Beyond Paycheck to Paycheck

at May 30, 2008 in Q & A, Retirement and Tax. 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.

I saw something on the news yesterday about a credit for saving for retirement. I thought you could only get a deduction for an IRA or 401(k) contribution. How do I take maximum advantage of the tax law when saving for retirement?

–John B., El Segundo, California

STRAIGHTFORWARD ANSWER:

If you qualify, the credit for retirement plan contributions is a huge opportunity.

More detailed explanation:

First, a review of the differences between a tax deduction and a tax credit: When an expense is deductible, the item reduces your taxable income. Let’s say you have a $1,000 expense related to your move from one state to another. Since moving expenses related to a move like this are typically tax deductible, your taxable income is reduced by $1,000. If you are in the 25% tax bracket, this means your taxes will decrease by $250 (25% x $1,000).

A tax credit of $1,000, however, works differently. Let’s say you recently had a child (like me!) and as such qualified for the child tax credit of $1,000. In this case, your taxable income is unaffected by the credit (no deduction), but your tax will decrease by $1,000.

In short, a tax deduction is worth the amount of the expense multiplied by your tax rate, while a credit is worth the full amount of the stated credit. As a result, credits are usually much better.

Still, many credits are non-refundable.

You: Like advance-purchase airline reservations?

Sort of. Actually, not really. A non-refundable credit is one where the amount of the credit is limited to the amount of tax you would have otherwise had to pay. So if your tax liability would have been $700, the value of a $1,000 non-refundable credit is limited to $700. (What this really means is that you can’t get a refund of taxes you haven’t paid as a result of a non-refundable credit).

Now let’s talk about the credit for retirement savings contributions. This is a non-refundable credit for up to $2,000 for those making retirement saving contributions (to either 401(k)s or IRA’s). During 2008, if you are single and make less than $26,000 you’ll probably qualify for this credit. If you are married and filing jointly, then you can make up to $52,000 combined and still receive the credit. The lower your income and the more you save for retirement, the higher the credit.

You: What about the deduction?

You get that too!

You: So I’d get a deduction and a credit for the same savings?

Indeed. Of course, your income must be below the limits above, but if so, do your best to save something for retirement. Retirement savings made by those eligible for the credit cost the saver next to nothing.

Note that you must be at least 18 and not claimed as a dependent on your parent’s income tax return to qualify for the credit.

Hey, you graduating college seniors, this might be you! Think about it, you’ll be earning just a half-year’s salary this year. What a better way to start saving for retirement than doing so while you are still young and with minimal net-impact to your cash-flow. That’s what I call living Beyond Paycheck to Paycheck.

"financial education"

Learn via podcast

Published by

Getting Started With Personal Finance Management

at May 29, 2008 in Debt management, General Financial Planning, Media and Saving Strategies. 3 Comments

A few months ago, I worked with Intuit’s Quicken team to develop some podcasts. The material is timeless. Given that I just got off the red-eye, I feel pretty timeless myself. Seemed to make sense to post these links today. Hey, it’s another way to get some solid personal financial education — without reading!

Here are the podcasts and links:

10 Tips for Saving Money, Part 1

10 Tips for Saving Money, Part 2

Debt: How to Handle It, How to Manage It

Putting It All Together: Make a Change to Your Financial Life

# # #

What do you think? Questions? Like the podcast idea?

"financial education"

A flight delay isn’t an emergency, but you should fund one anyway

Published by

at May 28, 2008 in Ranting, Saving Strategies and Uncategorized. 1 Comment

It’s all relative. I now sit here 34,000 feet above upstate New York, having left an hour late out of Boston . . .

You: You have an Internet connection up there? Fancy!

No, I don’t have an Internet connection on the plane. My private jet is in the shop. Next to my time machine.

You: Then how are you blogging without an Internet connection?

Surely you’ve figured out that some of these postings are done “real-time.”

You: Ah, yes, of course.

Anyway, as I hover over New York en route for Los Angeles for my retirement seminar tonight, I could be really ticked off.

You: Could be?

Yes, I could be. They kept us on the ground for over an hour due to a “maintenance” delay. Now, I’ll be lucky to get to bed by 2AM ET.

You: Well, are you ticked off? I kind of wonder what you’d be like really irritated.

Not really. Certainly not as much as I was this day. But some others on this flight were really irritated when the delay was first announced.

You: Some people –

I know. They should take it easy. It’s a freakin’ hour! I’m busy, I’ve got places to be too, but you know what? I’m happy that they took the time to be absolutely sure that the engine was fixed. After all, consider the alternative.

You: Seriously.

Works the same way for finances too, you know?

You: No, random segue-man. What do you mean “same way for finances”?

You shouldn’t go nuts over the small stuff that just happens. Especially, when this small stuff isn’t anything you can influence, let alone control. No one on my flight today could have possibly foreseen or prevented the delay. It is what it is.

Same thing with finances.

You: Well, there you go again.

Is that you, Ronald?

You: No, this isn’t the gipper.

Occasionally, you will have expenses you simply can’t do anything about. Something breaks in the house, your car gets particularly cranky, or someone text messages his way into a rear-end collision. That rear-end? Your car. And regardless of the source, there goes a few hundred of your hard-earned dollars.

You can’t get too upset about this stuff. Sure, you can plan for these contingencies through the establishment of an emergency fund, but you shouldn’t get too upset. That’s why you have the emergency fund. So many financial planners advocate for emergency funds not because they know what kind of emergency you will have, but because we can be reasonably certain that at one point or another, you’ll have an emergency.

And we don’t want you to be too upset over it.

# # #

Can you forgive yourself for at least one unavoidable expense these last few months? What was it? Did you have an emergency fund?

"financial education"

Free wireless from a carnival

Published by

at May 27, 2008 in Carnivals and Saving Strategies. 1 Comment

This week’s carnival of personal finance is hosted by Canadian Dream: Free at 45. Featuring the best of recent personal finance postings in the blogosphere, the carnival featured my recent post My Car is Driving Me Nuts. If you haven’t checked that one out, go ahead. It’s decent for a good laugh - especially from one of the comments, and I’d love to hear your opinion.

One of the most useful posts I’ve seen recently is from Living the cheap life. You already know I’m not a fan of living cheaply; rather, I prefer fiscally responsibility - big difference. But the truth is that the strategy discussed in this blog posting (getting free wireless access as you travel) isn’t a cheap one at all. Cheap would be depriving yourself of the Internet while you travel, or finding a painfully slow dial-up connection for 99 cents a month. Nope, Living the cheap life gives you a few solid ways to get access while traveling — for nothing. That’s fiscally responsible in my book!

Personally, I hate paying the hotel charges for Internet access and often find a way around them. This post gave me a few new good ideas - hope it does for you too.

"financial education"

To roll over or not to roll over: Friday Q & A

Published by

at May 23, 2008 in Q & A and Retirement. 2 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.

Say I invested 10% of 50k for 4 years (20k) and had 8% returns, but now things are tanking. How does a person decide whether to bite the bullet or not? If I roll it from account A to account B, same type of asset class, I’ll be buying far fewer shares, I think, and then my brain starts to melt. I don’t know if this even made any sense, but if it did, I’m curious about your thoughts.

Beth H.

STRAIGHTFORWARD ANSWER:

When you roll over your 401(k) into an IRA, you can invest in just about anything you want to within the IRA. This often includes the exact same investment as you formerly held in your 401(k).

More detailed explanation:

By saving 10% of your gross $50K salary, you saved $20,000 after four years. You earned an 8% return over that time. Fair enough. Now “things are tanking” and you would like to know whether “to bite the bullet.”

You are actually mistakenly combining two decisions into one.

Your first decision is whether to roll over your 401(k) account into an IRA.
Your second decision is whether to “bite the bullet” and sell your existing investment.

These two decisions can and should be made separately.

A decision to roll over your account is not an investment decision–it’s a convenience decision. This is because you can invest in just about anything within an IRA. (Note, in some cases, you may have special classes of low-expense versions of funds not offered to the general public (you) in an IRA. For most people, this is not a legitimate concern, however.)

I typically advocate for rolling over your 401(k) balances as you leave employers because it keeps life simpler. Rather than having different accounts to keep track of (and effectively manage), you can just have your current 401(k) plan plus one IRA. To make it even simpler, you can roll over your previous 401(k) to your current employer’s 401(k) plan, but then you forgo the opportunity to have unlimited investment options. Instead, you’ll only have the options presented to you in your current employer’s plan. Furthermore, your current job might not even have a 401(k) plan.

As far as the investment decision goes, I don’t have nearly enough information from you to tell you what to do. But even if I did, I wouldn’t actually render an opinion. But I think I can help anyway.

Assuming you have a long time until retirement, you should be willing to ride out the ups and downs of the stock market. These lower points provide you an opportunity to buy more shares at a cheaper price – a good thing to be sure. Experts will tell you that many successful investors buy when others sell and sell when others buy. Of course, that’s market timing – so I don’t advocate doing exactly that. The best approach is to not think about your investments’ return on a daily basis. You can forget about it for extended periods–once you know you’re in quality investments.

Ultimately, you need to do some research. Check out the quality of your investments by looking at their long-term investment performance against similar funds and similar indices.

Sound good?

"financial education"

Getting a new cell phone from a carnival

Published by

at May 21, 2008 in Carnivals and Saving Strategies. 1 Comment

This week’s carnival of personal finance features dozens of interesting personal finance articles including my post discussing Six Ways to Get a Ton of Money & the Attitudes That Go With Them

Since I know you’re busy, my tradition remains to NOT list five articles (or even 10 or 20) that could be valuable to you. If you want to see them all, and you have the kind of time, kudos: go to the carnival itself or keep surfing Total Candor

But if you have time for just one more article, I suggest 5 Mistakes I Didn’t Repeat When Buying My Cell Phone by Poorer Than You. Getting a new cell phone is something we seem to be doing regularly, yet many times with little advance forethought. This costs us time and money. Poorer Than You succinctly shows you how she (and you) can learn from her past mistakes. Learning from the mistakes of others is also more financially responsible than making them all yourself.

"financial education"

My car is driving me–nuts

Published by

at May 20, 2008 in Car, Cash Flow and Ranting. 4 Comments

I have a car. Its name is $aturn. I bought it new in 2001. I’m not sure I’d buy new today, but I’ve been a fan of buying a car and then driving it until it drops. I think it’s the most economical way to go. Once I’ve finished paying it off, I enjoy years of no car payments. It makes saving much easier when you quite suddenly have a $348.50 monthly bill disappear.

I bought a car seven years ago because my first car, the ultra-sleek babe-picker-upper extraordinaire tough-hauling Plymouth Neon had died. With a bit less than 100,000 miles, it needed $2,500 of repair work. Blue book value (assuming it was fixed) was about $1,500. You don’t need to be a CPA to figure out that fixing the car was a losing investment. So I didn’t make it—and neither did little red neon. I was able to get $1,250 for the car at the $aturn dealer, (not bad given it was actually worth negative by my calculations) and bought a $aturn.

I figured this nearly $20,000 car would be more durable (less plastic) and I could drive it to, perhaps, 150,000 miles or more without recurring major expenses. As a very low mileage driver, the car will reach its seventh birthday this summer with only about 80,000 miles on it. I think I should be enjoying years of no payments on this car.

But I’m not.

And that’s annoying.

Mr. $aturn keeps asking for money. Since January 1, here’s have been its requests:

Hotel $aturn

Despite the fact that the car is garaged, the rather hospitable $aturn managed to welcome—no, invite—a mouse to live with it. Not only was the rent-free housing not reported as imputed income by the mouse (I hate freeloading taxpayers), but the mouse did some significant damage. Turns out he wasn’t inside the car, he opted for the blower motor as his new domicile. Unfortunately (and somewhat ironically) having a brain the size of a mouse proved to be the downfall for this little guy.

Turns out a blower motor is not such a safe place for anything that wants to live.

My $aturn was bummed too, since he lost his tenant. The mouse’s death caused other problems as well. Most notably, on January 14, there was an enormous noise when I turned the heat on. Why do I remember the exact date? Because my daughter was born on January 13 and now $arturn had only a “no heat” option for me to pick her up in. Remember, this in New Hamphshire. In January. Deciding not to invite correspondence, let alone a personal visit, from Child’s Services – I borrowed a car. Later that week, I said goodbye to $500.

That’s Not Fruit Punch

In late April, my wife noticed that the floor in the passenger seat was wet. I told her it was rain, which I honestly believed, since it was pouring that day. Unfortunately, it turned out, upon closer examination, that the liquid on the floor was bright pink. I remember learning about the dangers of acid rain from 8th grade earth science, but I was pretty sure this was a more acute problem. Further research showed there had been a major leak of antifreeze. Nice. I didn’t want that $435 anyway.

Live Warm or Die

It hasn’t been that warm yet here in New Hampshire, but last week we went south—to Massachusetts. With all four of us in the car on a rather sunny day, it made sense to put the AC on low. You guessed it. AC provided no comfort. Or cool air.

Thank you Mr. $aturn for withholding your AC. Fortunately, I have a friend who is as handy as I am not. He looked at it, since, apparently there might have been a way for him to bring up the charge of the AC and add Freon. Sounded good to me. Unfortunately, and of course, the AC charge is as dead as a doornail (or a mouse in a blower motor for that matter).

If it were just me, I’d possibly consider skipping the AC fix, but with a wife and two little girls, that’s just not an option. Besides, if I trade in the car, I know from previous experience, they’ll check the AC. So even if I don’t pay to get it fixed, it will cost me on trade-in value. How much will fixing the AC cost me this weekend? I don’t know, but if I had to guess: about $500.

So here I am with a seven-year-old low-mileage car that has cost me about $1,500 in just a few months. From this point, $aturn could give me a few years of good and very little non-routine maintenance expenses. Or, it seems, it could ask for another $500 every few months endlessly.

I’m going to get the AC fixed because, like I said, I’ll pay for it either way. But the next major repair, I’m not so sure. I’d like to get another few years out of $aturn. But it’s testing my patience and my steadfastness that this is a good financial move.

What do you think?

"financial education"

Will I See You in May?

Published by

at May 15, 2008 in Events. 0 Comments

I’m heading out of town next week and will be delivering retirement planning seminars at the ING DIRECT cafes in New York, Philadelphia, Wilmington (DE), and Los Angeles. These events are free and are open to customers and non-customers of ING DIRECT alike. Audience members receive a copy of Beyond Paycheck to Paycheck and the opportunity to learn a lot of the Total Candor education firsthand. There’s also plenty of time for Q & A as well.

You can register with ING DIRECT here. If you don’t live near one of their cafes, then you should really consider moving. Just kidding. But tell a friend who lives in one of these cities. Then bug ‘em by asking for all the details, since you let ‘em know about it in the first place.

Hope to see you soon!

"financial education"

Six Ways to Get a Ton of Money & the Attitudes That Go With Them

Published by

at May 14, 2008 in Ranting. 0 Comments

During my time as a personal financial planner for the extremely wealthy, I learned that rich people also put their pants on one leg at a time.

You: What kind of planning, exactly, were you doing?

I was speaking metaphorically.

You: Yeah, sure you were.

There were some really great clients and some that were, let’s just say, less so. Some clients were extremely down to earth and others were completely full of themselves. After a few years of doing this kind of work, I came up some general rules by which I could accurately predict which client would be which (that is, fun or an a$$hl$#) before I even met them.

In preparation for the meeting, I’d ask my boss how the client had acquired their money. From that one bit of information, I’d be mentally prepared. Like all stereotypes, there’s some risk and I was mistaken at times, but I thought I’d share my mindset at the time. I welcome your thoughts on your experiences.

Here are the six ways to obtain significant wealth and the attitudes that go along with them, in my opinion only:

1. Earn it as an Entrepreneur

Entrepreneurs were my favorite clients. Now that I’m an entrepreneur myself, perhaps that explains part of it; people like people who are similar to them. But I don’t think so. After all, we’d have to sell Beyond Paycheck to Paycheck to each American 10 times to reach a respectable fraction of the level of wealth many of my clients had already achieved.

Rather, I think it was the entrepreneur’s attitude I most enjoyed. They had worked really, really hard for their money, they were glad to have made it, but appreciated that it was just money. They wanted it taken care of, but for many, their journey really wasn’t about the money and it certainly was not their measuring stick. As a result, they didn’t let it define them. In short, they talked to the little people (like me) with the same respect as my boss’ boss. So of course I worked harder on their accounts.

2. Earn it as an Executive of a Large Company

This was the hardest group to stereotype, since I found variability by industry. Those in fast growing industries (like technology) thought they had conquered the world –and some actually had. As such, they were often receptive to new ideas and eager to engage in active discussions. Others, primarily in slowing industries, were understandably more defensive about their wealth, both in terms of their strategies and their attitudes about it.

3. Inherit it

Those who inherit a ton of money are an interesting lot. Many knew they would have a rich adulthood before they went to prom, in a stretch limo. Wearing diamonds. With Bono. But I found many of those extremely wealthy by inheritance to be extremely thoughtful. Old money often brought old multi-generational traditions. Many of those were good things. As a group, they understood a greater sense of place. Managing their legacies was of utmost importance. Many worked very hard without–from a financial perspective–ever needing to do so.

4. Marry it.

These were the clients and conversations I dreaded the most. Unfortunately, many of those who married money felt that they had earned it. But they haven’t. I’m not saying they married for money. After all, how would I know what was really in their hearts? But my own experience with those who had married the extremely affluent was an attitude you could smell a mile away. These were the least receptive folks to any ideas and people. They were much too busy to implement any plans (even the really important ones) despite having no claim to a day job or meaningful volunteer work. I once theorized that one of my clients daytimes was exclusively occupied by playing video games. I couldn’t prove it, but we all agreed that no one in the office had a better theory.

5. Win it.

A great group, at least at the beginning of their wealth cycle. Realizing that they were among life’s most fortunate, those who listened to their advisors typically remained so. Humble too. But those who didn’t heed the advice of experts quickly found themselves out of luck—and out of the offices of firms such as the ones I used to work for.

6. Get it Another Way (Like Through Sports or Entertainment)

I didn’t really work with too many from this group, but I had to put it in here as it’s the most obvious group of people who can obtain a lot of money from a source not yet discussed. It’s telling that there are so few of these people compared to the other groups mentioned – yet they have entire magazines and television shows dedicated to watching their exploits while the other groups only have some older books.

# # #

Thoughts? What kind of person would you like to be? What if you had a bunch of money? How would you be sure the money didn’t change you? Or would you want it to?

"financial education"

This carnival made me laugh

Published by

at May 13, 2008 in Carnivals. 0 Comments

Money Under 30 hosted this week’s carnival of personal finance.

You: Money Under 30?

Yes.

You: Is that some sort of joke?

No.

You: Oxymoron?

For some people. But, probably not for many of those here who actually implement the key steps required. that’s the hope anyway, to help readers achieve what might otherwise seem most difficult.

You: Or oxymoronic.

Is that a word?

You: Not sure. Always wanted to use it though.

Fair enough.

In addition to my post In love with a possible recession? there are numerous other great articles. But since we’re pressed for time, here’s the lengthy list of the best articles (my opinion anyway) from last week’s blogosphere:

10 Steps to Avoid Becoming a Millionaire.

Humorous, yet effective, No Debt Plan gives you some top tips to ensure you’re never wealthy. Ten seem like too many? No problem! Consistently following just one or two could guarantee you financial troubles for years to come! Get going!

You: Where’s the rest of the list?

You: Hello? “personal finance” “financial education”