Yearly Archives: 2004

ING Orange Savings Account

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It’s tough to find a savings account that does a good job doubling as your emergency fund account. I think the ING Orange Savings Account fits the ticket.

My wife and I recently signed up. Previously we were using Vanguard to house a money market account. The service was great. I use Vanguard for other services still. However, as most of you know, money markets are not FDIC insured. An ING Orange Savings Account is.

In our money market account (which is a mutual fund with very stable holdings), we were getting an annual interest rate of about .67 percent. Now, with our Orange Savings Account we’re getting 2.2 percent (UPDATE: we’re now getting 4.75%). You might be thinking, “2.2 percent is still so low!” And you’re right. It isn’t a lot. But when you consider that it’s more than three times what we were getting with our money market, all of a sudden the savings account looks pretty attractive – especially in orange.

We’ve recently had quite a few “emergency” expenses, including three plane tickets, an anesthesiologist’s bill, some prescriptions, a speeding ticket (that was me), four new wheels & tires for the car, along with a new battery. This all happened during October and the first ten days of November.

I’m thankful we had a reserve. If you don’t have three to six months of expenses sitting in a safe, liquid account, it’s time you get working on it. Start with step one of the Four Steps to Cash Flow and get moving! The lasting rewards are worth the temporary sacrifice.

ING has been a very simple, efficient, alternative to what we were using before for our emergency fund. I was pleasantly surprised to find that we didn’t need to sign any papers to open an account. They have many security questions they ask you, and one of those questions is asked each time you log in (along with your customer number and PIN). These extra security measures allow the entire process to be paperless.

Your interest is accrued daily. When you log in you can see how much interest you have accrued so far for the year and for the month. I enjoy seeing money being created from virtually nothing. It’s empowering to have your money be working for you (even in a small way), rather than having it working against you.

Transferring money is pretty easy also. The Orange Savings Account you open is linked to a checking or savings account of your choice. Each time you deposit money you simply log in, click deposit, enter the amount, and the money is automatically pulled from the linked account. If you want to make a withdrawal, the process is virtually the same. It usually takes between three and four days for the withdrawn money to be deposited into your linked account.

The ING Orange Savings Account may not be right for you. However, having an emergency fund is right for everyone – even stuck in a shoebox behind the fish tank. You need to make sure you have the money set aside for a rainy day. I’ve become a recent fan of the ING Orange Savings Account and will continue to promote it unless and/or until I find something better.

Start Your Emergency Fund

A Tip to Manage Your Money? Write it Down!

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This little tip helped me manage my money by cutting spending about 60%. Those results are a little skewed because I did this when I was in high school. However, the principle remains the same.

What if I told you this little money management tip can easily cut your spending by 10-20% right off the top? It can. No software package can do this for you. There is no purchase necessary. You don’t have to worry about needing fancy equipment or even a fancy new catch phrase. You just need to learn how to do this one ridiculously simple thing.

Write down what you spend.

And a collective groan ensues from the readership. Allow me to explain my findings. When I was a senior in high school I decided I needed to do a better job of saving money. Most people would naturally set some type of a savings goal. I didn’t do that. I didn’t have a set goal. I wasn’t shooting for any particular target number each month. Instead, I just wrote down everything I spent–and I mean everything. If I bought a soda out of the machine in front of Wal-Mart then I wrote down $.25 on my sheet of paper. I didn’t have some fancy software package, excel spreadsheet, or neato binder, I simply had a piece of paper that had three columns: Date, Description, and Amount. Each night I would write down whatever money I spent.

My findings were surprising. In the first month my total really shocked me. I couldn’t believe I was spending that much money. Since I was making $6.25 an hour, working part-time, it wasn’t as if I had lots of money coming in. But despite that, I was shocked at the amount of money that was flowing out.

The next month, my spending total was literally cut in half. The important item to note here is that I did not make any special effort to save any money. I simply had made the goal to write down everything I had spent. Let me repeat that: I made no extra effort to save money. I simply wrote down the item every time I spent money.

The next month, the amount from the previous month (50% lower than the first month) dropped another 20%. This means that in three months I had curbed my spending 60% from the original amount. During the third month I really did notice a difference in my spending habits, whereas during the first and second months I hadn’t noticed much difference at all. The difference I did notice during the third month was interesting. I wouldn’t spend money because I didn’t want to have to write it down later. Writing it down was annoying enough that I would forgo stopping at a restaurant to grab a bite to eat, or buying a new shirt when it wasn’t planned. Writing down my expenditure made me not want to spend as much money.

Even more encouraging than the drop in expenses was the “status-quo” feeling I was still maintaining. By this I mean that during the previous three months of writing expenditures down I had cut my spending by 60% but I didn’t feel any different. I didn’t feel deprived, dejected, boring, out of style, uncool, or weird. I really felt like I still could have anything I wanted. Put another way, I had maintained my happiness (I would say I was even happier now knowing I was saving money), while lowering my consumption.

How is that possible? I believe that happiness is not a product of consumption.

What was making me happy? I think the feeling of control over my money added to my happiness. Also, I knew I could still buy the things I wanted. I wasn’t feeling deprived–just in control.

Once you have gotten in the habit of writing down everything you spend, you’re ready to begin budgeting. And once you attain that step in mastering of your money the sky is the limit as far as your financial potential goes.

I challenge you to write down every single thing you spend. Your expenditures will drop–guaranteed. Write it down!

“Tax Advantages” of Owning a Home

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My objective in writing this article is to dispell a myth that should have been dispelled a long time ago when it comes to the tax advantages to owning a home. For purposes of my objective, a better title to this article should be “The Tax Advantages to Owing on Your Home” because you only get the tax advantages if you are in debt.

Really quickly, we’ll move through the tax advantages to owning (owing) a home. When you enter into a mortgage, as you probably know, a large portion of your monthly payment will go towards interest. As you pay down the principal, the interest portion of the monthly payment grows ever smaller, while the principal amount of your payment (the portion that goes towards actually paying down your debt) grows ever bigger. This interest is tax deductible if you choose to itemize your tax deductions. This tax advantage can be pretty lucrative for just about everyone – especially when you’ve first entered into the mortgage because you will naturally pay more interest.

However, it is a tax advantage. If you could choose to pay tax or pay taxes with an advantage, you’d choose the latter. That makes perfect sense. But never forget how this tax advantage actually becomes available.

You have to be paying interest.

Even savvy tax advisors will tell people the following: “Oh no, don’t pay your home off early. You’ll lose your tax deduction!” I feel sick to my stomach. Very well educated people tote this as a reason to stay in debt.

Would you like to guess who really pushes the tax advantages to owning (owing) a home? You got it–mortgage brokers, banks, loan officers, etc. They stand to profit from you stringing that mortgage out as long as you possibly can. They’re probably hoping you’ll take out an equity loan as soon as you get a chance too. There’s a conflict of interest if you’re taking advice from your lender when it comes to the tax advantages of owning a home.

The lender will give you, let’s say, a 7% interest rate. At the same moment he’ll tell you that the real rate or effective rate is only 5.6% if you’re in the 20% tax bracket, and 4.9% in the 30% tax bracket (you can get to these numbers with the following formula: interest rate * (1 – tax rate) ).

They never really mention that the tax advantage is only made available because you’re still paying them 5.6% or 4.9% on the loan.

Owning a home is a wonderful, wonderful thing. When I say owning I mean owning. You don’t make house payments. We’ll run two different scearios to drive home this point. Paying your house off early is and always will be better than having a tax deduction for the interest you pay.

We’ll use the following numbers:

  • Sale Price: $150,000
  • Down Payment: $30,000 (20%)
  • Interest rate: 7%
  • Tax rate: 25%
  • Time: 30 years


  Keep Mortgage Pay it off*
Total Payments $287,410.68 $222,987.11
Total Interest $167,410.68 $102,987.11
Tax Savings $41,852.67 $25,746.78
Total Cost $245,558.01 $197,240.33

*This assumes you make two extra payments per year towards your principal

By making only two extra payments per year you are out of debt 10 years faster and save $48,317.68! Remember, I’m including the tax “advantage” to owning a home in this calculation. Any way you cut the cake it’s still going to come out the same.

Finally, the tax advantage is there to promote home ownership, so I do appreciate it. It certainly does help. It is a nice benefit. But in no way does it outweight being entirely debt free with almost $50,000 saved as a result. Think about it this way–would you give me $1 to save $.25? Of course not. Yet that is exactly what you’re doing when you decide to not pay off your mortgage in favor of a tax advantage you will be giving up. That is a ludicrous idea. The numbers are here and they speak for themselves. Ownership will always be better than borrowing when it comes to funding your lifestyle securely.

Debt: Make a Guaranteed 18%

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People are always looking to make a return on investment improvement. Don’t you love hearing about a person’s raving success in the stock market? (Yet they fail to mention all of the losing stocks they also picked). If you’ve ever been bored enough to be watching late-night television, you most likely saw an infomercial about how you can make it big “flipping” properties, or leveraging (using debt) yourself to the hilt to make huge returns on your investment.

Well, I’m here to say that I also have come up with a way to make a guaranteed 18% return on your investment! Read that again if you’d like. I guarantee that you can make an 18% return on your investment. And it won’t cost you a dime. You won’t even have to buy my extremely expensive tape set for $49.95 (normally $149.95 – but if you call within the next twenty minutes you save $100!). That’s right. I’m going to give this information to you absolutely free. Here we go.

Imagine you’re an average American. That means you carry about $8,000 on your credit card. If you’re still average, then you also pay an interest rate of about 18%. That means in one year you pay $1,440 to Visa, Discover, or whoever else might be your taskmaster.

Suppose your wealthy grandmother gives you $8,000 tax free. What should you do? What would most people do? Let’s take a look at two different alternatives. Suppose you have the opportunity to invest that $8,000 into a mutual fund consisting of the stocks that make up the S&P 500. Historically (cautiously including the bubble…) you might get 11%. Let’s make the gross assumption that this fund is expected to also return 11% this year. So you take the plunge and invest the $8,000. In one year you’ll have made $880.

Because you invested your $8,000 windfall into a mutual fund instead of paying off your credit cards you effectively made a -7% return. You always need to evaluate choices with money based on the next best alternative. And in this case, you lost $560.

You must also note that the 11% return offered by the mutual fund is not a guaranteed return on investment. Naturally, there is a chance that the mutual fund could lose money during the year, or return some paltry amount. These risks are not present when you use the windfall to pay off the $8,000 credit card balance. Let me make that point again. To avoid an interest payment of 18% by zeroing the debt is the same as getting an 18% return on money you invest.

When would paying off your 18% credit card balance not be financially prudent? There is one scenario: If you can find a risk-free, guaranteed investment for your $8,000 that would yield a return on investment greater than 18% per year then it would be wise for you to invest your money in that vehicle and continue paying your taskmaster. The odds of finding such an investment? Virtually zero.

The only guaranteed return on investment I know of is to pay your debts off early or settle for federal rates. If your mortgage rate is 7% and you decide to pay the principal down then you are making a guaranteed return on investment of 7%. If your credit card balance is subject to an 18% balance and you pay it off then you have made a guaranteed 18% return.

I think I’ve beat that dead horse enough.

If you have enough money in your checking account to cover one month’s expenses, and you are budgeting your money effectively from month to month, then you need to be capitalizing on the returns you can make by paying your consumer debts (automobiles, boats, 4-wheelers, credit cards) as soon as possible. Once you have these debts paid off it’s time to finish off your emergency fund with another 2-5 months’ expenses. Put the emergency fund money in a very liquid, stable place. (I highly recommend ING DIRECT). After you’ve completed that step, begin working on having interest work for you in the other direction. Begin investing for the long run. A rich man has interest working for him, not against him.

The Root Causes of Poor Spending

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I thought I’d expand on the six root causes of poor spending, as highlighted in “Money for Life”.

1. Loss of a psychological tie to real money.
2. Explosion of ways to spend money.
3. Inability to compare expenses to income.
4. Lack of training.
5. Advertising-driven consumption.
6. Easy access to consumer credit.

Loss of a psychological tie to real money
It seems people have lost their sense of the value of a dollar. It doesn’t hurt anymore when we spend money. The amount of cash that changes hands every day is growing ever-smaller. I’m no different. I use a debit card for the large majority of my transactions. It’s the same as cash – except for the psychological impact.

Author Dave Ramsey says that when you spend with cash it “hurts more.” Also, studies have shown that people spend an average of 18% more when they spend with plastic instead of with cash. McDonald’s doesn’t accept debit cards because it increases serving time (although it does). I’m betting they accept debit cards because people spend more.

How do you get around the danger of spending more with your debit card (we won’t touch credit cards here) because you aren’t using cash? If you operate under the guiding hand of a monthly budget then I think you’re okay. That’s how I justify my use of a debit card. My wife and I budget how much we’re going to spend in each category every month. If we stay under that amount, whether we used a debit card or cash to purchase things, we still stayed under and we’re happy. If we’re having trouble sticking to our budgeted amount for a specific category then we’ll take the cash out of our checking account for that amount and pay for those things in that category with cash. When the cash is gone, we’re done spending. Period.

Try using cash for one of your spending categories for a few months instead of your debit card. See if this 18% result applies to you also. You might find that you too spend more when the psychological impact of a transaction is removed.

Explosion of ways to spend money
Just recently I heard on the radio that Discover Card is partnering with a company that produces a system whereby you could process a transaction with a thumbprint. Woah. Discover Card introduced the keychain credit card which was just oh-so-cute. Instead of having to get out your wallet (psychological impact because of its association with money) you just have to take out your keys! Handy!

This is just one example of a new way to spend your money. I’m sure the thumbprint idea will become mainstream. Instead of having to pull out the keys, you just have to stick your thumb up against a screen. They’ll promote it as a consumer service to stop credit card fraud. That would be helpful. But their primary motive is to give you yet another painless way to spend you hard-earned money.

The internet has given us a great avenue for spending money. On this site how do I collect the money from customers when they purchase something? I use PayPal. The person simply has to enter their payment information. Convenience makes purchasing so easy, that people find themselves going through with it before they’ve evaluated whether they need or can afford what they’re purchasing.

Inability to compare expenses to income
One of the reasons spending has gotten out of hand is because people don’t know how much they’re spending. They get bank statements, credit card statements, online invoices…and if they took the time to add their outflows and subtract that amount from their inflows they would see that they are spending more than they earn. The only way to curb this is to know how much you make and how much you spend.

My wife and I must be weird. We have a little system to track our spending. We budget at the beginning of the month exactly how much we made last month. We lag a month behind. At any rate, we budget how much we’ll spend each month in each category. At the end of the day, if we’ve spent some money that day we’ll put the receipt(s) in an envelope that sits on our bedside table. Every few days we’ll enter the purchases into our YNAB Budget. After that, we usually throw away the receipt. It’s pretty darn simple.

Some people have it out for me when I tell them I save the receipts. They say that’s a waste of time. It’s cumbersome. It’s annoying. I don’t agree at all. While you’re watching TV, I’m taking five minutes to track my spending each week. It does not take long. Second, sticking a receipt in my pocket when I buy something, then emptying my pockets each night when I climb into bed is hardly cumbersome. It takes virtually no thought now. Sure, for the first week or so you have to get used to not throwing the receipt on the floor of your car, but after that it’s pretty much automatic. And it certainly isn’t annoying. What is annoying is having some broke person tell me that they think writing down everything I spend is stupid. That’s annoying.

When you know how much you spend, you will (1) spend less and (2) see any problems you may be having. If your credit card balance is slowly climbing then you are spending more than you earn. MyVesta says that the average American spends $1.22 for every $1 earned. Scary.

Lack of training
I readily admit that there should be some type of formal financial training given to students in high school. Most kids don’t even know how to balance their checkbook. They have no idea what interest is, how it works, and what it can do for or against them. The younger generation needs to learn about money.

However, before we point fingers at the school system for leaving out this necessary curriculum, why don’t we sit back and think about what we can do as parents? The education of your children is still your responsibility when it comes down to it. What are you doing to train your children to be good money managers? Are you a good example? Do you instruct them on proper giving, saving, and spending habits?

If you don’t feel qualified to teach your children about money then you need to begin training yourself. Begin now to educate yourself. Don’t take a passive, blame-everyone-else stance when it comes to learning about money. If your parents were lousy teachers when it came to money then I’m sorry – but move on! You decide what you want to learn. Turn off the television and begin acquiring some knowledge. It will pay you dividends in the end.

If people were just a bit more educated when it came to money, we would not have the rampant consumer problems we have today. The fact that you’re reading this article goes to show that you are anxious to learn something. I admire that. Keep it up.

Advertising-driven consumption.
It’s been said that 70% of purchases are impulse purchases. My wife and I were in a Macey’s grocery store looking for a frozen pizza. Guess what was right next to the pizza? Root beer. We bought some root beer. Retail stores are becoming ever-wiser in how they place items, what signs they put up, what types of promotions they offer and when, to whom, and for how long. I’m not going to delve into the topic of whether advertising is ethical or not. I think it serves a purpose. It lets us know what is out there. What I do want us to be aware of is that we do not have to succumb to the pressure that advertising can place on us. Buck the billboard. Can the commercial. Silence the salesman.

Half of winning the battle against the hoards of advertising that comes our way every single day is to be aware of it. Keep in mind that these people want your money. Protect your wallet as you would your life. Take pride in being able to withstand the enticements placed before you thousands and thousands of times each day. Just say no.

Easy access to consumer credit.
As soon as a high school senior applies for a college, credit card applications begin pouring in. I totally disagree with any institution for higher education that sells this list of applying freshmen to credit card companies. I think it’s totally wrong. They might say the money goes toward their education, or to a good cause, or whatever. I don’t really care. I wouldn’t want to use money that was acquired through such a practice. I think it’s mean and dishonest. I think schools owe more to their prospective students than to subject them to the pressures of credit card companies to begin “building credit.”

If you’re anything like me, you probably get several credit card offers per week. I heard a few weeks ago that someone’s dog was pre-approved for a credit card. Great.

The fact of the matter is the credit card companies know it’s just a numbers game. If they can get you to sign on, the odds of them making a good amount of money off you are pretty high. I know some of you probably use credit cards wisely, paying them off every month, gaining sky miles or whatever your “reward” may be. I choose to not use them at all. The overwhelming majority of Americans would be well served by destroying all of their credit cards–so that is what I promote here.

I don’t see this tidal wave of consumer offerings slowing down any time soon. Perhaps when interest rates rise we’ll see it ebb ever so slightly. Most people have simply made debt payments a part of their life. If you pay cash for an automobile you’re one of a small majority. If you don’t have any credit cards or have zero balances, you’re in an even smaller majority. It’s tough to withstand the pressure of 0% APR for six months, or six months same as cash type of deals. Withstand anyway! Just because credit is easy to obtain does not mean it is worthy of obtaining.

Keep these seven factors in mind as you begin managing your money. Start by saving one month’s expenses. Begin budgeting. Get out of debt. With no payments and a mastery over your money, these causes of poor spending won’t even be an issue and you’ll be well on your way to financial security.

401k Basics, Taxes, Investing

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It seems as though people in the money industry thrive on confusion. They enjoy knowing cool numbers that mean neat things to boring people. If the discussion of topic doesn’t involve a 1040, 401k, or 403b it involves a SEP, Roth IRA, or HSA.

I won’t go into each of these today. But we should really take some time to talk about the basics of a 401k.

Planning for retirement is crucial. The time-value of money principle has proven itself time and time again. You have to begin saving for retirement as soon as possible. However, you must make sure your financial situation allows it. If you have done the following four things then you are ready to begin investing for retirement:

1. Stop living paycheck to paycheck.
2. Begin budgeting your money and sticking to it.
3. Get out of debt except for your home.
4. Save three to six months’ expenses in a liquid account (I recommend ING DIRECT).

Once you have these four steps down, you can begin thinking about retirement.

I admire the fact that some people want to begin investing for retirement early, but if you have debt, that is probably not the wisest financial decision. For example, suppose you have a $3,000 balance on your credit cards with an interest rate of 9%. You’re anxious to begin putting some money away so you start a retirement fund that could potentially earn 10% per year. If you would simply pay off your credit card balance you would, in effect, be making a guaranteed return of 9%! Make sure you have completed the first four steps mentioned above before you begin worrying about retirement (an exception might apply if you have massive student loans, i.e. they’re the size of a mortgage).

On to the 401k basics. Once you begin investing for retirement, you should first look to your company’s basic 401k plan if there is an employer match involved. The reasoning behind this is pretty straightforward. If you work for a company that matches 2 for 1 then that would mean that for every $1 you invest into your 401k, your employer invests $.50. This is subject to IRS limits that we’ll talk about a bit later. This is essentially free money. To not be contributing to an employer-matched 401k is like flushing money down the toilet. Holding all other things constant, if your employer matches your donation 2 for 1 then you are making a return of 50% on your investment. That’s not too shabby, partner.

In general, payments are auto-deducted from your paycheck. This is advantageous to many people who lack the discipline to not spend that money as soon as it touches their hands. It’s also pretty darn convenient – one less thing you have to worry about doing each time you’re paid.

Your 401k contribution, along with your employer’s matching contribution, will usually be invested in some type of a mutual fund. Some companies allow you to invest in company stock – even at a discount. My heart aches for those Enron employees who lost all of their retirement savings when Enron collapsed. Please, please don’t put all of your eggs in one basket. Diversify.

Diversification is accomplished quite easily with a mutual fund. Generally with a 401k plan you’ll be given several fund choices. I am partial to index funds for their ease of administration and low expenses. In the long run, with an index fund you will out-perform 2/3 of investors. You will of course, under-perform against the other 1/3. For a more in-depth explanation of this concept, take a look at this article. Make sure to choose a fund with a risk profile you feel comfortable with. If your allocation doesn’t allow you to sleep at night then it’s probably not worth it to you. Understand what you’re investing in and keep it simple.

The tax implications of a 401k are powerful and in your favor as long as you play your cards right. Generally, contributions to your 401k are made pre-tax, which saves you the amount contributed times your tax rate. For example, suppose you have an income of $100,000 without contributing to your 401k. If you contribute $10,000, then your taxable income will now be just $90,000. If you were taxed in the 30% bracket without having made the contribution, you would owe $30,000 in taxes. If you make the contribution however, you would only pay $27,000. You save $3,000 in taxes for contributing to your own retirement!

Another tax advantage to the 401k is that all of your earnings from your investment are tax deferred. Let’s do another hypothetical. Suppose you invest $10,000 just one time into your 401k and then sit on it for 40 years. After 40 years you withdraw the money and pay taxes on the entire amount. You would end up with $316,815. What if you just invested into a mutual fund that had no tax advantages? You would have $149,755. Less than half! The 401k is a powerful vehicle to minimize your tax bill while maximizing your return on investment.

Be warned: the 401k is there for retirement. The IRS imposes a 10% early withdrawal penalty if you’re under age 59 1/2 which can be absolutely devastating to your growing nest egg. Avoid withdrawing your 401k at all costs. If you have followed the steps outlined at the beginning of this article, the chance of you needing to borrow against your 401k balance is very, very slim.

There are limits to how much you can invest in your 401k. In 2004 the IRS has capped the contribution limit to $13,000. Current law provides for growth of the annual contribution limit to match cost-of-living increases. Currently the contribution limits are set to increase by $1,000 each year until 2006, where it will be $15,000.

If you change jobs, start your own business, or are laid off, there are a few options available to you regarding your 401k:

1. Take a cash disbursement. This is the absolute worst choice. Your employer is required by law to withhold 20% of the disbursement amount to pay your taxes, and if you are under 59 1/2 years of age then you will also be assessed a 10% early withdrawal penalty. Something else to keep in mind is that your tax liability for the disbursement may be greater than 20%, which would leave you with taxes to pay that you may not have anticipated.
2. Leave the investment with your employer. This choice is much better than the first. If you choose to leave it with an employer it continues to grow tax-deferred. You would most likely end up opening another 401k at your new employer and begin contributing to that. Switching between jobs can cause quite a bit of confusion with your retirement funds,  however. Many people find it hard to manage funds when they are spread in many different places, which may lead to sub-optimal investment performance.
3. Transfer your 401k to your new employer. This is a solid choice. You end up having your investment under one adminstrator, which makes it easier to manage and monitor. Not every employer allows you to do this, which might make the last option your best choice.
4. Rollover the 401k to an IRA. This option is a great choice for a couple different reasons. First, you can always rollover and don’t have to worry about whether your employer accepts transferred 401k plans. Second, a traditional IRA offers all of the tax advantages of a 401k plus increased flexibility. You can invest in almost anything you want with an IRA, while a 401k’s choices are limited by the employer plan options (usually 10-15 different funds).

One other important term you might want to be familiar with is vesting. Most companies have certain requirements regarding when the contribution they make on your behalf actually becomes your money. Usually you have to work a certain number of years before the employer contributions are vested. Being vested simply means that those funds now belong to you and you can do with them as you please. If your company’s vesting requirement is 3 years, and they’ve matched your contributions at all, it would be a good idea to stick it out if you’re thinking of quitting with 2 years and 8 months left. You could be leaving a lot of money on the table! Not only would you be letting go of the amount contributed, you’d also be letting go of any capital gains attributed to that amount and any future capital gains that amount would have earned for you.

If you’re over the age of 50 and need to move quickly in planning for retirement then the 401k is still a great vehicle. Current legislation allows anyone 50 years of age or older to contribute an additional $3,000 in 2004, $4,000 in 2005, and $5,000 in 2006. Many plans offer these catch-up contributions, but check with your employer first to make sure.

The 401k is there for your use. It’s a powerful, tax-advantaged tool when used correctly and should belong in your arsenal of retirement savings weapons. Hopefully this basic 401k discussion has helped you. Use it wisely.

Three Factors of Wealth

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Observing wealthy people teaches us three key factors in how they built their wealth. Keep in mind, I’m not talking about Hollywood-type wealthy. I’m talking about the kind of wealthy people we don’t see in the media. “The Millionaire Next Door” type of wealthy people. We would all be well served mastering these three factors of wealth:

Wealthy people:

1. live well below their incomes.
2. believe that financial independence is more important than high social status.
3. allocate their time and energy efficiently in ways conducive to building wealth.

These three factors appear in the e-book “Money for Life”.

Let’s discuss all three.

Wealthy people live well below their incomes.
We could possibly check Webster’s Dictionary to see what the definition of “rich” or “wealthy” is. I’m not going to bother. My home-grown definition is that the rich have more assets than liabilities. The richer have even more assets than they do liabilities, and so on.

I had a conversation with a friend once, where she mentioned how upsetting it was that “only the rich get to drive new cars. All of the middle-class has to drive used.” That shouldn’t be upsetting. That should be motivating. If you want a new car then save your money and buy one. The only person stopping you from doing this is you.

Wealthy people don’t use consumer credit. Now I’m not talking about inheritors or Mike Tyson, not even MC Hammer. I’m talking about those neighbors you have who are worth several million dollars – but you would never know. And frankly, they like it that way.

Wealthy people budget their money. They spend a few hours each month looking over their finances. They communicate well with their spouse about money because of this budgeting process. This allows both spouses to be on the same page about money. It removes unnecessary guilt when one has to buy something – because it’s already been talked about.

A wealthy person might only make $50,000. Does that make you rich automatically? No way! There are plenty of families that bring in way more than $50,000 that are living paycheck to paycheck. What makes the family with a $50,000 income rich? They live on $40,000 of it. What good will saving that $10,000 each year possibly do? My calculator tells me that if they put away $833 ($10,000/12 months) each month into a retirement account, such as a Roth IRA, in 40 years, making an average of 8% per year, they would have $2,909,173. This unrealistically assumes that they never make more than $50,000 per year!

Did they drive used cars? Living on $40,000 a year, you bet they did. Sitting on almost $3 million, do you think they still drive used cars? Oddly enough, they probably do. Because they understand and appreciate the value of a dollar. Could they buy a new car if they wanted? Sure. If they put their nest egg into an ultra-conservative investment making just 4% per year, they would be making a passive income of $116,367 every year.

Where did their unbelievable financial ability come from? They lived well below their income. Now let’s look at how they were able to do this.

They believe that financial independence is more important than high social status.
Let’s admit it. Social pressure is very, very strong. It’s hard to resist buying name-brand clothes, a new car (newer than the neighbors!), or even a larger house.

A wealthy person has an invaluable perspective when it comes to these social pressures. They see them as just that – social pressures. There is no substance behind them. There is no reason to heed them.

The irony about keeping up with the Jones’s is that the Jones family is completely broke. They’re leveraged to the hilt and are enjoying the use of other people’s money. If dad comes home with a bonus they blow it. They don’t think about possibly putting that windfall towards the principal on their house. They don’t consider paying down the debt they owe on their vehicles. The Jones family is broke! Stop trying to keep up with them! You will digress if you follow their financial plan.

The rich see this. It’s as if they have financial x-ray vision. I am trying to develop this skill myself. What do you see when your colleague (who makes just as much as you do) drives up in a brand new car that is valued at half his annual income? Most people see a very nice car. Most people then see an ad for 0% APR for six months on all new vehicles, with a cash-back bonus of $2,000. And most people would go out and “match” their colleague – or maybe even raise him one. Most people are broke.

The wealthy person, equipped with financial x-ray vision, sees a money pit. They see a ball and chain attached to their colleague’s ankle. They see piles and piles of future cash flow that have now been lost to interest. They see a stressed wife who will now have to charge groceries when the end of the month comes because a car payment is devouring the monthly cash flow.

With financial x-ray vision a rich person sees things as they really are. A rich person doesn’t have to impress anyone with material goods. They are satisfied with financial peace of mind – not the next fad.

They allocate their time and energy efficiently in ways conducive to building wealth.
Let’s face it. All of us have some spare time. If you don’t think you have any spare time then I challenge you to do a little exercise for a week. Keep track of what you do for every minute of every day for one week. You will be surprised how much spare time you actually have. Once you gain this realization, begin focusing on using your spare time in a way conducive to building wealth.

Wealthy people do exactly this. How much time does the average millionaire spend watching television? Virtually none. Why? Because the millionaire recognizes the value of his or her time and uses it for activities that add value to life: spending time with family, developing new skills, reading informational and uplifting books, managing investments, etc.

On average, millionaires read one non-fiction book per month. When was the last time you read a non-fiction book? For what reason? Millionaires seek knowledge to improve their situation – they don’t seek a new government program or social initiative. They seek out knowledge to solve their own problems and then they apply that knowledge.

I challenge you to read one non-fiction book per month starting now. If you want a list of great books then check out the many lists of classic books available on the internet. Seek out new knowledge. Turn off the television an hour earlier and read a good book.

Do wealthy people spend their valuable time budgeting? Of course they do. Many millionaires are in their great financial position because they budget. The couple will sit down for an hour or so each month and budget that month’s money. Can you believe that millionaires even keep their receipts and record every purchase? Many of them do. This is one thing that has enabled them to live within their means. They know where their money goes and how it’s used. They devote a couple hours each month to have this absolutely invaluable information – and it pays big dividends in the end.

Do you use your time on the job in a way that is conducive to building wealth? And I don’t mean the fact that you’re paid while at work. How do you use your time at work to increase your skills, marketability, value-adding capability, and prospects for the future? Do you make sure you give your employer an honest day’s work? Do you stay aware of opportunities that present themselves where you could be stretched and grow? On-the-job training is absolutely invaluable when you approach your job with the right perspective. Make sure you make your job an opportunity that will facilitate the building of wealth.

These three factors hold true for any person who’s going to make it in the financial long run. Keep them in the forefront of your mind. Strive to live on less than you earn, treasure financial security over the fleeting fads of society, and spend your time improving yourself, your family, and your financial future.

The Illusion of Debt Consolidation

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Not too long ago, Americans’ greatest asset was the equity in their homes. However, banks have targeted the home equity loan aggressively in the last several years. This has caused a dangerous shift in the net worth statements of Americans. What was once an asset is now a liability.

The offer might be extremely enticing: You have nine credit cards, all with outstanding (the credit card companies sure think so) balances. You have to pay nine separate times each month. And the interest rates on these cards are pretty high to boot. The bank comes along and offers you a home equity loan that will pay all of the outstanding debt you have on your credit cards.

Relief…

Now you just make one simple payment per month instead of nine – and the interest on this home equity loan is so much lower. All of the numbers make sense. But have you made a wise financial choice? Probably not.

Picture this. You still have nine credit cards. All of them have zero balances and it feels good. Your consumer side starts to whisper: “You’ve got some leeway, a buffer, a cushion for those extra things you need!” You are not immune to such temptations! Do not underestimate the power of the dark side (advertising) to use mind tricks against you. With a simple wave of their hand your wants have now become your needs.

And the credit card balances begin to climb.

On top of these new and enticing zero balances, your home is now at risk. You have taken on secured debt. But the only people that feel secure are the banks. You fell prey to the illusion of security and have failed to do something extremely critical to your financial security:

Change your behavior.

If you choose to consolidate loans you have probably made a wise choice by the numbers. If you use a zero-percent-for-six-months credit card to which you can now transfer all nine balances then you have probably made a wise choice by the numbers.

But you haven’t changed your behavior.

You are treating the symptom – not the problem.

Scariest of all, now that you have your credit cards consolidated into one card, or a home equity loan, you still have those available lines of credit. And you haven’t learned to live without credit. You haven’t learned to live within your means. You haven’t learned to manage your money. This move of consolidation has brought you to a better place financially for the time being. But if your behavior does not change now, you will end up in a far worse situation than you had even before consolidating. I am not against consolidation (examined on a case by case basis) if you have already changed your behavior. If you can show me that you have one month’s expenses saved, are in control of your money and are just bursting at the seams to absolutely destroy your debt, then I do hereby qualify you as someone who may consider consolidation. The numbers make sense and your behavior has changed.

If you have not changed your behavior then consolidation is the absolute worst thing you can do to get out of your present situation. It will only suck you back in even deeper.

Finance is not about numbers nearly as much as it is about behavior. Make the change.

May the force be with you.

A Money Saving Trick: Saving Money Saves Money

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If saving money just to save money doesn’t really float your boat, then you might want to read a little bit of this.

This little money saving trick is often overlooked, but those of you who are “financially savvy” might be anticipating the topic of this article, based on the title. My goal in writing this is to drive home two very crucial points about the emergency fund principle and saving money in general.

The trick to saving money is to have an emergency fund. As we all know (or as you are learning right now), every single person needs to have an emergency fund of three to six months’ expenses in a very liquid (accessible) account. I recommend you have this money in a savings account or money market. Your options for an account are numerous (I recommend ING DIRECT). Remember, don’t go hunting for some great interest rate – you won’t find it. You want something that is easy to set up and easy to withdraw money from in case of an emergency.

So how does this trick of saving money save money? We’ll discuss two different items.

A lot of people disagree with the idea of “no credit cards” because they might need one in the event of an emergency. I think this is ludicrous, but that’s a different subject all together. Let’s suppose that an emergency comes up and you need to fork over $1,000. Because you have an emergency fund, you simply pay it all up front and begin replenishing your account. If you didn’t have this money set aside, where would you turn? To your “emergency” credit card. With credit card rates being their lowest in history at the time of this writing, this won’t be as drastic, but it will still drive home my point. So, you charge the $1,000.

In 10 months, socking away $100 towards emergency fund replenishment, you are back up to par again. But if you charged the $1,000 and paid $100 a month to pay it off? It would have taken you almost another month. It cost you about $60 (assuming a 9% APR) just to charge it on your card. That may seem small to you, but couple that with other credit card balances and you have a pretty formidable giant you’re playing footsies with.

So when saving money, you save on interest because you have the money when an emergency strikes. The emergency fund replaces the emergency card.

Insurance premiums are often overlooked in terms of your ability to save money. I just got off the phone with my insurance company and they told me that if I were to remove the maximum deductible that I have in place and drop to no, or a very low deductible (as most people do), it would cost me another $630 per year. That’s on one vehicle! Most people are scared when it comes to choosing a high deductible. Why? Because they don’t have an emergency fund. When you have your emergency fund in place, you’re allowed to live with a bit more “risk” if it’s even correct to call it that. In reality, you’re living with less risk – further from the edge. Anyone who chooses to lower their deductible so they don’t have to pay out more money in the event of an emergency, but doesn’t have an emergency fund, is playing with fire – now there’s risk. That’s a game I just don’t like to play.

Wrapping things up, you might think that having your money stashed in a low-interest rate type of fund is costing you a lot in opportunity. I tend to see it a different way. When you have that money there to fall back on you save any interest costs associated with having to borrow money to get out of a jam, and you can increase your deductible because the money’s there. An emergency fund is really the only way to go. Start saving money by saving some money.

Meet Murphy: Arguments For an Emergency Fund

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Everyone is familiar with Murphy’s law. It basically says that if something can go wrong, it will. Popular radio talk show host Dave Ramsey also warns listeners that if they buy a house while they’re broke, Murphy will “move into the spare bedroom.” My favorite Murphy’s Law revision:

You cannot successfully determine beforehand which side of the bread to butter.

If you could, you wouldn’t need an emergency fund.

As discussed in Rule Four of the Four Rules of Cash Flow Management, 70% of Americans live paycheck to paycheck. This means that if something unexpected comes up, they’re broke. All of a sudden they’re behind on their car payment, Mastercard payment, Visa payment, Discover payment, and worst of all, house payment. Rule Four teaches us to lag one month behind with our expenses. What we make in January, we spend in February – you know the drill.

You might consider finishing off the emergency fund soon after. Mr. Murphy is the reason we do this. When the transmission goes out on your car, you have a couple grand saved in your emergency fund to take care of it. If your child breaks an arm you have the money to take care of it. If you lose your job, you have the money to take care of it. Remember, if something can go wrong, it will. I addressed the question of why people desire to live so close to the edge in Paycheck to Paycheck. I didn’t come up with the answer to that question there and honestly I don’t know if I ever will.

“Meet Murphy”, however, is not about getting your emergency fund together. You already know you should do that. This is about the strange phenomenon that takes place once you do have your emergency fund in place.

Perhaps you also have noticed that bad things seem to happen to those who are unprepared. Perhaps the Powers that Be have made it so. Declared in the beginning: “Those who are unprepared shall be punished!” I don’t think so. For the most part, emergencies tend to come up in the lives of unprepared people because they are unprepared. Let’s see if an example will drive this home.

Scenario One: Steve lives paycheck to paycheck and loses his job because of corporate downsizing. Because he needs to meet all of his self-inflicted financial obligations, he immediately goes out to find a job. He interviews with a place and, because he needs the money so bad (his severance money ran out quickly), he accepts a sub-par position paying less than what he made before. That doesn’t matter though because this is only temporary. He just needs a few paychecks to get back on his feet, then he’ll start his real job hunt. Now he’s working at a job that he doesn’t like, for less money, and still waiting to find some spare time so he can begin his job hunt. The car needed over $2,000 worth of repairs last week so he had to charge the entire amount to his credit card. Once he pays his debts off he’ll be able to justify working a little bit less so he can start his job hunt. Little does he know that his house needs a new roof…Steve’s response: “I’ve been dealt a bad hand. I can’t believe my luck.”

Scenario Two: Stan spends in February what he makes in January. He does not live paycheck to paycheck. Not only does he lag one month behind in his spending, he also has four months’ of expenses in a money-market account earning a paltry amount of interest. The account is easily accessible. He can have any money he needs from there simply by writing a check. Stan loses his job at the same company as Steve for the same reason. He begins looking for a new job full-time. He interviews at the same place Steve does and is even offered the same position as Steve but he turns it down. The pay wasn’t as good as his previous job, and he didn’t know if he’d like the work environment. He continues searching and finally, after two months, lands a job at his old company but in a different division. He’s now making five percent more at the same company that he loved working for anyway. Now he’s working on replenishing his emergency fund reserve. Two weeks later the car needs $2,000 of repairs. Stan can’t believe his luck, but he pays the $2,000. One week after that the roof starts leaking. Knowing that bad things come in threes, Stan pays for the new roof. His emergency fund is tapped quite a bit. At the moment he could maybe only go one month on the money he has left – but he made it – and he’s still debt free. Stan’s response: “My emergency fund took a hit, but I’m already rebuilding it. I’m glad it was there. I now have a better job, with better pay. All these things worked out for the best in the end.”

The fact of the matter is, when Mr. Murphy knows you have an emergency fund, it’s as if he just doesn’t want to mess with you. This is the strange phenomenon. Unexpected things happen to everyone, but not everyone classifies these things as emergencies. Why? Because they aren’t. Those who are prepared have their money in place. They’re ready for the unexpected and when it comes, they just roll with the punches, replenish their fund, and continue building their house of wealth, one brick at a time.