Entries from October 2007 ↓

My schoolmate Anna asked the following in a comment:

What is your stance on saving for retirement vs saving for house? I’ve been reading some advice that says only save for house first (putting into high-yield savings account) and save for retirement once you have a house. Other advice says always save 10% of gross income to retirement even when you’re saving for a house.

Well, first I have to say that everyone’s priorities are different, but my husband and I are saving for both. We are both contributing 17% of our income to our 401ks and we have gotten used to that deduction so we don’t miss the money at all. We don’t totally max out our 401k but 17% is a good amount that we’re both comfortable with. We’re keeping most of what we save outside of our 401ks in a Vanguard money market fund and a Vanguard index fund and we do intend to use the money to purchase a home sometime in the future.

Personally I think that saving for a house shouldn’t be put ahead of saving for retirement. The reason is that money grows exponentially in a retirement fund with time. Generally the earlier you start contributing the larger a nest egg you would have in the end. Diverting your money from a retirement fund to purchase a home would require much larger retirement contributions in the future to achieve the same nest egg. Lets use some real numbers to see what I mean.

Scenario 1: 24 Year Old Saving for Retirement for 35 Years

Suppose that I put $1200 a month into a 401k. Since this money is contributed pre-tax, I am actually seeing a deduction of about $800 from my paycheck due to my fairly high tax rate in California. I can withdraw from my 401k at the age of 59.5 without penalty, so I can keep on contributing for at least 35 years. Assuming a fairly conservative average annual growth rate of 7% a year, my nest egg will grow to approximately $1,990,611 at age 59.5. Meanwhile I can still save whatever money I have left for a home.

Scenario 2: 24 Year Old Saving for a Home Before Saving for Retirement

Suppose that I need a downpayment of $75,000 for a below median price Californian home and I am saving what I would have put into my 401k into a money market account. I would have to save after-tax money so I could only contribute about $800 per month and lets assume that I use a money market fund that pays 4% per year after tax. At this rate, it would take me just about seven years to save for the downpayment. The $75,000 is good for a 20% downpayment on a $375,000 home. Usually there are other closing costs so actually I need more money to buy a $375,000 home. Just to make this example simple, I will say that $75,000 is adequate for me to buy a $375,000 home and the entire $75k is applied to the price of the home. Suppose that I take a regular fixed 30 year loan on the remaining balance of $300,000 and I get a fairly good rate of 6% I would now have a mortgage payment of 1798.65 per month.

This scenario means that I would lose seven years on my retirement contributions. If I contribute $1200 a month to my retirement for only 28 years I would have only 1,599,377 at age 59.5.  To reach the same nest egg of scenario 1 at age 59.5, I would have to contribute about $2055 per month to my 401k for 28 years. This is not even possible without company matching because the IRS limit on 401k contributions is $15500 a year right now.

Now, some may argue that  savings are going into the home that I bought. Historically, home prices have only risen 2 to 4% over long periods of time. Additionally, there is a 1.1% property tax in California on the value of my home every year even if I have paid it off. In other states the property tax can be very high and completely wipe out the gains on a home. So, suppose that I take an extremely optimistic growth rate of 4% on my home then the home is worth about $1,216,274 after 30 years. However, I am not accounting for the effects of inflation and maintenance costs so I think I would break even at best.  If I put the mortgage money in an investment account instead I would have more than $2,000,000 after 30 years assuming a growth rate of 7%.  In that case, I could use my $2 million and buy a better house with cash.

With all of that said, I realize that not everyone live in a place with ridiculous real estate prices and in some places of the country it still makes sense to buy a home because the house payments are less than rents. In those less crazy parts of the country it doesn’t take seven years to save a reasonable downpayment so the potential time loss on a retirement account isn’t as severe. Saving for a home first could make sense for some people. However, it really would take young people years to save an adequate downpayment here in California. In fact, there is nothing decent for $375,000 here in San Mateo and a 20% downpayment on an average home is more likely to be $120000 to $140000. My stance on the subject is to save for retirement as much as you can and as soon as possible. You can still save for a home as much as you can, but you should clearly understand that a home is a cost center, and not a savings vehicle. I still want a house of my own, but I do not expect it to feed me and pay for my health insurance when I retire. I would approach buying a home as I would approach buying any other item, such as a car or a stick of gum. I want a quality home at a reasonable price, and I don’t mind waiting a while for a sale. While I wait to buy a home, I am building up a strong retirement nest egg. I hope I answered your question Anna!

Share This

Welcome to the 32nd Carnival of Money Stories. On this foggy and ghastly eve of Halloween The Baglady brings you a creepy collection of money horrors. This edition includes 21 stories about mooching relatives, timeshares, and giant wallops of debt. If you want to have a relaxing day please stop reading here, but if you want to be shocked, titillated, and inspired, please read on!

Editor’s Picks of True Financial Horror Shows:

Eric presents When Saying No Helps Your Family posted at A Penny Closer. This is a well written story about a truly horrible situation. You have to read this article to see why I found this story to be the most upsetting and scary. People really just have to say no to family members that mooch continuously and that is why I say parents should make their adult children pay rent.

Ana presents Stupid Tax on Wheels (But not mine!) posted at DebtFREE-Revolution. I fear debt so much that when I read this story I felt like I was being run over with the kid’s truck. He should really be feeling the weight of his monster truck debt but .

Repugnant Real Estate:

Millionaire Mommy Next Door presents Can Renting Play A Part In The American Dream? posted at Millionaire Mommy Next Door. Honestly, the picture insert on this post gave me quite a fright, but I agree with the Millionaire Mommy that renting makes sense for a lot of people.

Silicon Valley Blogger presents Don’t Let Real Estate Clean You Out posted at The Digerati Life. SVB’s dry cleaner turned into a real estate agent! I hope that guy will be okay, but the fact of the matter is that real estate is softening quite a bit here.

Terrible and Terrific Timeshares

Maria Fernandez presents Have an enemy? Buy him a timeshare! posted at Learn a foreign language. I am so glad that my parents didn’t buy any timeshares and just took the free gifts and ran.

Betsy Teutsch presents A True Tale: Making Lemonade out of a Lemon-Sized Inheritance posted at Money Changes Things. This is a great story about a couple quite scary things: a timeshare and a golddigging stepmom.

Triumphs Over Life and Death

Brip Blap presents follow the white rabbit to financial freedom posted at brip blap. I actually really liked this story and voted for it over at Millionaire Mommy’s Carnival of Personal Finance Contest. It begs the question “have you used your real eyes before?”

Raymond presents Life Comes At You Fast - Be Organized and Financially Prepared posted at Money Blue Book. Raymond shows us that being organized and financially prepared could really help in a situation where a family member’s health turns for the worst.

Scary Shopping Trips

JvW presents Shopping Extravaganza posted at The Good Life on a Budget. Group shopping can be pretty dangerous and you can end up with things you don’t really want. JvW shows us how she planned for a group outing.

freefrombroke presents EMOTIONS GOT THE BEST OF US AT THE PICTURE PEOPLE posted at Free From Broke. Marketing people really sell us a lot of things by playing on our emotions. This story shows us a prime example of this manipulation.

A Ferocious Fire

FIRE Finance presents Wild Fire Disaster! posted at FIRE Finance. I have survived a rather large hurricane and quite a few floods, but I think I am still most afraid of fires. FIRE Finance writes about the on going disaster in Southern California.

Repulsive Jobs and the Wonders of Unemployment

FMF presents Get Rich by Doing Something No One Else Wants to Do posted at Free Money Finance. My hubby’s ex-coworker went mountain biking with a sewer cleaner, and that’s when I first found out that they made so much money. We pay money to take care of tasks we find disgusting to do, and those with the guts to do these dirty jobs really really deserve the money.

Lynnae presents The Benefits of Unemployment posted at beingfrugal.net. Losing your job can be a traumatic experience, but Lynnae seems to see the good parts of being unemployed.

Hideous Health Insurance:

paidtwice presents The Ominous HR Letter posted at I’ve Paid For This Twice Already. I must say paidtwice’s family pays quite a bundle on their health insurance and this post made Brip Blap’s blood boil! Read the article and comments for details.

Ghoulish Greed and Feral Fees:

caw presents How petty greed translates to more fees posted at Money $ Liberty. This is a story of an App-o-rama gone wrong. I guess it could have been a lot worse.

ispf presents Bank “Upgraded” The Account and Started Charging Fees without Authorization! posted at Grad Money Matters. Ispf shows us that we need to check for things that are anomalous on our bank statements. If you’re not careful the sneaky bankers may take your money without your consent!

The Investor’s Journal presents The Temptations of the Stock Market posted at The Investor’s Journal. This blogger reminds us that investing shouldn’t be like gambling, but sometimes it really tempts us to act like gamblers.

Magnificent Miscellaneous Money Stories

cashmoneylife presents What Is Your Magic Number? posted at Cash Money Life. This story made me feel warm and fuzzy. It wasn’t scary, but it was certainly magical.

Pinyo B. presents Why Do You Work So Hard? posted at Moolanomy. A story that has floated around the net. Very sweet though.

Kyle James presents What My Dad Taught Me About Money posted at Rather-Be-Shopping.com Blog. I think I would get along with Kyle’s dad.

Lazy Man presents My experience as a member of CNBC’s Fast Money live audience - Part 1 posted at Lazy Man and Money. I must say, Lazy Man seems to be enjoying his unemployment.

This concludes the 32nd edition of Carnival of Money Stories. Please submit your story next week if it wasn’t included in this edition! Have a safe and delicious Halloween tomorrow everyone!

Share This

Today I was reading an article about America’s Best Young Entrepreneurs and once again it made me think about starting my own business.

When I think about it, I already have a lot of things that could help me in a business venture. Here’s a list:

• I am young and I could afford to take a bit of risk.
• I have quite a bit of experience working at startups.
• I have a degree in engineering and I am fairly capable with web technologies.
• I am fluent in Chinese and English and could possibly source products and services from China.
• My parents are financial professionals and could help me with the accounting
• I have a good network of contacts in the Silicon Valley through jobs and school.
• I have a hubby that is usually pretty supportive

Then there are the hurdles I need to overcome to actually go ahead and start something:

• I need an idea for a business that could be profitable
• I need to get over the fact that I would probably not make money right away.
• Eventually I need to give up my job and work on my business full time.
• I need to get over my fear of failure since most small businesses fail and I absolutely abhor losing or failing at anything .
• I need to get off my butt and execute my idea once I have one.

I think the biggest hurdles for me are that I may fail and I may lose a stable income while I focus my energy on my own business. Coming up with a business idea isn’t very hard because I firmly understand that I just have to sell a product or service that people want and it really doesn’t have to be a complex “web 2.0″ idea. The business could be as simple as buying useless cheap crap from China and selling it to people here at a markup. In fact, a lot of people and companies make billions of dollars doing this. My business doesn’t have to be huge and glamorous so coming up with an idea is easy. I have dabbled in quite a few “businesses” where I sold very mundane things and I did make small buckets of money. However, I always quit because they became too time consuming and my full time job paid much better. Running a business takes a lot of work and most of the time it is easier just collecting a stable salary. I think my mom also said that she always wants her own business, but after calculating everything she found that collecting a salary is just less of a hassle.

It is hard to convert from a wage-slave to a capitalist, and I think for me that is the hardest part about starting a business. If I did get really serious about having my own business I think I could do very well. The problem is that I may never get started.

Share This

It’s happening all over again. I am leaving a job where I have done a lot and earned very good reviews from my managers. The last time I left my job many people talked to me and tried to convince me to stay. The entire day felt like breaking up with one man after another. It is actually quite easy to map what they said to what boyfriends would say in a breakup. Here are some examples:

The Psycho Boyfriend — One guy called me on the cell and said, “You’re leaving over my DEAD body! I want you to stay!” I’m happy to report that he is still alive and he didn’t kill me after I left the company

The Boyfriend That Knows He Has Done Wrong — This is typical of what people say to convince someone to stay. Basically it goes like this, “Listen, I know that things have not been going well, but I can make sure things change. Please stay and see that things will change!” Unfortunately, things usually don’t change.

The Boyfriend That Sounds Heart Broken — People have said things like, “this is a huge blow to my heart” and “I’m very very upset right now.” These feelings are probably true, but it’s hard to respond to them sometimes when you’re in a conference room.

To all of these “boyfriends” I generally respond with the cliche “it’s not you, it’s me”. I tell them that they have been great to me (it is usually true), and I am just leaving for something new.

The working relationship is usually a long term relationship and the emotions felt when someone useful leaves can be pretty similar to the emotions in a break up. When you think about it, a lot of people probably spend more time with their coworkers than with their families. I do feel bad when grown men that I respect get on the verge of tears while trying to convince me to stay, but when I have made up my mind to leave I go for it. Also I understand that most of them do have selfish reasons for being upset. It takes time and money to train someone and it takes time to trust someone so it is always a bad thing when someone useful leaves. Currently I am going through another round of “breakups” at work. I am leaving a well-paying job at a stable and highly profitable company for a startup that is just starting to become profitable. I am taking a fairly big risk, but I feel like I need to join another startup before I have kids. It was a tough choice to make, but I am sure I will learn a lot of new things.

Share This

So I have been writing this blog for three months and I am surprised that I haven’t written about being an only child. I am an only child because I was born in China and my entire generation was subject to the “One-child Policy”. In China my entire class consisted of only children and the closest thing I had to a brother was my first cousin, who happens to be only 3 days older than me. Last year I read quite a few articles published by the official news agency of China about my generation of “little emperors” and “little princesses” and I found them quite interesting. Here is a short summary of the central government’s findings on this enormous social experiment.

Pros:

1. A lot of only children are quite independent and very productive.
2. Urban females are more educated than past generations since parents could only give attention and care to their only child. In past generations the boys usually received preferential treatment. The only-child policy actually did create more gender equality in urban areas.
3. The only-child generation did not show distinct personality defects as feared by sociologists when the policy went into place. In fact, they are generally healthier than previous generation.
4. Only children are more sociable than children with siblings because they have to get friends outside of their family.

Cons:

1. The only-child generation tends to have less responsibility growing up and end up being lazier.
2. Divorce seems to be rampant in this generation because of overprotective parents and unyielding egos.
3. Only children have no idea how to take care of their own kid.
4. As their parents and grandparents age these peers of mine will have to potentially take care of six people.

When I was a child I really thought that being an only child is the right and normal thing because it was the law and I was born into a world of only children. I remember that it took me a while to adjust to the fact that only children are fairly rare in America and most people has at least one sibling. Since in China the kids with brothers and sisters were from the countryside I thought that maybe most Americans are farmers. I had a few classmates that also came from China, but their parents chose to have more children in America. Most of these American siblings were ten or more years younger than my classmates. In fact, one of my friend’s mom produced his last little brother when he was a senior in high school. This is because in the Chinese culture children are considered blessings. In America the one child policy has many critics, and I agree that it does impede on the basic reproductive rights of human beings and millions of babies have died because of this law. However, population control is probably needed in the world and it’s a tough issue to resolve when most humans are biologically driven to have more children.

For the most part I did benefit from the law because I had the full attention of my parents and they provided me with all that I needed. Even though I live in America now I think I am not so different from my Chinese counterparts. However, my dad wrote in his blog (in Chinese) that I am much more independent than most Chinese children because I grew up in America. Looking back, I probably wouldn’t want a sibling to play and fight with and I quite enjoyed being an only child. There are definitely moments of loneliness, but I just filled my time by reading a lot of books and spending time with my parents. To this day I am still more comfortable talking with older people because I am used to having my parents as my friends. Maybe that’s why I identify with an old baglady and I am so keen on retirement planning. Now that I am married I am trying to adjust to not being an only child, but a wife. It is kind of hard since my hubby takes care of so many things around the house. He is the older brother in his family and he is definitely taking care of me in a lot of ways. I definitely need to take care of him more so that I maintain my marriage and not end up a divorce statistic.

Sources:

China’s Only-child Generation Healthy, Sound
China’s Only Children at Risk of Divorce
When ‘Little Emperors’ Become Parents
On-the-go Chinese Women in No Hurry to Wed

Share This