Beyond Paycheck to Paycheck

at October 31, 2008 in Tax. 1 Comment

You: Wasn’t the first economic stimulus a failure?

Well, some people feel it did help the economy.

You: What? The economy’s in the crapp toilet.

Still, some people feel the economy would have been even worse earlier if not for the first stimulus package. That said, the administration of the economic stimulus is still causing pain, evidenced by my earlier blog posting (and the fact that people are still commenting on it months later).

But today, I am going to ask you a question. Actually two questions:

Do you think we should get another economic stimulus?
Do you think we will get another economic stimulus?

Where do Beyond Paycheck to Paycheck readers stand on these questions?

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Money, taxes, relationships

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at October 29, 2008 in Uncategorized. 0 Comments

Having just read through this week’s Carnival of Personal Finance, I’m happy to provide you with the number one article of the week: Is the credit crunch threatening your relationship? What a shame that the question has to be asked and I’m hopeful that Beyond Paycheck to Paycheck readers can confidently answer “No.” But the truth is that, at least in the U.K., the answer is an undeniable yes, as divorce inquiries there are through the roof.

Just last week I wrote about Personal finance and your spouse, stressing the importance of getting on the same page as your life partner. I hope each of you did (or already were ). Although this financial turmoil should prove temporary (as every other previous storm has), all of our emotions are heightened. I believe this is due to some sort of fight of flight instinct taking over because we can’t control much of what is going on around us.

However, we can each control the most important part of the economic situation - how we react to it. I, for one, know that this will have little to no impact on any of my relationships. It may cause me to talk to some people more about money than in a normal situation - usually in the form of answering questions, but on the whole, money is not the primary focus on my interaction with the key people in my life.

I do enough of that during normal business hours!

If you missed it, my post Why you’ll pay tax on losing investments was also featured in this week’s carnival.

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Pay less for the same

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at October 27, 2008 in Cash Flow and Saving Strategies. 2 Comments

I visited my brother over the weekend. He gave me another example of how to live fiscally responsibly without being cheap.

You: Why is “living fiscally responsibly, not cheaply” such an obsession for you?

While obsession seems like a strong word, the concept is critical because it is sustainable.

You: You mean from an environmental perspective?

No. A successful saving strategy is one in which the individual stays with it. In talking with thousands of regular people throughout the country every year, I’ve concluded that saving strategies are only sustainable (and thereby effective) if there is either little pain or no pain associated with the actual implementation of the strategy.

An easy-to-remember example is adjusting your cell phone plan to the right package instead of paying for a ton of minutes and features you don’t use (or, in the other extreme, ensuring you don’t pay any expensive overages). You still get to use your phone in the exact same way as you do now, yet at a lower price than you may currently be paying. Note: your cell phone company isn’t going to call to tell you that there’s an easy way to lower your monthly bill. You’ve got to do the work, but once you invest 10 or 15 minutes of time, the savings you get reoccur every month. Cell phone bill reductions are an example of sustainable savings because the pain - measured as the time and what you have to give up - is nominal and non-existent respectively.

My brother’s example was for XM radio.

You: That’s a luxury.

I happen to agree, but millions of others don’t feel that way.

You: Paying for radio? C’mon!

I’m not going to defend it, as I don’t have it myself. However, I’ll ask you to consider the fact that you, in all likelihood, have at least basic cable for your TV. Technically, you could have free TV through antennae (at least for a few more months) but you choose to pay for it.

You: Okay but –

I know, I’m not there yet either. But here’s the point. My brother became convinced he wanted XM radio after one of those free trials.

You: That’s why the companies do free trials.

I know. But rather than just pay the stated rate when he decided he wanted to continue with XM, he did some research online and found that there just might be a lower rate plan available if he said the magic phrase.

You: Bosco?

No. Not Ovaltine either. But my brother said the magic phrase to the right person and, presto, he’s now paying a lot less than the rate most frequently advertised. Same satellite radio, yet a different and lower price. Given that he wants XM, he’s being fiscally responsible. The exercise cost him just a few minutes of time and yet the monthly savings are forever.

You: Still, it’s satellite radio, a luxury.

For you and I: yes. For others, no. But I bet you could think of other examples of things or services that you want or need that others may be paying different amounts than you are. Care to give an example? Be as specific or general as you wish.

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Why you’ll pay tax on losing investments

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at October 24, 2008 in Investing and Tax. 0 Comments

You: Pay taxes on losing investments? That sounds counterintuitive.

It is counterintuitive.

You: Okay.

But it is what can happen and is likely to happen to many mutual fund holders this year as reported by The Wall Street Journal earlier this week.

You: What? I own some mutual funds. I’m going to owe taxes on them even though they’re down? That’s crazy.

It’s counterintuitive.

You: It was counterintuitive before I knew you were talking about me. Now it’s just crazy!

But it can happen. Let me explain how.

You: Yes, do that.

Remember, I’m only the messenger.

You: Yeah, whatever.

Here’s the deal. Whether your mutual fund goes up or down in value has no bearing on the income tax you pay. This fluctuation in mutual fund value is known as an unrealized gain or loss. You don’t report unrealized gains or losses, so you don’t have to pay taxes on the gains and you don’t get to deduct the losses.

You: Okay. I am with you so far.

However, if you sold the mutual fund at a gain, then that unrealized gain becomes a realized gain and, presto, you’d pay taxes. Likewise, if you sold a mutual fund at a loss, the unrealized loss becomes a realized loss and you can deduct that loss (subject to certain limits, of course).

You: Of course. But still, I didn’t sell any of my mutual funds this year and those I have went down in value, so how is it that I might owe tax from that? You know, the crazy talk from before?

Each year, mutual funds must distribute substantially all of their investment gains and income. If you own your mutual fund in a taxable account (not, for example in an IRA or 401(k)), then your pro-rata share of this distribution is taxable income to you.

You: Okay, even that seems fair. After all, my mutual funds lost money this year so they won’t be distributing income so I don’t have anything to worry about from what you just said.

Wrong.

You: Wrong?

Okay, probably wrong.

You: Why “probably wrong?”

Just because your mutual fund lost value doesn’t mean that it didn’t have any gains.

You: There’s that crazy talk again.

I agree, but again, I’m just reporting the news here. Let’s say that during February your mutual fund sold some stocks it had purchased a few years earlier and did so at a substantial gain. With this cash, your mutual fund purchased other investments which have since plummeted. The mutual fund believes, however, that in the long-term these investments will bounce back.

You: Okay, that sounds plausible.

Not only is it plausible, it’s taxable.

You: Seems like anything plausible is taxable.

Good one. That gain your mutual fund obtained in February is a taxable gain because it has been realized. But the loss on the replacement investments is not deductible because it has yet to be realized. It is an unrealized loss. Net impact to you: a taxable distribution despite the fact that your investment has gone down in value.

You: Would this be true even if I bought the mutual fund last October, before most of the gain was earned by the mutual fund?

Yes. In fact, it would be true even if you bought the investment in March of this year, after the underlying stocks sold at a gain were sold.

You: More crazy talk.

Hey, it’s plausible.

You: So it’s taxable.

Indeed, so buyer beware. Make sure to double-check with the mutual fund company before buying any mutual fund in a taxable account before the end of the year. If they intend to make a sizable distribution, it may be a good idea to consider waiting to invest in that fund until after the distribution is made.

# # #

Has this ever happened to you? Can you think of more “crazy” examples of taxes being assessed against “unreal” gains? I can.

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Personal finance and your spouse

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at October 22, 2008 in Cash Flow. 2 Comments

Is your spouse good for your marriage?

You: What?

Is your spouse good for your marriage?

You: I heard you the first time. I’m just not sure what you mean. I don’t think I’d technically be married without my spouse.

True enough. What about financially, is your spouse good for your marriage?

You: Is this about a dowry?

No, it’s about how your life partner’s financial habits can impact your marital satisfaction.

You: Now this is sounding like an article from a magazine displayed at the supermarket checkout article!

Ouch. But it got your attention, didn’t it?

You: Maybe. Or perhaps it was the headline about Bradalina. I’m not really sure.

I’ll take it either way. A relatively recent article in the New York Times, The Key to Wedded Bliss? Money Matters, discusses the importance of having a spouse with a similar financial disposition. Here’s my favorite paragraph of the article:

Today, while most of us marry for romantic reasons, marriage at its core is still a financial union. So much of what we want — or don’t want — out of life boils down to dollars and cents, whether it’s how hard we choose to work, how much we consume or how much we save. For some people, it’s working 80-hour weeks to finance a third home and country club membership; for others, it means cutting back on office hours to spend more time with the family.”

I love that paragraph so much because it captures the element of choice. Much of the financial writing these days implicitly tells us how to deal with what’s been handed to us as opposed to mapping out a plan to achieve what we want. Within a marital setting though, achieving our dreams can typically only work if both spouses want the same things. Imagine one spouse cutting back to spend time with the family while the other is working like crazy to make that beach house a reality.

You: I don’t have to imagine - that sounds just like my buddy and his wife.

Indeed, such stories are everywhere and can make your lives (both financial and marital) more challenging.

# # #

Did you find your financial soulmate when you found your true love? Or is it more of an “opposite’s attract” phenomenon when it comes to money issues? Do tell!

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The White Mountains are beautiful - and inexpensive

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at October 20, 2008 in Carnivals. 1 Comment

I hope you had a nice weekend. Aside from sports (Michigan got killed and the Red Sox finally succumbed in Game 7) I had a great weekend. My family and I went to the White Mountains and had a wonderful time. The girls just love the outdoors, especially hiking. Thanks to hotel points, the whole weekend cost less than $100 (including several meals, a bunch of hikes, and a tank of gas) yet we made memories all weekend long. It’s such a treat to see how much a three-year old can look forward to climbing a mountain! Indeed, although we were gone less than 36 hours, it was like a month in the “recharge” department.

Although this week’s Carnival of Personal Finance provides links to dozens of excellent financial planning articles, Don’t get screwed by your landlord. Top Tips is my favorite article. Of course, if you missed my post, Return of premium term life insurance overview, last week, the Carnival provides another great opportunity to understand that product.

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Return of premium term life insurance overview

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at October 17, 2008 in Insurance. 3 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.

Thank you for writing this book. In one place, I have found a way to understand my financial future!

I have on question, though: My wife and I just bought a home, so it’s time to get some life insurance. I have gotten quotes for my term insurance but my father mentioned Term Return of Premium Life Insurance. I’ve looked into it and it seems like a good deal (I think?) but as this was not touched on in the book. I was wondering what your opinion of it is. (Maybe this could be a blog topic???)

–Jeffrey R., Philadelphia, PA

A while ago, I blog extensively about life insurance, especially in the very popular post The Four Questions of Life Insurance. You are correct, however, in that I have not previously written about the specific product you mention above, “Return of Premium” term life insurance.

Congratulations on your recent home purchase. For the purpose of this post, I’ll assume that life insurance is appropriate for you and your wife (as you have concluded), but depending on your personal facts and preferences, it’s possible the act of simply purchasing a home wouldn’t cause you to automatically need substantial life insurance. Again, read The Four Questions of Life Insurance for a discussion of when you truly need life insurance.

What is Return of Premium Term Life Insurance?

This is one of these things that sounds like what it is. Specifically, you acquire a term life insurance policy with a feature that provides, if you are alive at the end of the policy term, for the total return of what you paid in life insurance premiums. In addition, this return of premiums comes to you tax-free.

You: So it does sound like a good deal.

But you know there’s always a catch. Logically, you already knew that there was a reason why the insurance company is being more generous with a Return of Premium policy compared to an ordinary term policy. In this case, the “generosity” comes to you in the form of a significantly higher policy cost.

You: What?

In other words, the premium you are charged each year is far higher for the same coverage (say $500,000) where the policy provides for the return of premiums than if it does not. It is these additional amounts that you pay every year that are effectively invested by the insurance company and then returned to you (albeit at a guaranteed tax-free rate) at the end of the term. You’re paying more money then the cost of the insurance and the insurance company, by investing the extra amount, can easily afford give you all your money back at the end of the term.

Why People Buy Return of Premium Policies

Psychologically, people have a hard time buying things they expect to have no value.

You: That’s not true. I play the lottery.

Point taken. Maybe for small dollar purchases, they mind less. But when it comes to something more than a dollar or two, it’s harder for people to accept. That, combined with the fear of confronting one’s own mortality, makes a purchase of a term life insurance policy more difficult to complete. So, when an agent can explain that you’d be guaranteed a payback (either in the form of returned premiums or the true jackpot (a life insurance claim from your early demise), it’s a more attractive sale.

Gary: A more attractive product.

But it shoudn’t be.

You: Why?

You can create the same concept on your own, and likely do much better.

You: How?

Simply be purchasing a traditional low-cost term life insurance policy. Then, with the savings you’d obtain compared to the cost of a Return of Premium policy, invest the money on your own. Depending on your investment performance and the cost difference between the policies, it’s possible that you could have even more money this way. Plus, you’d be under control of your funds the entire time, not just at the end of the term of the policy. With the Return of Premium policy, you lose all flexibility with this extra money. Should you wish to switch to a cheaper policy or cancel it because it is no longer needed, you’ll forfeit a good amount of the potential returned premium, as you are considered to earn most of it back in the final years.

Verdict

Unchanged. If you need life insurance, get what you need at the lowest possible (read: plain vanilla term) cost. Use the amount you’d save (compared to any alternative policy) for your many other financial goals, some of which, in all likelihood, you’re not able to currently obtain.

It’s quite all right for you to never see any financial value from your term life insurance because you outlived your policy. In fact, that’s exactly what I hope happens from mine.

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Driving home the basics

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at October 16, 2008 in Car and Carnivals. 1 Comment

Continuing on our theme of basics, I read one particularly good article at this week’s Carnival of Personal Finance: The article, written by Fiscal Zen, is 25 Savvy Tips for Car Buyers and Owners

As you know, there are always great articles at the Carnival of Personal Finance, this week including my post discussing how The world is not ending: Three days with 3,200 financial planners, but I always try to be realistic with my recommendations, so I only put out one suggested reading from that source each week. Fiscal Zen’s post is perfect because there is something in there for anybody who has or uses a car (which is about 99% of the people I know).

You: Who are the other 1%?

My cousins, who live in NYC. (Thanks for asking.) But for everyone else, there’s bound to be useful information there that will save you money. It’s the kind of stuff that makes it easier to live fiscally responsibly without being cheap. It’s basics. It’s what we all need to get back to. A car is a great way to start the trip.

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Back to basics

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at October 14, 2008 in Balance, General Financial Planning and Investing. 0 Comments

The stock market is hyperactive.

You: Gee, you think?

Indeed. The last thing I saw this volatile was Joe Pesci in Goodfellas.

You: That guy was explosive!

Fortunately, less people will be murdered as a direct result of this market’s volatility.

You: I sure hope so.

One of the things to remember during periods of economic certainty is that the basics still matter. Arguably, they matter even more.

You: More?

Absolutely. For example, those who properly rebalanced their portfolios each year wouldn’t have been over-exposed to stocks at the beginning of this crash. Those who buy stock mutual funds automatically through their 401(k) plans every paycheck (thereby dollar cost averaging), probably have some money that’s actually “up” right now thanks to yesterday’s positive explosion.

Outside of investing, the same is true: get back to basics. If you’re feeling more nervous about your job security because of what’s going on, let’s hope it’s just healthy paranoia on your part. Still, you’d feel better if you knew you had your emergency fund set aside, and not simply as a task item on your endless to-do list.

Living within your means by spending less than you make, getting your debt under control, and protecting your family from an unfortunate mishap were always important financial objectives that are only highlighted (but not made more or less important) by the events around you which you cannot control. The moral: Sweat what you can influence but only for as long as it takes for you to get it done.

You’ll feel much better (and you’ll sleep much better) once you do.