Don’t Let a Salary Raise Get in the Way of Hustling

The following post is by MPFJ staff writer, Sally. Sally is the blogger behind TinyApartmentDesign.com, a blog about design, living well, and simple, tiny spaces. Enjoy! 

A couple years ago, I finally decided to turn my finances around.

I was in debt and always thinking about the next bill I had to pay. It was nerve-wracking. The changes came slowly but surely. A big part of it had to do with finally finding ways to make money consistently that didn’t come from a job. I did a few things to make money. I bought a very small vending machine business. I had an online business that sold a physical product. And I had three paid writing gigs, as well as being an on-call copywriter for a company that created small business websites. I was on track to clear out all of my debt in mid to late 2013.

Then something unexpected happened.

I was offered a new job that came with a very nice pay raise from my previous position. I took the offer and started a job that was challenging, rewarding and exciting. I stayed on track and paid off my debt right around the time I had expected to, but also wanted to streamline some of my side gigs. I sold the vending machine business (with the move, it no longer made sense to drive to the location to collect less than $100 each month). I walked away from my writing gigs, needing a change of pace and feeling the pressure to write rather derivative posts. The only gig I kept was my online business, which has always been consistent and promises to grow in the future. I no longer needed the little gigs to sustain me, I had a salary for that!

But, this line of thinking was temporary. The truth is, as much I am excited about this job, I have to keep my bigger purpose in mind: which has always been to be a business owner, to make my own income and to generate income (through investments) without working, hourly or salaried. So I’ve gotten back on the horse. I am writing again, but this time on my terms and on the topics I care about (they’re not always this first-person oriented, promise!). There are always more ways to make money, and I may even look at another vending business closer to my new home. My online business is steady, but I am ready to branch out and try selling new products too. My new salary has been a great boost for my finances, but it also made me complacent a little too quickly. Learn from my mistake and don’t let a salary boost get in the way of hustling. There are always new opportunities out there and ways to diversify your income. There is nothing permanent except change, and there is no reason to stop looking for new opportunities, especially when that’s half the fun of hustling!

How about you all? Have you ever stopped or taken a break from your side income or side hustle? Was it the right move or did you feel like something was missing?

Share your experiences by commenting below! 

***Photo courtesy of http://www.freedigitalphotos.net/images/Business_People_g201-Lady_Looking_Through_Binocular_p89551.html

$98.40 Giveaway – Community and Charity 10% Monthly Blog Income Give Back # 27 – December 2013 Edition

The 10% give back giveaway fun rolls on for the month of December!

In case you missed the first 26 editions of the 10% Blog Income Give Back, after doing some thinking at the beginning of October 2011 about what direction I want this blog to grow and evolve towards in the future, I decided that any income made from this blog would have more significance to me at a personal life values level if I knew that a portion were being given back to the following places:

• 1) The readers – Obviously, without you here to read my articles and interact with my ideas, there would be no blog in the first place (let alone blog income). As such, it is only fitting that you receive a portion of any blog income.
• 2) Charitable organizations – If you’ve read my blog before, you know that I’m a big believer in donating a portion of my money to charity. Each year, I donate between 5-10% of my income to the National Multiple Sclerosis Society as part of the Bike for MS fundraiser that I do. Beyond the good that is done by donating your money, getting used to contributing to charity is also a good practice to emulate the actions of affluent individuals (T. Harv Eker discusses this in his book, Secrets of the Millionaire Mind, which I would definitely recommend reading if you have a few hours).

Because of these considerations, I’ve decided that each month going forward, I’m going to give away 10% of my net (after-tax) blogging income/profit to My Personal Finance Journey readers (5%) and to charity (5%). Listed below is how the process will work:

• After each calendar month passes, I’ll tally up my net blog income and determine what Dollar value correlates to 10%.
• I’ll post the giveaway (similar to this post you’re reading now), and you’ll have approximately 2-3+ weeks to enter.
• Once the giveaway is over, a grand prize winner will be announced, and that winner will then select what charity they’d like to have 5% of my blog income sent to. Once the giveaway entry window ends, I’ll send out the money to the blog reader winner(s) and personally drop off the charity donation, if possible.
• So far, I’ve been very happy with the success of the October 2011 – November 2013 give backs. Listed below is a summary of what we’ve accomplished so far with the give backs.
  • Current total given to charity = $2,298
  • Current total given to blog readers = $1,028 

Details of December 2013 10% Blog Income Giveaway

How to Enter the Giveaway – Deadline to Enter is 11:59 PM, December 31st, 2013

Like previous months, I’ve decided to use the RaffleCopter giveaway management tool to handle sign-up facilitation for this giveaway, so simply go through the steps listed in the widget below to enter the running for the prize and accumulate entry points.

There is no limit to the amount of points you can earn. If you refer 10 subscribers – your name will have accumulated 170 entry points! Or, if you link to the giveaway more than once, you can accumulate those 10 entry points multiple times. You can also share other My Personal Finance Journey articles via social media sites once per day. In the event of a tie, I will be using a random number generator to select the winner.

Important instructions: After you complete an entry method, make sure to click and fill out the “I Did This” or “Enter” button in the widget so that I have a record of your points.

a Rafflecopter giveaway

Remember, the deadline for entries will end at 11:59 PM, December 31st, 2013 (a little over 3 weeks from today – the start of the give back). Good luck to you all! Please contact me if you have any questions. After the deadline for entries passes, the winner (one with the most points accumulated) will be contacted via email to receive their prize.

***Photo courtesy of http://www.flickr.com/photos/comedynose/9972164896/sizes/m/in/

Why You May Not Want Insurance to “Total” Your Car

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.

Your car – a 12-year-old vehicle in good working order – is involved in an accident, and needs substantial repair work.

The total cost of the repairs are in the $5,000 range, which is right about what the car’s book value is. The insurance company suggests totaling the car, by offering you a check for $5,000, rather than going through the repair process which also has the potential of costing even more.

Due to the age of the car, and the fact that you’re now looking at a $5,000 cash windfall, the idea of accepting the check and using it as a down payment on a new car suddenly looks appealing. Is that the right course of action?

Sometimes – but not always.

While I will admit that accepting the check and replacing the car is probably the path most people would take, there are several reasons why you might refuse it and go with repairing the car instead.

You may not be ready to buy a new car – and the loan that comes with it

$5,000 is an attractive amount of money, but it won’t come close to buying a brand-new car. The most it will do is act as a reasonable down payment. You’ll have to make up the difference by taking a loan to fully pay for the car. With an average car costing around $25,000, this could mean taking a loan of $20,000. That could result in a monthly car payment of $400-$500.

You may be ready for a new car – heck, nearly everybody is – but are you ready for a hefty new car payment? Since your car is well over 10 years old, you probably don’t have a loan on. You probably haven’t have a loan on it for several years.

As great as a new car will be, taking on a new, large monthly payment can be a budget buster, especially if you have not had a car payment for several years. That payment could eat up all the money in your budget that would otherwise go for savings, the payoff of other debts, or even next summer’s vacation.

Instinctively, allowing the insurance company to total the car may seem like the right thing to do. But there’s a very real possibility that it will turn out to be a much more expensive option in the long run.

The car may be more valuable than what your insurance will total it for

It’s very difficult to value the true worth of an older car. Sure, there are car valuation websites, like Kelly Blue Book that provide generally accepted values on both new and used cars, but some cars just run better and longer than other cars of the same age.

Part of it may have to do with how well you as the owner have taken care of the car over it’s lifetime. If you have been particularly ambitious about this, and the car is extremely well-maintained, it may be worth far more to you than it’s technical book value.

You may decide that fixing the car and keeping it will be the least expensive option. After all, replacing it with a brand-new car will substantially increase your cost of living. And trying to replace it with a similar aged vehicle will be no better than a crap-shoot – there’s no way you can know if the previous owner has maintained the vehicle in anything like the manner that you have.

You may be able to get the car fixed for less money

If you have no mechanical abilities, and are forced to rely upon repair shops for needed repairs, accepting the insurance company’s check to total the car could be the best way to go. But if you can do a lot of repair work yourself, or if you have the ability to get it repaired by others at less than full-service shop fees, it may be less expensive for you to repair the vehicle.

For example, if you can fully repair the car by using used car parts, and either do the work yourself, or have it done by a “friend in the business”, you’ll save thousands of dollars over having it repaired by full-service mechanic.

Full-service repair shops, and especially body shops, often see wrecked cars as a cash cow, and charge premium prices. But if you have the ability and resources to work outside of the system, you may be better to go the repair route.

Replacement components may increase the life of the car

This is yet another outcome that people who have been in car accidents don’t often consider. If your car has just sustained substantial damage, the replacement parts that are put into the car on repair could actually prolong the life of the car.

We’re not talking about the resale value of the car here. As a general rule, the fact that the car has been in a major accident will lower its resale value. But if you’re talking about a car that is over 10 years old, its value is close to scrap anyway. The main reason that you would keep such a car is because you can get several more years out of it, and doing so will keep your auto expense low.

If replacing significant components are reasonably likely to enable you to keep the car for several more years, then repair will become the least expensive option.
Of course, we’re not talking about $10,000 worth of repairs to a car that’s only worth $5,000. Trying to fix car under those circumstances could be counterproductive. But if the balance is close – certainly with a few hundred dollars – you may not want to be so quick to allow the insurance company to total the car.

How about you all? Have you ever faced a situation where the insurance company wanted to total your car? How did you handle it?

Share your experiences by commenting below! 

***Photo courtesy of http://www.flickr.com/photos/madaroni/4964347820/sizes/m/in/

Two Lessons I Learned About Retirement Planning

The following post is by MPFJ staff writer Travis.  Travis is a customer blogger for Care One Debt Relief Services, and also appears weekly at Enemy of Debt.  Travis candidly shares his personal journey to pay off $109,000 of credit card debt and the tips he’s learned along the way. As a father and husband he provides a unique perspective on balancing debt, finances, and family.

Retirement Planning. 

Do these words instantly make your eyes glaze over?  For many people, it does.  It’s like that statistics class that you wonder all semester when you’ll ever use the information the instructor is droning on and on about each day.

The thing is, you can’t afford to not pay attention.

During orientation for my first job, I was informed that I could contribute to a 401K plan, and that my employer had matching funds for the first 3%.  Sounded like a great deal, so I started off contributing 2%.  I felt good about myself, I was doing the adult thing and planning for my retirement.  But was I contributing enough to accumulate a big enough nest egg for the retirement I wanted?  Did I even know what that meant?

I didn’t have a clue, and worse yet, I didn’t talk to anyone.

The first time I talked to anyone about my retirement goals was five years into my marriage when my wife was pregnant with our first child.  We visited with our life insurance representative about our changing needs to the imminent addition to our family.  He helped us set some reasonable retirement goals, and a plan of action to achieve them.  I upped our 401K contributions to be inline with our action plan, and figured we were good to go.

I went along like this for several years.  At some point, I thought it would be a good idea to take a closer look at the 401K statements that showed up in my mailbox every three months.  I thought I was being smart by diversifying my contributions across several funds that my employer had available within the 401K such as a Large Company Fund, Small Company Fund, and even an International Fund.  When I took a look at how each fund was performing, I noticed that the fund I had been sinking the majority of my money into was giving me a return of less than half of some of the other funds.

Another mistake that may have cost me tens of thousands of dollars.

Here’s a  simple example to show how much even a small percentage change in your rate of return can affect your investments.  Let’s say that at a person contributes $300 a month from the day he starts his first job at age 22, until the day he retires 40 years later.  Now, let’s say that his investments give him a rate of return of 4% per year, compounded quarterly.

$300 a month for 480 months, rate of growth of 4% compounded quarterly = $353,415.92

What happens if we up the rate of growth a single percent?

$300 a month for 480 months, rate of growth of 5% compounded quarterly = $455,341.69

In our very simple example, that’s a difference of over $100K, or an net increase of close to 29%!!  You can see how paying attention to your investments can dramatically change your financial picture for  retirement.

I quickly called my insurance representative who invited me to pay him a visit to re-evaluate my retirement goals as well as the growth performance of my retirement funds.  He half-jokingly scolded me for not calling him for so long.  But the realization of how I had handled my retirement savings taught me two very important lessons:

Retirement goals are not a one time “set it and forget it” deal:  As you progress throughout life, your goals will change and you need to adjust your retirement planning accordingly.

Review your retirement fund growth periodically:  When you calculate projected retirement savings, you use an estimated average growth rate.  It is essential to check how your funds are doing periodically to see if you need to adjust where your money is invested, or your contributions based upon how your money is growing.

We have had to halt our retirement contributions over the last 4 and a half years while we were enrolled in our debt management program and concentrating on paying off our consumer debt.  With only 4 months to go until we complete our program, it’s time to schedule another appointment to go over our retirement goals, and examine how our money is growing.

We have goals for retirement, and through careful and constant planning we aim to achieve them.

How about you readers, how often do you re-evaluate your retirement goals?  When was the last time you did so?

Image courtesy of hyena reality / FreeDigitalPhotos.net

How To Learn More About Finance Without Boring Yourself to Tears

The following post is by MPFJ staff writer, Catherine Alford. Cat is a freelance personal finance writer who blogs at www.BudgetBlonde.com. 

Don’t get mad at me for saying this, but for most people, finance is kind of boring.

I mean, I like it (and presumably if you’re reading this blog you like it), but I only came to enjoy finances and learning more about it in my 20’s. It wasn’t something I got really excited about as a kid or a teenager. It wasn’t something that I thought was particularly important until recently.

However, now that I have my own kids on the way, I want them to like finance. I want them to understand it, and I want them to be interested in learning more about it. The only problem is, how do you impart that kind of knowledge without boring them to tears? How do you get them pumped about saving and encourage them not to go into debt?

Furthermore, how do you encourage anyone to get on the right path when it comes to money? How do you teach someone about investing without it being boring?

1.    Make it a Game

When I first told my husband that I wanted to learn more about the stock market, he cautioned me that I had to watch the market for three months before investing. He didn’t want me jumping into the game without making an informed decision.

I didn’t know the best way to “watch” the market though. Did I just read the Wall Street Journal every day and keep track of stocks I liked? Did I just keep an excel spreadsheet of how certain companies were doing?

After a little bit of searching, I came across an online game called Wallstreet Survivor, which exists for the sole purpose of increasing financial literacy. On this game, you create a fake stock portfolio. They give you about 100k of fake money to play with, but I only “invested” $1,000 of it since that was a more realistic number for us.

A few months into “playing” (which really meant I bought some shares and watched it), and the stocks were so erratic that I’m not comfortable buying them. Still, it’s been fun to check in on the portfolio and see how it’s doing. It’s a pretty detailed game, and if you want to learn more about the stock market, I’d suggest it.

2.    Talk to Someone Your Age

I’ve learned a lot about finance from my father in law. He’s seriously a genius when it comes to the markets. At the same time, he knows so much that I really have to pay attention to follow along. I don’t feel like I have quite the knowledge yet to have a full fledged conversation with him about finance. I mean, he has at least 50 more years of experience of reading the business news, and I feel almost inadequate sometimes trying to get a solid understanding of a lesson from him.

My husband, on the other hand, is maybe 5 years ahead of me in terms of his understanding of the way the finance world works. He doesn’t know as much as his dad, but he knows more than I do. For that reason, I feel like we are more on the same page, and when he gets excited about a topic, I get excited about it too.

Learning more about finance is something we can do together that benefits our family. I would encourage anyone who wants to know more about money to find someone their age to talk to about it first, and once you get comfortable with the terms and get some basic knowledge down, then go ahead and approach your parents or grandparents for some more detailed discussion.

3.    Read Fun Books

There are some really great finance books out there. Some are really dry and boring and others are incredibly well written. Of course, not everyone likes the same financial gurus. It really just depends on your personality.

Some people love Dave Ramsey. Some people love Suze Orman. It really just varies from person to person, so my advice is to pick up a few of the top selling finance books at your library and flip through them to see who has the best writing style that speaks to you. I really love reading personal finance books, and I want to make it one of my 2014 goals to read them a lot more!

Ultimately, learning about finance and good money management doesn’t have to be boring. As long as you can talk to someone or play a game or read a book that gets you pumped and excited about learning more, you’re on the right track. If you try one method and it doesn’t get you interested, go for plan B. Watch some videos on You Tube about money management. Talk to you friends about it. Look up your favorite companies.

Just doing one of these tasks per day will increase your financial literacy dramatically, and suddenly, it won’t be boring anymore!

How about you all? How did you increase your knowledge of finance?

Share your experiences by commenting below! 

***Photo courtesy of http://www.flickr.com/photos/binusarina/3889528397/sizes/m/in/photolist-6VGRhr-6XMJb5-735pS4-7k

Reader Profile – Robert from Beat the 9 to 5

Today, in the ongoing Reader Profile Series, we’re getting to know MPFJ.com reader and commenter, Robert, from the site, Beat the 9 to 5. Let’s all give Robert a big round of applause for sharing his life with us and listen to his 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).

My name is Robert Farrington and I’m the owner of The College Investor and Beat the 9 to 5.  I’m passionate about helping young people be smart about their finances, specifically when it comes to investing and getting out of student loan debt.  This really comes from my own situation.

I hustled through my undergraduate education by working full time and doing odd jobs.  This helped me avoid student loan debt.  I also went back to get my MBA, but only did it because my employer paid for it.

In my day job, I’m a retail manager.  I love my job and the people I work with, but being in retail is tough on my family.

I’m married and my wife and I just celebrated the birth of our first child.  This has led me to my next goal in life – beating my nine to five job to become a full time entrepreneur.

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

I would describe our current financial situation as being in a massive saving phase to achieve two closely related financial goals.  Goal one is to make enough money for my wife to stay home with our baby.  Goal two is to have enough to retire by 35.  Not that we will retire, but we want to have enough to be able to.

A third goal, but not totally financial, is to be able for me to work from home on my entrepreneurial endeavors.

Right now, both my wife and I work full time, and I also side hustle.  You can find out more about my side hustle income by reading my Income Reports.

For our expenses, our biggest expense is our house, since we live in Southern California.  Beyond that, we enjoy dining out, and then the baby.  My biggest surprise in my expenses was that the baby was relatively cheap – so many bloggers talk about kids being expensive, but I haven’t found that to be the case.

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 we’re currently facing financially is to make enough to support my wife not working.  The goal is to be able to live off of my income and my side hustle income so my wife can stay home.

A part of this is that we don’t want to cut expenses.  Instead, we want to grow our income.  So, the biggest thing that is going to define our success is whether I can continue to grow my side income.

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

The key plan for the future is for my wife to stay home in the next 18 months.  Then, within 7 more years, be able to have enough to retire.  The way we are going about this is by maxing out our savings.

We max our IRAs and our 401ks each year, but we also invest in a taxable account.  The reason for this is that if we do retire early, we can’t really touch our retirement accounts without paying a penalty.  So it makes sense for us to stash money away in a traditional brokerage account as well.

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

My general philosophy on saving money and investing is that you have to pay yourself first, and you have to hustle.  Nobody in this world will take care of you better than you will take care of yourself.  This means saving a lot, being mindful of your expenses (but at the same time understanding the choices you make with your money and what you value), and being self-sufficient.

I don’t plan on anyone – a company, the government, etc. – to take care of me when I’m older.  We’re saving now to be well off later.  We have a lifestyle we want to live, and understand that this requires money.  We like a bigger house in Southern California.  We like to vacation in Hawaii.  We don’t want to change that.

Instead, we build our financial lives around achieving these goals and priorities.

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/

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/

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/