Beating Broke

Your Primary Home is NOT an Investment

April 4, 2012 By Shane Ede 11 Comments

Your primary home is not an investment in the normal sense of the word. Dictionary.com defines Investment thusly*: “the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.” Some of you will argue that you buy your house because it will appreciate in value. But, to fit the definition, you must have bought it specifically for that purpose. And in the case of a primary residence, that isn’t true.

When you bought (or buy) your primary residence, you’re looking for a home. You’re looking for a place to call your own where the money that you spend on it goes towards your ownership of the home. Sure, it may show some returns by way of appreciation of value, but those are locked into the house until you sell. And, truthfully, you probably don’t care about that unless you sell, so if you plan on living in the house (the definition of primary residence) it makes little difference what the house is worth as long as it provides a home for your family.

So, don’t be fooled into looking for a good “investment” when you buy a house. Look for an affordable home that will provide for your shelter needs. When (if) you sell the house, it gets converted into an investment and you will have hopefully made some money, but when you’re looking for a home, pick the one that will fit your needs. Not the one that shows the most potential for return. That’s what second homes and rental properties are for.

*I know that thusly isn’t really a word. I blame it all on Alton Brown.

Photo Credit: svilen001 @ sxc.hu

Invest in Yourself Instead of the Lottery

April 2, 2012 By MelissaB 8 Comments

Last week, the Mega Millions lottery reached an historic high of $640 million. That is more money than most of us can wrap our minds around. In the days leading up to the historic drawing, people everywhere bought tickets, some spending $20 or more on a lottery jackpot they had a 1 in 176 million chance of winning.

Put this in perspective—if you fly on one of the 25 safest airlines (based on safety records), your chances of dying in a plane crash are 1 in 10 million (Yahoo! Voices), which is 17 times greater than your chance of winning this particular lottery. Likewise, according to the National Lightning Safety Institute, your chances of being struck by lightning are 1 in 280,000 (628 times greater than winning the Mega Millions), yet the majority of us don’t expect to be hit by lightning in our lifetime.

In the days leading up to the lottery drawing, when I expressed disbelief that some whose states do not sell Mega Millions tickets traveled out of state and waited up to six hours to buy the tickets, the romantics around me declared, “When you buy lottery tickets, you are buying the chance to dream.” So, basically, lottery ticket buyers know they won’t win, but they pay to “dream.”

I’ll dream for free, thanks.

Even if you do buy the tickets with the hope, the dream, of winning, do you really want to win? Time and time again we hear of those who win millions and watch their lives disintegrate and sometimes tragically end. Business Insider included the tale of 10 lottery winners who won big and lost even more. Consider just a few of the stories:

-Jeffrey Dampier won $20 million in 1996 and he generously helped his family members buy houses and opened a gourmet popcorn restaurant to supply his family members with jobs. Still, in 2005 he was kidnapped and murdered by his sister-in-law and her boyfriend.

-William Post won $16 million in 1988. An old girlfriend sued him for half his winnings, and his brother hired a hit man to kill him. Within a year he was $1 million in debt and filed bankruptcy. He now lives on food stamps and $450 a month.

Unfortunately, these stories are not unique. In addition to the Business Insider post, a quick web search reveals similar posts, “6 Lottery Winners Who Lost It All” and “13 Lottery Winners Who Lost Everything.” In addition, TLC has a show called Lottery Changed My Life. If you watch the show, you know that for the majority of winners, their lives were not changed for the better.

Many of us dream about what we would do with more money. However, the best way to achieve the dream is not through purchasing lottery tickets for a multi-million dollar jackpot that we won’t win (even if you use the worn out argument, “somebody has to win”). Instead, the best way to achieve that dream is through our own lives. Dream about what you can do with your life, how you can improve it, and then set to work doing so. That will get you infinitely further than buying a lottery ticket and paying for the right to dream.

What is the Roth IRA?

March 27, 2012 By Shane Ede 17 Comments

Retirement. Have you thought about that yet? Still think you’re too young to deal with that? Or, just assume that your company 401(k) is enough, so why even worry about anything else? Let me introduce you to the Roth IRA.

IRA is an acronym that stands for (I)ndividual (R)etirement (A)ccount. The Roth part is named after the Senator that sponsored the bill that created the Roth IRA. But, what really matters is that it could be really important to your retirement fund building. So, pay attention to the next few paragraphs. Do it for the retired version of yourself!

Source: goodfinancialcents.com via Jeff on Pinterest

Why is the Roth IRA so important?

Unlike the other versions of the IRA (Traditional, SEP, SIMPLE, Self-Directed), the Roth gets some special treatment when taxes come into play. Instead of being a pre-tax contribution, like a 401(k), or a tax deduction contribution, like other IRAs, the Roth is an after tax contribution. That means that you’ll be taxed on the income before you contribute it to the Roth IRA. That sounds terrible, doesn’t it? It’s not. And here’s why. All of the gains on the account are tax free. What that means is that, if you contribute $5,000 today, and gain $45,000 between now and retirement, you don’t pay any taxes on any of it when you start taking withdrawals. That’s pretty significant.

If you had your money in any of the other retirement accounts, you’d be taxed on the whole $50,000 as you withdraw it. At your then current tax rate. While we can’t know what our current tax rate will be when we retire, we do know that one will exist. Unless you think that your retirement tax rate will be significantly below your current tax rate, you really should consider adding a Roth IRA to your portfolio of retirement accounts.

How should I use a Roth IRA?

Why did I just say “adding a Roth IRA to your portfolio of retirement accounts”? There’s a couple of reasons. The biggest one, though is that the Roth has a contribution limit that is a bit low. As of right now, that limit is $5,000 if you’re under the age of 50, and $6,000 if you’re over the age of 50. Unless you really think you’ll be able to build a retirement nest egg that will be sufficient on $5k a year (hint: you won’t be able to), you’ll need to supplement with other retirement accounts. If you’ve got a 401(k) offered at your employer, use it. At the least, contribute enough to get the maximum match from your company. Once you’ve met the match, use the next $5,000 and put it into a Roth IRA. (I’ve got mine at Sharebuilder, but just about every investment house does Roth accounts.) Once you’ve got the full 5k in your Roth, you and your financial planner can decide what the next best idea is. If you’re happy with your 401(k) and the investments offered in it, you can continue to contribute any further monies into the 401(k). If you don’t like the 401(k), you might consider some other form of retirement account. Maybe a traditional IRA. The traditional doesn’t have the same tax benefit of the Roth. Taxes are still taken out before you contribution, in most cases, and you get a tax deduction based on those contributions. Any withdrawals taken after retirement are also taxed. The contribution limit is the same, however.

How do I structure my retirement?

How your retirement portfolio and where/when of your contributions is very important. There are tax codes to take into account, as well as changes to the way that you contribute. Everyone’s retirement situation is very unique to them. To really get a good handle on all of this, you really should talk to a financial planner who can get a good idea of what your unique situation is, and make suggestions based on that. It will likely cost you a little bit up front, but the difference could be life changing when it comes time to retire. (Check out these great tips on finding a great financial planner)

I’m writing this post as part of the Roth IRA Movement. It’s a great movement, headed up by Jeff Rose of GoodFinancialCents. He recently discovered that many of our youth are under-educated on what the Roth IRA is. He’s gathered well over 100 personal finance bloggers (including Beating Broke) and we’re all posting a Roth IRA post today to try and help with educating on the Roth IRA. You can read all about the movement as well as see a list of all the posts that are/were written as a part of it at Jeff’s Roth IRA Movement post today. You can also see a list of the posts over at RothIRA.com.