401K fees can be such a complicated topic — so when the good folks at DailyWorth offered to guest post I jumped at the chance to have someone wiser than myself cover it! – Kat

Is your 401k plan costing you too much?

Many people don’t realize that they’re being charged a fee (or fees) for participating in their 401k plan–and over time, those fees can eat up a chunk of your savings. (Pictured: Erosion Control? originally uploaded to Flickr by muffinman71xx.)

Shocked? You’re not alone. In fact, new federal rules requiring 401k plans to be more transparent about fees take effect in July — and women everywhere should sit up and take notice.

Keeping retirement fees low is critical for women, who tend to live longer than men and thus need to be vigilant about keeping investment costs low, so they can hang on to more of their cash.

Over 20 or 30 years, a fee difference of even 1% can swallow tens of thousands of dollars. For this reason, cheaper funds are often found to perform better over time–because the lower fees mean that you net a bigger return.

One of the most commonly talked-about investment fees is the expense ratio, which is basically a management fee charged by the mutual fund (and you probably have a few mutual funds in your 401k portfolio).

But some plans levy a handful of fees on top of expense ratios, such as administrative fees, and investment adviser fees.

The new fee disclosure rules will require your 401k provider to spell out what they’re charging you. Already some large 401k providers (Vanguard, Schwab, and Lincoln Trust, to name a few) are offering cheaper plans to small businesses–which means lower fees for employees.

“In an ideal 401k plan, the expense ratio for every fund option should be less than 1%, and the plan should offer index funds with an expense ratio of less than 0.5%,” says David McPherson, a financial planner in Falmouth, MA.

The heftiest fees in your portfolio–and the ones you have most control over as an investor–are expense ratios. As an investor, it’s relatively easy to compare the expense ratios of various funds to pick the best fund for you that’s also the least expensive.

For a quick overview of your retirement portfolio–including your average fees compared with the fees of a comparable portfolio–try plugging your holdings into Morningstar’s Instant X-Ray. Or compare different funds being offered by your 401k by using the FINRA fund analyzer.

If your all-in fees are higher than 1.5%, lobby your employer to switch 401k providers–it will save them money and help you keep more of your nest egg.

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Back in January — inspired by a Mint article — we took a look at tax-savvy investment vehicles such as 401Ks and IRAs. Today, let’s look at some of the other tax-friendly ways to save, such as 529s and Health Savings Accounts (HSAs). Just as a reminder — according to the article, “The Value of Tax-Deferred Savings.” “[u]nless you make enough money to max out all of your tax-advantaged accounts (401(k), IRA, 529, HSA, and the like), it rarely makes sense to do any investing outside them.” (Please note, I am not a financial adviser — this is all just my personal knowledge, so take it with a grain of salt.)

(Pictured: PS1 Wallet, available in 8 colors at ProenzaSchouler.com for $165.)

Like we did before, let’s go through the main questions on everyone’s mind…

• What’s the advantage?
• How much can you put into it?
• Who can use it?
• Can you use it to put a downpayment on a house, or pay for something else big (wedding, car, schooling, etc)?
• When can you take it out?

529 Plans

• What’s the advantage?

There are two types of 529 plans: pre-paid tuition plans and college savings plans; every state has at least one type of plan. College saving plans allow you to establish an account for a beneficiary; depending on which state’s 529 plan you choose you have different options for investments. (For example, my husband and I recently opened a 529 plan in New York State for our son. The NY plan is managed by Vanguard, so there are a ton of investing options, including many index funds.) Withdrawals from college savings plans can “generally be used at any college or university.” Tax benefits really depend on which state you’re in (as well as which state’s plan you’re investing in). Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses (tuition, room and board, even books sometimes). In some states, if you’re a resident of the state, you get an additional state tax deduction — for example, NY taxpayers investing in the NY Direct Plan can deduct up to $5,000 ($10,000 for married couples filing jointly) from their state taxes (but not their federal taxes).  Other states may offer matching grants, and a few even allow state tax deductions if you contribute to any 529 plan.

• How much can you put into it?

It depends on the state; I would recommend focusing on how much you can put in and still get the state tax deduction. For NY, for example, you can put more than $10K in per year — but it doesn’t make sense to (particularly because you have to pay gift taxes after you hit $13K).

• Who can use it?

Anyone can open a 529 plan, even people without children. Because you can change the “beneficiary” once a year, you can begin saving before you have children, or even save for yourself if you plan on going back to school.

• Can you use it to put a downpayment on a house, or pay for something else big (wedding, car, schooling, etc)?

If you withdraw money from a 529 plan and do not use it on “eligible college expenses,” you generally will be subject to income tax and an additional 10% federal tax penalty on earnings.

• When can you take it out?

This depends on the state and the plan — most do not require a minimum holding period.

Health Saving Plans

• What’s the advantage?

A Health Savings Account allows people in high-deductible medical plans to save money for medical expenses in a tax-preferred way by claiming a tax deduction for contributions you make to your HSA. The contributions remain in your account from year to year until you use them, and the interest and other earnings on the assets in the account are tax free.

• How much can you put into it?

In 2012, you can contribute up to $3100 if you’re a single, or $6,250 for families.

• Who can use it?

You only qualify for an HSA if you are covered under a “high deductible health plan,” described in 2012 as having a minimum annual deductible (for self) of $1200 or (for family coverage) of $2400.  (Full disclosure: I don’t have an HSA, but realized in writing this post that my family and I may qualify for one — my insurance plan (Oxford) has a whole little section on its website for HSAs, including how to open an account.)

• Can you use it to put a downpayment on a house, or pay for something else big (wedding, car, schooling, etc)?

Not really: If you receive distributions from your HSA for reasons other than qualified medical expenses, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax.

• When can you take it out?

When you pay medical expenses during the year that are not reimbursed by your insurance plan (such as because you haven’t hit the deductible limit), you can ask the trustee of your HSA to send you a distribution from your HSA. You do not need to take it out every year, and the HSA can go with you when you switch jobs.

Readers, do you have HSAs or 529 plans?  How have they worked out for you?

Something I’ve been thinking a lot about since I read it is this Mint article on “The Value of Tax-Deferred Savings.” According to the article, “[u]nless you make enough money to max out all of your tax-advantaged accounts (401(k), IRA, 529, HSA, and the like), it rarely makes sense to do any investing outside them.”  (Please note, I am not a financial adviser — this is all just my personal knowledge, so take it with a grain of salt.) (Pictured: Marc by Marc Jacobs – Turnlock Shine Long Tri-fold (Electric Teal) – Bags and Luggage, on sale at Zappos from $198 down to $150 today. Lots of great sales on Marc by Marc Jacobs stuff on Zappos today, actually.)

To be honest, the value of tax-deferred investing isn’t something I understood until really, really recently. So I thought we’d review some of the main vehicles for tax-savvy savings here, answering — for each, the main questions on everyone’s mind:

• What’s the advantage?
• How much can you put into it?
• Who can use it?
• Can you use it to put a downpayment on a house, or pay for something else big (wedding, car, schooling, etc)?
• When can you take it out?

Oh, and all of these vehicles aren’t the “end” of the story; you still have to figure out what fund or bond or stock you want your money to go into once it’s into that tax-deferred account.  If you don’t have time to research the different options, here’s my tip:  look for a “lifecycle” fund, such as a “Retire in 2040″ or “Retire in 2050″ fund — the idea is that the fund manager reallocates the fund over time, so right now it’ll be heavy in aggressive investments like stocks, whereas when you’re closer to retirement they’re in safer investments like bonds.  (N.B., though: I have heard that you have to really pay attention to these when you get closer to retirement to make sure they’re conservative enough for your blood.)  Where possible, I’ve linked to different articles written in plain English to back up my assertions; I’ve also linked to the non-fun IRS pages.  Oh, and note that all of these deal with earned income only — so, for example, you can’t open an IRA in your child’s name and gift him $5K to put into it every year (unless s/he has somehow earned the money — child modeling, anyone?).  And one other note: can I just say I am stunned at how hard it was to “source” this article — for example, MyMoney.gov has a whole page on “saving for retirement” with “helpful” advice such as “don’t eat out a lot,” but next to no information on IRAs.  Thanks, government!

401K

• What’s the tax advantage? Money goes in before it is taxed, and grows tax-free.  Even though the money will be taxed when you take it out, the idea is that your tax rate will be much lower when you are at retirement age.  Furthermore, because it grows tax-free, you’ll save thousands of dollars over the long run.  Very noteworthy bonus:  many employers “match” — if you put in $3,000, they put in $3,000.  Everyone agrees that if you don’t at least contribute up to the match, you are throwing away free money. That said, I have never had the pleasure of working for an employer who matched.
• How much? If you’re under 50, as of 2012 the maximum you can contribute every year is $17,000.
• Who?  You have to contribute to your 401K through your employer — so if you aren’t a permanent employee, you’re out of luck.
• Can you use it to put a downpayment on a house? No.  This is the big drawback to 401Ks — instead of being able to use the money for something right now (house, wedding, car, school), it is Retirement Money.  Sometimes you can take a 401k loan out, but that can be tricky.
• When can you take it out? Age 59 and a half.  If you take it out before age 59.5, you will pay income tax as well as an additional 10% early distribution penalty tax (although there are some fun exceptions, such as disability or death).

Roth IRA

• What’s the tax advantage? The money you put into a Roth IRA comes after it’s already been taxed — but you don’t pay taxes on it once you withdraw it.  Furthermore, the money grows tax-free over the years. Technically, this is tax-exempt saving rather than tax-deferred saving.
  
• How much? You can put $5,000 into a Roth IRA and/or a traditional IRA every year.
• Who? You can only contribute to a Roth IRA if your adjusted gross income is below $125,000 (for singletons) or $183,000 if you’re married and filing jointly. (See also.)  Note that unlike other vehicles, there are no mandatory withdrawals at age 70.5 — and you can continue contributing to it for as long as you are working.
  
• Can you use it to put a downpayment on a house? After you’ve held the account for 5 years, you can withdraw up to $10K in earnings without penalty or tax for the purchase, repair, or remodel of a first home. (See also.)  As readers have noted, you can always withdraw principal.
• When can you take it out? While there are some exceptions (such as first time home buyer, significant unreimbursed medical expenses, etc), the normal age at which you can take it out is at 59.5.

Traditional IRA

• What’s the tax advantage? Like a 401K, money placed in these accounts grow tax-deferred.
  
• How much? For 2012, you can contribute up to $5K annually.
  
• Who? You can contribute to a traditional IRA even if you participate in an employer-sponsored 401k. Note, however, that if you or your spouse is covered by an employer retirement plan such as a 401K, that will affect how much of your contribution is tax-deductible.  Depending on your income, you may only be able to take a partial deduction (if you make between $56-$66K and you’re single, or $90K-$110K if you’re married filing jointly), or no deduction at all if you make more than those amounts.
  
• Can you use it to put a downpayment on a house?  You can withdraw $10K for the purchase of a first home without paying the 10% penalty tax.
  
• When can you take it out? 59.5, generally.  If you are under age 59.5, you must pay a 10% additional tax on the distribution of any assets (in addition to any regular income tax) unless you meet some of the exceptions, such as for higher education or the purchase of a first home ($10K limit, though).
  

I’ll take a look at other investment vehicles (such as 529s and HSAs) in a later post.  Oh, and Forbes just had an interesting article on a “back-door Roth” strategy, noting that if you make too much for a Roth IRA but have the cash to save, you can open a traditional IRA and then go to the trouble of converting it to a Roth IRA, where it can grow tax-free.

Readers, how much are you saving for retirement each year (versus saving for specific events such as a wedding or the purchase of your first home) — and which of these vehicles are your favorites?

What sort of year-end financial housekeeping do you do? What should you do?

I have fond memories of a trip home for Christmas one year, perhaps a year or two after I’d started working as a lawyer. I always used to sleep late and my parents would each poke their heads in to check on me and try to rouse me. Anyway, one morning around December 27th or 28th my father burst into the room at some ungodly hour (or so I thought then) to remind me that I needed to review my stocks and sell off some losers so I could have capital losses to offset against capital gains. Uh: thanks, Dad. (Pictured: Magic wallet in fresh strawberry, available at J.Crew for $22.50.)

He was right, though — as the year draws to a close now is a great time to think about a number of different aspects of your finances. For example:

• Use the money you put into your flexible savings accounts — think eyeglasses, over the counter medicines, and more.
• Max your contributions to retirement accounts if you can.
• If you’re saving to go back to school, or saving for your child’s education: consider maxing  your contributions to your 529 plan (if you can) if your state has a deduction for contributions.
• Get your free credit reports if you haven’t already gotten them for the year. (And according to that article you can also get a free credit score, which is news to me — I’ll have to check it out after holiday shopping, as the article advises.)
• Give to qualified non-profit charities (and lower your taxable income).
• Assess your stocks and other holdings. As my father noted, if you’ve had capital gains, selling loser stocks and funds can be a great way to offset those gains.

Readers, what sort of things do you do for your finances at the end of the year?  What sort of regular housekeeping do you do for your finances in general?

More reading:

- 6 Tax Moves to Make Before the End of the Year

- Tax Planning: 5 Things to Do Before the End of the Year

When it comes to money, the true savings are never in the tiny things — they’re in the big things like your healthcare plan and your investments. My old friend Sue is a master at all of this hard personal finance stuff — I’ve asked her to share some of her knowledge with us today. You can follow her on Twitter at @suziedonuts if you want more great tips! – Kat. (Pictured: Boje Designs Paradise Lace Essential Wallet, available at Endless for $34.)

Yes yes, you know how to clip coupons and shop sales. But there are two problems with this approach: First, it takes too much time for not enough payout, so you’re practically doomed to failure before you begin; and second, you’ve heard it all before, so if you’re not doing it by now, you’re not going to do it tomorrow. Plus, being frugal requires constant vigilance. I’m not saying it’s not worthwhile, because it is; but especially when you’ve got a healthy cash flow coming in, you have to put dollars before cents.

First you need to make sure you are fully maximizing your savings the big stuff, and not necessarily the stuff you read about. The big savings can be found in your workplace benefits and your investment accounts. The tips below will help you shave up to $10,000 off your expenses.

(Note: For simplicity’s sake, we’ll assume in these examples that you are making $150,000, are married filing jointly with one dependent, and are living in New York state.)

Saving at Your Work: $3,576+

Whenever you start a new job, HR gives you a giant info packet. Grab a cup of coffee and dig in. A good benefits package is worth its weight in gold. At a large company, the benefits might include perks such as:

- Free admission to major museums in your city

- Discounted rates on mobile phone service, banking, childcare, and insurance

- Health Advocate services (I can’t say enough good things about these guys)

- Flex spending accounts

Sure, the museum and gym perks are nice, and I’ve used them. A lot. But the real savings for me has been in the boring stuff.

Let’s say you are spending $500/month on groceries, and you cut your food spending by 50% by shopping sales and using coupons. That’s $3,000 a year. And it’s a pain in the neck to do. Believe me, I’ve done it. I’ve got the coupon organizer and the deep freezer and the stacks of sales circulars. I even wrote up a grocery price book, although that’s a whole other post. Suffice it to say, there’s a reason that most of the women on Extreme Couponing are stay-at-home moms.

Alternately, you can save almost $3,500 a year just by finding tax-advantaged ways to do the same stuff you’d do anyway – namely, by using the flex-spending accounts that your company may already be offering. In our example, you’ll save 34% by using flex accounts:
- $1,700 savings: Flex Spending Account for medical out-of-pocket ($2,500/year per worker @ 34%) – just be sure to “use it or lose it” each year
- $1,876 savings: Commuter Spending Account for mass-transit passes or parking ($2,760/year per worker @ 34%)
- BONUS ROUND: $1,700 savings: Dependent Care Spending Account for daycare or preschool ($5,000/year per household @ 34%)
Source: Bankrate.com 125 Cafeteria Plan Calculator

During Benefits Season in November, set up your flex accounts for 2012. Then take the afternoon off and visit your local museum on the company’s dime; you deserve it.

Saving with Your Investments: $6,721

With all that extra cash, you can front-load a 529 plan, which can be used for educational spending for yourself and then handed off to your children when the time comes. In New York, you can deposit up to $10,000 a year state-tax-free into the New York 529 College Savings Program Direct Plan, which is administered by Vanguard. In this example, maxing out the 529 will save you another $738 in taxes this year. Not to mention, the money grows tax-free. If that $10k sat in the 529 for 18 years, growing at 7%, you’d save $5,497 in taxes versus using your regular brokerage account.

Source: Bankrate.com 529 College-Savings-Plan Estimator

There have been countless books written on investing. I’m not going to tell you how to invest, but please, make sure you pay as few fees as possible. I’m a Boglehead myself. I make a regular contribution to an index fund every month; if the market tanks, I increase my contribution as much as I can stand it. Since I put in relatively small amounts each time, I want to minimize my commission fees (the price you pay per trade) and my expense ratios (the % the fund charges annually for maintenance). So I stick to index funds from discount brokerages like Vanguard or Schwab, which have very low expense ratios. You can open a brokerage account at Schwab with as little as $100. (Vanguard’s minimum is $3,000.) You also should never have to pay a commission fee when buying an index fund.

Schwab’s expense ratio for its Total Stock Market Index Fund (SWTSX) is 0.09% as of this writing. The Morningstar industry average is 0.38%. If you invest $500 a month with Schwab, you save $174 a year in fees.

You can also link your Schwab brokerage account to its High Yield Investor Checking account, which is truly free checking – Schwab even reimburses all ATM fees. At two, $3 trips a week, that’s $312 a year in fees.

The Long View: Break a Million Without Breaking a Sweat

Based on the above examples, a married couple with children could save as much as $6,500 a year. What does that get you in the long run?

Let’s say you’re 30 now. If you invest that $6,500 in an index fund making just 7% annually (because that 10% figure you always see thrown around is so 2007), you’ll be a millionaire by age 65. All without clipping a single coupon.

Source: Bankrate Simple Savings Calculator

Readers, are you maximizing your money with all of these big picture items? What are your best tips with the big picture items?

(L-2)

When should you consider buying an apartment or house to call your own? What should you know before you start the process?

When I asked the readers last week what sort of financial topics they wanted to talk about, a number of people chimed in asking that we talk about buying an apartment or house. All finance topics are fairly huge ones, but this one is particularly huge — books! classes! blogs! — not to mention very regional-specific. I’ve looked to buy an apartment in the New York City area twice, so I’ll share my experiences there, but let’s just keep in mind from the get-go that this post will be written in very broad strokes.  This has kind of turned into a runaway post, so I’ll put some reader Qs up front — ladies, what have your experiences been with buying property?  Have any of you decided that, despite having the money to buy, that you would rather rent?  What factors would you advise a younger woman to look into?  What resources did you find most helpful when researching? (Pictured: FOR SALE BY OWNER (if you can find it), originally uploaded to Flickr by The-Tim.)

Some Basic Considerations

Risk Factor: As far as investments go, this can be a pretty risky one, even though there’s an attitude (at least in NYC) that you will always make money on an apartment. I’ve seen some friends sell their apartments for nearly a 50% profit a few years ago — I have some other friends right now who need to move for their jobs and realize that not only are they losing their down payment, but that they’ll have to pay an additional five figure sum just to walk away from their homes. Ouch.  It should be noted that right now, prices are generally the lowest they’ve been in a long while — that is by no means an assurance that they won’t go lower, though.  Keep in mind that if the economy continues to tank, rents will probably self-correct pretty quickly — but a mortgage will not.

Renting versus Buying: There are a number of online calculators that can tell you if renting or buying is better, such as the one at The New York Times. For my own $.02, I’d suggest taking these with a grain of salt, but that’s me. I just fooled around with the numbers, putting in the rent my husband and I were paying at our last apartment as well as the purchase price for our condo, and the initial number said we’d be better off buying after 15 years — but after I went to the advanced tab and jiggered around with more numbers (such as adding in the broker’s fee I’d paid to find the rental, deducting the closing costs for our condo which were paid by the seller, etc), it said we’d be better off buying after 4 years.  Meanwhile, the Yahoo calculator tells me I’m saving $70K after only 3 years by buying my apartment rather than renting.  So: grain of salt.

How much you can afford? This is always a tricky question.  Things to consider:

• The down payment. In New York City, you almost always have to put at least 20% down in cash; some places require more like 30%.  For example, if the apartment you’re buying costs $500,000 and requires you to put down 20%, that’s $100,000 down, and you’ll be borrowing $400,000 from the bank.  Note that loans over $417,000 are generally considered “jumbo loans” and will be at a higher interest rate.
• The monthly mortgage payment. Most home buyers end up borrowing a massive amount of money in order to buy a home, and your monthly mortgage payment will massively affect your lifestyle.  Consider your debt to income ratio. Before you get the loan, your bank will check your credit score and will assess how much debt you have to pay every month (student loans, credit card bills, the proposed mortgage payment, any condo/co-op/HOA fees, etc) compared with how much income you make.  Most banks like to see your debt be no more than 28-36% of your income — many co-op boards may be a bit stricter than that and want no more than 28% debt to income.
• Additional monthly fees. In addition to your bank loan, many home purchases come with built-in fees, either as “maintenance” fees from the co-op or condo, or HOA fees for the house.  I always looked at these as the equivalent of “rent” — even assuming I owned my home outright, I would still be paying X to live in the space — and I always looked for places with a fairly low maintenance fee.
• Taxes. This is where things get complicated.  Back when I was first looking for an apartment (in 2005), all of the “sale sheets” in NYC told you what your estimated tax savings were — because of the way most mortgages are structured you primarily are paying interest, NOT principal, for the first 3-5 years you own.  Interest is tax deductible, so a lot of sellers would do this math on the sales sheet to the extent of “This is what your mortgage is each month, but when you factor in tax savings, THIS is the real number!”  Which always seemed like a ridiculously low number about equivalent or less than the cost of renting a comparable space.  They weren’t doing this when we were looking again in 2009 — perhaps because there’s been so much talk of having that particular tax deduction repealed.  Either way, remember that really only makes an impact in the first 3-5 years of owning, and then the tax savings taper off.  Real estate taxes are usually deductible also.
• Closing costs. I’m sure this varies widely from state to state.  Just here in New York, it depends what kind of property you’re buying (is it a building that is newly going condo or co-op?  Is the purchase price more than $1M?  is it a condo or a co-op?).  The big money for closing costs is usually the broker’s fee, which in New York is about 6% of the purchase price — but most of the time the seller pays that fee, not the buyer.  Buyers are responsible for a number of other little costs that do add up, though — when we bought our place, we wound up paying things such as title insurance (it can be .5-.8% of the purchase price), mortgage tax (1.8% of the purchase price, but it only applied because our mortgage was less than $500K), legal fees to our lawyer, as well as smaller bills such as a “managing agent” fee, the bank attorney’s fee, a credit report fee, an application fee, an appraisal fee, and then money for title searches.  At the end of the day, we paid nearly a third of what the sellers paid, and neither were what I would call insubstantial amounts.
• What else you could be doing with the money that’s tied up in the down payment? Traveling?  Cushioning yourself if you got laid off?  Helping an ill parent?  Making money in the stock market?
• How much cash will you have left in case you get laid off, have huge medical bills, etc?  See our prior discussion on emergency funds.

Kat’s Adventures in Purchasing Property

Like I mentioned above, I’ve looked to buy an apartment twice.  The first time was in the spring of 2005.  I was single but making good money, and thought perhaps I should consider buying a studio or one-bedroom.  I was only interested in the Union Square/Gramercy Park area of Manhattan.  I looked for about 4 months — every weekend I’d head out with my broker, and we’d look at places.   In 2005, the market was fantastically different than it is now, though – bidding wars were common.  I’d see a place listed for $X, and the seller would ask everyone interested in making an offer to make your “best offer” on a specific day.  I’d submit an offer (usually of $X, the asking price) and find that I’d been outbid, sometimes by as much as $50K.  I put in four offers, if I remember correctly.  I vividly remember the first place I offered, and would have been happy with that purchase — but by the fourth offer (which I don’t even remember — I think it was an extremely small studio that someone had tried to convert to a “two bedroom” around 9th Street) I was pretty disillusioned.  After I put in my offer for $X, the seller came back and said “just $5K more will get you the apartment.”  I made one of the hardest decisions I’d made at that point in my life and walked away from the deal — I just wasn’t psyched enough about the apartment and I was tired of the whole experience.  The hardest part about it was my poor broker — he had literally come out with me most Sunday afternoons to go looking at apartments, and I considered him a friend by this point.  He was getting a fantastically short stick out of all of this — four months of work and no commission or payment of any kind! — but I did what I had to do.

(On the renting side of things, I had been in a studio on Fifth Ave. and decided that, for my next apartment, I should rent in Brooklyn to see if I liked the area and perhaps consider buying there if I did.  As it turned out, I hated living in Brooklyn with a fiery passion — I was single, all of my friends were in Manhattan, the subways never seemed to be running, and cabs could never be found, so invariably I was teetering around Brooklyn Heights on 3-4″ heels searching desperately for a cab.  I found that it made dating difficult also — Manhattan guys didn’t want to date a girl who lived in Brooklyn, and it was a royal pain trying to meet up with guys who lived in other parts of the city, such as Williamsburg, Hoboken, or Queens.  So I stayed until my lease expired, and then rented a bigger, nicer one-bedroom back near Union Square — where after about a year I met a nice Brooklyn boy, who is now my husband.)

2009:  After my husband and I were married in May 2009, we started the search for an apartment in earnest.  The market was totally different this time — prices had fallen drastically in recent years, and mortgage rates had also taken a dive.  If a place was listed at $X, it was common to see numerous price reductions — sometimes by as much as six figures.  This time, there was none of the tomfoolery I’d experienced in 2005.  Bidding wars?  Bidding at “ask”?  Are you kidding?  It was a commonly accepted practice to bid at least 10% less than the asking price, sometimes even more than that.  Places that were initially outside our budget either eventually came down to our budget, or else we would later see that they had gone into contract with a reported purchase price that was well within our budget.  This was a season for bargains, clearly — much more my speed.  We kept telling each other that it didn’t matter if we bought at the BOTTOM of the market, so long as we didn’t buy at the top.  This search was also different from the first in that while I no longer needed a doorman-building, like I’d insisted upon in 2005, I now refused to consider places that were walk-ups (hoping that babies and strollers would be in the future).  With my husband by my side, I also was far more open to renovation projects than I would have been as a single girl — he’s in the construction/design industry and, in addition to knowing a number of contractors and suppliers and more, he also is much handier with a power tool than I am.  We wound up making two offers this time.  The first was on an apartment that we called the “time warp” — it was if it had been designed with Miami Vice in mind.  We didn’t get the place — our offer matched the offer submitted by a pair of empty-nesters who, the seller thought, the co-op board would like much better.  The second was on our current apartment, which has really weird angles and needed a kitchen renovation (which we thankfully finished already) but more than enough space for us to grow into it.  Funnily enough, the condo is just a few blocks from the rental apartment that I hated back in 2005-2006.  It was about a four month process from when we made the offer to when we took possession of the apartment, if memory serves.  In addition to the closing costs, we had the entire place repainted before we moved in, and we also paid an electrician to put an overhead fan in our bedroom.  Oh, and yes, we went back and used my old broker from 2005 — he got a bigger commission than he would have in 2005, and he only had to show up at a few different meetings because my husband and I preferred to do most of the looking ourselves.

Kat’s Takeaway

I really, really lucked out in that I walked away from that deal in 2005 — if I had held it until I got married (2009) there would have been absolutely no way I could have sold it then for any sort of a profit, and we’d be trapped.  All of the places that were in my price range then would have been way too small for my now-growing family, and honestly I’m glad that once my husband and I got married that we had the freedom to create a home together, rather than have him just move into a place that I’d already established as my own.  But then, hindsight is 20/20…

This isn’t to say that I’d advise all single women to not buy property, but in my case I really lucked out.  I have no idea how my current apartment purchase will shake out — but like I said we have more than enough room to grow, most of the renovation costs are behind us, and if worst comes to worst we could hold this apartment for a long time.  At this point in time, I feel like we got a great deal, I’m glad we did it, and I feel like it was a smart financial decision for us and a good use of our money.

Further Resources

- I got a number of books out of the library about buying a place.  I wouldn’t say that any of them were particularly helpful, but they all contributed to my general knowledge.

- I loved using StreetEasy when we were looking — I could set up alerts, do price comparisons, and more.  I had to slowly wean myself off it — I think I hung onto the “premium subscription” for a full six months after we were already in the apartment.

- TV shows.  Honestly, my husband and I both got addicted to shows like “My First Place,” “House Hunters,” and “Property Virgins.”  It was fun to follow the buying process for another person/couple/family (even if the show was outdated and they were buying in a totally different economy, or if they were buying in a completely different area of the country), and it was fun to see the kinds of issues that came up.

Like I said: this post is written in huge, broad strokes, but hopefully this gives people a basis for discussion.  To repeat my questions above: what have your experiences been with buying property?  Have any of you decided, despite having the money to buy, that you would rather rent?  What factors would you advise a younger woman considering her first property purchase to look into?  What resources did you find most helpful when researching?

Managing your money can be one of the most important things you do when you’re just starting a job — but it also can be super difficult.  We’ve talked about the importance of an emergency fund, but we haven’t really had a good conversation about where to stash your money in general — a high-yield savings account? CDs?  Treasury bills? The stock market? (Pictured: Emilio Pucci Print Flap Wallet, available at Nordstrom for $295.) (As always, please keep in mind that a) these are huge issues with a lot of nuances, and many personal finance sites, magazines, and books do a much better job with them, and b) I am by no means a personal finance guru — this is just some common, fairly basic knowledge that I’ve learned over the past 10 years or so.)

Before you decide where to save your money, though, you need to know the answers to some important questions first, though:

1) How much money do you need to live on before your next paycheck comes? What money is needed to pay recurring bills that will come due before then?

2) What is your idea of an “emergency” — and how quickly can you get your hands on enough money to cover it? For me, I can’t imagine there being any sort of emergency where my husband or I would need more than $5K within 24 hours (with no advance notice).  This matters because of the different options out there in the market.  For example:

• an online-only bank will often provide you with a higher interest rate than a brick-and-mortar bank will, but most of those banks don’t offer a checking account — so it can take 3-5 days to get your money out.
• Money market funds.  This is actually where I kept the majority of my money when I was saving up to buy an apartment.  At the time, the interest rate was great (as high as 7% at one point!), I could invest it in stocks or mutual funds immediately if I wanted to, but I could get it to my checking account in 3-5 days or so if I needed it.  The interest rates are not guaranteed, though — when I realized I was getting about 1/10th of the monthly interest that I used to get, I looked into it, and the interest rate was less than a percentage point.  Another major downside: these accounts are not FDIC insured (although the institution does try to maintain their value at $1 a share) — but if something happens in the market, you have no protection.  Some banks offer money market accounts that ARE FDIC insured, but the interest rate will be less.  (Right now, the interest rate for both money market funds and money market accounts stinks.)
• Stocks and mutual funds often allow you to withdraw funds immediately (although your broker may charge a penalty if you’ve only held the security for a short while) — but you’re subject to the whims of the market.  If the market is having a bad week (or year, or decade) you could lose a lot of money. It can take a day or more for the sale to go through, and then another 3-5 days to transfer the money to your checking account.
• CDs, treasury bills, and bonds are all “safer” than stocks and mutual funds — you know the interest rate up front and shouldn’t be subject to the whims of the market — but for the best interest rates you consign your money away for 6 months (at a minimum) to 30 years, with huge penalties for taking it out early.  (And of course, the best rates are for the longer   Which means you can’t rely on that money in an emergency.  Some people talk of “laddering” investments such as these so that every 6 months some of it becomes available.  Let’s say you had $15K to invest — if you put $5K in a 6-month bill, $5K in a 1-year bill, $5K in an 18-month bill.  In general, the longer you commit your money, the higher the interest rate, so after the initial cycle ends all of your money is earning the highest rate available, but you’ll have access to it every six months.
• Finally, 401Ks, IRAs, and other retirement vehicles pose huge penalties if you remove the money before you turn a certain age (I believe right now it’s 59 and a half).  So: Definitely not good in an emergency.

Keep in mind that a true emergency (9/11, The Rapture, whatever) may require cash — and ATMs may not be working.  So if you’re really concerned, you may want to keep some cash in your house, or even something like gold bars.

3) How comfortable are you with risk in general? Right now, most savings accounts will give you about 1.5% interest — which is a lousy, lousy interest rate. The last time I looked, CDs, bonds, and t-bills are providing only slightly better rates than that — and it wasn’t worth it to me to consign my money away for so long. (There may even be FDIC insurance for bank accounts and government-issued securities, so keep an eye out for that.) (Hat tip to commenters!)  Stocks and mutual funds may give you returns of 7-15% (the average is allegedly 10%) — but if the market goes down, you go down with it.

4) How often do you want to move your money around? Interest rates change really frequently, and it’s a pain to open and close different accounts (or to keep the minimum in each one).  Don’t get me wrong, you need to stay aware of what a competitive rate is and whether your bank is meeting it — like I said, it was a huge shock to me when my money market fund went from 7% to like .025% interest.  But is it worth it moving your money from an account providing 1.5% interest to one providing 2.5% interest?  That’s a question only you can answer.

For my own $.02, I have a tiered system when it comes to my money.
- Checking account: I really keep just the minimal balance, plus the amount needed to cover any bills due that month.
- Savings account (attached to checking):  Right now, I keep a fairly minimal amount of money here also — if it grows to more than $5K I tend to move it to the next level.  Pros: We can move it to checking pretty much instantaneously, either if cash withdrawals are greater than expected, or to cover us if an incoming check bounces or is delayed.  Cons:  The money is earning next to no interest.
- Online savings account. I’ve said it before and I’ll say it again: I love using Mint.com.  One of the nicest things about it is that you can always run a search for the best interest that a bank is providing — as well as the best interest for CDs, the lowest rates for credit cards (useful if you don’t pay off your balance every month), and so forth.  This is where we keep our emergency fund.  It’s a low interest rate, but if my husband were to lose his job or this blog were to suddenly go south, we’d be able to live on the money for quite a while.  We chose Capital One, which was offering about 1.5% interest plus a quarterly bonus) at the time we were looking.  Taking a quick look at Mint, it looks like that’s down to about 1.08% interest (joy), but none of the competitors are offering more than 1.35% interest — so I’ll stay put.  Similarly, the 1-year CDs seem to be 1.3% at their best, and a 5-year CD is, at best, 2.40% interest — so personally, for any investments beyond our retirement funds and our emergency fund, I’ll continue looking to the stock market.  If you’re not a fan of Mint, check Bankrate.com or even Kiplinger’s Personal Finance.
- Retirement vehicles. I kind of forget about the money we put in our 401Ks, to be honest, because it doesn’t feel like “saving” — it’s just money that we don’t get in our paychecks.  (Last year was the first year I contributed to an IRA, which is a different story, and because I’m contributing as a business owner probably not one worth getting into in the context of this blog.)  Stay tuned in future columns — we should have a discussion about retirement vehicles and why they’re important.  The short version: if your employer matches, you are an idiot not to contribute at least that amount if there is any way possible for you to do so.  Free money is always nice.
- CDs, bonds, T-bills: If interest rates here were at all nice this would probably be the next place my risk-averse self would go — but right now the interest rates are so low (see above) that I’ll either play it safe with my online savings account or invest it more aggressively.
- Stocks and mutual funds. I read an article years ago which crunched the numbers and determined that if you had bought stock on the eve of the Great Depression, but held onto the stocks for enough time (we’re talking decades here), you still would have turned a major profit.  This one article shaped my view of stocks and mutual funds — when I put money here I know that I’m in it for the long haul.  If my investments are performing poorly I may sell some, usually near the end of the year as a tax write-off — but I hate losing money!  This one is also deserving of a longer post, because there are a number of ways to figure out which stocks and funds to buy (ranging from financial advisers (look for one who gets a flat fee, not a commission) to index funds and target-date funds to various research tools).

Readers, where do you stash your cash?  How often do you reevaluate?

This started out as a post about how to pay off debt, and I realized as writing it that the huge question is thus:  When should you pay off debt? So let’s talk about it.

As I’ve mentioned before, I generally led a charmed life (as far as debt is concerned) in my 20s — my parents paid for my education (thank you!) and I never had any credit card debt. In the past few years, though, I’ve gotten better acquainted with debt. First, my husband and I got married — when we met, he was finishing his master’s degree at NYU, and he took out some loans to pay for the education; they are now my responsibility as well. Then, we bought an apartment in NYC — we kept our loan in the “non-jumbo” category, but we still now owe six figures to dear old Wells Fargo.  (Pictured above: Lodis ‘Cairo Diva’ Clutch Wallet, available at Nordstrom for $68.90 (was $138).)

I think there are three cardinal rules for debt.
1. Do what you can to avoid accumulating it.
2. REALLY do your best to avoid credit card debt. Live within your means, and spend less than you earn. Pay off what your balance every month.
3. For all your other loans, pay at least the minimum every month, on time — your credit card report will be severely affected if you don’t.

Easy peasy, right? Questions still remain — how much should you be saving versus trying to pay down debt? If you’re paying down debt, which ones should you pay off first?

Save For Your Emergency Fund. Life has a funny way of taking you by surprise, and you need to protect yourself — you could get laid off, or get in a car accident, or your roof could start leaking.  The emergency fund is for all of this. In general, keep your emergency fund in a “you can get the money tomorrow” kind of account, not an investment vehicle like a CD (even the shortest are 6 months). As I’ve mentioned before, I use Mint to keep track of finances — one of the fun things about it is that it can tell you which banks are currently offering the highest interest rates.  (We keep the majority of our emergency fund in a Capital One account.  It takes a few days to transfer the money, but we also keep a small amount in our checking and savings account.)

Contribute to your 401K. I didn’t start until I was around 27, and I kick myself for that — the effects of compound interest are so great that those first few years are crucial.  There are some important, basic things to know about a 401K: Your 401K is a retirement savings fund — the money is taken out of your paycheck before you’re taxed on it, meaning that if you think you’re contributing $100 to your 401K each month, it would be more like trying to save $140 in after-tax money (or whatever rate your income is taxed at).  (Um, don’t quote me on those numbers.)  Your employer may match your contribution, up to a certain point — figure out what that is and contribute at least that amount, because it’s basically free money.  (You contribute $100, your employer contributes another $100.)  A few other fun points about the 401K: You can’t touch the money until you’re 59.5 65 (you can, but you’ll be taxed on it and pay a 10% penalty before then), and you’re only allowed to contribute a certain amount every year — right now the maximum is $16,500 (unless you’re over 50, when you’re allowed to contribute a bit more in “catch-up” money).

Next, automate debt payment. I read a great article on Simple Dollar a few months ago about how one of the easiest ways to pay down debt is to simply round up the minimum each month that you pay.  Say your student loans are $754.85 per month.  Pay $800 instead, and have the extra go to the principal.  You won’t miss the extra money, and it can make a big difference in the long run, as illustrated in the Simple Dollar examples.  Do what you can here — for example, if you can round up that payment to $1000 every month, do it.  We do this with our mortgage and the student loan payments.  (I also like it because I frequently schedule payments a few weeks in advance, and I can easily remember how much money will be taken out.)

If after all that, you still have money left, then you have a few big questions:

1. Should I contribute more to my 401K?
2. Should I pay down more debt?
3. Should I be saving even more money?
4. Should I be investing my money in the stock market?

These are difficult questions, and I’m curious to see how you readers balance these questions and answer them yourselves. The answer for most people, I suspect, will be “all of the above” — if you have an extra $1000 a month, you may want to put another $250 towards your 401K, another $250 towards one particular loan, another $250 to your cash savings account, and another $250 to your investments.  Factors you may want to consider here include what your long-term goals are (retirement? savings for a child’s education? marriage? house?) as well as what your short-term goals are.  If you have a short-term goal — I’d define it as being 1-2 years away — like a downpayment, or a desire to quit your job to launch a business or have a baby, you may keep accessible money in a savings account and lower your monthly debt load while you can by paying off specific loans so your monthly minimum is reduced.  (In fact, many lenders will look at your debt-to-income ratio, and if it’s higher than 28%-36%, you may have problems borrowing money for a mortgage or loan.)  Taxes are also a consideration — you can take a tax deduction on some things (like the interest you pay on your mortgage and student loans) but not on others (credit card debt); meanwhile you don’t pay any taxes on what you contribute to your 401K until later. Another big factor is interest rates — what you’re paying on your various loans, as well as what you’re getting in interest on your various savings.

Readers, what factors do you consider when trying to determine whether to save or pay down debt with extra money?

We noticed that our post on savings seemed to be a popular one, so we thought we’d start another discussion on money and investing. Today we’re wondering, dear readers, about your emergency funds: how did you calculate the amount, how do you store it, and how often do you reevaluate the amount and the storage situation?  (Pictured: Comme des Garcons Large Zip-Around Wallet, available at Saks.com for $325.)

A caveat, at the beginning: we are not experts in financial advice.

The emergency fund, though, is one of those basic topics that you read about.  If you’re in debt, they say, save for your emergency fund first, and then begin paying off debt.  If you’re not in debt, they say, save for your emergency fund — and keep it liquid — before you start investing in the market.  The emergency fund is supposed to be there as a a cushion in case you or your spouse lose your job, or if some other emergency comes up, such as medical needs or a car accident.

OK, so, fine — great.  But how much is it? Some say to figure out six months of living expenses — your mortgage or rent, your school loans, your basic food and living needs — and to bank that.  Others say to figure out what your salary is for six months (the higher of two, if there are two) and just save that amount.  (We’re guessing the after-tax amount?)  Which calculation do you use?  In the recession, have you tried to build up more than six months of living expenses?  (We have a few good friends who’ve been out of work for more than six months, so it isn’t the worst idea.)

Once you have it, where do you stash it? It should be fairly liquid, so the stock market isn’t the right place for it.  But do you go for a high-interest savings account?  Do you have them in rolling treasury bills?  Do you put them in a series of 6-month CDs, designed to give you access to some of your cash once every month or so?  We always used to have them in Schwab money market funds — which at one point had an interest rate as high as 7%, we believe — but it’s now gone down to a sub-one percent interest.  We’ve recently found a savings account (using the tools described in this recent NYT blog column) that had about 1.8% interest (through Capitol One), but that’s already down to 1.60%.  We suppose this raises another question:  How often do you reevaluate your savings vehicle?

Another option for the emergency fund is cash — we’ve heard tales of people burying up to $10K in cash in their backyard in order to have quick access to it should there be some catastrophe in which banks and so forth are not working — does anyone do that?

There are no right answers here, and we’re curious as much as you guys. What’s your take on the emergency fund?

(L-1)