Monday, September 21, 2009

Personal Responsibility in Finances

I have gone away from my original plan of talking about personal responsibility and have been focusing a little more on politics. While I do feel it is a personal responsibility to remain informed and research what we are told, I also believe we have to focus on all aspects of our lives. We can very easily get tunnel vision and become obsessed to the point that nothing else is getting done.

I have not gotten tunnel vision so much as a traffic jam in the tunnel that is my brain. I got locked up with all that is going on and just couldn't focus on one thing. So I decided to go back to my original mission statement for this blog.

So in keeping with this blog’s theme, I will write about personal responsibility in finance.

I should disclose that I am not a financial expert and only started worrying about my finances three years ago. But in the past three years I have studied and have learned a lot. I would like to share with all of you the high points.

401K = Free Money:

The 401K program is a personal savings that has replaced company pensions. The money is deducted from your pay check PRE TAX. Your company sets up the plan with businesses like Vanguard or Sentry. Those businesses then give you multiple options of where you can invest that money. These options range from plan to plan, but most if not all offer bonds, treasuries, normal savings, mutual funds, and even specific stocks. These options should be reviewed carefully and if available you should take the quizzes offered to determine your risk tolerance.

If your company offers a 401k with company matching and you are not using it then you are throwing away free money.

From my experience the average companies 401k plan offers matching of 50 cents for every dollar up to 6%. (This may vary from company to company so I am using just my experience) This means that for every dollar you put into your 401k the company puts in 50 cents. The do this for first 6% of your income you put in. Let’s say you make 100,000 dollars a year, this is just to use a nice round number. 6% of that would be 6000 dollars. SO the company would put an additional 3000 dollars on top.

Salary: $100,000

401k Savings plan:
6% to 401K: $6,000
Company matching: $3,000 - Free money
Total savings for the year: $9,000

Right now you can contribute up to $16,500 dollars a year to you 401k. This is a lot of money to a lot of people so not many do it. Some financial people say you shouldn't do it. But all agree that you should be putting in at least the percentage that gives you the free money.


Paying yourself first means that before you pay any bills or spend any money with your paycheck, you put some money into savings. You could consider your 401k plan paying yourself first, but I do not.

Here is what I do. I have my paycheck directly deposited into my bank. The same day the check is deposited I have money automatically transferred to my E-trade savings account. From this account I can then leave it there earning minimal interest or shift it to my stock account and invest in stocks.

Company Stock Purchase Plan:

This is another form of free money. I kick myself every time I think about how I missed out on this for six years. This is a guaranteed return of 15% every six months, unbelievable. Not all companies offer this so check with your HR department.

Here is how it worked at my company:

The stock purchase plan (SPP) was available for enrollment every six months and you could put 15% of your paycheck into it. At the start of the six months the company started taking out that 15% from your paycheck EVERY PAYCHECK. When the six months is up the company takes the money you have put in and buys as many shares as possible at a 15% discount from lowest price of the fist day and the last day of the six month period. Confused? I am and I just wrote it. So let me draw it out:

Let’s say the six month period starts January 1st and ends June 30th. If the stock price on January 1st was $10 and the price on June 30th was $15 dollars then the company would buy your shares at the $10 price with 15% off making your price per share $8.50. If you sold the day you received your shares you would make a profit of $6.50 per share.

You can see how that adds up quickly especially if you are putting 15% of your paycheck into the plan.

Here is another scenario in case you are confused. It is really just the reverse of the scenario above. Let’s say that on January 1st the stock price was $15 and on June 30th the price had dropped to $10. You get the stocks at the $10 rate plus the 15% discount for a value of $8.50. You sell that day at $10 and you have made a profit of $1.50 a share. Not as great as the first scenario but still a profit above the average S&P return.

Here is how I started getting into my companies plan and I have to admit that it hurt at first. For the first six months I went on a spending diet. I put 300 dollars a pay check into the plan and cut my spending where ever I could at home. It hurt but after the first six months I got all that money plus 15% back. Actually, I got in at the best time and actually got a return of 25%. What is even better, living frugally for six months taught me I didn’t really need the crap I was missing out on. So after the first six months I increased my contributions to the SPP and did not withdraw my earnings from the previous 6 months. I used those earnings to start investing on my own.


If you thought you were done studying when you left school then you are sadly mistaken. Everything I know about finances I learned on my own. I started out reading Jim Kramer’s book “Mad Money” which got me excited about investing. I then moved on to other books that taught me how to read charts and company financials.

The greatest compliment I ever received was from a new friend who has a degree in Finance. I had been investing for about a year and was sharing my new found knowledge and modest gains. He asked where I had learned all this stuff and I replied that I learned it on my own from reading books. He responded, “I have a degree in Finance and I don’t even know this stuff”. His statement made me feel good and encouraged me to keep studying.

I encourage all of you to find a book on personal finance, read it, and pay attention. You do not have to invest in stocks or do anything risky. There are many different ways to invest your money and work on building personal wealth.


Since I have started investing I no longer live paycheck to paycheck. I have a sizable savings account, stock portfolio, and 401k. Sizable does not mean I can retire, it just means that I am comfortable and happy with my progress. Because of my studying and my keeping informed on financials I was able to pull out of the market before the crash which left me all in cash so I could start investing near the bottom.

I am on my way to building a very nice nest egg for myself and my family. Because I like to play in the stock market I am always at risk. But by diversifying my investments and my risk I feel comfortable. I encourage all of you to start studying where your money is going and how it could be used to make more money.

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