5 Tips for Saving when Unemployment is Rising

As we creep into Labor Day we learn that the unemployment rate rose in August to 9.7% from July’s 9.4%. The U.S. Department of Labor announced September 4 that this rate is the highest in more than a quarter century. There are now an estimated 14.5 million jobless Americans.

I know what it feels like to lose a job. In early 2003, I lost my six-figure television job as a Wall Street Journal reporter for CNBC. Like millions of others in corporate America, I, too, was laid off in a cost-cutting move.

After my layoff I didn’t immediately rein in my spending. I even made some serious money mistakes that I’d never advise anyone else to make. For example, I took $80,000 out of my 401(k) plan.

I tell you my story in the hopes that you won’t be ashamed of the money mistakes you’ve made or that you can even learn from the mistakes I made in the past and not even make them.

Here are 5 tips for saving if you’ve been laid off, fear you might or just need to save more.

1. Don’t raid your 401(k). If you lose your job, leave your 401(k) with the same account if you can. Otherwise roll it over directly to a IRA or Roth IRA without taking any as cash. You will have 20% withheld for taxes if you took cash. And there’s a 10% early withdrawal penalty if you’re under age 55, as well as the missed opportunity of tax-deferred growth.

2. Pay bills on time. I know that is easier said than done for some people. You can save hundreds of dollars a year on late fees if you simply pay your bills as you receive them or set up automatic payment plans.

3. Curb eating out. You can save $1,825 a year by cutting out an average of $5 a day on fast food purchases and $3,650 a year for an average of $10 a day. Take a week or two and track your restaurant spending habits. Tabulate every bagel and coffee. You might be surprised by how much money you’re wasting on these purchases.

4. Become a frequent library patron. Borrow videos, DVDs, CDs and books from the library instead of purchasing them. If you’re used to buying even just 10 DVDs a year at $10 – $30 a pop, or downloading 50 MP3 music files a year for $0.99 – $1.99, or renting several videos a month from Netflix or Blockbuster, you’ll save hundreds of dollars a year by simply borrowing them from the library instead.

5. Take a level-headed friend shopping with you. If you’re the type who just can’t stop spending, bring a friend with you who can keep you focused. Don’t bring the friend whose Visa bill is constantly more than her rent, but do bring the one who knows not to squander rent money for a new pair of shoes one doesn’t really need. A friend with a good head on her or his shoulders will keep you from making outlandish purchases and wasting your money. Take that friend’s advice without holding it against her or him.

Don’t Take from 401k to Pay Bills

It's a bad idea to take an early withdrawal, loan or a disbursement from your 401(k). Consider it untouchable until retirement age, as it is not a good financial move to use it to pay off credit cards or remodel your kitchen.

As the U.S. unemployment rate spikes to 9.5% as of June 2009, more and more people are considering taking a distribution from their 401(k) or withdrawing from other retirement accounts to help meet their expenses. This is a move of last resort, and even then it still remains a bad idea.

Any money you withdraw from a 401(k) or take as a distribution after losing your job, is like stuffing 40% of it down your garbage disposal, flipping the on switch and saying goodbye to that money forever.

When you take money from your retirement account before age 59 1/2 you:

• Pay a 10% penalty on the withdrawal
• Have to report the money as income on your taxes, potentially taking another 28% hit
• Lose compounded growth of your retirement account
• Have less to live on when you actually do retire

I spoke with the Associated Press about 401(k) withdrawals and loans back in March 2009. Watch this video to learn more.

5 Reasons to Keep Contributing to Your 401(k)

By Lynnette Khalfani-Cox, The Money Coach

Many people are cutting back their contributions to their retirement plans, such as to their 401(k) or IRA because of the deflating U.S. economy and even their deflating pocketbooks. If you’re one of those people, or are one considering saving money by not contributing to retirement, that’s not the way to go. You’ll only feel the sting even more at tax time.

Adding to your 401(k) or another retirement plans through your employer actually will gain you money now, not just when you retire. Consider these five  points about retirement contributions:

1) Save on your income taxes. When you add to your retirement account you reduce your taxable income.  The less you add in, the more you’ll pay in taxes.  If you’re under 50 years old, you can contribute as much as $15,500, and you will not be taxed on that much income. So imagine, by not contributing that, or even a lesser amount, you will be taxed on it. If you’re at a 25% tax bracket, that would be $3,750 in taxes on $15,500.

2) Reduce your FICA tax. A 401(k) contribution reduces how much you pay out in FICA tax each pay period, since your taxable income is being reduced. (The same does not apply to the Medicare tax, however.)

3) Increase your chances for tax credits. Tax credits start to phase out for upper-income earners. However, contributing to your retirement plan may let you take full advantage of the dependent-care, dependent-child, and tuition credits since your take home pay would be reduced.

4) Claim more itemized deductions. If you itemize your deductions contributing may keep your income below the level at which itemized deductions are reduced.

5) Get free money from your employer. Although many employers recently have changed how much per dollar they match on your retirement contributions, most companies still offer some form of matching.  You’ll only lose that free money  if you don’t contribute to your plan.

Valentine’s Day Tips #9 and #10 for Love and Money

 By Lynnette Khalfani-Cox, The Money Coach            

This is the last entry of 5 sets of “Valentine’s Day Tips for Love and Money” geared to help you achieve financial harmony in your relationship. Read the first set here, the second here, the third here and the fourth here. 

9. Retirement happens.  Plan Accordingly. Given the current financial crisis, younger generations are worried most about not having enough to live the way they want to, while those over 45 worry more about having resources for old age and retirement.  The under-45 crowd could learn a lot from its elders.  There’s no time like the present to start saving for retirement, especially for couples.  Sit down together and evaluate your respective 401K plans, then make your collective contributions to the plan that offers the best benefits – higher employee matching, for example —instead of each contributing blindly to your separate accounts. If you have maxed out the matching options under one 401K, and still have extra funds to put toward retirement, then consider other investment options, such as the other spouse’s retirement plan if employee-matching is available there. Free money in the way of matching, tax credits, tax deductions, tax-deferred savings, should typically win out over those that don’t offer such benefits .

10. It’s OK to have some financial independence, too. While it’s imperative to plan your financial future together, many couples still want their own money to spend as they like. In fact, over half of all couples keep some sort of separate bank accounts.  The smartest solution is to keep joint bank accounts to pay household bills but also separate checking accounts for personal spending.  Just make sure to agree on how much each of you contributes to your joint accounts — take into consideration what you earn. 

 

 

Valentine’s Day Tips #3 and #4 for Love and Money

By Lynnette Khalfani-Cox, The Money Coach       

  

This is the second of 5 sets of “Valentine’s Day Tips for Love and Money.” Read the first set here and come back each week day this week for more tips to help you achieve financial harmony in your relationship.

3. Get to know each other’s money personalities.  For the third year in a row, money is the leading reason American couples fight; notably, however, half of the time couples didn’t have their first fight about money until after they were engaged or married.  While it’s always best to talk about your financial values as early as possible in a new relationship, remember that it’s never too late to get to know each other’s money personalities. If you’re saving for a vacation to Hawaii but he won’t take a day off until you have enough to retire there, don’t despair:  there is always a middle ground.  Identify each of your best spending habits and agree to meet halfway, each adopting what’s best about the other. (To discover your own money personality, as well as your partner’s, take my Money Personality Quiz, available under the “Free Info” section at www.TheMoneyCoach.net).  

4. Make a plan for getting out of debt together.  If the current recession has taught us anything, it’s that “debt” is a dirtier word than anyone had imagined, and yet over half of American couples enter relationships with debt. Now more than ever it’s time to get serious about money management and debt elimination. Sit down with your partner and make a realistic plan for getting out of debt together, then stick to it no matter what.

 If you need professional help, contact a trustworthy non-profit agency like the National Foundation for Debt Management  (www.NFDM.org or 866-409-6336).

Top 10 Smart Financial New Year’s Resolutions for 2009

 By Lynnette Khalfani-Cox, The Money Coach    

1. Eliminate credit card debt. Answer this question: Do you really want to be in debt year after year and living paycheck to paycheck? If you said “No,” then it’s time to get serious about managing your money and getting rid of excessive debt. You can do it – but you must have an action plan and you must stick to it. Get help from the National Foundation for Debt Management (www.NFDM.org), a reputable non-profit agency.
2. Slowly set aside 3 months’ savings. If an emergency happens – from a job loss to a car breakdown – your savings cushion will protect you from resorting to credit cards. Get free wealth-building tips and pointers on how to save more at www.AmericaSaves.org.
3. Prepare your taxes early. Get any tax form you need from the IRS at www.IRS.gov and file your taxes ASAP. You’ll avoid the procrastination and stress, as well as the hassles and long lines, at the Post Office on April 15th. Early filers also get faster refunds.
4. Make a financial plan. Start writing out your financial goals and what it will take to achieve them. Get help from the Financial Planning Association (www.FPAnet.org).
5. Create or update your will. Nobody likes to think about his or her own death. But you can’t ignore reality. Look at the Hurricane Katrina, 9/11 or the unfortunate, 150,000+ victims killed by the Tsunami that spread across Asia and Africa. Tomorrow isn’t promised. For a low-cost will, visit www.buildawill.com or www.legalzoom.com.
6. Fund a retirement plan. If you have a 401(k) or 403(b) plan at work, start contributing, or increase your contribution. Learn all about 401(k) plans at www.401k.org. No 401(k) plan or you’re not eligible for it? Then open an Individual Retirement Account.
7. Ask for a raise. List the ways you’ve contributed to your company’s prosperity or your department’s well being, and approach your boss for a raise. The Wall Street Journal’s Careers section has tips for getting a pay hike at www.wsj.com. If you work for yourself, give yourself a raise by raising your prices or offering higher-end products and services.
8. Get proper insurance. Get life insurance worth 5 to 10 times your salary, and adequate coverage for your valuables and property – home, car, etc. – too. If something goes wrong, you and your family will be so glad you did. Find quotes at www.insurance.com.
9. Share your knowledge. Mentor a young person, teach your children about “wants” vs. “needs,” or tell a friend about some smart financial tips you have learned.
10. Improve your financial record-keeping. Get your paperwork in order, and keep good records all year round. This will save money in the long run and reduce your aggravation come tax time. Try the free online budgeting and record-keeping tools at www.mint.com.