Money Crashers » Money Management

Should I Cash Out My 403b Account To Pay Off Debt?

Erik Folgate — Thu, 19 Nov 2009 03:02:41 +0000

Help a reader with this question:

I currently have a 403b with about $20k in it. I am planning on leaving my job late April and was previously planning on moving the money somewhere else. However, I owe a family member $15k for a car they bought me almost 5 years ago. I did not pay them back yet because we have been working on paying off all of our other debts (which we have paid them all off!), and the family member was not charging me interest or asking for the money back. So this $15k (and our mortgage) is the only thing holding us back from being debt free. Would it be wise to consider pulling the money out of the 403b when I leave my job, paying the taxes, and then giving my family member the money to pay off the debt? Then I was thinking about opening a Roth IRA with any remaining money since I think we can get down to owing the family member $10k by the time I leave my job.

Another factor which I need to look into is how my company has invested in my 403b. I am not fully vested since I will be about 7 months short of becoming fully vested so I am not sure if I will lose money from the 20k when I leave my job.

My Answer:

Regarding the 403b, I would NOT pull the money out of it to pay off the debt you owe the family member. The reason for this is because you will potentially pay a 35% penalty to withdraw the money early. The 403b will charge you a 10% penalty and then you’ll owe the IRS taxes on the withdrawal amount based on your current tax bracket which is probably 25%. So, would you borrow 15k at 35% interest to pay off the personal loan? No, I am sure you wouldn’t, so there’s no reason to use the money from the 403b.

When you leave the company, transfer the 403b money into a Roth IRA with a discount stock broker. I like Vanguard, Charles Schwab, and Etrade.com. You want to do a DIRECT transfer. This is very important, because if they cut a check to you, you cash the check, and put the money into another account, the IRS could hit you for the taxes. You want the money to go straight from the 403b provider to the new brokerage account. Whoever you choose will have instructions on what to do for a direct transfer.

I commend you for wanting to get out of debt quickly, and I think you still can, but the family member obviously isn’t hurting from that loan, so contact him or her and tell them you’ll start sending them money on a monthly basis. Who knows, maybe after 6 months of sending them money, they’ll forgive you for the rest of the loan. But, you definitely owe the money, so you should start putting together a repayment plan as part of your monthly budget to get the loan paid off as quickly as possible.
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Should I Cash Out My 403b Account To Pay Off Debt? is a post from: Money Crashers

3 Reasons Why You Shoud Avoid Bankruptcy

Erik Folgate — Thu, 29 Oct 2009 01:36:28 +0000

I listen to the Dave Ramsey Radio Show every once in a while on my way home from work, and one of the most common topics I hear from callers is the question about bankruptcy. So many people call in for advice about whether or not they should file for bankruptcy. Ramsey, having gone through a very messy bankruptcy himself 20 years ago, almost always talks people out of filing for bankruptcy. There are some cases where bankruptcy is the only option, but after listening to his show for a while now, I’ve realized that bankruptcy doesn’t need to be the first option for someone in serious financial trouble.

But bankruptcy sounds so easy, right? You hire an attorney, they file some papers, and your slate is wiped clean. Well, it’s not quite that easy, and many people take filing for bankruptcy lightly nowadays. Here are three reasons why you should try to avoid bankruptcy at all costs.

You’ll be dropping a bombshell on your credit. The bankruptcy will stay on your credit report for 7 to 10 years, and you’ll be treated like an untouchable when it comes to getting a loan in the future. The only people you’ll attract are sub-prime loan sharks. The worst part is that it will take at least 3 years to be bankable again for a mortgage. You’ll need to pay for everything on time and not slip up ONCE if you want to think about buying a house after a bankruptcy.
It puts an emotional strain on your relationships. You’ll be getting sued, dealing with attorneys, and going to trial hearings. It’s not a walk in the park, and if you’re married, it will definitely affect your relationship. Ramsey is very candid about the fact that his marriage was hanging on a shoestring while they were going through a bankruptcy and raising two kids. It’s not a fun and easy process. It’s not the “start over fresh” feeling that some portray it to be.
It Can Be Expensive. That’s right, filing for bankruptcy isn’t for free, and if you want to do it right, you’ll need a decent attorney to handle it for you, and attorneys aren’t free! If you don’t use an attorney, you leave yourself vulnerable to possible liability for debts you can’t pay. Remember, it can be expensive to go broke!

Most people don’t need to file bankruptcy to get out of their financial mess. Most times it only requires you to get organized, take control of your life, and start systematically paying off debt. Get on a written budget, work another job, sell a bunch of stuff, and get your debts paid off. It sounds so simple, but the hard part is overcoming the person that got you into this mess…yourself. If you can overcome yourself and make wiser decisions, you can win with money and avoid bankruptcy.

10 Tips For Saving Money On Back-To-School Shopping

Erik Folgate — Wed, 06 Aug 2008 04:14:44 +0000

The average consumer spends $500 every year just on back-to-school supplies. This doesn’t even cover clothing. If you have three kids, you could easily spend $2,000 every August on back-to-school shopping. But, for every shopping nightmare, there’s a way to save money. In fact, I’ll give you 10 tips for how to save money this school season.

Shop at discount stores such as Marshalls and TJ Maxx for your children that are brand conscious. These stores carry many of the hottest brands at a much cheaper price.
Buy in bulk. If you have multiple children at similar ages, use it to your advantage. Buy in bulk to save on bulk rate prices.
Check online for discounts. You can often get better deals on items such as graphing calculators, shoes, and books by checking big online retailers such as newegg.com, amazon.com, and buy.com.
Don’t take your kids with you to shop. You’ll probably need to take them with for clothing, but don’t take them with when buying school supplies. They’ll have you buying supplies that they don’t need, and they always think that generic brands are dumb.
Stick to Wal-Mart and Target for supplies. Drug stores and other smaller retailers are still a rip-off. I’m a big supporter of small business, but not in this instance. They can’t compete with companies like Target on Wal-Mart in price, and the price of food and gas is making it tougher every day on the budget.
For younger children, try to contact the teacher directly for a list of supplies. I’m sure that many of you have followeed the check list for your 2nd grade child to the tee only to find that they use half of the stuff that you bought. Sometimes, the teachers don’t make those lists. If you’re able to get a hold of them directly, they’ll know exactly what your child will and will not use for the upcoming school year.
Take your teenager to high-end consignment shop. Stores such as Plato’s Closet and Buffalo Exchange carry some of the hottest brands with the latest styles at a fraction of the cost of new clothes. I know what you’re thinking. You work too hard to be buying your kid used clothing. But seriously, check the store out before you stick your nose up at it. They only accept clothing in pristine condition.
For older children, set a budget for their clothing. Give them a certain amount such as $100 or $200, and let them pick everything out. You’ll be very surpised at how far they can stretch a dollar when they know how much they can spend. If you don’t set a dollar amount, they’ll treat you like a bottomless money pit.
Use hand-me-downs from previous years. Remember to keep items such as pencil sharpeners, hole punchers, lunch boxes, back packs, and other reusable items for younger children to use.
Search Craigslist for higher priced items. People aren’t dumb when it comes to selling stuff in the classifieds. Craigslist is the biggest and most famous online classified on the internet. If there is a high-priced item that your child needs for school such as a calculator, check Craigslist first.

Don’t settle for getting ripped off from retailers this year. They’re biggest ploy is to make you feel like you’re getting all of these deals, when in reality, you’re spending much more money than you should have spent. Retailers live for this time of year. Don’t let them win.

25 Reasons To Get Out of Debt Today

Erik Folgate — Wed, 23 Jul 2008 03:24:34 +0000

Some of you will go through your entire life being in debt. You’ll always pick up a car loan, always carry credit card debt, and you’ll always move up in house. My challenge to you is stop the debt cycle in your life. Stop the cycle of always being in debt. If you need some convincing, here are 50 reasons why you should get out of debt as quickly as possible.

It will free up your household income

More money to invest in your retirement accounts

Less stress in your life

No chance of becoming upside down on a loan

Greatly reduces the risk in your life

Helps improve and maintain healthy relationships with your spouse, family, and friends

It puts you in a better position to give with abundance

The feeling of owning a car or a house outright is awesome

You will work harder at your career

You will be more motivated to make more income

You won’t feel like you’re running in a hamster wheel.

It will free up your thoughts

Improves your credit score, which could lower your insurance premiums

Improves your credit score, which could help you land your dream job.

Motivates you to work towards your dream career.

Improves your marriage.

Improves your health. Less stress equals a healthier body.

It will free up more income to help you save for your children’s future

Allows you to help friends and family get out of debt

It will free up money to put towards the home improvements you’ve dreamed about

You’ll be a happier person, and people will like you more.

You can finally take control of your financial life

More time and money to devote to your favorite hobby

Unfortunate events won’t ruin your financial and personal life.

You can teach your children how to stay debt free

I could come up with many more reasons, but 25 is good for now. Are you fed up with drowning in debt? My wife and I are fed up with it. We have paid off $10,000 in two years, and once she starts working and we have two incomes, we have a plan to pay off $50,000 in two years. We know that we can do it with diligence and motivation. We definitely have the motivation to be debt free, but we need to maintain diligence even when we’re tempted to use the money for other things. I want to hear from those of you who have recently decided you want to become debt free. I want to hear from those of you that have already become debt free and what the feeling was like when you paid off the last debt. Being debt free except the house counts as being debt free in my eyes. The ULTIMATE debt free feeling is payinig off a house, but that takes longer than a couple of years. Let’s start a revolution. Let’s our generation and generations below us to live debt free. Who’s with me?

How To Save Money In the Big City

Erik Folgate — Thu, 03 Jul 2008 22:53:19 +0000

This week, I am visiting my brother and his family in Los Angeles, California. To be more specific, they live in Pasadena. People from Los Angeles don’t like when you say “They’re from L.A.”. You need to be more specific, because the city is so huge. It’s a fun city. The whether is amazing, but the traffic and the cost of living is enough to keep me away. I’ve been observing some of the interesting ways that they save money in this city. Los Angeles is a little different than big cities such as New York, Chicago, and Atlanta. It is a hybrid city. It has a downtown, but very few people live there. They live in the hundreds of towns that surround the core of Los Angeles. You can’t call these smaller cities suburbs of Los Angeles, because they still feel like the big city. Los Angeles doesn’t have a great public transportation system. It’s so spread out, that a transportation system to cover every area would cost a fortune. Here are a few ways that my brother and his family save money to live well in Pasadena.

They use a cloth diaper drop-off service. They use the cloth diapers, throw them in a big bag, and a delivery truck drops off fresh cloth diapers and picks up the dirty ones. The service is expensive, but it cuts down the trips they need to take to the grocery store to buy diapers. Plus, they don’t have to use as much water to wash the diapers themselves.
My brother works from home, and his wife works about ten minutes away from their house. Even though her commute is nothing, she still car pools with a friend from work. Their gas expenses are minimal, because they hardly use their cars during the week. They’ll also spend less on car maintenance.
They shop at Trader Joe’s, a cheaper grocery store than Whole Foods or Ralph’s Supermarket. Los Angeles is trendy, People get caught up shopping at supermarkets that are convenient rather than cheaper. Trader Joe’s has quality foods at a cheaper price, and they have a great selection of organic foods.
They buy memberships. They have a membership to their favorite museums, the zoo, and other places of interest that charge for admission. A one-year membership always has price advantages, so it’s silly not to take advantage of it if you know that you’ll visit often throughout the year.

These are just a few ways that they save money in a city that will tap your bank account dry if you’re not careful. If you live in the city, share your tips about saving money in the concrete jungle.

Simplify Your Finances: Organize Your Accounts

Erik Folgate — Tue, 03 Jun 2008 03:38:49 +0000

I’m going to run a short mini-series on simplifying your finances. I think that much of the problem sometimes with managing our money is that we tend to complicate the situation more than it needs to be. There is no reason that you should feel intimidated or overwhelmed with managing money. Money is not complicated. We are the ones tha make it complicated. So, the fist thing to do get your bank accounts organized. I am going to show you a method that works for me. Basically, I have three separate accounts for three different purposes. They are as follows:

Checking Account: This is a joint checking account. All of our income flows into this account. We pay all of our bills out of this account. We also extract all of our discretionary money out of this account including cash for entertainment, clothing, and “mad” money. This is our primary account and it has the most activity. We have our debit cards attached to this account, and we ONLY try to use the debit cards for groceries, gas, and some items that need to be bought online like flea medication for our dog. This money is already pre-budgeted out, but we just keep it in the account and use the debit card for it. We found that taking out the money for this kind of stuff was too dangerous to be carrying around.

Short-Term Savings Account: We use ING Direct’s online savings account. The interest rate isn’t very good right now. I think it’s about 2.5%, but we don’t have it for the interest rate. We have it to set aside money for our emergency fund and anything else that we are saving up for within the next 1 to 3 years. This can be anything such as a vacation, car, or other expense that are anticipating before it happens.

Long-Term Savings Account: We actually don’t have one of these yet, but I’ll be setting it up as soon as my wife starts working. I contribute to a 401(k) at my day job right now, but we have waited to open up Roth IRA’s until my wife starts working as a physician assistant. Any of the online brokerage accounts such as Etrade, Scottrade, or Sharebuilder are good brokerage accounts to open up to send money to for long-term investing goals.

These are the only three accounts that you need. If you don’t like to carry around much cash, then you could consider opening a second checking account to keep discretionary purchase money in a separate checking account with a separate debit card. But, that would be the most that you’ll ever need. If you have multiple brokerage accounts or multiple savings accounts, you’re just creating a hassle for yourself. Simplifying your finances is the name of the game. Once you’ve done that, you’re well on your way to achieving your financial goals and financial freedom.

Next topic: Simplify your investment strategy
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Simplify Your Finances: Organize Your Accounts is a post from: Money Crashers

Question From Money Crashers Reader: What Should I Pay Off First?

Erik Folgate — Mon, 21 Apr 2008 11:52:38 +0000

Here is a question from a Money Crashers reader. She is in a great situation, because she has a nice lump sum of money, but she doesn’t know what to do with it.

My home is worth about $375000 and I owe $62000 on it. My credit card debt is $21000 ($11000 at 3.99% for life of loan and $10000 at 10% until 11/08) and school loans of $10000. I am recently widowed and am struggling month to month with my bills. I have a lump sum of $80000. Should I pay off the credit cards and school loans which would decrease monthly payments by about $700? Thank you.

My Answer: First of all, thanks for being a reader. I answer all reader questions based on what I would do. It’s merely my opinion and you can take it for what it’s worth. I always answer these questions by evaluating what plan of action will help you reduce the most amount of risk in your life. With an $80k lump sum, I would definitely pay off the the credit cards and student loan first. You’ll be debt free, except the house, and you’ll free up a huge amount of monthly income. That extra $700 will be great to have for a single mom who is working paycheck to paycheck right now. With the remaining amount, I would set aside four to six months worth of monthly expenses for an emergency fund. Then, if you haven’t started saving for retirement, open up a ROTH IRA and fully fund it for 2008. You’ll, still probably have about $25k after all of this. You can then invest the rest in index funds that follow the S&P 500 such as the Vanguard 500 or pay down some of your mortgage. If you’ve done all of the other steps first, what you do with the extra $25k is not a huge deal. Even if you wanted to set aside $5k for a vacation or to just have some fun with, that’d be fine too!

Readers, please post your suggestions with what this reader should do given her situation.

Help A Reader: Should I Pay Off My Mortgage or Pay Off My Student Loans?

Erik Folgate — Mon, 31 Mar 2008 19:21:29 +0000

Here is a good question from a Money Crasher’s reader that I thought I would share with everyone, because some of you may have the same question. Remember, don’t take my advice as gospel. Verify it with other people you trust in your life. I answer questions how I would do it and what I feel is the best thing for your personal finances.

My wife and I currently have a 6.125% 1st (30 year fixed) and a 6.65% 2nd (5 year arm interest only) (80/20 loan) mortgage on our homestead, and we also have student loans which have been consolidated at 3.75% fixed.

We have a sufficient emergency fund, invest in our firms’ 401(k) programs and have no credit card or car loans. If we want to allocate addition funds to pay down either our mortgages or student loans. Which one should we do? Oh, we also do not qualify to take student loan interest as a tax deduction anymore.

First of all, I want to congratulate you for doing so well with your money so far. You’ve got great interest rates on your mortgages and on your consolidated student loans. You’ve got no other credit card or car loan debt, which is great! You’ve also got an emergency fund, which is what I would have told you to do (build one up first) before you start paying off any of these debts.

The only thing that concerns me a little bit is the 5/1 ARM interest only 2nd mortgage. You did not indicate how long you’ve had the ARM, if you’ve had it for a couple of years, then the interest rate will soon start to adjust and raise your payment on it. I would say that this is the riskiest debt that you have, and you should pay it off first, as fast as possible. Then, start paying off your student loans. Save the 1st mortgage for last. Even though it has a higher interest rate than the student loans, it’s a low, fixed rate and you’ve got something to show for that debt – your house! The ARM can make your life miserable if you let it stick around for too long, so I would work hard at paying it off first, because you’ll be building equity into your home and getting rid of a lot of risk in your life.

Does anyone else have any suggestions for this couple? Post it in a comment!

Four Tips On the Issue of Money and Family

Erik Folgate — Tue, 05 Feb 2008 20:51:57 +0000

When I was in college, my first car had finally broken down. I needed another car, but I didn’t have any money to get another one. I didn’t want to go to a bank to get a loan for a car, because I was didn’t want to pay all of the interest and I didn’t want the possibility of it getting repossessed if I could not make the payment. After several discussions with my dad, he agreed to pay for the car and I would pay him a set amount each month until the loan was either paid off, or he felt that I had paid enough towards it for him to give me the title. I didn’t have to pay any interest, and if I was a few days late, I wouldn’t be penalized. It seemed like a sweet deal at the time, but once I started driving that car and paying payments to my dad, it just didn’t seem right. He wasn’t a jerk about it, and he didn’t hold it over my head, but I didn’t like the idea of owing my dad money. I thought to myself, “My family shouldn’t feel like my bank.” At some point in your life, your money and your family will mix together. You may not want it to, but it will. However, you can choose how you deal with money when it comes to you and your immediate and extended family. Borrowing money, lending money, and starting business from family can be very alluring, because you are close to that person and you feel like you can trust them. I understand why families borrow money from each and start businesses together, but I am going to give you a few reasons why you should not do it and how to avoid it.

Don’t Borrow Money From Your Family. I have adopted a rule to never borrow money from my family. Granted, I know there may be dire situations when you are going to lose your house, have a medical emergency, or some other tragedy occurs where borrowing from your family might seem like the only option. If they are your last resort and the situation is life or death, then borrow from your family. But generally speaking, I don’t think it’s a good idea to use your family as your bank. You shouldn’t have to sit at the Thanksgiving table wondering if your parents, brother, sister, uncle, or grandparent is wondering when you are going to pay them back. It’s a horrible feeling. The best way to enjoy your family is by keeping your borrowing habits to yourself. Lord knows that most families have enough issues and money would just complicate them even more.
Don’t Lend Money To Your Family. This is the same concept as above. If you’re not going to borrow it from your family, you shouldn’t lend it to your family, either! Dave Ramsey likes to quote a famous proverb in the Bible that says “the borrower is slave to the lender”, and it is so true. Do you really want your family member to feel like they are a slave to you? Well, I know some of you wouldn’t mind your in-laws feeling that way, but you know what I’m saying.
Give Money To Your Family. I’m not a cold-hearted person, so if your brother, parent, or other family member really needs some financial help to get out of a bad situation, my suggestion would be to just give them the money, no strings attached. You’ll show them a lot more love by just giving it to them rather than “loaning” them the money. Watch out for enabling that family member, though. If you know the family member habitually gets into bad situations, makes bad situations, or has an addiction, don’t keep shelling out money to them. The worst thing that you can do for a family member is continue to enable their bad habits and decisions. But, if your sister just went through a divorce and she needs help with her rent/mortgage payment just one time, go ahead and give her the money rather than loaning it to her.
Give Financial Advice With a Loving Approach. You may have a family member that is completely screwing up their finances, and you don’t want them to keep falling into the same financial traps. If it’s your parents, they may never listen to you about money, because they don’t want to hear advice or criticism from their children that they raised. If it’s your sibling, cousin, or any other family member, the best way to approach them is with a loving and empathetic attitude. If you attack them and tell them how much they’re screwing up, you’ll never get anywhere with them. They’ll shut down, and you won’t get anywhere. Start the conversation by telling them a story about how you were not on the right path with money but how you turned it around. Show them that you were in their shoes a few years back. If you take this approach and show them that you genuinely care, rather than come down on them, they’ll be more susceptible to your advice.

Family and money just don’t mix. If you mix them, you’ll have quite a sticky situation on your hands. Consider these four tips when it comes to money and family. If you’re on the right track with your finances, you can be a light to your family members who are running their finances into the ground, but lead by example first. They will appreciate you much more for it, rather than spouting off at them at every family reunion. Related Posts:

Four Tips On the Issue of Money and Family is a post from: Money Crashers

The Cheapest Way To Keep Your Pet Healthy

Erik Folgate — Wed, 31 Oct 2007 01:40:23 +0000

My wife and I were sitting in the Vet’s office with our new puppy, Harley, about two years ago. This was our first pet together, and it was a new experience for both of us. You may have a pet when you’re a kid, but it’s really your parent’s pet. All you do is play withh it and feed it sometimes. When you own your first pet, you’ll realize the costs associated with owning it. A few personal finance bloggers have chronicled the high costs associated with owning a cat or dog. My first experience with it was when we were sitting in the vet’s office, and they told us that Harley was allergic to fleas and now skin mites had flared up. We walked out of the office $150 dollars less richer, and we said to ourselves, “What can we do to keep this dog healthy?”

We asked that very question to the veterinarian the next day, and he asked us, “What are you feeding Harley?”. We responded that we were feeding her Purina’s Beneful. His reaction was not good. He went on to explain to us that dogs are much like humans. What you put in their body directly affects their health. If we stuff ourselves with fast food and candy every day, we probably won’t stay very healthy. Likewiise, if you feed your dog the cheapest or cheaper food, he or she will eventually become less healthy. Then, you’ll be stuck with the dilemma of letting your best friend suffer or paying the bill.

We quickly changed to Eukanuba (it’s the dry stuff, so it had nothing to do with the recall), which was only $7.00 more per 20lb bag than Beneful. Part of the reason we were buying Beneful is that it was one of the cheaper products, but also it was just ignorance. We never thought of checking the ingredients or doing research about the company.

The Most Important Tip to Remember

If you want to feed your dog or cat quality ingredients that will contribute to better health, check the ingredients! The first ingredient listed should be a certain type of meat such as lamb, chicken, beef, or turkey. Chicken or lamb meal are okay, but I prefer looking for those brands that list THE REAL DEAL first. Most cheaper brands will have the first two or three main ingredients as corn meal, wheat flour, or brewers rice. Then, you’ll finally get to a meat and it will be chicken-by-products or chicken meal. Do you really want to feed your dog or cat a bunch of carbs to fill them up with no nutritional substance? Some higher end products will include chicken meal or chicken-by-products as a lesser ingredient, because it’s a source of glucosamin for better joint health.

If you look at the ingredients of Ole’ Roy, the cheap Wal-Mart brand, you should be astounded by it. The main ingredients are BONE MEAL and MEAT-BY-PRODUCTS. They can’t even specify which type of meat, because they don’t even know! And what the hell is bone meal? Do they grind up bones and put it in there? Yum Yum!

Yeah, but it’s just a dog or cat. They don’t know the difference!

No, they don’t know the difference, that’s the point. I’m not trying to make this post come across as some kind of “Save The Pets Telethon”. I’m trying to help you save some money, by spending a few extra bucks on pet food. I was convicted by it, when I realized that if I fed my dog better food, that would result in less trips to the vet and less money out of my pocket in the long run.

I’m sure there are some of you out there that will leave a comment about how their dog has been eating Beneful or Ole’ Roy for the past 10 years, and you haven’t had any problems with them. There are always exceptions to the rule, and I won’t deny that. But think twice about saving $7 to $10 dollars next time when you’re picking out pet food. I think you’ll be pleased with the results. Related Posts:

The Cheapest Way To Keep Your Pet Healthy is a post from: Money Crashers