talking about money | Bigg Success

work Fred Gratzon, author of The Lazy Way to Success, had a great post recently called the Definition of Success. He says that you’re a success if you can “give from your abundance”.

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george He’s not just talking about money, but it reminded me of one of the guest speakers for my class. He said that his goal is to give away a million dollars in his lifetime. One of my students asked him why he set a goal for giving instead of a goal for how much he would keep. He said that he felt that, if he could afford to give away a million dollars, he knew he would be doing just fine!

Fred also said that a lot of people think you have to work hard to be a success. He disagrees. In fact, he thinks you have to avoid work to be successful.

The definition of work

This is what we found most interesting – how he defines “work”. He says you are working “if you’d rather be doing something else.”

So if you love what you do, it’s not work! You can spend countless hours at it, because you find joy in it.

marylynn We love what we do here at Bigg Success. Sure, we work hard by most people’s standards … it’s definitely not 9 to 5. But we found a way to work together doing what we love for a fantastic community of people. It’s not always easy, but it is fun … it doesn’t feel like work, at least not most of the time!

Blaze your own trail

A great example of this is a young man we talked with recently – Sean Aiken. His last year of college, Sean’s dad told him to find a career that he was passionate about. Like a lot of young people, Sean didn’t know what that was. So he decided to find out by working 52 jobs in 52 weeks!

Now he’s working on a documentary about the project and he’s writing a book. He found his passion by blazing a new trail.

george My students are usually a pretty money-motivated group. They often go for the jobs that pay the most. The problem is it’s cyclical – the highest paying job now may not be the highest paying job in five years. So I encourage them to think about what they really enjoy doing and find a way to make a career of it. Now they’re set to rise to the top of their profession because it won’t feel like work.

marylynn Don’t accept the terms that the world sets for you. Don’t define yourself by other people’s terms. Use your imagination to create your own world.

As Ralph Waldo Emerson said, “When you make a decision, the universe conspires to make it happen.” So make a decision to do what you love!

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Your Potential Power

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balancing We’ve been talking about money decisions in tough times and how it may affect your 401(k). We started by looking at cashing out a 401(k), which is the absolute last resort.

Next, we looked at cutting back on 401(k) contributions. This is a much better option than cashing out, but you should try to contribute up to the limit of your employer’s matching contribution. That’s found money so you’ll be thankful you did.

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Now, we want to look at borrowing from your 401(k). The best advice we can give you on this is … don’t listen to us! Seriously, we can only talk about this in a general sense. So before you make a decision, talk with your professional financial advisor about the specifics of your situation. Then you can do what’s best for you with confidence.

There may be a better solution

Before you borrow from your 401(k), consider whether a home equity line-of-credit might be a better solution. You may already have one you can tap into. If not, consider applying for this type of loan instead of borrowing from your 401(k).

These loans are not as easy to get as they were a couple of years ago. You also won’t get as much of a line as you might have then because house values in many areas.

How much can you borrow?

If you decide a home equity line-of-credit isn’t your best bet, you can tap your 401(k) up to two times each year for money. It’s your money, so there’s you don’t need to be approved for the loan. You can borrow up to half of the vested portion of your portfolio, with a $50,000 limit.

Pay back is purgatory!

A loan from your 401(k) is a relatively inexpensive source of money. However, you’ll be paying the loan back with after-tax dollars (i.e the interest isn’t deductible). Compare that to a home equity line-of-credit, which is deductible in most cases.

In the eyes of the government, you and your 401(k) are two separate “entities”. So even though you think you’re borrowing from yourself, you’re not – you’re borrowing from your 401(k) so you have to pay it back within five years with an exception for first time homeowners who may have a longer payback term.

You can do that with each paycheck or you can do it in installments. You have to make a payment at least once every quarter. For example, if you borrowed $10,000, you would have 20 quarters to pay back the loan so you would have to pay $500 every quarter plus interest.

Of course, while you’re paying back the loan, you’ll have less money to spend every paycheck or every quarter, depending on which way you choose to pay back the loan. If things are tight now, what will they be like with even less free cash flow?

The other thing to consider about paying back your loan is that the dollars that were taken out of your portfolio are only earning whatever interest rate you’re paying. If that rate is less than what you could have earned if you kept it invested in your portfolio, you’re losing money you would have had at retirement.

No pay back is hell!

So it may be tempting to “borrow” the money and then not pay it back. In the government’s eyes, that’s the same as cashing out. So you’ll have to pay income taxes and, if you’re under 59½, you’ll also pay a 10 percent penalty.

Analyzing the scenarios

The Center for American Progress Action Fund recently analyzed a number of scenarios [pdf]. Let’s look at the two extremes:

IF you take out a loan, pay it back with interest, and continue making your regular contributions, THEN there is almost no effect on your expected portfolio at retirement. In fact, in all the scenarios they considered under these conditions, there is less than a one percent difference in the end portfolio. Not so bad, huh?

But that ignores the fact that we’re borrowing money because we need it now. So we’re likely to cut back on our 401(k), if not stop making contributions altogether. That’s the double whammy.

IF you do that (i.e. the double whammy), THEN you can expect your savings at retirement to be as much as 22 percent less.

What if …

Before you borrow, ask yourself some questions. For example, what if your company cuts back and you lose your job? Let’s spin it in a positive direction, what if you get a great job offer? You want to consider these scenarios as well before deciding if you want to borrow now.

Bottom line

Look for other ways to cut back on your spending. Even a little bit here and there can make a bigg difference. Consider temporarily cutting back on your contributions, but don’t dip below your employer’s match if you can possibly avoid it. Borrow if you must, but don’t cash out unless there is just no other alternative.

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Don’t Make This Costly Mistake

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