I’m ending the week with an important question from a reader about her 401(k). If you’ve got a real job, pay attention:

“I was supposed to start a 401K… two months ago and
decided not to because apparently you can’t choose the stocks or
whatever that you want. The company has set ones and that’s it. When I
asked people who have been here five years or more they told me all of
this because at least three people have lost tens of thousands of
dollars because of what their 401K money went to. Are they telling me
something wrong…or does it depend on the company?”

Was it wise for me to stay away? I have my INGDirect and am trying to
get up to six months in my savings. I have like three months now. I
wonder because I know you’re supposed to save as much as possible as
early as possible.” — Vanessa

First, it’s great that you’re thinking about your retirement finances while you’re young. More people should be following your lead. As far as your 401(k), I think you’re right to be skeptical of the advice your co-workers gave you for a few reasons.

First, I think it’s highly unlikely that your company’s 401(k) doesn’t have any investment choices at all. The entire point of a 401(k) is to allow workers at various ages and stages of their careers to choose investments that make the most of the length of time before they retire. Someone in his 20s would want mostly stocks and could invest more aggressively than someone in her 50s, because the 20-something has more time to make back any money the market might lose in the short term. I don’t know the specifics of your company’s plan, but my guess is that your co-workers are complaining more about limited investment choices than none at all. You really need to go see your HR department and request all the materials they have and look them over for yourself.

Second, for the reason I cited above (the 20 year old vs. the 50 year old), I wouldn’t worry about how much my co-workers “lost” recently. As long as you have the ability to make choices in your 401(k), your portfolio won’t perform exactly the same as someone else’s. And since you’re young and not going to be needing or withdrawing any money from that account for decades, who cares if it loses some value now? In fact, that the market has been down this year is a good thing from the perspective that you’ll get more shares of whatever investment choices you make for less money, and over the long-term, that’s likely to pay off for you. My guess is those who were worried about the value of their portfolios are probably people who are closer to retirement than you, and that it’s also likely they’re in investments that are too aggressive and exposes them to too much risk for their age bracket.

Last, your ING account is a good thing, but it can’t replace your 401(k). One of them is short-term savings you can hit up if you have an emergency, the other is long-term that you won’t touch for years. You don’t need one, you need both. Besides, if your company matches contributions to your 401(k) (and most do), by not investing, you’re passing up free money. And who does THAT?

Thanks for the question, and have a good weekend.

If you’re anything like me, the most nagging financial issue you have is credit card debt (click here to see my plan to get rid of it all).

Most folks think that it’s the credit card interest that keeps you in debt: buy something then pay only the minimum and eventually your balance balloons and you’re not paying down the original principle for years. But this story on MSNMoney.com shows how even if you make more than a minimum payment, carrying and using the card at all can keep you in debt for a long time:

“You’re not thinking clearly about the actual cost of things, because credit transactions skew how you view the money you spend. There is a vast difference between how it feels to pay $10 in cash versus $100 in cash (not to mention the difference to your wallet). But when you sign a slip of paper, spending different amounts feels similar…”- MP Dunleavy, MSNMoney.com

Put another way, carrying a credit card makes it easier for you to overspend because you don’t ever actually see the money you’re spending, unlike cash when the money actually disappears before you. And while the article was about credit cards, I’ve seen how using plastic can screw up your budget even when it’s a debit card you’re using. Those $5 and $10 and $20 transactions don’t feel like much when you just swipe, sign and walk away, but sometimes they’ve added up to hundreds of dollars I didn’t plan to spend.

So I’m trying something different in the next few weeks: I’m going to look at my budget, then withdraw only the amount of money I can afford to spend in cash, and try not to use my debit card at all. Using the credit card is already off limits.

Anyone else have any strategies they’ve used to master the plastic?

Everyone I know is paying off student loans. I’m fortunate enough to be making my payments with no problem but I did struggle with them in the past (when I was significantly more broke). But with the economy as foul as it is, more and more people are getting behind on their loans and even going into default. And those that do, according to this story in the NY Times, are finding out just how much of a hassle dealing with their lender can be.

“More borrowers may begin to discover the harrowing consequences of reneging on student loans in the current economy. Numbers of borrowers behind on payments and in outright default are rising for some types of loans, and the tight job market makes it harder for graduates to find jobs that let them pay off debts. At the same time, investors are pressuring lenders to raise revenue by minimizing losses. Investors also expect more revenue from those lenders that operate collection agencies.” –NY Times

At the end of the day that all means more phone calls from collectors and a more stressful life for people who fall behind, so do your best not to.

One interesting thing about the NY Times story, though: they feature a 38 year-old activist who is fighting the student loan companies over their tactics. The problem: he’s behind in his own student loan payments, yet quit his job because he didn’t get the raise he wanted, and also spends time and I’m assuming money on tango and salsa lessons. How’s that work?

I know I’ve been a little heavy on the celebrity money misfortunes lately, but it just seems like the news keeps on coming. Last week, Michael Vick’s bad money decisions made headlines, yesterday it was Jermaine Dupri allegedly not paying workers at his restaurant. Now it’s Damon Dash, who just sold the Pro-Keds shoe line back to its previous owner after owning the license for the brand for only four years.

Selling a business ain’t a bad thing, but in this case it’s other things happening at the same time, especially the foreclosure on two of his cribs in Manhattan. The bank that holds his mortgage says he and his wife owe $7.3 million total; they were supposed to be making mortgage payments of $78,000 per month. At that rate, you’d have to be almost eight years delinquent with payments.

Sigh. Well, since I know I’m going to get comments and emails accusing me of being a hater, lemme end like this: the reason I post about celebrities and their money woes is to show that everyone, even those who look wealthy in front of the camera, can have money problems. Fame doesn’t make you immune, and in a lot of cases, the saying more money, more problems is exactly right.

That said, I wish Dash, Vick, Dupri and all the celebs I write about a quick rebound.

OK, how many times a month can there be another story about an entertainer or athlete with a business venture gone all kinda wrong?

This time around it’s Jermaine Dupri, whose Atlanta restaurant closed…apparently without letting employees know it was coming. Or, um, paying them. In fairness, the restaurant business is one of the toughest to be in and JD wouldn’t be the only celeb to have a restaurant fail. But the employees think they were done real dirty. JD’s mom, who ran the spot, didn’t have anything great to say about her workers, either. See for yourself here and make up your own mind. (thanks KTC for pointing me to this).

Here’s something to make you go ‘hmm’. Or maybe ‘Damn.’

Researchers studied whether you could tell a person’s race and income by looking at how much unnecessary crap they buy. In other words, is the stereotype true that black folk spend more trying to look rich than people who are actually rich?

 Guess what they found? You got it: all these fools riding around in clown cars on 36’s with five pounds of jewelry on are really showing off how likely it is that they’re poor and really can’t afford the stuff. The theory, broken down in this story in the Atlantic, is that people who tend to have less money will spend more on things they perceive others will view as signs of wealth. And since black folks have on average less wealth than other ethnic groups in the US, the trend cuts across racial lines.

 “An African American family with the same income, family size, and other demographics as a white family will spend about 25 percent more of its income on jewelry, cars, personal care, and apparel. For the average black family, making about $40,000 a year, that amounts to $1,900 more a year than for a comparable white family. To make up the difference, African Americans spend much less on education, health care, entertainment, and home furnishings.” — The Atlantic

Really, is this something we don’t already know? Every Saturday morning at the barbershop, we laugh at the fools who spent $50,000 to hook up a 73 Coupe de Ville, then fill the 90-gallon tank with $4 a gallon gas just to ride around the hood looking like they got something. And they generally accomplish what they set out to do: they look ”hood rich”, but everybody with some sense knows they probably don’t have any money in the bank.

What’s troubling, though is that as a group, we skimp on education, investing and other things that lead to building real wealth. There’s nothing wrong with liking what you like, but where are the collective priorities?

So now that we know the deal, the question is how do you turn it around. I’ll take any suggestions in the comments section.

After yesterday’s post about the need to pay off credit cards “Slim” posted a comment I wanted to respond to for everybody:

I totally agree about paying off the credit cards. I paid off and closed my credit card just this February 2008 after B of A would not reduce my interest rate. One thing I do not understand, why did my credit score DROPPED about 15 points after I closed the credit card and now only have my mortgage payment as outstanding debt. I have never been late one credit card or mortgage payments. It is like the financial world rewards you for being in debt!!!!!!

Slim, the reason your credit score dropped was because you made the mistake a lot of people do when they pay off a card: You closed it. How much debt you have as a dollar figure is just one of the things that goes into your credit score. Another part of it is your ratio of debt to available credit.

Let’s say I have three cards with $1500 limits. That means my available credit is $4,500. If I carry a $900 balance on each, or $2,700 total, that means I have a ratio of 60%, or that I’m using more than half the credit I have available to me.

Now, if I pay off one of the cards and close it, My balance goes down by $900, but my available credit declines by $3,000. That means even though I’ve paid off one-third of the debt, the credit agency still sees me using the same 60 percent of my available credit.

Another important factor is the length of your credit history. Basically, the longer you’ve had established credit, the more favorably that plays into your score. Close a card that you’ve had open for 10 years, and you could damage your score.

In the long run, the best thing is to pay off a card, cut it up if you have to, but keep it open.

Fortune.com has a really good column about what they call “the next credit crunch”. Since I know most of you aren’t about to click that link and read the whole thing through (even though you should), I’ll run it down for you:

(1) Americans’ incomes haven’t gone up in years (2) so we keep borrowing money, mostly through credit cards, to afford all the crap we want, (3) but credit is now as tight as it’s been in the country in decades so banks are about to cut the credit cord to many consumers (4) and in the end of lot of us are going to be screwed.

Get it? Credit card companies are starting to take big losses and that means they’re about to start raising rates. If you carry a balance, your monthly payment could jump. If you don’t have any savings and have been relying on your credit card for emergencies, think of how much more you could wind up paying off that debt in the long run.

Today’s a good day to get a piece of paper, and make a plan for paying off your cards and saving at least three months worth of living expenses as quickly as possible.

A reader asked for advice over the weekend on when its a good time to lend money to family and friends and more importantly, how to make sure you get the money back.

I have one rule when it comes to lending money to anyone, but especially to family in friends. Don’t.

Actually, the rule is a little more nuanced than that: I don’t lend any money to anyone that I know I can’t afford to get back. In other words, if I know I’ll be heated that you didn’t hit me back with that $50 you borrowed, then I just won’t lend it to you. Of course, if I loaned you $10 and you renege on a promise to pay me back, don’t expect to borrow money from me again, but some amounts are small enough that I’ll simply consider it a gift and not ask for it back anyway.

Also, you have to ask yourself who you consider family and “friends”. Here’s what they’re not: the third cousin you only hear from when the lights are about to get cut off (again) or the “homeboy” who’s really only your boy when he’s short on the bar tab but not when it’s time to settle up with you. I’ve been burned lending money before, but never for more than $100, which ultimately I didn’t miss, so my rule “works” (not getting that $100 back made me a lot more cautious about who I lend to in the first place.) I’m also loathsome about borrowing: I’m fortunate enough that I never need anyone else’s money for anything because I can take care of all my necessities myself.

Anyone else have any rules on lending cash to family and friends? What’s your worst “they didn’t pay me back” story?

I’ve poked fun at celebrities and athletes before for some of their financial mistakes. Not that I think it’s funny when people are duped or fall on hard times but sometimes the things that people will do with their money just crosses that big, red line in the sand that says “STOP! YOU’RE BEING EXTRA!”

But this weekend I was reading my homegirl Jemele Hill’s blog and ran across something VERY extra but not at all funny. Jemele writes for ESPN.com and had linked to this story by another ESPN writer about Michael Vick’s finances. Here’s a sample:

Banks in Toronto; South Bend, Ind., and Charlotte, N.C., demanded repayment of more than $6 million in loans used to finance a car rental business, a wine enterprise and other ventures. A sports marketing company that he hired and fired even before he was drafted in 2001 hounded him for another $5 million in lost fees. And he faced breach of contract charges on two other deals…

A review of bankruptcy court records and other litigation filed against Vick shows a remarkable series of blunders and thefts that could leave Vick insolvent even if he manages to retain the bonuses the Falcons and the NFL are trying to take back from him.

-Lester Munson, Espn.com

Somehow, shaking my head still doesn’t seem like an appropriate response. Jemele’s post on the subject is a little less forgiving.

Seriously, people, at what point does the madness end? How many times do you have to hear a story like this one before some pro atheletes and entertainers become wiser about trusting just anyone with their cash?