THE Y&FB BLOG

Come tell me your "Broke Is" Story

Hey, I'm hitting the road to talk about the new book. Check out my travel sked; if I'm showing up in your neck of the woods I hope you'll come by to say hi.

And as I mentioned in the book (page 12) I bet you have a pretty good (or should I say bad?) "Broke Is" story. So come lay it on me. I want to hear what you're dealing with; and I promise to report back here on the best (actually worst is probably more to the point) stories. And you bet I'll also offer up my take on what you might do to help deal with your B-dom.

Be sure to check the travel sked for the appearances at Apple stores across the country. I'll be giving away a free iBook, Mac mini and iPod Shuffle at each Apple talk.

Index Fund Fee Wars Great for Investors

Okay, if you saw the riff on index funds in the Money Book for the Young, Fabulous & Broke (check out page 228 for a quick refresher) you know I am a big-time fan.

And the game just got even better.

There's a nice competitive war going on between Vanguard and Fidelity; the two big-boys of the no-load fund world. Vanguard used to have bragging rights to offering the lowest expense ratio (the annual fee that is skimmed off of a fund's performance to pay bills etc...) in the business. The 0.18 percent expense ratio on its Vanguard 500 Index fund is flat out cheap. But Fidelity stepped in and said it would offer its Spartan Index funds for just 0.10 percent, until further notice. Well, just today Fidelity said the 0.10 percent is permanent. The only catch with the Fidelity funds is that you typically need $10,000 to get started; but if you're self-employed and have a SEP-IRA the minimum gets down to $500. Over at Vanguard the minimum for any type of IRA is $1,000. If you can find the cash to invest in these super cheap index funds, just do it. Over time, those lower expenses (about one-10th or less what a typical stock fund charges) are going to make a huge huge difference in how big your account gets over the years.

Don't believe me? Check out this Fund Expense Calculator. (Some tips on using the calculator: on the first page plug in a hypothetical investment of any amount, and 8 percent for the annual rate of return. Pick a long Holding Period; since you're YF&B and investing for your retirement, I'd recommend plugging in 30 years. Everything else can stay set to "0" since you are only investing in a no-load fund. And just check "no" on the Convert question on the bottom. Then on the next page you'll be asked to plug in an annual expense ratio for each fund. Here's where it gets fun. Use 0.18 and 0.10 and then for the third fund choose a higher expense ratio. If you are currently invested in a fund, use its expense ratio. Or just go with 1.5 percent, which is the average ER for actively managed stock funds.) If you're on the index fund fence, I think I will knock you over to my side once you catch a glimpse of the "savings" you get with index funds.

Stolen Identity

Seems like we can't get through a week without news that there's been yet another breach of our financial and personal data resulting in yet more ID theft. The latest breakdown was the admission by ChoicePoint, a huge data compiler--and seller of that data-that it had forked over info to ID thieves.

Congress is acting absolutely shocked about all of this,which is laughable given what a huge problem this has been for a very long time. (ID Theft has been the #1 consumer complaint at the FTC for the past few years) Yet only now that it seems some members of Congress have discovered their own data has been breached, does it become the cause du jour in Washington.

Look, I hope Washington does take a serious look at this issue and comes up with ways for consumers--you and me-to gain protections against all this freewheeling sharing and selling of our personal financial data.

But I ain't holding my breath. In the meantime, the best way to deal with the ID theft epidemic is to constantly check your credit reports to make sure there's no sketchy data showing up; that's a tipoff someone may have stolen your financial identifying info and is masquerading as you. A new federal regulation is being phased in throughout 2005 that will allow all of us to get a free credit report from each of the three main credit bureaus, once a year. Don't get all three at once; its smarter to get one report every four months. That way you're consistently checking up on your record.  Check to see if free credit reports are currently available in your state.

What I told President Bush...

I had an interesting chat with a high-ranking member of President Bush's inner circle recently. The administration honcho had contacted me to see if I was interested in talking about Social Security.

You bet I was. And so we sat down for a 1:1.

I knew the administration was reaching out to me for my insight on what "real" people outside of the Washington beltway are concerned about.

He sure got an earful from me:

I give the President major points for being willing to take on the controversial issue of Social Security reform, but he's doing a lousy job of talking to you and me.

My take is that there is way too much policy wonk debate going on, and no one is telling you exactly what you need to hear: How the privitization plan will solve the system's current problems, how it will protect you tomorrow in the way that today's current Social Security system protects its retirees. And most importantly: how the new system will be easy for every American to understand and participate in. Forget about offering a bunch of investment choices; Americans are already overwhelmed with all the things they need to track and understand. Whatever revisions that are made to Social Security need to be easy to implement for you and me, easily understandable, and that they will indeed offer the same level of security.

Agree? Disagree? Let me know...for the next time the administration asks me to tell them what is going on in the real world.

The Best Place to Stash Cash

The low interest rates of the past few years have been great if you happened to be shopping for a home, or wanted to refinance your mortgage. But if you've been looking to park your cash somewhere nice and safe, you haven't been so thrilled with what's going on with interest rates; there's not much to get your motor running over a 1 percent yield on a bank savings account or money market.

Well, ladies and gents, start your savings engine right now. EmigrantDirect, an online bank is now offering a 3 percent guaranteed yield for the rest of the year on its AmericanDream Savings account. That's a heck of a lot better than what you can get elsewhere. And amazingly, there are no ugly strings attached. No five figure minimums, or all sorts of annoying rules. It is insanely easy; you can have Emigrant get the money by simply linking to your existing checking account at any bank.

Listen to me; you are beyond nuts to pass up this offer. It is the perfect place for your emergency cash fund, or for any money you are going to need to use in the next few years. Remember, if your goal is short term--such as saving up for a home down payment over the next year or two--that money doesn't belong in the stock market, which has plenty of risk over the short-term. The AmericanDream Savings Account is aptly named; it's as close to a dream for savers in this low-rate environment we're stuck in right now.

Give me a Coffee Break

The other morning I got to have breakfast at one of my favorite joints, the Classic Diner in Malvern, PA.  Like any self-respecting great diner it serves a mean cup of coffee. With free refills.

So I nearly popped a gasket when three guys slide into the booth next to mine and each of them was toting a big honkin' cup of Starbucks. Looking past the rude factor on this move, I then got to listen to them compalin about how they don't have money to pay their bills. They are collectively downing close to $15 in coffee--and you know it had to be cold coffee after the trip in freezing weather from the Starbucks to the Classic-and wondering why the hell they don't have money to pay their bills. Talk about the height of financial stupidity.

Look, in the Money Book for the YF&B  I told you I'm not gonna insult you with the notion that cutting back on the coffee is your ticket to financial security. If lattes are important to you, that's your call. But come on, be strategic folks. If you are scrounging around to pay the bills how about drinking the bottomless cup of coffee at the diner.

Is your Company Really Looking Out for You?

So you know how much I love Roth IRAs, right? Follow a few simple rules and when you retire you won't owe a penny in tax. That's a lot better than withdrawals from your 401(k), which are gonna get taxed at your regular income tax rate. Yes, I realize the 401(k) comes with a nice tax break on the contributions you are making today, but since you are so B right now, I'm guessing that tax break isn't worth too much to you, cause you're probably in a pretty low tax bracket.

But if we jump forward 30 or 40 years when you are ready to start pulling your money out of the 401(k) there's a great chance you're going to be in a higher tax bracket, and 100 percent of the money you withdraw will be smacked with income tax.

Now here's the totally great new twist in 401(k) investing that no one is paying attention to: Starting next January your boss has the option of allowing you to invest in a traditional 401(k) or a new Roth 401(k). With the Roth 401(k) you will get no upfront tax break; all your contributions are made on an after-tax basis. But just like the traditional 401(k) your money will grow tax-deferred meaning there's no annual tax bill while the money is invested.

And the super huge payoff: when you make withdrawals from a Roth 401(k) you will owe no tax. Zip. Zero. None. I think that is a huge opportunity for the YF&B.

But here's the problem: most companies aren't rushing to offer a Roth 401(k). Hewitt, a big employee benefits consulting firm recently polled a bunch of corporate clients and found that just one-third expect to roll out a Roth 401(k) in 2006.

I think that's ridiculous. If I were YF&B I would be bugging my HR department, or employee benefits folks to find out when they intend to offer a Roth 401(k). Notice I didn't say "if." I said "when."

Look, a 401(k) is operated for the sole benefit of its participants. That's you. So you and your YF&B colleagues need to start applying some pressure to let the corporate poohbahs know that a Roth 401(k) option would definitely be to your benefit. Don't be shy. Hell, I wouldn't be surprised if they are completelty out of the loop on this; it just doesn't seem to be on too many radar screens at the moment.

It's up to you to make them aware that you want a Roth 401(k) option, and you want it sooner, not later.

Now a few basics on how this works: In 2006 you will be allowed to invest a maximum of $15,000 in your 401(k), whether it be a traditional 401(k) or a Roth 401(k). And the same matching rules apply; if your company kicks in for the traditional, it will also contribute to your Roth.

Let me know what you hear back from your benefits dept.

Common Cents...

Scene 1: I'm getting on a plane the other day and as I am sliding into my seat I see a dime fall out of the pocket of a gentleman across the aisle. I point out the dime on the floor and he shrugs and says, "oh, I don't need it."

So I picked it up and put it in my pocket. Who the hell doesn't need money? I don't care if it is a $10 bill or a dime, or a penny.

Scene 2: Speaking of pennies, a few days ago my good friend Sophia, age 5, called to chat. Seems she somehow swallowed a penny and decided that Aunt Suze would know what to do, "since you know a lot about money."

Sidestepping the issue of a penny making its way through her system, I told her the real problem here was that she no longer had a penny to spend. She shot back, "Oh Aunt Suze, that's not a big deal, pennies aren't worth anything."

I had her get her Mom on the line and made my dear friend Barb promise that she would go to the bank and get a bunch of rolls of pennies. And then whenever Sophia wanted to buy something, they were to use just the pennies to make the purchase. After a few weeks Sophia called me back to let me know she's tired of using pennies, but she sure understands that pennies are indeed worth a lot.

It absolutely amazes me how whether we are 50 or 5 we develop this cavalier attitude toward money. Yeah I know, a penny or dime isn't going to buy you much on its own, but if you don't respect the value of small amounts, I bet you're also not respectful of money in general. And when you are YF&B you can't afford to be a money slacker.

Save a dime a day, for the next 50 years and earn 8 percent on the investment and you'll have an extra $25,000 in your pocket. Who doesn't need that?