Know Thyself – What is Your Money Personality Type?

I have written a couple articles such as this one and this one on the psychology of money.  There is the MBA finance chick side of me who looks at sheer numbers, then there is the realist who says wealth building isn’t all about the numbers it is even more about personality and psychology. 

 SO what are the money personality types as I see them:

Slow and Steady Wins the Race – These folks are the ones that follow all of the rules.  They max out their 401Ks, IRAs, have 529s for their children, an emergency fund, pay their credit card bills in full.

Get Rich Quick – These folks really want to be rich but don’t have the discipline for long term wealth building.  So instead they typically try to build wealth with the “investment of the moment”.  Sometimes this strategy works, but most of the time it doesn’t.

I Could Be Hit By a Bus Tomorrow – These people are the folks that aren’t so focused on wealth building period.  Its just not on their radar.  They can range from simple to extravagant folks, the common thread being they are way more interested in living life than thinking about money.  Fortunately, most of them never get hit by a bus.  Unfortunately, this means they never planned financially for not getting hit by a bus.

Nervous Nellie – Nervous Nellie is a hybrid of Slow and Steady Wins the Race and Get Rich Quick.  Nervous Nellie is the type of individual who knows what the rules are: invest in Retirement Accounts, 529s, etc.  But gets really nervous when the market is unstable.  This is the investor the buys high and sells low because they think that the world is ending when the DJIA loses 5%. 

Broke as a Joke – This person is broke they don’t think about money because they are barely covering expenses.

I would love to hear your thoughts on this subject and see if any of you have identified other money personality types.  In a subsequent entry I will talk about how these folks should invest differently!

Please contact Dollars & Sense Education to bring our seminars to your company or organization! 

 

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834

A Primer on Retirement Saving (Part 3 of 5)

Okay, I think we are well on our way to saving for retirement.   In Part 1 of this series, hopefully I convinced you of how important it is to save for retirement.  In Part 2, I talked about the different options that exist for retirement savings.  In this installment, I will show you how to efficiently use the options that exist for your retirement savings. 

In order to make an informed decision, the first thing you need to do is decide how you see your lifestyle during retirement.  There are three options:

1)  You will not work at all. 

2)  You will work in some capacity.

3)  You are not sure if you will or will not work after retirement.

Your retirement savings decisions are highly dependent on which of these categories you see yourself in. 

If you are not going to work and will live solely off your retirement income, it makes more long term sense to max out your 401K, 403B or traditional IRA before investing in a ROTH IRA. 

If you are going to work or are not sure if you are going to work in retirement, it makes more long term sense to contribute to your 401K/403B up to your company match, then max out your Roth IRA and then max out your employee sponsored plan.  If you do not have an employee sponsored plan, max out your Roth IRA first and then max out your Traditional IRA. 

These assumptions are made based on the current income tax rates.  If these were to increase significantly, my advice would be very different.     If you are not sure if you are going to work in retirement or you are wary of income tax increases in the future – by all means utilize the ROTH IRA after taking advantage of any free money match from your employer.  It is a way to diversify your tax risk.  But if you know you want to relax on the beach, not work, and are confident that tax rates will stay constant or decline than make the most of your employer sponsored plan or Traditional IRA before participating in the ROTH IRA. 

Now you know that you should save for retirement, you know what vehicles are out there and what make the most sense for you to use – In Part 4 I will show you how to sign up for these retirement vehicles and get in the game.  Stay Tuned!

Please contact Dollars & Sense Education to bring our “Financial Health 101″ seminar to your company or organization!

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 – 499 – 3834 

A Primer on Retirement Saving (Part 2 of 5)

Hopefully, in Part 1 of this series I convinced you to start saving NOW for retirement!  If are convinced or if you were already doing so, read on.  Part 2 discusses the different types of retirement vehicles available to us and explains why we want to maximize their use.  Let me start with why you should maximize your 401Ks and IRAs for your retirement savings versus other types of accounts such as a savings account, online or traditional brokerage account.   One word, TAXES.  When you invest in retirement accounts your money grows tax free.  The amount you will save in taxes as your retirement account grows tax almost always outweighs the benefit of taxable accounts. 

Ideally you should maximize your retirement accounts before you begin after tax investing.  What retirement vehicles are available in the marketplace?  There are many, but the two major types are employer sponsored plans and IRAs.  The ability to participate in them is based on your employer and income.  I describe the most common vehicles below. 

Employer Sponsored Plans:

401(k) – For profit companies offer 401(k) plans.  These plans allow you to save up to $15,500 per year (for 2007), usually through payroll deductions.  If you are 50 or older, you can put away $20,500 for 2007.  Your employer’s plan may have lower limits.  Your contributions to a 401(k) are excluded from your reported income and thus are generally free from income taxes.  Your withdrawals at retirement are taxed at regular income tax rates.  Some employers don’t allow you to contribute right away.  Some employers match up to a certain percent; so in addition to saving on taxes, you get extra money.

403(b) – Not for profit companies offer 403(b) plans.  These plans allow you to save 20% or $15,500 per year (for 2007), whichever is lower usually through payroll deductions.  If you are 50 or older, you can put away $20,500 for 2007.  Your contributions to a 403(b) are excluded from your reported income and thus are generally free from income taxes.  Your withdrawals at retirement are taxed at regular income tax rates.

IRAs:

Standard IRA – Anyone with employment income can contribute to an IRA.  For tax year 2007, you may contribute up to $4,000 per year, $5,000 if you’re age 50+.Your contributions to standard IRAs may or may not be tax deductible.  If you are not covered by an employer sponsored retirement plan, you can take a full deduction regardless of salary.  If you are covered by an employer sponsored retirement plan, for tax year 2007, if you’re single your tax deduction is phased out when your AGI is between $50,000 and $60,000 – for couples they are phased out between $80,000 and $100,000.  Your withdrawals at retirement are taxed at regular income tax rates.

Roth IRA – Your contribution is not tax deductible but the money grows tax free and is withdrawn tax free.  For tax year 2007, you may contribute up to $4,000 per year, $5,000 if you’re age 50+.  However, there are income restrictions – Single: Up to $99,000 (full contribution); $99,000-$114,000 (partial contribution) Married: Up to $156,000 (full contribution); $156,000-$166,000 (partial contribution)

All individuals have at least one type of Retirement Account they can participate in, many have more than one.  As you plan your retirement savings, utilize these tools to their fullest potential. In part 3 of this 5 part series “A Primer on Retirement Saving”, I will discuss the best use of these retirement investment vehicles to meet your retirement needs.    Stay tuned! 

Please contact Dollars & Sense Education to bring our “Financial Health 101″ seminar to your company or organization!

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 – 499 – 3834 

A Primer on Retirement Saving (Part 1 of 5)

Save for Retirement?  C’mon, that is soooo far away.  This is the last thing on most people’s minds.  They want to travel, they want to buy nice clothes while they still look good in them, they want drink good beer.  I get it, I get it.  So do I.  But you need to realize that you are going to want to do all of these things when you retire and you need to have a way to pay for it!  So a little self sacrifice now will go a long way later.

 Let me use an analogy: Say Jim graduates from college and makes $40,000 a year.  His company offers a 401K plan and he decides to put away $4,000 annually.  His 401K returns an average of 9% per year for the next 43 years.  He does this until he retires at age 65 with $808,000* in the bank.

Aaron also makes $40,000 dollars per year.  He does not begin investing for retirement until he turns 40.  At this point he starts to sock away $8,000 per year in his employer’s 401K plan.  Like Jim his investments earn about 9% per year.  He does this until he retires at age 65 with $462,000* in the bank.

In terms of sheer dollars Jim saved $28,000 less than Aaron but he retires with $346,000 more than him. 

How did that happen?  Compound interest!  Compound interest is the concept that your interest earns interest and this makes you more money.

So moral of the story…Start saving early.  If I haven’t convinced you to start saving for retirement, well, don’t bother reading parts 2-5 of this series.  But please don’t cry to me when you are 85 and still working.  The most critical part of this whole process is to just do it – start planning for retirement early.

 In part 2 of this 5 part series “A Primer on Retirement Saving”, I will discuss the different investment vehicles you can use to save for retirement.  Stay tuned!

*adjusted for 3% inflation per year

Please contact Dollars & Sense Education to bring our “Financial Health 101” seminar to your company or organization!
Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 – 499 – 3834

Payday Loans = Mayday

I received an email this week from advertising representative from a payday advance loan company asking me if they could advertise on my company’s site.  My company, Dollars & Sense Education provides personal finance education in the workplace.  Payday loans are predatory loans that prey on unsophisticated people with little to no financial education.  This would be equivalent to Marlboro asking the American Cancer Society to advertise on their website.  I sent them a scathing email. 

Just like smoking, I know the consumer bears alot of the blame.  But these companies make a living from putting people into financial ruin.  At least packs of cigarettes coming with a warning label.

What Separates Those Who Build Wealth From Those Who Do Not?

I am not talking mechanics here.  I know the people that save, invest, postpone gratification are those that get ahead financially. 

However, alot of people know the mechanics of the system, but not alot of people apply the basics.  Why do some apply the basics and not others.  What causes lack of discipline in spending? Do we blame it on marketeers?  Do we blame it on parents?  Left brained People versus Right Brianed? Do we blame low self esteem? Internal vs External Locus of Control?

My guess is locus of control.  As defined by Wikipedia:

 Locus of control theory is a theory in psychology that originally distinguished between two types of people – internals, who attribute events to their own control, and externals, who attribute events in their life to external circumstances.

 How can I incorporate this into my Financial Health 101 course? Help! I’m stuck!

The Psychology of Money

If there is one thing that my new business is teaching me, it is that there is a POWERFUL psychological connection between people and money.  This is a huge hurdle for me to get over.  I am beginning to think that the majority of people need not only a financial planner but a money psychologist.  I think the package deal would really be the best approach to people righting their money ship. 

What types of irrational approaches do folks have? Generally, they divide into a few categories, what Olivia Mellan, a Washington, D.C.-based psychologist, in her book Money Harmony: Resolving Money Conflicts in Your Life and Your Relationships (1994, Walker & Co.), calls “hoarders,” those who can’t part with their money; “spenders” (just what it sounds like); “amassers,” those who create wealth for the sake of it; and “monks,” those that regard money as evil.

 These “financial personality types” all have to do with how we were raised, our past experiences with money.  But the real question is, how do we deal with this so we can thrive financially?

I think a great first step in the process is to answer the following questions:

What are the uses of your money that have made a significant positive impact in your life?

What are the uses of your money that have added little quality to your life?

What are the uses  of your money that will affect your life positively a decade or more from now?

What are the uses  of your money that will affect your life negatively a decade or more from now?

Once you answer the questions.  Try to redirect your money to those things that will affect your life positively.