Saturday, December 10, 2016

Reconciling Faith, Career, and Financial Success

Jennifer writes in with a beautiful question:

I am a married 24 year old Christian woman. I attended college at a Christian school majoring in marketing, fell in love there, and got married shortly after college. I worked for a year immediately after college, but my husband and I agree that I would be a stay at home mom when we had a child and we started trying immediately after getting married.

I’m now a stay-at-home mom with a one year old and a three month old. While I love having the opportunity to do this and take care of my babies, I also struggle with the impact that this choice has on our family’s future.

My husband makes about $60,000 a year as the IT director for a fairly small local company. He has two people who work under him. I’m not sure he has anywhere to move up in his career without switching employers. We tithe 10% of our income to the church which is an automated $120 a week. This is something we are called to do by our faith and it comes first for us.

I feel like my faith and my family are pushing me in one direction and my desire to have a career of my own and to have a stronger family financial situation is pushing me in the other, but the push of faith and family is much stronger. I am still left with some difficult thoughts sometimes. I hope that you can provide some wise guidance on how to balance faith, family, career, and finances.

There’s really a lot to unpack here in Jennifer’s question. I’m going to do my best to walk through the major issues that I see in Jennifer’s email.

First of all, Jennifer and her family are Christians, but there are many aspects of what she writes about that apply to people of other religious traditions and faiths as well as to people who are not particularly religious. She’s speaking of balancing strongly-held values against financial and professional success when they pull in opposite directions, and I know that a lot of people struggle with that across countless different religions and social beliefs.

I’m going to specifically address Jennifer throughout this article, but if you don’t feel as though those beliefs apply to you, take a moment and think about beliefs in your own life that point in a direction that isn’t a straight route to financial success. Perhaps you have your own particular moral or ethical views that restrict you in your career, such as an unwillingness to cut certain corners, or in your financial life, such as some specific causes that you support.

Let’s start digging in.

Figuring Out Your Values

Jennifer’s question revolves around the tug-of-war between some of her deeply held values and her desire for financial and professional success. Before we go on, let’s see if we can extract some of her values – implied and directly stated – from this article.

She’s very family-oriented and wants to have multiple children. Her choice to have children very quickly after marriage and become a stay-at-home mother makes this very clear. This value trumps most other values, particularly those related to continuing her career at the time being.

She tithes 10% of the family income to their church. Jennifer’s faith is a major part of her life and this involves participation in a church. Part of that commitment is to tithe 10% of their income, right off the top, to this church.

Her husband has chosen a career path that earns a solid income right now, but may have some obstacles with regard to bumping up his earnings going forward. It’s hard to say whether values are connected to this career choice or not, as we don’t have enough information about the community they live in, but it is worth noting that this appears to be a more hands-on technical position rather than a management position. Although he has two people working under him, I’ve yet to meet an IT worker in that small of a group that wasn’t incredibly hands-on, too. This is much more “technical” than “manangement.”

She has a degree in marketing and has at least some desire to put it to work. Although she has prioritized staying at home, she does have a marketing background and, at least at some point, was putting it to work. She’s not actively in that career path, but does seem to voice some desire to return to it in the future.

She wants her family to achieve a greater level of financial success than they currently have. Her primary struggle is in figuring out how to achieve that with the above constraints.

What follows are several suggestions on how to maximize your financial standing with those constraints.

Talk About the Future

This might seem like a strange place to start, but I think it’s where you need to start when you’re trying to figure out how to balance your life going forward. It needs to center around conversation with the core people in your life – in this case, Jennifer and her husband.

Part of what’s going on under the surface of Jennifer’s note is an uncertainty about the future. She correctly has a sense that they need to be building toward something together, but she’s unsure what that is. It’s really hard to work for the future if you have no idea what that future looks like.

You need to solidify that future as much as you can, and that starts with conversation.

Talk with your husband about where you’ll both be in five years, ten years, twenty years down the road. What do you want your life to look like at each of those points? How many children will you have? What kind of job does your husband strive to have at those points? Will you return to the workplace at some point?

The answers to those questions need to be figured out between Jennifer and her husband. Not only will those answers provide them with some goals to work toward, it will also help them clarify some of their values and get on the same page on a lot of things. It will also help them see a few differences between them, areas where deeper conversation is needed.

Trust me, the most valuable thing you can achieve in a marriage is being on the same page with things. You don’t have to agree on everything, but you should be able to find ways to compromise so that you’re working together rather than against each other. Jennifer should get “her way” on a few things regarding the future, and her husband should get “his way” on a few things, too.

Work to build some concrete plans that will help you get to those visions of the future. Once you’ve figured out where you want to go, work together to come up with a plan to get there. What do you need to do to get from here to there?

Again, this is all about conversation. Where are you now? What’s different between here and there? What do you need to do to get there? What can you start doing right away to make it happen? What are some of the major initiatives you’ll need to take on?

Those thoughts will give you a lot of useful direction going forward. The key is to start actually doing those things as soon as possible.

Keep revisiting those conversations and plans. On a very regular basis – my wife and I do this about once a week – talk a bit about how you’re each moving forward on your plans. You won’t necessarily be moving forward each week, and that’s okay. Just give each other encouragement and be positive.

Once a month or so, talk in general about your goals and plans. Are they still ones that seem powerful to you? Do the plans make sense? I’ve found that a goal you’re not excited to work toward is generally not a great long term goal, so if you find that you’re not making much progress toward that goal, be critical about the goal and the plan.

Don’t judge, though. Don’t be negative. The goal is the best life possible for the two of you, and that involves working toward things that you’re both excited about. If that’s not happening, then it’s the goals and plans that need a fresh look.

Make Saving for Big Goals Much Like a Tithe

Jennifer and her husband have a clear commitment toward tithing. That’s not only a useful strategy for giving connected to your faith, but also for broader financial success.

Automate your savings goals, much like you do with your tithe. It sounds like Jennifer and her husband automate their tithing through some mechanism. The truth is that automating your savings in a very similar way is a powerful way to save for bigger goals.

It’s easy. Just instruct your bank to peel a little bit of money out of your checking account each month and put it in a separate savings account, one you’re not going to look at regularly.

At first, treat that money as a pure emergency fund. Later on, you may want to start additional funds with multiple savings accounts, each with their own automatic transfers. That’s a great way to save for a car or for a house down payment or for a child’s college education.

Figure out your family budget after the money from those savings goals are removed. This is the core of the idea of “paying yourself first.” You put aside money for your big goals first and then figure out how to make ends meet with what’s left over.

That means that your family budget becomes a bit tighter than before, something we’ll address in a little bit, but it also means that you’re planting a lot of seeds right now that will grow into beautiful trees in the future.

I find that the concept of scattering seeds that will grow into wheat is something that tends to strike home for many Christians. That’s exactly what you’re doing when you’re saving for the future. You’re scattering seeds now that will grow into wheat when you need it later on. Make it a priority and figure out the day-to-day life after that.

Make the elimination of debt a top priority. If you still have debt in your life from school or from a car loan or from a mortgage, make it a priority to eliminate that debt. It needs to go.

I strongly encourage you to find room in your family budget to make a double payment on your highest interest debt, whatever that might be. If it’s too large to pull that off, just make an extra half-payment.

The reason for this is that the elimination of debt payments from your budget is one of the most powerful ways to free up space in your budget for other things, like saving for the future. It also gives you some breathing room for handling unexpected life changes, like a loss of work for your husband.

Become a Highly Efficient Home Economist

So, how will Jennifer make this compressed budget work? The most powerful tool she has at her disposal is her time at home, which she can use to become much more efficient in terms of frugality and home economy.

Focus on strategies that save both money and time, like making meals in advance and using a slow cooker. One of the big drawbacks of many frugal strategies is that they can suck up a lot of time, time that working professionals have to devote to their jobs and time that stay-at-home parents need to devote to their children. That’s why I believe the best frugal strategies save both money and time.

I’m a big fan of things like preparing four copies of a casserole or soup at once and freezing the three extras for future use. I’m a big fan of making meals in the slow cooker so that family time in the evening is minimally interrupted by the need to prepare meals. I’m a big fan of making a grocery list before you ever go to the store so that you spend far less time in the store.

Any situation in which you can spend less money and less time is almost always a winner. Strategies that involves spending less money with no time cost, like buying store brand items, are also great ideas.

Start a garden and make it your “calm place.” Stay-at-home parents need a place to “escape” to sometimes, but there’s often little opportunity for that. My best suggestion for finding that kind of breathing room and calmness in life is to start a simple vegetable garden and spend some time each week or even each day tending it.

Gardening might not seem like your kind of thing, but I encourage you to give it a try. Make a little garden in the spring, then spend a little slice of time each day out there weeding or watering or seeding. Let the kids play in the yard for a bit while you do it, or do it when they’re napping, or spend an hour there on the weekend when your husband is handling primary child care.

Not only is gardening a great way to just focus on something else for a while, it puts you outside in a natural environment and it grows incredibly cheap and incredibly healthy food for your family without costing a lot of money for you to find a place to “escape” to. I highly recommend it.

Make energy improvements to your home so that your energy bills drop over the long term. There are many little energy tweaks you can make to your home so that your monthly energy bill is permanently lowered.

You can do things like switching to LED light bulbs at home or weatherstripping your doors or putting caulk around your windows to block air drafts; each of those things can really decrease your energy bill.

The truth is that there are many strategies for cutting back on your family budget, from shopping around for insurance to cutting out your cable or satellite bill and from cutting your children’s hair yourself to airing up the tires on your cars to the maximum level. The goal is to find things you can do under the constraint of having two young children at home, so things you can easily pull off with a toddler running around are at a premium.

Keep Your Career Skills Sharp

Jennifer’s long term goal seems to be to return to her field of expertise, which is marketing. Although she’s a stay-at-home mother right now, that won’t always be true, and thus she needs to keep at least a little bit of an eye on the field.

Subscribe to periodicals related to your career path, and stay aware of people in your career path on social media. Stay-at-home parents often don’t have much free time, but I strongly encourage you to block off at least a few chunks of time for yourself, and at least a little of that time should be spent on keeping tabs on your old career.

Be involved on social media with things that are related to your profession. Maintain a “professional” social media account on various sites – Twitter is a popular place for marketing people – and have conversations about your career with people still in the field.

Also, stay up to date with your field through reading. Know what’s changing in your field and try to stay in touch with what you need to know if you were to return.

Help with marketing your church or other civic organizations in your spare time. This is all about finding ways in your life as it is right now to ply your skills, hopefully in a way that provides something that you can note when you try to get a new job.

Almost every church and every civic organization has some need for marketing expertise to attract new members and keep current members interested in the various programs available. Use some of your marketing skills there to transform some of the programs into something exciting and engaging both for new and old members.

You can very much control how much time and effort you put into this. Don’t take on too much, but find ways to actually use your skills and keep them fresh.

Look for situations to take on simple freelancing work in your community. You may also find that there are occasional opportunities to use your marketing skills in freelance work in the community, perhaps even freelance work that’s opened up through your efforts with the church or with other community groups.

Maybe a local business wants an overhaul of how they attract customers or someone wants to launch a new business and needs some startup marketing help. Since you’re already involved in your church community, you probably have some connections, and if you’re showing off your skills in the church and in community organizations, you’re probably primed to make those connections.

Again, keep it simple. Take on little things that you can handle in your relatively few spare hours, and remember that the goal is to keep your skills fresh and earn a few dollars.

Final Thoughts

In the end, I feel as though you need to prioritize your personal beliefs in everything that you do in life. If you sacrifice your personal beliefs in the name of short term financial success, you’ll quickly find yourself adrift in many areas in life. Stick to your beliefs (but don’t be afraid to let those beliefs grow and be questioned sometimes).

However, even as you’re doing that, you can still keep the windows open to opportunity. Don’t bend your beliefs to match what you think is needed; instead, bend the situation to your beliefs to the best of your ability. Don’t look at your beliefs as constraints but as powerful filters for only the best opportunities.

You have a strong family, a strong set of values, and a community of supportive people around you. That’s a valuable thing. Keep them at the core of who you are and what you do and use them as a lens for your money and career choices and you’ll end up making choices that just feel right.

Good luck!

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Opening a Restaurant? Here’s How to Get Financing

Who among us hasn’t at least flirted with the dream of owning a restaurant at some point? If you’re beyond daydreaming and you’ve decided to enter the highly competitive restaurant industry, one of your most important tasks will be securing adequate financing.

Opening a restaurant is challenging, especially for people who are new to the business. About 60% of new restaurants fail within a year of opening, according to CNBC, and almost 80% go out of business by their fifth year.

You’ll stand a better chance of succeeding if you understand what your financial needs are, says David Gilbert, the founder and CEO of lender National Funding.

“A lot of people get loans that aren’t large enough,” he says. “Most businesses fail because they are undercapitalized.”

Adding Up Your Costs

There are numerous things to spend money on when you own a restaurant. You’ll need enough capital to pay your lease, buy equipment, pay a staff, and buy supplies. You’ll also need to factor in the cost of signage and promotion to make sure customers know where to find you.

“A new business owner has to understand the fixed and variable costs of running their business, estimate how many customers they will get and the capacity they have,” says Chris Moloney, the chief marketing officer and head of products at CAN Capital, an online lender. “It takes a fair amount of financial understanding.”

There are a variety of ways to raise the money you need. One of the easiest ways is to tap into your own resources. You’ll save money by avoiding commercial loan interest rates. Your resources may include personal savings, borrowing from a 401(k) retirement plan, borrowing against a life insurance policy, seeking loans from friends and family members, or tapping into home equity.

“Home equity is the primary form people use to finance a small business, especially restaurants,” says Gilbert.

Finding Restaurant Loans

Restaurateurs often seek small business loans from banks and other commercial lenders. To qualify, you’ll need to show that you’re a good risk. This means having adequate experience in the industry and a good credit score.

Be prepared to explain what collateral you’re willing to put up to get the loan. This may include a home, a car, or restaurant equipment.

You’ll have to convince your lender that you’re prepared to make a success of your business, says
Meredith Wood, vice president of content for Fundera, an online lending marketplace. Lenders want to know exactly how you plan to spend the money they loan to you.

Developing a Business Plan

Before you go in search of a loan, you’ll need to develop a business plan that demonstrates that you know how to make your business successful. The plan should explain how you’ll earn enough to repay the loan.

“If you are a start-up, the business plan and personal financial history are very important,” says Wood.

In addition to having a good business plan, banks and other lenders typically will require you to put some of your own money into your business. If you have a financial stake in the enterprise, you’ll be less likely to walk away from your debt.

“You are going to think more strategically about how you spend,” explains Wood. “Putting your own money in is a good way to force yourself to think that way.”

Weighing Your Choices

Finding a restaurant loan may be easier if you visit a lending institution that participates in U.S. Small Business Administration (SBA) programs. The SBA guarantees small business loans against default. This makes lenders more willing to take on risk and frees up money for borrowers. SBA loans are made through banks, credit unions, and other participating lenders.

In some cases, entrepreneurs seek high-worth investors or venture capitalists to provide start-up funding for restaurants. However, this can mean surrendering some degree of control over your business, depending on the terms of your investment agreement. You may need to hand over a share of your business in return for the cash.

Venture capital firms typically expect a high return on investments. Wood advises borrowers not to turn to investors unless it’s absolutely necessary.

“For the average small business, investors don’t make sense because they don’t want to give up ownership,” says Wood. “They just want to open a restaurant. That is what they aspire to.”

Making a Wise Decision

Whatever method of financing you choose, be certain that it’s one you can live with over the long term. Make sure you end up with a loan you can actually afford to repay, or investment partners you truly want to work with.

Related Articles:

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Friday, December 9, 2016

Using Negative Visioning to Improve Your Personal Finances

Countless articles and books and videos and classes have been created to talk about the power of positive thinking and positive visioning, some of them sensible and some of them pseudo-religious and fanciful. It’s easy to see why: positive visioning can be a very powerful tool for your financial life.

However, it’s not infallible and it’s not the only type of visioning you should rely on.

Before we dig in too deep, though, let’s step back and take a look at what positive visioning is. Positive visioning or positive thinking is the practice of using your mind to imagine a positive outcome for something that’s coming up in your future or something that you want to come up in your future. You might envision a positive conversation with someone you are interested in dating, for example, or envision a positive outcome of a work project.

The big idea behind positive visioning is that it helps build confidence. It enables you to see that positive outcomes really are possible and also helps you to arrange your thoughts and plans in a way to increase the chances of those positive outcomes. That’s incredibly helpful.

However, it’s also a fragile thing. While it does help you feel more confident and does give you a plan, it leaves you completely unprepared for the unexpected. The truth is that relying wholly on positive visioning for your planning and confidence leaves you with no real contingency plan or backup plan because you’ve given yourself no room to think about anything but a successful outcome. And, like it or not, life’s outcomes aren’t always successful ones.

In the wise words of Jean-Luc Picard, “it is possible to commit no mistakes and still lose. That is not a weakness, that is life.”

Positive visioning doesn’t help at all with those situations. If life has failed you, all of the positive visioning in the world won’t help you with what to do next or with the resources you need to recover from that state.

That’s why it’s my belief that positive visioning, especially with long term planning, needs to be paired with at least some negative visioning.

Negative visioning is just the opposite of positive visioning. It’s all about envisioning undesired outcomes to a particular upcoming event in your life. You don’t get the job. You don’t get the date.

Some people might look upon that idea with disfavor. After all, on the surface, you might think that negative visioning would work against self-confidence.

I actually find that the opposite is true, for several reasons.

First of all, I often discover that the downside of failure isn’t as apocalyptically bad as I think. I’ll often buy into the fact that failure in a particular situation is going to be incredibly bad, with devastating personal consequences and far-reaching effects. The truth is that most failures in life really aren’t that bad.

Second, negative visioning often unveils flaws in my current planning. I’ll envision an negative outcome for a particular event and it will make me quickly realize that the plan I have in place that’s supposed to bring me a positive outcome has a flaw of some kind, one that I would have never seen without negative visioning.

My favorite example of this is the emergency fund. An emergency fund – and the value of it – is an outcome of pure negative visioning. If you never imagine bad outcomes like your car breaking down when you need it, you’ll never see the purpose of an emergency fund. If you never imagine situations like a lost wallet or a bank declining your credit card, you’ll never see the purpose of a cash emergency fund.

When you combine those two together, you’ll often find that negative visioning becomes a confidence builder. If you know that the plan you have in mind is a strong one, it actually accelerates your confidence because you know that your plan has you covered in the case of unexpected events.

Even better, if you do fail – and you will sometimes – you’re ready for that downside. You’re not caught in panic mode because the thing you only envisioned in a positive way fell apart on you leaving you without alternative plans.

Here’s how you can use negative and positive visioning in balance to achieve great outcomes in your financial, professional, and personal life.

First, identify something you’re concerned about in the future. Maybe it’s a job interview or perhaps it’s a little bit further down the road like switching careers or maybe it’s way down the road, like helping your children through college. Whatever that concern is, focus on that for the time being.

During your spare moments, envision those things with a positive outcome. Think about them the way you’d like for them to turn out. Imagine yourself performing well and getting the outcome you desire.

Think not just about the big picture, but the specific elements of your performance in that visioning. What specific things are you doing to produce that positive outcome? Are you smiling? Are you on top of the facts? Do you have a business plan in your hand? Did you start saving long ago?

Those elements are going to form the backbone of your plan for achieving that goal, but you’re not done yet.

Next, envision those things with various negative outcomes. Imagine yourself bumbling in the interview and not getting the job. Imagine yourself failing to save and not being able to help your child. Imagine the starter in your car failing so that you can’t make it to work.

Obviously, such images of the future are not pleasant ones to think about. They might give you a queasy feeling in your stomach and might put a ding in your confidence.

Rather than looking at those visions as inevitable outcomes, though, ask yourself what you can learn from each of those negative visions. What can you do to minimize the chances of bumbling through the interview? Preparing for hard interview questions is one definite route. What can you do to ensure that you’re going to be able to help your child? Automating some savings into a 529 plan is a good start. What can you do to still make it to work if your starter fails? Knowing the bus schedule and having an emergency fund are two powerful steps.

You can take those steps that you think of as a result of your negative visioning and use them directly to make your plan much stronger than before, one that has taken care of potential negative outcomes.

What I often do is alternate between positive visions and negative visions, at least early on. I want the positive visions so that I have an overall structure that leads to a positive outcome, but I want those negative visions so that I have contingencies in place against unwanted outcomes. A positive outcome is great, but a big part of that positive outcome is making sure that you’ve minimized the chances of negative outcomes, and that comes through preparation.

Once I feel that I have a strong plan in place that has maximized my chances of a positive outcome and minimized my chances of a negative outcome, I mostly use positive visioning at that point to build confidence. I envision things that could potentially go bad, but I’m saved by my planning, and I also envision outcomes that are just purely positive.

In the end, negative visioning early on helps me to develop a more robust plan for the thing I’m concerned about, so that my positive visioning later on becomes much stronger and better at building confidence.

I don’t simply ride the pure power of positive thinking from my dreams to my destination, because that train will often fall right off the tracks. Instead, I use a mixture of positive visioning and negative visioning to develop a very robust plan for achieving my goal, and then as I move forward with that plan, my positive visioning for the future becomes much more robust and becomes a tool for increasing my self-confidence.

In short, the power of positive thinking alone is useful, but weak; much of that weakness is bolstered by also incorporating the power of negative thinking!

If you have some plans or events in the future that are weighing on your mind, I highly recommend using a mix of positive visioning and negative visioning to develop a strong plan for making sure that the positive outcome is more likely to happen, and then using positive visioning atop that plan as it progresses in order to build confidence for the event itself. It’s helped me through many life challenges over the years and I continue to use it quite often.

Good luck in whatever challenges life brings you!

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Rules of the Roth IRA: Income Limits, Contributions, and More

For many financial growth professionals, Roth IRAs are the most exciting play in the retirement savings game. It’s easy to understand why: tax-free growth and tax-free distribution. You put the money in after taxes, it grows tax-deferred, and comes out tax-free as long as you wait until you’re 59-1/2 years old.

“If your goal is to save as much for retirement as possible, then it’s a slam dunk for the Roth IRA,” says Jeffrey Layhew, president and wealth advisor at Wealth Resources Network.

While not everyone can enjoy its perks, the Roth IRA income limits are fairly high: In 2016, if you make less than $132,000 as an individual or less that $194,000 as a married couple filing jointly, you can contribute at least something to a Roth IRA. If you earn more than those limits, you can’t fund a Roth IRA (that is, unless you use the backdoor).

Regardless of your road to a Roth, there are residual benefits to funding a nest egg with after-tax contributions. “We don’t know what our tax rates will be in the future,” says Layhew. “If they’re much higher, it’s a beautiful thing when you got a Roth IRA.”

Further, if you’re in the position to open a Roth IRA early in your professional career, you’re probably paying less taxes on a smaller amount of money than you would be if you paid taxes at distribution, as with a traditional IRA. “Early in your career, the Roth makes more sense—you’re usually in a lower tax bracket and the tax deduction doesn’t mean that much to you,” says Layhew.

As long as you qualify and play by the rules, a Roth IRA is a great way to save for retirement—which is why the Internal Revenue Service strictly enforces contribution limits, income limits, conversion rules, and distribution rules. Reading the fine print will help you avoid penalties that could cut into that pile of money you worked so hard to put away.

Roth IRA Income and Contribution Limits

The contribution limits on a Roth IRA are primarily based on your income. The most you can put into any IRA in 2016—be it a Roth, traditional, or combination of the two—is $5,500. If you’re at least 50 years old, that number bumps up to $6,500.

But a Roth IRA has income limits, too. If you make between $117,000 and $132,000, or between $184,000 and $194,000 as a married couple filing taxes jointly, then the amount you’re allowed to contribute starts to drop. Roth IRA income limits are based on your adjusted gross income (AGI) and conform to the chart below, which is found on the IRS website.

Roth IRA Income and Contribution Limits for 2016
Filing Status Modified Adjusted Gross Income (AGI) Contribution Limit
Married filing jointly or a qualifying widow(er) Less than $184,000 $5,500 (50 or older: $6,500)
Between $184,000 and $194,000 Reduced contribution amount
$194,000 or more Zero
Married filing separately, and you lived with your spouse at any time during the year Less than $10,000 Reduced contribution amount
$10,000 or more Zero
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year Less than $117,000 $5,500
Between $117,000 and $132,000 Reduced contribution amount
$132,000 or more Zero

A few things to note:

  • You can fund your 2016 Roth IRA well into 2017, right up until you file your taxes, granted you file them before April 17, 2017.
  • You can never put in more money than your taxable compensation for the year, if your taxable compensation is less than the limit for your age bracket. In other words, a 21-year-old single man claiming $3,200 on his taxes can’t put more than $3,200 into his Roth IRA.
  • Unlike a traditional IRA, you can continue to contribute to a Roth after you turn 70½ years old.

Roth IRA Conversion and Distribution Rules

If you’re rolling funds into a Roth IRA from a qualified retirement plan, the contribution limits don’t apply, but some different rules do. Basically, you can convert as much money as you want from a traditional IRA (for instance) to a Roth IRA, just remember that you’ll have to pay taxes on that amount of money upfront, in that tax year, and that you generally have only 60 days to complete your rollover upon distribution. Remember, too, that the rollover (and each subsequent rollover you make) must be left in the account for five years before you can touch it without penalty.

When it comes to withdrawing funds from a Roth IRA, it’s important to note the difference between contributions and earnings. The money you put into the account — your contributions — can be distributed back to you at any time without penalty. After all, you’ve already paid taxes on this money. In addition, you can withdraw contributions and earnings by tax day of the year you funded the Roth IRA penalty-free, but you have to pay income taxes on the earnings.

For your Roth IRA earnings — the investment gains your contributions make while sitting in your retirement savings account — you must adhere to a five-year, 59½-years-old rule: Your account needs to be at least five years old, and you need to be 59½ years old to withdraw earnings tax- and penalty-free. If you withdraw earnings early, they’re subject to both income taxes and a 10% penalty for unqualified distribution. Not fun.

A Roth IRA offers some surprisingly flexibility, however, and there are a number of exceptions to the early distribution rules. You can withdraw funds early, and without taxes or penalties, in the following circumstances:

  • Your distribution is for a first-time home purchase (in which case you can pull out as much as $10,000).
  • You’re using the distributions to pay qualified higher education expenses.
  • You’re dead. In that case, your beneficiary or your estate can withdraw the earned funds without incurring the 10% tax.
  • You are considered totally and permanently disabled.
  • You have unreimbursed medical expenses that are more than 10% of your adjusted gross income for the year (7.5% if you or your spouse was born before Jan. 2, 1951).
  • You’re paying medical insurance premiums during a period of unemployment.

When Does It Make Sense to Open a Roth IRA?

Before you open a Roth IRA, first make sure you’re getting the most out of your 401(k). If your company matches your contributions up to a certain percentage, make sure you put at least that much into your company plan. “We match 3%,” said Layhew. “If people don’t put in the 3%, they’re foolish because it’s a 100% return on their money with no risk whatsoever.”

If you’re a couple of years from retirement at the peak of your career, it might be better for you financially to go with a traditional IRA, rather than a Roth. Play around with an online calculator, or talk to the guy where you get your taxes done. According to Layhew, there’s a certain point in your career where it makes more fiscal sense to pay the taxes in retirement — when you’ll probably be withdrawing funds in a lower tax bracket — than to forego the tax break for earnings that won’t have enough time to bake before you start taking them out.

And finally, try to plan for everything by having a little bit of everything. Mixing a Roth’s flexibility with the required minimum distribution requirements of other retirement accounts can help you balance your savings—and how it gets taxed—against your needs. “Think about this: We all want to diversify our investments, imagine if you could diversify your taxes?” Leyhew said. “And that’s basically what I’m trying to accomplish.”

Related Articles

The post Rules of the Roth IRA: Income Limits, Contributions, and More appeared first on The Simple Dollar.

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Thursday, December 8, 2016

31 Days to Financial Independence (Day 17): Integrating Cost-Cutting Measures Into Your Life

“31 Days to Financial Independence” is an ongoing series that appears every Thursday on The Simple Dollar. You might want to start this series from the beginning!

Last time, we finished up our deep look at the average American family budget, going through each category and examining how one could trim the cost of typical expenses in that category. Here’s the “average American family budget” that we’re looking at, along with links back to the earlier entries on those specific areas:

Housing – $10,080
Transportation – $9,004
Taxes – $7,432
Utilities – $7,068
Food – $6,602
Insurance (including things like pensions) – $5,528
Debt Payments – $5,252
Healthcare – $3,631
Entertainment – $2,564
Cash Contributions – $1,834
Apparel and Services – $1,604
Education – $1,138
Vices – $775
Miscellaneous – $664
Personal Care – $608
TOTAL – $63,784

While this cruise through the average American budget produced a ton of specific money-saving tips, what it doesn’t cover is how to really use those hundreds of tips in any sort of meaningful and coherent way. Obviously, you can use a specific tip and it will reduce your spending a little, but how does that little change impact your finances in any meaningful way.

Today, we’re going to talk about how exactly to use many of those frugal tips – there are literally hundreds in the links above – to enact meaningful long-term financial change in your life.

The valuable part of this type of financial change is that virtually anyone who isn’t already pinching every single penny can do this. It doesn’t require a high-salary career or something like that as many other pieces of financial advice require.

Let’s dig in.

Exercise #18 – Turning Frugality Tips Into Real Financial Change

This exercise isn’t something you can do in a single day; instead, it’s something that you’ll have to spread across a month or two in order to really see the benefits of how it works. It involves what I like to call “practical frugality” – making frugal choices, seeing how they add up, and then using that net benefit for something financially positive.

Step One – Try Lots of Frugality Tactics

This is where it all starts. It begins with actually trying money-saving strategies in your day to day life.

At the top of this article are links to a ton of different tips that I’ve shared over the last few weeks, sorted by category. Although it’s not a “be-all-end-all” guide to frugality, almost everyone should be able to find dozens of tips and strategies from that article that could theoretically apply to their life.

Try them all. Give every single one that could remotely apply to your life a sincere try. Even if the tip seems strange or a little outside of your comfort zone, give it a shot. There are going to be quite a few that fall into that “little bit outside of your comfort zone” area, and that’s okay. Human beings are creatures of habit, and many of those tips tweak a habit that we’ve established in our lives.

Make a conscious effort each day to try out at least one new frugality tactic and to try to repeat a tactic or two that worked from a previous day. It can be anything – buying store brand items at the store, installing a weather strip, replacing a normal light bulb with an LED bulb, making supper at home instead of getting takeout or eating out. As I said earlier, if you’re out of ideas, hit the links at the start of this article. You’ll find literally hundreds of ideas.

Step Two – Estimate and Record How Much Each One Saves You

Whenever you do something frugal take note of it, and when you have a free minute estimate how much that frugal tactic is actually saving you. Pull out that grocery receipt and estimate how much you saved by buying store brands. Figure out the energy savings of an LED bulb over the course of its life. Calculate the savings from making a crock pot of chili at home rather than eating out.

You don’t have to be perfect here – a rough estimate is good enough. Just try to get a rough sense on how much you saved thanks to that frugal move and how much it will save you going forward in terms of permanent changes like weatherstripping.

My recommendation is to try to figure out how much it will save you over the course of a month. If it’s a one-off change, just focus on how much that one action saved you. If it’s a permanent change, like installing weatherstripping, try to estimate on the low end how much it will save you per month going forward.

I keep track of these things myself using Evernote, as I like to keep tabs on my money-saving efforts (in part for articles like these, but also in part because I simply want to know what works). I take pictures and little text notes of the things that I do, and then about once a week I spend time figuring out what these things actually saved me (and whether they’re worth writing about on The Simple Dollar). Honestly, this is a routine I would continue even without writing, simply because I find it useful to know whether something is really worthwhile or not so that I know if I should try to change my routines and make them better.

Step Three – Discard the Ones That Don’t Work; Keep All of the Ones That Do

The reality is that some tactics you try won’t work very well, while others will make a ton of sense for you.

Some tactics simply won’t save much money at all for you compared to the effort. You have to spend significant time doing something you don’t enjoy and you’re barely saving anything at all, so it’s not worth it.

Other tactics have outcomes that you simply don’t want. You buy a store brand, for example, and you find that the specific item you bought isn’t good (though you should make absolutely sure that it’s the product and not your sense of brand loyalty at work). In those cases, the new way of doing things has a real drawback that you’re not going to repeat.

Discard those things! Don’t do them again!

The thing to always remember about a big list of frugal ideas is that everyone’s life is a little different. Different people have different preferences about, well, everything in life. What you’re going to find when you start experimenting with frugal strategies is that some of them are going to fit right into your life perfectly and other ones aren’t going to fit well at all – and that’s okay. Remember that the set of strategies that works well for you is going to be different than the set that works well for someone else.

Also, remember that just because a tip feels a little unnatural at first doesn’t mean it’s not a positive move for you. It’s very likely that you’re going to feel like you’re giving up something important to make some of these tips happen, but keep in mind that it’s often much more about losing a routine than it is about the actual thing that you’re changing. I find that a lot of frugal changes initially seem like a bigger change than they actually turn out to be; I do it a few times and it quickly begins to feel like the new way is the norm, even if it felt odd at first.

Step Four – Total Your Frugal Savings Over the Course of a Month

After you do this for a month or so, sit down and calculate how much you’ve saved over the course of a month. In particular, focus on the changes that you’re pretty confident will stick throughout your life, but you should also add up all of the other changes that were one-time things.

Going forward from here, the amount you saved from the changes that will stick – the ones that are permanent changes and the ones that fit in your life – is an amount of money you can use going forward to elicit financial changes. You can use that money to build an emergency fund or to save for retirement or do whatever it is that your financial goals are centered around.

At the start of this series, we spent some real time focused on figuring out direction and meaning in your life, giving you a sense of what you want to be working for. This is the start of that. This is the seed money you now have each and every month to work toward that goal.

Step Five – Use That Amount for Financially Positive Moves

So, what are you going to do with that money?

The first thing that you should do with it is to build up an emergency fund. This is a small chunk of money that you keep in a savings account to help you deal with life’s emergencies. I usually recommend that a starter emergency fund be around $1,000 and to build it up to a couple of months of living expenses later on when you’ve taken care of a few other things.

Once you have that $1,000 emergency fund, you should be using this monthly frugality savings to tackle your remaining high interest debts. Earlier in the series, we took a long, hard look at your debt situation and took a few quick measures to stop the worst of the financial bleeding. Now, you have some steady money with which to address the remaining high interest debts. In other words, your extra money from being more frugal can be directly put toward an extra debt payment to get rid of debts much faster.

Step Six – Automate Those Moves

One final problem: when you have extra money sitting in your checking account, it can become very tempting to just spend it. You’ll glance at your account balance, think that you have plenty of money for whatever impulse buy you have at the moment, and then go spend it.

A much better approach is to take that money out of sight and out of mind. Once you have a monthly total of how much you’re consistently saving due to frugal moves, set up a weekly automatic transfer from your checking account to your savings account for a quarter of that amount. So, if you’ve found ways to spend $100 a month less without any real life changes, set up a transfer of $25 a week from your checking to your savings. You may even consider opening an account at a completely different bank just to keep this money out of sight and out of mind, as many online savings accounts make this kind of thing very easy.

If you’re building an emergency fund, that’s all you have to do. Don’t touch it until there’s an emergency. If you have other goals, go into that account every once in a while, transfer that money back to your checking, and then immediately use that amount for something financially positive. Pay off a credit card! Have a down payment for a car so you can get a better loan – or, even better, pay for that car out of pocket so you don’t even have a car payment!

The point is to start eroding some of the long term expenses in your life. If you manage to use this to pay off a credit card bill, see how much that credit card bill was in a typical month and add that to your automatic transfer (a quarter of that bill per week). If you manage to pay off a car loan, add a quarter of that monthly bill to your weekly automatic transfer.

What’s going to happen before long is that your weekly transfer is going to get nice and fat. You’re going to be putting aside enough money to easily buy your next car without a car loan, which means no new bill and no interest that you have to pay. Instead, you’re earning interest from your savings account. When an emergency happens, it’s not panic mode time; you have money in that savings account to cover whatever happens.

Why Does This Work?

The entire purpose of all of this is to take all of those little savings from frugal moves, like the $5 per month you save on your energy bill from LED light bulbs and the $5 you save each month from installing weatherstripping and the $10 you save each month from switching to store brand laundry detergent, and scoop all of those little bits into one big pile.

It’s like sweeping the floor – you might notice one or two little things out on the floor, but when you start sweeping, you collect all of those little things and lots of other little things that you didn’t even notice at all and suddenly it becomes this surprisingly big pile.

Those little bits on their own seem tiny and unimportant, but when you’re doing a lot of them all at once, they start to really add up. One thing that will save you $5 a month seems tiny, but if you’re doing twenty such things, it’s $100 a month. If you’re consciously keeping track of those savings and then doing something smart with that money, it’s going to start making a big difference in your life surprisingly fast.

More than anything, the power of frugality begins to appear when you buy less stuff on credit and more stuff out of pocket. Let’s say, for example, that you need to make a $1,000 purchase but you don’t have the money on hand. Ordinarily, you might put that expense on a credit card and then make minimum payments to pay it off, but if you did that on a typical credit card with a 19.9% interest rate and 4% minimum payments, you would end up paying $555.93 in interest. On the other hand, let’s say you were able to save up to that $1,000 over the course of several months. Not only would you be able to pay that out of pocket, thus saving you the $555.93 in interest, you would have also earned some interest over the time that money was in your savings account. That’s a swing of $600 in your favor just by being a little more financially responsible.

If you start looking at those kinds of swings on every one of your debts, you start to get the picture: freedom from debt, particularly high interest debt, is how you get ahead, and you can start to free yourself from that grip by taking lots of little frugal actions, sweeping them together into a pile, and then using that pile to hammer down that debt.

Debt repayment isn’t the only useful thing you can do, either. This “swept together frugality” money can be used for retirement savings, for child education savings, and, more importantly, for “personal goal” savings.

It’s those “personal goals” that often have the greatest impact because you can look at your current life when you’re in the process of saving for and working for those personal goals that can give you the motivation you need to keep going. You can see that your life really is headed for that big dream.

Next time, we’re going to start taking a look at increasing the “earning” side of the “spend less than you earn” equation.

The post 31 Days to Financial Independence (Day 17): Integrating Cost-Cutting Measures Into Your Life appeared first on The Simple Dollar.

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Almost Half of Job Applicants Don’t Follow Basic Directions, Say HR Pros

Were you one of those kids who always followed directions on classroom activities? If so, you probably had an advantage when you started your career, because standing out from the pack may be as simple as paying attention to the details as you submit your job application.

While there’s little hard data on the subject, it appears a startling number of job seekers don’t follow basic directions when applying for a job: The human resource professionals I spoke with estimated that about half of all candidates are guilty of leaving out critical information on their applications.

Whether it’s forgetting to include an attachment or requested references, or accidentally leaving a section blank, a haphazard application can have real consequences for your candidacy; depending on the circumstances and the strength of your resume, it could even get you knocked out of contention.

How Many Job Applicants Don’t Follow Directions?

“I think the answer is higher than half, but I think people who are serious about the job are far more likely to follow the application directions,” says an anonymous human resources professional at an executive search firm in New England. “I’d say 65% to 70% of serious candidates follow the instructions, but overall maybe 45%.”

She adds that she doesn’t count cover letters that consist of, “I’d like to be considered for X position and my resume is attached,” as following instructions. (Good tip for job seekers: To get called in for an interview, you’ll have to obey the spirit of the directions, and not just squeak by on a technicality.)

Other HR folks says that job level seems to correlate with a willingness to follow directions – no surprise to anyone who’s ever spent the early part of their career spamming entry-level job openings.

“As a former recruiter and staffing firm executive, I can tell you that the higher level the job is, the fewer issues you’ll have with people who don’t follow directions,” says Andrea Clement, director of communications at the Medicus Firm, a national healthcare recruiting firm. “That’s for multiple reasons, but partially because you don’t have as high volume of applicants for higher level positions.”

Clement says that while they don’t have exact figures on how many applicants follow directions, their director of employee engagement, Megan Williams, tells her that it’s at least 40%. Williams adds that this number could actually be lower than average because the company often hires through employee referral.

What Happens to Incomplete Applications?

“Most of the time, if the directions aren’t followed, they won’t be considered for the job, unless there just happens to be something really stellar or compelling about the candidate’s resume that would cause the hiring manager to overlook the fact that the candidate didn’t follow the directions for job application,” says Clement.

If the employer uses an applicant tracking system — that’s software that sorts resumes and allows HR professionals to search them by keyword — failing to fill out a required box could get an applicant’s resume booted from the process before a human ever lays eyes on it.

How Robots Can Ruin Your Job Search

And then, there’s the fact that robots aren’t as smart as humans when it comes to understanding context.

“Sometimes it’s not even [applicants] causing the error,” says an anonymous associate professor who teaches human resources in healthcare in the southeastern U.S. “For example, our local health department uses a computer screener: If you don’t check yes to certain buttons, it doesn’t submit your resume.”

For example, she says, an epidemiologist job might require a master’s degree, but prefer a doctorate. The system would take users through a series of questions:

  • Do you have a PhD?
  • Do you have a master’s degree?
  • Do you have a bachelor’s degree?
  • Do you have an associate degree?

If the applicant checked PhD, but didn’t also check master’s degree, the system might hold the resume – even though the candidate is fully qualified. That’s especially problematic if the candidate in question skipped getting a master’s degree and went straight through to the PhD. In that case, the applicant is being honest and thorough – they’re just not speaking the same language as the computer.

Bottom line: A human might be inclined to forgive an incomplete application, but a computer will not. To make sure your resume gets in front of a human, you’ll have to be as thorough as possible… and hope the applicant tracking system sees things your way, too.

Related Articles: 

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DirecTV Now: Cord Cutter’s Dream or a Wolf in Sheep’s Clothing?

By Chris Brantner

With the addition of DirecTV Now, the satellite TV company’s new entry into streaming television, there’s yet another cord-cutting option on the market, making it easier to cut cable TV and save some much needed money. But can DirecTV Now actually save you money in the long run? Or is this just another way for Big Cable to trick you into handing over your hard-earned money?

First let’s take a look at the positives:

  • For a limited time, you can get the $60, 120-channel DirecTV Now package at an introductory price of $35 a month. If you sign up for the introductory price, you’ll pay the $35 a month as long as you remain a member.
  • If you sign up and pre-pay for three months, you’ll get a free Apple TV (4th generation).
  • And, despite the FCC stepping in, for now, if you’re an AT&T mobile customer, you can watch as much DirecTV Now as you want without it counting toward your data allowance.
  • You can get HBO as a $5 add-on.

It all sounds great, right? Especially with the average cable price sitting at $100 per month.

But is it worth it in the long run? Well, that depends. If you sign up for the introductory price, you’ll pay the $35 a month as long as you remain a member, which sounds like a pretty good deal. But if you don’t get in while the getting’s good, the 120+ channel package will be $60, and there will be a smaller, $35 package available.

On top of that, there’s a decent possibility that the AT&T-owned service will follow the path of traditional cable and raise prices as it feels necessary. During the launch event, Brad Bentley, executive vice president of marketing, mentioned the potential for a price hike, saying, “These packages will be subject to price increases down the line.”

That doesn’t bode well for a service that’s already being accused of seeming a bit too much like the cable TV we all love to hate.

And it doesn’t sound like the mantra of Dish Network-owned Sling TV, which is sticking with its $20 price point for its basic package, and offering multiple add-on bundles for other channels.

Speaking of that $20 Sling TV price point, that’s still the cheapest skinny bundle of cable channels you’ll find anywhere — meaning you can save $15 per month if you opt for that service over DirecTV Now, even at the cut-rate introductory price.

However, you’re going to get significantly fewer channels, and you’ll only be able to stream shows on one device at a time with the basic Sling TV package. For multi-device streaming, you need to step up to the $25/month Sling Blue package — which still is $10 less than DirecTV Now’s introductory offer.

While there are a few channels available on DirecTV Now that Sling TV and PlayStation Vue don’t offer, for the most part, the packages are fairly similar. The one difference seems to be with DirecTV Now’s $70 package, which has a whopping eight different Starz channels included in the bundle. Of course, at $70 a month, it’s fair to say that you should have just kept cable instead.

So is DirecTV Now the right choice for someone looking to drop cable and save a bit of money? Or are you better off going with a cheaper service like Sling TV? There’s not a clear answer, but here’s how you can decide for yourself.

  • Determine how many people need to watch the service at once in your home.
  • Decide which channels you can’t live without.
  • Compare your needs to the different services (here are good overviews of DirecTV Now and Sling TV to get you started).

Oh, and one other thing to consider: DirecTV Now is not currently available on Roku devices. So if you’re a Roku user, you might need to wait before you try out DirecTV Now, which means you might miss the introductory deal. Decisions, decisions.

Related Articles:

Chris Brantner is founder of CutCableToday, where he helps people cut the cord and find the programming they want. Follow him on Twitter (@CutCableToday) for more cord-cutting tips.

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Wednesday, December 7, 2016

Wealth, Purpose, and the Idea of “Enough”

I’ve recently been enjoying The One Thing, a very thoughtful time and goal management book by Gary Keller and Jay Papasan. While I came away from the book with several very good ideas for time and goal management, there was one quote on page 142 that just stood out to me like a beacon of light:

“[F]inancially wealthy people are those who have enough money coming in without having to work to finance their purpose in life. Now, please realize that this definition presents a challenge to anyone who accepts it. To be financially wealthy you must have a purpose for your life. In other words, without purpose, you’ll never know when you have enough money, and you can never be financially wealthy.”

Let’s break this down into parts.

First of all, the authors hit the nail on the head with the first sentence, defining “financially wealthy people” as being those whose expenses are covered by income from their investments or from their previous efforts so that they no longer have to work for money. I call that state “financial independence,” meaning you’re simply no longer dependent on work to make ends meet in your life and can instead direct your energy elsewhere. It’s my long term goal at the moment, one where I’m far from the beginning but also far from the desired destination.

What’s interesting, though, is that the authors assign a purpose to financial independence. In other words, a significant part of their idea of financial independence is that you have some kind of purpose in your life that’s able to be financed by your investments and careful planning. That purpose inherently defines exactly how much money you need. Without that purpose, you can never have enough money.

I’m heading for this nebulous goal of “financial independence,” but how will I really know when I get there? I need some sort of purpose so that I know how much money I will need in order to be financially independent and live out that purpose.

This idea was one of those “close the book and think for a while” moments. I actually sat the book down, put on my coat, and went for a walk around the neighborhood when I first read those sentences.

Here’s the reality: Sarah and I have worked our tails off up to this point in our lives and right now, we could both retire extremely early if we were willing to live on a very tiny income, smaller than either one of us feels comfortable with. We’ve sat down together and done some modeling and realized that with our current financial state, we actually wouldn’t lose our house and we would be able to feed everyone if we both lost our jobs at the same time.

However, there are a lot of things we wouldn’t be able to do. We wouldn’t be able to travel much at all. We’d go down to one vehicle and would have to be very careful with how we used it. We’d have to make a lot of things ourselves, meaning a healthy portion of our time. As a result, we’re not retiring early any time soon unless it’s forced on us.

The interesting part, though, is that even those realizations point to a bit of a purpose when we’re financially independent. Clearly, some degree of travel is part of our purpose in retirement, which means that it requires a certain level of investment. I would very much like to spend at least a week at every national park in the national park system and walk the Appalachian Trail while I’m still young and healthy enough to pull it off.

That’s not going to fill all of my time, though. The truth is that I am wired for creative endeavors. I like making things. I like writing essays and books. I love writing and compiling computer code. I like building stuff. I also like learning new things and incorporating what I’m learning into the stuff that I build.

I also enjoy helping people. I’ve done a lot of different kinds of volunteer work over the years. I also write for The Simple Dollar, whose core mission from the day I started it was to offer as much insight into financial decisions as I could muster from an ordinary person with nothing to sell who wasn’t a part of the financial industry.

That’s who I am. That’s the core of what’s meaningful for me. I like learning and thinking and creating and helping people. When I am doing those things, I feel the most complete. That’s my purpose.

Thus, when I reach financial independence, I want to be able to support a life where I can learn and think and create and help people. I intend to take some classes at the local university and slowly progress through a different degree program for my own enrichment. I have ideas for several books I want to write. I want at least two or three hours a day for reading and I’ll probably take a daily hike, too. I will probably take a leadership role in a local charity that would eat up 10 to 20 hours a week at least. Aside from that, I want a life that’s largely like the one I have now, except with perhaps a little more domestic travel.

That is the life that I want in retirement. It sounds incredibly fulfilling to me. It fulfills what I think is my purpose in life – to create things and to help people. It also doesn’t rely greatly on the actions of others.

The question then becomes centered around cost and, honestly, that adds up to roughly what we’re spending now. Our children will move out, which will lower our costs, and we’ll travel a bit more, which will bring them back up. I work from home so my professional expenses are already pretty low – no commute, no wardrobe – so nothing like that will vanish when I retire early.

Thinking about financial independence through the lens of purpose really helps me to understand that goal and what it’s really all about. It isn’t about dollars and cents in an account; it’s about building a purposeful life that really has meaning for me. The dollars and cents are just a tool and the amount we need to save is just a target number, nothing more. The thing that matters is the purpose, because without that purpose, the goal of financial independence becomes very vague, very fast.

Another valuable part of this type of thinking is that it often really informs how you spend your spare time right now. The list of things that I want to do – to learn and to think and to create and to help people – are things that I fill my professional life and my leisure time with right now as much as possible. I engage in hobbies that make me think and learn, such as playing strategic games and reading, and my other hobbies blatantly recharge my creative juices, like hiking does. My work is about thinking and creating and helping people. I spend a surprising amount of time volunteering to help people in other ways.

It turns out that my life is pretty fulfilling right now. Financial independence merely serves to add to that fulfillment by eliminating the profit and income motives from everything that I do, rather than just from some of the things that I do, and also eliminates some of the time constraints. It lets me do those things more and gives me more windows of opportunity to get lost in the flow of the moment, because I’m convinced that flow is the truest source of happiness in life.

So, turn this whole thing around on you. Let’s assume that somehow, right now, you had enough money in the bank to simply fulfill whatever purpose you have in life. What would you do? How would you fill your days with something that brings deep and lasting meaning to yourself?

It’s not an easy thing, of course. It will take time and you’ll find that over time your idea of “purpose” will shift around a little bit as you gain life experience and knowledge.

However, when you put a purpose in place and give yourself a real, tangible goal that just rings true for you, you’ll not only find a ton of motivation to work toward financial independence, you’ll also find things to fill your spare time with and perhaps even find some smart career choices along the way.

What is enough? Enough means simply having adequate financial resources to do whatever it is that you’re drawn to do in life without interference. It’s a wonderful, powerful personal finance goal.

Good luck.

The post Wealth, Purpose, and the Idea of “Enough” appeared first on The Simple Dollar.

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Five Things Your Life Insurance Agent May Not Tell You

Life insurance agents provide a valuable service by explaining policy benefits and costs, but they may not tell you everything you need to know before you make a coverage choice.

Agents are in the business to sell policies, so it’s to their advantage to focus on the positives. Consumers can protect themselves by doing some research so they’ll understand the basics of how life insurance works. It’s also important to ask questions about anything you don’t understand.

“Not everyone’s needs are the same,” explains Curtis Price, an independent insurance agent based in San Diego. “You need to ask questions.”

Here are five things that your life insurance agent may not tell you:

1. Not everyone needs life insurance.

While many people can benefit from life insurance protection, each situation is different. The main purpose of life coverage is to replace your income if you die, so your dependents will be provided for. If you’re a primary breadwinner with a spouse or children who rely on your income, buying a life insurance policy probably is a wise decision.

However, if you have no dependents, a life policy could be a waste of money, unless you plan to designate a favorite charity as your beneficiary.

Also, some people have enough financial resources to guarantee their dependents’ wellbeing, even if they die unexpectedly. “If you have enough savings or investments so that all of your primary expenses are covered, you may not need life insurance,” says Price.

Kevin Foley, an insurance agent in New Jersey, says for some people it makes sense to buy a minimal amount of life insurance to cover final expenses, such as funeral services and burials.

2. Permanent life insurance isn’t right for everyone.

The two basic types of life insurance policies are term and cash value, which also is known as permanent or whole life insurance. A term life insurance policy generally is less expensive, because it insures you for a fixed period, such as 10 years. At the end of the term, you must buy a new policy.

Cash-value insurance covers you for your entire life, as long as you pay your premiums. It gradually builds a value on a tax-deferred basis. The cash value is the amount available if you surrender a policy before you die or after the policy reaches maturity. Maturity typically occurs when the insured reaches age 100, says Foley.

A cash-value policy can be borrowed against for such expenses as down payments on homes and college tuition. The cash value is different, though, than the policy’s face amount — which is the money that will be paid upon your death, or when the policy matures.

Because cash-value policies are designed to keep for extended periods, they may not be right for people who don’t have a need for long-term coverage, according to Life Happens, a nonprofit organization formed to educate the public about life insurance issues.

3. You can buy too much life insurance.

It may sound like a good idea to buy more life insurance than you need, but taking on too much coverage will place an unnecessary strain on your bank account. MarketWatch points out that it’s a good idea to have enough coverage to pay off your mortgage. After that, the amount you select should be based on the needs of your dependents. Don’t be too quick to agree to $500,000 or $1 million in coverage.

If you’re widowed and your children are grown, your need for life insurance is likely to be much less than a primary breadwinner with a spouse and young children, says Jim Armitage, an insurance agent in Arcadia, Calif. “It all depends on what your goals are and what your needs are,” he says.

4. Your life insurance agent is paid on a commission basis.

Your agent may be sincere when he or she says you don’t have enough life insurance coverage, but remember that agents typically are paid on commission. The larger the policy you buy, the more money they earn. Sometimes agents will urge clients to replace existing policies just to generate new sales, says Foley.

“Be cautious if your agent sells you a policy and tells you a couple of years later they have a better deal,” he says.
If your agent says you need an expensive policy, make sure he or she can justify the cost, Foley adds. Don’t be afraid to ask about your agent’s commission on various insurance products.

5. Insurance is primarily a risk-management tool.

If you’re looking for a way to invest your money, there normally are more profitable ways to do so than buying a life insurance policy.

While permanent life insurance has an investment component, the main purpose of any life policy is to replace the income of the insured and to protect his or her dependents. A policy enables you to manage your risk of dying.

“I’m not an advocate for saying life insurance is a good investment,” says Foley. “It is a tool for providing a cash flow to your family after death.”

There are cases, however, when it makes sense for high net-worth individuals to minimize estate taxes by buying permanent life policies. Consult a qualified wealth planner to explore your options.

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Tuesday, December 6, 2016

How to Take Out Student Loans Without a Cosigner

You want to take out a student loan, but without using a cosigner. While that’s not ideal, it’s certainly understandable.

Sure, getting your parents or a guardian to cosign your student loans would make it far easier to access financial aid, and if the cosigner has good credit, you’d likely benefit from a lower interest rate than you could get on your own.

But there are plenty of situations when you may need a student loan without a cosigner attached. Maybe your relationship isn’t strong enough to ask for that sort of help, or you simply don’t have anyone to ask. Whatever your reasons, if you want to take out student loans without a cosigner, try the following:

First, apply for every scholarship and grant you can find. That’s because, obviously, it’s free money, and you want to first see how much free money you can get before you start putting yourself in debt.

Kendra Feigert, director of financial aid at Lebanon Valley College in Annville, Pa., suggests that high school students check with their guidance office for local scholarships, but also devote some time to national scholarship searches. She says there are a lot of websites that allow you to search for grants and scholarships, including Fastweb.com, CollegeBoard.com and ScholarshipExperts.com.

Second, apply for federal student loans. Loans offered by the federal government don’t require a cosigner, whereas private student loans usually do — assuming you’re a high school student without a full-time job and little or no credit history to speak of.

That’s another perk of applying for federal student loans – you don’t need to have a credit history (except with PLUS loans). You’ll also typically get lower interest rates than on private student loans, and you’ll find that federal loans offer more flexibility when it comes time to pay them back, with options such as income-driven repayment plans.

You might even be able to get your federal student loans forgiven. This is rare, but if you’re a teacher in a low-income school, for instance, or you devote a decade to working in public service, you may be eligible to have your loan balance forgiven.

Anyway, you’re probably sensing an emerging theme here: Federal student loans are easier to qualify for without a cosigner, and financially easier to pay back than private loans.

Get acquainted with the FAFSA. If you’ve been looking into financial aid for, say, at least five minutes, you’ve already heard of the FAFSA (Free Application for Federal Student Aid). But in case you’re only in Minute Two of your research, here’s the lowdown: The FAFSA is an online form that you fill out, which will determine how much financial aid you’re eligible to receive from the federal government. Everyone who wants a federal student loan fills out the FAFSA.

And not to worry. The U.S. Department of Education’s office of Federal Student Aid offers more than $150 billion every year in loans, as well as grants and work-study funds. Most students are eligible to get something.

And the relatively good news is that you probably won’t walk away from FAFSA with too much debt, says Christopher Hanlon, director of financial aid at Albright College in Reading, Pa.

“There’s a misconception that large student debt is linked to federal financial aid programs,” he says. “In fact, the federal government goes to great lengths to be sure that debt is not overwhelming for student borrowers. Students eligible for the very maximum in undergraduate Federal Direct Stafford Student Loan will complete their undergraduate years with a student debt of $37,000. The great majority of students complete their undergraduate years with a total federal debt of $27,000.”

So why do so many people get stuck paying student loans until their retirement years? Well, plenty of students take out federal loans in addition to numerous private loans. And obviously your ability to pay off your student loans efficiently and relatively quickly often depends on what your career post-college is – and how quickly it takes you to find a career that’s well paying. Most new graduates don’t leave college making six figures (or deep into the five figures), and it’s always more lucrative to, say, own the restaurant than flipping burgers for the guy who owns the restaurant.

If you have to, you can apply for a private student loan. But it won’t be easy without a cosigner – which is the whole point of this piece – especially if you’re a high school junior or senior. Still, if this is a road you need to take – getting a private student loan without a cosigner – then you’ll want to start establishing your credit history.

The best way to do that is with a credit card. Some student credit cards are specifically geared toward young people trying to build their credit profile. But the Credit Card Act of 2009 made it hard to get a credit card without steady income. Some people have griped about that rule; as a (barely) survivor of a lot of credit card debt, I personally think this is a smart idea and makes a lot of sense. But, it does make it harder to apply for a credit card on your own if you’re, say, a high school or college student, or a stay-at-home spouse with access to household income.

So you may have to ask a parent or guardian to cosign a credit card for you while you build up a credit history, in order to eventually land a private student loan without a cosigner. I don’t like the irony there, either.

Anyway, if you do get a credit card with a parent or guardian as your cosigner (or if they add you to their card as an authorized user), from there, you’ll want to occasionally check your credit report and credit score to track your progress.

You can get a free copy of your credit report once a year from AnnualCreditReport.com. There are three main credit bureaus — Experian, TransUnion, and Equifax – so if you ask for your annual report from each of them at four-month intervals, you can get a version of your credit report three times a year.

You might also want to visit CreditKarma.com, any time, and get free credit scores from TransUnion and Equifax. These are calculated using the VantageScore model instead of the more commonly used FICO model, and there are minor differences between the two, but if you want to get a decent sense of what your credit score is, it’s a perfectly good way to get started.

But, again, hopefully you can find enough money for college without getting a private student loan. As noted, it can be more challenging to work with a private lender if you’re struggling to pay off a loan — you won’t find any alternative repayment plans or loan forgiveness. And generally, private student loans are more expensive than federal loans.

So if you want to get a student loan without a cosigner, go the federal student loan route. And take heart: As you do all of this extensive research into student loans and financial aid, it’s probably very good practice for all of the research you’ll do when you finally get to college.

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The Financial Decision of a Lifetime: Should I Have Children?

As I write this, I’m sitting in the overstuffed chair in our living room waiting for my three children to get off the bus, as they will at some point in the next hour or so (their bus driver seems to stop along the route and shout at the kids to be quiet sometimes, so their exact drop-off time varies). When they get home, I have a snack waiting for them (an apple and a small glass of milk), and then we’ll spend the next hour doing sustained silent reading and homework, after which I’ll start preparing a dinner for the five of us so that it’s at least partially prepared when Sarah arrives home.

This is our completely normal after-school routine, repeated about 150 times a year (with another 30 school days or so filled with an abnormal routine of some kind). Let’s start unpacking just that one little routine.

First of all, it means that I’m stopping work at around 3:30 each day. If I didn’t have children arriving home, I would definitely work later than that and probably get more things done. I’m making a conscious career choice related to my children which is costing me in terms of salary.

Second, they eat an after-school snack each day. Three apples and three cups of milk is a pretty typical snack, so let’s say that costs $1.50 all told.

Third, I prepare a much larger dinner than I would for just Sarah and myself. The cost of a typical meal in our household right now is doubled. Let’s say an average meal at home would cost $5 without kids; now it costs $10.

Now, repeat all of that 180 days a year for several years and you can see the costs wrapped up in just that little after-school routine. We’re not talking about the costs of keeping the children clothed, the cost of their medical care, the cost of some of their toys and books. We’re not talking about the cost of their other meals, the cost of their extracurricular activities, the cost of a larger house to provide them with adequate places to sleep.

Those costs add up surprisingly fast.

CNN Money estimates that the average cost of raising a child in America is $245,000, a number I would have thought was ludicrous before I had children but a cost that I now completely believe. (It’s worth noting that a second and a third child in close succession are less expensive comparatively because of economies of scale, so we’re not quite spending $750,000 by having three kids.) There are many, many things you can do to reduce that number, but no matter how much you try, there’s only so much reduction you can do. Children require food and clothing and shelter and attention and enrichment and those things cost money, no matter how carefully you slice it.

Kids are expensive. Really expensive.

Clearly, if you’re looking at nothing but your financial bottom line, children are a huge expense that will drain your dollars. And, at the same time, considering that having children is a choice, not a requirement, choosing to not have children is the one that will put you in better financial shape twenty years down the road. Those claims are largely beyond dispute.

Then why on earth did we choose to have children? It’s worth noting that we chose to have our second and third children after starting our financial turnaround and yet we chose this financially challenging path. Why did we do this?

Let’s walk through that thought process a little bit so that perhaps you can decide for yourself if children are right for you (and if you’ve already made that decision, perhaps you can share this article with others who are in the process of making that decision).

The Reason for Work

Why work? Why exactly do you (most likely) get out of bed several days a week and face a job of some kind? Sure, you need at least a little bit of income to keep a roof over your shoulders and minimum food on the table, but the majority of working Americans earn significantly more than that and hope to earn a lot more than that, so they work.

But why? Why do that? Why earn more than the bare minimum you need to survive?

Almost always, people do it because they have personal dreams and goals that they want to achieve in their lives and they need money – often, quite a bit of money – to be able to achieve those dreams.

Two of my closest friends are on vacation in southeast Asia right now because their dream is to travel the world. They make good money, so once a year or so they plan a trip to another part of the world and go there.

Another of my closest friends currently owns a tract of land in southern Iowa that he essentially uses for outdoor play. He’s cultivating it into a little patch of forest, exactly the way he’s always wanted since he was a child.

Many other people I know simply want a day to day life with some small perks scattered throughout.

One of the first things that Sarah and I really discovered about each other was that one of our absolute biggest shared dreams was to have multiple children and raise them into adulthood, giving them opportunities and life experiences that neither one of us had. We would have the opportunity to enjoy childhood from the “parent” side of the coin as well and then we would perhaps have the opportunity to become grandparents when we grew older.

This whole process was something that we were drawn to do. It was something that we both internally felt from a rather young age, that parenthood was something we deeply wanted in our lives and that we were quite willing to sacrifice a great deal of time and some of the money we were going to make in our lives to make it happen.

In short, part of our motivation for every single day of work that either one of us have put in over the years is our respective desire to have children and be good parents. That’s why we work, among other goals.

The Goal Needs To Come From Within

Here’s the thing, though: many people are pressured by relatives to have children. They hear constant questions from their parents about whether a grandchild is coming or from other family members who are keen to see you go through that adventure of parenting.

I’m going to give you one very straightforward piece of advice here: if parenting is not something you want in your heart, don’t have children. No matter how many hints or how much pressure the people in your life are putting on you, don’t have children.

You should absolutely follow the dreams that you have for yourself, not the dreams others have for you.

Quite often, the pressure to have children comes from external sources – parents, pop culture, television shows, and so on. You’ll often see parenthood presented as the norm and the idea that a person might not want that in their life is seen as abnormal. You might feel various responses to that – guilt is often one. Many people try to talk themselves into wanting to be a parent.

Don’t do that. You don’t deserve it. You don’t deserve to be foisted into a twenty-plus year commitment to complete care of another person just because your mother or popular culture seems to imply that you should. Your hypothetical child especially doesn’t deserve a parent that isn’t fully committed.

If the desire to become a parent comes from within, you’ll know that it comes from within. You won’t feel as though you have to “talk yourself into” parenthood. Instead, it’ll feel like an inevitability, as though it’s something you’ve always wanted to do and you’re simply waiting until the right time or the right biological conditions.

The truth is that most of the benefits of parenting are internal ones. They’re almost impossible to describe in terms of dollars and cents and in terms of free hours on your calendar. You can’t point to tangible things that explain why parenting is worthwhile. It’s something that’s internal, and it’s okay whether you have that internal feeling or not.

Real Talk About the Costs

Sarah and I have three children under our roof. The oldest is a pre-teen; the youngest is a first grader. We went through a seven year stretch where at least one member of our household was in diapers or training pants at all times.

Here are some hard truths about parenting.

Your day to day life will radically change, particularly in terms of time use. If you’re not a wealthy person and won’t be hiring someone to do all of the work of raising children, your time use is going to radically change. Children need time, lots of it. I’m not even talking about “quality time” where you’re doing something enjoyable together or actively involved in “parenting.”

I’m talking about things like preparing more meals at home (because eating out with kids isn’t happening) and doing more laundry because there are many more clothes and sheets and other items to be washed. I’m talking about more housekeeping than you can ever imagine. I’m talking about trips to the doctor to make sure your child’s ailment is handled or that they remain healthy. I’m talking about not being able to go out whenever you feel like it because you have a young one at home that can’t take care of himself or herself.

You’ll find yourself making choices you never expected. You might be a workout fanatic and then discover that there just isn’t room for that any more in your life. You might be a neat freak and then find yourself not vacuuming for weeks. Things change. Priorities change.

Your days will be very different. For some, that’s not a bad thing. On the whole, I enjoy my daily life now more than I have during most of my life. For others, those who enjoy their free time as it is right now, it can be miserable.

Your social circle will change. When your time use changes that much and the things that are on your mind change that much, it stands to reason that there will be some real changes to your social circle. You’re going to find that some of the people you are friends with are not interested in being friends with a parent. That’s just the truth of the matter.

What I found is that the friends who stuck around through this shift in my life are now tighter with me than ever. They stuck around, so I know how true they are as friends, and I would do anything for them.

There were some people that I thought would continue to be a part of my life, but they fell off the radar. It hurt greatly when this happened, but looking back, I understand that I inherently changed as a person when I became a parent and those changes took away some of the key elements that our friendship was built on.

This will happen… and it’s okay. You’ll find that you have less time for a social life and that the people that continue to be your friends will fill it up nicely. Just don’t be surprised when a friendship or two gradually fades away.

Your career will take some odd turns. Regardless of your parental role, your career is going to face some unusual challenges because of this radical shift in time use. Even if nothing seems to change in terms of your day-to-day career, the long-term choices you make for your career will change.

Taking a big career risk suddenly seems like a questionable idea because you have a dependent that needs steady food on the table and stability in his or her life. Moving across the country can seem like a really bad move if you’re yanking your socially awkward third grader away from the only friend she’s ever had. Staying late to meet a big client suddenly seems like a questionable decision if you’re supposed to be at your son’s first concert.

You might decide to become a stay-at-home parent. You might force your career to take a 90 degree turn so that you can have the flexibility you need to be there when the kids go to school and when they get off the bus (this is exactly what I did).

The result of all of those shifts is that you probably close the door on a few opportunities in your career and you find yourself needing to double down much harder in the areas that you can still control. Parenting made me much more interested in things like focusing and time management in terms of my professional life because I realized that my career was now taking up a smaller portion of my life but I still needed to get the same value from it, so I needed to become more efficient at it (and more efficient in all areas of my life).

Your hobbies and interests will shift. Here’s the truth: your total leisure time is going to shrink and some of that leisure time is going to be spent with your children. Again, unless you’re hiring a full time child care person, that’s the reality of things.

Because of those shifts, your hobbies are going to shift, too. You’re going to be cutting back or dropping some of the things that you spend your free time on and altering some of the other things.

My honest suggestion is to choose one or perhaps two hobbies, intentionally schedule time for those things, and let the rest of them go. I have basically three hobbies at this point – playing tabletop games (I have penciled off two regularly-scheduled game nights), hiking (I usually go on one daytime hike a week, which usually doubles as a brainstorming session), and reading, which flexes around everything. I basically gave up watching television and movies, only doing those things if it’s a pure family event. Most of my reading time is during a sustained silent reading block with the kids. In other words, my hobby time is largely bolted into my calendar.

This leads right into another point: “empty” time will basically disappear. You’ll find that you’re either doing something meaningful with every hour of your life or you’re feeling some sort of guilt that you’re not doing something meaningful. It’s just a truism in the life of almost every parent that I know.

I don’t have a “free afternoon” or a “free evening” unless I basically plan for them and wall them off in advance, and they usually come with something I’m planning on doing during those hours. Time to just sit around and do things as they come to me doesn’t exist. The time I used to spend doing things like that is now taken up by the added responsibilities of parenting. I no longer understand the concept of “bored.” There isn’t time for being “bored.”

“Getting ahead” financially becomes much harder. You have to become as regimented with your money as you are with your time if you want to financially succeed while being a parent. Children are money vacuums, which means you have to be much more careful with all of your spending choices in order to have money left over to save for your own future, let alone their future. Techniques like knowing how to maximize the value of shopping for groceries become vital, for example.

“Are You Trying to Talk People Out of Becoming Parents?”

This was a question that a friend of mine asked me when I made an offhand reference to this article as I was working through it in my mind. Most of my argument here seemed to be against parenting.

The truth is that I can name many, many reasons why I am extremely glad to be a parent, but those reasons are almost entirely internal. They revolve around how fulfilled I feel in my life as a whole and how I am often buoyed by things like seeing intellectual and moral growth in my children. When I look at external measures, like time use and money use, those things appear to be costs rather than benefits, most of the time. Parenthood is the most fulfilling thing I’ve ever done in my life, but it’s almost impossible to describe in an external way.

In other words, my friend is right when it comes to making a case against parenthood. My belief is that unless you are deeply committed without doubt in your own heart to having a child and being a parent, you shouldn’t do it. It’s not that people who are uncertain might not become good parents – many of them would become great parents. It’s that a person should never jump into a twenty year long commitment of time and a six figure commitment of money unless they’re certain of it in their heart.

If you’re certain of it, have children! You’ll find it to be so rewarding for you that the time and financial costs end up being absolutely worth it.

If you’re on the fence, though, spend some time thinking about what you truly want out of life. What are your life goals? What seems like the best life you could possibly have ten years from now? Does it include children? What about the best life for you twenty years from now? Does that include children? Don’t force something you think should be in the picture into this vision of the future. Think about what you want.

If that picture includes children, then having is probably a solid choice for you. If not, then you shouldn’t take on that expense.

Good luck, in wherever your path may take you.

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