After you’ve stocked away tens, even hundreds, of thousands of dollars into your 401K, you may be tempted to borrow against when, say, you want to buy new furniture for your house or you want to pay off a high credit card bill.  Let’s take a look at why you shouldn’t touch your 401K until retirement or some other life and death emergency that you cannot fund otherwise.

3 Reasons Not to Borrow Against Your 401K

If you leave your job – whether it’s voluntary or involuntary – the balance of the loan will be due within 60 days.  If you don’t repay it, you’ll face a 10% early withdrawal penalty and you’ll owe federal and state taxes on the amount you borrowed.

Your paycheck will be less until you repay the loan.  Getting the 401K loan payments taken directly out of your checks is good because you’re less likely to become delinquent.  However, you’ll be bringing home a lower paycheck until the loan is paid in full.  This means, you’ll have to change your lifestyle to accommodate the decrease in income.

You set back your retirement savings.  Typically, you can’t contribute to your 401K until you’ve repaid the loan, so during that time, your retirement savings isn’t really growing.  If you have a retirement goal to reach (which you should), you’ll have to save more after the loan’s repaid or delay retirement.  Not only do you miss out on those extra contributions, you also miss out on the interest payments you would have gotten if you hadn’t taken out the loan.

All Financial Matters does a nice analysis of the cost of taking out a 401K loan.  It includes a lot of assumptions, but the net is a 401K loan costs more in taxes and sets you back in terms of savings.

Alternatives to 401K Loans

Instead of borrowing against your 401K loan, seek some other alternatives.

• Another savings account
• A credit card
• A home equity loan (interest paid is tax deductible)
• A bank loan

The recent failure of IndyMac, a California-based bank, brings up the question about bank account insurance.  How upset would you be if you were one of the customers with $100,000+ in your bank, but couldn’t get any of it?  Now’s a good time to review the basics of FDIC insurance and to examine each of your bank accounts.

What the FDIC Insures

The FDIC – Federal Deposit Insurance Corporation – is a U.S. government agency that insures bank deposits in the event of a failure.

Checking accounts, CDs, savings accounts, and money markets accounts are insured for $100,000.

Retirement accounts are covered up to $250,000.

• IRAs
• Section 457 deferred compensation plan accounts
• Self-directed defined contribution plan accounts
• Self-directed Keogh plan (or H.R. 10 plan) accounts

You can be covered for more than $100,000 if you have funds in different account categories: personal account, retirement account, joint account, or revocable trust account.

In a joint account, each account holder is insured for $100,000, so the account is insured for $200,000 total.  Joint savings and joint checking accounts are insured for a total of $200,000.  So, as a couple, you are insured for $100,000 in a checking account and $100,000 in a savings account.

What the FDIC Doesn’t Insure

• Stocks
• Bonds
• Mutual funds
• Life insurance policies
• Annuities
• Municipal securities

Any amount over the $100,000 for personal accounts, $200,000 for joint accounts, and $250,00 for retirement accounts is not insured.

I don’t know about you, but I feel the weakness of this economy each time I pump a tank of gas or visit the grocery store.  Prices are rising and unfortunately, wages aren’t rising to keep up.  Living paycheck to paycheck isn’t a desirable way of life and making more money might not be an option.  So, in times like this, we must figure out how to save money.

A couple of months ago, I took a look at my spending and managed to cut out $100 worth of things I could live without.

1. Cancel unneeded subscription services.  Lots of subscription services make money from people who pay but don’t actually use the service.  A few months ago that was me.  I cancelled a credit monitoring service – $12 – and movie subscription service – $22 – and saved $34 a month.

2. Reduce your cable options.  I was also paying for HBO and Cinemax – $26.  I love movies, but I’ve been watching tv a lot less during these summer months, so I cut out the premium channels for awhile.

3. Reduce insurance costs.  Make sure you have the right insurance coverage.  I was able to save $16 between renter’s and car insurance by reducing coverage and asking for discounts.  You can also increase your deductible to decrease your monthly rate.  If you end up with a higher deductible, make sure you have that amount tucked away in your emergency fund.

4. Change your rate plan or get rid of the cell phone all together.  Make sure you’re getting the best use of your cell phone rate plan.  If you’re constantly paying for overages, you either need to talk less or increase your minute plan.  Or, if you always have minutes left over, go to a lower plan.  You can also stop buying features like ringtones and wallpapers.  If you have a landline phone and a cell phone, get rid of one of them.

5. Cook more.  By that I mean, cook more frequently (rather than going out) and cook enough to have leftovers.  It’s been proven that cooking your own meals costs a lot less per month than eating out everyday.  You can eat the leftovers the next day for dinner or pack them in your lunch.  One-dish meals like casseroles, soups, spaghetti, and lasagna are easy to make in large quantities.

6. Buy store brand ingredients.  When you’ll be mixing ingredients together to make a dish, you won’t notice a difference between a store brand and premium brand.  For example, the next time you make lasagna – use store brand noodles, ricotta cheese, and eggs.  You can even experiment with store brand sauce if you have seasonings to fix it up.

7. Drive smart.  When the price of regular gas is reaching $4.30/gallon in some places, saving on gas will certainly help.  Drive during the times of day with the least amount of traffic.  This will cut down on the stop and go that burns gas.  When you’re driving longer distances, set your cruise control to 65 or 70 to stop yourself from accelerating and decelerating too much.

Those are my tips.  What are you doing to save money these days?

Guilty pleasures, everyone has them.  In your budget, they’re the things you can’t resist buying.  The things you later regret buying.  The things you wish you could take back when you can’t pay your credit card bill.  Even in a budget crunch, you’ll find yourself making room for your guilty pleasure.

When it comes to recognizing your budget’s guilty pleasure, the signs may be there, but what you really need are cold hard facts.  If you want to find out what you spend most of your money on, it’s time to do some number crunching.

Depending on how you spend, there are two ways you can figure out your weak spot.

1. If you mostly spend cash, you’ll need to save your receipts for a certain period of time.  Two weeks to a month should be enough time to recognize a pattern.

2. If you use a check card, you can download your transactions into a spreadsheet and look at them.  Some online banking systems only allow you to download into a personal finance software like Quicken or Microsoft Money.  If this is the case, you can copy and paste into Excel.  Or, you can still use the receipt saving method.

Ultimately, you want to get a detailed list of spending in one place.  Categorize your spending, e.g. Food, Utilities, Transportation, Entertainment, Miscellaneous, etc.

Once you’ve grouped your spending, look for high spending in areas like food, entertainment, and miscellaneous.  This will clue you in to what your budget’s guilty pleasure might be.  Are you eating out a lot?  Buying a lot of clothes?  Spending money on DVDs?

When you figure out what you’re spending your money on, the next step is cutting back (or eliminating) your spending in that area.  How do you do that?  Well, it takes some old-fashioned self-discipline.

I almost feel silly writing this because I know you’ll laugh.  This is so simple, I’m sure you already know it.  But, like millions of others, you’ve made budgeting and spending so complex, you’ve forgotten the elementary principles behind money management.

You’re not the only one.  People do it all the time.  That’s why there are so many financial magazines, websites, and blogs out there.  People need financial guidance.  They add unnecessary complexity to simple things, then wonder why the thing that used to be so simple has become so difficult.

And here it is, the one thing that will always keep you from being broke – Never spend more money than you make.  If you make $100 a month, only spend $90.  If you make $10,000 a month, only spend $8,000.

Before you try to correct me, yes, it is possible to spend more money than you make.  You can dip into your savings, use credit cards, take out payday loans, or borrow from friends and family.  When you live like this, you’ll end up drowning in debt in no time.

This is the point where most people begin to argue and say, “I can’t help but spend all my money, I have bills to pay.”  The latter part of that statement is quite possibly true.  The first part, however, is almost always false.  You feel like you have to spend all your money, but you don’t.

There is a very easy way to make decisions about what to spend your money on.  Ask yourself what will happen if you don’t spend that money.  If the answer doesn’t lead to death of you or a loved one, don’t spend it.

Next, don’t try to disguise luxuries and necessities.  Food, you must buy.  Steak and shrimp, you can live without.  Clothes, you must buy.  Designer jeans, you can live without.  Electricity, you must buy.  A thermostat set to 60 degrees in the summer, you can live without.  Do you see how easy it is to spend all your money on frills?

Put your income and expenses on paper where you can see them.  Use cash to pay bills and buy groceries if you have to.  Whatever it takes to get your spending under control and make sure you never go broke again.

A quick lesson in finances:  anything that depreciates in value isn’t an investment.

Your car depreciates the day you drive it off the lot.  If you took out a $30,000 loan to buy a brand new car, then tried to sell or trade it, you would not recover the full $30,000 and would end up owing the bank,

If you can’t afford to buy a new car, don’t try to justify the purchase by convincing yourself it’s an investment.  Even if you pay for the car in full, it’s still not an investment.

Not everyone can count on  receiving the exact same amount of money each paycheck.  Many self-employed people, sales people who work on commission, waiters, and waitresses can’t predict how much they’re going to make from one month to the next.  Even though a fluctuating income makes budgeting difficult, it’s doable.

Making the Variable Income Budget

Total your monthly expenses just as you would if you made the same amount every month.  Add up housing, transportation, food, utilities, clothing, insurance, debt payments, and other things you need to live.

As for your income, average what you’ve made for the past year.  Use your recent bank statements or last year’s tax return to figure out how much you bring in.  When you’ve come up with an average income, use that the “income” part of your budget.

Add to Your Savings

Having a healthy savings account is the only thing that will make variable income budgeting work.  Think of your savings account as an insurance plan that will cover your expenses when your income isn’t enough.  Before this insurance plan can work for you, you have to build it up.

Any month you make more than your average income, put the extra money into your savings account. 

The months that you make less than your average income, use money from your savings to cover the bills.

Avoid overdipping into your savings for spending money, especially during the months that your income is less than average.  By “spending money”, I mean money to spend on unnecessary luxuries like a new tv or pair of shades.

Build a Fat Emergency Fund

When you live on a variable income, your emergency fund should be higher than if you had a more steady, reliable income.  Having six months to a year’s worth of living expenses will keep you afloat if anything happens to reduce your income.

It’s a good idea to keep your emergency fund separate from your “living expenses” savings account.  While your savings account is used to float you during the months when your income is less than average, your emergency fund should be used strictly for emergencies, like unexpected medical bills or car repairs.

Variable Income Budgeting Tips

If you have a job that has a base salary + commission, build your budget using your base salary.

If one spouse has a fixed income, build your budget using that spouse’s income.  The variable income can be used to build your emergency fund, pay off debt, or save for retirement.

There’s nothing like getting a raise.  More money coming into your home means more room in your wallet.  After finding out their getting a raise, most people start thinking of all the things they can now afford to buy.  A new tv, new wardrobe, new car…

By all means you should enjoy your raise, but spending it on consumable goods, isn’t the wisest thing.  If you’re already living comfortably, it’s actually stupid to just spend the money.  You’ll unnecessarily inflate your standard of living making it nearly impossible to realize you’ve gotten a raise.

Dumb things to do with a raise

• Buy a new car, especially a larger, gas-guzzling one
• Go on an extra vacation
• Buy more expensive clothes
• Hide it under your mattress
• Spend it before it shows up in your paycheck

Smart things to do with a raise

Pay Off Debt

When you get extra money, put it toward your debt, especially high interest credit cards and loans.  Stretching out your payments means you pay more interest to the banks than you would if you’d paid the debt sooner.  Paying off debt sooner rather than later saves you money in the long run.

Invest and Save

It only makes sense to put your money toward something that will make more money, rather than something that will only cost more money.  Put your raise in a high-yield investment or savings account.  Let’s say your raise gives you an extra $250 a month and you put it into an investment that gives you 7% a year.  After 5 years, you’d have $21,477.  If you spent that money, after 5 years, you’d have $0.

Having an emergency fund of at least 3-6 months of living expenses is important to keep you afloat in a financial disaster.  Since your emergency fund will be a large amount of money, you’ll likely keep it in a checking or savings account.

This weekend my car battery died.  Since my car was parked in the garage, I needed one of those battery pack things that tow trucks carry.  It was Sunday and most towing companies were closed.  The ones that were closet to me and open, only took cash and I only had credit and check.  The one I found that took credit was a 30 minutes away from me.  It actually took 45 minutes for the truck to come.  I was kicking myself for not having cash on me.

You won’t always be able to make it to the bank in time to finance a emergency.  So, keeping some cash stashed somewhere in your home is a good idea.  You don’t need much.  Just a few hundred dollars kept hidden and locked away in a safe can save you a lot of trouble.

I have a problem with people who buy what they want and beg for what they need.  I put work into managing my money, often sacrificing dinner dates and shopping sprees.  Those sacrifices are not meant to finance someone else’s lavish lifestyle.  It bothers me when someone who could have been making better financial choices asks me to borrow money. 

They won’t pay you back

Yes, you want to help the people you love and there’s nothing wrong with that.   Just don’t loan them money.  You don’t know when you’re going to get it back, if you ever get it back at all.

Often, people who need to borrow are mismanaging their money.  If they need to borrow from you to cover their rent, lights, car, etc. what makes you think they’re going to be able to pay you back?  They’re barely making it as it is.  No matter what they say, what windfalls they think they’re getting, chances are they are not going to be able to repay you.

Are you prepared to act like a bank?

Banks go through a rigorous approval process before approving someone for a loan.  They also have strict processes in place for collecting on defaulted loans, like hiring collection agencies and suing for the money that’s owed to them.  Are you prepared to go this far when someone wants to borrow money from you and doesn’t repay you?

“Give a man a fish…”

Teaching your loved ones about better money management is a much better gift than a $100 loan.  If they learn to budget their money and control their spending, they may never have to borrow from you or anyone else ever again.

If you don’t know about money management yourself, don’t try to give any words of wisdom.  Instead, take a trip to your local library and check out a few books on budgeting and personal finance.

It’s ok to help, just don’t loan

I’m not suggesting you leave your loved ones hungry and homeless.  When it comes to loaning money, my motto is Don’t loan what you can’t afford to give.  Help them out, within reason, but don’t put yourself in an financial bind.  If they repay you, good.  If they don’t, good.  Lowering your expectation of repayment will save your relationships and keep you from stressing about making your own ends meet.