No doubt, if you’re here, you’ve probably made some mistakes financially. That’s okay, there’s no adult walking the earth that hasn’t. You can certainly be sure of that.

I truly enjoy helping people get their finances under control. It really does bring me a lot of satisfaction. One thing I do to make sure I stay abreast of new financail crises is to watch message boards. Many times people will join a message board and post something along these lines:

Help me get out of credit card debt!
I really need someone’s help. My spouse and I have made some mistakes financially and now we’re really in a bind. We’re barely making ends meet. I’ve even taken on a part-time job. It just seems there isn’t enough money at the end of the month. No matter how hard we try, it seems there’s always something that comes up that keeps us from saving anything! Please, help us get out of credit card debt. We’re drowning!

Small details in these situations change, but the answer is almost always the same. If you find yourself in a similar situation, think long and hard about what you are about to read, then commit yourself to doing it.

Three steps to help you get out of credit card debt:
1: Cut up your credit cards and close your accounts. I don’t care about your FICO. I don’t care about “emergencies”. You need to stop borrowing money. You can’t dig yourself out of a hole - you need to climb out. Cut up your credit cards and close your accounts. This step might take a lot of faith on your part. It maybe sent an uneasy feeling to the bottom of your stomach. That’s okay though - that’s just because you have gotten so used to that comforting plastic that you’re going through a bit of withdrawal. Take a deep breath and destroy your credit cards.

2: Get on a written budget. What does this mean? You write down everything you spend and you sit down at the beginning of the month and budget your money. Experience (mine and thousands of others) has shown that when you begin budgeting your money by having a plan and sticking to that plan, you experience a raise. And usually it isn’t the 3-4% raise you’re used to. We’re talking 10-20% - even 30% at times. When you plan and budget your money you are not constricting yourself, you are telling your money what you want it to do. Once you do that, get out of its way and let it do what you told it to! Once you’re on a written budget you’ll see where you can easily cut back on unnecessary expenses while not even experiencing a change in your lifestyle (which wouldn’t be the end of your world, if you’re having credit card debt issues). Once you have a budget in place, you’ll see where the extra money can come from - enter step three.

3: Snowball your debt. This final step will be the final blow to your credit cards. Do you want to know what will really help you get out of credit card debt? Big, fat payments on the principal that you owe the credit card companies. That’s right, you will not be shifting the debt around, pretending to actually be doing something. You will be paying down your credit card debt one step at a time.

Let’s do a quick recap on what will help you get out of credit card debt: (1) Cut up your credit cards and close the accounts. Never use them again. (2) Get on a written budget. You tell your money what to do - not the other way around. (3) Snowball your debts into absolute oblivion.

I could probably explain the difference between a roth IRA and a traditional IRA in one sentence (don’t expect me to do that though):

With a roth, you tax the seed. With a traditional IRA, you tax the tree:

Alright, there you have it.

We’ll do a little number crunching to fully illustrate the difference between these two retirement vehicles. Check out the article on Roth IRA Basics if you want to get into specific rules and regulations regarding the Roth specifically. If you just want to know the difference between the roth and traditional, stick around.

With a roth, you contribute after-tax money. So, if I have taxable income of $50,000 and put $4,000 into my roth, I still pay taxes on $50,000. With a traditional IRA, your contribution is pre-tax. Given the same situation of $50,000 taxable income, if you put $4,000 into your traditional IRA, you would pay taxes on $46,000 (50,000-4,000). Traditional IRA contributions are deductible. Roth contributions are not.

Let’s get an investment going:

Alright, so what can actually be invested? Well, if you can only afford to invest $4,000, then, after taxes, your roth would be funded with $3,000. $1,000 less than your traditional IRA. That’s because the traditional IRA contribution is deductible.

“Echo to base. The seed has been planted“. Let’s say we contribute $4,000 before tax each year to our investment. We do this faithfully for 30 years. Let’s also assume we get an 8% return on our investment (after inflation) for both the roth and traditional IRA. Here’s what our nest egg would’ve grown to given these assumptions:

So the difference between the traditional IRA and roth IRA nest eggs? You have another $113,283 in your traditional IRA.

Except we haven’t paid Uncle Sam

So am I trying to tell you that it doesn’t matter? It’s all a wash in the end? Not hardly. The one key assumption I haven’t talked much about is the tax rate. If you contributed starting at age 35 (start earlier!), until you were age 65, we’re talking about a 30-year spread of future history (?) there. I assumed your tax rate at 35 would be 25 percent. However, who’s to say that Uncle Sam won’t raise the tax rate to 35 percent? Or, what if you’re earning significantly more money during retirement (now wouldn’t that be sweet?), so you’re naturally in a higher tax bracket, maybe 37 percent?

What if Uncle Sam lowered the tax rate to 10%…

You get my point. The tax rate is an unknown variable. I personally choose the Roth IRA for the following reasons: I’m a college student. My tax rate is virtually zero percent. I am fully expecting my tax rate to go up in the future. Also, I sure hope I’m in the highest tax bracket when I retire; that means I’ll be making a ton of money.

The difference between the roth ira and traditional ira lies in your current tax rate, and your expected tax rate upon retirement. Remember, it’s not set in stone which one you’ll use forever. You can contribute and not contribute at will, even doing both simultaneously (subject to certain limits).

1,006 more words to finalize my point.

The Roth IRA is arguably one of the best retirement vehicles out there. It is important that you understand the basics of a Roth IRA. This basic knowledge will go a long way in helping you figure out whether opening and funding a Roth IRA would be in your best financial interest.

It’s my goal to discuss Roth IRA basics in very clear terms, forgoing any confusing terminology (which is tough to do if you’re talking about legislation in any form, and if this legislation affects taxes in any way? Your chances are even slimmer).

Roth IRA Basic Outline:

1. What is a Roth IRA?
2. Why should I open one?
3. Who’s eligible for a Roth?
4. How do I make contributions?
5. When and how do I get distributions from my Roth IRA?

What is a Roth IRA?
A Roth IRA is a type or classification of an investment. So when someone says, “I have a roth.” It really doesn’t tell you too much. That’s like me saying, “I have a car.” Neat-o. The more relevant question is probably, “What kind of car do you have?” Or, in retirement talk, “What assets are you holding in your Roth IRA?”

So remember, that a basic Roth IRA is simply a classification of an investment. You can hold almost anything in a roth: mutual funds, single stocks, bonds, CDs, etc.

Now, because these investments you have are classified as a Roth (only certain institutions, such as banks, brokerage companies, or federally insured savings and loans or credit unions have approval from the IRS to offer Roth IRAs), it earns special treatment come tax time. One of the basic components of a Roth IRA is that your investment earnings grow tax-free, and are distributed to you tax-free, if the distributions are qualified.

Why should I open one?
An example will probably work wonders here:

Let’s say you contribute $1,000 after-tax income a year to your Roth IRA (below contribution limits, but just to keep it simple for now). And let’s say this $1,000 each year is invested in an S&P 500 Index fund. If you do this from age 25 to 65, at an average annual return of 10%, you will end up with $527,000. Now, remember, you contributed a total of $40,000 to your fund (40 years at $1,000 per year), so your investment grew $487,000. That whole $487,000 is tax free baby!

If you had simply invested that $1,000 in a normal mutual fund, where your earnings did not grow tax-free, and the capital gains rate remained at 20%, you would have a mere $291,000. So you can see that the Roth IRA, by being allowed to grow, and distribute its funds to you tax-free, saves you almost $200,000! That is sweet.

Who’s eligible for a Roth IRA?
You are eligible to open and/or contribute to a Roth IRA if you have taxable compensation during the year, or self-employment income (as with sole proprietors or partners). Your modified adjusted gross income (MAGI) cannot exceed certain limits however. These limits depend on your tax filing status, and are outlined below:

How do I make contributions?
If you’re working for an employer, basically your compensation that is eligible for contributions is anything in Box 1 of your W-2. This includes wages, salaries, commissions, and bonuses. If you’re self-employed, your eligible compensation consists of your net earnings less any contributions to retirement plans and less 50% of your self-employment tax.

There is, unfortunately, a limit to how much you can contribute to your Roth IRA each year. For the 2005 tax year, the limit is $4,000 per person. So, if you are married you could potentially contribute $8,000 in 2005 ($4,000 for you, $4,000 for your spouse). However, spousal contributions must meet the following requirements:

* The couple must be married.
* The couple must file a joint tax return.
* The person making the contribution must have eligible compensation.
* The total contribution made for both spouses cannot exceed the taxable compensation of the couple.

Rental income, and interest and dividends are not eligible for contributions.

When and how do I get distributions from my Roth IRA?
Alright, this gets a bit hairy, but it’s not really too bad. In order for a distribution to be tax and penalty free, it must be a qualified distribution. A qualified distribution must take place at least five years from the establishment of the Roth IRA and meet at least one of the following requirements:

* The IRA holder is at least 59 1/2 years old when the distribution occurs.
* A distrubtion of no more than $10,000 ($20,000 for married filing jointly) is used toward the purchase or rebuilding of a first home for the Roth holder, OR spouse, child, grandchild, parent, or ancestor of the Roth holder. This can only happen once per lifetime.
* The distribution takes place after the IRA holder is disabled.
* The assets are distributed to the spouse upon death of the IRA holder.

If an unqualified distribution is made then you will be required to pay income tax on any amount that was not an original contribution and an early-withdrawal penalty of 10%. This can be a huge hit. I strongly discourage taking any unqualified distributions. Certain exceptions apply, but for the sake of brevity (have I already lost my chance with that?) we won’t get into it.

Conclusion
As illustrated above, the Roth IRA is a powerful investment vehicle when used properly. You can potentially save yourself hundreds of thousands of dollars you might otherwise have to hand over to Uncle Sam. I strongly encourage you to look into opening a Roth IRA so you can begin benefitting from the tax-free growth it offers.

I ran into this article about 40 year fixed rate mortgages at Bankrate.com and I just couldn’t let it slide without a bit of comment.

Okay, so people are starting to look at 40 year mortgages because they want to squeeze a few extra bucks a month off their mortgage payment. According to the article, with a $200,000 loan, you’re looking at saving on your mortgage payment less than $64.

But how much is the extra ten years going to cost? In the first five years of your mortgage (and we all know that most mortgages don’t last much longer than 5 years), you’ll pay an extra $3,500 in interest. Oh, by the way, guess how much equity you built in your house during the first five years when you elect to stay in debt for 40? $6,500. More than $7,000 less than on a 30 year fixed-rate mortgage. Sheesh, if housing happens to be somewhat stagnant, you’ll be lucky to come out even a bit ahead after closing costs.

“It allows you the opportunity to have a lesser payment, and for many people it gives the luxury of choice,” says Jim Sahnger, a broker with Palm Beach Financial Network in Sewall’s Point, Fla.

Alright, first, Mr. Sahnger is a broker. He makes money when you take out a mortgage. I can promise you that selling you a 40 year fixed rate mortgage will be much more profitable than selling the 30 year counterpart.

No conflict of interest there.

What Mr. Sahnger says really burns me. He mentions that having a “lesser payment…gives the luxury of choice.” First of all - $64 measly dollars gives more choice? Okay… And second, since when has someone in debt had more choice than someone not in debt? When you are in debt you are obliged to pay, as the Bible says, you are “slave to the lender.” So who really has the luxury of choice in the long run? The person who choose to live debt-free. What does debt-free mean to me? Your house payment, on a 15-year fixed rate mortgage, is at most 25% of your take-home pay. Other than that, you shouldn’t owe anybody anything. And congratulations, you just found a house you can afford.

They will compete with interest-only mortgages. Those, too, were a niche product until home prices began zooming in parts of the country three or four years ago. Now interest-only loans occupy a big chunk of the mortgage market in high-price cities as buyers hunt desperately for ways to afford absurdly expensive houses.

And please, don’t get me started on interest-only mortgages! Alright, why are home prices zooming? Because sellers are willing to pay that price. Why are they willing to pay that price? Because their monthly payments are jimmied low enough using financial instruments such as interest-only mortgages or these 40 year fixed rate mortgages. So, buyers “hunt desperately for ways to afford absurdly expensive houses” (italics added).

That’s an interesting (and wrong) use of the word “afford”. The applicable definition of that words is as follows: “have the financial means to do something or buy something”. I’m sorry, but if you need to pay only interest for the first 3, 5, or 10 years of your mortgage, or if you have to stretch the payment to 40 years, you cannot afford the house you so desparely want. Think smaller, or continue renting until you have saved more money for a downpayment.

Being debt free will give you the “luxury of choice” you want so badly. Do not proceed to attach ankle weights to your legs before beginning a marathon, and please don’t take a 40 year mortgage to “afford” a house you can’t.