Lynnette Khalfani - The Money Coach™ Newsletter 11-08-2004
Hope your week is off to a great start! Mine is …
especially since I’ll be appearing this Friday on
The Dr. Phil
Show. For details and other exciting TV and media events featuring The Money
Coach, click here
…
This newsletter is also jam-packed with lots of personal finance information that I hope you find useful, including:
Because so many of you have asked about future projects, I wanted you to know that I’m currently completing The Zero Debt Workbook (to be published in early 2005). If you have any debt or credit-related questions that weren’t answered in ZERO DEBT, please write me and I’ll be sure to incorporate your queries, and my responses, into The Zero Debt Workbook.
Please also keep sending me your success stories, letting me know which chapters in ZERO DEBT you found most helpful, and which steps you took to get on the road to financial freedom.
Lastly, to all you subscribers who are book club members: I can’t tell you how grateful I am for your support. You’ve help ZERO DEBT become a bestseller at numerous independent book stores around the country.
Please continue to spread the word about ZERO DEBT. J
Here’s wishing you health and wealth!
Best,
Lynnette
Reader Question of the Week: How should I handle my 401(k) money?
Q: I’m planning on leaving my current job in early 2005. I have a $15,000 401(k) loan balance outstanding. I also still have $20,000 left in my 401(k). Can I cash out the rest of my retirement savings (with or without penalty?), or do I have to leave the money in my current 401(k) plan?
A: Here are the rules and consequences regarding tapping your 401(k).
If you have less than $5,000 in your 401(k), when you leave a job for whatever reason (you move, get a new position at another company, get downsized, etc.), then the company can force you to take that money out of the 401(k) plan. Basically, employers feel that it's too costly to administer a plan that they consider a "small" account - especially if the person no longer works there.
But with approximately $20,000 left in your 401(k), you have several options:
1) You can take the money out and cash in you when you leave your job. I don’t recommend this because if you are not of retirement age, you will have to pay ordinary income taxes on the amount you withdraw, as well as a 10% penalty to the IRS.
Also, any 401(k) loans that have not been repaid by the time of your separation will also be taxed at ordinary income rates and assessed that same 10% penalty.
2) You can leave the money in your current employer's plan.
So let's assume, for example, that your 401(k) plan is held in a mutual fund that’s been performing well. If so, you might just let that money stay put. You can keep it there as long as you’d like – or until you find another job.
When you secure new employment, you can then rollover your 401(k) funds into your new company’s 401(k) plan.
3) Upon leaving your current place of employment, you can also rollover your 401(k) money into an IRA - an individual retirement account. This would likely give you a range of investment options, since most employers have a limited number of funds in which their workers can invest their 401(k) dollars.
Again, generally speaking, I tell people to not withdraw money from their 401(k) plan if they can help it. Take a loan – if you must. But withdrawals that you’re not going to pay back really cost you in the long term.
In my book, ZERO DEBT, I talk about some of my own financial blunders, including taking premature distributions of more than $80,000 out of my 401(k). Take a lesson from The Money Coach: don’t make the same mistake I did!
For those leaving a job and desperately needing access to 401(k) money, if you’re willing to incur the taxes and 10% penalty, you might at least buy yourself some time by rolling the 401(k) money over into an IRA. You can take a “loan” from an IRA once a year for 60 days. So let’s say you rollover 401(k) money in Jan. 5, 2005. And then on Feb. 10, 2005 you withdraw $15,000 of your $20,000 that’s now in your IRA. You would have until April 10th to put the money back into the IRA – without incurring any taxes or penalties. If you don’t put the money back in, you’ll be subject to taxes and that 10% penalty.
How to Avoid Debt and Holiday Over-Spending
November is here, and that means you can’t walk into any retail establishment or department store without being inundated with sales offers, promotions, and other marketing gimmicks designed to get you spending early for the holiday season.
Well, I don’t want to dampen your year-end festivities. But I would like you to think about some smart ways you can avoid overspending and debt during the holidays. Start with these ideas:
Most of us take shopping lists into the mall when we go hunting for gifts for family members, friends and co-workers. What we should be taking – in addition to our lists of who’s getting what – is a budget and a buddy.
Your budget should include a total dollar limit on how much you will spend. Don’t make the mistake of writing down 10 people on our gift list – but not having a specific budget cap. If you do, you could end up spending, say $1,000 for those 10 gifts. But let’s assume that you knew realistically that you could only afford to spend $500 (and we’re talking cash here … not credit!). Well, then you know that the maximum you should spend per person is $50, in order to stick to your $500 overall budget.
Take a buddy shopping with you also to help you stick to your plan. Ideally, your shopping buddy will keep you honest and accountable. He or she can also drag you – if necessary – out of the mall if you can’t curb your spending impulses.
Studies show that shoppers tend to buy more than they had planned (in terms of quantity) – and to purchase higher-priced items when they use credit cards versus cash. When you have to fork over cold, hard dollar, psychologically, it makes you think about the value of your purchases. So before you go on a gift-buying binge, hit the ATM first – armed with your budget – and take out exactly the maximum amount you’ve determined you can afford. Later, when you are out of cash, that’s it. Leave the mall or whatever store you’re in. Resist the temptation to whip out plastic to buy more stuff.
And while you're at it, say "no" to those tempting offers you'll get this season from credit card companies offering to let you skip payments for a month or so. That'll just cost you more in interest payments in the long run.
Many of us have been brought up to believe that you absolutely must buy a gift for those closest to you – even if you have 7 siblings and 18 nieces and nephews.
A better strategy, especially for those with big families, is to buy a gift for the whole family. So instead of buying your sister a $60 sweater, buying her husband a $45 bottle of cologne, and spending $30 on each one of their three children, try purchasing a family pack of movie tickets for the whole gang. That’ll run you $30 to $35 depending on where you live).
Or if movies aren’t their thing, maybe they’d love to have an annual family membership to the local zoo, a regional museum or their local YMCA. The point is to get something the whole family can enjoy – preferably together – without blowing your budget.
You can create some wonderful holiday gifts on your own, by making them. Some ideas: a special photo album, a picture collage, newspaper clippings of someone famous in your family’s history. All of these things require very little money to create. Don’t forego the opportunity as well to create special traditions. Lots of people have parties and family celebrations. During those gatherings, start an annual tradition, such as a family songfest, where you sing impromptu lyrics about “The Best Holiday Ever” or “What I Like Most About The Holidays Is …” Don’t make it competitive. You’re not putting on a professional talent show. In fact, it can be a fun, or humorous time. (Well, if any of you heard me sing, I’m sure you’d crack up laughing!). Here’s the bottom line: You’re really creating memories, and starting traditions that may last for generations to come.
Follow these tips and you’ll have a less stressed holiday season … and you’ll avoid going into debt to boot! After all, you DO want to start off 2005 on the proper financial footing, right?
The Top 5 Debt Triggers … Or How Do People Fall Into Debt:
Those of you who
have read my book, ZERO DEBT: The Ultimate Guide to Financial Freedom, probably
know that I have a theory about people in debt. Basically, I believe that most
individuals deep in debt find themselves in that situation for one of two
reasons:
1) They’re over-spenders or poor money managers;
or
2) They’ve fallen victim to what I call “The 5 Dreaded D’s”:
1. Downsizing
2. Divorce
3. Death
4. Disability
5. Disease
For those who haven’t been over-spending and mis-managing their money, these 5 Dreaded D’s are the top 5 debt triggers. If any one of these things happens in your life, it can totally throw your finances awry.
Solution: protect yourself against The Dreaded D’s by making sure you have a sufficient cash cushion (at least three months’ expenses set aside), as well as adequate life and disability insurance.
What’s New with The Money Coach …
Once again, please set your VCRs so that you don’t miss The Money Coach! I’ll be on The Dr. Phil Show on Friday, November 12, 2004. For anyone who wants to get his or her spending under control, eliminate debt, and better manage his/her finances, this is a MUST SEE hour of television! The show is called "Where Did the Money Go?" On the program, Dr. Phil calls my story - about how I got of out $100,000 in credit card debt in less than three years - "amazing," and he encourages his TV audience to go out and buy a copy of my book, ZERO DEBT: The Ultimate Guide to Financial Freedom.
And speaking of TV ….
Many thanks to all of you who sent best wishes and congratulations after watching me on The Jane Pauley Show Oct. 29th. The nationwide response to that show has been incredible … with many viewers specifically asking how they could buy their own copies of ZERO DEBT to learn how to conquer debt, the way I did.
In fact, so many people snatched up copies of the book, that ZERO DEBT is already in its 2nd printing …. Just one month after the Oct. 1, 2004 publication date!
Radio Broadcasts …
For all of you radio listeners, please tune in to The Tavis Smiley Show on NPR this week, starting Monday. I’ll be on with Tavis talking about the importance of your credit score, and how to improve your credit standing.
You can also hear my personal finance advice every Wednesday at 6:50 a.m. on WLIE Business Talk Radio (syndicated from NY).
Seminars/Workshops
Want to learn how to build your portfolio on just $25 a month? Come learn savvy ways to grow your wealth – even if you don’t have a lot of money with which to start. I’ll be teaching a class on this topic at The Learning Annex in New York on November 9, 2004,
For any of you in the greater New York-New Jersey area, I want to extend a personal invitation for you to come to The Road To Wealth Conference at Rutgers University in Princeton, NJ on November 13, 2004. To register, just log onto http:///www.nj.com/personalwealth. I’ll be signing copies of ZERO DEBT, and will give a featured presentation called: “How to Eliminate Debt From Your Life.” Suze Orman is the keynote speaker at this event. David Bach, bestselling author of The Automatic Millionaire, will also be there. I took part in the Conference last year as well and it was a huge success … About 2,000 people were at my seminar in 2003, and I expect about the same number this year. I’d love to see you there!