What Renters Need to Know

I think it is obvious when you own a home that you need homeowner’s insurance. However, the need of renter’s insurance may not be so obvious.  Every renter should have this form of insurance. It is inexpensive and may cost on average from $10 to $20 a month depending on the amount you are insuring.  

What is Renter’s Insurance?

Renter’s insurance is a form of protection you have on your property (furniture, jewelry, electronics, etc.) while you live in your rental space. It insures your property if your place is damaged by a fire or if your place is burglarized.  It is hard to imagine and we like to think, this will never happen to me, but it does happen and you should be prepared.

What Renter’s Insurance Does Not Cover…

Always read the fine print.  Your basic renter’s insurance will not cover everything.  For example, it does not cover flood damage.  In order for your property to be covered by flood damage you need flood insurance. (Yes there is insurance for everything, ha).  If you do not know if you live in a flood area, contact your property management and they should let you know.

What if I am Renting a House, am I covered?

Eh, you may want to check with your landlord.  But chances are your “stuff” is not cover under their insurance.  Their insurance will cover structural damage (exterior parts of the home).  If you have valuables inside the home, you may want to look into obtaining this type of insurance.       

What if I have a roommate?

You may need separate policies if you have a roommate.  If you have renter's insurance then your "stuff" is covered. Most insurance companies will insure individuals or families on one policy, not unrelated individuals, ie. roommates.  

Discount Double Check

Make sure you shop around.  If you have auto insurance, this insurance provider should be your first stop.  Most of the time, they will give you a discount for having more than one insurance policy with them.  It never hurts to ask!    

I Don’t Need Renter’s Insurance!

Ok, you say you don’t need renter’s insurance?  When you get home or if you are home take a seat on your sofa and look around.  What if everything was destroyed by a fire or your iPad or laptop you are reading this blog on is stolen. Do you have the cash to replace it? Do you have enough cash to replace the sofa you are currently sitting on?! The questions are rhetorical but hopefully it will make you think twice before saying no.

Have a great day!

Rianka D.

Ballin’ on a Budget

When I hear the word budget, I cringe.  I have changed my mental thought behind this concept and I call it a spending plan – it doesn’t sound as harsh.  

With a spending plan you actually plan on what you are going to do with your money before it hits your bank account.  Basically, each dollar down to the penny has a “job”. 

How to put this to practice?


Say for instance you will receive $1,200 on Friday. Before Friday arrives, plan the job this money will have…


For example:

• $200 towards retirement savings (401(k), IRA, etc.) – this should be automatic; this money should never hit your hand.  If it does, it may never make it to it final destination… your golden year’s fund.
• $100 for Emergency fund – this should be automatic, too
• $200 for groceries
• $300 for car note
• $200 towards paying off debt
• $100 towards utilities (this may not be the entire amount for utilities, but it is good practice to but money aside each paycheck)
• $50 dinning out/fast-food (you don’t have to spend the entire $50, but you can’t go over that amount).
• $50 rainy day fund/ fun fund (this is fund is for the spontaneous need to shop. Just because it’s spontaneous doesn’t mean you shouldn’t be prepared)

Before I receive my hard earned money, I assign jobs to each dollar… it is tough, but I have to do it! If I don’t, the already growing number of shoes in my closet will need its own closet!  I digressed…  Another method I have recently put into practice is the envelope system.  With an envelope system you withdraw cash and actually put in an envelope (or your wallet) and label it, “groceries”.  I think if you actually see/feel yourself spending the money, instead of swiping a plastic card, you will become very fastidious on what you spend it on.    


For categories I know I may go over, such as dinning out, I separate out the money by withdrawing cash and putting it in my wallet.  Therefore, when the money runs out, so do my trips to my favorite deli. 

How much you choose to spend on each category is up to you.  But, you should assign your money to the essential categories first.  If you don’t plan then you are planning to fail.  So cliché, but I couldn’t help myself, ha. 

My Favorite Online Tool 

If you have no idea how much you are spending, a tool you can use is www.mint.com.  Mint is an online software/website that allows you to set spending plans for your personal categories and will alert you when you are over your planned amount.  This tool will also allow you to track your expenses.  After a month of using this tool, you can use their cool tools that will allow you to see where your money is being spent.   

I hope this helps in your endeavor of understanding your personal financial situation.

Rianka D.   

The Account You Must Have

Ok – I know I’ve talked about the need of saving for your golden years (401(k)s and Roth IRAs), but this is a stash of funds you must have! 

One of the most important accounts you must establish is an emergency fund.  The purpose of this account is to always be prepared in case of an emergency.  Emergencies can range across the spectrum from replacing a tire on your car to unexpectedly losing your job. :-(

From the smallest emergency to the largest, please be prepared.   

Rule of thumb:

•  If you are single or have a single income household then it is recommended to have an amount equal to at least 6 months of your fixed expenses.
• If you have a two-income household then it is recommended to have an amount equal to at least 3 months of fixed expenses.  
• Fixed expenses are the expenses you have consistently every month.  Fixed expenses include (but not limited to) the items below:

o   Mortgage/rent

o   monthly utilities (phone, internet, water bill, electricity, etc)

o   Car note

o   Insurance (auto, home, etc)

o   Student loan payment

Source

Where to start?

If you need a starting point - my good friend Dave Ramsey (no I really don’t know him, but love his book) suggest you should start off with a goal of saving at least $1,000 towards your emergency fund.  My suggestion - if you already have over $1,000 set aside for emergencies, then start savings towards the larger goal of 3-6 months worth of fixed expenses.  Also, this stash should be easily accessible/ liquid/ in cash.   

You always want to be prepared!  If you have a goal of paying off debt, you will not be able to accomplish this goal if every time an unexpected expense comes up you are swiping your credit card.

I encourage you to pick up a personal finance book, maybe Dave Ramsey’s book - The Total Money Makeover is a good place to start. 

Step back and think about  your financial situation as it looks today.  If an emergency occurred today, big or small, would you be prepared?

Rianka D. 

I am a Financial Junkie

Oh how I love personal finance and you should, too!  Truly understanding your personal financial situation will pay you dividends for life, seriously.  Some may get overwhelmed thinking about their debt, credit card bills, budget, etc. and if this happens instead of doing something many choose to do nothing.  Please do not fall into this category. I would like to encourage you to take some time to review your financial situation.

It's not this bad.... haha

Do you have a budget/spending plan?

If you have debt, do you have a solid plan to pay it off?

Saving for a house or car?  

What have you done to try to accomplish these goals?  Let’s make a deal… To all my March Madness “I have the winning bracket” fanatics – how much time did you dedicate trying to figure out which team would make it to the final four? To all my reality TV shows fanatics – how many hours do you spend each week watching these shows? Finally, if you are a “goody to shoes” and did neither, think of your guilty pleasure and think about how many hours a week you spend doing such activity.  I would like for you the match those hours over the next few weeks and spend time mapping out your financial situation.  If you are in a great financial situation, then pick up a personal finance book and get to the next level financially – my library tab is a great starting point.   

The next few post I want to focus on your financial foundation.  It all starts with … stay tuned for the next post! 

Rianka D. 

Roth IRA + Gen Y = Wealthy

I was trying to think of a fancy way to explain the concept of Roth IRAs and how all young professionals should take advantage of this investment vehicle because of their (your) low income tax bracket and couldn’t think of one – I’ll blame it on writer's block.  So here it is plain and simple…

An Individual Retirement Account (IRA) is another investment vehicle to put money aside to save for your golden years.  Instead of relying on your employer to sponsor this account for you, you can establish this one on your own.  Not so fast…  In order to invest/contribute to this type of plan you have to have “earned income”.  Earned income simply means you had a job during that contributing tax year.   

There are two types of IRAs - Traditional and Roth. 

A traditional IRA allows you to invest pre-tax money into an account. (Think of pre-tax money as dollars never hitting your hand). You do not pay taxes on the contributions or earnings until you take a distribution from the account at age 59 ½ or after.

The Roth IRA is the complete opposite. 

With a Roth IRA you invest post-tax money into an account and you do not pay taxes on the contributions or the earnings when you take qualified distributions.  (Think of post-tax money as dollars hitting your hand, meaning you have already been taxed on it).  Just in case you missed it, you do not pay taxes on the earnings of your investment… Why is this so sweet, especially for Gen Y?  Well… right now (theoretically) you're at a low earning point in your life which translates to a low Federal income tax bracket.

Unlike a traditional IRA, defer paying taxes, with a Roth IRA you pay taxes now so when it is time to take a qualified distribution from your account it is tax free!

• Quick example: you invested $50,000 over the years and it has grown to $70,000.  When you reach age 59 ½ (or after) and you want to take out the entire $70,000 you can without paying taxes. Gosh I hope you are as excited as I am.

Source

Another sweet feature to Roth IRAs is you can, at any time, withdraw your contributions (not your earnings) at anytime without paying taxes.

• Quick example: you invested $50,000 over the years and it has grown to $70,000.  You can withdraw $50,000 at anytime without paying taxes.  If you touch the earnings before reaching 59 ½ OR it is not a qualified distribution, you will be subject to taxes and a 10% early withdrawal penalty.

Where to establish my new Roth IRA?

Now you are as excited as I am about (yet another) savings vehicle, where and how do you establish a Roth IRA?  I found this great post that explains the different type of places you can open a Roth IRA. Check out the post here: Best Places to Open and Setup Roth IRA.  

I want to make sure this message is clear…It is so important to take advantage of these investment opportunities now.  I found this jargon free video that explains the benefit of contributing to a Roth IRA.  This is what I call great golden financial nuggets! 

Check out this video: How to Pay Taxes Like the Rich 

Rianka D. 

~~~~~~~~

Useful link : What the IRS has to say about IRAs

We All Love Free Money Part Trois

In my previous post, I touched on the importance of saving to retirement plans.  Remember - compounding interest is your best friend.  The follow up post touched on the vesting schedule and portability of retirement plans.  Before I leave the topic of 401(k) plans, I want to briefly touch on contribution limits and withdrawing funds.

Contribution Limit

You may contribute up to $17,000 for 2012.  If you are age 50 or older, you can take advantage of the “catch-up” provision.  This provision will allow you to contribute an additional $5,500 to your 401(k) plan for a total of $22,500.

Contributing to your retirement plan is extremely important. Besides the compounding interest phenomena as discussed in part 1, you will also reduce your taxable income thus causing your tax liability to be lower.  How?     

• Quick example:
• In the 2011 tax year, a single person earning $50,000 pays $8,625 in federal taxes.  Conversely, by contributing 10% of pre-tax earnings to a 401(k) plan will reduce the participant’s taxable income by $5,000 making their taxable income $45,000.  As a result of savings towards retirement, the participant saves $1,250 in taxes.    

Distributions

If you hit rock bottom, and I do mean the bottom, then you could do one of two things - take a hardship withdrawal or a loan from your retirement account.  Of course Uncle Sam will receive his fair share of taxes and in some cases you may incur an additional percentage penalty before it touches your hands.  This penalty is put in place to remind you that this money is to be saved for your retirement.  

There are a ton of nuances involved with taking such distributions, but I will give you a high level overview.

  

           Hardship Distributions

The following items are considered by the IRS as acceptable reasons for a hardship withdrawal:

• Unreimbursed medical expenses for you, your spouse, or dependents
• Purchase of principal residence
• Certain expenses for the repair of damage to the employee's principal residence
• Payment of college tuition and related educational costs for you, your spouse, dependents, or children who are no longer dependents
• Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence
• Funeral expenses

 Check out the IRS website for more information: Hardship Distributions 

           Loans

There are a lot of specifics that are involved if you should take a loan from your 401(k) plan (check with your HR department).  Just know this – you will be taxed twice, double taxation – that should be a good enough reason for you not to take a loan. 

1. You have to pay income tax on the amount you are borrowing which could range from 15% to 25% of the amount distributed.
2. The money used to pay back the loan has already been taxed… You are using after tax money (usually from your paycheck) to pay back a loan you have already been taxed on!

Saving now is very important.  Delaying instant gratification will pay off, literally!  You may not see it now, but years down the line you will have accumulated a large nest egg.

Catch up with my previous two posts.  Click the links below:

•  We All Love Free Money Part 1
•  We All Love Free Money Part 2  

 

We All Love Free Money Part Duex

In my grandparents’ generation when you started working for a company you generally stayed with that company until you retired.  In my generation, generation Y, statics has shown that we change jobs every two to three years.  There is nothing wrong with changing jobs, but if you establish a retirement plan with each company, what do you do with it? Keep it there? Cash out? This post will help you understand your options.

There are multiple retirement plans out there; however, for this post I will focus on the most common, 401(k) plans.  Keep in mind, each type of retirement plan has specific rules and guidelines tailored towards that plan.   

Vesting Schedule

When you contribute to your retirement plan your contributions are 100% vested.  This means if you decided to switch jobs you can take 100% of your contributions with you.  However, this may be different from your employer’s contributions. 

While some employers may offer immediate 100% vesting of their matching contributions to your retirement plan, often their contributions are restricted to a vesting schedule that is determined by the length of time you have been employed.   

There are two type of vesting schedules: graded vesting and cliff vesting

Graded Vesting:

• After one year of service: 0% vested
• After two years of service: 20% vested
• After three years of service: 40% vested
• After four years of service: 60% vested
• After five years of service: 80% vested
• After six or more years of service: 100% vested

(Example of graded vesting schedule)

With a graded vesting schedule, if you choose to leave your company after three years of service, you will be able to take 100% of your contributions and 40% of your employer’s contributions.  To put this schedule with numbers – if your employer contributed $5,000 (over three years) into your retirement plan, you will be able to take $2,000 with you if you were to leave the company.

Cliff Vesting:

• After one year of service: 0% vested
• After two years of service: 0% vested
• After three or more years of service: 100% vested

(Example of cliff vesting schedule)

With a cliff vesting schedule, if you choose to leave your company before three years, you will be able to take 100% of your contributions and 0% of your employer’s contributions.  

Portability

A great feature of the 401(k) plan is the portability feature.  Here are three choices:

• You may be able to roll your money into your new employer’s plan

• If you have $5,000 or more in your account, you may have the option of leaving the money in your (old) employer’s plan

• You can set up an Individual Retirement Account (IRA) with your bank, a broker, or with a mutual fund company

The bottom line - when you start a new job learn about your options specifically dealing with your retirement plan.  Making a hasty decision to leave your job could cost more than you think.  You do not want to leave money on the table.

Have you switched companies recently?  What was your experience with transferring your retirement plan?

Check out my previous post: We All Love Free Money!

Stay blessed!

Rianka D.