Monthly Archives: January 2010

Should I Save For Retirement While In Debt?

Posted on by  at  6:00 am
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This article is by Adam from Money Relationship. Subscribe to his site to get updates about his journey out of $150,000 in debt.

That’s a question that a lot of people ask while in debt. Dave Ramsey, possibly the most popular debt counselor, recommends that you stop ALL retirement saving while eliminating debt. He argues that it gives you a huge advantage because you have a lot more money for your debt snowball.

I am a little more liberal when it comes to this rule. I think that it should be based on some other factors as well. For example, our current pile of debt is so large that we will be missing out on 5+ years of retirement saving (the amount of time it’s going to take us to pay off this debt). When you add compound interest into the equation, it means that we would be missing out on a lot more money. Let me give you our situation as an example:

I currently work for the Government and am offered a 5% match for money I put into the Thrift Savings Plan (fancy government word for 401k). That means that for every dollar I put into the plan, they match me 100% up to a 5% of my income. That’s a guaranteed 100% return on my money and I can invest it in any of their funds. However, if I didn’t contribute to the plan, I would miss out on that free money. Plus, I would miss out on 5+ years of compound interest.

Now, I am going to put some numbers to the scenario. Let’s say I start putting 5% of my income (plus the match) into the plan starting today (age 25). By the time I reach age 70, I will have almost $2.5 million in the account assuming an 8% return. Now, if I wait 6 years (best case scenario for debt repayment) and start investing the same amount per year, I will only have $1.7 million in the account. Still not bad, but almost $800,000 less than if I would have started at 25. Here is a graph of this example:

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So, as you can see, starting to save for retirement 6 years from now instead of today will cost me about $800,000 in retirement savings by age 70. Am I really going to pay that much more in interest by not stopping my contributions? I don’t think so!

So, I guess the question is, when should you stop contributing to retirement in order to clean up your debts? Should you do it if you can get the debts paid off in 2 years or less? 4 years or less? What is the magic number?

All I can say is, I am not missing out on almost $800,000 in retirement growth to save MAYBE a couple thousand in interest charges.

What are your thoughts on the subject? Can you think of any reasons why I should be STOPPING my contributions?

Weekly Roundup: Big Screen for the Big Game Edition

Posted on by  at  5:00 am
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With the Superbowl teams set, how many of you are rushing out to pick up a big screen television for Superbowl Sunday? I suspect not many of you will actually do this, but judging from the number of ads I’ve seen in the last week or two, I’d bet this is a popular thing to do.

Sure, prices of plasmas and LCD televisions have come down a bit, but at the upper end of the market they still cost as much as a small, used car. Is it really worth laying out a few thousand bucks just to see four hours of football in higher resolution? What’s worse is the rent-to-own shops that will really be pushing the big screens over the next couple weeks. If you are in the market for a high-def television, at least considering paying cash, else you may be still making payments when next year’s Superbowl rolls around!

The Frugal Roundup

Don’t Fall Into the Minimum Payment Trap. Stop paying only the minimum payments on your credit card. With the high rates that credit cards are charging these days, most of your minimum payment is going towards interest charges. Paying only the minimum means you may be paying for that pizza for years to come! (@ Gen X Finance)

7 Ways to Control Spending When You Have Out-of-town Guests. This happens to all of us. You let people stay at your place and end up heading out on the town with them. You feel almost obligated to spend time (and money) with them. Use these great tips to break the habit. (@ The Sun’s Financial Diary)

How Conan O’Brien Wants You to Succeed. Flexo has another great guest post which talks about what Conan O’Brien’s ouster from The Tonight Show can teach you about life. (@ Budgets Are Sexy)

7 Money Lessons From Monopoly. Here is a cool list on lessons that the game of monopoly can teach you. I think some of my favorites are that you can’t avoid taxes and cash is king. (@ Financial Highway)

Best of the Rest

Financial Infidelity: Cheating On Your Partner With Dollars

Posted on by  at  5:00 am
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The following post is from Neal of WealthPilgrim.com. After reading the article, be sure to sign up for free at Wealth Pilgrim to receive more from Neal.

Last week I wrote about a newlywed couple that had to deal with the issue of “financial infidelity.” To make a long story short, Karin bought a laptop (with her own money) without telling her husband Jim about it first.  He flew into a rage and started throwing temper tantrums, accusing his wife of “financial infidelity.”

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Photo by Ed Yourdon

I personally think the husband is out of his mind, but the situation does bring up an important question; what constitutes financial infidelity and how do you deal with it?

While I am no expert in infidelity (thankfully), it occurs to me that other forms of cheating are a bit more-clear cut.

When you break an implicit or explicit promise – that’s cheating.

But money is tricky.

Where do you draw the line?

If I come home to find that my wife put the house up for sale without discussing it with me first, I’m going to feel cheated.

If, on the other hand, I bring home Honey Nut Cheerios rather than Corn Flakes because the Cheerios are on sale – it’s no problem.

So do you draw the line simply based on the dollar amount? Do I have discretion up to $10 and after that, I have to consult with my wife?

In my household, we both work.  I happen to make more money than she does.  Does that mean I have more discretion than she does?  If that’s the case, she’d be guilty of “financial infidelity” at a lower number than I would.  Does that make sense?

I believe there is no “global solution”.  Each couple has to make their own agreement, be crystal clear where the boundary is and communicate about it often.

So what do you do when your spouse breaks that boundary?

Here’s an approach I’ve come to rely on:

1.   Communicate what you feel and why.

Rather than blame your spouse from the get-go, just tell him/her you are upset, scared, afraid, whatever…and tell them why. You may find out that they did what they did for a perfectly justifiable reason – even though they failed to talk with you about it first.

2.   Get agreement on how to handle similar situations in the future.

Communicate how you would like to handle the situation going forward and find out if your partner agrees. Don’t try to force them into agreeing.  Just ask them how they would like you to handle it if the situation were reversed.

3.   Don’t expect perfection.

Your wife is probably a great person – but she’s not perfect.  Neither are you.  There may be some area where she continually lets you down in the financial world.  Can you accept it?  Has your wife accepted your imperfections?

Some battles are just not worth fighting.  Make sure you pick your battles well.

How have you dealt with issues like this in the past?

A Giveaway for Frugal Dad Readers

As an extra incentive to pick your brains, Jason has twisted my arm and convinced me to give away 3 copies of my course, “Money School for Couples”. It’s a course I created to help couples stop arguing about money. It’s made up of 10 short videos, some exercises and a few whitepapers.  Basically, it’s everything I’ve learned over the last 25 years. The course teaches you how to fix a marriage by fixing the finances. I’m going to use Random.org to pick the lucky winners.

All you have to do to have a chance at snagging your free copy is:

a.   Enter a comment with your answer to one of the three questions below.

b.   Agree to give me your honest feedback about what you like and dislike about the program.

1.   Have you ever had to deal with “financial infidelity”?

2.   Have you ever crossed the line when it comes to cash?

3.   What system do you use that has helped you and your spouse avoid these kinds of battles?

What I Learned About Saving Money From Older Generations

Posted on by  at  5:00 am
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This is a guest post from MD of Studenomics. If you hate boring finance stuff and love practical tips than Studenomics is the place for you. If you haven’t stopped by in a while, don’t be shy and please come on over to see the new design. If you enjoy this article then please consider subscribing.

You ever notice how there are older people that don’t know the first thing about the world of personal finance, yet they seem to be experts at saving money? These people have also not heard of personal finance gurus, such as, Dave Ramsey or Suze Orman, or even Frugal Dad. Yet they still save money. They don’t read personal finance blogs nor do they ever want to listen to a full personal finance podcast.

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Photo by eyg2158

Many of us twenty-somethings are completely lost sometimes when it comes to personal finance, yet we have all the information about money management available to us within a few clicks. We have a lot to learn from older generations when it comes to saving money.

How do these old school people manage to save money? What are their money saving tips?

They follow the “pay yourself first” mentality.

Instead of waiting for the end of the pay cycle, these ambitious individuals put their money away as soon as their paycheck comes in.
Whether they choose to invest in CDs, mutual funds, risky stocks, online savings accounts, or keep it under their pillow is irrelevant. Savings come first. Bills come second. Third is the necessities of life. Whatever is left over is used to enjoy life a little.

The key takeaway is that savings are always done first. Before you buy that new cologne it’s imperative that you have reached your set savings target for that pay cycle or whatever deadline you have set for you financial goals. If not, then the new bottle of cologne is going to have to wait.

They live below their means.

Not a revolutionary concept but a getting rich slowly basic that needs to be reinforced into all of us. These people are usually the millionaire next door that drive the car you would never dare step foot in because it’s embarrassingly ugly. They will never be the nicest smelling person in the room nor will they wear the most expensive pair of shoes.

These old school money savers understand how much money they earn and their lifestyle is directly proportionate to their income. If they earn $50,000 a year before taxes, they will likely not go all out and buy a BMW. They simply don’t see the need to acquire debt for a car (or home for that matter) that doesn’t fit their lifestyle.

They avoid external influences.

Advertising does have an affect on everyone. However, it is more severe on certain individuals. The old school money savers are less susceptible to fall victim to new age marketing techniques. How come? Because they have everything they need in life and don’t go looking for more. Sure they may occasionally splurge and buy something they really don’t need all that much. At the end of the day these scenarios are few and far in between.
Impulse purchases are kept to a minimum.

You have to work for their money.

It is fairly easy to extract money from most of us. The old school crowd feels that everything is a scam. They do not want to hear your sales pitch. They will not even humor you by pretending to listen to the sales pitch. You have to work your butt off to get your hands in their pockets.
You will have to sell something really good at a bargain price to get into their wallets.

At the end of the day we have a lot to learn from these old school folks (don’t worry guys I’m not calling you old, just old school).

Are there any other old school money saving tips that I missed?

What have you learned from older generations about saving money?

Why Do You Want To Be Rich?

Posted on by  at  2:00 pm
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This is a guest post by Joel Reese, the managing editor of We Seed, a site that helps everyday people get to know the stock market. You can find the site’s blog here.

Here’s a question: Why do you want more money?

Maybe you don’t want to luxuriate in a gold-plated bath filled with lilies imported from a meadow in the Swiss Alps. Maybe you just want to get out of debt. Maybe you just want to get a handle on your day-to-day expenses. And more power to you.

But many people want to move beyond that, into the rarefied air of the 35% tax bracket — and beyond.

So here’s my question: Why?

I ask this question with no judgment. I’m not Noam Chomsky. I’m not going to go on some anti-materialism diatribe here. When I was young and foolish, I thought anyone who pursued money was greedy and shallow. Now, I’m older (alas) and wiser (perhaps), and I don’t have as much of a problem with wealth.

Actually, if I’m honest here, I sure do wish I little more jingle in my jangle. I drive to work in a 2001 Volkswagen with an odometer that’s well north of 100K. I try to make dinner in a microwave oven that inexplicably shuts itself off after exactly 2:48. I watch TV on a ratty old couch that Mickey Rourke would probably avoid.

And I find myself thinking: “Man, it would be nice not to have to worry about this stuff.”

Maybe that’s about the extent of my wishes: As Dorothy Parker said, “I want only enough to keep body and soul apart.” But I also have an adorable two-and-a-half-year-old daughter, and I would love to be able to move into a house with a big yard for her to play in.

And to be able to buy her all of the Olivia books, without worrying if we’re going over our amazon allotment for the month.

And to be able to go to restaurants more often.

And to buy a bottle of wine without making sure it’s in this book.

And the occasional trip to, say, France.

And to sleep like Rainer Wolfcastle in The Simpsons: “On top of a pile of money with many beautiful ladies.” (To my wife Jeanne: Just kidding.)

But the point is, it becomes a slippery slope. You want just a little bit more, and soon it becomes like a drug. You want that next thing. Sure your cellphone is nice, but does it have augmented reality? No? Oh man, you have to have augmented reality!

The thing is, I know I’ve got it pretty good. As seen recently on Financial Samurai, we here in the U.S. enjoy a standard of living that most of the world wouldn’t dare dream of. My debt is pretty minimal, I’ve got a great job with amazing benefits, and so on. So I don’t mean to be a malcontent.

But I’ve been able to dip my foot into the waters of the wealthy. Years ago, my ex and I went on a bicycling trip with a high-end travel company through Tuscany. (We were only able to afford it because she was doing some travel writing, one of the sweetest gigs you can have.)

Our group rode some of the Tour de France’s route, and we saw some of the race. I even have a picture of Lance Armstrong raising a glass of champagne right at me. (Well, my ex has it now, but let’s not split hairs.)

And at one point, we stayed at the same Tuscan inn as Robin Williams, who’s apparently a huge cycling fan. And I have to say… living the way the uber-wealthy live was really, really nice. Imagine a football-field­–sized bed with the softest sheets imaginable. Elegant linen curtains. A view of the Alps. Delicious dinners with endlessly flowing hand-crafted Italian wine. And so on.

So we got to pretend that we were rich for a little while. And then, like Charlie in Flowers for Algernon, we were sent back to our middling lot in life. (And no, we never saw Robin Williams, either.)

So is it just me who wishes I had a little more? Or are you one of those people who is happy as a pig in mud with what you’ve got? And if so, what’s your secret? I’d love to know it.