7. Participate in your company's 401k or 403b at least to get the company's match.
A 401k and 403b are virtually the same thing. A 401k is the retirement plan you get at a for profit company. A 403b is the retirement plan you get at a non-profit or not for profit company. 401k/403b are the actual numbers in the IRS tax code allowing retirement plans.
Why should you participate in your 401k/403b?
-Matching funds. Most companies elect to match a certain amount of the money you put in. This varies from company to company. Some change the amount based on how the year went. Some have a set rate. A typical scenario is you putting in 3% and your company matching that 3%. At least put in the minimum that is required to get a company match. Check with your HR department for the low down.
-It is another tax shelter. You can put up to $17,000 of your money in 2012. This limit does not count any funds your company may match.
Make sure you know what each fund in your 401k/403b charges for annual fees. Your HR department should have this info. Look for index funds charging less than 1% and diversify from there. My employer's plan only offers one index fund. It is indexed to the US stock market. If that was my only account I would be heavily weighted in US Stocks. I diversify in other accounts. This allows me to be in the cheapest fund and still be diversified. Watch for my upcoming post on asset allocation.
A "Target date" fund may be an option if this is going to be your only retirement account. They self adjust to give you the "right" mix of funds for your age and take the work out of diversification and rebalancing. I am not a big fan of them. I prefer set asset allocation myself. They also charge more than index funds. Plus there was quite a bit of discussion on how the target date funds didn't really protect the folks near retirement during the Great Recession.
The moment you leave employment with your current employer move your retirement account to your own IRA. With a typical 401k/403b you will pay 0.75% to 2% in annual fees. This is OK because of the matching funds and tax shelter. Once you don't work there anymore get your money out of there and into cheaper funds. At an online brokerage you will pay 0.05% to 1% annually depending on your fund choices. Plus a one time transaction fee per fund purchased (usually $4-$10).
Friday, December 30, 2011
Thursday, December 29, 2011
Question in response to #6 Emergency fund
I got this email from a reader today in regards to the emergency fund post. I think this deserves more discussion.
Here's what I always wonder about - when is it ok to actually use the emergency funds? Sounds like a dumb question - but really, it's complicated. Like, when my Spouse was out of work for 2 years, that money would have been gone right away. And was - because we had no choice but to use all savings to pay mortgage. (another reason we are downsizing so that won't happen again - any new mortgage we take on will have to be payable by one person only in case one of us loses a job)
Here's what I always wonder about - when is it ok to actually use the emergency funds? Sounds like a dumb question - but really, it's complicated. Like, when my Spouse was out of work for 2 years, that money would have been gone right away. And was - because we had no choice but to use all savings to pay mortgage. (another reason we are downsizing so that won't happen again - any new mortgage we take on will have to be payable by one person only in case one of us loses a job)
So - outside of job loss, what is the money ok to be used for and what is it not for? (medical bills, broken furnace, new roof, unexpected lawyer fees? Or none of the above)
For me it comes down to needs vs. wants. I would consider medical bills, broken furnace, new roof, unexpected lawyer fees to be needs. Therefore eligible for EF use. Some other examples of EF eligible needs are.
-Auto repairs and associated costs. As long as the vehicle is crucial for work. Getting your hotrod modified would not qualify.
-Speeding ticket or towing charge.
-An escrow shortage.
-Emergency home repair. Just repair not renovation. Water leaks, Gas leaks, Broken locks, Broken windows' main drain etc...
-Crucial appliance failure. Fridge, Furnace, Hot water heater, Sump pump etc... Is a clothes dryer crucial? Not for us, but maybe.
With medical bills I have a caveat. If the medical bill is so large that it would wipe out your whole emergency fund I would work out a payment plan with the medical service provider.
A job loss or potential job loss changes things quite a bit. You want to make the fund last as long as possible. When I was laid off in 2005 we started asking ourselves hard questions. "Can we live with a bucket under that leaky sink? If not can we shut off this sink for now?" We dumped our Dish and never went back. We found it wasn't necessary, even when fully employed.
If you get into a situation where you have to chose between paying medical bills or paying your mortgage, pay your mortgage. They can't foreclose on your body (yet) but they can kick you out of your home. Try to make a payment plan and keep in regular communication with the medical provider. Once they sell your debt to a collection agency the damage to your credit is done. Even if you tried to pay back the medical provider in full it would not come off your credit. Plus they probably won't take it and refer you to the collection agency. You have a lot of rights when it comes to collections. You can request that all future communication be in writing. They can not threaten you etc.. please check this link if you need more info on this.
The key is to not let it go to collections but if it does, do not jeopardize your families future to satisfy a collection. Medical debt on your credit is not the end of the world. A foreclosure on your credit would be pretty bad. If it is a huge debt they could sue you but they will most likely sell it to the next agency. I have been the victim of agencies looking up my name in the phone book thinking I was another Brandon Smith and trying to get me to pay their debt. DO NOT give them ANY information about yourself when they call. They really wanted my SS#. Which if I gave them, would be written down next to the fraudulent debt and make it much harder to get out of. I would respond "How do I know your not an Identity thief?" I would always make them prove it, which they couldn't. So the calls would stop. For a while. Until the next agency bought the fraudulent debt. Then the calls would resume and I would start the process over. After 3 or 4 rounds (about 2 years) it finally stopped, I hope.
The lesson? I am not scared of collection agencies. If you know your rights and read them back to the caller they back down fast. I could have sued them many times for violating the law but I am not a big believer in litigation unless I am seriously impacted.
It's a bit of a moving target but to simplify my answer.
Fully employed you can use your EF for needs you can not immediately meet. Use it to stay out of debt.
Fear or threat of job loss. use your EF sparingly.
Under or unemployed use your EF as sparingly as possible. Use it to stay in your home.
It's a bit of a moving target but to simplify my answer.
Fully employed you can use your EF for needs you can not immediately meet. Use it to stay out of debt.
Fear or threat of job loss. use your EF sparingly.
Under or unemployed use your EF as sparingly as possible. Use it to stay in your home.
Tuesday, December 27, 2011
6. Emergency fund
6. Save 6 months worth of living expenses in a money market fund or CD ladder. The money must be liquid (easily withdrawn)
Now that you are out of debt (bad debt anyways) start diverting the money you were using to pay off debt to build an emergency fund. You should sock away 6 months of living expenses in a money market or cash equivalent account. You can use your budget to tell you how much money that is. As far as the type of account is concerned you want be able to to access this money at a moments notice. Such as an online savings, money market, personal Savings, or CD Ladder.
To make a ladder divide your emergency fund by 5 and put the first 5th in a 5 year CD. The second 5th in a 4 year CD. The third 5th in a 3 year and so on. When the 1 year CD comes due put that money in a new 5 year CD. When the 2 year CD comes due put that money in a new 5 year CD and so on. After 5 years of this you will have five 5 year CDs. The CD ladder may make you more interest but it can be difficult to take it all out without penalty. In today's market, interest rates are so low that the difference between an online savings and a 5 year CD is negligible. The ladder can be adapted to bonds as well. This is how many people get their nest-egg to make them a regular income. When rates go up a few points I will reconsider using the ladder approach.
Some financial advisers suggest building up your emergency fund before you pay off your bad debt. I found this hard to do. I would build a little savings and BOOM car repair or BOOM medical bill. I had a much easier time focusing on my debt first. Plus as you pay off individual cards the "extra" money left over every month grows. This allows you to pay off the rest of them faster. If you have to pay all of the minimums while building up you emergency fund it can be a long slog.
Now that you are out of debt (bad debt anyways) start diverting the money you were using to pay off debt to build an emergency fund. You should sock away 6 months of living expenses in a money market or cash equivalent account. You can use your budget to tell you how much money that is. As far as the type of account is concerned you want be able to to access this money at a moments notice. Such as an online savings, money market, personal Savings, or CD Ladder.
To make a ladder divide your emergency fund by 5 and put the first 5th in a 5 year CD. The second 5th in a 4 year CD. The third 5th in a 3 year and so on. When the 1 year CD comes due put that money in a new 5 year CD. When the 2 year CD comes due put that money in a new 5 year CD and so on. After 5 years of this you will have five 5 year CDs. The CD ladder may make you more interest but it can be difficult to take it all out without penalty. In today's market, interest rates are so low that the difference between an online savings and a 5 year CD is negligible. The ladder can be adapted to bonds as well. This is how many people get their nest-egg to make them a regular income. When rates go up a few points I will reconsider using the ladder approach.
Some financial advisers suggest building up your emergency fund before you pay off your bad debt. I found this hard to do. I would build a little savings and BOOM car repair or BOOM medical bill. I had a much easier time focusing on my debt first. Plus as you pay off individual cards the "extra" money left over every month grows. This allows you to pay off the rest of them faster. If you have to pay all of the minimums while building up you emergency fund it can be a long slog.
Saturday, December 24, 2011
5. Pay off debt
5. Pay off any debt that is not mortgage or student related. The key here is to pay off the higher interest rate loans first. A mortgage and student loans are considered "good debt".
Apply the same principle of paying off highest interest rates first to your HELOC, Auto loans, or any other lines of credit. I am making an assumption that any lines of credit you may be using have lower interest rates than any of your credit cards. If this is not true you should pay off whichever has the higher rate first.
Let's move on to "Good Debt". Good debt is any loan used to purchase an asset that you could not pay for up front. i.e. A first mortgage or student loan. To get rid of bad debt we limit savings. That way we pay it off quicker. Good debt should be carried while striving towards many other financial goals. If you are making all of your financial goals, Emergency fund, Roth IRA, 401k, 529. Then you can start accelerating your payment of good debt. If you are in that position I suggest paying off any student loans first. Student loans tend to be less flexible if you need to refinance. Also student loan debt can not be discharged in bankruptcy.
Apply the same principle of paying off highest interest rates first to your HELOC, Auto loans, or any other lines of credit. I am making an assumption that any lines of credit you may be using have lower interest rates than any of your credit cards. If this is not true you should pay off whichever has the higher rate first.
Let's move on to "Good Debt". Good debt is any loan used to purchase an asset that you could not pay for up front. i.e. A first mortgage or student loan. To get rid of bad debt we limit savings. That way we pay it off quicker. Good debt should be carried while striving towards many other financial goals. If you are making all of your financial goals, Emergency fund, Roth IRA, 401k, 529. Then you can start accelerating your payment of good debt. If you are in that position I suggest paying off any student loans first. Student loans tend to be less flexible if you need to refinance. Also student loan debt can not be discharged in bankruptcy.
Friday, December 23, 2011
4. Pay off your credit cards.
4. Pay off your credit cards. Why didn't I think of that?! Well you do need to get a handle on this or your financial life will rule you.
Now we get to the good stuff.
Whenever I carry a balance I notice that all of these unplanned expenses arise and require more credit to keep on top of. When I pay off my balance every month I am able to keep on top of the extra stuff. hmmm
Make a list of all of your credit cards (store cards too), their balances, and their interest rate. Sort this list by interest rate highest to lowest. The card on top of this list (highest rate) is the one we will tackle first. All extra money should go to that card first.
Extra money? HA! Only pay minimums on all other credit cards/debt. Still no extra money? Dump your cable for watching shows online. Cut out those coffees at Starbucks and make your own. Pack a lunch. Try to buy used by going to garage sales, thrift stores, and estate sales. Keep your car longer. Trade down to a more basic transport. Or dump your car altogether for busing and biking. There are always places to cut. Even if you just pull back on spending while managing your debt. It doesn't have to be forever. Once the first card is paid off put it on ice or in your safety deposit box and move on to the next card.
Eventually the number of credit cards in your wallet should be 2. I like having 2 just in case one of them doesn't work. There is nothing worse than being out of town with no working credit card. Even if you have perfect credit, someone can steal your card number and leave you in limbo.
The first card is for everyday use and you pay it off every month. This card can be a rewards card with a higher rate (Stay below 20%). Shop around and try not to pay an annual fee either. 1% cash back is typical on these types of cards. Read the terms carefully. A friend of mine got a card that promised 3% back on groceries. Since he bought all of his groceries at Target the card company only gave him 1%. Target is not exclusively a grocer blah blah blah.
The second card or back up card should have a low interest rate (under 10%) and no bells or whistles. If for some reason you must carry a balance use this card. It will help you pay it off faster. If you do have more than 2 do not cancel them yet. Your credit score may suffer if you suddenly have less credit on hand. You can start closing them once you are out of debt. You should also wait if you have a major purchase coming up. One big enough that they would check your credit.
Now we get to the good stuff.
Whenever I carry a balance I notice that all of these unplanned expenses arise and require more credit to keep on top of. When I pay off my balance every month I am able to keep on top of the extra stuff. hmmm
Make a list of all of your credit cards (store cards too), their balances, and their interest rate. Sort this list by interest rate highest to lowest. The card on top of this list (highest rate) is the one we will tackle first. All extra money should go to that card first.
Extra money? HA! Only pay minimums on all other credit cards/debt. Still no extra money? Dump your cable for watching shows online. Cut out those coffees at Starbucks and make your own. Pack a lunch. Try to buy used by going to garage sales, thrift stores, and estate sales. Keep your car longer. Trade down to a more basic transport. Or dump your car altogether for busing and biking. There are always places to cut. Even if you just pull back on spending while managing your debt. It doesn't have to be forever. Once the first card is paid off put it on ice or in your safety deposit box and move on to the next card.
Eventually the number of credit cards in your wallet should be 2. I like having 2 just in case one of them doesn't work. There is nothing worse than being out of town with no working credit card. Even if you have perfect credit, someone can steal your card number and leave you in limbo.
The first card is for everyday use and you pay it off every month. This card can be a rewards card with a higher rate (Stay below 20%). Shop around and try not to pay an annual fee either. 1% cash back is typical on these types of cards. Read the terms carefully. A friend of mine got a card that promised 3% back on groceries. Since he bought all of his groceries at Target the card company only gave him 1%. Target is not exclusively a grocer blah blah blah.
The second card or back up card should have a low interest rate (under 10%) and no bells or whistles. If for some reason you must carry a balance use this card. It will help you pay it off faster. If you do have more than 2 do not cancel them yet. Your credit score may suffer if you suddenly have less credit on hand. You can start closing them once you are out of debt. You should also wait if you have a major purchase coming up. One big enough that they would check your credit.
Thursday, December 22, 2011
3. Make a Budget.
3. Make a Budget.
Seems obvious but it can be a pain to keep track of. A spread sheet will help you greatly. There are tons of ways to track your budget online or on your smart phone. I can not recommend one because I made my own. I prefer to keep that information offline. It's probably just paranoia. I like having a sheet with check boxes for each month so I can track which bills are paid and which are still waiting. I have a basic sheet created for this purpose. Drop me a line and I will send you an excel template. thefettler@yahoo.com
For the full budgeting experience follow these instructions.
http://financialplan.about.com/od/budgetingyourmoney/ht/createbudget.htm
To be honest I don't check my budget totals all that often. I feel that I have squeezed every penny out of my monthly bills. I make sure every bill is paid each month and my savings vehicles are on auto-pilot. I do keep track of how much I need to make to keep up. In the beginning I followed the budgeting mantra. Once I got out of debt and disciplined about saving it seemed like extra work.
Seems obvious but it can be a pain to keep track of. A spread sheet will help you greatly. There are tons of ways to track your budget online or on your smart phone. I can not recommend one because I made my own. I prefer to keep that information offline. It's probably just paranoia. I like having a sheet with check boxes for each month so I can track which bills are paid and which are still waiting. I have a basic sheet created for this purpose. Drop me a line and I will send you an excel template. thefettler@yahoo.com
For the full budgeting experience follow these instructions.
http://financialplan.about.com/od/budgetingyourmoney/ht/createbudget.htm
To be honest I don't check my budget totals all that often. I feel that I have squeezed every penny out of my monthly bills. I make sure every bill is paid each month and my savings vehicles are on auto-pilot. I do keep track of how much I need to make to keep up. In the beginning I followed the budgeting mantra. Once I got out of debt and disciplined about saving it seemed like extra work.
Wednesday, December 21, 2011
2. Subscribe to Money magazine and read it!
2. Subscribe to Money magazine and read it! You can ignore their individual stock picks (more on that later) but their tax, investment, consumer, and policy info is second to none.
I have been sampling financial periodicals over the past few years. Forbes, Kiplinger, WSJ, Businessweek etc... None of them give a good "consumer perspective". While they are fine magazines. They are skewed towards business and give far more detail than you and I need. When it comes to personal finance I like to keep it simple. Money magazine fits this bill perfectly. I have been hassled for reading Money in public. My response is "Excuse me for wanting to be able to retire!" Shuts them up every time. Well both times anyway. "
"The market is designed to transfer wealth from the active to the patient." Warren Buffet.
"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." Warren Buffet.
Read more: http://www.brainyquote.com/quotes/authors/w/warren_buffett.html#ixzz1hEQZwJRk
"If you master the consumer side of finance you will retire well. If you master the business side of finance you will make enough to really help others and have options to not work." B. Smith
These quotes/philosophy helps me tune out the noise. It reinforces the position of Buy and hold. Or Buy for the long term. I'm still working on the consumer end of finance FYI.
Even some of the information in Money is a little deep but I encourage you to read it cover to cover. You may not understand everything but through osmosis you will absorb enough knowledge. Suddenly you will remember bits and pieces when you need them. This is how I got through Benjamin Grahm's book Intelligent investor. Benjamin Grahm was Warren Buffet's mentor. Speaking of good financial books I loved John C. Bogle's Little red book of investing. Bogle founded Vanguard and invented index funds.
I have been sampling financial periodicals over the past few years. Forbes, Kiplinger, WSJ, Businessweek etc... None of them give a good "consumer perspective". While they are fine magazines. They are skewed towards business and give far more detail than you and I need. When it comes to personal finance I like to keep it simple. Money magazine fits this bill perfectly. I have been hassled for reading Money in public. My response is "Excuse me for wanting to be able to retire!" Shuts them up every time. Well both times anyway. "
"The market is designed to transfer wealth from the active to the patient." Warren Buffet.
"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." Warren Buffet.
Read more: http://www.brainyquote.com/quotes/authors/w/warren_buffett.html#ixzz1hEQZwJRk
"If you master the consumer side of finance you will retire well. If you master the business side of finance you will make enough to really help others and have options to not work." B. Smith
These quotes/philosophy helps me tune out the noise. It reinforces the position of Buy and hold. Or Buy for the long term. I'm still working on the consumer end of finance FYI.
Even some of the information in Money is a little deep but I encourage you to read it cover to cover. You may not understand everything but through osmosis you will absorb enough knowledge. Suddenly you will remember bits and pieces when you need them. This is how I got through Benjamin Grahm's book Intelligent investor. Benjamin Grahm was Warren Buffet's mentor. Speaking of good financial books I loved John C. Bogle's Little red book of investing. Bogle founded Vanguard and invented index funds.
Tuesday, December 20, 2011
1. Listen to Financial podcasts.
- Listen to NPR's Marketplace money's weekly podcast. This program gets the basics right and is easily digested. If you love it and want more there is a daily Marketplace podcast as well. All are free and very useful.
A lot of Financial programs are fairly unrealistic about what your goals should be. "You need about 1.2 million to retire in this environment" NOT! I find this to be discouraging for most people causing them to give up on that unrealistic goal. Marketplace Money is more realistic on this front.
The daily Marketplace program gives more Stock market news and what affects it. OK I will stop shilling for MPR now. I also like The New York Times Weekend business. They get a lot more in depth but are always spot on.
Which Financial podcasts do you like? Let us all know in the comments section below.
Sunday, December 18, 2011
Anyone's personal financial plan overview part II
12. Create an asset allocation based on you risk tolerance.
13. Rebalance annually.
14. Now that all of your tax shelters (Roth/IRA 401k/403b) are maxed out open an online discount brokerage account.
15. Save for your goals. Down payment on a house. college fund for your kids. Vacation of a lifetime. etc....
16. Adjust your asset allocation as you age.
17. Challenges of retiring early.
18. When to take Social security.
19. Converting your nest egg into income.
20. You should be able to safely withdraw 4% annually from your nest egg when you retire if...
21. Mandatory distributions at age 70.5
22. When to pay for professional help.
This is just a general order of things. Many factors can change the order of events and even omit some. I will go into further detail throughout the next few weeks. feel free to suggest things I may have missed on this list.
13. Rebalance annually.
14. Now that all of your tax shelters (Roth/IRA 401k/403b) are maxed out open an online discount brokerage account.
15. Save for your goals. Down payment on a house. college fund for your kids. Vacation of a lifetime. etc....
16. Adjust your asset allocation as you age.
17. Challenges of retiring early.
18. When to take Social security.
19. Converting your nest egg into income.
20. You should be able to safely withdraw 4% annually from your nest egg when you retire if...
21. Mandatory distributions at age 70.5
22. When to pay for professional help.
This is just a general order of things. Many factors can change the order of events and even omit some. I will go into further detail throughout the next few weeks. feel free to suggest things I may have missed on this list.
Saturday, December 17, 2011
Anyone's personal financial plan overview
Hello everyone! It has come to my attention that my friends and family would love some free financial common sense. This is the first installment of the overview. Over the next week I will finish the overview and start examining each step in depth. So subscribe, comment, and enjoy.
- Listen to NPR's Marketplace money's weekly podcast. This program gets the basics right and is easily digested. If you love it and want more there is a daily Marketplace podcast as well. All are free and very useful.
- Subscribe to Money magazine and read it! You can ignore their individual stock picks (more on that later) but their tax, investment, consumer, and policy info is second to none
- Make a Budget.
- Pay off your credit cards. Why didn't I think of that?! Well you do need to get a handle on this or your financial life will rule you.
- Pay off any debt that is not mortgage or student related. The key here is to pay off the higher interest rate loans first. A mortgage and student loans are considered "good debt".
- Save 6 months worth of living expenses in a money market fund or CD ladder. The money must be liquid (easily withdrawn)
- Participate in your company's 401k or 403b at least to get the company's match.
- If you are Self-employed you can open a SEP-IRA in addition to the $5000 in your Roth/IRA. This year you can save up to $49,000 in a SEP-IRA. It just has to be 1099 income.
- If your company offers a Roth option take it. Any money you put in plus gains will be tax free when you withdraw it.
- Give every raise you get to your online Roth IRA. You can have any amount diverted from your paycheck to another account that funds your Roth IRA. When you get to $5000 a year in your Roth/IRA go to next step.
- Give every raise you get to your 401k/403b until you hit the annual maximum (2011 = $16,500) This could take a while. more to come!
Subscribe to:
Posts (Atom)