Family Is Key to Personal Finance Success

It is fair to say my family and I wouldn’t be where we are today if it weren’t for my wife. In fact, that’s a gross understatement. My wife is the reason we turned it all around shortly after we were married.

I firmly believe family is the key to personal finance success. You can carefully plan your 401(k) allocation; you can be frugal all day long; you can pay down credit card debt. If your family isn’t behind your efforts and 100% onboard, you’ll be wasting your time.

Our Story

My personal finance journey is going to sound familiar to a lot of people, so I’ll keep it short. I graduated college with several thousand dollars of student loan debt and several thousand dollars of credit card debt. Mine was a somewhat different situation after graduation than most. I was commissioned as an officer in the army, so I went to training for six months. During that time, I literally ate out every meal (we lived in dorms basically). I saved nothing. I paid the $15 minimum on my credit card debt.

Then I met my wife. We married not long after and she did something amazing. She got me on the right financial path. She did it with a simple action.

She insisted we save something every month.

We were still hurting because she was still in college. We were going further into student loan debt and trying to dig out of credit card debt. But we saved $100 per paycheck religiously. That simple act changed it all for me.

To make a long story short, we’re now debt-free (other than our mortgage) and save and invest every month.

The Family Factor

Had my wife (my family at the time) not been with me, we simply could not have recovered from the hole I’d dug us. We put vacation pay, bonuses, and gifts toward becoming debt-free. We budgeted. Our entertainment was inexpensive or free. We drove crappy cars.

And we did it together.

Today we make decisions together (and argue along the way sometimes) and once the decision is made – we’re in it together. Having everyone pull in one direction makes progress possible. Family behind you is the key ingredient to financial success.

How to Deal With a 401(k) Plan That Sucks

Most of the time when you read about 401(k)s, it’s something like, “contribute at least up to the company match,” or, “don’t put too much in company stock.” But what do you do when your company’s 401(k) sucks?

Problem: Your company doesn’t offer a match.

Solution: Contribute as much as you can to a Roth IRA, then contribute to your 401(k).

I recommend maxing out a Roth IRA before contributing to a Traditional 401(k). The reason is that Roths are funded on an after-tax basis, but you withdraw the money at retirement tax free. I believe most people will be paying more taxes in the future, so a Roth is usually the best solution.

I also recommend contributing to a Roth IRA even if your plan offers a Roth 401(k). The reason is because you can always withdraw your contribution to a Roth IRA without penalty before retirement if disaster strikes and you needthe money.

After you max out the Roth IRA, go back to your 401(k) plan. A 401(k) has great tax benefits. It reduces your current taxable income. Your contributions compound tax-deferred or tax-free, depending on with type you use (Traditional or Roth). It’s also an easy, automatic way to save for retirement. A company match is nice, but it’s not the best reason to use a 401(k) to save for retirement.

Problem: Most or all of the funds offered in your plan suck.

Solution: Figure out just how bad the funds are and decide if saving outside a 401(k) makes more sense.

Great, so how do you do that?

I’d consider a fund ‘bad’ if it has higher-than-average fees for its type and middling or below returns compared to its peers over many different time periods. If just some of the funds in your plan fit that description, invest instead in the ones that are good, even if it means overweighting your asset allocation. That is, if you’re offered a good stock fund in your plan, but no good bond funds, go ahead and invest in the stock fund. Outside your 401(k), say in an IRA, you can overweight bonds to compensate.

If truly all of the funds are bad, you have to consider not contributing to the 401(k) at all. Before you do, though, consider any employer match. If you’re offered a match, you’re almost certainly better off contributing to the match maximum and investing in bad funds. That’s because the immediate 50% or 25% return a company match gives you counteracts the general suckiness of the fund you invest in. For example, if you’re offered a 50% match on contributions up to 6%, go ahead and contribute the 6%. Even if your fund returns -20%, you’re still netting a positive 30% return – great by any standard.

So what if you have the worst situation of all – the funds suck and there’s no company match? In that case, there’s a very good chance you’d be better off not contributing to the 401(k) at all. Instead, invest in an IRA. I recommend a Roth IRA, but Traditional is good, too. That way, you can choose any fund you want.

Problem: Your match is in company stock and the stock is going nowhere.

Solution: Sell your company stock as soon as you can.

In 2006, Congress passed the Pension Reform Act that allows 401(k) participants to sell company matching stock. For stock given before the law was passed, you can sell 1/3 of the total each year over three years. For future matches, you can sell immediately. I advocate selling matching stock as soon as you can anyway, but this is especially true if the stock is declining or flat.

Personal Savings – China v. U.S.

The personal savings rate is one of those topics that comes up occasionally in the media that always stokes discussion. The U.S. personal savings rate has hovered around 0% for several years now. There’s a lot of argument about what, exactly, that means.

Some people argue that the calculation of the savings rate is flawed. It doesn’t count the capital gain on assets, for example. So someone who sells shares in their mutual fund and spends the money has a ‘negative savings rate.’ Others say the number actually understates the lack of saving in the U.S.


I’ll leave those arguments to others. Frankly, I don’t much care about the details. The plain fact is, Americans are selling assets and taking on debt to finance their lifestyle. We just don’t save enough as individuals or a nation.

Americans’ attitudes about saving are markedly different than that of people in other countries. Check out this quote from the Christian Science Monitor:

Mr. Xu, who pulls in $266 a month – below Beijing’s $400 average – is typical. He socks away one-fourth of his pay packet, as does Chen Ping, his girlfriend, who makes a similar wage as a store assistant. Asked if he isn’t tempted to save less and spend more, he shakes his head.

“If we enjoy life now, what about the future? We need to think of our future,” he says.

The rising cost of living is one reason why many here are reluctant to splurge in fancy malls. Unlike US consumers, many of whom use credit liberally, Chinese workers opt to save, knowing that a feeble welfare system is unlikely to provide for them.

This guy, a mechanic, saves 25% of his salary. Twenty-five percent! Can you imagine what an American would say to the suggestion that he or she save 25% of his or her income?

I also thought the last part of the quote was telling. Chinese workers, assuming their welfare system won’t be in place when they need it, are saving like crazy. U.S. workers, who also widely believe Social Security will not be there for them, seem to be crossing their fingers and hoping for the best while they go about their consumerist ways.

I’m not saying the Chinese have it all figured out. But it seems clear to me that America is facing trouble ahead if it doesn’t start saving and investing more.

Homeowners Insurance – 5 Things to Check in 5 Minutes

Looking over my homeowners insurance policy isn’t something I relish. It’s not that it’s hard, it’s just that it’s one of those checklist kind of tasks you should probably do regularly but hardly ever do. But after reading a Wall Street Journal article this morning about how some insurance companies are switching customers from a standard dollar amount deductible to a percentage of home value, I thought I’d better check mine.

Without rehashing the entire article, the issue was born of the recent hurricanes in the southern U.S. and wind damage in the Northeast. Usually, the deductible on your home insurance is a flat amount, say $1,000. With these changes (and not all insurers are doing this), the deductible is a percentage of the insured home value. Of course, this change is disclosed but buried in the packet people receive each year from the insurer. JLP over at AllFinancialMatters actually read his, though, and caught the fact that he has one of these for wind damage.

So without further ado, here is the list of 5 things to check in your homeowners insurance.

  1. Check your deductibles. Make sure you know what the deductibles are for the various coverages you have. The higher the deductible, the lower your yearly premium. And understand what it means to have a percentage listed instead of a dollar amount.
  2. Make sure you have adequate coverage for the dwelling. It’s important that your coverage increase through the years along with the value of your house. Some insurers (like mine, USAA) do this automatically each years; others do not. Make sure you’d be able to rebuild your home with the amount of coverage you have. I’m not saying you have to be a contractor, but make an educated estimate based on recent new home sales in your area. Also make sure you’re not over-insured. You don’t need insurance on the full price that you’d get if you sold your home. That price includes land, which obviously won’t burn down (unless you live in Centralia, PA).
  3. Check your personal possessions coverage. Is this number enough to replace your stuff? Do you have replacement coverage or actual cash value coverage. The first will fully pay to replace your TV, even if it’s 10 years old. The latter will only give you the $25 it’s worth.
  4. Do you have ‘loss of occupancy’ or similar coverage? In the event you can’t live in the house, will insurance pay to put you up somewhere? For how long? Is there a dollar cap?
  5. Ensure you have appropriate riders. Homeowners insurance covers very little in the way of jewelry and electronics. So it’s likely only a small portion of your engagement ring would be covered, for example.

Do a quick audit of your homeowners insurance. It took me all of five minutes online for ours. And it gave me piece of mind that I’m not one of the people who has a percentage of value deductible.

Goosing Emergency Fund Earnings

I got a question about emergency funds I’d like to address:

“With rates on savings accounts like Emigrant and ING dropping, where’s a good place to put my emergency fund? I hate seeing my money sit around doing nothing. Thanks.”

My answer to this is simple. An emergency fund is not for making money. Achieving the optimal return on your money is NOT your goal. Having a stack of bills to use in an emergency is.

Putting your emergency fund in a savings account or equivalent achieves the three things an emergency fund is supposed to achieve:

  1. It keeps your money readily available
  2. It keeps the value of your money constant over time
  3. It keeps your money safe

Your emergency fund is not supposed to do anything else, including add to your net worth. Looking for another quarter point in interest should not be your goal. Having the money you need, when you need it, should. Do not make the mistake of losing sight of the objective of an emergency fund.

My first-line emergency fund sits in a money market earning barely over inflation. And that’s just where it will stay.

Getting Student Loans Cancelled

It is possible to get student loan debt cancelled. You read that right, some people can get student loan debt completely forgiven. Mostly the benefit is for teachers, so if that’s not you or someone you know, this program isn’t likely to help. (Unless you’re dead, which is another way. Really.)

Who’s Eligible

Teachers who have borrowed money directly from the government through the Perkins or Direct Loan programs and who teach in low-income schools and/or certain high-demand subjects are eligible for the program. The complete details are on the Department of Education student loan website, but here is the basic run-down.

DoE maintains a database (a surprisingly hard-to-find database) of low-income schools. If you teach full time at one of these schools, you may be eligible to apply to the program. States also submit their lists of subject shortage areas compiled here. If you teach one of these subjects in one of these states, you’re also eligible. The lists are surprisingly wide-ranging – math and science teachers are listed for many states.

How it works

The two loan programs have slightly different rules for applying.

For the Perkins loan, you request the forms directly from the college that holds your loan. You then provide documentation to show your qualifying status. It is a school decision as to whether someone qualifies for student loan cancellation. The decision cannot be appealed to the Department of Education.

Student loan cancellation through the Perkins program is on this schedule:

15% debt cancellation for years one and two of full-time teaching
20% debt cancellation for years three and four
30% debt cancellation for the final year

The Direct loan program is a bit different. You apply to the lender or servicing agency instead of the college you attended. The form you use is here. Your employing school certifies your status. Another key difference with the Direct loan program is you apply after you complete five years of teaching service. An important caveat, though, is that one of the teaching years must have been in the 1997-1998 school year. Most teachers can get $5,000 of student loan debt cancelled. Special Education teachers can get a whopping $17,500 forgiven.

There are lots of important details I’ve left out. You should consult the Department of Education student loan cancellation website for details before doing anything. For those who qualify, these are great programs.

Get Free Money – Use Your ESPP

One of the most awesome employment benefits you can have is an Employee Stock Purchase Plan. Most of the time, contributing to them is the equivalent of getting free money. Most of these plans give you a discount on the price and many have a look-back provision that makes them even sweeter. Buy one day. Sell the next. Make 15%.

ESPP Basics

Employee Stock Purchase Plans are programs that allow employees to buy stock in the company they work for, usually at a discount. They all have their own rules set by the company, but there are usually commonalities among them:

  • Provide for a discount on the price. The discount will vary, but 15% is not uncommon.
  • Have a look-back provision. A look-back sets the your purchase price at either the day the purchase cycle ends or the day it began, whichever is lower. In other words, if your plan runs every six months, you’ll buy at the lower of the January 2nd price or the June 30th price.
  • No restrictions on how long shares must be held. This one is key. Ideally, you can sell the next day. Sometimes the transaction takes a few days. Worst case, you have to wait for several months.

Take the money and run

Here’s how the free money works. It’s too simple. As soon after your program buys shares for you as you’re permitted to, sell them. At minimum, you make an immediate 15% (or whatever your discount is) profit. It could be even better using a look-back provision. In that case, it’s possible your discount (and hence, profit) would be even higher.

What I’m advocating is derisively called ‘flipping.’ Some people say it’s an abuse of the system. To which I have two things to say.

  1. They set up the rules. I’m just playing by them.
  2. Do you really expect me to keep an inordinate amount of a single stock, in the company I work for no less, in my investment portfolio? That breaks, like, rule number one of investing.

Our experience

My wife worked for a company that had an ESPP. The discount was 15% and it had a look-back provision. We took a slightly different tack than what I’m advocating here, simply for tax reasons. We waited until we’d held the stock for a year to take advantage of long-term capital gains tax. Though in retrospect, it probably didn’t make any difference because of our taxable income.

The beauty part is that, because the money for the ESPP came directly out of her paycheck, we never even missed the money. So every six months was another windfall. If I remember right, we used the bulk of it to pay for her MBA program.

Bottom line, if you have an ESPP available to you and you don’t participate, I think you’re a turning down free money. And turning down free money is dumb.

Financial records – what to keep, what to toss

The other day I was filing away my paystub and saw all my financial files. It got me thinking about how I haven’t gone through them in a while and if I should redo anything. I started reviewing in my head what financial records to keep and for how long and what to just toss. Here’s what I came up with.

  • Tax returns and forms. Bottom line: Keep for seven years. I’ve always heard to keep them for seven years. I knew that you can be audited any time if the IRS suspects fraud. I looked it up and in addition to that, the IRS has six years to audit you if it believes you underreported your income by 25% or more. My question is, if underreporting your income by 25% or more isn’t fraud, what is? You know somewhere in the 44,000 pages of tax code is an actual definition. Finally, a traditional audit happens within three years. That’s the period of time during which you can amend a return, by the way. I’ve had to file an amended return, so I can vouch that keeping your return can be important.
  • Property records. Bottom line: Keep until you sell the property.
  • Canceled checks. Bottom line: What canceled checks? I don’t think most banks have returned canceled checks since the 80s. In a bit of coolness, my bank shows the check on my online account statement as a link you can click to see the scanned image. I write checks so infrequently that I often don’t remember why I wrote one. With one click I can see my contribution to Save the Whales.
  • Receipts. Bottom line: Depends. With the vast majority of receipts, I keep them only until I put them in Quicken. The only exception is for clothing we haven’t already ripped the tags off of and car parts I haven’t installed yet or something like an appliance. In another bit of coolness, at Target (where we shop quite a bit), you can just give them your credit/debit card and they can look up the purchase without a receipt. I’m sure other retailers do this, too. Oh, yeah, keep tax related receipts of course.
  • 401(k) and IRA statements. Bottom line: Keep quarterlies until yearly arrives; keep yearly forever. When I receive the year-end statement, I toss the quarterly statements. I keep the yearly statements until I roll-over the account.
  • Brokerage/Mutual fund statements. Bottom line: Keep forever. You need to know when you bought a security and how much you paid for tax purposes when you sell. For quarterly/yearly statements, I use the same schedule as 401(k)s above.
  • Credit card statements. Bottom line: Pay and shred. The exception might be if you suspect the possibility of challenging a charge.
  • Paystubs. Bottom line: Keep until you get your W-2 then shred.

All this talk about shredding makes me want to grab my board. Just kidding. I’m a total nerd and have never skated in my life.

These are just my personal guidelines for recordkeeping. I don’t know what, if any, official rules exist but I’d like to hear other peoples’ ideas.

Deal With Insurance After a Car Accident Like a Pro

About a year ago, my wife was hit from behind and her car was ultimately declared a total loss. She was not seriously injured, thankfully. We did learn from the experience, though, and I’d like to share some of those lessons here. (We also later learned how not to buy a car)

I hope you never have to use this list.

1. Go to a hospital if you suspect any injury, no matter how slight. Except in the case of very low-speed collisions, you will certainly feel sore in the back and neck the next day. So there’s very little reason not to go to a hospital and get checked out.

2. Get a police report. This might seem a no-brainer, but insist that the police write up the accident. Sometimes they’ll be unenthusiastic about doing so. Make them do it anyway.

3. If at all possible, get phone numbers from witnesses. This is absolutely critical. In an accident, you must assume the other driver will give a version of events that puts them in the best possible light. People will often lie about the circumstances of the accident. I know. It happened to me. A woman drove into the side of my car on the beltway in broad daylight and told her insurance company it was my fault. Naturally, any insurance company is going to side with their client – they have a financial interest in doing so.

4. Take pictures. With the ubiquity of cell phone cameras, it’s pretty easy to take pictures of the scene and both cars. It takes a more than a little presence of mind, though, so if you don’t remember, don’t worry about it.

5. Call your insurance company as soon as possible. It’s important to immediately make a statement about the accident to your insurance company. You do not want them to hear about the accident first from the other insurer. Plus, the details of the incident are fresh in your mind.

6. Keep good records. Keep copies of all reports, medical bills, and estimates. Also start a log of contacts with both insurance companies. Record who you spoke to, when, and what the conversation was about.

7. Don’t mention a lawyer unless you truly intend to hire one. As soon as you mention to an insurance company you are talking to a lawyer, they will immediately stop talking to you. Then your hand is played – your committed to hiring one.

8. Don’t accept the first settlement offer. I’m definitely no negotiating professional, far from it. But I have it on good authority from a friend in the business and from personal experience that the first offer is always going to be laughably low. Just tell them that’s not an acceptable number.

9. Using your records, develop a reasonable settlement offer from your point of view. Things to consider include property damage, lost wages, medical payments, car rental, and personal inconvenience. I’ve been told it’s best to stay away from mention of ‘pay and suffering.’ It’s overused and tends to turn off claims agents.

These are all things we learned from our experience when my wife was hit from behind and went through the process. I’m not an expert in this (and don’t want to be!), so take this list as a starting point.

Health Insurance – Who Understands This $#!+?

I just did benefits renewal at my employer. It’s a glorious time of year. You get to see how much more you’ll be paying to get worse coverage. And boy am I paying more. And oh, how it is worse.

At the top of the list for this crapenfest is health insurance. Now I am an educated man, but how the hell am I supposed to understand all this crap? I mean seriously. PPO, HMO, EPN, catastrophic care, indemnity option, out-of-pocket maximums, blah, blah, blah.

News flash for company benefits people – I’m not a health insurance expert. That’s not what I do for a living. I don’t know the difference between a PPO and an EPN and I don’t want to know.

Here’s what I need: reasonable medical coverage for a reasonable price.

Is that so hard to deliver? Apparently it is.

And no wonder. Have you ever seen the little form your doctor uses to select what services he or she performed during your visit? It’s two pages of 8-point font. Then the office staff has to translate that into a code for each and every insurance they take. Is there any wonder billing screw-ups are routine? If you don’t have one of these stories, either you’ve never used health insurance or you’re not trying hard enough.