2013 401k Limits

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The IRS published the new 401k contribution limits for 2013. By law, these limits are adjusted annually for inflation according to the governments cost of living statistics. For the last few years, there have been several small adjustments upward because inflation has been relatively tame during the slow recovery from the U.S. recession. The IRS also published increases for current 401k contribution limits. 2013 401k Contribution Limits The 401k contributions limits in 2013 increased by $500 over the 2012 401k contribution limits. The maximum 401k contribution in 2012 was $17,000. The 2013 maximum 401k contribution amount is $17,500. For 401k participants age 50 and older, there is a catch-up contribution available. The 2013 401k catch-up contribution is unchanged from the 2012 catch-up contribution. Using this provision, older 401k plan members can contribute an additional $5,500 per year into a 401k plan. With the catch-up contribution, the maximum 401k contribution limit for someone age 50 or higher in 2013 is $23,000. Remember that 401k contributions must be made via salary deferral according the individual plan rules established by each employer. Many plans have rules that allow only a certain maximum percentage of salary to be contributed. In years past, the IRS …

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1987 Stock Market Crash 25th Anniversary

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Twenty-five years ago on October 19th, the Dow Jones Industrial Average fell 508 points, just over 22 percent, the biggest one-day percentage drop in history. The crash was so severe that it usurped the use of the term Black Monday, which had previously been used to describe the two-day crash in 1929 that led to the Great Depression. Ironically, the stock market ended up for the year in 1987, having opened on January 2, at 1,897 and closing on December 31 at 1,939. However, it would be almost two years until the market overtook the highs for the year that occurred before the crash. After Black Monday, the so-called circuit breakers were implemented to reduce the chances for such spectacular, all at once, market drops. These curbs were revised and expanded to individual stocks after the “flash crash” of May 2010. Most interesting for students of personal finance is that while events like these can be punishing over the short-term, they fade quickly into the realm of past returns for long-term investors. Remember that just a decade later, in 1997,  the stock market was in the middle of a major rally which would continue for several years until the popping …

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Cable Bill Scams

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If you’ve ever seen the advertisements for cable TV, you may wonder why you can’t ever seem to get a good rate like that. After all, according to the back and forth commercials between satellite TV and cable television, it seems like a $99.99 per month cable TV bill would be an easy score, and yet, no one ever seems to pay that much. Is it all part of a big cable TV scam? Real Cable Bill The problem, of course, with those advertised cable TV rates, like those from Comcast and Time Warner, and those from satellite TV companies like Dish Network and DirecTV, is that they have plenty of fine print typed neatly at the bottom of the page where you won’t notice it. So, when you are offered a $99.99 cable TV bundle of some sort, you are actually agreeing to pay far more than the rate advertised in big, bold letters. So, just how do cable companies trick you into paying higher rates than they advertise? The answer, as always, is fine print and long disclosures. That advertised rate is a just a base rate, and there are several add-ons that will jack your final bill …

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Cell Phone Bills Too High for Budget

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The Wall Street Journal recently published an article about how cellphones are eating the family budget. It seems as though the idea and everything but the words were lifted from an earlier article in the Boston Globe. Whatever the source, this is something that I saw coming years ago as a financial planner, and now, it seems things are maybe worse than ever when it comes to your budget and your cell phone. Your Cell Phones, Your Budget When I was a Certified Financial Planner advising clients, one of the first steps (after signing them up as clients) was to review their budget. For the wealthy, a budget isn’t really all that useful or eye-opening, but for everyone else, a budget can reveal some very ugly truths. First, most people spend way more money each month on things than they think they do. Nothing is a bigger shocker than filling out a budget that includes everything you THINK you spend money on each month, and then sitting down with someone and matching that up to your bank and credit card statements to see what you ACTUALLY spend each month. Second, for most people, there actually isn’t much they can do …

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Keep Home in Bankruptcy

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After yesterday’s post about rebuilding credit after bankruptcy, I got two different questions about how to keep your home during bankruptcy. One of the readers seemed a bit frustrated and finished by asking, “Why can’t I get a simple answer to this question: Can I keep my home if I file bankruptcy?” The simple answer is: Yes, you can keep your home if you file bankruptcy, but only if you do the right things. I suspect it is that, but only if, part that is causing the answer to not seem simple, so let’s break it down. Keeping Your House After Filing Bankruptcy First, it is important to understand that a home mortgage is a secured loan. The security, or collateral, for the loan is the home. If the debt is not repaid, then the lender may take the collateral and sell it in order to pay off the loan. Now, just like any other debt, a mortgage can be discharged in bankruptcy. Doing so means that the lender may no longer attempt to collect the debt. So far, so good. However, the lien, or the right to take possession of the loan’s collateral is NOT discharged, or affected in …

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How Should I Invest $3,000

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A recent Money magazine tidbit on Twitter caught my eye. Someone asked how they should invest a small amount, in this case, $3,000. The response suggested a target-date retirement fund. However, I don’t think that is a very good answer in this case, or in most cases. How To Invest a Small Amount When I was a Certified Financial Planner, I would come across people all the time who wanted to know how to invest a small amount. It isn’t hard to see why. We are constantly reminded that we should be saving and investing money. Books like The Richest Man in Babylon (the single best book for beginners in personal finance) extol the virtues of investing some of everything you earn and letting the power of compound interest turn that on-going investment into millions of dollars. However, this very simple concept is actually very misunderstood. First, remember that compound interest is NOT fast. If you invested that $3,000 and were able to earn 8 percent per year you’d have just $4,408 in five years and $5,141 after a full seven years. That isn’t to say that you shouldn’t invest that money, you should just understand what your realistic expectations …

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What Causes Inflation?

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Recently, I wrote a little bit about inflation. Specifically, I wrote about why the Federal Reserve is so worried about inflation, and why good economic news and inflation often seem to go hand in hand. That led to some questions about what inflation is exactly and where inflation comes from. What Is Inflation? Perhaps, it is best to start at the beginning with a definition of inflation. Inflation defined is, The rise in prices of goods and services when spending increases relative to the supply of the market. In other words, when prices rise because spending, by business, or consumers, or both rises. Where Does Inflation Come From? Pinning down exactly what causes inflation can be tricky. Inflation is a simple word applied to a very big concept that encompasses a lot of how a market economy works. For starters, inflation is natural. This may come as a shock considering how much the Fed and the media harp on keeping inflation down. However, inflation is inevitable as long as the population within an economy is growing, as is the natural state of the human race. Consider a small tribe with a fully modern monetary economy. Let’s say that there are …

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Why the Fed Worries About Inflation

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The Federal Reserve, like many government agencies and organizations, has a dual mission. On the one hand, it is the Fed’s job to keep the economy running smoothly and maintain the economic and monetary systems the country depends upon. On the other hand, it is the Fed’s job to prevent rampant inflation from crippling the economy. Doing one job well, sometimes means messing up the other job. Under normal circumstances, the Federal Reserve uses its power to set interest rates to moderate the ups and downs of the economy. In a free market system, there are periods of expansion and contraction (good times and bad times). These variations in the economy occur for two main reasons. First, people (as a group), do not always behave rationally. Second, even when people are behaving rationally, there can be a significant lag between the arrival of data and the impact of that data on decisions. For example, when we talked before about how inflation works, we talked about a man named Brad who, when prices rise, cuts back on spending by cancelling his gym membership. Theoretically, the exact moment for this to happen is when Brad’s expenses increase beyond his income. However, in …

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Good Economic News and Inflation

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It seems any time economic news gets reported, there is a good news / bad news sort of thing going on. If there is an economic report that offers up good news about the economy, that is paired with the bad news that the Federal Reserve is either not going to do anything (recently) or may move to increase interest rates. Either way, that seems to worry some people, no matter how good the economic news might seem other wise. The Fed and Inflation The Federal Reserve’s mission is to regulate the U.S. economy independently of the U.S government. That role has never been as important as it has been lately when Congress and the President seem constantly paralyzed by politics from taking any steps or implementing any policy to help the economy. In particular, the Fed’s role is to help regulate U.S. monetary policy. This is a historical mandate, and it shows that those who created the Federal Reserve had remarkable foresight, because what is good for the country’s economy does not often square up with what is good for the political parties that want so desperately what to gain and hold power. There are two main missions for …

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Job Numbers Good News or Bad News

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On Friday, the US Department of Labor released the July non-farm payroll numbers. They showed that employment rose by 163,000 while the unemployment rate was basically the same at 8.3 percent. Of course, this is an election year, which means that within minutes, the airwaves were flooded with spin about how this was good news or bad news, depending upon your political persuasion. Truth in Money How do you tell if the July nonfarm payrolls data is good or bad? Among politicians, talk is cheap. There is no need to be accurate or correct, only to color the perception of the electorate in such a manner that you garner the majority of their votes. In other words, a politician, and their supporting ecosystem of political pundits and talk show hosts have no interest in what the jobs numbers, or other economic data, actually mean. How can you tell when a politician is lying? His lips are moving. In fact, many of them have only the barest of understanding as to what the data actually says. Instead, they have their experts comb through looking for what can be characterized as good or bad and then run with whichever one supports their …

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