Our Adventures with a Roth IRA

A little less than a year ago, my wife landed a position with a wealth management department of a large bank.  It took awhile, but finally their compliance department said we could not keep my 15-year-old daughter’s Custodial Roth IRA at its then current custodian.  We would have to move it to their custodian.  So I contact that financial company.

Now we are talking about less than $500 in the account (Time value of money,  little deposits over time will grow into a huge amount!).

The company that her compliance department required me to move the account to cannot accommodate a custodial Roth IRA.  The other part of that broker dealer can, but my daughter’s balance is WELL below their $250K minimum balance requirement.

So I begin to hunt for a bank who can open this account, just sock it away in a money market account IRA until she is 18.  Don’t like missing the potential growth of a mutual  fund investment, but it is what it is.

Well, after having conversations with 6-7 banks, both local and national, not one of them could open this type of account.  One even offered to open the IRA in her name, I could make deposits to it, but NO ONE could make withdrawals or close the account until my daughter reached 18!

Wow.  See, because my daughter is under the age of 18, she cannot sign agreements like an IRA agreement.  So, a custodian (like Dad) is the signer, acting on her behalf, but the custodian has no ownership in the account.  Simple, but beyond the ability of most banks to do.

A Roth IRA can be opened by or for ANYONE with an earned income, even if they are an infant (baby in a commercial?  Just drop that $5K commission check into a custodial Roth IRA earning 8% for the next 60 years and it grows to almost $600,000.00 tax free)!

For the time being, my daughter’s Roth IRA was moved out of the protective umbrella of Roth and into a minor savings account.  She is working one day a week, and we are tossing HALF of her pay into this retirement account.  She won’t even have the maximum (currently $5500) annual investment limit when she turns 18, but starting her out so she lives on half her income can turn her into an early retirement superstar!

Stay tuned!

Roth IRAs, The Whats and Whys Part One

It’s June, and school is out or almost out for the summer.  Our thoughts turn to summer vacations, cold drinks and cooking outdoors. So what better time to talk about Roth IRAs?

Roth IRAs?  In June?  Aren’t Roth IRAs so April 15thy?  Why now?  Now, because NOW is the best, most perfect time to open your own Roth IRA!  Run, don’t walk to open a Roth IRA and here, you can learn the whys and hows of Roth IRAs today!

But wait,wait, wait.  I don’t even want to start talking about Roth IRAs until we cover some quick information about your company’s retirement plan.  If you work for a company (1) and they offer you a retirement plan (2) that you are eligible to participate (3), look here BEFORE dedicating money to a Roth IRA.  See if your company offers some of their money in a match for what you put into it.  If they match, please, please put enough into the company retirement plan to get that FREE MONEY the company match represents.  Enough said.

What’s in a name?  Just what is a Roth IRA?

A Roth IRA  is an Individual Retirement Account that you open yourself and you fund yourself.  It’s different in those ways from your company retirement plan, and it also differs from a Traditional IRA.

Differs how?

With a traditional IRA, you might be able to contribute pre-tax money.  Roth contributions are always after tax.

Traditional IRAs grow tax deferred; if you hold the money within the IRA until you are at least 59 1/2, you won’t pay any taxes until you take money out of the IRA.  Then, any money not taxed going in will be taxed per the tax rates in effect when you use the money.

The Roth IRA, if you hold it until you are 59 1/2 or five years from when you open the account, money taken out is free of federal taxes.  Yes, tax-free!  You see, your money went in after taxes, so that won’t be taxed again, but the growth in your account is not taxed either if you meet the five-year or 59 1/2 rule.

Traditional IRAs have an “end of the ball” bell that rings when you turn 70 1/2.  Two important changes happen at that point.  One, even if you are still working, you can no longer contribute to a traditional IRA.  Worse yet, whether you want the money or not, there is a Required Minimum Distribution rule that comes into play.  Using formulas (not going into them here), the IRS requires you to spend down your IRA until it is exhausted at age 100.  (This rule is also in place for 401K type accounts).

At 70 1/2 with a Roth IRA, neither of these things happen.  You can still contribute earned income to a Roth (as long as your income is not too high) AND THERE IS NO REQUIRED MINIMUM DISTRIBUTION EVER!

Well, I have bored you with this important information long enough.  Look for a Roth IRA Part Two, soon.  Happy Saving!!!!!

Oh, the smiling white guy in the middle of the post is Senator William Roth, the legislative sponsor of the bill creating the Roth IRA.

 

 

 

Using Personal Sinking Funds To Improve Your Financial Situation

No, not this kind of sinking!

This kind of sinking:

     “Sinking funds” are often used by governments and corporations.  What the do, they set aside large sums of money to pay off certain debts and obligations.  But here, we are using the same term and principles on a personal level to help you make a brighter financial future.

     When creating a cash flow plan for the first time, a lot of your money will be going to work on monthly obligations; food, mad money, utility bills, loan payments and so on.  But there are some spending events that are not monthly, and a few are not even yearly, and it is for these events you can use a sinking fund process to great effect.

    Cash Flow Plan items to consider for this process:  Gifts, vacation, car repair, car replacement, house repair.  More you can probably think of.  These events are important, but maybe not too much on your radar because the events are so far away.

    But, if you build your cash flow plan to SINK small amounts into these categories every pay, with time these categories will GROW so that (for example) you will never again sit around the Thanksgiving dinner table wondering how to pay for gifts.  Out come the credit cards and the January bills to follow.

    OK:  Say you want to spend $1,500.00 on gifts this year, and you get paid every two weeks.  Starting with your March Cash Flow Plan, you will transfer to a savings account (or to a cash envelope marked for gifts) $68.19. ($1500 divided by the remaining 22 pay periods.  Come Black Friday, you will have $1,363.80 plus a tiny bit of interest.  Cash to buy gifts, and NO DEBT!

    Throw $90.91 each pay into a car repair Sinking Fund, and be year’s end you will have a car repair budget of $2000, minus maybe one oil change and other repairs.  NO DEBT!

   Look at what you want to spend per year (or per period) and you can use the SInking Funds concept to slowly build yourself enough to fund your dreams with your money and NO DEBT!

   Sinking Funds.  Add this powerful weapon to your financial arsenal today, if you have not already.  Don’t be a slave to the lender!

Our Love of Stuff

Our Love of Stuff

Want a good investment?  In the middle of last year, Moody’s Investment Service wrote a nice article on the growth of the self storage industry. See the article here.  In it, their analyst predicts that this sector is poised for strong growth for the next 3-5 years!

But Financial Literacy Conversations is not looking at this trend as an investment idea.  For investment ideas, go see a financial advisor!  We bring this up to point it out to you as a symptom of a major disease that plagues American households more and more.

We Own Too Much Stuff!

When you have so much stuff that you cannot fit it where you live, and you are willing to pay a fee to keep that stuff, you likely suffer from what the Dave Ramsey folks call Stuffitis!

Read any religious, psychological or improvement book, and you quickly learn that it is not STUFF that makes us and keeps us happy.  We are bombarded with ads everywhere we look and listen (more than 5000-10,000 times a day) that tries to convince us that the previous sentence is balderdash, and sadly, too many Americans have bought into what the ad agencies are selling.

“Buy this!, It will make you popular and attractive!, Buy this, you really need this!”  and on and on it goes, every day of your marketed life.  Break this chain by remembering the only things you need are:

      1.  A roof over your head

     2.  Clothes on your back

     3.  Food on the table

     4.  A way to get from place to place

Within these four physical needs, there is obviously a wide variety of options to meet them.  But none of these options should end up with you putting stuff in a storage unit!

If you live in an apartment, why buy so much stuff that you cannot fit it in what storage they provide?

 When you move, it’s time to get rid of the stuff you cannot take via:  Ebay, Craiglist, FreeCycle, give to family, friends, co-workers, neighbors, donate to charity or take to the dump.

Set your standards that if the stuff doesn’t meet one of these fates, it is something important enough to take along on the move.

Next time you are home (or in your storage locker!), put on a different pair of glasses.  Look at the stuff, and think of these things in two different ways.

  Way 1:  Is this thing a true NEED, or is it a WANT?  And how strong is the want and why is it strong?

  Way 2:  If you can remember, try to recall what you paid for the item and how.  Is this thing accountable for part of your debt?  If that answer is yes, time to get mad at yourself if this item that you wanted bad enough to go into debt to get is sitting in storage!

Planning your  yard sale yet?  (ours is scheduled for May 17th, a neighborhood effort)

Going forward, see if you can see all “stuff” with those different eyeglasses.  And, with the exception of a home, never go into debt to get stuff.

Cure your stuffitis!

Imagine your uncluttered life, not buying stuff, only to put it into storage later.  Imagine (and realize) how NOT BUYING this “stuff” also means that money stays in your hands, available for emergency savings, retirement planning, new car fund or a lot of better jobs than dumping your income into STUFF!

Snowballs and Snowflakes

Snowflakes and Snowballs, Killing Your Debt Forever!

I know this might sound harsh, but debt is dumb, and that is putting it mildly.  When you are planning where every dollar coming into your hands goes each month, the stupidity of payments to others so you could “have it now” or get the “nicer xxx” begins to show pretty quickly.  You’ll see the opportunity cost of that loan or credit card payment that could of gone to your vacation fund, your house repair budget, or maybe even toward your retirement!  Instead, you have to send those funds to lenders.  Dave Ramsey likes to quote a Bible passage that I will paraphrase:  “The borrower is the slave to the lender.”

When you have your first monthly planning meeting after your last debt is done and gone, you might actually feel the chains of debt falling off your back.  The room, and your money future, will appear in a much brighter light.

But how do we get to this point in our financial lives?  First and foremost, the single most important point is for you to STOP BORROWING.  Do not take on ANY future debt (with the exception of a home mortgage).  Starting NOW, save up toward spending goals and ONLY pay YOUR MONEY for the things you need and want.  Never again use money that belongs to banks, finance companies or credit card companies.  This is HARD TO DO, but you need to WAIT TO BUY things until you have the money saved up to pay for the stuff.

Wow, all this information and we have not gotten to snowballs and snowflakes.  Never fear, now that we have built the base of this snow castle by “debt is bad” and “stop digging your hole deeper by borrowing more” we can talk about snowballs and snowflakes.

It’s mid November as I write this, and winter is on the way.  For some of us in the northern part of the world, this time of year can bring the white stuff; snowflakes and snowballs.  But for those of us in debt, with a cashflow plan helping us get out of debt, the terms snowball and snowflake are year round terms.

A debt snowball is a plan and a process to get out of debt quickly, with a lot of smaller wins along the road to becoming debt free.  To put a debt snowball plan together, you put all your debts (except your home mortgage) on a sheet.  List them from lowest balance at the top of the sheet to the highest balance at the bottom.  Also list each account’s minimum payment.  Then, head over to your cash flow plan. Plan in your cash flow plan to pay everyone but the Number 1 debt their minimum payment.  Then, with an intensity of getting out of debt, trim your plan to free up money to begin your debt snowball. Let’s say you are able to clear $100 a month for this job.  Add that $100 to the minimum payment of your smallest debt.  Being the smallest debt, it dies a quick death after a few months.  Without squeezing more money out of your plan, you take the minimum payment from debt #1 and the extra $100, and apply both to the minimum payment on what was debt #2.  And CELEBRATE the kill of debt #1!  It is these small wins that will keep you emotionally “in the game” to keep this plan moving ahead.

A debt snowball plan is not the best way to pay off debt mathematically. Paying off debts by using the interest rate will have you paying a little less interest overall.  But keeping up with your get out of debt plan month in, month out for as long as it takes, the debt snowball process gives faster ‘wins” that provide motivation to keep chugging along that the mathematically correct way does not.

Debt Snowflakes are small (or big) amounts that you throw at your target debt that do not come from your regular income.  You sell some of the stuff that you don’t need, you get an unexpected bonus at work, you used your fun money to buy a lottery ticket and actually won, these are examples of snowflakes that you can pile onto your debt to become debt free that much faster.

When ATTACKING your debt, we mean you should treat your debts as your worst enemy and attack them with everything you can and at every opportunity.  Reduce your food bill, apply the savings to your snowball.  Sell stuff on Ebay, Craiglist or elsewhere online and apply the profits to your debt.  Have a yard sale.  Anything (legal) you can think of, attack and kill your debts with vision and guts!

Snowballs and snowflakes.  You might not like the white stuff that comes out of the sky, but applying debt snowflakes and debt snowballs in your all out war on debt gives you some strong ammunition.  Load your debt killing cash flow plan with these tools and FIRE, FIRE, FIRE!

Up Next:  disturbing facts about debts

Climbing the income ladder, you can do it!

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Climbing the Income Ladder?

Yes, yes you Can!

I was amazed to see a story on Bankrate.com on November 14^th that talked about a Pew Charitable Trusts study that shows a lot of poor people tend to stay that way, generation to generation.  And the article went on to say three factors were the major contributors to those people that were able to break the cycle and move up the income ladder.

The most important factor was a college degree.  Study covered a long period, 1968 through 2009.  During that time, only seven percent of the individuals studied got a college degree, of those seven percent, a whopping 86% of them went on to higher incomes than their parents.

Next factor was dual earner house holds.  Two incomes lifted 84% of the people in the study to greater income than a generation earlier.

For the purposes of this blog, it’s the third factor that might be surprising, but shouldn’t be once you think about it.  The other key factor was home equity or liquid capital.  In other words, families who lived on less than they made and put money away (even a little at a time) and were not mortgaged to the hilt BUILT A BRIGHTER FINANCIAL FUTURE FOR THEMSELVES!

This is exactly what we teach at Financial Literacy Conversations!  Great to see a huge study by the Pew group bear out our methodology so well.  Link to the Bankrate.com story below (I love the paragraph right before the “Rags to Riches….” headline)!

http://www.bankrate.com/financing/wealth/can-you-climb-the-income-ladder/