Debt $ense

How many other people have decided it’s much less painful to stop thinking about 401(k) performance for the time being?

I just keep reminding myself I have 40 years until retirement and I’m buying more shares now while the price is lower that will help boost my portfolio value once the stock market improves. And then I try to remember not to look.

I sat down last night and figured out where I stand as the end of May approaches. Thanks to the beating my 401(k) has taken the last week or two, I’m not as good as I should be, but my overall net worth is up to -$5,662. If my 401(k) bounces back to where it was, I’ll be around -$5K, which isn’t bad.

My credit card balance continues to drop. Tomorrow’s to-do list includes bringing my cable modem back to Adelphia and canceling service, so that will let me increase my weekly payments. I’ll also find out Friday how the adjusted withholding affects my take-home pay. So next week’s payment should be up significantly.

My goal for June is to get my net worth up to about -$3,500, though that depends some on how my 401(k) does. That will get my CC balance down under $6,500.

I’m going to stop checking my 401(k) balance for a few weeks. It’s just getting too depressing, and for no reason.

“No reason?,” you ask. “You mean you’re not concerned about the falling stock market?”

Sort of. In a big-picture sense, the falling stock prices could signal an economic slowdown, which could be bad. But I have enough seniority and usefulness at work that my job’s unlikely to be in jeopardy. And it means my retirement fund is worth less, but with 40 years to go until retirement, that’s not a huge concern either. There’s plenty of time for it to bounce back.

And zooming in a bit, the funds in my portfolio that are really falling are the two aggressive ones, which makes a fair amount of sense. The others are doing fine. So I’ll use this time to buy more shares in the funds than I normally can and be in good shape for when the market swings back up later this year.

But until then, I’ll stop checking every week. No need to undo all the good psychological effect of my declining CC balance by fretting over my declining 401(k) balance.

Thanks to the stock market’s not-so-great week, my 401(k) is down far enough so that my net worth is actually worse this week by about $75. Fortunately, I have about 40 years until I retire (the advantage of truly loving my job is I have no desire to take early retirement), so I’m not worried. It just means my paper numbers don’t look as good this week.

But by Monday my CC balance will be down to $7,700, a full $300 under last week’s milestone. And in another week, I’ll be able to increase my weekly payment again after I see what my paycheck looks like now that I’ve adjusted the withholding.

I’m also still chasing down my friend who hosts my Web site to check some details there. I might be able to get away with not using my PC to upload files, which would eliminate my need for internet at home. That would save me about $50 a month. And if I cut the service before June 6, Adelphia will actually owe me money.

That’s my weekly update, and overall it’s not bad. As I was telling one friend this week, my April/May expenses were higher because of two gifts I hadn’t planned for ($240), plus the root canal ($100 and counting). I also spent $180 on spring clothes, which I had planned for, but then the gifts sucked up that money and then some.

But I figure if I can make budget in a month with about $350 in extra expenses, and take a mini-vacation and stash almost $100 in savings ($60 for CC, $35 for sneakers), I’m in pretty good shape.

This week, both my CC balance and my 401(k) balance should cross the $8,000 mark — going in opposite directions, of course. And both are a couple of weeks ahead of schedule!

The success with both of those goals is a great confidence booster, and makes me even more determined to hit the rest of my goals. Since my CC payment increase by $8 a week this week, about three weeks earlier than I had planned, I think I’m in good shape. Now I just have my fingers crossed that my annual raise is on the high end of what I normally get to reflect the additional responsibilities I’ve taken on this year. Our department head is fair, so I think that’s a reasonable expectation. Once I get word of what the raise will be - in about three weeks - I can re-run my numbers and see how it adjusts my repayment schedule. I’ll post new goals then.

I was checking my various accounts online last night and realized I’m just a few weeks away from getting my CC balance under $8,000. In the grand scheme of things, this is still a lot of debt, but it means I’ve managed to knock about a third of my balance off in the last few months. It’s been a long time since that balance has started with a 7, and I’m looking forward to the day when it does. It will be a day to celebrate.

Why?

Not because it means I’m done, or I’m in good shape. But because it’s a milestone, a point at which I’ve made noticeable progress. Round numbers are good for marking progress because they’re “pretty.” So even though it’s no more progress than any other month, it’s something I can point to. Dropping below $10,000 and staying there was one milestone for me, as was $9,000.

Breaking $5,000 on my 401(k) was a milestone. I’m about to break $8,000 (going to other way) on that account, and I’ll be ready to celebrate that too. Not only will it mean I’ve passed a round number, but also that I will have saved more than I owe.

$7,750 on my CC is another milestone because it means I’m below the 50 percent mark against my CC limit. I’m on track to hit that in early June.

Other milestones I hope to celebrate this year:

mid-July: less than $7K on my CC
late August: more than $9K on my 401(k)
early September: less than $6K on my CC
late November: less than $4K on my CC and more than $10K on my 401(k)
Year-end: My net worth finally becomes positive!

I don’t know what I’m going to do for these milestones to celebrate. It might be as simple as giving myself a free day without work or chores or any responsibility. Maybe a trip to the coffee shop instead of making my own tea. Or maybe a ball of the cool yarn I’ve wanted to try. As long as it doesn’t undo the progress I’m celebrating, the sky’s the limit. All that matters is I reward myself in some small way for taking enough bites to swallow a noticeable portion of that elephant so I remember I’m that much closer to the day I can make that last CC payment and celebrate my freedom from “bad” debt.

Now that will be a milestone worth noting!

In light of Aleta’s comment below, I figured I’d break down how my 401(k) is arranged.

Since I get my company match in company stock, but don’t invest any of my own money into said stock, my existing balance mix is always a bit different than my future contributions.

That said, I make my contributions to 30 percent each international, large-cap and mid-cap stock funds and 10 percent balanced. I don’t contribute anything regularly to a pre-mixed fund, but I am moving half my company stock into that fund, with the other half in the balanced fund.

That means my actual balance now is: 6 percent company stock, 28 percent mid-cap, 26 percent international, 34 percent large-cap and 3 percent each balanced and pre-mixed.

In July, when I get my annual raise, I’ll also do my annual rebalancing to transfer money from the funds with a greater percentage than my plan to ones with a lower percentage. For example, some of the large-cap money will move to international and mid-caps, and my company stock will move to balanced and pre-mixed. It’s a good rule of thumb to do this once a year or so to make sure your overall investments don’t get out of whack. If a fund’s actual balance is way off your future contributions, then your risks and returns will be different than what you actually want (assuming your contributions reflect how you want your money distributed).

Depending on what the raise looks like, I might increase the contribution by a point or two. More likely, I’ll keep it at the minimum to get the full company match and increase my debt repayment. I should be able to add $15-$25 a week to the payment, which means another $60-$100 a month on top of the $580 I’ll already be paying. (Once my cable bill is adjusted to reflect the fact I now only have internet, I’ll be able to pay $8 more a week.) That will help me pay down debt faster, which means I can increase my contribution to about 15 percent by this time next year.

I’ve been getting a lot of questions from co-workers about 401(k)s lately, and I’m kind of surprised at how little people understand about them. I guess my parents did me more of a favor than they thought when they got me that Zillions subscription as a kid.

Jennie’s rules for 401(k) contributions

1. Don’t put your own money into company stock. If the company match is in company stock, regularly transfer it to other funds. You already have too much of your future tied up in your company’s financial success, especially if your have stock options or a pension. Don’t put your 401(k) in their hands too.

2. No matter how broke you are, always invest at least enough to get the company match. As Suze Orman points out in “Young, Fabulous and Broke,” where else can you get 50 percent or more return on your money? It’s basically free money.

3. Start a 401(k) as soon as you can. The earlier you start, the more you have of your greatest assest - time. One guy I know who’s several years older than me has about 10 times what I do in his account. But if we both stopped investing today, I’ll be way better off when I retire in 35 years than when he retires in 20 because the balance keeps compounding.

4. Don’t cash out your 401(k) when you leave a job. Count this as a lesson I learned the hard way. I started one when I was 21 and working my first job after college. I built up a decent amount, maybe $3,500 in three years. When I left, instead of being smart and rolling it over, I cashed it out to pay down my credit card. But I wasn’t committed to killing my debt yet, so the balance went back up, I had to pay all the lovely tax penalties and I lost out on all the money I would have earned over the next 40 years.

5. Be wary of taking out a loan from your 401(k). Maybe things will be fine and you’ll be able to pay it back. But what if you lose your job? What if you leave your job? What if you decide you hate your job but can’t leave because you can’t afford to pay back the loan? Taking a loan really restricts your options and shouldn’t be used if you have another alternative.

6. Know what your portfolio should look like for your stage in life. If you invest too conservatively early on, you won’t make enough money to retire on. If you keep an aggressive portfolio too long, you risk a stock market crash or major downturn just as you’re getting ready to join the ranks of the retired. Start out aggressive, and tweak your portfolio over time to be more conservative.

7. Resist the urge to fiddle. This is a long-term investment. Adjusting your contribution rate and portfolio once a year is good. Changing it every other week is not. Also, don’t panic over blips in the stock market, epecially if you’re a 20-something like me. The point of this is long-term investing, not making a quick profit. There are going to be weeks or months that things aren’t doing so well. Keep investing - you’ll pick up more shares because they’re cheaper and be in better shape when the stock market picks up again.

8. That said, when you do move money out of a fund, do it over time. If you have a third of your 401(k) in company stock and you just realized that’s not a smart move, don’t go in tomorrow and move it all out. Figure out how long a time frame you’re comfortable with and divide the balance by that amount, then transfer that amount each week. (My company match amount is fairly small, so I’ve been moving $100 a week, and will be done in June.) This evens out the cost of the stock so you’re less likely to have one of those wonderful moments where you sell off big and the stock shoots up the following week.

Any other suggestions for smart 401(k) investing?

My dad is very organized with bills. They all go in this organizer when they arrive, and once or twice a month he sits down to pay them.
I’m not organized. My dad would have a fit if he saw the stack of bills and financial papers stuffed into slots of my desk, scattered on the coffee table, piled on the kitchen counter… Well, you get the picture. I usually remembered to pay my bills on time, and I usually had the money available. (The “usually” qualifier would give my dad fits too.)
Fortunately, my company has a deal at my bank that lets me have an account with free bill pay, despite my small balance. Bill pay is a lifesaver. All my bills are automated except my electric, which comes in electronically. Even my rent check is done through bill pay. It saves me tons of time, and I haven’t had a late payment since I started using it.
Online banking also lets me automatically deposit money in my savings account, $50 a week. Since I’m so focused on paying down debt, the savings account is less my real savings than my emergency fund and payment source for things like car insurance that are one-time expenses during the year. It’s also my overdraft protection account, which both reduces fees to the bank and keeps me from rationalizing using my card by saying “I’m not sure if I have the money in my checking account…”
The credit card payments also are automated - obviously, since they’re bills - and like the savings are done weekly. It makes progress more noticeable for me, since pretty much every time I log into the online account there’s a lower balance than last time. It also (slightly) shrinks the amount of interest I pay because the balance keeps shrinking.
As a result, monitoring my spending and saving takes almost no time and I avoid late fees. Automation rocks!
Automating payments is something businesses have done for years by deducting taxes and benefit costs from your paycheck. It’s also the way most 401(k) plans work. In fact, there’s talk of making opting in the default for 401(k) plans. That would mean your employer automatically enrolls you and contributes a set amount of your paycheck unless you ask to opt out. In companies that have those types of arrangements, a much higher percentage of the employees contribute. With Social Security and pensions in danger across the country, more people saving for retirement can only be a good thing.