Roth IRA vs. Traditional IRA: Which Is Better?

What’s The Difference?millennials

Many adults can’t even answer this question!

This post comes directly from a comment left by a reader in a previous article. That person wanted me to explain the difference between a Roth IRA and Traditional IRA, as well as explain how to open one, where to open one, and how much to contribute to one.

All of those questions would make for an extremely lengthy article. Instead, I’ll be breaking it into a few posts. Today, I’m going to just start by explaining the difference between the two. This is really easy for me to answer and may seem obvious for those who know about them. But for many college students (and adults for that matter), retirement accounts are a topic everyone seems to have questions about.

Retirement! Only 40+ years awayRetirement beach writing

I’ve indirectly explained the significance of starting to save for retirement at a young age in another article on compound interest. If you haven’t seen that, it might help to start there. Click HERE to read all about compound interest.

I will end up explaining more in-depth the importance of saving for retirement in your 20’s in another article. It’s really just important to start a ground zero if you will, and explain what the benefits and cons to these accounts are.

What is an IRA?

IRA stands for Individual Retirement Account. Meaning that you, the owner of the account, are solely contributing to the account and receive no contributions (help) from an employer. IRA’s are in contrast to a 401(k) retirement account that an employer typically provides where they contribute money in addition to what you contribute. I will explain more about 401(k)’s in the future.

Why Would I Need One If I Will Have a 401(k) From My Work?

This also seems to be a question that pops up a lot. The quick answer to this is so you can save additional funds for retirement outside your employer and possibly get better returns on the money you invest. In a lot of employer given 401(k) plans, there is a limited number of investments you can choose from. Employers set it up for employees to select from a smaller number of funds they have chosen. They do this to reduce costs on their end and also provide lower fund fees for you. Because this article isn’t about 401(k)’s, that’s all I’ll say about them in this post. If you want to know more, definitely research it or drop me a comment below!

Traditional IRA’s

An IRA is an account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis. Money put into an IRA is from your own income after taxes. This money you’re putting in is on a post tax basis, meaning it is income that has already been taxed just like all your other money. This is in contrast to a 401(k) that allows you to put money into it before taxes are taken out.

With a Traditional IRA, you make contributions with money you may be able to deduct on your tax return. Any earnings potentially grow tax-deferred until you withdraw them in retirement. All the money you make on your investments will not be taxed up until when you retire. Traditional IRA contributions are also tax-deductible on your tax returns for the year you put money in. So you’ll end up getting some savings on your taxes for doing this. To learn more about this, click HERE.

PROS:

-Tax deferred earnings you won’t pay until you take money out during retirement

-Tax deductible on your taxes each year you contribute to the account

-Contribute $5,500 a year to one of these bad boys, regardless if you’re rich or poor

CONS:

-You’ll end up paying taxes at the end when you retire which will definitely decrease your money for retirement

ROTH IRA’s

These are great for young people. Here’s why.

With a Roth IRA, you make contributions with money on which you’ve already paid taxes. Your money can then potentially grow tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met.

What this means for you is that just like a normal IRA, you contribute money after taxes to the account. But when you withdrawal during retirement, there is NO TAXES. NONE. You keep all the money.

No taxes! What’s the catch?

The catch is you have to meet certain income requirements. You have to make less than less than $132,000 a year if you’re single (it’s higher for married couples filing taxes together). This is why they’re so great for young people. Early in your career, it is doubtful you’ll be making over $100,000 a year. Where as later in your career, it is possible that you may not qualify for one of these if you’re making the big bucks. Which YoungMoney really hopes you do.

PROS:

– Tax free withdrawals

-Contribute $5,500 a year to one of these, but only if you’re making less than 132k a year

-After five years, up to $10,000 of earnings can be withdrawn penalty-free to cover first-time homebuyer expenses

CONS:

-Money put into these are NOT deductible on your income taxes

-Have to make less than 132k a year to be eligible

Which One Is For Me?

There are pros and cons to both as you can see. But at a young age, many experts recommend contributing to a Roth, especially if you expect to not qualify for it later on. You can always switch to making an IRA account later on. Also to keep in mind is you can contribute to both if you like. However, that $5,500 annual contribution limit from the IRS isn’t per account. It is in total. Meaning you can only contribute 5,500 to any IRA in one given year. If you put 5,500 in a Roth one year, you’re maxed out and can’t contribute to a regular IRA that year.

I can’t tell you which is for you, but if you’re interested in reading more about them here is more info from Fidelity. Click HERE.

Hope That Helps!

Hope that gives you a better understanding of them. If you have any questions, comment section is below and you can comment anonymously.

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See you next week!

-Matt Dalton

Having More Money In College

Help! I Spend All My Money.

save


Here we go. The top question I’ve gotten since the launch of this site.

How on earth did I save so much money during college? The answer to this question is honestly pretty boring.

People asked me a lot of ridiculous questions after I published how much I’ve saved. Let me just start by dispelling any rumors.

I didn’t win anything. I didn’t get a ton of money by receiving scholarships. The biggest scholarship I ever got was the $732 middle-class scholarship (Thanks, Obama).

Here is the big one: “Did you make all that investing in the stock market?”

The answer is no. Actually, the only investing I do currently is through my retirement accounts.

Like I say in my introduction to this website, it all has come from simply saving money I’ve made from working throughout college.

What Do You Mean No Stock Market?

I’d like to actually address the stock market question specifically. Stocks are sexy apparently, because that’s what everyone assumes is the sure-fire way to make money. Don’t get me wrong, it is. But any finance professional will tell you the stock market is a long-term play unless you’re a wiz like Warren Buffett. Even then, you’re going to need a bit of knowledge and a ton of luck to beat the markets.

You also have to understand where you’re at in life. As a college student, I can’t imagine you’ve got tens of thousands in capital just lying around at your disposal to invest in the stock market. Well, then again, I suppose many reading this went to Del Norte High School. Scratch that, you might.

All kidding aside, the amount of money you could put into investing would buy you probably a handful of stock shares. Not thousands. Unless you’re going to do some penny stocks, Jordan Belfort sh*t. If you are, god speed. A handful of shares even getting you a huge return (20%+) would make you a small amount by the time it went through Short Term Capital Gains Tax. As any accounting student will tell you, it’s hefty if you sell a stock if you haven’t owned it for over one full year. Yes, less than one year is considered short-term by the IRS.

Save More Today Than The Stock Market Will Make You

Here’s some food for thought. Let’s say I think Twitter is bound to shoot back up in value after Disney & Apple both decided to not purchase it today. (Did you know Twitter is for sale?) I put in $500 in order to purchase 25 shares at $20 a piece. Twitter comes through for me and shoots up 20%. This is a HUGE gain. I mean, seriously read that as a Donald Trump HUGE.

The stock price is now at $24. I made $4 on every share I own. My $500 turned into $600. HELL YEAH. Let’s cash out. I made 100 bucks doing nothing. BUT…now it is time for taxes.

Short term capital gains is done by your income tax bracket. Let’s say I’m in the 25% bracket. My 100 gain is now only 75 bucks. Thanks again, Obama.

So you made $75. You know where else you could have gotten $75 from? By just saving $75 from your paycheck instead of spending it. Chances are, you can end up with more money by just saving that you can make doing short-term sales in the stock market without investing a lot.

The Truth Is That Saving Money Is Boring.

To get better with money, you have to start by learning to save. People hate this. Mostly because it takes a while to do and also to get good at doing. It takes the commitment of making it a habit. You can’t half-ass it and do it for two weeks like people who promise to get themselves into the gym every new year.

But let me tell you something I learned.

You Learn To Love It

It took me a while to get going, but once I was consistently saving money, I loved it. You get excited to see your bank account balance growing and begin to set mini-goals for yourself. The more you start to save, you’d be surprised how much more you watch every aspect of your spending.

So How Do I Spend Less? I Have Bills, BRUH.

So do I. And I also love going out with my friends and buying stuff. But it can be done! Slowly but surely.

HOW TO START SAVING

  1. Figure out how much you’re spending.
    • This might hurt. It’s like waking up after a night out and checking your bank account.
    • Start by going back through your bank account and determining all your spending for one full month.
    • You can’t start saving unless you know how much you’ve got to manage
    • Many banks offer a tool to check your spending categories and break it out for you!
  2. Determine money spent on needs vs. wants
    • Figure out what you have to spend money on (Rent, food, utilities, gas, etc..)
    • Figure out how much you’ve been spending on wants (Going out, drinks, eating out, movies, dates, your Amazon cart)
  3. Make A Budget
    • You can do this easily in Excel if you like that or I recommend Mint.com.
    • THIS IS KEY TO STARTING TO SAVE
    • Figure out how much money is coming in. (Paycheck)
    • Take away all money you must spend on your needs
    • You’re left with money you probably normally spend all on wants
  4. Determine How Much You’ll Spend On Wants OR how much you want to save
    • This can start two ways. People who are looking to really start saving may decide how much per month they want to begin saving. They save and then the left over is “spending money”
    • This might be tough for those who go out a lot currently or feel like they’re always low on cash. So start by deciding how much you’ll spend on those wants. $200 a month, $300 a month. Whatever it is.
    • The rest will be your savings
  5. STICK TO YOUR BUDGET
    • This is all your own self motivation. You have to stick to the budget. Divide your monthly spends into weeks so you have $50 a week to spend instead of one big sum you blow through at the start of the month.
    • Set limits through your bank. If you really have issues with this, you can tell your bank to cut you off. You can set a limit on yourself that once you spend a certain amount, the card stops working.
  6. Save
    • Put money into you savings account. Ideally one that might be separate than the bank you use for your checking/debit card. That way it’s harder to touch. So you’d have to request a transfer and wait a couple of days before getting it in your account.
    • Don’t take it out. You’re only hurting yourself.
  7. Watch your money grow!
    • This isn’t rocket science. It’s easy to do but hard to stick to doing. Just like going for a short run everyday isn’t that hard, but the hard part is you have to keep doing it.
    • You also don’t have to only save money for no reason. Save towards something. You first need an emergency savings for when stuff comes up. After that, you can save towards a vacation, a car, Coachella. Whatever. Learning to save really benefits you.

I really hope this helps to put you on the right track if you’ve been needing it. Ask any questions in the comments below!

Thanks for reading!

Matt Dalton

What’s The Deal With CD’s?

Certificates Of Depositcds

(You didn’t think I meant compact disks, right?)

I’m not sure what’s happened, but everyone seems to want to know about CD’s these days. I’ve had at least 6 people ask me about this in the last couple months. In fact, my best friend’s fiancée asked about them last week.

Are your banks trying to pitch you on buying these or something? Just curious. With a strange amount of interest on these and because they’re easy to explain, I’m going to write about them.

So What Is A Certificate Of Deposit?

It’s an investment product offered by banks that offer a specified rate of return over a set period of time. The period of time varies depending on the bank, but common time frames are 6-Month, 1-Year, 2-Years, 3-Years, and 5-Years.

They are super easy to understand.

The deal is that you deposit a preset amount of money with your bank and agree to let them hold onto it for a period of time that you choose. In return for letting them hold your money, they will pay you interest on the money you deposited. At the end of the time period you get your principal (money you deposited) back.

If you’re wondering how this benefits them, it gives them cash reserves. Banks have a complex system of managing all the money that comes in and out. Basically, while your money is being “held” in the CD, they’re lending out your money to other customers or simply holding it because federal law mandates banks to keep a certain amount of money in reserves. But don’t worry, you’ll get your money back. CD’s are FDIC insured and are one of the safest investments you can make. You might as well go buy some T-Bills.

So They’re Safe To Invest In? Sweet, Dude! Sign Me Up.

Yes, they’re basically risk free investments that will make you money.

BUT: How much money you make largely depends on 2 things.

  1. How much you deposit
  2. How long you’re willing to deposit it for (this is the key to CD’s)

The more money you deposit and the longer you’re willing to let them hold onto it, the better interest they will pay you. I’m tempted to explain why time value of money (TVM in the finance world) makes this the case. But, for now, just know you’ll make more money for letting  them hold onto it longer.

So How Much Can I Make?

Ah, finally, what you really wanted to know. The best answer to this is you’d need to figure out how much money you’re willing to invest in one and how long you’d be OK with not having access to that money. This is because if you withdrawal from the CD before it matures, there’s a pretty big penalty. You don’t wanna do that.

You can check your own banks rates on CD’s, but here is a list of the BEST rates I could find. (As of 9/15/2016)

6 Months – Capital One 360 (0.9%) No min deposit

1 Year – Barclays (1.20%) No min deposit

2 Years – First Internet Bank (1.36%) $1,000 min deposit

3 Years – Barclays (1.50%) No min deposit

5 Years – First Internet Bank (1.92%) $1,000 min deposit

I found all these using NerdWallet.com. These also assumed my zip code and a minimum balance of $1,000. You can go play around with their tool to see if you can find higher ones that I did. You probably can, I didn’t dig that hard. I just wanted to give you an example of the going rate for them these days.

So the first thing you’ll notice is that to get higher rates, sometimes there is a minimum amount you need to deposit and that the longer you keep it in there, the more you make. Unless you find a CD like the ones Barclays seems to be offering right now that don’t require a minimum. This happens sometimes because banks just need to raise their capital reserves.

Great! I’ll Go Buy Some!

Well not so fast. Here comes the catch.

You knew there had to be one, right?

CD rates are at historical lows. Check out this graph from Bankrate.com.

dhd

Sorry to disappoint but the rates on CD’s have literally never been lower. You’ll notice a serious drop off somewhere between 2005 and 2010. I’ll let you figure out what happened there.

Anyways, this doesn’t necessarily mean you shouldn’t buy any. Just that they are not what they used to be.

Warning, Unqualified Opinion Ahead!

The reason I’m confused why people are so interested in these is because there are just so many better options out there to make money. Especially for college students who 1) don’t have tons of cash to invest and won’t earn a ton of interest money 2) don’t know where they’ll be 6 months, 1 year, 5 years from now as a CD requires.

Things are going to change for you a lot in the next few years. I’m going to tell you the same thing I told my best friends fiancée:

“What happens when you need that money for something next year?”

Now, this is something I’d really only say in a select set of situations. Investing money is very wise to do at a young age because of the immense benefits of compound interest. It’s the only way you could possibly ever retire! But investing in CD’s in my opinion is just not worth the draw backs of the time factor as well as the minimal amount you receive for all that commitment.

The stock market will give you way better returns than a CD as I’m sure you know.

BUT, that’s actually not what I recommend you do unless:

  1. Have a solid emergency savings account first
  2. Pay off all bad debt (there is a difference between good and bad)
  3. Get a retirement account set up and begin contributing (This is investing, but not in the same sense as a non-retirement investment account that invests in stocks, funds, ETF’s…etc.)

I probably just opened a can of worms. I swear this website will explain all that stuff.

But here’s my deal.

If you’re looking to make a bit of money on your savings (or at least better than your banks measly .01%)…

Check out an online savings.

Online banks can pay beyond 100x better than your brick and mortar bank. They can also pay better than lots of Money Markets!

This is because they don’t have the costs of running an actual retail location you can walk into. It’s all online. Less costs means they can pass the savings onto you in the form of higher interest rates on your savings.

The case for an online bank:

  1. Higher interest rates
  2. Higher than almost any CD under 1 year
  3. Take out your money anytime! No need to commit! (which I know you love)
  4. Often times, better user interface than your regular banks website
  5. Better customer service
  6. Move your money between your bank and online savings account very easily
  7. No monthly fees

OK, So How High?

Up to 1.05%! (Synchrony High Yield Savings)

Ok, so that’s not a ton of money. But hey, it is WAY better than your banks .01% by a huge margin.

You might be able to find a bank with 1.10%. Offers like that happen every so often.

Who Do I Use?

Ally Bank.

They pay 1.00% on all balance tiers. No minimum. I also really like their user interface and think they’ve got good customer service from my own experience with them. I just opened with them 6 months ago. So far, so good! They deposit my earnings at the end of each month. Now again, it’s not a ton. But it’s better than nothing.

I’ll do a full review of Ally soon, but just figured you’d might wanna know who I use. Not being paid by them to say this!

I’ve hoped you’ve learned something and feel better educated on CD’s pros and cons!

Please comment below! I want to hear from you guys. (Yes, you can comment anonymously if you like. Just don’t enter your info and press submit)

I also have an email subscription list! Please subscribe to that and get updates when I post something new!

Please share and help my website grow! I would really appreciate it. It takes time to write these as you can imagine.

Until next time!

Matt Dalton

Credit: What The Heck Is It?

3 Most Common Question I Get About Money:

  1. How do I start saving more money? And where do I save it?
  2. Should I invest in the stock market?
  3. I don’t know what my credit is like. How do I find out?

Today, I’m going to answer the third question. Now, most commonly when someone asks me this, they’re asking how their credit is effected based on how they use their credit cards. But your credit is decided by far more than that.

I’m going to explain how your credit gets decided and where you can check it.

Your parents or someone in your life has most likely told you that building good credit is critical.

And it is.

SO WHAT IS CREDIT?

Your credit is defined by a variety of factors. These factors are weighed differently so that some matter more than others. Based on the calculation of the various factors, credit reporting agencies give you a credit score. Different ratings agencies decide on their rating scales differently. But the most common scale is rated between 300-850. This is known as the FICO score.

In the Untied States, there are 3 big credit reporting agencies. ALL of them have your information. Even if you don’t have a credit card.

These 3 are…

reports

 (1) Equifax

 (2) Experian

 (3) TransUnion

 

WHAT DETERMINES MY SCORE?

  1. Credit Card Utilization (High Impact)
    • The amount of your total available credit that you’re using on your credit cards.
      • For example, lets say my credit limit is $1,000. I spend $100 this month. My utilization is 10%. Easy, right?
  2. Payment History (High Impact)
    • Hey, are you paying your bills on time? (This can include credit cards, auto loans, student loans, your rent, utilities)
  3. Derogatory Marks (High Impact)
    • The number of collection accounts, bankruptcies, foreclosures, civil judgments or tax liens on your report
      • Hopefully you have none!
  4. Age Of History (Medium Impact)
    • How long have you had credit accounts for?
  5. Total Accounts (Low Impact)
    • How many credit cards or loans do you have right now?
  6. Credit Inquires (Low Impact)
    • How many lenders, possible landlords, employers have asked about your credit?
      • There is a difference in credit inquires called Hard Pulls and Soft Pulls.

Learn more about these factors HERE.

There ya go! You now know how your credit is determined.

WHAT IS A GOOD SCORE?

Credit Score Range Definitions (Sourced from Experian.com)

  • 800 +: Indicates an exceptional FICO Score and is well above the average credit score. Consumers in this range may experience an easy approval process when applying for new credit. Approximately 1% of consumers with a credit score of 800+ are likely to become seriously delinquent in the future.
  • 740 to 799: Indicates a very good FICO Score and is above the average credit score. Consumers in this range may qualify for better interest rates from lenders. Approximately 2% of consumers with a credit score between 740 to 799 are likely to become seriously delinquent in the future.
  • 670 to 739: Indicates a good FICO Score and is in the median credit score range. Consumers in this range are considered an “acceptable” borrower. Approximately 8% of consumers with a credit score between 670 to 739 are likely to become seriously delinquent in the future.
  • 580 to 669: Indicates a fair FICO Score and is below the average credit score. Consumers in this range are considered subprime borrowers and getting credit may be difficult with interest rates that are likely to be much higher. Approximately 28% of consumers with a credit score between 580 to 669 are likely to become seriously delinquent in the future.
  • 579 and lower: Indicates a poor FICO Score and is considered to be poor credit. Consumers may be rejected for credit. Credit card applicants in this range may require a fee or a deposit. Utilities may also require a deposit. A credit score this low could be a result from bankruptcy or other major credit problems. Approximately 61% of consumers with a credit score under 579 are likely to become seriously delinquent in the future.

OK, SO WHY DO I NEED A GOOD SCORE?

This is why:

  • Having good credit shows your ability to pay back debts
    • Whether that be on a credit card, student loan, auto loan, mortgage, etc.
  • Building credit is also evaluated by your potential landlords or employers (to evaluate your ability to repay something)
    • Apartment companies or landlords will more often that not pull your credit when evaluating your potential as a renter
    • Employers frequently check your credit during their background checks on you
      • Companies say they primarily do this to prevent or reduce theft (More Info On that Here)
  • Building good credit will qualify you for lower interest rates over the course of your life saving you TONS of money.

Matt, I don’t have any credit cards, student loans, auto loans, rent payments, or utilities payments in my name. This is useless information to me, dude!

It’s not! Here is why you should still check your credit.

Fake accounts get created all the time. It’s called identity theft. Someone out there can easily be using your name to open accounts. Heck, your own bank could be opening accounts without telling you! If you haven’t heard, Wells Fargo opened millions of UNAUTHORIZED customer accounts without people knowing. They’ve been convicted and owe $185 Million in fines. That happened last week. (Sept 2016) Learn more about that HERE. I personally bank with Wells Fargo. I’m not leaving them. I’ll write a future post on it.

Don’t let someone mess up your credit without you knowing. Check it.

Also- If you’re an authorized user on one of your parents credit cards (even if it’s not in your name), it’s still on your credit report.

FINE, WHERE DO I CHECK IT?

Federally mandated law requires you have access to 3 free credit reports a year. One from all the big 3 companies I mentioned above.

CREDIT REPORTS HERE: https://www.annualcreditreport.com/index.action

You can report fraud, misinformation, and get a good idea of what’s out there for you. This website is 100% safe. I recommend checking one of them every 3-4 months so you have year round coverage of your credit report for free.

BUT WHERE IS MY SCORE?

Your credit report doesn’t give you a score. In the past you had to buy it from one of those 3. But this is 2016, my finance curious friends.

Many banks are beginning to offer the score for free on their websites when you log in. Not all do, but see if your bank does!

WHERE I GET MY SCORE: CREDIT KARMA  —   https://www.creditkarma.com/

You’ve seen a commercial for these guys. Have you thought it was a gimmick? It’s not. I promise you. I’ve been using them for years. They will give you your score AND your credit report from 2 of the 3 FOR FREE. Anytime you want, as much as you want.

(It doesn’t effect your credit because it is a soft pull)

It’s super user-friendly and I’ll go into detail about why I love CreditKarma so much in a future review. CreditKarma is not paying me to say this. I truly love their site.

You can see your credit score each month super easily. (Mine got a nice boost this month as you can see)

my-scofre

Even break out possible scenarios!

my-scofre-w

Super handy!

SO NOW GO CHECK YOURS!

If you liked this post and want to see more, please subscribe to my email list! I will only send you emails when I post something new.

Comment down below your own thoughts and experiences! Share with your friends. The more views on the site, the more posts I’ll be writing.

PLEASE NOTE: You do not have to leave your name and email to comment. Just write a comment and press submit. I realize it appears you need to. You do not. I am working on this.

What do you want to see next?

Thanks for reading!

-Matt