The Broke Professional - Optimize Your Financial Life

Avoid Stupid Bank Fees

                                                                They’re making a killing off of us.

My first checking account was at the same local bank that my dad used and he helped me sign up for it.  Banks LOVE this since they are hoping to get your business for life and then I will do the same thing with my son.  They’re hoping people don’t catch on that there are great checking and savings options available and you aren’t beholden to your local bank.

Depositing your money into a checking account is the safest way to store your cash.  If you’re not careful, however, the fees can really stack up.  ATM fees, overdraft fees, insufficient balance fees, and even fees for talking to a human.  Navigating around these is essential to your finances, as these fees can really eat up your money and are easily avoidable.

While little account fees have always been there, they have been even more prevalent since the Great Recession of 2008.  Since banks can’t make as much of a killing (they still make a killing though) off of mortgages, they turned to ticky tack fees to make up the difference.

And make up the difference they did.  Chase, Bank of America and Wells Fargo, the three biggest banks in the country, made over $6 billion in 2016 from ATM and overdraft fees.  That’s pure profit for the big banks without providing any service.

And the banks will keep on charging fees since most of the country doesn’t know any better.  But these fees are easy to avoid.

Everything is Negotiable

If a bank tells you that there is now a monthly maintenance fee with your account, find a way to get around it or just ask to have it waived if you have been a long time customer.    Many banks will waive the fee if you sign up for direct deposit of your paycheck, for example.  Also, they will be more likely to change things if you talk with a branch manager.

If negotiating is getting nowhere, tell them you will take your business elsewhere.  And if they still don’t budge, close the account and just go elsewhere.  There are tons of options for bank accounts out there and if the bank you have stuck with for years doesn’t think it’s important to keep you as a customer, then find a bank that does.

One fee that is usually not negotiable is ATM fees.  Either you use your bank’s ATM or you don’t.  But nowadays you don’t have to use cash for pretty much anything.  Even going to the coffee shop is as simple as loading some money from your credit card to your smartphone app.  And you can pay bills and your friends easily through Bill Pay services with your bank or apps like PayPal or Venmo.

But the best way to avoid ATM fees is to switch to a different account altogether.

Consider an Online Bank

Internet only accounts have exploded in the last few years.  If you’re getting a raw deal from your current big bank, switching to a vastly superior online bank has never been easier.

Many online banks provide the same services as the big boys do.  You can direct deposit your check and pay bills easily.  But the most important difference is the lack of fees.

Many online banks will waive ATM fees.  Some are unlimited and some up to a certain amount.  Many of them also allow you to order checks for free, which is something that can cost $20 easily at most big banks.  There really is no reason not to consider an online bank if you’re being hit by fees from your current bank.

My favorite account has always been the checking account offered by Charles Schwab.  It has withstood the test of time and continues to offer unlimited ATM reimbursements, even internationally.  It truly is a no fee checking account that would serve anyone well.

Ally Bank also has a great online checking account that reimburses ATM fees up to a certain amount.  A nice website that will allow you to compare different online banks is Magnify Money.

The days of being beholden to the big banks are over.  While most of the country will probably never catch on to this, you need to.  There are lots of options out there and doing a little bit of research will lead you to find the perfect bank for you.

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Sweat the Big Things. Part 3: Taxes

This is Part 3 of my three part series about housing, transportation and taxes.  These are the three things which I believe can make or break your finances.

Part 1 discussed housing and Part 2 talked about transportation.

In this Part 3 of this series, let’s save the best for last and talk about taxes!

In my experience talking with fellow doctors and professionals, the subject of taxes usually comes up.  But many people misunderstand taxes.  It is most likely the single biggest expense you will face every single year.

You need to get it right!

Depending on which state you live in (California *cough cough*), your entire income can be taxed at 50% if you’re not careful.

Everyone has to pay taxes.  There is just no way around it.  So it really pays to find out ways to keep your tax rate as low as possible.

While the tax code is pretty complex, there are two main things that most working professionals need to understand to avoid paying too much tax.

PROGRESSIVE Tax Brackets

If you understand this chart, you are far ahead of most Americans when it comes to understanding the tax code.

We all pay federal income tax.  Most of us pay state tax too, but that can vary between states.  So I will just focus on the federal brackets for now.

This chart is important and understanding it will give you a good idea about how much tax you will pay.  More importantly, it will drive some financial decisions throughout the year that will help you minimize your taxes.

The first thing to realize is that the tax brackets are progressive.  Meaning that the more income you have, the higher your tax rate will be.  But our entire income is NOT taxed at the highest rate.  Just the limits spelled out by the tax brackets.

As an example, a new doctor makes $200,000 the the first year out of residency.  Looking at this chart, he might be horrified to learn that he will fall in the 33% tax bracket.  That means he will owe $66,000 on his $200K income!

This is actually incorrect and it is how many people think the tax system works.  The doctor’s income does put him in the 33% bracket, but the entire income is not taxed at 33%, just the portion above the lower limit.

So according to the chart, our doctor would pay 33% on the part of his income above $191,650, which is $8,350.  His total tax would be 33% of $8,350 + $46,643.75 from the previous brackets.  The amount of tax owed is $49,399.25.  That’s a lot of tax but still sounds a lot better that $66,000.  In reality his tax would be even lower with the standard deduction and other deductions available, but there isn’t enough space in this post to get into that.

So with the progressive tax brackets, our entire income is not taxed at our highest bracket only the last dollars we make are.  How can we use this to our advantage for tax planning?  Reduce the amount of last dollars we make!

And by far the best way to do this is by contributing to a tax advantaged account.  This could be a 401k, Traditional IRA or even an HSA.  Money contributed to these accounts are taken off the top of our income, so we are not taxed at our highest tax rates.

In the case of the doctor, if he contributed just $10,000 to a 401k that year, his highest tax bracket would become 28% instead of 33%.  That’s thousands of dollars saved in taxes right off the bat.  We should be saving for our retirement anyway, but it’s nice to be able to save on taxes every year in the process.

Know Your 1040

 

 

The tax code can be difficult to navigate, but the IRS gives you some clarity on the 1040 form.  That is the form we all have to file for our personal taxes, and having a basic understanding of it can really help reduce your taxes.

The 1040 form provides a summary of our taxes.  It lists your income as well as any credit and deductions you receive.  It is a great line by line playbook of how taxes are paid in this country.  Knowing the ins and outs of this form gives insight on why you pay the amount of tax you do.

It would be too involved to go into each line of the 1040, so I will just mention a few things about the place where you get the biggest bang for your buck: above the line deductions.

The higher income you have, the more tax you will pay in general.  So you want to get that income as “low” as possible.  That doesn’t mean you work less or start slacking off.

What we need to do is make as much money as we can, and then try to make it look a lot less on our taxes.  This sounds shady, but it’s totally legal.  And above the line deductions are the best way.

The “line” I’m referring to is line 37 of Form 1040, which lists our adjusted gross income (AGI).  We are taxed on our AGI and not our actual earned income, so making this number lower is key.  And lines 23-36 tell us how to do just that.

Not all these lines will apply to everyone.  But find what applies to you and work on that.  For most working professionals, deductions for IRA contributions and the student loan interest deduction are two easy ones.  Check with your tax professional to see where you can maximize your deductions.

Know thy taxes

The last thing I would recommend for everyone is to find your tax return from last year and take some time to sit down and go through it line by line.  It is an enlightening exercise to see how certain calculations for deductions and credits are made.

And if you don’t like looking through your tax return as much as I do, then sit down with your CPA before the year is up and see where you can find ways to minimize your taxes.

Taxes are definitely complex, especially if you have a business.  But if you sift through the complexity you will be able to find ways to reduce your taxes that many people don’t think about.  Just be careful not to reduce them TOO much so the IRS doesn’t come poking around!

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