If Peeing in Your Pants is Cool, Consider Me Miles Davis

In the August 2008 issue of Money Magazine, roughly 40 well known names share "The Smartest Advice" they have ever received concerning their personal finance. Among them is Elizabeth Gilbert, the author of "Eat, Pray, Love". She shares the following advice, a lesson taught to her by her grandfather:

"Borrowing money is like wetting your bed in the middle of the night. At first all you feel is warmth and release. But very, very quickly comes the awful, cold discomfort of reality."

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Kudos Kiplinger

I read an interesting article in the most recent edition of kiplinger magazine. The editor in chief, Knight Kiplinger was writing his regular My Point of View editorial. Commenting on the possibly dark long-term future of American finance, the housing "crisis," and increasing foreign control and purchasing of American businesses among other things, a few of his words include,

"Most of our wounds are self-inflicted, stemming from our inability to live within our means."

"A financially healthy household should be saving at least 10% of its gross income for emergencies and retirement."

"Many Americans live in a house - and drive a car- that eats up too much of their monthly budget."

"We Americans have it within our power to slowly reverse these dangerous trends. The big question is whether we have the will."

Kudos Kiplinger

Simple Cents University: The 401(k)

Despite popular belief, 401(k) is not the classified name of a top-secret government agent. I know, that's shocking. However, a 401(k) is a powerful retirement tool - and a tool you ought to know about.

The name itself, "401(k)" refers to IRS tax code. Note: tax code is a safer alternative to common sleep aid - LunaSom PM. Fundamentally, a 401(k) is a glorified mutual fund. In a practical sense, it is money in a mutual fund, stamped with a "for retirement only" tag. There is, however, an advantage to tagging the money.

Whether you realize it or not, as you work the government takes roughly 30% of every dollar you make, before it is paid to you. They also make your employer pay an additional 30% of every dollar they pay you. You know all those small, confusing numbers that come on your check stub at work - supposedly they tell you all about the 30% tax. Supposedly. But don't worry, all of this money goes toward necessary, responsible spending. I digress.

A 401(k) account works like this...

1. You earn money through an employer who offers a 401(k) plan.
   
2. You choose to put a percentage of that money into the 401(k) account. Within the account, the money is invested in your choice of a limited list of mutual funds.
   
3. You defer the payment of the 30% tax on the money you put into 401(k).
4. Typically, your employer matches some portion of your contribution (ex. they match 100 of your investment, up to 4% of your salary)
   
5. That money is locked into the 401(k) until you reach age 59 1/2.
   
6. At age 59 1/2 and beyond, you can begin to withdraw money from the account, paying the taxes you deferred in Step 3 as though the money you withdraw is income.

Why is this so helpful? Not only are you saving for retirement, which is almost always a great idea, but you are gaining a 100% return on the money your employer matches. Doubling your money is always a good investment.

Say a 25 year old earns $100 at work. He pays 30% in taxes and is left with $70. He invests the money in mutual funds for his retirement. The funds earn him an average of 11% in interest over that time. At age 59 1/2, lets just call it 60, the money has grown to $3,200.

Now, under the same stipulations, the 25 year old instead puts the money into his company's 401(k) plan. By deferring the taxes & gaining the employer match, $200 is invested. The money grows to $9,200 over the same period of time. You pay taxes on the money as you withdraw it, and you are left $6,400. Thus, you have gained the difference - in this case $3,200. If the 25 year old continues to invest additional monies over the course of a career, you are talking big bucks.

Cha-Ching. That's why 401(k)'s are a powerful retirement tool and an important factor in career choice.

Is a Hybrid/fuel efficient car worth it?

In a world of raising gas prices, many have chosen to purchase a new vehicle (potentially a hybrid, but for sure a more fuel efficient car.)

But how do the numbers add up?

For all of our computations, lets assume gas is $4 a gallon.

The average American drives 15,000 miles a year. Unless your car runs on water (that is the ugliest car I have ever seen, I wouldn't drive it even though it runs on water!), your car most likely fits into one of these categories.

For a car averaging 15 mpg, that would add up to 4,000 a year in gas.

For a car averaging 20 mpg, that would add up to 3,000 a year in gas.

For a car averaging 25 mpg, that would add up to 2,400 a year in gas.

For a car averaging 30 mpg, that would add up to 2,000 a year in gas.

So let's say you want to trade in your 5 year old mid sized SUV that gets 15 mpg, for a 2 year old sedan that gets 30 mpg. The trade sounds smart from all angles, especially the pump, but is it? You save only $2,000 in gas per year...but the car cost $10,000 more than your older SUV. So you are looking at five years just to break even. Not to mention, most Americans would finance their new purchase "to save money" on gas prices. Really a couple minutes with a calculator will eliminate "financial savvy" from most car upgrades. These numbers really fall apart when you consider the high cost of the average hybrid. Sit down, crunch the numbers before you pay 12 grand to save money on gas prices.

So is it ever a good idea to purchase a more fuel efficient car? Yes. If it is time (apart from gas prices) for you to buy a new car and you are not acting out of fear, then it would be wise to consider fuel efficiency.

Gen Y is Broke

In a recent article by Emma Johnson, Why Generation Y is broke, various reasons are given for why today's youth are struggling financially. A few thoughts:

• Although the author cites the problem is not due to "lack of smarts", she then proceeds to explain how the financial landscape is too complicated for the youthful understanding. How is that not a lack of education?
• The "boomerang generation" is a thought provoking bunch. What is different about this generation than those of the past. Why the dependence issues (or lack of taking pride in independence) versus that in which we see in previous generations?
• I hate using increased healthcare & education expenses as an excuse for debt. Bread has increased in price too. So has coffee, dining out, & stamps. Point being, budgeting is about placing proper priorities. Healthcare is a high priority. Education can be as well (although formal education is often not as high of a priority as we make it). But if healthcare is the driving force for debt, than why has Starbucks surged in recent years. Why is Bestbuy booming? Are healthcare & education really to blame? Why are luxury items higher priority than necessities? Who is actually to blame for the debt?
  

Modesty: The Financial One-Piece

Modesty - it's not just for church camp. I love the quote by Chesterton:

There are two ways to get enough; one is to continue to accumulate more and more. The other is to desire less.
~ G.K. Chesterton

In America - where bigger is better, income & importance are in direct correlation, credit is king, and diamonds are a girl's best friend - we know very little about modesty. And what we know, we certainly don't appreciate.

Modesty is a key to financial freedom. You will never win driving a new car, living in a huge house, & impressing people with the size of you wallet.

The End of the World! (Financial Fear)

Recently in California (no comment) we have people standing in line to withdraw their money after a bank went under. It is reminiscent of the Great Depression. Shouldn't people get worried? Not hardly. The important thing to remember in times like this is that financial decisions based on fear are never good ones. The bank (as all reputable banks) was FDIC insured. Which means, ALL members are guaranteed up $100,000 by the US government in the event of a bankruptcy. The funniest (or saddest) part of the story is that people stood in line for hours and some even stayed overnight to get their money. Banks are only required to keep 10% of their total assets in liquid form at a given bank. Therefore, even if the bank wasn't in financial trouble, it could not pay out money to everyone in line. So standing in line to get your money from a recently bankrupted bank doesn't make you look smart and savvy, it makes you look like a moron. You will get your money (eventually), and if you have more than 100,000 dollars sitting in your checking account you are a moron for other reasons. The point of this story isn't to make fun of people from California (they're too easy targets anyway), but rather to encourage you to never make financial decisions based on fear. When you have a clear head, you make better decisions. When scared, you act rashly.