Armchair Millionaire

Putting Your Money Where Your Mouth Is

Question of the week:I'm just starting to invest and feel very strongly that I want to invest in line with my own personal values. I've recently heard about socially responsible investing. Can you tell me what that's all about? --Maria H.

Dear Maria,

The Social Investment Forum, a trade group for the social investment industry, says that there are more than one hundred socially or environmentally responsible funds today, and that they include every type, from growth and value funds to bond funds and money market funds.

So you're clearly not alone in giving some thought to the impact your dollars have on the companies where you invest. When we asked members of the Armchair Millionaire community recently about their thoughts on the subject, we heard two very different angles:

Go socially irresponsible. "Even though I invest in the Vice Fund and Invesco Leisure fund, which both invest in gambling, alcohol and other sinful causes, I am not at all embarrassed. I feel as I am doing my part to get the economy back on track. I also look at it from the standpoint that people are going to smoke, drink and gamble whether I invest in it or not." --JP

Go socially responsible. "I have to believe that in some small way that the way you invest makes a difference ultimately. It's like voting--your one vote might not make a difference, but all together they do. At the end of the day, business only listens to one thing: money." --Jen

At the heart of it, socially responsible investing is making your investment decisions not just with a financial goal in mind, but a social or environmental one, as well. The easiest way to do this is by investing in socially responsible mutual funds, which use screens to either exclude or include particular types of companies. A "negative screen" will exclude companies for practices or products considered negative (for example, the sale of tobacco products), while a "positive screen" will include companies that are seen as taking positive actions, such as friendly environmental practices.

And while some believe that you have to give up performance to invest in a socially responsible manner, this isn't always the case. According to the Social Investment Forum, three-quarters of the socially responsible funds with at least $100 million in assets earned top marks from fund analysts Morningstar and Lipper for the one- and/or three-year periods ending June 30, 2003.

If you decide that mutual funds are the route you want to take to be a socially responsible investor, my guide will get you started.

The Armchair Millionaire Guide to Choosing Socially Responsible Mutual Funds

• How does it fit with your portfolio? Just because a fund invests according to your values does not make it an automatic choice for your portfolio. It still must fit into an asset allocation that is suitable for your goals, time horizon and risk tolerance.
• How does it screen? Some funds might use many screens, others only one. You'll need to choose according to what is most important to you. A fund that only invests in companies known for excellent labor relations for example, might still allow investment in other companies involved in activities you object to--for instance, animal testing. Bear in mind that when a fund has more stringent screening, the fund manager has fewer investments to choose from, potentially making it more difficult to deliver good performance.
• How long has it been around? Many socially responsible funds are relatively new on the scene, so check on how long it's been in business. Also, find out how long the current manager has been running the fund.
• If you need it, get expert advice. Some financial advisors specialize in socially responsible investments. You can find a directory of these advisors at www.socialfunds.com.

THE BOTTOM LINE: If you want to put your investing dollars to work at more than just achieving your financial goals, socially responsible investing is absolutely worth investigating further.

Saying "I Do" with a Prenup in Hand

Question of the week:Our daughter recently got engaged and will be married this winter. We have been wondering about when a prenuptial agreement might be called for. Any guidance on this issue? --Miami Dad

Dear Miami,

A prenuptial agreement defines the financial obligations and responsibilities of two people about to get married. Its primary intent is to reduce heartache and conflict later on if the marriage doesn't work out. Given that, according to the Census Bureau, about half of all marriages end in divorce, a prenuptial agreement can definitely be useful for many couples.

When we asked members of the Armchair Millionaire community their thoughts about prenups, the comments we heard showed how much it depends on each couple:

Burned once. "I did not have one but would have been more than willing to sign one if my husband wanted. He had been in a bad divorce before I met him which consumed his assets, including an inheritance from his grandmother." --Jennifer

Just common sense. "We didn't have a prenup when we got married--we were young and had nothing to fight over, except a little debt. I think prenups make sense for people who go into their marriage with sizeable assets, or for second or third marriages. It might take away the romance, but it's common sense!" --Gina

People most often think that prenuptial agreements are needed when one party has substantially greater assets than the other. While that certainly the case, there are actually many other circumstances when a prenup might be in order. Here are some examples:

• If one or both parties have children from a prior marriage. In this case, a prenuptial agreement can ensure that certain assets go to the children in the event of their parent's death.
• If one or both parties own their own businesses, and don't want the business assets to be part of any divorce proceeding.
• If one party will be giving up their career once married, or will be supporting the other through graduate school. In such a case, a prenup can define the spousal support (alimony) this partner would receive in the event of divorce.

If you think your daughter might benefit from having a prenuptial agreement going into her marriage, my guide will help her get started.

The Armchair Millionaire Guide to Drafting Prenuptial Agreements

• Ensure that it's needed. Sit down with your spouse-to-be and outline exactly what each of you would want to accomplish with a prenuptial agreement. State laws already cover how property is divided during divorce, so it usually only makes sense to have a prenuptial when both parties want a different outcome.
• Get legal assistance. Prenuptial agreements are legal, enforceable contracts and the laws governing them vary from state to state, so this is one time you should not try to do it yourself. To ensure an agreement that addresses your particular needs and is fair to everyone, each party should consult with their own family lawyer.
• Make full disclosure. Both sides need to disclose all of the assets and liabilities they are bringing to the marriage. Failing to so will usually void the agreement.
• Keep it strictly financial. Courts will only uphold agreements that are monetary in nature. So don't try to sneak in anything about requiring your future spouse to take out the trash every week.
• Plan ahead. While there's nothing to stop you from drafting this kind of agreement after you're already married, I recommend doing it before--when you're madly in love and have your partner's best interests at heart.

THE BOTTOM LINE: Drafting a prenuptial agreement certainly isn't romantic, but in some cases it can be very wise and extremely practical.

Keeping Your Good Name from Going Bad

Question of the week:My sister was the victim of identity theft and went through months of hassle getting everything straightened out. What are your suggestions for safeguarding your identity? --Ramona

Dear Ramona,

Identity theft--whenever someone uses your personal information such as Social Security, credit card or driver's license numbers to make purchases or open accounts--is definitely on the rise. While it's impossible to put exact numbers on it, a report last year by the General Accounting Office said that up to 750,000 Americans are victims of identity theft each year.

There's certainly plenty of anecdotal evidence within the Armchair Millionaire community. When we asked members about identity theft, we heard from several people who had been victimized. This story was typical:

Mysterious credit card user. "I had credit cards that I had not used for some time suddenly appear with balances. I canceled the cards and was not penalized and also asked the credit bureaus to put a fraud alert on my Social Security number. I am also checking my charges on the Internet almost daily as this will probably happen again." --Steve

As your sister experienced, the hardest thing about having your identity stolen is clearing out the illegal activities from your credit report. It's certainly far easier to keep it from happening in the first place. My guide provides the steps everyone should take to protect their identity.

The Armchair Millionaire Guide to Preventing Identity Theft

• Careful with your checks. Never have your Social Security or driver's license numbers printed on your checks. Put your work phone number instead of your home number on your checks. If you have a P.O. box, use that instead of your home address.
• Careful with your credit cards. When you pay your credit card bills, don't write your full account number on your checks, but just the last four digits. This prevents everyone who has access to your check as it is processed from capturing your account number. When you get a new credit card in the mail, sign it immediately. And when you mail your credit card bill payments, put them into a U.S. Postal Service collection box--don't leave them in your home mail box for your letter carrier to pick up.
• Careful with what's in your wallet. Minimize the amount of ID and credit cards that you carry to what you actually need. If you have credit cards you never use, leave them at home. (Or better yet, cancel the accounts.) Don't carry your Social Security card or birth certificate except when absolutely necessary. Memorize your credit card and ATM card PIN numbers--absolutely never carry that information around with you.
• Careful with the Internet. Don't transmit credit card numbers or account information to any Web site that does not offer a secure data transaction. Look for an icon of a lock in at the bottom of your browser, or for the URL of the page at which you input your data to begin with "https." Never give out personal information unless you initiated the transaction and you trust the merchant, and never email your Social Security or credit card numbers.
• Careful with your records. Invest in a good paper shredder and use it often. Old credit card receipts and bills, bank statements you no longer need--anything with your account information on it--should go through the shredder before you toss them. Same goes for all those credit card offers you get in the mail.

THE BOTTOM LINE: With all the tools available on the Internet, you no longer need to rely solely on your financial advisor to get your questions answered. While it will never replace that human touch, it can absolutely make you a better, more-informed manager of your own money.

Trimming Your Student Loan Payments to Size

Question of the week:With the lower interest rates, it seems everyone's been refinancing their mortgages. Is there anyway to re-negotiate my student loans? And if so, should I? --Alison S.

Dear Alison,

Your timing is excellent, given that the interest rates on Stafford federal student loans dispersed since 1998 dropped to an all-time low this summer--3.42 percent. (Compared to what rates have been in recent years, this is an incredible bargain--as recently as 2001, the rate was 8.19 percent on these loans.) That means that rates for consolidation loans will be lower, too.

We asked the Armchair Millionaire community to tell us about their experiences with student loan consolidating, and heard many stories. Here are two:

Happy to have consolidated. "I have about $16,000 in student loans and am perfectly happy with that. I have since consolidated my loans and locked in a low interest rate. Student loans are good debt, and worth the investment." --Travis

Consolidated too soon. "I consolidated once soon after graduation because I liked the idea of a fixed rate. I wish I hadn't done that, now that the rates have gone down so much, and I can't find a way to refinance that lowers the rates. I don't regret taking student loans to pay for college, but I do regret the way I managed them in the early years." --Robin

People consolidate their student loans for the same reason they usually refinance their mortgages: to reduce their monthly payments. When you consolidate, your original loans are paid off in full in return for a single loan for the combined balances. The new loan will typically have a lower interest rate that is fixed for the life of the loan. If this sounds appealing to you, my guide will provide you with the basic information you need to get started.

The Armchair Millionaire Guide to Student Loan Consolidation

• Is consolidating right for me? If the consolidation loan offers you a lower rate than you're paying now, it probably is, particularly if you're having trouble making your monthly payments. If you're close to paying off your student loans, however, it may not be worth the trouble.
• What interest rate will I pay? It depends on the rates you're currently paying on your loans. The interest rate for consolidation loans is calculated by taking the weighted interest rate of all the loans being consolidated and rounding up to the nearest one-eighth of one percent, with a cap of 8.25 percent. There's an online calculator that will do the math for you on the U.S. Department of Education's loan consolidation Web site at www.loanconsolidation.ed.gov.
• How much will I save? According to Sallie Mae, the leading provider of student loans in the U.S., consolidating student loans could reduce your monthly payments by up to 54 percent. However, these kinds of savings are achieved in part by extending your repayment term. (Depending on the amount you're consolidating, this could be all the way up to 30 years.) If you choose to extend your repayment term, it will take longer to pay off your overall debt and you're total interest expense will be higher.
• Any other advantages? Many lenders will reduce your interest rate by one percent after you've had an on-time payment record for a certain period, such as 36 or 48 months. You can also receive a quarter-point reduction in your interest rate by agreeing to pay by automatic debit. Also, there are no pre-payment penalties on consolidation loans.
• Where do I get a consolidation loan? From any bank or credit union participating in the Federal Family Education Loan Program, or directly from the U.S. Department of Education. The loan terms and conditions are generally the same, regardless of where you consolidate.

THE BOTTOM LINE: Once you consolidate your student loans, they're gone and there's no going back. Since you can only consolidate once, be sure that it's the best financial move that you can make before plunging ahead.

Exploring Financial Cyberspace

Question of the week:After much pestering from our granddaughter, we have finally started using email and the Internet. Now we're considering online banking. Any pointers on how to get started? --Ohio Grandparents

Dear Grandparents,

Congratulations on making the leap over the digital divide! Like you, lots of people these days are interested in e-banking. The Pew Internet Project found that about one-third, or 32 percent, of Internet users were doing their banking online in 2002, up from 17 percent in 2000.

When we recently asked members of the Armchair Millionaire community about their online banking experiences, we found that folks are taking full advantage of it. Here are several comments:

Stay ahead of the curve. "I use online banking to pay ALL of my bills. Traditional banking is going the way of the Dodo bird … If you don't jump on the bandwagon you will be left behind. --mdonalds

Go automatic. "After setting up every automatic bill paying option that was available to me, I discovered that I could schedule recurring automatic payments even for those companies that don't offer the service themselves. Combine that with money management software (like Money or Quicken) and soon you'll find yourself on autopilot." --Jerry

Pay on time. "I use my credit union's bill pay service (which is free!). It's not only convenient, but is a real time saver. I always found it hard to find the time to pay bills so quite often they used to be late. Now my credit rating has also increased because the bills are paid automatically on time."--lM

Online banking, which allows you to take care of all your bills and monitor your accounts from your computer, offers terrific advantages over traditional banking. Payments are processed quickly, never lost in the mail, and can be scheduled in advance, so bills are paid while you're away on vacation. It's a money saver--no more stamps or envelopes for paying bills, and fewer paper checks. But perhaps best of all, it saves time. There's no more sitting down to the kitchen table to write out checks and, because transactions are recorded online, no more having to file away all the records.

Online banking is offered by thousands of banks and credit unions around the country, and getting started is easy--just visit your bank's Web site and sign up.

But online banking is only the tip of the iceberg. If you really decide to go hog wild on managing your money with the Internet, you'll find that there's much, much more waiting for you in cyberspace. My guide will get you started.

The Armchair Millionaire Guide to Online Money Management Tools

• Calculators ask you for a couple pieces of information, do some quick math, and then deliver the result. They will answer your questions on everything from how much you should be saving for your kid's college to whether it makes sense to refinance your mortgage. Planners provide you with specific recommendations for reaching your goals. For example, retirement planners will figure how much you'll need for retirement, and recommend savings strategies and asset allocations for getting there. Another popular type, debt reduction planners, map out the most effective route for paying off your debt.
• Investment research tools. Screeners allow you to sift through thousands of stocks and funds to locate those that meet your criteria. Looking for a domestic large-cap index fund with an expense ratio of less than .5 percent? A screener will turn up a list in seconds. And that's just the beginning. The Web can provide you all the information on particular stocks and funds that you could possibly use, including earnings reports and estimates, annual reports, price charts, company and fund news and much more.
• Portfolio trackers. These nifty tools let you enter the number of shares and ticker symbols of the stocks and funds you own, and then keep your portfolio up to date. Every time you log in, you'll get current quotes and values for all your investments.
• Account managers. Many brokers and fund companies allow you to manage your investment accounts online. You can check your account status, place buy and sell orders, or make transfers between accounts, all with the click of your mouse.

THE BOTTOM LINE: With all the tools available on the Internet, you no longer need to rely solely on your financial advisor to get your questions answered. While it will never replace that human touch, it can absolutely make you a better, more-informed manager of your own money.

Making Your Plastic Pay

Question of the week:I get a half dozen credit card offers in the mail every week. I'm tempted to go with one that offers frequent flyer miles, but the annual fee is $60. How do I figure out which is really the best deal? --B. Gonzalez

Dear B.,

Given the Americans are up to their necks in credit card debt, people are smart to get as much as possible in return for all the interest they're paying. According to the Federal Reserve, revolving debt (which mainly includes credit cards) is at an all-time high--we owe a cool $725 billion, at an average interest rate of 12.9 percent.

What to do? When we asked Armchair Millionaire community members for their tricks on getting the most from their plastic, we heard some interesting stories. Here are three:

Go on vacation. "I travel regularly for business and have put over $300,000 in company-paid expenses on my Amex in the last four years. At one point for every dollar spent, the points add up! My wife and I recently spent a week at a Hilton in Hawaii. The entire vacation, including our airfare from our home, cost us nothing more than cashing in some of the points." --David

Pay for college. "I have two credit cards that give me cash back for my child's education that go into her 529 account and her Upromise account." --Shelly

Get bucks back. "I pay for all my work expenses (meals, hotels, materials, etc.) with the Discover Platinum Card, which rewards me 1 percent cash back on all my purchases. If I charge $50,000 a year for company- reimbursed expenses, I get a check for $500 every year. There's no annual fee, and I pay the balance each month so I don't pay any interest." --Josh

To understand if those frequent flyer miles are really worth the 60 bucks a year, you really have to run your own numbers. If you charge enough to get a free ticket every year or so, it could certainly be worth it. If you only earn a free ticket every ten years, however, than clearly the $600 in annual fees that you would have paid over that time would more than cancel out the value of that ticket.

But the gimmicks are not all that you should consider when looking at credit card offers. My checklist provides a complete rundown on everything you should look at to make sure you get the best deal.

The Armchair Millionaire Checklist of Credit Card Features

• The rates. This is the first thing most people look at, but remember to consider more than just the annual interest rate. Does the card offer a lower introductory rate? Or a lower rate for balance transfers? If so, how long do these rates last? And what about the interest rate for cash advances? Also, is the annual rate fixed, or will it go up and down with prevailing interest rates? Finally, what is the interest-free grace period?
• The fees. Of course, you'll want as low an annual fee as possible (or better, none at all), but consider other less obvious fees. These include late fees and fees for charging more than your credit limit.
• The extras. Cash back, frequent flyer miles, and merchant discounts are all well-known, but many cards offer a range of other benefits that may be useful to you. To name but a few, these include travel accident insurance, travel and emergency assistance, auto rental insurance, lost luggage insurance, extended warranty protection, free additional cards, annual account summaries and online account management. Remember that frills rarely come free, however.
• The hidden "gotchas." Some cards charge a fee whenever you transfer a balance to it. Most charge a fee for cash advances (up to 4 percent of the amount). And some will cancel your nice low introductory interest rate if you make a single late payment. Read the fine print carefully.

THE BOTTOM LINE: Regardless of the gimmicks you go for, you should always follow a single rule: Pay off your cards every month. Otherwise the interest you pay will outweigh all those goodies.

Putting Your Money Where Your Mouth Is

Question of the week:I'm just starting to invest and feel very strongly that I want to invest in line with my own personal values. I've recently heard about socially responsible investing. Can you tell me what that's all about? --Maria H.

Dear Maria,

The Social Investment Forum, a trade group for the social investment industry, says that there are more than one hundred socially or environmentally responsible funds today, and that they include every type, from growth and value funds to bond funds and money market funds.

So you're clearly not alone in giving some thought to the impact your dollars have on the companies where you invest. When we asked members of the Armchair Millionaire community recently about their thoughts on the subject, we heard two very different angles:

Go socially irresponsible. "Even though I invest in the Vice Fund and Invesco Leisure fund, which both invest in gambling, alcohol and other sinful causes, I am not at all embarrassed. I feel as I am doing my part to get the economy back on track. I also look at it from the standpoint that people are going to smoke, drink and gamble whether I invest in it or not." --JP

Go socially responsible. "I have to believe that in some small way that the way you invest makes a difference ultimately. It's like voting--your one vote might not make a difference, but all together they do. At the end of the day, business only listens to one thing: money." --Jen

At the heart of it, socially responsible investing is making your investment decisions not just with a financial goal in mind, but a social or environmental one, as well. The easiest way to do this is by investing in socially responsible mutual funds, which use screens to either exclude or include particular types of companies. A "negative screen" will exclude companies for practices or products considered negative (for example, the sale of tobacco products), while a "positive screen" will include companies that are seen as taking positive actions, such as friendly environmental practices.

And while some believe that you have to give up performance to invest in a socially responsible manner, this isn't always the case. According to the Social Investment Forum, three-quarters of the socially responsible funds with at least $100 million in assets earned top marks from fund analysts Morningstar and Lipper for the one- and/or three-year periods ending June 30, 2003.

If you decide that mutual funds are the route you want to take to be a socially responsible investor, my guide will get you started.

The Armchair Millionaire Guide to Choosing Socially Responsible Mutual Funds

• How does it fit with your portfolio? Just because a fund invests according to your values does not make it an automatic choice for your portfolio. It still must fit into an asset allocation that is suitable for your goals, time horizon and risk tolerance.
• How does it screen? Some funds might use many screens, others only one. You'll need to choose according to what is most important to you. A fund that only invests in companies known for excellent labor relations for example, might still allow investment in other companies involved in activities you object to--for instance, animal testing. Bear in mind that when a fund has more stringent screening, the fund manager has fewer investments to choose from, potentially making it more difficult to deliver good performance.
• How long has it been around? Many socially responsible funds are relatively new on the scene, so check on how long it's been in business. Also, find out how long the current manager has been running the fund.
• If you need it, get expert advice. Some financial advisors specialize in socially responsible investments. You can find a directory of these advisors at www.socialfunds.com.

THE BOTTOM LINE: If you want to put your investing dollars to work at more than just achieving your financial goals, socially responsible investing is absolutely worth investigating further.

Uncle Sam's Bonds:Slow,Steady,Safe

Question of the week:I'd like to diversify my investments (which are now mostly stocks) and am considering savings bonds. Do you think they're hopelessly old-fashioned, or could they actually be useful in my portfolio? --Barb M.

Dear Barb,

Given the roller coast ride the stock market has taken us on lately, I can certainly understand your inclination to duck into something a bit more sure. And you have plenty of company--according to the U.S. Treasury, over 55 million Americans own savings bonds.

When we asked members of the Armchair Millionaire community about why they like savings bonds, we heard a number of responses. This one is typical:

Love those bonds. "I bought some Series I savings bonds a couple of years ago. The things I like about them are safety (no chance of losing principal when interest rates rise, as with a bond fund), no commissions, hedged against inflation, and a decent rate of return (versus cash and bonds, anyway). They won't match stocks for the long run, but seem to be a good place for 'rainy day' cash and as a diversifier." --Jack

As Jack points out, savings bonds offer some very nice features that can really help round out a portfolio. And while I believe that most people investing for the long term should be primarily in stocks (or stock funds), I do think that fixed-income investments (such as bonds) can also have a place in a common sense portfolio, as well. And savings bonds are definitely the easiest bonds to buy. If you decide that savings bonds are right for you, my guide will give you what you need to get started.

The Armchair Millionaire Guide to Savings Bonds

• The basics. When you buy a savings bond, you're making a loan to the government, which promises to pay interest in return. Savings bonds are backed up by the full faith and credit of the United States, making them perhaps the safest investment around.
• Your choices. While there are currently three kinds of bonds available, I recommend only the Series EE and I bonds because they are easy to buy, provide tax advantages and offer nice interest rates.
  • Series EE bonds. These bonds are issued at one-half of their face value (so a $50 bond costs $25), in denominations ranging from $50 to $10,000. The interest rate on EE bonds is adjusted every six months and is currently set at 2.66 percent. This interest accumulates until you redeem the bond, or for up to 30 years.
  • I bonds. These are a lot like EE bonds, except that their interest rate is intended to keep your investment growing ahead of inflation. At the moment, I bonds are paying 4.66 percent interest. Also, I bonds are purchased at full face value (so a $50 bond really does cost $50), in denominations of $50 to $10,000.
• Buying 'em. There are three easy ways to buy Series EE and I bonds:
  • From almost any bank, credit union or savings and loan.
  • Directly from the U.S. Treasury through its EasySaver program at www.easysaver.gov. EasySaver lets you buy savings bonds online and make regular purchases (like monthly) with automatic withdrawals from your bank account.
  • If your employer offers it, through your payroll savings plan.
  Regardless of how you buy your savings bonds, there's never a fee or commission.
• Cashing 'em in. Savings bonds easy to redeem. The only requirement is that you have owned the bond for at least 12 months. (Although if you redeem one before you've owned it for five years, you'll pay a penalty of three month's worth of interest.) Just about any full service bank can redeem them for you.
• The tax advantage. Federal income tax on the interest you earn is deferred until you cash in your bond, or until it stops earning interest. And depending on your income and other circumstances, you may not have to pay federal tax on the bond's interest if it's used to pay for higher education expenses. In addition, the interest on savings bonds is exempt from state and local income taxes.

THE BOTTOM LINE: If you're considering bonds for your portfolio, the convenience and simplicity of savings bonds make them an obvious first choice to get your feet wet.

To 401(k) or to Roth

Question of the week:Citing a need to cut expenses, my employer just suspended its match on employees' 401(k) contributions. With the match gone, I'm wondering if it's better to just set up a Roth IRA and drop the 401(k). What do you think? --Martin S.

Dear Martin,

This is one of those classic dilemmas in which you're forced to compare apples to oranges, which takes a bit of mental juggling. And it's one that more and more people are facing, given that many employers are cutting and even removing their 401(k) matches. The Profit Sharing/401k Council of America says that company contributions in 2001 were an average of 2.5 percent of pay, down from 3.3 percent in 1999.

We recently posed your question to members of the Armchair Millionaire community. Since contributions to 401(k)s are usually tax-deductible and contributions to Roth IRAs are not, much of what we heard was about taxes. Here are comments from both sides:

Go for the Roth. "I have never seen taxes go down over time, so I prefer the Roth IRA. Also I don't want to have to guess what I'll really have left over after taxes when I retire." --Brad

Go for the 401(k). "I fund my 401(k) over a Roth to get the tax deduction now. The current law says that withdrawals on Roth IRAs are not taxable, but who knows what will happen in the future? I don't have enough faith in Congress to trust that they won't someday repeal the Roth IRA, so for now, give me the current deduction." --Bryan J.

In my opinion, if your employer does offer a match on your 401(k), you should go for it. The free money in the form of that match makes the decision a slam dunk.

But if you don't have the match, then you need to have to have a clear understanding of the ups and downs of both kinds of plans. Both offer advantages and disadvantages that, depending on your personal situation, can make a big difference to your retirement. My guide breaks down the major differences between the two.

The Armchair Millionaire Guide to the 401(k)-Roth IRA Debate

• Taxes. A 401(k) contribution is deducted from your income before you pay taxes. Since it reduces your taxable income, it lowers your taxes. However, later--in retirement--you will have to pay tax on the money you withdraw, just like it was ordinary income. For the Roth, you get no tax break now--but you'll never have to pay tax on any of your withdrawals. So it's a matter of choosing whether you pay taxes now, or pay later.
• Contributions. The 401(k) wins here. In 2003, most employees can contribute up to $12,000 per year, and people over the age of 50 can contribute $14,000. The Roth? Just a paltry $3,000 in 2003 (or $3,500 if you're over 50).
• Investment choices. Typically, you'll have a dozen or so choices of mutual funds to invest in with a 401(k) plan. For a Roth IRA, though, the sky's the limit--stocks, bonds, and mutual funds can all be purchased through IRA accounts.
• Convenience. For making investing painless, the 401(k) is hard to beat--the money is taken out of your paycheck before you even see it and invested for you by your employer. For the Roth, you need to save the money, set up your account, and then make the investment. Most IRAs do allow automatic investments, though, so once your IRA is set up you can have regular monthly amounts taken from your checking account and invested in your IRA.
• Withdrawals. Uncle Sam says that you have to start withdrawing your money from your 401(k) by the time you hit age 701/2, and that you have to take out a minimum specified amount each year after that. On the other hand, you don't ever have to make withdrawals from your Roth IRA if you don't want to, making it a valuable estate planning tool.

THE BOTTOM LINE: Like every other investing decision, choosing a 401(k) or a Roth IRA requires you to look at a range of issues, most of them not black and white. Weigh each issue carefully to arrive at the best option. And if you're still not sure, then get the best of both worlds--fund both your 401(k) and a Roth IRA!

Paying for Your Future First

Question of the week:I know I should be saving, but times are tough right now and there never seems to be enough money left over to put any away. Saving just seems impossible--is there any hope for me? --A Wannabe Saver

Dear Wannabe,

If it's any help, you've got plenty of company. According to the U.S. Department of Commerce, Americans aren't doing a very good job of saving. Recent statistics show that we're saving on average just a tad under four percent of our personal disposable incomes.

However, there's no shortage of ideas out there for how to reduce expenses and save more. When we asked members of the Armchair Millionaire community to tell us their methods for how they save, we heard dozens of great ideas. Here are just a few:

Just say no to new cars. "We've easily saved over $150,000 by driving used cars over the past 35 years. Repairs, insurance, and the original cost of the cars and interest on the savings invested well all add up. Plus you don't worry about drinking coffee in the old car or scratching it in the parking lot." --GM

Don't carry lots of cash. "I keep less than $10 with me, so if I want something more than that, I have to write a check, and that stops me from buying things I don't really need, because I don't want them bad enough to write a check." --Dayna

Buy carefully. "We never buy anything big (such as a car, boat or house) unless we think we'll be able to sell it for as much or more than we paid (and we usually do)." --A.

The savings technique that I personally recommend above all others is paying yourself first--stashing a portion of your net income in a separate account before you have a chance to spend it. Sound complicated? It isn't. My guide will get you started.

The Armchair Millionaire Guide to Paying Yourself First

• Save automatically. The easiest way to save automatically is to set up an automatic investment plan with your broker or mutual fund company--or wherever you decide to save and invest your money. This will enable a set amount of money to be automatically withdrawn from your checking account each month and automatically placed into the investment of your choice. This service is nearly always free. The best thing about it is that it's painless--the money is gone before you know it, so you never really miss it.
• Save enough. To make a real difference in your long-term financial health, you need to sock away a substantial part of your income. I recommend saving at least 10 percent of your take-home pay. If you absolutely can't do 10 percent right now, start at 3 or 5 percent, but commit to increasing it as soon as you can. If think this is impossible, just think back to a time (it probably wasn't too long ago) when you earned less than now. You still found a way to make ends meet, didn't you?
• Do the math. Little will do more to motivate you than knowing how much your "pay yourself first" money can grow over time. Let's assume that you bring home $3,500 a month and that you decides to save 10 percent, or $350 a month, over the next 20 years. Assuming an average annual growth rate of 9 percent--historically, an extremely realistic number--your money would grow to over $235,000.
• Start now. Without a doubt, saving that first month's amount can be difficult. But starting is the only hard part--once you get started, it's all downhill from there. You'll not only get used to saving money, you may even forget that it's happening.

THE BOTTOM LINE: If you combine it with other wise financial moves (like fully funding your retirement account), your monthly "pay yourself first" contribution to your long-term savings will make you wealthy over time. Best of all, it will grow your nest egg while sparing you the hassle of dealing with a budget.