Using a Solo 401(k) to Fast Forward Your Retirement Savings

The following is a post by MPFJ staff writer, Kevin Mercadante, who is a professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

The topic of solo 401(k) plans is usually one of those subjects reserved for small independent business people who are looking to establish a viable retirement plan for their business. It’s not a discussion that comes up often by many other people.

It needs to.

The solo 401(k), called more formally the one participant 401(k), has obvious benefits for anyone who is self-employed, but also great potential for someone who isn’t. More on that last point toward the end.

The plan is available for anyone who is self-employed – even if it is through an S corporation – as long as the business has no other employees. It is a simple plan to manage, with flexible investment options, and generous contribution limits.

But there’s more.

The solo 401(k) hidden advantage

When we think of 401(k) plans, we mostly interpret them through the lens of large employer plans. That means that you are able to contribute a percentage of your income – usually somewhere between 10% and 15% – and the funds accumulate on a tax-deferred basis until retirement. Some employers also offer a partial company match on the employees contribution.

Solo 401(k) plans are similar in the basics, but there’s one advantage they hold over employer-sponsored plans that make them worth investigating for anyone. Under IRS regulations, 100% of the first $17,500 ($23,000 if you‘re 50 or older) can be contributed to the plan.

Got that? 100% – there are no percentage of income limits up to that point.

That means that if you have a small business that earns $50,000 per year, you can contribute the first $17,500 of your income into the plan. If you had an employer sponsored plan that limited you to 10% of your income, your contribution on the same amount of compensation will be just $5,000. That’s a huge difference, and an advantage to the solo 401(k) that most people don’t even know about.

If you are self-employed, this contribution limit is far more generous than it would be for either a traditional or Roth IRA, where your maximum contribution is $5,500, or $6,500 if you’re 50 or older.

But once again, there’s more.

An outsized tax benefit

$17,500 is not only a big chunk of money going into your retirement plan, but it’s also a lot of money to deduct from your income for tax purposes. And that’s only the beginning.

With a solo 401(k), you are both the employee and the employer in your business. That means that you can also have an employer match to your basic employee contribution.

As employer, you can contribute up to 25% of total income to the plan. Let’s say that you earn $50,000 in your business. As the employer, you can contribute $12,500 to the plan (25% of $50,000) for your “employee” – who is also you.

When you add the $12,500 employer contribution to your $17,500 employee contribution, this gives you the ability to contribute up to $30,000 per year. Once again, that’s a lot of money to put into your retirement plan, as well as a huge tax write-off.

Think about it – your business earns $50,000, but 60% of that ($30,000) will not be subject to either federal or state income taxes.

Also think about the impact on your retirement savings of being able to contribute $30,000 per year to your plan. Even if you haven’t saved a single dollar for your retirement up to this point, $30,000 per year will provide a huge advantage in helping you to make up for lost time.

In fact, you can contribute up to $51,000 to the plan each year, limited to $17,500 for the basic employee contribution, plus 25% of total income as the employer contribution.

Setting up a side business – with it’s own solo 401(k)

So far we’ve discussed the potential to fast-forward your retirement savings with a solo 401(k) on a business that represents your primary occupation. But you can also establish a solo 401(k) for a side business.

This is why consideration of a solo 401(k) could be important even if you don’t have a business.

Let’s say that you are 45 years old you have about $50,000 sitting in your employer 401(k) plan. You earn $50,000 per year, and your employer plan limits you to contributions of no more than 10% of your income, or $5,000 per year. Not to be coldhearted, but you’ll never be able to fully retire under those circumstances.

But let’s say that you have the potential to start a side business – or maybe you already have one up and running. Let’s say that you are freelance blog writer, earning an additional $30,000 per year from your side business. If you establish a solo 401(k) plan attached to your writing business, you’ll be able to contribute $17,500 to the plan as an employee, plus an employer contribution of $7,500 (25% of $30,000).

That’s $25,000 in retirement savings, over and above your employer-sponsored plan.

At that rate, a comfortable retirement will be just a matter of time. Not only will this be a much more generous retirement plan contribution then you could get under an IRA, but it will also be fully tax deductible. IRA contributions have a limited tax deductibility if you’re already covered by a plan by your employer.

Starting a side business and attaching a solo 401(k) to it could be a way to either ramp up your retirement savings, or to do a fast catch-up if you haven saved much so far.

How about you all? If you are self-employed, have you checked out the benefits of a solo 401(k) plan? If you’re not self-employed, have you considered the possibility of starting your own side business, and using it to fast-forward retirement savings with a solo 401(k)?

Share your experiences by commenting below! 

***Photo courtesy of – http://www.flickr.com/photos/solo_with_others/3011148496/sizes/m/in/

Your Mobile eCommerce Kit

The following is a guest post. Enjoy! 

While a good chunk of eCommerce happens online, you can’t ignore the opportunities that conventions, fairs, farmers markets and festivals can offer your business. While you may only get to one or two of these a year, it’s still important to present a professional and organized appearance so you can turn the impulse shoppers you meet on the road into regular customers at your online shop. It doesn’t matter if you are vending at a major convention or setting up a table at a local church craft show, there are few things you need to have to make sure you are successful.

Display Must-Haves

A large part of marketing at events comes from how you set up your display. You don’t always know what you’ll have available at a given site. You might be provided with a table and wall space, or you might just have a designated section of grass. Do your best to find out beforehand, but always bring a few essentials with you. While you can expand on this depending on the type of products you sell, the absolute minimum you must have are a solid colored tablecloth, blanket or length of fabric, a basket, string and tacks, and a folding table. You will eventually want to invest in a professional banner or sign that can easily be set up.

Payment Options

The vast majority of customers, even at events that are traditionally cash-only, prefer to use credit or debit cards. Some venues require all vendors to provide electronic sales option. For example, the Portland Farmers Market requires all vendors to accept not only debit and credit cards, but also EBT payments for programs like the Farm Direct Nutrition Program and the Supplemental Nutrition Assistance Program. Even it isn’t required by the venue, it’s a good idea to have a mobile credit card reader and a credit card receipt printer with you. This way you will be sell to more customers, and assure them of the professionalism of your business.

The Back-up Plan

No matter how well you plan ahead, you cannot rely on having Internet access or functional devices. Even if the WiFi signal or your cell service is good, the website you are relying on to process transactions may go down or become impossibly slow. Similarly, you may run out of power halfway through the day and be unable to recharge your device. Or, worse, it might be damaged, stolen or misplaced. You should always bring along what you need to complete any transactions manually. This means having a ledger to record transactions, a receipt pad and plenty of pens. Fortunately, most of these items can be stored in the bottom of your cash box against the eventual need.

Taking your online business out of your house is a great way to drum up new business. By participating in local fairs and events, you can connect your small business with the community at large. By presenting a professional and competent appearance at these events, you can strengthen your businesses presence and reputation.

The 72(t) Penalty-Free Distribution From Retirement Accounts – How Does It Apply To You?

A few months ago, I published an article about a fascinating and useful concept that I have been able to successfully implement this year – The Three Legged Stool for Retirement.

The crux of this whole concept is that we should aim to have built up (by the time of retirement) an approximately equal amount of savings in three different types of accounts (legs) – tax free (Roth-type accounts), taxable (regular accounts), and tax-deferred (401k/traditional IRA accounts). There are two main reasons to have a variety of accounts vs. just one:

• Advantage #1 of The Three Legged Stool – It allows you to adjust/tweak your income sources during retirement so that you can get yourself in the lowest tax bracket possible.
• Advantage #2 of The Three Legged Stool – On the road to retirement, having a mixture of account-types enables you to have money at hand (without penalty and minimal income tax burden) if the need were to arise.

The idea behind today’s post relates to the 2nd advantage above. More specifically, it relates to the fact that with most all retirement accounts (IRA’s and 401(k)’s), you generally have to pay a 10% penalty to access your money before the age of 59.5. For exceptions to this general rule and all the gory details on withdrawal rules, check out my previous post on the different retirement account options.

Thanks to a reader comment in the Three Legged Stool post, the idea was brought up that you could actually get around this 10% penalty on early withdrawals by using something called the 72(t) rule.

The goal for this post will be to examine briefly what the 72(t) rule is (because it is no doubt defined well by other writers previously) and how I think it should affect us as savers for retirement trying to establish our Three Legged Stool. Let’s get started!

What is the 72(t) Distribution Rule?

As eluded to above, the 72(t) distribution rule allows a person to withdraw funds from a retirement account (401(k), IRA, annuity, etc) before the age of 59.5 while avoiding the normal 10% penalty that applies.

The rule dictates that in order to qualify for this exemption, you must take [Substantially] Equal Periodic Payments (SEPP’s) at least annually in such a way that the entire balance of your retirement account is depleted over your remaining life expectancy. While there are many other fine details to be aware of, I will stick to the brief description here and refer you to some great resources I found below:

• Excellent 72(t) Articles You Should Read to Learn More!
  • Oblivious Investor
  • Good Financial Cents
  • Retire by 40
  • Money Crashers
  • BankRate.com Calculator to decide which payment calculation method is best for you.

Questions Applying The 72(t) Rule To Real Life

Having read through the articles above, there are three primary questions I would have if I was personally going to employ the 72(t) in my life. In order to help others that may also have similar questions, I’ll discuss the answers to these below. Luckily, the remedies all seem pretty straight-forward and available.

Question #1 – Is it possible to use the 72(t) exemption rule if you only want to withdraw a small amount of money from your retirement account (not the entire balance as the rule states)?

Although the 72(t) rule does indeed state that you must take the equal periodic payments in such a way that the ENTIRE retirement account balance is depleted over your remaining life, there is a fairly easy fix to get around this by using or opening up multiple retirement accounts. 

As WealthPilgrim explains, you can choose to only apply the 72(t) distributions to one of your retirement accounts (not all of them).

What this means is that if, for example, you only want to withdraw $10,000 of the $100,000 you have saved in your Vanguard IRA, you can achieve this by rolling over the $90,000 you want to keep saving in to an existing or new IRA (has to be prior to starting the equal periodic distributions) and then execute the 72(t) distribution to deplete the entire remaining $10,000 balance in your first IRA.

Question # 2 – Do you have to be officially “retired” or “separated from service” to qualify for the 72(t) distribution rule?

In short, the answer to this question is Yes and No. Here’s why:

• For IRAs, no, you do not have to be retired and/or separated from service. 72(t) can be used at any time for IRAs.
• For qualified plans such as 401(k)’s, yes, you do have to separate from service from your employer before taking a 72(t).

Question # 3 – Can you still contribute to a retirement account after/while taking 72(t) distributions?

Thanks to the feature discussed in Question #1 about being able to elect to use 72(t) distribution on only select (not all of your) retirement accounts, there is a fix for this as well.

• According to eHow.com, if you’re taking 72(t) withdrawals from one retirement account, you can not make any more contributions to that same account in order to still be exempt from the 10% penalty.
• However, you can still contribute to A SEPARATE RETIREMENT ACCOUNT at the same time you are taking 72(t) withdrawals from the 1st account.
• So, simply open up a new IRA to contribute to or contribute to a separate existing IRA.

Conclusion / How This Applies to My Three Legged Stool for Retirement

To sum up the 72(t) distribution rule, I will conclude that it falls in the category of “a nice, workable feature to know about in an emergency/unexpected situation to access retirement money, but not something that is likely to affect my long-term financial planning.”

The reason for this is two fold:

• First, while the 72(t) distribution is nice in letting you avoid the 10% early withdrawal penalty, it does not shield you whatsoever from the more potent 25-45% tax burden that you’ll have to pay for accessing the retirement money early (with the exception of Roth and annuity contributions).
• Second, and more importantly, the 72(t) rule doesn’t help you at all during retirement at managing your income tax bracket by taking income from different types of accounts.

How about you all? Have you ever done a 72(t) distribution from a retirement account or know anyone that has? Did the process go smoothly, or did something unexpected come up?

Does the 72(t) rule affect your long-term financial planning process?

Share your experiences by commenting below! 

***Photo courtesy of http://www.flickr.com/photos/rvw/116017204/sizes/m/in/photostream/

Are Banning Referral Fees Is Effective?

The following is a guest post. Enjoy! 

As of April 2013, referral fees in the personal injury sector have become illegal. Previously, when a personal injury occurred, the claimant would find legal help through a third party or middleman. This would usually be a claims management company or insurer. They would then receive a generous payment for their pains.

The government decided to outlaw these fees because they feel they push up costs and encourage a compensation culture in the UK. Between 2012 and 2013, 477,000 whiplash claims were made. In fact, compared with the EU, the UK makes 30% more whiplash claims. Are British necks softer? No. It’s thought that ‘ambulance chasing’ in this country had increased the amount of spurious claims, and this was fueled by referral fees.

The government hoped this would also pan out to halt pest texts and cold callers. But with the industry priced at £600m, nobody wants to put them out of business altogether.

On the flipside, these referral companies have actually increased the access to justice for many. And ‘no win, no fee’ solicitors have little incentive to take on weak or spurious cases.

How Effective Will The Ban Be On Reducing Personal Injury Claims?

It’s likely that there will be little to no effect. All this has done is forced referral fees to go underground. Referral fees actually have no fixed definition, so it’s entirely possible to outsource ‘marketing’ to another company and pay them in kind. Alternative business structures will appear left, right, and center.

How You Can Make A Personal Injury Claim

If you have suffered a personal injury, don’t let the government stop you from accessing the justice you deserve.

Start by amassing the evidence for your case. This could mean gathering photographs or taking down the details of witnesses. Make sure that you get the proof you need to pursue your case. This will also mean going straight to your doctor, even if you think the injuries are minor, and receiving a diagnosis.

Find a personal injury law firm – which specializes in your type of injury – that you like, and gives you a good quote. They should be able to kick off the proceedings for you, while you convalesce at home. Sometimes, you can secure compensation, without having to go to court; in fact, the majority of cases are settled this way.

However, before you can pursue your case any further, you will have to get reasonably well. Focus on your health, follow all of your doctor’s instructions, and relax. You may have to take time off work, so remember to take note of how much wages you lose through this. It may be possible to recover this sum, on top of personal injury compensation.

The government can hope to reduce personal injury figures, but if accidents happen, people are likely to lose out financially. And not everyone can afford that.

The Negative Effects of Money Laundering

The following is a guest post. Enjoy! 

Money laundering is the process of disguising the source of money that has been obtained unlawfully and it has significant negative effects on people and the economy. Research has shown that several hundred billion pounds of illegal money is laundered every year and the impact this has on countries across the world can be very serious.

Socio-Cultural Effects

The current success of people who engage in money laundering gives the impression that crime can actually pay, which only serves to encourage more criminal activity such as fraud, selling drugs and corporate embezzlement. Embezzlement can lead to the loss of jobs and pensions when a company collapses, which in turn impacts on people’s health and the welfare system.

As drug-related crime increases, the police force and other emergency services find their resources being stretched to breaking point, which puts pressure on the tax system and the burden all too often falls on the shoulders of everyday working people.

There can also be a loss of morale and desire to engage in competitive trading amongst legitimate business owners who are unable to make the same amount of money that criminals can.

Additionally, further tension around the subject exists in the business community as a result of legitimate and law-abiding business owners finding themselves the subject of anti-money-laundering investigations. Those concerned about any current or potential investigation should speak with money laundering criminal lawyer.

Economic Effects

Developing countries are often cited as victims of money laundering organisations based in the developed world. This is due to the fact that many of these countries have governments that are in the early stages of establishing practices and regulations for newly privatized financial sectors. This leaves them vulnerable and at risk of unknowingly attracting and assisting criminals who deposit money into national financial institutions.

When rumors start to make local customers question the integrity of their bank and the safety of their savings, they often withdraw their money and this can cause banks to collapse and create instability in the market.

Influxes of laundered money into sections of the economy that are specifically targeted by criminals can create a false demand. This leads to an adjustment in economic policy, which can have devastating effects on the economy of a county when the laundered money is withdrawn from the market due to police pressure and criminal investigations deterring the practice.

Laundering money can also remove competition from the market as this money is usually untaxed, so businesses that act as a legitimate front for those who are laundering money can afford to sell their goods much more cheaply than their law-abiding competitors. Primarily, their concern is moving large amounts of illicit money through a business such as a laundry-mat or car wash, so they are not usually concerned with making the business successful.

Research has shown clear links between money laundering, drug-trafficking and terrorism, so tackling this problem may have a beneficial impact in terms of reducing levels of crime and violence.

What Size Pond Do You Want For Your Fish-Metaphored Life?

This post topic has been on my radar to do for quite a while now, as it’s been something that I’ve thought about quite a few times in my life, moving different places, meeting new folks from different backgrounds, etc.

What am I talking about here? Well, it relates to the very common metaphorical question that we’ve no doubt all heard at one point in our lives – “Would you rather be a big fish in a little pond or a little fish in a big pond? 

Essentially, it is the idea that how successful we perceive our lives to be is based more on how we compare ourselves relatively to people around us vs. the absolute value of our outputs on a global scale.

A great money-based example of this metaphor is the age-old question of rather you would prefer to make $50,000 per year when all your friends are only making $30,000 per year, or if you would rather be making $200,000 per year, but all your friends make $1 MM per year?

More specifically, I am interested in how this metaphor applies to a person’s schooling, career, and personal finances throughout various life stages. Assuming that you are a “big” fish, I want to explore answers to the following questions:

• Is it better to attend an undergraduate college that is a “big” pond or a “little” pond?
• Is it better to attend a graduate school that is a “big” pond or a “little” pond?
• Should the first few years of your career experience be in a “big” or little” pond?
• Should the later/more senior years of your career be in a “big” or “little” pond?
• Should you physically live in a “big” or “little” pond?
  • Or, perhaps for these various stages, there is a happy “medium” size pond that is just right…. 

Let’s take a look at each of these life stages and examine some of the advantages and disadvantages presented by being in the different pond sizes at that specific time in life. I’ll start off by describing the working definition I’ll use for a big pond and little pond in each specific set of circumstances.

Undergraduate College Degree

Definition of big and little pond sizes in this context: For the context of undergraduate college degrees, I will define a big pond as a school which requires top-of-the-line entrance testing scores and grades to get in and is also very selective in the ratio of applicants vs. accepted for admittance. In other words, a school where pretty much all students are STELLAR. A little pond would be on the opposite end of this spectrum.

Advantages of a Big Pond

• As you can imagine, there are many benefits of attending a top-tier school for your undergraduate degree.
  • You will be surrounded by incredibly smart student-colleagues and world-renowned professors from which you can learn countless valuable things.
  • In addition, you will have a much easier time than your little pond contemporaries in finding a job and/or internship, as many high quality/high paying companies will likely be recruiting directly from your door stop. All you will have to do is saunter on down to the career fair at your school with your resume in hand!
  • Along these same lines, it has been my experience that several specific types of jobs pretty much unofficially “require” you to have attended a top-tier undergrad school in order to land the job. Investment banking is one type of job that comes to mind where this is more or less the case.

Advantages of a Small Pond / Disadvantages of a Big Pond

One of the key things that sparked my curiosity/motivation in finally writing this article was a recent newspaper column covering the entrance statistics of the Fall 2013 entering class (the one graduating in 2017) of a public Ivy undergrad school, which is ranked approximately 2nd in public undergrad schools in the US according to World News. This article stated that, “The Class of 2017 averages an SAT math and verbal score of 1349, keeping close with the Class of 2016’s 1350. Ninety-two percent of incoming students were in the top 10 percent of their high school classes.”

Now, I’m not sure how you all did in high school and on your college entrance testing, but I would be very below average (a TINY fish) in the midst of the standards of this BIG pond grouping of undergrads.

Being a graduate student at this institution and having been through undergrad teaching assistant orientation, I also have been told that the prevalence of depression, anxiety, and usage of the psychological counseling services are higher at this school than other schools in the same state. One of the reasons the orientation teachers offered was that the undergrads that come here are often top notch students in high school, but then come to college and are simply average or below average because of the high caliber of the overall student population.

Overall, I do think it is a very good thing to surround yourself with other top notch people at least once (or even multiple times) in your life. However, the aforementioned example brings up the following question – since your personality/self-confidence/sense of individuality is not yet fully formed at the fragile age of 18 when you start undergrad, would it not be better to delay the likely possibility of feeling of below average until later in life when you are a little more sure of yourself? In other words, by putting yourself in a smaller pond at such a young age, you can allow your self-confidence to develop on its own.

Furthermore, if you put yourself in a smaller pond during undergrad, it is possible to temporarily immerse yourself in a big pond through a competitive/challenging internship, during the summer or a single semester.

From a personal finance perspective, another disadvantage of a big pond undergraduate degree is that you are more likely to end up with additional student loan debt since the amount of scholarships they give out/that you will be eligible for will likely be less than at a smaller pond where the school desires your big fish talent.

Graduate School and/or The First Few Years of Your Working Career

Definition of big and little pond sizes in this context: 

• For the context of graduate school, I will use the same definition of a big pond and little pond as for the undergraduate section above, except that the entrance scores and other criteria would be shifted to fit the graduate school setting.
• However, the definitions in the context of a career will be slightly different.
  • A big pond in the case of a job setting will be defined as working at a company/organization that is considered one of the best in the world, often termed a “name brand” employer (one that is recognized by everyone).
  • Their ratio of people hired / total job applicants is much less than 10%, and they can only hire from very selective target schools if they so desired.

Advantages of a Big Pond

Similar to what I discussed above with big pond undergraduate schools, swimming in a big pond for your first job or for graduate school will allow you to be surrounded by top-notch talent and smart people. You will be able to connect, network, and make friends with big-time current and future generation influencers that will benefit your career for years to come.  Perhaps even more importantly, you will learn how to do things THE RIGHT WAY (ie the way that the best in the world do it), so that you can elevate your career “game” and skill set to match. Lastly, having the widely-recognized big pond employer on your resume will be easily recognized by future employers as a common meter of the caliber of your talent.

Advantages of a Small Pond / Disadvantages of a Big Pond

A potential pitfall of being in a big pond for your first job, on the other hand, is that you run the risk of potentially not standing out from the crowd and being recognized for your talent. In other words, even if you are a big fish, you’re in a big pond, and your complete talent set may not be leveraged if you are surrounded by other stellar people. The opposite would be true of a small pond career/grad school setting.

However, even if you were to be only “below average” in a big pond, in theory by this time in your personal development, you will have enough self confidence to not let this bother you, and simply accept that you’re doing your best and that it’s OK to be mediocre when surrounded by other top notch people.

Later Working Years of Your Career

Using the same working definitions of a little and big pond as we employed in the above jobs section, let’s analyze how the pond size might play a role when your career is a little more mature. For this thought experiment, we will assume that you have been successful in your career and have still emerged/remained as a big fish!

Advantages of a Big Pond

As a top notch, senior-level big fish, what advantages are there of teaming up with a big pond organization/company?

• First, I think that it would likely make your job as a supervisor/boss a little easier. Assuming that you can recruit top notch talent, you theoretically will be able to find people to execute your ideas and follow your strategical plans more easily.
• As a result, this might make the absolute amount of projects you accomplish higher than if you were in a little pond.
• Second, the big pond organization will likely pay you more since they theoretically would have more money to obtain/keep your big-fish, top-notch talent.

Advantages of a Small Pond / Disadvantages of a Big Pond

One clear advantage of working in a small pond environment later in your career is that your contributions will likely have a greater breadth of impact across an entire organization versus in a big pond where you will have a large impact, but in a very specific area of the company. For example, if you are a top-notch senior engineer at a big pond company, you might be perfectly qualified to perform as a Vice President or CEO of a smaller, start-up company.

Living Location

The big pond vs. little pond decision when it comes to location is one of my favorites to think about.

Essentially, what I’m talking about here is if you are moving to a new city and money is not much of a consideration (because after all, you are a big fish, remember!), is it better to live in a neighborhood where you’re surrounded by normal, everyday folks (little pond), or is it better to live in a subdivision where your McMansion is only 1 out of 100 the same size and everyone around you is successful (big pond)?

On one hand, in the big pond location, you will likely be surrounded by very smart, successful people that can become your friends, help you in the future, etc. In addition, the school system in the area may be better since the property tax base is higher. However, a negative would be that in this setting, you likely would be more inclined to increase your spending. After all, you can’t be seen in a Honda Civic when your neighbors have the Porsche, right?! This of course wouldn’t be an issue in the little pond setting.

Conclusions

In the interest of wrapping this post up, I was trying incorporate my usual personal tie-in where I state how I will  apply this topic to my personal life. However, I became somewhat stumped on this one. As such, I have unfortunately concluded that I am not yet sure what type of pond size, big or little, I want for my various future life stages. I’ll have to let time play out to help me figure out what is best I think.

How about you all? Were you in a “big pond” or a “little pond” for your undergraduate, graduate, first real job, senior career, and/or physical location life stages?

If you could do it over again, would you do anything differently?

Are there specific life stages when it’s generally better to be in a big pond vs. a little pond?

Share your experiences by commenting below! 

***Photo courtesy of http://www.flickr.com/photos/wildlife_encounters/8024090659/sizes/m/in

Frugal Holiday Traditions You Can Start This Year

The following post is by MPFJ staff writer, Melissa Batai.  Melissa is a freelance writer who covers topics ranging from personal finance to business to organics to food.  She blogs at Mom’s Plans where she shares her family’s journey to healthier living and paying down debt.

The holidays are upon us, and while this should be a joyful time, for too many people, it is a stressful time where there is too much to do and too much to buy.

Stores start pushing Christmas products in early September, and the jewelry and toy commercials featuring a loving spouse or Santa Claus have already begun. Getting wrapped up in the marketing bonanza can be all too easy, and you can feel guilty if you don’t drop a lot of money on your loved ones and friends.

However, it doesn’t have to be this way.  You can choose to step off the buying merry go round and instead have a more joyful, less financially stressful holiday season.

Within your own immediate family, you can start frugal traditions this year that take the emphasis off of buying and consuming and put the emphasis on spending time with loved ones, being grateful for what you have, and enjoying the season.

Frugal Thanksgiving Traditions

It’s not too late to start some new Thanksgiving traditions.  Remember, the original Thanksgiving occurred after the Pilgrims had suffered a horrible year in the new country.  They had lost half of the original group that crossed the Atlantic to the New World.  However, Thanksgiving was a time to be thankful for the crops they learned to grow and their new found knowledge of how to survive in the New World.

Just thinking of their story can make us more thankful for the lives we have, but these activities will also help:

1. You can express your own thanks by creating a Thankful Tree.  I’ve seen a variety of these across the Internet.  One blogger puts up her Christmas tree early, but rather than decorating with Christmas ornaments, she first decorates with Thanksgiving “Doorhanger” Ornaments.  Later, these can be swapped out for Christmas ornaments.

Another blogger creates hers out of colored construction paper and has each of her kids make a handprint and write all of the things they are thankful for on the hand.  Then, they attach it to the tree.  Create the handprints in a variety of colors, and you have a beautiful fall tree full of blessings.

2. Give thanks by donating your time.  If crafts aren’t your thing, another frugal option is to donate your time.  Every Thanksgiving my aunt and her family spend the morning working at a soup kitchen or homeless shelter.  When, later in the day, they celebrate their own Thanksgiving, they have plenty of things to be thankful for.

3. Share your appreciation of, and gratitude for, others.  Speaking of Thanksgiving dinner, another nice, frugal tradition is to have each person go around the table and mention one thing they are thankful for about each person.

Frugal Christmas Traditions

Christmas is the one holiday that is marketed the most and cheapened because of corporate America’s desire (greed) to make money.  Keep in mind that our modern gift extravaganza is only a recent development as Americans get more disposable income.  Sixty years ago or more ago, Christmas was a much simpler affair.

You can bring the simplicity back with some of these frugal traditions:

1. Give your children only three gifts.  The idea is that you give your child one gift to wear, one to read, and one to create.  Or another thought is to give him one gift he wants, one he needs, and one he will wear.  The idea is to simplify Christmas AND save your wallet.  Granted, if you have an older child, this tradition is difficult to begin, but if you have younger children, you can start now and save yourself a bundle of money over the coming years.

Make Christmas morning a bit more special by having all the other family members watch as one person opens his/her gift, and then move on to the next person, and the next until everyone has opened their gifts.  This slows down the gift opening process and helps build anticipation, especially for little ones who are so excited to open presents.

2. Make some or all of your gifts.  Thanks to Pinterest, there are plenty of ideas for cute homemade crafts like these snowmen that are really a hot chocolate kit.  Another option is to bake, but often, people get overwhelmed with baked goods at Christmas time.  A better idea might be to make homemade cookie dough that can be frozen.  Then, the gift recipient can take them out after the glut of holiday baked goods and enjoy them in, say, February.

3. Wrap and read a winter/Christmas book a day to your kids.  You likely have a large stash of holiday and Christmas books.  Rather than making them all available at once to your child, why not wrap 24 of them, and starting December 1st, let your children pick one a day to unwrap and read together as a family.  I just learned of this idea a few weeks ago and can’t wait to start it with my kids this year.  Buy books cheaply off Paperback Swap or Amazon (and use Swagbucks to make it even cheaper).

4. Have fun with food.  There are so many ways you can make little changes to the food you’re already serving your family and make it fun and festive.  If you’re going to serve pancakes Christmas morning, why not pour them with winter themes like snowmen and snowflakes?  Or, why not make and decorate sugar cookies?  You could even have a cookie decorating contest among the kids in the family.

5. Watch a holiday movie together.  For years my mom and I watched It’s a Wonderful Life until we grew tired of it.  My uncle still loves to watch A Christmas Story with his now adult children.  It’s a tradition they’ve shared for at least the past 25 years.

6. Create holiday ornaments together.  Again, use Pinterest to find simple easy crafts you can make at home with things around the house.  Each year that you put up your holiday tree, you’ll remember making the simple ornaments with your kids when they were little.  Our Christmas tree is full of homemade ornaments, and I like them so much better than the ones you can buy at the store.

7. Drive around and look at Christmas decorations.  Pack the kids in the car and drive around look at Christmas decorations.  While some people tastefully decorate in simple stringed lights, others’ decorations are over the top with the amount of decorations and lights that they use.  Chances are everyone will enjoy seeing the displays.

8. Visit the elderly.  Those living in nursing homes often don’t get visits from relatives because their families might live far away.  Take the time to visit a nursing home and bring some holiday cookies you’ve made.  The residents will appreciate your company, especially if you bring your children.

9. Sing carols together.  Our neighbors used to sing carols together the last 10 days before Christmas.  Because we lived downstairs from them, we also got to hear the show in our apartment.  The wife would play the piano, and the entire family would sing songs from simple winter ones to religious tunes.  This is a great way to get in the holiday spirit without spending money.

You don’t have to time travel back to 1950 to have a simpler holiday season.  You can choose this year to say no to the big corporations that want your money and instead choose to simplify the holiday season and create some wonderful memories.  These frugal ideas can get you started AND help you keep your wallet healthy and full throughout the holiday season.

How about you all? What is your favorite frugal holiday tradition to do with family and friends?

Share your experiences by commenting below! 

***Photo courtesy of http://www.flickr.com/photos/starshaped/2352292485/sizes/m/

Reader Profile – Dojo from Dojo Blog

Today, in the ongoing Reader Profile Series, we’re getting to know MPFJ.com reader and commenter, Dojo, from the sites, Dojo Blog and ByDojo. Let’s all give Dojo a big round of applause for sharing her life with us and listen to her story. Enjoy!

Also, if you’re interested in sharing your own financial story/journey with us in a reader profile of your own, just shoot me a quick email, and we can get the ball rolling!  

1. Please Tell Everyone a Little Bit About Yourself (Background, Education, Family Situation, etc).

I’m a 35 year old woman, who studied to become a teacher, worked for 10 years as a radio DJ and for the past 4 years is running her own business in web design (a passion that’s been consuming her since 2002). In my case, life proved that you won’t always end up as you planned, but you can still make it, if you’re open to change and willing to work.

On a personal level: I recently got married (we’ve been together for 11 years) and have been pregnant for 6 months, expecting a baby girl (which is exactly what I wanted, so it makes me feel happy and lucky at the same time).

2. Describe Your Current Financial Situation (Who Works in Your Family, How Your Income Is, Your Expenses, etc).

Back in 2009, both me and husband remained jobless.

I lost my job when the radio station closed down and he gave up his job, after seeing the work conditions weren’t as good as before and after getting sick and tired of having everybody take advantage of him. He’s a civil engineer and it’s been really hard for him lately with many construction sites and all the stress from such a job.

We relied on some of his savings, plus he sold some of his coins (he has a pretty nice collection), while I also started freelancing full time as a web designer and taking it more seriously than before. It wasn’t too easy, but we did manage it. I was also in debt (paying for my car), but the payments stopped in March 2012, when my car was paid off completely.

After 3 years of extensive travels (staying in NYC for 6 months at our friends), we decided to become ‘family people’ and he opened a business in the city (he’s doing the heating system’s mandatory 2 year checks – as they are here in Romania). It was pretty costly to set up (the gas analyzer and having him / the company certified cost us quite a lot), not to mention it’s slowly picking up speed, but it’s still OK.

We can live comfortably from my income and he’s also bringing money as much as he can. We’re both debt free and plan on keeping it that way.

Our income is around $30K/year, which is pretty OK for my country. We do pay a lot in business taxes and the regular expenses (mostly his side of the business, since he needs all kids of certifications), but are still left enough money to live comfortably and also save some money.

3. What Are the Current Financial Challenges You Are Facing (Saving, Paying Off Debt, Student Loans, Merging Finances After Being Married, etc)?

The biggest challenge now is to have our girl come to this world (I’m paying for my birth at a private clinic and it’s pretty expensive for the regular income here) and be well prepared for her. We also wouldn’t want to stop traveling (even if not for 6 months at a time) and need to save money for immediate emergencies and also for our retirement.

The retirement/pension system here is almost ‘dead’, so we’ll probably live on the money we saved only. Not such a great perspective, but we’ll make it.

I’m not 100% thrilled with our savings at this moment, but it’s true we did have many things to take care of. My pregnancy also cost us quite some money, but it will be soon over and we can get back to a more predictable budget.

4. What Are Your Plans for the Future (Retire Early, Build Your Career, etc)?

In both our cases, the goal is now to grow our small businesses. He needs to get more clients (which fortunately started happening after 8 months of pretty small income), while I’m constantly working on building my portfolio and client base for my web design business.

I’m also trying to develop my blog and start earning some ‘residual’ income from it, too.

We’re clearly far from being able to retire, which is still OK, since we’re not that old anyway. I’d love to be able to work for many years (even after hitting the retirement age), since I love my ‘job’ a lot and don’t feel it like ‘work’ anyway. We’ll see … There’s a lot between now and those years, especially having to raise our daughter and try to provide her with a good life and education.

5. What’s Your Best Piece(s) of Financial Advice and/or Your General Philosophy on Personal Finances?

What really worked for us was to find out which things make us truly happy. For these, we always paid good money (travels come to mind), while we could save money from other things that are not important to us. We’re frugal in many aspects, but know what makes us happy and pay for it.

We also want to remain debt free and save for anything we want to own. It’s not a very easy thing to do, but with consistency and drive, we’ll make it.

One of the most important advice we can give would be to live bellow your means and NOT feel bad about it. We constantly have people tell us that  with the money we earn, we should dress like this and do that. We both have similar goals in our lives and don’t care about how ‘cool’ we look or not in other people’s eyes. What matters most for us is to build a strong financial foundation, not keep up with the Joneses.

CD Rates Suck – But Here’s Why You Need to Be In Them Anyway

The following is a post by MPFJ staff writer, Kevin Mercadante, who is a professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

A one-year certificate of deposit (CD) paying 0.25% interest doesn’t look appealing on the surface.

And, as a matter of getting a healthy return on your investment, it certainly isn’t. But, don’t be so quick to write off CDs as being worthy of having a place in your investment portfolio. There are compelling reasons to have at least some money in them, even if interest rates are lousy.

Holding investments that are completely independent of stocks

In Investment 101, you learn that diversification of an investment portfolio is foundational. A portfolio invested 100% in stocks – even if they are split between 10 different stock sectors – is not an adequately diversified portfolio.

In order for a portfolio to be properly diversified, there must be a certain percentage of holdings that are totally unrelated to stocks. Though bonds and real estate represent a partial diversification, historically their performance is often parallel with stocks. Sure, they may not be stocks, but if their performance is similar than they aren’t a true diversification.

The best way to achieve true diversification is by holding assets that will be completely unaffected in the event of a blowout in stocks. CDs serve well in this function, because they have virtually zero risk of loss, no matter what is happening in the stock market.

Reducing exposure to equity risk

Whenever the stock market is on a tear – as it is now – it’s very easy for investors to get complacent and sloppy. You might even give it to the temptation of believing that this bull market will continue indefinitely. Rest assured that it won’t.

No one saw the length and severity of the market slides in 2000 – 2002 and again in 2007 -2009. That last one was so bad that many investors are only now beginning to recover their losses, with the Dow Jones Industrial Average having long since more than doubled from it‘s lows.

By having a small percentage of your investments held in non-risk investments – say 20% – you ensure that it will be virtually impossible for you to ever lose all of your investment portfolio. And by holding even that much in non-risk investments, like CDs, means that you will lower your losses in a crash by at least 20% across the board.

One of the biggest problems with major corrections and crashes in stocks is that once they get rolling, any efforts to reduce your exposure are usually too little, too late. What makes this outcome so predictable is human emotion. While stocks are rising, it seems counterproductive to remove any money from the market. That kind of a move only looks smart in hindsight.

A ready cash reserve to buy stocks after the next big slide

One of the truly underappreciated aspects of CDs is that they represent a store of capital that can be tapped in the aftermath of a major market decline. This is another way that CDs represent a true diversification away from stocks. They leave you better able to participate in the future rallies that will follow big market declines.

It is precisely because they are completely unaffected by moves within the stock market that they serve so well in this capacity. We can think of CDs as being an emergency fund for your investment portfolio. When things get really bad in the stock market, CDs become really good to have.

Don’t wait for the next bear market to find this out – especially if you’re something close to 100% invested in stocks right now.

Why not money market funds or online high yield savings accounts?

There are various cash type investments that work in a fashion similar to CDs. These include money market funds and high interest online savings. Why not just invest in those, rather than in CDs? After all, moving money between those vehicles and the stock market is so much easier.

CDs are fully insured by the FDIC, up to $250,000 per depositor per bank. Most people are probably completely unaware that money market funds only enjoy similar protection if they are held by banks. If a money market fund is part of an online brokerage account, or is a stand-alone fund, it does not have FDIC insurance. This could become particularly important if a major market slide were to turn into a major recession like the one we just had, causing institutions to fail.

(**Note from Jacob: Even though money market mutual funds with an investment house are not FDIC insured, I’ve often read in books something along the lines that “no money market fund has ever failed or lost money.” I also just read that in the 2008 market panic, the government even stepped in to support a money market mutual fund that was having trouble. Therefore, they are very secure, but as Kevin mentioned, not insured.)

High-yield online savings can provide richer returns than CDs – especially in today’s low rate environment. But once rates begin to rise, you may want to start locking into those rates for longer terms. This is something you can do with CDs, but not with either online savings accounts or money markets.

There’s one other reason to favor CDs over other cash type investments. It may be more psychological than anything, but savings instruments held at a local bank – rather than in a brokerage account or online savings account – represent an entirely different investment holding. There is an actual separation between your cash type savings and your equity investments with CDs that doesn‘t exist with other liquid account.

Human nature is the reason why this separation is so important. In a strong bull market, it can be tempting to move any available liquid assets into equities. That’s not quite as easy to do with CDs, not the least of which because they’re locked in for a certain term. They represent the one definitive part of an investment portfolio that will not be used for risk of any type, even in a strong stock market.

How about you all? Do you hold any CDs in your investment portfolio? Why you do this, even though rates are so dismally low?

Share your experiences by commenting below! 

***Photo courtesy of http://www.flickr.com/photos/spcbrass/2283908075/sizes/m/in/

Don’t Let Yelp Do All the Heavy Research for You

The following is a post by the newest staff writer addition to MPFJ, Sally. Sally is the blogger behind TinyApartmentDesign.com, a blog about design, living well, and simple, tiny spaces. Enjoy and welcome her to the MPFJ family! – Jacob

Yelp is my favorite social website.

It takes the power of the crowd and applies it to your local area, helping you find places to eat, a place to get your pants hemmed and a dentist. When you’ve just moved to a new area, Yelp can be a lifesaver. How else do you decide between the two identical pizza places that are within walking distance? Dry cleaning is another big win on Yelp. I want to know if it’s the kind of place that breaks buttons in advance.

But, too much of a good thing can be dangerous. Let Yelp take over your buying decisions too much and you’ll end up having fewer really new experiences and your wallet will pay the price as well.

1)      There’s No Accounting For Taste

I first realized that I could not rely on the taste buds of strangers on a taco quest in LA.

I had just moved to the city, and Yelp had fast become my new best Internet friend. I was Yelp-checking everything I did (how’s this dog park? How about this grocery store?) and I had yet to find my go-to taco spot in a town of 10,000 taco stands. And I kept seeing Tito’s Tacos on TV, which even has its own jingle: I love Tito’s Tacos, you love Tito’s too. The only thing better than a Tito’s Taco…is TWO! And then I Yelped it, and the place had thousands of reviews, most of which were pretty positive.

I knew I had to try it, and so I headed up Washington Blvd. to stand in that infamous line. I ordered two takeout boxes worth of tacos for my and my boyfriend and headed home excitedly. Well, once we opened up those boxes, I was in for a major letdown. These tacos were the most Americanized, Sysco-food-supplied basic tacos you could have. Hard shell tacos with iceberg lettuce and American cheese and pretty bland salsa. This was not the street taco I had envisioned. There wasn’t a fresh cilantro sprig anywhere in sight. I thought the food sucked. And although there are plenty of Yelp reviews that agree with me, the majority of Yelpers seem to love the place and their opinion swayed me.

Now, I take Yelp reviews with a grain of salt. Because food’s deliciousness is in the five senses of the beholder.

2)      Yelp Feeds on Your Impulsiveness

Using Yelp too often and too mindlessly can drain your wallet. I’ve often found myself browsing restaurants on Yelp, and soon enough, I start to feel hungry and everything is looking really tasty. Yelp makes it easy too, there are check-in offers, the map quickly sends you to your map app for better driving directions and they even have the store’s hours prominently displayed (something even restaurant owners sometimes forget to clearly display on their own website).

Before you reach for your trusty Yelp app, ask yourself if you really need to eat out or try that new place, or go for the expensive car wash. It might be just groupthink overwhelming you.

3)      Try Something Different and Stay Independent

I can name you dozens of restaurants that I love in LA, and I don’t think I found more than one or two on Yelp. It was mostly a result of walking or driving by a place and wanting to know more about it, getting a recommendation from a friend or even ending up there because of a business meal.

Yelp is awesome and definitely useful when you need a recommendation or new place quickly, but I also want to try things in my town and are part of the local community, not just what’s popular with Yelpers.

How about you all? Do you use Yelp to help find information on local venues/restaurants/businesses? 

Do you think it has saved or costed you money in the long run?

Share your experiences by commenting below!

***Photo courtesy of http://www.flickr.com/photos/zigazou76/7054766111/