Acorns - Round Up Purchases and Invest

Acorns is a money management service that allows you to invest for retirement without noticing that you are doing it. 

Let us say that you purchase a snack for $2.45, Acorn will auto invest $0.65 in a diversified portfolio for you. This method is the simplest and quickest way to save up acorns like a squirrel if you don't have time to make an extra effort today. 

https://www.acorns.com/

401(k) Spillover

401(k) Spillover - Some companies are including this new benefit into their retirement plan. With this plan, you are allowed to add to your 401(k) over the maximum amount allowable by the IRS ($18,000 in 2015). It is not pre tax like your first $18,000, but it can sit in your account for retirement nonetheless. 

The greatest benefit is to those who earn at the higher end and want to receive the full company match. Let's say that your income is $350,000 (congratulations on snagging this position!). Your employer will match 50% of your contribution, which can be up to 6% of your income (pretty standard). So, you contribute the full $18,000, yet that is only around 5% of your pay, which means your company match (at 50% of your contribution) will only be around 2.5% or $9,000. With a 401(k) spillover, you could contribute the full 6% of your pay ($21,000) and the company will be able to match the 50% of that contribution, a full 3% of your income, which is $10,500. You win by gaining a additional $1,500 in free money. Overall, your 401(k) funds will be $18,000 in pre tax funds and $13,500 will in a post tax portion of the account. 

Question Their Authority

Always question the authority or legitimacy of anything you see. I love calculators that tell me how much I should save for retirement and calculators that will help me do away with debt. However, keep in mind that certain factors are assumed in most calculators that are not solely based on math.

For example, the ING retirement calculator tells me I will need $1,000 per month if I want to travel internationally. To me, this seems insane. However, I can always find a deal and maybe some people cannot. Who knows, maybe my standards of living will raise this much when I am in retirement. However, I doubt it. There is always a better way to spend money or give money away than five star hotels.

Also, note that ING and other companies want your money in their accounts because this is how they make money. Maybe they are overestimating the total needed for retirement because they want more of your money. There is such a thing as saving too much for retirement. When you are currently not enjoying life because you are socking 40% of your income into retirement, the situation has gone too far.

Therefore, always think about where your financial knowledge comes from and what is the objective of your source.

Simple IRA Roll-Over

If you currently have a Simple IRA and no longer work for yourself, you can roll-over your IRA into a traditional one. The rule - you can do it after two years have passed.

Necessities vs. Luxuries

The only way to manage your expenses is to realize what are necessities and what are luxuries. For necessities, all you need is shelter, food, clothes, and some bathroom products.

Shelter means a roof over your head in a safe neighborhood, not a nice condo in a nice area next to your work. Food can be as minimal as rice, beans, some fruits and veggies, and the occasional meat. Clothes means a couple of outfits for work and something to keep you decent in other times. And, bathroom products are your basic shampoo, soap, toothpaste, etc.

If you are spending money on anything else, you are spending money on a luxury. I'm not saying that you should never buy clothes again or eat rice everyday. What I am saying is that if you are in credit card debt, cannot understand how you could possibly squeeze any money from your budget for retirement, or are living paycheck-to-paycheck and are spending money on luxuries, then you have no excuses as you are able to make a change and be able to save up an emergency fund, funds for retirement, and finally money for something fun.

Everyone gives excuses as to why they are buying 'luxuries' and why they are 'necessities.' I've said that the reason why I pay for a downtown apartment is because having a car would be more expensive. However, I've lived in the suburbs before and have taken a bus. I just don't want to get back on the bus even though I would save hundreds of dollars a months.

I've heard people say that they use coupons and, therefore, the ready made food is cheaper. However, unless you are like the people on Extreme Couponing, you are probably still paying more. The way to know is to see what is the average price per pound for veggies, rice, meat, etc. I've found that using $1/lbs of food is pretty accurate if you stay to the meat on sale, whole chickens, and chicken drumsticks. Therefore, if a 16oz package of a ready made meal costs $2, I know I'm paying double for the convenience.

For clothes, people use the excuse of their work to shop. However, after you have a few work outfits, you really don't need many more. See if you can remember when your coworkers wore the same thing as they are wearing today. Most likely, you will not be able to answer that question or guess if they own 5 shirts or 20. If you can't remember their wardrobe, most likely they can't remember yours either.

Bathroom products can be expensive, however, if they are bought on sale, they can cost next to nothing. The trick is not to be brand specific, which is a downfall of many. Try out the shampoo on sale and you will most likely not notice the difference.

Just remember to ask yourself next time you shop if you are buying a luxury or a necessity.

Flexibility

Setting financial goals is the best way to achieve what you want in your financial life, however, you must also be flexible.

Recently, I had to raid my emergency fund for a non-emergency purpose: advanced rent of 6 months. However, because I was willing to raid my emergency fund, I believe I received a better deal from my landlord.

Also recently, I made the mathematical calculation to see if it was better to pay off my private loan aggressively or to take it slow now because I am still paying capitalized interest which counts principal and interest as interest payments for tax deduction purposes. My goal was to pay the loan down aggressively, however, after doing the math, it did not make sense until the capitalized interest was paid off.

Therefore, it is always best to be flexible if it benefits you in the long run.

My financial goals are now the following:

1. Continue to contribute up to the match to my 401(k) (4% of gross salary)
2. Make my emergency fund what it was before
3. Contribute 11% of my gross salary to my Roth IRA
4. Then think about saving extra for increased student loan payments in the future

Saving 15% for Retirement Before the Match

Here are some reasons why you should save 15% of your gross salary before the match for your 401(k) from your employer:

1. Gross, because you can adjust your withholding so that you can take a lot or very little home
2. Gross, because you don't know how much your tax return or payment will be at the end of the year and gross never changes like your take home could
3. 15% before the match so that you will get used to saving 15% even if you start working for yourself, or move to an employer that does not have a 401(k) match
4. 15% before the match because your employer's match is probably not yet vested, so don't look at it as your money
5. 15% before the match just in case you quit your job and you do loose the un-vested amount
6. 15% before the match because if your employer's money is vested, it'll be a nice bonus

Financial Clean-Up

If you haven't done so already, now is a great time to get your finances in order. Taxes are done; it's a fresh financial year. Now is a good time to start making folders for 2011 taxes: one for receipts, one for paycheck stubs, one for interest payments you make on your mortgage or student loans, etc.

If you start organizing now, taxes will be a breeze in April, or maybe you will be so organized that you can do your taxes in January and get it over with.

Now is also a good time to make some long and short term financial goals.

Here are mine:

1. Continue to contribute 15% towards retirement through 401(k) and IRA
2. Pay extra on my student loans, but just enough extra that I only pay $2,500 in interest in 2011
3. Have an emergency fund of 6 months that I don't have to touch because I have enough in checking as well (recently I pulled some money out because I had a family medical emergency, a car accident, and I want to prepay some rent to negotiate the rent down)
4. Start saving money on the side to pay off my private student loan in 2013 (as discussed in a previous post, my whole payment is currently interest because I am only paying capitalized interest and after doing some math, it works out better if I only pay $2,500/per year in interest for the tax deduction and then pay off my loan in full in 2013, when I won't be able to rack up the $2,500 in student interest payments for the tax deduction) - I would like to see $3,000 in this account by Dec 31st, 2011
5. Get a raise of around 13% from my current salary by April 2012 - currently supposed to get a raise at the end of May and then again in April
6. And of course, be able to take all my vacation days by going somewhere, buy Christmas presents for the family, and spoil my nephew-to-be

New IRA Brokerage

A couple of days ago, I opened a new IRA Brokerage account. I picked Charles Schwab out of all the discount online brokerages because of the following factors:

1. Great website (TD Ameritrade was a contender, but I heard that sometimes the website is unavailable and that's not acceptable even as a rumor, especially if you want to do some trading on the spot)
2. Easy search for mutual funds
3. Largest amount of no-load funds available (I like no-load mutual funds for the IRA account as overall they are less risky than individual stocks)
4. Funds available from multiple families (important as I want the greatest diversity to find a fund that is highly ranked)
5. Great customer service (I received a welcome call, unlike when I opened ShareBuilder)
6. Low start-up costs (Fidelity and Vanguard are great companies, however, they require initial deposits of $2,500 and $3,000 respectively)
7. Overall highly ranked and reviewed online

Retirement vs. Emergency Fund

If you do not have a full (whatever that means according to you) emergency fund saved up, you might want to dedicate all of your funds towards the emergency fund and not save anything for retirement. However, I think there is another option that most people do not realize. Your Roth IRA can serve as a temporary emergency fund while you do not have the emergency fund build up all the way.

Most people do not say that all Roth IRA contributions are available for withdrawal anytime without taxes or penalties. Only the earnings on those contributions will incur penalties if withdrawn early. However, this is true.

Therefore, If you have an excess of $500 a month after fulfilling all your expenses and the 401(k) contribution (if it has a match). You have no emergency fund and you require an additional $300/month in retirement savings to be able to save the suggested 15% of your gross income. Instead of putting the entire $500 towards the emergency fund, put $300 in a Roth IRA and $200 in the emergency fund.

If you have a serious emergency such as a job loss or a medical accident you cannot cover, remember that you can withdraw the $300/month you have been putting in to the Roth IRA. The danger in this is that your holdings can go down. Therefore, you can hold all of your Roth IRA investments in cash until you have build up your emergency fund. The more real danger is that you will now always see your Roth IRA as an emergency fund and will empty it if an "emergency," such as a friend's wedding, arises. Don't ever take money out unless it's a real emergency. Remember that you can never replace it.

The main reason for this maneuver would be that if your emergency fund needs 8 months of expenses, then you will need a year or two to build this up. You can only contribute $5K in a Roth IRA per year and if you do not contribute one year, you miss out on that amount.

Suze Orman Expense Sheet - Budget and Emergency Fund Planner

Another great budgeting tool is on the Suze Orman's website, Suze Orman's Expense Sheet. You enter your emergency fund amount and break down how much you spend each month by category. Then, Suze lets you know what your essential expenses are and based on that how large your 8 months emergency fund should be.

If a budgeting category is off from the national average, the cell will highlight yellow and by hovering over the cell, you can see what the national average is. If you are spending less, that's great. However, if you are spending more than the national average on a category, you should reconsider that expense even if you have an above average income.

At the end of the process that takes 2 minutes, Suze will tell you to beef up your emergency fund if you do not have 8 months of essential expenses. If your emergency fund fits the bill, she'll say that you should aggressively pay down any debt.

NetWorth IQ

There are several ways to track your net worth. The most convenient for me, has thus far been Mint.com because it does everything automatically. However, another way to track your net worth is through NetWorth IQ. Here are it's advantages and disadvantages.

Disadvantages:

1. You must manually enter all your data
2. All other people's data is manually entered as well and might not be accurate for comparison
3. You must enter your data every month to see the progress

Advantages:

1. You can track your net worth with a graph
2. You can see the percentage change in each category
3. You can make your net worth public so other people can comment on your progress
4. Making your net worth public might motivate you to get that number up
5. You do not need to give out personal login information
6. You can compare your net worth to others your age, or in your occupation, for example
7. You can also compare each category such as student loan debt, credit card debt, or retirement assets to others in your demographic groups

When to Start Saving for Retirement

So, you've heard people say that the sooner you start saving for retirement, the better. If you are till not saving for retirement or are not saving enough, you probably were not shown the numbers. Use this CALCXML - Savings Calculator to see how much you would loose for every year that you delay savings.

Money in your 20's

Money management skills should be learned as early as possible and the 20's is a great place to start. Here are 10 financial projects you should take on in your 20's:

1. Learn to live on less than you make. Many people who find their first job, go all out with a new wardrobe, a new car, decorations for the new apartment, etc. Control your spending and only spend what you can afford with the money you have. See the Cash Flow blog post to see how you can see your cash flow with ease.
2. Start saving. Use the budget worksheet to see where you are overspending if you are unable to spend 15% of your take home pay. If you have large student loan payments, try to cut down in all areas to free up some space for savings, even if it's $5/month.
3. If your company offers a 401(k) match, start putting in the minimum amount you have to put in to get the full match.
4. Build an emergency fund in a high interest savings account.
5. Maintain a good credit score. Make sure you are never late. Automating your bills is an easy way to make sure of this.
6. Pay down on your student loan or any other debt with any extra funds that you have. If you receive a gift, a tax refund, or a bonus, try to apply it directly to your debt. See the Debt Pay Off Methods to see how you want to tackle your debt. See how even $5 per month extra will make a difference in your debt by using the Bankrate Amortization Calculator.
7. Save for retirement. Starting early is one of the best things you can do. Use a retirement calculator to see how much you should save. Start small if you can't contribute the full amount you are advised and increase your contributions yearly.
8. Designate separate savings accounts for various goals. Retirement should be saved in a 401(k) and an IRA. You should also have separate savings accounts for an emergency fund, grad school, vacation, car, down payment, etc. You can save in each account simultaneously or take it one step at a time and once your emergency fund is full, save for a vacation, once you have enough in that account, you can save for grad school and a car, etc.
9. Get health insurance. One accident can ruin all of your plans. 
10. Earn more money. Ask for a raise at the annual review or find a job that will pay you 15%-20% more and present the offer to the current employer. Be ready to leave for the new job if the offer isn't matched.

Pay Yourself First First, No Really

Every personal finance adviser out there says to pay yourself first. There are websites dedicated to the concept. However, many of us still don't do this simplest thing. For the longest time, I figured I was disciplined enough not to have to do this. However, since I've started a couple of month ago, it has done wonders.

Paying yourself first is as simple as setting up a new savings account (if you don't have one yet) and setting up automatic transfers of at least 15% of your take home pay. It sounds so simple, but paying yourself first lets you see the money that you have left over.

Since I am saving for a couple of things right now, I have one slush fund for the 15% savings and then I distribute from there to other savings accounts based on what I feel I want to accomplish first.

This 15% is the starting point for my savings. I also contribute 4% of gross pay to a 401K and I always end up transferring more out of my checking and into my savings. However, keeping the funds separate and having the automatic savings plan of at least 15% going into my slush fund, helps keep me on track.

Dave Ramsey's Baby Steps

Dave Ramsey is a hugely popular financial adviser. I like listening to his radio show just to see what his opinions are, even though a lot of the times, I do not agree with what he says. Here is the just of what he advises through his 7 baby steps:

1. Save $1,000
2. Pay off all debt, but the mortgage (this includes student loans)
3. Save 3-6 months in an emergency fund
4. Invest 15% of your income in retirement
5. Fund college education for children
6. Pay off your home
7. Build wealth and donate

 I think having a step process works for most people. However, not every household has the same factors in their financial life. I do have to credit him with saying that cheating baby steps in some circumstances might be okay, however, he does not seem to endorse it. I've heard his say, for example, that if you have an unstable job, you should increase the savings that you do in baby step one. However, he is never clear with how much.

I still believe in Suze Orman's idea of saving an 8 month emergency fund and then paying down the debt like student loans. Of course, if you have credit card debt at high interests and you feel pretty safe at your job, you could get by on a smaller emergency fund until your credit card debt is paid off.

I also think that Liz Weston has a point when she says that you can never catch up on your contributions for retirement. Therefore, I think that getting the employer's match in a 401(k) is a priority over paying for debt.

See my blog post on Prioritizing Savings to see what my personal 8 steps are.

The Math of Retirement

There are all sorts of numbers that you can calculate to see how much you will have in retirement. The truth is no one can predict how long you will live or what your medical costs will be, for example. However, there are some numbers that you could use as estimates without having to use complicated calculators.

• Always save at least 10% of your salary for retirement
• Have at least 10 years of your final pay in retirement before you do retire
• Never withdraw more than 4% of the principle of your total holdings in retirement to make sure you don't deplete your retirement fund (this means that you should be okay with living on 4% of the total amount you have as well)

Just remember 10, 10, 4 and you should be set. 

Rule of 100 - Portfolio Diversification

To know how much of your portfolio should be invested in stocks vs. bonds/CD/other safer investments, you can use the simple rule of 100. What you need to do is subtract your age from 100. For example, if you are 25: 100-25=75. You should have 75% of your portfolio invested in stocks and 25% in bonds, etc.

Of course, if you want to be more aggressive, you can invest more money in stocks or the other way around. If you want to be safer, you can invest more money in bonds and CDs. However, the rule of 100 can provide a basic guideline.

Reverse Mortgages Explained - the Good and the Bad

Retirement has many options such as annuities, IRA income, social security, etc. Reverse mortgage is one of them. A reverse mortgage is a loan that you can take against the equity that you have in your house and the loan can be taken out in a lump sum or in monthly payments. You do not have to repay the loan until you die or move. You must be 62 to qualify for this retirement program.

The Good:

• Money is quickly available in a lump sum to use to pay off debt in retirement
• Monthly payments that could support your social security and retirement distributions
• You can stay in your house
• Credit history is irrelevant to obtain this loan as your home is the collateral
• You can use the loan to pay off the remaining balance of the mortgage and never pay your mortgage again

The Bad:
 

• Fees to obtain a reverse mortgage can be high
• You are still liable for the insurance and taxes
• If you move (i.e. nursing home), you must start paying back the loan
• Once you die, the estate repays the loan and the fees if they want to inherit the house
• If you receive some payments and pass away, and your estate does not have the money to repay the payments and the accumulated interest, than your estate will loose the house

It is a great program for those who do not need/want to leave anything to their heirs and for those struggling in retirement. However, do keep in mind that you must live in the house to not have to pay back the loan. As soon as you sell the house or move, you must start repaying the loan back to the bank.

The 4% Rule

Here is another way to look at retirement and how much you should have saved. Many of the calculators I see online overestimate your needs. For example, the calculators think that just because you want to travel, you will need an extra $1K-$2K per month. I have managed traveling on a lot less and I know I could continue this when I am older as well. Therefore, a way to always know what you will need as the total sum in retirement is to see how much you want to earn. Let's say that you want to earn $40,000 a year in retirement. If you can make a 4% yearly return on your money (which is conservative), then you'll need $40,000/.04=$1,000,000. You can adjust this as times or living expectations change. However, there is always an easy way to calculate what you will need in the future. This is of course a rough estimate as it does not calculate taxes, social security, etc.

To see how much you need to save per month to reach your goal use this Bankrate Savings Calculator.