Financial Freak Show

As a follow up to my post I Call a Do-over I wanted to discuss how my goal of a Zero Credit Score and my actions of living with no consumer debts will affect my life in the future. There are two reasons I decided to eliminate my debts and work to live on less than I make.

The first reason is because this simplifies my life greatly in several ways. One I don’t have the stress of debt hanging over me every minute of every day. Second I don’t have many bills to keep track of and pay every month (I currently pay 8 bills each month and half of those are deducted automatically).

The second reason is the big one for me. Taking debts out of the equation means my income is no longer being used to support those debts. Not paying these payments means my income is now free to invest, spend & save. When debt is sucking your income out of your hands as fast (or faster) than you earn it you cripple yourself. You spend your energy and, more importantly, your time trying to climb a mountain you have the weight of payment books trying to drag you back down. You spend your days trying to make money for someone else – I don’t like that feeling.

So by eliminating debt payments you simplify your life and free up energy and cash that can be used towards more productive goals like retirement planning and building wealth. How hard would it be to stash away 15% of your income towards retirement if you had no car payments, credit card payments, or student loan payments? If you don’t believe me calculate your debt to income ratio then swing by the local old people farm and ask them what they would do differently if they had the chance. I’m sure they’ll be more than happy to give you their take on credit cards and car payments.

I was posed a question about using a 401k loan to clean up someone’s financial train wreck. The mess in particular was created by buying a bunch of junk that these people didn’t really have to ability to afford at the time but did have the ability to borrow. Now they’re trying to refinance their home to lower their monthly payments to get a little breathing room. The problem is they’re now a little upside down on the home and the bank wants them to bring some cash to the table before they will allow them to re-fi the house. So they’re considering a 401k loan to make this happen. That is until I laid out to them a little more insight into how these loans work.   

They would be allowed to borrow up to 50% of the vested balance with a maximum of $50,000. That should be okay in their case because they have a balance of near $65,000 and are looking to pull about $28k.

The money in their case would be available at a 6% interest rate. The interest does go back to your account but depending on the market performance this could be a losing deal as far as growth.

The loan sort of turn offs your 401k for a period of time while you work to pay back the balance. Well you don’t turn off the entire 401k but the portion you borrowed is no longer considered part of the balance so no growth will happen to the portion you have taken out of the account.

Here’s the big reason I think 401k loans should be used only as a last resort:

If you leave your company most plans require that the balance be paid back into the account within 60 days. This comes due no matter the circumstances of your departure, if you go “Jerry Maguire” on them and walk out the door with the hot receptionist you’ve got 60 days. If you decide to leave because things get a bit uncomfortable around the office after you’ve been fired, you have 60 days. If you’re unfortunate enough to die, 60 days. If the loan is not repaid within 60 days the remaining balance is considered an early withdrawal and you will have the pleasure of paying income taxes plus a 10% early withdrawal penalty (if you’re under 59-1/2). So for many families you’re looking at a full 30%-40% tax bill due on that money. So if my friends borrow the $28,000 they needed and it blows up in their face they are looking at writing a check for $8,400 to $11,000 conveniently right around the time they lose a job. Talk about crappy timing…oh, and add that to the fact that they had to borrow money so they obviously we’re already in a less than desirable situation before they lost the job! And remeber the IRS doesn’t like to wait around for their money.

So I’m not saying a 401k loan is not an option, in some cases it may be the only option someone has to save a house or avoid a bankruptcy. I just want to throw this out there so everybody knows what road they are heading down before they board the special bus.

What’s your experience with 401k loans? Please share.

It’s pretty easy to pick some goals  then get off your butt and begin working towards them. It’s also just as easy to focus on too many goals at once. In a previous post Take Aim & Kill It I talk about focusing all your financial resources at your smallest debt and working to eliminate it as rapidly as possible. Here I want to talk about why focusing on your debts now is important to reaching those larger goals further in the distance.

A contractor friend once told me this quote:

When you come across an electrical problem and a plumbing problem…don’t try to fix them both at the same time!

In other words don’t try to do too many things at once. I decided I would be better served by focusing on debts now which has allowed me to focus more on financing my retirement and reaching those larger goals. I once heard a story about a apartment maintenance man that bought his employer’s apartment complex with cash and managed to retire with over $3 million in the bank years later (that story could be  total B.S. but I did hear it). Well the story goes like this…He saved his butt off and even though he wasn’t making a ton of money over time he managed to save up enough dough to buy the small apartment complex he worked at and began creating some wealth. That’s pretty much the story. Instead of spending his money he saved his money and as the story goes eventually had enough dough to make a big fat real estate purchase. My guess is this person was a pretty simple dude and probably kept himself out of debt (I don’ see any other way he could really save up a ton of money like this). The obvious advantage though is that he was able to use his income to build something instead of paying for crap he bought in the past + interest.

Even if the story I heard was total B.S. the theory’s still valid. Freeing up your income by clearing your debts will allow you to stash away more money and collect interest instead of paying interest. Do that long enough and large enough and you could eventually turn that stack of money into investments to replace your income and build some wealth.  In my post I Call a Do-over I talk about some other advantages to freeing yourself from your everyday debts. As long as your income keeps going towards interest payments on credit cards and cars its going to be hard to use this money for much of anything else (it’s hard to save it if you don’t really get to keep it). So by wiping out my debts I’m now able to save and invest money much more aggressively because I actually have more available money now. 

I’m a long way from paying cash for my an apartment building but I’m a whole lot closer now that my money stays with me at the end of the month.  Freeing up my income has now given me access to the one tool I need to begin building some wealth, my income. 

If you were able to free yourself up from monthly debt payments what would you do with all that money?

Young people knows how to run fast but old people knows the way   -unknown

A survey of over a of over 1100 people ages 62-75 were posed a retirement question that only they have the experience necessary to answer. No matter how many finance blogs or books you’ve read, and no matter how many classes you’ve taken…nothing you have done to date, unless you‘re retired, will give you the experience and life lessons required to answer the following question:

If you could turn back time how would you have planned differently for retirement?

56% would have started saving earlier  

39% would have allocated more money towards retirement

27% would put money into safer investments

7% would put more into riskier investments

5% would have used a professional advisor

I found the results interesting because the two biggest I shoulda’s were behavior based mistakes and not really what I’d call investment mistakes. The two biggest mulligans they would take had little to nothing to do with investment proficiency and everything to do with the actual task of just getting the retirement savings in place and growing. So I’m thinking no matter what your situation may be right now it’s a good time to get about the business of putting yourself into a position where you can take the advice of these old timers and get things moving for your future. Imagine if you not only were able to run fast but you also knew the way.

So now that you know what the people “living the dream” have to say about their retirement savings what steps are you going to take to heed their advice? Or are you going to look back in a few years and repeat these same survey answers to the next crowd?  

Source: Harris Interactive and Financial Freedom Senior Funding survey of 1,140 seniors age 62-75

This post is a personal “Thank you” to all the folks who decided to pull their money out of the market as soon as the media scared the crap out of them.

Thanks to the action that was taken by so many of you I was able to purchase much more in my investments in the last 12-24 months due to the across the board drop in stock prices. True, my existing investments took a hearty blow to the groin but I figure with my discounted 401k and Roth IRA  contributions over the last 18 months it will more than make up for it over the long haul.

Remember there’s a significant difference between investing in the market and playing the market.

Investing takes a long term approach and over time will likely produce positive results if you’re properly diversified. If you are “playing” the market the results become much less predictable.

Playing the market, without question, sounds a lot more exciting when you’re chatting it up at some cool swanky cocktail party or favorite charity benefits but if you’re in the market to build financial security it’s rarely the best strategy. So if you find yourself caught up in a conversation with somebody flaunting their next (or last) great trade pour yourself another scotch and make a mental note to track this guy down on Facebook in a few years and see how that strategy worked out for him over time.

Many people approach the stock market with no investment strategy so they often go scared turtle, pull their heads in, close their eyes, and wait for the things to return to “normal.” As many of you know a recovering market will often provide the best returns possible. Remember recovering means the market is going back up – that means you make money if it’s invested there – got it? In my opinion if you don’t have a solid long term diversified investment strategy your shooting yourself in the foot and missing the recovery all the while complaining your not making a good return in your money market fund. Don’t follow the normal lemmings over the cliff. Invest like true a FinancialFreak and buy when things go on sale and let your account balances climb with the market over time. 

What’s your long term strategy for the markets? Are you getting investment advice from your broke coworkers and friends or are acting like a Freak and throwing everything you can into the battered discounted market waiting for the upswing?