Wise Money Matters - Get Out Of Debt and Finally Enjoy Life

I recently received an email asking about debt consolidation. The reader writes:

“Is it ever a good idea to use a debt consolidation company? My husbands minimum CC payments are up to $800.00 a month. He is working on becoming an attorney to increase our income but until that happens (another year) it’s killing us every month. What do you think?”

I’ve personally never used a debt consolidation company but I would warn that there are scams everywhere so you need to be very careful with how you approach this.

If you have any advice for this reader, please leave a comment.

Last week in Investing Basics, we talked about a Traditional IRA. This week we are going to talk about the Roth IRA.

What is a Roth IRA?

Like a Traditional IRA, a Roth IRA is not an investment per se but rather a tax code for the IRS. Various banks and investment firms offer Roth IRA plans as part of their investments whether they be in stocks, bonds or CD’s. As long as you are using a Roth IRA plan for your investments, you qualify for the tax benefits of the Roth IRA!

The Roth IRA is widely claimed as one of the best long-term investment options due to it’s tax benefits.

So what are the tax benefits?

The primary tax benefit of a Roth IRA is that the investments grow completely tax free. There are no capital gains tax on growth or dividends so long as you do not withdraw the money prior to turning 59 1/2. This can be incredible especially if you start early as you should (hopefully) expect large gains over the course of your life.

Another huge advantage of the Roth IRA is that, different from the Traditional IRA, it doesn’t require you to make distributions at 70 1/2. This can be advantageous if you expect to have a steady income at that age or want to take smaller distributions than what would be required from a Traditional IRA.

What are the disadvantages of a Roth IRA?

While Roth IRA’s are a great way to avoid taxes while investing, they are not without their disadvantages.

First off, the investments are not tax deductible. Traditional IRA’s have the advantage of allowing for a tax deduction when you make a deposit into the account.

Secondly, if you decide to make a distribution prior to 59 1/2 you will be subject for a 10% penalty on top of a tax equal to your highest marginal rate. This can really kill your Roth IRA if you need to dip into it. It’s specifically a long term retirement

Another disadvantage is that there are limits on the Roth IRA. You can only contribute a maximum of $5,000 (as of 2009) to a Roth IRA each year. There are also income limits as to how much, if any, you will be able to contribute.

The final disadvantage is actually just a hypothetical one. There is much speculation whether the Roth IRA will be a tax shelter forever. As we all know, the government likes to find ways to tax us. There is no telling whether they could start taxing Roth IRA’s in the future.

Should I invest in a Roth IRA?

That really depends on a lot of variables such as income level, marginal tax rate, and others. The best thing would be to talk to a professional such as an accountant and get their expert advice. They will help you make the best decision based on your personal situation.

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Well you voted on what type of bank you used and the results are in! Here they are:

I’m actually quite surprised at the numbers especially with the Online Banks. Obviously Online Banks can give you a significantly higher interest rate on accounts due to their low overhead but I didn’t realize so many people were actually using them. Credit Unions and Local Banks came in second. If you listened to our podcast, you heard me talk about how my wife and I were planning on switching to a Credit Union. That’s still in our plans but we just haven’t made it over to the bank yet to do it.

I am very proud of our readers though. It appears you guys are quite a smart group of people. Smarter than me for sure.

In this week’s edition of the Weekly Financial Checkup, we are going to discuss a little about barriers. We all have various barriers in our lives which hinder us from reaching our goals. These can range from things that are out of our direct control such as our childhood or things that are a result of our own decisions such as addictions. There are a lot of possibilities of things to get in the way.

This week we are going to focus on overcoming such barriers to our financial freedom.

Do a self-assessment

The key to overcoming barriers in your life is to first figure out what those barriers are. If you don’t understand and acklowledge barriers in your life then there is no way that you are going to take the appropriate steps to overcome those barriers.

There are a wide variety of barriers. Here’s a list of common barriers:

• My job doesn’t pay enough to allow me to save
• Have a spouse who spends all the money
• Have an addiction which is a money drain
• I have too many bills which eats up my paycheck
• I don’t know where my money is going
• I got a lot of bad money habits from my parents

There are obviously many more but those are a few examples. You need to find out exactly and precisely what your weaknesses are. Write them down for reference later.

Making a choice

Now that you have your barrier(s) written down, you need to make a choice. It’s a choice to overcome those barriers no matter what the cost. Some situations might require sacrifice.

Is that brand new boat costing you more per month than you are putting into savings? If so then get rid of it. It doesn’t matter if you owe more than it’s worth. If you owe $30,000 and it’s worth $25,000 I can tell you that a $5,000 debt is better than a $30,000 debt. Cut your losses and move on.

Maybe it’s an addiction like smoking or gambling which is taking up a lot of your money. Luckily there are plenty of groups to help you overcome that addiction, but it’s your choice to own up to the problem and move on.

Don’t make excuses

In fact, every single one of the barriers I listed above is an excuse.

My job doesn’t pay enough/I have too many bills

You either need to increase your income or reduce your expenses? If your expenses are at the absolute minimum, then obviously you need to increase your income. This might require spending 3 nights a week taking online classes in order to get a better degree. It might require working overtime to get some credit cards or car loans paid off. Or here’s a crazy idea: cut the cable. It’s not a necessity regardless of what you think. There are things you can do.

My spouse spends all the money

You may need to work on your communication skills. The biggest part of communicating is not talking. Listening goes a whole lot further than talking. Find out why your spouse is spending money. Often times it can be attributed to a childhood in which they didn’t have any money at all. Find out the root of the problem and work together on creating a budget that works for both of you.

For instance, my wife has trouble keeping track of expenditures. To help her we agreed that she gets a cash budget for discretionary spending. When it’s gone, it’s gone. Problem solved. But the key is that we both agreed on it. You can’t go all police officer on your spouse and force things on them. Work together.

Childhood issues

Childhood issues are exactly that: childhood issues. Leave them there. I know it feels like there is no way to break away from the family past but you can do it. If you keep returning to your past, you will never have a future. Leave the past where it belongs and move on.

This may require counseling in more extreme cases. There is nothing wrong with that. Do what it takes to take steps towards changing your future for your family.

Persevere!

Start now and put all your energy into it. Don’t stop until you have completely crushed any barriers in your way (don’t actually crush your spouse, just the issue). You can do anything you put your mind to, but it requries determination and sacrifice. You can do it!

Photos by takomabibelot and

I’m curious as to what actions you all may have taken recently during this time of market volatility. Did you sell your retirement fund? Are you still thinking about selling it? Did you just ignore the economy and continue business as usual? Do you even have a retirement fund?

And stay tuned tomorrow for the results of last week’s poll!

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