Beating Broke

Personal Finance from the Broke Perspective

Bye, Bye Pension; Your Opinion Needed

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We were recently told that our defined benefits plan was being taken away.  For those that are confused, a defined benefits plan is what is normally called a pension.  For me, I haven’t been around long enough for it to really affect me.  Some, who have been around for a very long time and are nearing retirement, it will mean a rather significant chunk of the money that they thought they would have for retirement will be gone.  To their credit, our employer is doing it the right way.

Rather than just declaring the fund bankrupt, or letting it run until it was bankrupt, they’ve decided to shut it down gracefully.  What that means is that those of us who are vested in the plan will receive a payout of the amount we have vested.  And, as part of that, we need to decide what to do with that money.  We have four options:

  1. Buy an Annuity.  Annuities basically work like this: You give them a lump sum of money, and they agree to pay you a monthly amount back.  The total of the payments is equal to some amount greater than the amount that you gave them.  It’s usually based on current interest rates.
  2. Roll the money into the company 401(k).  I’m already participating in the 401(k), so this would be a logical place to go with it.
  3. Roll the money into an IRA.  Also a logical way to use the money.  Could be rolled over into a Roth IRA as well.  Either way, I have far more control of the money than I would in my 401(k).  Also, I don’t believe I’d have to worry about IRA Contribution Limits if I roll it over.
  4. Take a cash payout.  They’d just write me a check, minus the 10% early withdrawal penalty from the IRS.

I’ve ruled out option 1 as it doesn’t make any sense to do with the interest rates where they are.  Most likely, I’ll be using option 2.  But, I just can’t come to a concrete solution.  If I take option 2, I add a significant amount of money to my 401(k).  More is always better.  But, I have no more control of that money than I do with the current money that’s in there. Wall Street's Cut of Your 401(k) Pie If I take option 3, I still retain the same amount of money in a retirement account, plus I have far more control of where the money is invested than I do in the 401(k).  That’s also the con of this option though.  I’m no investment expert.  I could look to invest in a stocks and shares ISA but as a general rule, most of the investments I’ve made aren’t all that great.  Which means it would have to be limited to EFTs and Mutuals which doesn’t afford that much more control than in the 401(k).  The final option would be to take the money in a check.  The big downside there is that the IRS takes 10% off the top as a penalty.  Then, it’s counted as income which gets taxed as income.  In our tax bracket, that could mean an extra 15% in tax liability.  If it bumps us up into a new bracket, it could mean some of it could be 25% in tax liability.  So, I’d pay an instant (or nearly so) 25-35% if I took a check.  But, that still means I would receive a lump sum of several thousand dollars.  That money could be used to pay off at least one credit card, if not two, and alleviate some of the monthly burden that our debt gives us.

I know that the safest (rightest) answer is to put it into one of the retirement accounts, but having the cash to dump some of our debt would also be very advantageous.

What would you do?  If you were in my situation, would you play it safe and roll the money into your 401(k)?  Would you take the cash and pay something off to reduce your monthly expenses?  Tell me how you would handle this!

photo credit: House Committee on Education and Labor

Affluent Wants vs. Needs

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We already know that a good portion of saving money (both saving in savings accounts and saving on spending) can be determining whether something that we think we need is really a need or not and whether we could really do without that need. The underlying problem there is that as we become more affluent, wants become needs. This isn’t a new problem.

What those wants are has changed, but the problem remains.  In the days of the Roman empire, things like Oranges were considered a luxury.  They didn’t have the ability to transport them as quickly as we can now.  Because they were unable to get them somewhere quickly, they would spoil in all but a few cases.  The elites of the time were affluent enough that they could afford to dedicate a whole team of chariots and riders to move the Oranges from the orchard to their homes as quickly as was possible in the times.  Today, oranges are a bit more commonplace.  And, as such, aren’t nearly the luxury that they were to ancient civilizations.  The same is true for many different commodities.

Without money

And so, we can be said to be equivalent of a Roman elitist.  But, even as we are equal in many ways when we compare our access to certain things, we are not equal in socio-economic standing.  We aren’t elitists.  We’re the modern day equivalent, in that way, of your average, everyday Roman.  Just as the elite Romans had their scarce commodities, the elites of our society have theirs.  Bentleys, Mansions, Lear Jets, and Caviar just to name a few.

One of the hazards of harnessing our personal finances is that we may begin to loosen our own self-made restrictions and some of our wants might become needs.  Sure, a private jet would be nice.  I want a private jet.  I certainly don’t need one, though.  But, what if my prowess with personal finance (stop laughing) causes me to become more wealthy than I could possibly imagine.  As it becomes easier and easier for me to get that jet without breaking the bank, it also becomes easier and easier for that want to morph into a need.

A jet is a bit of an extreme example.  But, apply the same concept to one of the things that you want now.  Here’s a perfect example from my own financial adventures.  About 7 years ago, shortly after my wife and I became engaged, we decided that we needed to move from the apartment we were in and into something that was a little bit more pet friendly.  If you’ve ever tried to have a 100+ pound dog in a one bedroom apartment, you know what I’m talking about.  Initially, we were talking about finding a house to rent that allowed pets.  However, the more we looked at it, the more we discussed buying a house.  We wanted to buy a house.  But, as we looked at houses to rent, we convinced ourselves that we needed a house.  And we bought one.  Now, 7-ish years later, we want to move into a bigger house to make room for our two children and a dog.  We certainly don’t need a bigger house.  But we want one.  As we get a better handle on our finances, it’s very possible that what we want now will become a need if we let it.

I won’t say whether that will be a bad thing or not.  Some would argue that if we don’t truly need the bigger house, we shouldn’t buy it.  Others will say that if we have saved up and can afford it, we should go for it.  That’s not the point of this article though.  What is the point?

Awareness.  One of the most important factors in your personal finance journey will be how aware you are of your situation.  Being aware enough to understand what you can and cannot afford as well as what is and isn’t a need will be a determining factor in where your finances end up when you are ready to retire.  Moreover, being oblivious to your situation isn’t an excuse.  Be responsible for your situation.  Learn how to fix your mistakes.  And become aware of your situation so that you can make educated choices for your financial welfare.

Image Credit: Without money by Toban Black, on Flickr

Even a Little Movement is Better Than None

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Consider this image the inspiration for this post.  It’s one of many daily photos and videos that the folks over at failblog.org post to their site.  If your curious, the fail here is that she’s sitting on a chair over the treadmill.  And at the core, they are right.  Just sitting there, she won’t get any exercise.  If she moves her legs as if she were walking on the treadmill, she might get some, but still very little.  Not nearly as much as she would if she were standing and walking the treadmill.  Or, better yet, if she were running on the treadmill.

But, sometimes, we get too stuck on doing something 100% or not doing it at all.  Instead we should realize that we sometimes have to start at 50% and work our way up.

Don’t get me wrong.  I’m all for giving something your all.  But, if giving something all your resources does more harm than good, you’ve got to know how to scale.  Take this lady in the picture.  She looks a bit on the overweight side.  Likely has problems with her knees.  Likely, she can’t walk long enough on the treadmill to do any good.  So, she sits on a chair and “walks” on the treadmill with just the lower legs.  Eventually, if she sticks to a diet and keeps doing exercise, she might lose enough weight to alleviate the pain in her knees and she can begin to walk on the treadmill.  But, if she were to try and do only that now, she might damage her knees further, or frustrate herself so much with the pain that she quits trying and resigns herself to a scooter chair the rest of her life.

The same thing applies in personal finance.  Each and every one of us would love to pay off all of our debt.  Even better would be to pay it all off all at once.  But we don’t.  Why not?  Wouldn’t that be “giving 100%”?  Sure, but we all have bills.  And most of us like to eat something now and again.  Instead, we give 20% or 30%, or whatever we can afford after we’ve paid our bills and eaten.  We take that little bit and pay it towards our bills.  Eventually, as those bills shrink, we can pay more towards them.  And if we keep on that track, we will eventually pay off all of our debt.  Just like the woman, we find ourselves running on the “debt free treadmill“.

Want to invest?  You’ve gotten good returns on what you’ve already invested.  Why not just sign over your paycheck to your broker and build your portfolio?  The returns are better there than they are in the electric companies bank.  Again, we still have bills and necessities to buy.  We can’t give all 100% of our income to one purpose.  We have to budget, and learn how to be satisfied with giving what we can, even if it isn’t 100%.

Life isn’t a “110%” game.  It’s about striking a balance where the different parts of your life all flourish with what you’ve given them.  Don’t fall into the trap of thinking that you’re not doing it well, or that you’re failing just because you aren’t putting 100% towards it.  Sometimes, even a little movement is better than none.

Image credit: failblog.org