What In The World Is A 401k?

"When you retire you switch bosses from the one who hired you to the one who married you."
- Gene Perret

When I first began my career, I was ashamed to admit that I really didn't know what a 401k was. Although I did my undergrad in business, we never discussed retirement, finances, or personal budgeting. No professor ever did a lesson on 401ks, IRAs or investments. However, everyone was telling me that I needed to save for retirement and that I needed start my 401k. So what did I do? I began to do research and eventually took courses to understand what a 401k really is and what was the history behind it.

Later in life, I realized that I wasn't the only one that didn't know what in the world was a 401k. Many people don't really know what a 401k is and how it works, and many of them think that a 401k is the only option when it comes to retirement. My goal today is to give you a quick history of the 401k and detail more or less what it does. In the next few blogs I'll explain the different types of 401ks that exists so that you can make better decisions when choosing a plan and hopefully manage your 401k much better. Let's get started.

The Era of Pensions

The 401k actually has a short history. Before they existed, some companies offered a pension plan to their employees. The Center for Economic Policy Analysis at the New School for Social Research believes that the old-traditional pensions would do much better now than the traditional 401k we have now. However, most workers in the private sector did not have a pension plan and according to the Center of Research on Retirement Income at the Employee Benefit Research Institute, most employees working in the private sector weren't working long enough with a single employer to qualify for a full pension. Now there are few employers that offer pension plans and the proportion of private workers participating in traditional pension plans is less than 20%, according to the Department of Labor. 

The Birth of the 401k

In 1978, after much debate between employers and the IRS, the Revenue Act of 1978 included a new section code which allowed employees to not be taxed on the portion of income they elect to receive as deferred compensation rather than as direct cash payments. This idea was introduced by Ted Benna, a benefits consultant for Johnson and Johnson and over the next few years the law went through different variations. Finally, the regulations were issued in November of 1981 and shortly after, companies like Johnson and Johnson were adapting 401k plans for their employees. This was called the Internal revenue Code (IRS) Sec. 401 (k). Many employers adopted the 401k plans simply because they were inexpensive.

The Evolution of the 401k

Originally, the traditional 401k plan only had two investing options: a conservative fund similar to a money market fund and a stock fund. That was it.  However, over the years the 401k plans seemed to have gotten more complicated. Many traditional 401k plans now offer more than 15 investment options 'depending on your style'. This becomes very confusing for an average employee who has no investment knowledge. In fact, it's confusing even for those that do have investment knowledge.

So, how does a 401k work and what types of 401k plans exist? That will be the topics of my following blogs. If you're interested in learning more about the history of 401k plans, or you just want to do a little bit more research yourself, please feel free to use the following resources:

The Surprising Origins of Your 401(k) - an article from Nasdaq.com

401(k) - Wikipedia

History of 401(k) Plans - an article from the Employee Benefit Research Institute (EBRI)

401k Fallout - a 60 Minutes segment

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How Much Money Do You Really Need To Retire?

"Don't simply retire from something; have something to retire to."
- Harry Emerson Fosdick

The picture are all the same. You and your spouse are older with white hair and a big smile. You are at a beach wearing white walking around with no problems. I'm not quite sure why you would be wearing white. Do people all of a sudden decide to wear white after they retire? Maybe that will be my next research project.

The pictures look really nice. All institutions that sell you 401ks or IRAs have a picture of this sort in the brochure or folder they give you. The crazy thing is that when we think of retirement, that's pretty much the first picture that comes to mind. However, there's a lot to consider when thinking about retirement. Most people automatically get a 401k from their job because they offer it, but there is no set plan or idea about what retirement really means. The most important element about retirement is knowing how much money you actually need to retire comfortably. 

According to US News Week, the federal government estimates that 12% of women and 7% of men over the age of 65 live in poverty. Why would this be? How could this happen? The research didn't necessarily say why, but according to the Transamerica Center for Retirement Studies, only 1 in 10 people have calculated how much money they need in the bank to comfortably retire. I want us to be that 10% so let's start making some calculations. 

Financial advisers recommend that after retirement you should be able to replace 80% of your income. This means during the year that you retire, if you make $65,000 annually, let's say when you're 65, then you will need  $52,000 a year for the rest of your years. This means that you will need some money coming from somewhere that equates to $52,000 a year or $4,333 a month. If you want enough money to last you for 20 years of retirement, then multiply that by 20 and you'll need roughly about $1 million dollars. I haven't even accounted for inflation which is about 3% a year. For those that might get a bit confused with my math, I found a great retirement calculator from CNN money. 

My goal is not to scare you at all. My goal is to have you face reality if you haven't yet made these calculations. My goal is also not to make you believe that it is impossible to retire with $1MM. The way I think about it is simple. I am currently 30 and have 35 years to figure out how to generate enough consistent cash flow to last me through retirement. It all starts now. We need to plan the seed now rather than later. We need to have our money working for us now if we really want to enjoy our later years without any financial worries. Whatever dreams ans aspirations you might have for retirement, I believe you can achieve them. The question is: do you believe you can achieve them?

Although I am definitely thinking and researching about retirement plans and options (which I will discuss in my next blogs), I would personally want to be on the beach with my loved one (with our black hair) living comfortably now. That's why I stress the importance of money management, cash flow, investments, budgeting and discipline. I personally love to work. The question I ask myself is more: what would I like to do for work when I'm 65? My goal is not to have to work for a paycheck, and that can start now. 

This way, my love and I can wear our white clothes now instead of later. Any thoughts? Share. 

Don't forget to share this blog so you can encourage others: family, co-workers, friends. Give them something to get motivated! You never know what they might be going through. A few words of encouragement can go a long way.

Still Trying To Figure Out What To Do With Your Money? Here Are Some Suggestions

"If you want to live a happy life, tie it to a goal. Not to people or things."
- Albert Einstein

I came up with a realization this weekend. As I have been sitting down with friends, family, clients and couples, I realized that I am actually not a financial adviser or a financial planner. As I reflected on all the sessions I had with people, I realized one important thing that I didn't realize before. I've been advising on money now for almost a year and this theory just clicked recently. This is my realization:

I'm not a financial adviser, I'm a life adviser. I'm not a financial planner, I'm a life planner.

As I reflect back on the sessions I had with people, I try to quantify the the type of conversations we have during our sessions. Most of our conversations are about goals, dreams or about the things we want out of life. The main reason I see people struggling with saving, debt and budgeting is because there is no clear vision to what they want in life. There is no plan. When there is no plan to follow, no goals to accomplish, the money just disappears. Before your money continues to disappear, I want to dedicate some time to hopefully help you discover what you want to do with your money. 

Everything we do in life has a price. Most of our goals and dreams have a price tag. However, most people don't take the time to calculate the actual price of their dream or goals and many people don't set plans or personal targets for themselves. I write with the hope that this can help you figure out a few things. 

Ask Yourself A Few Questions
Take two hours of your day, of your life to ponder about your life and your future. Grab a piece of paper, a notebook or a diary and a pen or pencil and start answering these questions:

• Where do I see myself next year? In 3 years? In 5 years? Where do I want to see myself?
• What have I accomplished these past 5 years? What do I want to accomplish in the next 5 years?
• What are my goals in life?
• If money wasn't an issue, what would I be doing with my time?

There is no right or wrong answer here. There are no limits to what you can dream or imagine. There is nothing that is impossible when doing this exercise. 

Do Some Research
When I ask people what they want to accomplish, I get a few typical answers: 'I want to open up a 401k to retire' or 'I want to get out of debt.' I definitely respect the goals of my clients, but my goal is to make them happy and to really think about what they want out of life. However, I personally think that there are other accomplishments to think about than just getting old and paying off bills and creditors. I take my time to educate and help people think things through. For example, I ask the question, 'do you know that a 401k really is and how it works'? Or 'do you know how much money you'll need to retire for 20 years?' What about 'Have you thought about how you could potentially retire younger and what it takes to make that happen?'

I propose that everyone goes online and just does some research. You can google pretty much anything. Here are some questions you might want to google:

• What's a 401k?
• What should I do when I'm 30?
• How to start a business
• How much is a farm?
• How to invest in Real Estate?
• Where should I travel?
• Where should I take my family?

You'd be surprised how attainable your goals might be after doing some research. I recommend you research about things you love, you wish to do, and things that matter to you the most. 

Set A Few Goals
Goal setting is key to life. I would personally prefer to be 70 years old and not retired but knowing that I accomplished 95% of all my life's goals and dreams than be 70 years old, retired and not knowing what the heck I did with my life. I set daily, weekly, monthly and yearly goals. We've all done this to some extent. We typically call these 'New Year's resolutions.' Here are some suggestions to get started:

• Choose a deadline that is realistic
• Make sure that your goal is measurable
• Hold yourself, or have someone hold you, accountable

If you want to learn more about goal setting, research this: SMART goals. Start with a goal for this week. Begin to gain discipline. Discipline is one of the key factors to accomplishing goals. 

Be Encouraged
Does this blog seem draining? Too bad. We can't expect to be encouraged every single second, or to have someone push us on every single time we encounter hardships. I suggest that you develop the discipline to be self-motivated. If you've never been the self-motivated type, then you should hang around very driven and motivated people. If you think it's impossible to travel to Europe because it's a lot of money, then talk to someone who will encourage you. If you hang around people that always tell you that you're doing things wrong or that you can't do something, then it's time to start hanging around a different crowd. Encouragement comes a long way.

Stay the course and believe. The biggest obstacle is yourself. If you can overcome your personal barriers, then you can accomplish anything. Any thoughts?

Don't forget to share this blog so you can encourage others: family, co-workers, friends. Give them something to get motivated! You never know what they might be going through. A few words of encouragement can go a long way.

Avoid These Mistakes When Trying To Pay Off Your Debt

"Debt is the worst poverty."
- Thomas Fuller

Today, I will complete our discussion about debt by suggesting to avoid certain mistakes when trying to pay it off. Before I give the actual list of suggestions, I ask you, once again, to look back at why you wouldn't even need to borrow money in the first place.

Most people borrow money for the wrong reasons. Did you borrow money to have enough cash to invest so that your money can grow and you can start generating passive income? Did you borrow money because you wanted to open up your business and you just needed start-up capital? Or did you borrow money because you wanted a nicer car? Did you borrow money to buy a new TV, get a fancy phone and live above your means?

My goal is to make you reflect on your decisions. Some people might be struggling to pay off the money they borrowed and are caught in a hamster wheel, just trying to make ends meet. Depending on your situation, I would advise you to avoid these four traps when trying to pay off debt. 

Don't use any payday loans
If you like to be caught in a trap, get a payday loan. Before I met with a few of my clients, I honestly never knew what a payday loan was. It's a very clever lender, however, if you're the lender's customer you will be trapped for some time. The payday loans give you quick cash but they charge you a fee to take out that cash and they have access to your bank account so they will take your money regardless. Most people who get payday loans think it will only be a 'one time' thing. They believe they will only take out a loan just once, pay it off and forget that it ever happened. However, most people will get caught trying to get more cash and it becomes an endless cycle. Most people don't have the discipline to only borrow once. If you don't have the discipline to borrow money, don't borrow money. 

Don't get caught up with 0% interest
People love free stuff. When people see '0% interest,' it's like they're getting something for free. People get excited knowing that they have a whole year to pay off a loan before it begins to accumulate interest. However, going back to my first suggestion, most people aren't that disciplined. If you take out a $5,000 loan and you're trying to pay that off in six months, before the interest kick in, you'll have to pay on average $833.33 a month to make that happen. Before you take out a loan of any kind, work out the numbers. Don't be afraid of doing some math on your own. Educate yourself before you get yourself in a whole.

Avoid getting loans to pay off other loans
Let's say you owe some money to a few credit card companies. You think the best solution is to take out another loan to pay off those credit cards. Your idea gets even better when you find out that you don't have to pay interest for the first 6 months on the loan you're planning on taking. This is a huge trap! Again, most people don't have much discipline and will continue to take out loan after loan to pay off other loans which they took to pay off other loans and this cycle won't stop for a very long time. At the same time, do the math. If you owed a total of $5,000 on those two credit cards, and now you're thinking of getting a $5,000 loan with no interest for six months to pay it off, guess what you're getting yourself into. A trap. 

Don't use all your tax return to pay off your debt
A few years ago I had a great idea: I'll use the money I receive from my state and federal tax returns to pay off my debt. So one year, I used that money immediately to pay off some debt. By the end of the year, I was living paycheck to paycheck trying to figure out where all my money is going. It was still going to paying off debt! So then, I got another genius idea: I'll use the money I receive from my state and federal tax returns to pay off my debt. This happened so frequently for a few years, that I no longer was living paycheck to paycheck. Instead, I was living refund check to refund check! (Read Before You Spend Your State Or Federal Refund Check, Read This!). Although it might seem like a good idea to use this money to pay off debt, it is not. Pay yourself first and read all my blogs so that you know which route is best for you. 

Most of what I recommend is really from experience and research that I had to do. In other ways, I had to learn the hard way. Some of you  might be learning the hard way right now. For those that aren't in any trap, follow my advice and don't try to learn anything the hard way. Good luck to all and enjoy your weekend. 

Don't forget to share this blog so you can encourage others: family, co-workers, friends. Give them something to get motivated! You never know what they might be going through. A few words of encouragement can go a long way.

When Is The Right Time To Pay Off Your Debt?

"Bad debt is sacrificing your future day needs for your present day desires."
- Suze Orman

Yesterday I gave a few reasons why paying off debt at once is the wrong way to go (Read Don't Pay Off Your Debt and Read This Instead). I figured the question would come up on when would it be the best time to pay off all debt and this will be the topic of today's discussion. 

Before I give my reply, I want you to take a look back on why you attained debt in the first place and ask yourself a few questions:

• Did you put yourself in debt because of necessity, or was it for pleasure?
• Was it worth it?
• How much in debt do you currently owe now?
• How much stress has it caused you?

These questions are important to ask because I'm sure you don't want to make the same mistake twice. These questions should apply to any kind of debt: your house mortgage, your student loan, your car loan, etc. The final question to ask yourself is: would you do it again?

As I meet with multiple clients a week, I find out a few interesting things. First of all, most people don't know what is the total amount of their debt. Secondly, the debt is not a small number, its typically tens of thousands of dollars. Finally, most (and in some cases all) of the money from someone's paycheck goes to pay off bills and debt with hardly any money to put in a savings account. So when is the best time to pay off the debt all at once? My simple answer is never, but the answer I'll give today is 'it depends.'

The only time where I believe it might be wise to pay off some debt is when you have negative cash flow on a consistent monthly basis. In many instances, the only solution some people see is to take a bigger loan to pay off the smaller loans. Debt is a complicated thing that requires an even more complex solution. In a blog last week, I gave some tips on how to change your negative cash flow to positive cash flow (Read How To Turn Your Cash Flow From Negative to Positive). The only complex solution I can give you consist of two words: sacrifice and discipline. 

If you are experiencing negative cash flow and it's mainly due to high amounts of debt, it's time to make some personal sacrifices. Sell your possessions. Sell your car, your big screen TV, your clothes, but start selling something so you can have cash in hand. Stop borrowing money and make money. Last year, I made $1,300 in 4 months just by selling my stuff on ebay. I sold DVDs, a broken guitar (yes, people will buy broken things online), mariachi attire that hasn't fit me since high school, and books that have just been collecting dust. I sacrificed my possessions. However, the hard part was the discipline. I took pictures of almost all things I had and tried to make them look nice. I was careful in my descriptions and tried to make the ebay pages look professional. I made sure that the items were shipped withing 48 hours. Was it a lot of work? Not really, it just seems like a lot of work when you list it out but my end result was there.

In conclusion, stop borrowing money and make money instead. Any thoughts?

Don't forget to share this blog so you can encourage others: family, co-workers, friends. Give them something to get motivated! You never know what they might be going through. A few words of encouragement can go a long way.

Don't Pay Off Your Debt and Read This Instead

"I invested all my money in debt."
- Hamish Linklater

I recently had a conversation with a relative of mine and was sharing information in regards to my student loan. It turns out that I finally owe less than $2,000 in my student loan and in a few years I will no longer have that loan under my name. 

"If I only owed $2,000 on my student loan," my relative said to me,"I would pay it all off right now and get it over with." Most people would probably say the same to me. The 'peace of mind' that comes after paying off your car loan or your student loan is priceless, right? Well, it's actually not priceless, it cost you the amount of the loan plus interest. 

There's a few reasons why I won't be paying off my student loan this upcoming month. I do have $2,000 in one of my accounts, but that money won't be going anywhere near the Department of Education. Here are my reasons:

My focus is positive cash flow

Throughout my blogs, the theme on positive cash flow is evident (Read Why How Much Money You Make Doesn't Matter). My goal is to pay myself first and then pay 'the man.' For the last few years I have cut down on my expenses and focused on maintaining a positive cash flow every month. I was able to achieve that without having to pay off all of my loans. I currently now pay $78 a month for my student loan. If I pay off the $2,000 of my hard-earned money to the US Department of Education so that I won't have to worry about my loan again, I only increase my monthly cash flow by $78. In my eyes, that's not where I want my money to go. I'd rather put that money to work so that my cash flow increases a lot more with my $2,000 investment. 

If I have $2,000, why would I give it to someone else?

There's a few things that are coming up in my life. One of them has to do with a few investments I have and the other 'thing' is a trip I'm planning. I have three options: Option 1 - add $2,000 to my current investments; Option 2 - use the $2,000 for the trip I'm planning in the fall; Option 3 - pay 'the man.' 

If I pay off my student loan, I will have $2,000 less in my hands. I already have a positive monthly cash flow, so a $78 increase might be nice, but it's not something I have my heart set on. I'd rather pay myself and choose one of the first two options. I don't mind paying $78 for a few more years. I do mind, however, giving $2,000 off-the-bat with very little return.

So when should you pay off your debt entirely? That will be our next discussion.

Don't forget to share this blog so you can encourage others: family, co-workers, friends. Give them something to get motivated! You never know what they might be going through. A few words of encouragement can go a long way.

Keep The End In Mind: Remember Your Dreams

"Begin with the end in mind."
- Stephen Covey (author of The Seven Habits of Highly Effective People)

When I was a little kid, I used to love science. I use to look up at the sky and stare at the stars and the moon for hours. I owned a toy telescope and imagined that one day I would be an astronomer and would discover a meteor that I would name "Allen." By the time I got to college, I hated science. During my years at UC Riverside, I tried to avoid any science classes. My interests seemed to change as I got older.

One of my earliest blogs (Read What Do You Want To Be When You Grow Up?) discussed the difficulty many adults still have when deciding what they want to do in the near (or not so near) future. During the first financial planning session I have with my clients, I typically ask my clients what are their goals and many of them have difficulty answering me. During my upcoming blogs, I will continue to write about money, but will elaborate more on cash flow, retirement plans and investments. However, before I continue with the 'money discussion,' I want to make sure that we back up a little and think about our goals, our dreams.

A picture is worth a thousand words

"The first thing I want you to do," I ask my client (who we will call), William, during our first financial planning session, "is draw a picture of what your future will look like." I then give William a box of crayons and leave him alone for a few minutes. Williams gives me a look of disbelief, but moves forward with the assignment as soon as he realizes that I wasn't kidding. 

I recommend that everyone who read my blogs does the same assignment. Hang it on your fridge if you want to, but draw out what you envision your future looking like. If you have a spouse, I recommend that you and your spouse do this assignment separately, and then come together to discuss your picture. You will be surprised how the conversation about your future just 'never came up'. I see this all the time when I meet with couples.

What would you do with your time if money wasn't an issue?

Most people think their dreams are silly. After drawing their picture and explaining to me what they drew, they'll follow up with comments like "but this was just an assignment," or "these are just dreams, you said I can draw anything." Most people think their dreams are an impossible thing. They give up on their dream before they even begin dreaming. I say, keep dreaming and imagine money wasn't an issue. Strive to keep dreaming and don't forget that dream. You can overcome the 'money' obstacle if you really try, but you must believe that your dream is a possibility. As soon as you believe that your dream is a possibility, 'money' will no longer be an obstacle. 

Write down your goals

Many people keep their personal goals in their head and a few might share them with someone here and there. Write down your personal goals and I will guarantee that they will align with your financial goals. Most of the goals people write down have a dollar sign attach to it (i.e. traveling, buying a home, etc.). After you write down your goals, put a deadline on it. Napoleon Hill once said, "A goal is a dream with a deadline." Writing your goals will help you remember what your shooting for. 

There will be people that will help you along the way. There will be challenges you will face. There will be times when you feel you'll never get to the end result. Just keep believing in yourself, in your ability to make your dreams happen. Your ability to make your dreams come true are strongly tied to your will to make things happen and the will to believe in yourself.

Share your thoughts and good luck accomplishing your dreams. 

Don't forget to share this blog so you can encourage others: family, co-workers, friends. Give them something to get motivated! You never know what they might be going through. A few words of encouragement can go a long way.