Yearly Archives: 2005

A Form for Your Home Budget? Priceless

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I’ve written about the value of a form for your home budget several times. I’ve also written about the value that is derived from.  I want to bring these two principles together:

1. Your home budget form need not be complex.
2. You must write your budget down.

I do a lot of research on the internet regarding budgeting. I try to see what people are really looking for to manage their money. This helps me market my product better, and helps me get to know my audience (I’ll take a small bow for any copywriters reading this…thank you).

What I’ve noticed over the years is the constant searching for some type of form for your home budget. People are looking for something they can use to get their finances in order. And where do finances feel the pinch the most? In your home.

But something is missing: ACTION!

What makes one form better than another? Will one method somehow spring your budgeting into action, while the other will do nothing at all? Of course not.

The form is not important. It’s your use of the form that is key.

Allow me to share my personal experience with this several years ago. While I was in high school (yes, high school) I thought it would be smart (and I was curious) to track my spending. I wanted to know exactly what I was spending all of my money on. Did I look around the internet for several hours trying to find the perfect solution? No. I took action. And created this:

home budget form
Download this form

If you’ve taken the moment necessary to download the .pdf of this, you might be laughing. To quote Han Solo in Star Wars, “Laugh it up.” Because this form cut my expenses in half baby! Now I’m laughing all the way to the bank (I won’t mention the fact that I was working for $5.50 an hour at the time – they were small deposits at said bank).

Let’s go through the bitter simplicity of this home budget form. I stuck it in a binder for starters. The binder sat inside my desk drawer. At night, when I was getting ready for bed I would think to myself, “Did I spend any money today?” This usually involved digging around in my pockets for any receipts. If the answer was affirmative I would pull out the binder, open it up, and record something like this:

sample budget form entry

If the answer was negative, I would go brush my teeth.

My point of all this is to illustrate that you do not need some fancy-dancy form to get your budget under way! A piece of paper and a pencil will suffice. Heck, I didn’t even put the numbers in a spreadsheet. When the paper was filled, I would manually total it up, print out a fresh copy, and put it on top in the binder.

Now, I mentioned writing down your budget. This form does not actually allow you to do that. What it does do is put a major emphasis on your spending. My spending went from $440 every six weeks, to $215 every eight weeks. And the beauty of it all? I didn’t even feel I was depriving myself of anything. Why? Because the things I cut out were not giving me real value anyway. They were impulses.

Keep that in mind. The most powerful tip I can give you on is to write it down.

Now, we’ve all gotten a bit more sophisticated since I was in high school. And everyone’s a bit (lot) more in debt too. The same rules still apply. Use something simple that will get you in the habit of writing down your purchases, saving your money, and getting out of the trap.

Regardless of what you use, begin writing down every penny you spend today!

TAKE ACTION!

7 Ways to Avoid Personal Bankruptcy

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I recognize that this can be a very, very emotionally-charged issue at times. My writing style is direct (read: blunt). I will be blunt here. But I want all readers to know this:

If you are having financial difficulty, and are possibly contemplating personal bankruptcy, that does not mean in any way you are a bad person. It happens to the very finest of people. It is not a reflection of your character. You are still of immeasurable worth.

I’ve outlined below 7 ways to avoid personal bankruptcy. These are most likely the same suggestions I would give anyone having financial difficulties. If you are considering filing for personal bankruptcy then you certainly should read on. It just may be that you can avoid filing bankruptcy all together.

Get on a Written Budget
One way to avoid personal bankruptcy is to immediately get on a written budget. You will need to get absolutely intense about your money. Money that is told what to do prior to it landing in your wallet will work harder, last longer, and keep your finances stronger than any other financial move you can make.

The simplest budget may work best for you: pencil & paper. Others enjoy the use of excel spreadsheets or fancy software packages. The key is not in what you use, but that you use it. You can take a look at this article on setting up a personal budget. We won’t go into the details here.

Just know that the #1 way you can avoid personal bankruptcy is to get on a written budget.

Sell, Sell, Sell Your Ball and Chain
items causing need to file personal bankruptcyWhat is causing this extreme financial pressure? Have you purchased too much home? Is your house payment representing 40% of your take-home pay (that’s too much)? Do you owe money on any vehicles? Many times personal bankruptcy can be avoided by people just taking a good, hard look at what they owe and why they owe it. While it’s true that most bankruptcies have been caused by health-related costs, we still need to analyze why a medical bill caused the ultimate pressure that led someone to want or need to file personal bankruptcy.

Not only do you need to assess what types of ball-and-chains you have lying around, you also need to see what type of junk you can sell quickly to cover any month-to-month cash shortages you may be experiencing. Do you have a ton of books or CDs that you could sell? Any hobby items you no longer use or need? Freeing up this cash can go a long way in giving you a clear head about your finances. It will give you breathing room – which will allow you to think clearer about other ways to avoid personal bankruptcy.

Cut Up Your Credit Cards
In no way – under any circumstances – should you be using a credit card. Destroy them. Cut them up. Even the one for “emergencies”. We’re talking about ways to avoid personal bankruptcy, not walk right into it.

But Jesse, I don’t have the cash right now to be able to handle any emergencies. And life is surely going to happen! I’ll just use it for emergencies.

That may be true. You might just use it for emergencies. But I guarantee that your definition of an emergency will become much stricter if you don’t have the ability to charge anything in the first place. All of a sudden having the air conditioner going out in the car isn’t an emergency. Why? Because you can’t afford (right now) to repair it.

Please don’t fall for that line of thinking. Until your finances are completely under control, you shouldn’t be using credit cards.

Negotiate or Surf to Lower Interest Rates
That’s right. After telling you to cut up your credit cards, I’m now telling you to surf high-interest-rate balances to new cards. But that doesn’t mean you actually keep the card – it’s cut up. You do want to take advantage of any low-interest offers you receive (take a look at the 50 you get each week for starters).

Your object in doing this is to create some short-term positive cash flow. Getting down to a lower interest-rate will bring you that much closer to avoiding personal bankruptcy. True, you won’t be getting out of debt any faster, but you will be freeing up some cash you might need to get by month to month. Not only will the extra cash help out there, but you’ll feel better, a little calmer, knowing you’ve got a bit of wriggle room.

Increase Your Income
While this might seem a bit obvious, it’s overlooked very often. You shouldn’t just look at cutting expenses. What can you do to increase the other end of the equation? The income side? Can you work overtime, get a second job delivering pizzas? Work for UPS? Can you mow lawns, trim hedges, paint houses, wash windows, flip burgers, etc.? A part-time job that brings in just $500 extra per month will do wonders for your monthly budget.

This is not a time to be prideful. You need money. You’ll need to work for it. You might even need to do less-than-glamorous things (I listed some above), but you’re doing this for a short amount of time so you can avoid a long-lasting curse: personal bankruptcy. Avoiding this financial pitfall by gutting it out for the short-term will bring you long-term benefit.

Avoid CONsolidation
Nine times out of ten this leads you to personal bankprutcy – it doesn’t help you avoid it. Do not fall prey to predatory companies that hunt the weak, desperate, and vulnerable for customers. CONsolidation will free up your monthly cash flow (which is a good thing) but it does this by extending the length of time you will be in debt (this is not a good thing) and hurts your credit badly (this is also not a good thing). Please, avoid the illusion of debt consolidation. Focus on increasing your income, cutting your expenses, lowering your rates, selling your junk, getting rid of any ball-and-chains (new car?) and getting on a written budget.

Maintain Your Perspecive
Times are most likely very emotional for you right now. Your marriage is probably stressed to the max, and you think about your money problems constantly. This is not a time to jump into any crazy ideas. You need to gain the advantage of many minds and consult with trusted friends and family. Consult before you decide to make any financial moves. Above all, remember that your worth is not tied to your net worth. You are not a bad person for being in this situation. While I do not completely write-off your contribution to this predicament (we’d have to talk one-on-one for that) I do recognize that life happens – sometimes in a very harsh way.

I admire your desire to look for ways to avoid personal bankpruptcy, instead of just filing and not taking responsibilty for your financial life. If you need free personal counseling or advice, please don’t hesitate to contact me directly.

Affluent Lifestyle: The Garage Sale Lady

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Recently I gained an insight into the affluent lifestyle. Having had a baby recently, we’re still on the prowl for a rocker. I guess some people call them gliders. We want to go all out and get one that swivels, reclines, and – of course – glides. With the car having 3,420 miles since its last oil change, and the fact that it was a nice Saturday morning, I set out to buy myself some oil, ramps, and an oil pan. The ramps were $19.99, the oil pan $3.50. The filter cost $3.50 and six quarts of oil about $8. To get the oil changed at Jiffy Lube it would cost me $27. So the ramps and oil pan are a one time purchase – from here on out I save myself about $15 every 3,000 miles. I don’t make enough per hour to justify not doing the oil change myself.

At any rate, on my way home I saw a few garage sale signs, so I took a detour to one in particular in hopes of striking gold and getting my wife a rocker/glider.

It was typical garage sale stuff: dusty, stained, a few nice things here and there, and a couch that looked almost as worn as ours. There was a lady there, browsing around. Lots of people were there still setting up the displays, so it was just she and I, parousing the merchandise. She picked up old clothes, looked them over, folded them back up nicely and laid them down again. I wouldn’t have noticed her except for the fact that she didn’t look like your typical garage sale lady. Allow me to elaborate:

I was wearing my oldest pair of jeans (at least 6 years old), a shirt I won when I was 15 at an ice skating arena, a Hard Rock Cafe baseball cap, and shoes that squeak when I walk. I fit the garage sale mold. This lady, on the other hand, looked nice. Her hair was done, she had on nice-looking clothes, and looked very well kempt. She looked as if she might live the affluent lifestyle. Yet she was at a garage sale. I didn’t find what I wanted, so I headed back to the car. As I pulled away she also got into her car – a Lexus.

My suspicions were confirmed. She was affluent, well-to-do. Now, just because someone appears to be living the affluent lifestyle doesn’t mean they’re necessary affluent. For all I know Joe BigCar is up to his eyeballs in debt and is one paycheck away from bankruptcy. I feel confident, however, that she is indeed affluent. Why? Because she shops at garage sales. She recognizes the value of a dollar. She is frugal. And a Mentality of Frugality leads to financial security. I’d be willing to bet that her very nice Lexus was purchased slightly used and with cash. Welcome to the true lifestyle of the affluent. Not quite as glamorous as you thought eh?

One more thing. I love garage sales for two reasons. (1) I find bargains. (2) I practice my negotiating skills. When you’re haggling over an old sewing table (yes – I did) with an asking price of $5. It’s just great practice to go up to the guy and offer $2. (I got it for $2). So the next time I go to buy a car, I won’t be without practice when I have to go head to head against somebody who’s negotiated hundreds of times. Sure $3 at a garage sale is nothing. But $3,000 off a slightly used car? Now that’s something.

The “well-to-do” recognize that garage sales are not just gathering places for junk. They’re negotiation training grounds. Hone your skills there – then save big when you’re up to bat against the big dogs.

A Marriage and Money Problem: What to Do About It

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Most marriage and money problems pop up in almost every marriage – with both newlyweds and veterans – especially when you’re newlyweds though. Money gets complicated when you’re married because you might have a hard time adjusting to the “hers is mine and mine is hers” mentality that is required for a marrige to function financially. When you marry, you are pronounced one – and that includes your checking accounts.

Root Cause of the Marriage and Money Problem
Communication. Spouses need to communicate a few things about money. And when you talk about this you need to be open and honest:

1. Goals: What do you want to do with your money?
2. Limits: What is a reasonable amount to spend without needing to discuss it previously with your spouse?
3. Budget: How much will you spend on various expenses?

Goals with Your Marriage and Money
Problems ensue when both spouses (whether they’re both income earners) are not on the same page regarding goals. When you set and strive for goals together it will bring you closer as a couple. It is important that the goals are mutually agreed to. If the husband’s goal is to build a shop out in the backyard before he is 50, and the wife’s goal is to redecorate the house, perhaps both goals should be worked toward. Either way, the goals need to be agreed to, written down, and reviewed on a regular basis.

It can be frustrating for the income earner to feel the money is just slipping through their fingers – or feel they are working “just to get by.” It can also be frustrating for the non-income earner to feel they won’t ever have a chance at their goal because they didn’t “earn” the money. (This line of thought is prevalent and completely wrong. Where there is a stay-at-home Mom – or Dad – there is a definite and very real economic value that is being provided by the spouse. That needs to be recognized and appreciated.)

Marriage and money problems abound when one spouse feels they “do all the work” because they’ll also feel that their goals then supercede the other spouse’s. Both spouses need to appreciate the work of the other, and give room for each other’s desires in the financial picture.

Spending limits stop marriage and money problems before they start
You might be required to negotiate reasonable limits and/or goals. If the husband wants the spending limit at $10 (control freak) and the wife wants it at $100 (spend-a-holic), you’re going to need to reach a compromise. The husband cannot simply impose his will on the wife to have it at $10, and the wife can’t expect the husband to be comfortable with her proposed spending limits.

The couple needs to talk through what they want, why they want it, and then listen and compromise to reach an agreement that both are comfortable with.

Remember, the spending limit is the limit above which point a discussion must occur if a purchase is to take place. The limit tends to rise as the couple’s income rises.

The Great Peacebringer: Budgets solve money problems in marriage
A budget is really the culmination of all three points of discussion with a couple’s money. The budget is a mini set of goals for the month. Each month the couple should sit down and assess what they have available to budget for the month (if they’re following Rule #1 they’ll be doing just that).

As the couple moves down the categories, they need to assess and realistically project what they will be needing for the month. You’ll have problems with the money side of your marriage if just one spouse budgets. Why? Because they’ll expect the other spouse to go along with it – and the other spouse certainly won’t.

There is usually one spouse in the family that is a bit more detail-oriented. They might spend more time working with the budget, and that’s okay. The important part is that both spouses sit down and hold a conference of sorts – a board meeting – and discuss where the money will be going for that month. It is critical that each spouse is completely on board with the entire budget. You can’t cut corners and you can’t be domineering. You need to give a little, negotiate, listen, compromise, and express your true concerns and wishes about your money. You’ll find these monthly sessions to be therapeutic to your marriage and money problems.

Root Cause of Marriage and Money Problems: Selfishness
If you are selfish with money when it comes to communicating and sharing with your spouse then you have major, major issues. I might as well paint with a broad brush: If you are selfish in any aspect of your marriage, you have major, major issues. Consider the golden rule: Treat Your Spouse as You Would Like to be Treated. Concede where necessary, and pick your battles. Remember, you are not a joint venture – you are ONE.

Your marriage and money problems will melt away if you implement these few basic principles: (1) Set and strive for common financial goals, (2) Set a spending limit that necessitates a discussion prior to purchase, and (3) Budget together on a monthly basis. And one final thing: make sure each spouse has a bit of spending money for which they do not have to be accountable to the other spouse. It does wonders for money stress and strains.

Classic Dave Ramsey Show Rant: Get on a Budget!

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I was listening to the Dave Ramsey Show the other day. He took a few minutes to rant about the importance of a budget. I don’t want to say much else about it. He does it best:

I’ve had several calls this hour from people who just couldn’t seem to get things moving. You know, there just is – sometimes when you’re overwhelmed, whether it’s with money or life – you, you just get paralyzed, you get this deer in the headlights thing – even though there’s an 18-wheeler coming right straight at your face, you know, at 65 miles an hour, you’re getting ready to be a speedbump, you still freeze in the headlights. You freeze in inaction.

And I gotta tell ya, inaction is sometimes a purposeful decision. But most of the time, inaction – status quo- in whatever you’re facing, if you don’t like where you are, most of the time, inaction is not your answer. Most of the time, you gotta raise up and smack something! Just get something started!

I love that scene in “Braveheart” where William Wallace is walking out, “Where you going?” “I’m gonna pick a fight.” You know. The way this is going is not working. I’m gonna go pick a fight! You know, you gotta decide that.

Now I don’t know if your fight is with yourself in the mirror – and you go, “Hey Stupid, you need a budget. Hey Stupid, you can’t keep using these credit cards. Hey You, straighten up. Hey, You need to get outta the house! You’re sitting around knowing that this is not right in your brain. But something about, you know, we don’t like change, we’re like a toddler sitting in a poopy diaper. “Yeah, I know it smells bad, but it’s warm and it’s mine. I’m just gonna sit here.” Get up outta the mess!

Now I gotta tell ya, a whole lotta ya that call this show over and over and over for 14 something years now, we’ve been telling you to get a budget, get a budget, get a budget, get a budget. And you think when I say that, “Yeah that sounds like a good idea.” But you don’t go get a budget. And then you keep going and you have no win. You have problems. You can’t get outta debt – “Yeah I can’t get this debt paid off.” – but you still didn’t go get a budget.

People – you have to freakin’ write it down! You have to write it down, on paper on purpose. You cannot win the money game EVER without a written gameplan. Every month, on paper, on purpose – every dollar has a name. You have to take action!

You keep doing what you’ve been doing you’ll keep getting what you’ve been getting. 12-steppers say continuing to do the same thing over and over again and expecting a different result IS the definition of insanity. And that’s if you’re sitting in there when your husband’s a crack cocaine addict, that’s if you’re sitting there and you have 80 million gajillion dollars in credit card debt, that’s if your’e sitting there and you have a back problem. That’s if you’re sitting there and you have too much car debt. That’s if you’re sitting there and your spouse won’t get on the page with you and work with you. If you keep doing the same thing you’re going to keep getting the same thing. You’re going to look up six months from now and go, “I’m still sitting in a poopy diaper.” Because you didin’t do something.

It’s about action! It’s a Nike™ thing. You gotta just do it! You gotta DO something. This is not theory. You see, that’s the difference in this show and 98 percent of your financial shows out there. Financial people talk about ideas, and concepts, and math, “Well here’s the, here’s the…” BULL. Let me tell you, it’s a behavior issue. 80 percent of personal finance is behavior. Only 20 percent is head knowledge. YOU already know what to do. And yet you call this show and you already know the answer. Now sometimes you don’t know the answer and I’m here to help you. Don’t misunderstand. I’m not going to fuss at you just for calling in with a question I’ve already answered. that’s not the point.

The point is to do a written plan, just start there. Because when you write down ninety-thousand dollar income, eighty-thousand dollar income, twenty-thousand dollar income, and you say, “Alright, what’s my take-home pay Friday? What’s my take home pay the next Thursday? What’s my take-home pay the rest of this month?” In writing on paper and now you start going: “Okay I take a house payment outta that, I take a car payment outta that, I take some credit card bills outta that, I take some medical bills outta that, I take some food outta that, I take some lights outta that. Wow, where’s the rest of this going?”

You’re WASTING it because you don’t have a plan! That’s where it’s going! You need to write it down! Because you’re wasting 25-30 percent of your income and you have NO clue where the money went. NO clue where the money went. If you worked for me I would FIRE your butt because you’re inept and you’re incomepetent! Write it down! Really, it’s that serious. You gotta write it down. You have to wirte it down.

I havent’ been broke in years. But I’ve had a written budget every single month. You come to my house right now I could pull it out and show you the written budget for this month – exactly where every dollar’s going to go. And my wife knows what the budget is. We’re on the same page, and we have been for years.

“We’ll you’re just lucky to be successful.” Luck had nothing to do with it. I’ve been kicking butt and taking names for a huge number of years – making every one of those dollars behave. Don’t talk to me about luck. It wasn’t luck. We busted it. We made every dollar SQUEAL! We lived like no one else – on paper on purpose. WE had a plan. That’s how you win!

Action!

Action!

Take Action!

Step into it!

This is the Dave Ramsey Show.

Yes, that is the Dave Ramsey Show. Thank you Dave, for that call to action.

Simple Ways to Save Money: Psych Yourself to Save

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Everyone’s always looking for some simple ways to save money, and there are plenty of ways to do it. The fact of the matter is, saving money – by its very nature – is simple. You don’t have to explain some deep concept to someone, then whip out a powerpoint presentation to visually illustrate how saving money works. You don’t need to get a formal education to understand the vast depths of the saving-money concept. Nope, you just have to do something. And that is why it’s hard.

I ran across some simple ways to save money in an article in Fortune Magazine today. I thought I would share the basic thrust of the article.

The first thing the article mentions is the U.S. “dismal savings rate” – which stands at less than one percent. We can’t save beans. We are consumers. And we’re going to consume ourselves right into retirement poverty if we don’t give ourselves a swift kick in the pants – now.

Fortune outlined four problems and their respective solutions, regarding saving money. I will – logically – begin with the first.

PROBLEM: If you see money in your checking account, you spend it.
SOLUTION: Pay yourself first.

Here Fortune pushes the idea of automatic savings plans that can be implemented by pretty much any bank or investment institution. Basically, you tell them, “On the 5th of every month, take $100 out of XXXX account, and transfer it to my XXXX mutual fund.” And it happens. Fortune relates the story of a doctor who “regularly outspent his $200,000 salary” – but once he got on an automatic deduction plan of 5%, he said he didn’t even notice the difference.

I wouldn’t be able to sleep tonight if I also didn’t mention the power that comes from living on a budget that you have made before the month begins – where you tell the money what to do. Then once you (and your spouse if applicable) have committed to the budget, it tells you what to do.

Alright, back on track. Fortune’s idea can work for the guy making 40k also. A simple way to save money? Have it auto-deducted. THEN DON’T TOUCH IT. Just wanted to make sure that was clarified!

PROBLEM: You spend “windfall” money whenever you get it.
SOLUTION: Treat all money the same.

Now here I thought Fortune had a great idea when it came to this little problem. Let’s say you get a tax refund of $1000. You see the money as something “extra” that you normally don’t count on. So you immediately think that you can just blow the money somewhere. Now, I agree that sometimes it’s healthy and smart to blow a bit of windfall money – but with a savings rate of 1%? I just can’t justify it.

If you’re trying to get out of debt, you can’t afford to think of any extra money as windfall money. It’s debt money. It’s part of the key to your financial freedom. Fortune suggests:

Put the “found money” into a savings account for just one month and consider how to spend it later. By the time the month is up…the dough will likely feel more like savings… and you’ll be less likely to use it on a shopping spree.

Now that seems like a pretty simple way to save money. Elegantly simple. I love it.

PROBLEM: You throw good money after bad.
SOLUTION: Don’t let past decisions dictate future ones.

Fortune used the example of a couple that bought a $250,000 yacht and had three years of maintenance on the sucker before they finally decided to sell the money pit. Maybe we can scale that example back about – oh, $249,000 – What if you invest in some stupid multi-level marketing gimmick and burn $1,000 buying super guava juice made by the rain people in the deepest parts of the African Congo? (It doesn’t taste good, but man is it good for you!) You have sunk one grand into the project. Not wanting to admit your stupidity, you continue pouring your time, and even some extra money, into distributing fliers, building a website, etc. It still doesn’t produce. You should cut your losses and walk away. So another simple way to save money is to walk away from a bad deal – even after you’ve invested time or money into it. (This is not to imply that you give up trying to earn money. Notice that I said you walk away from a bad deal.)

PROBLEM: Saving money feels like depriving yourself.
SOLUTION: Visualize something concrete your savings will buy.

This is another elegantly simple way to save money. If you find you’re lacking the motivation to really sock away the requisite amount for retirement and security, practice visualizing what that savings will earn for you later in life. Can you imagine getting a check from your mutual fund holder every month for several thousand dollars? And all you did that month was visit grandkids, play golf, and volunteer at your church?

The sheer idea that my savings could work for me all the time is motivation enough to want to save. But find whatever you need to visualize that your savings will buy for you – then use that visualization to motivate yourself to save, save, save! If you need to, start small, then work up to a necessary amount of consistent savings.

Remember, how much you save and what kind of life you will live ultimately depends on you. Take the necessary steps to attain the financial security you desire.

Help Get Me Out of Credit Card Debt: 3 Steps

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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.

The Difference Between a Roth IRA & Traditional IRA

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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:

difference between roth ira and traditional ira
All right, 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:

difference betewen roth ira and traditional ira table
All right, 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:

difference between roth and ira
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

difference between roth and ira
So am I trying to tell you that it doesn’t matter? It’s all a wash in the end? 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.

roth and ira comparison

Roth IRA Basics: What to Know Before Opening a Roth

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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:

Filing Status MAGI Limit
Married filing jointly $160,000
Married filing separately, lived w/ spouse $100,000
Single, Head of Household, or Married filing separately, did not live w/ spouse $110,000

 

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 would 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.