Financial Wellness @ Work

Pros & Cons of a 529 College Savings Plan for Your Kids

2012-05-16T22:03:26Z

Figuring out how to pay for your child’s college education can be overwhelming. The cost for one year of school at a public university is over $17,000 and is nearly $40,000 at a private school – and that doesn’t even include the price of room and board. Counting on scholarships to cover college costs is foolhardy and the availability of student loans (especially a loan with a good rate) is not guaranteed.

Perhaps the most common vehicle to save money for college is the 529 college savings plan. But just because everyone’s doing it doesn’t necessarily make it the best choice. Consider the following to determine if a 529 plan is the right savings plan for you:

Pros

Receive a Tax Break. On a federal level, contributions are taxed, but your 529 grows tax-free, and distributions for qualified education expenses are also non-taxable. Plus, many states allow you to deduct all or part of your contributions if you invest in your state’s 529 plan. Investigate multiple plans to find out which tax advantages are available.
Contribution Limits Are High. Just about anyone is eligible to open a 529 plan, and the contribution limits are high. Individual limits may vary by plan, but on average they’re around $250,000.
Enjoy Limited Flexibility. You choose the funds you want to invest in, but you can only change these investments once per year. Individual plans may further limit that frequency, however. Also, you are not committed to stay in any one particular 529 plan and can roll over funds to another 529 if you prefer.
Contribution Requirements Are Low. With some plans, the initial contribution requirement is as low as $25.
You Can Enroll in Another State’s Plan. You’re not limited to using your state’s 529 plan. Just because you live in Georgia, for example, does not mean you can only choose Georgia’s 529 plan. In most cases, you’re able to invest in any state’s plan, though you may give up some tax advantages by doing so.
You Can Change Beneficiaries. When you set up a 529 plan, you do so for the benefit of your child, thereby naming him or her as the beneficiary on the plan. However, if that child does not use all the funds in the plan or does not go to college, you can easily change the beneficiary to another child or relative so that they may use the funds for higher education.

Cons

Penalties for Non-College Expenses Are Steep. If your child does not attend college, you could face stiff penalties. On 529 funds withdrawn for non-college expenses, you must pay income tax plus an additional 10% penalty on the earnings.
Your Retirement Savings Could Suffer. The choice between whether to save and invest money for college or your own retirement is not an easy one to make. After all, you can’t take out loans for your retirement, but in most cases, you can for your child’s education. Plus, that education should lead them to earning an income with which to pay back those loans. One popular compromise is to invest in a Roth IRA, which allows you to withdraw contributions at any time tax-free and to withdraw earnings for qualified education expenses penalty-free – though you do have to pay income tax on those earnings.
Options Are Limited. Most 529 plans only offer between 20 and 30 mutual funds to invest in. On the other hand, if you invest in a regular taxable account, you have a virtually unlimited number of options from which to choose.
Investments Aren’t Guaranteed. Just like any market investment, risk is involved. You can lose some or all of your money depending on market fluctuations.
Financial Aid Eligibility Is Affected. Funds in a 529 plan are treated as a parental asset in financial aid calculations, thereby reducing your child’s ability to get financial aid for college. That said, 529 plan assets do not impact eligibility as much as any assets owned directly by your child.

Final Thoughts

While some parents opt to encourage their children to study a trade or explore occupations that don’t require a college degree, many still see a traditional college education as being vital to their children’s success. In this case, choosing the right vehicle can go a long way toward maximizing your college budget.

A 529 savings plan is most appropriate for parents who feel confident their child will attend college, especially if they have more than one child. In this case, even if both children don’t attend, the child who does can make use of 529 funds and avoid hefty penalties on withdrawals for non-college expenses.

What are your thoughts on 529 plans?

Financial Lessons From 17 Years of Marriage

2012-05-16T07:05:55Z

On Sunday, I sat next to a guy on the plane who was heading to Las Vegas for his honeymoon. Now why I was sitting next to him and not his wife I’ll explain in a moment, but I love meeting young couples that have decided to tie the knot and embark on what I consider one of the greatest journeys known to man. I learned that he and his spouse had actually been married for a year, but this was the first time the two of them were able to get away. The fact that the trip was planned at the last minute because of their busy schedules explains the separation in seats, so I insisted on trading seats with his wife so that the two of them would be together (which landed me in the exit row – sweet!). As I sat back in 9C, I began thinking about how this would probably be one of a thousand challenges they would face together, both financially and non-financially, as a couple.

This week, Susan and I celebrate our 17^th wedding anniversary. Now you don’t stay married for this long without a few bumps along the way, but in order to stay married this long it does require the effort of two people choosing to work together, especially concerning financial decisions. Here are some of the financial milestones Susan and I have achieved along the way, along with the unique circumstances that helped determine their outcomes:

The honeymoon

You may not consider this a financial milestone, but I believe it is a milestone nonetheless, and as you can see from my friend on the plane, not all newlyweds enjoy one right away. It takes planning, both on the part of schedules as well as on the part of finances, to enjoy this important “alone” time to strengthen your relationship. The key is to avoid borrowing money to pay for it. Chances are, when you get married, one or both of you will already be carrying debt (e.g. student loans, credit cards), and while it may not legally belong to both of you, it will most certainly affect both of you, so don’t add to it.

Susan and I were able to save enough to pay for our honeymoon without having to borrow, which I believe started us off on the right foot. Even if it means postponing your honeymoon for a short while, I suggest doing the same.

Our first apartment

Susan and I lived separately with our parents until we were married (we were married rather young), so living together would be a new experience for both of us. We knew that we would want to buy a home someday, but until then we figured an apartment would be appropriate. This was a good idea for several reasons. One, it allowed Susan and I to get used to living on our own; two, it helped to build our credit history; and three, expenses were fairly controlled, so we could start creating a budget based on our combined incomes. We chose to live off of one income so that we could use the other to start saving for future financial goals.

Our first house

After a year of renting an apartment, we were ready for our first house. Because we were DINKs (Double Income – No Kids), we were able to save for a down payment, but we could only afford to put down 10%, which meant our mortgage payment would include primary mortgage insurance (PMI). Also, we learned why it is so important to clean up your credit before applying for a mortgage because we almost did not get the loan thanks to a PG&E utility bill that my college roommate never paid (the account was in my name, so guess whose credit report it showed up on?). Needless to say, we qualified for the mortgage and moved into our first house.

Our first child

Rachel was born in August of 1998. Nothing in the world could have prepared us for the great joy we experienced, but there was plenty we were able to do to brace for the financial impact. The cost of raising a child varies based on where you live and other factors, but if you think you will wait to have children until after you can afford them, chances are you’ll be waiting a long time. Having children means making sacrifices, and the more children you have, the more sacrifices you will have to make.

One such sacrifice came at the time we purchased our house. Susan and I had discussed the possibility of having children, and we wanted Susan to have the option of returning to work, or to be a stay-at-home mom. To provide for this option, we decided to only consider how much we could afford based on one income. That way, if and when we had children, we could afford to have Susan stay at home. This also gave us a cushion should one of us lose our job unexpectedly.

Our first minivan

Eventually, we did have children (four actually), and as the family grew, so did our need for more seats and more cargo space. I didn’t mind the idea of buying a minivan, but I did mind the idea of making car payments. For this reason, Susan and I put money aside in order to be able to purchase a vehicle outright. However, doing so would have depleted most of our emergency savings, so we made a compromise. We used some of our cash reserve but opted to finance a portion of the cost to buy the minivan. That way, in the event of an emergency, we would still have some money to get us through. We were also able to pay off the car loan quickly, and then use the money that was going toward our payment as a monthly savings in order to build our cash reserve back up.

What lies ahead

These are just some of the financial milestones Susan and I have had to cross since the time we exchanged vows, and there are many more that lie ahead, including college, paying off the mortgage, and eventually retirement. The true secret to having a long, healthy marriage is to take the time to get on the same financial page. As a couple, Susan and I have regular “dates” to discuss our financial picture, and we also discuss major financial decisions (that’s any purchase over $300) before making them. If you truly love your spouse, you’ll make the time to work on a family financial plan together. Take it from me; we may not be perfect, but after 17 years, we must be doing something right.

Are You Aware That May is DIAM?

2012-05-15T03:10:01Z

So what is DIAM? It stands for Disability Insurance Awareness Month, sponsored by the Life and Health Insurance Foundation for Education (LIFE). Many employees are unaware of the disability coverage that may be available to them as an employer-sponsored benefit, so spread the word this month about your workplace disability insurance.

Even though you may offer this coverage to your employees as an employer-paid benefit, it is important to educate your workforce that the coverage also includes time off due to an illness or an injury that happens off the job. According to the National Safety Council, 73% of disabling accidents and illnesses aren’t work-related. But many employees could be under the impression that the disability must be work-related to be able to submit a claim. Whether you focus on disability coverage as a single topic or include it as part of an overall review of your benefit package, take the next few weeks to highlight your company’s short and/or long-term disability policy.

The typical group disability policy only replaces 60% of income, but for higher income employees that amount could be capped by a maximum monthly payout (for example $10,000). Employees should know that if the policy is paid for by the company, the benefit would be considered taxable income. However, if the employee pays the premium for the group coverage or buys a plan on the individual market, the benefit would not be taxable.

Although a disability policy isn’t meant to replace 100% of an employee’s income, it will at least provide the disabled worker with a source of replacement income to help make ends meet until they’re able to return to work to avoid a financial hardship situation. A LIFE Foundation study found that 70% of working Americans couldn’t make it one month before financial difficulties would set in. More than one in four Americans wouldn’t make it a week.

Most of us think a disability will never happen to us, but nearly one in three women can expect to suffer a disability that keeps them out of work for 90 days or longer at some point during their working years. For men, the odds are about one in four. And one worker in seven can expect to be disabled for five or more years before retirement. These statistics are alarming, but sometimes it takes this type of shock value to raise the awareness of your employees to one of the biggest risks to their financial security.

DIAM is actually a part of an overall campaign that is sponsored by EBRI, the Save for Your Future Campaign, because financial education should be an ongoing campaign, not a one time event.

Three Investment Mistakes the Trained Eye Can Spot

2012-05-14T07:48:04Z

Recently, I had the opportunity to have a series of one-on-one meetings with employees called Ask-a-Planner sessions where the employees could ask me any question on any financial topic they wanted. Fortunately, they didn’t “stump the planner!” Many people used their time as an opportunity to have me review their allocation in their 401(k). While most of them had an asset allocation that was a fit for them, some of the statements had huge rookie mistake red flags that I’d seen before.

Here they are:

Investing in every single fund in their 401(k) line up. Here is the justification — “I’ve heard diversification is good so I’ll pick them all.” That is not what is meant by diversification – think about it when you look at the mutual fund line up in the 401(k). Many of the funds are equities so the “choose them all” strategy may end up being riskier than the “choosing wisely” strategy.

How to best choose your asset allocation? Take a risk tolerance quiz to determine your own personal risk profile and based on your time horizon, choose your investment mix from there. For a link to the risk tolerance profile, click here. Still unsure? Choose the target date fund closest to your retirement date.

Owning more than one target date fund. The purpose of the target date fund is to have an “all-in-one” kind of retirement fund where essentially you don’t have to do much! You choose one fund that aligns up with your retirement date and it contains five or six funds in it so you have instant diversification. The mix of funds starts out more aggressive and gets more conservative as you get older and closer to your retirement date, and that’s exactly what many people want. That’s why they are so popular! Having three different target date funds doesn’t add any real value – it just dilutes what you are doing.

Owning a high percentage of company stock. Just because you work there doesn’t make you a stock expert! Many people feel a false sense of security owning company stock since they walk in the door of their office every day. When you work somewhere, you experience the company every day. That doesn’t mean the stock will go up or the doors will never close. It is dangerous to think it does. The guideline for company stock is no more than 10–15% of assets should be in one investment. If you have more, trim it down to diversify.

Some rookie mistakes are easy to spot – when I see one of these, I can tell right away that this employee is trying to do the right thing. They might just be going about it the wrong way.

How to Solve What Seemed Insolvable

2012-05-11T04:22:05Z

I recently had a meeting with a woman who is struggling financially and she was looking for a way to make things better for herself and her kids. She has had a rough last 12 months and is trying to put the pieces back together and find a way to move her life forward. This time last year, her husband was killed in an auto accident and that has obviously changed the course of her life. Unfortunately, he was unemployed at the time and his only life insurance was with his prior employer and he did not transfer it to himself when his company closed their doors for business. So, she is a relatively young widow who received no life insurance benefits and was the sole income earner for several months prior to that. She has maintained her sense of humor and can smile and say “Worst year ever!” She knows that she will recover and rebuild, and now she’s ready to. The only thing she didn’t know was where to start. So, she started with a conversation…That conversation turned into a series of conversations and she now has a plan for how to turn things around. Here’s where she started: She had an ongoing monthly “structural deficit.” The cost of her mortgage, car payment, utilities and groceries (even using coupons and shopping for deals) exceeded her monthly take home pay. That was before she even put gas in the car or did anything with her kids. She was slowly draining her savings account on a monthly basis. But, she had no idea where her money was going the 1^st time we talked. She walked out of our first meeting feeling a bit unburdened by telling someone in the financial world about her problems, but there was not much on her “to do” list after the meeting. She would have been overwhelmed if the list were too long. So, it was simple. Figure out where your money goes. She signed up for Mint.com and used this expense tracker to go back and review/categorize the expenses from her last 3 bank statements. She said all things considered, she spent just about an hour on this, and it gave her some clarity and direction. She was ready for the next step.

The next step for her was coming back in for a meeting where we reviewed her expenses and looked for ways to reduce them. We looked at her paycheck & her tax withholding to see if there was a little bit more she could squeeze out of each check by reducing the large tax refund she routinely receives. She would put the refund check in her savings account and deplete it throughout the year. That made her feel like she was going backwards. Instead, she reconfigured her W-4 using this IRS calculator to get a little more money in each check so that she could take less from savings each month. That gave her a better feeling, but it pointed out a glaringly obvious point. Her income simply wasn’t enough to cover her lifestyle. She was around $600-700/month short. She thought she might be $100-200/month short but had never done the math to figure out the real number.

We talked about ways to either reduce expenses or raise her income. For expenses, the biggest cost was her cost of housing. She could sell her house and move into a smaller place, but her mortgage balance is slightly higher than her house’s value so it might be a tough road. Plus, her kids love the house and she doesn’t want them to move so soon after losing their dad. So, downsizing right now is not an option. We talked about a 2^nd job, but her kids are in middle school and just not old enough to fend for themselves for long stretches of time if she had to work a job at night or on the weekends. We talked about renting out her extra bedroom to a student (she’s near a college), a flight attendant (she’s near an airport), or a business person who travels to her city frequently, and she seemed to like that option. We hopped on Craigslist to see what people in her area were charging to rent out a bedroom and it was in the $600-800/month neighborhood. Coupled with a small reduction in her expenses (she decided to drop her landline & use only her cell since the only time she uses her landline is when she answers telemarketing calls) she felt like she has a solid game plan for stopping the slow erosion of wealth. Once she gets the renter, and sees the expenses reduced, she plans to increase her 401(k) contribution in hopes of “making up for lost ground.” I’m excited to meet with her in a few months to see how her story is evolving. I have high hopes that she will be in much better financial shape this time next year than she is today.

I’d love to hear other ideas about what she could do. I’ll pass along any idea that I get here. So, what would you suggest to her?

Is Graduate School a Good Investment?

2012-05-09T21:08:32Z

Are you or someone you know thinking about going back to school? If so, you’re not alone. With the job market still weak, more and more people are wondering if it makes sense to go to grad school as a way to make themselves more employable.

However, this is not a decision to be made lightly. After all, grad school can put you six figures in debt and doesn’t always have the same income payoff as getting a college degree, especially if you want to get a degree in something like literature or philosophy. Those subjects may be great for the soul but not necessarily for the wallet.

How about more practical degrees like an MD, an MBA, or a JD? While I can’t speak with firsthand knowledge about the first two, I do know something about law school because I graduated from one so I’ll discuss this topic in that context. Here are some things to consider:

Why do you want to go?

Not knowing what you want to do with your life is not a good answer. I find that a lot of people who go to law school are social science or humanities majors that don’t know what to do with their degree so they think of grad school in general (and often law school in particular) as a way to extend their undergrad years and postpone the real world as long as possible. This is because a law degree is often thought of as a versatile degree that opens many doors.

The problem is that the huge debt burden that usually come with the degree tend to close a lot of those doors. Many graduates are forced to work long hours in a job they despise just to make the payments on the loans they took out in order to get that job. Doesn’t make a lot of sense when you look at it that way, huh

The point is that grad school is an expensive way to “find yourself.” Be sure you have a very clear idea of what you want to do with your degree and that you’d really enjoy doing it. The best way to do that is to first work in that field or at least shadow someone who does. If you want to go to law school, get a job as a paralegal for a year or two or at least talk to one or more actual attorneys (most of whom say that they would pick a different career if they could do it all over again.)

What will it cost?

This brings us to the question of cost. Law students generally graduate six figures in debt. That can be like having another mortgage payment, except that you can never walk away from it even through bankruptcy.

That’s not the only cost to consider though. In my case, I got really lucky and was able to get a full academic scholarship that not only covered my tuition and books but also provided me a stipend to help cover room and board. In other words, my situation was about as good as it gets from a financial standpoint. However, as a former economics major, I’m ashamed to admit that I left out another huge cost: the opportunity cost or what you could have earned by not going to grad school. Since I was making decent money as a VP at an investment brokerage firm, I gave up quite a bit in terms of lost income and savings over that 3.5 year period. If I had factored that in, I might have thought twice before accepting that scholarship.

To see if it’s worth it, look at all of your costs (tuition, room and board, books, etc) and estimate what your loan payments would be with this calculator. But don’t forget what you’re giving up in lost income and savings by leaving your current job.

What kind of return can you reasonably expect on your investment?

The blow of high student loans can be softened by a cushy and lucrative career. The problem is that while there’s a perception that law degrees are a ticket to six figure incomes, that’s not always the case. First, go back to the first question. If you want to work in the public sector or for a non-profit, don’t expect a big salary. If you’re lucky, you’ll get some help paying back your loan, but you’ll probably still earn less than a lot of the friends you graduated college with that didn’t go to law school.

Second, be realistic. If you look at the average starting salaries of graduates from law school, keep in mind that those numbers tend to be skewed upward by a few really high salaries at the top. (Several law schools have ironically been sued by their graduates on this issue.) However, those big six-figure jobs are generally reserved only for those who attended a top school and/or graduated at the top of their class. You had to put in some long hours to get there and you’ll be expected to put in some very long hours to stay there. In other words, they’re pretty much only for a few workaholics who are willing to spend a ridiculous amount of time thinking about things that no one else wants to think about, like the implications of some obscure part of the tax code on a business transaction between two companies you could care less about. (The more fun stuff is generally handled by those working for much less in the public and nonprofit sectors.) If this sounds like you, go for it. Otherwise, you’re likely to earn significantly less than that average starting salary. After all, you don’t have to be a math major to know that we can’t all be above average.

Finally, don’t forget taxes. Because we have a progressive tax system, a person that earns zero dollars for 3 years followed by $100k over the next 3 years will likely earn less after taxes over those 6 years than someone who earns $50k over that entire 6-yr period even though they earned the same $300k total before taxes. This tax burden is in addition to the debt burden mentioned earlier. In fact, Professor Lawrence Kotlikoff, the chair of Boston University’s economics department has argued that plumbers are actually financially better off than doctors over their lifetime when you factor in the opportunity cost of lost wages while in school, the student loan payments, and the higher tax rates. Given what I’ve said about the legal profession, I suspect that it’s at least as true for many lawyers too.

So does this all mean that grad school is a bad investment? Not necessarily. Like any investment, you just want to make sure you understand all the pros and cons before committing a substantial portion of your future income to it. You also don’t want to forget about all the non-financial benefits of going to grad school. (If money was the only thing that mattered, we’d all just get the highest paid job we could, work as long as possible, and save and invest almost every penny.) For some people, getting that piece of paper on the wall is about more than money or even a career but about becoming the person they want to be. How can you really put a price on that?

Learning to Become an Extreme Saver – Part 2 (How I live in NYC on $12,000/year)

2012-05-09T16:06:41Z

I live in New York City and spend only $12,000 a year.

Maybe you’re wondering right now, with eyes wide open, whether I’m about to explain how to live in extravagance in a Fifth Avenue penthouse and attend Broadway shows every night on a small budget. Or maybe based on stories you’ve heard about the high cost of living in New York, you’re thinking I might live in a condemned apartment where gunshots ring out every night.

But even though that $12,000 figure may be low, you don’t need to live at the extremes in order to be an extreme saver. I enjoy a normal, middle class lifestyle like most of us do. My wife and I live in a safe neighborhood with tree lined streets, we go out to eat, we take vacations. In fact, I’d be disappointed if there were something unusual about my lifestyle, if for example I got lucky by inheriting an apartment or did live in a crime ridden area, because then there wouldn’t be much to learn from my experience.

You might think you could never spend so little because you need every last dollar of your paycheck. But have you ever wondered how it is that people earning varying levels of income all somehow seem to feel like they’re struggling to make ends meet? Perhaps many people only think they need everything they earn simply because they’ve become accustomed to their current level of spending. Try thinking about lowering your expenses by first calculating how much you spend on your true needs: housing, transportation, food, health care, communication, and personal hygiene. The reason why that’s a good first step is because many people spend the majority of their income on these things, sometimes to pay for sizable houses or expensive cars and meals.

The most important thing I’ve done to limit my own spending is to not buy into the commonly accepted notion that when it comes to my needs, I should purchase as expensive an item as I can afford. Instead, in every area where I spend money, I’ve learned to purchase as inexpensive an item as I can feel comfortable using. This applies when it comes to housing, a car, or anything else. You may surprise yourself by how much cheaper things can be if you do the same. Here’s my own example of how my housing, transportation, food, health care, communication, and personal hygiene expenses add up in a city as expensive as New York can be (if you let it):

Housing. If you read articles about housing costs in New York City, you might think the only option is to spend $3,000/month or more on a place to live. That’s definitely true in some neighborhoods. The advantage of New York, however, is it’s supported by a cheap and extensive subway system. My view has always been that if you can live in a great neighborhood that’s cheaper, and still get to all major areas of the city within twenty five to thirty minutes by subway, then you’re able to get the benefits of living in New York at a fraction of the cost. These qualities are true of many neighborhoods in northern Manhattan, Brooklyn, and Queens.

I live in one such neighborhood known for its peaceful tree lined streets and historic architecture, where rents can start at $1,000/month for a studio apartment (this is low for New York). I know a studio isn’t right for all families, but when my wife and I thought about the smallest housing arrangement that we’d feel comfortable with, we couldn’t really see a need for anything larger. We own our studio apartment, where our costs total $1,100/month to pay the mortgage and HOA fees. But after factoring in the mortgage interest tax deduction, and the amount of the mortgage payment that goes toward principal and increases the equity in my apartment, the true cost of my apartment is only $800/month. My wife and I split that amount, making my individual cost only $400/month. Utilities, including electricity and cable Internet access (heat is included in the HOA fee), run about $100/month, or $50 each, making my housing cost just $450/month. It definitely helps me that my wife and I can split these costs, but if I were single, I’d be able to keep my costs almost as low by living with roommates (but definitely not in a studio!).

Transportation. Here’s one area where New York beats the rest of the country. For most errands I don’t need anything but my own two feet. Within five minutes, I can walk to three different grocery stores, a good variety of restaurants and coffee shops, a laundromat, a post office, a Fedex shipping facility, a dry cleaner, a barbershop, a gym, an art university, and a beautiful public park. If I do need to go elsewhere, that same five minute walk takes me to a train station that for $2.25 or less, will take me anywhere I want to go in New York City. Because of that, I don’t own a car, so no car payment or car insurance payment. My total transportation cost is only $104 for a monthly subway pass, reduced to $70/month through an employer sponsored tax deduction (available to most workers in NYC).

Food. I spend $200/month on groceries for my regular meals (this doesn’t include restaurant spending). If you break that down, that’s about $7/day. At first glance, that may not seem like much, but most meals generally don’t cost more than a couple of dollars if you buy the ingredients and prepare them yourself. For example, if you take a week to eat a $4 box of cereal and a $3 half gallon of milk, you’ve only spent $1/day for breakfast. A tasty lunch can be made from a $1 can of beans (dry beans are even cheaper), some rice, and spices. I may even spend more than most people on my meals because I like to buy organic ingredients; on the other hand I’m a vegetarian so I save money by not purchasing meat or fish.

Health Care. Fortunately, the cost of my health insurance premiums are paid in full by my employer. To limit any out-of-pocket expenses for doctor visits, I focus on preventative care. I go to the gym regularly, walk when I can, and make sure to eat right. Hopefully it’s working since I only seem to need to go to the doctor once or twice a year. If I had to pay for health insurance out of pocket, I’d consider getting a high-deductible health care plan with a health savings account, but that’s an extensive subject for another article. My health care costs are only $30 or $40 per year for a couple of doctor visits.

Communication. I spend $15 for a prepaid cell phone that provides unlimited text messaging and some prepaid talk minutes. You don’t have to be as extreme as me though; other cell phone plans I’ve seen offer generous text messaging and talk plans for $30/month or 300 talk minutes and unlimited Internet usage for $35/month.

Personal Care. I estimate I spend about $25/month for personal hygiene products like soap and toothpaste, laundry items, and dry cleaning.

Total monthly housing, transportation, food, health care, communication, and personal hygeine costs: approximately $760/month.

If we’re honest with ourselves, we have to acknowledge that anything we purchase that doesn’t fall into these categories isn’t something we truly need but something we want. The good news is by saving so much money on our needs, we’ve freed up some money to indulge a bit in our wants. And being an extreme saver doesn’t mean you should live a Spartan lifestyle where you feel deprived. We just need to make sure we set a limit on things we buy that we want but don’t really need. The way I spend money on my “wants” without going overboard is I separate a predetermined amount from my regular funds each month to spend and I simply do not purchase anything else once I’ve reached my limit. The limit can be different for everyone, but for myself I’ve allowed about $240/month. That’s $60/week, which is enough for me to live a middle class lifestyle: to go out to eat a couple of times a week, purchase clothing and other items that I need, and take a couple of vacations a year.

Finding inexpensive ways to enjoy your free time makes your money go even further. Personally, although you might not get this impression from tourist books, I find living in New York City is ideal for low cost ways to spend your free time. There are world class museums, art, and theater that you can often attend for discounted or no cost. There are lots of cheap, tasty places to eat where a meal can be had for under $10. You can visit a gorgeous public park with an unbelievable view of the city skyline for free and bring along a picnic to enjoy the day. Even just walking down the street can provide free entertainment and adventure. Last week, I planned to meet my brother for lunch and found myself in the middle of an impromptu, makeshift carnival, complete with people wearing monster masks on stilts.

So there you have it. Being an extreme saver on a budget of $12,000 in New York is possible. But even if you don’t live in New York, as it’s often said, if you can make it here, you can make it anywhere.

Fishing, and Other (Almost) Free Activities for Kids

2012-05-08T23:44:12Z

One of the things I enjoy most about this time of year is the chance to take my boys (and daughter, when she’s up to it) fishing at the local pond. What I love about fishing is being outside, away from the video games and television, listening to the birds chirp, the “ker-plunk” of the fishing lure when it hits the water, and the occasional “I got a fish!” when we actually manage to hook one. Truthfully, we can spend hours casting and reeling, but perhaps the best part is that, with the exception of the original purchase of the equipment, fishing costs next to nothing. Now that summer break is right around the corner, I thought it would be a good idea to prepare a list of other (almost) free activities for the kids:

Bike riding

Remember when kids used to use clothespins to put baseball cards in the spokes of their wheels so that it made their bike sound like a motorcycle? Maybe that was just me, but you don’t have to spend a whole lot to enjoy the wind in your face as you crank down on the pedals. In fact, I always wondered why parents would pay for brand new kids’ bikes when the kids would eventually outgrow them. I guess that is so there are plenty of good bikes for less money for people like me who buy them on Craigslist or at police auctions.

Hiking

No matter where you live, there are probably hiking paths and trails within a short distance, and other than the cost of a good pair of hiking shoes (or boots depending on the terrain), your cash outlay should be minimal. Don’t forget to pack a lunch or snack. This will not only save you money, but it will allow you to prolong the experience.

Swimming

As you can see, my goal is to get the kids out of the house, so any activity that can keep them outside for long periods of time is a plus. I had a pool growing up, but unless you already have one, building one is pricey. Not only that, but the cost of maintaining a pool can run you $100 a month or more, depending on the size, shape, type and location. A pool will also increase the cost of your homeowner’s insurance policy, and in the end, it may only increase the value of your home by a fraction (not to mention it can be difficult to sell a home with a pool, especially in today’s market).

My suggestion is to join a club, such as the local YMCA. Better yet, make friends with someone who already has a pool. If you live near a lake or the ocean, then you’re set. Just remember the sunscreen (and reapply after 80 minutes).

Going to the library

Getting tired of all the time in the sun? Take a trip to the library. Today’s library is a lot different than what you and I grew up with. If your kids aren’t into books, then maybe they’ll enjoy the multimedia center. For fun, create a scavenger hunt, but make the items “facts” they have to look up in a book. Many libraries offer a story time, allowing mom and dad to take a little time for themselves. Before you leave, have each child check out a book, and equate this to “borrowing” money. Remind them that if they don’t return the book (or money) on time, there are fines.

“Free” days at the museum

The Art Institute of Chicago offers “Free Family Wednesdays” to Illinois residents the first and second Wednesday of every month. Contact local museums to see if they offer similar promotions. If you Google “free activities for kids” along with the name of your city or state, you may be surprised at how many things there are to do in your area for little or no cost.

Camping (in the back yard)

So far all I’ve talked about are things you can do during the day, but there are even things you can do at night. One of my favorites is setting up a tent in the backyard, building a fire in the portable fire pit, and sleeping under the stars. It may not be the best night’s sleep, but at least you don’t have to spend an arm and a leg spending some quality time with the kids.

Climb into the attic, pull out the tent, grab some flashlights and the UNO cards, and head out to the backyard—you’re bound to create a memorable evening.

With so much to do, your kids should never utter those two dreaded words: “I’m bored.”

A Vision of Retirement Under the 20/20 Proposal

2012-05-08T05:43:29Z

Would the government want to encourage workers to save LESS? A recent proposal by the deficit reduction committee calls for a reduction to the total combined annual limitations for both the employer and employee to retirement savings plans. Called the 20/20 Cap Proposal, the committee suggested a cap of the lesser of 20% of an employee’s compensation or $20,000 in annual total employer and employee retirement plan contributions. Although this sounds higher than the current 2012 deferral limit of $17,000 that employees are restricted to now, the 20/20 Cap Proposal will also include employer contributions that now has a $50,000 or 100% of income limitation for 2012. This combined limit of only $20,000 will severely limit the tax benefits of business owners to sponsor a retirement plan. According to the American Benefits Council, “ When a typical small business owner evaluates the significant legal responsibilities, risks, and costs of voluntarily sponsoring a retirement plan, it is often the promise of meaningful tax benefits for key employees that is the deciding factor in choosing to establish and maintain a retirement plan. But if tax benefits to decision-makers are substantially diminished, businesses that would have considered plan sponsorship may no longer do so, and existing plan sponsors might reduce employer matching contributions or stop offering retirement plans altogether. All employees would suffer because employer sponsorship offers considerable advantages for workers, including strict fiduciary standards; participation rules that ensure that benefits are delivered across all income groups; easy payroll reduction; lower fees from group participation; access to financial education; and often significant employer contributions.”

The Employee Benefit Research Institute (EBRI) studied the potential impact of the 20/20 Cap with an assumed start date of 2012 to determine any potential reductions in 401(k) balances that could occur due to the $20,000 limitation. Not surprisingly, the highest income quartile would experience the largest percentage reduction with a maximum reduction seen in the age 36-45 group. Of course, this is where I fall in the age spectrum as a Gen Xer. Earlier EBRI research found that about half of those in my age group, born between 1965 and 1974, were already at risk of running short of money in retirement, so an assumed 15% reduction in account balances for this group does not offer much hope for a positive outcome if the 20/20 Cap Proposal is passed. You can read more about the EBRI study here: http://www.ebri.org/pdf/notespdf/EBRI_Notes_07_July-11.TaxCao-UnionHI.pdf.

Although the 20/20 Cap is still just a proposal, employees need to be aware that their efforts to save for their retirement nest eggs could be limited in the future and of the importance of taking advantage of contributing to their 401(k) plans and IRAs now, while these accounts still offer a great tax incentive with generous contribution limits. Don’t let hindsight be 20/20. Share the vision now with your workforce about the importance of saving for retirement by hosting a retirement preparedness workshop or 1 x 1 employee financial planning sessions.

Remodeling – Will You Get Your Money Out of It?

2012-05-06T23:31:52Z

My husband pulled a “home makeover – bathroom addition” on me! Knowing I was traveling on business, my husband thought it would be the perfect time to put new floors in our bathrooms, kitchen and entry ways. Now, he is a smart man so he didn’t totally surprise me with new floors – we spent many hours choosing the perfect color together. He did schedule them to be installed when I was away.

He was the one who had to put up with the refrigerator being in the middle of the living room, the piles of wood all over the house, tile chipped away, the toilets off, and all the dust! When I left we had beat up looking linoleum and drab looking tile – very sad looking. When I came back, I walked in to a beautiful wooden entryway and stepped on freshly shampooed carpet as I took a tour of the place.

When we decided to put in wood floors, we did it for our enjoyment, knowing we’d be here for many years, and if we ever decided to rent this place out, the floors would help sell the coziness and warmth of the mountain condo. It’s kind of scary these days putting money into our homes when the housing market is so sluggish.

You can over improve your home. When real estate values were skyrocketing in the mid – 2000’s, you could easily do an entire bathroom remodel and get all of your money back when you sold. Today is very different. Before going into a remodeling project, make sure to go in with your eyes open. Check the numbers – how much you can recoup if you sell. According to remodeling magazine, I found that in the mountain states where I live, homeowners who did a bathroom remodel only recouped 62.2% of their investment when sold. That’s not much.

The best addition for the buck? Topping the list was a new entry way door! That was a surprise coming in at 73% replacement recouped. Of course it was a steel door – so I am thinking this could either be for security reasons or just making a great first impression. The first thing you see is the front entryway so when you think about it, it does make sense. Kind of a boring addition in my book.

The second best was adding an extra bedroom to your attic. Homeowners who did so recouped 72.5% of their money. This one totally makes sense. An extra room is very desirable in a tough economy – move Junior upstairs and your mother-in-law into the downstairs bedroom! Extra space is always important for a guest room or a growing family.

What remodeling decisions are the worst in terms of recouping the money? A home office remodel and a sun room addition recouped less than half of the money spent. Anything you do to your home that you see as unique and interesting may strike others as odd or difficult to adapt to. Be careful when putting money into something like a greenhouse, wine cellar or sauna – though each would be really wonderful to have at home. See remodeling magazine’s annual survey by clicking here.

Sadly, these days most people who make improvements to their homes won’t get back what they put in … at least until the real estate market comes back. Who knows when that will be? In the meantime, if you plan to stay in your home, making improvements that will improve the enjoyment and quality of your life might be worth it. A little sprucing up can certainly change the look and feel of your home – and lift your spirits.

And when they are done when you are out of town, even better!