Archive for April, 2008|Monthly archive page

The Simplest Guide to a 401K Part 1

One very important vehicle of investing that people can use is the 401k. But what exactly is it? How does it work?

A 401k is an employer sponsored retirement program. The name for it comes from the section in the U.S. Internal Revenue Code. Employees contribute a portion of their income (taken from their paychecks) pre-tax. Pre-tax means that you will not be taxed for it until you withdraw it.

The actual work of administration and monotoring the retirement accounts is done by an independent bank, mutual fund company, financial service and more. The types of investments that are offered are stocks, bonds, money market instruments, and my personal favorite-mutual funds.

So why should we invest money in a 401k? Companies are moving away from pensions and into 401ks. If you are looking into starting investing long term, they are a great place to start. The most important reason would be if a matching contribution is involved. That is free money! For example, my current employer offers a match of up to the first 3% of my income. Therefore, if I invest a minimum of 3%, the company will match 3% every time as well. It’s free money so take advantage of it.

When investing in a 401k one should study and understand the risks involved with investing. Most financial experts would suggest to have a well diversified portofolio to help minimize risk. As with any long term investing, this is not ment to make you rich overnight. This is ment to grow steady and slowly with compound interest working its magic.

In Part 2, I will talk about the details in a 401K.

Frugality:Dating and Money

As one tries to start to embrace the frugal lifestyle, one of the questions that I get is “how can I go out in a date and not look cheap?”. At a glance, it can be hard finding places and activities that won’t hurt your pocket book. A movie and a dinner date can be somewhat expensive. On average, going to the cinema for two in the afternoon will cost you about $19. If you want popcorn and a couple of drinks that would be another $15. Later that night you go out to a restaurant. I’m not talking a five start restaurant-just a regular chain restaurant. That will be a minimum of another $25 dollars. Total=$59.

Now, if you are doing well financially, this wouldn’t be too much of a problem. But remember that if the date goes well, you will probably go out on a second, and maybe a third. Little by little, it will start adding up to a higher cost. If you are starting to pay of your debt, this could really tighten your pocket book and might cause a possible set back with your financial plans. Here are some ideas one should use when dating:

  • Budget. Look at how much you can actually spend when you go out on a date, and make sure you stick to the figure you came up with. I suggest adding a little more than what you think you are going to spend. This will give you some wiggle room for unexpected expenses.
  • Customize your date with her interests. If you know some of the things he/she likes before you go out on a date, make it tailored to her. Maybe he/she likes reading-take her to a book fair. Likes to travel-check to see if there is a cultural festival going on. Think outside the box when planning. Also, make sure to check that pricing is reasonable.
  • Have a dinner at home. We know that eating at home will always be cheaper than eating at a restaurant. Plus, you can show her your culinary skills. If this is a first date, she might not feel comfortable coming over to your home. Tell her to bring a friend over. Just make sure not to burn the food.
  • Discover your city or town. Here at Houston, we have many different festivals going on all the time. Reading your local newspaper will give you great places to go without breaking the bank to do so. My fiancee Crystal and l do this all the time. We get to go to new places, meet interesting people, eat cheep but good food, and best of all the entrance is usually free
  • Know your museums and zoo. If both of you like animals and/or museums, why not go on a date to one of these places? Usually these institutions run specials throughout the week. Learn when they are and take advantage of them.
  • Be honest. At some point, let the person know your financial plans. They don’t need to know the details. Just that at this point in your life you are trying to take control of your finances.

Dating can be awkward at times, specially in the beginning. Money can be a touchy subject to talk about. During the time that you get to know that person, the subject will probably come up. As I mentioned before, be honest with them. If you two are becoming more and more in sync, she will most likely understand your opinion. This does not mean that you should try and convince her that your way of thinking is right. Her opinion about handling money could be way different than yours. Just remember that dating is the time when you get to learn more about a person. Don’t let money get in the way.

Dealing With The High Cost of Food

It feels like Murphy’s Law is kicking in full effect and the cost of food has taking it’s beating. Basic food products such as rice and pasta have almost doubled in the past year. Corn and sugar have also seeing substantial increases. Most of our food has seen some type of upward price change and it is starting to affect our pocket books. What is the cause of this? Well, a little of everything. According to Katherine Corcoran with the Boston Globe the rise in the cost of food is a combination of things.

“Freak weather is a factor. But so are dramatic changes in the global economy, including higher oil prices, lower food reserves, and growing consumer demand in China and India.”

Kimberly Palmer with U.S. News offers 6 great tips to eat better for less:

  1. Plan ahead. Planning your meals for the week can make it easier when grocery shopping. Remember that some of the ingredients you buy can be used for tons of different recipes. The more you cook from scratch the more money you will usually save.
  2. Do it yourself. Instead of buying things that are pre-made, start making them yourself. The best example would be buying grated cheese. Why not buy a block a cheese which will be cheaper and grated at home. How about making your own mayonnaise. Not only will you save a little cash, but you can add some flavor of your own to some of your creations that you can’t do if it’s already made.
  3. Rediscover eggs and beans. Eggs and beans are extremely versatile food staples. Not only that, they are still relatively cheap compared with meat. How about a quiche, or some beans and rice. A dinner for two of this will run you about $5 to make.
  4. Go meatless. Not spending money on meat can substantially save you money while helping promote a healthier lifestyle. Just remember to include protein in your diet in some other form. I don’t think I could do this 100% but I could trim down my meat intake.
  5. Leftovers. I love them. Remember that you can take them to work, eat them the next night, or use them to create a new meal. Left over ground meat from hamburger night-use it for spaghetti night.
  6. Use what’s on the fridge. How many times do we look in the fridge and say “there’s nothing in here”. Look again. Get creative with your ingredients. Look in the Internet for ideas and you will find that you have way more dish choices than you thought. I recommend using FoodNetwork or AllRecipes for ideas on what to make with the ingredients you have at home.

Food prices are expecteted to stabilize in the future. Unfortunately the prices will not go down. Adjusting our budget and our lifestyles will help us combat the rising food prices. What are some ways that you save on food?

Credit Cards…No Thanks

I’ll be honest. I am not a big fan of credit cards. Everything I purchase is always with cash. If there is a high priced items such as high-end electronics, vacations, or even a car, I simply save up the cash for them and then buy them. The only thing that I plan on not paying in full will be my future home.

Before I start this rant, let me say that I am okay with the use of credit cards responsibly. This is just a personal view on the overexposure of the importance credit and the credit card companies who are trying to suck every penny out of our pockets.

We are always told the importance of our credit score. They tell us how this can affect everything we do from purchasing certain goods, getting loans, and even getting a job. This is true…To a certain extent. A higher credit score can get you better interest with a bank. A higher credit score can also make it easier to rent an apartment. That’s great! But what they don’t want you to know is that you can still do fine without credit. As I mentioned earlier, if I want something, I save the money for it. When I look for an apartment, I just use my work history, and I pay a larger deposit to get the place I like. When I do decide to get a house, cash will always be king. A large down payment (40% of the value of the house) and manual underwriting is all it takes for me to find my dream home. As for getting a job, I certainly don’t want to work for anybody who solely will hire me due to my credit score.

On an earlier post on marriage and money, I had mentioned about my fiancee paying of her credit card in full and cancelling the account. My fiancee fell into the trap set out by the credit card companies. This particular card gave her all types of discounts in places she shopped at. She believed that by using this credit card she was actually saving money. Wouldn’t you know it that this wonderful card put her $1000 in debt. That doesn’t not sound like a deal I would like to do.

I do understand that if you pay of your card in full monthly, you can actually reap benefits such as a higher credit score (funny how nobody really knows the math into how they come up with this score), and rewards such as:gas, cash, airline miles etc. Again, for all of you that are financially stable and understand the use of credit cards, this is not meant for you. This is for those individuals who need to stop spending money they don’t have, and thinking that a good credit rating is the only thing that will help them in the future. Remember that the credit card companies are a multi-billion dollar business who yearn for you to miss just one payment and start paying the minimum amount. Odds are stacked in their favor that sooner or later you will start falling behind on payments and that is when they win. Those are odds I don’t want to play with it.

If you are interested in learning about some of the horrible business practices that the credit card companies do I suggest going to your local library and renting the movie Maxed Out. You can also watch it here:

Money Management in Marriage

This weekend, I had the pleasure to attend a church retreat for soon-to-be married couples. The retreat was hosted by many married couples who came and talked to us about their experiences with married life. Topics ranged from communication, to finance. Unfortunately, the topic of finance was the least informative of all.

My fiancee and I have discussed plenty about how we would handle our finances. Here is a snapshot of how our finances are at this point separately:

  • I’m very much a saver while she tends to lean on the spending side.
  • Both of us work and pay for everything cash (She has a Credit Card that has been recently been paid in full and cancelled).
  • I put away about 20% of my income into retirement accounts and she puts about 8%.
  • Both of us make a monthly budget where we allocate where our money is going to be spent and where we list our financial goals.
  • We both have emergency funds that we plan to combine after marriage.

The biggest question that we have is how we are going to handle our checking and savings accounts? Three of the most common responses we found where these:

  1. Having joint accounts only. The reasoning behind this is that if we are “becoming one”, shouldn’t it also include our finances?
  2. Keeping our finances completely separate. If we keep our money separate. We won’t worry or feel bad every time one of us spends money.
  3. The third option we found was a combination of the first two. We should have a joint account where all our money goes to directly from our employers. That money is then divided to pay our monthly expenses, long term and short term savings goals, and a portion sent to separate checking accounts for the two of us. This is money that we can use to spend it on whatever we want. The only catch is that if it is an item or service that costs more than $100, we have to consult with each other to see if it is alright to spend it.

We are still indecisive of which option to choose. All of them have their pros and cons so we are trying to find the one that fits our personalities. The last thing that we want is money being an issue in our marriage. So I am asking the readers is how you handled money with a significant other? Any tips on how to avoid conflict? What has worked and hasn’t?

Failing to Plan for Retirement

We have all heard the old saying “people don’t plan to fail. They fail to plan”. I have a boss who seems to use this saying every other week, so just writing makes me roll my eyes to the back of my head. But like many sayings, the reason that they are still being used is that they are valid and are still applicable to our lives. Planning is important, especially when we are talking about retirement.

Katy Marquardt with Yahoo! Personal Finance wrote about six common steps people overlook for retirement:

  1. No plan. The statistics for people that are not saving for retirement are sadly high. What’s surprising is that the statistics for people not having a financial plan for retirement. Marquardt suggests starting by using financial calculators. If your employer offers investment-advice program use them. The financial institution where your investing your money, usually have a free checkup of your finances and even comprehensive looks into estate planning and asset allocation.
  2. Lowballing your life expectancy. We are living longer than ever. Expect to live 30 to 40 years after retirement. When you make your plan, make sure that it will cover this spread of time.
  3. Lowballing your expenses. Don’t think that because you are not working, or maintaining a full family that your spending is going to dropped. Chances are you will still spend about the same you did during your working years due to increases in healthcare and miscellaneous categories such as travel.
  4. Plan for the unexpected. What if your child moves back home, or you need major repairs in your home. Make sure to save a little bit extra to be prepared for life’s little curveballs. (Sounds like an emergency fund!.)
  5. Healthcare costs on the rise. As employers are moving away from offering retiree health benefits, and premium costs rise for retirees, not planning how to pay for the costs of healthcare can seriously make a dent in your nest egg.
  6. Inflation. Remember that inflation’s ugly little head is going to increase about 4 percent every year. This has to be included into the equation when looking for that magic amount need it to retire comfortably.

Next month, I am going to see a financial adviser to get a check up on my retirement plans. For whatever reason, I am somewhat nervous. It feels like a fearful visit to the doctor. One of the most important questions I have for him will be that of healthcare. I want to retire early, and I believe one of the biggest obstacles that will be in my way will be how to pay for healthcare for me and my spouse. I will write a post with my experience with the adviser. I’m also making a list of other questions to ask. Feel free to let me know what questions you think I will probably overlook.

To Commute or Not Commute

Last year, I took a position with a company where I had to drive 55 miles one way from home to work. Many people had suggested to me that I should move or look for a job closer to where I’m living. I didn’t want to do that because it would take me away from my family and fiancee, which are the most important things to me. Plus, I was excited about the job so I wasn’t even putting attention to the negatives that the position had. More importantly… the drive.

The first couple of weeks, everything was fine. The traffic and long drive was not bothering me, but I did notice that I would get home late every night, and wouldn’t have time to do anything else because I had to get some sleep, to wake up early, to get to work on time the next day. And so the cycle began.

After the first month, I noticed my energy level being less and less. I wasn’t eating healthy and I started to loose weight. I have always been thin, but I had a healthy body weight. My face looked thinner and in general, I just looked skinnier. I have always been into sports. The moment I took this job, I basically said goodbye to them. I didn’t have the energy to go and work out or to play a pickup game of basketball. I started to see my friends less and less and my overall happyness began to go down.

My relationship with my fiancee was starting to strain. Before I took this position, I was seeing her and spending some qualitiy time, 3-4 days of the week. After taking this position, I was lucky to see her more than once a week. When I did see her, I was always tired and not up to doing anything. It almost felt like the commute was sucking the energy out of me.

By the third month, I really felt unhappy. No matter what, I was working a minimum of 12 hours (9 at work and 3 commuting). I didn’t have time to exercise, see my family, or even to sit down and read a book. I felt zombie like. Finally, I couldn’t take it anymore so I decided to let my boss know that the moment a position opened up closer to home, I would be interested it in taking in it. I knew that there was a possibility that I would have to take a paycut but I was willing to do it in exchange for more social time, more energy, and less stress.

Luckily, on February a positioned opened up about 4 miles from my house and I was given the offer to take it. I think I didn’t even let my boss finish the sentence with me already saying yes. The good thing, was that I kept my salary so the loss of income was not something I had to worry about. In the end, it was the best decision I could of made. I’m saving over $200 on gas a month, spending 10-12 hours extra a week at home, I’m starting to work out again, and more importantly, my fiancee and I are spending much more time together (yest that’s a good thing).

While writing this post, I found an article in The Washington Post talking about the consequences long commutes can cause to your body and mind. I highly suggest taking a look at it specially if you are thinking about doing a commute longer than an hour.

So what are your thoughts on commuting to work? I’m specially interested in hearing your experiences with it and how you dealt with it or are currently dealing with it .

Tough Times For Your IRA

Something that I am learning the hard way is that patience is a very good quality to have when investing your money long term. Specially when it comes into checking your IRA for gains/losses. At first, I remember checking almost daily how my Roth IRA was doing. Trust me, you don’t want to be doing this. Specially with the down turn cycle that our economy is in right now, you can worry yourself silly.

Now, I try to look at my investments at a quarterly basis. But even then, it is still tough seeing your investments sometimes not doing so well, and even loosing money. Just remember that the market is cyclical. So sooner or later, the upswing will begin and your investments will most likely begin to record profits. The good thing about having an IRA during tough times in the market, is that it is a way to “bargain shop” for stocks. But a question that I always had was what if you are nearing retirement and the economy is not doing good?

CNN Money blog has a great post where Walter Updergrave answers this question. Here are some of the advice he gives:

The worst things you can do to your IRA is cashing it out. The taxes you would have to pay would be tremendous so this option should rarely be done. If you did, you would still need to re-invest. This time, you will have much less money and you will no longer have the tax-deferred compound gains you might generate.

If you have been using a long term investing strategy, stick to it. That means that you have a well balanced portfolio. At this point of your investing life, your strategy probably has shifted to one with much less risk to prevent a large portion of your investments to be loss right before retirement.

If you don’t have a long term investing strategy, create one now. It is not a good idea to have a collection of holdings that can help you when the market is doing good, but can really hurt you during rougher time. figure out your goals and come up with a strategy that will protect your investments, and provide you with a constant income during retirement. Your allocation will most likely consist of less stocks than before and more bonds to accommodate risk and return

If you don’t feel comfortable creating an investing strategy, choose a target-retirement fund. These are funds that are adjusted according to a persons age, retirement year, and risk tolerance. You simply choose the one that corresponds to you and you get the right mix of stocks/bonds that will fit your situation.

Short term losses are bound to occur no matter what. But if you plan ahead, you can prevent a lot of headaches in the future.

The Meaning of a Diversified Portofolio

One of the advices we hear most often given to us about our personal finances is to start saving now and to have a diversified portfolio. Everyone says it, but what exactly does it mean. Heck, at one point I thought that it meant having many different types of briefcases! Well… Just joking. In all seriousness, a diversified portfolio actually is one of the most important things one should have, especially if they are investing long term.

This is the simplest definition of what a diversified portfolio is-Having your investments spread out into different stocks, bonds, markets, etc. In other words, not putting your eggs into one basket. What diversifying does for you is help you reduce risk while keeping a somewhat similar rate in return.

Let’s say that a one, or two, or even three companies or banks that you invested some of your money completely plummet while the rest of your investments stay on average. By having a diversified portfolio spread around the different markets (including international), the loss will not be as bad compared to if all of your money was invested into one asset. On the other hand, if all of your investments do good, you get about a similar rate of return that you would of gotten if you did not have a diversified portfolio.

Remember that in investing there is never guarantees. One should carefully research and plan how they want to diversify their investments. As I mentioned earlier, this strategy works best for the long term. This by no means is will get you rich overnight. Many will argue that for the short term investor, investing in just a couple of high performance investments is a better way to go. That sometimes may be the case, but for the average investor, I believe that the tortoise will slowly win the race.

I highly recommend reading JD in GetRichSlowlywho wrote an excellent post dealing with diversification as well.

Spring Cleaning Can Make You Money

Last weekend, my fiancee was doing some spring cleaning around her apartment.  As she dug through her closet, she was amazed at all the useless stuff she had been storing for years.  Some things where not even open or worn.  They still had the sale ticket on them!

About two years ago my fiancee was a BIG SPENDER.  She just love the sense of buying and couldn’t get enough of it.  As we began to save to start a new life together, she began to realize the foolishness of her spending.  She noticed that with or without the things she bought, she was still the same person.  Now that she has money in the bank and even extra to invest, she tells me she feels almost free.  Before, she felt like a slave to her credit payments (she at one time owed around $2000 which she paid in full about a month ago) and nothing to show for it in terms of savings.  After seeing both sides, she tells me that she will never go back.

As she began to separate the items that she wanted to keep and the ones she didn’t, she came up with a great idea.  “Why not make a little money out of this”.  As I mentioned earlier, much of the unused clothes she had in the closet still had their tags.  She also kept the receipts for them.  Depending of the store she had bought them from, she could return them and get her money back.  The ones she couldn’t return and get cash back, she would  either get store credit (if there is something she truly wants and needs), or they can be sold in an upcoming yard sale and still make a little bit of money.  So far this is what she has found:

  • Clothing.  Lots and lots of clothing.  Thankfully the store she bought them from has a lenient return policy so as long as the clothes were in good shape, and we had a receipt, we can get our original tender back.  Some of her purchases were done with a credit card, which she has already cancelled, so she received store credit.  The other purchases were done with cash so that is what she received back.  Total in cash:$100.27   Store Credit:$120.45
  • Old Furniture.  Two old bookshelves that were just collecting dust.  She talked to some of her coworkers and sold them to them.  Cash: $20
  • Dvds and cds.  Two full boxes of them.  We found dvds that we only watched once and music cds that we never listened two.  We made a list with the names of the movies and cds and sent them to all our friends and family.  They chose which ones they liked and bought them from us for a $1 each.  Cash:$33

Her grand total came up to be…drum roll $153.27 in cash and $120.45 in store credit.

I’m in the process of Cleaning my things as well so we can put our stuff together for a yard sale.  Any cash we can make will be a win for us.  Not only are we making money for our wedding, we are also getting rid of stuff that was just taking up space in our homes.  The things that end up not selling will go to charity.  I will let you guys know what treasures I uncover in a later post.  What our some of the things you have found while spring cleaning?