Why Having Nothing To Wear Is Making You Broke

Don’t get me wrong, I love to shop, buy a new outfit or two, but I have never been the type of woman who stands in front of my closet saying…I have nothing to wear.  Maybe it is my oversized sense of self or just my decisive nature, but it is just something I don’t do.  Many of my friends agonize over this decision daily, ultimately resulting in the purchase of more (and more and more and more) stuff.

The thing about stuff is, you will NEVER have enough, there never comes a point where you will say, yep, that’s it.  Anyone remember Amelda Marcos, the wife of a Philipino dictator in the 80s?  She had 3,500 paris of shoes.  Nuff said.

If you are trying to get ahead financially, this infinite money suck, called your closet, is not an asset to your financial health.  My suggestion is, set a monthly clothing number.  You will probably spend it the first week of the month, I always do!  And the number will vary wildly from person to person based on your income and other monthly outlays but setting up monthly limits will tame your inner Imelda and help release your inner Warren Buffett:)

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

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

The Golden Rule of Personal Finance

The Golden Rule is a fundamental moral principle which simply means, “Treat others as they would treat you.”  It is arguably the essential basis for human rights.  Similarly, in my mind there is a Golden Rule for Personal Finance.  Like the moral Golden Rule, it doesn’t encompass everything you need to know but unless you tackle it, the rest is moot. 

Golden Rule of Personal Finance:  You must earn more income than what you spend.

Sounds simple enough but so many folks don’t follow this rule.  Check out this link to an awesome skit on SNL.

A Personal Finance Blog Revolt!!!

My one pet peeve with MOST personal finance blogs out there is their almost religious commitment to being thrifty.  I have read articles lately about refilling toothpaste bottles and reusing cereal liners.  In my opinion that’s not personal finance, that is borderline homelessness. 

I know there are people out there that are mired in debt and need to use these gorilla tactics to crawl out of the hole they are in.  I have been at those points in my life where I had to stretch every dollar reeeeeeeeeeeeaaaaaaaaaaaallllllllllllllyyyyyyyy far.  However, I suspect that there is another group of individuals out there that are so turned off by the “personal finance paupers” that they eschew personal finance blogs, articles and tv shows.  My belief is that you can still have a comfortable life and build wealth.  You just need to budget accordingly.

I have a confession to make: I eat out every day.  That’s right.  Every day.  No, I don’t buy my food in bulk at Sam’s Club.  And you know what else, I drink alot of beer at bars.  I have budgeted these things into my life because they make me happy.  Could I sock a little bit more into my savings account if I ate at home and drank a six pack all by my self.  Sure, but what fun would that be?  I have been able to invest a hell of alot of money from age 22-29 without living a boring life.  Does it help that I am single with no children? Sure.  Does it help that I live in a city with a low cost of living (Philly)? Sure.  Does it help that I have made a decent salary over the last few years? Sure.  But I am convinced you can have your cake and eat it too.  In college, I made $12,000/year.  My pay was able to cover rent, electric, gas, car insurance, food and alot of partying.  Did I have to skimp on luxuries? Obviously.  But I budgeted around my priorities and 12K went a long way.

My view is personal finance should be about finding the sweet spot between growing your net worth and living a fulfilling life.  Just my 2 cents.

 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

Retirement Accounts for the Self Employed (Part 2 of 5) – The Solo 401K

So for all you self employed folks out there, this week is for you!  I am laying out all of your retirement plan options in gory detail.  For everyone else, take the week off from reading.  Grab a beer.  Watch Heroes:)  The first installment of this series discussed the SEP IRA.  Part 2 of this series explores another popular option: the Solo 401K. The next two entries will describe the other options available to the self employed and the last entry will discuss what options are appropriate for you according to the kind of business you have and your goals!

Do I Qualify For A SOLO 401K?

Any type of business with no employees, can establish an individual 401(k) plan – generally referred to as a Self-Employed 401(k), or Solo 401(k).  The business can be brand new or old. It can be a sole proprietorship, LLC, partnership, or corporation.

Where Do I Set Up a SOLO 401K?

Fidelity and T. Rowe Price offer SOLO 401Ks or 401kBrokers.com.

How Much Can I Contribute Annually to a SOLO 401K for myself?

For the tax year 2007 you can contribute up to $15,500 plus 20% of your business income, with a maximum contribution of $45,000 in 2007. You can make an extra $5,000 catch-up contribution if you’re 50 or older.
 

Why Not Just Open a Traditional or Roth IRA?

Do Both!   

When Do I Set This Up?

Each Self-Employed 401(k) must be set up no later than December 31, to be eligible for tax deductions for that tax year.

What If I Already Participate In My (Other) Employers Plan?

If you have a regular 401(k) through an employer and have some freelance earnings on the side, then your solo 401(k) limits will be reduced by any contributions you’ve made to a regular 401(k). But that only affects the first $15,500 of contributions, not the 20% of business income. So if you contributed $10,000 to a regular 401(k) through your employer, for example, then your solo 401(k) contributions will be limited to $5,500 plus 20% of your business income.

Do I Have to Put Away the Same Amount of Money Every Year?

No!

What If I Have Employees?

If you have employees you are not eligible for a SOLO 401K unless it is your spouse.

Anything Else?

Keep in mind that the eligibility requirements for having a self-employed 401k plan are quite strict. It’s not widely offered by most investment companies and those that do offer it provide limited investment options. And once you add a single employee outside of your spouse, you must convert to a traditional or SIMPLE 401k plan. 

Summary 

If work for yourself take full advantage of the tax benefits that affords you! A Solo 401K allows you to defer a significant portion of your retirement savings from taxes. Don’t let Uncle Sam get more than his fair share!

In the next installment of this series (Part 3 of 5) I will describe another kind of retirement account for the self-employed – The SIMPLE IRA!

Other great blog entries on Solo 401Ks:

http://www.mymoneyblog.com/archives/2007/10/fidelity-self-employed-401k-account-review.html

http://www.my-personal-finance-blog.com/2006/12/28/set-up-my-solo-401k/

http://taxplaya.typepad.com/tax_playa/2007/03/selfemployed_40.html

For the last article:

https://daseducation.wordpress.com/2007/10/08/a-retirement-accounts-for-the-self-employed-part-1-of-5-the-sep-ira/

Retirement Accounts for the Self Employed (Part 1 of 5) – The SEP IRA

It seems like October is Independent’s Month at Dollars & Sense Education! I just helped a client who is a Realtor (1099 employee) rollover a 401K from an old employer into a SEP-IRA with Vanguard. If you are self employed or have a side business you can start your own retirement accounts.

When you are self employed there are retirement vehicles that are made specifically for you and can allow you to sock away alot of tax deferred moolah. Independent contractors, sole proprietors and business owners can sign up for:

• Simplified Employee Pension IRA (SEP-IRA)
• Solo 401k’s
• Savings Incentive Match Plan for Employees IRA (SIMPLE IRA)
• Keogh Profit-Sharing Plan or Keough Defined Benefit Plan

Part 1 of this series will describe the SEP IRA. The next three entries will describe the other options and the last entry will discuss what options are appropriate for you according to the kind of business you have and your goals!

Do I Qualify For A SEP IRA?

To qualify you must have self-employment income. Self-employment income consists of net profits from a Schedule C or Schedule F on your tax return, or guaranteed payments from a partnership. If you run an S-Corporation, your corporation will have to set up the SEP-IRA and deduct your contributions from your W-2 salary. You must open and contribute money to a SEP-IRA plan by the due date of your tax return.

Where Do I Set Up a SEP IRA?

SEP IRAs can be setup with the same companies that provide Traditional IRAs and ROTH IRAs although the fees will vary slightly from traditional IRA and ROTH IRAs.

How Much Can I Contribute Annually to a SEP IRA for myself?

Your annual maximum contribution to a SEP-IRA is 20% of your net earnings minus self employment tax from self-employment income or $45,000 (for 2007), whichever is less.

Why Not Just Open a Traditional or Roth IRA?

Do both! You can sock away money in both a SEP IRA, ROTH IRA and a Traditional IRA. You can still contribute to a Roth IRA or a Traditional IRA if your modified gross income is under approved limits. Your employee contribution is capped at $4,000 regardless of the type of IRA you use. Where you sock away the extra dough is the employer contribution (up to $45,000) in the SEP IRA.

What If I Already Participate In My (Other) Employers Plan?

You can have your cake and eat it too! Sock your money away in a SEP IRA and a 401K!

When Do I Set This Up?

This can be setup until you file your taxes, including tax extensions.

Do I Have to Put Away the Same Amount of Money Every Year?

No.

What If I Have Employees?

A SEP allows for a contribution of up to 25% of your employees’ salary per year at a maximum of $45,000 (2007). An employee is defined as at least 21 years old and must have worked for you 3 out of the last 5 years. Contributions to employees SEP IRA MUST BE UNIFORM – that is if you contribute 20% to one employee’s account, you must contribute 20% to all.

Employees cannot contribute to their SEP, unless they are self employed obviously. Employees can contribute to a Roth IRA or a Traditional IRA if their modified gross income is under approved limits. If in the calendar year, the employer doesn’t contribute to the SEP IRA, the employees can contribute to the Traditional IRA regardless of income.

Summary

In short, if work for yourself take full advantage of the tax benefits that affords you. A SEP IRA allows you to defer a significant portion of your retirement savings from taxes. Don’t let Uncle Sam get more than his fair share!

In the next installment of this series (Part 2 of 5) I will describe another kind of retirement account for the self-employed – The Solo 401K!

Other great blog entries on SEP IRAs:

http://www.bargaineering.com/articles/primer-on-self-employment-taxes-or-why-sep-iras.html

http://www.sitelead.com/blog/how-a-sep-ira-can-cut-your-taxes/2007/04/05

http://www.fivecentnickel.com/2006/10/19/opening-a-vanguard-sep-ira-and-executing-a-direct-rollover/

http://taxes.about.com/b/a/257220.htm

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 5 of 5)

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 Part 3, I discussed how to efficiently prioritize the options that exist for your retirement savings.  In Part 4, I discussed how and where you go to sign up for your 401K, 403B and IRA.  In this final installment, Part 5 of this series, I discuss good investment options for your IRAs, 401Ks and 403Bs.

1)    Determine the Appropriate Asset Allocation for Your Age and Risk Tolerance 
Diversification is a powerful investment concept.  It refers to saving your investments in different baskets.  Diversification requires you to place your money in different investments with returns that are not completely moving in the same direction at the same times.  When some of your investments are up, others will be down. To decrease your chances of getting clobbered at the same time, you must put your money in different investments such as stocks, bonds and cash.  You can further diversify your investments by investing in domestic as well as international markets.  The process of how you spread your money around and diversify is called “asset allocation”.  The wise approach is to have more risk (equities) in your younger years and as you move into retirement move the majority of your money into less risky assets (bonds and cash). There are many different ways to allocate your assets for retirement, but below I outline one possibility. 

Age:  Less than 40 years

Allocation:  100 % in stocks.  Of this, 40% invested in large cap-growth funds, 25% in small-cap growth funds, 25% in large-cap value funds, and 10% in international.

Age:  40 – 50 years

Allocation:  80 % in stocks and 20% in bonds.  Of the stocks portion, 40% invested in large-cap growth funds, 25% small-cap growth funds, 25% large-cap value funds, and 10% in international.

Age:  51 – 55 years

Allocation:  70% in stocks and 30% in bonds.  Of the stocks portion, 40% invested in large-cap growth funds, 25% small-cap growth funds, 25% in large cap value funds, and 10% in international.

Age:  55 – 60 years

Allocation:  50% in stocks and 50% in bonds.  Of the bonds portion, 40% invested in large-cap growth funds, 10% small-cap growth funds, 40% in large cap value funds, and 10% international.

Age:  60 – 65 years

Allocation:  Reduce stocks by 5% per year and increase bonds by 5% per year so that at retirement you have 25% in equities and 75% in fixed income.  Of the equity portion, 40% invested in large-cap growth funds, 10% small-cap growth funds, 40% in large-cap value funds and 10% international.

2)    Choose High Quality/Low Cost Funds
The second factor to take into account when you are choosing the mutual funds in your accounts is cost.   Typically the lowest cost funds that one can buy are index funds.  An index fund is a fund that merely tracks a specific financial market.  For example an S&P 500 index fund just copies the movement of large cap stocks.  A Russell 2000 index is used to track small cap companies.  Index funds do not have managers making decisions about what to invest in so they are less expensive.  They also tend to outperform actively managed, more expensive funds.  So if these are an option within your plan, take advantage of them to carry out your asset allocation strategy.   

If actively managed funds are your only option, invest in them but be wary of expenses associated with the fund. Actively managed funds have expense ratios and loads that eat into your returns.  Minimize these costs as much as possible!

3)    Rebalance Your Portfolio Annually
The great thing about investing for retirement is that once you are set up you really don’t have to do much.  Just once a year look at your portfolio and make sure your investments still match up with the asset allocation you want.  Because your investments grow at different rates, this can throw off your asset allocation.  Make sure you rebalance it every year!

I hope you have enjoyed this 5 part series on Investing for Retirement.  Please contact me with any questions or clarifications!

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 4 of 5)

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 Part 3, I discussed how to efficiently prioritize the options that exist for your retirement savings.  In this installment of the series, I will discuss how and where you go to sign up for your 401K, 403B and IRA.  Signing up for a 401K or 403B is quite easy.  Picking the right company for your IRA is more complicated.  In this post I will attempt to make picking a company for your IRA as easy as possible.

Where to Open a 401K and 403B 

If your company offers a 401K or 403B, opening one is quite easy.  Just contact the HR office of your company and ask them for the paperwork!   

Where to Open a Traditional or Roth IRA

1)    Full Service Brokerages – Merril Lynch, TD Ameritrade, Wachovia, etc.  These are my least favorite options unless you really feel like you cannot do this on your own.  They provide investment advice but are very expensive.  If you want to use this option you can go online to find your nearest branch office. 

2)    Online Discount Brokerages – ShareBuilder, Scottrade, Firsttrade, Zecco, ETrade etc. 
Discount brokers appeal to many people because they have low or no minimums to open an account. Short term, online discount brokerages can be a good alternative if you only have a small amount to invest (less than $1,000) and you are not willing to make automatic contributions of at least $50/month. If you are a mutual fund investor, opening an online brokerage account should only be a short term bridge to opening an account at one of the big three mutual fund companies.  Discount brokers are a good option if you’re primarily interested in purchasing individual stocks instead of mutual funds, but for most casual investors this is not advised.   

3)    Banks – Bank of America, Commerce Bank, Citizens Bank, Washington Mutual, etc. Another option if you’re short on cash to open an IRA at a mutual fund company is to open an CD-based IRA at a bank until you’ve saved enough for the minimum initial deposit at one of the three big mutual fund companies.  This is only a short term option. As soon as you have at least $1,000 you should be rolling you IRA over to a mutual fund company. 

4)    Mutual Fund Companies – In my opinion, mutual fund companies are the best place to open your IRA.  However, they have fairly high minimums for investing.  Fidelity Investments, The Vanguard Group and T. Rowe Price are the three largest mutual fund companies and signing up for all three can be done easily online.  I will provide key details for each company so that you can properly evaluate which company best suits your needs. 

Fidelity Investments

Fees: No fee.

Minimum Investment: $2,500 minimum initial deposit, but this is waived if you commit to at least $200/month automatic contributions.

Additional Contributions: Minimum of $250 unless you commit to at least $200/month automatic contributions.

The Vanguard Group

Fees: No fee

Minimum Investment:  $1000 minimum initial deposit to purchase the company’s STAR fund.  (The STAR fund is a mutual fund of mutual funds, a safe choice for beginners.)  Most other funds at Vanguard have a $3000 minimum.

Additional Contributions: Minimum of $100 unless you use their Automatic Investment Plan, in which case the minimum is $50.

T. Rowe Price

Fees: $10/year per mutual fund owned for Roth IRA accounts until you have a balance above $5,000 for each mutual fund or an aggregate of $50,000 invested, after which there is no fee.

Minimum Investment: Minimum of $1,000, unless you sign up to contribute at least $50/month in automatic contributions.

Additional Contributions: Minimum of $1,000, unless you sign up to contribute at least $50/month in automatic contributions.

How to Open an IRA

Some firms require that you download the forms and then to mail or fax them to the company. Most companies, however, provide online applications. Before you begin the application, you will need the following:

• Social security number
• Bank account information
• Employment information
• Money

Once you’ve completed the application process, you will be asked to transfer money to your account. This money will probably earn interest in a money market fund until you choose an investment. In the final installment – Part 5 of this series, we’ll discuss good investment options for IRAs and 401Ks. 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 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