Archive for category Personal Finance
Which Retirement Savings Account is the “Best”?
Posted by Sonny in Personal Finance, Trading/Investing on July 20th, 2009
This weekend a family member was asking me about investing and asked me “which type of IRA is the best?” My answer was none of them. The reason I said that is because all of them have advantages and disadvantages and each could be the “best” depending on the individual’s needs. Here is a real quick run through of each type of investment account and my thoughts on them. This post is only for W2 employees who just want some simple advice. I am aware of other IRA’s but I won’t address those at this time. At the end of this post, I will discuss what I have elected to use. Remember this is just a blog, please see a CPA and tax planner to build an ideal strategy for yourself.
Traditional IRA
With a Traditional IRA, money is invested pre-tax (before tax) and therefore this reduces your taxable income. The idea here is that you get to invest you money now without being tax and then the government will tax you after you take the money out. Hopefully that number will be higher so you benefit from the larger account balance and the government gets to tax you on a higher amount. At the same time if you were to retire and therefore have a much lower income, the income tax rate you would pay could be lower. This is ideal situation is if you have a high income tax bill now but you expect to be in a lower tax bracket in retirement. The contribution amounts for 2009 (from IRS.gov) are $5,000 for anyone under the age of 50 at the end of 2009 and $6,000 for those 50 or older before 2010 assuming you qualify based on your income (check the irs.gov website). There is a lot more to go over but here is the main point: Main Advantage = Tax Deferral
Roth IRA
A Roth IRA is an account where money is invested after tax (so already paid taxes on it) and therefore the growth on the account is tax-free. The benefit of course is that if you grow your money, you get to keep that money tax-free since you the paid the tax up front. With the stock market volatility recently that’s a big assumption but in the long term should work out. The government is always in need of more money so they benefit from this plan as a dollar now is worth more than a dollar in the future. If you are in a low tax bracket and expect it to grow in the future than this is the plan for you. Another advantage that is commonly listed for Roth IRA’s is that contributions (NOT GAINS) can be withdrawn at any time. I would of course only use this provision under dire straits and that is why I try to avoid talking about it. Why give people the temptation? The contributions amounts for 2009 are the same for a Roth as they are for a Traditional but the income limitations are different. Please check those out and make sure you consult a professional to double check you do qualify. If you decide to do a Traditional IRA, you can not elect to do a Roth IRA. Finally one common misconception about the Roth IRA is the belief that Congress will one day in the future decide to change the laws which will make gains on Roth IRA’s taxable. I just don’t see this happening. This would be a great way for a politician to get thrown out of office and so I think we are safe from this fate. So the Main Advantage for the Roth IRA: Tax-free Investment Growth!
401K
This is a plan typically set up by private businesses Roth IRA’s are a way to let employees invest tax deferred money which can be invested. There is a Roth 401k which is like the Roth IRA but again this is up to the employer and the more popular plan is the original 401k. With a 401k plan, contributions are made by electing a percentage of income that you want to be invested in the company 401k Retirement plan. This money is then put into the plan and depending on your custodian (vanguard, fidelity, ING etc) that will determine what investment options you may have. Some plans have 5 choices: Cash, Bond fund, Large Cap Stock Fund, Mid & Small Cap Stock fund and International Stock Fund. That’s it but some allow you to buy everything under the sun. It just depends on the company plan and if you are like most employees, you may have no real say except maybe complaining to the HR/401k Administrator at work (which at my job does nothing!). One benefit for the 401k is the fact that it’s pretty simple to enroll in a company plan. At my job I just put down the percentage I wanted invested per paycheck, sign, and I am all done. It also is a way to invest without self sabotaging and saying “oh I will invest later once I pay…”. Once the plan is started, the money is automatically taken out of your paycheck. Out of sight and out of mind! Finally another benefit is the fact that the money is tax deferred like an IRA but unlike an IRA the contribution limits are $15,500 for 2008 and $16,500 for 2009. This is about 3 times as much as you can put in a IRA! I saved the most important advantage for last: COMPANY MATCHING! Most companies provide some type of matching of employee contributions. Typically I have seen matching up to 3% of employee contributions. So if the employee contributes just 3%, the company will give the employee 3%. If you are not contributing to your 401k, please at least consider contributing up to the point where you company matches. Its free money! The main advantage to a 401k is clearly the employer matching.
What do I do?
Right now my income is low and I think it will get higher (hopefully soon!) so I have Roth IRA but I also invest in the company 401k. I have both automatically invested every month so I don’t even see it happening. Unlike a 401k, however, this feature was rather hard to set up for my Roth for some strange reason. It took me about 1 month of calling, filling out forms and waiting to get this to automatically invest. , however, I don’t have do anything. My 401k does provide a 3% match on my contributions. Right now I contribute 3% but I used to contribute (before my school expenses) about 15%. When I graduate I plan to up this amount to about 20% hopefully. The reason I choose not to do a Traditional IRA is because the basic tax deferment benefits is already occurring through the use of the 401k. My strategy is to max out the Roth IRA first through automatic monthly investment. The reason I do this is so I can benefit from tax-free gains in the future and have the freedom to determine how I want my Roth invested. If I want all cash I can do that, if I want a specific mutual fund, I can do that, and if I want to pick 10 mutual funds I can do that too. There is pretty much no limit to what I can do investing in stocks/mutual funds/bonds. I enjoy this freedom and have this fully allocated to equities to benefit from future tax-free gains. On the 401k side, my investment choices are quite limited, so I try to protect principal as much as possible. I have about 50% invested in bonds, 40% in cash and only about 10% in equities/mutual funds. My 401k and Roth IRA are about the same size but for 2008, my Roth lost about 30% while the 401k lost about only 10%. That was by design and I couldn’t be happier with the results. Well I take that back, I would be happier if they were up! Overall an appropriate investment account should be selected based on each individual’s person situation and of course I make no recommendations. I’m just sharing my thoughts!
My First Foreclosure Auction
Posted by Sonny in Personal Finance on July 9th, 2009
On Tuesday (July 7, 2009), I went to my first foreclosure auction. Admittedly my knowledge of real estate is rather weak due to the fact that real estate has not interested me as much as the stock market. However, for one of my classes I will have to write a paper about the foreclosure auction process. Not knowing anything about the process, it was recommended that I should go to the courthouse on the first Tuesday of the month when our state has its auction. So I took some time off of a work and went to visit the courthouse.
As I was driving past the courthouse, I wasn’t sure if was in the right area but then I saw just a ton of people outside on the courthouse steps. I always assumed that foreclosures weren’t really handled on the court house steps. I thought it was just an expression now more than actual reality. However, I was wrong, that’s actually how we do foreclosure. In this day and age with technology and the internet, we still sell properties right on the courthouse steps. Anyways, as I walked up to the courthouse, it is organized chaos. There are two main “zones”. Zone 1 is where the state was selling properties due to lack of payment on property taxes. Zone 2 is where bank representatives were selling properties that were owned by the bank. This second zone was very confusing and looked like a mosh-pit you would see on the floor of the stock exchange. There was so much yelling and utter chaos I couldn’t imagine business was actually being done.
Zone 1 as I call it, seemed to be much more logical and orderly. The county sheriff would call out each properties information (lot number, stress address and court case) and then start the bidding at the minimum bid. If someone accepted the bid and there were no other offers, the only bidder was allowed to purchase the property. If someone took the minimum bid and there was more than one person interested in the property, a bidding war took place until one final buyer had emerged victorious. I saw one property start with a minimum bid of $2,000 and end at $18,000. I must say this was, by far, the most exciting part of the auction. About 50% of the time, I was shocked to see, the Sheriff would ask if there was any bids for a property and declared a “no bid”.
My biggest problem with the foreclosure process is the lack of information. I did not know how to find information on the properties. A few people informed me I could buy their book of information on the properties for about $50 a month. I finally spoke to someone that gave me the website to look for property but since it wasn’t a government website, I thought not to post it. I do not know how accurate the information on this site is. I thought should be available on the county’s or county clerk’s website. Also the time and date of when the foreclosures actually take place was surprisingly difficult to find. I actually went to the state’s website and found the rule that it’s every first Tuesday of the month. The location however, I couldn’t find it so I just guessed. Also the bidding process, I know that payment is demanded as soon as the winning bid is entered but I have no clue on how to set that up. All in all this process is still complicated and new to me, and I can’t figure out why people just couldn’t login to the county’s website, create a login, add an actual bank account information to verify funds and then allow for bidding to occur online. I would bet the state would make more money and more people would participate.
While I still don’t fully understand the process, I am intrigued by the possibility of making money through foreclosures. I spoke to one individual that told me he purchased a $100,000 condo for about $10,000. Now I could not verify any of this but if it is true, what a great deal! Now there are some pitfalls besides the actual process, including other liens on the property and state of the property. The sale of the property does mean you own the property but you still have to deal with other lien holders. So if, for example, you buy a property of $20,000 and it worth $100,000 but there is a second lien for $80,000, you didn’t get a deal. It is really important to do all the research before purchasing a property. I have no clue how to do this yet but hopefully I can learn. Another problem is actually doing a real survey of the state of the property. As of right now, I have not figured out a way to get a list of properties and then how to have a thorough investigation of the property before buying. I couldn’t imagine going to the property, knocking on the residences door and saying, “hey I want to buy your house in foreclosure, let me take a look around”. That’s of course assuming anyone is actually there.
Overall this was an interesting experience but I still have many questions that are left unanswered. One thing is for sure, a deal maybe had if you understand all the rules of the game and pitfalls. This statement is probably true of any type of business, now that I think about it. So if I do decide to buy a foreclosure, I really have to gain some knowledge and understanding of the foreclosure process but buying a house for pennies on the dollar could be motivation enough for me.
photo: respres
What to do when my Money has me down
Posted by Sonny in Personal Finance on July 3rd, 2009
I was looking at my finances today and I must say, considering the factors of my life, I think I am doing a pretty good job managing my money. But since I had to qualify that, I must admit, I don’t feel that great about my finances. I live a pretty frugal lifestyle, as I mentioned in my car decision post, I have had the same car for 10 years and have no plans to buy a new one. Clothes, I spent some money on my work wardrobe this month but in actuality I haven’t bought any new clothes since last year about this time. On the entertainment side, cable TV, books and eating out dominate but in fact I have cut back on these things lower my cable plan, returning my DVR and completely changed the way I eat at home. One month into my plan to stop eating out, I have saved about $160. Not bad!
So why am I feeling down? The problem is even though I am living frugally, education is eating up all the money I am saving. Between me and my girlfriend, it seems as if every month we pay the school more and more. My investment accounts haven’t helped my money problem. I had some foresight and some luck in selling most of my individual stock investments between February and June of 2008. I am not bragging but things could have been a lot worse. Now about 70% of my investments are in cash and 30% is still invested. That 30% is still hurting me when it falls though. Today the market was down about 2.5% alone. It gets tough looking at my statements, even if I consider myself somewhat knowledge about finances and feel overall pretty good about my investments.
So what to do when my Money has me down? First I must stop looking at my finances so much. I probably look at my finances a couple times week! Healthy monitoring is a good thing but I know what I’m doing is a problem. Making sure that I am not overcharged or that transactions are being charged properly is critically important. If I allow businesses to charge whatever they want, they will try to get away with everything they can. However, knowing that things are tight right now and that this situation isn’t going to change for a while, constant monitoring will just depress me. I think I am going to check my finances once a week every Friday for about 10 minutes and that’s it. Hopefully the Friday effect will positively influence the lack of money effect.
Secondly, I must appreciate what I do have. I know I sound cheesy but bear with me. I have a job in this economy when there is 10% unemployment, I should be way more thankful. It’s easy to get complacent, want more money or at least take your job for granted and I am doing all of these things. One of my good friends, who was out of a job for a couple months told me that the psychological effects of not having a job are more depressing than actually not having money (thankfully he has a new job now). At least I don’t have to worry about this! Another fact that I should be more appreciative about is that I am going to get a post graduate degree. Some people do not have the opportunity to get a bachelor’s degree and even though it’s expensive, I should be proud I am getting a graduate degree. I should feel thankful about not going into retirement right now. I truly sympathize with people all planning to retire and now having to change their plans. There is a saying I heard a commencement speech that goes “What makes God laugh? A: People Making Plans!” Unfortunately this couldn’t be more true. I have the benefit of having plenty of years to invest and hopefully I will make some money in the market. Most importantly, I should appreciate my family more. I have a great family, my mom and dad will always support me in my endeavors. My girlfriend is so wonderful and couldn’t ask for anything more. My dogs are so loyal and fun; nothing is better than a Saturday afternoon playing with them. I got a lot of things going for me and I should really stop focusing on money.
Finally,I need to give back. I do a horrible job as a humanitarian. Sure I donate stuff to charity but that’s just getting rid of junk first then helping people second. I would love to volunteer but honestly I have no time to do so. Since I am complaining about money, it is odd that I would even think about giving money but I think that is what I should do (hear me out). With the withdrawing of US troops from Iraq, veterans find themselves in a tough spot. They are coming back home from a war zone only to find that they themselves are having financial troubles and jobs that are not as available as they used to be. I don’t know what charity I want to give to or how much but I think I am going to start to give back some amount to a charity that helps struggling military get back on their feet. As an American I should do more. If anyone knows about any charity they like, please feel free to leave a comment or email me. One thing I take for granted is what a great country I live in, sure it has its problems but here you can do anything. Frugality is not a good reason to not give back and help out where I can.
My 401K is Down 60%, Now What?
Posted by Sonny in Personal Finance on June 27th, 2009
This week I had 2 tests and 1 term paper so of course I didn’t get to do any posting but I did get an interesting call from my mom. She wanted me to help a friend of hers out with a financial problem. Her 401k dropped about 60% in this financial crisis. I was very saddened to hear this news but I figured she had some time keep contributing and growing her assets. However, I was further saddened to hear that her friend was in her 60’s already and the account was only worth a little over $35,000. Now I was thinking there is not much to work with here but it in fact got worse. I got a statement emailed to me and found out there was a $20,000 loan on the 401k. That left actual equity in the 401k to be about $15,000. Wow now I have my work cut out of for me! I still have to call my mom’s friend and actually get way more information before I can get down to business but I really wanted to help her as best I can and come up with a game plan.
Questions I need to get answered:
1. How much social security is she expecting or currently receiving?
2. Does she plan to retire from her current job?
3. How much approximately does she and her husband make per month or per year?
4. How much do they spend per month or per year?
5. Finally how much do they have outside of the 401k?
6. Does she have debt and if so how much and what type of debt is it?
I don’t know how many of these questions I will get answered, they are extremely personal. Trusting someone over the phone in a different state is incredibly difficult to do and probably the number one issue in the financial advising industry. Still, the more questions answered, the better chance I will have to help.
The investment are spread out in about 10 or so funds some in 45% lifestyle funds, 30% Large Cap, 15% Small/Mid Cap and 10% International. Personally I am not a big fan of the lifestyle funds but in her case it may be useful. I haven’t decided how I want to do the allocation yet but I want to get some more information and what her strategy was in setting her 401k up this way.
The sad truth is there probably was no strategy in setting up the 401k. Since the great stock market from 1980 to 2000, people are told to put money into the 401k and to diversify. The idea of the market going down or that broad diversification may not always be the best idea might never come into people’s mind. I can’t help but be incredibly sad and upset with our education system. We are taught about World War I in history class but how to invest or save is pretty much ignored. Hopefully, I can help but I am not optimistic as of right now. I will keep everyone up to date as I get more information and explain the process of coming up with a plan in my future posts.
How to Save Money on Books
Posted by Sonny in Personal Finance on June 19th, 2009
I love books. I love buying them. I love reading them. My girlfriend is no different. Over the years we have both spent a lot of money on books, especially since about half of the books on our shelves we paid the retail price. It is so easy to buy a book at a bookstore, but it’s also a great way to overspend. Books are a discretionary item, first and foremost; you don’t need them to survive. It may sound like I am lecturing but I actually had to re-enforce that into my own head. I bought books like I was buying food and spending way too much on them. When you treat them as a discretionary item, you tend to try to look for better prices. Even though my love of books hasn’t changed, I decided I needed to be smarter about how I purchased them. Here is how I buy books now:
Step 1. Doing some Fun Research – My Girlfriend and I love going to the local Barnes and Noble store to look at books. There are other book stores where we live but that just seems to be our favorite. It’s great to spend an afternoon browsing and it’s also an opportunity to create a book wish-list. My girlfriend likes to write down the titles of the books she’s interested in and I prefer to use the app on my phone that allows me to scan the bar code and store it in my phone. If I want my phone to search for cheaper prices locally or online, it can do that to but I’m getting ahead of myself. Now that we have our lists, it’s time to go book-hunting.
Step 2. Try renting the book for free – The Public Library is often overlooked when wanting to purchase a book. If you want to keep a copy of the book, then its best to skip this step but if you only want to read a book, this is the best free resource available. It’s amazing to me that libraries are basically free bookstores and still not many people take advantage. I know that the two most common complaints I have heard about the library (aside from the boring décor and ambience) are the limited availability of new books and limited selection of titles. I agree with both but it is worth a shot to try to find the book at the library. So before I buy a book, I search the library catalog online for a copy: If they have a copy available right away I go pick it up, if not, I just put a hold request on it. If the book isn’t available at all, I move on to Step 3. I used this step when I was preparing for a trip to California and wanted something to read on the plane. I was able to find the book I wanted without spending a penny, not to mention I had a great flight!
Step 3. Buying online – If you can’t find the book at the library, then search online for a copy. Even though Amazon.com is the leader, I always start with Half.com. Both are great resources for buying new and used books. Through the power of the competitive market, I can find a dozen sellers that are selling my desired book at a much better price than the book store. I am really interested in all things finance and was recently searching for a book titled The Number by Lee Eisenberg. Flexo from Consumerism Commentary has talked a lot about this book and, I believe, called it is his favorite for personal finance. The list price for the book is $26 but I found it online for $0.75 plus shipping. Not bad for a fairly new book (it came out in 2006). This is a great way to easily save about 75% of all book purchases! I am not buying the book however as I found it at my library and I’m going to get it for a weekend read (hopefully).
I know there are some concerns or criticisms to these steps but so far, by using this plan, I have saved hundreds of dollars in books over the past couple of years. To be fair, I’m going to address those issues below.
Common Criticism of My Method (a.k.a. my girlfriend’s concerns):
1. What if I desperately need to have the book and want to read it right away? My answer: Most people say that their lives are incredibly busy and I know my life is busy as well. Let say we spend an hour or two at the bookstore. If I buy a book, am I going to read it right away? Hell no! I may browse through it, even read a chapter, but when I get home, there are things we have to do: laundry, take the dogs for a walk, get dinner ready and study for school. I have never bought a book and went home and finished it that day (though, to her credit, my girlfriend swears she has done this numerous times). In my opinion, no book is so important you must buy it today. Go home, spend 5 minutes, check out the library or buy it online. Not only can you save 75% off the retail price, you might just be able to get it for free.
2. But it’s more fun to buy books at the store! My answer: It’s more fun to save money and spend it on other things. Why not take the money you saved on all those books and go to the movies? Or save it? Or do something else with it?
3. Aren’t we being unfair to the bookstore, browsing and leaving without buying a thing? My answer: No, it’s not unfair. When I go to buy a TV, I go to different stores to compare prices. Where I buy depends on prices and service and so on. Same thing with books or anything else really. If you can buy it for less, why shouldn’t you? At the same time, whenever I am in a bookstore, it’s never empty. There are still a ton of people that will happily pay retail price. If that’s what they want to do, great! If they don’t want to pay retail, then they should read my post!
4. What about books that are newly released? My Answer: Anything new will cost more (cell phones, movies, music). If you can’t find the book at a discount on Amazon.com, I would use the library at this point. If you check around online at different branches, you can find brand new release books quickly. One new release book that I was actually planning to buy turned out to be so horrible that I didn’t buy it and was so thrilled that I checked it out at the library first. Also wait until the first wave of people, who rushed out to buy the book, start putting them up for sale on Half.com. If you can wait, I think the savings are well worth it.
photo by Faeryan
