Friday, October 13, 2017

Which Type of IRA Should I Choose?

While many people have a work-based retirement plan of one sort or another, that plan may not be all you need to prepare for retirement.  Today we are going to take a look at Individual Retirement Accounts--accounts that you fund but which the government helps you with by deferring or foregoing taxes.

Rollover IRAs:

When you leave an employer that has a 401(k) or similar plan, you are offered the opportunity to roll the money from the employer plan into an IRA.  The transfer has to take place between the custodians (companies holding the money) but a rollover puts you in charge of the investments and often allows less expensive options that what the employer may offer.  

Money is a rollover IRA remains there until withdrawn.  If you withdraw it before age 59.5, you have to pay penalties as well as taxes. 

Individual Retirement Account

IRAs are accounts individuals open with banks or brokerage houses and to which pre-tax dollars are contributed.  When you do your taxes, the amount you contribute to your IRA is deducted from the amount of money on which you owe taxes.  As of 2017, individuals under 50 are allowed to contribute $5,500 to an IRA yearly; those over 50 are allowed to contribute $6,500 annually.  

In order to contribute to an IRA, you must have at least as much earned (as opposed to investment) income as you contribute, or be the spouse of an earner.  

IRAs may be invested in mutual funds, stock, bonds, or just about any other type of investment except individually-owned real estate.  You get to decide where to open the account and in what to invest.  You may choose to have one IRA or multiple ones (but the contribution limit is per person, not per account).  

Once money is put in an IRA, withdrawing it before age 59.5 means penalties on top of the taxes owed.  There are a few exceptions, such as the purchase of a home, payments of medical expenses and payments for college, but in general you should consider money in your IRA to be for retirement, not for the new car or other pre-retirement expenses.

Like the 401(k), earnings within the IRA accrue tax-deferred.  If money is withdrawn after age 59.5, that money will be taxed at your then current tax rate.  Also like the 401(k), you are required to take a minimum distribution each year after you are 70.5.  

If there is still money in your IRA when you die, it is distributed to the named beneficiaries (not through your will), and as is true with distributions from a 401(k) they will owe taxes on the money unless steps are taken to defer them. 

Roth IRA

The Roth IRA is a relatively new type of account. 

In order to contribute to a Roth IRA, single people must have a modified adjusted gross income below $133,000, but contributions are reduced starting at $118,000. If you are married, your MAGI must be less than $196,000, with reductions beginning at $186,000.   You must also have earned income (as opposed to investment income) of at least the amount of your contribution.   

While regular IRAs allow you to defer the taxes you pay on both the money you place in the account and the money earned via the account, contributions to the Roth IRA are taxed before they are deposited.  However, the money earned on the account is NEVER subject to income tax.  

Another advantage of the Roth IRA is that you can withdraw your contributions penalty-free at any time, and since you have already paid taxes on them, they will not add to your income that year.  This makes the Roth IRA a good place for young people who aren't sure what the future will bring to save money.  While you don't want to have to take money out of your Roth IRA, the money is accessible if you are laid off, or even if you need a new car.

While regular IRAs require that those 70.5 and older take minimum required distributions, Roth IRAs do not.  If you do not need the money that is in your Roth IRA, you can leave it there to continue to grow.  When you die, any money left in a Roth IRA passes to the beneficiary(ies), and those beneficiaries do not have to pay taxes on that money.  

"Back-Door" or "Conversion" Roth IRAs

As noted above, the main advantages of the Roth IRA are that you never pay taxes on earnings and you are able to leave the account to beneficiaries without subjecting them to income taxes on the money.  However, as also noted above, if you make too much money you cannot contribute directly to a Roth IRA.  But, there is a "back door".  The law allows owners of regular IRAs to convert those IRAs to Roth IRAs.  If you choose to do so, taxes become due that year on the converted portion.  So, if you convert a $10,000 IRA to a Roth IRA,  your taxable income that year increases by $10,000, giving you an additional tax bill of $2,100 if you are in the 21% tax bracket. 

There are quite a few calculators online that will tell you whether it is likely to be advantageous to you to convert your current regular IRA to a Roth IRA (and it can be done a little at a time, you don't have to move the whole account in one year).  Basically you have to consider how long you have until you are likely to need the money, what  your tax bracket is now, and what it will likely be in the future and whether you have cash available with which to pay the taxes. 

Those who do not qualify to put money into a Roth IRA directly are allowed to convert a regular IRA into a Roth IRA.

Which IRA Is Best for Me?

The advantage of a regular IRA is immediate tax relief.  Tax brackets this year for those with taxable income over $91,000 range from 28% to 39.6%.  In those cases, a regular IRA allows you to invest 1/3 more money than a Roth IRA does.  If you are in peak earning years and expect your tax bracket to decrease significantly after retirement, the regular IRA may be your best bet, particularly if you plan to withdraw (and spend) the money.

While the Roth IRA does not give you immediate tax relief, you never owe taxes on the money from the account and you never have to take money out of it.  If you expect your tax bracket later in life to be similar to or higher than your current bracket, the Roth becomes more attractive.  

The main thing to remember about either IRA is that it doesn't make money unless you put money in it, there won't be any money to take out.  
Disease Called Debt

Friday, October 6, 2017

How to Get the Most From Your Work-Based Retirement Program

Work-based Defined Benefit Program:

Unless you work for the governement or a non-profit, you are unlikely to have this available to you.  These are traditional pensions where employers contribute on behalf of employees and guarantee to pay a specific benefit for the life of the employee, based on a number of factors, including the number of years employed, the average salary and the final salary.  

The main advantage of these pensions is that the employer takes the risk.  Contributions from employees may be required, and if so, the amount is not optional.  However, at the end of the day, you will know what you will receive and some of these pensions, particularly for school teachers or military personnel, can be very generous compared to the size of the paycheck.

The main disadvantage of these pensions is that they are not portable.  If you swich employers, voluntarily or not,  you may lose benefits.  They may give you some money upon leaving a job, but it it is probably not worth as much as the pension would be.  For example, I taught in Louisiana public schools for two years, and money for teacher's retirement was deducted from my check.  When I left, they refunded my contributions, but not those of the school system, and I received no interest.  

If you participate in such a plan, you need to know  the vesting schedule.  At what point will you be eligible for payments, and how much will you get?  The last thing you want to do is to leave a job a year or two before you would become eligible for a pension.  

Most pensions have some provision for continuing benefits to a spouse after your death in return for smaller payments during your life.  However, once you (and your spouse if that option is chosen) die, the pension is no longer an asset and cannot be left to your heirs.

Some pensions will allow a lump-sum distribution when you retire, which give you the ability to leave left-over money to heirs, but it comes at the cost of a guaranteed check for the rest of your life.

Generally speaking pension income is taxable income in the year it is received.

Some places that offer defined benefit plans also offer defined contribution plans which are a boon to those who do not plan long-term employment with that employer.

To get the most from a defined contribution plan, consider the vesting schedule carefully in making decisions about continued employment, so that you do not leave right before additonal benefits would be due to you.  In picking  your pension payout, consider other assets available and the age of your spouse to pick the type of payout that will likely be worth the most in your situation.

Work-based Defined Contribution Program

These are the 401(k), 403(b) and similar accounts.  Instead of guaranteeing how much money you will receive when you retire, employers who use these plans define how much they will contribute on your behalf (and sometimes that contributioin is $0).  Employers often "encourage" employees to contribute by making employer contributions "matches" rather than outright grants.  

Employee contributions to these plans are made on a tax-deferred basis, which means you pay income taxes on the money when you take it out of the account, rather than when you put it in.  If you are in the 15% tax bracket that means that $100 contributed to the plan reduces your paycheck by $85.  As long as money stays inside the plan, no taxes are assessed on earnings.  

Employers usually contract with an investment company to run the plan.  Usually employees are offered a variety of investment choices--usually mutual funds or similar--and the employee has to decide how to invest his or her account.

If an employer offers to match employee contributions, employees should do their best to contribute enough to get the maximum match--after all a guaranteed doubling of your money the first year is impossible to find in any other investment.  

As far as how much an employee should contribute to an employer plan once a maximum match has been achieved, that depends on the quality of the offered choices and the expenses related to the plan.  My husband's plan has only high-expense funds with mediocre returns.  We get his match and don't add more to that account.  My office plan is pretty good so we make substantial contributions.

Some companies allow you to borrow from your 401(k), others (like mine) do not.  The only way we could access the considerable money in that account (I've been there over twenty years) is for me to quit.  If I quit and wanted to spend that money before I was 59.5 years old, not only would I have to pay taxes on that money at my then-current rate, I would have to pay a penalty.

When employees leave a job with a defined contribution plan, they can always take their contributions with them.  Federal law requires that employees who have been at a job at least three years be allowed to take some of the employer contributions with them (partial vesting) and that those who have been there at least five years be allowed to take all of the employer contributions with them (full vesting).  Often employees who leave are offered to option of maintaining their accounts in the employer program or of moving them to an IRA.  While employer programs are a little more protected from creditors than IRAs, IRAs give you a wider range of investment options, and often lower fees. Having all  your accounts in one place can also simplifiy monitoring and bookkeeping.

Employees who leave a company are also offered the opportunity to "cash out" their retirement accounts.  For employees who are under 59.5, this means paying a penalty on top of taxes, and if your distribution is substantial, it could push you into a higher tax bracket, thereby costing you even more in taxes.  Unless there is an urgent need for the money, this option is not recommended for anyone.   

When you retire and withdraw money from your plan, it is taxed as ordinary income, since no taxes were paid when the money went in.  It makes no difference whether the money you withdraw was money you contributed, money your employer contributed or money that has been earned inside the account.  Generally speaking, once you reach 70.5 you are required to take a minimum required distribution from your 401k, and that amount is based on what actuarial tables say is necessary to deplete the account by the time of your expected death.

If you die with money in a 401(k), it is distributed to the beneficiary (ies) you named, and is generally taxable at that time unless steps are taken to defer the taxes.  The steps aren't difficult, and hopefully the custodian will inform you about them, but they would require another whole blog post, so maybe next week.

To get the most out of your 401(k), contribute enough to get the maximum match.  Pay attention to vesting schedules so you do not leave shortly before you would be entitled to more money.  Keep an eye on the investment options and fees to determine whether the plan is a good place for discretionary contributions.

Work-based programs form the backbone of most people's retirement.  Know how to get the most from yours. 
*Part of Financially Savvy Saturdays on brokeGIRLrich.*

Friday, September 29, 2017

An Open Letter to My New Adult Child

My Darling Daughter:

I am so proud of you!  I know at times college and the years before were a struggle, but  you've made it!  You have your degree and now you are ready to make your way as a adult in this world--as soon as you find fulltime employment at a wage that will allow you to move out.  Until then you may live here in return for a token rent check and any chores I need done.  I love you and I want to see you succeed in this world and so I have the following advice for you:

Get a Job

I know you want a career, an exciting job in a field that is interesting to you, and I hope you find it--but until that happens, get a job, any job--a job that requires you to show up on time every day and that expects you to be self-directed and to stay until quitting time.  One that pays decently would be nice too--but honestly, right now, get a job.  The longer  you don't have anything the more you look like a slacker to a potential good employer.  

Open a Roth IRA

There is an old adage--pay yourself first.  I know that retirement seems like a lifetime away and that you see so many expenses coming your way before that time, but believe me, you can never start saving for retirement too early.  Compounding is magical.

You don't have to put a lot away,but earmark a few dollars every paycheck for a Roth IRA. You can open one at the bank or if you have $1,000, most mutual fund companies would be glad to have you as a customer.

Why a Roth IRA?  There are three main types of tax-advantaged retirement savings accounts.  I talk about the 401k below and if you can't swing both your 401k and a Roth IRA, I'll give you a pass on the Roth. .  While contributions to a regular IRA are made post tax and the account grows tax deferred, the problem with both the regular IRA and the 401k is that you cannot withdraw the money without paying taxes and penalties until you are retirement age (and at that point  you will still have to pay the taxes).  While Roth IRA contributions are post-tax, you'll never pay taxes on the earnings--which if you leave the account alone until you retire will be far more than the contributions.  However, if you need money one day for a wedding, a car, a down payment on a house, or to stay home with my beautiful grandchild, you can withdraw your contributions with no penalty. 

For a young adult like you, the Roth IRA offers both the most long-term tax savings and the most flexibility to use your money for non-retirement needs. 

Take Full Advantage of Company Benefits

You'd be surprised how many employees leave money on the table.  If your employer offers a 401k or other tax-advantaged retirement plan, the first thing you need to know is how to obtain the maximum amount of employer money in your account.  Some employers match your contributions; others make straight up contributions.  Almost all have a limit on how much they will contribute and your goal should be to obtain the most possible.  

Look at your company health insurance plan(s).  Many companies offer a choice.  Generally speaking, the lower the premium, the more you will pay out of pocket.  Run the numbers; do the math.  How often were you at the doctor's last year? How much did it cost?  What is the difference in cost between the high priced plan and the low priced plan?  Cheaper isn't always better,but you don't want to pay more than you need to.

Does your company offer a flexible spending account?  Find out the rules vis-a-vis what you can spend it on, and "use it or lose it".  At least put enough in there for expected checkups not covered by insurance and for your regular medication.  This is money you do not pay taxes on and it is money that in some offices you can spend in January and then spend the rest of the year paying off.  

Learn About Investing

No one cares more about your money than you do.  You are an intelligent woman.  You can learn about basic investment--the advantages and disadvantages of various categories, by reading my blog or any good basic investing book.  You don't have to turn investing into a second job or even a hobby but you should have a good basic idea of what words like "stock" "bond" and "mutual fund" mean and how you can make and lose money.  

Get a Credit Card

Another old saying is that it is easy to borrow money when you don't need it.  Keep an eye on all those credit card applications you get in the mail and apply for one or two that don't charge a  yearly fee.  Keep them in your wallet for emergencies or use then as a convenient means of payment.  DO NOT make minimum payments--unless it is an emergency (like a doctor's visit, not like a hot date for which you NEEDED a new outfit) if you can't afford to pay the bill at the end of the month, you can't afford to buy it.  

Remember that Things Will Have to Be Replaced

The main thing I'm thinking of is your car.  We've been blessed financially and chose to bless  you with your first set of wheels.  Hopefully it will last you at least three more years.  However, it isn't a new car and old cars need to be fixed and eventually replaced.  Put some money aside every month for these expenses so you don't end up with a car payment.  

Make New Friends, But Keep the Old

Remember that Girl Scout song?  It works in life too.  I know you are feeling kind of "tribeless" and it is hard to get used to a world where not everyone is your age and at your stage in life.  Keep your eyes open and a smile on your face and let your beautiful personality shine through.  You'll eventually find a whole new tribe.

Don't Forget We Love You and Know You Will Succeed.


*Part of Financially Savvy Saturdays on brokeGIRLrich.*

Friday, September 22, 2017

4 Websites for Those Interested in Investing and Personal Finance

I enjoy participating in Financially Saavy Saturdays because I get to meet personal finance bloggers and read what they have to say.  However, the participating bloggers aren't the only ones with good advice for those looking to grow their nest eggs.

This week I'm going to share some of my favorite personal finance and/or investing websites.

The Motley Fool

This "freemium" site covers both personal finance and investing.  While it costs $99 per year to subscribe to the premium services, including stock picks, the free portion of the site includes podcasts, articles and discussion boards. It is a good place for anyone who wants to learn more about the investing end of personal finance.

Rockstar Finance

Rockstar Finance aggregates content from other personal finance sites.  My favorite is their "Feeds" feature that allows me to scroll through the headlines of all participating blogs.  As of this writing, they are showing 205 articles published in the last 24 hours by the 1289 participating blogs.  They also have a directory of all those blogs, as well as a forum and a place for you to advertise your services as a freelance writer, virtual assistant or social media maven.  

Daily Trade Alert

Daily Trade Alert is a blog about Dividend Growth Investing and find its articles to be well-researched and most of them are comprehensible to those of us with short attention spans and no math background. I especially like the "Undervalued Dividend Growth Stock of the Week" feature.

Simply Safe Dividends

Simply Safe Dividends is another site that provides information about dividend growth stocks. 

What You Don't See Here

I may be the only personal finance blogger out there who doesn't care for Dave Ramsey but I don't care for him.  I know he has helped a lot of people, and if you are one of them, more power to you and to him.  I know his "snowball" is a psychological thing and that it can be motivating, but I have to shake my head at people paying off loans with 10% interest while only making minimum payments on those with 15% interest.  

I also didn't list Pinterest because I find that it has more eye-catching graphics than substantive articles.  

Mr. Money Mustache isn't on my list either, nor are other "financial independence" or "early retirement" bloggers.  I also didn't list bloggers who write a lot of articles about rinsing and reusing plastic bags or extreme couponing.  Put simply, I'm not poor and I don't choose to live as if I was.  I don't buy designer clothes at full price but I enjoy having nice clothes, and my budget allows me to shop at mid-range stores, so I do.  I have no desire to ride a bike to work and I want the temperature inside my house to be comfortable. If that means I have to work until I am Social Security age, then so be it.

What are some of your favorite financial websites?

Friday, September 15, 2017

Today Only: Free Stock

Have you always wanted to stock, but never had enough money to invest?  Have you heard about people getting rich via Apple?  Do you love your iphone and want to buy the company?  Well, today is your lucky day.

Stockpile, an online stock broker I wrote about earlier this year, is giving away $5.00 worth of Apple stock. Today is the last day, so get yours while the getting is good.  Is there a catch?  Well, when you go to sell the stock, you will pay a $.99 sales commission, but other than that, nope.

I got my Apple stock.  Click here to get yours.

Is It Too Late To Save?

Many of us have read about how "John" saved an amount of money every year from the time he was twenty until the time he was thirty, and then never saved another penny, but, when ready to retire, he had more money than "Mike" who saved the same amount of money every year from the time he was thirty until the time he was sixty.  That definitely makes you think that saving earlier is better than saving later and makes you wonder if you should even bother saving  if you aren't young any more.  However, there is another side to that story.

How Much Will I Have?

According to this compound interest calculator, if you save $1000 per month for ten years, at the end of ten years you will have $155,929.29 if your return is 5% per year.  If you then quit adding money and let it continue to compound at 5% per year, at the end of thirty more years, you'll have $ 696,652.20.  On the other hand, the person who saves $1,000 per month for thirty years at 5%, will have $835,736.38.  

If you change the return rate to 8% the person who saves for 30 years ends up with $1,500,295.18, while her earlier saving sister ends up with $2,013,986.09.  The moral of this story is that you only end up with more money in the end if the return rate is high enough.

Is There a Catch?

At first blush the idea of funding your retirement in your twenties, and never having to worry about it again sounds great, but is it as wonderful an idea as it seems? Is there a catch?  

Yes. Actually there are two:

First, inflation means that the money you save in your twenties is worth more than the money you save in your fifties.  

Second, most people get promotions, raises or better jobs as they get older.  Even without inflation, $1,000 is a bigger part of your paycheck in your twenties than in your fifties.

Third, for many people, their twenties and thirties are high expense years.  


My first adult job was in 1983.  I was a first year school teacher so you know I wasn't getting rich, but I wasn't poor either. I made $14,300 per year.  To buy the same standard of living today would cost $35,144.98.  Using that $1000 per month figure, in order to not have to save today I would have to have saved more than I made (I don't remember exactly what my paychecks were back in the day, but I remember the first number was a "4".  Assuming that job has only kept up with inflation, then $1000 per month today would only be 1/3 of my income.  Big difference.

Increased Income

As I said, my first job was as a teacher.  Checking the salary schedule for that district, teachers get a $600/year raise for 25 years, so that the career teacher in her 50's makes about $16,000 more than the rookie.  Again, all things being equal, it is easier for the older teacher to save.

Different Expenses

Some people graduate from college with no debt, get a high-paying job and continue to live rent-free with Mom and Dad throughout their twenties--and they should be ashamed of themselves if they don't save.  However, many people today spend their twenties paying off student loans while toiling in jobs that aren't quite what they want either career-wise or salary-wise. 

Others have children and the expenses that some with them, especially when they are young--generally either daycare bills or reduced parental income due to reduced hours working. 

Young adults are either paying market-rate rent or buying houses at today's cost while many fifty year olds have either finished paying off the mortgage or are paying a much lower mortgage than is normal today.  

The Bottom Line

The bottom line is that compound interest is a wonderful thing.  The more you have, the more you make.  The stock market has been on a huge roll this year, and our net worth has increased by and amount that is about what our paycheck are--and we've been spending those checks.  

However, by the time the average person/couple reaches their 50's they are earning their biggest paychecks and they have most major child rearing expenses behind them.  If they are smart, their housing expenses as a percent of income are way down.  

How Much Does It Take?

Going back to the numbers in the first paragraph, if I had been able to save $1,000 per month at 5% for the first ten years of my working life (when I was making under $25,000 per year), and had never saved again, I'd have almost $697,000.  If I had started with nothing at 50, and was aiming for retirement at 65, with a nest egg of $697,00 and got 5% per year on my money, I'd have to save $2625 per month.  To put that in perspective, I've changed careers, but if I was teaching, I'd be earning $56,549 per year now.  While saving $2625 on that salary would be hard, it is at least less than the salary--and hopefully I wouldn't be starting at nothing in my fifties. 

It's Not Too Late

While saving earlier gives your money more time to compound, most people have some high-earning, low-expense years at the end of their career that allow them to bulk up retirement savings.  While you should save what you can for retirement throughout your career, know that you will likely have some "catch-up" years to put you over the top.  

*Part of Financially Savvy Saturdays on brokeGIRLrich.*

Friday, September 8, 2017

Should I Buy Insurance?

It seems that every time I turn around, someone is trying to sell me insurance of one type or another.  It doesn't take a genius to figure out that the ones selling are making money--why else would they do it--but does it make sense for me?

What Is Insurance?

No matter the type or who sells it, insurance is a risk management tool.  Insurance takes an unknown and turns it into a known. 

You don't know if you will require medical care next month, or if so, how much.  It could be that you won't require any care; it is possible that you will be diagnosed with and treated for a long-term very expensive illness.  It is possible you will have no medical bills; it is also possible you will incur hundreds of thousands of dollars in medical bills next month.  Health insurance can't keep you from getting that serious illness, but it takes those unknown bills and turns them into a known premium, plus co-pays and deductibles.

In the same way you do not know if your cell phone will spend the next year right where it belongs, or whether it will land in the washer or toilet.  The insurance on the phone turns the unknown (will I have to replace my phone) into a known--the premium you pay.

Why Do I Need Insurance?

You need insurance to protect  you from things you cannot afford to have happen.  You'll note that I said "things you cannot afford" as opposed to "things you'd rather not do".  

Insurance companies are not charities.  If they pay out more in claims than they collect in premiums, they go broke.  Most people who are paying the full cost of their insurance (health insurance is different because employers and the government kick in so much of the cost) will pay more in premiums than they will receive via claims.  

What Are Some Types of Insurance?

Life Insurance

Life insurance is money paid to your designee when you die, if you die when the policy is in effect.  As more fully explained in this post, it is either good for a certain term, or something that is maintained throughout your life.  

The purpose of life insurance is to make sure no one suffers financially if you die.  If the only hardship your death would cause loved ones is emotional, then you do not need life insurance.  

Burial Insurance

Burial Insurance is basically a type of life insurance that pays the proceeds of the policy to a funeral home rather than to he heirs.  Reality is that we will all die one day.  If you do not have enough assets to pay for your burial, and you are one of those people who will find a way to pay a bill, and a way to spend any extra cash, then burial insurance may be a good idea.  Unless you die prematurely, the chances are very good that your family can bury you for less than what burial insurance ends up costing you.  

Disability Insurance

Some type of disability insurance is a common fringe benefit.  Disability Insurance replaces part of your income if a medical or psychiatric condition makes it impossible for you to work (some policies specify unable to work at your current job).  

While Social Security offers some disability benefits, the standards for being considered "disabled" are generally higher for Social Security than for private insurance.  Also, particularly for high earners, private policies can pay higher benefits.

Disability insurance is usually divided into two types:  Short-term disability cuts off after a few months, but generally kicks in after a few weeks.  This insurance is designed to pay your family's bills if a breadwinner is sidelined with something from which they are expected to recover. 

Long-term disability generally has a longer "elimination" period--the time you have to be disabled before which you can collect on the insurance--but it can pay out for years.

Health Insurance

Health insurance is designed to help pay medical bills.  As we all know, health insurance is a common fringe benefit of middle and upper income jobs.  Health insurance obtained via the Affordable Care Act is subsidized by the government.  Because of these subsidies and they way our healthcare system has developed, health insurance is involved in most healthcare transactions.  This article talks more about healthcare and health insurance, but suffice to say that for many of us, our health insurance bill is one of our biggest. 

Homeowners'/Renters' Insurance

Your homeowner's policy pays to repair the damage done to your home by a covered peril.  Covered perils include (usually) wind, fire, hail, lightning, snow or other "sudden emergencies" such as broken plumbing. . Homeowner's insurance policies do not cover floods, and in some areas they do not cover wind.  

Your homeowner's policy will also, if you choose, cover the cost of the contents of your home.

In most states, a homeowner can choose between replacement cost or the depreciated value, but in no case will the policy pay more than the face amount.  What that means is that you (or your mortgage company) decides how much you want to insure the house for.  If you select $200,000, then $200,000 is the most the insurance company will pay, absent some special provision that says otherwise.  If your policy pays depreciated value, and the 20 year roof you put on the house 19 years ago is damaged in a hailstorm, they will only pay 1/20 of the cost of a new roof.  If you have replacement value coverage, they will pay to replace the roof, providing that replacement cost does not exceed $200,000.

While I do not know about policies in other states, Louisiana has a "value policy" law.  Basically, if damage exceeds 50% of the cost of the house, state law requires the insurance company to pay the face value of the policy.  The purpose of the law is to keep insurance agents from over-selling policies.  For example, if the cost to rebuild your house from scratch would be $200,000 and the house was 75% destroyed in a fire, in Louisiana, the insurance company would be required to pay you your policy limits, whether your policy was for $20,000, 200,000 or $2 million.  

You (with the approval of your mortgage company if you have one) can select a variety of deductibles, besides deciding whether your policy will cover replacement cost or depreciated cost.  Of course, the more you would pay out-of-pocket, the lower the premium.

While homeowners' insurance generally covers both the structure and the contents, renter's insurance covers the contents--generally the structure is the landlord's problem. 

The other thing that homeowers' and renters' insurance offers is personal liability protection.  Basically if you get sued for many of the common things people get sued for, other than automobile accidents or business disputes, your homeowner's policy may pay for an attorney and cover any judgment.  

Flood Insurance

Floods are not covered by standard homeowners' policies.  If you want coverage for floods you have to buy a separate policy.  While these policies are sold by the same agent who sells your homeowers'/renters' coverage, they are underwritten by and covered by the US Government.  While Allstate and State Farm probably charge different amounts for your homeowners' coverage, if they are quoting the same limits, both will charge the same for flood.  Flood insurance policies are serviced by the company that sold them--my flood insurance bill comes from Allstate and if my house floods I'll call Allstate, which will send an adjuster. 

Umbrella Policy

These policies may be called "umbrella" "excess" or "personal liability" but what they all do is provide another layer of coverage over your homeowners or automobile policy.  Because the other policy pays first, these policies are able to offer a lot of coverage for a little money.  They are primarily purchased by people with high net worths or high earnings. 

Extended Warranties/Product Insurance

When you buy an appliance, a car or even electronics, you are usually offered the opportunity to buy an extended warranty which covers defects or some repairs.  Sometimes (like with phones) you are offered the opportunity to insure it against things like dropping it.  The thing to remember about these warranties is that you are betting against someone who knows the odds.  If the warranty company pays out more in claims that it makes in premiums, it goes broke.   In short, if you can afford to replace the item if it breaks, the odds are you will be better off not buying the extended warranty.  

Automobile Insurance

Your automobile insurance policy, at a minimum, pays me if you cause an accident between us.  You can also get insurance to fix your car if you are in an accident, to pay your medical bills if you are in an accident and to pay you if I cause an accident and do not have enough insurance to cover your damages. I wrote more about auto insurance here.

Should I Buy Insurance?

If you have a mortgage, your mortgage company requires you to buy homeowners insurance, and sometimes flood insurance.   The law requires you to have health insurance.  Other forms of insurance are optional, so people wonder if they should buy them.

As noted above, when you buy insurance, you are betting against someone who has spent a lot of time and money calculating the odds.  Most people are not going to make money from their insurance company.  

You should buy insurance to protect you from things you cannot afford to have happen.  If you are struggling to make the payments on your new car, you not only need standard auto insurance (with a deductible), you probably need gap insurance to allow you to pay off the car on which you are "upside down" so you can get another one.  If you are driving an old car that isn't worth anything and you have money in the bank, comprehensive/collision coverage is probably overkill. 

If you are able to save money and have an emergency fund available, and are paying the full cost of your health insurance, the odds are you will be better off with a high-deductible plan.  However, if lack of first dollar insurance coverage is going to keep you out of the doctor's office when you need to be there, you may need a lower deductible, especially if you are the type of person who will pay monthly obligations but who has trouble in unexpected bills. 

As I said earlier, the purpose of insurance is to protect you from things you cannot afford to have happen.  It is not there to meet routine expenses and if you try to buy insurance to use for routine expenses all you do is increase the cost of those expenses. 

Disease Called Debt

Friday, September 1, 2017

Helping Houston Heal

Especially here in the Gulf South, Americans spent the last week watching as Houston flooded, and, as Americans usually do in times of crisis, we now want to flood Houston and its neighbors with help.  As a resident of the New Orleans area who lived through the aftermath of Hurricane Katrina, I feel qualified to give a little advice.

Don't Rush

I know it is heartbreaking to see people trudging through floodwaters with garbage bags full of possessions, or to see them sitting on cots in a shelter waiting for help.  I know you want to do something NOW but there are going to be a lot of needs in the days ahead.  Don't rush and give to anybody, any group that is collecting.  Find out who they are, what their experience is, and what they plan to do with the donation.  

There are groups that are good at disaster relief, and if you know the group to whom you plan to give is, then go ahead, but if you drop off supplies, money or old clothes to the brand new "Houston Help Society" you may be wasting your time/money or you may be causing as many problems as you are solving.  

Keep Things in Perspective

You've heard the old journalism adage:  "If it bleeds, it leads".  We've all seen the pictures of the roads that are underwater and the houses with water in them.  However, according to the Washington Post, only about 30% of Houston flooded.  The  Associated Press, reported that 10% of structures in Houston flooded and that about 40,000 were heavily damaged.  That sounds like a lot--and if it was your house that flooded, it is a lot to you.  However, Harris County, which includes Houston, is home to 4.5 million people, meaning that if each of those 40,000 homes housed four people, then 3.5% of Houston's population is effectively homeless.  90% of Houston's population will be cleaning yards this weekend and about 7% will be cleaning up minor flood damage.

Why does that make a difference?  Shouldn't we care as much about a few as many?  Yes, of course we should.  

What it means is that once the water goes back down and the roads are clear, the infrastructure will bounce back quickly.  The need for charities to bring in "stuff" from elsewhere is minimal.  Wal-Mart, Home Depot and HEB will be operating most, if not all of their stores within the amount of time you can collect goods and transport them to Houston. 

Give Money, not Stuff

As I read somewhere on Facebook, if you want to donate your old clothes to the hurricane victims, have a garage sale and then donate the proceeds.  Americans love to send stuff to people in distress but Houston does not need to be flooded with used clothing and stuffed animals.  

Even useful things like food and cleanup supplies can be a problem to store and distribute.  If this was like Katrina where everything for miles around flooded and it took months to get the water out or the power on and where a huge percent of the population had evaucated out of town with only a weekend's worth of shorts, t-shrts and flip-flops, then bringing in stuff from outside the area was helpful because stores were not open. As of September 1, Home Depot is only listing one store as closed.  No Houston Wal-Marts were closed. In short, I'm sure Wal-Mart's shipping and distribution system is more efficient than your friend from church loading a pick-up.  

The problem is that a lot of people (if 10% of structures flooded, that means about 10% of houses and 10% of the population, or about 450,000 people) now have substantial unexpected expenses. Many hourly workers have lost wages due to the city essentially being shut down for a week.  People are going to need to clean out flooded homes,  and replace flooring and furniture and  automobiles.  Many of these people do no have flood insurance and homeowner's insurance does not cover flood damage.  While the federal government may step in with some type of grant programs, the reality is that there will be uninsured losses.  

If you want to help people in Houston recover from Harvey, send money, or send gift cards to stores like Home Depot, Lowes or Wal-Mart.  Send the cards or donations to places like The Salvation Army, Catholic Charities, or other groups with experience in working the mass disasters.  While it may make you feel good to think that your old jeans are being worn by a Harvey victim, most Harvey victims will be able to take their jeans to the laundromat or a friend's house and wash them.  

Don't Forget to Pray

For the people who did flood it is may be heartbreaking to go through their home and throw away baby pictures, their grandmother's rugs or the box of family mementos.  Kids are going to be upset that their favorite stuffed animals have hit the trash and there are over 40,000 families whose lives will be totally disrupted for a long time.  Pray for them.  Pray for those who lost loved ones in that terrible storm and pray that those storms in the Atlantic fizzle out before they threaten land. 

*Part of Financially Savvy Saturdays on brokeGIRLrich.*

Friday, August 25, 2017

The Law of Supply and Demand

Did you ever take Economics in school?  I'm not talking about personal finance, I'm talking about Economics--the study of money.

One of the topics studied in Economics is the law of supply and demand and I thought I'd take a look at that law today.

Basically, the law of supply and demand is the way prices are set in a totally free economy.  Let's take something simple--I make these really cute Christmas ornaments out of craft sticks, hot glue and glitter. All my Girl Scout parents say how cute they are so I decide to go into business.

I can buy craft sticks on Amazon for about 3 cents each, and I use 5 of them to make the ornament.  I also use about 10 cents worth of glitter and glue.  I figure I can put up a free website to sell them, and will take payment via Paypal.  How much should I charge?

Well, I've got about 25 cents worth of raw materials in each one, and the mailer and postage, hypothetically will cost me about $2.00 each.  Paypal will take a cut of every sale.  It takes me between 5 and 15 minutes  to make each one (less time per item if I'm making a bunch and can do them assembly-line style, rather than getting everything out, doing one, waiting for it to dry between steps etc.) I think my time is worth $30 per hour and I am going to average the time and say it takes me 8 minutes to make each one.  Therefore, I am going to price them at $6.25.  Makes sense, right? 

First, as I'm sure many of you realize, I'm going to find out pretty quickly that an isolated free website isn't going to bring in any business, so I switch to Etsy, which does have fees.  Does that mean I get to raise my price? Maybe, so let's say that per item the Etsy fees work out to $.50.  Now my ornaments are $6.75.  That's a  price that pays me for my time, buys my materials and pays for selling and shipping.  That's fair, that's right, and that's what they should sell for, right?

In a controlled economy, $6.75 would be the price of my ornaments if the government functionary in charge of holiday decorations agreed with my reasoning about my time value; conversly if that person thought crafters were only worth $10 per hour, the price of my ornament would be set at $4.08.  Which is right?  Which is fair?

Free economies are not concerned with "right" and "fair".  In a free economy I now have an Esty site with my lovely ornaments for sale.  Since I know I'm going to be a great success, I've already made 100 of them, and I'm practically counting my money already--though at this point the only money is mine, since it cost me $25 to make them. At this point, one of three things can happen:

Nothing:  Hot glue, 5 craft sticks, glitter, Girl Scouts....hmmm...are you getting the mental picture I am?  All of us parents have plenty of those types of ornaments, and those who haven't chosen to be parents are glad they do not.  For some reason no one is buying them.  My supply of these creations exceeds the demand for them.  Since I have $25 invested, I want it back.  I decide to lower the price, and do so by $.25 per week, but how low can I go?  If I price them below $2.25, I go further in the hole, since it costs me that much to mail them and pay Etsy, so I'll put them on my tree, give them as gifts or throw them away before I do that.  In this case, the market has told me that my creations are not worth what it costs me to produce and distribute them.

They sell, at least some of them do.  Ok, maybe there is a market for my artistic creation.  I sell three or four of them a week starting right after Thanksgiving.  I tried lowering the price one week, but sales were the same as the week before, and when I raised the price back to the "regular" price, I again sold about the same number.  In this case, my price is about right.  People who want my ornaments are willing to pay that much for them, and lowering the price did not seem to increase demand for them.  After Christmas however, no one was buying them.  I didn't want them here all summer so I lowered the price to $2.50 and that increased the demand enough to get rid of the last ones.  Since I have not found a great demand for my ornaments in February, I am not making any more.  The supply goes down.

They fly off the shelves.  Of course this is what I hope happens.  I open that Esty shop and the first day, I have twenty customers, each of whom orders two ornaments.  At this point the demand for my ornaments outstrips the supply. I do what any reasonable business woman would do--I raise the price.  I watch my numbers.  I still have lots of orders, so I raise the price again. Then someone realizes that I'm charging (and getting) $25 for 25 cents worth of craft sticks, glitter and glue and decides that he can do it too.  He opens his Etsy shop and only charges $20.  My business slows, and I just bought a lot of supplies, since I was doing so well. I need to move them, so I lower my price to $19.50.  We end up in a price war, and eventually those ornaments are back down to $6.75.  He doesn't lower his price below that, because I guess he thinks his time is worth something too.  As the profits on the item increased, so did the competition (supply) which then drove the price down.  Supply and demand.

Supply, Demand and Lending Club

Supply and demand comes to mind because I just finished checking my Lending Club account, and found that my returns are still dropping.  A couple of years ago, investors were complaining that the number of people who wanted loans was lower than the number of people who wanted to invest.  Lending Club worked to increase the demand for its product by lowering credit qualifications and interest rates.  Now, the supply of loans is up, and the demand for them is decreasing, at least among some people, like me.  Lending Club is trying to woo us back by raising interest rates.

As an investor, I want to make money.  Over the last year, my Lending Club account has averaged about a 2% annual yield.  To me, given the relatively strong economy, that's not good enough.  I'm lending money.  Right now, while there are people who are losing their jobs, in general, the economy is good.  If I can't make money on Lending Club loans now, what makes me think I could make money on them when layoffs are rampant?

Supply, Demand, and Dividend Stocks

Supply and Demand are very evident in the stock market.  When you buy shares of stock,  you are buying part of a business.  While the business owns some things that are easy to value, like land and machinery, it also owns a stream of income and goodwill.  How much is that worth.  Every day when the stock market is in session, traders make that determination.  During the course of a day shares of the same company may sell for very different prices, based on supply and demand.  

Of course, most people want to buy the stock that is priced below what they consider its value to be.  They do that buy studying the company and finding reasons to disagree with the consensus in the market about the company (or by dumb luck). 

One type of stock that is very popular today is dividend-paying stocks.  When companies have profits that they do not need to invest to grow the business, those profits are distributed to shareholders as dividends.  These dividends can provide a source of income to the stockholder. Generally speaking, companies that pay dividends are established and profitable.  Since the dividends are generally determined by the profits of the company rather than by the cost of the stock, if the price of the stock goes up, the percentage yield for the dividend goes down.  Because of the popularity of dividend-focused investing the price of the stocks has increased, and therefore the dividend yield has decreased.  

Realizing that the law of supply and demand is alive and well can help you evaluate your investments and figure out why the price has change.  

*Part of Financially Savvy Saturdays on brokeGIRLrich.*

Friday, August 18, 2017

If You Take Care of the Process....The Product Will Take Care of Itself

I have a confession to make:  I am more than a couple of pounds overweight.  In fact, I've fought a weight battle my entire adult life.  Every so often I get sick and tired of the way I look and feel and then do something about it, but I'm the classic yo-yo dieter--and on every pass the low weight gets higher.  Of course, aging doesn't help with that, and the last couple of times I've tried to lose weight I've given up in disgust after a few weeks because the scale wasn't moving, at least not fast enough. 

This time, I'm trying something different--no I'm not going gluten free, low carb or following any of the trendy diets of the day.  I'm sticking to the old-fashioned eat less and exercise more plan.  We are taking my daughter's Girl Scout troop to New York City next summer and I don't want to be miserable walking through the city with the girls.  What am I doing differently?  I'm only getting on the scale every other month.  

Instead of worrying about the PRODUCT--the weight loss, I'm worrying about the PROCESS--controlling my eating and getting my body moving.  If I limit my calories and exercise regularly, I will lose weight.  Some week's I'll lose more than others, and realistically, some weeks I'll be going places or doing things that involve eating and usually broiled fish and steamed vegetables aren't what I want (if they are even available).  I'm in this for the long haul and I'm not going to eat only grilled chicken breasts for the next year.  

After limiting my calories and increasing my exercise for two months, I lost 15 pounds.  I'm hoping for 10 more pounds when I get on the scale six weeks from now.  After two months, if I've done what I'm supposed to do (followed the process) I should see noticeable weight loss, which is reinforcing.
So why am I writing about weight loss on a financial blog?  It struck me that saving money is much like losing weight.  You give up what you want today in hopes of a better future.  You have a lot of competing interests--should you put that money in the bank, or buy the new toy?  However, the bottom line is that if you don't do what you are supposed to do, you'll pay the price, and if you do, you'll reap the rewards.

There are bloggers out there who pride themselves in spending almost no money.  They live in small houses, rarely eat out, drive old cars and only buy secondhand clothes--and save a huge percentage of their paychecks.  Their goal is to amass as much money as quickly as possible so they can retire and spend the rest of their lives doing what they want to do. If that is their goal, they are welcome to it. 

In much the same way, there are people who always watch every bite that goes in their mouth.  They never eat a dessert that is not unadorned fresh fruit.  They work out over an hour a day every day.  They look great, and if it is worth it to them, they are welcome to it.

But what about the rest of us?  The ones who want to spend some of our money today, because we know we aren't guaranteed tomorrow?  The ones who want their chicken fried, or their sweet potatoes with praline crunch on top?  Hopefully we realize and accept the cost of what we are doing.  

Back to what we were talking about earlier.  The process of investing for the future involves spending less than you earn and investing the difference.  When the stock market is blowing and going, and you are watching your net worth go up all the time, staying motivated is easier than when the market is in a downturn and, despite investing more money, the value of the account goes down.  In a similar way, it is easy to stay motivated on the weight loss journey when the weather is great outside, you have lots of time to exercise and a friend to join you, and  harder when you are rushing and grab fast food for lunch and skip the exercise due to bad weather.  

In both cases, the trick is to remember the process and accept that there will be short-term setbacks.  Find a check-in period that works for you.  Weighing weekly was too much for me--I got discouraged too quickly.  On the other hand, I have no trouble checking in weekly with my investments, even when they are going down. 

You also need to find a process that works for you.  Some people swear by the fad diet of the week and others religiously write down everything they eat, weighing it and computing calories.  I've tried that, and for me, it doesn't work--it feel constrained, and I hate paperwork.  I have some "go-to" breakfasts and lunches for which the calories are either on the box or easy to compute.  For supper I just watch m portion size.  It is working for me.  

In the same way, some people create and stick to elaborate budgets that give a job to every dollar.  That would drive me nuts.  Overall our lifestyle is lower than our paychecks can afford.  A certain percent of our paychecks goes into savings before it hits our bank account.  Once that's taken care of, the rest is available for spending.  Some months we spend more than others and once a certain amount has built up in the checking account it gets invested.  We set up a process that, if followed, allows us to achieve our goals.  

With both weight loss and saving money, if you take care of the process, if you do what you are supposed to do, the product, the end result, will take care of itself.

Saturday, August 12, 2017

Should My Next Computer Be a Mac, a PC or a Chromebook?

One trick to getting your money's worth with any purchase is to buy enough product to meet your needs, and not more.  If TV is your major source of entertainment, the big-screen, all the bells and whistles model may bring you a lot of pleasure.  If you watch it an hour or two a month, just about anything will probably be fine.

If sitting at an antique table set with beautiful china and real silver gives you pleasure and you can afford it, go for it. If all you see is furniture to dust and silver to polish (what a pain) then you'll probably be happier with a Wal-Mart table and stainless steel flatware (and save a few dollars).

What about your next computer?  Until recently, you had two basic choices:  you could buy a PC or you could buy a Mac.  Now you have a third mainstream choice--a Chromebook.  Should you buy a PC or a Chromebook?  Should you buy a Mac or a PC?  Let's look at the options.

Things to Consider When Buying a New Computer

  • What would you like to use it for?  If you could spend as much as you want, what would your new computer do? If the answer is send emails and surf the internet, you will probably be happy with a lower-priced machine than the person who wants to play graphics heavy games.  If you have particular software you want to run, check to see if it can be run on the computer you are considering.

  • Where do you want to use it?  Obviously if you want this computer to travel with you, it will need to be some sort of laptop.  If it is for office use only, you may prefer a tower hooked up to multiple monitors (though you can hook your laptop up to multiple monitors as well).

  • Who is going to be using it, and how computer savvy are they?  Some people like to tinker with their computer and software while others just want it to work.

  • How much do you want to spend?  How important is price?  
  • Reasons to Buy a Windows PC--And Reasons Not To

    A PC (personal computer) that you buy in a store runs the Windows operating system, which is the most commonly used operating system today.  Today you can get a desktop computer, without a monitor, a laptop, or an all in one desktop computer that integrates the processor and the touch screen.  Generally speaking the desktop design gives you the most processing power for the dollar, though laptops are more comparable in price now than they were a few years ago.  All in ones are the new kids on the block and like most things, if you want the newest, you'll pay more.

    The main reason to buy a PC is compatibility.  Since the Windows operating system is the most popular, particularly with businesses, there is more software available for it than for the other systems, so if you need to run software that is only written for Windows, you may need to buy a PC (there are ways around it, but they generally require some level of technical expertise to implement and maintain). 

    Overall, Windows works reasonably well, though you won't find many people who love it, and because of its ubiquity, finding people who know how to tweak it or fix problems isn't difficult.  On the minus side, that same ubiquity means Windows is a popular virus target.

    One thing some people consider to be a big minus for Windows (and others consider an advantage) is that they have moved to automatic updates.  Rather than releasing new versions of the software, Microsoft is pushing updates to current users.  While they will take "not now" for an answer, they keep requesting to update and even if you don't want to do so, you may eventually end up accidentally hitting the "yes" button and updating.  Microsoft does this to keep the program secure, but people with finely tweaked systems or who are running outdated software may find that one of these updates "breaks" their system.  

    Reasons to Buy a Mac--And Reasons Not To

    Like PC's Macs (Apple Computers) come in desktop and laptop versions.  

    People who use Macs often love them and hate to even think of going to Windows.  People who do a lot of graphics or other artistic work tend to use Macs more than most businesses, so if that is your field, you may need a Mac to be compatible with other people--and I tend to think that if most people in a field are using Macs there must be some economic advantage to doing so.   

    Macs do not tend to get the viruses PCs do because there are not as many of them and because  they work differently.

    While Windows has become a lot more user-friendly lately, Macs have a reputation of just plain working--if you want something to fiddle with and tweak, go buy a Windows  PC.

    While you can buy Windows PCs in a lot of different configurations, made by a lot of different companies, at a lot of different price points all Macs are made by Apple and there are relatively few price points.  In general Macs are more expensive than Windows PCs, but they are durable and high quality.

    Reasons to Buy a Chromebook--And Reasons Not To

    The new kid on the block in the computer business is the Chromebook.  In a lot of ways, these computers are glorified web browsers, or tablets with keyboard--and whether that is a good thing or bad depends on your needs and wants.

    When you turn on a Windows PC you have to wait for it to "boot up", for all the background programs to start, before you can start doing what you want to do.  Chromebooks turn on in about 5 seconds.  

    Chromebooks are designed to be connected to the Internet and to run apps rather than locally installed programs.  While you can use them offline, it is not what they were designed for and if WiFi is not generally available where you are going to be using this computer, a Chromebook is probably not the best choice.

    The main strengths of Chromebooks are their price, ease of use, and battery life.  Even with a keyboard, their size and weight are closer to tablets than laptop PCs. They are becoming school favorites because they can be made school-ready (connected to the school's network, with chosen apps downloaded) in a matter of minutes.  Updates can be made to all computers in a school via a central control panel in a matter of minutes, whereas Windows PCs must be individually updated. 

    Chromebooks under $200 are easy to find, though a recent Amazon search also found one for over $400.00.  The one my daughter's school required cost right at $200.  Most Chromebooks will last close to eight hours per battery charge, far more than the average Windows laptop.  

    The main disadvantage of Chromebooks is that they do not run Windows software (though they can connect to Cloud Office).  If you have a need for a particular program and there is no Chrome app for it, you will have to chose another platform.  If your need is for web browsing, basic word processing and basic spreadsheets, a Chromebook will probably meet your needs.  

    What will your next computer be?  At this point, I'm still thinking Windows PC but Chromebooks are looking better all the time.

    Disease Called Debt

    Friday, July 28, 2017

    Why I Bank At Metairie Bank

    I've seen a lot of blog articles over the years praising certain banks and offering handy affiliate links that allow readers to open accounts, and bloggers to be paid commissions.  I have nothing against bloggers making money, and I'm certainly open to earning more of it.  However, you will not find any affiliate links in this post, nor will I be paid for writing it.

    Years ago I wrote an article about how we came to be customers of Metairie Bank. Basically I felt that our prior bank, Chase, stole $6.00 from my son.  He did not have a bank account (or any money) but had received checks as graduation gifts.  I had him endorse the checks to me, take them to my bank (Chase) deposit them in my account and then cash a check I had written to him.  Since he did not have an account, they charged him $ 6.00 to cash his mother's check, drawn on their bank.

    This week I found yet another reason to be pleased that we chose to move our money and banking business to a relatively small local bank, Metairie Bank and Trust.  We have several large bills that are due only once or twice a year and we've had to pull money from savings to help pay for some of them this year.  I've read several bloggers who have suggested creating separate bank accounts for bills like that, and contributing to those accounts monthly, so, via the website, I opened a new savings account to cover such bills.

    When the bank statement came, I found that I had been charged a $15 service charge, and since I had never seen a service charge on my other savings account, I called the bank to find out what I did wrong.  The clerk who answered the phone could not help me but put me through to the officer in charge of my accounts.  I left a voicemail message and she called me back within a couple of hours.

    When I told her what the problem was, she explained why the service charge had been assessed--there was a minimum balance requirement that I had not met.  I told her I'd accept responsibility for not reading the fine print, but that I needed to close that account before that charge hit again.  She said that wouldn't be necessary and asked me what I expected the minimum balance to be and how many transactions per month I expected.  When I told her, she changed the type of account--no more than six transactions per month (more than I need) and no minimum balance and no fee.

    I then asked her if I was going to be charged for a paper statement, like I was on  my Girl Scout account and on the account for my Dad's estate.  I told her that with those accounts, I was willing to pay for the paper because it wasn't my money, but that I'd be ok with online only for the savings account.  Again, she said that wasn't necessary, and then went through all my accounts with me and changed them to accounts that met my needs and didn't charge ANY fees.

    My whole family banks at Metairie Bank.  They offer free teen accounts which require the teen to get parental permission for large debit card withdrawals.They are everything I want in a bank and I hope they are in business for a long time because I have no desire to go back to doing business with a behemoth like Chase.  While Metairie Bank probably isn't in your area, I'll bet there is a small local bank that offers better service than the "big boys" do; give them a chance.  You may be as happy as I am.

    Friday, July 21, 2017

    Can You Make Money with Amway or Other MLM Companies

    One way many people make ends meet, or gain extra cash for investments or luxuries is via "side-hustles", jobs they do when not at their regular employment.  One such side-hustle that has been around for years is direct sales, otherwise known as "Multi-Level Marketing".

    What Is Multi-Level Marketing?

    Multi-Level Marketing is a business model wherein the company's products are sold directly from one person to another, without a physical store.  The sales people are independent contractors who set their own hours and find and service their own customers.

    It is called "multi-level" marketing because one characteristic of these businesses is that if you recruit and train a new sales representative, you get a share of his/her commissions, and depending on the company, a share of the commissions of the people those people recruit.  The people whose sales earn you money are called your "downline".  Generally speaking, people who make a lot of money in multi-level marketing companies are people with big downlines.

    What Types of Products Are Sold Via Multi-Level Marketing?

    The multi-level marketing model is used to sell products from insurance to cosmetics to toys or kitchen gadgets.  Well-known names include Avon, Amway, Pampered Chef and Discovery Toys. 

    How Do I Start With MLM?

    Many people have been invited to parties where the purpose is to display and sell MLM products.  You can go to parties selling Pampered Chef kitchenware, essential oils, candles or even sex toys.  Besides taking orders for merchandise, the sales representative is almost certain to tell you that you too could make money selling this stuff.  Today, many MLM sales people offer merchandise via facebook or webpage, and, again, let you know that you too could be doing this. In short, anyone who purchases anything from a MLM representative is likely to be encouraged to become a sales representative themselves.

    Why Would People Recruit Competitors?

    If you and I pretty much have the same circle of friends, why would I recruit you to sell the same widgets I'm selling?  Isn't that self-defeating?  There are three  reasons MLM sales people try to recruit friends and family to sell:
    • They receive commissions from their "downline".  When a representative recruits you, he or she trains you as well, and for the rest of your MLM career, will get a commission on things you sell.
    • It turns you into a regular customer.  Many MLM products are small low-priced consumables. They are things that will pay a very low per-item commission--the money is made by acquiring repeat customers who purchase multiple items per sale.  By signing someone up as a salesperson and giving them the "dealer" rate on the product, you improve the chance that they will buy the product regularly, even if they don't sell any.
    • They get to sell you a kit and starter supplies.

    How Much Money Can I Make Selling Mary Kay?

    There are people who make a living selling Mary Kay, Pampered Chef, and other MLM products.  However, according to this website, in 2010, Mary Kay had about 30,000 representatives in Canada in 2010.  Of those, about 3,800 had both been with the company for a year, and had earned commissions in 2010.  Over half of that 3,800 earned less than $100 in 2010.  However, Mary Kay did have 24 people in Canada who earned over $100,000 in commissions.

    I researched this subject a couple of  years ago and at that time most of the companies had a document on their website that showed the number of distributors they had and the percent of people with various earnings.  I can't find such charts now so the law that required them to be displayed must have changed.  Nevertheless, the figures I remember were similar to those listed above for Mary Kay--namely that few people stuck with it very long, and most of those who did still didn't make much.

    The other thing to remember is that while companies tout commission rate of 50% or more, they don't emphasize things like shipping, maintaining inventory, gas to deliver product or the cost of brochures or other advertising.  If you are going to sell essential oils, diet supplements or Amway products, you are running a business and will have business expenses.

    Still, I think many of us know people who have been selling these products for a long time.  Some readily admit they aren't making much if any money.  They like the products and sell to a few friends.  They aren't making real money because they don't treat it like a real job.

    Is MLM the Side Hustle for Me?

    Honestly, probably not.  First, realize that with ANY sales job, if you are selling low dollar products, you are going to have to sell a lot of them to make money. The higher the price of the product, the harder you are going to have to work to find customers, and the less often they are likely to buy.  Think car dealership vs grocery store.

    The Car Dealership

    When you walk into a car dealership, you probably want to buy a car.  However, there is a good chance you are going to walk off that lot, after spending time with a salesperson, without buying anything.  If you do buy something, chances are you will not be back for years.  On the other hand, the salesman who does sell you your car will probably make a day's pay (or more) on the deal.

    The Grocery Store

    When you go into the grocery store, you probably want to buy groceries and it would be unusual for you to leave without buying anything.  Chances are very good that unless you are visiting from out of the area, you will return to that store in the near future.  While the per product mark-up of about 15% isn't that much per item, when you consider the number of items moved per day, most grocery stores are profitable, even after paying the help--and speaking of  "the help", the amount of employee time  you consume per item is pretty minimal.

    MLM Products

    The price of most MLM products is closer to the price of groceries than to the price of cars.  If I run out of lipstick, and you happen to call and ask if I want some today, I may buy, but unless I am highly invested in your brand or product, calling you for it is an extra step and if I have to wait for you to get it before I can get it, then I have all the reason to buy a competing product. As a dealer you need me to return over and over again, just like the grocery store does, but you are giving me the attention that I get at the car dealership.  

    Think about it.  How much do you spend on make-up every month, total?  $100?  To me that is high,but let's go with that number.  If I buy $100 worth of cosmetics from you every month and you have no other customers, you make $50.00. Sounds good, right?  If all you want is enough money to buy your own make-up, then maybe, especially if we are friends, will see each other regularly, and you know that I will not need samples or freebies, and you know that I won't be getting any of my makeup at the mall.  

    What is more likely is that you happen to catch me at the right time or that you have a product or two that I like, so I buy it from you periodically, when I want it.  If you want to sell me other stuff, you need samples, you need to spend time talking it up.

    What Kind of People Make Money With MLM?

    People who make money with MLM are people who can sell--not only can they sell the  products to retail users, they can sell the concept of running your own business to other people and they can keep those people motivated to continue to sell both product and program.  They are also people who work their business full time.  

    But I Want to Try MLM

    The first step in "starting your own business" to sell MLM products is to purchase a sales kit of one sort or another.  The kit will contain samples, sales materials and perhaps some saleable products.  New sales reps are encouraged to "invest in their business" by buying more than the minimal kit and by investing in training classes.  If you want to try MLM sales, the first thing to do is determine how much you are willing to lose in the process--and then limit the amount you invest in product and training to that amount until you have earned enough to recoup your investment.  

    While some of the MLM companies sell products people really enjoy, the reality is that most of their sales representatives do not have earnings commensurate with the efforts they employ.  There are plenty of available side hustles that are worth more to the average person. 
    *Part of Financially Savvy Saturdays on brokeGIRLrich. *< and The John and Jane Doe Guide to Money & Investing. *

    Friday, July 14, 2017

    Update: Second Quarter 2017

    Hard to believe another year is half over.  Since it seems to be the thing to do for financial bloggers, I'll take a look at how this year has gone.

    This is the year we are learning how expensive new(ish) cars are.  We unexpectedly ended up buying an almost new car Labor Day weekend last year, and since we had just cleaned out our account buying a used car for my college girl, we decided to finance it.  Our interest rate is low, we are glad we have the car and financing it was a better choice than liquidating assets but we definitely notice that payment coming out of our account.  We also notice that it costs more to insure an almost new car than one that you only carry liability on.

    This has been the year of medical and dental bills.  I'm in the middle of getting an implant and crown, and I had a wisdom tooth pulled.  In March I had what I thought was a bladder infection, except that the tests came back negative for that so I ended up getting a bunch of other tests to rule out more serious causes of blood in the urine.  They came back negative as well, but the bills will be about $800.

    My teen starts Catholic high school in the fall, meaning her tuition is twice what we have been paying, and that it was due two months earlier.  To have the money, we had to liquidate assets, and chose to do so from our Lending Club account.  I'm not sure we'll be able to pay ourselves back this year, it just seems like every month there is something. To avoid this problem next year, I have started putting 1/12 of her tuition plus 1/12 of our insurance bills into a savings account each month.  The way those bills fall, we should be able to pay them from the savings account.  I'll be the first to admit that discretionary spending slows around here when the checking account balance gets low.

    Finally, with my college girl graduating and hopefully moving into an adult job (and out of the house) soon, we figured this spring would likely be our last full family vacation and even though we spent less than a week in Orlando, amusement parks aren't cheap.

    Luckily, our major savings in our 401ks are automated, and fortunately, the stock market has done well this quarter.

    Let's take a look at some numbers.


    My husband and I have Roth IRAs and regular IRAs, and a taxable account.  We deposited $300 in each Roth IRA this quarter.  The combined dividends from these accounts totalled $1922.60.  These accounts consist of a variety of mutual funds purchased for us by our ex-financial advisor, along with Vanguard's International Bond Index Fund, Total Stock Market Index Fund, 500 Index Fund, Total Bond Market Index Fund and REIT Index Fund. In the last year, our rate of return has been 11.8%.


    My 401k has a year to date return of 11.75 %, and the account paid dividends of $407.98 this quarter.  It is invested in Janus Triton,  Oppenheimer Int'L Small Mid Co A, MFS Government Securities Fund-A , Pioneer Fundamental Growth Fd-A,  and Delaware US Growth Fund-A.  My firm contributes 5% of my salary, and I contribute 6%.  


    My husband's 401K is with AXA and it has increased in value, though not a lot.  He puts in the minimum necessary for employer match.


    The initial investment in this account was $7,000.  It began the quarter at $8176.26.  Even though we've withdrawn dividend payments, it ended the quarter at $8,355.99,  So far this year the account has paid $78.98 in dividends.  I have invested in "Motifs" or baskets of stock with a variety of themes including dividend payers, things I like and online gaming.  Motif has changed their fee policy such that if you have less than $10,000 and do not have any commissions in a given six month period, they charge you a $10 fee.  To avoid that, I am planning on moving money from Lending Club to Motif.

    Lending Club:

    My returns have been steadily dropping.  Accounting for expected defaults, Lending Club estimates my return since I began the account at about 5.05% annually, whereas three months ago it was  5.68% annually.  I had a negative return last month--more write-offs than interest paid. From what I've read in various places, I'm not the only one whose returns have dropped. As notes mature we are not re-investing; we are moving the money to Motif and to our Roth IRAs. 


    My returns here have dropped as well, but not as drastically.  Right now my annualized net returns are still 6.9%, and my "seasoned" returns--the returns on notes that are more than ten months old are 6.23%.


    Loyal3 went out of business. Rather than selling the fractional shares and moving the whole shares, I just sold everything and applied it to the tuition bill.  


    At this point I own shares of AT&T, Visa, CVS, Lending Club and Hanesbrands.  Robinhood is an online broker that uses phone apps only, no webpage.  They charge no commission and allow you to place limit or market orders.  They also allow you to initiate bank transfers and then invest the money immediately--you do not have to wait for the tranfer to complete.  You do have to buy whole shares.  I've added money to this account that I've withdrawn from Kickfurther and right now the value is $442.96.  So far this year, dividends from this account total $2.24.


    This is an online broker for whom I wrote a sponsored post.  I invested $100 in Johnson & Johnson through them.  They charge $0.99 per trade, so even though they sell fractional shares, I don't recommend investing less than $100.00 per trade.  I plan to keep the account and use it when I want to buy shares of stock that are substantially over $100, since my investments in individual stocks are as much toys as investments and I don't plan to put too many dollars in any one stock.  My J&J stock is now worth $100.33.  


    I'm in the process of withdrawing my money not only because I'm in the red (an expected risk of investing) but because I've become convinced that Kickfurther is going to fail.  They have too little business at this time and while they have tightened their contracts and changed their business model somewhat, I've just seen too much incompetence to believe that the investment risk is the only risk I'm bearing and the returns have not justified the risk.

    All in all, the second quarter of 2017 was a good one investment wise. Hopefully during the second half of the year we can return some of the capital we had to withdraw during the first half, but I'm seeing some big expenses down the road.  If I could just get these kids to move out....(actually they pay rent, not what they cost us, but something).

    The Bottom Line

    As compared to the beginning of the year, we are about $50,000 richer, but most of that is stock market gains, not savings.  We did put more in our 401k accounts than we pulled out of the others so we are going in the right direction. 
    *Part of Financially Savvy Saturdays on brokeGIRLrich.*