401(k) plans: Is my company's default option the best?
401(k) plans expense ratio offered through a reader's job is competitive, but not the best. What are his other options? Question 1 in this week's mailbag deals with how to get the most out of 401(k) plans.
A money changer shows some one-hundred US dollar bills at an exchange booth in Tokyo in this 2010 file photo. According to Hamm, a reader's 401(k) option through his company is sound and competitive, but it's best to do your research and make sure the default option is right for you.
Issei Kato/AP/File
What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. 401(k) expense ratio
2. Grocery shopping idea
3. Home buying books
4. Raising allowance?
5. Consolidating several accounts
6. Compost and time
7. Making your own mayonnaise
8. Car insurance options
9. Crock pot recommendation
10. Challenging career choice
The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.
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There have been a few times in my life where I’ve been very close to a major accident. Memories of those events stick in my head and have made me really wary.
For example, when I was thirteen, I was riding around on an ATV. I flipped the thing on top of me and burnt the side of my leg on a hot part on the underside of the ATV. I was just an inch or two from the accident being much, much worse.
When I was about fifteen, I was pushing a large garden tiller up a rather steep bank and it flipped over. The knob on the gearshift stuck under my pant leg while it was flipping over and caused me to trip and my other pant leg got stuck in the blades. I immediately managed to get it shut off, but it was very, very close to doing disastrous things to my right leg.
I’ve had nightmares about both of these incidents (and a few more) ever since they happened. I suppose it’s my own mind guiding me and reminding me of things to be careful with and things to avoid.
Q1: 401(k) expense ratio
I just started my first “real” job last week, and will be eligible for my company’s 401k 6 months from now. The default option is American Century Livestrong 2055 target date plan (here is where I found my information), and it lists the expense ratio as .45%. I would greatly appreciate your perspective on this option, or if I should see what other options are offered.
For additional background information, the company contributes up to 3% matching, and although I’m unsure what the requirement is to get that match I plan on contributing at least 6% which should bring the total contributions to 9%, plus contributing additional money to my small but already established Roth IRA. I have no debt and have already established an emergency fund, so getting my retirement contributions established is the only real financial concern I have.
- Marcus
That particular fund is solid, but not a top performer. The performance is comparable to other target 2055 funds (like this one at Vanguard), but it’s really hard to get a good sense of the performance over such a short time frame, as both funds have just existed for a little over a year.
The expense ratio is a little high, but it’s not incredibly high. It seems to be on par with other funds from American Century.
Since I’m not sure what other options your 401(k) gives you, I can’t say for certain that this is your best option, but it’s decent and it seems as though it will get the job done. Most 401(k) plans don’t offer the “best” investment options, mostly because they’re restricted to the offerings of certain investment houses. However, the tax benefits of a 401(k) make up for it.
Q2: Grocery shopping idea
My best friend (who lives next door) and I came up with a great plan for solving our impulse buys at the grocery store. We both find ourselves buying silly stuff we don’t need whenever we shop. So we just started giving each other a grocery list on alternating weeks. One week she will take my list and buy everything on it for me and the next week I do the same for her. Once every month or so we resolve any financial difference between the two, which usually ends up just being $10 or $20.
I only have to go grocery shopping once every two weeks and my impulse buys are way, way down. It all works out really well.
- Jenny
This seems like a really good idea, actually. If you have a trusted friend who can follow your grocery list and it’s convenient to swap groceries with them (like a next door neighbor), this can be a great way to keep yourself from too much impulse buying.
Another thing I like about it is it forces you to carefully think about a grocery list, which means you have to plan your meals out for the week and think about it. It will also subtly encourage you to put healthier items on the list, which can only be good for you.
If I lived really close to one of our closest friends, I’d strongly consider this type of system.
Q3: Home buying books
My husband and I are starting to look towards buying our first home in the next 12 – 18 months. We are saving up now and plan to pay entirely in cash. Do you have any home buying books you’d recommend we read to help get us started?
- Alice
When we were looking at homes back in 2007, we read through a lot of home-buying guides. The best one we found, surprisingly enough, was Home Buying for Dummies by Eric Tyson.
Never mind the name. The book was actually a great overview guide for the process of buying a home. It alleviated a lot of our questions with just a couple read-throughs.
The small number of questions we were left with after that book were answered with Google searching and checking with multiple sources.
Q4: Raising allowance?
Up until now, we’ve given our children allowance based on a rate of $0.50 per year old they are, stopping at age 16. It’s worked really well, at least from our perspective.
Our twelve year old daughter – our youngest – has argued with us for the past week that the rate should go upwards. She actually went online to get inflation data and argued that there should be at least a 30% increase in allowance since we started doing this, since the price of things is at least 30% higher than when we started with her oldest sister.
How do you think we should handle this?
- Marcus
For one, kudos to your daughter for thinking about the situation, doing some research on her own, and presenting a case for an allowance raise that’s actually based on information and not based (purely) on wanting things. That takes some initiative and some smarts.
She makes a good point in the sense that the items she would buy would be more expensive than they were ten or fifteen years ago. However, she doesn’t make a good point in the sense that she’s not really going to be buying useful items.
My response as a parent would be to negotiate a compromise to teach her some negotiating skills. I would make a counter-case against her suggestion, actually, so you can dig into the realities of what inflation actually means and how it doesn’t affect all items equally.
I feel that a child exhibiting these skills should see some positive feedback, but she could also learn about negotiation. In your shoes, I’d probably aim for a raise to $0.60 per year (not quite 30%, but an increase), but I’d make her work for it.
Q5: Consolidating several accounts
Right now, I have several bank accounts and credit cards. My main checking account, and my only savings account are with Ally Bank. I also have a second checking account with a local credit union, which is where I also have my car loan. For my credit cards, I have one with Capital One, one with American Express, and one with Chevron/Texaco.
I really don’t like having these many accounts, but the second checking account with the credit union I keep just in case I need to pay my car loan through that account (since the payment is classified as a transfer and it can be done the same day). As for my credit cards, I’d like to get rid of one, but I’m not sure if I should (I pay each one in full every month). My Capital One card has an annual fee and a low credit limit ($1000), but it’s my oldest account so I don’t want to get rid of that one. I like my AmEx and I use that one the most, and my Chevron card I haven’t used in months, but when I got it I was in an area where I passed by several Chevrons, and I also got it to help with my credit score.
Ideally I’d like to get rid of my Chevron card, as it provides absolutely no benefits to me and I don’t even use it anymore, but I’m not sure if I should because I don’t want it to hurt my credit score. It’s not a major network card, so I don’t think that it would hurt my credit score much, if not all, but I’m not 100% sure.
- Drew
Since it’s not your oldest card and you have several other lines of credit, closing the Chevron card will not have a major impact on your credit score.
The only area where your score will be impacted will be a change in your credit ratio, which is the ratio of your credit card balances to your credit limits. Since you’ll be cancelling a card, your total credit limit will go down without adjusting your card balances.
Now, if you’re not regularly carrying a balance on your cards, this is completely a moot point. It only really matters if you carry a significant balance from month to month. If you carry no balance or only a small one that’s just a fraction of that card’s credit limit, go right ahead and cancel the Chevron card.
Q6: Compost and time
It seems to me that making compost isn’t a very efficient use of one’s time. It takes a lot of time to turn your scraps into compost, with all the carrying out of scraps and turning of the compost. It’s also messy. It seems like a pretty silly thing to do with one’s time.
- Jill
I view composting as a hobby. Whenever you look at someone’s hobby with a complete outsider perspective, it often seems like an ineffective use of time.
Look at golfers – they spend hours hitting a ball with a stick so that the ball will go in a little hole, then they do it again and again. Look at people who love to read – they spend hours just sitting in a chair staring at little markings on a page.
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