114. Should I cash out my 401k to pay debt?

I read recently “Should I cash out my 401k to pay debt?”

The answer is: No! Don’t cash out your 401k!

According to a recent article in February 2014 with data compiled by Fidelity one in three 401k participants have cashed out of his or her plan, often when changing jobs.

Cashing out a 401k is an easy way to generate a short-term cash need. But it’s a bad idea.

If you invest $5,500 that investment in an IRA could grow to over $58,000 in a period of 35 years.

If you do cash it out typically your plan administrator will withhold 20% of the balance and sends it to the IRS to core the taxes you'd pay in a withdrawal. 

On top of that investors younger than 59 1/2 who cash out may face an additional 10% early withdrawal penalty. 

So in essence you'd pay a 30% "stupid tax" as Dave Ramsey calls it.

What you CAN do is apply for hardship withdrawal with the IRS from your 401k, 403b, or 457b but that can be tricky. You'd still have to pay income taxes and likely an additional 10% penalty.

When switching jobs instead of cashing out your 401k consider rolling it over into a Traditional IRA, Roth IRA, or stick with another 401k.

My personal 401k which I rolled over in my previous job has more than tripled in value in the last 3-4 years.

Have you considered cashing out your 401k? When switching jobs did you rollover to another 401k? Or did you rollover into a Traditional or Roth IRA?

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113. What is some good career advice you'd give yourself years ago?

What is some good career advice you’d like to have told yourself 5, 10, 20, 30 or more years ago?

Based on my experience these are some of the things I’d tell myself from what I’ve learned, read, or heard over the years. I’m still learning so this list is not exhaustive. 

Hopefully, if you are just starting out in your career or know someone who is these will be beneficial guidelines for you.

1. More in less out. Spend less than you make! Let your income determine your lifestyle instead of the other way around. Carefully consider your options before spending pay increases, bonuses, or taking on debt as your income level increases. Yes, I’m talking about buying a brand new car, boat, motorcycle, condo, or house.

2. Pay yourself first. Ensure that you are saving for emergencies, retirement, and purchases in every paycheck. A strong cash position is a good way to avoid using credit cards when Murphy comes knocking as the car breaks down, the roof needs to be repaired, and the refrigerator needs to be replaced.

3. Network and build lasting relationships. You’ve heard the phrase “It’s not what you know but who you know”?

4. Help people. Be a team player. Be reliable. Become an expert in your field. Be the person people turn to when they have questions.

5. Expect to and allow yourself to fail. Failure is natural a part of life. You cannot be perfect. Failure is an opportunity to learn. Failure is not unusual. When you fail it will be because you were brave enough to take a risk. Don't allow fear to rule your life. Pick yourself up, dust yourself off, and face the next challenge! 

6. Check your attitude. We cannot control many times what happens to us. However, we CAN control how we react to things. Try to have a good attitude. Your attitude toward your job will often lead to greater opportunities or ruin your chances of career advancement.

7. Put your best foot forward. Make it your goal to be the best at what you do. Give it 100% of your effort. Hold nothing back.

8. Understand your motivation. The job that has the best pay isn’t always the best choice. Consider the work environment, your direct supervisor, and other benefits when evaluating career moves.

9. Prioritize personal grooming. People make snap decisions based on appearance. Make looking nice and presentable a priority. I originally was going to say this to guys primarily but in the last few weeks I guess I'd encourage girls in the same manner. Avoid tattoos that can’t be covered with everyday clothing. Do not get tattoos on your face.

10. Keep your personal life private at work. Keep others’ lives private. Don’t be the company or office gossip. Don’t be the company or office drama king/queen. Follow the old saying: “If you can’t say something nice don’t say anything at all.”

11. Do the little things: Come to work with a smile. Be on time every day. Stay extra if needed. Don’t complain.

12. If you work in any medical field avoid strong perfumes or smoking. Perfumes could aggravate patients further. Smoking as a health care worker is a huge turnover to any advice you might give patients.

13. Be honest. Never fudge even on a penny. Learn from your mistakes. Avoid making the same mistakes. Own up to your mistakes as soon as possible. 

14. Protect your immediate supervisor. Keep them in the know on your projects. Particularly, projects that are very hot. One of the worst things that a supervisor has to say is “I don’t know” to his or her superior.

15. Never stop learning. Economies, technology, cultures, laws, and people change constantly. Learn either through on-going education through self-study or educational institutions.

16. Not everyone gets to do what they love for a living. Work is not always enjoyable. You may take some jobs along your career path just to pay the bills. If at all possible try to find jobs that fit with your skill set and personality. Work can be fulfilling but don't make it the only thing that fulfills you. 

17. Don’t burn bridges. While having it out with a co-worker may feel good in the moment keep in mind you may be working with said person for a very long time. You may even end up working for said person. Consider instead seeking clarification and talking face-to-face with the person. A lot of communication is done through body language and tone.

18. Be humble. From my own experience I know the tendency is to approach life with a “everyone else is dumb” mentality. Remember if you’re a recent graduate, a new employee, and young that people have likely done this job longer than you. Try to see people as assets to the company instead of determining their worth by your perception of their worth. Age and experience can be very valuable assets in the workplace.

19. Be generous. When you can help someone out give to them no strings attached. You can't take anything with you anyway. Give to the poor and needy. Make every day count.  

20. Prioritize faith & family over work. This is a tough one. No matter how much success you have at the company or office your faith is priceless. Don’t neglect it. Prioritize it. Family should also come before work advancement. Remember your spouse and your wife are changing as well. Don’t miss out on their lives because of a promotion, hobby, or increase in pay. 

What have you learned? What do you think? Leave a comment!

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112. What Caused the Housing Market Burst of 2008?

Recently, I read the claim was made that the housing market bubble burst was the fault of big, greedy banking corporations. While banking corporations are partially at fault the issue is a lot more involved than simply blaming one party in this mess.

Let me say this is a very complex issue and this may be an over simplification of what occurred. I did some reading recently and this is a very rough look at the Housing Market Burst of 2008.

Before 2008 there was a trend for housing price increases. From 1997 to 2006 the typical American household increased by 124% according to Newsweek.

This kind of increase was not sustainable. Before 2008 consumers were saving less, borrowing more, and spending more. Easy credit, lax government regulations, the belief that houses would continue to appreciate all contributed to consumers getting mortgages they couldn’t afford with ARM (adjustable rate mortgages) loans.

Further aggravating this issue was during 2008 the typical U.S. household had 13 credit cards with 40% of those carrying a balance (paying interest). This was up from 6% carrying a balance in 1970 according to Newsweek.

The ratio of median household price to median household income was between 2.9 and 3.1 from 1980 to 2001. It rose to 4.0 in in 2004 and then to 4.6 in 2006. Meaning people were buying houses 4 to 4.6 times or more their household income according to Newsweek.  (See: http://www.newsweek.com/id/163449)

The housing market burst in 2008 can be blamed to some extent or another on financial institutions, regulators, credit agencies, government housing policies, predatory lenders, builders, and consumers. A big issue was many lenders pushed for ARM (adjustable rate mortgages) loans and subsequently consumers that were dying to live the “American dream” of home ownership signed the dotted line. U.S. households had become significantly indebted in the 2000’s. According to the Economist the ratio of disposable personal income rose from 77% in 1990 to 127% in 2007. (See: http://www.economist.com/node/12637090 )

Because home values started plummeting U.S. homeowners had a harder time refinancing their ARM loans. Securities backed with mortgages, including subprime ARM loans, held by global firms lost their value overnight. This meant the U.S. economy now had less global investors providing the easy credit sub-prime mortgage holders primarily with ARM loans desperately needed. It was a trickle down effect as more people were forced to default on their homes lenders kept increasing the interest rates to reduce their organizations risk. Home values dropped on average 30%. The U.S. stock market lost 50% of it’s value by 2009. This affected global markets in Europe, Asia, S. America, etc. as well. The effect on Europe for example was job losses and severe banking challenges as well.

Between June 2007 and November 2008 Americans lost more than a quarter of their net worth. The S&P 500 was down 45% in November 2008 from it’s 2007 high. The U.S. entered a deep recession with the loss of nearly 9 million jobs during 2008 and 2009 which reflected a 6% loss in the workforce.

The housing market burst could very well have affected me. As a part-time graduate student working retail for about $11 an hour I was approached multiple times by what I would consider predatory lenders between 2005 and 2008. The pitch I was given was I could qualify for a house mortgage, let the house appreciate, and then refinance the house a few years down the road with the equity I’d “earned”. Thankfully, I didn’t fall for it. No way I should have qualified for a loan or even been approached for a loan with my income level. Somebody made big money convincing people to apply for and obtain mortgages they couldn’t afford. There seems to also have been on average a lot of exaggeration on the part of both consumers and predatory lenders as to the applicant's yearly household income.

“Predatory lending describes unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. Lenders made loans that they knew borrows could not afford and that could cause massive losses to investors in mortgage securities.” (See: http://www.gpo.gov/fdsys/pkg/GPO-FCIC/content-detail.html

Hopefully we’ve learned from our mistakes. Yet, clearly by the information above it should be clear it  was not the fault of simply big business.

What do you think of the Housing Market Burst of 2008? Has enough been done to prevent such a catastrophe in the future? How did the burst affect you? Leave a comment!

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111. Eight Books on Personal Finance and Investing

Check out these books for free from your local library. If unavailable get them at www.half.com or Half Priced Books:

1. “The Total Money Makeover” (2003) by Dave Ramsey

Dave Ramsey is a personal finance g. Ramsey dispels many money myths. He also attacks many of the illusions and deception of the American dream which encourages massive amounts of debt and overspending. Dave says “Don’t even consider keeping up with the Joneses. They’re broke!” The book’s motto is “If you will live like no one else, later you can live like no one else.” At the core of Dave’s book are the 7 baby steps to financial freedom. Dave’s assertion is that by following these 7 steps in order readers can gradually progress from debt to wealth building. Critics claim Dave’s advice are simplistic. But the 7 baby steps work because they are simple and because people can get tangible results. Of interest you can also listen to the book for free on Youtube here.

2. "Investing for Dummies" (fourth edition 2014) by Eric Tyson 

The title isn’t too promising I know. But honestly Investing for Dummies is a great little book for beginners. I would skim through this one just to get a feel for the different categories and definitions. At least that's what I've done. I’d then move onto Malkiel’s book. Unfortunately, I couldn’t find a free pdf of this book.

3. "A Random Walk Down Wall Street" (2012) by Burton Malkiel 

Simply put, Malkiel takes some very complicated information and makes it so anyone can read and even more importantly understand it. Malkiel holds to a buy and hold approach to investing. A long-term approach to investing focused on passively managed index funds is the way to go. A great book for beginners. 

4. “The Richest Man in Babylon” (1926) by George S. Clason

This book is a classic. It is also a very quick, enjoyable read. Of interest it was originally a series of pamphlets distributed by banks and insurance companies. The Richest Man in Babylon gives an insight into the mindset of being a successful investor. The lessons presented are timeless regardless if you are just learning about finances and investing or if you are a seasoned veteran. The book quickly reveals that wealth building is not a secret. The same way people were accumulating wealth in ancient times is the same way people get rich today.  

5. "Rich Dad, Poor Dad" (2000) by Robert Kiyosaki

This book is great for absolute beginners. It is very inspiring and motivating. Kiyosaki challenges the reader to shift the way he or she looks at money. Rich Dad, Poor Dad gives you the “why” of investing and gets the reader on the path to the right mindset of becoming wealthy. Not sure I agree with using other people’s money to invest to make more money but most of what he writes is on target and there are some great quotes throughout this book. 

6. “The Essays of Warren Buffet” (3^rd edition 2013) by Warren E. Buffet & Lawrence A. Cunnigham

If you know much about Warren Buffet or follow his annual shareholder letters you know this will be good advice. Cunningham takes Buffet’s writtings and collated it by topic so it’s easier to follow.

If you’re interested in what Buffet as an investor looks for in a company this is the book for you. If you are into active trading this book might not be for you. Buffet has stated on numerous occasions that his holding period is “forever”. Again this is a long-term approach to investments. 

7. "The Intelligent Investor" (1949) Benjamin Graham

While this book was first published in 1949 the lessons in it are timeless. One of the key focuses of this book is Graham’s direction minimize losses and find the real value of a given company. In essence Graham argues to limit risk by long-term investing. Of interest Graham was Warren Buffet’s mentor. 

8. "Think and Grow Rich" (1937) by Napoleon Hill     

This book is unique in that it was written by Hill during the Great Depression. Since then Hill has sold more than 30 million copies all over the world. Hill was very interested in the lives of his wealthy friends during his life time. Hill published this book at the suggestion of industrialist Andrew Carnegie.  Hill published the 13 principles for success and personal achievement from his observations which included: 1. Desire, 2. Faith, 3. Autosuggestion, 4. Specialized knowledge, 5. Imagination, 6. Organized Planning, 7. Decision, 8. Persistence, 9. Power of the Master Mind, 10. The Mystery of Sex Transmutation, 11. The Subconscious Mind, 12. The Brain, and 13. The Sixth Sense. Some might call it a lot of psychological mambo jambo. Take what you can from it I guess. 

Bonus! Check out "The Millionaire Next Door" review here.

What books have influenced you in personal finance and investing?

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