Your Two Bits

Which should you do, pay down debt or invest? You can find different arguments for or against, but I generally say that you should pay down debt, assuming you have a minimal amount of savings ($1000) to cover emergencies. A good list of reasons for paying down debt is provided in this post at I’ve Paid for This Twice Already.

However, my biggest reason is the risk factor. I think Dave Ramsey sums it up best when he says, “I’ve done extensive research and found that 100% of home foreclosures occur on homes that have a mortgage.” Sometimes he might substitute “home foreclosures” with “car repossessions,” but it’s the same idea: If you have debt, you have risk. And don’t get me started on the issue of people willing to incur debt-related risk where they’re sure to lose money but are afraid of investment risk where they have a good chance of making money.

Ultimately it’s up to you to decide how much risk you are willing to take; my main recommendation is that you at least make it a conscious choice.

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Does anybody have to worry about taxes on capital gains right now? It seems most are worrying about capital losses. However, with the market so low compared to where it was last summer there is a decent chance that people who are currently investing (and likely buying low) will have reason to consider capital gains tax rates before they sell their investments in the future.

(Note, this assumes investments, such as mutual funds and stocks. Other types, such as real estate, have slightly different rates.)

2009 Capital Gains Tax Rates

Basically, you pay your regular income tax rate, if you sell the the investment within a year of buying it. If you wait at least one year from the date of purchase, your tax rate drops significantly.

However, the law regarding these tax rates is set to end after 2010. At which time the tax rates would return to what they were up to 2003, which also includes a slightly lower rate for holding investments more than five years.

2011 Capital Gains Tax Rates

Let’s hope that Congress votes to keep the rates low—better yet, let’s encourage them to do so.

That’s my two bits. What are yours?

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Since last week’s post regarding whether to keep contributing to a 401(k) if your employer drops the match, I have had a few discussions with people on this topic. Last week’s post was written assuming that you are going to keep contributing to some form of retirement investment; however some people have asked, if they should stop contributing to all investments. The short answer is “No.” The longer is answer is “It depends, and here’s why.”

In general, you really don’t want to lose any of that retirement savings momentum. That’s why the short answer is “No.” However, there may be exceptions. One person asked if they should stop contributing to the 401(k) so that they could build up their emergency savings. My gut reaction was to say to keep contributing; however, as I pondered the issue, I changed my mind a bit.

First of all, if a company is freezing its 401(k) match, that is most likely because they are struggling financially to some extent. If the company is struggling financially, you may have reason to worry about your job. Depending on your debts and amount of emergency savings, you may want to build your cash reserves in the short term. In this case, I am more open (albeit still very nervous) to stopping contributions to the 401(k) and not investing anywhere else. However, my openness comes with some caveats.

Create a Plan
Do not stop making contributions until you have a plan of action in place. This plan should include a few critical elements:

1. Determine how much money you are going to save. In other words, at what point will you be ready to begin contributing again? Write down an actual dollar value.
2. Once you reach your desired dollar value, are you going to begin contributions to your 401(k) or invest in something else? If something else, have that something else already selected. I would suggest even going so far as filling out the application with all but the signature and date.
3. Determine an alternate investment, in case re-investing in your company’s 401(k) plan is not an option, either because the company no longer exists, or your position no longer exists, or you have to wait for open enrollment.
4. Save every penny that was going to your 401(k) when you stop making contributions.
5. To help you save every penny, at a minimum save the money in a savings account that is separate from your general checking account—even better would be an account in a completely different bank. I would look for something like a money market account; it might give an interest rate that helps you keep up with inflation.

Hopefully, you aren’t in a position where you feel the need to stop all contributions; however, if you are, at least have your “exit strategy” in place.

That’s my two bit’s worth. I’m interested to hear what thoughts others have.

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With business tending to be slower for many right now, I have heard of cases where employers stopped matching employee 401(k) contributions. Along with the market’s downturn, this leaves people wondering what to do. What would you do if your employer stopped matching your 401(k) contributions? Here’s my two bits.

Did the employer drop the match temporarily or permanently? If permanently, unless I really liked the investment options in the 401(k) or the contributions lowered my income in a way that had significant tax implications, I would stop contributing. However, I would continue to invest essentially that same portion of my income to mutual funds I like, which I would set up as Roth IRAs to be automatically withdrawn from my checking account each month. That way it would still feel like I never have the option to spend that money.

If the employer dropped the match temporarily, it’s not as clear. If there is a decent chance they will begin matching again within a year, I would keep contributing to the 401(k). The reason being that it’s a little less hassle to keep it going and you don’t risk the possibility of failing to invest the money somewhere else. There may also be tax implications to your paycheck. However, if the employer won’t be matching contributions again for at least a year, or you really dislike your investment options, I would probably stop contributing.

Hopefully that situation doesn’t arise, for both your sake and your employer’s. If it does, just be sure to continue to invest the money somewhere either by contributing to the 401(k) or in other investments, such as mutual funds. In fact if you don’t trust yourself to be sufficiently disciplined to continue to invest that money, I would recommend that you simply stick with the 401(k).

Those are my two bits. What are yours?

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Following up on last week’s post about gold being a safe investment, you may ask yourself, “Should I invest in gold?” My thought is probably not.

I’m sure that many people who read this will be screaming, “Aaah, you’re completely nuts! Everybody should own gold.” I’m open to being dissuaded from my current views; however, while gold has done well over the last 10 years, historically, the stock market has performed better.

I ran across this statement on Wikipedia that sums up my thoughts quite eloquently: “Gold is regarded by some as a store of value (without growth) whereas stocks are regarded as a return on value (i.e. growth due to anticipated real price increase plus dividends). Stocks and bonds perform best in a stable political climate with strong property rights and little turmoil,” (http://en.wikipedia.org/wiki/Gold_as_an_investment).
We have seen a fair amount of turmoil over the last few years, with the “War on Terror” and related efforts, which have likely contributed to gold’s increase value.

Ultimately, if you believe that the political structure is going to crumble or the economy will collapse, gold is a better option than the stock market—of course, you may also want to include some food storage, a gun, a port-a-potty, and cigarettes in that event (those cigarettes could become your most valuable asset). Nothing in life is risk-free. The political system could change to a communal form of government and you might have all of your property taken away from you. My bet is that those disasters won’t happen, so I’m keeping my money in the market.

I know this topic has some passionate people on both sides of the issue. I’d love to hear your two bits on the matter.

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