Category Archives for Saving Money & Frugal Living

What are Your Options for Tax-Advantaged Retirement Savings and Investments?

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One of my favorite overused sayings is the one that states, “There are only two things certain in life – death and taxes.” However, I suppose this statement is used so frequently for the reason that it really does hold true. You are going to die, and you are going to in some way or another pay tax on your income now or in the future.

I personally have not heard of anyone that has ever been bankrupted or kept from reaching millionaire/billionaire wealth status because of taxes alone. Even so, that doesn’t mean that the effect of taxes should be ignored. Quite the opposite in fact – the effect of taxes is significant. As savers and investors responsible for self-directing our own money, I believe we have a fiduciary responsibility to ourselves to optimize our finances in such a way that we pay the fewest taxes required by current laws. 

One very potent strategy that we, as normal individuals, have at our disposal in performing the aforementioned optimization is to utilize various tax-advantaged savings/investing vehicles. As I mentioned several days ago in my post about blindly saving for retirement without considering the withdrawal process, there are two big problems I have encountered over the past few years (and ones that I am guilty of as well) circling in the air around how people utilize tax-advantaged money vehicles:

• Problem 1 with the Way People Use Tax-Advantaged Vehicles – People focus far too much on the advantages, while forgetting to really have the disadvantages sink in.
• Problem 2 with the Way People Use Tax-Advantaged Vehicles – People don’t fully understand all of the various tax-advantaged vehicle options at their disposal (i.e. getting focused solely on one with the exclusion of the others).   

In order to address these two problems I have experienced, the purpose of this post will be to review the tax-advantaged savings options on the market today. While doing this, we’ll cover both the advantages and disadvantages of each, but I’ll try to more blatantly call out some of the disadvantages of each vehicle in order to help people know what they are getting in to with the use of red text. I’ll also include my take on how I will or will not incorporate each in to my personal investing/saving strategy at the end of the post.

Let’s get started!

Tax-Advantaged Vehicles – Retirement Accounts

The first group of tax-advantaged savings/investing options that are available can be grouped in to the broad category of “retirement accounts.” Essentially, these carry this label, as you probably know, because they are designed to be vehicles that are only tapped/accessed/have money withdrawn from DURING RETIREMENT (hence the name!). With the possible exception of annuities, all of these retirement accounts are self-directed in the regard that you more-or-less have discretion in investing the funds as you want.

In general, it can be said that these have significant tax advantages, but you have the distinct disadvantage that your money is not quite as accessible as if it were in a taxable account. Having said that, let’s now work through each of these one by one:

Traditional and Self-Employed 401k

This is the tax-advantaged savings/investing retirement account that is most often used (in my experience) by workers at mid to large-sized companies.

• It has the significant advantages of contributions being on a pre-tax basis and your earnings accumulating on a tax-deferred basis. 
• This is nice because you don’t have to worry about the possibility of triggering a taxable event when you go to re-balance your asset allocation each year. 
• Another big advantage (one that you definitely want to capitalize on) is that employers often match contributions up to a certain % of your income. Don’t ever let free money pass you by! 
• They also do not have a low-income requirement like Roth IRA’s. 

Yes, putting money in to your 401k is super easy (done by your employer before it ever hits your bank account), and since it is pre-tax, it allows you to save 30% more money minimum! However, these benefits come with a price, i.e. disadvantages that I feel need to be highlighted more than they often are:

•  All amounts withdrawn (contributions + earnings) from a 401k are taxed as ordinary income at the state and federal level. 
• At first glance, this may not seem like that big of a deal because, hey, after all, you got a tax break on the funds that you put in to the 401k in the first place.
• However, if we dig a little deeper in to an example, it becomes obvious that pre-tax 401k contributions are not perfect since at the withdrawal point, you’re paying taxes on a large amount of earnings that have accumulated after 40+ years (we’ll take a look at an example in the Roth IRA section below).
• Just consider that you’ve got $1 million accumulated in your 401k for retirement. You’re feeling pretty good about your future. However, don’t be surprised when you find out that you really only have $600,000 because you need to pay 30% in federal income tax and 10% in state taxes prior to the money hitting your bank account in retirement.
• Your savings/investments are NOT accessible prior to the age of 59.5 without a 10% penalty.
• Unless you meet one of the specific IRS exceptions such as disability, death, or unemployment (a good article explaining the different exceptions can be found here), you will not only pay the ordinary income tax on 401k withdrawals, but you will also pay a 10% penalty for early access. This could amount to 40-50% of your withdrawals! Quite steep if you are needing the cash to capitalize on other needs or opportunities. 
• This penalty alone would personally keep me from tapping my 401k with the exception of if it were an extreme emergency. This would be somewhat inconvenient in the event that something comes up where I need a good chunk of my savings – a child getting married/going to college, buying a rental property, etc.
• You are required to make RMD’s, or Required Minimum Distributions, after the age of 70.5. 
• If you don’t make these distributions, you’ll be hit with a 50% penalty (essentially, a penalty + income tax at a high bracket) on the money that you should have been distributing. 

SEP, Traditional, and Rollover IRA

The next tax-advantaged retirement vehicle that we come to is the group that go by the name, Individual Retirement Accounts (IRA’s). From a taxation and savings withdrawal perspective, SEP, Traditional, and Rollover IRA’s are treated very similar to the Traditional 401k described above (although the contribution limit for a SEP IRA is generally higher):

• They have the advantage of contributions being on a pre-tax basis, and your earnings accumulate on a tax-deferred basis.
• They do not have a low-income requirement like Roth IRA’s.

Also like with Traditional 401k’s, the benefits of these three types of IRA’s come with a price, i.e. the same  disadvantages discussed previously:

• All amounts withdrawn (contributions + earnings) from a 401k are taxed as ordinary income at the state and federal level. 
• Your savings/investments are NOT accessible (excludes exemptions) prior to the age of 59.5 without a 10% penalty.
• Unless you meet one of the specific IRS exceptions such as disability, death, first-time home-buying, higher education, or unemployment (a good article explaining the different exceptions can be found here), you will not only pay the ordinary income tax on IRA withdrawals, but you will also pay a 10% penalty for early access.
• However, the good news is that compared to the penalties for 401k withdrawals, the rules regarding what situations avoid the penalty for IRA’s are much more lenient (encompass more situations). See the link mentioned above for more details.
• You are required to make RMD’s, or Required Minimum Distributions, after the age of 70.5. 

Roth IRA

Having covered the more traditional pre-tax retirement vehicles, we can now move on to some well-established, but perhaps less widely-employed/known retirement accounts that approach taxes from a different angle.

First, let’s discuss the Roth IRA – my favorite and perhaps the most powerful tax-advantaged savings vehicle currently available. 

• A really cool thing about Roth IRA’s is that they are tax-advantaged in a way that they are in fact tax free! 
• Although the contributions are made after-tax, your money accumulates tax-free, and withdrawals of contributions + earnings are tax free after the age of 59.5, provided that you opened and funded your first Roth IRA more than 5 years ago. What this means is that if your current Roth IRA balance is $1 million, all 1 million of those Dollars can actually hit your bank account and are not subject to taxes skimming 40% right off the top.
• Aside from the withdrawals in retirement not being taxed, the distributions also DO NOT increase your Adjusted Gross Income, meaning that distributions don’t cause your general tax bracket to increase.
• Due to the power of compound interest, I’ve read that at retirement age, retirement accounts consist of 90% earnings and 10% contributions. Because of this, it makes sense to at least consider the desire to only pay taxes on the 10% contribution part in exchange for skipping the taxes on the 90% earnings side.
• An example is useful to illustrate this difference. Let’s say that a 22 year old lands her first job after college and saves $1000 in a Roth IRA. Assuming a level 30% tax bracket during her lifetime, this would equate to contributing $1300 on a pre-tax basis to a 401k. 
• After 40 years of 10% annual compounded growth on the contributions, the $1000 Roth IRA contribution would have grown to ~$45,000, while the $1300 invested in the 401k would have grown to ~$59,000. (Note: $1000 is approximately 2% of the total account value of $45,000)
• The Roth IRA amount could be withdrawn free of taxes, so the $45,000 balance is still intact. However, since the 401k amount is exposed to taxes, that balance gets reduced to ~$42,000.
• So, this means that if you assume a constant tax bracket (which is not realistic because being 22 years old, you are likely in a lower tax bracket than at retirement), you still end up with a higher balance in retirement with a Roth IRA. 
• Of course, this example also operates under the assumption that the 22 year old does indeed invest the larger amount in the pre-tax 401k account since that is before taxes. In my experience, I have found that people do NOT indeed take this tax difference in to account when they invest. They simply want to invest $XXX.XX and don’t think about it’s current worth on a pre or post tax basis.
• A very powerful, yet little-known aspect of Roth IRA’s is that you can actually take out your CONTRIBUTIONS at ANY TIME without tax and without penalty. 
• If you think about it, this can be huge! If you have a contributed to your Roth IRA for 20 years at $5,000 per year, you could have $100,000 to remove and use as you want without tax and without penalty. And even better, whatever earnings this money has accumulated in the Roth IRA at the time will continue growing in the account tax-free. Pretty cool if you ask me! 
• This is a stark difference from the IRA’s and 401k’s discussed already where earnings and contributions withdrawn prior to 59.5 years of age are not only taxed but also subject to a 10% penalty! 
• Rollover Roth IRA contributions can be withdrawn after a 5 year seasoning period without taxes or penalties.
• Unlike the other vehicles discussed above, you are NOT required to make RMD’s, or Required Minimum Distributions, after the age of 70.5.

As I mentioned above, no retirement vehicle is totally perfect, and the Roth IRA is not exception in that it does have certain distinct disadvantages.

• You have to pay taxes in the current year on the contributions you make to a Roth IRA (since they are made with post tax Dollars). 
• This could be a BIG disadvantage if you make a lot of money now and will not have much income in retirement when you take the withdrawals.
• Unlike the 401k’s/IRA’s discussed above, you must have a sufficiently low income to qualify to make Roth IRA contributions. 
• Full Roth IRA contributions can only be made if you are single and make $110,000 per year or married filing jointly making $173,000 per year.
• However, if you do make over these income levels, you can still have a Roth IRA by performing a backdoor Roth IRA conversion by converting Rollover/Traditional IRA’s (which do not have income requirements) to a Roth IRA. 
• The earnings on your savings/investments are NOT accessible (excludes exceptions) prior to the age of 59.5 without a 10% penalty on top of ordinary income tax.
• Mike from Oblivious Investor explained this better than I ever could, so I will refer you all to his post here for more detail. 
• Briefly, if you do not die, become disabled, or purchase a home for the first time, withdrawal of your earnings in your Roth IRA prior to the age of 59.5 will be subject to normal income taxes. This is not a good thing since you already paid the taxes on that money, right?!!?
• Further, if you don’t fall in to the exception category, on top of income taxes, you will also owe a 10% penalty for withdrawal of earnings. 
• Essentially, what this means is that unless you have a “qualifying” reason for withdrawing earnings from a Roth IRA, you pretty much won’t be able/won’t want to take out your earnings.

Roth 401k

Another tax-advantaged retirement account that utilizes Roth-style tax treatment is the Roth 401k. What I’ve read is that these accounts were pretty slow to catch on after their introduction in 2006, but due to a 2010 extension that kept these plans in place, they are becoming more and more popular. Indeed, I think they are a very promising option for long term investing/savings.

Let’s take a look at some of their characteristics:

• As with a Roth IRA, contributions are made after-tax. 
• Your money accumulates tax-free, and withdrawals of contributions + earnings are tax free after the age of 59.5, provided that you opened and funded this specific Roth 401k more than 5 years ago (Note: this is different than with Roth IRA’s where the 5 year rule counts from the time that you funded your first ever Roth IRA).
• You can contribute much more money each year than with a Roth IRA. For 2013, employee’s can contribute up to $17,500 to their Roth 401k. Nice! You can also have/contribute to both Traditional and Roth 401k’s, provided that the combined yearly contribution is less than $17,500.
• Along these same lines, there are no low-income limitations that prevent higher income earners from contributing to a Roth 401k, like there are with a Roth IRA.
• Roth 401k contributions are still eligible for employer matches. However, the employer match money will sit in a pre-tax traditional 401k account. Even with this, it’s hard to turn down free money! 
• After you terminate your employment with your employer, you can roll over Roth 401k balances to a  Roth IRA. This is very useful to avoid the Required Minimum Distributions after age 70.5 (more on this in disadvantage section below).

Along with some strong advantages, the Roth 401k is also not without its respective shortcomings/disadvantages.

• You are required to make RMD’s, or Required Minimum Distributions, after the age of 70.5. 
• However, as I mentioned above, you can get around this by rolling over your Roth 401k to a Roth IRA, a vehicle which does not have RMD’s. Nice! 
• You have to pay taxes in the current year on the contributions you make to a Roth 401k (since they are made with post tax Dollars). 
• Your savings/investments are NOT accessible prior to the age of 59.5 without a 10% penalty + ordinary income tax. In other words, you have the same access to a Roth 401k as you do with a Traditional 401k. No more, no less.
• The rules regarding Roth 401k withdrawals are particularly dizzying, even for me as a PF blogger who enjoys learning about this stuff! 🙂 This is likely due to the fact that people have not fully adopted the use of this financial account yet enough to write much about it in plain English. I tried reading the IRS’s Q&A page, but found it of no use really. Surprise surprise, right?
• A very important difference between the Roth IRA and the Roth 401k is that Roth 401k contributions CANNOT be withdrawn at any time tax and penalty free.  
• Unless you died, became disabled, have huge amounts of medical bills, or are unemployed for a long time, ALL WITHDRAWALS prior to the age of 59.5 will be subject to a 10% penalty. A good article explaining the different exceptions to the 10% penalty can be found here.
• The taxation on withdrawals made prior to the age of 59.5 are confusing as well.
• The amount of taxable income on withdrawals of any size (even if they are less than the total amount you have contributed over the years) is calculated based on the % composition of the earnings in the Roth 401k account at the time of the withdrawal.
• For example, say at age 69.5, you have a total balance of $100,000 in your Roth 401k, consisting of $90,000 of earnings and $10,000 in contributions.
• If you were to take a $10,000 withdrawal before the age of 59.5, 90% or $9,000 of the withdrawal would be taxed as ordinary income, even though it is less than your total $10,000 contribution made over the years. A good description of this process can be found here. 

Stand-Alone Annuity

Our last stop on our tour of the various tax-advantaged retirement vehicles brings us to the somewhat-controversial annuity. As is the case with whole life insurance, the thing that makes these products so controversial is that the people offering them often do not have a fiduciary responsibility to get you hooked up with the most optimum product, since ones that are poorly designed will make the person selling them more money and you less money. There are, however, fairly good no-load annuities out there, such as the ones offered by Vanguard. At least that is my 2 cents…

• As mentioned in my previous post about investing in annuities, annuities are essentially a mix between an investment instrument and an insurance policy. You (the investor) opens up an annuity account, funds it, and in return, the insurance companies gives you a guarantee that you will receive a regular stream of monthly payments/income and/or return for a set amount of time, depending on how the annuity is structured.
• In the account, your contributions grow tax-deferred until withdrawal at the age of retirement (59.5 years of age). 
• Annuities have no annual maximum contribution limit.
• Contributions to an annuity are after-tax. However, once in the annuity account, your contributions can grow tax deferred until withdrawal.
• Another good thing about annuities is that they are currently being offered in many different flavors. Some give you a fixed interest rate, some invest in equity mutual funds, some start paying out immediately, and some accumulate for years before paying out guaranteed income.

As usual, along with these beneficial characteristics, the annuity has some significant disadvantages as well.

• Your savings/investments are NOT accessible prior to the age of 59.5 without a 10% penalty.
• Ordinary income tax is owed on all withdrawals (early or after age 59.5) of annuity earnings but never for recovering your contributions/basis.
• This is a definite disadvantage because even though you put post-tax money in to the annuity, you still will owe income tax on the earnings when you withdraw even during retirement (Note: this is different than the Roth IRA/Roth 401k above).
• Annuities can be complicated and have decreased visibility of their inner-workings.
• Often, you have to deal with sales-people that don’t necessarily have your best interest in mind. 
• Because of this, you’ll likely need to really study up to make sure that the annuity product you are picking out is indeed right for you. 
• Annuities are also complicated because it is difficult to understand how/if a guaranteed return is applied. This is especially true for variable annuities, and it makes all the more reason for the investor to know the right questions to ask before buying. 
• Another thing I don’t like about annuities is that they are not as transparent as a mutual fund. In other words, you cannot simply go on Google Finance and look up the performance of an annuity, I don’t think at least…Because of this, you just have to trust that the information the agent or broker is provided you is correct. This is the same situation of trust/lack of trust with whole life insurance as well. 
• Annuities can have higher fees. 
• Because of the insurance wrapper around an annuity, there is going to be a cost involved. 
• For Vanguard’s annuity products, the cost is between a 0.5-1% expense ratio. While that expense ratio isn’t bad, I wasn’t able to tell if that included the return guarantee. If it didn’t, I was reading something about it possibly costing an extra 2-3% of my holding values each year. Yikes! 

Conclusions and Path-Forward

If you’re fairly confused after reading this, you’re in good company! We’re all human. After writing about all of these products in one post, I became a bit dizzy as well and had to go drink some wine with dinner!

All of these products have so many things in common, yet have so many small things (that could potentially be significant on the money withdrawal side) as differences, that it is indeed hard for people to not be scratching their heads at this point.

In an effort to clear some of my personal confusion and indeed try to place some finality to this post, I’ve listed my brief personal opinions/verdicts/bottom lines/path-forwards for each of these tax-advantaged retirement vehicles below:

1. We must never pass up free money, so the first place that I would commit my money is to fund my 401k to the maximum that is matched by your employer.
2. In focusing on what I would do next, I cannot underestimate the power and flexibility that the Roth IRA allows in that I can access my contributions at any time tax and penalty free. Thus, my second move would be to fully fund my Roth IRA. Since I fully funded my Roth IRA, I cannot contribute to a Traditional IRA, so I don’t have to worry about that option. 
3. If I had more money left to invest during the year, I would at this point need to ask myself the question – “Do I have enough money saved outside of retirement accounts that I can access without penalty for any needs before the age of 59.5?” (I need to work this out – keep an eye out for a post on the way soon!).
4. If I determined that I had enough money accessible in non-retirement accounts, the third thing I would focus on would be fully funding my Self-Employed Roth 401k with Vanguard. I established a Self-Employed 401k back in 2011, but at the time, they didn’t offer a Roth 401k feature. However, I looked again recently, and low and behold, the option was there! Since I am a big fan of paying taxes in the current tax year in exchange for in the future, I would go with this option. If you currently have a Traditional 401k with your employer, I would highly recommend calling HR to see if a Roth 401k option is available.
5. Due to the higher fees and increased complexity, investing in annuities would be something that I would only do if I was completely maxing out all of my other retirement account options (a nice situation to be in!). I do like the guaranteed return that annuities offers, so that might be more valuable as I age. However, if I wanted to stability right now, I could simply invest more in my short-term bond index mutual funds, which even in the turmoil faced in recent years only varies in price by 2% or so. 

Well – that about wraps things up for tax-advantaged retirement accounts!

In an upcoming post, I’ll detail the various non-retirement tax-advantaged vehicle options that investors have on the market these days. Keep an eye out for that – on the way soon!

How about you all? Which of these tax-advantaged retirement accounts is your favorite/do you use the most and why? 

Do you feel you’re possibly using one of them too heavily?

Share your experiences by commenting below!

***Photo courtesy of http://farm5.staticflickr.com/4047/5120304358_72af165e30.jpg

Ways to Shop Smarter and Save Money on Groceries

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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The following is a guest post. Enjoy! 

We’ve all done it at times; shuffled down to the nearest supermarket rather than making a detour to the shop with the best deals. But, with many households still struggling to balance their income and expenditure and food which has risen more quickly than inflation, it’s important to make the right decision when it comes to shopping.

Shop at a Store with the Best Deals

Many people shop at a supermarket simply because it’s the one they have always frequented and probably their parents before them, never questioning whether it really offers value for money. But, taking a closer look at how much things cost can bring home some uncomfortable truths.

In recent months, supermarkets have launched into a fierce price battle in a desperate bid to attract shoppers and steal custom from their rivals. Savvy spenders are taking advantage of the price war and rather than staying loyal to just one shop, regularly switch between stores, depending on the offers and deals available.

Buy Generic When Possible

In addition, you may be one of the many shoppers that prefers to purchase brand name goods only, steering clear of generic own-label supermarket goods. However, in reality, many of these are manufactured by the branded company and simply sold under the supermarket packaging.

Researchers recently carried out a taste test and discovered that in a large proportion of cases, shoppers could not distinguish between branded and own label goods when blindfolded. And in many cases, the own-label goods were actually identified as the preferred brand!

Buy Frozen Foods to Save Money

Another means of cutting back on the price of shopping without skimping on your favorite foods is to consider purchasing frozen goods.

Frozen food is often viewed as substandard in some way and more comparable to convenience meals. However, a recent study by nutritionalists found that even high end items such as prawns contained the same nutritional value whether they were purchased frozen or chilled. With the price of meat being particularly hit by inflation, frozen food is a good way to reduce the cost without having to compromise. In many cases, frozen vegetables are preferable to fresh because the nutrients are sealed in and no degeneration can take place.

Consider Purchasing Items on the Internet

How often have you gone shopping and ended up with a basket load of items that you weren’t planning on buying and don’t really need? If this sounds like you, Internet shopping might be another way of saving some money.

Most supermarkets charge a small fee for delivering your items but offsetting this against the price of the gas you would use and the extra money you would spend, it could still work out cheaper. In addition, for the first few shops you could find that you get it for free as different supermarkets frequently offer to waive the delivery charge for the first order.

The other advantage to home shopping is that you have more time to check out the best bargains without any pressures of time or children playing havoc in the aisles. The first time you shop will take slightly longer but after that your preferences will be saved, making it quick and easy to re-order items. This will give you more time to compare prices between different brands and, potentially, even different shops!

Least We Forget Coupons..

No article on being a more savvy shopper would be complete without a mention of the latest craze: couponing. Shoppers everywhere are saving money by snipping money-off vouchers or special offers from papers and magazines. Some people claim they can save literally hundreds of Dollars per year!

Couponing can be a great way to save some money, but it’s important to keep an eye on what you need to spend in order to get the discount. If, for example, you need to buy 10 cans of dog food to qualify for a free packet of breakfast cereal – and you don’t own a dog – you could end up worse off.

With a bit of careful planning, it is possible to radically cut your shopping bill without having to go on a starvation diet. There are lots of different ways to save money and leave a bit more in your pocket, making household budgeting a little easier and less of a juggling act.

But, if you find that you’re struggling financially each month, you could try and consolidate debts into a lower, more affordable monthly repayment plan and free up a little money each month. To help you work out what solution would suit you best, one financial expert has put together this helpful free debt guide that will tell you everything you need to know about getting out of debt.

How about you all? What methods do you use to save money at the grocery store that work well for you? Have you tried any of the ones mentioned above?

Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

• Personally, I employ a lot of these techniques in my monthly shopping to save money. 
• The most potent method for me is making sure to make my big grocery shopping purchases at the cheapest place around (in my case, this is Wal-Mart). I’ve found that I can literally get about 30% more food for about the same price as I would spend at Kroger, even with my Kroger card discounts.
• Next, I always buy Wal-Mart’s generic Great Value brand whenever possible. As mentioned in the article above, I am pretty sure that these are the same products, just with different packaging than the brand name ones. That saves me a lot of money as well! 
• I don’t buy many of my normal monthly items online. However, my sister is happily using Amazon’s new recurring shipment service where they will automatically put in an order of say toilet paper each month and deliver it to your doorstep for free. Nice right?!
• Regarding coupons, since I mainly shop at Wal-Mart and buy Great Value, I don’t really need to use coupons since the items are already at rock bottom prices. However, if I do buy bigger-ticket items, I usually try to find online coupons or sites that provide me cash back by buying through them as well. 

***Photo courtesy of http://upload.wikimedia.org/wikipedia/commons/7/75/Colourful_shopping_carts.jpg

IberiaBank Visa Gold Cash Back Rewards Card vs. Chase Freedom Visa – Credit Card Boxing Series – Match # 3

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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Let’s face it. Sometimes, reading about personal finance can make for some pretty dry reading. Annual fee this, interest rate that, blah, blah, blah, blah, blah. Zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz. Are you still awake?

So, in an attempt to spice things up a little bit, I decided to start a series on MPFJ called, Credit Card Boxing. In each match, two credit cards (of the same general category of credit card) will be compared side by side in an attempt to determine which reigns supreme over the other. When applicable, the winner from the previous match will advance to compete in the next round.

In this, the 3rd match of the series, we’re again comparing two general purpose credit cards.

In the left corner, we have weighing in at a hefty 5.23 g (weighed in the scale in my lab), my favorite credit card that I use for almost all of my purchases, the Chase Freedom Visa Card. If you missed the first and second MPFJ credit card boxing matches the past two weeks, this card beat out both the new Discover it Card (although it was a close match) and the Barclaycard Rewards MasterCard.  

In the right corner, we have weighing in at a respectable 5.6 g, the IberiaBank Visa Gold Cash Back Rewards Card. I haven’t personally tried out this card yet, so I was curious to learn a little more about it.

Shown below is a screenshot from CreditCards.com (the first place I go for looking up information on credit cards) listing all of the pertinent details for the Chase Freedom Visa Card.

• Chase Freedom Visa Pluses
• There is no annual fee.
• A very nice $100 bonus for signing up.
• 5% cash back in rotating categories every quarter. From personal experience, I can tell you that these categories are actually quite useful. They are not highly specific like with some cards. For example, right now, they are doing 5% cash back for gas stations. I think pretty much anyone can relate to the benefits of getting cash back for gas purchases. They have also done grocery stores in the past, although discount stores like WalMart, Sam’s, and Costco do not qualify for this.
• 1% cash back on all other purchases.
• Chase Freedom Visa Minuses
• Requires excellent credit history, which can be a deal breaker for some folks. 
• 3% transaction fee for all transactions completed in a foreign currency. This can add up quickly if you plan on using this credit card whilst traveling! 

And, shown below is a table listing out all of the pertinent details for the IberiaBank Visa Gold Cash Back Rewards Card. You can also click here to view the card’s Terms and Conditions as well. 

• IberiaBank Visa Gold Cash Back Rewards Card Pluses
• No annual fee – always a nice thing!
• 1% cash back on all purchases.
• IberiaBank Visa Gold Cash Back Rewards Card Minuses
• 2% transaction fee for all transactions completed in a foreign currency (so slightly less than the Chase Freedom Card above).

WHO’S THE WINNER?

Although I honestly wouldn’t be ashamed of having either of these cards, I would have to say that for my money, the clear winner here is the Chase Freedom Visa Card. 

What made me lean towards this one was because Chase Freedom offers higher cash back benefits than the IberiaBank Visa Card (5% vs only 1%). Of course, this does assume that you can qualify for both cards, which might be a little difficult given that Chase Freedom requires pretty good credit history. Thus, the IberiaBank Card might be good to look in to if you find yourself being denied from your first choice cards.  

How about you all? Do you think the Chase Freedom Visa or IberiaBank Visa Gold Cash Back Rewards Card sounds like a better deal?

Do you personally carry either of these cards?

Share your experiences by commenting below!

Are You Making These Silly Money-Wasting Mistakes?

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***Photo courtesy of http://www.flickr.com/photos/59937401@N07/7214443324/

Five Reasons Why DIY Could Backfire on You

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The following is a post by MPFJ staff writer, Kevin Mercadante, who is 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.

In an era of constrained finances, the mantra is now do-it-yourself – or DIY.

I’m going to take a contrary view here and argue in the opposite direction. Here are five reasons why the DIY could backfire on you, and end up costing you even more money:

1. You lack the expertise

Some people are just good at repairs. They can fix just about anything, including things they never fixed before. That is just a gift that some people have, but most don’t. If you are not among the group of people who are blessed to have repair skills, DIY can become a disaster for you.

One of the biggest challenges in fixing anything that’s broken is figuring out exactly what the problem is. If you don’t know what the problem is, you can fix something that isn’t broken without ever repairing what it was that needed to be fixed. Worse, you can get caught in the weeds on a repair problem that will force you to bring in a true expert. Not only will it cost money that you were trying to save, but you’ll also be out the time you put into the attempted repair.

I suppose it is possible to learn a variety of repair skills, but that in itself will take time and could cost money. In addition, learning repair work often comes about by trial and error, which can also cost, both in time and in money.

2. You don’t have the time to fix everything

Anything you try to repair will take time. Whether it’s an auto repair, fixing your furnace, the electricity in your house, or even your toaster, it will take time out of your schedule that might be better used in some other direction.

Also, the amount of time that you will spend on any single repair will be in inverse proportion to your skill level. The less skill you have at any certain repair job, the more time you will spend working on it. This will be bad enough if you already have a tight schedule. But, if you do all of your own repairs, that effort could be the very reason you don’t have more time.

Yet another complication is that if you are accustomed to repairing whatever breaks, you could live in house full of items that are just days away from further breakdowns. Often when something breaks, it’s just the beginning of a series of problems. You could be investing your time doing little more than extending the life of an item by a few weeks or months. That can put you in a cycle of perpetual repair jobs that will leave you with even less time for everything else in life.

3. It could take away from making money

Often times when it comes to DIY, you can save money if you don’t count the time that you put into the project.

Let’s say that it would take an expert repair person one hour to fix a broken contraption, at a cost of $100 to you. Instead you decide to fix it yourself. If you normally earn $25 per hour at your job, and you spend 10 hours trying to do the repair yourself, you will have effectively spent $250 ($25 per hour times 10 hours) “saving money” by doing the repair yourself.

In in absolute sense, it would be cheaper for you to pay repair person $100 instead of doing the job yourself. And yet, this is not always the case. It is not as important a consideration if you don’t have the capability to earn additional income in the time that you might spend on repairs. But if you could earn additional income – from overtime, higher commissions, or more income from self-employment – you have to consider the opportunity cost of a DIY repair.

This could even be a test as to whether or not you do a repair yourself or hire someone else. Ask yourself the question: how much money could I earn in the time that will take to do this repair job?
If the answer to that question is “none”, then the decision is a little bit easier. But if you could be earning money instead of doing the repair job, you’re going to have to figure out which is more profitable to you.

4. It can be disruptive

Because it takes time to do repairs, and more so if you don’t quite have the skills necessary, it can become disruptive. For example, if you try to repair your own car, you’ll be without the use of the vehicle for the length of time it takes you to fix it. Would you be better off bringing the car to the shop where it will be fixed in 2 to 3 hours and back on the road, or doing the work yourself and losing use the car for two or three days?

5. If something goes wrong, it could cost you even more

Finally, we get to the question of what to do if your intended repair doesn’t go quite as well as you hoped? Most of us are pretty good at a few things, but none of us are good at everything. If you take on a repair project and the job takes a turn in the wrong direction, not only will you have lost time and all the efforts you invested, but you will certainly have to bring in a certified expert to fix the problem. That will bring you full circle to the exact situation you were trying to avoid by doing the work yourself.

Any time you attempt a DIY repair, consider your skill level, the time you will invest in the job, the opportunity cost and the potential of what could go wrong if you are not successful in your effort. DIY isn’t the automatic savings route it’s often made out to be, at least not for most people.

How about you all? Do you try to do most repairs yourself? Or do you turn them over to the experts and concentrate on doing what you do best? 

Share your experiences by commenting below!

***Photo courtesy of http://www.flickr.com/photos/christinehawks/776742529/sizes/m/in/photostream/

Festival of Frugality # 378 – March 5th, 2013 Daylight Savings Celebration Edition

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1. John presents You Bought That at WalMart?! posted at Frugal Rules.

2. Peter presents Rising Food Costs Have You Down? Here’s How to Fight Back posted at Bible Money Matters.

3. Miss T. presents Save Money Exercising posted at Prairie Eco Thrifter.

4. Suba presents It’s Going To Be A Big Year For My Family posted at Broke Professionals.

5. John presents If You Are Struggling with Debt, Do Not Get Pets… posted at Married with Debt.

And now, on to the best of the rest! 

Jen presents Saving Money Isn’t Always Easy posted at Master the Art of Saving.

PFC presents The Starter Emergency Fund posted at PF Carny.

Shaun Rosenberg presents 10 Reasons To Give Minimalist Living A Try posted at Shaun Rosenberg.

Mike presents Stop Trading Time for Money posted at The Financial Blogger.

Jeff Rose presents Money Basics: Manage Your Cash Flow posted at Good Financial Cents.

Carrie presents 6 Ways to Give Memorable Gifts Without Going Into Debt posted at PT Money.

Melissa presents Real Life Bartering with Mavis of One Hundred Dollars a Month posted at Free From Broke .

Mike Collins presents Five Reasons You Should Open a Capital One 360 Savings Account Today posted at Wealthy Turtle

Emily presents The Rise of the 15 Year Mortgage posted at One Smart Dollar.

Girl Meets Debt presents Observations of a Former Bank Teller posted at Girl Meets Debt.

Corey presents Clipping Coupons: Is it Worth It? posted at 20s Finances.

Maria presents Stumbles on the way to paying our debt posted at The Money Principle.

Jon the Saver presents Why The Envelope System is Perfect for a Marriage posted at Free Money Wisdom.

A Blinkin presents A Continuation of the Minimum Wage Debate posted at Funancials.

Invest It Wisely presents Romance 101: How to Turn Up the Heat This Valentine’s Day posted at Invest It Wisely.

SFB presents How to Prepare for Life After College posted at Simple Finance Blog.

Amanda L Grossman presents Insights from Our Free Investment Portfolio Check-Up, and How to Get Yours posted at Frugal Confessions.

Tushar presents The Importance of Planning and Saving for the Future posted at Start Investing Money.

Ashley presents Cash Discount for Car Repairs posted at Money Talks Coaching.

Jason presents APY vs APR – Understanding the Difference posted at Work Save Live.

Daniel presents Buy Cheap Wine For Your Friends But Tell Them It Was Expensive posted at Sweating the Big Stuff.

Don presents How Much Does an MBA Really Cost? posted at MoneySmartGuides.

KT presents How to define simple living money saving tips posted at Personal Finance Journey.

Hank presents What To Do Right Now Before You Lose Your Wallet posted at Money Q&A.

Crystal presents Why Freelancing Might Not Be For You posted at Budgeting in the Fun Stuff.

Little House presents The Advantages of Buying Secondhand posted at Little House in the Valley.

Pauline presents About money, time, and doing the right thing posted at Reach Financial Independence.

Lazy Man presents Gas Dryer Savings Are Worth a Big Risk posted at Lazy Man and Money.

***Photo courtesy of http://upload.wikimedia.org/wikipedia/commons/9/9f/Sunset_pier.jpg

How I Got Out of Debt Without a Job

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How about you all? Have you ever had to struggle with paying down large amounts of debt while also dealing with a job loss/switch? What strategies either worked or didn’t work for you?

Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

• Thanks so much for sharing your story with us today, Tony! 
• I’m curious – what sort of interest rate did you get charged on your consolidation loan?
• The decision to go with a consolidation loan can be a tough one because often times, there are underlying debt behavior problems that must also be fixed and there can be large fees charged for the consolidation agencies.
• I’m glad to hear it worked out for you and that you are on a better path now in your freelance career!

***Photo courtesy of http://office.microsoft.com/en-us/images/results.aspx?qu=paying+bills&ex=1#ai:MP900341906|

Should You Use a Real Estate Agent to Sell Your Home?

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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The following is a post by MPFJ staff writer, Kevin Mercadante, who is 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.

With real estate prices down in so many markets, if you’re looking to sell your home, you want to get as much from it as possible.

One of the ways to do this that quickly comes to mind is selling your home without using a real estate agent. After all, real estate agents charge a hefty fee for their services, that could run as high as 6% of the sale price. If you could sell your home without having to pay that fee, that’s more money in your pocket – a lot more!

As much as we might like to see the real estate agent’s fee – and their services – as superficial and unnecessary, the reality is that they perform certain vital services that spare us of the need to do ourselves. Before trying to sell your home yourself, think carefully about how that will impact the sale, and your efforts to make it happen.

What will you give up – and what will you take on – if you choose to go it alone?

You will have to market the home yourself

If you have ever tried to sell a home yourself, then you know how complicated the process can be. Top of the list is marketing the property – nothing will happen unless you are able to master this process.

If you decide to sell the home yourself, you’ll need to place ads in all of the major publications in your area. You may also have to consider advertising on “for sale by owner” websites. You will have to pay for all of these advertisements.

You’ll also have to purchase a “house for sale” yard sign, and print up hundreds of flyers providing photos, specifications, and a sales type description of your home. All of that will take time – and money.

A real estate agent will do all of that for you and you generally will not have to pay for any of it. In addition, the agent will list your property on the local multiple listing service (MLS). By having your property listed on the MLS, it will make it available to every other real estate agent in town so that they can then show it to their buyer prospects. This is a service that you cannot duplicate for yourself. Is also the system by which most homes are sold. You are at a severe disadvantage if your house isn’t listed on the MLS.

You will have to show the home yourself

This will mean you’ll have to make yourself available to show your home anytime anyone wants to see it. In order to do this efficiently, you’ll have to make a point to be home most of the time until the home is sold. You will find out quickly that most of the people who come to see your home will be “lookers”, either having no real interest in buying your home nor the ability to do so if they did. And, some people who call to look at the property just plain don’t show up. That can get old real fast.

There’s a skill involved in showing a property for sale, and unfortunately, most homeowners don’t have it. In fact, a homeowner is probably the worst person to show the property to potential buyers. You’re emotionally involving in the property, tend to see only it’s good points, and of course, anxious to sell it. This can make for a very uncomfortable experience for the people looking at home.

Real estate agents can handle all of this for you as part of the fee that you pay. Not only will they show the home even when you are not around, but they will also pre-qualify buyers to make sure that they have the ability to buy the house. And, since showing and selling homes is their business, they have the skills necessary to show your property in a professional manner.

You will have to handle the negotiations yourself

Whenever you are selling anything, it will help to have a “middleman” to handle the negotiations for you. Real estate agents can negotiate a sales transaction between buyer and seller, and do so in a way that will not only maximize the sales price, but will also avoid uncomfortable exchanges.

Because the purchase of a house involves so much money, emotions can get in the way of the process. Words can be exchanged that could doom the transaction entirely. With a real estate agent in the middle, such comments can be modified and that can keep the process moving forward.

A real estate agent, because he or she is not the owner of the property, will also find it easier to discuss sticky situations – such as repairs and closing costs – with both buyer and seller. Their position in the middle of the transaction could be the difference between a successful sale and one that never goes to contract.

Is that worth saving a 6% Realtor fee

Imagine doing all of that yourself; do you still think that a 6% Realtor fee is too much? 

While many of us that don’t work in the business tend to think of real estate sales as somehow easy, the reality is that it is very difficult and can break down at any point in the process. Since the real estate agent is paid a commission only upon the sale of your property, they have a built-in incentive to keep the deal alive and move it forward. Think of the agent as your partner in the sale of your home.

In today’s competitive real estate market, many real estate agencies are willing to work for less than the standard 6% fee. There are some agencies out there that will charge as little as 1% or 2%, just to put your property on the multiple listing service. You’ll have to handle all of the other aspects of the sales transaction yourself, but being on the MLS is a huge advantage – especially in a tight market.

I’m not a real estate agent, nor is this post an advertisement for Realtors in any way. After being in the mortgage business for many years, I saw a lot of home sellers waste a lot of time and a lot of money trying to handle this themselves. If you really want to sell your home in the least amount of time for most amount of money, a real estate agent is a necessary evil.

How about you all? Have you ever tried to sell your home without using a real estate agent? What would you recommend to anyone who is contemplating it?

Share your experiences by commenting below!

***Photo courtesy of http://www.flickr.com/photos/marciatoddrealtor/5986303280/sizes/o/in/photostream/

How To Save Money When Moving House

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The following article is by MPFJ staff writer, Miss T from Prairie Eco-Thrifter. If you want to learn how to live your dream life in a sustainable, healthy, and money savvy way, check out her site here.

Moving house can be traumatic, tiring, and expensive. Good organization and forward planning can help to make the process easier and simpler, and there are also strategies that can save you money when moving house.

I’ve done it several times, and I’m not sure it’s one of those things that gets easier the more times you do it! However, I have learned a few tricks along the way that might be able to help you cut the costs of moving.

Money-Saving Idea # 1 – Start Early! 

The first thing is to start early. As soon as you know you will be moving, even if you don’t have a moving date yet, start making plans and getting organized. The first decision is who is going to move your household from one address to another? The sooner you start to gather moving quotes, the better chance you have of finding the best deal. Not that the cheapest quote is necessarily the best deal, but if you aren’t rushed into choosing a moving company, you at least will have time to compare quotes and make the right decision.

Make sure all the quotes you get include the same things, so you can make a fair comparison. Remember to factor in insurance; some moving companies include this in their quote, but you have to organize your own with others.

Money-Saving Idea # 2 – Can You Do the Move Yourself With the Help of Friends and Family?

Of course, if you really want to save money when moving house, you should consider moving yourself. Hiring a truck, roping in a few beefy friends, and moving your own stuff will work out much cheaper than hiring a moving company. Take into consideration your fitness and energy levels, the time you have to do the job, and the loyalty of the friends you would ask to help. You won’t save any money if you end up so exhausted you need to take two weeks off work after the move! Check out the prices from several truck hire companies and make sure you ask whether they supply a hydraulic lift with the moving truck. This piece of equipment will save you loads of time and muscle in loading and unloading heavy pieces.

Money-Saving Idea # 3 – Try to Find Free Moving Boxes Before Buying New Expensive Ones

Packing boxes are an essential part of moving house. These can be purchased from a variety of outlets, but they are quite expensive. Look online and in local newspapers for people who have used packing boxes available for sale. These are much cheaper than new boxes, and you could even find someone who is giving them away for free. This will represent a huge cash saving. When you have finished with your boxes, you can pass them on to someone else who is planning to move house. You will need different sizes of boxes to accommodate different types and weights of items. Just remember to pack heavy things, like books, in smaller boxes so you don’t lose the bottom out of a box in the middle of the street – it has happened! 

Note from Jacob: Another good place to look for free boxes (that I have personally used in my 3 moves) is liquor/beer/wine stores. They receive tons of great moving-sized boxes with their products, and always are happy to give them away for free to get rid of them.

Money-Saving Idea # 4 – Don’t Move Unwanted or Broken Household Items

Everything you need to move will cost you to transport it. This is why it is a great idea to get all family members to have a clean-out and de-clutter well before moving day comes around. You can save money by not having to move items that are not needed or are broken. Better to throw them out or give them away now, rather than pay to move them and then throw them out.

Money-Saving Idea # 5 – Pack Each Box Carefully

How you pack the moving boxes also has the potential to save you money; a badly-packed box could end up costing you money if there are breakages and you need to buy replacements. Always pack heavier things at the bottom, lighter things near the top, make sure everything is carefully wrapped in newspaper or tissue and leave no gaps. Use towels and linen as a soft buffer around the sides and top of boxes of fragile things. Anything really precious could perhaps be transported by car, rather than in the truck.

Money-Saving Idea # 6 – Perform the Thorough Move-Out Cleaning Yourself

Many people hire a cleaning company to come in and thoroughly clean their old house after they have moved everything out. This is a great idea, but it is expensive. To save cleaning costs, plan to do it yourself, gradually, over the week or two before your moving date comes around. Start packing in the room that is used the least, such as the guest room or the formal living room. As you pack up the room, move the boxes into the garage and empty the room of as much furniture as possible. Move remaining furniture into the middle of the room so you can wash down walls, windows and closets. If you can completely empty the room, all the better because then you can clean the carpets. When the room has been fully cleaned, close the door and put a sign on the door “Cleaned room; keep out.”

The more cleaning you can get done in the weeks leading up to your moving day, the less you will have to do at the last minute. At least try and get the bulk of the cleaning done so you just need to go over the floors when the house is empty.

Money-Saving Idea # 7 – Avoid Expensive Take-Out Meals on Moving Day

It is also a good idea to plan ahead as far as food for moving day is concerned. Buying take-out is expensive, so you need to think about food that you can prepare ahead of time to feed yourselves and your helpers. Remember, you will need lots of fluids during the day to replenish what will be lost through perspiration doing all that lifting and carrying. We usually have a one-dish meal prepared in advance and frozen so we have dinner ready for us when the day is finally over.

I hope these tips on how to save money when moving house will help you keep the expenses down when you come to be involved in this great adventure.

How about you all? How have you all saved money when you have moved? Have you tried any of these ideas above?

Share your experiences by commenting below!

***Photo courtesy of http://prairieecothrifter.com/wp-content/uploads/2012/11/iStock_000006943487XSmall.jpg

Do Bank Overdrafts or Payday Loans Charge Higher Fees for Short Term "Lending?"

Let’s take a look at this in a little more detail:

For obvious reasons, payday loans are definitely not the type of loan situation you want to find yourself in, especially considering that credit card interest rates, at 20%, are even considered pricey! However, before we pass judgment too far on these, let’s also take a look at how the fees associated with bank/checking account overdrafts compare with this:

What is the Cost of Overdraft Fees for the Same 1 Month Time Period?

According to the CISI study above, main-stream banks charge overdraft fees totaling an APR equivalent of up to 53,099,884%. Talk about expensive! Does that really say 53 million percent?! That’s and outstanding business return!

Because this sounded pretty wild, I also wanted to check this APR reported with US banks to see how it compares. Below is what I discovered:

• According to Bank of America’s overdraft fee section of their website, they charge $35 per overdraft transaction on the first day the overdraft occurs, and then another $35 every 5 days until the overdraft transaction amount is paid off/you have a positive balance.
• Assuming 30 days in 1 month, this means you will be charged a total of $245 ($35 x 7 total charges) for the one month.
• Since these overdraft charges are on a per transaction basis, this means that the lower the value of the item you are using the overdraft to pay for, the higher the representative APR will be.
  • For example, if you had a 1 month overdraft on the 100 GBP / $151 mentioned in the payday loans section above, you would be charged the same $245. This would equate to a $2940 fee on a yearly basis, or an APR of 1,970%.
  • On the other hand, if you had the same one month overdraft on only a smaller $50 purchase, this would equate to an APR of 5880%.
  • As a worse (but maybe not very realistic) case, for a $1 purchase, this would equate to an APR of 294,000%. What this means is that in order to generate the 53 million percent figure mentioned above, they likely figured it using a purchase of only a few cents. Like I said, maybe not totally realistic, but possibly more effective at driving home their point…

What we can conclude from this is that even though there are better ways to pay for unexpected expenses (emergency fund ideally or even a credit card since it has a lower APR), if the single transaction/purchase you are taking the loan out on is quite large (>$200), it is actually cheaper to use bank overdrafts. However, if the balance is smaller, payday loans are technically cheaper.

Another interesting thought I considered while writing this article was potential reasons for why bank overdraft fees don’t really have the same bad reputation that payday loans tend to carry, despite the fact that they have similar APR’s. Perhaps it is because most of the time, when bank overdrafts happen, they are paid off very quickly, and so do not end up costing the full one month of fees modeled here. 

How about you all? Have you ever over-drafted your bank account? If so, how much did it cost you?

Share your experiences by commenting below!

***Photo courtesy of http://farm6.staticflickr.com/5093/5566653522_7edf8846f1_z.jpg