401K... on auto pilot

Contributing to the 401K my company provides is one of the few financial decisions that I am proud of.

A traditional 401K is a type of retirement plan that allows you to save money from your paycheck pre-taxed. This is a huge advantage because the money is not taxed until it is withdrawn from the account, which can only be done without penalty* when you hit the age of 59 1/2. (*except in special circumstances). Meanwhile the money in your 401K has time to earn interest and dividends, compounding tax-deferred. Money in your 401K can be diversified in stocks, bonds, mutual funds or other assets, even real estate! Also, you have the immediate tax benefit of having a lower taxable income.

Besides the tax advantage that the 401K provides, the other huge benefit is employer matching. Contributing to a 401K that your employer is willing to match is one of the best financial decisions you can make, because getting a 100% return on your money is difficult to do! The stock market only averages a 10% return (in long term investments). Joshua Kennon, from Investing for Beginners, is the author one of my favorite financial sites. Investing for Beginners is a great resource for newbies to the financial world. He has an article regarding the 401K, and makes a very good point encouraging everyone, even those in high interest credit card debt, to enroll in their 401K. If you are paying 20% on credit card debt, and not enrolling in your 401K with a 100% return, you are losing money. Joshua Kennon's article is also a great read to learn more about the basics of a 401K.

My company offers 100% matching on the first 3% of my salary, and 50% matching on the next 2%. To take full advantage of the employer matching, I contribute 5% of my salary. My current salary is $43,958.16 .

Here is the breakdown of my monthly contribution:

3% that is matched 100%: $109.90
Corresponding free money: $109.90
2% that is matched 50%: $73.26
Corresponding free money: $36.63

Summary:

My monthly contributions: $183.16
My company's contributions: $146.53


Total monthly 401K contribution: $329.69

Total yearly 401K contribution: $3,956.28

Since I have 36 years until I am eligible to withdraw money at 59 1/2, and 42 years until the normal retirement age of 65, I am able to be risky with the placement of my funds. I have put 40% in high risk stocks, 50 % in low risk stocks, and 10% in bonds. The less time you have to invest, the more conservative you need to be with your investments. Which leads me to the main point of this post...

The biggest advice I can give anyone about enrolling in their 401K is DON'T WAIT. The time value of money is so important. Time value of money is "The idea that money available at the present time is worth more than the same amount in the future, due to its potential earning capacity," according to answer.com. You can either put a minimal amount of money away each month now... or play catch up the rest of your life.

I went to a financial seminar right before I graduated college, and one story the speaker told is burned into my brain. Its the story of Jack and Jill:

Jill invested (with the help of her company matching) $4,000 for the first seven years after she graduate, and after that, she quit contributing.

Jack waited 7 years, and invested (with the help of his company matching) $4,000 for the next 30 years.

Assuming a 10% return, Jill would end up with $728,408 dollars! Jack would end up with $594,301. This is a difference of $134,107! Imagine if Jill would have kept contributing.

Moreover, Jill contributed $28,000, while Jack contributed 120,000! Jack contributed 4 times as much money and ended up with over 100,000 less.

This is a simple illustration that does not take into account annual raises, etc. But the end result is so compelling.

And did anyone notice how the female was the smart one? Coincidence? I think not. :)

I understand how hard it is to imagine retirement when you are young, its hard to see the point of putting money away now. It seems more important to have that extra couple hundred dollars a month. But when you look at the difference it makes in the long run, investing in your 401K is a no-brainer.

I get excited when I use an online calculator to estimate how much money I will save for retirement. I will do both a conservative and liberal estimate.

In my conservative estimate I use only a "cost of living raise" which is estimated to be about 3%. I will assume an 8% return. I will use 65 as my retirement age.

Conservative Estimate Grand Total:

One million eight hundred and five thousand two hundred seventy nine dollars!!

(Seems cooler when you write it out)

$1,805,279.00

In my liberal estimate I use a 5% raise, and assume a 10% return. I will use 65 as my retirement age.

Liberal Estimate Grand Total:

THREE million nine hundred seventeen thousand five hundred twenty nine dollars!!

(Wowza)

$3,917,529.00

Note: Obviously I'm a assuming a little more than I state. I'm assuming I keep my current job, the policies don't change, that there is no salary cap, etc. Also keep in mind with inflation a million dollars then will not mean what a million dollars means today.

So if I am doing nothing else right.... at least I am contributing to my 401K. I spent enough time while planning my 401K that I can now sit back and watch my millions grow.... literally.

Analyze your Budget.... Where Can You Cut Costs?

As I prepare to start my year long journey to save "2K in 12 months", I need to figure out where I can cut costs. To do this I am going to examine my budget.

I am amazed, and not in a good way, at how much of my life I went through without sitting down and figuring out my monthly bills and formulating a budget. I figured out my very first monthly budget at the beginning of 2007... at age 23!!! Eeeks!

Here are my current monthly/regular bills:

- $769 Rent
- $412 Car Payment
- $102 Cable/Internet
- $155 College Loan Payment #1
- $95 Car Insurance ($568 every 6 months)
- $65 College Loan Payment #2
- $60 Cell phone
- $60 Electric (average)
- $55 Gym Membership
- $25 Unlimited Tanning Membership
- $11 Netflix
- $1809 TOTAL


My take home pay is $2, 445 a month. This means that I have $636 dollars to use at my discretion for gas, groceries, eating out, entertainment, and saving.

I would like to add that I am also putting 5% of my pre-taxed income into my company 401K. I technically should say that my take home pay is more than $2,445, and include the money that is taken out into the budget, but I am trying to "trick" myself. I am not even thinking about the money that is being put towards my retirement. This way I do not miss the money. I also do not allow myself to consider myself saving, since I will not be touching this money until retirement, and I have other things to save for in the meantime. Some people may not agree with the decision to ignore my retirement savings, but when I was planning my 401K, I made sure that the amount I am investing would be enough for my retirement. The savings is on "autopilot" for now, and I will revisit my strategies in a couple years.

Anyway, I digress....

Here is a nifty graph to illustrate what percentage of my take home income is spent on individual bills:

Of the $636 remaining, my goal is to spend the following:
- $150 Groceries & Eating Out
- $85 Gas
- $300 Entertainment
- $100 ING


ANALYSIS:

I need a raise.




Just kidding!!

Rent: I have heard that 30-35% of your take home income spent on housing is the norm. According to this I am in the middle of this range. I still wish I would have skimped a little more on housing so that I can save more!

Car: When taking out a loan for my car, I should have based my decision on my "debt-to-income ratio. I already had student loans, so I should have figured out how much car I could afford.

Consumer Credit Counseling Service (CCCS) advises you have a "debt-to-income" ratio less than 15%.

My debt includes:

loan #1 (6%) + loan # 2 (3%) + car (17%) =

26% debt-to-income ratio

This is baaaaad. I should have found a car with a $147 monthly payment to stay in the range that CCCS advises. I plan on re-financing my car loan now that my credit has improved. Expect a post on my experience soon!

Netflix & Tanning Memberships: These are definitely the "extras" that I am going to force myself to cut.

Car Insurance, Cell Phone and Cable/Internet: These are all things that I could reduce in the future. After my terms are up on these things I am going to get competing auto insurance quotes, consider changing my cell phone provider to take advantage of an offer, and consider getting a smaller cable/Internet package.

Groceries & Eating out: My goal of $150 a month on food and eating out is a thrifty goal. But I think this is one of the areas that is worth the effort it takes to save money. Stop eating out, brown bag your lunches, coupon clip, visit farmer's markets, scour your weekly ads, grow your own vegetables, shop at multiple stores, use your crock pot, etc. Do whatever you have to do in this area, it is worth it. I am constantly trying to beat the amount I spent on last months groceries. Give it a try!

Entertainment: You might be thinking, "You spend twice as much money on entertainment than you do on food??" Yes. And this is the area I have the most trouble sticking to my budget. I have happy hour Thursdays, my weekends through the whole month of July are booked solid. I like to go out to bars, go camping, going to home football games, road trip to visit friends and family, go tubing, go to concerts and festivals, etc. It might seem like a high number but as long as I stay in my budget its okay. Its something I prioritize.

Savings: I should be able to put $100 dollars a month into an ING high-yield online savings account. This should be set up by July 1st so I can make this a direct deposit.


CONCLUSION:

So there is my brutally honest budget. There are some things in my budget that I need to work on, and sticking to your budget is always a continuous struggle. Making some sort of excel sheet, or using your money managing program on your computer is a good way to visually remind yourself of your budget. If you are just starting a budget, track your spending for a month or two (and I mean every penny), and see where your weaknesses are. If you've had a budget for months or years, track your spending for a month or two (and I mean every penny), to see if you are sticking to it!

Best of luck to you... and me!

Gardening

As you get to know me you will find out that I have tons of hobbies. For a 23 year old, some of them are considered dorky. But I am not ashamed to let anyone know how much I enjoy jewelry making, crafting, knitting, sewing, art, or any of my other "dorky" hobbies. There was one time that was kind of funny, in an ironic way...

A couple years ago, my mother was just getting into Internet dating, and I happened to be home from college that weekend. I was sitting in her living room, knitting a scarf. My 50-something-year-old mother came back from a dinner date with a man that she had met on the Internet and introduced us. So there I was, 21, sitting in a chair knitting, while I was meeting my 50-something-year-old mom's new boyfriend. It was kind of a role reversal situation that makes me laugh every time I think of it.

Anyway, since one of my latest hobbies will help me save tons of moola towards my "2K in 12 months" goal, I figured it was worth posting about. This year my apartment complex has offered its tenants the opportunity to have a 7' x 7' garden plot!

I had been wanting to put a potted tomato plant somewhere, but my apartment does not have any balcony's or decks so I had nowhere to put one. So I was so all sorts of excited when I heard the news! Being the engineer that I am, I researched exactly how much space different plants need and got out my grid paper to plan out my garden to perfection. Optimize is a term you hear a LOT in engineering, and I believe I have optimized that 7' by 7' plot of dirt.

My garden includes:

- 2 mounds of pole beans with 5-8 plants on each mound
- 2 mounds of snap peas with 5-8 plants on each mound
- 3 tomato plants (Cherry 100's, Roma, and Beefsteak)
- 3 foot row of carrots
- 5 kohlrabi plants
- 3 mounds of cucumbers
- 2 mounds of zucchini's
- 4 Romaine lettuce heads

Are you missing out on an opportunity to grow a garden? If you are lucky enough to own a house, do you have a small area in your yard that gets a lot of sun? If you are in an apartment, is there a community garden area that you are not participating in? Do you live in a town where they offer community garden areas?

If so, I HIGHLY recommend gardening. It is minimal work for maximum reward. Eating fresh veggies! Saving money! Spending time outdoors! Seeing huge fruitful plants grow from seeds! Nothing is more fresh and delicious than vegetables picked straight from the garden. A basket of some fresh veggies are a great (and inexpensive) gift to bring to all of the get togethers you will be attending late summer. As an added bonus, veggies are good for your health. Also, I cannot describe to you how cool it is to see a giant plant grow from a tiny seed. I don't care if that sounds "dorky". Every night after work when I walk down to my garden to water, the garden has changed. It's exciting.

Here are my pointers for gardening:

1. Make the most of your space without overcrowding..... Grow UP! Beans, for example, come in two varieties: bush beans and pole beans. By planting the pole beans and using stakes, trellis' or cages, you are using less ground area and utilizing the area above the garden. The more plants you can get to grow vertical, the larger your usable area gets.

Think about it, if all your plants are 1 foot high, your volume used is:

7' x 7' x 1' = 49 cubic feet

(L x W x H)

But if you have half of your plants growing 4' high (keeping in mind that you will never get carrots to grow 4' high), you will have:

(7' x 3.5' x 4') + (7' x 3.5' x 1') = 98 + 24.5 = 122.5 cubic feet

That is making your garden 250% bigger!

In my garden, I have tomato cages supporting the pole beans, snap peas, tomatoes, zucchini AND cucumber. Zucchini and cucumber like to spread out flat and wide, but by using the tomato cages they are growing somewhat higher and skinnier.

2. Make a raised garden bed: A simple raised garden bed is easy to make. It just takes a couple pieces of wood, a hammer and nails! Here is a site that gives basic instructions for building a raised garden bed.

A few of the benefits to using a raised garden bed are:

- Soil drains better
- Soil is less compressed
- Utilizes space more efficiently since you do not need rows for you to walk through
- Garden is more attractive with "edging"
- Garden is higher up, making taking care of your garden easier on you (and your back)

3. Plan Thoroughly: There are tons of free resources to learn about how to plan a garden. Either look online or go to your local library. Take the time to plan out a garden, making sure to give each plant as much room as it needs. What is that old saying? "Failure to Plan is a Plan for Failure!"

4. Water Water Water! I mentioned earlier that gardens were a lot of reward for not a lot of work. Planning and planting requires the most effort, and that can be done as a weekend project. The only thing left to do is water and weed! Gardens should be watered once a day, which seems like a large commitment. But its really not that bad! It takes only fifteen minutes out of your day. If you don't think you can handle this, consider buying a "soaker hose". Purchasing one costs less than ten dollars at Walmart. It is a rubber or plastic hose with perforations to let water seep into the ground. You can leave the soaker hose wound around the garden bed and simply turn on the hose and come back a half hour later to turn it off! I think everyone can find time for at least that.

And that is all the advice I have to give.

Here are the costs that I incurred gardening:

- 30 Dollars to my apartment to have a garden plot. This sucks but they made raised beds, hooked up hoses, laid wood chips around the gardens, etc.

- 20.15 Dollars spent on plants/seeds. I probably could have found better deals but I went for convenience instead of bargains in this case.

My mom brought a shovel up and helped me plant so that I didn't have to go out and spend money on gardening tools. I have been weeding with my hands.

$30 Fees

$20.15 Plants

$0 Tools

$50.15 Total

I'll keep you posted on my vegetable yield so I can do a rough cost analysis.

2K in 12 Months... The Nitty Gritty Details

So now that I have gotten my formal introduction and some basic background information done, I can talk about the nitty gritty details of my "2K in 12 months" goal. I will start on July 1st. This will work out great because my current apartment lease runs out at the end of next June, so if I chose to use this money towards a down payment, the timing would be perfect for moving. Its halfway through the year, my birthday month... everything just seems right. I'm feeling good ju ju about July 1st.

So I do have about 500 dollars in a savings account that I don't touch. 498.16 dollars earning just over 1% interest. It's from birthday/Christmas presents of money when I was a little kid. This money will NOT count towards the "2K in 12 months". But that does remind me, I should move this money into a CD or a ING Direct high yield savings account. Perhaps I could count the interest that the $500 earns after moving it to ING. Hmmm...

Speaking of ING Direct high yield savings account, I have decided to put my "2K in 12 months" money into one of these accounts. I don't forsee any problems with this, but I have not had an account with them before so I am not sure. I believe they have no minimum initial balance, and ability to automatically transfer from your bank account. Keeping my money in an ING account does two things for me. It is not in my normal savings account, which is directly linked to my normal checking account, so I will not be tempted to spend it. Also, it will let me earn a high interest rate on the money, and every dollar put towards my goal counts! I am actually really excited to try out one of these online high yield savings accounts. I've heard only good things. I will open it on July 1st.

Onto the ways in which I plan to save the money.

- Automatic deposit from my check every month (after a month or so I won't even notice it), I havent decided the amount yet.

- Never spend any change, save it in a piggy bank.

- I have a roommate living in my apartment for the summer, this rent could be considered extra money, save it.

In addition to saving money, I plan on earning extra money. All this extra money will go towards the goal.

- Sell crap on ebay. Pretty standard. I'm not an expert but I've sold a couple things. I have made a mini goal to stop being such a pack-rat, so I should have tons of stuff to sell. Two birds with one stone!

- Mow my mom's lawn. 20$ a week!!

- Get a second job. Maybe mowing other people's lawns?

- Aluminum cans. We have a place nearby where you can get money for aluminum. Not much, but like I said, every dollar counts.

In general I plan on living as frugally as possible. No big purchases, clipping coupons, spend less on groceries, cutting out netflix, my tanning membership (its summer, duh), etc. I plan on writing more posts about these things specifically.

One week til go time!! I can't wait!

Welcome!

Hello and welcome to my blog. I am a graduated Engineer as of May of 2006 and am now stumbling my way through the "real world". I have recently become somewhat obsessed with budgeting, investing, saving, etc. This probably happened when I bought a brand new shiny car with $500 down and a 15% interest loan!?!?! Ahhh, if I could only go back to those college days when paying my credit card bill on time didn't seem like such a big deal and smack some sense into "college" me.

I could have been SO much farther ahead than I am now if I had become interested in finances just a couple years earlier. My parents had put away money for college when I was a wee little baby. Although it wasn't enough to cover my entire college career, I was a very studious high school student, and received over 25K in scholarships. I was extremely lucky. The deal between my parents and myself was that they would cover what my scholarships didn't...through four years of college. And if it took me longer than that, I was on my own.

To interject, if I knew then what I know now, I would have spent those years putting part of what I made at my numerous jobs into a savings account so that I wouldn't have to loan any money during my SUPER senior year of college. I know that I couldn't predict that it would take me 5 years, but that little savings account would come in handy after graduation if I managed to graduate in four years (It takes the average Engineer 4.5 years to graduate these days). It would have been a win-win situation.

But, alas, that is not what "college" me chose to do. I paid little attention to my cash situation throughout college. If I had money, I spent it. Only when my money was running seriously low did I watch what I spent. I don't want to give the impression that I was TOTALLY out of control. I didn't charge up a storm on my credit card, my roommates and myself always found the cheapest college house we could find. I just went out a lot, and went shopping a fair amount, and things added up.

When my fifth year arrived, I took out a loan. For some reason I was almost excited to take out a loan. I felt independent. What amount did "college" me decide to loan, you ask? "College" me wanted to loan $30,000 dollars!?!? Luckily, my University would only approve $16,000. By the time I graduated, that $16,000 dollars was history.

I had a job secured by the time I graduated, in my college town, and three months left on the lease of my last college house (tear). The house was a crap-hole. The rent for the cramped 3 bedroom house that was eighty thousand years old was $990 dollars ($330 for each of us). And considering the prices to rent on campus, the location and the fact that there was one parking spot included... this was a steal. But it was summer, and my bedroom was 95 degrees, and all my fan did was blow 95 degree air at me. My judgement was clouded by the word SALARY and the fact that I would be making more than I ever had in my entire life. EVER. "College" me decided I should rent a nicer apartment. Not only that, but "college" me decided I should not wait until my lease ended, because SALARY meant I could afford two rents for a couple months. So, in June I moved off campus into a decent, 2 bedroom apartment all by myself. 769 dollars a month, and two months free if I signed a 13 month lease. Woo Hoo! PLUS $100 from Rent.com. Bonus. That made my average rent $643 a month. Honestly though, after living in cramped, eighty thousand year old houses with mice and sky high utility bills and wood floors painted brown (seriously) and sharing bathrooms and having roommates eat your food and having no room for your stuff.... and the list goes on...... having my VERY OWN, newly remodeled two bedroom apartment with a garbage disposal, dishwasher AND washer and dryer in the unit was like heaven on a stick!!

So far, "college" me has done some things that have led me to the financial situation I'm in now.

- I didn't save any money during school
- I didn't take advantage of the fact that I had four years of college paid for
- I took out a HUGE loan compared to what I needed
- I was so excited after graduation that I didn't wait for my lease to run out
- I rented a place that was more expensive than I should have.
- I didn't think of the fact that the "deals" that lowered my average rent were only there for the first year.

But then "college" me made one more stupid move before "college" me was forced to turn into "welcome to the real world, now get a hold of your finances" me.

In December after working for 7 months or so, my car was nearing death, and I decided I wanted to buy a new car. I did my research, and ended up buying a 2007 Honda Civic. It is so cute and I love it to death. Its my two door, atomic blue baby. I bought the car the week after Christmas, when all the car companies are trying to beat each others numbers for the year, and are therefore more willing to negotiate. I went with my mother, who is so in control of her finances, that she has never had to finance a car. But this also meant she had no idea how to help me with the financing part of the car buying experience. Ah, anyways, lets just say that I ended up with a 19,000 dollar loan, over 6 years, at 15% interest. To save you the math, if I stick to the payment schedule, I'll be paying $30,000 for that car. (Feeling nauseous). I'm sure that I will post more about my car buying experience later.

So, here I am. 23 years old. $19,000 car loan. $16,000 student loan. FINALLY smartening up financially. Once I do get interested in a subject, I can't get enough information about it. I have really enjoyed reading the personal finance blogs that I have found on the Internet. They are very inspiring and full of information and opinions. I have decided that I want to try to save/earn $2,000 in one year. Whether that money goes towards a down payment on a condo (more on that later) or goes towards my debt, I haven't decided. But writing this blog is a way to hold myself accountable for my financial decisions this year (and beyond). I hope that maybe as I track my progress, someone else in a similar situation is inspired by my story.

Nice to meet you.