Do You Suffer from Debt Guilt?

Debt guilt: it’s that feeling you get sometimes when you’re just plain down about the amount of debt you have. I know the feeling well. In fact, I think about my debt at least once a day. Maybe that’s excessive but it’s the truth. It weighs on me, and there seems to be no quick end in sight.

Even though I’m out of all credit card debt, I still look at my student loan debt and think about how I overdid it. I think about how I had a fully paid for tuition and stipend to graduate school but I took out funds on top of it. It really is one of the worst money decisions I’ve ever made (see that? Debt guilt!)

When it comes to my husband’s six figure student loans, I don’t really feel the same way. For some reason I’m okay with his because he’s going to be utilizing his education every day at work. Plus we only took what we needed and nothing more so it’s an entirely different situation.

I know I’m not alone so if you have this guilty feeling about your debt, here are some ways to deal with it. Or at least, here are some ways I’m trying to deal with my own sense of debt fatigue.

Let me know in the comment section if you’re in the same boat!

1. Realize You Can’t Go Back

What’s done is done. None of us can go back and undo the decisions we made. Our debt fate is sealed. Our “number” is there. The only thing we can do is move forward, pay down more than the minimum when we can, and keep on keeping on. I am trying to make an effort to not think about my debt so much and just do the best I can with repayment.

2. Realize your debt guilt is Just a Feeling

Guilt, like any other feeling, can be fleeting if we let it. When you’re feeling down or guilty about your debt, recognize it, take it in, and then go ahead and push it out. If we let the guilt consume us too much, it can start to control our lives and make things so much worse than they already are. Like the previous tip, just realize you can’t do anything about it except work to pay it off.

3. Remember Why You Have Debt

A good way to counteract guilt is to remind yourself why you have the debt. If you have mortgage debt then maybe it’s because you were trying to put a roof over your family’s head. If you have consumer debt maybe it’s because you were young and inexperienced. I’m not saying you should give excuses (because I really hate excuses) but I am saying it’s important to remember the “why” so that you don’t repeat the mistake again.

Overall, I think debt guilt is a normal part of the process when it comes to finally realizing something has to be done about your finances. It’s good and it’s bad because it’s not a fun feeling but it sure does make you face the facts and do something to change your situation.

Three Dont’s That Will Get You Into Debt

A little over a year and a half ago, my husband and I decided that we had to take control of our money. Our spending had spiraled out of control and landed us in a world of financial hurt. I am feeling reflective today and can’t help but realize how much our financial habits and priorities have changed since we decided to begin our journey of getting out of debt about 18 months ago. If you’re working your way out of debt or taking the first steps of your debt payoff journey, a lesson from my past might help you along your way.

Specifically, I remember that three money mindsets we used to have were the catalyst for our huge debt problem. They seemed like “little things” at the time, but they added up to big financial trouble. If you are anything like we were, these money mindsets might be destroying your financial life.

#1 – Don’t Keep Receipts or Track Your Spending 

If you’re not in a habit of tracking your spending, it can be easy to justify/deny/forget about where much of your money is going. When we first started tracking our spending in January of 2013, we decided to go back and analyze our 2012 spending so that we had a clear picture of what got us into trouble in the first place.

It turned out that although we “thought” we were being responsible with our money, we were truly spending much more than we figured in areas like groceries, entertainment, gas money and clothing. We were stunned after reviewing our 2012 expenditures to see that we spent nearly double of what we “assumed” we were spending in those areas.

Now that we’re tracking every dime we spend, we have a spreadsheet that we can review whenever we want that keeps us honest about where our money is going, and encourages us to continue making changes that will better our family’s financial situation.

#2 – Don’t Choose the Right Role Models

When we were in denial about our debt situation, we often justified our spending by saying “Well, so-and-so spends much more on going out to eat than we do, so we’re okay.” and other similar lines that helped us to continue to turn a blind eye to major money mistakes.

If you find that you’re regularly telling yourself that you’re “not as bad as them” in terms of spending and money management, it’s time to get some new role models. Look for mentors who have similar or lower incomes than you but are debt free and building wealth.

Can’t find any real life mentors? There are hundreds of personal finance bloggers who’ve bravely shared their stories of overcoming mountains of debt and moved onto building wealth. Use them as your role models and start expecting better things from yourself regarding your money situation.

#3 – Don’t Accurately Assess the Dangers of Debt

“Everyone has debt”, “We don’t have as much debt as so-and-so”, “We can make the minimum payments just fine, so it’s okay.” These lines and others like them caused us to be in denial so long that we were up to our necks in hot water before we chose to face up to the magnitude of our debt situation.

Don’t let that happen to you. Start educating yourself and facing reality about the clear and present danger that your debt brings to your life, and make a plan today to kick that debt to the curb.

It can seem overwhelming to change money mindsets you’ve held for so long, but breaking free of the negative money mindsets that plague your finances is both freeing and refreshing.

Don’t Worry; Everyone Has a Car Payment

One of our goals here at Frugal Rules is to dispel common financial myths by shedding light on them. The topic we’re tackling today – the ideas that everyone has a car payment so that makes one okay for you, is a powerful one that, when just assumed rather than thought through can sometimes keep us back from achieving our financial goals. As a continuation of our series covering the worst financial advice in all the land, I asked Holly from Club Thrifty to share questionable money advice she received in the past.

Holly said, “I remember that, when I bought my first car on my own, the car salesguy told me that ‘everyone has a car payment’ anyway so I might as well get what I want and get used to paying for it monthly! I ended up spending $25,000 on that car, and it took me FOREVER to pay it off!”

Debt Is Normal

The advice Holly received is unfortunately the norm. It reminded me of something that my own mom told me once and that is, “Debt is a part of life.”

My mom meant that most people had mortgages, etc. and she’s right. Most people do. However, for the salesman to tell Holly that “Everyone has a car payment,” is simply not true. In fact, it’s a sleazy sales tactic designed to con people into buying more car than they can afford.

Obviously Holly is quite successful now and is one of the most financially savvy people I know, so she wasn’t affected long term by the car payment. Still, what about the people who live their lives thinking that car payments, house payments, and just debt payments in general are never ending?

Why Pay it Off?

The worst part about this “advice” is that if people believe everyone has a car note, then what’s the incentive to pay it off? What’s the point in keeping a car that’s five years old when you could just go out and get a newer car? After all, everyone has a car payment anyway, so why should you go without one?

It takes a confident person to drive around a beater. It’s very common to do so in the personal finance community, but in general many people find it difficult to get into a run down, beat up car after work when all their co-workers have newer vehicles. This is part of the problem.

The Investing Debate

We’ve heard it before, though. Car payments are fine as long as you can get a better return in the stock market. Why pay it off in full when you can use the money you would have spent on the car to invest in a brokerage account instead?

Many people say this, of course, but very few people do it. My father in law is one of those people, but he’s an incredible example of financial stability (I’ve written about him before.)

I’ve Never Had a Car payment

I currently own two cars. They are both paid off. They are both old, 13 years and 8 years old respectively. I’m scared they’re going to break and then I’m finally going to have to go out and buy a car in the traditional way. My first car is the one my parents gave me when I was a teenager to go to college, and now my husband drives it. My second vehicle is one I bought from my parents (for the reduced family rate) when my twins were born.

I know that someday I will have a car payment, but you can bet I’ll make sure my kids know that not everyone has a car payment. Debt doesn’t have to be a part of your life. It can be useful, like helping you achieve educational goals when used in the right way, but ultimately it’s important that everyone is aware of slimy sales tactics, like the ones utilized by the car salesman that Holly had to deal with all those years ago.

What is the Key to Success When Paying off Debt?

Many of us have had various levels of experience with paying off debt. Whether it be mortgage debt, student loan debt or credit card debt we seem to be surrounded by it in our society. I’ve been asked numerous times recently about my journey of paying off debt – in the neighborhood of $45,000 if you count both credit cards and student loans and it caused me to look back at what the light bulb moment was and what it was that brought success.

As a disclaimer, I do believe there are many things that can help you succeed at your debt payoff and even possibly lead you to be able to pay off debt quickly. That said, as I look back, it really was one thing that made a difference and allowed me to pay off my debt successfully.

Some Methods Can’t Take You the Distance

What are some of the more popular methods suggested when you’re paying off debt? There are a few that seem to be mentioned nearly every time. Some of those include:

  • Cutting expenses
  • Budgeting
  • Earning more
  • Creating income by selling things

I have nothing against these suggestions. Heck, I think I’ve written about all of them in the past so I obviously support them. I also did each one of them when I was climbing out of credit card debt, so they do work. The problem though, is that they can tend to be limited in how effective they’ll be.

Take cutting expenses for example. If you’re up to your eyeballs in debt then trimming the fat will help. You can look at things like cheap cell phone plans from the likes of Republic Wireless or Straight Talk which can save you some money, but you can only cut so many things before you’re living in a refrigerator box. Yes, having that extra $100 or $200 will help you as you’re paying off debt, but will it really help you pay off debt substantially quicker if you have $50,000 or more in debt? I don’t think so.

You can also try to earn more so you can put more toward paying off the debt but you can work only so many hours in the day. However, if you can combine the two, that’s where the magic can happen and give a boost to your debt payoff strategy.

If these methods at paying off debt are somewhat limited, then what’s needed? I am glad you asked!

Paying off Debt Successfully Requires a Certain Attitude

If the above methods are somewhat limited, then what is it that will take attacking debt to the next level? In a word – attitude! That’s right, attitude, (in my opinion) is the key to success when paying off debt. Why you ask? I believe it’s because you have to want to be out of debt. Not in a ‘I want a puppy for Christmas’ kind of way, but in a ‘I am going to do this come hell or high water’ kind of way. Meaning, you’re going to give all you have at paying off debt and accept nothing less.

As I look back on my debt payoff journey, I went nearly a year knowing it was an issue but I did not want it in my heart. Simply put, I was avoiding it. I thought that by avoiding it that it would somehow magically go away and the debt fairies would wipe the slate clean.

Friends of mine knew this was going on and would bring up the debt and I’d quickly change the subject. My attitude was one of not accepting that I had gotten myself into this situation and thus made no progress. What eventually got me going towards paying off credit card debt was getting an attitude adjustment thanks to a few wise people. I saw that I had to stop seeing myself as a victim, to see that I wanted more in life than always worrying about debt and had to attack it with all I had. Was it easy? Heck no! But what made the difference? It was my attitude and the rest, as they say, is history.

That Attitude is Integral to Your Debt Payoff Plan

Ok, now that you have that attitude that’s geared towards paying off debt where do you go with it? I am a visionary, so I looked at what I wanted. I wanted debt freedom, but I needed to have a plan to attack it with. A goal is great, but it’s the plan that gets you there. That plan will vary based on your personal situation, but for me it meant being vigilant as I was paying off debt throwing all that I had at it. That vigilance was a natural outflowing of my attitude and helped me plan my attack.

I was also preparing myself for my post debt life because when you’re done paying off your debt, you suddenly realize you have a bunch of cash to use however you wish. I wanted to teach myself as I was paying off debt so I could be prepared to work on the next goal after becoming debt free.

My point in all of this is that your attitude can seem like it’s a very small thing, but that small thing directs so many of your actions and so much of your planning that it can be either your staunchest ally or most villainous enemy as you’re paying off debt. The beauty in all of this is that once you realize how powerful your attitude can be, it’ll benefit you in so many other ways in relation to your financial life and life in general.


Ask Yourself These 3 Honest Questions About Money

One of the hardest things about coming to terms with money issues is actually being honest with yourself about how you got there in the first place. For example, I have way too many student loans because I took out more than I needed and didn’t watch how I spent them. I know that now, but admitting that to myself and the world at large in blog-form took some time and forced me to ask myself honest questions about money.

Even now, I write post after post about my money weaknesses and money mistakes. I’m human, and I can’t pretend like my debt isn’t there. I write about it in large part to show others they’re not alone.

So, in an effort to help anyone and everyone who is struggling with money issues, let’s get down to the nitty gritty. It’s time to ask yourself a few honest questions about money. Here they are:

1. How Much Debt Do I Have?

I think the first step with anyone who wants to get out of debt is to bust out the calculator and do the excruciating task of adding it up. I still can’t believe that I waited until I graduated from college and was in the middle graduate school before I added up how much student loan debt I had. I just kept taking out money semester after semester without knowing the running total.

So, if you don’t know how much debt you have, it’s time to find out. Until you know that number, you can’t make a plan, and you can’t have a concrete goal. You can use this same principle towards retirement savings as well if you are out of debt. Until you know that number, you can’t set the wheels in motion to reach your retirement goals.

2. How Did I Get In All This Debt?

This is one of the hardest, albeit honest questions about money we just have to ask ourselves. We’re human, and because we’re human, we always have a good excuse or two hiding up our sleeves. Some people might be in debt due to circumstances like divorce or health issues. Much of that is unavoidable, and because it’s unavoidable, it’s harder to come to terms with.

Other types of debt, like basic consumer debt and debt accrued from an inflated lifestyle, can have a slightly different feel to them. Knowing how you got into the position you are in is really important because it can help show you how to avoid it in the future.

Unfortunately, regardless of how you got there, debt is debt. If it’s in your name, it’s your responsibility, even if you have a good excuse for having it. Trust me, I know!

3. How Will I Stay Motivated To Get Out Of Debt?

We know the basics of how to get out of debt: spend less than you earn, create an emergency fund, do an avalanche or snowball method, etc. The mechanics are not hard to understand, but what is challenging is finding the motivation to get started and once you’ve done so, to stick with it.

In order to find what will work, think about what motivates you in general. Does fear motivate you? Does praise motivate you? Think about the times when you got a lot accomplished and ask yourself what made you get there. Once you know the type of motivation that works for you, you can then reach out and ask others for help along the way.

What My Mom Taught Me About Personal Finance

A while back, I wrote a post on my site, detailing some of the accounts of my impoverished childhood with my mom and two younger brothers.  We were quite poor growing up, compared to many in the U.S.  My parents divorced when we were young (both admit responsibility for the derailing of their marriage), and us kids stayed with mom, which was the norm back then. Our income at the time was LOW.  Dad paid faithfully his $300 a month child support.  That was our income, as mom had been a stay-at-home mom for years, and our parents had no savings to speak of, only debt, debt and more debt.  Personal finance was the last thing my mom was thinking about in those days, but the lessons she’d learn, and teach us kids, about personal finance, were indeed profound.

As you can imagine, supporting a family of four wasn’t too feasible on $300 a month, especially when our house payment alone was $250.  Those first months and years were quite hellish financially, to be blunt, and they are forever ingrained in my memory.  There were days when food was beyond scarce, and days when we were threatened by the power company that they would shut off our heat/electricity.

Whereas in my first 40 years, I viewed those years as a reason to always make sure I got the “stuff” I needed and wanted, my mindset has now changed, and I’m working (with my husband who had a similar background) to make sure our family has financial security instead.  I never thought those growing up years could ever be counted as a lesson in personal finance, but now I’m seeing things differently.

Mom didn’t manage our family finances perfectly, by any stretch of the imagination (a fact she’ll freely admit), but she was quite persistent in her quest to keep us afloat financially, and I’m quite proud and grateful that she pulled us through it all.  My dad, of course, did what he could too, always paying his child support and seeing us kids regularly, but mom bore the brunt of the financial responsibility in those days as she had custody of us.

Here are some of the personal finance lessons I learned as I watched my mom raise our family and work to balance her meager means.

When it Comes to Personal Finance, Do What’s Right, Even if It’s Not Fun

One of my mom’s biggest regrets during those beyond lean years is that she continued to spend money on her two-pack-a-day smoking habit.  Now that she’s been a non-smoker for over 20 years, she can see what a waste the addiction was and how her denial of that waste and addiction hurt us financially (as in counting cigarettes as a necessity along with food and utilities).  She can’t go back now and change that, but if she could, she would’ve done the right thing and given up smoking (her words, not mine).  Doing what’s right isn’t always the most fun option, or the easiest option, but it is the right option.

There’s Always a Way Out

Or, ‘where there’s a will there’s a way,’ as the old saying goes.  My mom had been a stay-at-home wife and mother for 14 years until the divorce.  In fact, she didn’t even have her driver’s license at the time of the divorce.  She knew that if we were going to survive as a family, she had to find a way to bring more income in, and she did it.  She learned firsthand that there’s always a way out of a bad financial situation if you are willing to look for it.

Don’t Give Up, Even At Your Lowest Point

Those first couple of years following the separation and divorce were super tough on all of us emotionally, my parents included.  The last thing mom wanted to do in her depressed state was to move forward, but she did.  Mom learned how to drive, got her driver’s license, and taught herself to type so she would have more marketable job hunting skills.

Many days she had to force herself to keep moving on, but she did it anyway.  It wasn’t easy, by any stretch of the imagination, but she kept plugging forward.  When you are working to change your personal finance situation, success will only come if you choose to not give up.

No Matter How Bad You’ve Got it, Somebody’s Got it Worse

It helped us in some way to remember that somebody always had it worse than us.  Not that we were happy that others had it worse, but seeing commercials on TV of children and people who are lucky to eat once a week gives you some serious “stop your whining” medicine.

Seeing that others had it worse than us helped mom to remember and remind us that, in spite of our struggles, we had a lot to be grateful for.  When you’re working to change your financial situation, it’s important to concentrate on what you have accomplished, not what you haven’t.  Yes, you may have LOTS more debt to pay off, but you’re always making that move toward debt freedom.  Many other people are not. Give yourself a pat on the back for that.

Just Do What Needs to Be Done

After two years on welfare, all the while teaching herself valuable skills like driving and office skills, mom was ready to head out into the work force.  This was another hugely scary step for her after being at home for 15 years with little to no focus on herself whatsoever.  Mom was terrified to jump into this world of independence after so long at home, but she did it because she knew it needed to be done for the survival of her family.  Was it easy?  Of course not.  But sometimes you need to just do what needs to be done and take that first step.  If you do, the second step will be much easier.

How does this apply to personal finance?  It means that you take that big first step of making a budget and tracking your spending.  Will you screw up?  Probably, but so what?  Then you just get back on track and keep moving.


Did Your Spouse Bring Debt Into Your Relationship?

I remember it like it was yesterday. My husband and I were at a pre-marital retreat through our church (a requirement to get married there.) They played this game where the couples sat back-to-back, the leaders asked different questions, and you had to raise your hand if the answer applied to you.

For example, they would ask things like, “Who will be in charge of paying the bills?” and you had to see who raised their hand. Needless to say, the hubs and I both kept raising our hands for various things. It was clear we actually needed to be there. There were so many things we hadn’t discussed, so many things we thought the other person would be in charge of, even after four years of dating!

Looking back, though, I find it interesting that there were no questions about debt. Maybe it was too personal to ask, “Raise your hand if you have debt,” or “Who will be in charge of handling credit card debt?” in a room full of people, but it seems like the questions should have been a part of the program. After all, questions about money and debt are sometimes vastly more important than, “Who will take out the trash?”

I Knew About His Debt

I knew my husband had a little bit of credit card debt and a little bit of student loan debt when we got married. He just randomly told me one day while we were dating just because we were getting serious, and he thought I should know.

That information didn’t phase me at all.

I didn’t know what I know now about managing finances, but debt was not a deal breaker for me. Now, there are probably websites out there that match people up online based on credit scores.

It Could Be a Warning Sign

My husband and I have successfully gotten out of credit card debt and are slowly working on our student loan debt just like many other couples across the world. Yet, a very, very close friend of mine lost her marriage due to financial issues.

She tried hard to keep her family on budget and on track, but her husband would make large purchases without consulting her and without considering the repercussions of draining their savings account. Even though they were compatible in so many ways and very much in love, he soon drove them into the ground financially, and she had to walk away.

That is, of course, just one example and isn’t indicative of every couple who has money issues. It just illustrates that when you don’t talk about money and when you don’t know the financial history of the person you marry, things could get rough.

Did Your Spouse Bring Debt Into Your Relationship?

Now you’ve heard our story. We were a little young and naive in terms of finances when we got married, but we still have the same goals. You’ve heard the story of my good friend, who could not get her husband to level with her in terms of how they managed their spending. So, now I want to hear from you:

The Power of Customization in Your Debt Payoff Plan

One of the reasons we homeschool our children is because it allows us to tailor their curriculum to their individual learning styles, interests and educational needs. But a homeschooling lesson I learned this week taught me that not only does this type of customization work well in the classroom, it’s helpful for reaching financial goals such as working to pay off debt too.

We’re All Different

Our four kids have four very different learning styles. One of those kids was especially difficult for me to teach, until, that is, I learned how to customize her curriculum and lessons to her particular learning style. For years, I worked to teach her in the same style I did the other kids, and it was never easy. She’d resist, I’d coerce, yell, beg, bribe and use trickery all in the name of getting her to simply sit down and do her schoolwork. Now, mind you, this particular child isn’t rebellious or disobedient, at least any more than other kids are. But as I searched my mind for ideas to get her to get progressing, I had a flashback to her potty-training days.

Here too, she fought me every step of the way. I used all of the above tactics and more, working to get the kid out of diapers, but again, she resisted every step of the way. It wasn’t until I let her alone about it that she chose, on her own, to get it done. And it’s been that way with every single thing she’s done since then: If I harass her or interfere too much in training her, she’ll resist. If, on the other hand, I give her the instructions and let her be, she’ll not only get it done, she’ll likely excel far beyond what I expected of her. She’s the kind of kid that needs to do it in her own time and her own way, and when she’s left to figure it out on her own, she succeeds far beyond what our expectations of her are.

Case in point: One day on a mom/daughter bike ride, she asked me how to ride without holding on to the handlebars. I knew that she didn’t want specific instruction or training from me, but rather the basic verbal rules of the task. I told them to her and let her alone. By the end of the week, the kid was driving up and down our long, curved, inclined gravel driveway, turning around, and coming back up again, all the while not touching her handlebars once. Although, as a mother, this gave me a bit of a panic, I knew that she had practiced fervently enough that she knew what she was doing, so instead of trying to interfere and teach her the “safe” or the “right” way of riding without handlebars, I sat back and enjoyed the picturesque moment of my daughter’s stellar accomplishment.

And you know what? This same theory applies when working to pay off debt and/or making a plan for financial independence. There are all sorts of methods and teachings in the personal finance world when it comes to reaching financial independence and learning to pay off debt.

There’s the snowball method, the avalanche method, the snowflake method, and a host of other plans and theories that were designed to help people pay off debt and achieve financial independence. Some people will tell you to save 10% of your income, some say 20%.  All of these plans and tactics are great and allow for success in a journey toward financial freedom.

What’s Best for You When it Comes to Debt Payoff?

The plans are all great, in theory, but they may not be right for you or your particular situation. This is where customization is so very powerful as you plan your own journey to becoming debt-free.

Take our situation, for example. When we first started our debt payoff road in January of this year, our basic monthly bills added up to roughly $1,000 a month MORE than our base income. Suffice it to say that a basic budget was NOT going to work for us.

So what did we do? We customized a plan to fit our particular situation. We cut our expenses down to bare-bones minimum, made a budget as best we could, paid what we absolutely had to, and what we could afford to pay, and then the rest waited until we found a way to bring in some more income to cover the shortfall. We were winging it, largely.

Not much of a plan, you might say, but it worked for us, and it’s still working for us. Due to increased income we are not as short as we were at the beginning of the year, and we are better able to manage a real budget now. We are even putting away 1% of our income into a savings account/emergency fund. Although 1% may not be nearly enough for some financial gurus, our situation deems that we pay some stuff off before we put a larger amount into savings.

Given the specifics of our situation, we had to customize our budget and our debt payoff plan to meet our particular payment responsibilities and living expenses. And given that we started 2013 in the hole each month, the fact that we are now putting away a faithful 1% of our income into savings is a pretty darn big accomplishment, wouldn’t you say?

If, on the other hand, we’d tried to start off making a budget with 10% going into savings as some experts suggest, and so on and so forth, we would’ve never been able to pay our monthly bills on time, thus accruing late fees and ending up in even more financial trouble than we began with. If we’d stuck to the gurus and their plans, we’d feel like utter failures and our debt payoff plan likely would’ve failed.

The power of customization – customizing our budget and our plan to fit our specific situation instead of someone else’s – saved us from bankruptcy and got us moving, albeit slowly, on a road that will eventually lead to financial independence.

So remember as you contemplate your own road to financial independence to use the power of customization to get you succeeding on your path in the way that best suits your individual situation. Yes, use the gurus and their plans to educate yourself, to guide you, and to have goals to reach for, but customize your plan to get there based on what works best for you.

How to Easily Determine Your Risk Profile

Investing in the stock market can be a daunting and overwhelming task. There are many moving parts to think of and you’re about to put some of your money into it. There are stocks, bonds, and mutual funds, to name a few investment choices, yet you don’t know what suits your investment needs. This can result in many questions to answer as you look to grow your money and move towards the financial freedom that can be possible through doing so. The best place to find these answers is through determining your risk profile. While this may seem like a time consuming and difficult task, it doesn’t have to be.

Why Your Risk Profile is Important

The wide array of investment choices may cause you to feel overwhelmed as you wade through the possibilities, especially as you’re formulating a beginning investment strategy. You can be as aggressive as you want or as conservative as possible. If you don’t fit on either of the ends of the risk profile spectrum, there are many possibilities in between. That is where most people find themselves. The key is to put your money into something you’re comfortable with. That’s why determining your risk profile is so important, so you’re not invested in something you normally would not be.

What’s Your Comfort Level

This is taking the stop orders I’ve discussed in previous posts to the next level. Not only are you looking at how much you’re comfortable with losing on an investment, but how long it is until you need the capital from those investments. Generally, if you’re closer to retirement, you’ll be less comfortable with losses and looking for some security. If you’re just starting investing and have decades until retirement, then you’ll generally be more comfortable with losses and taking on more risk. Of course, this is all dependent on you and your specific needs and goals. Thankfully, there are painless tools available to help you think through all of these questions.

Monitor Your Risk Profile as Necessary

Your risk profile is not a static situation, but is one that changes as your circumstances change. Anything from a new job, to a new addition to the family, to aging can have an impact on your risk profile. It is something that needs to be and should be monitored over time. Consider returning to it annually as part of your rebalancing plan, unless changes dictate otherwise.

Determining your risk profile does not provide a panacea for your investments, rather a tool by which you can help formulate your investment strategy. Use it wisely, along with other tools, to formulate a strategy you’re comfortable with and that meets your needs.

You Left Your Job, Now Take Your 401k With You

I recently left my former employer (more on that later) and one of the first calls I made after making the decision was finding out what I needed to do in order to rollover my old 401k. I wanted to make sure that I had control over my retirement money and my 401(k) makes up a substantial portion of that. Unfortunately, I am in the minority when it comes to rolling over my old 401(k).

Statistics show, as of 2010, that 15 million Americans have left behind an old 401k with former employers. I’ve spoken with enough people over the years to know that most are confused by what to do with their old 401k and are surprised to learn that it’s not that difficult to perform a 401k rollover.

A 401k Rollover Can Be an Easy Process


The most common thing I’ve seen with individuals who have left behind an old 401(k) is that they don’t know what to do. They think they might be taxed, or that a ton of paperwork is required, or that it simply can’t be done. Generally, none of those beliefs are true. As long as the old 401(k) is going to the 401(k) at your new employer, or into a Rollover IRA, then it’s generally tax-free.

In terms of paperwork, usually a form or two is all that’s required. After you fill out the paperwork, then your work is usually done and the rest of the legwork will take place between your old employer and the final destination of the funds. Another thing to keep in mind is that many 401k plans will require you to move the funds if they’re under $5,000 in value.

Don’t Give Up Control of Your 401k


Each 401(k) is different, but in general most plans will switch the investments you can be in once you leave the plan. This resulting change can further limit your choices, which gives you as the investor lack of control over that money. Why would I want to leave my money somewhere that won’t allow me to invest it as I see fit, or severely limit what I can invest in? When you look at the possibilities of what you can do elsewhere it does not add up to leave your old 401(k) with a former employer.

Go on Take the Money and Run


For those who like Classic Rock, like I do, you’ll recognize this line from the popular Steve Miller Band song. This is how we should view our old 401(k). I like to think of it as I did not want to be with my former employer any longer, so why should my money be there? The money is yours and you should take control over how it’s invested. As a frugal person, I want to have say over where my money is and how it’s being used.

A 401k Rollover Can Save You Money and Give You More Choices


Like mentioned previously, many plans will change your investment options once you leave the plan. Often those can be mutual funds than can have high fees. By rolling over your old 401(k) into a self-directed IRA, you can significantly lower your investment costs by investing in index funds or solid, dividend-paying stocks. Check out my Motif Investing review for one such brokerage that offers a great service for limited cost.

Another nice benefit of rolling over that old 401(k) is that many brokerages offer a cash incentive based off of the dollar amount you bring over. You also get to benefit from having a broadened selection by which to invest your money, which can also help you further diversify your retirement investing. If putting it in into a self-directed IRA is not an option for you, then look to roll the 401(k) into your current 401(k) plan so you can keep the plans together.

If You Can Help it, Don’t Cash Out of Your 401k


Too many times I see people simply cash out their 401k plan. Of course, if you’re in dire need of money you may have no other choice. But, if at all possible, you should try to avoid cashing out of the plan. When you cash out of a 401(k), you’re usually going to run into at least a 10-20% (especially if you’re younger than 59 ½) tax hit that will be owed to Uncle Sam. As a frugal person, I hate giving up my money to the government, especially money that I’ve worked hard to save. If retirement is a goal of yours, then it starts by not cashing out of a 401(k) when you leave a job.