Traditional or Roth?

If you work for a company, chances are they offer a 401(k) retirement plan.  Some companies even offer a Roth 401(k).  Or maybe you're just looking at a traditional IRA vs a Roth IRA and don't understand the difference or which one you should invest in.

Yeah I ended that sentence in a preposition.  Big whoop, wanna fight about it?

In a nutshell, when you invest in the traditional 401(k), IRA or TSP it's done with pre-tax dollars, and you're taxed on the money when you withdraw it in retirement.  These plans have two benefits:

1) They reduce your taxable income.
2) More money gets invested earlier, and the returns compound.

Let's say you make 50,000 a year and contributed the maximum of $18,000 for 2014.  If you hadn't contributed, you would have paid over $5800 in taxes.  The contribution brings your taxable income down to $32,000, on which you would have paid $2800.  That $3000 difference would be invested and would go out to work for you.

For the Roth, you would be taxed on the entire $50k, but all the gains you earn on any money invested would be completely tax free when you withdraw in in retirement.  Let's say you invest $100 at 25, and withdraw that money at age 65 plus the approximately $2600 that the stock market would have made for you over 40 years.  The entire $2700 is tax free.

To know which type you should invest in, you need to ask yourself one question: Will your tax bracket be higher or lower in retirement than it is now?

If it's higher in retirement, you should put your money in a Roth.  If it's lower, you should invest in the traditional.  Of course, we have no way of knowing what the government will do decades from now, but you can probably estimate.  Generally, most people benefit from the traditional TSP, IRA or 401(k).  Two notable exceptions are people with low income and military folks.

If you're in the military, chances are you'll get deployed, and when you do, all the money you earn is tax free.  You would be better off putting that money into a Roth.  The Thrift Savings Plan offers a Roth version, so I'd recommend opening one of those vs the traditional.  Unless you know you'll never get deployed, in which case the traditional is better.  Or you may be able to open both, and allocate your money accordingly.

Of course, the best course of action would be to max out both accounts.  $18,000 for a 401(k)/TSP and $5,500 for a (Roth) IRA, but many people can't do that, so what you could do is just split your money between the traditional and Roth.

How to get out of (credit card) debt

Congratulations.  You're probably reading this because you realized you had an issue with debt and googled the phrase (or I kept sending you the link until you clicked on it).  Either way, you want to do something about it.  And much like the platitudes they spew at your AA meetings, the first step to recovery is admitting there's a problem.

So let's get into it.  I'm going to assume you're an Average American, and have a mortgage, a car loan, student debt and half a dozen credit cards, all of which have varying interest rates which you don't want to think about.

Pictured: the average American.  We'll call him Joe

You'll need to get a list of your debts that contains the amount owed, the minimum payments and what the interest rate is.  I'll use an example.  Here are a list of debts that Joe has:

Mortgage: 200k, 1200, 3.5%

Car:          20k, 300, 6%

Capital One: 4000, 70, 22%

Discover:   2000, 30, 17%

Amazon: 5000, 50, 0% until May of next year, when it becomes 26%

Personal loan from the bank to buy a Rascal scooter: 700, 20, 12%

Loan from Bob: 4000, N/A, 0%

You'll notice the last one is an interest-free loan that Joe got from Bob.  Bob hasn't set a monthly payment and isn't charging Joe interest and has told him to pay him back "whenever."  Make no mistake; Bob is generous, and Bob is patient, but Joe does need to pay him back.

So in your case, here's the plan: 

1) Make a list

2) See how much money you have left over every month after paying for the basics; mortgage, car, utilities, gas, groceries, etc.  For this scenario, let's pretend you have $500 you can use toward paying for your credit cards and other loans.  The minimum payments you MUST make in order not to default are $170 (70 + 30+ 50+ 20), which means you have $330 you can use to get out of debt faster.  Let's also make a minimum payment to Bob, say $30 a month.  That leaves $300 extra.

3) Put the entirety of that $300 toward the highest interest loan first.  In this case, the highest is the Capital One card, at 22%.  Now this is important.  I know it would be nice to pay off the lowest balance first, such as the bank loan since it's only $700, but the longer you neglect the higher interest rates, the more interest will accumulate. So you'll be putting $370 towards the Capital one card every month until it's paid off ($70 minimum plus the extra 300 you're using to get out of debt faster)

4) Once that card is paid off, use the extra $370 to pay down the next highest interest.  And so on.

5) Now let's pretend it's the following May, and that 0% interest Amazon card starts charging you 26%.  In this case you'll start moving all extra money towards that one.  Even if you're not done paying off the previous highest interest card.  But remember to keep making minimum payments on everything else.

Alternatively, you could take out a loan that consolidates all of your credit card debts into one handy loan, but you'll have to calculate whether it's worth it.

And that's about it.  Good luck.  Email me if you have any questions.

Don't panic

The stock market has taken a precipitous dive in the last few days, which leaves many people worried about their money and causes some to try to cut their losses and get out as soon as they can.  The problem is; after the market drops, it's already too late.

In this week's episode of 'Ow My Balls'

The price of a stock (and that of the market as a whole) is basically driven by buyers of stocks.  The biggest investors are fund managers, who have to try to make a profit no matter what the economy looks like.  The market drops when these people sell their stocks, due to sheer volume.

This is a quote I got from an article in the Wall Street Journal today: "Worried that the slowdown could spill over into the U.S., money managers on Friday sold stocks and piled into relatively safe assets such as Treasurys."

Now, you are probably not a fund manager.  You're not under pressure to make a profit every quarter.  You are in it for the long term (and if you're investing for something less than 7-10 years, get out immediately and put your money in bonds, a CD or a high yield savings account).

All that being said, you can't time the market.  No one knows when it will hit its peak and when it will hit its bottom, so there is no use in waiting to sell until it's at the top, and keeping your money safe until the end of a crash, at which point you put your money back into the market, buying stocks when they're cheap.

Your best bet is to do something called Dollar Cost Averaging, which is where you invest a specific amount of money every month, no matter what is going on in the market.

Now, that's not to say there aren't opportunities to be had.  Crude oil is down something like 46% over the past few months.  There are many reasons for this; shitty economies in foreign countries, Russia being stubborn, and OPEC trying to drive US shale companies out of business, to name a few, but I think we can all agree the demand for oil won't be going down for the foreseeable future, not until renewable energy becomes more affordable and ubiquitous.  And the global supply is going down.  Current production levels be damned.

Fund managers are getting rid of oil stocks like they have Ebola, because in the short term, they will lose a lot of money.  But for regular investors, whose time frame exceeds the next few quarters, now (or soon - I have no idea when oil will hit its bottom) is an amazing time to invest in oil.  Dollar cost average that shit.  If you have $5000 to spare, put $500 a month for the next 10 months, and watch your money multiply over the next few years.

So my advice here is:
1) Don't panic.  If you are itching to sell, it's too late.  Stick it through.  Maybe move your investments around a bit, but don't dump all your stocks.
2) When the money managers are panicking and selling all their stuff in one sector, that's the perfect time for the average investor to snap it up, because they just conveniently drove down the price for you.  Of course, be sure to do some research and check to see if the company is strong and will be viable for the future.