CD Rate Roundup for March. (video)

Senior financial analyst with Bankrate.com Greg McBride shares the current state of certificate of deposit rates and the best moves going forward.

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Since interest rates are still near an all-time low, yields on most CD’s are pathetic. Couple that with the specter of rising inflation and it’s a tough road for CD investors and anyone living on a fixed income. It’s not surprising then that Mr. McBride recommends finding the highest yielding CDs.

The problem is that even the highest yielding CDs are unlikely to keep pace with a rapid spike in inflation. Still, if you’re looking for the safety and security of CDs, stick to the shortest terms so you can be ready to renew at higher rates when interest rates begin to rise.

Related Posts:

• How to Survive (and Possibly Thrive during) Stagflation.
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• Inflation Winners And Losers.

Don’t Sabotage Your Retirement (Like Kris)!

Yahoo! contributor Kris Calhoun recently wrote an article for their “First Person” column titled: First Person: How I’m Sabotaging My Retirement wherein he chronicles some of the money mistakes that have cost him the most.

I for one congratulate Kris for his honesty and willingness to examine and learn from his mistakes. After all, if we can’t learn from our mistakes then we are not only doomed to repeat them but no good will possibly come from them either.

It’s a cliche that we need to learn from our mistakes, but I’ve often thought that we should learn from other people’s mistakes as well.

And so I’d like to offer my thanks to Kris for sharing some of his mistakes, so that we may all learn from them.

Know who you are

Kris states that one of his biggest financial mistakes was buying a house:

“The home I purchased in 2008 is probably the worst thing I could have done to hurt my financial future…. At the time, my wife and I thought we were doing things the right way. We put a nearly 45% down payment on the home, took out a 5.35% fixed rate, 15-year mortgage, and made extra payments along the way.”

So far so good, right? I mean many people who bought homes in the last five years in particular are struggling, due to declining values, evaporating equity and job instability. But those don’t seem to be a factor for Kris.

He states how he did everything right, financially speaking – hefty down payment, low interest fixed-rate 15-year mortgage. These are exactly the things you should do to mitigate the effects of the housing crisis. In fact, I’d say Kris was ahead of the game since most people can’t afford to do these things, yet he did.

The real mistake Kris made was in not knowing himself and his spouse:

“we really don’t like the area we chose and have found that home ownership just isn’t for us (I worry about things constantly and am afraid to go on vacation anymore for fear that something will happen to the house)… I’m kicking myself for ever allowing myself to be talked into home ownership (I’ve always been more of an apartment kind of guy)”

So his mistake is really costing him more of his mental health and happiness, which in turn causes financial problems when he can’t recoup his costs when selling his house.

The lesson here is to know whether you’re inclined to be a homeowner before you become one. Home ownership is not something to be taken lightly or dabbled in – it’s a serious commitment of time and money.

Weigh the pros and cons of job hopping

The next mistake Kris shares with his readers is his career change from hotel management to freelance writing.

There are some obvious hits to your financial bottom line here:

• reduced income (at least short term)
• reduced consistency of income
• reduced (or non-existent) benefits like:
  • retirement savings plan
  • health insurance

When you freelance, you are responsible for all the stuff your employer used to take care of. You’re on the hook for paying for heath care and contributing 100% to your retirement plan – all on a lower salary!

Kris may eventually earn more as a freelance writing, but it’s going to be a lot tougher than hotel management.

For the record, Kris made the switch to spend time with his newborn son. It’s a goal I can admire, since my wife made a similar choice 8 years ago and we’ve been living on a single income ever since. But these kinds of career moves take a lot of planning to make them work…

Risk avoidance investing

Perhaps because of his move to freelance work, Kris admits his investing style is much too conservative. This is a good thing, when you need the funds relatively soon. But for a retirement that’s decades away, low risk, low return investing choices are more detrimental.

He says his holdings are primarily in low-risk, income style assets. There are easy ways to get higher returns with little to no effort, and still remain diversified so sticking to fixed income with retirement 30 years away is a needless mistake, in my opinion.

No room for error

Lastly, kris admits to something I think a lot of people can relate to: Things are OK at the moment, but that’s mainly because expenses have been relatively low.

In other words, when prices start to rise and inflation really takes hold then things are going to get really bad. Without steady increases in income and with the cost of living rising daily, your standard of living will decline and at some point saving for retirement at all becomes a dream for another day.

Since we can’t control the global economic landscape, the best thing to mitigate this is to create as many side income streams as possible, cut your expenses as much as you’re comfortable with, and be involved in local and national elections to ensure that fiscal restraint and responsibility once again take hold in government.

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• REVIEW: Stock Investing For Dummies, by Paul Mladjenovic.

Ending America Saves Week With Advice on Saving.

As America Saves Week draws to a close for 2011, I thought I’d share just one last post of savings advice and commentary. I hope you celebrated by increasing your savings, or at least reconsidering your spending

Retirement

I encountered a problem with my 401(k) and saving for retirement and thought many others probably have experienced this too. I couldn’t find any real solutions on the web, so I wrote about my own solution to Save for Retirement When Your 401(k) Plan Sucks.

RC from Think Your Way To Wealth answers a question that many people ask once they’re out of credit card debt :
I’m Saving Enough To Get the 401k Match From My Employer, Where Do I Invest My Money Next?

College

Anybody with a child of college age knows that college tuition these days is insane. Heck, my oldest kid is in 1st grade I’m terrified to think at how expensive it will be when they head off to college. By that time, kids may be taking out an equivalent of a 30 year mortgage – just for education expenses!

Well, one alternative is to skip college altogether. I’m not saying it’s the best alternative, but it may be beneficial to Save Money and Skip College, at least for a year or two.

But if you or your children are looking at that costly expense, you should probably reconsider majoring in any of these 8 College Degrees with a Poor ROI. Thanks to Financial Highway for the list!

Either way, check out the article at The Amateur Financier about How to Survive 4 Years of College Without Going Broke.

Health savings

Perhaps the biggest expense outpacing incomes aside from college tuition is healthcare. MoneyNing shares a helpful list of 7 Questions to Ask About HSAs and Other Ways to Pay for Medical Expenses that can help get you thinking about how to mitigate these essential costs.

Emergency savings

A basic pillar of personal finance is the emergency savings account. But what is that savings fund for? Well, interestingly it turns out that The Most Common Emergency Expenses are the same regardless of income level. I suppose that’s because some things are unexpected whether you’re a line cook or Bill Gates.

Lastly, Ron at The Wisdom Journal has a poll you can vote in :Which Is Greater – Your Emergency Fund or Your Credit Card Debt?. The results may surprise you…

Related Posts:

• 7 Tips for Cutting Spending and Putting Cash Back in your Pocket. (video)
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• America Saves Week 2011 Is Here!
• When Saving Money Can Cost You.
• Minimalism vs. Simplicity – Are You Missing the Point?

How to Save for Retirement When Your 401(k) Plan Sucks.

I switched jobs last year and along with a better position and bigger salary came a host of benefit changes. One of these changes was my 401(k) plan.

Regular readers know that I’ve been a steady contributor to my 401(k) at every job I’ve had since I started work professionally about 12 years ago.

Consistent contributions (even through employer match cut-backs and the recent Great Recession) an good plans have allowed me to watch my savings cross the 6-figure mark at the end of last year. But I realize now how lucky I have been to have had such good options in my 401(k) plans to date.

I realize this because I’ve hit a problem with my current plan, and I bet I’m not alone.

The problem

The problem is this: The investment options in my current employer 401k plan stink.

The plan is administered through a well known insurance company with a catchy jingle and fees that top the range of what is considered average for the funds.

I’m a big believer in low fees. Research has shown that most portfolios have a greater chance of outperforming their peers and the benchmarks averages when they invest in lower cost mutual funds or ETFs. It’s just common sense that when all other things are equal, the fund that charges less with leave you with more money in the end.

Of course, some funds out perform their peers and have higher fees. That’s OK too, but the key is that you’re getting a demonstrated track record of out performance for that extra cost.

My problem is that few of the funds in my 401(k) out perform their peers, but still have higher fees.

So, I have a few options and if you’re in the same situation, you do too!

Retirement plan options

The 3 basic retirement plans available to me in my career are:

• Traditional IRA
• Roth IRA
• Employer’s (lousy) 401(k) plan

Each one has benefits and drawbacks, but the Traditional IRA and Roth IRA are slightly different beasts given that the Roth contributions are after tax, while the tradition are pre tax.

I don’t want to roll over my 401(k) to a Roth, because I don’t want to pay the taxes on the conversion. I’m considering opening up a Roth in addition to pre-tax retirement plans in the future, but the Roth is not being considered by me at this time.

That leaves the Traditional IRA and the crappy 401(k).

Rolling over my 401(k) to a traditional IRA seemed liked a no brainer – I would be able to invest in a wider range of funds, stocks and bonds – but then I realized this startling discrepancy:

The contribution limit for a traditional IRA is only $5,000!

By contrast, the limit on a company sponsored 401(k) plan is a whopping $16,500!

With all the talk of financial reform in Washington D.C. over the past two years, and all the discussion about ending the 401(k) plan in favor of another social security style plan, I wish Congress would just make the contribution limit of the IRA as large as the 401(k)!

The total solution

Well, this left me with the choice of saving less in my IRA but paying less fees, or paying higher fees and potentially saving more by using my 401(k).

After much pondering, and poking around the Internet (to no avail), my solution is this…

I will rollover my old 401(k) to a new IRA. I will make the maximum contributions per year ($5,000) to that plan and any remainder I will contribute to the least offensive options in my 401(k).

For example, I’m used to contributing about $7,000 a year to retirement. I will be splitting up that amount like so:

• $5,000 to funds in my IRA
• $2,000 to funds in my 401(k)

I call this the “total solution” because it reminds me to consider the total holding in these two accounts as my portfolio – I have 1 unified portfolio instead of 2 portfolios.

The trick is determining which holding to keep in my 401(k) considering that an future increase in contributions will need to go into those funds. I’m tempted to hold my bond allocations in my 401(k). That way I will automatically increase my bond exposure over time as my contributions increase and I get closer to retirement age.

It’s not an ideal solution by far, but it’s the best I could come up with and I couldn’t find a better one. If you have any suggestions, I would gladly welcome them!

Related Posts:

• Are You on Track to Retire Comfortably?
• Conversion to Roth IRA Still Possible for 2011.
• Generation Y slacking on Savings?
• Spring Cleaning My Finances and Looking Ahead.
• Don’t Sabotage Your Retirement (Like Kris)!