Beating Broke

Personal Finance from the Broke Perspective

Archives for November 2010

Bye, Bye Pension; Your Opinion Needed

By 14 Comments

We were recently told that our defined benefits plan was being taken away.  For those that are confused, a defined benefits plan is what is normally called a pension.  For me, I haven’t been around long enough for it to really affect me.  Some, who have been around for a very long time and are nearing retirement, it will mean a rather significant chunk of the money that they thought they would have for retirement will be gone.  To their credit, our employer is doing it the right way.

Rather than just declaring the fund bankrupt, or letting it run until it was bankrupt, they’ve decided to shut it down gracefully.  What that means is that those of us who are vested in the plan will receive a payout of the amount we have vested.  And, as part of that, we need to decide what to do with that money.  We have four options:

  1. Buy an Annuity.  Annuities basically work like this: You give them a lump sum of money, and they agree to pay you a monthly amount back.  The total of the payments is equal to some amount greater than the amount that you gave them.  It’s usually based on current interest rates.
  2. Roll the money into the company 401(k).  I’m already participating in the 401(k), so this would be a logical place to go with it.
  3. Roll the money into an IRA.  Also a logical way to use the money.  Could be rolled over into a Roth IRA as well.  Either way, I have far more control of the money than I would in my 401(k).  Also, I don’t believe I’d have to worry about IRA Contribution Limits if I roll it over.
  4. Take a cash payout.  They’d just write me a check, minus the 10% early withdrawal penalty from the IRS.

I’ve ruled out option 1 as it doesn’t make any sense to do with the interest rates where they are.  Most likely, I’ll be using option 2.  But, I just can’t come to a concrete solution.  If I take option 2, I add a significant amount of money to my 401(k).  More is always better.  But, I have no more control of that money than I do with the current money that’s in there. Wall Street's Cut of Your 401(k) Pie If I take option 3, I still retain the same amount of money in a retirement account, plus I have far more control of where the money is invested than I do in the 401(k).  That’s also the con of this option though.  I’m no investment expert.  I could look to invest in a stocks and shares ISA but as a general rule, most of the investments I’ve made aren’t all that great.  Which means it would have to be limited to EFTs and Mutuals which doesn’t afford that much more control than in the 401(k).  The final option would be to take the money in a check.  The big downside there is that the IRS takes 10% off the top as a penalty.  Then, it’s counted as income which gets taxed as income.  In our tax bracket, that could mean an extra 15% in tax liability.  If it bumps us up into a new bracket, it could mean some of it could be 25% in tax liability.  So, I’d pay an instant (or nearly so) 25-35% if I took a check.  But, that still means I would receive a lump sum of several thousand dollars.  That money could be used to pay off at least one credit card, if not two, and alleviate some of the monthly burden that our debt gives us.

I know that the safest (rightest) answer is to put it into one of the retirement accounts, but having the cash to dump some of our debt would also be very advantageous.

What would you do?  If you were in my situation, would you play it safe and roll the money into your 401(k)?  Would you take the cash and pay something off to reduce your monthly expenses?  Tell me how you would handle this!

photo credit: House Committee on Education and Labor

Affluent Wants vs. Needs

By 4 Comments

We already know that a good portion of saving money (both saving in savings accounts and saving on spending) can be determining whether something that we think we need is really a need or not and whether we could really do without that need. The underlying problem there is that as we become more affluent, wants become needs. This isn’t a new problem.

What those wants are has changed, but the problem remains.  In the days of the Roman empire, things like Oranges were considered a luxury.  They didn’t have the ability to transport them as quickly as we can now.  Because they were unable to get them somewhere quickly, they would spoil in all but a few cases.  The elites of the time were affluent enough that they could afford to dedicate a whole team of chariots and riders to move the Oranges from the orchard to their homes as quickly as was possible in the times.  Today, oranges are a bit more commonplace.  And, as such, aren’t nearly the luxury that they were to ancient civilizations.  The same is true for many different commodities.

Without money

And so, we can be said to be equivalent of a Roman elitist.  But, even as we are equal in many ways when we compare our access to certain things, we are not equal in socio-economic standing.  We aren’t elitists.  We’re the modern day equivalent, in that way, of your average, everyday Roman.  Just as the elite Romans had their scarce commodities, the elites of our society have theirs.  Bentleys, Mansions, Lear Jets, and Caviar just to name a few.

One of the hazards of harnessing our personal finances is that we may begin to loosen our own self-made restrictions and some of our wants might become needs.  Sure, a private jet would be nice.  I want a private jet.  I certainly don’t need one, though.  But, what if my prowess with personal finance (stop laughing) causes me to become more wealthy than I could possibly imagine.  As it becomes easier and easier for me to get that jet without breaking the bank, it also becomes easier and easier for that want to morph into a need.

A jet is a bit of an extreme example.  But, apply the same concept to one of the things that you want now.  Here’s a perfect example from my own financial adventures.  About 7 years ago, shortly after my wife and I became engaged, we decided that we needed to move from the apartment we were in and into something that was a little bit more pet friendly.  If you’ve ever tried to have a 100+ pound dog in a one bedroom apartment, you know what I’m talking about.  Initially, we were talking about finding a house to rent that allowed pets.  However, the more we looked at it, the more we discussed buying a house.  We wanted to buy a house.  But, as we looked at houses to rent, we convinced ourselves that we needed a house.  And we bought one.  Now, 7-ish years later, we want to move into a bigger house to make room for our two children and a dog.  We certainly don’t need a bigger house.  But we want one.  As we get a better handle on our finances, it’s very possible that what we want now will become a need if we let it.

I won’t say whether that will be a bad thing or not.  Some would argue that if we don’t truly need the bigger house, we shouldn’t buy it.  Others will say that if we have saved up and can afford it, we should go for it.  That’s not the point of this article though.  What is the point?

Awareness.  One of the most important factors in your personal finance journey will be how aware you are of your situation.  Being aware enough to understand what you can and cannot afford as well as what is and isn’t a need will be a determining factor in where your finances end up when you are ready to retire.  Moreover, being oblivious to your situation isn’t an excuse.  Be responsible for your situation.  Learn how to fix your mistakes.  And become aware of your situation so that you can make educated choices for your financial welfare.

Image Credit: Without money by Toban Black, on Flickr

Want to Save Money? Eliminate Some “Needs”

By 8 Comments

One of the key parts of any successful personal finance strategy is to save money.  It’s a two-prong thing.  You save money by putting it away in a savings account and you also save money by reducing the money that you would be spending.  Each plays a very important part in your financial life.

Often, when you talk to someone about saving money, they are quick to exclaim something along the lines of  “but, I’ve already squeezed as much as I possibly can out of my budget and spending!  There’s nowhere else to save!”  And in nearly every single one of those cases, they are completely wrong.  And in almost every case, that person needs to have a very serious discussion with him or her self and think about what is really a “need” and what is actually a “want”.

What you think are needs are not.  Do you really need a car?  Two pairs of shoes? Two cars?  Three bathrooms? How about the ever favorite whipping post that is cable t.v.?  How deeply are you willing to cut.  How much unlike everyone else are you willing to live so that you can save money and work towards financial freedom?

What extremes are you willing to go to?  Are you willing to go so far as to exist on Ramen and Rice for a year?  How about walking to work?  How about cutting back to only one pair of shoes?  How about selling your house and moving into something much smaller?  Yes, those are all sacrifices.  And, yes, they will all take a lot of adjustment to get used to.  But the savings could be a potential boon to your personal finances. What other money saving ideas can you come up with?

2004-10-03 Newport, RI - Cliff Walk, Carey Mansion
You really need to decide what you really “need”.  Many of the things that we think we need are really things that we want, but that have become so ingrained into our lives that we feel we need them.  For instance, in our family, we have two cars.  My wife needs a car for her work, and it’s easier for us if we don’t have to try and coordinate our schedules.  So, we have two cars.  We don’t have to try and figure out how to rearrange so that one of us can get home at 5 when the other has to be at a meeting at 4:30.  Could it be done?  Perhaps.  We’ve made it work for a few days at a time when one or the other of our cars has been in the shop.  Another more personal example would be books.  I like to read.  I get a few here and there for review that I usually don’t have to pay for, but otherwise, I buy my books or trade for them on Paperbackswap.com.  Once I’ve read them, I usually put them back into the paperbackswap system, but you can sell used books for cash too. Even trading for them, it still costs me the cost of shipping to send them to whomever requested them.  It’s way cheaper than buying retail, but it still has a cost.  I certainly don’t need those books.  I could just as easily borrow books from the library.  But, would they be the exact ones I want to read?  Not always.

In our case, there are many wants that have been elevated to a level of need.  Deep down, we know we don’t really need those things, but we want them bad enough and they give us enough value that we’re willing to keep them and the expense that goes along with them.

Yes, if we decided that we wanted to be rid of our debt now and not a minute later, we could eliminate a lot of things and be rid of it.  We choose not to go to that extreme, however.  Part of that decision is that we just don’t feel that we need to.  We’re making advances in our finances, and, while it’s slower than it could be, we’re happy making that compromise.

But, what about you?  How extreme are you willing to go to get rid of your debt.  And what compromises, like us, are you willing to make at the risk of delaying your debt payoff?  If you’re paying off debt, take a close look at the things that you think you need.  If I were still a betting man, I’d bet that a very large portion of those things aren’t really needs at all.

Image Credit: 2004-10-03 Newport, RI – Cliff Walk, Carey Mansion by QuiteLucid, on Flickr