Beating Broke

Personal Finance from the Broke Perspective

Archives for May 2010

I Won the Lottery! Almost.

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I won the lottery last week.  Almost.  Not quite, but almost.  I suppose I would have had a better chance if I still played the lottery.  I used to play the lottery off and on by myself, buying a ticket now and again, when the jackpot was several hundred million.  Then, I joined a group of people at my work that pooled our money together and bought lottery tickets with that.  Eventually, when I began listening and reading more on personal finance and then found Dave Ramsey, I quit paying the idiot tax.  Happily, I spent that $10 a month on something more worthwhile.  Like debt repayment.  And it was a good decision.  Until last week.

Last week, the group of people that I used to play the lottery with won.  Not the jackpot, but the second highest prize.  All 5 numbers without the magic ball.  $250,000.  There were 19 in the pool, and, after taxes, each will receive about $9700.  When I first heard, boy did I feel stupid.  What was I thinking?  I could have had a share of that!  Do you have any idea what $9000 could do to my finances?  It could eliminate my remaining credit card debt.  What was I thinking, dropping out of the pool?

Then, as I had more time to think about it, I came to my senses.  The odds of winning that prize were 1 in 3,900,000.  You have better luck finding a fresh lightning strike and getting struck by lightning right then and there.  Which doesn’t mean it couldn’t happen.  It did.  But, for each of those 19 very lucky people, there are thousands of people who bought a ticket and will never win.  I can’t say that I’m not still slightly jealous of the winners.  More so because of the “it could have been me” mentality than because I begrudge them the money.  Some of them truly could use it.  But, if they could use it, why are they playing the lottery.

Which is why I wasn’t playing.  I could use the money.  So, rather than spending my money on things like lottery, I was putting it to work for me.  As fate would have it, the pool that I used to play with won.  I see it, now, as a test of my financial resolve.  How many of those 19 will have spent the money on frivolous things and then be complaining in a month or two about how they have all these bills?  All while putting their money in to play the lottery, just in case lightning does strike twice?

I’ll keep plugging away at my debt.  And one day, when they’re still playing the lottery, hoping to hit it big and get rich, I’ll have made myself rich with the money I’m not spending on debt.  Now, does anyone know a good way to make my friends understand that?

401(k) Loans as Recession Insurance?

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With a recession (depending on whom you ask) upon us, would it have been wise for us to have taken a loan from our 401(k)s before it started?  Bear with me here for a second.  A loan from your 401(k) is pretty simple.  You borrow the money from yourself and then repay it to the 401(k) with interest.  The interest is usually something low.  Normally, it’s a bad idea, as the market usually performs as well, if not better, than the interest on the loan.

But, if (and that’s a big if) you were able to time the market relatively well to know there was going to be a downturn, you could loan the money to yourself.  Because the money would not be in the account, it wouldn’t suffer from the loss of value in your investments.  And instead, you’d gain whatever the interest rate was that you loaned the money for.  Instead of a double digit loss, you could have a relatively decent gain.  In theory it could work.

In theory.  The catch here is that you would have to time the market correctly.  If you missed it by a day, you could cost yourself some money.  If you were totally wrong and the market rallied, you’d end up missing out on possible gains.  But, if it worked, it could work out pretty well.  In the end, the more I look at it, it’s really a form of gambling.  You’re gambling that you can time the market and save your money.

Gambling is never a safe bet when it comes to your retirement.  It’s always tempting though.  It’s important to remember that a fall like we had over the last few years almost always comes back up.  You haven’t really lost money so much as lost value.  There’s a big difference there.  And if you keep contributing, which you should, you’re buying the very same investments at a bargain price.  So, instead of trying to minimize your losses by pulling your money out, you should be increasing your investment to maximize your return when the account finally bounces back up.

Escrow Accounts: A DIY Primer

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Quick!  What’s the first thing that pops into your head when I say “escrow account”?  It’s that account that’s associated with your mortgage, isn’t it.  That’s the first thing that come to me when I hear the word.  But, that isn’t all that an escrow account is.

At it’s very basic beginnings, an escrow account is nothing more than a savings account.  Of course, the usage of the money in that savings account is designated.  So, it’s a designated funds savings account.  Simple.  More commonly, it’s used in conjunction with a mortgage.  The escrow account that is tied to a mortgage usually holds the funds designated for taxes, insurance, and other non-monthly fees.  Each mortgage payment you make has a small portion of it that gets deposited into the escrow account.  At the end of the year, that account has enough money in it to pay your property taxes, and any other things that the funds are set aside for, such as homeowners insurance.  Yet another use is in the execution of a large purchase.  Say you’re buying a car on eBay.  You want to make sure that you’re not getting taken.  So, you use an escrow account.  You put the money for the purchase into an escrow account, and the buyer gives you the car.  Once you’ve confirmed that the car is what it was supposed to be, you can release the funds in the escrow account and the buyer is free to withdraw them.

What does all this have to do with you?  You can use escrow accounts in your personal finance as well.  Remember that an escrow account is really just a savings account where the funds are designated.  Many of you probably already have one of those.  If you’re particularly saving savvy, you likely have several.

Here’s what you need.  A goal, and a savings account.  Let’s start with a goal.  I’ll pick tires for the car.  You know you’ll need to buy some in about 6 months.  You know they’ll cost you a little less than $600.  If you had to come up with that all at once, you’d be flat broke.  In fact, some of you would just throw it on a credit card.  (I used to too, I understand.)  Instead, let’s set up an escrow savings account for it.  Get yourself a savings account.  Many banks and credit unions have them.  Many of them will allow you to give them nicknames.  If you’re bank or credit union allows nicknames, name it Tires.

All set?  Ok.  We know we need $600 in 6 months to purchase tires.  So, we take the $600 and divide it into 6 equal amounts.  (I’m no math genius, which is why I’ve got some simple numbers here.)  We end up with an amount of $100.  Each month, deposit $100 into the savings account, Tires.  At the end of the 6 months, you’ll have $600 in the account.  You can then purchase the tires with CASH!  How awesome is that?  And, if you’re any good at bargaining, you might end up with a deal when you start waving around all those benjamins.

You can apply the same principle to just about any planned purchase.  And it’s repeatable.  If you know you’ll need more tires in 6 months, you can just repeat and continue on with the escrow account.  I used to think that escrow accounts were these fancy, complicated accounts.  But, in reality, all they are is a savings account with funds that are designated for something.  There is one small difference in that usually, the money is out of your control after you deposit it and until it’s released for use.  You could replicate that, if you have a family member or very close friend that you trust that could be the controlling account holder.  If you’re even slightly afraid that they might run off with your money, though, you might just have to have some self control and do the account control yourself.