s plenty more balance than first meets the eyes. If you want to live Beyond Paycheck to Paycheck, it’s critical that you find yours.

Comment below on any other ways your children have helped save you money.

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Top 10 Excuses For Not Saving

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at November 9, 2007 in Cash Flow and Saving Strategies. 0 Comments

With the current writer’s strike, there must be a few others out there hungry for a new Top 10 list. So, from the home office in Portsmouth, New Hampshire, here are the:

Top 10 Excuses For Not Saving

(followed by the reasons these excuses are lame)

I’ll save more later (when I make much more money).
But I really do need this.
Life is too short.
What’s another $X?
But I don’t want to be cheap!
My friends don’t save.
Mom and Dad help with all that.
I wouldn’t have any idea what to do with any money I saved.
I have so much debt!
My husband/wife/partner/accountant/financial planner/mailman/crazy roommate/barista/dog is in charge of my household finances.

And now the matching top 10 reason those excuses are lame:

Did you remember saying that two promotions ago?
When was the last time you used it? Okay, how about where you put it? Do you even own it anymore? Do you remember what it was?
Then your retirement may be too long.
Depends on how long it takes to pay it back. Could be many times $X.
Me neither. Instead, be fiscally responsible.
Do you really need me to respond to this? Didn’t you have a parent say to you 1,000 times growing up “If all your friends jumped off the bridge, would you?”
Good for you. Count your blessings. When you’re done, hit ‘em up for something else, like a financial education.
That’s what we call a good problem. When it comes to investing, remember: how you invest matters far less than how much you save.
Then you already know that you need to pay it off. The only way to do so? Spending less than you make. Doesn’t that kind of sound like saving?
You can outsource love/tax prep/technical expertise/postal delivery/loud music/a mean espresso/love. But you can never delegate financial responsibility.

Did I cover them? What other excuses do you hear (good or bad) as reasons why people fail to live Beyond Paycheck to Paycheck? What others have you used?

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Money doesn’t fall from trees, but leaves do

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at November 7, 2007 in Balance and Saving Strategies. 0 Comments

Last Sunday, we had stunningly beautiful weather in Portsmouth, New Hampshire. To take advantage, especially as we head into the long New England winter, my wife, daughter, and I took a long walk to a playground on the other side of town.

For several yeas before our daughter was born, my wife and I took numerous walks together. I suppose it was just one of those things some couples enjoy while others consciously avoid. To each their own, right?

Now that our daughter is in the picture, our walks are even more sacred. With the accompanying time pressure, it has become harder to do them and, when they do occur, there’s three of us now–never just two. But as a proud father, I’d never trade my new life for the one I had before.

So there we were walking across town when we ran into friends who were also out for a morning stroll–and, also, with their children. So we formed a stroller parade and walked together before we each went our ways. (We had already promised our two-year old a visit to the playground and while adults experience plenty of spontaneity with a young child, it’s the child’s whims–not your own–which are followed. A mid-course change in plans, already en route to the playground was, to put in mildly, not advisable.)

Just as well. We completed our walk to the playground. Up and down on the see-saw we went. I was on one side, my daughter on the other, with my wife “spotting” her. A true blast. But the morning took on an entirely new meaning when we discovered an enormous pile of leaves up the park hill, above the playground.

Anyone who grew up in an area where leaves fall each year has special memories of laying down and jumping in the piles. Growing up in New York State, I was fortunate–every year I had this experience. But my wife is from New Mexico, so if she had tried jumping in a pile of cactus pins, well, let’s just say she still might not be comfortable.

Alas, in New Hampshire there are few cacti. So the three of us played vigorously, tackling one another and throwing leaves all around. Suddenly, it was easy to remember what this felt like as a child (although I must confess I hadn’t thought about any autumn-related memories in quite a while.)

But it was a totally different experience as a parent. Truly special, my wife and I agreed as we walked home. And my daughter has talked about “pouncing in the yeaves” every day since.

Was it a great morning? Sure, but it was much more. If nothing else good happens until December, I’ve already had a great month. Last Sunday’s experience at the park is something that will be with me forever: my daughter’s first time playing in the leaves. We made a memory together.

# # #

You may recall number 4 of the Top 10 Saving Strategies: Enjoy Free Stuff. It’s a critical component to living Beyond Paycheck to Paycheck.

Any guesses how much money I spent this past Sunday? Can you find a day like that later this month?

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The well-paid poor

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at November 6, 2007 in Cash Flow. 4 Comments

Many people, particularly young folks, think their paycheck to paycheck worries will go away once they make more money.

You: Dude, when I make what my boss makes, I promise you I won’t be living paycheck to paycheck.

I hope you’re right. But if that’s your only strategy for taking financial control, be careful.

You: Why?

Because there’s a good chance your boss is thinking the same thing.

You: What?

Seriously, your boss might be thinking the same thing. In other words, that he won’t have to live paycheck to paycheck any longer once he makes as much as his boss.

You: Hard to believe. My boss makes over $100,000!

Look at it this way. Depending on the study, between one-half and two-thirds of Americans live paycheck-to-paycheck.

You: Yeah, but–again–most Americans are not making what my boss makes and what I could be making in a few years.

Actually, 19% (that’s nearly one in five!) of those making $100,000+ lives paycheck to paycheck.

You: For real?

Unfortunately. And we should both feel confident when these 6-figure income people were making far less, they never thought they would still be living paycheck to paycheck on the substantially higher incomes they subsequently achieved.

You: How the heck does that happen? Is this because they’re floozy?

Not exclusively. I’m sure some are. I just read that despite Britney Spears’ monthly income of $737,000, she somehow has no investments. None. Nada. No savings. Nothing for the future. Each month: $737K comes in and $737K goes out.

You: Okay, but that is Britney Spears you’re talking about, not Alan Greenspan.

Excellent juxtaposition. Might be a web comparison first (Greenspan and Spears in the same sentence). Fair enough. Still, I once had a client who lived paycheck to paycheck on over $400K a year.

You: Rookie athlete?

Not quite. A 50-something tax partner.

You: An accountant?

Yup.

You: Wow. So what causes an accountant to live paycheck to paycheck on $400K?

That’s not a simple question, but it’s partly because people raise their expectations as they make more money. Their peer groups change. They need more stuff, so they spend more. Their tax rates go up. They have bigger houses so their mortgages and property taxes increase. And so on.

You: So how can I avoid that path (provided I can get the raises over time I strive for)?

Now that is an easy question. Just spend less than you make. Said another way, if you spend more than you make, you’ll always be in trouble.

You: No matter how much I make.

Right. At the youngest possible age, it’s important to realize that the cure for living paycheck to paycheck is not a higher income. Instead, it’s about becoming fiscally responsible. Take ownership of your financial responsibility while you’re young.

For example, if you can live on 95% of your current income (rather than the full 100%) you’ll be saving 5% of your income and you’ll see your net worth grow. Then, if you get a 4% raise, keep 3% for yourself, and send the other 1% to your future self (through saving).

When you live this way from the outset, it only gets easier over time. Soon you’ll find you’re living way Beyond Paycheck to Paycheck. On way less than $737,000 per month.

You: Take that, Britney.