Too much bad personal finance advice out there.

You ever read a blog post that went something like this…

You might want to think twice before you buy that brand new TV. It would set you back $2,000, and will likely only provide you entertainment for a handful of years. What if you invested that money instead? 

If you put $2,000 in to a Roth IRA and let it grow for 30 years, at 8%, you would end up with $20,000. 

I repeat, TWENTY-THOUSAND DOLLARS!!!!

Is that TV really worth $20,000 to you? I didn’t think so. Now go give yourself a spanking and put yourself in time out for even thinking that buying a TV was a smart move! 

I can’t tell you how many times I’ve read some iteration of the post above. Maybe instead of a TV, it’s a vacation. Or a boat. Or a house. Or probably the most popular topic for an argument like this to appear, a wedding post.

Consider this my permission to flip those other PF bloggers the internet version of the bird and tell ’em to buzz off. Unless of course, your goal is to be miserable for the rest of your life. Then by all means, drink the kool-aid.

Personal finance bloggers commonly confuse the term financial freedom with wealth. THEY ARE NOT THE SAME THING.

Say I had $1,000,000 in my 401k right now. I am literally a millionaire. But am I free?

HECK NO!

My 401k isn’t going to pay my cable bill, put groceries on our table, or a car in my driveway for another 30+ years. Yeah, I’m a millionaire, but I’m no more free than the dude that bags groceries down the street at the local Safeway. We both still have to go to work tomorrow.

Do you get it? 

You need to be working towards financial freedom, not wealth building.

I think, at 28 years old, I’ve reached that place. My job provides the best work/life balance of anyone I know, I make a reasonable, but still down-to-earth five-figure income. We have a roof over our head. We contribute 15%-20% towards retirement. And we’re content living within our means, no pinching pennies, but we still have to be mindful of our spending. As far as I’m concerned; we’re retired.

It’s a beautiful place to be, and a place I hope you are in, or working towards finding. 

Don’t get discouraged by the PF bloggers who talk about how great early retirement is even though they are still slaves to their blog (or their portfolios), who make you feel terrible for buying a new car, or who tell you there is no such thing as saving too much.

Those bloggers suck.

You be the best you you can be. Make a plan. Stick to it. And enjoy the ride along the way…even if that means you end up buying that TV.

You don’t have to be a millionaire to be happy. Promise. 

Thursday Poll: What day will the government get its crap together?

I recently mentioned I have not yet contributed to my Roth IRA this year. If you haven’t been living under a rock, I’m sure you’ve noticed the markets are down a couple hundred points as the Republicans and Democrats are being a bunch of drama queens. I would never advocate trying to time the market because no one can predict the future, but almost surely one of two things will transpire over the next week…

Option A) The government shutdown continues, and for the first time in the Nation’s history, we will default on our national debt obligations. The economy will likely see an immediate and sharp decline. If I buy in today, with the dow at 14,800, it could easily be thousands of points lower a month from now if the economic crap hits the fan.

Option B) Republicans and Democrats continue bickering, but ultimately strike a deal. Either the national debt issue is pushed back for another few weeks/months, or the debt limit is permanently increased and the shutdown ceases. The markets will react positively to this news.

What’s going to actually happen?

No one knows exactly. But, I’m pretty sure no elected official wants to be part of the nation’s first debt default so I’m betting a deal is struck before default becomes a reality.

Now is the part where you, the reader, can help me out.

I want YOU to pick what day I should make my Roth IRA contribution. Ideally I will contribute on the last business day BEFORE The House and The Senate strike a deal (right before the markets would make a nice little jump). Only problem is, I don’t know what day said deal will be made.

To have a little fun, I’ll let you do the picking for me. Whichever day gets the most votes, will be the day I drop $4,500 in to my Roth (side note: I’ve already contributed $1,000 to regular IRA). 

This could end up being the greatest idea I’ve ever had, but it could just as likely end up being the worst. Haha. Should be fun either way right?

So reader…

[poll id=”22″]

 

Financial laziness.

I’ve been a big sack of laziness lately when it comes to keeping up with my retirement planning. Apparently the calendar has decided to say it is September (when did that happen?) which means I could have contributed to my Roth IRA as early as nine months ago for the 2013 tax year.

Had I just invested the $5,500 Roth IRA contribution limit on January 1st like a good little Ninja, that amount would have grown by $935. Or in other words, basically my $5,500 contribution would be $6,500 right now. 

How lame am I?

Answer: only kind of lame because at least I’m realizing my lameness as opposed to justifying it? 

…Okay, well part of me wants to justify it for the following lame reasons…

  1. I upped my 401k contributions this year quite a bit.
  2. We bought a house, which hopefully will have some investment aspect to it.
  3. I’m lame.

It’s time I give myself a swift kick in the butt and get my Roth contribution in.

Have you needed to give yourself a kick in the rear for being financially lazy in any capacity?

  • Avoiding paying down debt faster than you could/should?
  • Not contributing to retirement when you have the means?  
  • Paying for two cable boxes when you haven’t turned your basement TV on in months? 

How many of you invest outside of retirement?

investing

I’m currently of the mindset that Girl Ninja and I have enough job security and enough liquid assets we can afford to quit saving money. It’s a fun place to be in for sure, but it is also extremely intimidating. Throwing excess income in to a savings account each month takes virtually no effort. Investing money in short-term investments, however, requires one to be much more proactive.

I could take the easy way out and just increase our retirement contributions to some insane amount, but that doesn’t really help us much. Sure, we’d be super rich when we are all old and wrinkly, but what good does that do my 40 or 50-year-old self?

I’ve said it before and I’ll say it again…

  • I’d way rather have $1,000,000 waiting for me on my 50th Bday (side note: today is my 28th birthday) and $2,000,000 in my retirement accounts, than just having $5,000,000 waiting for me at 65.

That’s just me though.

Maybe you’re different? Who amongst you ACTUALLY is being proactive about investing in shorter term assets? Throwing a couple bucks at some random stocks isn’t what I’m talking about. Strategic, consistent, and significant allocation of discretionary income is what I’m looking for.

If you don’t, why not? If you do, what specifically have you chosen to invest in?

 

I get high.

I’ve been doing a lot of blogging lately about real estate and the stock market. The last twelve months have been insane for both markets. Epic and unsustainable are some of the adjectives that come to mind for the recent  gains.

The general consensus amongst PF nerds is that one should strive to buy low and sell high. Today, I’ll make the argument that one should Buy low AND Buy high.

One of the Seattle Real Estate blogs I read repeatedly says this is a terrible time to buy a house in Seattle because of the recent market appreciation. This bothers me for a few reasons: 

A house is a home first, an investment second.

I have to pay to live somewhere, right? Real estate is one of the only investments I can think of that satisfies a basic human need, shelter. Even if my house lost all of its monetary value, it still provides ME value. If your WaMu stock loses all of its monetary value, you have nothing.

We are looking at houses within our budget.

Just cause the market went up doesn’t mean our budget did. If we find a house that we like – in our price point – I’m not going to refrain from buying it just because it was $20,000 less last year. Milk was also cheaper in 1995, so should I not pick that up at the grocery store today? Which leads me to my next point…

Buying high is a good thing.

I mean, that’s they way the stock and real estate markets works right? They should both be setting new highs every day. Okay well maybe not every day, but over the long haul the trend is supposed to be (and always has been) up. Why do we act scared or surprised when the Dow sets a new record?

THAT’S WHAT IT IS SUPPOSED TO DO!!!!

I get that one might argue the importance of buying low and selling high when it comes to short-term investments. But who the crap buys a house with the intentions of selling it two years later? That’s stupid, or at least speculative at best. Two years from now the housing market may be down, but I bet you a billion dollars twenty years from now the market is up. I don’t really care if my house is worth $300,000 or $320,000 today, when it is going to be worth $700,000+ thirty years from now. Sure, it would be nice to time the market, unfortunately no one can do that without taking a gamble.

Moral of the story kids: The market being at all time highs should be reassuring that the market is performing as expected.

Well, we officially quit saving yesterday.

After a brief chat with Girl Ninja yesterday, we’ve made the wise decision to stop saving money for the foreseeable future. No, we haven’t hit our $100,000 savings goal yet, and if I all goes according to plan, we never will.

I first blogged about our ambitious $100,000 savings goal in June 2010. Exactly three years ago. And here we are, probably four weeks away from reaching said goal, ultimately deciding it’s time to throw in the towel and give up.

Have I gone bonkers? 

bonkers

 

Don’t worry, I haven’t gone off the deep end yet. It’s just time I start practicing what I preach.

While it’s true we have not hit $100,000 in savings, we are pretty freaking close. About $3,500 short as of this writing. This week’s blog post about 401(k) loans got me thinking. I like the idea of using a 401(k) loan, but ultimately have decided against it for one reason.

I wont need (or want) a boat load of cash sitting in the bank once we’ve made our down payment.

As I’ve mentioned before, we will likely use between $70k and $80k for a down payment and closing costs. This will leave us with a $10,000 emergency fund and between $10,000 to $17,000 for “other things” (furniture, vacations, etc).

I have no desire to keep more cash in the bank than necessary. In other words, we’ve reached our MAXIMUM savings threshold. I feel like any additional savings would no longer be classified as “being responsible” but instead as “hoarding”.

hoarding

We knocked debt freedom off the list years ago. Yesterday, we put a check mark next to savings. Now it’s time to make some new priorities. So…

  • I upped my 401(k) contributions last night from 13% to 20%, and after I see exactly how that affects my paycheck (thinking about $430/month less in take home pay), I might increase it even more.
  • We’ll probably begin living slightly more frivolously (emphasis on slightly). Maybe we go out to a nice restaurant once a month. Take a weekend trip somewhere once a quarter. Or finally update one of our six-year-old laptops. We won’t be keeping up with the Joneses by any means, but it will be fun to splurge every now and again.
  • Lastly, and what I’m most excited about, we will take the majority of our discretionary income and FINALLY start throwing it in to taxable investment accounts. If all goes well, we can make some serious progress in our goal to build up some short to mid-term investments. It’s important we get a jump-start on this now, before we have kids, a larger house payment, and only one income. 

While it would be cool to actually reach our $100,000 savings goal, I think it’s way cooler to move on to the next phase of Operation Build Wealth.

I might take out a $30,000 401k loan just to piss some of you off.

If you’ve been reading PDITF for longer than, say five minutes, you’ll know I’m not necessarily the smartest PF blogger of the bunch. But what I lack in brains I make up for in crappy stick figure drawings…right?

yes

Over the years I’ve read a handful of articles about 401k loans. Most articles pretty much say the same thing, “They’re really dumb, so don’t do it.”

So for that reason, I’ve decided to consider taking out a 401k loan.

How you like them apples counterintuitive personal finance?!

Okay, I’m not necessarily considering taking out a 401k loan, as much as I am trying to figure out the reasons why I should not take one out.

A few things to note….

  • Girl Ninja and I have just shy of $100,000 in our savings account.
  • When we finally find a house worth buying, it will probably be priced between $350k and $400k.
  • We will put 20% down (so looking at about $70k to $80k).
  • My govt job is stable (instead of facing furloughs I am working mandatory overtime)

So now that you know those basic things about me, allow me to try and explain why I’m flirting with the idea of using a 401k loan as part of my down payment.

I logged on to the TSP website (the government version of a 401k) and played around with their loan calculator. I ran some numbers based off a $30,000 TSP loan (to be used for part of our 20% down payment) being paid back over 3 years.

According to the calculator I’d be charged 1.75% interest on the loan, and would have bi-weekly payments of $395 taken out of my paycheck to pay it back. Over the course of the three-year payback period, I’d have paid a total of $810 in interest, or $22/month. There would also be a $50 administration fee charged upfront.

The cool thing (is cool the right word?) about a 401k loan is that, although I would have to pay $22/month in interest on the loan, that interest gets paid to my 401k balance. So I’m just paying myself interest, not the bank, not the government, just myself. Essentially I borrow $30,000 from myself and pay myself back $30,810 over the course of three years.

I’m failing to understand why this is a terrible decision? 

The reality is the stock market has gone gang busters the last couple years.

DJI

What’s more, I didn’t start investing until 2007/2008. This means I missed the 2002 to 2007 bubble. Virtually all of my 401k investments were made while the market was “on sale”. This makes for some pretty incredible returns, not because I’m awesome at investing, but I didn’t have money to invest until the Dow was trading sub 10,000. Dumb luck I guess. 

While it’s true the market could continue to go higher and higher for the next couple years, I don’t think it’s necessarily a bad choice to lock in a 25% YOY appreciation. Especially when I’m cashing out at HISTORIC HIGHS in the stock market to take advantage of mortgage interest rates that are still near HISTORIC LOWS.

What am I missing here? 

There are only two things I can think of that make this 401k loan option potentially stupid…

    1. The markets continue to go gang busters for the next three years. I will be paying myself 1.75% interest on the loan which is a heck of a lot better than my savings account currently pays, but if the stock market goes up 20% a year for the next three years that will be painful to watch. My gut says this scenario is unlikely and the bull market will cool (especially as the fed lightens up on Quantitative Easing), but it is still a possibility and something to consider.
    2. If I get fired or quit my job I have to pay the loan back in full within 60 days. This is definitely the most popular reason PF bloggers advocate AGAINST 401k loans. But isn’t this because most people who take out 401k loans don’t have the cash on hand? I’ll have more than the loan amount in my savings account, so in the unlikely event I got canned, I could pay the loan in full no issue. Remember, I’m a firm believer “liquidity is king” so why not keep the cash in hand?

Okay, so like I said. I’m not the smartest kid in the room. Have I done all my homework? What am I overlooking?

Note: If you think this decision is really stupid (which it totally might be) I just ask that use realistic numbers and analysis in your rebuttal as I’ve tried to do in this post. Not just a  comment like “401k loans are for idiots.”