Scary, right? Although we hope it won’t happen to us, anybody could be a disaster victim. And that’s why home owners have insurance—to protect the roof over our heads and replace possessions in case the unthinkable happens.

But what if you don’t own a home? If you’re renting, you may not be required to have insurance, but you should have renter’s insurance to protect yourself and your belongings.

What is renter’s insurance?

Renter’s insurance protects the stuff you own when you rent; your computer, clothes, furniture, jewelry, etc.

If your apartment burns down tomorrow, your landlord’s insurance isn’t going to cover this stuff. His insurance is going to pay for the building to be repaired, sure, but it won’t replace your one month-old MacBook Pro.

You may think you don’t own much, until you stop to think about what it would cost to replace everything in your apartment. Even with just a few gadgets, some furniture, and a small wardrobe, the value of your belongings can easily run into the thousands or tens of thousands of dollars. And because rental insurance is often very cheap, it’s good peace of mind.

How much does renter’s insurance cost? 

Renter’s insurance premiums are usually affordable. When I used it, I never paid more than $9 or $10 per month in renter’s insurance. The National Association of Insurance Commissioners says that, on average, renter’s insurance runs $15 to $30 per month—of course this depends on the value of your belongings and other factors.

How do you get renter’s insurance?

You can get coverage through most insurance agents. If you already have auto or life insurance, check with your agent about adding a renter’s policy. The multiple policies will probably snag you a couple discounts, meaning lower rates for all of your insurance plans.

How much coverage should I get?

To find out how much renter’s insurance coverage you need, take an inventory of your belongings, especially the high value, antique, or collectible items that you own. Copy documentation and take pictures in case you do need to file an insurance claim. Also, keep a rough inventory of the rest of your stuff: clothing, small appliances, kitchen items, small furniture/accessories, etc. You can even maintain an online inventory for free at sites like Know Your Stuff.

After you take inventory of your items, your insurance agent can help you decide how much coverage you need. Have him or her decipher all the fancy insurance lingo for you so you can make the right decision.

The main thing to consider in renter’s insurance is “full replacement value” versus “depreciated value”. Most people recommend to go with full replacement cost coverage—even at it’s higher premiums—because you can replace any items you lose with new items. For example, if you own a five year-old TV at the time you file your claim with depreciated coverage, you would only be reimbursed for the amount that TV was worth. With full replacement coverage, you would be reimbursed for the amount it would cost to buy a new TV. This makes sense since you will, in fact, have to go buy a new TV if yours is lost in a disaster.

What else does renter’s insurance cover?

Other than coverings your belongings in case of a disaster, renter’s insurance provides two other big types of coverage: liability protection in case someone is injured at your place and temporary living, a paid-for place to live if your rental becomes uninhabitable for some reason (you know, like if it burns down).  Both situations carry huge financial risk that can be avoided with an inexpensive renter’s insurance policy.

Like with most insurance, you’ll probably rarely (if ever) use your plan or file a claim. But many renters that have experienced disaster without insurance will probably tell you that it’s pretty stupid to not protect yourself when it can be done so inexpensively.

What about you? Have you used renter’s insurance? Has it ever saved you?

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Keeping track of your credit score can alert you to problems in your credit report and show you how timely payments is paying off as your score goes up. You can also compare your score to national averages so you know how good a job you’re doing managing credit.

Fine.

But other than understanding your credit score, what good is it?

After all, if you walk into a bank for a loan or apply for a credit card online—you have no idea what credit score is required to get approved. So if you know your score is 665 and that’s about average, that doesn’t help you if the credit card you’re applying for requires a 670 credit score.

One of the things I try to do as a financial blogger is shed light on areas of finance that you wouldn’t know about if this stuff isn’t your job. Most people go about life, see a credit card ad with Alec Baldwin or Jimmy Fallon and apply because of the ad. I sit around running spreadsheets comparing rewards redemption rates or how much a 0% balance transfer with a 4% fee will save you  over a card with a 10.99% regular APR over 18 months. (Answer: $110.27 per $1,000 transferred).

The same is true for credit scores required for credit card approval. All you care about is getting a good card. I care about who the bank will give that card to and who it won’t.

Most Cards Require Pretty Good Credit

Let’s be clear about that. A lot of people who apply for credit cards are denied. And if you get denied too many times in a year, that can actually hurt your credit further. To help you avoid that, let’s look at what cards you can get with various credit scores.

If you’re applying for a new credit card, you can lump yourself into one of four groups: 

• Superstar credit (780+)
• Good credit (700+)
• Average credit ( 600+)
• Poor credit (Under 600)

Superstar Credit: 780+

Reaching this credit level is hard to do at a young age because it requires between five and ten years of on-time payments and usually takes a mix of credit accounts such as credit cards, student loans, and a mortgage. Obviously, if you’re in this range, you have your pick of any of the best credit cards, but some really cool cards like the American Express Blue Cash Everyday Card and Premier Rewards Gold charge card are only available to people in this group.

Good Credit: 700+

To have very good credit, your credit scores are at least 700. You’ve been using credit for a least a couple of years. In most cases, you’ll get approved for most credit cards provided you aren’t overextended with too much debt or too many credit card accounts.

You can take advantage of leading cash rewards cards like the Discover More Card or Chase Freedom Visa, top travel cards like Chase Sapphire and Capital One Venture, quality for cards offering sign-up bonuses of up to $500, or take advantage of 0% APR balance transfer or purchase period.

Average Credit: 600-700

If you’ve just started to use credit or are recovering from a missed payment or two, you’ll probably have a lesser credit score in the 600s. This means you’ll have trouble getting approved for many credit cards. Not knowing this, you may try to apply for several cards and get declined which, in turn, will hurt your credit score further. If you’re in this group, you want to know which credit cards will offer you the best chance of approval and apply for those cards first. You may be able to get approved for some of the leading cards, but it’s iffy.

On another site I run I keep updated pages on the best credit cards for people with a 650-699 credit score and the best cards for people with a 600-649 credit score. Check them out for recommendations.

Bad Credit: Under 600

If you’re in the last group and have bad credit because you’ve missed payments, had collection accounts or a foreclosure, you need to take special steps to get approved for a credit card. If you’re in this situation, you should only apply for a credit card in an effort to begin rebuilding credit (NOT to spend money you don’t have!)

Usually, this means applying for a secured credit card.

A secured credit card requires a security deposit before you can begin making charges. That security deposit acts as your credit limit. Although that may sound like a debit card or prepaid card, the secured credit card will report your payment history to the credit bureaus, which debit and prepaid cards do not do. After a year or so of using a secured card, you may be able to upgrade to an unsecured account and get your deposit back.

When a Good Credit Score Is Not Enough

Often times you can check your credit score, find out it’s not bad, and still be denied for a credit card. This is especially true if your credit score isn’t in the mid 700s or better.

What gives?

Banks’ approval criteria for each card changes all the time. But common reasons you may be denied a credit card even if you have a good credit score include:

• Too much debt (or high credit balances even if you pay them off)
• Too much available credit
• Too short of a credit history
• Recent late payments, charge-offs, or other negative items

If your credit score is in the high 600s, you may still get approved for some of the leading card offers, but this is where you have to be careful. You’re more likely to be approved if you have a year or two of on-time payments and very little credit card debt. If your score is lower than 700 because you’ve missed payments or have a lot of revolving debt, your approval chances are lower.

Before your apply for a credit card, check both your credit score and credit report. Don’t apply for new credit if you have recent late payments or big balances on your existing credit cards. Even if you pay your cards in full each month, that big balance from the month you went on vacation could look like debt to a bank’s computers.

Have you recently applied for a credit card? Let us know which one and what your score is. Got questions about getting approved for a card? Fire your question at me in the comments.

Disclaimer: One way I’m able to support my blogging while helping you is to link to products I like and earn a referral commission if you sign up. I only link to products I trust. That said, you should know that if you click the links to these cards and ultimately apply for and are approved for that card, I may be paid for that. If you choose to support Money Under 30 in that way, thanks!

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Recently I wrote about the benefits of both 401ks and IRAs offer. We also looked at the emerging Roth 401k option and when it makes sense for young investors.

But everybody’s next question is: “Okay, okay, but how much should I put into my 401k?”

Comparing Without Competing

One of the most popular posts in this blogs’ six-year archives is how much should be in your 401k at 30?

I was 25 when I wrote it, trying to decide how much to contribute to my own 401k.

But what I learned from over 200 (sometimes nasty) comments is that setting a savings benchmark by age alone is silly; no two savers are the same. You can’t compare the engineer who graduated at 22 into a $65k-a-year job with no student loan debt to a doctor who starts practicing at 29 and has $200k in loans. Or the social worker earning $35k a year and needing all of it just to eat.

Today I want to provide a slightly more tactical advice. As a percentage of your income, how much should you contribute to your 401k?

• If you’re in debt?
• If you can also do a Roth IRA?
• If your employer does not match funds?

A Few Rules

Here’s where to start: 

1. If your employer matches 401k funds, contribute enough to get the full match. Do this first. Even if you’re in debt. Even if you don’t put in a penny more.
2. Next, if you can contribute to a Roth IRA, work on contributing the full $5,000 a year to that account before you contribute elsewhere.

There are lots of ratios out there recommending how to divide up your income. Some are as simple as spend 50% save 50%. Although an admirable goal, most people will have a hard time with this. Especially in your twenties. I like 75/20/5.

• Spend 75%
• Save 20%.
• Give 5%.

But figure out the ratio you’re comfortable with. You may want to defer charitable giving until you’re debt-free. If you need most of your income to eat, it might be spend 90 save 10 or even 95/5. That’s okay. But you should reevaluate this as your financial situation changes and aim to get to at least 80/20.

In this example (75/20/5), if you earn $40,000, you would spend $30,000 or $2,500 a month, save $8,000 a year, or $667 a month, and—if you want–set aside $2,000 a year for your chosen causes. Note that we’re working off of before-tax income, so that $2,500 a month for spending might be more like $2,000 after taxes).

Working backwards from this, let’s say your employer will match a 6% contribution to your 401k. So 6% of your pre-tax income is $3,000. You put that in, and you have $5,000 left in your savings budget.

If you don’t have a fully-funded emergency fund, this comes next.

If you have plenty for a rainy day, then you return to your retirement options. If you qualify for a Roth IRA, then that’s probably where the $5,000 should go. If you don’t qualify or have more than $5,000 left to spend, return to your 401k and up your contributions.

The lesson is, figure out how what percentage of your income you can save in total, and allocate it appropriately:

1. 401k up to employer match cap.
2. Emergency savings until you have six months’ living expenses.
3. Roth IRA up to $5,000 annual cap.
4. Back to your 401k.

This flowchart from my post on creating an automated investing program will also help:

What If You’re In Debt?

If your employer matches 401k contributions, then put in enough to get that match, even if you’re in debt.

Next, if you’re in credit card debt, stop. Put your extra money towards paying that off before making additional retirement contributions.

Got student loans? Follow the above schedule anyway.  Unless your private loans have double-digit interest rates, I don’t recommend repaying student loans early.

What About You?

How much—as a percentage of your gross income—do you put aside for retirement? Let us know in a comment.

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Credit Card Rates, Nationwide Averages

*Sources: Bankrate.com and ArriveFinancial.com.

This Week’s Featured Card

Best Credit Card Rates

The following is complied using data from ArriveFinancial.com, another site I publish featuring exclusive insights credit card terms and approval requirements. Each card name here links to more information at that site.

Cards are sorted by lowest regular interest rate. Often, cards with higher rates have more generous rewards structures or are designed for applicants with limited credit histories.

*Rates are variable and subject to change. If a range is shown, your actual rate may vary based upon your creditworthiness.

Disclaimer: One way I’m able to support my blogging while helping you is to link to products I like and earn a referral commission if you sign up. I only link to products I trust. That said, you should know that if you click the links to these cards and ultimately apply for and are approved for that card, I may be paid for that. If you choose to support Money Under 30 in that way, thanks!

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If you read that and say, “huh?” Don’t feel bad. Despite hundreds of articles I’ve read on the topic, I have yet to find one that explains the differences between Roth and traditional accounts in a way that non financial nerds can understand it.

Today I’ll do my best.

Note: Not everybody has the option to do a Roth 401k. Only some employers offer this, although it’s becoming more common. In this series we’re discussing 401ks, but the differences between Roth and traditional accounts we discuss today apply to individual retirement accounts (IRAs) as well.

Traditional vs. Roth

Very quickly, retirement accounts come in two flavors—traditional and Roth.

• With traditional accounts, you don’t have to pay taxes on the money you put in now, but you have to pay taxes on the money when you withdraw it later.
• With Roth accounts, you can only put money in after you’ve paid taxes on it, but when you withdraw it in retirement, you don’t have to pay taxes on the money.

For quick trivia: the Roth accounts are named for this guy, the Delaware Senator who created the Roth IRA in 1997.

Roth 401ks vs Roth IRAs

We’re focusing on comparing Roth 401ks and traditional 401ks, but how does the Roth 401k differ from the Roth IRA, every blogger’s favorite retirement account? The big points are highlighted on the chart below—contribution limits, income limits, and mandatory retirement age.

But if you have a Roth 401k at work, is there any reason to still contribute to a Roth IRA?

Yes.

The main reason is Roth IRAs can double as emergency funds. With a Roth IRA, you can withdraw your deposits tax- and penalty-free at any time. (You just can’t touch the gains.) Not that you should do this, but if you ever had a big emergency and needed money, tapping a Roth IRA is better than tapping a 401k or traditional IRA and paying a 10% penalty. It’s probably better than taking a 401k loan, too.

*Penalty applies to earnings withdrawn before age 59 1/2 or within five years of contribution. You may withdraw deposits at any time penalty-free.
**Investors over 59 1/2 may make additional catch-up contributions.
***Anybody may contribute to a traditional IRA and earnings will not be taxed until retirement. Depending on how much you earn and whether you have a retiremetn plan at work, you may not be able to deduct all of your contributions, however.

Other Differences

As you can see, there are a lot of subtle differences between these account types, and all the acronyms and contingencies start to make your head ache like a bad hangover. Just a couple more things to mention:

Rollovers: When you leave a job, you can rollover your 401k into an IRA at the broker of your choosing. If you have a traditional 401k it becomes a traditional IRA; a Roth 401k becomes a Roth IRA.

Roth Conversions: You can convert a traditional IRA into a Roth IRA by doing a Roth conversion. You pay taxes this year on the balance of the IRA so you won’t have to pay them in retirement. This can be a way to diversify the tax basis of your retirement savings or for high earners to get around the income limits on Roth IRA contributions.

Choosing Between a Roth 401k and a Traditional 401k

Here’s the thing about this decision: If the tax rate you pay stays exactly the same between now and when you retire, there will be NO DIFFERENCE in your returns between a Roth and Traditional account invested in the same stocks. So:

• Roth 401ks are better if you believe you will be paying a higher tax rate in retirement than you pay now.
• Traditional 401ks are better if you believe you will pay a lower tax rate in retirement than you pay now.

Here’s how this looks. The table on top compares a traditional 401k with a Roth 401k if tax rates stay the same; the bottom table compares the accounts if the investor’s tax rate goes up 50%.

Of course, no one knows for sure what taxes will be in the future, but most people assume taxes won’t go down.

If you’re young and professionally ambitious, it’s a good assumption that you’ll be in a higher tax bracket as a successful retiree than you are now on an entry-level salary.

This is why most advice geared towards young investors heavily favors Roth accounts.

That said, some people hedge by using both traditional and Roth accounts so they get some benefits whether taxes go up or down. Before Roth 401ks became available, many investors had a traditional 401k at work and a Roth IRA too. If you can’t do a Roth 401k at work, this is what I recommend.

Here Are The Takeaways:

• Roth 401ks are good because if your tax rate goes up, your savings will be worth more in retirement.
• But because nobody knows what tax rates will do, it’s not a bad thing to have both Roth and traditional accounts.
• The less you earn now, the better it is to contribute to a Roth.
• The more you earn, the more you want to transition to traditional accounts.

If you make a lot of money, you cannot contribute to a Roth IRA because of income limits. You can still do a Roth 401k if you have one at work, but that doesn’t mean you should. Unfortunately, there’s no clear dividing line because nobody knows how their tax rate in retirement will compare to their tax rate now. If you want to make sure you get it right, regular visits with a financial planner or tax expert are a must.

To make it simple as possible, however, know that saving for retirement is more important than whether you use a Roth or traditional account. But as a rule, follow this automatic investing flowchart: Start with your 401k—traditional or Roth—and contribute enough to get your employer’s match (if there is one). Then contribute up to $5,000 a year to a Roth IRA. Then go back an max out your 401k.

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We all know there are still a lot of foreclosures out there. As a Realtor, it’s especially obvious. Every time I drive to one of my short sale listings it seems like there are two new foreclosures on the same block.

What gives? Although you might think that the real estate market—and, in turn, the foreclosure rate—might be improving by now, there are lots of factors preventing that from happning.

One of them is that a lot of people are simply tired of holding onto homes with negative equity.

Nearly 23% of Americans owe more money on their mortgages than their homes are worth, according to CoreLogic. Furthermore, an extra 2.4 million homeowners have less than 5% equity in their homes.

So many homeowners are paying money for a home that will not increase in value any time soon. And that’s raised an interesting question for many:

If your home is so far underwater that you can never sell it for what you owe, why should you keep paying the mortgage? Why not just walk away? Or at least stop paying until the bank kicks you out?

That’s exactly what some people have done.

Although you may be among many who feel it’s unethical to walk away from a debt obligation, others feel walking away is strictly business.

Whether you see it as more of a moral or economic decision, it’s a decision that has some serious consequences to consider.  If you’re thinking of walking away from your mortgage or know somebody who is, these are the consequences: 

Cancellation of Indebtedness Income

When you sign a mortgage note you are promising to pay off that debt. If you walk away from your home and your debt obligation, the IRS sees the money you should have paid on that debt as a form of income, which you can be taxed on.

Although the IRS does have a provision for allowing some debt to be forgiven if the debt was your primary residency and was purchased between 2007 and 2012, those who bought before 2007 or are walking away from a rental property, vacation home, or business may owe the IRS a hefty sum. (Let’s say you walk away from a $300,000 mortgage balance. If you face a 25% tax rate, you could owe Uncle Sam $75,000.  And tax debts do not go away, even in bankruptcy.

Ask your tax advisor about the consequences before making the decision to walk away. This IRS calculator may also help you calculate what you would owe.

Ruined Credit

Most people know that foreclosure is not good for your credit. But just how much does walking away from your home hurt that credit score, and for how long?

“The Fair Credit Reporting Act requires that negative information must be removed from your credit report after seven years,” says Steve Bucci of BankRate.com. A foreclosure will appear on your credit report (the one pulled every time you apply for a place to rent or a car loan) for up to seven years. Most people have no clue what their life will be like seven years down the road, so it’s hard to know exactly how much walking away from your mortgage today will impact your life tomorrow.

Some employers, especially government agencies, are also pulling credit before hiring, which can make rebuilding your finances even tougher. The way these employers see it is that if you have poor credit, you’re more likely to take a bribe or do something shady to get money. So you should probably plan on renting (from a landlord who doesn’t care about your credit score) for at least five years after walking away, as you won’t qualify for another home loan anytime soon.

An Impact on Others

When your home is underwater and perhaps you’ve lost your job, it’s easy to feel like a victim and that you simply need to look out for yourself. But walking away from your mortgage affects other people, property values and even entire communities. When the bank takes back a property, it eventually relists it for sale as a foreclosure. According to CNN, foreclosed homes tend to sell for about 26% less than regular sales.

These foreclosures become comparables for short sales and even traditional real estate sales, driving all holme prices down and making it harder for people to sell their home without taking a loss. Because foreclosed properties are vacant, they tend to be an eyesore for the communities. One house with broken windows and overgrown weeds sticks out among well-maintained houses bringing the values of the other houses down. Empty houses can also be a magnet for graffiti and squatters. Obviously, if your back’s against a wall, this probably won’t stop you from walking away. But when people make the argument that its immoral to walk away from your debt, it’s not just because of the contract between borrower and bank, it’s the unwritten contract between borrower and neighbors.

Emotional Damage

If you’re deciding to walk away from a rental property, it’s easier to think of it as a business decision. It’s not so easy to walk away from you own home. If you’ve raised a family there, or simply sunk money and weekends into renovations over many y ears, you may focus on past experiences and expenditures rather than how you can improve your future by finding somewhere else to live.

If you’re doing “the right thing” and paying an underwater mortgage or living in a small condo well within your means, it’s easy to judge someone who’s stopped paying their mortgage and maybe even still living in their home scott free.

Even though some non-payers are able to live in their homes anyway, sometimes for years, eventually they will have to leave, and that will not be easy. I would not be surprised if many have continuing feelings of guilt and fear about future consequences.

You may have thought about walking away from your house. If so, take time to weigh the advantages versus these impacts, and consider the other options like staying in your home and continuing to make the payments, renting the home out or doing a short sale.

Have you or somebody you know walked away or considered walking away from a mortgage? Let us know in a comment.

Note: We know this is a controversial issue. Disagreement is OK. Insults are not. Please do not flame others for sharing their experiences or opinions on this.  –Ed.

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A few weeks ago, I sent my focus group a quick survey on 401k plans. I knew 401ks are confusing—even to someone who’s been writing about them for years—but I was interested in what, specifically, you want to understand better about 401ks.

Over the next few weeks I’ll publish several posts that answer your top questions about at-work retirement plans. Starting with: Should I contribute to a 401k or an IRA?

Note: We’ll be talking about 401ks—the most popular at-work retirement plan. Non-profits and other institutions may offer 403b plans. Although there are some differences, if you have a 403b plan, most of what we cover will apply.

Today we’ll look at the pros and cons of a 401k or other retirement account at work versus an IRA that is a self-directed retirement account.

Save Something. Anything!

At work or on your own, everybody should save something for retirement. According to a recent survey, 55% of Gen Y have not started saving for retirement. No surprise. But we need to start.

Look at the reasons people give for not contributing to their 401k:

(Are you eligible for a 401k or 403b but don’t contribute? Let us know why in a comment. If it’s because of something you don’t understand, maybe we can help.)

Of course, lots of young people simply don’t have the scratch. It’s hard to set aside $50 a month when Two-Buck Chuck is your go-to drink and your iPhone is still on your parent’s family plan.

Others are confused or intimidated by investing. Still more get paralyzed by questions like: “Should I use a 401k or IRA?” or “What mutual funds should I invest in?”

What’s important is to:

• Automatically save something—even a tiny bit— in a retirement account.
• Invest that money in stocks or bonds (in other words—don’t create an IRA comprised of cash in certificates of deposit.)

Are there exceptions? Only one: When you’re in credit card debt and paying interest over 10%. Even then, I wouldn’t fault someone for contributing a small amount to a 401k.

Now that we have that out of the way, let’s look at the differences between 401ks and IRAs.

401ks vs. IRAs At-a-Glance

*For 2012; savers over age 59 ½ are eligible to make additional catch-up contributions.

What a 401k Is (And Isn’t)

Before we dive in, there’s some confusion surrounding what a 401k plan actually is. One respondent asked:

“Wouldn’t it be better to do your own fund, such as a Roth IRA? I ask because with the current economy, many people I know lost up to half of their 401k.”

A lot of people think like this, in part due to the media commonly using people’s depleted 401ks as a sign of how the recession hurt everybody.

During the down economy, not everybody lost a job, but anybody with a 401k lost money. Only not everybody lost 50%. Investors with who were properly diversified fared better.

Both 401ks and IRAs are types of investment account. The IRS gives investors in both 401ks and IRAs certain tax advantages over a regular investment account, and also sets rules for how they can be used.

It’s helpful to think of both a 401k and IRA as buckets with which you fill will rocks (investments like stocks and mutual funds). Because everybody fills their buckets with different types and quantities of rocks, no two are the same. But this is where the similarities between 401ks and IRAs end. Let’s take a look at what makes a 401k different from an IRA, for better or worse.

401ks Have Limited Investment Options

With an IRA, you can invest in virtually anything. You can have an IRA that simply holds a savings account or an IRA with 100 different stocks, bonds, ETFs, and mutual funds. You can even have an IRA that makes loans to other people through a peer-to-peer lending network.

With a 401k, this usually isn’t the case. Your employer partners with a financial services company to administer your plan. That company then gives you a limited number of investment options (usually, but not always, these are mutual funds). If you work at a large company you may have a lot of investment choices. If you work for a very small company, however, you may only have 10.

For most people, having fewer investment choices is actually a good thing. Most people aren’t stock pickers and shouldn’t try to be architects of the perfect portfolio with hundreds of mutual funds. The problem, arises, however, when 401k plans only offer mutual funds that have unnecessarily high expense ratios.

If you work for a larger employer, you can research how your 401k stacks up in terms of investment choices and fees at Brightscope.

401ks Have Higher Contribution Limits

The whole point of 401ks and IRAs is that Uncle Sam is giving you a break on your taxes to encourage you to save for your retirement. Unfortunately, there’s a limit to this particular Uncle’s generosity: contribution limits.

And this is a big differentiator.

In 2012, savers under 59^1/2 can contribute up to $17,000 to a 401k and up to $5,000 to an IRA. (For IRAs, this is an oversimplification, but bear with me.)

When you’re starting out, contribution limits are hilarious. There’s no way you’re going to come close to them. But as you earn more money, pay off debt, and get serious about saving for retirement, it’s another story. Especially if you’re saving in an IRA alone, $5,000 may not be enough to fund the kind of retirement you’re dreaming about. Advantage 401k.

401ks Let You Contribute Pre-Tax Dollars

Normally, if you earn $500 and want to invest it in McDonald’s stock, you first have to pay income taxes on it. So you pay $100 of taxes and invest $400 in a stock. Assuming you hold this stock for many years, when you sell it, you’ll need to pay taxes on the amount the stock has appreciated…called capital gains tax, currently 15%. So if the stock goes from $400 to $600, you’ll pay $30 in tax. The $500 you earned (before taxes) has become $570 for a 14% post-tax return.

Now let’s say you invest the same $500 amount in a 401k. Now, with a traditional 401k, you don’t have to pay income taxes on money you put in. So you earn $500 and can invest $500. When it appreciates the same amount, you’ll have $750. But now, you have to pay income tax on the entire amount…not just the gains…$150. You’re left with $600…a 20% post-tax return. Okay, so the extra $30 in this example isn’t impressive. But these are small numbers over a brief period of time. If that $500 were $500,000, that’s an extra $30,000 you get to keep.

Here’s another example:

*In our next post we’ll take a closer look at how Roth accounts—both IRAs and 401ks—compare to their traditional counterparts.

401ks and IRAs Have Early Withdrawal Penalties

Here’s the thing about retirement accounts: They’re meant for retirement.

The tax breaks Uncle Sam provides us on money saved in a 401k or IRA are incentives to save for retirement. So he also provides an incentive not to touch that money. This is the early withdrawal penalty.

If you withdraw cash from a traditional 401k or IRA before you turn 59^1/2, you will owe a 10% penalty to the IRS on top of ordinary income taxes.

IRAs provide a bit more flexibility in this arena, and there are a number of exceptions to the IRA early withdrawal penalty. You can, for example, use funds to cover higher education expenses and up to $10,000 towards the purchase of your first home.

With a 401k, you must prove severe financial hardship to obtain an exemption from the early withdrawal penalty. Some employers, however, allow you to take out a 401k loan. Essentially, you borrow money from yourself. Although this sounds like a great idea, it’s a slippery slope. Any money you borrow ceases to earn returns for you and, if you lose your job, you must repay the entire loan or pay income taxes and the 10% penalty on the outstanding balance.

The Bottom Line

The decision to invest in a 401k, IRA, or both is different for everybody and depends on another set of circumstances: Whether you are eligible for either a Roth 401k or Roth IRA. We’ll talk about that next time.

In the meantime, I will say this: for those eligible, 401ks are the easiest way to save for retirement. The limited investment choices can be a good thing because it simplifies your investment decisions, and the money is automatically taken out of your paycheck. So if your employer offers a 401k plan and you’re eligible, you should contribute to it. If you don’t have access to a 401k—or maxed one out—-and still want to save for retirement, you should open an IRA.

In a few days, we’ll take a look at another common and confounding question: When given the choice among a Roth 401k, Traditional 401k, a Roth IRA and a traditional IRA, which one(s) should you choose? We’ll also cover how much you should be contributing and how to select investments to obtain the right asset allocation.

What about you? Do you participate in your company’s 401k or 403b? If not, why? Let us know in a comment.

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So if you want to change your financial habits—say cut back on impulsive purchases and save a bit—what can you do?

A good start is to couple up with your counterpart.

Ever noticed that among couples, one person’s often a Saver and one’s a Spender? It’s a good thing. When two Spenders get together, it’s a recipe for financial trouble. Meanwhile, two married Savers may endure a very secure albeit boring lifetime together.

My parents are an example. My dad’s a Saver, my mom’s a Spender. My wife, Lauren, and I are like this too…and I’m the Spender.

But wait, aren’t I personal finance blogger? Yes, yes. But I’m still a Spender. Despite my dad’s efforts to instill a saving ethic in me, when I got out on my own, I ended up more like my mom: Spender. (Maybe it is in my genes.) Although I learned lessons from overspending, spent years repaying big debts, and now have created systems to pay myself first and invest a percentage of my income, when money comes in, my gut wants to spend it, not save it. I have to fight the urge to spend to put money in the bank. I’m a born Spender.

And though Lauren doesn’t set regular saving goals or always stay on top of things like her retirement savings, she’s a born Saver. When Lauren gets paid, she’s reluctant to spend her money, and usually doesn’t. For example, Lauren could use some new clothes to replace casual outfits she’s had since college. She knows she could use new clothes. We have the money to afford new clothes. I give her time to go shopping for new clothes, offering to watch our daughter on weekends. She’ll go shopping for new clothes. And come back empty handed. She can’t bring herself to spend the money. She’s a born Saver.

So when it comes time to make big financial decisions, Lauren and I balance each other. When I want to hurry up and buy something, she suggests we hold off. When Lauren balks at spending money we have on something that could really improve our life, she’s appreciative that I push us forward.

ARE YOU A SPENDER OR A SAVER?

A big step towards reaching your goals is to understand the subconscious forces driving your financial decisions. We like to think that we’re capable of making entirely rational financial decisions, but this is not the case. If you’re a Spender, you’ll need to create systems in your life that make it impossible for your impulsive self to spend your money. And if you’re a Saver, you need to find ways to create permission for yourself to spend and enjoy your money here and there.

You may already know if you’re a Spender or a Saver. If not, quiz yourself:

SPENDER OR SAVER? QUIZ

When you get a paycheck or another lump sum of money, do you:

1. Immediately start thinking of things you could buy with that money?
2. Put some of the money in savings, or simply ignore the fact you now have more money than before.

When you are getting ready to make a large purchase, do you:

1. Get excited and buy as soon as you can, sometimes too impulsively.
2. Feel anxious and put off buying as long as you can.

Do you tend to buy things that you don’t really need?

1. Yes, I have collected a lot of crap I shouldn’t have over the years.
2. No, I don’t buy something unless it’s absolutely essential.

Obviously, if you answered at least two of these questions “1”, you’re more of a Spender. If you answered two or more “2”, you’re a natural Saver.

When you know this about yourself, you can take steps to consciously overcome your money gut when you need to…even if you’re not married to your financial counterpart.

HOW TO SAVE WHEN YOU WERE BORN TO SPEND

If you perennially have the urge to splurge, saving can be as hard as shedding belly fat. As soon as you take a few steps forward, one lapse in willpower puts you right back at starting line…or behind it.

Michael Rubin is a financial planner and blogging friend of mine who’s just released his second book, The Savings Solution: A Conversation About Living for Today While Saving for Tomorrow. It addresses this exact problem. For Spenders, it provides a way to incorporate financial planning while still enjoying some money now. For Savers, it takes away some of the guilt that comes with spending money.

The Savings Solution presents 10 savings strategies that closely mirror the advice woven throughout my own blog. I want to highlight four here:

1. Stay emotionally connected to your money.

Emotional connections differentiate Savers and Spenders. (Again, this is not about numbers, it’s about psychology.) Savers are emotionally connected with money. It gives them pleasure to watch it grow and it pains them to part with it. We Spenders are emotionally connected to things money can buy; we get more pleasure out of a new outfit or that new car smell than we feel pain from spending. Rubin’s first saving strategy is learning to develop a healthy level of emotional connection to money. You want to feel pinch of spending money, but not so much you hoard it.

2. Major on the major, minor on the minor.

With some rare exceptions, cups of coffee don’t sink a budget—housing, cars, and other expensive stuff does. You want to take time with major financial decisions like where you live and what you drive. The little stuff matters too, especially small but recurring expenses (like a gym membership you’re not using), but you don’t want to be to pennywise but pound foolish.

3. Spend with comfort on what you value most.

This is what I call spending with intention, and it’s one of the pillars of my financial philosophy and my Richer By The Week 5-day goal-setting workbook. Here’s an example:

Michael travels from New England to the University of Michigan, his alma mater, for football games several times a year at a cost of at least $500 a trip. To a non-football fan, that’s a lot of money to spend each year on a very discretionary expense. But Michael loves those trips. They give him something to look forward to. He enjoys every minute of the games—and the trips—because they are intentional.

When you build an indulgence or two that you love into your spending plan, it makes it easier to make other sacrifices (like driving that old car another couple years), because you’re using money in ways that fill your soul and literally add meaning to life.

4. You don’t spend what you don’t see.

Paying yourself first is such a powerful strategy because, as Michael puts it, you don’t spend what you don’t see. If you want to save money, take it out of your paycheck before it even hits your checking account. Then, don’t give yourself easy access to the savings account where you store it (that means no ATM card.) When you automate your finances correctly, you don’t need to budget constantly (also one of Michael’s strategies), letting you worry about money less and enjoy life more.

What about you? Are you a born Spender? How have you trained yourself to overcome the urge to let your money burn a hole in your pocket? Have you used any of these strategies or something else? Let me know in a comment.

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Earth Day is an annual reminder of things we can do as individuals to help preserve our habitat and the resources that sustain us.

When we think about living green, recycling, buying locally, or trading in the SUV for a Prius usually come to mind. Not coincidentally, these green practices may result in having more green of another kind…the money saved by reusing products and reducing consumption.

But there’s another way to influence your environmental footprint that gets less press: how you invest.

Green Investing

According to the Forum for Sustainable and Responsible Investing, one out of every 10 dollars are invested in socially responsible funds, a sum totaling over $25.1 trillion.

Socially responsible investing is a wide umbrella, but it usually means avoiding the stocks of companies in vice industries like gambling, tobacco, or firearms, or companies with dubious business practices like poor factory conditions or a spotty environmental record.

A variant of socially responsible investing, green investing strives to limit investments in environmentally irresponsible companies and seek out companies that take proactive environmental measures or are involved in ecofriendly businesses like renewable energy.

Getting Started With Green Investing

I don’t recommend average investors pour money into individual stocks. But without stock picking, it can be difficult to avoid stocks that don’t meet socially responsible criteria. Major mutual funds (like those in your 401k) invest in dozens of companies and are frequently trading. And one of my favorite types of investments, index funds, follow entire markets comprised of hundreds or thousands of stocks, including plenty that are not socially responsible.

What’s an eco-conscious investor to do?

Some mutual fund companies offer socially responsible and green funds. At least two fund companies, Calvert Funds and Pax Wolrd Investments, specialize in sustainable investing strategies.

The Catch

Choosing investments is tricky business. Among thousands of investment choices, many can help you reach your goals, but choosing the wrong investments can be devastating. High fees and investing objectives misaligned with your goals will cause your money to go nowhere fast.

When you incorporate values into your criteria for choosing investments, the field of eligible investments shrinks but picking the right investments gets harder. Many socially responsible investments, for example, have higher expenses than average; something I caution investors to avoid. Many green investments also have loads (sales charges, or commissions, of four or five percent)—a no-no for most investors.

Five Green Mutual Funds

As an example, here are five socially responsible mutual funds with no sales charges and minimum investments under $5,000. I like the Vanguard Social Index as a low-cost index fund and the TIAA-Cref Social Choice Equity fund for its low expenses and low minimum investment.

Natural Investing, an investment advisory company focusing on green investing, provides a 5-heart rating system for the social responsibility of the funds’ investments. Note that the rating considers only how socially responsible the investments are, not the fund’s financial performance.

Fund	Symbol	Heart Rating	Expenses	Minimum
Vanguard Social Index Fund	VFTSX		0.29%	$3,000
TIAA-Cref Social Choice Equity Fund	TICRX		0.41%	$250
Green Century Equity	GCEQX		0.95%	$2,500
PAX World Global Green	PGRNX		1.40%	$250
Domini Social Bond	DSBFX		0.95%	$2,500

Here’s a list of more socially responsibly mutual funds.

Learning More

If you’re interested in green investing, there are plenty of communities and publications to help you learn more. The Forum for Sustainable and Responsible Investing offers lots of information, and the Green Money Journal is a quarterly publication providing well-written features articles and lists of mutual funds and green investing events. Annual subscriptions are $25 and many articles are available online for free.

What about you? Do you incorporate green values into your investing strategies? How do you do it?

Photo credit: Ironrodart.

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Still, we’ve been on the road to this day for a few years. My husband and I paid off our student loans and my car loan about three years ago and have been saving for our down payment and extra money for expenses ever since. A lot. As much as possible. Often, more than 50% of our net income.

It wasn’t easy, but we knew it was smart to wait and save as much as we could as we transitioned from depending on a landlord to depending on ourselves. Here are some lessons we learned along the way:

Patience!

I cannot stress just how important it is to be patient during the home buying process.

For starters, there have been very few times in history where both home prices and mortgage rates are so shockingly low. Usually, it’s one or the other. Because we waited, we were able to snag a 4.0% fixed-interest rate and negotiate a price on a home that was well below it’s market value. We also felt like we were able to skip the so-called “starter home” and jump right into a home that will be large enough to accommodate a future family. This way we don’t feel like we’ll have to move any time soon—or ever—if we don’t want to. This was a purposeful decision because we are definitely not interested in selling a home in a couple of years in a bad housing market.

As with any home purchase, we faced a few bumps in the road. Negotiating was especially tough (more on that later). Tears were shed. Husbands were forced by their wives to call real estate agents and “get tough”. Numbers were crunched. Breakdowns happened. We almost lost our dream home.

But every time we wanted to cave in or move on, we stayed patient. In the end, the sellers caved and we got a better deal.

Consider Credit Unions

For our mortgage pre-approval, I immediately went to the local bank where we have accounts. They were nice enough and gave me a good deal of helpful information. But their closing costs about gave me a heart attack. And their interest rates fluctuated daily—common for most institutions, but still something that made me nervous.

Luckily, someone recommended that I check out some nearby credit unions.  Boy, am I happy I did!  Their interest rates did not fluctuate daily and were even slightly lower than our bank. Even better, though, were their closing costs. In total, we paid about $3,200 in closing, which was about half of what our bank was going to charge. (We also were able to negotiate that the seller paid $2,000 of our closing costs, helping us out even more.)

Expect Unexpected Expenses

Since the sellers accepted our offer, we’ve been shelling out money for a lot of things we didn’t anticipate.

In addition to the closing costs (e.g., title insurance, appraisal fees, and more), you’ll have to foot the bill for any inspections you want conducted on the property. For us, this meant a building inspection, termite inspection, and radon testing.

Our inspector found two dozen minor issues that needed to be fixed within the house. So we’ll be loading up on caulk, hedge trimmers, and new dryer vents in the weeks to come; all expenses we hadn’t anticipated when we were saving for the house. Sure, this stuff comes along with home ownership, but it was all new to us.

After we moved in, we also shelled out $125 to replace the locks. We needed a refrigerator and washer and dryer set, so I stalked deals and coupons sites for a couple of days before handing over $3,000 for all three appliances. We also bought a new lawn mower just yesterday for a cool $300.

Prepare for An Emotional Roller Coaster

Negotiations can last a day or a week or a month—however long it takes in your particular situation. And this time should really be called Hell Week.

We submitted our offer on a Sunday and didn’t have a signed contract until the following Saturday. Here’s how our week went:

• Sunday: Submitted a low offer and asked seller to pay closing costs.
• Monday noon: Received a counter of $5,000 less than their listing price. No closing costs. We countered at $10,000 above our first offer.
• Monday afternoon: Sellers countered at $2,000 less than their previous counter. Confused yet? We countered back with our final offer of $20,000 above our original offer and asked for closing costs.
• Monday evening: Sellers countered with their final offer of $2,000 above our final offer and would not offer closing costs.
• Later Monday evening: We agreed to their price, but said we still wanted money for closing.
• Tuesday: We waited.
• Wednesday: They lowered their listing price. They were playing hardball and looking for other offers. At this point, we started looking for other houses.
• Thursday: Nothing. Even worse, we weren’t interested in ANY other house. We considered giving in to their final offer.
• Friday: Their realtor calls our realtor three times to feel us out. Finally, at 3pm, they accepted our final offer. Hooray!

That entire week, I couldn’t concentrate. I couldn’t focus on work or anything else. It was especially devastating because there were no other houses we were interested in. We were even considering backing out of the home search for a couple of months and continuing to save.

It seemed silly because both of our final offers were so close to each other. It was almost comical that we couldn’t agree on something. Truthfully, we would have caved to their final offer the next week if they hadn’t finally agreed to ours.

When hundreds of thousands of your dollars are in limbo for a whole week, it’s slightly traumatizing. Be prepared!

Don’t Fall in Love With One House

I kept beating myself up over this during Hell Week. I was so irritated with myself that I had fallen in love with one house. This is not the trap you want to fall into when you’re shopping for a home. Remember: have a few different houses that you’re interested in when you go to the offer table.  Otherwise, you’ll drive yourself crazy during negotiations AND you’ll probably ending up paying more than you wanted.

Keep Things Professional With Your Realtor

I live in Kansas, where college basketball is in almost everyone’s blood. Our real estate agent was no different—he was one of the biggest sports fans I’d ever met. There were many times where him and my husband were on long tangents about sports or tournaments when I wanted to be talking business or looking at a home we were viewing. Of course, this set the two of them on a friendship vibe instead of a business vibe.

During negotiations, we weren’t thrilled with a few things our realtor did and said. So when my husband had to get tough with him, it was harder because they’d been treating each other like pals instead of business associates. It’s fine to be friendly, but everyone needs to remember that there’s a lot of money and a big life decision on the line.

Enjoy The Process

If you remember to take a step back and enjoy the process, it can remove a great deal of stress. Spending Saturdays looking at homes is fun! Knowing that you’re about to be a homeowner is exciting. You get to choose your perfect house—-no one can choose for you. It’s definitely a process like no other, so take the time to relish it!

What about you? If you’re a homeowner, what did you learn from buying your first home?

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