Betty Smith’s novel A Tree Grows in Brooklyn is the coming of age story of Irish-American Francie Nolan set in Brooklyn in the early 20th century. The book is wonderful, and has lots of details about how Francie’s mother deals with money.
The Nolan family is poor, and when there is not enough food, Francie’s mother tells the children that they are explorers at the North Pole and they have to ration their food. It is very sad when Francie is old enough to realize the “game” is not much of a game.
When Francie is born, her maternal grandmother tells her mother, Katie, to start saving money to buy a piece of land. By saving 5¢ a day in a tin can, it will take about three years to save $50. They talk about ways to save the 5¢: bargain for groceries, burn less coal, and turn the lamp off.
Katie’s mother saves up $50 and thinks that she buys a piece of land. Since she cannot read, though, she does not realize she is given a fake land deed. She saves up again, and her husband spends the money on chickens, which are all either killed or stolen.
Katie saves up as much as she can, in part by asking her children for pennies they get from selling junk. Katie makes withdrawals a few times (to cover medical and transportation expenses), but always requires the amount be repaid with interest. At one point, the bank is emptied to cover moving expenses, and Katie starts saving again.
Eventually, Katie buys a piece of land with the money, but under sad circumstances. I will not say more than that because I do not want to give away the plot.
The Bureau of Labor Statistics provides a CPI infation calculator. CPI is the consumer price index, which represents prices of goods and services purchased by urban households. The CPI has been calculated since 1913, so the calculator only goes back that far. These would be Katie’s savings goals today:
- 5¢ in 1913 is $1.11 in 2008 dollars — a reasonable amount to save on a daily basis.
- $50 in 1913 is $1,110.93 in 2008 dollars — not nearly enough to buy land anywhere near Brooklyn
I highly recommend this book. It is a great piece of literature with insight into the struggles of a family trying to make ends meet.
There are two kinds of employer sponsored defined contribution retirement accounts: the Roth and traditional 401(k). These two options are analogous to the Roth and Traditional IRA accounts:
- With a Roth 401(k), taxes are paid on the contribution, and withdrawals in retirement are tax free.
- With a traditional 401(k), contributions are not taxed, but withdrawals in retirement are.
In Money Magazine, Walter Updegrave compares the two types of accounts:
Investing $11,625 in after-tax dollars in the Roth 401(k) is the equivalent of making the maximum $15,500 contribution of pre-tax dollars into a regular IRA. But you’re not limited to contributing $11,625 in after-tax dollars to the Roth.
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Which means that as long as the dollar amount you can contribute to a regular 401(k) and a Roth 401(k) are the same, the Roth 401(k) effectively gives you the chance to sock away more money on a tax-advantaged basis for retirement, assuming you’re willing to part with the extra bucks. [emphasis added]
At my new job, I have the option of opening a retirement account of either type. Last summer I worked out my budget assuming that I would open a traditional IRA (because I did not know the Roth was an option). The immediate benefit of the traditional 401(k) is the tax savings, leaving more money in my pocket each month.
But since a Roth 401(k) is available and it allows me to ultimately save more money for retirement, I am going with a Roth. That makes my take home pay a bit smaller, but in the long run I will appreciate having more money in retirement.
After I gave copies of On My Own Two Feet to some of my cousins, my extended family had a conversation about money and finances.
On one side of my extended family, all of the women out of college (except me) are either contributing to or receiving income from a teacher retirement fund. All of the women (except me) either are currently working in education or worked in education in the past. I was very surprised to realize this, but maybe it should not be too surprising in a family that is overall highly educated and that has houses full of books.
Good teachers and educators are never paid what they are worth and frequently spend money out of their own pockets to provide for their students. While I think teacher salaries should be much hire (1.5x or 2x what they are currently), I am glad to know that teachers are supported in retirement.
Teacher retirement plans vary by state and by education level. Calculating expected benefits can be complicated, and the easiest way to get information is to visit your HR department. I spent some time reviewing benefits from the Teacher Retirement System of Texas, and it took a significant amount of time to wade through the information and determine what was applicable to my mom. Some information about health insurance in retirement was not available online, but a friendly customer service agent was able to answer all of our questions.
If you are a teacher or are considering teaching, I recommend that you look through the retirement papers as soon as you start working (even if retirement is 30+ years away). In Arkansas, for example, retirement benefits can vary drastically based on a contribution choice made at the initial hiring.
A reader wrote in requesting information about Roth IRAs. If you would like to read about something, let me know in the comments or on the contact form.
An Individual Retirement Account is an account that you set up on your own (as opposed to through your employer), and you are the only owner of it (as opposed to a joint account with a spouse).
Some decisions to make:
- Should I open an IRA or invest the money in a taxable account?
- Where to invest?
- Roth or Traditional?
- How much to invest?
- How will I invest the money?
Advantages of an IRA over a taxable account:
- The money is “off limits.” There is an extra 10% penalty to withdraw the money for a non-qualified reason (i.e., a vacation). It is like your mom holding your allowance to help you save up for a new bicycle, but in this case the bicycle is retirement.
- The money grows tax free. You do not have to pay taxes on stock dividends or bond interest.
Where to invest? Most of the large investment firms are fine choices, especially Fidelity and Vanguard. My favorite firm is Vanguard; the fees are very low. If you are a member of USAA, it might make sense to invest there, keeping all of your accounts in one place. For buying and selling individual stocks, I use E*Ttrade.
How much to invest? The government sets limits for the maximum amount that can be invested in an IRA. In 2008, the maximum amount is $5,000 for individuals age 49 and under and $6,000 for individuals age 50 and over. Individuals with high incomes may not be able to contribute.
Invest as much as you can while still covering your expenses. It can be pretty disappointing to contribute $1,000 to an IRA only to discover that the minimum contribution for all of the funds is $3,000. Just keep contributing until you reach the minimum amount needed.
Roth IRA vs. Traditional IRA. With a Roth IRA your contribution is taxed the year it is contributed, but earnings are not taxed upon withdrawal. With a Traditional IRA, you can deduct the contribution on your income taxes, but when you take a withdrawal, it is taxed as income.
Which is better - Roth or Traditional? The short answer is that if you are young and satisfy the Roth income limits, you are better off putting the money in a Roth IRA than a Traditional IRA. The long answer depends on what you believe will be the income and capital gains tax rates when you retire.
What to buy? The easiest thing to do is buy low-cost index funds and mutual funds. One great option is a Target Date fund (or Life Cycle fund, each investment company calls it something slightly different). Figure out when you want to retire (for me, it’s 2045), and buy shares in a fund with that date. The fund automatically rebalances (changes the ratio of stocks/bonds/cash, to be in line with that retirement date).
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If you still want to know more, here is a brief history of the IRA.
Individual Retirement Accounts were introduced in 1974 by the Employee Retirement Income Security Act (ERISA), and individuals could not contribute if they had an employer-sponsored retirement plan.
Roth IRAs were introduced recently in the Taxpayer Relief Act of 1997.
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More info on IRAs
Which IRA is best for me? (Vangurad.com
If you want the best rate on your savings, bankrate.com tells you the current banks that pay the highest interest rates. Since the listing changes daily, to constantly get the highest rates, you have to transfer your money between banks regularly.
Some people “chase rates” by switching money between any number of savings accounts in order to always get the highest yield. I definitely want my savings earning interest, but I do not want to deal with the hassle of constantly switching between banks. That is why I use ING Direct for my savings (and also my checking account, but that’s another story). ING typically does not offer the highest savings rate, but it is consistently near the top. I have not had a single problem since opening an account (in 2005).
First of all, Why do interest rates change?
- The Fed changes the discount rate (which is what a bank pays to borrow cash overnight from the Federal Reserve). Your bank’s rates could go up or down and will usually be in the same direction the Fed’s change.
Why the Fed changes the discount rate is a very complicated question. Generally, the Fed changes the rate to influence the economy, by spurring it on in a recession or taming inflation in times of growth. - The bank wants new customers. Rates typically go down.
- The bank wants to make more money. Rates could go down or stay the same.
My reasons for not chasing rates essentially come down to simplicity (or you could call it laziness).
- It takes my time to check the current rates, open a new account, and transfer money.
- The potential gain is small. Let’s say by constantly switching to the highest yielding bank you can stay 0.5% above ING’s rate. Annually, this gives you an extra $5 per $1,000 invested.
- This results in extra paperwork when filing taxes. Each bank account that yields more than $10 in interest will send you a 1099, and that income needs to be included in your taxes (either entering another form in Turbo Tax or attaching another 1099 if you submit by paper)
I recommend checking your rates about once a year and comparing them to the national averages and the highest paid rates. If you are earning near the top and are otherwise happy with the bank, keep your money where it is.
When do you switch banks for a higher interest rate?
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