Roth 401k vs Traditional 401k

Traditional 401ks have been one of the main options for retirement investing for many working Americans over the last thirty years.  When the Roth 401k was introduced a few years ago the new type of retirement plan left many long time 401k investors debating the benefits of the Roth 401k vs the Traditional 401k.

The popularity of the Roth IRA and the large numbers of Roth conversions, led Congress to apply some of the Roth rules to the regular 401k. The new rules mean that it is possible to enjoy the higher contribution limits of the 401k, while also taking advantage of the tax benefits of a Roth IRA. It is also worth noting that, unlike the Roth IRA, there is no income limitation on eligibility to contribute to a Roth 401K.

Roth 401k and Traditional 401k Tax Differences

The biggest difference between a Roth 401k and a traditional 401k is the way taxes are handled. Contribution limits are the same for both types of 401k: $16,500 for 2011, and an addition catch-up option of $5,500 for those 50 and older. And, of course, it is possible to have retirement contributions made automatically through your employer if you wish.

Contributions: When you make your contribution to a 401k, the way it is taxed now depends on whether or not you have a Roth option.

• A traditional 401k contribution is made with pre-tax dollars. This means that you are getting a tax deduction now. You don’t pay taxes on the income that you contribute. This lowers your taxable income, and can save you money immediately, since your money grows tax deferred.
• A Roth 401k contribution is made with after tax dollars. You do not get an immediate tax benefit for making a contribution to your Roth 401k, and you will have to pay taxes on that income now, but your contributions grow tax free.

Withdrawals: Later on, you will start taking money out of your account, which will be taxed depending on the type of 401k that you have.

• Because you have not paid income taxes on your contributions to a traditional 401k, you will have to pay taxes on the withdrawals. Any withdrawals that you make during a year will be taxed as regular income.
• With a Roth 401k, you do not have to pay taxes on your withdrawals. You have already paid taxes on the income you used for your contributions, so your money grows tax free, and your withdrawals are not taxed, no matter your income bracket.

Which is Better – Roth 401k or Traditional?

Like so many decisions in personal finance the answer is “it depends”. Many financial experts recommend that you base your decision on what you think is likely to happen later on down the road with your income.

Roth 401k
If you are in a low income bracket right now, and you expect that you will retire into a higher income tax bracket, it might be worth it to contribute to a Roth 401k. This way, you will pay lower taxes on the income you use for your contributions, and when you are in a higher bracket during retirement, you won’t have to pay federal taxes on the withdrawals.

If you contribute to a traditional 401k now, and your income increases during retirement, you will have to pay higher taxes since you will be paying on withdrawals.

Traditional 401k
On the other hand, if you think that you will be in a lower income bracket at retirement, it might be worth it to contribute to a traditional 401k, since you can defer paying taxes on the money.

One other thing to keep in mind is that tax policies can change over time.  If you think tax rates will remain relatively steady then it doesn’t much impact the income logic discussed above.  However, if you think tax rates will be much higher in the future then a Roth 401k could make more sense. 

It’s kind of frustrating that you have to speculate about the future and make your decision based on a best guess but that’s the way a lot of things work in personal finance.  Don’t let the decision making process hold you up from getting started.  Regardless of whether you’re investing for retirement with a Traditional or Roth 401k it’s better to be putting some money away than none at all.

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Investment Risks & Your Money

Every investment has some risk, the question for investors is how much risk are you willing to take on in the pursuit of higher investment returns?

As I mentioned in my how to invest post, when you buy stock in a company you have both the potential of profit and the risk of losing money.  I used to work for a publicly traded company, and owned some shares of the stock, so I had an interesting perspective on the associated risks and the potential rewards of being a shareholder.

Opportunities & Threats

Whether formally or informally, many companies keep track of their corporate strengths & weaknesses as well as any potential opportunities for growth and pending threats to profits.  One name for this is a SWOT analysis (strengths, weaknesses, opportunities, threats) and most companies probably come away from one with a big list of potential threats.

There are many things that can impact the performance of a company that are out of the corporation’s direct control; such as the economy, government regulations, industry trends, natural disasters, and public opinion.  I saw the CEO of our company battle with all of the above factors in an effort to earn annual 10% growth for the shareholders.

The strangest one was a YouTube video about one of our customer’s products.  It had over 3 million visitors and brought enough bad publicity to the client that they made changes that cost our company a ton of money.  Things went from bad to worse a few years later when an economic downturn caused major cost cutting on their part and eventually lost us the client altogether.

Managing Risk

I share those stories as illustrations that risks are hard to manage.  All of our corporate, group, and individual goals each year were tied to the ultimate goal of annual 10% growth. They had us working full speed ahead to try and make it happen. 

The effort was from all levels – quarterly updates from the CEO on a corporate level and from our director at a product level kept our efforts focused.  The executives flew all over the country making deals, negotiaing, and trying to keep clients happy – while the rest of us worked like the devil to keep their promises.

Yet, despite our best efforts, our company lost money.  We lost clients to competitors, our costs were going up, clients were tightening their belts, regulations made things more expensive, and we were investing heavily in new technology and new processes to remain competitive.

It could be that with a different strategy or a different CEO things would have been different but the point is that it’s hard to tell how various risks will impact the share performance of a company.   Every quarter the company leaders would look at past and projected profits, opportunities, and risks and make public statements about where they thought the company was headed.  All the first-hand knowledge you have as a shareholder are the numbers you see in a company’s quaterly earnings and the forward looking statements of the CEO.

Risk Lessons

I learned three main things about investing money in public corporations during my time with the company.

1) Don’t Overlook Risks

Even if a company is in a stable industry, has a big client base, has quality products, and has a strategy that seems solid – coming away with profitable results is uncertain.  It can look good on paper but be aware of the things that could go wrong that could send profits south in a hurry.

2) Look for Long Term CEO’s

CEO’s of publicly traded companies are under a lot of pressure to make the numbers and sometimes this creates decisions that result in better short term numbers but weaker long term prospects.  If you’re investing for long term profits you want a company leader who’s willing to risk thier neck for the benefit of the company.  If you’re thinking about investing in a company, look at the track record of the CEO.  Are they willing to make moves that aren’t all about short term stock price in order to put the company in a better position long term?

3) Don’t Bet On One Company

I imagine former employees of Enron would agree with this one.  If you put all your trust into one company and it does poorly then you’re out a lot of money.  Obviously the Enron example involved fraud but there are companies with legitimate enterprises and good intentions that make bad calls and lose a lot of money.  In my opinion, the potential upside of a company stock is not worth the risk of investing all my money in one place – particularly if they’re the source of your primary income.

Stock Investing Alternatives

If you don’t have the time or desire to research a company and investigate things like the risks they face or the history of the CEO, you do have investing options other than individual stocks.  In fact, if you’re not willing or able to do the necessary research on a company before buying their stock, it’s probably best that you don’t buy any shares.

The other investment options that I’m referring to are ETF’s and mutual funds.  Instead of buying shares in a company, you buy shares of the funds – which then do the research and invest your money.  Although these funds evaluate investments for you and diversify your money across a range of companies, you still risk losing money when you invest with them. 

Next time we’ll talk more about how to determine how much risk you’re comfortable with and things to consider when investing in mutual funds and ETF’s.

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College Graduate Roundup

Graduation parties can be a bittersweet event for college graduates.  You’re relieved that all your hard work has paid off and you finally have your degree. It’s definitely a good reason to have a big party but as you celebrate with your classmates you realize that life as you know it is ending.  While the new chapter in your life will be exciting, you’ll miss your friends and the lifestyle of being a student, and you’re also a little worried about post-college life.

Life After College

I went to my cousin’s graduation party last weekend and she already had a jump on “life after college”.  She has a job and an apartment lined up and like many college graduates will start making more money than she’s ever earned in her life.  Not only that, she won’t have to spend every evening studying her brains out, she can come home from work and the night will be hers. 

Spending Money

The bad news is that with all this free time and a new paycheck you’ll find ways to start spending your money.  To start with, if you borrowed money you’ll have to start paying off student loans that you accumulated on your quest for wisdom.

Once you get a job and are no longer your parent’s dependent you’ll also have to look into post graduate health insurance plans and figure out the best balance of insurance premiums and deductibles for your medical needs.  One tip, if you do have any major medical procedures that you know you’ll need it’s good to try and get them done while you’re still on your parents insurance.

Saving Money

If you’re starting to get a paycheck you might feel flush with cash since you’re used to the student sized bank account.  You definitely want to put together a savings plan to cover your bills and avoid blowing all your newly earned money.  This is even more important if you haven’t found a job in your field yet and don’t have much of income to support those expenses.

When you’re a recent college grad the expenses like insurance, groceries, gas, and rent can pile up faster than you realize. You’ll want to try and cut your costs with things like finding an affordable apartment and looking for ways to save on auto insurance.

Money for the Future

Although you’re just getting your financial feet under you, it’s not to early to start thinking about your financial situation a decade or more in the future. If you want to buy a house someday, check out this post on credit scores for college graduates. 

Your credit score is becoming more and more important in your financial life and you’ll want to start building your credit history.  One way to kickstart your credit history is with a secured loan or a secured credit card.  If you already have some credit established and think you’d qualify for a credit card then a rewards card is an option.  Don’t open one if you’d carry a balance but if you pay it off every month a card can help your credit – here’s a look at some of the best credit cards for college graduates.

Something else to consider is to start investing money, whether it’s in a regular investment account or a retirement plan like a 401k or IRA – here are some investing tips for college grads.

Understanding Finances

Our public schools and even universities in the U.S. don’t do the best job about educating you on personal finances and how to handle your money.  One of the best investments of your time when you finish school is to spend an hour each week reading up on some aspect of your finances.  Below are some articles from blogs that I recommend subscribing to.  All of these sites publish several articles a week across a variety of personal finance topics.  Of course magazines and books are also great resources and many of these blogs have a preferred reading list you can check out.

Congratulations on graduating!

Personal Finance

• Creating a Budget: Money Management 101
• Finance and Techology Innovation Comes to Life
• Your Money Values: How Do You Value Your Money vs Time? 
• 8 New Financial Words Added to the Dictionary Since the Recession
• Why Routine Living Can Leak Your Money
• How to Zig When Others Zag: The Contrarian Approach to Personal Finances
• What’s the Best Financial Advice You’ve Ever Received?
• Carnival of Personal Finance 

Investing

• Use Oil Stocks As A Hedge Against Rising Gas Prices
• Stock Chart Reversal Patterns – Head and Shoulders
• Reasons Not to Buy Stocks
• Can the US Government Seize Your 401k or IRA? 
• Investing versus Gambling in the Stock Market
• Index Investors Can Be Aggressive Too

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How to Invest Without Wetting Your Pants

Deciding where to invest your money can be an unnerving experience in today’s world of corporate scandals, failing banks, and rivers of debt.  When I asked you and other readers for your biggest concerns about investing, I found a wide range of topics.  While some of them had to do specifically with the rocky economic environment, many of your concerns would apply in a good or bad economy.

It does seem the anxiety experienced by the economy and financial markets over the last decade has made it more difficult for some of you to get started.  Many times there’s not just one thing that holds you back from investing, it’s usually a collection of worries and uncertainties that convince you to sit on your money.  Maybe you’re not scared to the point of wetting your pants with fear of losing your money as the title suggests but there are lots of little nagging worries that stop you from making investing decisions.

Here are some of the questions I’ve gathered from newsletter readers in regards to investing.

Investing Questions

• Where should I setup my investment plan?
• How can I pay better attention to my investments?
• How can I be more disciplined about saving and investing?
• What’s the best way to set investing goals?
• What’s the best way to monitor my investments?
• How can I find low-risk investments?
• What should I do next after maxing out my 401k investments?
• What’s my proper asset allocation, how’s it determined? 
• I don’t where to invest my money, how should I decide?
• Can I invest for growth and safety?
• How do I know how much I need to invest for retirement?
• How do I decide whether to invest in a 401k or Roth 401k?

Investing Fears

Getting Started

If you’re facing any of these questions or others, you might feel nervous about putting your money into the stock market, which is understandable.  You’re definitely not alone, many other people have similar concerns – one person shared with me that their “biggest fear is actually taking the plunge to start investing”. The good news is that with reading, research, and planning people are conquering theirs fears and finding an investing strategy that works for them.

Having Enough

There are many reasons you might invest your money but one of the big ones is so that you’ll have funds to support yourself when you’re older. Some people look ahead to a period of time when they can retire and not have to work so hard, others are simply just worried that as they get older their waning strength and failing health will make it tough for them to make ends meet. I think this reader captured the fears of many people – when asked about their biggest financial worry they answered, “I’m afraid I won’t have enough money saved for retirement”.

Over the coming weeks we’ll address these and other investing questions to try and take some of the fear and uncertainty out of the investment decision making process. I think one of the best ways to tackle something you’re worried about is to learn more about. So we’ll start off by taking a quick look at what it means to invest your money.

What is Investing?

There are many acronyms, terms, and strategies in the world of investing but at it’s core it boils down to putting your money into the hands of a company that you think can make more money from your existing cash than you can.

Thanks to the entrepreneurial spirit of human kind there never seems to be a shortage of people looking for money in order to solve problems and create new solutions.  You see lots of great examples of this is the area of technology, where new innovations are making our lives better and easier.

An Investing Example

Let’s say there’s a medical technology company that wants to launch a new product but doesn’t have the money to turn their ideas into a reality.  They can sell shares of stock to investors who feel that the proposed new product could profitably fill a need in the marketplace.  The company uses the money raised from the sale of stock to hire a team of engineers who develop the new product and bring it to market. 

In order to keep it simple, this example doesn’t go into the risk/reward considerations of the investment but at a basic level, there are two main scenarios to consider – the product might be successful or it could turn out to be a flop. 

A Profitable Investment

If the new device earns the company enough profit to boost the bottom line then the investors could earn money.  When when the company reports it’s earnings the price of the stock might go up and investors can choose whether they want to sell and take profits – or hold onto the stock in anticipation of future increases in profits.

A Money Losing Investment

On the other hand, if the product doesn’t sell well then the money the company spent developing and launching the device isn’t recovered by an increase in profits.  When the company reports the resulting drop in earnings, the stock price may go down as well.  If investors paid $45 a share for the stock and the price drops to $40 and they sell, then they’ll have lost money.

Risks vs Rewards

As this example hopefully shows, investing involves both the potential of profit and the risk of losing money.  If you were considering investing your money into this fictional technology company I’m sure there are many questions you’d want to ask before handing over your cash.  There are lots of considerations when evaluating the risk and reward of a company and how it compares to any other investments you’ve already made.

We’ll cover the details behind those considerations in the coming weeks and try to address the investing questions that are keeping you awake at night.

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Popmoney – Person to Person Payments

Paying your friends and family money you owe them may have gotten easier recently.  My experience with it started when I emailed my friend John last week to ask him if he had a PayPal account so I could pay him the $20 I owed him.  He didn’t have an account with PayPal so said to just give him the cash the next time I saw him.

Cash Payment Alternatives

As I’ve mentioned, we put most of expenses on our Blue Cash card, or other card when a store doesn’t take American Express, so I never really carry any cash.  I told John that chances were I wouldn’t have any money on me the next time I ran into him, or the next time, or the time after that.  I could have mailed him a check but I use those even more infrequently than cash, we only have a few checks left and they still have our old address from before we moved.

Visa recently announced the upcoming ability to make person to person payments using your Visa card but the functionality isn’t available yet.  Based on their press release, it sounds like they’re using technology from two of the top person to person payment tools, ZashPay and Popmoney.

Person to Person Payments

So I decided to try out Popmoney since my local bank offers it as a service to it’s customers.  I’ve actually talked about it before when I covered how to send money with your phone but in that article the focus was on using your cell phone.  I first heard about Popmoney when FNBO Direct started offering the person to person payment service, I think they may be the only one of the high yield savings accounts that are offering the option right now.

The pop in Popmoney stands for “Pay Other People”, it’s a service that was built by a company called CashEdge Inc.  All you need to send someone money is their email address or cell phone number. 

When you start using the service you add in the person you want to send money to as a contact.  As you can see here, it asks what method you’d like to use to send them money.

I don’t know anyone’s bank account number other than my own so I doubt I’ll ever use that option.  The text message feature is nice but not everyone has a text plan setup on their phone and some people only have a limited number per month so I figured I’d just go with the email option.

Once you setup someone as a contact you fill out the form below to actually send the money.  Pretty standard form, you choose which account to send the money from, how much to send, when to send it, and you can customize the message that notifies them they have money.

Claiming Payments

I didn’t know how the claim process works at the time I sent the money but I’ve heard from John since he recieved my email.  Apparently in order to claim the money and he has to setup a profile with Popmoney and provide his bank account number and routing number so they can send him the funds.  If his bank also offered the Popmoney service I don’t think he’d need to give his banking info to Popmoney, they’d just facilitate the transfer between the two banks.

Popmoney Fees

The fee for sending money might vary from bank to bank but in my case it was a flat fee.  They charge $1 for standard delivery (2–3 business days) and $3 for Express Delivery (1 day).  If you’re only sending a small amount of money then the $1 fee can turn out to be a larger percentage of what you’re sending. 

However, if you’re sending hundreds or thousands of dollars then Popmoney will cost you less than using PayPal.  That’s because PayPal charges a percentage of the amount you send and Popmoney only charges you a flat fee for the transaction.  Again, that’s how it works at my bank, you should check with yours before sending a large amount, just to be sure it’s a flat fee. 

There is a limit to the amount of money you can send with Popmoney but it’s pretty high.  The table below shows what the limits are for my bank.  

Not all banks will offer the Popmoney service but it is becoming more popular and the network of banks offering the service is growing. As I mentioned earlier, ZashPay is another alternative p2p payment option you can check out and Visa should be making p2p payments via your credit card available later in the year.

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Angies List Contractor Checklist

Finding the right contractor for the job takes some work but it’s effort that will pay off with quality work and a fair price.  As I’ve mentioned in the past, my approach is to find the top 3 or so contractors or companies on Angies List a get a price estimate from all three.

Finding Contractors

Unfortunately for our budget, our back patio needs to be mudjacked so I went through my usual contractor search process yesterday afternoon.  I actually ended up calling 5 different places – I left a message with one of them, the second one specialized in foundation work, and I made appointments with the other three.

Everytime I go through this process I end up with a piece of scrap paper with a list of company names, phone numbers, appointments, notes, etc scribbled on it.  More than once I’ve misplaced my list which makes it a pain to remember who I called, who I liked, and who’s coming to give estimates (and when).

Contractor Checklist

So this time I decided to make a spreadsheet template I can use each time I have a big project I need to get bids for.  It’s actually too bad Angie’s List doesn’t have a feature like this built into their site for members, I imagine it would get a lot of use.  They’re pretty good about listening to customer feedback, maybe they’ll read this and add it.

But for now, here’s a link where you can download the template.  Of course you don’t have to find contractors on Angies List in order to use the spreadsheet. Anytime you’re researching companies and getting bids you can keep track of everyone you’re considering with this tool. However you find your list of potential companies, first add them to the spreadsheet. You can always add more as you go but I’d start with at least three contractors so you can get a range of bids.

Contractor Evaluation

If you’re busy like me you may not get to all of the companies in one sitting so it helps to include the date you called them.  This can help you remember which you’ve talked to and which you have to call still.  In my case there was one that really sounded good, they had great reviews but they didn’t answer their phone so I left a message.  Recording the day you called also lets you keep track of how long it’s been since you contacted them.  If I don’t hear back by Tuesday I’ll probably try again, or you may decide if it’s been 3 days with no response you don’t want to hire them because it could be sign of how responsive they are.

Appointments

There’s also a place to record the day/time of any appointment you make.  When you’re dealing with several contractors it helps to keep track of who is coming when.  You don’t want to miss the initial appointment because in a way they’re evaluating you as well. If you don’t show up for your first meeting they might decide that you’re not worth their time.

I also include approximately how long it will take them to start the work if you decide to work with them.  If it’s an urgent issue and one contractor can start weeks before the others that’s a good thing to know.

Estimates

If they give you an estimate over the phone or after they’ve come and given you a bid you should record it in the spreadsheet.  This can help you compare the different contractors and also helps you remember how much each one bid.  It’s not a good surprise if you get the bids mixed up and after choosing to work with one you find out the cost is higher because you lost track of which bid was from each contractor.

Some companies will give you an Angies List coupon if you found them via the service.  Most businesses will ask how you got their name and I always mention that I saw them on Angies List. 

Some places offer a fixed amount off their services and others do it a a percentage.  Typically if they do offer an Angies List discount it’ll mention it in their company description as shown here.

Rating

If you only go with companies that have an A rating, like I have, then you might not use this field.  However, Angies List does have several different sub-criteria that members use to rate contractors (Price, Quality, Responsiveness, Punctuality, Professionalism). 

They could have a B in a few sub-categories and still have an A rating overall.  It’s nice to note any B ratings so you can be aware of those when you’re evaluating providers and trying to choose between two of them.

Notes

I actually have two different places to keep notes in the spreadsheet.  One of them is to keep track of anything you find out in your phone calls or face to face visits with a contractor.  For example, I found out that one of the companies worked mainly on house foundations and didn’t do much with patios.  I’d prefer someone who had experience with patios so I moved that company to the bottom of my list and made a note of why.

The other notes section is to record anything that jumps out at you from other customer reviews.  Some reviews are pretty short and don’t offer much in terms of specifics.  However, some people go into detail about particular aspects of their experience – for both positive and negative reviews.  If there’s anything that really stands out you should make a note of it, particularly if it’s mentioned by more than one person and you see a pattern emerge.

Comparing Contractors

Once you’ve spoken to all the candidate companies and have all your observations in your spreadsheet, alot of times the information you’ve gathered will make it easy to choose a contractor.  If you do find two that are pretty similar and you’re having a tough time deciding between them, hopefully having the detail you’ve captured in an easily comparable list will make your decision easier.  Some of the spreadsheet columns, like Angies List coupons and customer reviews, won’t apply if you’re not using Angies List – but the others will.

So, whether you’re using Angies List or not you can use this tool to compare contractors and find the one that should do the best work at the most reasonable price.  Good luck!

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Do It Yourself Lessons Roundup

How did you spend your Mother’s Day weekend?  Our’s was consumed by putting together our kid’s new playset.  We spent all day Saturday and Sunday putting it up and then I had to take a day off work on Monday to get it finished.

We had considered hiring someone to assemble the playset for us but decided to go the “do it yourself” route – here are a few lessons I learned.

1) Buy in Bulk

The playset has a big sandbox so I called around Home Depot, Lowe’s, and Wal-Mart to price sandbox sand.  Lowe’s was the cheapest but they were out and Wal-Mart was the most expensive.  We needed almost 1000 lbs of sand, which would have cost us about $100 after tax at Home Depot.  Instead we picked it up ourselves from a local landscaping company for only $18.83.

2) Shop Around Online

My wife did the research and found a highly rated Gorilla swingset that seemed to best fit what we were looking for.  Then she shopped around online and found a website selling it for a few hundred dollars lower than anywhere else – no sales tax and free shipping.  Just make sure it’s a legitimate site before giving up your credit card.

3) Read Reviews

We knew from reading reviews on various sites online that the two biggest complaints about this playset were that it was difficult to assemble and that not all the parts were shipped with the playset.

Based on this we had it delivered three weeks before installing it, leaving enough time for me to go through all the parts and make sure everything was there.  Fortunately we weren’t missing any parts but if we had been we allowed enough time to call the manufacturer and have them shipped out before the installation weekend.  We didn’t want to get 2/3 of the way into the project and find out we were missing a critical part.

We also knew from the reviews that aligning the four main posts and setting up the t-nuts were the biggest challenges – ones that could cause a lot of re-work once we were deep into installation if we didn’t get them right up front.

4) Plan Out Your Steps

The installation instructions were pretty good but it’s tough to communicate everything you need to be aware of for a step in a one page diagram.   It pays to go over the diagram twice, once to understand it, and twice to make sure you interpreted it correctly.

It takes a little longer but if you plan out each step and think it through it can save you alot of re-work and frustration.

5) Don’t Always Do It Yourself

I was lucky enough to have my father-in-law helping me the entire time.  I’m not a great handyman so if I’d have done it myself it would have taken weeks and I’m sure it wouldn’t be put together quite right.  It was certainly a team effort, my mother-in-law helped watch the kids and my parents stopped by for a while to help – and it still took us 3 days.

As I mentioned earlier, we had considered hiring a local contractor to install it for us – and without the help of my father-in-law I imagine I would have.  A quick search on Angies List for swingset installation brought up a list of 8 companies that install playsets.  I probably would have gotten bids from the 3 highest rated companies and gone with one of them. 

If you are thinking of a DIY project, just be aware of what you’re getting yourself into and think about who you can ask for help that might have the experience and/or tools you’ll need.

After spending the extended weekend offline, I’m getting caught up on some of the personal finance articles I’d missed over the last week.  Check some of these out.

Investing

• Play the Invest Lazy Man’s Money Game @ Lazy Man & Money
• Employee Stock Purchase Plans @ The Wealth Artisan
• How Expense Ratios Impact Your Investment Performance @ Moolanomy
• Index Funds Work in Bull and Bear Markets @ The Oblivious Investor

Personal Finance

• Big Banks Are Eliminating Free Checking Accounts @ Suns Financial Diary
• Parenting Moments @ Brip Blap
• Financial Strategies for the New Stay at Home Parent @ Million Dollar Journey
• Emergency Fund Planning: Don’t Assume Expenses Will Go Down @ Frugal Dad
• Applying the Golden Rule to Tough Personal Finance Situations @ The Simple Dollar
• Are You Letting Fear Cloud Your Financial Judgment? @ Cash Money Life
• Small Financial Sacrifices For Big Achievements @ My Two Dollars
• Purchasing When You Can Afford It @ Sweating The Big Stuff

Career

• Get Paid to Do What You Love @ Generation X Finance
• The Best and Worst States to Make a Living @ Free Money Finance
• Questioning the Value of a College Degree @ My Money Blog
• Quitting a New Job for a Better Offer @ The Money Crashers

Frugality

• 7 Rules for Successful Pre-Buying @ My Dollar Plan
• The Truth about Haggling @ PT Money
• Restaurant Menu Tricks to Get More of Your Money @ Budgeting in the Fun Stuff
• Getting Rid of Old Appliances for Money @ Frugal Confessions

Debt

• Stop Worrying About How You Got Into Debt @ The Digerati Life
• Crippled by Student Debt @ Money Ning
• Should You Build an Emergency Fund or Pay Off Debt First? @ Money Crush

Thanks to the following site for including Money Smart Life posts in the carnival of personal finance:

• How to Use a Mortgage Calculator to Compare Home Loans @ Live Real Now
• 5 Ways to Pay Off Your House Early @ Yes I Am Cheap

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Term Life Insurance 101

The main purpose of life insurance is to help protect your family from financial hardship in the event you die and they’re left with the same expenses but less income.  If that were to happen and you had bought life insurance then they’d receive what’s known as a death benefit, a lump sum cash payment that could help them get by without you around.

There two main types of life insurance, term life and permanent, or whole life – this article is going to look only at term life insurance.  One of the main reasons that people choose term life over whole is that the premiums are cheaper, that’s because term only lasts for a specific period of time.

Why Term Life Insurance?

Many of us have the biggest financial obligations to our family when our kids are young.  Often during this stage of our life we’re not only paying to raise the kids but also have expenses like car payments, medical bills, and maybe house payments.  If you were to pass away it may be tough for your spouse to cover all those costs, particularly if you’re the only one working and they stay at home with the kids.

Now fast forward to twenty years later when the kids have grown up and moved away and your house is getting close to being paid off.  The importance of your income to the family has decreased significantly.  Although you’d still be sorely missed if you weren’t around, it probably wouldn’t be as financially catastrophic as it would have been two decades earlier.

This is the kind of scenario that term life insurance is designed to cover. If you bought a 20 year term life policy to get you through that period of raising kids, then they would be covered if you weren’t around. Or maybe you’d want a 30 year term to make sure your house was paid off and the kids had made it through their college years.

Life Insurance Costs

As I mentioned earlier, term life insurance typically has much lower premiums than whole life.  Your premiums are usually paid monthly so if you are a young family starting out the term insurance option is likely a more affordable payment than a whole life policy would be.

The cost of your policy will vary not just based on the length of the term but also the type of term life insurance you sign up for.  There are several different varieties of term life, lets take a look at some of the major ones.

Annual Renewable Term Life Insurance

As the name suggests, each term only lasts for one year.  At the end of the year you have the option of renewing your life insurance policy.  The premiums typically rise as you get older, often rising at the end of each year.  Some policies include a maximum premium to cap the amount you’d have to pay.

Fixed-Rate Level Term Life Insurance

If you know that you want life insurance for a longer period than a year, you can go with fixed rate level term.  The nice thing about this type of insurance is that once you sign up for the policy the monthly premiums are the same for the length of your contract.  So unlike the annual renewable version, your costs don’t go up each year.  Common term lengths for this type of life insurance are 10, 15, 20, or 30 years. 

Typically the longer the term, the more expensive your monthly premiums will be.  This is mainly due to the fact that the older you get, the higher your chances of death are.  So if you want to insure your life for 30 years vs 15 years, the probability the insurance company will have to pay out is higher – so they charge higher insurance premiums.

Decreasing Term Life Insurance

If you like the idea of a fixed premium but would like a longer term and want to pay less you could consider decreasing term life insurance.  Your premiums stay the same throughout the life of your policy but your coverage amount decreases annually.

The idea behind decreasing life insurance is to cover big expenses that will shrink over time.  The best example of this is a home mortgage.  Over the years the amount you owe on your house will go down (as long as you don’t have an interest-only mortgage) so a decreasing term insurance policy assumes that your family will need less money once that big expense is paid off. 

Of course this doesn’t take into account any other large expenses you incur over the course of your term, like medical bills or college debt, so keep that in mind if you’re considering decreasing term life insurance.

Convertible Term Life Insurance

One thing you have to do before buying life insurance is to be evaluated for your eligibility. If the insurance company find you to be insurable then you’re covered for the length of your term.  If your insurance term expires and you want to buy another term life policy you may have to go through the eligibility process again, depending on your contract.

If you’d like to buy term insurance now but know someday you may want to have permanent life insurance, you can look into a type of insurance called convertible term. This type of life insurance starts off as term but gives you the option of converting to a whole life policy later down the road, without having to go through the insurability process again.

How Much Insurance Do You Need?

The amount of coverage you need varies for each personal situation but here are a few general things to consider when trying to decide how much life insurance would be enough if you died:

• Expenses from an injury or sickness that eventually lead to death – ex: hospital expenses or long term care
• Any debts you would leave behind (credit card, mortgage debt)
• Expenses related to death – funeral costs and/or estate attorneys
• Future cost of living – funds your family would need to pay for daily living

Where Can You Buy Life Insurance?

When you’re pricing life insurance, one option is to work directly with insurance companies, some of the bigger ones are:

• Allstate
• Liberty Mutual
• MetLife

If you want to compare options and rates without calling up each company you can also use sites like these to compare term life insurance rates:

• Insure.com
• Accuquote.com

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How to Buy a House in an Expensive Market

Buying a house always seems to cost you more than you planned.  If you live in a city with expensive real estate you might even feel like those high home prices mean you’ll never be able to afford your own home. While some citites in California, New York, and other states across the country have dauntingly expensive homes, there are ways you can pay less to live in some of those areas.

Our Home Buying Story

My wife and I live in that beautiful semi-rural part of central New Jersey that nobody knows about. It feels as far away from “The Jersey Shore” as Boulder, Colorado. Because of our relatively close proximity to New York City, the houses here are always very expensive.

During our nearly one-year house search, we learned that it was nearly impossible to find a decent house for under $300,000 in the county where we live. Note that I’m talking about a whole county, not just a town or two. This is also true of many of the surrounding counties where we live.

Here were our only requirements for our first home:

1. Home not be listed “as is”
2. Have three or more bedrooms
3. Be located in an area with a good school district
4. Not be located on a busy street
5. Not be a total “fixer-upper”

Our price range was $300,000 or less. We found it nearly impossible to find a home that met even three or four of our requirements in that price range. By utilizing the below tips, however, we did eventually find and purchase a great home.

We love our house and it met all of our qualifications with the exception that it is located on a busier road than we would have liked. It took nearly a year of planning to find a home we could afford in a pricey market. With the below tips you too might be able to buy a great home, even in an expensive real estate market. By implementing the tools it took us a year to learn, hopefully you’ll be able to afford a home in a much shorter period of time.

1. Find the Right Agent

I think this is important for any real estate purchase, but even more so if you are looking to purchase in an expensive real estate market. In the beginning of our house search my wife and I found an agent online. We were not very impressed with the results and still wonder whether that agent had our best interests in mind.

The second time around we got smart and asked a few real estate attorneys we know their opinions about who the most trustworthy local real estate agents are. You should be able to find a good real estate agent from within your social circle as well.

2. Do Your Own Homework 

Although you will be well-positioned if you have a committed and trustworthy agent, you should still learn about your local housing market. You should visit as many houses as you can. How else will you know what a fair price?

Websites such as zillow.com, realestate.com, or trulia.com can show you globalized real estate listings. Make sure you study the listings sent to you by your agent as well–even the homes you have little or no interest in.

3. Consider Foreclosures and Short Sales

Buying a foreclosure or a short sale can be an effective method for buying into an expensive market that you may otherwise be price-precluded from entering. Recognize, however, just how difficult these types of transactions generally are.

Banks have made the short sale process more difficult than ever. You may wait months even after a seller accepts your bid waiting for the bank to reach a decision. Some people waste months waiting for a bank short sale acceptance that will never come.

Foreclosures have their own issues. Many foreclosed homes are in terrible shape. Foreclosures and short sales provide a means to purchase a home in an expensive market at a reduced price, but do realize you will likely be paying in other ways.

4. Expand Your Search 

If you’re not finding a value home in your price range, then consider expanding your search. This will provide you with more options and a better chance of finding a home you can afford.

5. Look For Homes New to the Market 

Most of the homes that have been sitting on the market for months remain unsold because they are either: a) extremely flawed; or b) not priced to sell. Also, be weary of sellers who list the home themselves or who are using a real estate company you have never before heard of. These may be signs the sellers cannot accept the true value of their home, and therefore have not been able to hire a legitimate real estate agent to assist in the sale.

6. Develop a Solid Negotiation Strategy 

One of my favorite negotiation tools is the “price history” on Zillow.com. Many times I would find that the owner purchased their home in 2005–right at the height of the market. I knew this person would likely be difficult to negotiate with, because they would want me to subsidize their mistake.

If you know your market you can use the price history to establish a fair current market value. For example, if you know the person purchased their home in 2005 and your real estate market’s average home prices have decreased 20% since that time, this provides an idea of the home’s current market value.

The key to just about any negotiation is to make a low first offer that is still high enough to not be offensive. Good real estate agents should help you with your negotiating strategy as well.

7. Save for a Larger Down Payment 

It seems to mee that we’ll see further depreciation in most real estate markets. Although nobody can time the market, perhaps the best idea is to wait a year. During this time you can save for a larger down payment and hold out to see if prices will continue to drop. A year from now you might be able to afford that dream home, even in an expensive market.

What other strategies have you used to purchase a home in an expensive real estate market?

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What To Do If You Can’t Pay Your Mortgage

Owning a home is a great thing… until you find yourself in a financial place where you can’t pay the mortgage loan. With the housing bubble going bust and the ensuing financial crisis the inability to pay a mortgage has gone from being a rare occurrence to, sadly, something quite common. Millions of Americans have found themselves without incomes, without money to pay for groceries and utilities, not to mention a monthly mortgage payment.

Steps to Take If You Can’t Pay

It is of little comfort to know that if you are in this situation that you are not alone. Although it feels overwhelming, try to remain focused. Here are some things to do if you can’t pay your mortgage:

Notify the Loan Servicer

Honesty is the best policy. Being honest with yourself during tough times is hard, not to mention to a financial institution you owe thousands of dollars to.  Let your lender know you intend on paying what you owe but have hit a rough spot.  See if they’re willing to work with you  Perhaps in a few months you’ll be back on your feet and able to pay again.  It’s better to be in contact with the bank than to stop making payments and ignore them.

Apply for a Home Modification

The federal government funded a large home mortgage modification program called Making Home Affordable. You need to apply for a HAMP modification (HAMP stands for Home Affordable Modification Program). There are specific requirements you must meet to be eligible for a modification. If you don’t meet the qualifications don’t cling to hope that you will still be able to modify your mortgage. The government program isn’t going to change to suit you.

Ask for Forbearance

A forbearance is a period of time the bank allows you to, essentially, get your life together in order to get back on track paying the mortgage note. With a forbearance the loan servicer may reduce or completely eliminate your payment for a specific period of time. If you’ve lost your job but anticipate getting back to work soon this can be beneficial. You can save on costs today, get your income back, and continue to make payments to the bank. You’ll owe either higher payments or a lump sum at some point to make up for the payments and interest you avoided during the forbearance.

Sell Your Home at a Loss

If you can’t get a modification or a forbearance it is time to consider selling your home, even at a loss. Many banks are covered up in foreclosure proceedings and you might be able to get away with living in your home “rent” free for a while. But eventually the bank will catch up with you.

Find an Experienced Agent

Obviously it’s best if you can avoid getting to this point. Try and find an agent who’s dealt with other homeowners in your same situation.  They should have a general feel for a realistic selling price and help you price the home for a quick sale.  Since so many people have been hit by the economic downturn, there are many realtors that have worked to sell homes that are facing foreclosure.  The benefit of working with one of these agents is that they know the system and what your options are.

One thing to watch out for is that people in your situation may feel desperate to sell and crooked agents may try and exploit your situation.  So be sure to screen the agent well and check their references.

Short Sales

One option to consider is doing a short sale – but you will need the bank’s approval. A short sale is where you sell the home for less than what is owed on the mortgage. The bank has to agree to this and approve any offer that you accept – which can slow the process down.  Going through a short sale is preferred over foreclosure but be aware that it still does damage your credit and will make getting a loan in the near future more difficult.

If you’ve been in this situation before, are there any other tips that you’d add?

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