I found this article about Roth IRA’s and I think it is worth posting. It goes over the basics of Roth IRA’s and why you should consider one, if you don’t already have one. If you are thinking, “what’s an IRA?” then you should probably start here.
Right now, you may be wondering why you should invest in a Roth IRA if you currently have a retirement plan (401k, 403b, etc.) with your employer. The Roth IRA has many benefits that other retirement plans don’t have, and chief among them is the fact that your investment earnings may accumulate tax-free. In other words, your Roth IRA has the opportunity to grow without incurring any taxes and can be distributed to you tax free, if some certain conditions are met.
While there are advantages to owning a Roth IRA, there are also some rules you should think about before you decide this is the account for you. First, not everyone can take advantage of a Roth IRA. You or your spouse must have earned income or compensation – this includes wages, tips or salary. However, be aware that earned income or compensation does not include rental, interest, dividend, pension annuity or deferred compensation income. Second, your modified adjusted gross income cannot exceed certain limits. For single people, your modified adjusted gross income must be less than $114,000 and $166,000 for married couples filing jointly.
Contributions you make to the account are not tax deductible, but may be withdrawn any time without tax or penalty. Before taking withdrawals from your Roth IRA you need to determine if you are receiving a “qualified distribution.” Any withdrawal that is not a “qualified distribution” can result in income taxes and IRS penalties. For example, any earnings on your principal will be subject to income taxes should you decide to withdraw them prior to the five-year holding period or before age 59 ½ (contact your state department for state tax rules). In addition, these earnings are also generally subject to a 10% IRS penalty.
Tax and penalty free withdrawal of your Roth IRA earnings for “qualified distributions” can be made once a five-year holding period is satisfied and one of the following applies: you have reached the age of 59 ½, you have become disabled, the funds are used for a first-time home purchase (subject to a $10,000 lifetime limit) or the funds are distributed to a beneficiary after your death.
After thinking over the rules, if you are eligible for a Roth IRA you may be wondering how much you can contribute. For 2008, you may make regular contributions that do not exceed $5,000. If you are 50 or older, you can also make “catch-up” contributions of up to $1,000 per year for a total contribution of $6,000.
A couple of other important items worth noting – contributions to your employer’s retirement plan do not exclude you from making contributions to a Roth IRA, and owning a traditional IRA does not prevent you from setting up a Roth IRA either (although contributing to a traditional IRA for the same year will limit the amount you can contribute to your Roth IRA).
Whether or not you decide a Roth IRA is the right retirement account for you, it’s always smart to plan ahead and save money for the future. Never underestimate the importance of saving for the future and using a variety of investment vehicles to achieve your goals.
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Financial advice for college grads
The most recent Money Magazine had a few interesting articles worth commenting about. The first of which was one that contain advice from the pros for new college grads.
Clean up MySpace and Facebook pages
“. . . because potential employers will check them. One test: Make sure there’s nothing up there you wouldn’t want your grandmother to see.”
I think that is good advice for job-seekers and anyone really. Also, you may want to Google your name once in a while just to see what is showing up. Googling someone is the new form of background check that can provide a lot of detailed information. We are transitioning to a transparent society where not much can be hidden any longer - so do your best to watch what you type - no matter where you are online (and make sure you add me as a friend on Facebook).
Spending less than you earn
“Make it a habit to have more money coming in than going out. You may need to drive the clunker a bit longer or postpone that trip to Europe.”
Good advice. It is the simple 3rd grade math problem that is the ONLY way to wealth. If you can start the habit now, you will be in great shape for the rest of your life. If you don’t, you will have to face the music sometime and the longer you wait the more difficult it becomes.
Saving Money
“Sign up for your 401(k) the first day on the job; and put $25 a month in an ING Direct savings account as a cash cushion. Don’t let credit cards or Mom and Dad be your emergency fund.”
It is amazing how simple it can be to retire well off, if you start young.
Following this advice will pay huge dividends over the course of your life. Don’t be like so many who get into their 40’s and start wishing that they had started 20 years earlier. Take action now! You will thank yourself later.
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I get Dr. Andrew Jackson’s newsletter on a regular basis and the most recent one contained a few nice tidbits of info about the U.S. government and their spending habits.
These are a few of the nuggets from the newsletter that I thought were useful or interesting…
What do we mean by the words deficit and debt?
The deficit reveals whether the government has balanced the budget in any year. Our federal government is addicted to deficits. The federal government has spent more on programs and services than it has collected in taxes thirty-one out of the last thirty-five years. But, don’t be fooled by any news headlines boasting about balance the budget. Simply balancing the budget, although it helps not to add to the overall debt, will not solve the long-term financial problems of Social Security and Medicare.
The debt of the federal government reveals how much money the government has borrowed in total.What are the federal government’s primary sources of revenue?
The federal government’s four primary sources of revenue are (1) Individual income taxes at 43.4% (2) Social insurance and retirement receipts at 34.8% (3) Corporation - big & small - income taxes at 14.7% (4) Excise - alcohol, tobacco, gas - taxes at 3.1% and (4) other at 4.1%. The federal government receives approximately $2.4 trillion each year in revenue. Since individual income taxes is the largest source of federal revenue, approximately 50%, it is important to know what “individuals” are really paying income taxes. Well, approximately 52 million Americans pay little or no income taxes at all because of their income level.
What does the federal government spends its money on?
The federal government spends its money in six primary areas (2006): (1) Non-Defense Discretionary at 31.9% (2) Security Security at 20.7% (3) Defense at 19.7% (4) Medicare at 12.4% (5) Medicaid at 6.8% (6) Interest on Debt at 8.5%. To clarify things even more, the federal government spends approximately 68% of its revenue on five things: Social Security, national defense, Medicare, Medicaid, and interest on the money borrowed.
What percentage of federal spending goes to programs for the retirees/elderly?
It is estimated that about 46% of the domestic federal spending goes for programs for the elderly (Social Security, Medicare, and Medicaid).
Are all federal government programs equal in nature?
No. Not all federal government programs are equal in nature, there is a big difference between discretionary and entitlement programs. Some are “discretionary,” meaning the government can give and take away (education, defense, veteran’s programs, space program etc.), and others are “entitlements,” meaning that government has no choice but to pay (for example, Social Security, Medicare, and also, in a sense, the interest on the national debt since it is off limits). Entitlements are on autopilot and Congress has no responsibility to review them as part of the budget process and make any spending decisions.
I am blown away by the amount that the U.S. government spends on interest for debts. If they receive $2.4 trillion dollars in revenue each year and pays 8.5% of that amount (actually more - how often does the government live within it’s means?), that is $204 billion dollars each year.
I know it must be challenging managing our country’s finances, but can you imagine the possible benefits of our government being debt-free? An extra $204 billion dollars each year!! I can think of a few things to spend it on - how about you?
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To the beginner…
Money management is not just for big corporations. It is for you and I as well. It doesn’t need to be labeled with terms like money management or budgeting. If you are where I was, it means nothing more than GETTING RID OF THE CHAOS.
If you are just beginning to get your financial life in order - I am excited for you! It is a fun journey and it is well-worth the effort. The peace that comes with knowing how much money you actually have and being in control of your spending is truly priceless.
Not too many years ago I was out of control financially with my maxxed out credit card and empty (and likely overdrawn) bank accounts, and not a dollar in savings. I decided that I was not going to live my life out of control and had to get things in order.
It did take a little work and a little time, but it is not much different than cleaning out a junk filled garage. It looks like an overwhelming task, but once you get going, it is easy to keep going. And once it is finished, it brings a sweet taste of satisfaction of a task accomplished.
Money Management
If you are looking for a way to get your bank accounts set up to to make bill-paying simpler I have laid out how I organize my bank accounts. And how I manage my bill payments will show you the steps that I take to keep my bills in order and pay them 2 times a month.
I also use a balance sheet to keep track of my financial life. You can also download a copy of my balance sheet template that I use.
Budgeting
If you are making the wise move to start a budget, I suggest reading why budgeting is like baking cookies to get some fun into your budgeting and these 4 quick tips to sticking with a budget.
Then you can learn some techniques with how to budget with the envelope system or how to budget with ING direct.
Saving Money
If you are having trouble spending too much money, then I suggest you read how to quit spending more money than you make or the trick to saving money.
If you are having trouble finding money to save read how to find money to save. One great way to find extra money to save, is to use the money from your raises at work. Read what to do with a raise for a more detailed analysis of what I do with each raise.
As you take your beginning steps with managing your money you will find that it is a lonely journey sometimes. Most people do not ever get their financial lives in order, and sometimes you can feel like you are not normal. Well, the truth is that in the U.S. “normal” means living paycheck to paycheck and in debt up to your eyeballs. Who wants to be normal anyway? Here are 16 ways to save money by not being “normal”
Building an Emergency Fund
One of the best tips for beginners is to build an emergency fund. Experts recommend anywhere from 1 month to 6 months of your expenses. It really depends on your personal situation.
Don’t be intimidated by the amount, just start saving, realize it may be a distant goal, and keep going and you will get there!! It is a very comforting feeling, knowing that if the car breaks down or the water heater breaks that you have money in reserve waiting for it.
If you are wondering if you need an emergency fund you can read “do I need an emergency fund?” and if you already have one and are looking for ways to make more money with it check out how to make more money with your emergency fund.
Saving for Retirement
So you want to retire? You mean you don’t actually want to work until you are 85? Good, me neither. The good news is that it is never too late to start saving for retirement. And, the earlier you start, the better off you will be. I have a quick and easy solution for twenty-somethings to retire well off.
You can find out more about saving for retirement with these 4 quick steps to retirement savings.
I think this should give you a good start at managing you money like a pro, keeping checking back (or get updates in your inbox) as I regularly aim to provide money management tips for beginners and veterans alike…
Veterans: Do you have any suggestions for beginners? What financial advice do you wish you would have received when you first started the journey?
Technorati Tags: beginner tips, money management
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The Bible says that Solomon was the richest man who ever lived and also the wisest ever to live (1 Kings 4:31). I think that makes him qualified to give some financial advice.
I know there is some debate over whether or not Solomon wrote Ecclesiastes, so just in case he didn’t we can use the alternate title of: Financial Lessons from someone wise. 
Money does not satisfy
- He who loves money with not be satisfied with money… -Ecclesiastes 5:10
Loving money is a dangerous thing. Some people spend their entire lives chasing more and more money thinking that it will bring them satisfaction, only to never actually attain the satisfaction they were searching for. True satisfaction only comes from God. It doesn’t come from getting married, a bigger house, a Mil in the bank, or being retired. What is interesting is that when we take our focus off of getting more money and more things, then they seem to start appearing. I guess this is what was meant by the verse in Matthew, “But seek first His kingdom and His righteousness, and all these things will be added to you.”
Diversify your investments
- Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth. -Ecclesiastes 11:2
I get two things out of this verse. First, that Solomon lays out the groundwork for diversification. I like the balance of having 7-8 “eggs in the basket,” rather than just one that would leave us with nothing if it turned out bad. But also, not 200 miniscule eggs that are worth next to nothing individually. In this case, if any one investment performed very well, it would make very little impact on the portfolio as a whole. On the other hand, if you had seven investments and any one of them performed well, it would have a decent impact on the portfolio as a whole.
There is never a perfect time
- He who watches the wind will not sow and he who looks at the clouds will not reap. -Ecclesiastes 11:4
I think the reason that some of us wait for the perfect time to do something is because we are trying to wait until there is no risk. It is human nature, we want to eliminate any and all risk of bad things happening. No matter how much we try, we can NEVER eliminate all risk. Any time we step out into anything there will be some level of risk, but that is not an excuse not to take action. If it is stepping out into a new job, taking the first step to get out of debt, quit a bad habit, or anything else - there will always be an excuse not to take action. Step out and be one of those people who realizes that the perfect time is now.
Work Smarter, Not Harder
- If the axe is dull and he does not sharpen its edge, then he must exert more strength… -Ecclesiastes 10:10
Steven Covey calls this his 7th Habit of Highly Effective People. He calls it “Sharpening the Saw.” Sometimes the most effective thing we can do is to rest. Though, it seems counter-intuitive, it really isn’t. Resting, allows for more production on your productive hours. People who live by this principle realize that often 6 hours can be more productive when accompanied with rest than 10 without.
This was another lesson that I learned the hard way while in school. I would frequently spend 4 hours on homework, when I am sure I could have done it easily in 2 hours. I was living in a sleep-deprived zombie-like state because I, “had better things to do with my time than sleep.” But because my brain was functioning well below its capability, it took me a lot longer to finish my assignments.
My best success with this has been by regularly asking myself am I working hard or working smart. They aren’t mutually exclusive, but if you are only focusing on working hard, without actually thinking about if it is the smartest method, then you could be wasting your time with a dull axe.
Technorati Tags: financial lessons, Bible
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Everyone knows they should save, but a lot of people say they can’t find the money to start saving. They get their paycheck, promise themselves that this time they will save whatever is left over and sure enough two weeks later nothing is left over to put in savings. Have you ever been there?
So how do you find money to save on your current income?
The best way is to get a piece of paper, attach it to your hip for a week, and write down EVERY SINGLE thing that you spend money on. Even if it is a 50 cent newspaper - every single thing. Most people are amazed at what they find, not so much because they forgot that they spent the money on _____, but now they can see how it all actually adds up.
Once you are armed with the truth of your miscellaneous spending, you can look to find ways to fight back. David Bach calls this the “latte factor.” In his book, The Automatic Millionaire
The point here is that you can exchange a small sacrifice (a coffee everyday) for a large reward (a nice sized nest egg for retirement). So, regardless of whether it is a daily coffee, or buying one less article of clothing a week, or cable television, or any number of things, it is surprising how much benefit can be gained by making a small sacrifice.
So grab your list and look for trends in your spending - things you may buy on a regular basis and ask yourself, “Will my life come to a screeching halt if I stop buying ______?” Chances are good that you can find one or more things on the list that you could answer “NO” to. If so, are you willing to sacrifice them?
For some people it can be difficult to pinpoint an expense that is UNNECESSARY, because otherwise you wouldn’t be buying it in the first place. For these people, this is where the rubber meets the road, because if all of these expenses are necessary, then you need to decide which of them you are willing to sacrifice in order to live the life you want in the future. This part requires thinking “outside of the box” and imagining and adapting to a life without _______.
Often times we are perpetuating expensive habits, just because that is what we are used to doing. It is scary to think that a habit, that I may not even enjoy that much can be the only thing between retiring well or not at all.
Technorati Tags: find money to save, save money
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Video Lessons from Warren Buffett
If you have been a regular here for any length of time, you will know that I have a strong appreciation for Warren Buffett and his wisdom on business, investing, and life. I have written about a few things I learned from Warren and some famous Warren quotes as well.
I found a series of videos from a talk Warren gave to MBA students at the University of Florida. It never ceases to amaze me how large of a goldmine of wonderful information is available for FREE. He still hasn’t written a book, so you have to soak up his wisdom via other methods (like this). If you are even remotely interested in investing or business these would be a good use of your time. (each one is a little under 10 minutes)
YouTube - Warren Buffett MBA Talk - Part 1
YouTube - Warren Buffett MBA Talk - Part 2
YouTube - Warren Buffett MBA Talk - Part 3
YouTube - Warren Buffett MBA Talk - Part 4
YouTube - Warren Buffett MBA Talk - Part 5
YouTube - Warren Buffett MBA Talk - Part 6
YouTube - Warren Buffett MBA Talk - Part 7
YouTube - Warren Buffett MBA Talk - Part 8
YouTube - Warren Buffett MBA Talk - Part 9
YouTube - Warren Buffett MBA Talk - Part 10
Technorati Tags: Warren Buffett Video, Warren Buffett
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Dividing large bills into smaller chunks can make them much more manageable.
They say the best way to eat an elephant is one bite at a time. The point is, that when you look at the size of the thing, it is overwhelming, but by working at it one small bite at a time, you will make progress and eventually you will complete the task. The same principle applies to our finances. Be it saving for retirement, eliminating your consumer debt, or paying a huge bill.
In our state we have to pay taxes on our personal property. So, at the end of every year we owe a few hundred dollars in property tax for our cars due on December 31. A bill for $350 can be challenging at any time, but right after the Christmas spending spree makes it even more difficult.
The great news is that for $29.16 a month I can have all of the money saved up for that bill when December rolls around again. This is part of my budgeting with ING Direct that I use. I create a savings account for each “elephant” sized bill and divide by 12 to figure out how much I need to save on a monthly basis. A side benefit is the interest that is being earned all year long on that savings.
If you haven’t tried saving up for large bills, I promise that you will absolutely love the feeling you get when you do. It almost makes me excited when the bill comes in, because I don’t have any question of where is the money coming from. It has been sitting in a savings account just waiting all year for that bill to come in.
I use this method with car insurance premiums rather than using the monthly rate that some companies offer. Normally there is a fee charged for the monthly billing option and you can save yourself a few bucks a month by paying the 6 month premium all at once.
Oh and don’t forget to use the interest you earned to take yourself out to lunch, because you’ve earned it. 
Technorati Tags: saving techniques, budgeting, pay large bills
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It is so SIMPLE to retire well off, if you make just a little sacrifice now. The alternative is making a huge sacrifice later on (in your 40s) and still probably not doing as well as if you made a small sacrifice now.
You just finished your degree and you are probably looking for your first “real” job. This is the perfect opportunity to decide how you would like your financial life to be. You have the choice to spend and buy whatever you feel like which will likely put you in heaps of debt. If you choose this path, you will be in good company. You can be sure most of your peers will take this path.
Or, you can take the road less traveled. You can be one of the “weird” people out there who refuse to believe that they have to be in debt all their lives. You can get motivated by the thought of the freedom that comes with being debt free. This road can sometimes feel like a lonely road, when everything and everyone around you is yelling, “Spend! Spend! Spend!” But, be assured, those who go down this road get the last laugh. They experience freedoms that most people only dream of.
If you are like I was, you will think, “oh, I can spend now, because I will be making more money later.” Well, the truth is that it doesn’t matter how much money you make. Expenses rise to meet income. So, as your income increases, you can be sure that, by default, your expenses will increase as well. Believe it or not, there are people out there with $500K annual salaries filing bankruptcy and in the same moment, you have people who never made more than $50K a year retiring as millionaires. It is not about how much you make. It is about how much you keep.
So, I say all of this to say, if I could teach a college grad only one financial lesson it would be to:
Max out your Roth IRA for five years
By maxing out ($4000 for 2007 and $5000 for 2008) your Roth IRA for the first 5 years after you graduate - you will likely have over $24,000 by the time you are 27. If you add NOTHING else to it, when you are 67 and ready to retire it will be worth over $1,000,000 (assuming 10% growth). If you can keep adding to it, you can really watch the puppy grow!!
But don’t wait, if you wait until you are 27 to start rather than 22 - the million is now down to $675,000 when you retire. Still not bad, but definitely not a million. And if you wait just 5 more years until you are 32 - you are looking at about $415,000 when you retire. So, you can see the importance of doing this right away - no matter what age you are. You can make this retirement figure a lot larger if you keep adding to it, rather than just doing it for 5 years.
Figures calculated with the savings calculator at CNN.com.
Invest the money in an Index fund
Buy an Index fund that follows the S&P 500 - The average performance of U.S. stocks over the last 80 years is over 10%. You may find a few stock mutual funds that occasionally beat the index, but very few consistently beat the average. This is the big secret of the industry - you will never (yes, I can pretty safely say never) have a financial advisor tell you to buy an index fund, because the fees are a lot smaller with an index fund than with a managed stock mutual fund. Therefore everyone involved in the sale of the mutual fund is getting paid a lot less than if you bought a managed mutual fund. The fact is that the great majority of managed stock mutual funds fail to beat the index.
Bottom line: Buy an Index fund in a ROTH IRA account, max it out for your first 5 working years and forget about it until you retire. If you can’t afford to max it out, don’t worry about it, just do the best you can. The purpose of the article is to emphasize how important it is to START EARLY!!
What I wouldn’t tell the grad (but I am thinking)
The reason this is the one thing I would teach them, is because it will probably help them to spend less than they earn - which is the KEY to financial well being. Secondly, if they can do it for five years - it will likely become a habit that they should be able to continue for the rest of their lives. And lastly, there are a bunch of things I would love to teach the grad, but this was the lesson that got me interested enough in money to learn the other lessons that I needed to learn.
Technorati Tags: college grad, financial advice
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For some reason the word “budget” has an interesting effect on most people causing them to cringe in pain more than the thought of going to the dentist. It really shouldn’t be as painful as people make it seem. If done correctly, it should give you MORE freedom to get what you want. If you think of a budget as a plan “that takes away all the fun” or eliminates your ability to get things you want, then you are doing it wrong.
A budget is no more than “measured spending.” I think it is a lot like baking cookies. Just like cookies, to make the perfect batch you have to follow a recipe and measure each ingredient. Of course you can improvise a little bit, but each slight variation changes the outcome of the cookies and can take a great recipe and make it mediocre, or a decent recipe and make it great.
Budgeting is not like cookies without sugar
Most people seem to think of budgeting as baking cookies without sugar or chocolate chips. To me chocolate chip cookies are the only kind, so if they don’t have chocolate chips, they aren’t really cookies.
A budget is no different, if you don’t have money budgeted for areas like going to the movies, vacation, buying clothes, or even “blow money” then IT IS like baking cookies without chocolate chips or sugar!! Of course no one likes it!! Who would eat cookies without sugar or chocolate chips?
On the other hand, if your cookies are all sugar and all chocolate - well, that doesn’t sound good either.
The reason many budgets fail is because people forget to add or are instructed to eliminate the ingredients they enjoy the most. If you invent a cookie that doesn’t have sugar or chocolate chips please let me know
Budgets are NOT supposed to be TORTURE!
Don’t get me wrong, there may be some slight discomfort, if you have never told yourself NO, you will have to say NO to yourself occasionally. If you are currently spending more than you earn - just like the little kid who eats chocolate until they vomit, you will have to learn to say NO when you just want to eat the whole bag of chocolate chips in one sitting.
This is the other main reason that budgets fail. A baker has to be disciplined enough to know that just because sugar and chocolate are good, it doesn’t mean that they can just add as much as they want. Having the correct amount of each ingredient is the key to great cookies.
Don’t forget you SHOULD add sugar and chocolate to the cookies, it is what makes them good!! Maybe just not the whole bag.
Find a recipe you like
Creating a budget is a trial and error process. Just like creating a recipe from scratch will take you a few attempts to get it right, a budget is no different. Using someone else’s recipe may give you a head start, but still may need to be tweaked a little to fit your personal preferences (check out budgeting with the envelope system and budgeting with ING Direct for a head start).
Stick with what works
Once you find the recipe that you like, the only way to get those cookies exactly the way you want them is to follow the recipe. Sure, you can bend on the ingredients if you need to - after all they are YOUR cookies. But learn from the pros - cookie companies may spend years or months developing a recipe, but once they find a great recipe that works, they print out a recipe that measures out each ingredient that will yield those great cookies if followed exactly.
Cookies are made for enjoyment
Cookies are baked by someone for someone to enjoy. Budgets are the same, being disciplined to follow the recipe may be a little bit of a challenge, but the rewards are the cookies!
In terms of a budget, the reward is having control over your financial life, rather than letting it control you, telling your money where it should go, rather than being told, watching debts shrink, watching savings increase, and not really having to think much about money. Now those are some good cookies!!
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