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March 2009 - Posts - The Dollar Stretcher
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The Dollar Stretcher

The Dollar Stretcher blog will explore people and money.

March 2009 - Posts

  • The 401k Layoff Trap

    I was surprised at the "Borrow from your 401k" suggestion. While it's true that it's better than cashing out, so many people are being laid off unexpectedly. When this happens, it must all be paid back or considered a cash-out, which comes at a time when people are least able to repay because they just lost their job. It should at least have been mentioned as a consideration. -- Deborah in San Diego

    Deborah makes a very interesting point. She's referring to an article entitled "Need Cash"  that discusses 10 ways to raise cash quickly if you're in a jam.

    How widespread is the problem? It's hard to find many statistics on 401k loans. But a Harvard report cites two statistics that point to trouble. The vast majority of plans allow for borrowing (over 85% in 2005, Investment Company Institute, 2006). And they also report that 18% of 401(k) participants had a 401(k) loan in 2006.

    We can't know for sure, but it's probably not an unreasonable guess that about one in five or six people who are laid off will have a 401k loan outstanding when they get the pink slip.

    And, that's when Deborah's problem comes in. As a general rule, if you leave your employer you need to repay the 401k loan in full. You may be given a month or so, but that's it.

    Any amounts that you fail to repay are treated like a withdrawal. That means that you add the amount of the loan to your income and you'll pay normal income taxes on it. Plus, you'll be liable for a penalty that equals 10% of the unpaid loan.

    What can you do about it? First, if you have a 401k loan and think that you could lose your job, you need to take it seriously. Begin by estimating how much the taxes and penalties would cost you if you didn't repay part or all of the loan. It'll be bad. But since your income will be lower than previous years (because of the layoff), your tax rate should drop (that assumes no tax rate hikes).

    In any event, you need to have some idea of how much the penalties and taxes are. You'll want to compare that to the cost of other alternatives.

    There are a couple of withdrawal exceptions that might help in a layoff situation:

    • You were age 55 or over and you retired or left your job
    • You paid for medical expenses exceeding 7.5% of your adjusted gross income

    What if you don't fit into one of those categories? Your options are limited, but you still have some choices to make.

    Now might be the time to consider selling a car. Your ride needs to be worth more than any loans on it. Any cash you raise could help pay off the 401k loan. If you're not working transportation won't be such a big issue. You can always buy another car when you're employed again.

    Do you have a homeowner's line of credit or enough equity to refinance your home? That could provide some money to repay the 401k loan. Refinancing will be easier before you lose your job. So you might want to consider this if you expect to be laid off.

    Using your credit card to pay off the 401k loan is a high-risk strategy. You'll probably pay a higher interest rate. And, you'll also need to keep making payments even if your income has dried up. Plus, you'll be consuming part of your credit line that you may need later.

    The only advantage to shifting the debt to a credit card is that you avoid the tax problems of a 401k withdrawal. But it's wise to compare the numbers before you make a decision.

    The unfortunate fact is that most 401k loans were promoted as an painless way to 'borrow from yourself'. Turns out that's not so true if times get tough.

    Keep on Stretching those Dollars!

    Gary

  • Partner Laid Off?

    You'll find an interesting article on what to do (and what not to do) when your partner is laid off. Good advice. I went through lay-offs twice in my life. Once I didn't know what I wanted to do next. It wasn't an easy time emotionally. My wife's support was priceless.

    The second lay-off was when I had already started The Dollar Stretcher.com. I expected it and had taken steps to prepare. Had a much easier time handling it.

    But, in both cases it was much easier to face with someone I loved standing beside me encouraging me to take the next step.

    It's a short read. Well worth your time.

    Keep on Stretching those Dollars!

    Gary

    Posted Mar 26 2009, 10:26 AM by Gary with no comments
    Filed under:
  • Swap It!

    Just the other day I was watching TV and saw an ad for bundling phone, internet and cable. I was struck by how we've changed what we consider entertainment. My family was full of readers, but the books came from the library, not Amazon.com. We bought some records, but not many. TV reception was from an antenna, not a cable. Overall entertainment was not a big expense in our home.

    But, that's changed today. We don't go to the library. It's easier to order books, CDs and DVDs online. And, then there's the video games. It's real easy to spend a bunch of money without realizing it. That's why we've been encouraging people to save on their entertainment budget.

    Recently I was introduced to a media swapping site called Swaptree.com. It allows users to trade the media they have for the media they want. Just list the items that you have to trade and the ones that you'd like to receive. Swaptree has a formula that works out two- and even three-way trades. So you don't have to do the matching. They'll tell you what swaps are available.

    It's particularly handy for those of us who are always looking for something new. If Junior is bored with that expensive video game you can trade it. No need to put it on the closet shelf to collect dust.

    The service is completely free, and users only pay for the shipping of their item. That's something that we like!  Swaptree also simplifies the mailing process by allowing users to print a postage label on their regular printer. So no need to weigh items or find the right stamps.

    So do like I did. Give it a try. Who knows, you might seriously reduce your entertainment budget. Check it out at <www.swaptree.com>

    Keep on Stretching those Dollars!

    Gary

    Posted Mar 19 2009, 09:16 AM by Gary with 2 comment(s)
    Filed under:
  • Unavailable Credit

    When I was young, one of the things that was most likely to cause a fight was when someone changed the rules in the middle of the game. Generally someone else was a victim of the new rule and wasn't too happy about it. Fortunately, it was just childish stuff. Even if there was a fight, everyone would make up the next day.

    But, it does remind us of an interesting point that's relevant today. We make plans based on how we understand the rules of the game. A change in those rules could work against us. And, as adults, unlike kids, we're playing for keeps.

    A couple of articles brought this home to me. The first is "Credit Card Issuers: Buy Something or Else!" by Kelli B. Grant. She points out that credit card companies are actively reducing the number of customer accounts. Especially those that haven't been used lately. According to Grant issuers including Chase, Bank of America, American Express and Citibank are reducing available credit lines.

    This poses two big problems for consumers. First, their FICO credit score could drop. One factor in the credit score is the percentage of available credit available to the consumer. Reducing unused credit lowers your score even if you do nothing wrong.

    The second problem is that many consumers use available credit as an emergency fund. Instead of having savings sitting in an account, they plan on using credit cards in case of a job loss or other emergency.

    How important that can be to consumers (and ultimately the whole economy) becomes clearer if you read "Credit Cards Are the Next Credit Crunch" by Meredith Whitney. According to Whitney, there is approximately $5 trillion in available credit to all consumers. And, about $800 billion is currently being used.

    In the last quarter of 2008 banks reduced available credit by $500 billion. And Whitney estimates that half of all available credit will be eliminated by the end of 2010. To put it another way, that's $2.5 trillion that was available to be spent, that is no longer available!

    What can you do? Frankly, there aren't many easy options. All of the easiest choices should have been started years ago. But, there are some things that you can do to minimize the damage.

    First, choose which credit cards you want and use them periodically. You don't need to carry a balance. But, use the card to charge something. By making a purchase on the card your account will show recent activity. That's one of the triggers to close an account. When the bill comes pay it completely.

    Limit unnecessary expenses now. Build up your cash reserves. Unless you could survive for six months on your current savings, it's time to get real serious about cost cutting. The internet (including stretcher.com) can provide you with all kinds of tools to reduce expenses. Remember that no one can suddenly decide to reduce your savings account. It's your's.

    Pay down any credit card balances. You can create more unused credit by reducing the existing balance. Obviously, this takes time and should have been started before. But, better to start now than to not start at all.

    Don't count on your credit lines. Expect them to drop. If Whitney's projections are right you could lose 50% or more of your credit lines. What will you do if you run out of savings and available credit? What steps would you need to take? Who's help would you seek? Think through these things now.

    Don't wait until you lose a job to take action. This could be very serious. Experts say that one of the major causes of the 1930's depression was that the supply of money shrank. Cutting available credit lines has the same effect. And, as more people default the banks will have additional reason to reduce even more available credit. So the noose gets tighter.

    Now is not the time to panic, but it certainly is time to make responsible preparations.

    Keep on Stretching those Dollars!

    Gary

  • You Can Fool Some of the People...

    "It is wise to remember that you are one of those who can be fooled some of the time." Laurence J. Peter

    What has that got to do with our money? Good question! Perhaps more than we think.

    We've all heard that 'pride goes before a fall' and most of us believe that to be true. But, I've noticed something funny about pride. We have a hard time recognizing it in ourselves. We can see it in others. But, we often overlook it in the mirror.

    For instance, it's much easier for someone to scam us when we think that we're too bright to fall for such schemes. And, it's much easier for us to take on too much debt when we think that we know enough to bend the rules a little bit. I think that you get the idea.

    In this era, when many of our financial rules seem to either not be working or are obsolete, it's wise to remember that we can be fooled some of the time. Just because some expert says it's true doesn't make it so.

    Right now it's very important to question EVERYTHING that you hear about your finances. Turn it over. Look at what's underneath. And, what might be the future consequences. Failure to do so could cost you dearly later.

    Keep on Stretching those Dollars!

    Gary

  • Learning 101

    "Half of learning is learning. The other half of learning is unlearning."

    Recently I saw this quote and thought how it applied to our financial lives. It was attributed to Mark Batterson from his book "In a Pit With a Lion on a Snowy Day". Although I doubt that Batterson meant to talk about finances, the quote certainly does apply. Especially today.

    Many people throughout the world are re-evaluating their finances. They recognize that they might not want to keep doing the things they did last year. That means that not only do we need to learn new skills and methods, but we also need to unlearn habits and beliefs that are part of our lives today.

    If you think about learning and unlearning, you'll recognize that sometimes we need to do the unlearning first. The reason is simple. If your habit is to stop for a fancy coffee on the way to work every day, you can't learn a new habit until you unlearn the old. So let's start with some things that you might want to consider unlearning.

    We need to unlearn the "things that we can't live without". For many of us it's hard to imagine living without a dishwasher or a car. But, if we try we might find that we can live without these things. Especially if we get creative in looking for alternatives (like asking kids to do the dishes or joining a carpool). You might want to think about all the must have things in your life to see whether they really are that necessary.

    We need to unlearn some pride. The "I'd never be caught dead..." syndrome. Would you be embarrassed if your friends knew that you bought second-hand clothes or a used car? Maybe so. But, if you're going to survive tough times, you'll need to get over that embarrassment. You can't feed your family or pay the mortgage with designer clothing.

    We need to unlearn evaluating ourselves in terms of our possessions. You are not worth less than your neighbor because they own a newer or more expensive vehicle. For many of us this could be hard to unlearn. Since childhood we've assumed that our worth is based on how much stuff we have. But, unlearn it we must.

    You may think of other things that you need to unlearn. Each of us walks a different path through life, so we'll each need to make our own adjustments. Once you've begun to unlearn, you can begin to consider some new things that you may want to learn.

    We need to learn to "make do". The time has come to question every purchase. Is there some way to avoid spending money? Is there something that you already have or could borrow, that would be good enough? We all need to learn to make do with the things that we already have. It's an acquired skill.


    We need to learn skills that are new to us. You can learn to sew. You don't need to be good enough to sew your whole wardrobe. Just good enough to repair clothes that need mending. You can learn to cook. You can learn to garden. Learn to do household repairs. There are all kinds of things that you can learn to do. It's especially easy with available instruction on the net. You have the ability to learn. And, you'll have the will to learn if it becomes important to you.

    We need to learn to make our efforts count. There are some tasks that can save us a lot of money. But, others don't have such a good payback. If you're going to take on extra tasks around your home, do those that will save you the most money. Mixing homemade cleansers can save a lot of money for the amount of time spent doing it. Same thing with hanging clothes to dry. But, there are other things that just won't save much money. You'll need to decide which things are a profitable use of your time.

    Again, you'll think of other things that you need to learn. Don't be afraid to take this opportunity to grow. Many great advances have grown out of adversity. And, you're only beaten when you give up trying.

    Keep on Stretching those Dollars!

    Gary

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Gary is a former financial planner and purchasing manager who edits The Dollar Stretcher website <www.stretcher.com> and newsletters. You can follow Gary on Twitter.com/gary_foreman
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