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| Sunday, March 23, 2008 |
| Money Makeover: Rob Danckert |
 The Boston Globe Money Makeover: Foundation is solid for geologist's fiscal future profiles 31-year-old Rob Danckert of Waltham, MA. While sparse on the nitty gritty financial details (like what is his Net Worth, or at least the total amount currently in his retirement accounts) it does provide a few: Not only was Danckert tucking 10 percent of his $50,000 a year salary into his 401(k) plan, but his employer's match was adding an additional $1,960 to his plan each year as well. He housed those funds to craft a well-diversified portfolio that was performing well. Levit awarded him an A+ on both counts.
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The first step, she said, was for Danckert to build up his regular savings account (the balance was just $700) until it equaled 10 percent of his gross income, or $5,000. And she recommended using a high-interest account to increase returns. Online banks such as ING Direct typically offer higher rates than brick-and-mortar banks' savings accounts, she said. The current rate is now about 3 percent. Hopefully Danckert will open that ING account with a $25 bonus referral, which will immediately increase his $700 emergency fund by about 3.5%! I found it interesting that the Money Makeover was prompted by Danckert's desire to own a second condo and spent more on travel. Basically the advisor tells him he really can't afford to do either - yet we don't get his reaction to that news.
Book Mentioned in the article: The Automatic Millionaire: A Powerful One-Step Plan to Live and Finish Rich Labels: Money Stories |
| posted by Boston Gal @ 1:06 PM *
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| 5 Comments: |
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You won't see a more responsible candidate in a makeover profile. However, it's beyond me how someone can sleep at night with virtually nothing in the bank! My guess is he has Mommy and Daddy living nearby in case he trips and skins his knee. (If that is the case, he should punt completely on the savings, and max out his 401k. I knew plenty of people that got a head start that way.)
As for the planner, I would like to ask her: ARE YOU CRAZY??? Using his 401k as a secondary emergency fund? Sure there's a 10% penalty, but it would only be for a 'real emergency'. C'mon! If he's going to split his savings, it should be in a Roth IRA! Sure, it's after-tax money, but he can withdraw his original contribution penalty free, and still have tax-free interest. Shame on her!
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I'm not sure you're being completely fair to the planner. It seems like she's talking about changing the allocation of his 401(k) money to more conservative vehicles to protect the assets (to be used as a secondary emergency fund) while he builds up his primary emergency fund. At least that's how I read it. This seems like sensible advice to me if he doesn't have Mommy and Daddy to fall back on.
If I'm right, she'd argue that this is not an ideal solution, but it beats falling back on credit cards until he can save more in both cash savings and a Roth IRA. Of course, I have long argued that meeting your Roth IRA contribution goal should come before even an emergency fund (if you must choose one or the other) precisely because it can be used as an emergency fund in extremis. (If being used in this way, it should probably be invested relatively conservatively.) The lack of mention of Roth IRAs is a troubling omission in the article.
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I agree that he shouldn't use his 401k as an emergency fund, even a "back up" emergency fund. If he's going to sock the money away, why not somewhere that he can access it when necessary?
@Andrew Stevens - I interpreted the article as saying that he already has his 401k in the high-yield cash account. If that is the case, why bother putting more emergency money into the 401k? Why not put it all into an accessible account where he can reach it in an emergency without paying the penalty? If he loses his job tomorrow, or next month or next year, he's going to have basically the same amount in 2 emergency funds that he would if he put it all into one. The 10% penalty will likely be more than any gain he'd get by putting the money into his 401k (which I guess the planner thinks will earn more than an ING-type account?).
He seems like a pretty responsible guy (they didn't mention credit card or other consumer debt). Is the planner worried he'd use the money for other things if it wasn't harder to get at in the 401k?
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Last time I had an employer 401(k) match was in 2003, shortly before becoming a "victim of the New Economy". Maybe I should find a new job...
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The emergency use of the 401k struck me as a mite bit crazy, too.
I don't think only people who rely on Mom and Dad for bailouts let their savings accounts get that low. With easy credit and the choir singing "tap your equity", a responsible 31 year old might have spent the last few years honestly believing that funding the cash reserve last was a smart way to go.
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You won't see a more responsible candidate in a makeover profile. However, it's beyond me how someone can sleep at night with virtually nothing in the bank! My guess is he has Mommy and Daddy living nearby in case he trips and skins his knee. (If that is the case, he should punt completely on the savings, and max out his 401k. I knew plenty of people that got a head start that way.)
As for the planner, I would like to ask her: ARE YOU CRAZY??? Using his 401k as a secondary emergency fund? Sure there's a 10% penalty, but it would only be for a 'real emergency'. C'mon! If he's going to split his savings, it should be in a Roth IRA! Sure, it's after-tax money, but he can withdraw his original contribution penalty free, and still have tax-free interest. Shame on her!