Beyond Paycheck to Paycheck

at July 30, 2008 in Cash Flow, General Financial Planning, Media and Ranting. 0 Comments

You: Dude, you spelled “facts” wrong up there.

Maybe it’s the stress. Ever think of that?

You: Stress? From inflation?

No. From blogging while I’m on vacation.

You: You shouldn’t do that. You’re the guy who talks about balance.

Maybe I’m not.

You: Not what?

It depends.

You: What depends?

There. I’ve distracted you from inflation.

You: I think I’m just confused generally.

That works too. Truth is, inflation shouldn’t stress you out.

You: But why not? Don’t you drive?

I drive. Not a lot, but enough to get to the gas station 2-3 times per month. So, yes, I absolutely notice gas prices. But I’m still not stressed out.

You: You’re so on vacation. Why aren’t you stressed by gas prices?

Because there’s nothing I can do about gas prices. It’s not something I even influence. You can only control what you can control.

Best-selling author James Geary writes a monthly column for the CFP Board. I was pleased to be a key source for his recently released July column about inflation. By reading it, I think you’ll see that while inflation is real, it’s not something which should dramatically impact your stress level. While there may be some opportunities to revisit with regard to your spending, they’re probably not in the way you think.

If you have a comment about the article, feel free to leave it below. Even though I’m not blogging from vacation, it may take me longer to respond than normal. But that’s okay. After all, why stress?

"financial education"

How to stay poor at a carnival

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at July 29, 2008 in Carnivals and Saving Strategies. 1 Comment

This week’s Carnival of Personal Finance, hosted by You Need A Budget includes my article “Can I lower my tax withholdings?”.

In my completely unscientific but completely genuine opinion (and in a desire to keep your required reading to a minimum), this week’s one best “other” posting is 7 Ways to Stay Poor. Perhaps I enjoyed this post because LivingAlmostLarge concisely talks about how so many people focus on the little things. Sure, people make little mistakes. But putting too much emphasis on the small stuff while losing money hand over fist on the big stuff is a pure violation of Saving Strategy # 5: Major on the major, minor on the minor. It’s the same reason I’ve always screamed “Your Problem Isn’t Starbucks!”

"financial education"

Once in a lifetime opportunity for new college grads

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at July 28, 2008 in Cash Flow, Saving Strategies and Tax. 3 Comments

Congratulations! If you just graduated from college, there’s a good chance that you’ll make more money in 2008 then you did in 2007.

You: That’s what they tell me.

In fact, you’ll also make quite a bit more money in 2009 than 2008.

You: How do you know that? You know my raise?

Nope, but in all likelihood, you’ll work less than eight months full-time in 2008. In 2009, you’ll work the whole year. So even if you don’t get a raise at all, your income should dramatically increase from 2007 to 2008 and again from 2008 to 2009.

You: That’s cool, I guess. But where’s the opportunity?

Tax-planning.

You: Sounds boring.

It is boring. You want excitement, go here. That doesn’t work, try visiting here. You want tips that can help you financially, keep reading.

You: Okay. Go ahead, bore me.

Last week, I told you how to determine how little you can withhold without owing the IRS any interest or penalties. If you are a recent graduate who will make dramatically more each year than the previous, you have a major opportunity to increase your net pay right from the outset.

You: Increase my net pay? Maybe this isn’t as boring as I thought.

You don’t want a big income tax refund, right?

You: Right. I don’t. We covered why an income tax is a bad idea earlier.

If you just complete Form W-4 without any thought, you’ll probably put in “1″ for the number of allowances (line 5). As a result, you’ll wind up with a big refund, since the amount withheld each paycheck assumes that you’ll earn your salary for 12 months. Since you’ll only earn that salary for a few months of 2008, too much tax will be withheld. That’s the first reason why you’ll want to increase your allowances to lower your withholdings.

You: Is there a second reason?

<Think game show voice-over man speaking:> In fact there is!

Since you only need to withhold the amount of your prior year’s tax (virtually nothing in 2007 if you were a full-time student), you can even further increase your allowances and thereby dramatically reduce your withholdings.

Increasing your net pay in this manner will allow you to get more money in your hands when you need it most, thanks to the start-up expenses of life including a security deposit, work clothes, and initial emergency fund savings. Just make sure you have enough around next April to pay the piper (should you actually owe the IRS). You can use this handy withholding calculator to help you calculate your allowances (designed to make it so that you neither owe much or get a big refund) or you can spend four days and use the one available at this site.

Figuring this all out is worth it. Personally, I put 10 allowances my first two years of working after graduate school, and still got refunds each year. Not as big as they would have been without adjusting my withholding, but having that money in my initial paychecks to use as needed definitely allowed me to save far more far earlier in my career than I otherwise would have been able to.

Start saving right away by being fiscally responsible. There’s never a better time to develop good, smart financial habits than today.

Let me know what you think and how this works out for you. . .

"financial education"

Friday Q & A: Can I lower my tax withholdings?

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at July 25, 2008 in Q & A 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.

Michael-

I have a question about the W-4 and changing number of exemptions. I graduated from law school in May 2007 and started my salaried position in Nov. 07. So, if I was to change number of exemptions (I used the withholding calculator on your website and it said to change exemptions to “6″) - would I then OWE money to gov. next April instead of getting a refund? Would there be any other foreseeable disadvantages- any tax penalties?

I was just wondering because I have not had the same salary for several years and since I will be making more for 2008 than i did for 2007, would it be smart to change # of exemptions and take more $ now instead of bigger tax refund or could this backfire next April (could i owe a lot of money to government)?

Thanks so much-love your book!

–Renee R., Chicago, IL

STRAIGHTFORWARD ANSWER

Renee, the calculator tells everyone to put in “6″ so I’m not sure what to tell you.

Just kidding!

In determining the number of allowances to use, the calculator attempts to make it so that you will neither owe nor receive a refund.

More Detailed Explanation

This is a great question, Renee. As you’ve learned, consistently receiving an income tax refund is not a good thing. It amounts to you making an interest-free loan to the government. Don’t be so generous. Instead, adjust your allowances so that each one of your paychecks increases throughout the year. By increasing your allowances, you will reduce your tax withholdings. Since your gross pay is the same and now you are having less taxes withheld, you’ll find that your net pay (what you can spend or save) increases!

The calculator at Total Candor seeks to make it so that you’ll neither owe nor receive an income tax refund. Obviously, this is only as good as the assumptions you enter. Since it’s impossible for most people to predict their exact future income tax (i.e, how much interest they’ll earn or the precise amount of deductions they’ll be eligible for), more than likely you’ll owe a little bit or get a small refund come next April.

What about penalties? Interest?

The IRS rules for penalties and interest related to underpaying your tax are actually very simple.

Okay, not really, but I think most people can follow them.

In order to avoid owing any interest or penalties next year when you file, you must withhold from your paychecks at least the lower of the following two figures:

90% of your total federal income tax for 2008
100% of the total federal income tax you paid in 2007 (You can find this number at line 63 of your 2007 Form 1040. If, however, your 2007 Adjusted Gross Income - line 37 of your Form 1040 - was more than $150,000, then this second figure is actually 110% of your 2007 income tax).

You: Why is this so complicated?

535 members of Congress on the wall, 535 members of Congress. . .

As long as you withhold at least the minimum of those two amounts above, then you will have nothing to worry about with regard to underpayment interest and penalties. However, you could still owe a lot of income tax with your return next April IF you choose to withhold based on last year’s tax and your current year’s income tax is much higher. That’s a sound financial strategy (since it is better to pay later rather than sooner), but you have to be sure to have the money on hand come next April.

Soon, I’ll talk about part 2 of the aforementioned calculator - using it to increase your 401(k) contributions without lowering your net pay.

"financial education"

What the heck is consumption smoothing?

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at July 22, 2008 in Carnivals, Cash Flow and Saving Strategies. 2 Comments

That’s the question I asked myself when I finished reading through this week’s Carnival of Personal Finance to determine which one article is most worth sharing with you. (In addition, of course, to my own article about the endless correspondence I received related to the economic stimulus.)

Well, here it is: the best (completely subjective) article of the week from the carnival: Consumption Smoothing and You: Save While the Saving’s Good by FivecentNickel. Nickel discusses the concept of saving more while you can afford to while spending more when you need to. Consumption smoothing, in my mind, is something that happens automatically to those who save at all (but it’s good there’s a name to describe it).

You: Automatically?

Yes. People who save aggressively from an early age learn that once they have kids it’s nearly impossible to save as much as they did earlier in their lives. (Note: Personal experience: kids are expensive, even if you’re cheap. Even if you focus on the free stuff. After all, a family of four eats about twice what a married couple eats. Plus, if your child likes organic strawberries - look out!)

On the other hand, if you didn’t save when you were younger, consumption smoothing really won’t apply to you. Instead, you’re more likely to simply struggle to save your whole life as you slowly realize that, despite a growing income, your needs increase even faster.

Net: consumption smoothing works great - so long as you save when you can most afford to. For most people (even those with student loans), that means when they first start out in the “real world.”

Your take?

"financial education"

Again with the air conditioning?

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at July 21, 2008 in Car. 1 Comment

Just about two weeks after I paid over $$$ to replace the condenser on my money-sucking $aturn, recharge the AC and assorted other AC stuff I don’t understand, my wife informs me that the AC isn’t working again. While I’m highly disappointed, I’m thinking “Hey, they said there was a 12 months, 12,000 mile warranty on repairs. Since it hasn’t been 12 days or 120 miles, I should be good here.”

Wrong!

Something else broke with the AC.

Of course

This time, it’s the proverbial “crack in the line.” I have the repair guy on the line for about 20 minutes pestering him as to what else could possibly go wrong with my $aturn that is going to cost me big $$$ considering it has just under 80,000 miles on it. Quite frankly, the list is longer than I’d like. Still, with two little girls, I have to have AC and I figure if I try to trade in a car without the AC working, it’ll hurt me on the trade-in value anyway. So I fix it. Money-sucking $aturn takes another few hundred bucks.

I told the repair guy that I was paying him more a month than I’d be paying the bank on a new car loan. He didn’t argue.

I think I’ve reached my limit, but it probably depends on what comes next (the need for a second car, what type of thing goes wrong, how long it is between now and then, and so on).

# # #

What’s more annoying, expensive, and less predictable than car repair expenses?

"financial education"

Graduation Speech Conclusion: Use it or lose it.

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at July 15, 2008 in Graduation Speech. 0 Comments

Although I am often asked to speak to recent grads, I have never been asked to speak at any graduations. But if I were, I imagine I would deliver something along the lines of this speech.

Today is the last part. To see the entire speech released so far, click here and read from the bottom up.

Rule 10. Take this knowledge and use it.

You now own an education enabling you to choose to live Beyond Paycheck to Paycheck and to achieve your lifelong financial goals. As with most things in life, implementation will be your key to success.

You will make some mistakes. Everyone does. The key is to make your mistakes small ones and to make them while you are young. Larger mistakes made when you are older are much harder mistakes from which to recover.

Still, having the necessary knowledge but choosing not to help yourself leaves you an unsympathetic figure. Unlike many other folks, you have an opportunity to take the deliberate and confident steps necessary to make your own success story come true. So do so.

Go ahead. I dare you. Live Beyond Paycheck to Paycheck.

Thank you.

"financial education"

See me live

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at July 14, 2008 in Events. 0 Comments

That’s “live” not “live,” by the way.

You: What?

There are obvious limitations of this medium.

You: The TV show on NBC?

Of blogging.

You: I’ve never seen that episode.

No, this has nothing to do with Patricia Arquette. What I mean is that it’s hard to tell from the subject line whether people would wonder if I’ve survived a short period of contemplating “ending it” or if they can infer that what I really mean is that they can see me live (long “eye” sound) this week and next as I tour the country.

You: Why didn’t you just change the subject?

Of the blog?

You: Yes.

Then you wouldn’t know I was on tour.

You: You’re on tour?

Yes!

You: Where?

This week I’ll be in Minnesota, Chicago, Philadelphia, Delaware, and New York this month as part of the Beyond Paycheck to Paycheck seminar tour. ING DIRECT provides these seminars at their fun, high-tech, and cutting-edge cafe locations.

At each event, you can attend the seminar, ask questions, get a free drink, and receive a free copy of Beyond Paycheck to Paycheck (autographed if you hang out for a bit at the end). All this - regardless of whether you are an ING DIRECT customer! All they ask is that you register in advance, which you can do here.

Did we mention that these event are free? Remember Saving Strategy # 4?

Most of my upcoming live events are now posted online. I look forward to meeting you soon!

"financial education"

Friday Q & A: Picking an IRA custodian

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at July 11, 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

Are all custodians of Roth IRAs the same? How do I know whether to pick Ameriprise or Fidelity or a different custodian?

–Jennie K., Burnsville, MN

STRAIGHTFORWARD ANSWER
Although all Roth IRAs are the same, all Roth IRA custodians are not. Choose a custodian the same way you chose a bank.

More detailed explanation:

An Account is Only an Account

First, remember that a Roth IRA is a Roth Individual Retirement Account. An account is just a place to hold money; they’re is nothing unique about it. You can open an account and not even put money in it (Of course, it’s useless to do so, but many people open IRAs intending to put money in and subsequently forget.). The point is that there are lots of places to get an account; no one has cornered the market on IRAs.

Choices For Your Investments

More important is how you’ll invest the money once it’s in the IRA. While retirement plan investing is an entirely different conversation, your investment choices are relevant as you evaluate different custodians. For example, can you purchase no-load mutual funds from the potential custodian? If so, are they any good? Can you buy with no sales commission from many different fund families, or only a limited few that are affiliated with the custodian?

Account Fees

Another top consideration when choosing an IRA custodian are fees. This is particularly tree for young people or people who are just starting to invest for retirement who therefore have low balances. Make sure you aren’t going to get hit with excessive fees. Paying $39 a quarter or something similar because you don’t have (for example) $10,000 or more in your account is very expensive. Critically, it puts an unnecessary additional hurdle in your quest to grow your retirement plan balance over the long term. There’s no reason to pay expensive maintenance fees. To me, anything more than a few bucks a year is ridiculous, especially when there are many no-fee or low-fee IRA programs out there.

Automatic Investment Programs

Another way to reduce the chances you’ll have to pay any fees for simply holding an IRA is to sign-up for an automatic investment program (often abbreviated AIP).

You: What else would they abbreviate it to besides AIP?

Four letters, my friend: R.S.V.P.

You: Gotcha.

Signing up for an AIP means you agree to invest a certain dollar amount (often as low as $50 a month) and, in exchange, the custodian agrees to waive most, if not all, of its account fees.

Inexpensive access to a diverse array of investments, minimal account fees, and programs like AIP are all important considerations when selecting an IRA custodian. It’s not much different than selecting a bank, except, perhaps, that location matters even less. Almost everything these days can be done online; so if the custodian you’re considering isn’t as close as another one, but you like the one that’s a little further, go there. Or to that firm’s web site.

Today

Most important: just get started. Don’t let the uncertainty of choosing the absolute best custodian cause you to delay saving and investing for your retirement for more than an hour. First of all, there is no “perfect” custodian. Second, you’re going to make mistakes. Just make them small and make them early in your financial life. Such minor errors are much easier ones from which to recover and to laugh at years later.

"financial education"

Graduation Speech Part 10: Death happens

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at July 10, 2008 in Balance and Graduation Speech. 0 Comments

Although I am often asked to speak to recent grads, I have never been asked to speak at any graduations. But if I were, I imagine I would deliver something along the lines of this speech.

Today is part 10. To see the entire speech released so far, click here and read from the bottom up

Rule number nine is a downer. Sorry. Ready? One day you will die.

Rule 9: Death happens.

Be prepared for it. If you had a crystal ball, you could spend your last dollar on your last meal. But it seldom works that way. Sadly, there will be those of you out there today who won’t make it to their 30th birthdays. Others will live to be 100. But since we don’t know who’s who, the best thing to do, the thing you must do, is to always be sure to live in balance.

Make sure you plan for your future, but never at the total expense of today, because tomorrow is promised to no one. One day, you will learn that. And it will be painful. Move forward in a way that you are always able to look back without regrets.

And finally,

[To be continued]