Happy New Year? Not For Some. At the beginning of 2009, employees who take part in a 403(b) plan, which is like a 401(k) plan for non-profit organizations, will have fewer investment options. This change will bring 403(b) plans in line with the expectations for 401(k) plans. The change will probably mean higher expenses and more paperwork for everyone involved: employers, employees, and plan managers.

Dow 8,000: The Psychology of Round Numbers. This is a short article that doesn’t get deep into the topic. It is interesting how psychology is attached to round numbers, whether it’s 14,000, 10,000 or 8,000 for the Dow Jones Industrial Average. These numbers are seen as triggers.

100 Money Saving Tips for the Holiday Gifting Bonanza. Do not shop for gifts this year without memorizing Jim’s list of 100 tips. If not, at least skim through. There are bound to be several dozen that could guide you this year with the economy in a mess.

Save Time and Effort With a Personal Shopper. This is often a free service clothing stores offer, and they may not even advertise it. Carson Kressley’s fee is too high, and apparently, it’s easy to get the same service. All you have to do is prepare a list of what you need, bring your measurements or have yourself measured in the store, and answer some of the personal shopper’s questions about your lifestyle and preferences, and he or she will bring you items to try on with no obligation.

For the “News and Blogs” features, which I plan to run almost daily as long as I have additional articles to share, I select some of the most interesting posts from my RSS reader and from pfblogs.org. If you don’t believe you blog is included on my RSS reader, please let me know to so I can add it. Thanks!

Yesterday, GM announced that it would be suspending the company’s matching contributions into its employees’ 401(k) retirement plans starting November 1 and lasting until financial conditions improve. For people like me who make their living working for a corporation, the 401(k) match is practically expected.

One way to look at the company match, if dollar for dollar like the plan offered by my employer, is as if it were an immediate 100% return on your money. There’s no sense in turning down a guaranteed doubling of your money, so it makes sense to choose to contribute to your 401(k) at least enough to receive the maximum match.

After that, if the investment options are good, it’s a good idea to contribute as much as possible. I’m working at investing in my 401(k) to the maximum amount allowed by law, but it looks like I’ll fall short this year. I’ve decided to invest beyond the maximum match offered by my company, 4% of my salary.

If those who make these decisions at my company were to announce that the employer matching contribution would be suspended, I would probably continue investing in the 401(k) for the tax benefit, half in a traditional 401(k) and half in a Roth. But if I didn’t have extra income, I’d probably be investing only 4% of my salary, taking advantage of the maximum company match and nothing more. Without the company match, I would have a tougher choice.

My investment options in the 401(k) are mediocre at best. Expense ratios are high, and I’d prefer index funds rather than managed mutual funds. But in the end, it still makes sense to invest in a 401(k), rather than invest in a regular brokerage account, thanks to the tax advantaged status. In a regular brokerage account, you’ll have to pay taxes on your gains in addition to having less to invest with in the beginning after tax.

This also assumes that you will be in a lower tax bracket when you retire, which may not be the case considering your goal is to have as much retirement income as possible and the fact that low tax rates and high national debt now may mean higher tax rates all around in the future.

Would you invest in your 401(k) if your company stopped matching a portion of your contributions?

Photo credit: femaletrumpet02

Here’s what an economist had to say about investing on ABC 7 Eyewitness News tonight:

• Third quarter 401(k) statements are reaching homes now. Don’t look at your statement.
• If you put more money in your 401(k), put it into Treasuries.
• If you are thinking about stocks, think again. They look cheap now, but they’ll be cheaper later.

I suppose if you would go insane after seeing your 401(k) balance, it would be a wise decision for your mental health to hide your head in the sand. Times like these test the investor. Putting your money into stocks is risky; if you want the returns touted by finance professionals, you have to accept that risk. It’s easier to accept that risk when the market is moving upwards.

I’m not quite sure the same tips apply to the 25-year-old with 40 years before retirement and the 60-year-old approaching retirement.

This is interesting advice from an economist. What do you think?

The Dow Jones Industrial Average, a measurement of the stock market at large, ended below 10,000 yesterday. That’s the lowest closing since 2004 and it’s quite a drastic change from a year ago, when the market closed above 14,000, the highest watermark for the Dow.

It’s tempting to just stick my head in the sand. I have been looking at my investment balances, though. While it’s hard to separate my emotions as my 401(k) balance quickly moved from about $50,000 to about $40,000 despite contributions, I try to keep in mind that my time horizon is decades in the future.

When the market is in turmoil, it should put asset allocation into the front of any investor’s mind. For people who have a long time before retirement like me, it’s not a good idea to run for cover. It might be a good time to ask yourself if you’ve accurately thought about your risk tolerance. It’s much easier to say you’re willing to accept more risk in return for a higher return over the long term while the market seems to be increasing without bounds. But if you freak out when you lose 20% on paper and consider evacuating your money, either you underestimated your ability to accept risk or you just need to work a little harder to separate your emotions from your financial decisions.

I’m sticking with my “aggressive” retirement portfolio of 100% stocks. My contributions are split evenly between large cap growth, large cap value, international, and commercial REIT, while my current balance has more of a mix including mid cap growth, mid cap value, and small cap stocks. Half of my employer matching contribution is in company stock, and I exchange out of that stock when I’m in a good position to do so.

And my performance this year through September 30 is a loss of 20.85%.

On the positive side, I’m purchasing my investments at a much lower price now than I was last year at this time.

While some pundits are calling for a Dow as low as 8,000 before we hit bottom, it doesn’t make sense to make reactionary decisions, particularly when the money is invested for the long-term. It does help to review your risk tolerance to determine if you can face downturns and to find a way to strive to separate your emotions from financial decisions. Emotions are there to guide us, to let us know what may be right for us, but when emotions form the basis of financial decisions, investments suffer.

If you’ve suddenly come upon $1,000 you didn’t have the day before, you may get the urge to celebrate. $1,000 doesn’t open many new opportunities to you these days, but there are a number of options. Kiplinger has published a special with 37 ways to invest $1,000, but I have a few suggestions of my own.

Savings Options

1. Start or increase your emergency fund. Am emergency fund is there to help you cover expenses when some unplanned event interrupts your income stream, and the best emergency fund is tiered.

2. Open a high-yield savings account. Set aside the $1,000 for a future spending goal, like a vacation or a new car. Keeping this money investing as much as possible while still “liquid” will allow you to access the cash when the time is right.

Debt reduction options

3. Send $1,000 directly to your credit card with the highest interest rate. If you have credit card debt, sending an extra payment of $1,000 will save you lots of interest down the road. This isn’t a very exciting option, because it’s hard to “feel” the benefit of saved expenses over time, but it is worthwhile.

4. Pay off your mortgage faster. If you own a home, it’s likely you also have a mortgage. If your lender doesn’t penalize you, consider sending $1,000 as an extra payment. Many people have goals to be debt-free. A mortgage is debt, so any debt reduction plan must consider the mortgage.

5. Reduce your student loan debt. This month, I again increased my monthly payment to my student loan debt. This student loan is currently the only debt I have, and I no longer qualify for a tax reduction for paying student loan interest. It is in my best interest to get rid of this debt as soon as possible. An extra $1,000 can make a significant dent in my student loan, and it might for you, as well.

Investing options

6. Invest in a Roth IRA. If your income doesn’t disqualify you, you can invest up to $5,000 in a Roth IRA. This type of account allows you to take advantage of low tax rates today. The earnings on the money invested will grow tax-free, and you’ll be able to withdraw your earnings without penalty after you’re 59.5 years old.

7. Invest in the total stock market. Whether or not you have investments, the Vanguard Total Stock Market Index (VTSMX) is a good option for long-term investing. This low-cost index fund tracks the stock market index, which is one of the best possible investments over time. Many people try to beat the performance of this index and most fail. In order to qualify for the investment, you will need to invest a minimum of $3,000, so you may need to use your new $1,000 to help save for your initial investment.

8. Invest in your children’s education. If you have children and you want as many educational opportunities available to them as possible, you may want to consider a 529 college savings plan. 529 plans are run by states and offer some tax incentives when the investments are used for education-related expenses.

Charitable giving

9. Give the $1,000 to a cause with importance and meaning to you. Tax deductions should only be considered an ancillary benefit rather than the primary driver for contributing to a non-profit organization. Finding an unexpected $1,000 creates a perfect opportunity for sharing your good fortune with those who need it more than you.

Treat yourself

10. If you’re in a good shape from a financial perspective, don’t neglect yourself and your family. While buying things might not affect your long-term happiness, deprivation of things that make you happy in the short-term can increase long-term frustration.

The above ten options are probably some of the most popular choices for taking advantage of unexpected income. The above is my list. Kiplinger’s list, which I mentioned above, contains 21 suggestions, many for savvier investors. Here is the magazine’s full set of suggestions, although I can’t agree with every tip. Read the rest of this article »