Posts Tagged "fees"

401k Loans : The Good, The Bad, and the Ugly

Posted by jefferson on Apr 4, 2012 in Career Advice, Eliminating Debt | 26 comments

Like many folks working in Corporate America, the lynch pin of my retirement planning involves a company sponsored 401k.  My company matches 5% for the first 4% that I ante up, so I happily contribute that amount and take the free money.   The total amount in my account has swelled to over $40,000,  and as long as the stock market doesn’t totally mess itself and I continue working for this company– that amount should continue to grow steadily.

I also had a 401k at my last company many years ago, and when I switched jobs– I rolled it over into an IRA (which I still have).  However, I took a major hit in the process because I had an outstanding loan against the 401k, and left the job before I had finished making payments.  Of course, my retirement would be in much better shape today had I never taken out that loan.  We used the loan to help us through a really tough financial period, but I was young and didn’t really understand the impact of what we were doing.  In general, taking out loans against your 401k is NOT a good idea.  But it is easy to see why people do it:

The Good:

You don’t have to deal with a bank or get your credit checked when you get a loan against your 401k.  You earned the money in your retirement fund, so you are effectively borrowing money from your future self.   Yes, you do have to pay a low interest rate (usually pretty close to prime), but you are actually paying the interest to yourself.  Most plans let you choose your loan repayment term, and you can extend payments for as many as five years.  Your loan payments will be automatically withdrawn from your paycheck, along with your taxes, insurance premiums, etc.

The Bad:

Taking out a loan against your 401k will cost you money in the long run.   By taking this money out, you lose out on any potential returns on your investment accounts.   Even worse, you certainly lose out on some of the tax benefits of having a 401k in the first place.  Contributions to your 401k are normally made before taxes (that is the whole appeal).  However,  the loan repayments that are automatically deducted from your paycheck are actually made AFTER taxes.  This means that as you make these payments (and the corresponding interest) you are completely  eliminating the tax benefits that you originally received, and more.  I should also mention that most 401k loans also charge a fee for taking out a loan, so this is an additional charge that is taken off the top.

Note: I am going to stop short of saying that you are “double-taxed” here, because you really aren’t.  If you didn’t borrow from your 401k, you certainly wouldn’t find a loan from a bank somewhere else that would allow you to pay with before-tax dollars.

The Ugly:

The true ugliness of 401k loans surrounds the exact situation that happened to me. If you leave a job (willingly or unwillingly) before you finish making payments on your loan, you generally have 60 days to pay the balance, or you will default.  You typically can’t roll a 401k loan over to a new company.  Defaulting on the loan, means that the outstanding balance counts as earned income for this year, and is taxable.  But that isn’t all.  It also means that you are withdrawing the money before you are 59 & 1/2,  which adds another 10% penalty.  Ouch!

Because of the penalties, 401k loans have been known to force people to stay at jobs that they aren’t happy with.  Perhaps that is why most companies are willing to sponsor these loans!

Why Have An Emergency Fund?

Posted by jefferson on Mar 20, 2012 in Eliminating Debt | 14 comments

photo from kayaker1204

In the many years that we spent racking up credit card debt, we never bothered to set up a true emergency fund.  This isn’t to say that we didn’t use savings accounts at all, because we did.  For us, a savings account was just a place to temporarily hold money for a purpose (like a vacation), so that we didn’t spend it all at Target or Home Depot.  If you “hide” money from yourself, with a bigger goal in mind, then you won’t spend it in your normal day-to-day activities.

In the past, I always thought of the term “emergency fund” as describing a hidden and untouchable account with several months worth of living expenses.  The purpose of this account was to be a safety net in case you ever lose your job, and it should never be touched for any other reason.  This certainly is a good reason to set some money aside (especially in this economy), but I now believe that an emergency fund can have a different purpose in mind:

An Emergency Fund is Your Last Line of Defense Against Credit Card Debt

I am sure that you already know that Credit Card Debt is just the worst.  The more debt that you have, the more you have to pay in interest each month.  As your debt balloons, an increasingly large percentage of your budget will have to be funneled into these interest charges, which means that you are having to spend your hard earned money to make the banks richer and richer, instead of spending it on things that you want.  And that isn’t good.

If you are like us, and more than half of American cardholders, then you already have credit card debt and are currently trying to pay it off.  To be successful in this mission, you are going to first and foremost need to avoid adding any more debt to your current totals.  If this sounds easy to you, then you are forgetting some of what pushed you into debt in the first place:

Life *IS* Going To Throw You Curveballs; You Need a Financial Buffer to Help Weather the Storm

Sometimes it seems like everything is expensive.  The dentist tells you that you need your wisdom teeth out: $750.  A tree falls down in your front yard that needs to be cut, hauled away, and replaced: $1000.  Your primary vehicle won’t pass inspection without a new set of tires: $600.  Your water heater breaks down and cannot be repaired:  $500.

These small financial emergencies are just a few of the many unexpected expenses that have popped into our life in the past few years.  I am sure that every one of you, our lovely readers, has a similar list that you have had to deal with.  Because we didn’t have an emergency fund set up to help us in these situations, we reached into our wallet, pulled out the credit card, and added another debt block to the wobbly tower that we were already attempting to keep from tipping over.  If we had been prepared, we could have paid for these items with our emergency fund, thus borrowing the money from ourselves, instead of from Joe Banker, with his nasty interest expenses.

I don’t have any good excuses as for why we never set up an emergency fund in the past.   My impression of the fund as an ivory tower with months worth of  salary made it seem like it was something unattainable.  I wondered how we would ever be able to save that much money, if we were barely making ends’ meet as it was.  But you don’t need that much money in an emergency fund to make it useful.  Having $500 in a savings account somewhere will be enough to keep you from breaking out the credit card in most situations.  Having $1000 should cover you for almost anything.

Put Money Into an Emergency Fund BEFORE You Start Paying Off Your Debt

Having already established the evilness of credit card debt earlier in this post, this advice may seem a little counter-intuitive.   However, you will never succeed in getting out debt if you leave yourself vulnerable to life’s little emergencies.  It may feel a little bit painful to pay the minimum on your credit card bills for a month or two while you buffer your savings account, but it is a key step in the process.  Once you have established your buffer, I recommend instead directing your attention to paying off your credit cards.  Eliminating your credit cards, their interest expenses, and their monthly payments– will make the biggest difference towards improving your financial situation.

Our emergency fund is currently right at $1000, and tied up in a variety of accounts.   At this point, we are all in on paying off our credit card debt, and we are making great progress.  It gives me even more confidence that we can meet our goals, knowing that we are prepared for life’s little emergencies that will undoubtedly come our way.

I Love the Library.. But Suck At It

Posted by jefferson on Feb 22, 2012 in Saving Money | 11 comments

When it comes to places to entertain your family without spending any money, there is no place better than the library. It even gets my vote above the park, which is a  close runner up. The library is available year round,  even when the weather is terrible. Everyone at the family can find something at the library just for them. Want to learn a new hobby or just increase your knowledge on any subject?.. Well the library has non-fiction books on pretty much everything! Want to lose yourself completely in a another world?.. Thousands of fiction classics are available for checkout! Want to find some board books to start teaching your baby the alphabet? They have those too! The library even has DVDs and Audio CDs (some libraries even have video games) for you to check out. And all of this for free! It is easy to see why I love the library so much. But the truth is, I suck miserably at it.

When you check anything out from the library, you have two weeks before you have to return it. If you don’t return the books/movies/whatever on time– you start to incur fees. The fees are charged daily, and a few years ago our local library bumped the late fee from $0.05 per day/per item, to $0.10 per day/per item. This means that if you checked out 20 items, which is not at all unusual for my family, you would get a $2.00 per day fine. Returning your items just one week late would give you a $14.00 charge.

Unfortunately for me, I have had to pay library fees many times. There is really no excuse for it, all it would take is a little bit of organization to prevent this from happening. I use Google Calendar, and sync it up with my Outlook Calendar at work, and have it all available on my Smart Phone wherever I go. It really doesn’t take a whole lot of effort to put a reminder on the calendar for “Library Books Due”, for two weeks after our library visit. But even with that, we still get fees from time to time. There have been a few times that the kids have damaged or lost library books, and we have had to pay to replace them. Many other times, I have just lost track of the due date, and haven’t made it a priority.

In spite of the hundreds of dollars of library fees we have paid in the last ten years, I know that the library has saved us much, much more. My whole family loves to read, and loves books in general. The picture at the top of this post is of a portion of my book collection (feel free to judge me on the books that I have), but I really haven’t bought many books in the past few years. Most of the books that I own, were from the eight times that I  joined QPB (Quality Paperback Club), and from hitting up some used books sales that the library has each year. There is a certain joy that comes in having a copy of your favorite books: you can loan them to friends, offer them to your kids to read, or re-read them yourselves to rediscover why you loved the book in the first place. But if given the choice, I would rather read something new. The feeling that you get when you can’t sleep because you are so excited to see what is on the next page, is one of the best feelings in life. The local library has an endless supply of new books, of course.

We have gotten a lot better in the last six months about keeping our library fees to a minimum. Below are a few techniques that can help library lovers like us, avoid paying late fees:

HOW TO PREVENT LIBRARY LATE FEES

1. Use The Website to Renew Books - Virtually every library system in the country now has a website that you can use to search their catalog, place reserves on books that you want to read, and most importantly- renew your books online. If your Google Calendar starts barking at you (Library Books Due!) because you have reached that two week period, and you are just too busy to make it to the library that day. Just go online and renew your books there! Most libraries will only let you renew a set amount of times, and you cannot renew a book if someone else has placed a reserve. If you take advantage of this, you must remember to update your calendar to speak up again in two weeks, otherwise you may forget your new due date.
2. Don’t Checkout 30 Books At Once – When we go to the library, we usually grab one of the baskets that they have in the front, and let two boys pick out whatever books they want. We want to encourage them to explore whatever interests they have, and to encourage them to read as much as possible. We grab five or six board books for the baby and, and Michelle and I usually get two or three each for ourselves. After all is said and done, we regularly find ourselves with 30 or more books. This is too many books to keep track of, and chances are good that some of them will get misplaced.
3. Print Off a List- When you check out your books at the library, they will often ask if you want a printout of your books. I usually decline, because I know I will just lose the list.  However, it is possible to get the same type of list on the Library’s website. Our usual routine is to print off the list of books before we go to the library, and have the kids round up all of the books on the list. They can check off items on the list as they find them, which makes it easy to see what books are still missing.
4. Use Digital Books Instead (Kindle/Nook/etc)- The family obtained two Kindles this year (one as a gift, one as a contest win), and we have been putting them to good use. The selection isn’t as large as I would like, but they do have 10,000 or so books in our local system available for checkout. The best part about getting digital books is that it isnt possible to get late fees. Once two weeks are up, the book simply disappears from your device. The downside of this is that you cannot renew a book if you aren’t finished with it.