5 Classic job hunting tips that never went out of style

I decided to take a detour on my blogging adventure to write about a topic that is relevant for far too many Americans these days, many of which are friends and family, job hunting. This topic is not directly related to my previous articles but since it involves income and a persons ability to save, invest and support a family, I think it isn't too far off topic.

Over the course of my career I have had the opportunity to take part in dozens of interviews, both as an interviewer and an interviewee. I have noticed a significant change over the past decade in the observance of common customs and courtesies surrounding the interview process.

I think during the boom times when unemployment was at 5% or lower, job seekers became complacent. It was easy too become a passive job seeker. The Internet provided an easy way to apply to position or simply post a profile with a resume and let recruiters and employers find you. Common customs and courtesies seemed to have eroded because separating yourself from the pack wasn't a requirement anymore. Those times have come and gone and they may not be back any time soon. Unemployment is still near 9% years after the worst of the financial crisis and job growth has been slow. There are more college graduates flooding the talent pool each semester and experienced and educated people have been laid off and are willing to accept lower tier positions that they may not have considered in the past.

Here is a list of 5 classic interview tips that are still relevant and maybe more so now than ever.

Dress the part (even at a job fair)

I've been to job fairs in which 30% of the job seekers are decked out in their very finest flip flops and t-shirts. If you want an interview, DRESS LIKE IT!! While clothes don't make the man, they do say something about the amount of effort you put into your job search and that may correlate to your work performance. Employers don't have the time to get to know you. They have to rely on superficial evidence to weed out candidates. Don't give them a reason to doubt your considerable desire to work for them.

Smile

I have been on both sides of the desk at interviews and let me tell you, it is OK to smile. In fact, it is more than OK. Interviews are generally a high pressure situation.  Smiling makes you appear comfortable, calm under pressure, approachable and friendly. Moreover, you may find that it actually boosts your confidence. Interviews needn't be clinical and serious. A well written resume illustrates your experience and expertise but can't effectively communicate your personality, social aptitude and enthusiasm. That is what the interview is for and a smile is a great start.

Customize your resume

Employers want to think that you only have eyes for them. You wouldn't recycle a love letter from an ex-girlfriend with your new lady love, right? Guys.....right? If you are struggling to answer, let me help you. Of course you wouldn't. Don't do it with employers either. Ensure that your resume matches the job description, skills and experience requirements as closely as possible without exaggeration or falsehood.

Effort is important. Taking the time to customize a resume is a way to show the employer that you are willing to go the extra mile.

Be prepared

If you get called in for an interview be prepared. Bring copies of your resume  (I recommend at least 4), recommendation letters (no more than two) and past performance reviews. I have gotten a lot of positive feedback on my "candidate packet". I take a standard navy blue folder, staple a cover sheet on the front that lists the position title, requisition number, company name (and logo if you can find one online), my name and the date and time of the interview. On the inside (left pocket) I provide an index. In the right pocket I provide a copy of my resume, a recommendation letter, a customer feedback letter and 3 years worth of performance reviews.

Remeber, effort is important. This will take you 10 minutes to create but can leave a lasting impression. It shows you are thoughtful, organized and willing to work for what you want.

Write a thank you letter (maybe two)

Within 3 business days of your interview be sure to send a thank you letter to everyone that participated in the interview. Thank them for their time and consideration and remind them why you want the job. This is your last chance to make an impression so if you walked out of the interview and thought about things you should have said, now is your chance.

If you find out later that you did not get the job I recommend writing a second letter to the hiring manager. Again you should thank them for their time but also solicit feedback. Reiterate your desire to participate in this particular line of work. Ask for any feedbacks or notes from the interview the hiring manager may have and is willing to share. Ask if the hiring manager would recommend a particular experience, training or education to pursue that will better prepare you for future interviews. In my experience, only 1 in 10 hiring managers will provide feedback but that feedback is nearly always invaluable and can be the first step to establish a lasting business relationship. You may not have been selected for this job but your persistance may be rewarded with a future opportunity working for the same employer.

Picking Stocks: For Beginners

If you read my last post  you may have a few ideas for stocks you might like to own. If not, you can check that post out here. So, you have an idea for a stock but how do you know if it is a good one? Here are a few rules for beginners that will help you separate your good ideas from the bad ones.

Go with what you know: Being intimately familiar with a company, its products or services is crucial for the beginning investor. The incite gained by being a customer is invaluable and can make up for a lack of financial education to some degree. Let's look at McDonald's (Ticker Symbol: MCD). You have probably been to McDonald's a few dozen, if not hundreds of times over the course of your life. If you haven't think of a fast food chain that you have.

You would notice if the prices went up or the customer service went down. You can probably identify when a new item is put on the menu or an old one removed. You might have tried the new item and have an opinion or heard opinions from your friends and family about the new item. You probably noticed that quite a few McDonald's are selling specialty coffee now and it is pretty good. Many McDonald's stores have been renovated to look more upscale. You probably drive buy one or more McDonald's on a weekly basis and would notice if they were shutdown. You can probably list at least 5 competitors and have an opinion on why McDonald's is better or worse than they are. Wow, after looking at all of that, you seem like an expert, don't you? Furthermore, you have friends, family and co-workers that have incite that you can leverage by having a casual conversation.

For example, I was talking to a family friend today that works as a mail carrier. He told me that at one point a couple years ago a few of his co-workers were discussing the huge increase in the number of Netflix envelopes they were delivering. That is a pretty good indication of that the company was doing very well.

Understand the business:
This is an expansion of the first rule but it is important and distinct enough to warrant a few paragraphs of its own. When I say "understand the business", I don't simply mean knowing what a company sells. I mean understand how they make money. For instance, movie theaters make most of their money in concessions. Tickets sales largely go to the studio that produced the film. The extra $3 (or so) that you pay for a 3-D movie might go the 3-D technology company (but not necessarily).

You should also understand what sets them apart from their competitors. This rule is why I avoid pharmaceutical companies. It isn't that they are not profitable companies, I just don't understand why Merck is any better than Pfizer. I do have a pretty strong opinion when I choose an airline though. I can explain why I prefer Southwest Airlines (Ticker Symbol: LUV) over every other domestic airline.

You should also think about who a companies primary customers are. This will help you understand what events (global, national, regional or local) might impact a stock. For instance, we are currently experiencing extremely high unemployment. Certain companies actually benefit from these conditions. For instance, Monster Worldwide Inc (Ticker Symbol: MWW), is the company resonsible for Monsters.com, the website that assists job seekers find employers and vice versa. Discount stores are another industry that does well in tough economic times, companies like Walmart (Ticker Symbol: WMT).

Go with established companies: I always recommend folks new to the stock market choose companies with a history of success and a solid brand name. Companies like Walt Disney (Ticker Symbol: DIS) or Coca Cola (Ticker Symbol: KO) This does not guarantee success (nothing really does) but it will help you avoid companies that that don't have staying power or are fads or fly-by-night operations. These are companies that have been around long enough to see difficult economic times and have survived or even come back stronger. They have made mistakes and recovered. They are mature, stable and generally return cash to their stockholders in the form of a quarterly dividend.

SIDE NOTE: Stay away from penny stocks (stocks priced under $4.00).

Power to the people!

Finding a good stock isn't nearly as complicated as you think it is. No, really. I mean it. You know far more about picking stocks than you realize. You are a consumer. You interact with dozens, maybe hundreds of products, services, and companies on a weekly basis. You have family, friends and co-workers that talk about products, services and companies daily. You know what you like, you know what they like.

That is a pretty good start when you are considering buying stock. It isn't enough but it gives you a place to begin your research. In later blogs I will take you through my process for that deeper research but for now lets keep it simple. Here are some questions you can ask yourself that can lead you on your search for a winning stock;

• What product or service just seems to be everywhere? What product can you not leave the house without seeing? Coke, McDonald's, IPads and IPhones (Apple), Amazon Kindle (I'm a big fan by the way).
• What marketing push worked on you? Domino's pizza admitting that they were selling an inferior product and promising to fix it won me over. I was intrigued. I had to try it and I have to say, I like the new pizza. I hadn't eaten a Domino's pizza in over 5 years but I am a regular customer now. Apparently, a lot of other people felt the same way. Domino's Pizza's stock (Tiker symbol: DPZ) is up over 80% since last August.
• What company consistently delivers a quality product, service or experience? 10 out of 11 Pixar movies have been #1 in the box office and all of them have been extremely profitable. The only reason Tangled did not make it to number 1 was because a Harry Potter movie came out the previous week. Pixar was purchased by Disney (Ticker Symbol: DIS).  
• What product or service do you abslutely love? For instance, when I am booking a flight I always fly Southwest (Ticker Symbol: LUV) if there are seats available. They generally have the lowest fares, they don't charge to check a bag and I think they have great customer service. Chances are, if I feel that way about them many other people do to.   
• What product or service can you not imagine living without? or said another way, what product or service has changed your life permanently? There are certain products or services that change the way we do things forever. For instance, the internet, cell phones, credit cards, DVR, GPS, streaming video (Netflix) etc. Finding the leader in these segments of industry might be a pretty good start.

Finding a winning stock isn't about crunching numbers and watching CNBC 12 hours a day. Its about recognizing the impact consumers (you, me, your friends, family and co-workers) have on individual companies and the stock market as a whole. Where we decide to spend our money decides which companies succeed and which fail. We, the middle class and below, power the stock market but too few of us participate in it. If we want to close the gap between the rich and the rest of us, we need to leverage all of the tools available to us. 

So, hopefully I have gotten you to start looking around, thinking about your own habits, experiences and interactions with companies and their products and services in  a new way. If you have time think about the questions I posted above, try jotting a few companies down over the next week or two. I will follow up this post with one that will get into the next layer of research.

What is the Stock Market?

The Stock Market can be an intimidating place. The recent financial crisis which decimated so many people’s retirement accounts is still fresh on everyone’s mind. Economists and Financial Experts are all over the news talking in jargon that 90% of Americans don’t really understand. They use acronyms, terms and ratios that are confusing and overwhelming. It makes the Stock Market seem inaccessible at best. I have heard people commonly refer to the Stock Market as gambling (my wife is one of them) or a fool’s game. Many people have told me that the Stock Market is a game for the rich, that lower and middle class folks don’t stand a chance.

I am trying to dispel some of those misconceptions because I believe the best way for someone to claw their way out of the lower or middle class is by taking advantage of the Stock Market. It can help you put your kids (or yourself) through college. It can ensure that you can live comfortably in retirement or help purchase your first home. There are risks. I won’t deny that but there are simple ways to minimize them. It is far easier than it looks but it is not intuitive. You need someone to walk you through it, someone that can translate the jargon and explain financial concepts in simple terms.     

Let’s start from the beginning;

What is the Stock Market?

The Stock Market, for the most part, is a secondary market. That means that when you purchase a company’s stock you are not buying it from the company but from someone else. You are buying stock second or third or 23^rd hand. Stocks for the most part are used goods. Think of the Stock Market like a giant swap meet but instead of crafts, clothes and used furniture people are haggling for stocks, bonds, mutual funds, commodities and other more obscure financial products.

What is a Stock?

Each share of stock represents a miniscule portion of company ownership. Many companies have sold millions or even hundreds of millions of shares. When I write that you own a portion of the company I do not mean that in some abstract sense. You literally own a portion of the company. You have voting rights (each share is a vote) on company matters. You can attend and be heard at company shareholders meetings. Some companies even give you a cut of the profits called a “dividend” for each share of the company you own (I will write about that in great detail another time). All of this participation is strictly voluntary.

So why own Stock?

The goal of every company is to make money for the owners. As a stock holder, that’s you. Ever considered opening a business but decided it was just too risky. Maybe you just didn’t have enough cash on hand to make it happen. Well, why not just buy into a well established company with great leadership and a product line that anyone born after 1975 can’t seem to live without; Apple (AAPL). Or how about a fast food company that has stores in 119 countries world-wide but is still an American icon; McDonald’s (MCD).

These two companies are highly respected organization and while their stock price may go up and down over the weeks, months and years the general trend is up and they will be around for a long, long time. It is important to remember during those down days that you do not gain or lose money until you purchase and then sell your stock. It may worry you to the point of giving you hives but you are not out of the game until you sell.

SIDE NOTE: I would suggest that any new investor stick to this type of large, well known, highly established companies that would make headlines if they were in trouble. I am not saying it is a fool proof investing plan or a plan at all really but you will avoid a lot of risk by simply choosing companies that you know and are familiar with. I mean, if a few of McDonald’s near you boarded up their windows you would notice.

How does owning stock make you money?
There are two primary ways that a stock can make you money. The first way is stock appreciation. You have probably heard the phrase "buy low, sell high" before. It refers to buying stock at one price and selling it at a higher price. It is a very simple concepts that we all are familiar with but it is easier said than done.

The second way a stock can make you money is through a dividend. A dividend is basically profit sharing. The company distributes cash to its owners based on the number of shares they hold. The distributions generally happen four times a year (quarterly) at a set annual rate. For intance, Windstream Corporation (WIN), offers $1.00 per share, broken into quarterly distributions of $0.25. This is often represented as a percentage of the stock price called the dividend yield. Windstream's price is currently about $13.00 a share. To get the yield take the dividend and divide it by the stock price and multiply it by 100 like so: ($1.00 / $13.00) X 100 = 7.7%. That means if you purchase the stock at $13.00 a share and you keep it for a year you will earn a 7.7% return without selling the stock.

SIDE NOTE:  Dividends can be altered or suspended at any time. Buying a stock with a dividend does not guarantee the yield. Also of note, this percentage changes as the stock price changes. If the dividend stays the same but the stock price drops the yield increases.    

What is a Bond?

When you purchase a bond you are purchasing debt or in more familiar terminology, you are loaning money. There are many kinds of bonds. You can buy them from the United States Federal or State governments, another country’s government or a corporation. Bonds have far less risk than stocks but the potential for reward is capped by the interest rate. Just like any loan, when a bond is purchased it has an interest rate and a specified duration. For instance a 2 year treasury note right now will earn you around a 2% guaranteed annual return (unless the US government collapses). Stocks do not come with a guarantee but the potential gain is unlimited. Most bonds do not really come with a guarantee but the risk of a government or company defaulting on a loan is generally pretty remote because the impact is to the company or governments well being is often catastrophic. The more likely a company or government is to default the higher the interest rate they will offer for their debt.

What is a Commodity?

In a word, Stuff. Commodities are everything from oil and gold to coffee and grain. This stuff, or more often the paper contracts that represent the purchase or the option to purchase this stuff is bought and sold daily.

What is a Mutual Fund?    

A mutual fund is a collection of stocks, bonds, commodities and other financial products crafted and managed by a financial professional. When you buy shares of a mutual fund you are purchasing a portfolio of financial products that when combined are supposed to meet an objective. An example of a common objective would be to match the performance of a particular index, say the S&P 500. That portfolio is not static. It is professionally managed which means the mix of stocks, bonds, commodities etc can and often will change. The point of a mutual fund is for a bunch of individual investors to pool their money together so they can achieve a level of diversification they couldn’t on their own. They also have access to investment products and opportunities that are only available for larger investors. The down side of course is that there are fees associated with the professional management.         

I managed to avoid discussing the mechanics of purchasing stock or methods for stock valuation yet again. I am starting with baby steps so that this can be a comprehensive resource for all levels of traders. Trust me, I am as anxious as you to discuss the nuts and bolts of stock valuation. I hope you found this primer helpful. I will spend more time on all of the topics discussed above in the future so if I did not get to your specific question, come back at a later date (or you could ask me by commenting below).

Family Man Mission

I often recommend, as I have in past blogs, that people open Individual Retirement Accounts (IRA) or 529 accounts (college savings plan). Both of these accounts allow you to participate in the Stock Market. I understand the fear and suspicion people feel towards the Stock Market. It is understandable really. When you don’t understand the rules or why things are happening it can be confusing and scary. I feel the same way about Cricket. I am sure it is a really great sport but for the life of me I just can’t figure it out.

I hope over the course of the next few weeks, months, maybe years to help you figure out the Stock Market (in return, if anyone knows how Cricket works, I am listening). If you’re interested in learning how the Stock Market works and maybe even how to manage your own brokerage account then subscribe to my blog or visit me periodically. If you have questions, please ask them and if I don’t have the answers I will do the research to find them. This is a passion of mine. I enjoy Finance and enjoy helping people out. That’s what this is all about.

I want to show you that the Stock Market isn’t gambling or throwing money away. It isn’t magic. You can make sense of it, you just need a guide.

The Stock Market is a tool that can help send your children to college. It can allow you to retire with dignity. It can help you buy your first house or get out of debt. I am not interested in making rich people get richer. I will not promote get rich quick schemes or promise guaranteed returns if you just donate x amount of dollars. This information is meant for anyone that is struggling to keep their head above the water or just wants to improve the quality of life for thier family.

From one Family Man to another (or to a Family Woman), I just want to share what I have learned through my experience and my studies.

College Savings Plan (529 Account)

Over the past 30 years it has become increasingly evident that getting a college education improves everyone’s chance to be financially comfortable or even wealthy. We all want our children to have a better life than we have had. While college is not a ticket to easy street it gives our children a fighting chance in the real world. Unfortunately college tuitions are going up fast and average household income rate cannot keep pace.

In a previous blog I mentioned college savings plans and specifically referred to a 529 account. This article will focus on what a 529 account is and how it can help pay for your children’s college expenses.

What is a 529 plan?

A 529 Plan is a tax-advantaged education savings plan that is run by a state that is designed to help pay for tuition and other college expenses. Every state has at least one 529 account and many have 3 or more. Think of the 529 account as a 401k or IRA but instead of saving for retirement you’re socking away cash (and hopefully getting a good return) to pay for college. A 529 account and an IRA share many of the same benefits but they are not identical and they differ from plan to plan. Here are answers to frequently asked questions regarding the 529 account:

What are the Federal Tax benefits?

In this respect a 529 acts like a ROTH IRA. The contributions to the account are not tax deductible but if the money is pulled out to pay for college expenses the contributions and any gains will not be taxed.

What are the State Tax benefits?

Some, not all, 529 accounts will allow you to deduct your contributions for your state taxes. Of course, this benefit doesn’t mean much for those that live in states like Florida or Texas which don’t have state taxes.

Who is in control of the money?

The owner of the account retains all rights to the account. This means that even if you appoint a beneficiary (a requirement for most 529 accounts) you still dole out the money as you see fit. If your beneficiary decides not to go to college, gets a full ride scholarship, joins the military or if you decide that they just don’t deserve it, you maintain all rights to that money. Furthermore, you can pull all of your contributions out of the account at any time without penalty (unless you touch the gains).

Who can contribute to the 529 account?
Anyone. Most 529 account websites will provide a link that you can email to your friends and family that will allow them to directly deposit money into the account. Contributions to a 529 account make great gifts for babies and toddlers especially since they would rather play with a cardboard box or wrapping paper than the expensive new toy you got them.

How much maintenance is this going to take?

Generally, when you open a 529 account you are given a number of investment options. The one I recommend is the aggressive time based option. It may be called something different depending on the account. This is a management technique that takes into account the beneficiary’s age. The portfolio will be a mix of bonds, stocks, mutual funds and cash. When the beneficiary is very young it will be mostly stocks and mutual funds and little bonds and cash which is considered riskier but should provide for higher gains. As the beneficiary approaches 18 years of age the investment mix will progressively become more conservative. The manager will cycle the investments out of stocks and mutual funds and into bonds and cash to protect it from potential economic threats.

How flexible is a 529 account? What if I change my mind?

You can change the beneficiary or your investment option once a year or name multiple beneficiaries if you would like. You don't even have to wait to have children before you open a 529 account. You can open the account and name yourself as the beneficiary or your spouse, cousin, mother or father. If your child happens to get a full ride due to some academic or athletic achievement you can wait until your future grandkids are heading of to college. As long as the money goes towards college expenses there will be no penalty. If you do decide to use the money for something other than college expenses there is a penalty. That is discussed a bit more below.

Will this complicate my taxes?

Since the money you contribute is already taxed there are zero tax implications until you start distributing the money. Even when you do start taking or doling out distributions as long as they fall within the rules for a qualified college expense you will not be penalized. You also won’t receive a 1099 form to report taxable or nontaxable earnings until then.

What qualifies as a college expense?

Surprisingly, a lot qualifies as a college expense. College tuition is a no brainer but books, room, board, school supplies (paper, pens, scan-tron sheets etc). Even a laptop computer can fall into the category of qualified college expense as long as its primary purpose is school. Let’s get back to room and board for a second. This is not just a dorm room and a college cafeteria card. This can go towards an apartment or a mortgage (though not as a down payment). Groceries and dining out also count (but I wouldn’t push it by running up a large bar tab). 

What’s the limit on contributions?

Unlike a ROTH IRA, no one is excluded from using a 529 account regardless of income. Also, the contribution limit varies from state to state but it is typically a total of $300,000 per beneficiary. This means that you can contribute as much as you want annually but be careful, if you contribute too much ($13,000) you may have to pay the federal gift tax (but that is another blog entirely).

Will this impact my child’s financial aid application?

Parental assets are assessed at a maximum 5.64% when determining whether a student is eligible for financial aid. So the impact should be very small.

What if I decide not to use the 529 account for college expenses?

If the account distributions do not go to qualified college expenses than a penalty of 10% will be assessed. On top of that, if the gains on the account (anything over the total amount contributed) are used in an unqualified way taxes will also be assessed.

How do I set up a 529 account?

I suggest that you visit your bank and discuss it with someone from the investment group there. They will likely have a few to choose from that they recommend.

This was just an introduction to the 529 account. In a later blog I will dissect the 529 account, typical cost and the best benefits.

Remember, saving for your children to go to college is a high priority but you need to ensure that your retirement plan is in full swing first. The last thing your child will need when they are 30 years old and have a family of their own to take care of is the additional financial burden of supporting you through retirement. 

Why a ROTH IRA?

In a previous blog I recommended starting a ROTH IRA as a suitable retirement savings option but didn’t I didn’t tell you what a ROTH IRA is and what it can do for you. I intend to correct that omission now.  This Blog will discuss what a ROTH IRA is and why I recommend it over a Traditional IRA 9 times out of 10.

What is an IRA?

IRA is an acronym for Individual Retirement Account. This is an account with specialized rules, regulations and benefits designed to make it easier for folks to prepare themselves for retirement. This blog will focus on the ROTH IRA which has a few very important differences from the normal or Traditional IRA. It is these differences that prompt such a strong recommendation from me towards the ROTH IRA over the Traditional for anyone in the middle class or below. This will be discussed in further detail a little bit later.  

Here is a list of what the Traditional and ROTH IRA have in common;

·         Contribution limits: Both IRAs allow a person to contribute up to $5,000 annually for anyone under the age of 50. Anyone over 50 can contribute an additional $1,000.

·         An individual can contribute to both a ROTH and a Traditional IRA if they would like but the total of those contributions cannot exceed the annual contribution limit ($5,000).

·         Penalty free distributions after the age of 59 ½. “Distributions” is just a fancy way of saying withdrawal.

·         A person must have real income in the form of wages, tips, salaries, bonuses or fees to contribute. Stay at home spouses may contribute if taxes are filed jointly.

·         There is some form a tax benefit for each IRA.

Why a ROTH?

The biggest difference between the ROTH IRA and the Traditional IRA is the tax benefit. The Traditional IRA allows you to defer taxes on up to 100% of your annual contribution depending on your income level. Instead of paying taxes on the money now you pay for it in when you take withdrawals. At first glance that seems like an amazing benefit and it is under some circumstances but I see two concerning issues with tax deferment in most cases;

1.       Not only will your contributions be taxed when you start to take distributions but any gains you made over the life of your account will as well. That means that the government defers taxes on a small amount now only to reap the rewards of your investments over the course of 30+ years.

2.       Currently we know how much we are taxed. Whether you like that number or not, it is a known quantity. The same cannot be said for the tax rates 20, 30 or 40 years from now. The money you withdraw in the future will be taxed at that future rate, whatever it is,  not the current known rate. I don’t know for sure whether taxes will go up or down over the next 30 years but I prefer not to chance it either way. (NOTE: I have a different opinion on this regarding 401ks, I will explain that in a separate blog)

Why is the ROTH better? Contributions to a ROTH are not tax deferred at all. So what’s the benefit?

By forgoing the instant gratification of a small tax deferment now, all future withdrawals are TAX FREE. This means that when you pull money out after the age of 59 ½ both the money you contributed and any additional money that you have earned throughout the life of the account is completely, 100% TAX FREE. In almost every scenario I can image tax free beats tax deferred hands down. The chart below is an illustration of the difference in the amount of taxes paid between the two. 

There are too many variables for this chart to be really accurate but if all things remain equal including tax bracket (28%) this is what the difference might be.

A ROTH IRA can double as an emergency savings account.

Yes, you read that right. All the money you contribute to a ROTH IRA can be withdrawn without penalty (or tax) at any time for any reason. It is very important to recognize the “all the money you contribute…” part of that sentence. You cannot pull out more than you have put in or you will be penalized 10% (still not taxed).

This isn’t so for the Traditional IRA. Not only will you be taxed for an early withdrawal but you will be penalized an additional 10% as well. This could mean giving as much as 40% of your hard earned retirement distribution to Uncle Sam.

Also important to note is It is not as “liquid” (meaning quickly converted to cash) as a typical savings account. Since the IRA is likely made up of mutual funds, stocks and bonds it may take one to three days for the money to be on hand.

And for the record, when I say “emergency savings” I don’t mean buying an “emergency” Lexus or taking an “emergency” Caribbean cruise. When you’re considering pulling money out think about this example;

Say you want to pull out $10,000 for a down payment on a house and you have 30 years until you retire. That $10,000 would have conservatively turned into just over $100,000 by the time you retire. You may be saving yourself 5% interest over the course of the 30 year mortgage but you are losing out on 8-10% return you would have received annually over that same time.   

You can contribute as long as you want.

Should you find yourself in the unbearable predicament of having extra disposable income well into your 60s, 70s or even into your 100s, you can still contribute to your ROTH IRA. That is not so for a Traditional IRA. In fact, a Traditional IRA requires distributions to start at the age of 70 ½ whether you need the money or not.

The ROTH IRA does not have mandatory distributions.

If you don’t need the money, you don’t have to take distributions, not ever. Why wouldn’t you take the money? Perhaps you happen to have a spouse without retirement benefits of their own or perhaps you just want to leave a sizeable inheritance to a favored grandchild.

The ROTH can be passed on to an heir without penalty. The spouse is the beneficiary if the account owner dies. If the spouse already has a ROTH of his/her own then these two accounts will be rolled together. If the spouse has also passed on then the account can be willed to another penalty free (estate tax does apply but is reduced because taxes have already been paid for all of the contributions) and but now there are rules regarding mandatory distribution.      

Restrictions

The ROTH IRA is a powerful tool for retirement savings and as such it has restrictions. A person has to earn under a certain amount each year to be eligible to contribute to a ROTH IRA. The numbers change periodically to keep up with the cost of living. Right now a couple that is married filing jointly must have an annual income of less than $177,000 for instance.  

Wrap up - So in a nutshell that it why I recommend the ROTH IRA 9 times out of 10. There are other options and in some cases better options depending on your individual circumstance. I will discuss 401K plans and an overall retirement philosophy here in the near future. Stay tuned and feel free to post questions and I will do my best to answer them.    

Financial Priorities

One of the questions I get most often from friends and family is about priorities; which loans to focus on paying off first? What to do if you find a little a little extra money? Perhaps this tax season you are expecting a check from Uncle Sam and are wondering what to do with it. Maybe your car is finally paid off and you’ll have a few hundred bucks a month to allocate. Maybe you just want to be sure your doing the right thing for your family’s future. 

This blog focuses on Financial Priorities. I will explain the types of accounts mentioned (IRA, 401K, 529) in separate blogs. Here are some general guidelines that can assist you in determining where that money will serve you best;

Pay the bills first. If you have any outstanding bills, this is a great time to catch up. Never save, invest or blow money frivolously instead of paying the bills. Doing so will destroy your credit score in a hurry, especially once you hit the 90 days delinquent mark. You can destroy your credit score (also known as a FICO score) in a matter of months but rebuilding it takes years. Your credit score may seem inconsequential now but long term it is a big, big deal. It will determine how much it costs for you to borrow money. It can raise the interest rate on any line of credit you are after; a mortgage, car loan even credit cards.

Second, build an emergency fund. I recommend having a minimum of three months worth of your bills covered in your emergency fund. Six months is preferred. This means that if your mortgage, car payment, insurance, utilities, gym membership, Netflix, etc totals $2,500 a month you should have a minimum of $7,500 in a savings account ($15,000 is preferred). If you or your spouse lose your job or got into an accident, you need to be able to cover your expenses. This is especially relevant if you have a job with uneven income distribution like if you work on commission or if work is seasonal.

When you are totaling your monthly expenses be sure to include money for gas, groceries and a little extra for your discretionary expenses (gym membership, cable service etc) as well. It is always better to over-estimate your expenses than to under-estimate.

Third, erase debt.  Once you have your financial safety net in place it is time to start trimming debt. If you happen to have some credit cards or other debt with high interest rates (think 10% or higher) this may be worth looking into sooner, say, once you have 3 months worth of emergency savings. Make sure you prioritize which debt you pay down first starting with the one with the highest interest rate and working your way down. This likely means starting with your credit cards and any unsecured loans you may have. Mortgages, car loans and college loans in recent years have had very low interest rates so you can get away with paying the minimum until those high interest loans are gone.

Fourth, Retirement contribution. As I discussed in my previous blog the sooner you start saving, the better. If you’re lucky enough to land a job with a company that has a 401k or similar retirement account, be sure to contribute. This account allows you to defer taxes and many employers provide some sort of matching, meaning they will match every dollar that you save, often  up to as much as 3 or 4 percent of your total salary. Once you start your 401k contributions, if you've got cash left over or if no 401k is available to you, start a ROTH IRA.  

Fifth, a college fund for the kiddies. Why is this so low on the list? Simple. There is a lot of money out there for college these days. There are scholarships, grants, loans and work study programs all that can help pay for some or all of your child’s college expenses. If you don’t manage to save enough to send your child to college chances are they will be eligible for one or more of these programs.

For retirement, there is one failing system out there to help you should you not have enough to live on: Social Security. You need to be sure that you have taken care of retirement before setting up a college savings plan for your child. It sounds harsh but your retirement is going to be longer and far more expensive and you will have very little assistance from Uncle Sam or anyone else save your family and no one wants to burden their family in retirement.  

One of the newer tools available and gaining in popularity is the 529 account, named after the section of tax code that regulates these accounts. In many ways they are similar to IRAs but the money can only be pulled out without penalty if it goes to some form of college expense. This includes things like tuition, books, a dorm room (or other living quarters), a computer and school supplies. Each state has two or three of these accounts available and they all have different fees and benefits associated with them. That is why I intend to devote an entire blog to them in the near future.

I hope you found this helpful. I will follow up with a blog on the Traditional and ROTH IRA and the 529 account in the near future. Check back next week and I am sure I will have something up. In the meantime, if you have questions feel free to ask them via the comments.

Time is Money

Most of my friends, like me, either have a family or are starting a family. They are in a variety of financial positions. Some just recently claiming financial independents, some have had their butt handed to them in the monopoly game of life and are still brushing themselves off. But all of them, ALL of US, need to start thinking 20 or 30 or 40 years into the future despite the goings on in our lives right now.  

The truth is saving sooner is better than saving more. You have probably heard of the old adage; “Time is money.” Well, I say it’s false or at least, incomplete. Time is worth far more than money. And unfortunately it is the scarcest of resources. Nobody, especially nobody with a family has an abundance of time and even if they did it is not transferrable, they can’t sell it to you if they wanted. So use yours wisely. To illustrate my point think of the story of the Tortoise and the Hare.

We all know that story right? The Tortoise and the Hare are in a foot race for some wacky reason and the Hare is real cocky and the humble Tortoise just chugs along “slow and steady.” The Hare give the Tortoise a hefty lead and then takes off like a lightning bolt but the lead he gave the Tortoise proves too much and he loses the race. Pretty embarrassing really.

Here’s how it would go if it were a financial foot race. The person (or animal) with the most money for retirement after 30 years wins.

The Tortoise heads off the starting line in 2011, putting $1,000 in his Individual Retirement Account (IRA) and chugs along year after year socking away that same $1,000 for 30 years. (Total Contribution: $30,000)

The Hare gives the Tortoise a 10 year head start. In 2021, he starts saving $2,000 a year, twice as much as the Tortoise, for the remaining 20 years. (Total Contribution: $40,000)

At first glance it may seem as though the Hare finally beat the Tortoise. After all, he did contribute $10,000 dollars more. But if you look at the chart below you see clearly that the Tortoise with his mantra of “slow and steady” stuck it to the Hare yet again.

How could that be? The answer is simple; compound interest. Let me explain. The chart above assumes an average annual interest rate of 8% for both the Tortoise and the Hare. That means that one year after the Tortoise put in his first $1,000 it was worth $1,080. Then he put in another $1,000. Now he not only gets 8% interest on the $2,000 he has contributed thus far but on the previous year’s interest as well. By the end of year two he has over $2,245. Like a snowball rolling down hill collecting more snow as it goes, getting bigger and bigger, so does the interest earned each year.

The time component is so valuable that to catch up to the Tortoise the Hare would have had to contribute $2,446.23 each year. That is a total of over $51,000, more than $21,000 greater than the Tortoise’s contribution.

Compound interest is the single most powerful financial tool we have at our disposal. It gives everyone a chance to retire comfortably. You just have to start early. When you are young and starting a family retirement might seem so far away. You may think you can make up for lost time by contributing more, later. Truthfully, you can but it is at a much higher cost than you realize. You would be doing yourself and your family a huge service if you started sooner rather than later. Like the Tortoise showed us; every little bit counts, and it counts even more the sooner you start.