We just experienced a big day for the United States of America. All over the country, people cast votes for new laws, amendments and elected officials, including the most popular — President. When us common people elect officials, it brings up a question:
Does this mean anything to your overall plan?
For my friends Chris and Lisa, you may wonder. They have two young children and make $87,000 per year. According to them, they have about $6,000 of credit card debt. Although they more than have the capability, they do not save. When we look at their overall financial picture, there is a clear pattern:
They absolutely love high-end restaurants.
One night my wife and I were over at their house watching movies and I asked them “why?” Lisa asked me if I could find her a lower rate credit card and handed me their latest bill.
“We eat dinners out because we work hard all day. We’re both totally fried when the time comes to make dinner,” Lisa replies. “It doesn’t make sense to be tired all day at work, come home, make ourselves more tired by cooking dinner. IF we do that, we are so tired the next day at our job. Everybody’s had enough, so we head for a nice meal out. We’re happy sharing our day together instead of slaving over prepping a meal.”
That sounds nice, until you read the bottom lines: $46 here. $58 there. $76 over there.
“We try to stay away from alcohol during those meals,” Chris says. “That helps keep the price down.”
Further down on the bill, I see some department store shopping.
“It makes it so much easier to get all the stuff at one place. It saves us time,” Chris explains.
“I completely hate shopping,” Lisa says defensively.
Chris has an addiction: sports. They have the MLB network package that allows them to see every game in the league each night.
Each weekend during the fall, he’s watching several games, courtesy of NFL Sunday ticket.
“It’s all for my league,” he says. “I’m in this fantasy football thing. It’s only $100 to get in. If I finish in the top three, I at least get my money back.” Then he points to the television remote. “If I win, it pays for about three years of this.”
“Have you ever won?” I asked.
“This is the year!” he smiles.
House & Lawn Work
Every weekend when I drive by their house, a team of high school age kids are cleaning their lawn. I asked Chris about it at a church function one day. “The kids needed the work. It was nice. They came to the house and asked if they could cut our grass. It’s only $20 a week. Saves me all that time… and gas!”
Speaking of gas… they live in the country. “No high city taxes.” Both Chris and Lisa commute over 20 miles to work. They must spend a couple hundred dollars in gasoline a week. They do not drive gas-efficient vehicles.
On my personal Facebook account, Chris made his politics known leading up to the big vote. “We’ve gotta get the President out of office. He’s costing this country dearly. We can’t afford four more years.”
I think there’s a bigger question:
Can Chris and Lisa last four more years whether the President won or not?
First off, I want to commend you for taking the time to educate yourself on protecting your family.
Many employers will offer basic life insurance to their employees. This life insurance is usually for a small amount or equal to one years salary. This might be enough coverage if you are single with no dependents, but if you are married and/or have kids, this is not the best place for you to have insurance. They often offer you the option to purchase more insurance in order to raise your coverage amount. However your work should not be the primary place that you buy life insurance from. We have all had our eyes on the news on where jobs are at right now. Tons of jobs do not even offer benefits. However, if you were to lose your job, you would lose your life insurance coverage. That would just add one more think to worry about to your life.
You should look for a term life insurance policy of about eight times your annual income to cover your expenses. The insurance that you have at work should be a looked as an addition what you already have. Although you may be tempted to use it and get less insurance, be sure that your family will be able to get by without it since you may lose it if you were to lose your job.
If you have a preexisting medical condition such as diabetes, it may be more difficult to qualify for a traditional term life insurance policy (you still need to try though). If this is the case you may want to max out the work life insurance if you do qualify for it through your work. This is not the best solution to the problem, because you will lose the coverage when you change jobs, but it is better have some coverage than to have none at all.
When you look for life insurance, be sure to shop several different policies to get the best rate available. Price is a big factor, but is not the only factor you should look at. Cost is only important in the absence of value. Life insurance companies do a risk assessment when they insure you and you may be declined for serious health conditions or charged a higher rate if they feel that your risk is greater. Term life offers the lowest rates. You can also save money by paying annually, semi-annually or quarterly instead of just monthly.
Whole life insurance is not a great insurance option. The investment side of it offers an extremely low rate of return, and you purchase much smaller amounts of insurance at a higher rate than with term insurance. If you already have a whole life policy, you may want to consider cashing it in and looking for a term life policy. If you choose to do this, you should have your term life coverage in place before cashing out the policy. Additionally, you should keep your whole life insurance if you do have a medical condition that makes it difficult to get life insurance.
If you live in Illinois or Missouri, I can help you with a term life quote. If you live in any other state, I can connect you with someone who can help you.
Estate planners tell us that nearly 70% of Americans die without a will. Come on folks. This is dumb – really dumb. If you hate the people in your life, die without a will, because you’re going to tie them up for years.
A will is a gift you leave your family or loved ones. It is a gift because it makes the management of your estate very clear, saves them tons of time and plenty of headaches. If you don’t have a will, the state (not known for its financial prowess) will decide what happens to your stuff, your kids and your financial legacy. You don’t want this to happen. Even if you’re single, get a will right now!
The Legacy Box
Making a will is one of the best things I’ve done for my wife, Ashlie. We have what is called my Legacy Box. It is a fire-proof box in our study that has everything one of us would need if something happened to the other one. It has letters of instruction on everything in there: a full will, a full estate plan, all of our investments, copies of insurance information, etc. A 12-year-old could read through it all and know exactly where things are and what everything is.
How to Get a Will
The easiest and most cost-effective way to go about making a will nowadays is to use one of the online and/or pre-paid legal services. I recommend Pre-Paid Legal Protection, which offers state-specific wills created by professional attorneys for public use. All you need to do is fill in your information, and the will is tailored for you.
You can also contact a good estate attorney; however, that will cost a bit more money. Typically, with your attorney, you can create mirror-image wills. That way, if one of you dies, the surviving spouse will get the entire estate. Everything is pretty much the same in both wills, with the exception of simply switching the names – hence mirror-image will. That is what Ashlie and I have.
Also, after someone has died, 98% of the time I recommend that the survivors keep the will and all related papers for seven years. But double check with an estate attorney.
This is something we all need to be doing. You are going to die, so go out in style, and die with a will in place.
Need a will? Get a will today with me. If you live in IL and MO, I can personally help you. If you live in any other state, send me an email and I can put you in touch with someone who can do it for you.
It’s only the second month of 2012, and there have already been 1.7 million victims of identity theft! (identitytheft.info)
Here are a few more statistics about this rapidly-growing crime:
- In 2011, nearly 11.3 million Americans were victims of identity theft.
- Nearly 40% of identity theft victims discovered fraudulent activity resulting from identity theft within one week.
- If you do not find and report an incident within 60 days, you are 100% liable.
- 87% of the victims did not know the thief involved in the crime.
- 56% of identity theft victims don’t know how thieves got their personal information.
You can see by now that this is a huge problem. According to Federal Bureau of Investigation, identity theft is the second largest (and growing) crime in the world right behind human trafficking, which currently sits at #1 and drugs at #3. This is nothing to mess around with!
A study conducted by the Ponemon Institute arrived at some eye-opening findings. In summary, although most of the participants of the survey were aware of the risks associated with using online platforms to divulge personal information, more than half of those failed to take steps to adequately protect themselves from identity theft. Even more, people who had already had their identity compromised displayed similar attitudes and were very lax about securing and limiting their online information, even though their ordeals included having been robbed of savings and deteriorated credit scores.
Social media and other networking sites have blurred the difference between information and too much of it. Tweets and status updates by the hour flood the cloud with excessive personal information that can be leveraged by criminals to impersonate their victims and potentially cause losses of thousands, tens or even hundreds of thousands of dollars before they are even caught.
The use of social media and networking sites has not only made identity theft a common occurrence, it has made impersonation an extremely easy task, attracting amateur fraudsters as well. A shared minute detail goes a long way, since identity thieves document every bit of information that is available online; not just what you share yourself, but also what your friends write about you. This combination can prove to be deadly in the hands of an imposter. In order to protect yourself from such harm, try to limit the information that is put out there, and improve your privacy settings to filter out acquaintances and obscure colleagues.
Additionally, ensure that you have a good anti-virus installed on your computer. Update it regularly to prevent against spyware and malware lifting information off your computer. Also, never use an unsecured wireless network to login to any of your accounts, whether email, social networking or bank accounts. Information shared over unsecured lines is very likely to fall into sinister hands. That means don’t go online shopping or check your bank account while you’re sitting at the Panera Bread Co. sipping your soy latte.
However, it is not just your online activity that puts you in harm’s way. The main motivation behind impersonation is to make financial gains, and these impersonators lurk at the source as well. Before inserting your debit card inside an ATM, always check for any extra installations such as small cameras or magnetized devices that record keystrokes for PIN numbers and record other data from the magnetic stripe on the card. These jerks have gotten a lot smarter as the years have passed by.
Similarly, exercise caution when disposing financial and personal documents. Credit card statements, utility bills, receipts, etc have sensitive information listed and many thieves resort to “dumpster-diving” to salvage such details and a investment in a paper shredder is a wise idea. Such safety measures should also be taken prior to selling/disposing a computer system. Simply reformatting your hard drive is insufficient and a little hanky-panky by a technician is enough to reveal all previously stored data. Use specialized software to erase data permanently.
Apart from all the above listed preventive measures, review all your financial statements periodically to check for accuracy and/or suspicious activity. Regular monitoring of credit scores also ensures that such activity is nipped in the bud and potential losses avoided. There have been a few cases where the victim has been unable to prove wrongful use of identity and had to bear the brunt of financial obligations resulting from this misuse. Innocent until proven guilty is not a given when it comes to identity theft.
Here is my little plug:
My company has a program designed to protect you from identity theft as well as provide you with the following:
- Accountability, automation and ease-of-use
- Establish a Fast Pay Plan to pay off your debts in record time
- Access to 4 Score Power Reports
- 24-hour access to your Equifax Credit Report
- Notifications via email or text message of key changes on your credit report
- Up to $1,000,000 of identity theft insurance with no deductible
Now that last feature is worth the price on it’s own. It does cost $14.95/mo but the rewards are well worth it. Just think if you were hit with identity theft, didn’t have this, and you owed thousands of dollars because you didn’t find it in time. You need this. My wife and I both use this program… it saved our lives.
Before you hit the back button, I will let you know that I do NOT ask for any of your personal information. Just send me an email that says something like, “Hey Weirdo, send me that info on that sweet debt and identity theft program, yo!” and I will make sure to respond with where you go to sign up along with the information you need.
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Here is a series of emails back and forth between me and a SLSQ reader. It’s always cool to be able to offer advice so that you guys can see that this stuff is for real.
Here we go!
So I’ve been reading your website a bit lately and I’ve realized I’m in a pretty good spot right now. Most importantly:
- I’m in college (Read: life is fun)
- I get paid to go to school! (About $5000 extra after ALL living expenses, books, and tuition, it’s cash in my pocket.)
- I’m a Computer Engineering major at a top ten university. (Read: I really like what I’m doing but don’t want to do it the rest of my life.)
I also want to applaud you on reaching out for advice. Being 20 years old, that shows me that you are extremely mature and have a good head on your shoulders.
Before I can offer you some advice, I need to ask a few questions. You said that you have $5,000 leftover after all of your educational expenses have been paid.
Question #1: Is this $5,000 what you have for the entire school year?
Questions #2: Are you working anywhere part-time?
In order to secure your financial future, the most important things are these (in order of importance):
1. Proper Protection. If you have a car, insure it. If you rent, get renter’s insurance (you can get it for a cheap as $13/mo). Assuming you have nobody who depends on your income, you don’t really need life insurance right now. I would recommend getting a small $50,000 policy on yourself of TERM INSURANCE ONLY. This is an optional step for you, but that way if something were to happen to you, nobody would have to front any money to take of your final arrangements. The average funeral is about $15,000. Wouldn’t want Mom and Dad to shell out that kind of cash would you? You’re 20, healthy, etc. This would probably cost you anywhere between $20-$30/mo. Remember… TERM only. NEVER, and I repeat NEVER, get any kind of cash value life insurance (whole life, variable life, universal life) no matter how the insurance agent dresses it up. It’s a horrible investment.
2. Debt Freedom. If you don’t have any debt, move on to number 3. If you have significant debt, establish a plan to pay that off as quick as you can.
3. Financial Independence. The place everyone wants to be but where very few are. at 20 years old. I would recommend that you, first, start saving money. Put away $30-$50 a month. I don’t care if you put it into a sock drawer, under your mattress, or bury it in the back yard (don’t do that). But get yourself in the mindset of saving money. THEN, establish a small emergency account at your local bank. I would recommend getting that to about $500. This is money that you do not touch EVER unless it is a dire emergency. Not food, not gas, not a date night with the hot blonde you met in Geography. If the transmission goes out, us it. If the washing machine busts, use it. Only emergencies.
After you get there and you feel good about saving, start a Roth IRA. Start investing $50-$100 every month towards your future. If you remember #4 in the “ten Worst Money Mistakes” post, it was not saving early enough. Re-read those two examples and you’ll know that you want to be the smart saver. Depending on what state you live in, I can put you in touch with some colleagues who do what I teach and will help you invest the right way.
Remember, the road to financial independence is 20% knowledge and 80% behavior.
A lot of things that you will learn in the “real world” are not the right things to do. Just look at the economy and where jobs are at right now. Has the “real world” really been teaching what’s right? No way.
I hope this helped you a little bit. Feel free to email me any time and ask any questions you have. I’m always here to help.
Have a great day!
That’s a lot more than I expected to get back. Really I appreciate it a lot.
I try to be as thorough as I can. I don’t want to shortchange anyone, especially when they are gung-ho about getting on track :-)
If you feel like getting a very part-time would hinder your school time, then don’t do it. If you feel like you can manage 15-20 hours per week working and keeping those grades on point, I would go ahead and do it. That will do a few things.
1. Get you used to working.
2. Give you some “fun money” on top of the money you already have. That way you won’t feel so guilty if some friends ask you to go to the movies or to Six Flags or something. You have to have some fun in college, just not over-the-top.
If you are renting, renters insurance is a must. Its always the folks that think “it’ll never happen to me” that it ends up happening to. It’s better to be safe than sorry.
Good job on the credit cards. Never get a credit card. NEVER NEVER NEVER NEVER! I swear the devil came up with those things.
Before really getting into the nuts and bolts of all of the terms and such on Roth IRAs and investments, you want to get yourself into the habit of saving first. What you mentioned is a great idea. I would make it a clean $25 just to make it a nice round $100 a month being saved. Write yourself a check and put that into an account at your local credit union (I should have said that before).
From the outside, banks and CUs look alike.They both have checking, savings, CDs, etc, etc. ATMs, good service and the list continues. But under the surface, there are some pretty profound differences.
Banks are for-profit owned by a company.
CUs are non-profit owned by the members (you).
Banks policies are voted on by Board of Directors.
CUs policies are voted on by members (you).
Banks are insured with FDIC.
CUs are insured through NCUA.
Banks have poor consumer ratings.
CUs have superior consumer ratings.
Banks focus is profit for upper management.
CUs focus is its people (you) and its co-workers… making you happy.
CUs offer higher interest rates (not suggested for retirement money to sit. ONLY emergency account money). They offer lower rates on loans (don’t get one). Free checking accounts. Lower penalties, fees and fines.
As you can tell, credit unions are more concerned about the happiness of you then turning a profit. That’s why I would choose a credit union.
Start saving a few bucks here and there. get yourself into the mindset and we’ll keep in touch about everything else. How does that sound?
Sounds great. Definitely something I want to do. I figure that if I do that at least in the next two years I will be able to get a handle on things and know where I want to be financially.
How would you have helped this reader? Agree or disagree?
For the past two years doing taxes has not been bearable: it’s been terrific! I’ve been using TurboTax Home and Business and take great pleasure — really! — in filling out the paper forms, just because it gets the money to me far more quickly. Since starting my own business, it requires a little bit more paperwork but the payout is worth the time.
Last January I began to fill out the online forms and, at some point, started glancing at the little status bar on the upper right corner. I’d filled in all my write-offs and household income, and the number corresponding to my refund was more than double what I thought I might be able to expect. It ended up more than triple my expectations — about $3,900. As my own business income has increased, thanks to an amazing partner that lets me work as hard as I can, we were getting an earned income tax credit on top of everything else.
This year, we’ll get a tad bit less. You know by now that I am not a fan or large tax returns. However, if you are going to not follow smart direction and get that big return, at least follow these rules so that you do not blow it:
1. Don’t spend a single penny before the money arrives in your bank account.
Don’t charge something on credit cards; don’t promise to spend the money; don’t put a deposit down with the rest due the day you expect the refund. Naturally, this is a very difficult to practice. This year, I had a fantastic deal on going to a Tom Hopkins event in the spring for a fraction of what he usually charges. I didn’t necessarily have the cash on hand right then and there to pay for it. Surely my tax refund would arrive by the time the deal ended! Everything worked out. I got a few clients and paid for it, even though I’d have to make it up later.
You won’t know what unexpected expense or nasty delay might cause you to be staring down a final payment or contract fulfillment without anything left in your bank account but hope. And then, you could end up using costly credit or financial shenanigans to make good on your promise.
2. Pick a debt that can reasonably be paid off with the tax refund. And do it!
Also, try negotiating the balance due. My wife and I are still, faithfully but slowly, paying off long-ago-closed credit card accounts. The biggest one was 46% paid as of January 30. I called the other day to negotiate a big payment that will satisfy the whole account — and I’m saving $1,000 off the original balance. (I could probably have worked it down further; my negotiation skills are great, until I wear out and let them “win.” You could try harder!) Now I’m planning to spend March working out a payment plan for the remaining debts. Then on to the student loans!
3. Put at least a third in a savings account, right away!
Consider it “someone else’s money.” (Your future needy self, of course!) If I leave the money in my regular checking account, I’ll consider it fair game. And it’s the perfect seed for the emergency fund you’ve been wanting to start. It’s important that I separate the concepts of “savings” from “checking account buffer”; I’m far less likely to preserve the buffer, so I have to get it into a separate account. Preferably one that’s harder to withdraw from. So I’m planning to get a third of that savings into my Roth IRA. It’s not a ton of money, but it’s better than letting it sit where I can access it for emergencies that… aren’t really. Besides, my wife and I are having a baby in June and she will not be working for 8 weeks. We plan to use the rest of it to pay bills during that time she isn’t working.
4. Commit to yourself to buy things that will pay you back in savings.
Note that I am not including “wardrobe investments” in this (unless perhaps we’re talking about a wardrobe completely devoid of work boots, or something). I consider things such as upgraded windows (to save you energy costs), a couple of bus passes or other bulk purchase of something you use very frequently (to save you stress, having to make change, and get a bulk discount). Maybe a bike could replace a short commute, or a second car. Maybe you can buy a half of a cow from a local farmer, saving you tons all year on quality meat — or maybe a chest freezer to make that possible. Invest in warmer indoor clothes so you can keep your bill down during cold months.
5. Spend 5% or so on something nice.
I know, the “windfall” rules say to only spend 1% on splurges. But let’s go crazy! It’s just a tax refund, after all. Go out to eat with your family (once). Buy yourself a pretty raincoat or some new wool underwear (if that tickles your fancy). Just make sure you feel good about yourself and you stick to the 5%. Which leads me to the most important thing of all…
6. Make your budget before you do anything.
Well, it’s okay to stick that 1/3 in the savings account first. But don’t rush off and spend your splurge and your “investments” before you’ve sat down with a piece of paper or a spreadsheet and list all your bills for the month. Go on: put in one column all your regular income and the tax return. Put in the other column all the regular bills (put those first!) and what you’ve hoped to spend your tax refund on. Let’s not put off paying your home equity loan or your power bill because you have so much money, right? Make sure you’ve paid your bills first. I went so far as to forcing myself to record all the money I’d spent, down to the last gallon of gas and slurpee, over the month of January before I’d let myself spend any money on treats.
It’s really effective (if you can hold yourself back) to let the debt payments and bill payments clear your bank account before you buy anything fun.
7. Don’t let yourself go shopping.
I rarely go shopping, because I rarely have much spare cash. Except for when I have spare cash! Then the wife loves to shop. Still… we shouldn’t.
So I’ve found the best thing to do is to make a list of all that stuff I’ve been wanting — “needing” —for the past year, and prioritize. The wireless modem is about to fail, so we’ll get that — but not the new iPod touch to replace the one with the marred screen. It still works and, after I made my list, I learned that it would cut into my savings funds. That’s non-negotiable.
Make your list, do the math, then go shopping.
8. Think about investments in a new way.
Last year I spent part of my tax refund on tickets to my company’s national convention, thinking that they’d be good for my professional development. The things I learned almost doubled my income over a 3-4 month period! And I made some great friends.
So I’m being more strategic about conferences this year, and focusing on the ones where I am comfortable my “career” is already established and will give me the opportunity to strengthen relationships with people I really look up to. I went to a local conference a few weeks ago and got fired up even more! I’m heading to a Tom Hopkins even in which many of our top earners will be in attendance. A happy person is both a better money-maker and a person who needs less money, right?
Like I said, if you are going to be dumb and get the return, at least be smart about your dumb decision.
Boom. The end.
One million cash right now!
A penny doubled every day for 30 days.
Our first response might be to grab the million dollars, but let’s give the penny a chance. Take a look:
Day 1: $0.01
Day 2: $0.02
Day 3: $0.04
Day 4: $0.08
Day 5: $0.16
Day 6: $0.32
Day 7: $0.64
Day 8: $1.28
Day 9: $2.56
Day 10: $5.12
Day 11: $10.24
Day 12: $20.48
Day 13: $40.96
Day 14: $81.92
Day 15: $163.84
Day 16: $327.68
Day 17: $655.36
Day 18: $1,310.72
Day 19: $2,621.44
Day 20: $5,242.88
Day 21: $10,485.76
Day 22: $20,971.52
Day 23: $41,943.04
Day 24: $83,386.08
Day 25: $167,772.16
Day 26: $335,544.32
Day 27: $671,088.64
Day 28: $1,342,177.28
Day 29: $2,684,354.56
Day 30: $5,368,709.12
There is a big difference between a million dollars and $5.3 million, wouldn’t you say? Albert Einstein said that compound interest was the most powerful force in the universe. He was a pretty smart guy.
Why let compound interest work against you? Credit cards, car payments, etc. Grasp this power and use it for your benefit! But up those credit cards and never, I repeat NEVER, buy a brand new car. (More on that next week).
Check out the Rule of 72. The most important rule you will ever need to know.
There another side to this besides money. Life is a cumulative experience. You see, what we learn today becomes the foundation for what we learn tomorrow. If you are in a state of constant growth, however small that growth may be, sooner or later your totals will begin to amount to something very, very significant.
Your efforts toward personal growth and development will pay dividends all your life. As you accumulate greater knowledge and experience, your life will seem more enjoyable and your relationships more meaningful. Remember, it is never too late to start investing in yourself. To live a life that feels like it is worth million dollars, all you need to do is make a penny’s worth of investment in yourself each and every day.
You will not believe what I’ve been hearing people talk about lately. I have heard story after story from clients and future clients about how they are taking/have taken loans from their 401k accounts and borrowing money! I don’t know if there are people out there giving this advice to do this, but it’s probably one of the worst ideas I’ve ever heard of! In fact, I would put it up there with not saving for retirement at all (you are double dumb if you’re not saving money). After listening to a conversation about how this is a great strategy in this recession, I just had to set the record straight and educate these people. After all… that’s what I do for a living. I mean, someone has to do it, right? Well, to sum of the multiple conversations we had, here are five reasons why you should never tap into money from your 401k.
If You Do Borrow, Time Is No Longer Your Best Friend
Money grows over time — everyone knows that. And if you are investing regularly, time is truly your best friend. I’ll use a known statistic for example. Most of the time, your money doubles every eight years on average. For someone who is investing and not tapping into their 401k plans like a savings account, this is great news. However, if you withdraw money from your 401k plan, you are missing out on serious growth opportunities.
There are many reasons people take 401k loans, but many Americans take out money for a mortgage. 401k provisions allow for these loans to be taken out for up to 5 years, and up to 15 years for a home purchase. If you borrow from your 401k, you are missing out on opportunities for your money to grow among other things. Over the long haul, this could mean the difference between $50,000 and $500,000. I don’t know about you, but I don’t want to miss out on the potential long-term growth prospects for my retirement money.
Losing Money Is Not Fun
You wouldn’t throw money out of your car window, now would you? Yeah… didn’t think so. So why do it with your 401k money? Because essentially, that’s what you are doing when your borrow from your retirement account. And don’t use the excuse that paying yourself back the interest is boosting your savings. The long-term return on your money makes the average interest rates today look like chump change. Don’t buy into this. Avoid borrowing from your 401k. And don’t even get me started on tax implications.
To repay a 401k loan, you are using after-tax money from your paycheck. That means that anything above and beyond the principal repayment will be taxed a second time when you make a distribution from your account. That’s a bum deal, friends.
Like a Bird in Tar — You’re Trapped
While speaking with these families, many did not realize that a 401k loan stipulates that if you quit or lose your current job, the 401k must be repaid almost immediately. In effect, this is a type of leash that could force you to stay at your job and prevent you from seeking other higher paying opportunities. If you plan on staying where you’re at for a long time, you better hope they don’t downsize. I can’t imagine having this kind of freedom taken away from me.
Even worse, if you unexpectedly lose your job after borrowing a large chunk of your retirement plan, you are stuck with the bill. And if you can’t repay the loan, you get stuck with then a big tax bill for the early distribution. Talk about making a bad financial decision even worse. Borrow from your 401k and you are totally at the mercy of your employer.
Makes You Look Like You Are Chasing the Joneses
If you can’t live within your means and need to take out a 401k loan for anything other than an absolute financial crisis, what does that say about your character and spending habits? This is a huge wake-up call. Are you managing your money well? Are you keeping track of your costs? These are questions you need to ask yourself if your find yourself borrowing from your 401k for a frivolous purchase. is that LED TV or bathroom remodel really worth the sacrifice of potentially a hundred thousand extra dollars in retirement?!
Don’t Listen To Nike. Just DON’T Do It!
Look… is it really worth it? There are plenty of sources of income and savings. You could even up a zero interest credit card if you needed a short-term influx of cash (not recommended). Sacrificing future gains to make a purchase today is not wise and I highly advise against it. Instead, look at your lifestyle and evaluate your choices and decisions. Are you making bad ones? If so… seek help. You will be glad that you did. If you want to be living on a beach at 65, you will NOT tap into your 401k account.
Have you taken out a loan? Are you considering it? For what? Share with us!
Many of you reading this are either in school or on your way to school come the fall season. That time will come with life-lessons on money management. Personal finance can be easy, even if you are just starting out. To make money work for you — you have to know how money works. All of these concepts I wish I had known before I went to college. I am still paying for mistakes I made six years earlier.
Now that you’re on your own and away from Mom and Dad, you might be tempted to spent a little more on things that your parents wouldn’t let you have before. You have to go slow. Play it smart. By doing that, you can avoid many of the money troubles that plague many young adults today.
- Join a credit union. Do NOT just sign up for some random bank giving away free t-shirts and holding gift card raffles. You’ll see a lot of these come out around registration time. Cheetahs. Track down the local credit union or do some research into online banks.
- Do NOT get a credit card! Don’t be a sucker. The guys a attractive gals sitting behind the sign-up table are not there to help you. They’re there to make money.
- Avoid non-academic debt. It might seems like a good idea to put that Xbox on the credit card, but don’t do it! It’s a horrible idea. Focus on developing good money skills with cash. The only credit you ever want to see in your life are if your parents took out a student loan and/or a mortgage. Car loans and credit cards are the worst habits to build. They’re vampires.
- Save and then splurge. If you decide that you absolutely must have the Xbox… save for it until you can pay cash.
- Pay your bills on time. Pretty basic advice, but you’d be surprised at how many people lose track of things. If you pay your bills as they arrive, you won’t have to worry about forgetting any of them.
Organization and Planning
Minimal organization will help you keep your fiannces in order. As an adult now, each of these is important.
- Track your spending. Use a notebook or get Quicken. It’s a great investment. Keeping good records will prevent you from getting overdrawn at the bank or charging more than your credit limit. This habit also allows you to detect spending patterns.
- Make a budget. I can’t stress this enough! It doesn’t have to be fancy. At the start of the month, estimate how much money you’ll receive and decide where it needs to go. Remember: you don’t need to spend it all.
- Save your receipts. Put them in a shoebox under your bed, keep a folder… I don’t care. Just do it. You’ll need to be able to compare them with the statements at the end of the month. Some you will need to keep for a couple of years.
- Guard your information. Don’t give out your social security number or your debit/credit card information except to known and trusted sources.
It seems like there are hundreds of things competing for your money. It’ is hard to know what to do. Here are some smart ways to save money on campus.
- Buy used textbooks. You’re just going to sell them back at the end of the term anyway! (Or end up wishing you had done so five years from now.) You do not need brand new textbooks.
- Skip spring break. Forget the long road trips, the sunny beaches and the babes in bikinis. You can have a lot of fun for cheap close to campus. There is always stuff going on. Check out the student events calendar at your school. You’d be surprised how much fun you can have close to campus.
- Live without a car. Cars are expensive: gas, maintenance, insurance, registration, parking. Stick close to campus. Learn to use public transit. Better yet… become friends with people who have the cars.
- Don’t hang out with big spenders. Some kids have parents with deep pockets. Other kids are well down the road to financial trouble. Hanging out with them can lead to spending more than you can afford.
- Take advantage of campus activities. There is always something to do. Free movie festivals, go to the local symphony, go to sports games. Get the most out of that student ID!
Take care of yourself, folks. Your mother is not around to remind you to brush your teeth every day. Nobody is going to scold you for eating three bowls of Cap’n Crunch Peanut Butter Crunch (thanks God). Self-discipline now than it ever will be for the rest of your life.
- Go to class. You’re paying for it! You’re in college to learn. Everyone skips now and then, but don’t make it a habit. What you learn and do will have a profound impact on the rest of your life.
- Get involved. Staying busy tends to keeps boredom at bay. It also helps you build skills and form social networks that will last a lifetime. Try out for a play. Join a club or organization. I joined a fraternity where I met some of the best friends I still have today. Write for the school paper. Find something that sounds fun and do it. Take a risk!
- Stay active. A healthy body costs far less to maintain than an unhealthy one. You don’t have to do that much to avoid gaining weight in college. Just a stroll around campus once a day will do you fine.
- Eat healthy. It’s possible to eat well on a small budget if you know what you’re doing.
- Limit vices. Beer, cigarettes and pot are expensive. They also crew with your body and your mind. There’s nothing wrong with a drink or two on Friday night, but don’t go overboard.
- Learn the art of the Cheap Date.
- Take advantage of mother nature
- Go for coffee
- Use CitySearch or Urbanspoon to track down cheap food and activities
- Attend campus events
- Have fun. Your college years will be some of the best of your life. It’s trite, but true. Make the most of them.
Get in the habit of making smart choices now and you’ll develop a pattern of behavior that will stand firm the rest of your life.
- Make smart choices. You can do anything you want, but you can’t do everything you want. Decide what’s important to you and pursue that. And remember to leave time for yourself.
- When you want to buy something, ask yourself “Do I need it?” If you think you do — then wait. Don’t buy on impulse. Write the object of your desire on a piece of paper and pin it to the wall. Look at it every day for a week. If, at the end of the week, you still think about it, then consider purchasing it.
Saved the best for last! If you can master even one of these, you’ll have a head start on your friends. Master all four, adn you’ll be on your road to wealth. No joke.
- Spend less than you earn. Don’t earn much? Then don’t spend much. If your spending and your income are roughly even, you have two choices: earn more or spend less. When I was in college, I worked part-time to have money to do what I wanted to do. I had saved up for three years in high school so that I did not have to work full-time in college. This gave me some spending cash. Unfortunately, I do not do so good with the spend less part of the equation. Hope you do better.
- Be an outstanding employee. Good work habits pay enormous dividends. They can lead to recommendations and contacts that you can use after you’re out of school. Several of my classmates turned work-study jobs into launching pads for future careers.
- Start your own business. Can you install a hard drive? Can you strip a computer of spyware? Can you perform minor car repairs? Do you have a pickup truck you could use to haul furniture? Are you a passable guitar player? Charge cheap rates and exceed expectations. Word will spread. When you’ve built up a customer base, you can raise your rates a little. This is an awesome way to make money. I made money blogging :-)
- Learn to invest. Find a discount broker and begin making regular investments. With some brokers, you can invest as little as $20 a month. Get with me and I will show you how! Don’t obsess over the details yet. You can worry about high returns and low fees later. Right now the most important thing is to develop the investment habit. Ten years from now, you’ll thank yourself. If you can find a way to invest $1,000 a year for the next ten years, you can set yourself up for life. No joke.
You are ahead of the game just by reading this list! Congrats! Now do yourself a favor: subscribe to SoLongStatusQuo.com via RSS. Also, if you can find it, pick up a copy of Young Money, a magazine for college students.
Now stop fretting about money and get out there and have some fun!
It’s list time! Long ago when I first started this blog, I promised to do a list post every week. Since then, I have had the longest brain fart coming up with ideas. Thank you to those of you who made suggestions!
Here we go!
I’ve said many times that seeing success in your personal finances is pretty simple: spend less than you earn over a long period of time. If this is the heart of your financial plan, your plan will be prosperous.
With that said, there is one other thing you’ll need to do…
You must avoid the financial pitfalls that can derail your financial success.
I call these the worst money mistakes anyone can make. I’m listing them below in a countdown fashion along with some suggestions for avoiding them. Here are the top ten:
10. Not having an emergency fund.
An emergency fund is your the front line of defense against unexpected financial problems.
And believe me, unexpected financial problems happen pretty regularly. Washing machines break, cars need repairs, kids need braces and so on. It’s a fact of life. Accept it.
If you don’t have an emergency fund, you will likely have to borrow money (either from a person of off the plastic) when an emergency pops up. And as we’ve seen before, borrowing is the worst money mistake.
So how much should you save in your emergency fund? If you’re a Dave Ramsey fanatic like me, Baby Step #1 is to have at least $1,000 in the bank. Once you’re debt free, a good rule-of-thumb is to have six months of living expenses saved up. Keep it in a safe place! Not the underwear drawer, not the freezer… keep it in the bank. Don’t worry about earning a ton on it, no one ever became rich by making money off their emergency fund, just make sure it is safe and accessible.
9. Neglecting to make a Will.
Money magazine reports that 57% of Americans do not have a will, including 69% of parents with kids under 18.
Without a will, guess who decides what happens with your finances and your kids?
Do you really want to let your state decide these issues for you? Hmph! Especially if you live in Illinois.
To avoid this horrible money move, you need a will and the other documents that account for good estate planning. Along with a Will you need a Durable Power of Attorney and Living Will. For some guidance, shoot me an email and ask me any questions. I also have some great options for you to get all of these for an incredibly low price!
8. Not having enough insurance.
Think of insurance as a very big emergency fund that supplements your cash emergency fund. It covers the things you couldn’t save up to cover in advance, helping to replace/protect the largest assets you have – your career, your home, your investments – if you experience a major accident, death or injury.
Here is a quick list (a list within a list… gotta love it) of insurance policies that every family needs (notice I said needs… not wants… you need this stuff):
- Auto and Homeowners Insurance – choose higher deductibles in order to save money on premiums.
- Life Insurance – Purchase 20-30 year level term insurance equal to 10-15 times your annual salary.
- Long-Term Disability – If you are thirty-two years old, you are twelve times more likely to become disabled than to die by age sixty-five. The best place to buy disability insurance is through work at a fraction of the cost. You can usually get coverage that equals from 50 to 70 percent of your income.
- Health Insurance – The number-one cause of bankruptcy today is medical bills; number two is credit cards. One way to control costs is to look for large deductibles to lower your premium. The HSA (Health Savings Account) is a great way to save on premiums.
- Long-Term Care Insurance – If you are over sixty, buy Long-Term Care insurance to cover in-home care or nursing home care. The average nursing home stay costs $40,000 per year.
In addition to that list, I would add umbrella insurance to cover general liability – in case you’re sued for one reason or another (and we all know what a sue-happy country we live in these days.)
One more bit of advice: do not go overboard and become over-insured. No one needs to win the lottery when misfortune occurs. For example, your family most likely does not need a $10 million life insurance policy on you. If you have one and you don’t make $1 million a year or so, you’re probably spending too much on life insurance. But you do want to be sure you have enough life insurance to replace your assets in times of trouble or loss.
7. Marrying the wrong person.
Wait… what? Yeah. Read on.
There are actually two major financial mistakes related to marriage: marrying a spender and getting divorced.
Couples where both spouses know and apply basics of finance do much better than ones where one or both spouses have bad financial habits. The Millionaire Next Door says:
What if your household generates even a moderately high income and both you and your spouse are frugal? You have the foundation for becoming wealthy and maintaining your wealth. On the other hand, it is very difficult for a married couple to accumulate wealth if one is a spendthrift. A household divided in its financial orientation is unlikely to accumulate significant wealth.
In addition, a divorce is a major hit to any couple’s finances. According to the Journal of Sociology, those who divorced saw their wealth shrink by 77 percent. A smaller decline would occur if the couples just split everything down the middle. Instead, they both go broke trying to take everything from each other.
So here’s some advice regarding money and marriage:
- Discuss finances prior to marriage.
- Get educated on finances as part of marital counseling. I recommend Dave Ramsey’s Financial Peace University.
- Marry a money-wise spouse.
- Stay married – if you have financial issues, seek counseling or financial help.
- Share in financial decisions while married.
6. Not saving.
As I noted earlier, the formula for financial success is pretty simple:
#1: Spend less than you earn
#2: Do #1 for a long time
If you do these two things, you will be wealthy. Why? Because you’re saving money. See… money is 20% education and 80% behavior. You have to change yourself and break bad habits.
On the other hand, if you’re not saving, you are not making progress financially. And the longer that you wait to save, the harder it will be to catch up later.
A great move to make is to save a portion of every paycheck you receive. A good rule-of-thumb is to start out by saving at least 10% of your income, and from there the amount should increase over time.
Remember this simple breakdown:
10 – 10 – 80
Memorize these numbers… and live them out!
Give 10%, Save 10%, Live on 80%
And some may ask just what you are saving for? Any major expense you know you’ll have in the future: a house, retirement, cars, college costs for kids, etc.
5. Buying too much house.
A house is probably the biggest purchase most of us will ever make. And unfortunately, many people buy homes incorrectly:
- They let a bank or real estate agent set the amount they are able to spend on a home.
- Then they find a home they “love” that is even more expensive than that.
- So the home becomes a financial stretch to the point where they can barely make payments – as long as nothing goes wrong.
- Then something goes wrong – which it always does because life happens.
- But because things are so tight, when a money issue occurs (sickness, pregnancy, unexpected expense, and so on) everything falls apart financially (or at a minimum it starts the financial drop).
Instead of that, here’s my formula for buying a house:
- Buy a house you can easily afford – one where you can make payments and still have some financial cushion.
- Put at least 20% down.
- Put extra payments into your budget as well as bonuses, gifts, second job income and all other “extra” sources of money into paying off the loan (assuming you have no other debt).
- Become debt free in 7-10 years.
For those of you who want a bit more, the book Stop Acting Rich gives more precise rules:
If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s annual realized income.
4. Waiting to invest.
There are three factors that determine how well your investments (savings) perform:
- The amount that’s invested (how much is invested)
- The rate of return on your investments
- The length of time they are invested
Most of what we see in the media deals with getting the best return on your money. But actually, the factor that most influences the value of your investments is the time you have it invested.
And the longer you wait to save and invest, the more you’re costing yourself.
Here’s an example that illustrates the high cost of waiting:
- Smart Saver starts saving $3,000 every year, starting at age 20. After 10 years, her $30,000 total contributions are worth $62,000 (at an annual growth rate of 10%). At age 30, Smart Saver stops saving and makes no further contributions. She just lets the money grow at an 10% annual rate of return for the next 30 years, until age 60. At age 60, the $62,000 will have grown to $1,230,000.
- Her sister, Late Saver, waits until age 30 before she starts saving $3,000 a year. Unlike her Smart Saver sister who stopped saving after 10 years, she doesn’t stop saving. She saves every year for 30 years, from ages 30 until she is 60. At age 60, her account is worth only $656,000.
Let’s drive it home:
- Smart Saver invests a total of $30,000 over the course of 10 years, stops investing for 30 years and ends up with $1.2 million.
- Late Saver waits 10 years, invests a total of $90,000 over the course of 30 years and ends up with only $656,000. (By the way, you won’t last your full retirement on anything less than $1.5 million. Hello Wal-Mart).
Now I’ll add a couple extra points to this example to show how Smart Saver could really have made it big in saving and investing for retirement:
- If Smart Saver would have kept saving $3,000 her whole life, she would have ended with almost $1,829,000.
- And if that $3,000 would have been $5,000, she would have ended with $2.8 million.
So the solution for this money problem is to:
- Save early
- Save often
- Save more as time goes by
3. Being deep in debt.
The leading investing company, Morningstar, says that, “Over a lifetime, the average American will pay over $600,000 in interest.”
$600K? YOUCH! This is a pretty big example of the fact that debt is very costly — it can rob you of hundreds of thousands of dollars.
The solution to this mistake is simple:
- If you’re in debt, start taking steps on how to get out of debt today.
- If you’re not in debt, don’t get into debt.
2. Not working to maximize your career.
Your career is your most important financial asset. This is because the average American can reasonably expect to earn in the neighborhood of $2 million during his/her lifetime. But if that person works hard and grows their income at 8% per year, they could have more than $3 million more than that. If they don’t, their $2 million can dry up to a bit over $1 million (or even less). So not working to make the most of your income can cost you millions of dollars.
And let me add a couple other mistakes you do not want to make because they can derail your career and your income as well:
- Do not quit your job without another job lined up. While it may be stressful to work where you do — not having enough to eat is much more stressful.
- You must take care of yourself physically. Eat well, get plenty of rest, exercise and enjoy life. Your career and its earning potential are dependent on you being able to work.
If your outflow exceeds your income, you are in trouble.
The first step to gaining wealth is spending less than you earn — it’s vital to making any progress. So when you over-spend, you’re doing the most damage possible to your finances.
Here’s what Stop Acting Rich says about the issue:
Most people will never earn $10 million in their lifetime, let alone in any single year. In fact, most households (97%) are unlikely to ever earn even $200,000 or more annually. So what if you are unlikely to become rich by generating an extraordinarily high realized income? The only way you will become rich is by being like those millionaires at the other end of the continuum: by living well below your means, by planning, saving, and investing.
There are two types of over-spending that can ruin your finances:
- Over-spending on the little things – the small amounts that seep out of your pockets here and there and eventually become large.
- Over-spending on the big things – homes, cars, boats, cottages and so on.
The top complaint I hear from people who don’t have balanced budgets is, “I don’t make enough money.”
I’m telling you that in the vast majority of cases (probably 95% or more), it’s not the amount these people make – but the amount that they spend that’s the problem.
In some cases, yes, it’s true that people simply don’t make enough money to save, invest, etc. As such, they need to concentrate on increasing their income as much as they need to control over-spending.
I once sat down with a guy who made $160,000 a year. That’s a pretty good income! When I saw his income, I thought “this will be a piece of cake” to make a balanced budget. But once we got through the mortgage on the houses (plural) he owned, the four luxury cars he leased for himself, his wife, his kids, and the amounts they spent on clothes and vacations – they had spent it all and then some!
And people who make much, much more can spend it all as well. Here’s a quick review of several wealthy people who spent more than they made – despite the fact that they made a bundle:
- Mike Tyson — The famous boxer reportedly earned $300 million in his career, but it wasn’t enough to support a lavish lifestyle. He filed for bankruptcy in 2003, owing $27 million.
- MC Hammer – Despite a former $33 million income, he filed for bankruptcy in 1996.
- Scottie Pippen – The former Chicago Bulls star lost $120 million in career earnings due to poor financial planning and bad business ideas.
- Evander Holyfield – Four-time boxing champ reportedly made over $250 million in cash during his boxing career, but despite this he is now flat broke.
- Some others who made big money and spent it all and then some include: John Daly, Nicolas Cage, Bernie Kosar, Gary Coleman, Kim Basinger, Don Johnson, Michael Vick, Andy Gibb, Isaac Hayes, Lenny Dykstra, Latrell Sprewell, Mick Fleetwood, and Marvin Gaye.
This is why over-spending is the #1 money mistake – because no matter what your income is, if you spend it all plus some, you’re going backwards financially and you’re losing ground.
What to do to combat this: develop a budget and live on it.
As I mentioned before, the 10-10-80 rule is a good, simple budget to begin with.
From there, the 10’s should get larger as you give and save more through the years. The 80% should become a smaller number over time. You may still end up spending more in total because your income is rising too, but as a percentage of what you earn, spending should decline as income increases.
That’s my list of the worst money mistakes anyone could make. What do you think of it? Did I miss anything? Is the order wrong? Feel free to add your thoughts in the comments below.