Monthly Archives: May 2009

Retirement Savings: 401k Matched, Roth IRA Maxed, Now What?

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Financial planners occasionally squabble over whether or not to invest Roth IRA vs 401(k).  Most agree that passing up matching funds in a 401(k) plan makes little sense, so it’s probably best to start there.

After taking advantage of those matching funds by investing through the company match, it most advisers recommend investors turn to the Roth IRA to take advantage of tax free growth opportunities.  After that, you are on your own, and left with a lot of questions.  Do I return to the 401(k) plan and max out my annual contribution there?  Do I invest in company stock?  Do I park anything left over in cash, or single stocks?  Let’s take it one step at a time.

Invest In 401(k) Through Matching Funds

Let’s assume your company offers to match the first 3% of your annual salary if you contribute to the plan.  If you earn $50,000 a year, and agree to participate at a 3% contribution, your annual contribution amount will be $1,500.  Your employer will kick in another $1,500, bringing your total contribution each year to $3,000.  That $1,500 contribution from your employer is almost like free money (nothing is completely free – you will owe taxes on it when you withdraw it down the line).

Max Out Roth IRA Contribution For You and Spouse

If you are living frugal, and haven’t buried yourself in house and car payments, you can probably afford to kick in another few thousand dollars each year to saving for retirement. Assuming you are eligible to contribute to a Roth IRA, it probably makes sense to turn your investment dollars above your employer’s 401(k) match here.

Contributions to a Roth IRA won’t help with your taxes in the year they are made, but earnings grow tax free over the life of the investment.  If your $5,000 contribution this year turns into $40,000 by retirement, you get to keep all $35,000 growth tax free, assuming you withdraw after reaching retirement age, or for a narrow list of specified qualified withdrawals.

Another beauty of Roth IRAs investments is that Roth IRA withdrawal rules allow for the withdrawal of contributions without penalty, at any time.  So theoretically, you could park money in a Roth IRA to grow for three or four years, and then only withdraw contributions, leaving the earnings untouched and continuing to grow.

Max Out 401(k) Contributions or Taxable Investing

At this point you’ve invested in a 401(k) through the company match, and maxed out contributions to a Roth IRA for you and your spouse (if married).  If you still have money to invest for retirement you have a choice:  return to your 401(k) plan and invest up to your annual maximum contribution, or invest in non-retirement, taxable accounts.

The path you ultimately take here depends on your goals for the future, and your overall financial picture. Personally, I would begin to invest in low-cost, low-turnover, taxable investment vehicles such as a broad index fund.  I have plans to “retire” early from full-time employment, and to do so will need access to savings prior to the IRS-defined retirement age (currently 59 1/2). If I planned to work well past the currently defined retirement age, I would probably plow more money back into the 401(k) plan to lower my taxable income and defer those taxes to retirement.

If you do decide to invest in taxable accounts go with a low-cost brokerage such as Vanguard (which I happen to think is one of the best places for a Roth IRA) or Fidelity.  These brokerages are widely recognized as two of brokerages with the lowest expense ratios in the industry.  Inside those brokerages, look for mutual funds with low turnover.

Remember, each time an investment inside a mutual fund is sold or exchanged, or “turns over,” it is a taxable event.  Those taxes will be distributed to mutual fund owners at the end of the year, and can create quite a tax hit, even if your overall mutual fund performance is down.

If I had to pick one fund to invest in it would the Vanguard Total Stock Market Index fund, which owns a little piece of every stock listed.  As you can imagine, there is not a lot of buying and selling happening here, which minimizes your tax hit.  It is also about as diversified as one could get within the domestic equities market (the Total International Stock Index fund is the international investment equivalent).

Additional Resources:

Carnival of Top Personal Finance Posts #2

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Welcome to the Carnival of Top Personal Finance Posts #2!  I was so intrigued by this new carnival format that I agreed to host the second edition here at Frugal Dad.  The six articles below were selected as the the top personal finance posts of the week, and now you get to decide which one deserves the top spot!

Note: Subscribers may need to drop by the site to vote if the voting widget is not compatible with your particular email client or feed reader. Thanks for participating!

This survey is now closed. Financial Freedom in Five Years (and the Difference Between Rich and Wealthy) @ Lazy Man and Money was voted the best PF post of the week(May 11th 2009) in a very tight race with That One Caveman.

10 Secrets To Curbing Your Appetite For Stuff

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If I gave you a sheet of paper and asked you to list all the things you really wanted right now, how many could you come up with?  Five?  Ten?  None?  Chances are there are quite a few things on your spending radar.  Some of the things you need, but most of them you want. It’s OK; you’re human.

We all sort of walk around with an idea of things we like to replace, or upgrade, or add to our lives.  If these things add value to our lives then planning for their purchase is not necessarily a bad thing.  It is the impulse purchases of stuff that get us into trouble.

Secrets To Curbing Your Appetite For Stuff

1. Unsubscribe to catalogs. A friend of mine in college griped incessantly about being broke.  He also subscribed to every catalog under the sun.  In any given week I bet he received 10 catalogs on sportswear, hunting and fishing gear, golfing equipment, etc.  And then he would salivate over the things he saw in the catalog.  Easy fix; cancel the stupid catalogs.

2. Get a TiVo and skip the commercials.  When I bought my TiVo a couple years ago I felt a twinge of guilt over the purchase – after all, DVR is still kind of a luxury.  But now I’m convinced it has actually saved me time and money.  Not only can we motor through a half-hour show in twenty minutes, but we can skip all the commercials, too.

3. Ignore unreal media examples.  While on the subject of television, ignore examples in the media of entertainers living lavish lifestyles without putting in an ounce of real work. I’m always amused by soap operas where the main character is depicted as a policeman or detective and lives in a multi-million dollar home.  I have family members in law enforcement, and I can tell you that they are grossly underpaid for the work they do, and there is no way they could afford such a lifestyle.

4. Don’t hang out with materialistic people.  Friends influence purchasing decisions more than any amount of corporate advertising ever could. For this reason, avoid hanging out with people wrapped up in their clothes, their cars and their expensive homes, or you will start to feel the need to keep up with them.  Better to let the “Jones” keep up with themselves.

5. Sleep on it.  Before making a major purchase, give yourself some time to decide whether or not you really need it.  My garage is full of crap that I just had to have, but later found out I didn’t really need.  I’ve slowly been purging this stuff from my life, and it feels great. I only wish it was as easy to get rid of the associated debt, too.

6. Convert the cost of items to hours worked.  This idea comes from my all-time favorite personal finance book, Your Money or Your Life. In the book, the authors advocate calculating your real hourly wage as the total amount of time you spend getting ready for, commuting to, and being present at, paid employment.  So if you work eight hours a day, but commute thirty minutes both ways and take half an hour to get ready in the morning then working actually costs you 9.5 hours of life energy each day.  Divide your earnings by this amount, and then decide if that new toy is worth x amount of working hours.

7. Beware of coupons.  Coupons can save you a ton of money off the retail price, but they can also cause you to spend more money, overall, than you normally would.  I’ve fallen into this trap while playing The Grocery Game, which publishes a list of “rock-bottom” priced goods at your favorite store.  I see the item is 60% off, flip through my folder of coupon fliers and I’m off to the store to buy it.  The problem is, I don’t even like Raisin Bran cereal, and I wouldn’t have normally bought it.  That’s exactly what the manufacturers are counting on. They’re hoping I’ll like their cereal and give up my usual fast-breaking bowl of Peanut Butter Cap’n Crunch.  Not likely.

8. Set boundaries with well-intentioned family members.  This one gets a little touchy. Parents often want the best for their kids, but sometimes they advocate the wrong ways of acquiring it.  The classic example is the meddling parents who try to convince newlyweds to buy a house instead of renting.  They think they are helping, but don’t realize that in six months the couple might be fighting over money every night because they are drowning in debt and have a mortgage they can barely afford.  Buy things on your terms, not your family’s.

9. Be content with what you already have.  How many times have we rushed out to replace something just because a new model is out?  Could be a car, or a game system, or a computer, or a cell phone.  If the current model you own is meeting your needs, why upgrade?  Unless a case can be made for serious productivity increases, chances are you will never recoup the costs of upgrading.  Be content with what you have, and resist the temptation to upgrade.

10. Quit worrying about what other people think.  This is the number one indicator of financial maturity. Think of the amount of money wasted each day by people attempting to impress strangers.  From luxury cars to expensive jewelry, the examples of ostentatious buying are never-ending.  Entire industries have been created around the idea of making people look better off.  From tanning beds to plastic surgery, from one-day luxury rental car companies to glamor photographers, we spend an insane amount of money trying to be something we aren’t.

Be happy with yourself.  Be content with what you have.  Look for fulfillment and self-worth in things other than material possessions.  Volunteer your time. Be a good parent. Love your neighbor.  These are the things that make a lasting impression, and leave a lasting legacy when you, and all your stuff, is finally gone.

14 Quick Ways To Raise Cash

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In the days before emergency funds are fully established there will come a time when you need to generate some quick cash.  In a worst case scenario you may need the cash to pay a utility bill, a medical bill, or even your mortgage.  In a real emergency, every little bit of cash helps, and here are several ways to raise cash quickly.

1. Take a “day laborer” job. Check out the classifieds for listings looking for day laborers.  Often times contractors are looking for people to do some type of manual labor for a short duration, even as short as one day.  It could be cleaning up a job site on a new build, or tossing bricks up to guys on a scaffold.  You’ll probably earn minimum wage, or only slightly better, but for a couple days work you could clear $100.

2. Sell Your DVD Collection on Ebay.  Seriously, how many of those DVDs do you really watch repeatedly?  I can count on one hand the ones I would want to keep, but the rest could be sold and I’d never miss them.

3. Work surveys at CashCrate.  I’ve been a member of CashCrate for nearly two years now, and still work surveys for extra grocery money.  It may take a while to get to $100, but hitting the minimum payout can easily be done the first day. Talk up CashCrate to your friends and family and have them sign up under your name, as the real earning opportunity is in the referrals.

4. Ask neighbors if you can mow their lawn.  Even if you don’t consider yourself a “landscaper,” you could easily mow, edge and blow a couple yards for your neighbors on a Saturday morning and make $100.  You’d be surprised how many people will take you up on the offer just to take a week off from yard work!

5. Hold a yard sale. One of the faster ways to raise cash is to hold a yard sale.  You don’t have to spend a lot of money on advertising.  Simply buy a few pieces of brightly-colored poster board and a fat magic marker.  Write “YARD SALE” in bold letters, followed by the times and your street address.  Place the signs at major intersections to draw traffic.  For other ideas read more tips for a successful yard sale.

6. Sell gold jewelry.  Thanks to the recession gold prices are still running high. If you have some gold jewelry sitting around that you rarely wear, it might be worth offering it up to broker such as Cash4Gold, who will give you cash in exchange for allowing him to melt it down and resell it for a profit.

7. Be a medical guinea pig.  Medical research facilities and universities will pay participants to take part in trials, surveys, and other types of research.  Tread carefully here; some trials could have negative medical consequences, while things like surveys and sleep studies don’t seem so bad.

8. Donate plasma.  Most cities of any size have a donation center that will offer $25-$35 for a donating plasma.  And depending on your medical condition you may be able to donate up to twice a week.

9. Redeem your credit card rewards.  Even if you are like me and you haven’t used credit cards in a while, but are working to pay them off, chances are there are some rewards points accumulated from past spending.  Contact each credit card company and ask about your rewards balance.  Redeem what is available in the form of cash (check from company), or a gift card to a store you can buy some household essentials (Walmart, Home Depot, etc.).

10. Sell your books online.  Services like Cash4Books.com will provide an online quote for your books and even add a little extra for the trouble of shipping.  Books that don’t sell here may sell at sites like Amazon.com marketplace (a great place to sell textbooks) or eBay.

11. Take something valuable to a pawn shop.  Musical instruments, computer equipment, jewelry and sporting equipment in good condition all sell well at pawn shops, and owners are more likely to give you cash for these items.

12. Sell company stock.  If you currently participate in an employee stock purchase plan at work, consider cashing out if you are in need of cash. Company stock is not well-diversified, and often the cash could be put to better use, even if it is simply reinvested with a broader diversification.

13. Ask to work overtime.  With unemployment running high, and little budgeted for new hires, you may be able to work a little overtime if demand justifies it.  Talk to your boss about working some extra hours and you should have a little extra in your next paycheck.

14. Gather up loose change.  If you are like me you probably have a couple stashes of loose change – on top of your dresser, in the cup holder of your car, and the cracks between sofa cushions.  You can either roll the coins in wrappers provided by your bank, or visit a Coinstar machine in your area to convert the coins to cash.  Coinstar charges a fee for cash payouts, but you can get an Amazon.com gift certificate for your full balance, which could be used to buy just about everything under the sun.

Money Makers

Going Off The Grid Once A Week

Posted on by  at  6:00 am
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Caught a post recently about “off the grid” living over at Five Cent Nickel, and the author had an interesting idea I’d like our family to adopt.  His arrangements sound a lot like ours.  Like us, he found it nearly impossible to live off the grid 100% of the time when you are living in the middle of a neighborhood.  If we were out in the country it might be just as much of a challenge, but at least there we would have more room, and more freedoms to try to pull it off.

off the grid vegetable garden
Photo courtesy of Southern Foodways Alliance

Still, suburban living is no excuse for not finding creative ways to become a little more self-reliant.  So beginning tomorrow, each Saturday morning we’ll throw the breakers to the “Off” position (all but the circuit controlling the refrigerator and freezer) and go 24 hours without power, intentionally.  Obviously, we don’t want our food to spoil as that would not be very frugal.

To prepare for such an experiment, I’ve been trying to brainstorm the pros and cons of going off the grid once a week.  Here are a few of the obvious ones, and a couple that seem like minor annoyances we can work around.

Pros of an Off the Grid Saturday

Lower utility bill. Not sure how much lower the utility bill will be, but I’d like to think not running the air conditioner, computers, lights, televisions, etc. 14% of each week would have some positive effect.  Because laundry will still need cleaning we’ll probably use the washing machine, but not the dryer, opting instead to line dry clothes, or use a drying rack.

More family time.  I imagine without me being huddled around a computer, and the kids parked in front the Wii, we’ll find more family time to spend together.

More outside time.  As a family, we’ll probably look for ways to escape our dark house and get outside for some fresh air.  It would do us all to get outside more, particularly on the weekends when we aren’t cooped up in school or the office.  We can spend the afternoon gardening, playing basketball, and take a leisurely stroll or bike ride through the neighborhood.

Cons of an Off the Grid Saturday

Resetting clocks on oven, microwave, radios, etc. This may seem like a minor thing, but resetting the time drives me nuts!

The heat. I’m jealous of those that live places where they don’t need air conditioning.  I live in the south, and here air conditioning is a must. Not only do the temperatures climb near the triple in the summer, but the humidity is unbearable. 90 degrees here is sweltering compared to 90 degrees in drier climates.  For this reason, it might be tough to go without AC (and ceiling fans) during the hottest months.

After giving it some thought, we could probably leave the electrical panel alone and simulate not having power by turning off the air conditioner at the thermostat, keeping all electronic devices off for the day, and not using lights. That way we can still make use of ceiling fans, not worry about killing power to refrigeration devices, etc.  Now I just have to sell this idea of living off the grid once a week to my wife and kids.  And that could prove to be the toughest part of the entire experiment!  I’ll follow up next weekend to let you know how it goes.