Money Savers Archives - Page 2 of 4 - The Broke Professional

How Much Cash Do You Carry?

Only Floyd Mayweather should be allowed to carry cash

Only Floyd Mayweather should be allowed to carry cash

Right now I only have $10 in my wallet.  I know I’m a Broke Professional and whatnot, but I usually had more cash than that when I was an even more broke college student.  That’s because I used to pay for everything with cash, including gas, which means I had to talk with those rays of sunshine who worked inside the gas station convenience store.  Then I got my first credit card, which was a 5% gas credit card for BP, still a pretty good deal nowadays.  As soon as I got to experience the convenience of credit cards (and got a little cash back for my regular spending), it was credit cards all the way for me.

And many others are going in that direction also.  According to a recent survey at Bankrate, half of Americans surveyed carried less than $20 in their pockets (try buying a tank of gas with that).  This shows that most Americans are opting to use credit or debit cards for their purchases.  There are a number of reasons for this, but I think the biggest reason is simply convenience.  Carrying a lot of cash (and God forbid, coins), can be cumbersome.  Making a purchase of any kind is a lot easier with a credit card because you don’t have to fumble around looking for exact change (don’t you love getting stuck in line behind those people?) or find somewhere to put your coins which will end up getting lost under your car seat.  Pulling out a solid rewards earning card for all of your purchases seems like the most efficient way to buy anything nowadays.

But having lots of cash in your wallet makes you feel like a high roller.  Is there any better feeling than pulling out your wallet or your fancy money clip and seeing everyone’s eyes bulge out of their sockets as you count your cool stack of Washington’s?  Yes there is something cooler, and that is going on your smartphone and checking your budget and knowing you have more than enough to spend with your credit card.  The ability to do almost everything financially on your mobile device has really made needing cash a thing of the past.  It is also easier than ever to pay for things with your mobile device as well.  A number of big companies have apps to download where you can pay straight from your phone.  There are also companies like Square and PayPal that make it really easy to pay for services.  Companies that accept cash only are becoming more of a rarity than ever before.

Some argue, and there are even studies, that show people spend more when using credit cards than when using cash.  I would argue that the people who do this don’t have a great grasp on their financial situation.  Make no mistake, the credit card companies know that most people spend more when using credit cards and they want you to keep using their cards instead of cash.  That’s because there are many irresponsible people out there who get caught in the credit card trap and end up paying month after month of interest to the credit card companies.  Visa can continue to get rich off of those people and I will keep using credit cards for their rewards and being able to easily track my purchases.  In my case, credit cards have become such a normal thing for me that I would probably spend more if I had cash because credit card spending seems “real” to me.

There are people in both the cash and credit card camps who are sure that there way is the path to financial salvation.  The cash only camp is getting decidedly smaller over time, however, and we may be nearing an era when we will have hardly any incentive to use cash instead of credit.

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Tax Savings For Having a Little One

Very few events in life can bring such joy and emotion as having a child can.  Whether it’s your first (experienced this last year) or your tenth (hope to never ever experience this), nothing can really match up to the happiness you get looking at your newborn for the first time.

And then the bills come.  First the hospital bills will slowly trickle into your mailbox.  Everyone from the anesthesiologist to the guy who changed the garbage in your hospital room needs to get paid.  Then you have to decide how to feed the kid.  If you decide to use breast milk, that can save some money but can be time intensive.  If you have to go with baby formula, prepare to shell out about 5 times the amount of money you pay for your regular grown up milk.  Hopefully you can scrounge up some secondhand clothes from family and friends, but raising a child can cost a pretty penny.

But there is a group that will come to your rescue.  The US government.  While the government isn’t usually known for swooping in to save anyone who is not a big bank, they do provide some tax relief for those who have children.  There are two big tax breaks most parents will get, and other breaks available depending on your situation.  These tax breaks won’t make having kids a bargain, but they can potentially save thousands of dollars on your tax bill every year.

Dependency Exemption.  This is one of two major tax breaks most parents will be able to get.  If you file as a single, you get one exemption.  If you file a joint return, you get two exemptions.  And you get another exemption for the year for each child you have, even if they were born on December 31.  For 2014, the exemption amount is $3,950.  So if you have one child, you get to deduct $11,850 ($3,950 times 3) from your income.  Not too shabby.

High roller couples, beware, this benefit starts phasing out with an Adjusted Gross Income (AGI) of $305,050 and is completely phased out at an AGI of $427,550.

Child Tax Credit.  Tax credits are awesome because they decrease your actual tax TOTAL and not just your taxable income.  For 2014, you get a $1,000 credit for each qualifying child.  So a family with 3 qualifying kids would get $3,000 off of their tax bill (assuming it doesn’t bring the tax bill to 0 because the credit stops there).  This credit can be a great help especially for families with lots of kids.  The credit starts phasing out at an AGI of $110,000 and is completely phased out at $130,000.

The Dependency Exemption and the Child Tax Credit are two big tax benefits that many parents will be able to qualify for.  There are other tax breaks that will apply for certain situations:

Child Care Credit.  This is a credit some can claim for child care expenses that enable the taxpayer to earn an income (like an in-home nanny).  For those with AGI’s of $15,000 or lower, they can claim a maximum of $3,000 worth of allowable expenses for one child.  The credit is 35% of the allowable expenses.  For those with an AGI of $43,000 or higher, the credit is 20% of allowable expenses.

Adoption Credit.  Adopting a child can be an honorable venture but it can get really expensive.  The government gives a pretty good tax credit in 2014 of $13,190 for adoption costs.  The credit stops once your tax bill hits 0.  The benefit phase out begins at an AGI of $197,880 and is completely phased out at $237,880.

Child Care Reimbursement Accounts.  These can vary by employer but they allow you to set aside pre-tax dollars to use for child care expenses, similar to a flex spending account for healthcare purposes.  This can be very helpful as the amount you decide to set aside avoids both state and federal income tax.

These are just a few of the great tax breaks available for having children.  Tax filing season is still a few months away, but it’s always helpful to think about these tax breaks now and do what you reasonably can to get them if you’re eligible.  And try to enjoy your kids.  They don’t stay small and cute forever.

Taxes can get tricky for certain situations, so always consult your tax professional for any specific questions.            

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Standard Deduction or Itemize?

Trust me guys.  Buy a house and your taxes will be so low.

Trust me guys. Buy a house and your taxes will be so low.

Imagine this all too familiar scenario.  A young couple just a few years out of college are living in a small apartment.  It’s not the fanciest place, but it’s nice enough to have guests over and they’re comfortable living there.  It’s in a nice and clean building with front door security.  And if anything goes wrong maintenance wise, they can call on their trusted landlord to fix it up in a day or two.  But after a few years they start to get the “itch”.  They visit a couple of friends who recently got a nice house and it seems that more and more of their peers are buying houses or hunting for them.  It hasn’t really crossed their minds but the latest advice from a well meaning (but uninformed) friend puts them in the hunt:  “You need to buy a house because you get a great deduction on your taxes.”

The couple discuss this and decide it is time to buy.  It’s just the “right” American thing to do.  And besides, they’ll be saving so much money on taxes right?  The hunt begins, and they soon find a nice house not too far from where they both work.  They put in an offer and it’s accepted!  Because they’ve been working for a few years they were able to save up a 20% down payment on their home.  The monthly mortgage payment isn’t much more than their rent was, but with the awesome tax savings that they’ll receive, they will be so far ahead!  They move in, figure out how they want to decorate and they both live happily ever after.

Right?  That is, until they do their taxes and find out the awesome tax deduction isn’t as awesome as they’d thought.  If only they did a little research into the tax implications of the mortgage interest deduction, maybe they would need a more compelling reason to buy a home.  This happens all too often, and many well intentioned people are singing the praises of the home interest deduction without even knowing if it applies.  The issue at heart here is the misunderstanding (or ignorance) between taking the standard deduction or deciding to itemize deductions.

When you prepare your taxes, you have a choice to either take the standard deduction or to itemize your deductions (or neither if you’re a dummy).  When you take the standard deduction, you have your taxable income lowered by a predetermined value set by the almighty IRS.  This is a deduction that everyone gets just for being a US citizen.  See, the IRS ain’t all that bad.  For tax year 2013, the standard deduction for a married couple filing their taxes jointly was $12,200.  That means even if this couple didn’t have any specific deductions to make that year, they would get a $12,200 deduction on their taxable income just for filing their taxes.  Not bad.

If you decide to itemize your deductions, you have to calculate how much those eligible deductions add up to.  If it is more than the standard deduction amount, then you should go ahead and itemize.  Eligible deductions include state taxes, real estate taxes, charitable contributions and, the holy grail, mortgage interest deduction (Here’s a more official list).  If the combination of all of these deductions is more than the standard deduction amount, then you should go ahead and itemize.

So what happened to our happy home buying couple?  When they were living in their cozy apartment, they didn’t even get close to being able to itemize so they got the standard deduction every year.  Now that they own a home and can add the mortgage interest and real estate taxes to the mix, their itemized deductions amounted to $13,000.  They definitely should itemize their deductions but the difference in their deduction is only $800 more than if they took the standard deduction.  So their taxes aren’t reduced by much at all.

Another thing to remember which most people surprisingly don’t get is that a deduction doesn’t reduce your taxes directly but only your taxable income.  If you’re in the 15% tax bracket, that means a $10,000 mortgage interest deduction will save you $1,500 (10,000 x 15%) on your taxes and not reduce it by $10,000 directly.  So in the case of our couple, that $800 extra they could deduct because of mortgage interest only saved them $120 (800 x 15%) on their taxes as opposed to taking the standard deduction.  You could save more by going to Starbucks four days a week instead of five.  So if our couple knew these facts beforehand, they might not have gotten a house so soon.  Or they still might have because there are a lot of reasons to buy a house.  But doing it solely because of the mortgage interest deduction shouldn’t be one of them.

The US tax code is very complex but it pays (literally) to know some of its intricacies.  That’s because it is a tax code that rewards certain behaviors and punishes others.  For example, if you withdraw money too early from your 401k, you’re going to be hit with a penalty.  This is presumably to prevent people from raiding their retirement accounts and putting their future at risk.  If you pay student loan interest, you are rewarded by being able to deduct some of it from your income.  This is presumably because the government likes when citizens get educated (not so sure about this one).

What about itemizing your deductions and, specifically, the mortgage interest deduction?  It seems to favor those in higher tax brackets who have bigger mortgages, unlike our couple who was in a lower tax bracket and had a modest amount of mortgage interest.  So is the government promoting high rollers to buy big houses?  Maybe.  But it is important to know what rules favor what type of behavior so you can pay the least taxes (legally) possible.  This deserves a whole series of posts in itself, so look for that sometime  in the future.

Has the mortgage interest deduction been a big help for you or not so much?  Comment below and join the discussion.

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Frugality Can Make you Wealthy

They should call him "Froog" Mc Duck

They should call him “Froog” Mc Duck

The word “frugal” can elicit different emotions from different types of people.  In the personal finance world, frugality is a virtue that allows you to save money every month and not get caught up in Keeping up with the Joneses.  The frugal practices of Warren Buffet, for example, are well documented and legendary.  For those people who know money, being frugal is a way of life.  But if you tell a guy who knows nothing about money that you try to live a frugal life, one word will come to their mind: cheap.  This is loaded with a ton of connotations and this person will think you are this stingy and mean person who only cares about keeping their money (as if keeping your money was a bad thing?).

Being considered frugal (or cheap) is frowned upon by most people.  But it shouldn’t be.  In fact, if everyone practiced frugality this would would be a much better place with much happier (and wealthier) people.  This post is not going to talk about different ways to live frugally.  You can search my other posts for that (like how to save money on eating out) or the countless other great frugality blogs out there.  I just wanted to touch on the idea that frugality is the ULTIMATE way to become wealthy.  It’s an idea many people propagate but I have not seen it explained better than in this article by the Badass himself, Mr Money Mustache.

While saving ten bucks a month doesn’t seem like a whole lot by itself, the implication is much greater.  If you’re able to kick a habit that costs $10, you have to realize that will be $10 a month you shouldn’t have to spend for the REST OF YOUR LIFE.  This will allow you to reach your savings goals that much quicker and will let you retire that much earlier.  The whole point of personal finance is increasing your assets and decreasing your spending.  Saving $10 a month does both of those things.

It should be obvious that the goal is not to stop at just $10 a month.  Look at ways to save on housing and transportation, usually the biggest money sinks for most people.  Learn to eat more at home and bring awesome lunches to your workplace.  Evaluate your cable and cell phone needs.  Most people can easily find ways to save a few hundred dollars a month by looking at where their money is going.  At the same time, you should try to increase your income and put those savings and increased income to work in the form of investments and/or paying off debt.  This is the sure path to financial success and it all starts with living a frugal lifestyle.

One thing you will most likely get from living a completely frugal life is resistance from others.  People are not used to living frugally.  Most want to spend their hard earned money on things that will only end up bringing temporary happiness.  Many people scoff at the idea of trying to cut down on your morning coffee, for example.  But this little change can free up money which you will have for the rest of your life.  Cutting out things you can live without to create a life that you enjoy is nothing to scoff at.  Let others think what they want while you trim your monthly expenses and reap the enormous benefits.

One final argument for frugality.  Living a frugal life and being able to live on less will teach you skills that will last you for a lifetime.  Almost everyone will go through tough times financially at some point, so it would be ideal to learn to live on less when times are good.  Cutting expenses won’t be such a shock and that will help you dig out of any hole you get in.  Besides, living frugally when times are good will allow you to save more which will hopefully prevent those tough times from affecting you too much!

Taking the time to go through your monthly expenditures and cutting things you don’t need, and banking the savings, can be one of the most powerful things you could ever do for your finances.

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It’s Easy to Save Money on Your Meds

America is a sick country.  It is reported that around 70% of Americans are on at least one prescription drug  and around half of the country is at least on two.  That’s a lot of pills for a lot of people.  Seeing patients on a regular basis myself, I can definitely confirm this.  I see multiple patients every day who are on a whole cocktail of medications.  Now this is a huge problem in itself, but it is also a huge financial problem for the patient.  Medications can get expensive, especially if you have to take a lot of them.  So I’ve compiled a few ways that I think can really change the game when it comes to paying for meds:

Ask for a generic medication- This should be the first thing you ask your doctor.  Doctors may give you a brand name medication because of incentives from a company or just because they are used to writing it.  It never hurts to ask for a generic as long as it will get the job done as well as the brand name drug.  And there can be huge cost savings.  There certainly are cases where a brand name medication may work better than a generic, but it definitely pays to ask.  And don’t think that if a brand name is covered by your insurance that you won’t pay much.  In my experience, it is actually cheaper to pay for a generic out of pocket than a brand name that is covered.  Always ask your doctor if there is an appropriate generic medication you can take for your condition.

Shop around- Many people are unfortunately unaware that you will pay different prices at different pharmacies for the same medication.  Simply calling around to different pharmacies to see how much your medication will cost can save you lots of money.  Some pharmacies even have special low prices for certain commonly prescribed medications.  Generally, warehouse stores such as Costco and Sam’s Club have much better prices than other pharmacies.  It is definitely worth it to call or visit different pharmacies in your area to get the best price.  A website that can help is called goodrx.com.  Just type in your medication and zip code and it will show you which location in your area will have it for less.  It can be surprising to see the price disparity between different stores.

I prescribe medications on a regular basis, and when patients come back for their follow up exams I always ask how much they paid.  I’ve gotten wildly different answers for the same medication, even with insurance coverage!  It really is worth your time to call around to your surrounding pharmacies and get the exact price.

Consult the drug formulary- To add more confusion to the health insurance maze, not all insurances cover all medications the same way.  It actually varies very widely so it pays to check the formulary, which is the list of medications that your insurance will cover.  Insurance might cover medication A for a disease, but not medication B.  You should check with your doctor to see if they can preferably prescribe a drug which is already on the formulary.  Being prescribed a non-formulary drug and getting sticker shock at the pharmacy is no fun.

Ask the doc for samples- Doctors get bombarded by drug reps who want them to prescribe their companies’ medication.  They sometimes give doctors samples of their medication.  If the doctor tells you a brand name medication is necessary, be sure to ask for any samples they may have.  That will at least give you a few days supply so you can shop around at different pharmacies.

Ask for coupons- Similar to the last point, drug reps sometimes leave coupons for certain medications.  Some websites (such as needymeds.org) also have coupons for various medications.  Many drug companies have reduced cost programs for certain drugs.  It never hurts to ask if something like this exists.

Get a second opinion- There can sometimes be more than one way to treat a condition.  Certain levels of high blood pressure, for example, can be treated with a medication or simply with diet and exercise.  When you get a potentially serious diagnosis and the doctor insists on one way of doing things, it might be worth it to get a second opinion.  You can ask family and friends for any trusted doctors in the area and see if there may be an alternative.  In the aforementioned example, controlling blood pressure with diet and exercise may be all that is needed, which can lead to better health overall and definitely some money saved.  Some doctors may be quick to pull the trigger on prescribing medications, so that could be the right time to seek another opinion.

Use an FSA account- Many workplaces offer flex spending accounts to their employees.  What these accounts do is set aside a portion of your pay for the year, decided by you, and give you a debit card with that amount that can be used on certain medical related expenses.  It can be a game to see what exactly is eligible, but FSA money is definitely eligible to be spent on medication.  The main advantage of an FSA is that the money you have set aside is not calculated as part of your income. So instead of using money that has already been taxed, you can use pre-tax money to pay for medication.  Even if you do not go to the doctor much, FSA money can be used for other things like dental work or glasses and contact lenses.

Open a Health Savings Account (HSA)-  HSA’s are great for many reasons.  And they’re definitely useful for their intended reason: helping you with your healthcare expenses.  Paired with a high deductible health account, which aren’t the best choice for everybody, the HSA is a great companion.  It lets you set aside money before taxes, allows them to grow tax free and then be withdrawn tax free as well.  I wrote about how you can use it as kind of a pseudo-IRA here.  When it comes to your health care costs, it is a powerful tool as well.  If you can handle small costs like doctor co-pays and medications out of pocket on your own, you can allow your HSA to grow and use it for big planned (or unplanned) expenses like LASIK or any other surgeries.  As I mentioned before the high deductible plan may not be for everyone but if you decide to go with one, you should definitely sign up for an HSA.

As the famous saying goes, prevention is always better than cure.  Practicing healthy habits such as staying active every day and eating right will lessen the chance of needing certain medications.  Most people need the occasional antibiotic, but conditions such as high blood pressure and diabetes are preventable for the most part.  These chronic diseases can be debilitating to your well-being and also your wallet.  Your health can be looked at as an asset, just like any bank account you may have.  If you don’t take care of it, you will definitely be paying for it.  Hopefully some of these tips will help ease the financial burden.

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You Are Your Own Worst Enemy

The human race is a very interesting one.  The past few centuries of our existence have produced massive leaps in the areas of technology and exploration.  Just a few decades ago not many people had computers or cell phones.  Despite all of this progress, there are still dark things that always occur.  Violence, war and intolerance to name a few.  These have all taken on different forms in different eras but that self destructive nature is always there.  We are a true dichotomy and probably always will be.

These self destructive habits can be found in our individual lives and habits as well.  In our never ending quest for comfort, people still smoke and eat poorly despite knowing the harmful effects to our body.  We avoid doing things we know will be beneficial for us, while choosing things that are easier to do but may not be good for us in the long run.  While these individual flaws don’t have a global effect like wars and violence do, they can be minimized in the same way.

Society sets laws to limit our destructive habits.  For whatever reason, many people resort to things like theft and violence to get what they want.  Laws were created to prevent this and while they don’t eliminate it completely, it greatly reduces the amount of crimes that occur.  We all follow some types of law, be they religious or secular.  For the most part, they are there for our own good and for the good of society.  In essence, laws prevent us from making bad choices that we might have made if left to our own devices.

This same idea can be applied in order to improve our financial lives as well.  Most people commit a financial “crime” at some point.  Spending a little more than we would have liked on the coffee run.  Going out for an overpriced dinner while cooking at home would have been much cheaper and just as tasty.  Not contributing to our 401k plan because we need all the money we can get in order to pay the credit card minimums.  We know actions like these are not good for our financial health, but they end up happening anyway to a lot of people.  But just as society can set laws to keep the crime rate down, we can set some laws of our own to keep financial crimes from happening.  The two best laws to help us financially: setting up automatic transfers and creating a spending plan.

Automatic transfers:  The best thing to come from being able to bank online is the ability to easily transfer funds from one account to another.  It’s so easy to do and is the single best way to prevent financial crimes from occurring.  Why?  Because it takes the decision out of your hands.  By having a set amount of money transferred from your checking account before you ever get a chance to spend it, you’re taking away the potential of doing something stupid with that money.  Part of your earnings need to be earmarked for savings and investment.  Instead of stressing about how much you have left over to contribute to your savings, set a comfortable amount to be taken every month so you don’t have to worry about it.

We all need to have something saved for the future and the best thing to do is save early and often.  That means contributing as much as you can to your retirement account as soon as you can.  For those who can participate in a 401k plan through their employer, this is best done with deductions from your paycheck straight into your retirement account.  You won’t even have a chance to miss the money.  This is key since most people don’t like getting less money in each paycheck. If you start early and have it deducted automatically, you have to find way to make do with what you get.  In my own personal situation, the ability to automatically transfer money from my checking account into my savings and 401k has been the best thing I have ever done for my finances.

Spending plan:  The second way to keep yourself from committing a financial crime is to set a spending plan.  This can also be called a budget, but spending plan sounds cooler.  It’s really very simple.  Just take a look at how you spent your money the last 6 months or so.  The longer time period you analyze the more exact you can get, but 6 months will give you a good overview of how you’re spending your money.  Divide it up into categories and look at where you feel you’ve been spending too much.  This is where personal finance gets personal as everyone has different tolerances.  Some people love food and don’t mind spending a lot on eating out.  Others like a strong cell phone plan and will gladly pay for it.

The key is to optimize your spending.  Spend what you like (within reason) on what you value and cut what you don’t.  This takes a few minutes of thought but it will have a profound effect on your finances.  You can then set up estimates on how much you want to spend in each category and try to stay within those values.  The goal is not to hit that exact dollar amount every month, but to recognize where you’re spending your money and shift it to where you want.  Any money you save from those things not so important to you can be sent to your savings and investment accounts.  Knowing really is half the battle.

These are two of the best ways to hack your finances and keep yourself from making a costly mistake.  There are many financial “laws” you can set to protect yourself against yourself, so just experiment around and find what works the best.

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Hedonistic Adaptation and Your Finances

happy hobbits

Be happy. Like the hobbits.

Humans are unusual creatures.  Unlike hobbits, who are perfectly content with their lives of eating, drinking, smoking and just plain chilling, we humans keep wanting more and more.  From those in poverty to those who have had everything served to them on a silver platter, we all just want more.  And we think having more will make us more happy.  “If I just made $1,000 more per month, all my problems would be solved.”  “If only I had gotten that promotion, my life would be perfect.”  We all say these things to ourselves from time to time.  And we are lying to ourselves all the way.

I recently read about a term called hedonistic adaptation.  According to all-knowing Wikipedia, hedonistic adaptation is “the supposed tendency of humans to quickly return to a relatively stable level of happiness despite major positive or negative events or life changes.”  Meaning that no matter how high or low we get, we tend to end up at a happy medium at some point.  There are many examples of this in all of our lives, but the one that jumps out to me the most is a death of a family member or friend.  When you first found out that someone close to you has passed away, there is this feeling of crushing sadness.  Usually accompanied by lots and lots of tears.  You don’t want to eat, sleep or work because you are just so down about your loss.  But eventually, some people taking a longer time than others, you get over it.  You’re able to get on with your life and not let the loss completely debilitate you.

Everyone has lost or will lose a loved one at some point, but we move on.  No one lives the rest of their life in the same fashion as they did when they first found out about the death.  We had an incredible low, but we get back to our medium more or less.  The same goes for happy events.  A celebration for getting a job doesn’t last forever.  We eventually get back to a steady state.  This is an important thing to remember and a good reminder for us not to get too high or too low on ourselves, because we’ll eventually get back to normal.  Celebrate and grieve within limits, and then move on.  While this seems like a somewhat callous and objective way to think of things, it is so very true.

The idea of hedonistic adaptation can also be applied to our financial lives.  We all want more money because we think it will solve all of our problems and make us happy.  But most likely it won’t.  Think back to your time as a kid.  More than likely, you had a lot less money in your pocket when you were 10 years old (though probably a bigger net worth if you’re a broke professional).  Many people probably remember being a bit happier when they were younger.  We were used to the simpler things in life as kids, but as we get older and get more money, our expectations change as well.  As the good old saying goes, mo’ money mo’ problems.

If most of us remember being happier when we had less money as kids, how can we possibly think that having more money will guarantee happiness?  Well it’s easy to say that Hollywood is the cause of the world’s problems, but in this case it certainly is.  Specifically, marketers making us believe that having more money will bring real happiness.  This idea has turned this age into the age of consumption, spawning a whole new set of problems (such as Keeping up with the Joneses).  This goes against our nature of returning back to our happy medium no matter how high or low we get.  And this is a problem.

But how can knowing this help us?  Should we make it a point not to worry about money?  Should we turn down that raise or not increase our prices because it won’t make us happier?  Absolutely not.  What we can do with this knowledge is become smarter with our money.  The two things that many people, including myself, worry about when it comes to money is reducing debt and ensuring my family and I are financially secure for the future.  Notice this doesn’t include worrying about what type of TV or phone I will get years from now.  Most people innately worry about having enough for the future, and this is where debt and retirement savings come into play.

If you get a raise that nets you an extra $200 per month, don’t just let it sit in your account and eventually spend it on something frivolous.  Automatically transfer that extra $200 into your debt repayment amount.  This will get you out of debt sooner and decrease the amount of interest you pay.  Got some more money?  Increase your retirement plan contribution and don’t even give yourself the chance to miss that money.  Your heart will want that extra money to buy things or go on an unplanned trip to temporarily increase your happiness.  But knowing what we know about hedonistic adaptation, that happiness will not last.  Increase your piece of mind by getting rid of debt and saving for the future.

This obviously doesn’t mean living like a hermit and having a too large retirement account (yes there’s such a thing).  Spend money on yourself and your family on things that you will remember and that will bring lasting happiness and memories.  But focus on securing your future selves financially.  This is what brings people most happiness in the end.

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The Best Way to Save Money on Groceries

Everyone’s gotta eat.  Even people who undergo hunger strikes have to eat at some point (or face an alternate end to the strike).  Along with shelter, transportation and cell phones, food and drink are the necessities of life.  So we should naturally find the least expensive way to do it.  Some people scoff at the idea of saving money on food, but finding ways to minimize your money spent on food, without sacrificing nutrition or flavor, will lead to a lifetime of money saved.

There are two main ways to get food nowadays:  eat out and have someone else cook for you or cook at home with stuff bought at the grocery store.  You can also make lots of friends and attend lots of dinner parties, but that sounds exhausting.  Gone are the days of hunting, gathering and foraging for our food.  No longer do we have to be the strongest or fastest to get the best food.  We are definitely blessed to live in a period where good food and clean water are plentiful and relatively cheap.  But it CAN get expensive if you’re not careful.

Eating out is almost always more expensive than making your meals at home.  But eating out once in a while can be fun, so if it is a regular thing for you, try to minimize it.  This will have two main benefits.  One, you will definitely save money.  When you eat out you not only pay for the food, but also the salaries of the people who cook it and then some so the place can turn a profit.  You are almost always going to save money by staying home (unless you only eat from the dollar menu.  Then you might save a little but your food will suck.)  The second benefit to eating out less?  It will actually make the experience more memorable.  Once you do something regularly, no matter how awesome it seems at first, it will become routine and not as exciting anymore (think first week of driving a car and driving a car for years).  Save it for really special occasions and it will definitely become more memorable.

Now that we’ve determined that eating at home is cheaper and better, what’s the best way to save money on groceries?  Some people love coupons.  Others will swear by a certain grocery store.  The truth is, all these little strategies can be right because being an efficient grocery shopper requires experimenting.  Find out when the best time to shop is one example.  A lot of people shop after work, but a lot of people are tired after work so they might just pick the more expensive thing because they have trouble finding the cheaper one.  Some people are very organized and love keeping folders of coupons.  Others throw coupons right into the trash.  It will take some time, but doing experiments and finding what works for you is the only way to really save money shopping for groceries.

Drum roll please…

But there is one thing that EVERYBODY can benefit from to save money on groceries.  From the fabulous couponistas to the broke grad school student just stocking up for the week, all shoppers can benefit from making a shopping list.  Something as simple as looking in your fridge and seeing what you need for the upcoming week or so and typing it into your phone will save you a lot of time and money at the grocery store.  Making a list will guide you on which aisles you should be in, rather than just wandering from aisle to aisle in a snakelike fashion.  You will get what you need and get out of there, without picking up those colorful donuts that were on sale (and are probably stale).

Another benefit of consistently making a list when going grocery shopping is that you will start noticing what staples you really need and will start finding the best places to shop for them.  Some stores tend to have better prices (or quality) when it comes to produce or dairy etc.  Finding those things you consistently use at the lowest prices will do wonders for your budget.  So if there’s one single thing you can do to consistently save money on groceries, making a list is definitely it.  And what do we do with our newfound saved money?  Apply it to our debt repayment plan or increase our savings/investment.  That sounds pretty appetizing.

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Quick and Easy Ways to Pay Less Taxes

homer check

Tax season 2014 has come and gone.  The best thing about it being over?  No more seeing those unfortunate Liberty Tax employees dancing on the corner.  Way to make paying taxes even less dignifying.  Since you filed your taxes, are waiting for your refund (here are some things to do with your refund by the way), or have to send a payment in, it may be time to finally relax.

WRONG!  There is never a time to relax when it comes to taxes, because what you do this year will affect you next filing season.  Being mindful early on in the year, however, can make tax time 2015 a lot easier and hopefully more lucrative.  Here are some easy things you can do now in order to reduce your tax bill if you’re employed:

Contribute to (or increase) your 401k:  Can’t think of a quicker and easier way to reduce your taxes than this.  Though it is technically a tax deferral since you will be paying taxes on it when you eventually withdraw between age 59 and a half and 70, the earnings have time to compound.  And if you don’t think your income, and thus your tax liability, will be lower when you’re retired than in your prime working years, you have some priorities that need to be shifted.

Another thing to remember is that money contributed to a 401k is done so before taxes, so a $100 contribution doesn’t take $100 away from your next paycheck.  Having less money is the main reason that people don’t want to increase their 401k contribution, so this fact should be kept in mind.  Besides, just find one monthly expense to cut or reduce and voila!  You have successfully invested in your future and increased your net worth.

Open a Health Savings Account:  Regular readers on this blog know that I’m a big fan of the HSA (here and here).  Irregular readers should know that I’m a big fan of the HSA.  You can set aside pre-tax money for an expense you will need now and in the future: health care.  Everybody has to go to the doctor or dentist at some point, so why not save money on taxes and open an HSA?  The contribution limit for families in 2014 is $6,550.  That’s a lot less money to pay taxes on.  The best part is that when you eventually use your HSA money, you are not taxed on it.  Any earnings are not taxed either.

This is such a great deal but you have to have a high deductible health plan (HDHP) to participate.  Some people, especially those who see doctors a lot, are wary of these because you pretty much pay any emergency visits in full until you meet the deductible amount.  The advantage is that their premiums are much less and the plan still pays for routine annual visits.  If you run the numbers and find that even with the tax savings and lower monthly premiums you would be saving more money by having a traditional health plan, then signing up for a high deductible one wouldn’t be the best idea.  But if you’re not in that minority of the population, fully contributing to your HSA is an amazing way to reduce your taxes.

Open a 529 plan (some states):  If you would like to give your kid a little financial head start for college, you can open a 529 plan.  Each state has their own plan with different administrators, investments, fees etc.  Some states allow you to deduct some or all of your 529 contribution from your state taxes.  Currently, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming don’t offer this because they don’t have any state income tax (this is also a list of good states to retire in).  California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Hampshire, New Jersey and Tennessee have a state income tax but don’t allow for a 529 tax deduction.  I guess they don’t care about education.

All other states have some type of deduction from state taxes.  It’s also worth pointing out that 401k contributions should have priority over 529’s.  Not only do you get a federal tax break, you also probably get matching funds when contributing early on.  And if you don’t make sure you’re taken care of during retirement, your kids (if they’re good) will have to pick up the slack anyway.

Work less:  Not a popular piece of advice on personal finance blogs, but if you make less money then you pay less in taxes right?  While this is true, it’s probably not recommended in most cases, especially if you need money to pay off debt or save for retirement.  But if you are in that enviable position where you make more than enough money and want to spend some more time with family or just relaxing, work a few less hours per week and you’ll be paying less taxes.  Not a bad trade off.

These are just a few very quick ways to reduce your taxes and help your future self at the same time.  There are many other ways to reduce taxes, which is why there are books and CPA’s available.  The US tax code is complex but it is definitely worth learning since you will most likely be paying taxes until you’re in the grave, and even beyond.

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A Twist on the HSA

The Health Savings Account is the relatively new kid on the block in the healthcare world (check out my intro post to the HSA here).  The HSA has the distinct advantage of staying with you at the end of every year rather than expiring on December 31 like Flexible Spending Accounts.  Depending on which bank you open your HSA with, that money can be invested or gain a small amount of interest.  If you’re eligible for it, it is a nice account to have because contributions, earnings, and qualified distributions are all tax free.

There is one condition of the HSA that actually gives it a while new dimension.  It can act as an IRA.  My eyes were opened to this idea from a post by the Mad Fientist.  It took me a few days to kind of wrap my head around it but ever since I did, I’m all in.  And it’s all because of one rule regarding HSA’s:  any distributions made from the account after the age of 65 can be used for ANYTHING.  Meaning that after you turn 65, you can use the money for healthcare expenses, paying the mortgage, going on a vacation or just letting it sit in the account and grow.  The one caveat is that if you withdraw HSA money after 65 for anything other than healthcare expenses, you will have to pay taxes on it. This makes it similar to a traditional IRA.

The key to making this happen is that you don’t have to DIRECTLY pay for healthcare expenses because the funds don’t expire.  Let me explain.  With an FSA, the money expires at the end of the year so you better use that money on any and all healthcare expenses.  Or scramble to get glasses in December like I did because I had too much money left over.  You either use the debit card they give you or pay for it yourself and make sure to submit the receipt by the end of the year.  With an HSA, you can just pay for a $100 doctor’s visit out of your own pocket (ideally with a rewards credit card), hang on to the receipt and know that you have two choices.  The first choice is to now move $100 from your HSA to your checking account to cover the $100 charge you made.  This is fine if you know you won’t have enough money in your checking or savings to cover the bill.  This is also similar to what you would do with an FSA.

The second choice, and the better one, is to not touch your HSA money and simply file the receipt away for future use.  This will allow that $100 to grow in the account and still give you the ability to withdraw that $100 at some time in the future if you really need it.  Or, ideally, just let it sit in the account until you’re 65 and withdraw it without penalty or taxes.

There are certainly some things to keep in mind when using the HSA as a modified IRA.  If you have a genuine healthcare emergency that you will definitely not be able to cover out of pocket, use the HSA money.  That’s what it’s there for.  Hopefully the emergency will happen after you have had a few years to build up some money in the account (the 2014 IRS limit for HSA contributions for a family is $6,550).  So saving the max amount even after a few years will give you a nice cushion in case of a high hospital bill.  So if you haven’t opened an HSA or are not contributing the max amount, find a way to do so.

For its intended use, the HSA is a great account as it allows you to set aside money tax free, lets the money grow in the account tax free and lets you withdraw it tax free for qualified healthcare expenses, which we all need to spend money on at some point.  No other account allows you to do this.  But if you can keep your healthcare expenses low and cover them out of pocket, this money can grow and grow until 65 and if you need it before then, it will certainly be there for you.  Just be sure to hang on to your receipts.

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