Beyond Paycheck to Paycheck

at April 29, 2008 in Carnivals and Debt management. 1 Comment

This week’s Carnival of Personal Finance, hosted by Lazy Man and Money featured my recent post about 401(k) loans. In addition, here’s the number one article of the week, at least according to a statistically insignificant panel of one (That would be me.):

Take a look at Our Car Buying Experience - Part Three: 5 Lessons Learned to Reduce Stress and Cost by Chief Family Officer. It’s a great summary of key points to consider when buying a car. Now look, I know following her tips might take some time. Furthermore, you may find some of her suggestions annoying to actually do. Is it easier to just take it from the dealer, know that you’ve been had and then move on?

Yes.

Perhaps you negotiate a little and say to yourself, “Hey, I knocked off a grand, that isn’t so bad.”

It’s a start.

But if you want to be able to minor on the minor, you’ve got to major on the major. A car is a major expense for almost anyone, which means it’s worth your investment of time to get the best possible deal out there. That even includes financing. Once you sign your name, you’ll paying off that chunk of steel for quite a while. Make writing the amount of each check put a smile on your face, not a grimace.

"financial education"

Does graduate school get you a pension?

Published by

at April 28, 2008 in Retirement. 9 Comments

I just read the results of a Wall Street Journal/Harris Interactive Personal Finance Poll. The emphasis of the press release (and related media coverage) is their finding that about one-quarter of those saving for retirement had prematurely withdrawn their funds. I’m not sure this is surprising. Personally, it seems like I talk to people everyday who have taken early retirement plan distributions. To me, this finding is certainly disappointing, but it is not surprising.

Call me crazy, but I like finding things that are truly surprising or at least good blog topics.

For example, take a look at this paragraph:

Despite the decline in offering traditional pensions, over one-third of respondents with some graduate school experience expect to rely on a pension. This could be due to the type of employment that requires a graduate degree.

I’m a bit more skeptical. I’ve got a graduate degree. I’ve got plenty of friends with graduate degrees. I also know people who never contemplated college, let alone going to graduate school. Want to know what we all have in common?

We’re not getting defined benefit pensions. Now, if the statistic said that a couple of percent more graduate students believed they were going to get pensions, I wouldn’t make a big deal of this. But a third of all graduate students to rely on a pension? That’s not even close to reality. Paris Hilton has a better grasp of what’s going on in the real world.

My theory is that graduate students just haven’t looked at this “retirement planning stuff” too closely. They’re hoping that their education will make them more secure financially. The good news is that it can. The bad news is that it only does if they, like everyone else, understand the new world they live in, and take matters into their own hands.

# # #

How about we vote? Just comment below with the following:

Did you attend graduate school?

Are you getting a defined benefit pension?

My theory is those who understand that a defined benefit pension isn’t the same as a 401(k)) already have a greater understanding and therefore long-term likelihood of reaching a successful financial future.

"financial education"

Bankruptcy at 24? Friday Q & A

Published by

at April 25, 2008 in Debt management and Q & A. 0 Comments

It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question.

I am considering declaring bankruptcy but I’m unsure of all the ramifications. I’m only 24 so I want to make sure this is the only option I have before I move forward. I am in debt with credit cards approximately $23,000. I was on a debt management program for a while, with a 0% interest rate, and was able to take care of about $6,000 of it. The monthly payment was so high and I began to fall behind on other bills — almost had my car repossessed. That’s when I decided bankruptcy might be my only option. Since I stopped paying the debt management company, I’ve been contacted by the collections agency for Amex to settle at $10,000, instead of $15,000, with a low monthly payment of $200. I am considering taking that offer but am nervous I will wind up in this same position down the road - not being able to make all my monthly payments. Should I call a spade a spade and declare bankruptcy?

–Kacy, Los Angeles, CA

STRAIGHTFORWARD ANSWER: Maybe, but probably not.

More detailed explanation

Let me make one thing clear right at the outset: Declaring bankruptcy is what you do if you have no other choice. Kacy, some introspection on your part is likley warranted here. What caused you to get into this predicament?

You: I spent more than I made.

Of course, but why? Was it because you had poor financial habits? Did you become disabled or lose your job and have fixed expenses you were unable to eliminate rapidly enough to avoid adding major debt? Were there high one-time uninsured medical expenses?

You: Why does that matter? I’ve got $23,000 in credit card bills alone. Twenty-three grand is twenty-three grand.

Only by understanding the true cause of your debt can you chart your best course of action going forward. If you have the confidence to pay back your debts because of new steady income and an appreciation (actually dedication) to living below your means, you should negotiate like heck to get as much of your debt reduced as possible, the lowest possible interest rate, and then pay it off aggressively.

If, on the other hand, you have been out of work for a lengthy period of time, see no prospects for employment, and have enormous expenses you can’t reduce (such as ongoing medical expenses, childcare, etc.) bankruptcy may be your only option. But only go there after much deliberation.
Bankruptcy has significant negative ramifications inlcuding:

Noted on your credit report for 7-10years (and yes, many companies will request your credit report before hiring you).

Not all debts go away (student debts, taxes, alimony and child-support, for instance are hardly ever wiped clean from what you owe).

You may have to sell everything you own - including your home and car.
Bankruptcy is not the final chapter in your financial saga. It’s just the next one. Many people are not better off after declaring bankruptcy (and remember, things are pretty bad if they declared bankruptcy so it’s a pretty low threshold). This is primarily due to people’s failure to eliminate the causes of what caused the bankruptcy in the first place.

Here is some related reading about bankruptcy. In addition, check with your state about free credit counseling.

Bankruptcy is an option, but typically not an ideal choice. If you can find a way to pay down your debt, do so - negotiate aggressively on the amount owed, the rate charged - then do whatever you can to get in front of this train. Remove the causes (whether it be temptation or something you already own or lease that is bleeding you).

Raise your income, even if that means a second job. You’re just 24. If you’re in good health with marketable skills, you can certainly turn this ship around - quickly too, if motivated! A lofty financial future may well be within reach. Go get it.

"financial education"

401(k) Loan: Friend or Foe?

Published by

at April 23, 2008 in Debt management and Retirement. 4 Comments

A 401(k) loan is different from a distribution because a loan means you intend to pay the money back to your account. In essence, you borrow from yourself. Here’s how it works, subject to additional restrictions and criteria possibly added by your employer:

You request a loan from your plan.

Typically, the loan amount cannot exceed the lesser of either 50 percent of your vested balance or $50,000.

You must pay back the loan in 5 years or less (unless you are using the loan to buy a house, in which case the term of the loan can be much longer).

You must pay interest.

You: Doesn’t seem so bad—I’m paying the interest to myself, right?
So smooth. A 401(k) loan isn’t terrible, but it isn’t desirable either. Most often, the loan is preferable to an outright pre-retirement distribution. You don’t pay taxes and penalties and, yes, you pay interest to yourself. But there are negative repercussions to consider before borrowing from your 401(k) plan:

During the time your money is on loan, it doesn’t grow. The amount borrowed is temporarily gone, and since it doesn’t exist it can’t grow.

If you do not pay back your loan, it becomes a distribution subject to taxes and penalties.

Your loan repayments are made with after-tax money. In other words, you use money from your net pay to repay the loan. To make a loan payment of $100 if you are in the 25 percent tax bracket, you must earn $133 of gross income. You pay $33 in income tax and the rest can be applied to the loan. Then, when you receive money from your 401(k) plan during retirement, you pay tax on that $100 again! That’s because 401(k) contributions are made with pre-tax dollars; loan repayments are made with post-tax dollars.

If you terminate employment with the company you work for, the entire amount of the loan is due, usually within 60 days of your last day of work. This is typically true regardless of whether you quit, are fired, or are the victim of a major layoff. Any amount you are unable to pay becomes a distribution, likely subject to taxes and penalties.

Given the length of time people stay at their jobs, don’t expect much time to pay back a loan. A 401(k) loan is a bit like playing with fire. Consider alternative sources of money and the necessity of the expense before tapping your 401(k) plan. A 401(k) plan is a retirement plan and you should use it that way.

# # #

Have you ever taken a 401(k) loan? How did it work out for you?

"financial education"

Great Start to the Week: First the Tribune, then a Carnival!

Published by

at April 22, 2008 in Carnivals and Media. 0 Comments

I was thrilled to chat with the preeminent financial columnist Gail MarksJarvis of the Chicago Tribune last week. Over the weekend, the Trib (I can say that, I used to live in Chicago), published her article about a 48 year old man who had recently lost his job and was contemplating bankruptcy as a result.

You: Good idea?

We thought not. Read Bankruptcy a last resort to deal with job loss, debt to find out why.

In addition, this week’s carnival of personal finance is hosted by The Happy Rock. You can find nearly 100 articles at the site, many of which are quite insightful including (including a post of mine from last week: Retirement for Gen X: Black Hole or Perfect Storm? )

As usual, if you only have time for just other article, here’s my weekly recommendation:

Tales from the road less traveled presents I’m Only On Page 7! - Momma shares how she has problems with the victim mentality of Suze Orman’s The 9 Steps to Financial Freedom.

I love the title of the blog and her passion comes through. Fun read and good for some solid introspection.

Hope to see you in Chicago!

"financial education"

Free Retirement Planning Seminar Tuesday and Wednesday

Published by

at April 21, 2008 in Events. 0 Comments

I’ll be presenting two free retirement planning seminars this week.

You: For real?

Yup.

You: What’s the hitch?

No hitch. It’s free. You even get a free copy of my book if you attend.

You: Now you’re just talking silly-talk.

It’s the truth.

You: Okay, then, fine. When?

Tuesday at 6PM or Wednesday at 12:15PM. Join me after work or use your lunch break.

You: Where?

At the ING DIRECT cafe in Chicago.

You: Aha! Gotcha!

What do you mean?

You: I found it - there’s the hitch.

Where’s the hitch?

You: It’s in Chicago.

The hitch is in Chicago?

You: No. You are.

No I’m not. I’m in New Hampshire.

You: But you’ll be in Chicago.

True, giving two retirement planning seminars. But I told you that.

You: Exactly.

What?

You: I live in LA. The seminars are in Chicago.

I see. Well, for your friends who live in Chicago, there really is no hitch. Check out the ING DIRECT seminar schedule and register to reserve your seat. If you live in LA, NYC, Philadelphia, or Wilmington, Delaware, you’ll just have to wait a little longer. I’ll be visiting you in May.

In the meantime, tell your Chicagoland friends. I look forward to seeing you (or meeting you for the first time).

"financial education"

Roth vs. 401(k): Friday Q & A

Published by

at April 18, 2008 in Q & A and Retirement. 0 Comments

It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question.

If I can’t do both a maximum 401(k) contribution and a maximum Roth IRA contribution, what should I do?
—Beth M., Ramsey, NJ

STRAIGHTFORWARD ANSWER: Contribute to your 401(k) at least up to the point your employer matches. With additional funds available to save for retirement, contribute to the Roth. If there’s still money you can save after contributing $5,000 to the Roth, then return to 401(k) contributions.

More detailed explanation:

I love this question for two reasons.

First, asking this question shows your desire to understand of the best ways to save. Unfortunately for most people, far more time is spent debating whether to save in the first place. But by asking the question you have, it’s quite obvious that you “get it.”

The second reason I love this question is that the answer is fairly simple. What can I say? I like easy questions.

If your employer matches part of your 401(k) contribution, then your 401(k) is your best form of saving. Say, for example, your employer matches 50% of the first 6% you put into your retirement plan. If so, saving in your 401(k) instantaneously provides you with a guaranteed 50% return on your money. You put in a dollar and they add fifty cents. There simply is no better alternative out there. Period.

Even smooth-talking commission-obsessed financial salespeople have tough times winning arguments over that point.

The bottom line is that you should take advantage of an employer match. Rich people never turn down free money and neither should you.

Of course, it’s possible that Beth is already contributing up to the amount her employer matches. If so—and she qualifies for and can afford to save more for retirement—she should seriously consider contributing to a Roth IRA. A Roth IRA provides for tax-free growth of your retirement investments. While you don’t get the tax deduction you receive from a 401(k) contribution, the tax-free growth (as opposed to a 401(k)’s tax-deferred growth) makes the Roth a very attractive option. In fact, the younger you are, the more compelling a Roth IRA will be for you.

(If you are 50 or younger, you can contribute $5,000 to a Roth IRA this year (subject to income limitations based on filing status). If you’re over 50, you can contribute up to $6,000.)

If you still have money that you can contribute towards your retirement savings goals, increase the amount you save in your 401(k) plan above the match. Then give yourself a pat on the back. You’re doing really well.

"financial education"

Retirement for Gen X: Black Hole or Perfect Storm?

Published by

at April 17, 2008 in Retirement. 3 Comments

A recent study by Scottrade and BetterInvesting found that 43% of Gen Xers do not expect to ever be able to retire. In addition, 26% were unsure that they would be able to retire one day. Here’s what Chris X. Moloney, Scottrade’s chief marketing officer, had to say about the study:

“Gen X is in the middle of a ‘retirement perfect storm’ — very high expectations, low retirement savings and massive concern about the future of Social Security.”

Although everyone died on the boat (and I don’t expect such carnage here), I understand and agree with the implications of the reference to a perfect storm. But is this a generational thing? Let’s go one by one:

Higher Expectations

Do Gen Xers really have higher retirement expectations? Not the ones I talk to. Heck, the study itself indicates that two-thirds of Gen Xers are unsure they’ll ever be able to retire. Seems like pretty low expectations to me.

Low Retirement Savings

Once again, is this something that is specific to Gen X? I think not. In fact, I bet that in their 20s and 30s, Gen X has saved more of their own money for retirement than any previous generation. Of course, they have received far less from their employer (in the form of accruing pension benefits) than the generations before them did. But whose fault is that exactly? No Gen Xer I’ve ever met has opted out of a defined benefit pension to go buy a latte or been part of the executive committee voting to end the benefit for others.

Massive Concern About the Future of Social Security

Here’s my passionate agreement. You bet there’s massive concern about the future of Social Security! You could call it paranoia, but if there really were ants in my daughter’s bed, is it a bad dream or just really bad uncontrollable circumstances? Gen X, like the Boomers, continues to make huge involuntary payments every paycheck to today’s retirees. Yet few believe they’ll see much (if any) return from that money. Personally, I tell people to treat any Social Security benefits they may see during retirement as gravy. This stinks (I’d use a different word if this were a verbal conversation) because the enormous payroll tax (7.65% paid by you and 7.65% paid by your employer) makes it so much harder for each of us to save.

Maloney had another comment: “[Gen Xrs] are earning money and paying into Social Security and yet — they fear they may never see the payback. They feel they deserve it, but it looks like a financial black hole to them right now.”

I like the black hole analogy. But I’m glad we know about it now, when we can still do something about it.

What do you think? Black hole? Perfect storm? Are you getting ready or hoping it goes away?

"financial education"

What’s different about today’s twenty-somethings?

Published by

at April 15, 2008 in Carnivals. 0 Comments

It’s a bird, it’s a plane, it’s–

You: Cheesy.

You try coming up with one hundred different ways to introduce the carnival of personal finance! Not easy.

You: You’re the blogger.

Indeed. This week’s personal finance carnival which featured Five (Nonsensical) Reasons to Delay Saving for Retirement is hosted by Gather Little by Little. If you like North Carolina or, frankly, any nature photography, you’ll get a little treat above and beyond the week’s best personal finance articles.

My one recommended read of the week: (remember, I’m realistic, no laundry lists of stuff to read)

The Financial Generation Gap by Working for Rachel.

Whether or not you agree with her, Rachel has created a solid list of the differences current twenty-somethings vs. those of yesteryear. Sure, it’s somewhat oversimplified, but she’s not presenting it as a Gallup poll. Directionally, there’s a lot more to this than most people would care to admit.

"financial education"

Observations from reading Parade Magazine

Published by

at April 14, 2008 in Ranting. 0 Comments

With a couple of little ones, Sunday night has become my personal “Beyond the Headlines” night. That’s when I try to get through the last few days worth of newspapers in more detail than I can manage to during the week.

So last night, I’m going through the Sunday paper and see Parade magazine (it comes with many a Sunday newspaper). On the front page is their “What People Earn” annual report.

These reports are interesting for a few reasons:

The data itself is fascinating. See what real people earn by doing jobs you considered (or perhaps never would have considered.)

Comparisons are inevitable. “I can’t believe a bounty hunter gets paid $74K! That’s more than double what my friend the teacher earns.”

It’s what we think is important. I have no proof, but I bet that this report is one of the most popular Parade issues of the year (or they wouldn’t keep doing it.) As a society, we really want to know how we’re doing — compared to others.

I get a big kick out of who they choose to include in their list of what people earn. Although the list’s accompanying article and polls focus on “real people,” the list itself does not. Instead, it contains many absurdly non-representative salaries. I just calculated two key data points in their list:

The median salary of those profiled in the “what people earn” list: $55,000

Seems reasonable and likely representative of newspaper readership.

The average salary of those profiled in the “what people earn” list: $34,600,000

Representative of the general population? I think not. The list is stacked, and not just because they included one guy who made $3.5 billion last year. In fact, about one out of every six people on the list earned more than $1,000,000 last year. Consider yourself and five of your closest friends. Any of you make a million last year? How about all of you combined?

Why do I point this out?

Because too many people look at the list and begin to feel inadequate. Look, Parade doesn’t come out and say their list is representative of the country. But, of course, they don’t say it’s not either. Everything around their list (articles, surveys) focuses on the real issues facing real people. But in the one place where people are prone to compare themselves to others, the list is so distorted from reality it is truly counterproductive. This leads to folks chasing a fantasy that is utterly unobtainable.

With solid financial habits, many of us can become millionaires one day. But making a million in a single year? Far less likely.

Your best chance to get a million? Save a bunch of money for a long period time, yet look at the results to this Parade poll question:

Do you save money each pay period, or are you living paycheck to paycheck?

Only 14% said they save a significant amount.

About 49% said they either have nothing left for saving or that they are spending more than they make.

Without changing their habits, these people have no chance to obtain wealth. That’s the key takeaway from the report, not that they can’t because they’re not in Hollywood, the NBA, or Wall Street.

Do you think lists like these are helpful? Would you rather see a truly representative display of what folks make? What about the public profiling of salaries in general?