The Simple Dollar
Over the last two weeks, quite a few readers have passed along a link to Helaine Olen’s article at Salon entitled 401(k)s are a sham: Duped by a DIY retirement dream, the elderly now face staggeringly low living standards and have asked for my thoughts on it. Are 401(k) plans really a scam?
I think the article, like all articles along these lines, makes some good points and some bad points.
First of all, the point I disagreed with the most was that the article completely excuses people from any level of personal responsibility for their retirement. The article is filled with statements like “It was a fraud because to expect people to save up enough money to see themselves through a 20- or 30-year retirement was a dubious proposition in the best of circumstances.”
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Well, I’ve used a 403(b) plan in the past (basically the same thing as a 401(k)) and I’m currently looking at (ideally) 40 years in “retirement” ahead of me. Twenty or thirty years should be pretty straightforward.
Why? For one, I started saving young. I contributed from the first day I was employed after college. For another, I contributed a lot. At the minimum, I always contributed up to the match. I also have a Roth IRA and a Traditional IRA.
I took responsibility for my own retirement and because of that, I’m going to be able to retire on my own terms. I don’t feel that someone else is to blame if people choose not to save in advance for their own retirement. If you’re choosing not to save, that’s your choice, but it doesn’t mean that retirement plans are evil. It just means you’re choosing to spend now in exchange for working later in life.
So, what did I agree with? I agree that many 401(k) plans are fairly unscrupulous when it comes to the fees that they charge. Olen does a great job taking on the specifics of some target retirement funds here: ( Continue… )
Recently, Housing and Urban Development Secretary Shaun Donovan said, “Not everybody is going to be able to get a mortgage or buy a home. We need to recognize that as a country.”
The argument he was making was that lenders simply can’t lend to everyone. People in poor financial shape received loans that they couldn’t afford during the housing bubble and when they weren’t able to pay, the housing bubble burst. Donovan argues that this is a mistake that we shouldn’t repeat.
I agree with him, except that I put it in a personal context.
If you’re not in good enough financial shape to be able to have strong credit and save enough for a down payment, then you’re not in good enough financial shape to be a homeowner with a mortgage and all of the other costs associated with home ownership. A bank should not take a risk in this situation and you should not, either.
Does that mean that the “American dream” of each person being able to own a home is dead? No.
Regardless of the fact that not everyone should receive a home loan right now, the vast majority of Americans (excluding those in truly exceptional circumstances) has the potential to get their finances into good enough shape to be able to handle home ownership. The fact that the road is tough for many does not mean it’s impossible.
( Continue… )
Kelly writes in:
“Sometimes you encourage people to rent instead of buying a home ASAP. This seems like a giant waste of money to me. Renting doesn’t build equity or help with taxes.”
When it comes to housing, I do not believe that either renting or buying living space is the right answer for people all of the time. I know that there are a few zealots on both sides of the coin (and perhaps a few more zealots in favor of homebuying than renting), but neither is an absolute winner.
There are a lot of factors to consider when making housing decisions. Some of those factors favor homebuying. Some favor renting. Some factors depend entirely on the situation you’re currently in as well. Let’s run through some of these factors.
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Rent versus mortgage payments Assuming you’re getting a mortgage that’s worth somewhere around 80% (or more) of your home’s value, it’s likely that your monthly mortgage payment will be significantly higher than what your monthly rent would be in an equivalent home. The exact amounts vary wildly depending on your location, which is one big reason why I can never absolutely be in favor of one side or another.
When you make a mortgage payment, you’re actually paying two separate things: one portion goes toward the interest on your mortgage (which essentially means it disappears), while the other part goes toward paying down the balance of your mortgage. When you pay rent, all of it disappears into the pocket of the landlord. ( Continue… )
One of the most mystifying things that readers write to me about is when they’re living in a very expensive urban area and struggling with a minimum wage job or just above it.
I received a note not long ago from “Jenny,” who lived in San Francisco and made only $22,000 a year. She shared an apartment with three other people and had virtually no money. Her only spending money was money she received as gifts.
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Right now, she could move to Des Moines, work at Starbucks and at Home Depot with the exact same hours, and she’d have several thousand dollars more per year in spending money.
How is that possible? It’s all about the cost of living. ( Continue… )
Frugality is simply a tool to ensure that whatever does come first in your life is well protected and facing a minimal amount of stress.
This is something I often have to remind myself of. I spend a fair amount of my time during the week reading personal finance blogs and other sites, looking for interesting links and ideas and perspectives.
When you spend time browsing through all of these people practicing and talking frugality, it’s really easy to let yourself focus on the nuts and bolts of maximizing every dollar and lose sight of the big picture.
We don’t make meals in advance at home so we can be proud of the $2.50 we saved. We do it as a matter of routine so that we know we’re not overspending on food, which lets us save for that home in the country we dream of.
We don’t browse the community calendar for free activities so we can revel in the fact that we didn’t spend $20 at the movie theater. We do it because it’s fun, it’s a great way to meet people, and the fact that we’re also making sure the entertainment part of our budget stays under control is just a sweet kicker. ( Continue… )
Over the years that I’ve been doing the reader mailbag columns, I’ve received many, many emails from readers. A lot of those readers tell me that they’re in a serious financial bind and that they’re on the verge of being unable to pay their bills or debts. They claim to have stretched every penny they can and they practically beg me for some sort of magical answer to their problems.
What I’ve found is that people in these situations often have huge blind spots when it comes to their spending. Often, they are acting very frugal in some respects, but in two or three areas of their life, they’re spending money in very unnecessary ways.
I often want to send them back a list of questions covering many of the most common spending mistakes people make. After receiving several emails from readers asking what boiled down to this exact same question, I started actually drafting a list of those questions. Then, I realized that those questions would make for a pretty worthwhile article.
Give each of these ten questions a bit of thought. Hopefully, one or two of them might push you toward a new money behavior. The best part? Most of these changes are relatively painless ones. They just save you money.
Are you buying store brand or generic items at the store? Many people simply associate their purchases with the name brand version of that item. A recloseable sandwich bag must be a Ziploc or a bag of flour must be King Arthur. Step back from this and try the store brand. Quite often, they work just as well as the name brand except they cost substantially less. If you’re bothered (for some reason) by the generic packaging, save your old name brand package and fill it with the generic contents when you get home. ( Continue… )
Whenever I happen to look at the salad dressing options at a store, I’m always taken aback by the price. A bottle of the cheap salad dressing is usually at least two bucks. Want something that’s healthier or tastier? You’re paying more than that, without a doubt.
It’s absurd because most salad dressings are made up of a few very simple ingredients. The ones in the store usually include a bunch of extra stuff in them that I don’t even want, like MSG, extra salt, or flavors that I’m not particularly a big fan of. If you make it at home, you can use just the two or three things you actually like to make a killer dressing, leave out all of the junk you don’t want or need, and still enjoy it for a fraction of the price.
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In fact, the only exception to this I can think of is that the salad dressing on the shelf will generally last longer sitting in the fridge than the dressing you make yourself. Preservatives help with that. Even so, if you eat a salad at home a few days a week, you should never have dressings or ingredients go bad.
So, let’s talk about salad dressing. Almost all dressings are based around oil of some kind. I generally just use olive oil as my basic ingredient for all dressings. It works well for everything. Since I use olive oil in many things besides just dressings, I generally buy it in bulk, which gets the price down pretty low. ( Continue… )
It’s a simple question, and one I think about surprisingly often.
Let’s say I could magically roll back the clock to the end of my final year in college. I’m single at the time, but I’m planning on getting married in the next few years. I have a job lined up, but I’m not sure how secure it is. At the same time, I have a pile of student loans that I’m about to face – $40,000 or so – along with a car loan and some credit card debt.
What’s my game plan? What would I do at that point to get myself in the best possible financial shape today?
Here’s exactly what I would do. I believe that most people in financial or professional challenges can draw some useful ideas from what I’m describing here.
First, I would continue to live much as I did in college. That first job out of college is a big raise in money and it’s really tempting to “live a little.” However, “living a little” without a good financial foundation is a pretty big mistake. I’d avoid it like the plague. ( Continue… )
It’s no secret that I’m a big fan of playing board games. A good board game can be played hundreds of times and fill countless evenings with family and friends. A good board game can make you think and make you laugh. A good board game makes a great gift, too, and they can often be found at a pretty nice price if you’re patient and wait for sales.
Readers often write to me with mailbag questions related to boardgames, particularly focusing on how to start a board game night. The first step, of course, is to have a good but straightforward and, ideally, inexpensive game. Here are seven such choices (beyond the many games you can play with an ordinary deck of playing cards, of course).
In Forbidden Island, each player is an explorer of an island, which is represented on the table by a set of double-sided tiles. Hidden on this island are four treasures. Your goal is to find the treasures and get off the island, and each turn you can make a certain number of moves to try to do this. One problem, though: random sections of the island are sinking, so you may have to use your moves to shore up the sinking areas and make sure there’s still paths to the treasure. As time goes on, the island sinks faster and faster.
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The game is cooperative, meaning all players are working together to try to defeat the scenario, and the setup is randomized with different difficulty levels. It has very nice components and comes in a nice tin to boot. This makes a good choice for a couple, a pair of couples, or a small family (up to four adults and children).
$14.99 at Amazon.com
Deductive social game with a mild sci-fi theme
15 minutes to play, 5 to 10 players
Similar, but with a bit more depth/complexity: Battlestar Galactica (both involve hidden roles and a sci-fi theme)
In The Resistance, each player receives a secret card at the beginning of the game. Most of the cards are blue, meaning you’re trying to work together to win the game. A few of them are red, which means you’re trying to secretly undermine the other player’s efforts. The game is played through secret cardplay using a very clever and simple ruleset that allows clever blue players to guarantee mission success and clever red players to undermine the missions. ( Continue… )
All of us have that dream of sitting back and just opening the mailbox to watch the checks come in. It would bewonderful to be in a position where those checks care of all of our day-to-day financial needs, freeing us to use our time in whatever way we saw fit without income as a requirement.
That’s the dream of passive income. Passive income is income received on a regular basis, with very little or no effort required to maintain it.
Obviously, achieving passive income is a tricky thing. From my personal experience, at least one of three things need to occur before passive income can begin to put significant money into your pocket.
The first option is that you need to be lucky. Being in the right place at the right time can sometimes set you up with a great passive income stream.
My favorite example of luck playing a big role in passive income is the story of Ozzie and Dan Silna, who owned a low-rent American Basketball Association franchise in the late 1970s. At that time, ABA franchises were worth about $2 million each, give or take. In 1976, when the NBA and the ABA merged (mostly with the NBA absorbing parts of the ABA), the Silnas agreed to fold their team and not sue the NBA in exchange for 2/7ths of an ordinary franchise’s share of television revenue. Currently, the Silnas each receive an annual check for $14.57 million from the NBA for their revenue share without having to lift a finger. That’s luck – there’s no two ways about it. ( Continue… )