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| To Buy or Not To Buy | |
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It was December 2003, and Judith Levine was fighting her way through the Christmas rush on the slushy streets of New York City. During the previous two weeks or so, she had spent about $1,000 on presents, maxed out her credit cards and was, as she describes it, "tapping the ATM like an Iraqi guerrilla pulling crude from the pipeline." After one of her sodden shopping bags split open, spilling gifts and tree ornaments onto the sidewalk, she realized she had had enough. Together with her partner, Paul, she decided to buy nothing in 2004 except the bare necessities-food, medicine, utilities and whatever the couple needed to keep their businesses going, mainly Internet access and computer supplies. Levine chronicles her experience in Not Buying It: My Year Without Shopping, an entertaining account of how one woman gave new meaning to the phrase 'living within your means.' Despite the title of her book, Levine is not an anti-consumerism activist. In fact, she's quite attached to the pleasures of purchasing. When she loses her beloved SmartWool socks in February, she agonizes over whether forking out $15 for a replacement pair will break her vow of parsimony. Her year of spending frugally is not so much an exercise in self-deprivation as an experiment in self-discovery. "One of the most personal effects has been that I've ceased to be an impulsive buyer," Levine says now. "No more buying lattes just because I'm bored. That's a big change, and very good for the pocketbook." Levine's book, written in the form of a diary, offers some timely insights on the psychology of spending-even if you don't plan to go cold turkey on shopping this holiday season. As part of her discretionary spending diet, Levine stopped doing things like dining out, renting DVDs, going to the movies and buying processed foods (except for bread). She tried to stick rigorously to the essentials, a somewhat elastic concept that for her included fresh ground roast coffee. The list of prohibitions presented her with some potentially awkward social situations as well as a few practical challenges. What, for example, do you do when you have to decline a friend's invitation to a restaurant? Try going for a walk, instead. And what do you give as a birthday or graduation present when you're not allowed to shop? Homemade cookies and handmade silk roses are not bad alternatives. The dilemmas Levine describes in her book are familiar. We all engage in similar negotiations with ourselves every day as we try to separate what we really need from what we simply want. Do I go out to dinner tonight or do I use that money to pay down the balance on my credit card? If I do go out to dinner, do I order that bottle of expensive wine or go for something less pricey? Or should I never go out to dinner again and just funnel all that money into my 401(k)? "Financial pressure can make people feel like there's no hope," Levine says. "Not buying anything is a way of calming down. It made me feel much more in control of my financial life. I realized I could live on less than I thought I could." Indeed, the economic effects of not shopping were dramatic. Levine took a look at her debits and credits in December 2004, a year after she started her experiment. On an income of roughly $45,000, she managed to spend $8,000 less in 2004 than in 2003-and she paid off her credit card balance of $7,956.21. Not all the experiment's effects were pleasant, though. Almost two years after the project finished, Levine says she feels more anxious about making major purchases. She recently bought an expensive Afghan rug for her renovated home, but deliberated long and hard before going ahead with it. Having gone for a year without such extravagances, she wondered: "Can't I just sit on the bare floorboards, instead?" The fact is, she could have just sat on the floorboards-but she didn't want to. And that is one of the lingering questions posed by Levine's alternative lifestyle: When is it OK to buy something? "I am more conscious of the moral dimension of buying things," she says. "How can we enjoy capitalism without killing the Earth in the process? Ideally, we should be able to deal with both impulses: the desire to have beautiful things and the desire to not contribute to global warming." At one point in the book, Levine set out to measure the environmental effects of her buying habits by going to the Web site of Redefining Progress, an organization that works to promote sustainability. Redefining Progress came up with the concept of the "ecological footprint," a measurement (in acres) of an individual's consumption patterns on the Earth's resources. According to Redefining Progress, the average American uses 24 acres of the planet's resources to fuel his or her consumption. In the midst of her non-shopping experiment, Levine and her partner used just 12 acres. But to achieve sustainability, Redefining Progress calculates that each person should use no more than 4.5 acres. (If you want to measure your own footprint, take the Ecological Footprint Quiz.) To tread more lightly on the planet, Levine believes people need to act as citizens as well as consumers. And as for shopping, her advice to anyone contemplating a consumption-lite lifestyle is simple: "Try to get more pleasure from the stuff you buy rather than buying more stuff to get more pleasure." |
| Reasons To Be Cheerful | |
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Even the best economists can sometimes find it hard to count their blessings. It should come as no surprise then that the average consumer occasionally misses the good financial news amid all the headlines about housing market troubles, high gas prices, failing pension schemes and the rickety Social Security system. There's plenty of good news out there, though, if you know where to look. Take America's negative personal savings rate, the tendency of consumers as a whole to spend more than they earn. Turns out that things may not be as negative as they seem. In August, the U.S. Department of Commerce estimated that the country's personal savings rate was -0.5%; in other words, Americans are in the red. But that figure includes expenditures-like money spent on education-that could also be classified as investment, which will have a financial pay off in the future. Adjusted for considerations like this, the personal savings rate doesn't appear quite so dire (though it's still a good idea to save more!). So if you're looking for a few more reasons to be grateful this Thanksgiving, here are a few suggestions. The Roth 401(k) A Roth 401(k) might appeal to younger workers just starting out on their careers. Young people are far more likely to be in a lower tax bracket than older employees. If that's the case, it's better to pay the lower tax rate now rather than the higher one young people are likely to be in by the time they retire. Conversely, if you are currently in a high tax bracket and expect to be in a lower one in retirement, you might be better off sticking with a conventional 401(k). But even high-earning individuals could benefit from a Roth 401(k) since the plan has no income restrictions on eligibility. Roth 401(k) accounts are subject to the same contribution limits as regular 401(k)s: $15,000 for 2006 and $20,000 for those 50 or older by the end of the year. These limits apply to both plans collectively, though, so annual contributions to both accounts together cannot exceed the $15,000 and $20,000 ceilings. Employers' matching contributions are still made with pre-tax dollars, and are placed in a separate account that will be taxed at withdrawal. Anyone can qualify for a Roth 401(k)-as long as your employer offers it. If your employer doesn't offer this option and you would like them to, make sure you let them know. The Internal Revenue Service has a list of Frequently Asked Questions about Roth 401(k)s on its Web site, while the SmartMoney.com Web site has a Roth 401(k) Estimator to help you decide whether this might be the right option for you. The Pension Protection Act of 2006 One of the benefits of the PPA is that it encourages companies to automatically enroll employees in defined contribution plans, such as 401(k)s and 403(b)s. In the past, most workers eligible for these types of plans had to opt into them and then make a series of investment decisions. Only around 65% of employees actually did so. The PPA includes provisions that make it simpler for employers to set up plans that offer automatic enrollment and default investment options. Individuals can still decline to take part by simply opting out. Some pension experts estimate that participation in defined contribution plans could exceed 90% thanks to automatic enrollment. The more employees that take part in such schemes, the more secure they'll be in retirement. The PPA also encourages employers to provide financial advisors to employees involved in company-sponsored defined contribution plans. As responsibility for retirement increasingly falls on individual workers, the need for sound financial advice becomes ever more acute. Many people need help in making the investment decisions required by such plans, so the PPA allows employers to provide access to qualified and unbiased financial advisers. Let your employer know you're interested in such a service if it's not already available at your workplace. If you want more information about retirement planning, the CFP Board Web site has some useful resources on savings options: Take Advantage of Retirement Savings Opportunities from Your Employer offers tips on how best to capitalize on employer-sponsored defined contribution plans and Plan Now for A Comfortable Retirement lists valuable guidelines for preparing for retirement. The Retirement Planning section of MyMoney.gov, the U.S. government's financial education Web site, also has useful tips on retirement. Starting in 2007, the PPA permits non-spouse beneficiaries (such as children, grandchildren or even trusts) to make tax-free transfers of inherited 401(k) or IRA funds into their own 401(k) or IRA accounts. Inherited funds are normally subject to immediate tax. But this PPA provision allows non-spouse beneficiaries to defer taxes on inherited 401(k)s or IRAs until the money is withdrawn. The PPA also gives individuals 70.5 years of age or older the opportunity to donate IRA funds (up to a maximum of $100,000) to charity without having the withdrawal subject to tax. Unlike the non-spouse beneficiary provision, however, this one expires at the end of 2007. To take advantage of these tax breaks, though, funds must go directly from the plan-holder's account into a 401(k) or IRA set up in the name of the non-spouse beneficiary or charity. If the money is distributed in any other way, it becomes immediately taxable. So be sure to consult a financial advisor if you want to explore these options. If you're due a tax refund from Uncle Sam, the PPA enables you to deposit that money directly into an IRA. Beginning next year, tax forms will include an option to instruct the IRS to direct all or part of any refund to your IRA, a convenient way to automatically make an annual contribution. Finally, the PPA makes permanent the increases in basic IRA contribution rates that were set to expire in 2010. The annual limits are now fixed at up to $4,000 for IRAs and $15,000 for 401(k), 403(b) and 457 plans, with the potential for adjustments for inflation beginning in 2008. For individuals aged 50 years or older, the limit for "catch-up" contributions-additional savings opportunities for those nearing retirement-is $1,000 for IRAs and $5,000 for 401(k) and 403(b) plans, with the possibility of future adjustments for inflation on the contribution limit for 401(k) and 403(b) plans. Free Annual Credit Reports To order your free report, visit the Annual Credit Report.com Web site or call toll-free 877-322-8228. There is also an Annual Credit Report Request Form on the Web site of the Federal Trade Commission (FTC), the government organization that works to prevent fraudulent, deceptive and unfair business practices. The FTC can be reached toll-free at 1-877-382-4357. Also, the FTC publication Your Access to Free Credit Reports is available online. If you believe your credit report contains inaccurate or incomplete information, consult the publication How to Dispute Credit Report Errors on the FTC Web site.
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| Planning Your First Visit with a Financial Planner | |
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New experiences - no matter how rewarding they may turn out to be - can be intimidating. Meeting for the first time with a professional from whom you're seeking assistance can be one of those situations. When you've made the decision to seek professional help with your finances and have taken action to find a financial planner, there are steps you can take to make your first meeting both a pleasant and productive one. A first meeting with a financial planner will likely begin with a discussion of the services offered and the type of business engagement you wish to enter. Much of this will be information about the financial planner and his or her business. There will be paperwork describing the financial planner's business, including any potential conflicts of interest, explaining the costs of different services, and outlining how those costs are paid. If you don't understand certain terms or concepts, be sure to ask. Your questions will not only increase your understanding of financial topics, but help your financial planner learn about your experiences and the way you think. After you've reached agreement on the scope of the services your financial planner will provide for you, the meeting's focus will turn to you and your finances. Many financial planners send their clients a list of financial documents and information that should be collected beforehand and brought to the initial meeting, while others use the first meeting to get more general information and to explain the types of information the planner will require before providing you with any recommendations. If you haven't been given a list of documents and information to bring to your first meeting, you may want to take time to write down the basic details of your financial life and collect some financial documents so you have the specifics of your financial life ready to share with your financial planner. CFP Board's Web site provides a free Personal Data Organizer to assist you in putting important financial information in an easy-to-use format as well as a Document Checklist of important financial documents that you may want to bring to your first meeting. When you've provided your financial planner with the numbers that describe your financial situation, the primary focus of conversation will become you - your life goals, financial experiences and approach to money. It's important to provide your financial planner with accurate and detailed information so that she or he can develop a financial plan suited for you. This type of information doesn't necessarily fit well on a spreadsheet. Your financial planner may also have her or his own set of questions to get to know you better. But you can nevertheless take time to prepare for your initial meeting by thinking in more detail about your goals, assembling an accurate record of your significant financial experiences, and thinking of situations that demonstrate your typical approach to money. Clarify your goals before your meeting with your financial planner. What do you want to accomplish in your life that will require money? When you've outlined your basic goals, press on and describe them in more specific detail. For example, many parents have the goal of sending their kids to college, but there's a lot of variation possible within that goal. Some parents envision Harvard; some see the local state college. Some want to pay for a full ride, some want resources to pay tuition and books only, and some want to pay only a set percentage of the tuition. All of these parents have the same generous goal, but the details of the goal reflect different ways of thinking about money that may be important for your financial planner to consider when developing a strategy for you. Think back on your financial experiences. What types of investments have you made in the past? Have you been involved in investments that went sour? How did you react when you found out there was a possibility of losing money? What financial challenges have you taken on and overcome? Sharing with your financial planner your past financial experiences, both good and bad, can provide your planner with an indication of your risk tolerance more accurate than the results of a short questionnaire. How can you describe your approach to money? Do you need to have your finances organized before you can think of other things in your life, or do you think of money only when there's a problem? Does thinking of money make you anxious, or are you generally satisfied with the place money has in your life? What money issues have you argued over with family members? Think of an amusing story from your life where your money values shone through loud and clear, and be willing to share it with your financial planner. Your financial planner is ready to get to know you and provide advice that will keep you on track toward your financial goals. Knowing yourself and being able to communicate the values and idiosyncrasies that make you the person you are will help you develop a productive relationship with your financial planner.
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| Recent Financial Alerts | |
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NASD recently issued an investor alert about unsolicited e-mails many are receiving. These e-mails appear to be a personal e-mail sent to your address in error, but they quickly move from chit-chat to a description of what may be a hot stock pick. NASD warns that these e-mails are likely to be part of "pump and dump" scams, which involve the recommending a company's stock through false and misleading statements (the pump) in the hopes of creating demand for the stock. If the stock price soars, the scammers then sell off their shares (the dump), which causes the stock's price to drop and can leave investors with worthless, or near worthless, stock. NASD provides tips to help you avoid being scammed. Another investor alert was recently issued by the North American Securities Administrators Association (NASAA) regarding recent "hack attacks" in which criminals broke into online trading accounts and made unauthorized trades worth millions of dollars. NASAA provides tips to help you protect yourself online.
Read more about these and other financial alerts. |
| About This eNewsletter | |
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