Mastering Money

Does Your 401(k) Have a Match?

Today, so many companies have been forced to cut back on expenses just to make earnings estimates, and thereby not push down the price of its stock even further.  Salaries have been frozen; many people have even taken a cut in salary so that no one gets laid off.  The subsidy on benefits has been reduced, such as health insurance, so the employee pays more towards the cost, and may have even received a reduction in coverage.  This means take-home pay is less; a note or two about that a little later. 

 

One of those expenses / benefits being cut is the match to the 401(k).  I’ve spoken to many Fortune 500 companies, most of which participate in a matching contribution.  This means when the employee contributes to their 401(k) account, the company will match it, up to a point, usually a percentage of the employee’s salary.  Recently, that point, for many companies has been lowered, and in many cases, has been eliminated altogether.

 

I’m a huge fan of 401(k)’s for many reasons.  First, the company match is free money.  If the company is matching, say 5% of the employee’s salary, the employee in effect is receiving a 5% bonus; however, the employee must put in the 5% in order to receive the match.  How cool is that??  Secondly, the employee’s contribution is tax-deferred.  This does NOT mean tax-free.  What it means is that the employee will not pay federal income taxes on their contribution.  So, if the employee makes $40,000 a year and contributes $5,000, their W-2 at the end of the year will reflect wages of only $35,000, thus saving taxes on the $5,000 contribution.  When the employee retires, and withdraws the $5,000, the amount is taxed at that time.  Hopefully, at that time, the retired employee will be in a lower tax bracket than when they earned the money.  Last, the amount in the 401(k) grows tax-deferred, so it can grow to a larger amount a lot faster, as Uncle Sam is not reaching in and taking his share of the employee’s growth.

 

For 2009 an employee can contribute up to $16,500 tax-deferred if they are 49 or younger; $22,000 if they are 50 or over.  (They have to have had their 50^th birthday by December 31^st.)

 

The tightening of the economy has put a big squeeze on 401(k) savings.  First, if the employer decides to no longer match the contribution, there’s obviously less money going into 401(k) accounts.  Some employees feel that there is no incentive for them to save if it’s not matched.  This simply isn’t true.  They should be saving more because they are no longer receiving any help from their employer and they need to make sure they’re securing their retirement.  Additionally, they still get to defer their income dollar-for-dollar for their contributions.  Furthermore, it still grows tax-deferred.

 

Here are some figures reported in The Wall Street Journal on March 26, 2009, which were in a report released by Spectrum Group.  The Spectrum Group surveyed 150 plan sponsors in February, 2009 and found that 34% of U.S. employers have reduced or eliminated the company match in the last 12 months; another 29% plan to make changes in the next 12 months.  The margin of error is plus or minus 8%.  Another study by Spectrum polled 400 active plan participants and found that 20% had reduced their contributions and another 5% plan to do the same in the following 12 months.  Interestingly, 14% said they plan to increase their savings.  You rock!!!

If you have to decide between the mortgage payment and saving for retirement, this can be an issue.  If this persists, you will have nothing for that time in your life when you won’t be working.  All the more reason you need to get a grip on your cash flow.  The best way to do that is to track everything you spend your money on.  The Financial Fuel Gauge™ is a great tracking device; I have never missed a payment and have never paid one dime in credit card interest.  Call me and we can talk about creating one for you.

 

Dining Out On a Budget

These days many people are cutting back on all their major expenses, and eating out is no exception.  Consumers are only now realizing the cost benefits that I’ve explained for years of going to the grocery store.  You know grocery stores?  Those places where you can go in, buy raw meat, take it home and prepare it. 

 

You can save 70% on your food bill by shopping at the grocery store; take chicken.  A pound and a half of chicken breasts at the grocery store will cost you about $6.00 and will make at least two servings, at a cost of $3.00 per serving.  If you ordered chicken at a restaurant, it would cost about $10.00 with tax and tip.  So, cooking at home only costs you 30% of the cost of ordering out.  Yes, I realize you’ll probably receive mangled vegetables with the chicken you ordered out, but those vegetables were cooked so long they have absolutely no nutrients left in them.

 

I realize it is difficult coming home from work and fixing a meal.  But, think, you still have to drive to the restaurant, wait for a table, (perhaps not in this economy,) wait for your food to come and wait for the check.  I also realize there is someone at the end of the meal at the restaurant who will clean up after you.  But, 70% off, when does that ever happen?  Don’t get me wrong, I’m not opposed to dining out; however, dining out should be saved for those special occasions, such as birthdays, or the weekend.  For those of you who are managing to save 15% of your gross income, then eating out once a week is a nice reward for your hard work in saving.  Here are a few tips that you may want to consider when you do eat out:

 

1. Don’t order an appetizer; you won’t be hungry to eat your entrée.  Sometimes, when money is tight, consider meeting friends at a Mexican restaurant and order an appetizer for your meal.  A full order of nachos should satisfy any hunger rather well.  Even for long-distance swimmers.
2. Make sure you know the price on “specials.”  Sometimes the “specials” have a special price, and that’s about it.  It is always advisable to know the cost of anything before purchasing, that way you won’t be surprised when the bill comes.  At a restaurant, at that point, it is too late.
3. Many times entrees are huge; I used to be ashamed to even ask for a doggy bag, as I believed it to be unmanly.  Not anymore; why stuff yourself and get sick?  I’ll take the leftover home and have it the next day.  I also don’t have to work out as hard by eating less.
4. I love dessert.  Unless a restaurant has a special dessert, I won’t order it.  Many times restaurants don’t even prepare desserts anymore; they simply buy them at the store or from a dessert vendor.  I get great desserts from Sam’s Warehouse, and of course, to me, NOTHING beats a good Oreo.

I hope I didn’t take the fun out of going to a restaurant.  Many times it’s not the food, but the company that’s important.  Yes, I do understand the convenience aspect, but, again, you can’t beat the 70% discount for eating at home.

 

Seven Simple Steps to Saving

Let’s talk about the savings rate in America.  It used to be non-existent.  Now people are beginning to save.  What exactly is the definition of savings and how is it calculated?

First, we’ll start with gross income, which is the amount you earn.  Then come the deductions: Uncle Sam takes taxes and you pay for benefits.  The remainder is what you deposit in the bank, unless of course, you don’t have an account and you cash your paycheck and receive money orders, which is called your disposable income.  Believe it or not, there are only two things you can do with your disposable income: you either spend it or you save it.  So, when you read about the savings rate in America, it is simply the amount that is not spent from disposable income.

Up until a few months ago, America’s savings rate was negative, meaning we spent more than we deposited in the bank.  When that occurs, we have to make up the difference by either cashing in our investments or going deeper in debt, or both.  However, lately the savings rate in America has pushed the 5% level, meaning we are not spending 5% of our disposable income.

This is great for consumers in several respects: debt levels are being reduced, emergency funds are being built and retirement accounts are being replenished from the downturn of the market.  This is not good for the economy, as consumer spending accounts for 68% of the American economy, so when consumers don’t spend, the economy contracts.

 

I believe consumption patterns in America are changing and this change will be permanent.  I don’t believe the consumer will sustain the 5% level of savings, but I do believe we won’t go into the negative as we have in the past.  This means for a slower recovery from the current recession.  However slow that recovery may be, it is all the more reason to continue our new thrifty habits.  Here are the steps to help you along the way:

1. Create a budget.  Start with simple steps, as I have previously outlined in my blog (http://chexuo.notlong.com) by writing everything down when you spend; I don’t care if it’s 35 cents for a package of gum or $2,000 for something extravagant.  Do this for two weeks.  You’ll be amazed at what you spend your money on!!
2. Multiply everything from step 1. above by 26 to annualize it (2 weeks X 26 = 52) and you’ll see how much you spend every year on each item.
3. Cut out the unnecessary spending.  You will be embarrassed over the needless things on your list.
4. Your list of expenditures should not exceed your disposable income, otherwise your personal savings rate will be negative and you’ll go deeper into debt.  If your expenditures do exceed your disposable income, you have some more cutting to do.
5. Continue to track your spending for each item.  If you see you are approaching your limit on any item on your budget, start pulling back on the spending of that item.
6. Create a new budget next month and track your spending for each item as you did in the first month.
7. Repeat step #6 for the remainder of your life.  (I’ve been doing this since 1981 and have never paid one dime in credit card interest.)

I hope this helps.  Let me hear from you.

 

Pay Check or Pay Cut? Hmmm....

Chances are if you know someone in this economy who hasn’t lost their corporate job, they have undoubtedly lost some income.  Most employees would agree to take a cut in pay than have cuts in the payroll, as that cut might just be them.  I have seen this thinking stretch across the entire rank and file spectrum, from management all the way to assembly line workers, including union members.

 

Not only large and small companies are reducing pay for their employees.  Revenue for state and local governments has been drying up, as foreclosures mean property taxes aren’t being generated from those homes; spending has been curtailed by many individuals, some who have jobs and fear losing them, not to mention a depleted spending pattern for those who have indeed lost their jobs, which mean less sales tax revenue.  To make up the difference, teachers, police officers and firefighters have had their wages cut or have had to take unpaid furloughs.

 

The cut in pay doesn’t necessarily have to be a decrease in income.  It could take the form of decreased benefits; specifically, it could be an increase in the employee’s share of health insurance, which may as well be a decrease in pay, as net pay is smaller as a result.

 

As if that wasn’t enough, in order to remain competitive in a global economy, most employers have reduced, if not eliminated entirely, their contribution to employees’ 401(k) accounts.  Old fashioned pension plans, where a retiree receives a monthly stipend (called a defined benefit,) well, is a thing of the past, as only about 16% of American workers are still entitled to a defined benefit pension plan.  Translation: saving for retirement is now totally in the hands of the employee.  You really think Social Security is going to take care of you?  Think again!

 

With this tidal wave hitting every day Americans, there’s all the more reason to cut back on spending.  The ONLY way to accomplish this is to track your spending as you are spending, in real time.  This does NOT mean getting a report at the end of the month to see what you’ve done.  The key word here is done; you cannot go back and change it; it’s not unlike looking in the rear-view mirror.  You need to start looking through the windshield, so you can see where you are going.  That way you can make adjustments to your spending as you are spending, thereby allowing you to reach your goal.  So, you spent too much on groceries, and you find that out at the end of the month, what are you going to do next month?  Not eat?  I don’t think so.

 

Most people say, “Okay, that’s great, but how do I start a budget?”  Good question.  The best way is to write down everything you spend for two to three weeks; yes, I mean EVERYTHING.  That way you’ll know where your money goes.  That will form the basis for your budget.  You’ll see the error of your ways once it’s on paper.  You’ll see certain extravagances that you can easily live without, but you won’t know those things unless you write it down.  Throwing down the credit card at every purchase will not alert you to what you’re spending.  You think you’re going to examine that credit card statement when it comes?  Think again!  Even if you did, remember, it is in the past.  It is done.  You can’t change it.

 

If you find yourself in this pay cut squeeze, you might want to try your hand at a budget because you really need to make that paycheck stretch.

 

Some Advice on Credit Scores

It seems if you ask three people how a specific action will affect credit scores, you’ll receive four different answers.  This is nothing new; there has been much confusion with regard to paying-off credit cards and do I close the account of keep it, how will the reduction of my availability limit affect my score, and what can I do about increasing my availability?

 

First, let’s address how the markets work with regard to your credit card.  Just like your mortgage, which is sold to investors and is eventually securitized so the bank can then have more money to lend to prospective home buyers, your credit card balance is securitized in much the same way.  As you probably guessed, as the market for securitization of mortgages has dried up, so has the appetite waned to buy securities backed by credit card debt.  Since issuers can no longer sell as much credit card receivables as in the past, they therefore do not have the financing for those receivables, and therefore cannot extend it to you.  Thus, the lowering of your available balance is not a result of the bank being insidious, they simply no longer have the funds.

 

Now that you know how the back office works, let’s say you followed my advice, started tracking your spending with my Financial Fuel Gauge ™ and you started saving money.  You also took my advice and used that savings to pay down your credit card balance.  Good for you!!  Chances are your credit card company will use this to lower your available credit.  A word about that later; the question is, how do you then get back that “lost” availability?

 

First of all, do you really need it?  As far as credit scores are concerned, you really do.  With all the confusion over credit scores, and do I close a card down when I’ve paid it off, etc, there is one underlying cardinal rule: keep your credit card balance(s) under 25% of your available balance.  In other words, say you have four credit cards, each having an availability of $2,500, totaling $10,000 of available credit.  Your total balance (all four cards) should not be greater than $2,500, or 25% of the $10,000.  So, it could be in your best interest to open a new credit card and replace that “lost” availability.  However, there is a caveat: if you open a new card, sometimes a credit bureau may look at that and think this person is going to go out and make a ton of new purchases and lower your score.  This is where the confusion lies because there is so much subjectivity as a result of these actions.

 

Therefore, if you pay off a credit card, then close it, you will then have less available credit, and therefore raise the ratio of your balances to your remaining  available credit, which will then lower your credit score.  If you pay down your credit card, keep it, so you won’t decrease your available credit, and you will increase available ration and thus increase your credit score.  If you are afraid of using that credit card you just paid off, then cut it up.  The bank will never know.

 

One phenomenon that is currently occurring when consumers pay down their balances, is the credit card company will chase down their availability.  Say you have a balance of $8,000 on a card with a $10,000 limit.  You pay down $2,000 and now have a $6,000 balance.  They may lower your limit to $7,000, thereby lowering your ratio of availability and thus lower your credit score.

 

Just keep the simple rule in mind: keep your balance below 25% of your availability.

 

Does Credit Card Protection Really Work?

  

There are several credit card protection plans offered by various credit card companies and banks.  As of this writing, May 28, 2009, the prices vary from 35 to 99 cents for every $100 of protection each month.  The credit card companies will tell you they’ll make your payments for you should anything happen to you, such as losing your job, becoming disabled or die.

As with everything else, especially when it comes to creditors, the fine print cannot be forgotten.  Kelli B. Grant, from The Wall Street Journal, writes there are several details one must note before participating:

 

Cost

 

As noted above, the monthly cost varies greatly, with the majority being over 50 cents per $100 balance per month.  Since the average card has a $10,000 balance, the protection would cost $35.00 to $99.00 each month, plus, of course, the finance charges for the charge itself if you don’t pay off the balance, which is why you would want the protection to begin with.  You might want to think about paying down your balance before adding this charge to it.

 

Other Insurance

 

Ken Clark, a certified financial planner from Little Rock, Arkansas, says that credit protection benefits are triggered usually after other insurance policies pay out first, so there’s little point to take this out if you already have life or disability insurance through your employer, or a private policy, and such policies are a better deal with broader coverage.

Exclusions

 

As usual, the fine print will tell what exactly is covered.  For instance, disability means that you cannot work at all.  The article in The Wall Street Journal was a hoot: it gave an example of a surgeon who damaged their hands, but could probably still flip hamburgers.  Coverage for unemployment will usually not work if you left your job on your own volition, or if you were dismissed due to performance.

 

Hardship Help

 

If you are disabled or become unemployed, credit protection plans will only make your minimum payments, so your balance continues to accrue interest.  If either of these situations should happen to you, the article states, you would get better results by requesting a hardship plan.  Hardship plans, issuers will cut the interest rate to 0% and waive the minimum payment for a set period.  The fee is similar to a protection plan above, but you’ll pay only as long as it takes to get you back in a position to restart your payments; however, your account may be frozen during that period.

 

 

As with anything in life, read the fine print; that’s what any transaction is all about.

 

Until Debt Do Us Part

It was reported this morning that child abuse is up due to the freezing economy.  Nerves are tight and that spells irritability.  For the same reason, there is mounting pressure on marriages; sometimes patience runs thin even when credit is available and jobs are plentiful.  Does this economy make you worry about your level of debt?  Is your relationship with your spouse rather strained these days?  In an April 1, 2009 article in The Wall Street Journal, Fadi Baradihi, president of the Institute for Divorce Financial Analysts (a group of financial planners who help couples plan the finances of divorce) says that demand is up 15% for their services over last year.

Wall Street Journal reporter Jeff D. Opdyke in his book “Financially Ever After: The Couples’ Guide to Managing Money” writes about the problems couples face and how to overcome them.  Opdyke says couples need a “debt philosophy,” which is merely a mission statement, such as “We agree to live below our means, not to pursue material wants without the money to afford them, never to use emergency savings for consumer purchase and to take on debt only when it benefits the family’s long-term goals or needs.”  According to Opdyke, here are the questions you want to ask when forming your philosophy:

1. Will we pay cash for everyday purchases or maintain a balance on the credit card?
2. If we don’t pay off our credit card every month, what balance are we comfortable with?
3. Can we restrain from spending more than our monthly income?  If we overspend, how soon can we pay it off?
4. Will our savings account be untouchable, except for emergencies?  If we dip into savings, how soon will it be replenished?
5. What defines emergency expenses?

In my consulting business, I’ve discovered most couples won’t agree on the answers to these questions.  There needs to be a compromise; while this may seem a bit too yielding, at least the issues are discussed and they are out in the open.

Couples enter marriage with debt, and marriage counselors agree that couples need to discuss how their pre-marital debt will be paid off.  Opdyke says one must “proactively engage” one’s debt so that it doesn’t “consume” one’s finances, thus destabilizing one’s marriage.

I wanted to share this information with you because I feel it’s great advice, whether you’re married or single.  These are rules we can all live by.

He's Baaaaaack!!!!

Yes, folks, it’s has been a while, perhaps too long.  For those of you who are newcomers, you’ll see the blog below this entry was July, 2007.  After nearly two years, I have finally re-emerged. 

So, what was I doing for nearly two years?  I was speaking.  Specifically, I was speaking to employees at Fortune 500 companies.  Some of these companies included American Express, Accenture, IBM, Vought Aircraft, Johns Manville, BP, The Gap, TXU, Eli Lilly, Rio Tinto and Hilton Hotels.  While I was busy having a blast dispensing financial information to all levels of the working strata, the learning has indeed been a two-way street.  Here are a few things I learned from the hard-working corporate employee, from blue-collar to middle-management:

1. Most employees are extremely savvy when it comes to understanding investments and how they work.  At Rio Tinto, I was speaking to miners, yes, people who work in mines; they told me themselves they had no education, but what they knew about securities was truly amazing!
2. In conjunction with the above, most everyone is tired of hearing about how to invest; they are afraid if you start speaking about a specific investment, like a specific mutual fund or a specific stock, or even a class of investments, you are there to sell them something.
3. Everyone is concerned with the news and how to interpret events.  Most everyone is aware of all the important issues; no one seems to have their head in the sand, they simply want to understand the event and how it impacts them, their families and their jobs.
4. Surprisingly everyone understands the term “Cash Flow.”  Every time I brought it up, I thought I’d have to explain it, but I didn’t.  What people don’t understand is how to maximize their cash flow and how to keep it positive.
5. Everyone wants to know how to get out of debt and the steps they need to take to make that happen.
6. No one wants to work forever.

With all this in mind, I’ve decided it’s time to start writing once again.  Now that I’ve learned what you’re hungry for, I’ll be making comments on those issues on as regular a basis as possible.  As usual, I always look forward to your comments.

And All You Were Worried About Was the Monthly Payment...THINK AGAIN!!!

You know, these days all consumers seem to be concerned about is how much something is going to cost them on a monthly basis.  “Yeah, I’ll buy that iphone, I’ll buy that HDTV, I’ll buy that new refrigerator…it’s not too expensive when I put it all on my credit card.”  Yeah, right!!  You may be paying for something several times over once it’s paid for and you’ve paid all that interest.

By the time you’ve paid off your 30-year mortgage, you’ve paid for your house three times!!!  Let’s talk about another expenditure we typically finance:  our car.  Not to be forgotten are the extras we put on the car.  A good salesperson (or bad, depending on which side of the fence you happen to be on) will exclaim that the options you’re adding to the cost of the car will only cost you so much per month; they really don’t tell you the cost of the option.  For that matter, they don’t even tell you the cost of the car; they simply tell you how much it will cost you per month.  Researchers say few car buyers know the actual full cost of their vehicles or stop to consider how much more it’s going to cost them by extending their loan on the vehicle.

I’m absolutely amazed at the length of some car loans.  When I was growing up in the days when cars slept up to nine people, three years was the longest one would ever consider paying off a car.  Now days, one can finance a car for eight or even nine years!!!  Jonathan Welsh writes in The Wall Street Journal, if one extends one’s car loan from five years to seven years, it will increase the average cost, or how much the buyer will pay out, by about $3,000 in interest.  The average maturity on a car loan today is 70 months, up from 62 months just a year ago, and those longer term loans carry higher interest rates.  Take a look at these figures:  a five year loan at 6.05% interest will cost about $5,700 in financing, but a seven year loan at 6.59% interest will cost about $8,850 in financing.

All I can say, that better be a trouble-free car for a contracted period of time if you plan to pay it over nine years.  Imagine if the car died after six or seven years and you still had a couple of years left on your loan.  Not fun!

As the average car loan increases, more people are trading cars in before they are paid off.  Unfortunately, at that point the owner owes more on their car than the car is worth.  In 2006 about 29% of car buyers who traded in a car to buy a new one were in this position.  This statistic is up from 20% just five years ago.  Mr. Welch further states in 1990 the average a buyer owed on the car they were trading in was $617, which increased to $1,726 in 2000 and $3,062 in 2006.  This is NOT a good trend.

One of the components of inflation is what I call “technology inflation.”  Take cars for example.  A 1987 Chevy Caprice is not the same as a 2007 Chevy Caprice due to all the technological advancements, such as satellite navigation and entertainment systems, once reserved for the premium vehicles only.  This makes new cars that much more enticing.

What’s the answer?  It’s not necessary to seek out the latest and greatest.  When one buys a new car, all one has to do is drive it home and suddenly it’s worth a lot less than what one paid only a few minutes earlier due to the fact that it’s now considered a used car, and the first payment hasn’t even been made yet!  It used to be when one purchased a used car, one was literally buying someone else’s problems.  The fact is, cars are being made better today.  My suggestion is to buy a decent “pre-owned” car and purchase an extended warranty along with it.  Let someone else depreciate it.  You’ll be a lot happier in that you didn’t pay an arm and a leg for your car and you’re not paying for the rest of your life on the car!

Summer Money For Kids

Well, here we are at summer time.  I can't believe that five months have gone by in the New Year already.  School is out for summer and this is an excellent time to teach your children about money and how it works.  What makes the learning process about money so unique is that it doesn't have to come out of a text book; the BEST money lessons come from LIFE lessons, so the "student" doesn't feel the traditional "pangs" of the typical learning process.

The first step is learning that money doesn't simply appear.  Something has to be traded for it.  Usually time and labor are the bartering tools for money.  If your children are too young to be slinging hash at the local diner, then I would suggest giving them chores to do around the house.  That may already be happening; however, in the summer, there are more things to do that don't normally occur during the rest of the year, such as mowing the lawn, tending to the flower beds, and washing windows, just to name a few.  Pay them for their labor and reward them for their level of performance.  They will learn the difference between doing a job adequately and doing a job superbly.

Young adults will begin to grasp the relationship between time and money.  Most people say "time is money;" I think differently:  money is time.  Simply put, we are trading our time for money and time is what we are sacrificing for the money we earn.  The earlier a person realizes this concept, the better prepared they will be when they get their first job outside of the home as they realize that the commodity of time is something that cannot be replaced, so that time which is given up for money is time that is gone forever.  Thus, the money earned for that time that is gone is precious and should be spent accordingly.

That brings me to the next step:  spending money.  Now that it has been earned and has an intrinsic value, the spending part will feel differently since the money has been earned by THEM.  Teach them to be charitable.  Perhaps 10% of their earnings can go to the charity of their choice; this will teach them that there are people in the world that are worse off than they are.  This is a great eye opener for the child that complains they have to work for their spending money.  The next thing is that they should save 10% of their earnings.  This will teach them that they shouldn't spend all of it and that an amount should be put away for a time when they can't earn it, such as when school starts again and they don't have the commodity of time to trade for money.

Some experts go out on a limb and suggest that children should pay for some necessities, such as toothpaste, so not only they see how much it costs, but also as a type of "tax" on their money.  After all, as an adult, we don't take home EVERYTHING we make since some of our earnings go to Uncle Sam.

This leads into setting priorities.  As children learn about the choices they have to make with their money, they will begin to set priorities since they have only so much to spend, they will realize they can't buy everything they want.  A great way to exemplify this would be on vacation.  Let your children decide whether they want to stay in a posh hotel or participate in a unique activity while traveling.  Let them see the cost of transportation on a trip, the cost of food and accommodations, and the cost of riding a llama in the Peruvian countryside.

The earlier we teach young folks about money and how it works, the better off they will be for life.  Understanding how money works is not just on the spending side, but getting a handle on how it's earned is of paramount importance.  Eventually the young person will see that they are merely trading their time for the things they buy, just like adults.