Beyond Paycheck to Paycheck

at March 31, 2008 in Retirement. 1 Comment

With just over two weeks remaining until April 15, millions of Americans are attempting to come up with as much money as possible to contribute to their IRAs.

You: Why now?

You have until April 15, 2008 to make a 2007 IRA contribution. Yet, like everything else we were supposed to do yesterday, we procrastinate as long as possible: instead of making our IRA contribution months ago, we try to make it right at the deadline. For some people, unfortunately, this time crunch means they won’t be able to make the maximum contribution.

You: How much is that maximum again?

For 2007, you can contribute up to $4,000 to an IRA provided that you have earned at least that much (or, if married, that your spouse has at least $8,000 so you can each contribute $4,000. Also, if you are 50 or older, you can contribute $5,000 for 2007.)

You: Four grand? That’s a good chunk of dough to come up with all at once. No wonder most people can’t come up with it in just two weeks!

Exactly — a textbook example of a legitimate financial cost resulting from procrastination.

You: Not sure I follow you. Four grand is four grand whether you have to come up with it in April 2008 or a year ago. How would not procrastinating help me come up with all that money?

Simple. Twelve months ago you would not have had just two weeks to come up with $4,000; you would have had 12 months. So, rather than needing to save $4,000 all at once, you would only have needed to save $333 a month.

You: Well, for me, that’s still a lot of cash.

Sure it is. But if $333 is a stretch, imagine how $4,000 would feel.

You: Don’t have to imagine. It’s impossible.

Right, but if you can’t get to $333, how close can you get? Perhaps next year, after a raise or reduction of debt, you may be able to afford more (which is a good thing, because the 2008 contribution limit is $5,000 ($6,000 for those 50 and over.)

You: So when is the best time to get started?

Today. You are never further from retirement than you are right now. By saving today, you not only make it easier on yourself by having to come up with less money all at once, but you also increase your benefit of the miracle of compounding interest, as your savings will have even longer to grow.

How do you make your IRA contributions? All at once? Whenever you have extra money? By putting away a set amount each month?

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Friday Q & A: Gearing up for a big transition

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at March 28, 2008 in Q & A and Retirement. 0 Comments

It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question.

Hi. Perhaps you can help me with some specific advice? I’ve been following the standard rules for the past decade:

Get out of debt. Check. Took a while, but it’s done. Whew!

Feed your savings. Check. Well, a little, since I could only recently get started & don’t make too much to spare.

Spend sensibly. Check. Even though I give myself a treat here & there, I’ve stayed away from buying for comfort.

So, what comes next? My circumstances are a bit unusual, so in a nutshell:

I have no dependents to inherit. I’m almost 50, in relatively good health, but starting to feel my years. No real bad habits, no smoking, drinking or gambling, but I like gadgets & a bit of travel once in a while.

Right now I live in expensive New York, but since I could manage with a smaller salary, I’m planning to relocate to a smaller/cheaper city in less than 2 years, even though that will eat up most of my savings. Life will be less stressful, less expensive, & less complicated.

What should be my next focus, before, during & after that relocation?

Many thanks.

–Rosie T.

STRAIGHTFORWARD ANSWER: Your next focus should be to create a savings cushion.

More detailed explanation:

Congratulations on being debt free and for recognizing the need to take additional steps to achieve your financial goals. Your prioritization question is an interesting one. In order to address it, I made a few assumptions, but here goes:

If you’d like to stop working one day, you need to get serious about retirement planning. Said another way, you’ve got to save. Since you’re 50 years old, your anticipated retirement date is less than 20 years away. On the other hand, you probably still have at least ten years to add to your existing nest egg.

Retirement is the ultimate point in time where you need to be living Beyond Paycheck to Paycheck; after all, there wont be any paychecks. Relying exclusively on Social Security may not provide you the lifestyle you want. It usually provides you with the basics, but little else.

Moving away from a very expensive place (like New York) to somewhere cheaper can provide you with an enhanced ability to save. But doing so often means an income sacrifice. You may very well come out ahead as a result of the move, but you will need to be even more disciplined in your spending and saving habits than you were before you left New York. This is especially true given that you expect your move to “eat up most of (the) savings.”

You also asked about what your focus should be during and after your transition. With Total Candor, I can tell you that the during and after won’t be a concern unless you nail the before.

Still, once you have the savings cushion necessary, your subsequent priorities will be to use the right type of vehicles (think IRA’s and workplace retirement plans) and investing your assets appropriately. Keep us posted!

# # #

Anybody else have suggestions for Rosie? Whether you’re a pre-retiree or someone who recently went through a different kind of financial transition, we could benefit from what you have learned from the experience.

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Three ways to know if you have a good tax preparer

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at March 26, 2008 in Tax. 0 Comments

I was chatting with an old friend yesterday and–I swear I am not making this up–we started talking about how to know if you have a good tax preparer.

You: Are all your conversations this pathetic?

During normal business hours?

You: What? Oh, wow.

The topics may seem uninteresting, but a different take on a mundane matter often leads to an intriguing dialogue. Or at least that’s why I think people still pick up the phone when I call.

Here are the top three things good tax preparers do that many others do not:

1. Ask to see your prior year tax returns.

You: Isn’t that, like, cheating?

I do like your healthy skepticism, but in this case, no, it isn’t like cheating. A good tax preparer reviews your previous tax returns to check for any information which could help him lower your tax bill this year. He also should review your return to see if anything was missed last year.

You: Why would that even matter now?

If he finds something significant, you could decide to amend your prior year’s tax return and receive the additional refund you were entitled to.

2. Make suggestions for next year. And for this year.

Upon preparing your tax return, a good tax preparer will notice and share several opportunities for you to improve both your tax and overall financial situation. If you aren’t receiving this kind of feedback, you’re overpaying for tax preparation because you’re effectively only receiving clerical support. Recent tax and financial opportunities we’ve noted and subsequently shared with our individual clients include:

Lowering their 2007 taxes by taking the IRA deduction, allowing them to then use the refund to actually make the contribution
Giving themselves a raise at work by properly adjusting their tax withholdings
Prioritizing their debt repayments
Amending their prior year tax return to take advantage of missed credits

And so on.

3. Ask you a LOT of questions, quickly.

Any halfway decent tax preparer can take the information you provide him, enter it into his software, and print out (or electronically file) your return. Many will even do so mistake-free. But what you really want–where the real opportunity is for a tax preparer to create value above his fee–is for the tax preparer to ask you questions. Some of them may even be somewhat personal.

You: What?

Look, he won’t be prying and he doesn’t need to know (and probably doesn’t want to know) the gory details. But only by asking you a bunch of very quick questions can he possibly ensure you pay the least amount of tax.

Here, we’ve developed the “speed round.” Every client receives a very simple excel workbook via email. Inside are about 50 very easy questions.

You: How easy?

Very easy. They’re all multiple choice and feature the following possible answers:

Yes
No
Not sure

These questions are like a visit to the new doctor, where you complete a form that has a million questions about your health history and (hopefully) you can select no for most of them.

You: Do you make your clients wear that paper gown?

People should wear whatever makes them comfortable but so far I am very pleased that we still have a gown-free client base.

# # #

What about you? Have you filed yet? Did you use a preparer or do it yourself? What worked well? What didn’t?
“personal finance” “financial education”

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Highlights From the World of Personal Finance Blogs

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at March 24, 2008 in Carnivals. 0 Comments

The Carnival of Personal Finance went live this morning featuring my article “Your Problem Isn’t Starbucks.” The carnival features dozens of the best blogger articles in personal finance from last week. As usual, I’ve boiled it down for you:

My favorite article from last week’s carnival is Just Say “NO” To Crap! Cleverly written, the blogger makes it quite clear there are far more upsides to buying less crap than the clear financial benefit. Think environmental and health for starters! It’s a good for a couple of chuckles along the way too. Enjoy.
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Maximizing value when paying more than the minimum

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at March 21, 2008 in Debt management and Q & A. 1 Comment

Based on the strong response, there’s definite interest in adding a Q & A element to this blog. Read more about the new Q & A feature, but the short answer is to email your questions and I’ll answer some of those based on originality, usefulness to other blog readers, and my general mood at the time.

Here we go:

I have student loans. I want them to go away. I have been paying a wee bit more per month than they require: they want $117, I send $125 (for no specific reason). They are never ever ever going to go away at that rate!

My current plan is to save cash in a savings account, then periodically throw a chunk of change at the loan balance.

My question: do I need to declare that the overage be applied to the principal? I have heard that advice before, but to my mind it doesn’t make sense. I don’t trust the companies and am sure they’ll look after their own interests before they consider mine, but if interest is charged monthly, how could extra money be put toward future interest? Is this a fine print thing, or is it an urban myth that we have to tell them how to apply extra funds?

I look forward to the answer!

Beth

STRAIGHTFORWARD ANSWER: Yes, it does matter. Write “apply to principal” on your checks.

More detailed explanation:

Part of every payment you make on any loan goes to interest and the rest to principal. Since the interest charged is the intererst rate multiplied by the principal owed, reducing your principal today reduces the interest you’ll pay tomorrow.

When you pay the minimum, or exactly what is owed based on the payment schedule, everything is remarkably simple. But if you pay $125 when only $117 is due, where does the lender apply the extra eight bucks? To principal? To interest? To an embezzlement slush fund?

When you write “apply to principal,” the lender should take the extra eight dollars and reduce the amount of total debt (the principal) you owe. If they ignore your instruction (or if you fail to provide one), the lender may instead take the $8 and apply it towards your next installment. In this case, it’s as though you prepaid $8 of the $117 due next month.

Some lenders make pre-paying principal far easier than others. But in the lender’s defense, the lenders can’t know your intention without you telling them. Say you mailed in a check for $234 (double the $117 required) on March 31 without a note. While I’d hope that you were doing so to accelerate the rate at which you pay off the debt, the lender could legitimately think you had a great income in March and are a little nervous about April’s expenses and so you wanted to get both your March and April payments out of the way.

Take away any doubt and tell them what you want to do with the extra payment. Then, ask for a payment schedule or other documentation showing that the principal was reduced. Like I said, some companies will make this very easy - others make you dance through hoops. But dancing is good exercise and you should do it.

Paying more than the minimum while ensuring that the excess is applied to principal, is the most efficient combination available to paying down your debt as quickly as possible.

Thanks for the question, Beth.

Who else has done this? Did you write anything on your checks? Did you run into any obstacles? How many years did you knock off your repayment schedule?“personal finance” “financial education”

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Borrowing from Mom and Dad vs. the bank

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at March 20, 2008 in Debt management and Media. 1 Comment

Last week, I had the wonderful opportunity to chat with Shelly Banjo, author of the “Starting Out” Column for The Wall Street Journal. We discussed the intricacies of tax and gift law when borrowing money from your folks at below-market interest rates. I’ll spare you the arcane details and cut to the chase: the law is confusing cumbersome and, like many others, provides plenty of planning opportunities for those willing to take the time to do it properly. If there’s interest, I’ll go into further one day soon.

But the laws turned out not to be the focus of the WSJ article. Instead, Ms. Banjo focussed on some of the larger issues like should you even ask Mom and Dad for the loan and considerations for paying the money back.

It’s a brief but insightful article, so check it out.

Of course, not everyone can choose or does choose to borrow from the ‘rents. Some choose that plastic in their wallet. Also this week I was quoted in CreditCards.com’s report about Tuesday’s lowering of the Federal Funds rate. I explained that this rate cut won’t matter much to the average credit card borrower who isn’t already making paying off his loan balance a top priority.

Thoughts on borrowing from Mom and Dad vs. the bank? Anybody done so? How has it worked so far? Did it change the relationship? For better or worse?“personal finance” “financial education”

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Your problem isn’t Starbucks

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at March 19, 2008 in Cash Flow. 5 Comments

Financially speaking, we’re a country of idiots. Despite spending billions educating our children, we fail to provide some of the most important and basic of life’s lessons. For me, money, nutrition, and relationships are the most critical but neglected topics. Unfortunately, I have no credibility to write about the last two—my love affair with homemade chocolate chip cookies notwithstanding.

# # #

Your problem isn’t Starbucks.

Many financial experts feel that the problems of the world (and especially of young people) would instantly disappear if we could only get rid of our coffee shops.

Look, if you’re going to Starbucks five times a day, spending $100+ a week there, you’ve got problems. But your money problem isn’t the first one to address. Of course, most people don’t use Starbucks that way, and so what the financial talking heads miss is that nobody—not even the most coffee-addicted person you know—is going to find ten grand a year by pinching pennies at Starbucks.

Instead, you’ve got to put major focus on major expenses, like your housing and car choices. The typical underpaid twenty-something simply can’t live on the same block as the manager two levels up from her or drive the car her boss drives. Not yet. When you commit to high housing or car expenses, you pay them for a long time. Therefore, that’s where you want to put most of your financial energy and discipline. Remember: just because someone will sell you something doesn’t mean you can afford it.

Still, day-to-day spending can make a difference, so it’s important to stay emotionally connected to your money. Most people have no idea how much cash they have in their wallets until they find themselves at a place that has the audacity not to accept credit cards. This disconnection matters because when you’re emotionally separated from your money, you spend more. Spending cash hurts—right away. Using credit cards is painless—until you get the bill.

Leave your credit cards at home for a few days, use cash, and see how your spending habits change. They will. When you see two options for something you need, one at $55 which is “good enough” and another at $89 that is “better,” spending cash means you’ll likely take the one for $55. Handing over three twenties to the cashier feels a lot better than saying goodbye to five of them.

By prioritizing what really matters to you, constant budgeting isn’t required. The beauty of following the saving strategies is that you save so much you don’t need to micromanage your finances. Budgeting can limit your desire for spontaneity, making it hard to keep at it. But you can get away without budgeting entirely if you simply commit to saving. After all, if you’re putting away 15 percent of your income, what’s the difference how you spend the other 85 percent?

Most of all, relax.

Don’t worry about retirement. Yes, I said that. You’ve got all the time in the world. It’s only if you haven’t done anything about your retirement and are now a fortysomething that you should begin to be worried.

The key for twentysomethings is to just start. By saving for retirement while in your twenties, you eliminate the key source of worry later on: the cost of procrastinating throughout your youth. Thanks to the miracle of compounding interest (your money earning money), the amount you have to save when you are young is quite minimal compared to what you’d have to save if you wait just a few years.

Don’t worry about it, just do it.

The key is not to begin cutting all of your discretionary spending. Instead, you need to find a way to spend on the items you value the most. If it’s coffee, pull up a chair and enjoy. But if it’s not, simply keep walking.

Personal finance isn’t that hard. Your day job is much more complicated. But you were taught how to do your day job. Managing money only takes a little effort, some patience, and an occasional bit of willpower. Today, you can choose to make a big difference in your financial future. Why wait?

"financial education"

More great sources for personal finance info

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at March 18, 2008 in Carnivals. 1 Comment

On the theory that most people won’t create customized news pages for themselves, Alltop aggregates the top blogs and news services in several categories. Beyond Paycheck to Paycheck was recently selected as one of their key sources for personal finance information. Check out the Alltop personal finance site. Now, you won’t need to visit to a zillion blogs (except this one, of course), just go to Alltop and find the headlines which are most relevant to your needs.

In addition, it’s the beginning of the week, so it’s time to link to the personal finance carnival where Beyond Paycheck to Paycheck was once again featured. Finally, I’ll share one of my favorite posts of the last week:

A popular money debate — and one about which you can have many reasonable people disagree — is the use of 0% credit cards. Since nobody, even (okay, especially) a bank is going to give you something for nothing . . . yes, of course there is a catch! But it doesn’t mean signing up for a 0% card is a bad thing, particularly if you’re already paying high-interest credit card debt. Dough Roller’s post 0% Balance Transfer Credit Cards: The 10 Commandments of Responsible Borrowing is a great summary of what you should be thinking about before you fill out that application.

Happy reading!

"financial education"

Q & A Arrives!

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at March 17, 2008 in Q & A. 1 Comment

You’ve got complicated questions? We’ve got straightforward answers.

Effective immediately, we’ve created a new email address for you to send your questions: questions@totalcandor.com

Since the reason we gather here is to learn about money, try to keep your questions related to one of the following topics:

Saving Strategies (How do I?)
Debt Management (Credit cards, mortgages, credit scores, etc.)
Investing (stocks, mutual funds, bonds, dollar cost averaging)
Retirement Planning (IRAs, Roths, 401(k), annuities)
Taxes (Federal, State, income, payroll)
Estate Planning (wills, trusts)

You an choose to go “off the board” and ask about the Red Sox or Michigan football, but you may be disappointed with the response (especially if you like Notre Dame).

The frequency of this new feature and how many questions are answered each time will depend on how many questions are asked, so stay tuned. I’m sure this will change as it gains popularity. In the meantime, take advantage of the fact that there aren’t a zillion people here right now.

Remember, you can learn a lot from someone else’s questions. It’s a lot cheaper than learning from your mistakes, too.
“personal finance” “financial education”

"financial education"

Will the fiscal stimulus actually stimulate?

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at March 14, 2008 in Cash Flow, Media and Tax. 0 Comments

In about two months, millions of Americans will receive a check from Uncle Sam.

You: How much will I get?

That’s a subject for a future post.

You: Should I save it or spend it?

That depends on your overall financial situation. But more than likely, your check represents a rare opportunity to increase your savings or decrease your debt without the normal pain of cutting back on spending elsewhere. After all, this is “found” money for you.

You: How much will my decision affect the overall economy?

What? Why are you asking that?

You: I don’t rally know. Why would I care?

You don’t. In fact, few Americans ask that question and I have no problem with that. A recent study sponsored by creditcards.com found that about half of Americans do not plan to spend their rebates. Those folks won’t be stimulating the economy either.

Talking with the media is a lot of fun, especially once you get comfortable with the whole process. I’ve talked to Jeremy Simon at creditcards.com many times over the past year, so talking to him is really no different than talking to you; it’s just a conversation. I shared with him my frank opinions on the whole individual’s interests vs. best interests of the national economy dilemma in his new article.

Don’t get me wrong–I love the United States. There’s no better place in the world. But I’m not going to spend more just to prove my patriotism.