The following is a wrap up of Frugal Dad’s week-long series, The 7-Day Turnaround: One Week to Change Your Family’s Financial Destiny:

• Day 1 - Take an Inventory of Your Finances. This step involves taking an inventory of all of your assets and liabilities to create you own personal balance sheet.
• Day 2 - Build an Emergency Fund, Quickly. The cornerstone of any solid financial plan is to have a decent emergency fund in place. Start with getting three months of expenses in a high-yield savings account.
• Day 3 - Cut Up Those Credit Cards. The easiest of all the steps, mechanically, but one of the hardest to actually do. Forget loyalties, sentiments, just cut. Save one for emergencies until a healthy emergency fund is in place.
• Day 4 - Slash Your Expenses. Now that you have slashed credit cards, it’s time to slash your monthly expenses. Cancel subscriptions, cancel the cable, stop eating out, and basically live ultra-frugal lifestyles until you are debt free.
• Day 5 - Start Saving for Retirement. Determine how much you will need in retirement and use that as a minimum target goal. Start investing in your 401k at your employer, up to any matching funds, and then fund the rest in Roth IRAs,
• Day 6 - Give the Gift of Education. Start investing in ESAs or 529 plans for your kids. Avoid “managed allocation” options and direct the fund selections yourself.
• Day 7 - Invest for an Early “Retirement.” After you are maximizing savings in tax-free or tax-deferred retirement plans begin to save outside of retirement accounts in solid, low-turnover growth mutual funds. These funds can be tapped before the traditional retirement age, allowing you to step away from your “day job” and start doing some work you love.

This is the seventh article in Frugal Dad’s week-long series, The 7-Day Turnaround: One Week to Change Your Family’s Financial Destiny. Each day brings a new step to implement and help you get control of your finances.

The word “retirement” has always evoked day dreams of playing out the remainder our lives fishing, golfing and joining a bridge club. However, with improvements in preventive medicines people are living longer, and with a bull market at the end of the last decade, many of those people are “retiring” earlier. Instead of retiring from the work world entirely early retirees are simply hanging up their careers and looking for more fulfilling work, a search for that self-actualization Maslo referred to. That is a noble goal. We spend the majority of our early careers working to pay for things (houses, cars, college for the kids). Why not start saving for an early retirement from your day job so you can then go do something you have always wanted to do, regardless of the pay.

Invest outside of retirement accounts. We’ve already learned the virtues of investing inside retirement accounts, but in this final step let’s start to invest outside of retirement accounts so that money is available to tap before 59 1/2, the current minimum age to withdraw from an IRA. This step requires closer scrutiny of investment options than investing inside retirement accounts. For one thing, your time horizon is shorter so you have less time to recover from making a bad investment selection. You also have less time to recover from a market downturn, so riskier investments are usually off the table for this type of investment. Capital preservation is nearly as important as capital appreciation in this step.

Don’t forget about taxes. Since these investments are outside a tax-deferred, or tax-free retirement account you have to be more conscious of the tax implications. Consider investing in a more conservative mix of index mutual funds with a low turnover to minimize taxes. Vanguard’sTotal Stock Market Index Fund and 500 Index Fund are good examples of low-cost mutual funds with low turnover. With interest rates hovering near record lows, high-interest savings accounts are not as attractive an option as in times of higher rates. Still, keeping a portion of your “early retirement” fund in cash may make sense if you can find rates that significantly out-pace inflation. Treasury bonds, high-interest bearing CDs and money market mutual funds offer decent returns with minimal risk, but should only represent a portion of your total early retirement fund in the beginning stages. You need growth on your side up front, and once you’ve earned that growth you can begin to take those profits and preserve them in these safer savings vehicles.

At some crossover point in the future your monthly investment income will match your monthly expenses. At this point the money in your “early retirement” account is generating enough working capital to pay your monthly expenses. You are no longer dependent on earning a wage to provide necessities. This point was best illustrated in the book Your Money or Your Life. Author Joe Dominguez used a graph to plot monthly expenses and monthly investment income. Over the years his investment income grew, and as he practiced frugal living principles his expenses decreased. One day the two figures met. It is at this point that you can finally break away from the daily grind. What is it you’ve always wanted to do, but could never afford to start? Maybe you want to start your own business, or perhaps you would like to volunteer more of your time towards a particular cause. Regardless of your chosen endeavor, you are now free to make the jump without worrying about how much money is involved. With that kind of freedom creativity is released in waves, and you just might find yourself making more money than you made in your working lifetime.

Like this article? Subscribe to Frugal Dad’s RSS feed here, or if you prefer receiving notifications via email you may subscribe to email delivery here.

Technorati Tags: early retirement, minimize taxes, inflation

This is the sixth article in Frugal Dad’s week-long series, The 7-Day Turnaround: One Week to Change Your Family’s Financial Destiny. Each day brings a new step to implement and help you get control of your finances.

One of the most valuable gifts we can give our children is the gift of education. Used properly our kids can lead successful lives long after we are gone. I am not one of those that believes a college degree is an automatic way to wealth. What you do with your education is far more important than the degree hanging on your wall. Having said that, if you are in the position to help your children complete their education it will help them immensely because they won’t owe Sallie Mae two years of their first salary earned out of school. Too many new graduates are saddled with huge student loan debt, stifling their financial productivity in those precious early years after graduation.

Start early. Like any type of investing, the key is to start early. College tuition continues to rise at a staggering rate, and by the time your newborn heads off to school it may costs as much as your mortgage, in today’s dollars. The only way to beat that pace, other than hitting the lottery, is to get an early start and take advantage of 18 years of compounding growth.

Take advantage of tax-free savings vehicles. The government has made the job a little easier these days by offering two outstanding tax-free savings plans for college savings. Education Savings Accounts (ESAs), sometimes referred to as an Education IRA, may be opened at nearly all brokerages. Unfortunately, you can only contribute up to $2,000 a year for junior, but the earnings do grow tax free. So if that $36,000 in contributions from birth to age eighteen grows to $100,000 you can withdraw 100% of the account balance tax free, as long as it is used for educational expenses.

Education Savings Accounts may provide adequate savings for your child, but in case they get accepted to attend an ivy league school it might also be a good idea to invest in a 529 College Savings Plan. 529 plans are sponsored at the state level, and many states offer tax deductions for contributions made to your in-state plan. If your state’s plan is lousy, don’t invest just for the tax deduction. You are able to invest in plans managed in other states, you just simply don’t get a tax deduction on your state income taxes. Saving for College has a good 529 plan overview that lists all the state plans.

Financial aid is still available. Neither type of college savings plan are considered student assets in the eyes of federal financial aid providers, and therefore will not significantly reduce your child’s eligibility to receive federal financial aid. However, since most needs-based scholarships are offered at the individual school level the schools may have different rules on how assets are treated.

Chart your own course. Regardless of savings vehicle you choose be sure to select your own investments. Some of the best 529 plans offer a wide range of investment options in top mutual fund brokerages such as Vanguard or TIAA-Cref. Others offer only “managed allocation” options based on when your child plans to attend college. The plan administrator may not have the same tolerance for risk as you, and move your child’s savings balance to more conservative options too early.

What if my son or daughter decides to take a different path? If your child decides not to attend college you may assign another family member as beneficiary, which could be a nice gift for a brother, sister, or favorite niece or nephew. If you have a small family with no other beneficiaries available you can always cash out the savings and pay a 10% penalty, in addition to your ordinary income tax rate.

Like this article? Subscribe to Frugal Dad’s RSS feed here, or if you prefer receiving notifications via email you may subscribe to email delivery here.

This is the fifth article in Frugal Dad’s week-long series, The 7-Day Turnaround: One Week to Change Your Family’s Financial Destiny. Each day brings a new step to implement and help you get control of your finances.

Now that you have moved beyond the half-way point in your 7-day turnaround, it’s probably a good time to look back and see what all you have accomplished. After taking an inventory of your finances you established a three-month emergency fund to break the cycle of relying on credit cards. In step three we cut up those credit cards, saving one no-fee, low-interest card for emergencies only. Slashing your monthly, non-utility expenses was a major emphasis in step four, requiring you to think long and hard about trading your hard-earned income for things like gym memberships and cable service. By now you are debt free with a solid emergency fund - it’s time to start saving for your retirement.

The first step in planning for your retirement is coming up with your Number. Everbody has a Number, but few of use know what it is. Your Number is the amount of money that will grant you the level of financial independence that allows you to quit working for money. The Number, by Lee Eisenberg, offers many strategies for calculating your Number. It isn’t good enough to say, “I’ll retire when I have a million dollars in the bank.” Determining your Number takes actual planning, determining how much working capital you will need to live off of your investments, and estimating your expenses in your golden years.

Take advantage of matching funds from employer retirement plans. Most employers offer full time, professional employees the opportunity to invest in an employer-sponsored 401k plan (or 403b, if you work for a non-profit or educational institution). Many companies even offer to match employee contributions up to a certain percentage of the employee’s income. This is like free money. Get your retirement savings started by enrolling in the plan and contributing up to the percentage of income the company matches. Don’t worry if it is only 3% of your income, we’ll use your remaining earnings to save in a different savings vehicle.

A Roth IRA is the best retirement savings vehicle around. Some experts argue over whether or not to fully fund a 401k or a Roth IRA. For me, the argument for Roth IRAs is explained beautiful in the following analogy.

Would you rather pay taxes on the seed or the crop?

In other words, would you rather pay taxes on your income now, when it is smaller, or later when you are a millionaire (and you will be if you stick to this plan!). Easy choice. I would rather pay taxes on money now, and invest in a Roth IRA with after-tax dollars. When you withdraw that money in retirement Uncle Sam will let you keep 100% of the contributions and earnings, tax free! Conversely, 401k balances grow tax-deferred, which means you will save a little now diverting pre-tax income to your 401k plan, but you will have to pay more when making large withdrawals in retirement. Remember, the key to any good financial plan is to keep a long-term view. Sacrifice the reduced tax liability now offered by the 401k for a tax free payoff from the Roth IRA years down the road.

Like this article? Subscribe to Frugal Dad’s RSS feed here, or if you prefer receiving notifications via email you may subscribe to email delivery here.

Technorati Tags: retirement, investments, 401k plan, Roth IRA, taxes

This is the fourth article in Frugal Dad’s week-long series, The 7-Day Turnaround: One Week to Change Your Family’s Financial Destiny. Each day brings a new step to implement and help you get control of your finances.

At this step in your 7-Day Turnaround it is time to take a serious look at your expenses. To make a dent in debts, or boost your savings, you have to free up some income by either earning more, spending less or some combination of the two. Begin this process with a review of your monthly, non-utility expenses.

Gym memberships are usually the first to go. At $40-$50 a month for the average membership you are giving $500-$600 away that could be spent building your Roth IRA balance, or paying down your credit card debts. Buy a good pair of tennis shoes and some used dumbbells to simulate your gym experience at home.

Consider canceling the cable. The mere thought of living without television strikes fear into most people’s hearts. Fact is, television programming today is filled with mindless reality shows and silly sitcom scripts that are far from educational. Spend your time away from work participating in things that enrich your life, not wasting it. Read a personal finance book, or a book on personal development. Grab those new running shoes and take your kids on a walk. Take up a new hobby. Volunteer your time for a cause you believe in. All of these things will enrich your life, both personally and professionally. Knowing the last five winners of American Idol, or who got voted off the island will do little to further your career or your important relationships.

Adjust your W-4. Stop giving Uncle Sam an interest-free loan every year with biweekly contributions from your paycheck. Visit the IRS website, or Paycheck City, and estimate this year’s tax liability. Adjust your withholdings accordingly. Many taxpayers use the payroll tax system as a forced savings account and rely on their tax returns to plan for major purchases. If you depend on the federal government to save for your annual vacations you have a much bigger problem than credit cards.

Brown bag it. There is never a shortage of broke people out on their lunch breaks waiting for a table at their favorite restaurant. The average lunch combo runs $7-$8 with drinks and a tip. That could push your “eating out” budget to $40 a week, or roughly $150 a month. A simple switch to bringing you lunch to work could save you enough to make an extra car payment, or start a 529 college savings plan for your child. Plan to take soups, sandwiches and dinner leftovers for one month and monitor your food budget. Chances are it will shrink significantly, and so will your waistline.

Like this article? Subscribe to Frugal Dad’s RSS feed here, or if you prefer receiving notifications via email you may subscribe to email delivery here.

Technorati Tags: expenses, personal finance book, personal development