Ask your employer to consider a Roth 401K

Many people are familiar with the concept of a Roth IRA. For those that are not I will give a quick summary of the difference between Conventional and Roth IRAs and why I believe that a Roth is ALWAYS better for new contributions. Both offer significant tax advantages but one provides more advantages today while the other provides more advantages tomorrow. Given they are retirement investing vehicles clearly we should think more about the impact when we are 65 then when we are 30, 40, etc. Here is the basics of each…

• Conventional IRA - You put money in up to a set maximum per year. You then deduct your contributions from your income for that tax year. So if you owe taxes on 50,000 dollars for a tax year, contribute 10,000 to your conventional IRA you will then pay taxes only on 40,000. However, the tax is not avoided only differed until the time of withdrawal. When you then withdraw this money in retirement you pay taxes on 100% of the money you withdraw as 100% earned income. Oh and should social security survive till your retirement since a Conventional IRAs distributions are considered “income” it will effect what portion of your Social Security is taxed.

• Roth IRA - With a Roth we change the time of the tax advantage to the future vs. the present. So this year you owe taxes on 50,000 dollars and put 10,000 into your Roth IRA and you still pay taxes on the full 50K. However you will now never pay tax on that 10K you contributed or the interest earned on it EVER AGAIN. So if you are 30 in that year you will earn interest for 30 years or more tax free and you will NEVER pay a thin dime of tax on the earned interest. Also when you do withdraw the money it is already your money, it will never be considered “income”, you won’t pay any tax EVER.

Now some advisers point out that if you will have lower tax bracket in retirement and believe in “fuzzy math” that a conventional can win out. However, we should live in the world of practice vs. theory. What I have seen actually happen is that be it Roth or conventional people always contribute the same amount. What this means is while you will pay taxes on a Roth contribution today you will end up with the same amount of money at age 60, 65 or whenever you start to take the money out. In other words your tomorrow will be better with a Roth.

Now what many people do not even know is that a 401K which an employer provides can also now be set up with a Roth Option. With a 401K your employer takes a percentage of your check and deposits it for you. While 401’s have some restrictions that IRAs don’t they work quite similar in how they defer or eliminate taxes. The beauty is when you quit working you can roll your 401K into an equivalent IRA and that means if you have a Roth 401k you can roll to a Roth IRA and have money you can take as needed, keep inside the account as long as you like and never pay taxes on it or ever have it count as income.

Again though while the option of a Roth IRA is well known today most people are not aware of a Roth 401K so ask your employer to check into the option for you. To me they are better for all workers but for the youngest workers the advantages are even bigger. There is a good chance that your employer may not even be aware that they can offer a Roth 401k and as we said all the time in the Army “the squeaky wheel gets the grease”.

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Advice from the broke is useless

I know this seems so obvious, never take advice on money, investing and business from the broke. The problem is it is not always easy to recognize the “broke”, when I refer to people that are broke I am not saying they live in a “poor house”, make very little money and eat mealy porridge. I simply mean they are broke as in more money goes out that comes in.

Broke people live next door to you, they live in neighborhoods that are both two steps down and two steps up from yours. Broke people are everywhere, most of the people in America are broke by my definition. They are the people in huge 50K dollar SUVs that they justify as being needed “to cart the kids around in”. Jeez, how big are these kids? They have beautiful homes, nice furniture and perhaps even lawn care service. Many have vacation homes or time shares or other true luxuries. How can I call these people broke?

Easy they are broke, they have very little to no surplus cash flow, they save next to nothing other then what perhaps goes automatically into a 401K (Thank God for that at least). They have TVs on credit, cars on credit, pools on credit, some have charged the very paint on their walls and the sofa they sit on. Cut off their income for 30 days and most would loose every thing they have. They are broke because they have no “wealth” only things, stuff and the appearance of wealth.

Such people are always big talkers. They tell you “now is the time to buy” or that “that business deal seems risky” and other wonderful nuggets of advice. They tell you how great that new SUV is, how wonderful owning a plasma TV is and they always have investment advice for you.

My advice is, don’t take their advice. If you follow the advice given by most people it will lead you down the same path they are on. In other words take advice from your uncle who has that beautiful house, nice cars and kids in top schools and you may just get their yourself. Yet you will probably do it “his way” (the normal way) and be in debt up to your eyeballs and working into extended retirement years just to pay the interest on all of it.

So where do you go for advice? To the successful, to the millionaires next door. Look for the guy that pays cash for everything, the woman that has a 6 figure job and a 150,000 dollar house and a sensible car along with a nice savings account, a good team of advisers and a very fat and growing Roth IRA. These people are not “broke” they could go with out work 6 months to a year with just a bit of sacrifice if they had to.

How do you find them? There are many of us, just talk to people and you will know right away.

• The broke talk about how expensive gas is and the wealthy talk about how efficient their cars are.
• The broke think rich people are “over paid” and “thieves” and the wealthy think the rich are “generous” and “admirable”
• The broke shop for “deals” on consumer goods, the wealthy look for “deals” on real estate and investments
• The broke think cars are status symbols and the wealthy think cars are a “necessary expense”
• The broke talk about “saving money” by spending it, the wealth talk about budgeting and investing the savings

Just realize it is not income that separates the broke from the wealthy. In my town I can show you people with a household income of 100K or more that are “broke” and I can show you some with a household income of say 70K that are very “wealthy”.

Just remember this and consider it when anyone advises you how to spend your money, what to buy, how to invest and on what is important or what is safe vs risky. Now I am not saying that no broke person ever gives any decent advice. Sure many times they do, just don’t let the broke counter your instincts or justify what you know to be a mistake for short term gratification.

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Your job is not secure

Let me be clear I don’t think you have a safe, secure job today if you work even say for the Post Office or even a State Government agency. I believe firmly with the toxicity of debt in both the consumer credit card market and the sub prime lending market a major recession is coming. We won’t die off, no one will jump from tall buildings on Wall Street and the dust bowel is not comming back but there also may no longer be “two chickens in ever pot”. Todays “chickens” are Plasma TVs and other do dads.

Right now there is over 1 Tillion Dollars in toxic debt in the consumer credit market, that is money that will NEVER get paid back. The American tax payer has had enough, we won’t bleed money any more. Social Security is getting to where you as a working member of society have you “own old person” to provide for, it will change and that will be good but short term it will hurt.

The dollar weakens almost daily now! Canada now has a stronger dollar then the US that has never happened. The weak dollar is supposed to help fix the multi trillion dollar trade deficit we have with the world, it does nothing of the sort. The biggest potential export markets for us are China and Japan and both artificially tie their currency to the dollar. When the dollar drops so does the Yen by an equal amount. All a weak dollar does is make your money worth less and less in the global market.

My point is this can’t all just stand as the house of cards it is today and there will come a time soon when some of the bills will have to be paid. When that happens there will not be enough money to pay it. At that point employers are going to feel it hard and tough decisions will have to be made. Your boss might love you but if it comes down to the company surviving and your employment he will have that hard talk with you about some measly severance package. Odds are in many instances he will then get to have the same talk with his boss and so on.

How bad will it be? I do not pretend to know but it will be worse then it is today, that I am sure of. My real point though is it doesn’t really matter does it how many people loose jobs? All that matters to you is if and when you loose yours! It can happen to the best of us, it happened to me and because I live by the things I teach and write about it just wasn’t that big of an issue.

My point is you need to live as though you are currently in the hight of summer. You must buget and make spending choices with the view that you are right now at the peak of your earnings, you must plan for a big decline that can come at any time. This does not mean that you live in fear only that you live free from illusions.

If right now this second you or your spouse lost a job and were unable to replace it quickly how long would your last before you started to go negative on paying your bills. How long till you lost your house or got evicted from your apartment? The average American could scarcely make it 30-60 days! Many are but one or two paychecks from bankruptcy!

How do people get in this position? The belief that a paycheck is an entitlement that’s how. It amazes me how entitled employees tend to be in relation to their employers. Just look at the auto and airline unions, they keep getting more and more from their employers but the problem is the airlines and the car makers no longer can pay the bills. They are putting their very security in jeopardy by always wanting more, more, more.

So what is the solution? - Here are ten things you should be doing starting yesterday.

First - Never see yourself as secure in your job, have a plan B. Always know which competitor or similar company would be best for you to go work for. Cultivate relationships within said company, don’t act like you are ready to switch if you are not but be on the radar.

Second - Build a big network of contacts in your line of work, I don’t care if it is packing boxes or running companies as a CEO. Build network of people around you that can help you if you ever need a new job.

Third - Live below your means! Nothing is more important, make sure you buy less house then you can afford. Buy a cheaper to own and maintain and fuel car that you really have to settle for. In short never buy what you can afford today, buy what you should still be able to afford with far less then you have.

Fourth - If you deep in debt get out now! If have home equity and large credit card debt refinance your house and pay off the cards, then cut them to pieces.

Five - Buy and own a home! Renting has a place but as soon as you can afford to own a home the right way do it. Buy smart, pay less then the house is worth, find a deal, there are always deals. Know this variable rate mortgages are the devil, if you can’t afford the home with a fixed loan, you can’t afford the home!

Six - Build a second income, in other words own your own small business. You know how to do, make or advise on something better then most people. Find a way, anyway to make money with it. Do private consulting, build online income (this is what I do) hell just by blogging you can make 500-1000 dollars a month, (I will show you how in the future). Someway, somehow develop a second and even a third stream of income.

Seven - Save money outside of just your 401K, IRA, etc. The golden rule is get to where you save 10% of your income in an IRA or other tax deffered acocunt. That money is locked away until you retire though. I am all for 10% going to retirement as long as you can save say 15%. If today all you can afford to save is 10% put 5 into a long term locked away account and 5% where you can get to it with out penalty if you need it. Build an emergency fund of at least 90 days of your current income before you lower your savings contributions to liquid accounts.

Eight - Plan on being fired, your company being bought, your job being downsized, etc. It may never happen but plan on it. The very act of viewing such things as a possibility will make you smarter in your decisions every day. It will also make you more level headed and able to stand the hardship if it comes. Again do not live in fear, just follow the boy scout wisdom of “be prepared”.

Nine - Educate yourself in and outside of your current employment niche. When I lost a job about 8 years ago it became an opportunity! I went from Sales Management into online marketing and became very successful. The reason was simple in my sales career I educated myself on how to sell all the time. At the same time I taught myself how to market on and off line. I took my sales knowledge and put it to use online with my new skills. This was my “secondary income” a tiny small business that was making me about 500 dollars a month. I turned it into a new career because I had become a learning sponge. Today I own companies because of this education I gave myself. Be it online, via books, classes, seminars, I don’t care what invest both time and money in educating yourself.

Ten - Be the supreme commander of your own life and destiny. Every day think about how you can do better for yourself, your family and your employer. Your job IS NOT a right, you salary IS NOT an entitlement. Get that into your head right now this second. Would you take a raise if it was enough to damage your companies future? If you can answer that with a yes you should be fired! See yourself as an independent contractor, self employed no matter what your job is about. You should get paid as much as you can with in reason, many are underpaid but many people are also over paid. Work hard enough to be able to demand and expect more.

The key here all goes back to one thing though, no job is secure today. That false belief has put many people into massive debt and financial ruin along with a retirement in poverty. Sure this post was an ass kicking but most of America needs one from time to time.

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