Becoming a millionaire used to be hard back when gum was a penny and comics were ten cents. Now that a pack of gum costs a buck and comics suck, becoming a millionaire is much easier but still a laudable goal. Don’t believe me when I say that becoming a millionaire is easy? I’ll give you six easy steps that, if you have the diligence and the discipline to discard the temptations of a world filled with easy credit and consumerism, will leave you a millionaire. $1,000,000 buckaroos. If you don’t follow them, you’ll likely have to start a dot-com that Google will buy or work 16 hour days and climb that corporate ladder (that’s if you don’t hit some glass ceiling because you’re not in the old boys network).

Many of these ideas are so simple the could make you crazy. None of them are sexy. None of them have you racing down the autobahn in a convertible going 150 MPH. None of them have you throwing dice in Vegas and none of them involve games of poker against James Bond. That’s part of the reason so few people do them… that’s exactly why if you do them you will become a millionaire.

Step 1: Participate In Your 401(k)

If you contribute a meager $3,000 a year to your 401(k), get no match, and it appreciates at 8% a year - after 40 years you will have a balance of over $777,000 on contributions of $120,000. That one little step gets you three quarters of the way there. That one little step that anyone with a job can, and should, do (if you don’t have a job, becoming a millionaire will be very difficult) immediately. Unfortunately, the purchasing power of that $777,000 in 2006 dollars (assuming 3% inflation), will only be $238,000 so we still need some more help to get to the millionaire status but we’re well on our way to millionaire status.

Step 2: Contribute To A Roth

The Roth IRA and it’s tax-free growth is one of the best investment vehicles out there. It also diversifies your tax profile when it comes to retirement because it balances out for your pre-tax 401(k). If tax rates go through the roof, you still have a Roth IRA to tap into tax free. What’s unfortunate is that if your salary keeps increasing, there may come a time when you reach the phaseout contribution limits for the Roth IRA so get your contributions max’d out as early as you can.

Step 3: Find Another Source of Income

Whether it’s selling knick-knacks, performing some freelance work, writing a blog, or taking on a second job; increasing your income and saving that extra income is yet another way to get your precious net worth into the seven figure range. Take that extra money and put it into a brokerage account (if you have no debt) and watch it grow. Since this second income isn’t “necessary” or “expected,” putting it all away should be trivial and something your future self will thank you for as he or she sips mai thai’s in Waikiki.

Step 4: Cut The Fat (Your Budget and Your Belly!)

Do you really need some of the things you always buy? Consider taking a little breather on Netflix and save some cash. Look for some trimmables in your budget and cut them out. Much like losing weight, it’s far easier to reduce your spending than it is to increase your income. If you don’t buy that cup of coffee, you can save yourself $2. Can you think of a quick way to make $2? Probably not.

Step 5: Cut Down On Fees

Adding just half a percent in fees severely reduce the appreciation of your assets. In the earlier example with the 401(k), I did the math and said you get $777k after 40 years at 8%. If you were to add a half percent annual fee, you end up with less than $675k after 40 years instead of $777k. If you add a full percent in annual fees, your nest egg is now worth less than $587k. One percent in annual fees results in a difference, over 40 years, of nearly $200,000. If all other things are equal, find yourself a cheap fund!

Step 6: Buy A House, Then Rent It Out

At one point or another you’ll probably want to buy a house and live the American dream (it’s become the American nightmare for some now!). Be smart about it and don’t overpay, don’t get rushed, and you could be unlocking one of the great wealth building strategies. As they say, they aren’t building any more land. When you buy, remember that after you live in it for two years, you can sell it and the profit is tax free as long as you buy another home with it. If you don’t want to sell, consider renting out the home. In renting, you can go after positive cash flow or just tread water, content in banking on the appreciation of the home at a later date. Either way, it’s a great way to leverage your assets into something bigger.

There you have it, six powerful steps that will turn you into a millionaire in no time!

(Photo by tychay)

This morning I did a bit of an apples to oranges comparison of a 401(k) and a high yield savings account, showing that the two would meet two years and two months out given a set of probably unreasonable assumptions. It was apples to oranges because the risk involved in investing in the stock market simply isn’t anywhere near the risk involved in saving money in a high yield savings account. So, I took Anne’s suggestion and compared a pre-tax account, in this case the 401(k) again, and a post-tax account.

Results? 401(k) never catches up. Despite starting with more money, $133 vs $100, 401(k) can never get over 25% the marginal tax rate + 10% penalty hit that it takes when you extract funds from it (not a loan, a straight up withdrawal). If you plan on pulling out your 401(k) funds to buy a house, don’t put them in there in the first place. Make the minimum contribution to get your match, then put the rest somewhere else.

Assumptions

• Better is defined as the approach that ends up with the most amount of gain.
• You are in the 25% marginal tax bracket.
• Both accounts return 11% a year, or 0.8735% each month, compounded monthly.
• There is no 401(k) contribution match by your employer. An employer match will bring in the breakeven point and raise the value of the 401(k).

Pretty Charts!

The chart below plots the growth of the brokerage account versus the 401(k) account. The value shown is the final extracted value, but growth is based on the non-extracted value. For example, with the 401(k), it’s the pre-tax dollar amount that is being compounded but the graph is showing that value reduced by 35% (25% tax, 10% penalty). The brokerage account line is growing based on its unrealized gains but the value shown is the realized gain, minus long term or short term capital gains. If you’ll notice the little hitch in the purple line at around month 12, that’s because the brokerage account tax rate fell from 25% (short term capital gains) to 15% (long term capital gains).

If you’re interested in the Excel spreadsheet I played with to reach these simplistic conclusions, I’ve made them available here. Please check it out and let me know if you see any mistakes I may have made.

When it comes to saving for a house, is it better to contribute pre-tax into a 401(k) and withdrawing it (taking the 10% penalty) or contribute it post-tax into a high yield savings account? The trade off is that a 401(k) will grow more, start with a bigger pot, but take an extra 10% hit on the way out. A high yield savings account starts with a smaller balance, takes an earnings tax each year, but doesn’t face a 10% penalty at the end. According to my analysis, after three years of growth, contributing to a 401(k) comes out 6% ahead compared to a high yield savings account (my assumptions and an explanation of my analysis to follow). The break-even point is at around two years and two months.

What does this mean? If your sole concern is saving and earning the most to put down towards a house, with no consideration towards retirement, then contribute to your 401(k) if your target date is at least two years and two months into the future. I believe that to be short-sighted because retirement is far more important than whether you own or rent, but that’s a decision you have to make. *One other option to consider is that you can contribute to a 401(k) and then borrow from it at prime + 1-2%, so these are by no means the only two options you have.

Assumptions

• Better is defined as the approach that ends up with the most amount of short term gain, this analysis gives no consideration towards retirement goals, which I believe is far more important than buying a home.
• You are in the 25% marginal tax bracket.
• The 401(k) would return 11% a year, or 0.8735% each month, compounded monthly.
• The High Yield Savings would return 4.75% a year, or 0.3875% each month, compounded monthly.
• There is no 401(k) contribution match by your employer. An employer match will bring in the breakeven point and raise the value of the 401(k).

Explanation of Approach & Spreadsheet

I assumed that you would contribute $100 in the beginning of January (once) to your high yield savings account and you would contribute $133.33 to your 401(k), that’s the pre-tax equivalent of $100 if you are in the 25% marginal tax bracket.

Pretty Charts!

The chart below compares the growth between the high yield savings account and the 401(k). You’ll notice the dips at the end of each year in the HYS, that’s when income tax is levied on the interest earnings. The 401(k) line reflects the post-tax value of the 401(k) balance, that is after a 25%+10% reduction (25% marginal tax rate, 10% penalty). The 401(k) growth is calculated using its pre-tax value but the chart is charting it’s post-tax and post-penalty value. You can see that the lines intersect around the 2 year, 2 month point (X-axis 25 or 26), when income tax is levied on the HYS.

If you’re interested in the Excel spreadsheet I played with to reach these simplistic conclusions, I’ve made them available here. Please check it out and let me know if you see any mistakes I may have made.

Personal finance is boring, but with a little work and preparation in the beginning and some time spent checking in, it can be put on autopilot. That’s right, just spend a little time setting up your personal finance strategy and then spend a little more time each year just to check in on it, and you can ensure that you’re ahead of the average for your age and live comfortably. While leaving anything on autopilot can be tricky, it’s better to participate and be on autopilot than to not participate because it’s too “hard.” Below is a discussion on the different parts of personal finance and how to put them on autopilot.

Retirement planning: 401(k), Roth IRA

401(k): If you’re starting a new job, it’s been mandated that your employer automatically enroll you into the 401(k) plan if it’s available and allocate your funds into some very basic and safe fund. All you need to do is log in, double check your contribution amount (make sure it’s over the level at which your employer will match your contributions), double check the funds you’re contributing to, and then log out. If you have been on the job for a while and aren’t participating, call up HR for the enrollment form immediately. After you submit it and they set it up, just follow the easy instructions above. Then, just once a year, check to make sure everything is okay and that your allocations are what you think they should be. Do this for 40 years and you’ll be way ahead of the game in terms of retirement funds.
Roth IRA: If you don’t have one, opening a Roth IRA takes literally ten minutes. Some brokerages will let you do auto-deposits every month so divide the annual limit (this year the limit is $4,000, in 2008 it’ll be $5,000) by twelve and set your contribution allocations as you would the Roth and don’t worry about it. You have until tax day to contribute to your Roth IRA for the previous year (you have until April 15th, 2008 to contribute for 2007) but make sure your payments indicate which year they apply to.

Budgeting

The envelope budgeting method is by far the easiest and requires the least amount of tracking and thinking. The premise is that you have different envelopes based on category of spending and that you put how much you can spend in each envelope for that month. As you spend, you pull the money out and when you run out, you no longer spend. It forces you to budget and establishes a simple framework to help remind you. First, open up an ING Direct checking account (email if you want a $25 bonus). I recommend ING because you can open up new accounts within the interface of your first account in minutes, it’ll take much longer at a regular bank. Open up as many accounts as you have “envelopes,” or categories of spending. Link up your local checking account to your ING accounts and have your paycheck direct deposited into your ING. Then, setup recurring transfers from your main account, where funds are direct deposited, to your envelope accounts, which govern spending in a particular category. As you spend money, withdraw the funds from your account and the balances will reflect how much you still have left in your envelope.

Investing

Investing is truly no different than 401(k) or Roth IRA autopilot, the difference is in which brokerage you choose. I have no recommendations other than to say that if you prefer a particular mutual fund (I prefer index funds), then go with one of the larger mutual fund companies like Fidelity or Vanguard. On index funds they simply cannot be beat on fees and that’s all you should care about with index funds. If you want to invest in stocks, you’re on your own because I don’t think you can really put that on autopilot. While I don’t believe in checking your stocks daily, unless its for entertainment value, you have to check in periodically to read news and keep up to date, so it doesn’t lend itself well to putting it on autopilot.

Saving

Finally, saving is again no different than investing or retirement planning because fundamentally all you’re doing is putting money into an account for an expressed purpose. In fact, you should have a goal, a reason to save, because it will help you remain diligent. Mechanically, automatic savings are easy. Many banks have automatic withdrawal features that will let you withdraw a set amount each month from a linked bank account. Simply establish a goal, figure out how long you have, and setup regular and automatic transfers into a high yield savings account to reach your goal. It’s that easy!

Bills

Many companies will let you link up a bank account or credit card so that your bills are automatically paid on time each month. There is one downside to setting this up, a company can then charge you on that method of payment for things you never realized you authorized (here’s an example of an unauthorized billing from a reputable company). The upside is that you’ll pay at the last minute and you won’t pay late, two pretty good reasons to set up auto-billpay. I have all my bills automatically paid this way from my cell phone to my mortgage to my electricity and water bills. The sheer convenience, and I save on stamps, can’t be beaten.

See how easy it is to set up your personal finances on autopilot? One thing to note is that while it may be easy to setup and convenient to simply let it run, you should check in periodically to ensure that everything is running properly.

When I was younger, I used to play Sid Meier’s Civilization all the time. One of the best parts of the game was trying to build one of the Seven Wonders of the Ancient World because it gave your civilization a distinct advantage in the world. My personal favorites were the Lighthouse (it gave your ships a farther range and they wouldn’t get lost) and the Hanging Gardens of Babylon (I believe each one of your cities now had a Granary), but fun part was being exposed to these wonder in the first place.

Since then, there have been more “Wonders of the World” like the Natural Wonders of the World, 7 Wonders of the Modern World, so why not create a Seven Wonders of the Personal Finance World? Hokey, I know, but it’s my opinion that, if you can, you should “visit” every single one of these wonders.

1. Roth IRA

tax free and whose disbursements are tax free isn’t worth a darned thing. Another wrinkle that makes the Roth IRA is interesting, outside of the tax free elements (growth and disbursements), is that you are limited in how much you can contribute based on your income. While you’re young, it’s less likely that you’ll be restricted in your contributions and it’s more beneficial (because you’ll be taxed less now), so it creates a scarcity effect that almost spurs you to contribute while you still can. (Photo by scottwills)

2. 401K Employer Match

If you put $1 in this jar, I’ll put in 50 cents and you can keep it all. It’ll grow and grow as long as you pick the right jar and you can have it all in forty years, minus taxes. That’s sounds like magic right? Well, for some workers, it’s a reality and it’s called a 401(k) employer contribution match. At my former job, if you contributed 6% of your salary to your 401(k), the company would kick in 3% of your salary and that vested immediately. It’s like a 3% raise for something you should be doing anyway.

3. Pensions (and Social Security)

I lump these in together because they exist and will likely stop existing in the near future so get your looks in now. In both cases, you’re contributing (with a pension, you’re contributing by virtue of having a slightly lower salary than if there was no pension; with social security, it’s deducted straight out of your pay) to a pot that is supposed to grow over time, without you having to deal with it. The problem with pensions is that it requires your company to remain in business, not a guarantee. The problem with Social Security is that it requires the government not to pilfer the lockbox, which it already has. In both cases, they look like great plans because you don’t really contribute and you get a benefit in retirement, which make them wonders, but they’re also both probably on their way out, which makes them ancient wonders. (Photo by Barack Obama, yeah really!)

4. ETFs

These babies have the flexibility of a stock with the diversification of a mutual fund. Before ETFs, you traded mutual funds on their net asset value calculated at the end of each day. Now, with ETFs, you can do everything with it than you can with any stock, such as short it, and you can do it all day as its price is determined much like a stock is. Want to invest in diamonds? Find a Diamond ETF. Want to track the S&P? There are a ton of S&P ETFs. I’m sure if enough people wanted a Personal Finance Blog ETF, someone would sell those too.

5. Credit Cards

Like many things in life, credit cards are a double edged sword. It’s easy unsecured credit that can get you out of a jam or just give you some extra time to float a purchase. It’s easy, unsecured credit that can get you into a jam if you lose control, overspend, and find yourself unable to pay the bill after the grace period. To say that it’s not a wonder would be wrong, but to say that it’s a wonder with just an upside would be wrong as well. With one plastic card, you can bring to bear the power of thousands of dollars of purchasing; it’s enough to carry you through the difficult times and it’s enough to sink you through the prosperous times. With great power comes great responsibility. (Photo by Martin Q)

6. Insurance

Automobile, homeowners, renters, term life, medical, dental, disability, … etc etc etc. If something bad can happen to you, someone is willing to sell you insurance against it. If you’re willing to pay enough, you can insure parts of your body! However, the fact that this exists is a wonder because there is absolutely no reason why someone has to sell you protection against an unknown future. The reason they do is because they can make money, but that doesn’t necessarily mean that they’re making money off you or that you shouldn’t get insurance because you’re “losing.” Insurance buys you peace of mind, sometimes at a premium, but the fact that you can even buy peace of mind is a wonder in and of itself. Look at your situation, look at the various coverages, do you have enough insurance?

7. Personal Finance Blogs

That’s right, I’m calling personal finance blogs a Wonder of the Personal Finance World and you all probably think I’m having a swell time patting myself and my “colleagues” on the back right? There are excellent reasons why personal finance deserve to be mentioned:

• Where else can you read about regular people pulling themselves out of thousands of dollars in credit card debt? (Tricia, NCN)
• Where else can you read about the personal finance trials and tribulations of LGBT individuals? (QueerCents)
• How about the issues swirling around in someone’s head after they’ve just lost their job? (Lazy Man: lost job, his first day off, his wife’s thoughts, an update, and how he handles “how’s work” questions)

Personal finance blogs are open, honest, and they’re not written by Suze Orman, Robert Kiyosaki, or other “experts,” they’re written by regular people for regular people who are dealing with regular problems. That’s why it’s a Wonder. (Photo by nina_pope)

There you have it, the seven Wonders of the Personal Finance World; what do you think?

Last week, reader AJ sent me an email asking for ideas on where he should be putting his savings once he’s maxed out the contributions to both his 401(k) and Roth IRA. He’s 23, employed in real estate, and has fully funded his emergency fund and was wonder where he should go next.

Question: I’ve been sold on the wisdom of buying index funds and I would like to take a portion of that savings account and buy at least 3 different index funds (total stock fund, total bond fund, and a total international fund.) Reason being, I do not want to be wholly in stocks, be it domestic or internation, or bonds. However, the minimum investment is $3000 per fund at Vanguard. So at the very minimum I would have to spend $9000 to begin which is not the problem. However, if I stopped there, my allocation would be all out of whack. I’d be 33% in domestic, 33% in foreign, and 33% in bonds.

At my age, those allocations do not make sense. (Bonds and foreign, I think are too high of a percentage.)

Any suggestions - short of buying enough of each to make the proper allocations?

I told AJ that his situation and my situation are very similar, I’m not 100% sure what to do with the excess funds (not a bad problem to have!) and right now my solution is to have it in a target retirement fund at Vanguard. Now, that puts a heavy skew on stocks vs. bonds, which isn’t necessarily a bad thing. For example, VTIVX (TR 2045) is 88.27% stocks, 9.76% bonds, and it has an expense ratio of 0.21%. VTSMX, the total stock market index fund of Vanguard, has an expense ratio of 0.19%, a difference of 0.02%. The target retirement funds basically aggregate the fees of its constituents without adding anything onto them, which is great.

In terms of domestic and international exposure, you can only get at that if you look at the components of the retirement fund. The top ten holdings are: (from Google Finance)
Vanguard Total Stock Mkt Idx: 69.83%
Vanguard European Stock Index: 10.52%
Vanguard Total Bond Market Index: 10.04%
Vanguard Pacific Stock Index: 4.73%
Vanguard Emerging Mkts Stock Idx: 2.88%
Vanguard Total Stock Market ETF: 1.99%

So you’re talking essentially 82% domestic, 10.5% european, 5% asia, and 3% everything else (you’ll have to dig deeper into each fund to know for sure). Either way, a TR fund might be the easiest route to go.

However, if you want greater control and flexibility, i think your approach of selecting a basket of funds from vanguard’s offering is a good one. You’re essentially doing what these TR funds are doing, except manually, and you aren’t going to be charged more or less in either scenario.

One main reason I chose TR funds was because it was easy.

To which AJ responded with:

Ah, the target retirement fund. What an invention! All my contributions to my Roth IRA are invested in VFIFX, the TR 2050.
I could just put all my excess money ALSO into VFIFX, but for some reason I shied away from doing that. But, it seems, now that I think about it further, that I didn’t/don’t have a good reason for that aversion….

In addition to the fact that it’s comprised of index funds (diversification element #1), it also invests in different TYPES of index funds: stock (domestic and foreign), bond, among others (diversification element #2). Which would solve my problem of having to invest over $20k in order to get the same diversification in picking individual funds…

Hmm… maybe my hesitancy was based on “not putting all my eggs in one basket?” Which really doesn’t apply here because of the above, right? Complicated.

I told him that I had the same reaction when I decided to invest some of my Roth into the TR2045 too, I just felt odd putting so much into one fund but the fund is diversified. I guess it’s just a reaction to the idea that it’s one stock ticker, not so much the underlying factors. I think the eggs in one basket doesn’t apply but I think the reaction is very natural (mostly since I reacted that way too!).

It’s hard to decide what to do because there isn’t much guidance out there and the guidance out there isn’t necessarily right for everyone. Once you get past 401k and Roth, it’s pretty much wide open because very few people have the ability to save beyond 20k a year strictly for retirement (if you subscribe to the idea you should contribute your 401k to the max). Plus, there are so many people within the min max/Roth max bucket that catering to those outside of it doesn’t seem to pay for mainstream media.

That being said, I think a target retirement fund is a good idea but that’s because it’s easy. You might want to consider other assets other than stocks and bonds, perhaps investing into other things like gold, jewelry, real estate or art (I know nothing about it, just throwing out some of the more non-standard investment instruments) might be worth investigating. It all depends on how much time and interest you’re willing to spend, plus how much you’re willing to risk.

What do you all think? What would you recommend for AJ?

Are you employed? Does your employer offer a 401K (or 403B, or any number of similarly acronym’d up retirement plans)? Does your employer offer an employer match/contribution on dollars you contribute? If the answer is yes to all three, you better be contributing to your 401K. If your employer doesn’t offer a match, you should still be contributing to your own retirement though it’s not as pressing. It should take you less than ten minutes to sign up for your 401K unless your company is stuck in the stone ages. Give your HR a call or check out your company Intranet for a 401K enrollment form, fax/inter-office mail that baby over to HR/Benefits, and you should be all set. As for the what funds you should divvy up your hard earned money into, just wing it until the account is setup. You can figure all that stuff out later, time is of the essence!

For many recent hires, this is a non-issue because the Pension Protection Act of 2006 made employers auto-enroll their employees. So, for some, this tip took less than ten minutes! The next step is making sure you’re contributing enough. The law says that you’re auto-enrolled at 3% and then every year after that you’ll be bumped up 1% until you get to around 6% to 10%. Now, employers are not required to do this (they get out of some discrimination testing if they do), so there’s a chance your employer hasn’t done any of this (double check!). Also, this is what the employer must do, you can adjust it up or down or sideways as much as you want.

Let’s say your employer offers to match your contributions 50 cents to the dollar up to 3% of your salary. That means if you contribute 6% of your salary, they kick in 3%. Well, if you’re auto-enrolled at 3%, that means you’re leaving 1.5% of your salary on the table because you didn’t do anything. 1.5% doesn’t seem like much but:

1. It’s free.
2. In 40 years, with interest and years of 1.5% of your salary, that’s going to be a lot of money.
3. It’s free.

So, make sure you’re enrolled and make sure you’re contributing enough. If you saw a twenty on the sidewalk, you wouldn’t just walk by it would you?

There are five finance related accounts in the personal finance world that I think every single person must have and they should get it as soon as possible. They run the gamut of the obvious, an accessible checking account, to the not so obvious, a high yield savings account (as surprising as it sounds, this is not obvious to most people because they are amazed when I tell them you can get 5% from a regular savings account). So, please enjoy this list of five accounts you absolutely must have and three that you absolutely must avoid.

These Five Accounts You Absolutely Must Have

1. High Yield Online Savings Account

Number one definite must have account is a high yield savings account getting you at least 4%, at the very very least. If you assume inflation at around 3%, anything less and you’re losing money. Take your pick of ING Direct, FNBO Direct, Emigrant Direct, Citi, and you’ll get over 4%. My recommendation is that if you have a Citi or an HSBC bank account, go with one of them because your transfers will be instant between accounts. If you don’t, I use FNBO Direct but both they and HSBC offer 5.05% APY.

2. Savings and/or Checking Account at a Credit Union

A relationship with a credit union is an absolute must for anyone looking to ever get a loan for anything. The typical rate for a 5 year loan on a new car from Tower Federal Credit Union (some local credit union in my area but I do not have an account there) is 5.74% (currently they have a promotion where the rate is only 5.34%) and for a used car it’s 6.19%. Compare that with a Bank of America rate of 5.89% for new and 6.54% for used. While the difference isn’t all that great, for the typical rates, why pay more than you have to? Also, the interest rates on your savings and checking accounts will typically be higher as well.

Why are the rates low on loans and higher on savings accounts? It’s because the basic premise of a credit union is that it’s there to pool the collective resources of its members and work for its members. It’s a not-for-profit so it’s not looking to earn money off you, at least as its primary focus, and so that’s why the rates are always so much more favorable than a regular bank. Whereas a bank is FDIC insured, credit unions are covered by the National Credit Union Share Insurance Fund (NCUSI) administered by the National Credit Union Administration, so you’ll see NCUA-insured on the placards (also up to $100k).

3. Retirement Account (Roth IRA, 401k or equivalent)

If you have a job and your employer offers a 401k, with or without a match, you should be participating in your 401k (or an equivalent depending on your employer). If you can, budget-wise and income-restriction-wise, definitely participate in the Roth IRA as well. Just as how squirrels save away nuts for the winter, you should be doing the same through a tax-advantaged retirement account. The 401k will let you save pre-tax money but it will be taxed when you take payments in retirement. A Roth IRA will let you save money post-tax but it won’t be taxed when you take payments in retirement. It’s important to use both so that your retirement assets are tax diversified.

4. Accessible Checking Account (Ubiquitous ATMs)

I think that most checking accounts are pretty much the same and it really doesn’t matter which bank you go to, with several exceptions and the biggest one is the location of its branches and ATMs. I chose to do my main banking with Bank of America because they have a branch near my home and my work place plus they have ATMs everywhere. In fact, BoA has 16,000 ATMs and 5,700 branches, so that I can probably find one anywhere I go and I can avoid those stupid ATM fees everyone hates.

5. Credit Card Account

If for nothing else other than to have a safety blanket, having a credit card builds credit and will pay dividends down the road. You can leave it out of your wallet or purse and it’s still building you some solid credit because it’s lengthening your credit history. Don’t ever carry a balance either.

These Four Accounts You Absolutely Must Avoid

1. Store Branded Credit Card Accounts

We’re talking department store credit cards, the ones where they offer you 10% off today’s purchase if you’re approved, and you should avoid these because the APR on these babies are usually pretty high and the payoff, the 10% off, is usually not worth it. If you want free cash for credit cards, here’s a list of credit cards with sign-up promotional offers that you can take to the bank and spend the rest at the store.

2. Finance Accounts From a Dealer, Store, or Anywhere That Isn’t A Reputable Bank

Buying a car? Buying a TV? Avoid the financing from the auto dealer or the electronics store unless it’s a 0% APY for a year, or something great like that. Also be aware that if you do get that offer, it’s likely that once it ends, all of the interest that was deferred during that period will come due (read about how 0% financing offers work). It’s a very insidious practice but one that’s well documented but not well explained to borrowers. If you need a loan, try to get it from your bank or credit union either before you buy or immediately afterwards. If you can get some sort of discount or promotional offer for using their financing, you can always use their financing and then secure your own afterwards.

3. More Than One Checking or Savings Account

This one isn’t that big of a deal but you really should consolidate your banking for a few reasons. First, it’s always better to simplify your life and deal with as few things as necessary. There’s no sense trying figure out which account has what because you’ll start to go crazy. Secondly, you want to consolidate balances so that they’re higher and you can avoid any low balance fees if your bank has them. Lastly, the fewer accounts you have the fewer opportunities there are for your information to be compromised, either by the bank or by you on accident. Simplification is crucial.

4. Reward-less Credit Card Accounts

Your credit card is charging each merchant you deal with somewhere in the neighborhood of 2-3% for each transaction, there’s no reason why you shouldn’t get kicked back a little piece of that. It takes about thirty seconds to apply for a card that will give you 1% cashback on all of your purchases, which is an automatic 1% discount on everything you buy. I use a variety of cards but I like my Citi mtvU card for 5% cashback at restaurants, movies, and bookstores; a Discover Open Road card for 5% cashback on gas purchases; and an American Express Costco TrueEarnings card for 1% cashback everything else with no annual limit.

This is a psuedo-Devil’s Advocate because it’s not generally assumed that one should always roll over their 401k’s when they leave their job but a lot of folks have recently been asking me, since I had just gone through the process, who they should roll their 401k over to (I wish with Vanguard). The troubling aspect of that question is that they’ve already decided to rollover their 401k before they’ve answered the crucial questions leading up to that decision. See, you should rollover your 401k if it makes sense - that is if you can get better options, better pricing, and better management elsewhere. By asking “where” to go after “if” you should go, you can’t analyze the differences. There are many reasons why you should stick with your 401k administrator even after you leave your job, here they are:

Employer institutional funds may be superior
Depending on how big your company is, you may be dealing with your company’s own special institutional funds that aren’t available on the open market and they could be awesome (or awesome in certain aspects). This was the case at my former employer who had about a dozen actively managed funds (they weren’t index funds) with fees under the average expense ratios of typical actively managed funds and performance on par with its benchmarks - so you get actively managed while paying near index fund prices. Now, if you don’t have many good options with your current administrator, the fact that they’re cheap doesn’t help (but cheap is better than expensive).

Custodial fees and balance requirements
Your 401K funds probably don’t have any balance requirements and reasonable custodial fees, that’s usually not the case with major brokerages. Vanguard doesn’t have low balance fees for retirement accounts but it does have initial minimum investments (usually $3,000 to $5,000) and Fidelity does have low balance fees though it’s phrased as they “may” charge a $12 fee for a balance under $2,000, so be sure to check whether the brokerage you choose has this low balance fee. The same applies for custodial fees, be sure to double check those before you roll over.

You can roll it over whenever you want
You are thinking about rolling over your 401k because you just left your job (otherwise you wouldn’t have this opportunity in the first place) and that usually comes with a whole host of other issues you have to deal with. You may have been fired or you left of your own free will but either way, don’t feel like you need to worry about whether you should roll your 401k within a certain short time frame. Some plans give you three or five years (check with your administrator) to roll it over, don’t think you have to do it in the next month. I waited six months before I rolled mine over and I could’ve waited even longer if I wanted to.

Rolling over your 401k, especially if its because you just lost your job, can be a very complicated and somewhat confusing time, don’t feel that you should, 100% of the time, always roll it over to an IRA. Most of the time, you will probably want to roll it over to open up your options, but don’t feel it’s a forgone conclusion. Also, remember that you have plenty of time to weight your options, perhaps after things have settled down, so don’t make any rash and hasty decisions.

A lot of times we put something off because we think it will take a long time and be a lot of hassle and a lot of times those things happen to deal with money. Well, if you have ten minutes, you have enough time to do one of the things on this list that could change your life financially for the better (and ten minutes is a conservative estimate, you could finish most less). In less then 15 minutes, Jack Bauer can escape from the grasp of terrorists by biting into a man’s jugular, I’m just asking for ten and for you to check your credit report (#1) - sounds fair right?

1. Request Your Credit Report - If Congress can spend countless hours (and millions of taxpayer dollars) in debate to pass a law that gives consumers free credit credit reports each year (one from each of the three credit bureaus), the least you could do is spend the fifteen minutes it takes to request and scan over your report. Get your free credit report from the only officially sanctioned website - AnnualCreditReport.com. You could find a mistake that could cost you thousands of dollars in added interest or higher fees down the road. The request itself takes no more than ten minutes so request and print now, review later.
2. Open A Roth IRA - I wrote a post about opening up a Roth IRA that details every step and the financial impact of doing so. If you want this to truly be a 15 minute move, put the contribution into a Target Retirement/Lifecycle fund and let the brokerage worry about re-balancing it for you.
3. Participate in your 401K - It wasn’t until recently that folks were automatically enrolled into their company’s 401K plan by default so if you aren’t yet participating, do so and make enough of a contribution to get the maximum employer match. All it takes is a call to your HR department to make it happen - you wouldn’t pass on a twenty dollar bill sitting on the sidewalk, don’t pass it now.
4. Open a High Yield Savings Account - The typical savings account gives a piddly 1%, get five times that by opening a savings account at any number of FDIC insured online banks like ING Direct, Emigrant Direct, HSBC, Citi, the list goes on and on. As long as they’re FDIC insured (all those listed are), you don’t have to worry. Get the yield of a CD with the flexibility of a savings account.
5. Split Your Paycheck - Out of sight, out of mind. Have 10% of your paycheck deposited into that high yield savings account and think of it as an “automatic” savings (in the sense that this is one of the ideas from the Automatic Millionaire - set it and forget it Ronco style) and you’ll never know the difference.
6. Use 0% Balance Transfers - Use a 0% balance transfer (list of 0% bt cards) to pay off an existing credit card balance, it takes only a few minutes to apply for a card and a few minutes to do the transfer (I’ve found Citi has the easiest balance transfer process). The little brother to this tip is to just call up your credit card and asking them to lower your interest rate, saying that you could always just try a 0% balance transfer and leave them. Between 0% balance transfers and asking, Tricia from Blogging Away Debt went from $400/mo in interest to a mere $100 - that’s $300 that can go towards principal.

Don’t read anymore, go do!