So what are your plans when you retire? When are you going to retire? Where will you retire? Now, we are no where near "retirement age", whatever that means anymore, but people always ask. To be fair, they ask because my husband is active duty military. We are bumping up against a full military career so people ask the inevitable "what's next?" question.
We have had a paradigm shift when it comes to retirement. We will probably never retire from doing something. We weren't born that way. We enjoy all that we do. Are we going to slog at jobs we hate because we have to? I sure hope not. That is where "retirement planning" comes into play. Saving for our future is very important. With that said, how we manage that piece is now different. We don't have an arbitrary number in our heads of what we think we need or what someone else thinks we need. There was a time I would calculate out for us and for others what their "number" for the future should be. Not anymore. I was younger and bought into the hype of the "number." I laugh when I see that commercial...do you know that commercial I am talking about...people running around with their "number?" The one thing I think they get right is that the "number" is different for everyone. And our "number" has gotten smaller. Our needs and wants have lessened as we have gotten older.
What got me thinking about this today was an article I read today titled Retiring, But Not. The premise of the article is that the supposed retired people in America are still looking for work, particularly part-time, to fill up their day. The woman started the article by discussing her mother's situation when she applied for a part-time job at the library. It got me thinking about my own mother and discussions we have been having lately. My mother is eligible to collect social security next year. She had been looking forward to retirement for years. Now that it is just about here I have asked what she plans on doing during said retirement. She has no idea. She thinks she may keep working. She knew that social security alone wouldn't be enough, but she has been widowed recently and her circumstances have changed as have her retirement plans. Funny thing about plans, they change and need to be updated.
I think what most people want is choice. By that I mean, people don't want to feel like they have to continue if they don't want to. And that is where our "number" comes into play. That "number" gives us freedom to choose what we want to do as oppose to what we have to do. See I am pro-choice afterall! hahaha (just couldn't help myself!)
I talked about this with savings in one of my earlier posts. Having money in the bank gives us options. Having money in a retirement vehicle, whether it is a Roth or Traditional IRA, a 401k, a 403(b), TSP, or some other pension plan, gives us more dignified options when we are older.
Have you ever thought about retirement like that? Or are you just chasing a "number?"
Tuesday, February 28, 2012
Saturday, February 25, 2012
Our perceptions of wealth
I had a conversation with a friend today about financing college for children. You all probably know how I feel about that, if not there is a blog in the archive section that will enlighten you. I mentioned to said friend that I wouldn't lose sleep if my children took on a trade. A book I read years ago, and still refer to often, had interesting conclusions regarding who millionaires in this country actually are. They tend to be tradesmen and/or craftsmen. The book is The Millionaire Next Door: The Surprising Secrets of America's Wealthy by Thomas J. Stanley and William Danko.
My friend knows a plumber who he considers wealthy. Said plumber owns a large house, a couple of boats, and some other expensive toys. What I found intriguing was how my friend equated the stuff the person had acquired to the person's wealth. Most of us do that....so-and-so must have a lot of money because they own this-or-that. Actually, that may not be true. Most of us own big ticket toys with big ticket loans attached to them. The truly wealthy have gotten that way through hard work and savings. They don't tend to flaunt their wealth. I'm not referring to celebrities. I am referring to your neighbors who may be wealthy.
I remember a couple of years ago when one of my nieces and I had a text-conversation about name brand stuff. I told her that the fancy bag is a great way to tell someone you overpaid for a purse. And it just added some more cushion to the CEO's bank account. The wanna-be's, that's us, purchase name brand stuff for the appearance of what it says about us. What it says about us is that the marketing machine is doing a great job. I know I sound cynical because I am cynical.
I know I did a post on "getting what you pay for". I still stand by that post. I think there is something to be said about quality products. What I don't do though is purchase items for the sheer delight in knowing you know how expensive the item is. I purchase quality products, like sheets and bath towels, that most of you won't ever have the opportunity to see. When a woman purchases a $300 purse all the other ladies around her KNOW how much the purse costs and we make judgements on her and her purchase. Not very Christian-like, but that is how it is.
This is a huge barrier to savings, IMHO. Needing to keep up with the Jones' is detrimental to saving for your emergency fund or the future. Ask yourself what would happen if you didn't shop at a name brand department store or didn't buy that fancy purse. There are psychological challenges we all face regarding money. Where we come from and how we perceive money and wealth play into how we spend or save money.
One phenomena I have observed, very unscientifically (I am sure there is a study somewhere but I haven't looked for it) is the beautiful new cars in low-income areas. The reason, again IMHO, is probably because the low-income residents equate wealth with owning "stuff."
I use to be that person. I use to think that I needed to "stuff" to prove I have made it out of the poverty I grew up in. Not anymore. The game is on to see how much stuff we can live without. I much prefer to see how much I can save. How 'bout you? Are you still accumulating stuff or have you figured it out yet?
My friend knows a plumber who he considers wealthy. Said plumber owns a large house, a couple of boats, and some other expensive toys. What I found intriguing was how my friend equated the stuff the person had acquired to the person's wealth. Most of us do that....so-and-so must have a lot of money because they own this-or-that. Actually, that may not be true. Most of us own big ticket toys with big ticket loans attached to them. The truly wealthy have gotten that way through hard work and savings. They don't tend to flaunt their wealth. I'm not referring to celebrities. I am referring to your neighbors who may be wealthy.
I remember a couple of years ago when one of my nieces and I had a text-conversation about name brand stuff. I told her that the fancy bag is a great way to tell someone you overpaid for a purse. And it just added some more cushion to the CEO's bank account. The wanna-be's, that's us, purchase name brand stuff for the appearance of what it says about us. What it says about us is that the marketing machine is doing a great job. I know I sound cynical because I am cynical.
I know I did a post on "getting what you pay for". I still stand by that post. I think there is something to be said about quality products. What I don't do though is purchase items for the sheer delight in knowing you know how expensive the item is. I purchase quality products, like sheets and bath towels, that most of you won't ever have the opportunity to see. When a woman purchases a $300 purse all the other ladies around her KNOW how much the purse costs and we make judgements on her and her purchase. Not very Christian-like, but that is how it is.
This is a huge barrier to savings, IMHO. Needing to keep up with the Jones' is detrimental to saving for your emergency fund or the future. Ask yourself what would happen if you didn't shop at a name brand department store or didn't buy that fancy purse. There are psychological challenges we all face regarding money. Where we come from and how we perceive money and wealth play into how we spend or save money.
One phenomena I have observed, very unscientifically (I am sure there is a study somewhere but I haven't looked for it) is the beautiful new cars in low-income areas. The reason, again IMHO, is probably because the low-income residents equate wealth with owning "stuff."
I use to be that person. I use to think that I needed to "stuff" to prove I have made it out of the poverty I grew up in. Not anymore. The game is on to see how much stuff we can live without. I much prefer to see how much I can save. How 'bout you? Are you still accumulating stuff or have you figured it out yet?
Thursday, February 23, 2012
My Challenge and Barriers to Savings
Finally a minute to sit down and spend some time with you. It has been very hectic here lately. We have 2 birthdays within 3 weeks of each other, plus I have 3 Thirty-One parties to close within the next few days.
I have had a couple of interesting situations come along concerning my Lenten challenges of "no non-essential spending." One is on the subject of gift cards. Can I use a gift card that I already own? Does that count? Some people have responded on my FB page that it is already money spent. What do you think?
The other interesting question concerns birthday parties of friends' children. Is their gift essential or non-essential? My husband says essential. I know, I know, we can make a gift and it's the thought that counts, but really? Would you do that? Am I being "too" frugal? I do re-use packing paper as gift wrap and have the kids decorate it so we save on wrapping paper. I was just thinking I may let the kids make a gift for a close friend. It would be more personalized that way. Isn't that an interesting thought process? We will make a gift for a close friend and not worry about being too frugal, but worry how I will appear to a not-so-close friend....hmmmmmm.....
On to another topic...that one was getting too intense for me to continue to contemplate. Feel free to express yourself in the comments. And please feel free to share the blog.
I asked my 22 year old yesterday what one piece of financial advice, that I have given her, she is most thankful for. She didn't hesitate. She told me she is grateful that I have nagged her to no-end to start saving. (truth be told she never said she was grateful for my nagging...hehehe) She had a flat tire over the weekend and had enough money in her savings account to replace it. She is getting ready to move into her first apartment this summer and is grateful that she has money to help her get started. She then went on to tell me how she tells her friends that they need to save some money no matter what. I started laughing. This is a girl who I have nagged and nagged to "get it together" and now she is giving financial advice. I love it!!
One thing I made clear to our oldest is that being fiscally irresponsible was not an option while she lives with us. If she so chooses that route then she has to move out. I am not joking about this. There is no excuse not to know how to set up a spending plan or have a savings account when your mother is an accredited financial counselor. It has been a long, slow process, but I feel she is finally on board.
And that is half the battle with anything....are YOU ready? No matter how hard I pushed our oldest, yelled, nagged, you name it, she wasn't going to start saving money or stop being irresponsible until SHE was ready. When she finally understood the magnitude of some of the upcoming expenses she had, I think it finally sunk in. It helps to see such a nice sum in the savings account too I'm sure.
So are YOU ready? What is preventing you from saving? I have the opportunity to get published in a newsletter on this very topic and I would love your help in identifying some of the barriers to savings that are out there. And no, I will not use your name :)
Monday, February 20, 2012
Lenten Challenge
I read an article in the National Catholic Register that gave some "tips" on what to give up for the Lenten season. As I was reading I was thinking "we do that already, yep, and that, oooh that's intriguing." So I proposed the intriguing idea to The Man last night. He was intrigued also. Our Lenten sacrifice is NO NON-ESSENTIAL SPENDING. Yep, you read that correctly.
We will still buy gas for the cars, grocery shop for the kids who hate my dinners, and pay the utilities. But what will be curtailed are the little Amazon shopping trips because there is a buffer in the spending plan.
I will say I am a tad nervous about this challenge. I wasn't sure how The Man was going to respond. He jumped on board right away and my heart started racing. Can I do this? What if....?? Nope. Not allowed. After all, Jesus Christ gave up his life for us, the least I can do is put down the dang credit card, don't ya' think?
We did make an agreement though to continue with birthday party plans for the 2 little ones. Both have birthdays during the Lenten season and plans are under way already. That only seems fair.
Wish me luck. Join me. I dare you :)
We will still buy gas for the cars, grocery shop for the kids who hate my dinners, and pay the utilities. But what will be curtailed are the little Amazon shopping trips because there is a buffer in the spending plan.
I will say I am a tad nervous about this challenge. I wasn't sure how The Man was going to respond. He jumped on board right away and my heart started racing. Can I do this? What if....?? Nope. Not allowed. After all, Jesus Christ gave up his life for us, the least I can do is put down the dang credit card, don't ya' think?
We did make an agreement though to continue with birthday party plans for the 2 little ones. Both have birthdays during the Lenten season and plans are under way already. That only seems fair.
Wish me luck. Join me. I dare you :)
Saturday, February 18, 2012
"Student Loan Crisis Busts Retirement Savings" This is the headline of the following article I found on CNBC :
Parents who borrow money to pay for their children's college education are exacerbating a growing student loan crisis.
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Jupiterimages | Getty Images Many parents who co-signed loans or borrowed money on their own for their children's education now face the loss of their retirement nest eggs, homes and other assets. |
Student loan debt amassed by parents is growing faster than loans taken out by the student.
Parents' loan debt has more than doubled over the last decade — exceeding $100 billion dollars or 10 percent of all outstanding student loan debt, according to the independent research firm FinAid.org.
"Parents of every income level are increasingly borrowing for their children's college education. It doesn't matter whether the parents are low income, middle income or upper income. There's been dramatic growth in the percentages of parents who've been borrowing," says FinAid.org founder and publisher Mark Kantrowitz.
Many parents who co-signed loans or borrowed money on their own for their children's education now face the loss of their retirement nest eggs, homes and other assets. As student loan debt has topped U.S. credit card debt, "America faces the very real possibility of another major threat on par with the devastating home mortgage crisis," according to a new study by the National Association of Consumer Bankruptcy Attorneys (NACBA).
Piling up student loans in middle age is "troublesome", says NACBA vice president John Rao, an attorney with the National Consumer Law Center. "Parents who take out loans for children or co-sign loans will find those loans more difficult to pay as they stop working and their incomes decline."
But, parents' need to borrow has grown as their savings has declined and plummeting home values have made it difficult for many households to tap what was once a common financial resource — the equity in their homes.
Parents have an average of about $34,000 in student loans and that figure rises to $50,000, including interest, over a standard 10-year loan repayment period. Interest rates on the most common parental loan — the federal Parent "PLUS" loan — is fixed at almost 8 percent. So the return on parents' investments needs to average at least 8 percent just to break even.
The fixed-rate PLUS loan is often a better choice for families than private student loans, whose rates may vary. But the need to borrow private or PLUS is often a sign of over borrowing, Kantrowitz says.
"Parents should borrow no more than they can afford to pay in 10 years because they have to worry about their own retirement. By the time they retire, they should have no debt remaining since they will have no income to repay that debt."
THIS is precisely what I was talking about in a previous post. I can NOT fathom taking out loans in MY name for my child. Seriously? Are you kidding me? Clearly not since so many parents are doing just that. Yes, I love my children and yes, I want what is best for them, but I have given and still give them the tools they need to get scholarships or jobs to pay for college.
What about the outrageous tuition at different schools? What about the debt they will have when they graduate? Well, first, if they want to attend such an institution then they need to find a way to pay for it. There is ROTC or straight up academic or athletic scholarships. Their debt is not our problem, in my and my husband's opinion. They are adults. Classifying them as anything other than adults is not accurate. 18 is the age of majority. They can vote and they can enlist in the military. I don't have access to your medical records anymore. You are an adult. Done.
And here is some irony with age....the FAFSA (Free Application for Federal Student Aid) form still requires the parent's income. Why? I am not sure how my adult child is still considered my responsibility. No, I am not ignorant, I know, they are still my dependent IF I claim them on my taxes, but when I no longer do claim them then we shouldn't count on their FAFSA. Not so. Even if we don't claim, the parental income is still needed. I am sooooo unhappy about that. I don't get it. Maybe someone smarter than me can explain this.
Let me give you an example....our oldest works a full-time job. She lives home (not rent free mind you, we aren't that nice lol). We have NOT claimed her as a dependent for 2 years now. Doesn't matter. When she applied for financial aid they still asked for our information. We refused. They made her sign some form and she didn't qualify for anything. She was penalized. Nice, huh? She is 22!! How is she still our responsibility financially??? I don't get!!
Friday, February 17, 2012
To Rent or To Own? That is the question....
Yesterday I read an article on CNBC titled As Investment, Renting Beats Owning "100 percent of time." I had to think and stew on this for a while after I read the article. Here is the article in it's entirety:
The founder and CEO of Cornerstone Wealth Management, who bought the 5,000 sq. ft. property in 2005 for $1.8 million and has spent $500,000 improving it, considers the abode a wonderful place for his family. But ask him to rate his home — or any home, for that matter — as a financial investment, and Arzaga balks.
Rich Arzaga owns a luxury home in San Ramon, California, but he's not betting on it as an investment.
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"It's the American Dream to own a home, but whoever said that didn't do the analysis on it," says Arzaga, knowing he's taking a contrarian stance to conventional wisdom.
Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it, Arzaga, an adjunct professor in personal finance at the University of California at Berkeley, found that, "100 percent of the time it was better to rent, rather than own."
That's right: 100 percent.
The reason is simple. While a home is the main repository of wealth for many Americans, it comes with numerous hefty expenses. The carrying costs — what's needed to hold and maintain the asset — range from property taxes and home insurance to emergency repairs and renovations.
In a rental situation, the landlord covers those costs, leaving the occupant free to invest revenue in other areas.
"I don't have the emotions a lot of people do surrounding real estate," Arzaga says. "I have steely eyes for how investing in real estate works, and I'd better be a prudent investor for my clients."
Owning a dream home, he says, creates a drain on other financial priorities, causing homeowners "not to meet their financial goals. They were going to fail."
Some real estate experts thought there was some truth to Arzaga's argument, albeit with several conditions.
"To state that owning a home is or isn't a good investment is too simplistic," says Jeffrey Rogers, president and COO of Integra Realty Resources. "It depends. In times of relatively higher rents, low home values, and low interest rates, it makes sense to own a home. But in a reverse market, it wouldn't be economically feasible. Over time, those who purchase in down or flat markets with low interest rates come out ahead."
"Our lifetimes are a long time, and when we look over the long term, real estate and other investments tend to have a positive return," says Jed Kolko, chief economist at Trulia.com, a real estate search and research website.
"But when it comes to real estate, changing your mind is expensive. There are a lot of costs involved in buying, selling and moving. If you move every two years, it's probably a bad investment for you. It also depends on your job market. If you're in a one-company town and the company goes down, there goes your job and there goes your home value."
"But when it comes to real estate, changing your mind is expensive. There are a lot of costs involved in buying, selling and moving. If you move every two years, it's probably a bad investment for you. It also depends on your job market. If you're in a one-company town and the company goes down, there goes your job and there goes your home value."
Greg McBride, a senior analyst at Bankrate.com, agrees with one point of Arzaga's. "Home ownership is not so much a creator of wealth as a store of wealth," he says. "The promise of home ownership is that over the long haul, it can rebate many or perhaps all of your costs, unlike rent, which doesn't rebate a dime."
The trouble, he says, is that many Americans want a home so badly, they neglect other ways to grow wealth and financial security.
"You have the other financial bases covered: emergency savings, retirement savings, paying off debt, saving for the education of your children," McBride says. "There's no sense in buying a home if it's going to deplete your emergency or retirement savings."
McBride crunched the numbers in a pre-bubble era (2004) for a home purchased at $200,000 by a buyer in the 27 percent marginal tax bracket. Factoring in a 30-year mortgage, $1,200 in annual home insurance, closing costs of $5,500 and maintenance costs of $100 a month, along with property taxes, he calculated that it would take a selling price, 10 years later, of $395,404 just to break even. His conclusion gave Arzaga's view credence: "Homeownership may not be the moneymaker you think it is."
Then there's the emergency fund, a must for when a home requires unexpected repair work.
"As far as emergency savings is concerned, six months of a cushion is adequate," McBride says. "But only 24 percent of people have that kind of cushion, and about 65 percent own homes."
So while home ownership may sound glamorous, you need a lot of money to make it work, without much guarantee of positive returns in a post-bubble era. Indeed, Arzaga cites himself as an example of how home ownership doesn't pay off. His residence is today worth $1.5 million, about 17 percent less than what he paid.
So why not sell? For Arzaga, it's a lifestyle choice, and one that he doesn't regret, since his big money-making investments are elsewhere.
Here's what I think, and a couple of my friends on Facebook concur, not all the value in homeownership is tangible. A lot of the value in owning a home, to me and my husband, is that it is ours. We rented a house for the first time last year and it wasn't a pleasant experience at all. It started well and quickly went downhill when the house was put on the market for sale. Our lives turned upside down. We had to be available for showings at all times. Granted we were given 24 hour notice, but sometimes we had other things scheduled which made that difficult. The other hard part is having workmen milling about when things were being repaired or improved. It was very disruptive. Plus, some of the workmen were sketchy looking to say the least. I have a newfound respect for our former tenants and what we must have put them through.
Purely from an investment standpoint I wholeheartedly agree with this statement: "Home ownership is not so much a creator of wealth as a store of wealth." Gone are the glory days of rapidly rising market values. We purchased our current home as an investment. We are in an unusual area that sees a lot of short term renters passing through. Most people aren't going to purchase if they are only here for a year or two. We are willing to park our money in this investment. The goal is to pay the house off early and have the passive income supplement what ever we have available in retirement. Yes, we will need to do periodic repairs and improvements, but we have entered this phase with lots of experience in home ownership under our belts...this is house number 4.
The gentleman who has taken the contrarian point of view to most of society purchased a LUXURY home. Yeah, most people I know and hang out with do not own homes in that price range. One thing I think about when we purchase a home is will our lives "fit" in this home? In other words, will I need to totally upgrade our furniture or even add pieces to fill the rooms. That's not to say that I am opposed to adding a few pieces here in there, but I am not interested in having to get furniture that is "above" the way we live. Owning a luxury home or even a home with too much square feet is not for me either. Besides having to fill the house, someone will have to clean it and that someone is usually me. And lastly, the utility factors are always thought about. I am not interested in heating or cooling a McMansion. I am too frugal for that.
What do you think?
Here's what I think, and a couple of my friends on Facebook concur, not all the value in homeownership is tangible. A lot of the value in owning a home, to me and my husband, is that it is ours. We rented a house for the first time last year and it wasn't a pleasant experience at all. It started well and quickly went downhill when the house was put on the market for sale. Our lives turned upside down. We had to be available for showings at all times. Granted we were given 24 hour notice, but sometimes we had other things scheduled which made that difficult. The other hard part is having workmen milling about when things were being repaired or improved. It was very disruptive. Plus, some of the workmen were sketchy looking to say the least. I have a newfound respect for our former tenants and what we must have put them through.
Purely from an investment standpoint I wholeheartedly agree with this statement: "Home ownership is not so much a creator of wealth as a store of wealth." Gone are the glory days of rapidly rising market values. We purchased our current home as an investment. We are in an unusual area that sees a lot of short term renters passing through. Most people aren't going to purchase if they are only here for a year or two. We are willing to park our money in this investment. The goal is to pay the house off early and have the passive income supplement what ever we have available in retirement. Yes, we will need to do periodic repairs and improvements, but we have entered this phase with lots of experience in home ownership under our belts...this is house number 4.
The gentleman who has taken the contrarian point of view to most of society purchased a LUXURY home. Yeah, most people I know and hang out with do not own homes in that price range. One thing I think about when we purchase a home is will our lives "fit" in this home? In other words, will I need to totally upgrade our furniture or even add pieces to fill the rooms. That's not to say that I am opposed to adding a few pieces here in there, but I am not interested in having to get furniture that is "above" the way we live. Owning a luxury home or even a home with too much square feet is not for me either. Besides having to fill the house, someone will have to clean it and that someone is usually me. And lastly, the utility factors are always thought about. I am not interested in heating or cooling a McMansion. I am too frugal for that.
What do you think?
Wednesday, February 15, 2012
Credit and Debt
I was going to blog more on other types of retirement vehicles that you may run across, but I have heard from a couple of my girlfriends this week about debt and credit issues.
Let's start with credit since it is the thing most people start out thinking they need to build and then proceed to fall into debt. Sounds romantic, doesn't it? "Fall into debt." Yeah, not so much. Do you need credit? Yes, you do. I know there are some old timers out there who insist that they never needed credit and paid for everything in cash. I even know of a financial guru who swears that you should pay for everything, to include your car and house, in cash. That is all well and good, but most mere mortals can't do that. And if you want that car or house you need good credit to get a good interest rate and the loan.
Now to be fair to those that do save and pay cash for their vehicles, good on you. You have learned to delay gratification and have amazing discipline to save that kind of cash. And good on you if you only buy used vehicles. You are correct, you will save lots of money that way. (See, I already anticipate some of the naysayers...I've been doing this awhile hehehe)
So, first things first. You need to check your credit report. The best website to use, IMHO, is Annual Credit Report. This is NOT the one with the cute and funny jingle on tv. Once you are at this site and put in some data, check the box to only get 1 report at a time. There is a method to my madness. You are only entitled to 1 free credit report per year. If you pull Experian (name of credit reporting agency) in January, for example, then you can pull the TransUnion report in May and the Equifax report in September. Then the following January you can do it all over again. Most of the information is the same across reports. Pulling your reports in this fashion allows you to monitor your own reports without having to pay for costly "credit monitoring".
You will not get your credit score with your report unless you pay for it. The only thing that is free is the actual report. There is a Frequently Asked Questions tab on the home page. Peruse it before proceeding.
So now you have your credit report in your hot little hands, or more precisely on your computer screen. What the heck does it all mean? Well, scroll through the tabs and down through the report to see all the creditors that say you have or had accounts with them. Make a note of any discrepancies. These will be items you will want to dispute. You want your credit report to be as accurate as possible.
Now there are many, many people giving their opinions about closing accounts and how that will affect your credit score. I went to this link Bankrate and found a question and answer section between Bankrate and a FICO product support person. Bottom line, if you close an account that is in good standing, that account will fall off your credit report after 10 years. Not a good thing. If you leave it open, the account will stay on your report indefinitely. As long as it was in good standing this is a good thing. Check out the question and answers on the link.
So now we have credit. There is different kinds of credit debt. There are revolving loans and credit cards. There are installment loans (car loans, personal loans). There are bank credit cards and store credit cards. Most people get into trouble because they have used too much of their available credit. There is usually too much month left at the end of the money. If you find yourself in this position it is time to get a handle on this problem.
This is where your spending plan comes into play. You need to know where your money is being spent every month...down to the penny. Seriously. I know it is work, but if you want to get out of debt you will do this. Once you know where your money is being spent then you need to make some changes to start paying down debt. This website PowerPay is my absolute favorite website for helping figure out when you will get out of debt. You have to sign in to use the site but it is free. You input all your debt data to include balances, minimum pays, and interest rates. It will calculate an "end date" to your debt if you do nothing else but what you are doing assuming you are paying on the debt..
Most people will not like that result, so I will encourage you to number your debt by priority. This is a very personal issue. I know, I know, talking heads, your mother, your brother's uncle, your cube mate, and your babysitter will all tell you the best way to pay down your debt....highest balance first, highest interest rate first, etc,etc. I do things differently. First I ask if there is a personal attachment to which piece of debt gets paid off first. Most people don't care, but some have a preference. If there isn't a preference, I tell the person to pay off the smallest debt first. I don't care about interest rate at this point. I care about the psychology behind this. When you pay off a bill there is a sense of accomplishment..."Woo-hoo! I did it!!" If you continue to slog away at the highest balance it can seem like f-o-r-e-v-e-r to get there. People will quit. It's like dieting. If the scale doesn't move downward after a week or two, most people will get discouraged and want to throw in the towel. It's the same thing with getting out of debt.
Okay, so now you have paid off that first credit card. Put the monthly dollars used to pay off that credit card onto the next debt on your list and so on. Paying off your debt in this fashion will not require you to adjust your spending plan if you are only using the money you currently have allocated. If you don't have money allocated to outstanding debt then drastic adjustments need to be made.
PowerPay will also allow you to show how a lump sum payment onto debt will affect your payoff time. It is tax refund season and alot of you will be putting your new-found cash onto outstanding debt.
As always, email me or leave me comments if you have any questions. I'm here for you girlfriend. Good luck!
Let's start with credit since it is the thing most people start out thinking they need to build and then proceed to fall into debt. Sounds romantic, doesn't it? "Fall into debt." Yeah, not so much. Do you need credit? Yes, you do. I know there are some old timers out there who insist that they never needed credit and paid for everything in cash. I even know of a financial guru who swears that you should pay for everything, to include your car and house, in cash. That is all well and good, but most mere mortals can't do that. And if you want that car or house you need good credit to get a good interest rate and the loan.
Now to be fair to those that do save and pay cash for their vehicles, good on you. You have learned to delay gratification and have amazing discipline to save that kind of cash. And good on you if you only buy used vehicles. You are correct, you will save lots of money that way. (See, I already anticipate some of the naysayers...I've been doing this awhile hehehe)
So, first things first. You need to check your credit report. The best website to use, IMHO, is Annual Credit Report. This is NOT the one with the cute and funny jingle on tv. Once you are at this site and put in some data, check the box to only get 1 report at a time. There is a method to my madness. You are only entitled to 1 free credit report per year. If you pull Experian (name of credit reporting agency) in January, for example, then you can pull the TransUnion report in May and the Equifax report in September. Then the following January you can do it all over again. Most of the information is the same across reports. Pulling your reports in this fashion allows you to monitor your own reports without having to pay for costly "credit monitoring".
You will not get your credit score with your report unless you pay for it. The only thing that is free is the actual report. There is a Frequently Asked Questions tab on the home page. Peruse it before proceeding.
So now you have your credit report in your hot little hands, or more precisely on your computer screen. What the heck does it all mean? Well, scroll through the tabs and down through the report to see all the creditors that say you have or had accounts with them. Make a note of any discrepancies. These will be items you will want to dispute. You want your credit report to be as accurate as possible.
Now there are many, many people giving their opinions about closing accounts and how that will affect your credit score. I went to this link Bankrate and found a question and answer section between Bankrate and a FICO product support person. Bottom line, if you close an account that is in good standing, that account will fall off your credit report after 10 years. Not a good thing. If you leave it open, the account will stay on your report indefinitely. As long as it was in good standing this is a good thing. Check out the question and answers on the link.
So now we have credit. There is different kinds of credit debt. There are revolving loans and credit cards. There are installment loans (car loans, personal loans). There are bank credit cards and store credit cards. Most people get into trouble because they have used too much of their available credit. There is usually too much month left at the end of the money. If you find yourself in this position it is time to get a handle on this problem.
This is where your spending plan comes into play. You need to know where your money is being spent every month...down to the penny. Seriously. I know it is work, but if you want to get out of debt you will do this. Once you know where your money is being spent then you need to make some changes to start paying down debt. This website PowerPay is my absolute favorite website for helping figure out when you will get out of debt. You have to sign in to use the site but it is free. You input all your debt data to include balances, minimum pays, and interest rates. It will calculate an "end date" to your debt if you do nothing else but what you are doing assuming you are paying on the debt..
Most people will not like that result, so I will encourage you to number your debt by priority. This is a very personal issue. I know, I know, talking heads, your mother, your brother's uncle, your cube mate, and your babysitter will all tell you the best way to pay down your debt....highest balance first, highest interest rate first, etc,etc. I do things differently. First I ask if there is a personal attachment to which piece of debt gets paid off first. Most people don't care, but some have a preference. If there isn't a preference, I tell the person to pay off the smallest debt first. I don't care about interest rate at this point. I care about the psychology behind this. When you pay off a bill there is a sense of accomplishment..."Woo-hoo! I did it!!" If you continue to slog away at the highest balance it can seem like f-o-r-e-v-e-r to get there. People will quit. It's like dieting. If the scale doesn't move downward after a week or two, most people will get discouraged and want to throw in the towel. It's the same thing with getting out of debt.
Okay, so now you have paid off that first credit card. Put the monthly dollars used to pay off that credit card onto the next debt on your list and so on. Paying off your debt in this fashion will not require you to adjust your spending plan if you are only using the money you currently have allocated. If you don't have money allocated to outstanding debt then drastic adjustments need to be made.
PowerPay will also allow you to show how a lump sum payment onto debt will affect your payoff time. It is tax refund season and alot of you will be putting your new-found cash onto outstanding debt.
As always, email me or leave me comments if you have any questions. I'm here for you girlfriend. Good luck!
Sunday, February 12, 2012
Roth or Traditional..which one is for you?
I, of course, have an opinion on this subject, but first I will lay out the differences to them and how they pertain to mutual funds.
A Roth IRA (heretofore referred to as RIRA) and a Tradtional IRA (heretofore referred to as TIRA) are retirement vehicles. By that I mean, they are designed to help you have a retirement income, the market willing. So you put money into these investments and they grow to a nest egg. I say, market willing, because there is NO GUARANTEE that the investment you put your money into will grow at all and it could even lose money. That is the sad truth about the stock market. But overall the actual long term rate of return is better than a savings bond. Here is a website you can put dates into and adjust for inflation to find out rate of return over a specific period of time. Remember, though, someone trying to sell you something will show you rates of return that are positive, more times than not. Play around with the dates. Say, what if I started investing January 1, 2000, what return would I have realized by December 31, 2011? I used this site Compound Annual Growth Rate. My average return was only -.13% and annualized return was actually -1.93%. Ouch!
Now change the dates to January 1, 1990 to December 31, 2011. The average return is 7.12% and annualized return is 5.14%. When I change the dates to January 1, 1980 to December 31, 2011 the average return is over 8% and annualized return is over 7%. What does this mean to you? Well, what I would think just looking at the raw data is that the longer I stay invested the better my return. Do you see the same thing? When I look at the yearly breakdowns on the site I see that there are some really good years and some really bad years. The market is cyclical. It goes up and down. Just be prepared to stick it out through thick and thin if this is route you intend to take.
Okay, enough about returns. Let's talk more about the differences between the TIRA and the RIRA (did you remember what they meant? You didn't know there would be a pop quiz did you? lol). In a nutshell the TIRA is what is called TAX DEFERRED. In other words, you can right off the amount you invest yearly (most of the time...we will discuss further in a minute) from your taxes, but the amount you finally withdraw after 59 1/2 is taxed at your new tax rate. Everything you put in and all the earnings are taxed. The RIRA, on the other hand, is TAX FREE. You can't deduct any amount from your taxes. But all the money that you put in and all the money your money earned is not taxed when you finally withdraw it at after age 59 1/2.
As you notice, I referred to an age....59 1/2. That is the age that was designated as the beginning of "retirement." Another age that is important is 70 1/2. With a TIRA you are required to start withdrawing funds whether you need them or not. Not so with the RIRA. You never have to withdraw funds from your RIRA. Here's the thing, though, once you start withdrawing you have to continue. And there are rules governing the withdrawal...yep rules and rules. This isn't a spigot you can stop.
Also, if you decide you are in dire financial straits and need the money from your TIRA, you can withdraw money, but you will be fined a 10% penalty, plus you will pay taxes on the money withdrawn. This is usually a big enough deterrent to stop people from using their IRAs as a savings account. There are exceptions to the penalty and the rules are found here: IRS From this link you can follow links to other publications. Now with a RIRA the rules are a little different. You may withdraw the amount you put into the RIRA per this: It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and the payment or distribution is: made on or after the date you reach age 59½, made because you are disabled, made to a beneficiary or to your estate after your death, or one that meets the requirements listed under First home under Exceptions in chapter 1 of Publication 590 (up to a $10,000 lifetime limit).
Okay, enough about returns. Let's talk more about the differences between the TIRA and the RIRA (did you remember what they meant? You didn't know there would be a pop quiz did you? lol). In a nutshell the TIRA is what is called TAX DEFERRED. In other words, you can right off the amount you invest yearly (most of the time...we will discuss further in a minute) from your taxes, but the amount you finally withdraw after 59 1/2 is taxed at your new tax rate. Everything you put in and all the earnings are taxed. The RIRA, on the other hand, is TAX FREE. You can't deduct any amount from your taxes. But all the money that you put in and all the money your money earned is not taxed when you finally withdraw it at after age 59 1/2.
As you notice, I referred to an age....59 1/2. That is the age that was designated as the beginning of "retirement." Another age that is important is 70 1/2. With a TIRA you are required to start withdrawing funds whether you need them or not. Not so with the RIRA. You never have to withdraw funds from your RIRA. Here's the thing, though, once you start withdrawing you have to continue. And there are rules governing the withdrawal...yep rules and rules. This isn't a spigot you can stop.
Also, if you decide you are in dire financial straits and need the money from your TIRA, you can withdraw money, but you will be fined a 10% penalty, plus you will pay taxes on the money withdrawn. This is usually a big enough deterrent to stop people from using their IRAs as a savings account. There are exceptions to the penalty and the rules are found here: IRS From this link you can follow links to other publications. Now with a RIRA the rules are a little different. You may withdraw the amount you put into the RIRA per this: It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and the payment or distribution is: made on or after the date you reach age 59½, made because you are disabled, made to a beneficiary or to your estate after your death, or one that meets the requirements listed under First home under Exceptions in chapter 1 of Publication 590 (up to a $10,000 lifetime limit).
I hope I haven't confused you too much at this point. Now an IRA, either one, can be opened using either a mutual fund, a savings account, or you can individually trade stocks through a brokerage account. I would NOT suggest this last option unless you are schooled in the nuances of trading. So when you tell me that you have an IRA and a mutual fund I will ask what your IRA is invested in and then gently remind you that your IRA is in a mutual fund (more times than not). A "mutual fund" that is separate is from your IRA is a taxable investment vehicle that is not intended for retirement usually.
Oh yeah, before I forget, your Individual Retirement Account has contribution limits. It is $5,000 per year, unless you are over 50 and that limit is $6,000 per year. And that is all based on your Adjusted Gross Income (AGI on your 1040). Refer to the link above to get specifics or email me and I will help you if you have concerns.
Here's the kicker, my girlfriends, you can contribute the maximum amount to your IRA whether or not you have earned income in your name. And let me suggest you do so. Now. Do this before the kids' education. (find my post on that in the archive section)
The title Individual Retirement Account means just that...it is for the individual who's name is on the account. Just because your spouse, Jim Bob, has an account does not mean you have an IRA. You may be the beneficiary, but when push comes to shove that account is Jim Bob's. Get your own. Demand your own. You are entitled.
I told you at the beginning that I have an opinion as to which type of IRA I prefer...it is the RIRA. I like the idea of tax-free later in life. My life has been busy and complicated enough so far. I want simple during my sunset years. That's my 2 cents :)
Wednesday, February 8, 2012
Bill size does matter
How many of you carry cash anymore? I hadn't for the longest and found myself relying on that piece of plastic in my wallet. I was using plastic for everything and then the bill came and I was unhappy at the balance. Well it was because I was using my credit card indiscriminately. Okay, truth be told, we both were. So The Man and I did something radical. We now head to the ATM weekly and take out our "allowance." That is the money we need to use for those trips to Starbucks, Chick Fil-A (shhh...don't tell anyone), or to pick up the bottle of chardonnay I can't live without. We aren't perfect on this account. Sometimes we run out of allowance before the end of the week and reach for the plastic. I probably do it more than The Man since I know there is always a buffer in the spending plan hehehe
What got me thinking about this topic was a conversation today with a couple who I am friendly with. The husband was hesitating before giving his wife a $20 bill for the snack bar. The hesitation was because it was a $20 bill. If it had been something smaller, there wouldn't have been hesitation the wife explained. Once that bill was broken then all bets were off on spending the rest of it. I laughed because I had just come across this article recently about how bill size really does matter http://moneyland.time.com/2012/01/26/why-bill-size-really-does-matter/?utm_source=Jean%27s+Email+Newsletter&utm_campaign=251ca6f6e2-This_Week_In_Your_Wallet1_31_2012&utm_medium=email
So how do you handle your spending money? Do you have a set amount? Do find this very thing to be true in your case?
Monday, February 6, 2012
Learning to Blog
I am trying to figure out how all these gadgets work so please be patient if you click on a tab up top that isn't working. Thanks!
You can't finance your retirement
I have so many topics rattling around in my brain that I started a word document so I could remember what I want to tell you. The challenge is finding the time to share them all.
One thing that seems recurring in my casual and deep conversations with you all is the need to save for your children's college education. Some of you even save for their education before or instead of your retirement. I know why you do that. It's because people like me in the financial services industry told you how important it was. Well, I don't think it is that important any longer. And truthfully, I haven't been drinking that kool-aid for a while.
Here's the deal. Your kids will figure it out. You do not OWE them a college education. Yeah, I get that you don't want them to have exorbitant loans and you want them to have every opportunity. I do understand. I am not cold hearted. What I am is practical. According to the U.S. Dept. of Agriculture "The cost of raising a child from birth to age 18 for a middle-income, two-parent family averaged $226,920 last year." Wow!! Roll that number around in your mouth for a while. A quarter million dollars per child. I have 3 to get to 18 still. If that number is accurate then we will have spent over three-quarters of a million dollars. Yeah, I'm not feeling obligated after that lol
All philosophical differences aside, the sooner you start saving for your retirement the better. You will need to put less money aside monthly the younger you are. Here's an example from http://www.bbt.com/bbt/Financial-Education/Savings/Sooner-Rather-Than-Later.asp
So as you can see from the example (remember it is JUST an example and there is no guarantee of any results), it is better to start sooner rather than later. And if you are putting money aside for your children's college education, chances are you aren't saving for your retirement to your full potential. If you are Woo-Hoo! for you. Then keep saving for the rugrats. If not, please rethink that decision.
Here's another thing to think about. I am not opposed to helping my kids out when it comes to college. But helping them out when they get there is more our goal. We will help with books and food. By that point, we won't "need" to save as much for our retirement because we have started early. We may be able to free up some of our cash.
You may not agree with me and that's okay. That's not the point. The point is to get you thinking.
One thing that seems recurring in my casual and deep conversations with you all is the need to save for your children's college education. Some of you even save for their education before or instead of your retirement. I know why you do that. It's because people like me in the financial services industry told you how important it was. Well, I don't think it is that important any longer. And truthfully, I haven't been drinking that kool-aid for a while.
Here's the deal. Your kids will figure it out. You do not OWE them a college education. Yeah, I get that you don't want them to have exorbitant loans and you want them to have every opportunity. I do understand. I am not cold hearted. What I am is practical. According to the U.S. Dept. of Agriculture "The cost of raising a child from birth to age 18 for a middle-income, two-parent family averaged $226,920 last year." Wow!! Roll that number around in your mouth for a while. A quarter million dollars per child. I have 3 to get to 18 still. If that number is accurate then we will have spent over three-quarters of a million dollars. Yeah, I'm not feeling obligated after that lol
All philosophical differences aside, the sooner you start saving for your retirement the better. You will need to put less money aside monthly the younger you are. Here's an example from http://www.bbt.com/bbt/Financial-Education/Savings/Sooner-Rather-Than-Later.asp
Just consider the difference between saving $300 per month at age 30 compared to age 40. Simplify the example by ignoring taxes, and assume you earn 6 percent on your money. If you start at 30 and continue until age 65 (420 months), you will accumulate $427,413. If you wait until age 40 and continue to age 65 (300 months), you will only have $207,898.
What about the difference between saving $300 and $350 using the same assumptions?
| Monthly saving | Starting at age 30 | Starting at age 40 |
| $300 | $427,413 | $207,898 |
| $350 | $498,648 | $242,547 |
So as you can see from the example (remember it is JUST an example and there is no guarantee of any results), it is better to start sooner rather than later. And if you are putting money aside for your children's college education, chances are you aren't saving for your retirement to your full potential. If you are Woo-Hoo! for you. Then keep saving for the rugrats. If not, please rethink that decision.
Here's another thing to think about. I am not opposed to helping my kids out when it comes to college. But helping them out when they get there is more our goal. We will help with books and food. By that point, we won't "need" to save as much for our retirement because we have started early. We may be able to free up some of our cash.
You may not agree with me and that's okay. That's not the point. The point is to get you thinking.
Friday, February 3, 2012
Doesn't Spending Plan Sound Much Better Than "Budget"?
The truth of the matter is that what we do is spend. We budget what we spend, but all in all it is spending. Do you have a spending plan or a budget? Budgets are restrictive in nature and NO ONE wants to tell their friends they are on a budget. I mean really, it sounds so antiquated doesn't it? Plus, then your friends think you are cheap.
At least my friends KNOW I am cheap. You know who you are. Actually I like to think that I am frugal, conservative, conscientious, even a good steward of the blessings God has given us.
Well, back to this spending plan business. It's actually pretty simple. Figure out what you spend on fixed items. Examples of fixed items are rent/mortgage, insurance, car payments, etc. Things that you have every month. Sometimes the fixed items $$ amounts will change from month to month like your utility bills. Fixed items are absolute, gotta haves in order to survive month to month. I hear you now telling me that you don't know how to figure this out...just shoot me an email and I will send you a copy of a spending plan. I am having trouble uploading one here in the format that Blogspot will accept.
Then figure out what you spend on non-fixed expenses such as dining out, coffee/donut stops, hair, nails etc. These are things you CAN live without. And don't tell me you can't. Of course you can. You CHOOSE not to...big difference. The way to figure this out is to track your spending for a minimum of 2 weeks. A month is ideal. Yep this is work, but if you want to get a handle on your finances then a little effort is needed on your behalf. Get a notebook, use an app, grab an envelope, whatever works and keep track of every single amount spent on everything. After a 2 week period multiply times 2. This will give you an idea of how much you are spending on a monthly basis. Multiply by 12 and you have a year. I know there will be some out there who are going to tell me that isn't correct....whatever. It's close enough. This is not an exact science and for those who think it is, well, sorry it's my blog hehehe
Lastly, pertaining to expenses, are credit card payments, rent to own places, etc. What do you pay monthly? If you pay more than the minimum, great. If not, that is fine too (for now...more on that later).
So you take all those amounts and add them up. Then subtract that from your NET monthly income. That is the bottom line amount of money that hits your checkbook every pay period. Hopefully this is a positive number. If it is not, then some adjusting needs to happen in your non-fixed expenses. You may need to cut back on coffee shop runs, not getting your nails done, etc. You get the idea.
If you are in the positive and don't know where the money is going, take another look at your checkbook. I didn't specifically address tithing or savings so that may be where the money is going already. Also, if you have a positive cash flow, and know you have a positive cash flow, what are you doing with that cash? Do you spend it because you have it? A lot of us do that.
But now the hard part begins. What to do with this knowledge? What do you want to do? Do you have any short term goals....vacation, new car, new outfit? How about long term goals....house, retirement? This is all very personal and there is no one-size fits all solution. Everyone will have an opinion on this, but your personality and family lifestyle will dictate in which direction you head from here.
Personally, I think everyone should have a savings account and a retirement account. But what those magic numbers are for you are different from mine and your neighbors. No one-size fits all and don't forget that.
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