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Have you ever wondered why we hawk on using a free budget planner, setting up a budget, working towards lower debt, etc.? Well, to answer this question let me give you an observation I made in the park recently.
When I went for a run in the park on one of the nicest spring days of this year, I saw two dog owners walking with their dogs. The one owner was pulled all over the place by a medium sized dog whose breed I could not identify. This owner held tightly on the leash trying to keep the dog in check. I could hardly pass the two of them as I was running by them. (Needless to say I was also a little scared since I was not quite sure how the dog would react to a runner coming up from behind and how well the owner could control the dog.) Not much further the other dog owner was walking leisurely with his golden retriever close to his heel. This owner seemed to enjoy the nice day in the park much more so than the first one did.
The first dog owner reminded me of a person who is not responsible with his or her personal finances. He or she will most likely overspend, that is he or she will spend more each month than the monthly household income. This leads to higher debt and an inability to add money to long-term savings such as a retirement account. I can imagine that such a person will end up worrying about debt and the lack of savings. Tons of questions will haunt him or her. How will I be able to pay back all this debt? How will I live in retirement when I don’t want to work anymore or when I cannot work anymore? Financial problems and worries will dominate the overall wellbeing. Money, or better yet, the lack of it will control that person.
But when you do the opposite of the above scenario, you start out by spending within your means. You will have some money left over each month, you will be able to set aside a few dollars for emergencies, you will not incur debt, and you will be able to save for retirement. In short, you control your money. You are in charge. You enjoy life a lot more just like the second dog owner enjoyed his walk in the park.
setting up a budget is usually the first step to keep a household in good financial order or to get the household into better financial shape. All other benefits like lower debt and growing retirement savings come from controlling household spending. – Now you know why we talk about budgets and spending so much, right?
The House Introduces 401(k) Fee Disclosure Bill - finally. Now let’s hope that the folks in Congress will actually pass the bill. The only reason why a bill like this had not been passed sooner is quite simple. Companies who are involved in the 401(k) business want to make money, and lots of it. And they want to make this money very quietly. My guess is that, until now, these companies had enough influence on Congress and/or the President to prevent any such bill from being introduced and/or from being signed into law.
Why is this bill so important? Well, they charge us all kinds of fees just to hold our money – even as they’re imploring us to save for our own retirements. Now that we have lost lots and lots of money with the declining stock market, people finally realize that we have been paying through our noses for the privilege to save for our own retirement. So, we should know how much saving is actually costing us, but many of us don’t. Let me show you an example how these fees alone make it especially difficult to put money away for retirement.
Let’s say you save $500 every month for 30 years and your average return in that time period is 7.5%. In 30 years you will have a nest egg of about $641,000. Pretty nice, isn’t it? But now let’s assume that you are saving these $500 in your 401k account. Let’s say that the various companies involved in the management of your money charge you a 2% fee. That does not sound like that much, does it? But, guess what! Over 30 years it adds up to a nice chunk of money. After you pay the 2% fees ever year for 30 years, your $500 monthly contributions add up to only $445,000 – you’ve “lost” nearly $200,000! Said another way, it comes to nearly 1/3 less the amount that you would otherwise have had! That money doesn’t just disappear - these $200,000 of lost return on your savings go right into the pockets of the companies who are “helping” you with your 401k savings.
This new bill would not eliminate these fees, but it helps to ensure that you know exactly how much of your 401k is taken out by each company involved in your savings. You can use that information to figure out how much these fees will cost you over the years you save. When you know the fees, you can also make an educated decision about how you could best invest your money. Right now it is very difficult for anyone of us to make such an educated decision because we don’t have full information about how much these companies are grabbing. Now do you still wonder why such a bill has not been introduced earlier?
If you’re thinking that this is the kind of information you’d find useful, I suggest you write to your Congressman/Congresswoman and to your Senator to make sure that this bill gets passed.
We all know that today, April 15th, is the deadline to file our tax returns. That day also brings out a lot of resentment in people who don’t like paying taxes. There are even annual demonstrations against the income tax. I am sorry, but I do not share this aversion to the income tax. Sure, I would not mind if I did not have to pay taxes, but in the end I pay taxes happily for a number of reasons. Let me list the most important here.
1. My taxes pay for things that I could not or would not want to afford as an individual. I would not want to be responsible for the roads that lead from my house to my place of work. I would not want to employ my own security force to keep me safe from possible attackers. I would not want to maintain a large enough property to serve as my park. As you can imagine, this list goes on and on. I am much happier that I am paying some money into a pot that collects money from all of us and that pays for services that I cannot provide myself or would not want to provide myself.
2. My household income is high enough that I have to pay a nice chunk of taxes. I would not want to belong to the poorer groups of society who are exempt from taxes or pay very little because they barely scrape by in life.
3. There are members of our society who cannot get by on their own for one reason or another, and I’m happy and even quite proud to say that part of my income helps them to survive with a little dignity. Let’s use an analogy that I hope is not offensive, but bear with me a bit. Taller people make more money on average than not so tall people. (If you don’t like using height as an example, substitute it with your choice of sex, race, body weight, or any number of other factors that have a positive correlation with income.) One’s height is not really one’s own doing. We are pretty much born with the likelihood to grow to a certain height (the average of our parents’ height, say). We may be able to improve on our endowment a little bit with proper nutrition and such, but for the most part our obtainable height is set when we are born. Now, if I am lucky enough to be one of the tall people and if I do indeed make more money as a result of my height, why would I not want to share a little with people who are not born with the same endowment and who need a little help getting by? Analogy complete. Instead of griping about the taxes I am paying that get redistributed by the government to the less fortunate, I count myself blessed that I am not one of the people who need help getting by. I am privileged enough that I can do it all by myself. I can feel very proud of that – and lucky. What is so bad about that?
If you have any other good reasons to be glad about taxes that you wish to add to this list, please let me know!
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In the area where we live spring has arrived. The crocuses and daffodils are in full bloom. The tulips are coming through. The grass is getting greener.
When we look out of our bedroom window we see trees budding now. Soon we will have full green foliage in front of that window that will change to bright yellow in the fall. This is one of the reasons why we love our home. It is not the biggest in the neighborhood, but it is not the smallest, either. It is just our home and we enjoy it.
While our house gives us lots of pleasure, it also gives us some headaches. The work we have done in a few years of ownership seems almost endless. We needed to fix the chimney, reinforce the foundation to control basement leaks, replace the roof, paint the house, get a new driveway and walkways, and so on. And this is just a short list of the maintenance we had to do. Never mind the upgrades.
The other headache is the state of the housing market. We are also fortunate enough that we have a good equity cushion in our house, but if prices drop way below trend (that is below the prices of 1996), we may end up owing more on the house than it is worth. That would not be good.
The bottom line of all this is that we view our house not so much as an investment but more as a home. This is where we live, this is where our little children grow up, and this is where we feel comfortable and happy. Isn’t this exactly how it used to be? A house was a family’s home. It often was also a source of wealth but mostly because the mortgage was being paid off and not refinanced. People did not used to refinance their homes over and over, they did not take out “equity,” and instead they dutifully paid off the mortgage on their home. At the end of the mortgage, they owned their homes free of any debt. That was the source of wealth.
We do hope that others will join us in going back to “housing basics” and that we will all look at our houses as homes again. This will make us all more responsible with the way we treat our home. We will be careful not to lose our homes and we will not engage in crazy house financing schemes that banks were all too willing to push on many of us in years past. We hope that this is the most important lesson that follows from the mess in which the housing market is right now.
This is our weekly roundup, where we share some interesting posts written by personal finance bloggers we follow. As always, when we list a post in this roundup we stick with our favorite themes: setting up a budget, household expenses, lower debt, and general personal finance topics that can aid in reaching financial goals. We hope that you enjoy the insights of these blog posts!
Lower Debt
New Rule: Pay Only The Minimum On Your Credit Cards. - This post informs us that Suze Orman apparently also has caught on to the fact that paying off debt and diminishing one’s cash position may not be the best thing to do these days.
Life Insurance
How (and Why) to Buy Life Insurance - Nora wrote a basic guide to life insurance: it covers the two main types of life insurance policies (term and whole-life), the reasons why you should get life insurance, the right amount of coverage, and gives us a way to actually buy a life insurance policy.
Investing
When Your Broker Account Has Problems - This post sheds another light on a technical problem a prominent online brokerage encountered on April 1st. It also tries to answer the question whether it is still okay to open up or maintain an account with that brokerage.
Not Just Another Recession - How This Economic Crisis Stacks Up - Philip of Weakonomics compares the current state of the US economy with how things were in 1920, the start of the decade that ended with the Great Depression. He also gives us hope that we are in a better position now since we have additional tools and institutions that did not exist 80 years ago. (We are also hopeful that the US leadership is as good as we can hope for. For one, Bernanke’s area of expertise is the Great Depression. He is most likely to know what went wrong then and what we can do differently now.)
Unemployment Numbers - If you ever wonder what the unemployment numbers actually measure, read this post. It explains the different types of measures.
Miscellaneous
Finding Balance Between Time and Money - This post points out that there is more to life and happiness than money - like time spent with others. We like this kind of post because it reflects the theme of our own blog, that is, money is simply a means to another end.
Talk to Others About Financial Decisions - Jim of Bargaineering - gives us the very good advice to discuss financial decisions with others. This forces us to delay our decision a little bit, which may prevent us from doing something rash and stupid.
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