Posted By Paul
There are many options out there when it comes to saving for college. I had heard that some people use a Roth IRA as a college savings vehicle and this idea intrigued me.
The article Matt wrote already outlines the basics of the Roth IRA. So I was interested in how this applies to college savings.
So with a Roth you put post-tax dollars into an account and earnings that you make are tax free. You can withdraw your contributions at any time for any reason without taxes or penalty, but if you withdraw earnings early (before age 59 1/2) then you pay a 10% penalty tax AND you have to pay taxes on the earnings.
So how does this become a college savings vehicle? Well the answer is that if you withdraw earnings early and use them for higher education expenses then you avoid the 10% penalty tax but you still have to pay taxes on the earnings.
One reason this appeals to people is because the Roth sort of provides a savings vehicle that can be used to save for a child's college, but also can serve as something else.
For example, if you save all of this money in a Roth, but then out of nowhere your grandparents offer to pay for your child's college education (this is a VERY hypothetical case for most people) your Roth can still serve as your retirement account.
Another cool trick is that you can use your Roth as a combined college savings and retirement account. Let's say for example that you reach a point where you decide you can save $500 per year for college and another $1500 for retirement. You can take the whole $2000 and put it into a Roth IRA.
So now fast forward to the future. Let's say that over the years your $2000 became $3000. That means that the $1500 for retirement has grown to $2250 and the $500 has grown to $750.
Now you decide that you want to take some money out for college expenses. If you can take out the $750, and as far as the IRS is concerned you're still taking out less than the total money you have contributed, so this money is yours, tax free and penalty free.
There is a great article on college savings through the Roth here. The idea of using a Roth for college savings is interesting, but I think I'm going to keep looking around. I plan on researching (and posting articles) about other options in the future.
Wednesday, September 12, 2007
Article: 41 Tips For Saving Money
Posted By Paul
On CNN Money there is this great article on saving money. It's presented as a list of 41 tips that you can follow:
http://money.cnn.com/galleries/2007/moneymag/0709/gallery.35minutes.moneymag/index.html
I plan on going through the tips one by one and discussing them in the coming weeks.
On CNN Money there is this great article on saving money. It's presented as a list of 41 tips that you can follow:
http://money.cnn.com/galleries/2007/moneymag/0709/gallery.35minutes.moneymag/index.html
I plan on going through the tips one by one and discussing them in the coming weeks.
What happens to your 401k when you leave?
Posted By Paul
I had someone ask me recently what to do with their 401k when they leave a job. I thought I'd take a moment and list the options and my opinion on each:
Option 1: Cash it out.
This means just that, you take your money out of your 401k and get a check and it's yours to do with as you please. DO NOT DO THIS! When you cash out your 401k you get taxed on it, which really defeats the purpose of why you put the money in there in the first place. There may be a situation where doing this makes sense, but it would have to be a VERY extreme and dire situation before you start considering this.
Option 2: Leave it there.
As far as I know all 401k plans let you leave it in your company plan even if you are no longer an employee there (I think a lot of places have minimum balances you have to meet before you can do this, but usually they're pretty small). This option is fine, especially if you really like the 401k plan at the company you left. However, it also means that your 401k is in a company plan that you're sort of out of the loop on. Since you don't work there you don't get the nice annual presentation on the 401k program, and there may be other inconveniences. Generally I don't think this is all that great of a choice.
Option 3: Roll it into your new company 401k.
After leaving your old job you will probably end up at a company in the future that has a 401k plan of its own. You can then just roll the money from one to the other. It's a pretty simple process that takes a little bit of paper work, but your benefits representative at the company can help you with this as it is VERY common. I usually do this when I switch jobs but once I did try option 4.
Option 4: Roll it into your own IRA.
You can just open up an IRA and roll the money into that. Where you manage it yourself. When I did this one think I liked about it was that I rolled the money into my IRA and then any new money went into my new company 401k, so I haven't made any contribution to that IRA for several years now. It's kind of cool because I can actually watch and see how well my investment is doing. That's sort of harder with a 401k since you're constantly putting more money into it, but with my IRA I can easily tell you what percent increase I made in the last year, which is nice.
These are the only 4 options that I can think of. I think most people go with option 3 when they switch jobs, which I think makes sense. As long as you don't cash it out then I think any of the other choices is fine.
I had someone ask me recently what to do with their 401k when they leave a job. I thought I'd take a moment and list the options and my opinion on each:
Option 1: Cash it out.
This means just that, you take your money out of your 401k and get a check and it's yours to do with as you please. DO NOT DO THIS! When you cash out your 401k you get taxed on it, which really defeats the purpose of why you put the money in there in the first place. There may be a situation where doing this makes sense, but it would have to be a VERY extreme and dire situation before you start considering this.
Option 2: Leave it there.
As far as I know all 401k plans let you leave it in your company plan even if you are no longer an employee there (I think a lot of places have minimum balances you have to meet before you can do this, but usually they're pretty small). This option is fine, especially if you really like the 401k plan at the company you left. However, it also means that your 401k is in a company plan that you're sort of out of the loop on. Since you don't work there you don't get the nice annual presentation on the 401k program, and there may be other inconveniences. Generally I don't think this is all that great of a choice.
Option 3: Roll it into your new company 401k.
After leaving your old job you will probably end up at a company in the future that has a 401k plan of its own. You can then just roll the money from one to the other. It's a pretty simple process that takes a little bit of paper work, but your benefits representative at the company can help you with this as it is VERY common. I usually do this when I switch jobs but once I did try option 4.
Option 4: Roll it into your own IRA.
You can just open up an IRA and roll the money into that. Where you manage it yourself. When I did this one think I liked about it was that I rolled the money into my IRA and then any new money went into my new company 401k, so I haven't made any contribution to that IRA for several years now. It's kind of cool because I can actually watch and see how well my investment is doing. That's sort of harder with a 401k since you're constantly putting more money into it, but with my IRA I can easily tell you what percent increase I made in the last year, which is nice.
These are the only 4 options that I can think of. I think most people go with option 3 when they switch jobs, which I think makes sense. As long as you don't cash it out then I think any of the other choices is fine.
Tuesday, September 11, 2007
Buying to Cheer Yourself Up
Posted by Paul
A common problem I've seen with various people I've known who are in financial dire straits is the fact that they seem to buy things as a way to cheer themselves up.
Now, I also see people who I consider financially resposible also treating themselves to something when they've had an especially long day, or perhaps as a reward for completing a project around the house.
The difference that I've noticed is that the people who are in financial jeopardy often buy themselves big dollar items while the financial responsible people buy more simple treats.
For example, I know one person who is working their way out of several thousands of dollars in credit card debt. After a rough week as a way to cheer themselves up they bought a $300 stereo.
On the other hand, I have a friend who is pretty together as far as his finances. They spent the whole day working to complete a major project on their house so at the end of the day they treated themselves to a DVD movie they wanted (I think it cost them $12).
I don't see any harm in treating yourself to something every now and then, but I've noticed that often a simple treat (a new CD, eating dinner out, a trip to the ice cream parlor) can be just as satisfying of a pick me up as a big ticket item.
I also noticed that the people who had a tendency to buy big dollar items as a way to treat themselves were often in a dangerous spiral. They'd be in a troubled financial situation, so they would be more prone to stress and depression, they'd go out and buy some big item to cheer themselves up, plunging them further into a bad financial situation, making them more prone to stress and depression, and so on.
I think people should train themselves to take pleasure in the little things. Not only will it help your financial situation, but I think it will probably make you a happier person in general.
A common problem I've seen with various people I've known who are in financial dire straits is the fact that they seem to buy things as a way to cheer themselves up.
Now, I also see people who I consider financially resposible also treating themselves to something when they've had an especially long day, or perhaps as a reward for completing a project around the house.
The difference that I've noticed is that the people who are in financial jeopardy often buy themselves big dollar items while the financial responsible people buy more simple treats.
For example, I know one person who is working their way out of several thousands of dollars in credit card debt. After a rough week as a way to cheer themselves up they bought a $300 stereo.
On the other hand, I have a friend who is pretty together as far as his finances. They spent the whole day working to complete a major project on their house so at the end of the day they treated themselves to a DVD movie they wanted (I think it cost them $12).
I don't see any harm in treating yourself to something every now and then, but I've noticed that often a simple treat (a new CD, eating dinner out, a trip to the ice cream parlor) can be just as satisfying of a pick me up as a big ticket item.
I also noticed that the people who had a tendency to buy big dollar items as a way to treat themselves were often in a dangerous spiral. They'd be in a troubled financial situation, so they would be more prone to stress and depression, they'd go out and buy some big item to cheer themselves up, plunging them further into a bad financial situation, making them more prone to stress and depression, and so on.
I think people should train themselves to take pleasure in the little things. Not only will it help your financial situation, but I think it will probably make you a happier person in general.
Long-term purchasing.
Posted by Matt
I've found a helpful tip for making purchasing decisions, though I'm sure it is probably starting to bother my wife. Whenever I'm faced with a purchase (and I'm talking more like long-term items like housewares than groceries here), I try to remember to ask myself "Is this the last [blank] I'll ever buy?"
I've found a helpful tip for making purchasing decisions, though I'm sure it is probably starting to bother my wife. Whenever I'm faced with a purchase (and I'm talking more like long-term items like housewares than groceries here), I try to remember to ask myself "Is this the last [blank] I'll ever buy?"
First off, it means I shop with durability and quality in mind, and am willing to pay a little more for those attributes if it means I won't have to re-purchase the item when it wears out or breaks.
Next, I try to think about how well the item covers all of our requirements and whether I think I might get sick of the style eventually.
Now, admittedly, long-term purchasing is easier when you can actually afford to buy quality and when you are in a stage of your life where it makes sense. For example: when I was young and single, trying to find the perfect dinnerware was very low on my priority list and I probably couldn't have afforded it anyway. When my future wife and I first moved in together, we bought an inexpensive set of plates that we later grew tired of. We next received a very nice set of dishes as wedding gifts, but later discovered that they were very difficult to fit into our dishwasher racks and they also chipped frequently. That's when I thought, "okay, let's just find what we need already." Someone recommended Corelle
- The stuff is practically unbreakable.
- The design is plain, simple and classic (all white).
- They fit well in the dishwasher and our cabinets.
- The set was relatively inexpensive.
I NEVER want to replace this stuff. I will concede that all the other dishes I've owned or used in my life helped me define exactly what types of dishes I was looking for and there is definitely value in that. I'm just saying that I try to think ahead.
So far, I've got a fairly short list of things that I think I'll never buy again (my cast iron skillet, wedding ring, some furniture and some tools to name a few items), so I hope that other people will post suggestions in the comments.
Monday, September 10, 2007
Credit Cards Aren't All Bad
Posted by Paul
You often hear about credit cards and how they are the terrible, dangerous and potentially the quickest path to putting your financial life into a shambles.
Though it's true that credit cards can easily be misused, and that this misuse can easily put a person into dire straits, if used properly they can actually be a good thing.
For example I use a credit card quite a bit, since it's convenient to not have to carry around a lot of cash. I have a card that has no annual fee (you should never have an annual fee credit card, how absurd to actually pay a company to use their card), and I NEVER carry a balance on the card. Seriously, always pay off your credit card. As long as you pay off your card every month then you don't have to pay the crazy interest. If you ever find yourself with a balance on the card that you can't afford to pay off, STOP using your credit card immediately, pay it off as soon as possible and look closely at your life because you are almost certainly overspending somewhere.
So in addition to the convenience of using a credit card, I also have a card that gives me incentive points. For example one of my cards gives me 1% of my purchases in free Amazon merchandise. Books, DVD's, and CD's are items that I like to buy but that I really don't need, so I like to use my Amazon incentive points to buy fun stuff. It's a great way to use the "free money" from the credit card to buy fun stuff.
So as long as you can use a card and pay it off every month, I think it's a great idea to get one that has some sort of incentive that appeals to you and make use of the free stuff.
I like the idea that not only is the credit card company not making money off of me, but I'm getting free stuff by using the card responsibly.
You often hear about credit cards and how they are the terrible, dangerous and potentially the quickest path to putting your financial life into a shambles.
Though it's true that credit cards can easily be misused, and that this misuse can easily put a person into dire straits, if used properly they can actually be a good thing.
For example I use a credit card quite a bit, since it's convenient to not have to carry around a lot of cash. I have a card that has no annual fee (you should never have an annual fee credit card, how absurd to actually pay a company to use their card), and I NEVER carry a balance on the card. Seriously, always pay off your credit card. As long as you pay off your card every month then you don't have to pay the crazy interest. If you ever find yourself with a balance on the card that you can't afford to pay off, STOP using your credit card immediately, pay it off as soon as possible and look closely at your life because you are almost certainly overspending somewhere.
So in addition to the convenience of using a credit card, I also have a card that gives me incentive points. For example one of my cards gives me 1% of my purchases in free Amazon merchandise. Books, DVD's, and CD's are items that I like to buy but that I really don't need, so I like to use my Amazon incentive points to buy fun stuff. It's a great way to use the "free money" from the credit card to buy fun stuff.
So as long as you can use a card and pay it off every month, I think it's a great idea to get one that has some sort of incentive that appeals to you and make use of the free stuff.
I like the idea that not only is the credit card company not making money off of me, but I'm getting free stuff by using the card responsibly.
Thursday, September 6, 2007
New feature on Frugalize
Posted by Matt
I'm just posting a quick note to draw attention to a new feature here on Frugalize. Paul and I decided that it might be nice to keep a running list of whatever general financial rules we could agree upon. You can find them in the "Basic Rules of Finance" list in the column on the right. The list is short so far, but we will continue to update these rules as we go.
I'm just posting a quick note to draw attention to a new feature here on Frugalize. Paul and I decided that it might be nice to keep a running list of whatever general financial rules we could agree upon. You can find them in the "Basic Rules of Finance" list in the column on the right. The list is short so far, but we will continue to update these rules as we go.
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