If you have, or plan on having kids, how are you preparing for their education? College tuition continues to rise faster than the rate of inflation so parents need to plan ahead more than ever. How are you preparing to pay for their college education? Are you saving any money to help them out or will you let them rely on student loans and working to pay for school? If you are saving, are you using a special college savings vehicle or just setting money aside at the bank?

College savings was never a major priority for us for the longest time because we didn’t have children. But with the birth of our daughter, an 18 year clock started ticking. It may seem like a long time, but when you think about what college might cost 20 years from now and the many changes that are bound to happen to borrowing money for college, it makes you stop and think about how important it might be to try and set some money aside.

While our daughter is only a few months old, I made sure to get a 529 plan established right out of the gate. So far we aren’t aggressively funding it or reducing our retirement contributions or anything, I know that the sooner we can start putting some money to work, the better off we’ll be.

So, that brings us to today’s poll. How are you saving for your child’s education, if at all? Even if you don’t have children yet, have you thought about whether or not you’ll save?

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Poll: How Are You Saving For Your Child’s Education?

Everyone wants to eat better these days so the idea of local and organic food is quite popular. In some parts of the country your food may travel thousands of miles before it reaches your table, so it only makes sense that if you could get your food a little closer to home it would be fresher, and probably cost less since it didn’t have to travel as far. So, how do you go about getting local food? One option is to join a local food co-op or cooperative that brings local farmers together to sell their meat and produce locally. Since we had a new co-op start up right by us I figured I would give it a try. After a few weeks I’ve learned quite a bit about the process. Some things were as expected, but there were many surprises as well.

How it Works

The concept of a food cooperative is pretty simple. They are typically member-owned volunteer organizations. Members may be required to pay an annual fee to be part of the co-op, and it is often expected that members will try to help volunteer in some say if possible. The co-op itself is made up of two key groups: the producers, and the consumers. The producers are the local farmers who make the food available and the members are the consumers who purchase the goods.

Some co-ops make their food only available to members, whereas others may be open to the public with members receiving a discounted price on the goods. Regardless, the co-op is set up as a group-owned marketplace that brings together local food and local consumers.

Why I Joined

When I heard about the new cooperative opening up by me I was intrigued by the ability to buy local food. We live in a very rural area that’s full of farms as it is so I figured it would be great to support my neighbors. Literally. Plus, we do almost all of our eating at home. Since I cook every day it can make a big difference when you have really fresh ingredients.

In addition, this co-op had a very nice internet feature. I could go online each week and see what was available, place my order from the comfort of my home, and then pick up my order once a week. I love when I can get things done online so this was a nice benefit.

The Pros

It’s probably pretty obvious, but if you value organic food and supporting your local community, a co-op is a great thing. You can be sure to get produce or meat that was produced locally, organically, and get the freshest possible ingredients.

You can also volunteer and get involved so that you can give something back to your community. If you’ve always wanted to help out but didn’t know how, a food cooperative can give you a chance to work directly with your neighbors.

In addition, you will probably make some new friends and meet new people. The first week at my co-op I ordered some beef and when I went to pick up my order I got to meet one the farmer personally. Have you ever been to the grocery store and met the person who personally grew or cared for your food? Exactly. That was really nice and we struck up an interesting conversation. The best part is I learned his farm is literally less than 2 miles from my house. He even gave me his number and said I could call in personally and request food at any time and pick it up from him directly. How cool is that?

The Cons

Of course, there are two sides to every coin. With the many benefits outlined above there are also some downsides. In my case, virtually all of the downsides are financial. If you sign up for a food co-op and expect to save money, you might want to think again.

The first financial issue that stuck out was the membership fee. I had to pay $35 just to become a member. Of course I realize it’s going to a good cause so it didn’t bother me too much, but still, shelling out almost a week’s worth of groceries toward a membership fee just for the privilege of buying this food was a bit tough.

Second, raise your hand if you think that food will be cheaper if it’s sold to you directly by the farmer, cutting out the middle man, and not having to be shipped halfway across the country. Yep, that’s what I thought too. Common sense would tell you that if a local farmer can sell food directly to the consumer without needing to wholesale to a grocery store and ship up their product that it would be cheaper than the store. Wrong. I know that depending on the size of the co-op, your location, and the membership size that this may differ, but I was in for quite a shock when I went shopping for the first time.

A dozen eggs were $4.00. A pound of bacon was $8.50. A head of iceberg lettuce was a shocking $3.00. To give you an idea, I can get the those at the supermarket for $1.49, $3.00, and $0.99 respectively. I know, I know, but you’re supporting local farmers and this stuff is probably organic, right? That’s true, but I can actually still get the organic equivalents of those items for less than the co-op right at the grocery store.

Finally, our co-op only has one pickup time and a small ordering window. You have to place your order on just Saturday or Sunday. Then your order can only be picked up on Wednesday in a narrow window of 5:15 pm - 7 pm. This makes it tough because you have to plan on the weekend what you’re going to need, realize you can’t even get it for three more days, and then make sure you’re available in that 2 hour window on Wednesday to pick it up. It’s certainly doable, but it isn’t the most convenient thing in the world.

The Verdict

I think deciding whether a co-op is right for you will depend on a number of things. Do you value the local aspect of it while that may put a premium on the food? It is probably still worth it. If you’re more casual in that approach and are a little more budget conscious, you may find it isn’t as worthwhile. While I’d love to put money directly in my neighbor’s pocket, I’m not going to buy hamburger for $5.00/lb. If I were to do most of my shopping through the co-op my weekly grocery bill would easily increase by 200-300%. So for me, I think I’ll stick to just getting the occasional seasonal fruits and vegetables as they become available while still doing the bulk of the grocery shopping at the store.

So, it’s certainly worth checking out. You can look for a listing of local cooperatives in your area on this site. As long as you know what to expect, how much it will cost you, and who you’ll actually be supporting, you can decide if it’s something that’s worthwhile.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

The Pros and Cons of Joining a Local Food Co-op

Later this weekend I’ll be contacting the winners directly. If your winning entry was from the newsletter signup, you’ll receive an email from me. If you win via a Twitter entry, I’ll send you a direct message on Twitter.

After the winners are selected I will post the results here. So, thanks again for all of the entries. I look forward to sending out all of the prizes.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Stay Tuned for the iPod Touch Giveaway Winners

One of the questions I get a little more frequently than others has to do with emergency funds and credit cards or lines of credit. We always stress the importance of building up an emergency fund, but it can sometimes take a while to get to that three, six, or eight month target. So, people often wonder if it’s acceptable to work with a relatively small emergency fund while holding on to a few unused credit cards or a line of credit to make up the difference. So, what’s the verdict on credit cards and emergency funds?

Using Credit vs. Savings

Even if you have unused credit available to you in the event of an emergency it’s still vital that you build up a cash emergency fund. While it’s a good idea to have a credit card without a balance out there and ready in case something does come up, this should be an absolute last resort and not even thought of as part of your emergency fund. There are a few reasons why using credit over savings could be harmful.

First, cash is money that you have and credit is money that you don’t have. If something comes up and you have to find some money to pay the bills or other unexpected emergency, if you use cash you’ve saved you’ve immediately satisfied that need. On the other hand, if you pay off that expense with a credit card, you haven’t relieved yourself of that expense. All you’ve done is basically delayed the payment. And for that convenience you’ll be charged interest. So, cash eliminates the emergency, credit just delays it.

Second, you could be making the situation worse by introducing a new monthly expense which comes in the form of the credit card payment. Let’s say you have a $5,000 emergency come up. If you have that money set aside in savings it’s a quick one-time payment and you won’t have to think about it again. But if you are forced to use a credit card to pay that $5,000 you’ve only transferred the emergency from the initial bill to a credit card and will begin with monthly payments. A $5,000 balance on a credit card could easily amount to a $100-$150 monthly minimum payment. If your budget allows, that might not be a problem. But if your emergency extends for very long you could find yourself suddenly in a bigger emergency when you can’t make the minimum payments on that credit card.

Secured vs. Unsecured Debt

Make sure you understand the difference between the two when using credit to get through an emergency. A lot of people tend to treat their home equity loan or home equity line of credit as an emergency fund, but this is a bad idea. This is secured debt, which means the money you borrow is backed by an underlying asset–in this case, your house. When you can’t pay off a secured debt the bank can take the property back.

Just like in the credit card example above, if an emergency comes up such as a job loss and you tap into a home equity line of credit to keep things going for a few months, you’ve essentially just put your house on the hook for your emergency. Now, you not only have a mortgage payment on your house but a home equity loan payment, so what happens if you can’t find a job as quickly as expected? Sooner or later those monthly line of credit payments may be impossible to pay so now your financial emergency just expanded and puts you in a position where you could lose your house.

If you must rely on credit to get through a financial crisis, make sure you tap unsecured debt like credit cards first. Sure, you’ll pay a higher interest rate and may not have as much credit available, but the damage done in the event of a prolonged emergency can be minimized.

Consider Your Options Carefully

It’s ok to temporarily have some available credit out there as an added safety net if a true emergency arises, but it should in no way substitute for actual savings. Just because you have about two months worth of savings set aside and four months worth of expenses available in the form of credit doesn’t mean you have a six month emergency fund. It may be good to know that in a worst case scenario that you have that going for you, but you should still be working to build up the cash in your savings. Don’t stop saving just because you have a little bit saved along with a sizable unused credit line.

Credit can work in a pinch, but don’t get complacent and fall back on your savings. And also make sure your savings is working for you. I know interest rates aren’t as good as they used to be, but you’ll still want to earn a little bit of extra money in the form of interest so stick with a high-yield savings account if you can. Then, make sure you’ve created an automatic savings plan so that you have money going into the account each week, bi-weekly, or monthly. When you put your savings on autopilot you won’t even have to think about it, and before you know it you’ll have enough cash set aside that you won’t even have to think about using credit to get through an emergency.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Reader Question: I Don’t Have Much Savings So Can I Use Unused Credit as an Emergency Fund?

I’ll start with my own situation to kick things off. Right now our total monthly vehicle costs total about 9% of our monthly net income. This includes car payments, insurance, and gas. I added about $25/month to that to account for regular maintenance such as oil changes and annual registration fees. I feel that 9% is pretty good, but I was actually shocked it came out that high. When I started to factor in everything in addition to just the car payments it added up pretty quick.

Even so, there were a few key things we did to help keep our overall costs down. First, we had to buy two vehicles a few years ago. My clunker at the time finally died and my wife needed something a little more practical for getting around. So, the biggest thing we did was bought two used cars. Just gently used and only a year or two old, but it still saved thousands over buying new.

Next, we picked vehicles based on our needs. I have a long commute so a car that gets reasonable gas mileage. My wife on the other hand only has a 5 minute commute to work. So in her case we didn’t have to focus so much on gas mileage so we got something a little bigger that could handle the tremendous snow we can get and accomodate hauling an occasional trailer or kids.  So while I might burn through $100/month in gas, my wife can go weeks at a time without filling up.

Finally, we make sure to shop around for the best insurance. In addition to just finding good overall insurance we also knew better than to get a policy with a low deductible since that adds significantly to the premium. So by finding a good policy with a reasonable deductible and coverage options we can keep our premiums down to a reasonable level.

So, what about you? How much of your income goes toward vehicle costs? Did it come as a surprise when you figured it out? And how do you keep your costs down?

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Poll: How Much of Your Net Monthly Income Goes Toward Vehicle Expenses?

While just having a car isn’t a bad thing, most people don’t fully realize how much of their wealth is getting flushed down the drain while owning a car. They are expensive, depreciate in value rapidly, you have to regularly fill them with gas, and insure them. That really starts to add up.

A Typical Cost Breakdown

So, just how much is that car costing you? Let’s take a look at a typical vehicle and scenario that would fit almost any middle class American household. We’re going to use a new Toyota Camry and these sell for anywhere from about $20,000 - $30,000 depending on features and your location. So, we’ll shoot for something right in the middle of the pack and assume for this example that someone finds one for $25,000. And let’s not forget about sales tax since that’s going to apply to most people as well. 6% is a fairly common state sales tax rate so if we tack that on to the price of the car we have a total sale price of $26,500.

It really doesn’t matter what kind of car we’re talking about or even whether it’s new or used. What’s important is the actual price paid.

Financing

Now let’s talk financing. Most people don’t pay cash for their new car and will typically finance it for somewhere between 3 and 5 years. In addition, most people don’t put a significant down payment down or will trade in their old car. For the sake of this example we’ll assume that we’re putting $5,000 down or getting $5,000 for a trade. That means we’re left financing $21,500, and let’s shoot for a 48 month loan. Rates on this type of loan right now are averaging around 7% so we’ll go with that. That ends up adding $3,200 in interest payments over the life of the loan and a monthly payment of about $512.

Insurance

Insurance is going to vary depending on a lot of different factors. The deductible you choose, your driving record, age, state, and so on. So the best we can do is ballpark an average rate for this type of car. Just keep in mind that you may be paying quite a bit more or even less depending on your situation. Running some quotes and looking online the annual insurance premium on about a $25,000 sedan will cost roughly $1,200 a year or $100 a month.

Gasoline

Every car needs gas, and gas can be expensive. Luckily for this example we have a car that gets decent gas mileage and it’s rated for roughly 20 mpg city and 31 mpg highway. We’ll average it out and assume an overall mpg of 25. The average person drives 12,000 miles each year. Obviously, your own driving habits may differ. But at $3.00 a gallon that would mean you spend $1,440 a year or $120 a month on gas.

Maintenance

Cars need a little TLC and you will need to spend a little money to keep it running its best. The most common maintenance item is the oil change. At a quick lube place you can expect to pay around $30 for an oil change and you’ll likely need 3 of them a year. You’ll also probably need a few other odds and ends like new wiper blades, car washes, etc. So we’ll allocate another $50 a year to cover those miscellaneous expenses. Regular maintenance costs are going to be around $140 a year and you can probably expect to pay about $100 or so on annual vehicle registration.  Just to keep things simple, we’ll call these miscellaneous expenses $20 a month.

Total Monthly Breakdown:

• Car Payment = $512
• Insurance = $100
• Gas = $120
• Maintenance = $20
• Total = $752

It’s amazing how fast that adds up, isn’t it? We’re talking $750 a month just to drive a middle of the road sedan. And that’s with a 20% down payment, a good credit score that gets you a decent interest rate, and a clean driving record that keeps your insurance premiums down. Just imagine if you can’t get a rate for 7%, don’t put any money down, or your insurance premiums are nearly double because of a few tickets on your driving record. You could easily be approaching $1,000 a month. If you earn $40,000 a year you’re spending nearly 25% of your gross income on a vehicle that only decreases in value each year that you own it.

Multiple Vehicles and Luxury Cars

In that example we just used a modest no-frills sedan and look at the true cost with that. Now, think about needing two of these cars because you’re married and you both work. Now you’re making a mortgage size payment just to have something to drive you around.

And what if you’re driving a luxury car or SUV that comes in at $40,000 or more? You can expect your total monthly costs for just one car to easily exceed $1,200. If you need two of these more expensive vehicles you better be prepared to shell out close to $3,000 a month.

Car Costs vs. Saving

I help people with their finances every day. That’s my job. That means I usually have to spend some time digging into a person’s finances to help uncover problem areas or opportunities. If there is one thing that I see more than anything, it’s people who are spending more on their vehicles than what they are saving for retirement or otherwise. Without fail, whenever someone says they don’t have any extra money to put into their retirement account or into a savings account, you can almost always count on significant car costs when digging through their monthly expenses. Whether it’s $300 a month or $700 a month, they can make those payments each month yet can’t scrape together $100 to put into a savings account or their retirement account.

Here’s a rule of thumb: if your total car costs exceed what you’re able to save, you have more vehicle than you can afford. That means if you’re paying $500 a month to keep your car on the road yet can’t come up with $500 each month to stick in your savings or retirement account, you’re in trouble. You will never build the wealth you want by throwing more money away on a vehicle than you can save or invest. That money you apply to a car payment, gas, insurance and everything else doesn’t come back. You do not make money and it is not an investment.

At the same time if you can afford to spend $1,000 a month on your vehicle and still save $1,000 a month, that’s great. Sure, you could still save more money if you cut down your car costs, but at least you are matching every dollar that goes out and putting it into something that is an asset and an investment. At the bare minimum that is how you need to look at it. You have to at least be saving as much as you’re spending.

How to Make Sure Your Car Doesn’t Make You Poor

As you can see a car can make you poor pretty fast. The costs add up and if you’re spending more money on a mode of transportation than what you’re setting aside for the future it’s going to take a long time to build wealth. Unfortunately, most of us need a car. That’s just the reality of it all. But you can take some steps to make sure that you’re keeping your car costs as low as possible so that you can focus on building wealth, not just maintaining a vehicle year after year.

Used vs. New

It goes without saying, but a used car is going to save you money. Remember, cars depreciate in value, often as much as 20% each year. If you can buy a used car even just a year old you could save thousands of dollars which translates to less interest when financing and a lower monthly payment.

If you are looking at a new car, that’s fine too as long as you plan on owning the car for a long time. When you get into trouble is when you keep buying a new car every 3 or 4 years without paying off the first one, or just barely paying it off before buying a new one. This creates a vicious cycle of constantly spending more than you need to. A new car can be a good deal if you know that you’re going to keep it well beyond the financing terms.

Size Matters

The larger the vehicle, the more it costs. Smaller cars are generally cheaper than full size cars, and cars are usually cheaper than trucks or SUVs. So, only buy as much car as you really need. Your situation and driving needs will dictate what kind of vehicle you need, but don’t go overboard.

As you increase in vehicle size and price, you’ll also typically get increased insurance premiums and fewer miles per gallon as well. So, there is more to size than just the initial cost. The higher costs often trickle down to all other areas and it will really start to add up fast.

Consider Depreciation and Maintenance

Not all vehicles are created equal. Some cars will hold their value over time better than others, and some cars have notorious maintenance issues. Do your research before buying your next car and don’t just buy something because it looks good in the commercials. You can not only save some headaches down the road by picking a reliable car, but if it retains its value you will take less of a hit when it comes time to sell.

Finance Wisely

If you need to finance your car purchase, be smart about it. Yes, you can keep your monthly payment low by stretching out the loan to 5 or 6 years, but you aren’t doing yourself any favors. All you’re doing is paying more interest on something that continues to decline in value. Would you borrow money at 7% interest just so you could invest it in a stock that was guaranteed to drop in value by 15% each year? Of course not, but that’s what you’re doing when you finance a car purchase. We know that the value of the car is going to go down each year, so the sooner you can pay it off and the less interest you pay, the more you ultimately save.

You Are in the Driver’s Seat

It’s up to you to decide how you want to spend your money. A vehicle may be a necessity, but it doesn’t have to negatively impact your financial future. If you aren’t careful, a vehicle can erode your wealth faster than anything else, but with some smart decisions you can make sure that it doesn’t.

Be smart about your vehicle costs. It might be nice to drive around in something a little fancy but is it worth the negative impact it may have on your long-term financial goals? That’s for you to decide.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Your Car is Making You Poor And What You Can Do About It

There has been a lot of talk about retirement lately on the heals of a devastating market drop. Most investors saving for retirement are heavily invested in stocks so the market downturn took their account value with it. Those who are near retirement are often put in a position where they can no longer retire as expected or may have to suck it up with a reduced nest egg.

So, there’s good reason that the 401(k) plan has been on the hot seat. With most employees lacking a full pension plan and the expectation that Social Security will only barely provide enough income to pay a few bills, the weight of retirement falls squarely on your own retirement savings — and for most people that comes from their 401(k) or IRA. But when these plans don’t live up to all the hype a lot of people are being left high and dry.

The Good

Let’s start with the benefits of the 401(k). The obvious benefit comes from the special tax treatment. When you think about it, a 401(k) is just a few lines of tax code anyway. With a 401(k) you have the ability to reduce your current taxable income by making contributions. In addition, you defer taxes until withdrawal so your money can grow even faster.

Some people are fortunate enough to work for an employer who matches some of their contributions. This “free” money can really help accelerate the building of your nest egg.

And let’s not forget how easy it is to take part in your employer’s 401(k). It’s all done through payroll deduction so you don’t have to worry about setting up an account somewhere, making deposits, or any of that. It couldn’t get any easier.

The Bad

While there are many benefits to these plans, they don’t come without drawbacks. One thing to note is that 401(k) plans are not mandatory. Not all employers offer them and those that do may restrict the benefit to full-time employees. This puts a lot of workers in a situation where saving for retirement in a 401(k) isn’t even an option. Some companies also do not match contributions.

In many cases these plans have very limited investment choices and may include funds with high expenses. It isn’t uncommon to be charged 2% annually on the investments in a 401(k) compared to the fraction of a percent charged if you were to go out and invest on your own.

And finally, there are a lot of restrictions that come with a 401(k) plan. You have special withdrawal requirements, have to keep it with your current employer unless terminated, and of course the penalties for premature distributions.

Does the Bad Outweigh the Good?

If you ask some people in Congress, they call the 401(k) “little more than a high-stakes crapshoot” and would like to scrap them entirely. But are these plans really as bad as they make them out to be?

There are obviously some glaring problems with our retirement programs, but you know why? They are all centered around taxes. When was the last time you thought of our tax system as streamlined? Exactly. It doesn’t matter if you’re talking about a 401(k), 403(b), 457, Traditional IRA or Roth IRA, each one of these so-called retirement plans are just fancy words for special tax treatment. No more, no less.

Because of the emphasis on taxes these plans are primarily used by those with higher incomes. The more money you make, the more taxes you pay, so the harder you’re going to work to reduce your tax bill. Your typical working-class American earning $30,000 a year can usually care less about shaving a few hundred dollars off their taxes even if they could afford to put some money aside for retirement. To try and sweeten the deal the government even began offering a tax credit for lower income employees who save for retirement in a 401(k) or IRA and most people still don’t take advantage of it.

Lack of participation and not saving enough for retirement are the problems, yet all you hear about from lawmakers is about the fees and optional nature of these plans that need to be fixed. There are clearly fee issues that need to be addressed as these are cash cows for the investment companies who offer them, but let’s think about it for a moment. If you can’t get people to save for retirement by offering tax deductions, tax credits, and in some cases even free company match money, do you really think trimming fees by a percent and making sure each plan offers a few index funds is going to suddenly put people on track for retirement? Of course not. It would certainly be beneficial for everyone who is saving in a 401(k) but it’s far from the actual problem.

Let’s fix the problems with 401(k) plans where we can, but let’s also realize that most people simply don’t save enough for retirement. Period. And you won’t be solving that problem by maintaining a voluntary system that offers nothing more than a little tax break.

Expectations

There is also a problem with expectations. For years we’ve been told to just continue to stick money in a retirement plan and come time for retirement you’ll have a pile of money. Ok, sure. If you continue to put part of each paycheck aside and don’t touch it for 25 years, chances are you’ll have some money to retire on. Unfortunately, the expectations of saving money, compound interest, and time are often just crude marketing tools used by the financial industry to encourage saving. While this can certainly lead to wealth, retirement planning goes far beyond this simple formula. But people have just latched on to the expectation that if they save 10% of their paycheck they will magically have all the money they will ever need in retirement. As we all know, it doesn’t quite work that way.

I don’t have to say much about expectations when it comes to investment returns. We all know how dangerous that can be. People will say stocks return 10% a year on average. Sure, if you dig up enough data, history does indicate that. But average return does not equal actual return. When people use compound interest calculators to predict the size of their nest egg a compound interest calculator can be very dangerous since it literally compounds the same rate of return year after year. We all know that doesn’t happen in real life and there will be years or even consecutive years with losses. While it may all average out in the end, those bad years can take a toll on any portfolio, especially if an investor makes changes during that time.

So, just expecting that if you save money you’ll be fine, or that if you invest in stocks you’ll average double digit returns, or that asset allocation can prevent you from losing money is dangerous. It’s time for investors to readjust their expectations in line with reality. Is it the 401(k)’s fault that you lost 40% of your portfolio of all stocks when the market dropped? Is it the 401(k)’s fault that you didn’t accumulate a million dollars before retirement because you were only saving 3% of your income? There are clearly some areas that need to be improved, but many of the faults have nothing to do with retirement plans at all and are just a function of investor behavior.

Buy and Hold is Not the Same as Buy and Forget

One of the arguments coming out of this recession is that buy and hold is dead. Over the past ten years stocks are flat. You could have made more money by hiding it under the mattress or leaving it in a savings account. When people see that they have not made any money in ten years by investing in stocks it’s an easy argument to make. You bought, you held, and you didn’t make a dime.

The problem isn’t that buy and hold doesn’t work, it’s that most people buy and forget. You can’t just throw some money in the market and expect everything will just turn out fine when you’re 65 and ready to start drawing on it. You have to be involved with your retirement savings and understand that your goals, needs, the market, and investment objectives are constantly evolving. You need to rebalance your portfolio, you need to begin shifting assets around as you get closer to retirement, and you probably need to change how much you contribute to your plan over time.

Buy and hold just means that you invest some money with the intention of holding it for a while instead of trying to time the market. It doesn’t mean you pick a few funds to invest in, set your contribution rate to 5% and never look at your account for ten years and just assume everything is fine. Unfortunately, that’s what many people do with their retirement accounts and then they are shocked when something doesn’t go as planned.

Consider this. Would you go to the gas station and fill up your car with gas and then hit the freeway, get up to 70 mph and set the cruise control and let go of the wheel and take a nap just hoping when you wake up you’ll be at your destination? Of course not, that’s insane! But that’s exactly what most people do with their life savings. They put a little gas in their tank with each paycheck and then hit cruise control just hoping by retirement everything will turn out fine.

Some Final Thoughts

There is clearly some room for improvement with our retirement programs. The 401(k) landscape is very complicated and it doesn’t put everyone on the same playing field. These aren’t mandatory plans so some people don’t even have access to them, others are offered with poor investment choices, and even more with high fees. So you can have two people working identical jobs making the same amount of money while working for different employers and their retirement options can be completely different.

People just aren’t saving enough for retirement. That’s the problem. We can identify all the deficiencies that retirement plans have, but it won’t solve the problem of people not saving enough, if at all for retirement. Giving people a minimal tax deduction or even a tax credit isn’t enough to encourage more savings, so what’s next? I don’t have the answer, but I know that basing the entire retirement system on a few tax benefits will never be the solution. People should be saving for their future whether they get a tax break for doing so or not, but it just doesn’t happen.

So, is the 401(k) broken? I don’t think so, but I do think it’s a bit like driving a 20 year old car with 250,000 miles. Things don’t work as well as they used to and it’s probably missing some now common new features, but it will get you from point A to point B if you use it properly and take good care of it. The 401(k) is due for a tune up, but it is still a valuable tool for those who take advantage of it and know how to use it.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Is the 401(k) Broken? I’m Not So Sure

Why can’t the due dates just fall every three months? I’m sure there is some really good reason for the odd schedule, but then again it is the IRS and we’re talking about the U.S. tax code here. We all know how streamlined that is!

All kidding aside, your next quarterly estimated tax payment is due today. The easiest way to make these payments is online through EFTPS.gov but you can still mail it in with a voucher if you want.

The Payment Schedule

If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return. The payment periods and due dates for estimated tax payments are:

April 15
June 15
September 15
January 15

Have you been wondering if you should even be paying estimated taxes? Don’t worry, you’re not alone. If you aren’t sure, be sure to check out IRS Publication 505 for all the information you could ever want on estimated taxes. It’s better to be safe than sorry and end up with underpayment penalties, so check it out if you’re unsure.

And don’t be like me and wait until the last day to remember. Set up scheduled payments with EFTPS or set a reminder for a few days in advance.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Don’t Forget About Estimated Quarterly Taxes Due Today

In other news, I’ve also started a new hobby and I’m attempting to brew my own beer. As I get the process down and can be sure that it’s possible to make beer at home on a budget, I’ll likely put together a post or two highlighting the process, equipment, and cost and share that here. I have one batch currently underway and another scheduled to begin tomorrow so in about 4 more weeks I’ll be able to taste the results. What I have learned is that while you can indeed brew a batch of good beer for quite a bit less than you can buy, it’s easy to get carried away with equipment. Hopefully I’ll be able to put together a detailed post with photos or even a video post later this year showing how it’s done.

The Prepaid Funeral: Advantages & Disadvantages - Nobody likes to think about their own death, but what about those prepaid funeral arrangements you’ve heard about? Is it worth it to plan ahead and pay for things well in advance? Here’s some detailed information that can help you decide for yourself.

Tax Credit for First Time Home Buyers Improved - Good news if you’re looking to buy your first house this year. The tax credit is now even better. Learn about the tax credit, how to qualify, and how much money you can expect.

Extreme Saving When You Are Young: How Much Is Too Much? - Is it possible to save too much money when you’re young? Well, anything is possible. I like to think that everything should be done in moderation. Even doing too much of a good thing can ultimately have a negative impact on other areas of your life.

The Reform in Retirement Accounts That’s Not Coming - It probably goes without saying, but our retirement plan landscape in this country is a mess and it’s primarily because of our also complicated tax code. While there has been talk of reform in this area, I wouldn’t count on any changes soon.

SEP IRA: Self-Employed Retirement Plans - Want to save even more money for retirement as a self-employed individual? The good news is there are some special retirement accounts available to you. One popular option is the SEP IRA. Find out how this can benefit you and your own business.

Technical Analysis & Stock Charts - There are two types of stock research: fundamental and technical. Fundamentals deal with the financials of the company itself, but technical analysis only looks at the stock chart. Which method is best and when should you use them?

New PineCone Research Sign Up Link - PineCone Research is one of the best companies to provide paid surveys. Unfortunately, they only open to new membership a few times a year. Now is one of those times. Learn more about how you can make money by completing online surveys.

Find A Cheap Prescription and Discount Medication Using Medtipster - Health care is expensive, and a large component of that comes from perscription drugs. If you’re looking for cheaper medication, you might want to take a look at Medtipster.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Friday Finance Findings for June 12th

To recap, I’m giving away some great prizes. The first prize is a brand new 8 GB iPod Touch. A fresh copy of Quicken Premier 2009. A deck of Nuru Personal Finance Cards. 3 copies of Wise Bread’s book: 10,001 Ways to Live Large on a Small Budget. And a random assortment of finance books from my personal library.

As you can see, there are a number of chances to win, and some very cool prizes! If you want to enter there are two ways to do so. You can even enter with both methods and earn two entries!

Twitter

1. Follow @JeremyVoh on Twitter.

2. Simply tweet: Just entered to win an iPod Touch from Gen X Finance. Just follow @JeremyVoh and retweet. http://xr.com/genxipod

Sign Up for My Free Email Newsletter

1. Use the form below to sign up.

2. Check your inbox and make sure you confirm your subscription. Only verified subscriptions are eligible.

Make sure you use the sign up form above and not the one below since this one has the contest tracking code so I can keep track of your entry. Good luck, and if you’ve already entered feel free to let someone else know about it. And again, for all the contest rules and prize descriptions be sure to check out the official giveaway post.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Still Some Time Left to Enter to Win an iPod Touch and More