When we come into money very fast we tend to spend it much faster then if it was in our wages. Right now being tax refunds for some of us. This needs to be reconsidered. First off we need to make sure that we can live our daily life's. Then we need to make sure our retirement fund is funded. We don't need that new TV or iPad. When it comes to a tax refund. Our wages were over withheld. We should have had that money in the first place.
When we win big gambling. Did we really win big? I mean that in a sense of over the long haul are we up big gambling? Is this going to fund our next gambling trip? I suggest tracking your gambling winning and losses. Don't estimate what you've done in the past. Start today as you're at zero. Start an excel worksheet.
Inheritance is a hard thing to go over. When ever people talk about inheriting items they always seem to talk gross. There are a lot of expenses involved in inheriting money. Let say you inherit a house, cash, and or items worth $10,000. Don't go out and spend it all. Whether it be a car or a motor home. Look at your finances first. Maybe the hourse cost $150,000 split in 1/3. Your not going to walk away with $50,000. When you go out and buy $50,000 vehicle because of this inheritance you're going to be tapping into other money leaving you worse then you were.
After some windfalls a lot of people end up spending more then what they received. Maybe you won $75 and end up spending $150 celebrating. If you want to celebrate take the money in cash for how much you won. The conventional wisdom is to save 97% of the windfall. If you're going to spend more then that make sure you hold it in cash. If it's a lot of money make sure you have 3 months of savings available before you spend it. It doesn't all need to go to three months of savings, but you should at least partially fund it. If you're behind in your retirement put the money there.
Finally receiving payment from someone is not a windfall. I have made the decision to loan out money to my parents before. Not something I plan to do again. At least not to the people that I did. When I finally did receive some of it. It kind of did feel like a windfall. It's not though. That money was hard earned. Payment for working extra can fund that item that you want though. If you pick up an extra part time gig to buy something then spoil yourself.
Make a plan to what you're going to do with your large one time income. I've made the mistake of saying in my head well I won at the casino this is fine. It turns into rough estimates and telling myself I can spend $50 multiple times for winning $50 one time.
Sunday, April 21, 2013
Saturday, April 13, 2013
Tax Season
Well with tax season just about ending. I've seen several different situations from young to old, form owing a lot to receiving a big refund. I want to go over the odd situations that just don't make sense to some people. Now I think the goal is to always try to get as close to zero as possible. I always want to say a lot of people get frustrated when their told that they owe money. People seem to be so shocked. Once you've seen your tax return final number adjust it on your W-4. You can add additional withholding. You can also adjust your deductions. Maybe you want to claim an additional deduction to lower your refund or maybe you want to take away a deduction to withhold more tax.
One Lower One Higher
Employers look at peoples withholding individually. They look at your income and your W-4 and withhold based on that. When there is such a discrepancy in income that people are in different tax brackets is the lower income person is under withheld, because he's being withheld what tax bracket he would be in not their combined income tax bracket. Can you file married filing separately, yes. Actually usually married filing joint is better in these situations. It's really going to be based on how many itemized deductions you have. Lets say one person is retired and one person is still working. The working person makes more then the retired person. They are likely to owe. I would have then withhold more. It really doesn't matter who.
One High One None
Maybe it's a stay at home dad. Lets say one person is working and one person is in school. I would have the worker claim an additional withholding, because when they go to file it's almost like having a dependent. Now additionally when you have income from another source that is rather small. If you receive a one time check your likely not to get anything withheld. Which in their case would lower their income, because nothing is being withheld. I would say that's a good thing though.
It's not a bad thing to owe just as long as you can pay it. A lot of people struggle saving. Maybe you don't want to save by adding to your retirement. Maybe you want to get to the money soon. A good way of doing that is adding $50, $100, or more to additional withholding on your W-4. You'll receive it in a refund. Now if you don't have a problem saving and would rather put your money in the market or bank and make a little something. Try to lower your refund number. If you can pay there's nothing wrong with owing. Now personally I've found that the people that have owed a decent size amount. It is very stressful.
One Lower One Higher
Employers look at peoples withholding individually. They look at your income and your W-4 and withhold based on that. When there is such a discrepancy in income that people are in different tax brackets is the lower income person is under withheld, because he's being withheld what tax bracket he would be in not their combined income tax bracket. Can you file married filing separately, yes. Actually usually married filing joint is better in these situations. It's really going to be based on how many itemized deductions you have. Lets say one person is retired and one person is still working. The working person makes more then the retired person. They are likely to owe. I would have then withhold more. It really doesn't matter who.
One High One None
Maybe it's a stay at home dad. Lets say one person is working and one person is in school. I would have the worker claim an additional withholding, because when they go to file it's almost like having a dependent. Now additionally when you have income from another source that is rather small. If you receive a one time check your likely not to get anything withheld. Which in their case would lower their income, because nothing is being withheld. I would say that's a good thing though.
It's not a bad thing to owe just as long as you can pay it. A lot of people struggle saving. Maybe you don't want to save by adding to your retirement. Maybe you want to get to the money soon. A good way of doing that is adding $50, $100, or more to additional withholding on your W-4. You'll receive it in a refund. Now if you don't have a problem saving and would rather put your money in the market or bank and make a little something. Try to lower your refund number. If you can pay there's nothing wrong with owing. Now personally I've found that the people that have owed a decent size amount. It is very stressful.
Sunday, April 7, 2013
Rent vs. Buy
I really know absolutely nothing about housing market. There's a lot of math involved. Surprisingly buying is not as much of a no brain as I thought it was. Your home really does need to appreciate. In today's day in age when the market has bottomed out the only way is up. The market is definitely turning around and some people would say in a lot of areas it has turned around. I thought I'd give out this link. This link is absolutely great. It takes everything that I can think of into consideration. I just thought it probably doesn't include maintenance but it does. Every housing market is different. Everyone is in a different situation. This decision is different for everyone.
http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=1&
http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=1&
Saturday, March 9, 2013
Saving Money on a Trip
When planning a trip timing is everything. I wish more times I could take impulse vacations, but it's not in my DNA. Every March we take a trip to an NCAA basketball tournament site. This year we're going to Jerry's palace down in Dallas. First of all know what you can afford before any decision is made. Don't put yourself in a tough situation financially. Approximate what everything is going to cost you.
Transportation
It depends on how many people are going. It also depends on preference. If you're comfortable enough with the distance you're traveling take cheap public transportation. I am not a big bus guy. I like having my car available to me and not paying for cabs. Next drive when you can. For the most part one person can drive cheaper then he can fly. Always look at flights though. I live by a small airport making it difficult to find cheap flights. With four of us traveling from Iowas to Dallas it's a lot cheaper for us to drive. Plus we have 4 drivers. Personally I am a fan of driving. You have to get to the airport early, you're limited to their times, who knows about layovers, and you're without a car when you get to your destination. With technology airfarewatchdog and kayak are great sites. Here's the thing though sometimes there are cheaper flights in different cities due to different competition. If you're planning an international flight it's important to try and find a city with cheaper flights as airlines won't make these connections for you. DC is a great place to fly out of for select places. DC has some good competition though for international flights. Key to traveling though is to constantly scour. Airfarewatchdog is a great alert website that will send you alerts. Kayak will really get you the best results.
Hotel
Once you've figured out your flight dates look at hotels right away. One google search goes a long ways. Hotel.com is a good website. For certain destination sights all inclusive hotels can be the way to go. Know yourself. For me on certain destinations I need to go with all inclusive so I am enjoying my trip without being a penny pincher. Always estimate and compare though. If you estimate safely that all inclusive won't be cheaper, you can control yourself, and have fun go that way. Pretty simple figure out what each meal is costing you going all inclusive and figure out what each meal would actually cost you. Always do your research. Find a place and price your comfortable with on an alternative website and go to their homepage and compare sites. This has only made a difference for me once, but it did for our trip to Dallas. Our requirements are that we want a pool a good place to watch basketball. We need a good continental breakfast as well. The last few years we've gotten lucky with non franchise hotels. I prefer to really go decently cheap on the hotel. If we can save money on parking and transportation to location it makes sense to pay more. If you need a nice hotel and you are staying at a franchise make sure to get reward points. The higher end hotels it isn't cost efficient to up based on the fact you're getting "reward points." Which is just a way of saying you have store credit. Which means you have to pay that higher price to use the points. You're really just sleeping at the hotel for the most part. Get enough that you're comfortable in. There's no need to splurge.
Meals
Meals are where budgets get busted. Make sure you budget correctly to know what you can afford. If you want to eat out and enjoy the culture budget for more high end prices. If you want to do things cheap go to the grocery store. Really the best way to do it is a mixture of both. Still enjoy the town go out for dinners maybe every other days on a long vacation. On a short vacation maybe you eat dinners every night, but lunches are from groceries.
Enjoy your trip. Know what you can spend and be financially fit when you return. Make a budget you know you won't overspend. When you go down most of the big costs have probably already been incurred. Have fun and enjoy the trip.
Meals
Meals are where budgets get busted. Make sure you budget correctly to know what you can afford. If you want to eat out and enjoy the culture budget for more high end prices. If you want to do things cheap go to the grocery store. Really the best way to do it is a mixture of both. Still enjoy the town go out for dinners maybe every other days on a long vacation. On a short vacation maybe you eat dinners every night, but lunches are from groceries.
Enjoy your trip. Know what you can spend and be financially fit when you return. Make a budget you know you won't overspend. When you go down most of the big costs have probably already been incurred. Have fun and enjoy the trip.
Saturday, February 23, 2013
Roth vs 401k
I can set forth the information for you. You need to project where you at and where you will be. When there is an employer match no if ands or buts, take it.
Roth
A roth is all post tax contributions. Meaning your money will be taxed in the year you earned it and then invested. Now the tax benefit is that when you withdraw the money in retirement at least 59 1/2. If you make over $110,000 you cannot contribute the full $5,000 amount for a single filer and $173,000 for joint filers.
When should you contribute to a Roth IRA? We can make this pretty simple. If your younger and expect to move up tax brackets it makes sense to pay the tax now and take advantage of the tax fee withdrawals. Now I should warn you. The government can change what they want when they want. There would obviously be a big uproar for changing this though. What I personally love about a Roth is that it eliminates double taxation. Double taxation is the fact that the corporation pays tax on the income and the shareholder pays tax on dividends received. Meaning that all dividends received are tax liability to the corporation and the shareholder. Taxing the same money twice. Everyone agrees that this is an issue, but nobody can make a fair point to not tax one over the other. Keep in mind the government would have to find income another way also.
If you're 20-30 and plan to move up the corporate latter you should definitely be thinking about contributing as much as you can to your Roth. 30-40 age group I think it's important to stay diverse and take advantage of tax advantages. You should put in partially of what you can contribute. Age group 40-45 this probably needs to be an afterthought but I would contribute some to it if you can. I wouldn't max out my 401k and then go to my roth yet in this age group.
401k or 403b
Lets just use the term 401k in joint with 403b becasue they are basically the same thing. The real difference is for the employer. 401ks are more common. You can contribute up to $17,500 currently and withdraw with no penalties at 59 1/2.
401k is basically the opposite of a Roth. It is a tax deferred account. Meaning you don't pay tax till you withdraw. Where is the benefit? When your retired and you're only money is coming from your retirement plan and maybe you're making minimum wage sitting on a golf cart hopefully. Your income should be significant less then just before you retire. Meaning you are moving the money from being taxed at a higher tax bracket to a lower tax bracket. It will also delay your tax liability. If I'm in a 25% tax bracket and put in $4,000 that is $1,000 that I didn't have to pay this year.
401k is a tax sheltered aimed to move your money to a lower tax bracket when your retired. It makes the most sense to contribute most you can when your in your highest tax bracket probably later in your career. 50-60 age group you should consider trying to max out your 401k first then moving to your roth. Then basically the opposite as above against the Roth.
You should be contributing what you can to your Roth and/or 401k. Later in your career about to retire flood to your 401k and then your roth if you can. Early in your career try max out your roth, but always meet your employers maximum match first.
Roth
A roth is all post tax contributions. Meaning your money will be taxed in the year you earned it and then invested. Now the tax benefit is that when you withdraw the money in retirement at least 59 1/2. If you make over $110,000 you cannot contribute the full $5,000 amount for a single filer and $173,000 for joint filers.
When should you contribute to a Roth IRA? We can make this pretty simple. If your younger and expect to move up tax brackets it makes sense to pay the tax now and take advantage of the tax fee withdrawals. Now I should warn you. The government can change what they want when they want. There would obviously be a big uproar for changing this though. What I personally love about a Roth is that it eliminates double taxation. Double taxation is the fact that the corporation pays tax on the income and the shareholder pays tax on dividends received. Meaning that all dividends received are tax liability to the corporation and the shareholder. Taxing the same money twice. Everyone agrees that this is an issue, but nobody can make a fair point to not tax one over the other. Keep in mind the government would have to find income another way also.
If you're 20-30 and plan to move up the corporate latter you should definitely be thinking about contributing as much as you can to your Roth. 30-40 age group I think it's important to stay diverse and take advantage of tax advantages. You should put in partially of what you can contribute. Age group 40-45 this probably needs to be an afterthought but I would contribute some to it if you can. I wouldn't max out my 401k and then go to my roth yet in this age group.
401k or 403b
Lets just use the term 401k in joint with 403b becasue they are basically the same thing. The real difference is for the employer. 401ks are more common. You can contribute up to $17,500 currently and withdraw with no penalties at 59 1/2.
401k is basically the opposite of a Roth. It is a tax deferred account. Meaning you don't pay tax till you withdraw. Where is the benefit? When your retired and you're only money is coming from your retirement plan and maybe you're making minimum wage sitting on a golf cart hopefully. Your income should be significant less then just before you retire. Meaning you are moving the money from being taxed at a higher tax bracket to a lower tax bracket. It will also delay your tax liability. If I'm in a 25% tax bracket and put in $4,000 that is $1,000 that I didn't have to pay this year.
401k is a tax sheltered aimed to move your money to a lower tax bracket when your retired. It makes the most sense to contribute most you can when your in your highest tax bracket probably later in your career. 50-60 age group you should consider trying to max out your 401k first then moving to your roth. Then basically the opposite as above against the Roth.
You should be contributing what you can to your Roth and/or 401k. Later in your career about to retire flood to your 401k and then your roth if you can. Early in your career try max out your roth, but always meet your employers maximum match first.
Saturday, February 16, 2013
Free Money Keep Up or Lose Out
I want to talk about investing and employer sponsored plans.
For those of you who are self employed I can not say this enough. Yes, you need capital. The second that you need to start investing to an IRA immediately when you have any kind of steady flow of income.
For those of you that are employed I can't stress enough that you need to immediately enter your employer sponsor retirement plan at least up to the minimum they'll match. I don't care if your employer doesn't match for a year. I hear it over and over that people wait to opt into their employer sponsored retirement plan. For the sake of this post I'm going to refer to the employer sponsor retirement plan as a 401k which for most of you is. Do really stress this I tell people that is free money, take it. Now personally I don't think it's free money. When I calculate cost as an employer I consider that part of the cost when hiring someone.
Quite honestly it's a bonehead mood not to meet the minimum to get the match. It's part of your pay in my opinion. Why not take all your pay? I once had a friend tell me it's not necessarily free because the markets are volatile and you could lose it. I understand his thinking, but he's oh so wrong. First of all if I buy 5 shares at $10 a share. It goes down to $5/share, yes, the most important thing value has gone down. I haven't lost my 5 shares though. Now I'll touch on this a little bit more later why that really makes a difference. I've also heard that I can't afford. Now there might be some people that can't afford it. If you have a job you can and if you absolutely need to get to the money you can. Don't unless it's a necessity and I hear people tapping into their 401k for a down payment on a house which is a huge mistake. Just lost out on that tax advantage, growth, and the power of annuity. 4-5% isn't a killer. Over 17.8% of my income goes straight to my retirement. Trust me I don't make much money, but I love my job.
If your employer sponsors 50% up to like 4% of your contribution after a year of employment. Put in at minimum that 4%. Don't leave that 2% on the table. Whether you don't plan to even vest. First of don't take that chance of leaving it on the table and I'll tell you why you need to invest and invest early.
The power of annuity is your best friend. Annuity is why investing early makes the difference it does. There's an old saying that if you put away just 1¢ just one penny and it doubles everyday you will have $10,737,418.24 in 30 days. Now that is making 100% on your money put it puts a big principal point to mind. The money we're talking about making is 6-10%. Yes, there might be years you make 18% and you might lose 15%. In the end you should average around that 8%. Back to that 10 million number. Once that principal gets large and you gain 8% it's higher when the principal amount is higher. It's really hard to drive that home.
What about those losses though? Back to why that question about if you lose it it's not really free money. There is one concept that is hard to understand. I'm an example person.We all hear buy low sell high. When our investment goes down and especially ones we are constantly contributing to like your 401k you're more with the same amount of money. Lets get to the numbers.
Lets deposit $50 per deposit and here is the change per deposit comparison for a steady growth between something that steadily grows and something that goes down and starts at what it began at.
Up and Down Steady growth
Shares Cost/share Shares Cost/share
10 $5 10 5
13 $3.846 9.5 5.263
15 $3.333 9 5.555
17 $2.941 8.5 5.882
20 $2.5 8 6.25
20 $2.5 7.5 6.666
17 $2.941 7 7.142
15 $3.33 6.5 7.692
13 $3.846 6 8.333
10 $5 5.5 9.09
The value of up and down is at $750 and the value at steady is $704.54. On a graph the up and down would be like smile the start and the end would be the same point with a dip. Now the steady growth is just a straight diagonal.
Still not convinced? Real live exact numbers. Lets say hypothetically we make 8% every year. Person A invests at the age of 20 for 10 years and stops. B doesn't start to invests till 30. Each investor invests $5,000 a year. Difference being investor A invests from 20-29 putting in a total of $50,000 and then not contributing anything anymore and B won't start till 30.
Age A B
| 20 | 5,000.00 | |||
| 21 | 10,800.00 | |||
| 22 | 17,064.00 | |||
| 23 | 23,829.12 | |||
| 24 | 31,135.45 | |||
| 25 | 39,026.29 | |||
| 26 | 47,548.39 | |||
| 27 | 56,752.26 | |||
| 28 | 66,692.44 | |||
| 29 | 77,427.84 | |||
| 30 | 83,622.06 | 5,000.00 | ||
| 31 | 90,311.83 | 10,800.00 | ||
| 32 | 97,536.77 | 17,064.00 | ||
| 33 | 105,339.72 | 23,829.12 | ||
| 34 | 113,766.89 | 31,135.45 | ||
| 35 | 122,868.24 | 39,026.29 | ||
| 36 | 132,697.70 | 47,548.39 | ||
| 37 | 143,313.52 | 56,752.26 | ||
| 38 | 154,778.60 | 66,692.44 | ||
| 39 | 167,160.89 | 77,427.84 | ||
| 40 | 180,533.76 | 89,022.06 | ||
| 41 | 194,976.46 | 101,543.83 | ||
| 42 | 210,574.58 | 115,067.33 | ||
| 43 | 227,420.54 | 129,672.72 | ||
| 44 | 245,614.19 | 145,446.54 | ||
| 45 | 265,263.32 | 162,482.26 | ||
| 46 | 286,484.39 | 180,880.84 | ||
| 47 | 309,403.14 | 200,751.31 | ||
| 48 | 334,155.39 | 222,211.41 | ||
| 49 | 360,887.82 | 245,388.33 | ||
| 50 | 389,758.85 | 270,419.39 | ||
| 51 | 420,939.56 | 297,452.94 | ||
| 52 | 454,614.72 | 326,649.18 | ||
| 53 | 490,983.90 | 358,181.11 | ||
| 54 | 530,262.61 | 392,235.60 | ||
| 55 | 572,683.62 | 429,014.45 | ||
| 56 | 618,498.31 | 468,735.61 | ||
| 57 | 667,978.17 | 511,634.46 | ||
| 58 | 721,416.43 | 557,965.21 | ||
| 59 | 779,129.74 | 608,002.43 | ||
| 60 | 841,460.12 | 662,042.62 | ||
| 61 | 908,776.93 | 720,406.03 | ||
| 62 | 981,479.09 | 783,438.52 | ||
| 63 | 1,059,997.41 | 851,513.60 | ||
| 64 | 1,144,797.21 | 925,034.69 | ||
| 65 | 1,236,380.98 | 1,004,437.46 |
So what? A put in $50,000 and is still has $231,943.52 more then B. B has put in $180,000. Really think about it, it's a $361,943.52 difference. So when will B catch A? Honestly never with these variables. This is why investing early and keeping it in there is important. It doesn't even matter if you understand the power of annuity. Just put your money away. A dollar today doesn't buy the same thing tomorrow. Your money decreases in value 3% on average every year. If you don't make 3% you lost money. Look at gas. I've heard back in the day how it was 10¢ a gallon. I think here today ethanol is like $3.55/gallon. Everyone can see pop and candy prices go up. I remember getting a soda out of the vending machine for 75¢. I remember the change to $1 and now it's at least $1.25 they might be up to $1.75 in some places I believe. I remember when candy was only a 50¢. Might get something for $1.
The one last thing that I wanted to touch on again is dividends which is another power of annuity. When dividends are paid out and then reinvested you just gained a larger part of the pot. It adds to that principal amount. The larger the principal grows when there is growth and you'll also receive a higher percentage of dividends next time. It increases like the principal amount.The power of annuity.
About Financial Foes
To me times I hear so many mistakes and misunderstandings. Everyone's finances are different. I can be generic and very few times that is advice for almost everyone. To really help people out you need specifics. Please email me questions you have. I plan to cover finance mistakes I hear about and answer your questions.
Subscribe to:
Posts (Atom)