Personal Finance Archives - The Broke Professional

4 Reasons why an Emergency Fund is Crucial

The average person has many financial steps they need to take.  They need to make an income.  Preferably doing something that is not soul crushing.  They also need to make sure they are saving enough for retirement.  The government will not bail out the average American unfortunately.

If you have kids, college savings are important since tuition is rising rapidly.  And people also want to have a little fun with their money.  Imagine that.

With all these pressing concerns, the tried and true advice of having an emergency fund can become a second thought.  But it shouldn’t.  It should actually be the first thought and will provide the basis for every other financial goal you’re pushing for.

Here are four reasons why emergency funds are important.  I’m sure there are more than four reasons, but I just can’t think of any others at the moment:

Not having one can derail EVERYTHING: I mentioned retirement and saving for college.  Most people like making regular monthly contributions to these accounts to keep them well funded and growing.  But what if you get hit with a big medical bill?  What if the car’s transmission goes out?  What if the AC decides not to work?

Many people have to stop their monthly contributions to other plans in order to pay for such an emergency.  This means less growth and less money for you in the end.  Sometimes a lot less.  An emergency fund will allow you to keep on your financial path without skipping a beat.

Emergencies are inevitable:  Many people view emergency funds as just a “rainy day” fund in case something crazy happens in life.  The fact is, crazy things happen to EVERYONE at some point in their life.

It would be safe to say that everyone has had some type of financial obligation pop up that was not planned for.  Cars break down, people get sick and pipes burst.  Once you plan that an emergency will happen that will require some cash and fast, it makes it that much easier to save for that inevitable day.

Avoid credit card debt:  Credit card debt is one of the worst debts out there.  But it is so very easy to get into it.  You can’t go to a grocery or department store without being asked to sign up for a card.

Because credit cards are so easy to get, some argue that you should use credit as your emergency fund.  It’s easy to get and many people can get cards with limits of at least $5,000 easily enough.

But the problem is that even if you have every intention of paying the bill off in full, life can come at you fast.  You may be okay paying the minimum payment until you can get some more money.  Once you start down that very slippery slope, it can be very tough to recover.

Avoiding credit card debt is probably the one thing that will give people the best chance to have a great financial life.  And having an emergency fund full of cash will let you do just that.

Peace of mind:  We all talk about wanting financial peace or financial freedom.  Whatever your definition of that is, the fact is that having a solid emergency fund will help you get there.

When you hear an unfamiliar sound coming from your car or you notice a leak from the water heater, you will of course try to fix the problem but in the back of your mind you will know that there is enough cash to cover it.  There is no panic that needs to be experienced.

At the end of the day, peace of mind is one of the signs of someone who is financially free or on the path to get there.

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Valuable Above the Line Deductions

Make off with the deductions you deserve

Not sure if you heard, but a new tax law went into effect for 2018. I wrote about some of the major changes here.

One of the goals of the new tax plan was to make the tax filing process easier and simpler. While the jury is still out on that, one thing we can count on is that more people will be taking the standard deduction instead of being able to itemize their deductions.

The main reason for this is the limitation on the State and Local Tax (SALT) deduction to $10,000. The SALT taxes comprise of a number of different types of taxes, but the main one that will affect most people is property tax.

This is especially a huge blow for those living in expensive cities such as San Francisco or New York, where property taxes alone can be $20,000, way over the $10,000 limit.

So with the hard limit placed on SALT and the doubling of the standard deduction, fewer people will be able to itemize their deductions. That’s definitely a bummer, but all is not lost.

Above the Line deductions to the rescue!

Walk the Line

Deductions taken above the line have always been valuable. The “line” refers to your Adjusted Gross Income (AGI). Many tax breaks and credits are calculated based on your AGI.

And most of them start phasing out if your AGI is too high. That’s why above the line deductions are so powerful. Not only do they reduce the income that you’re going to be taxed on, they can also make you eligible for even more tax perks.

For example, the American Opportunity Tax Credit is a nice credit for tuition and other education costs. You can get up to $2,500 off your tax bill. That’s powerful.

But if you’re a married couple in 2019 and your AGI is above $180,000, you cannot claim the credit. A big loss.

Another good example is a Roth IRA. They are awesome accounts that allow you to save tax free money for retirement. But if you’re a married couple that makes more than $203,000 in 2019, you can’t contribute to a Roth. Another big loss.

I hope you can see the importance of keeping your AGI as low as you can. Since most taxpayers will be using the standard deduction under the new tax law, above the line deductions become all the more valuable in reducing your tax bill.

Low Hanging Fruit

Here is the actual list of above the line deductions taken directly from tax form 1040:

These are the big juicy deductions to focus on. What jumps out to me is that there are two no brainer deductions that most people can take advantage of.

Health Savings Account deduction. HSA’s are one of the best accounts out there. And if you have a high deductible health plan, which many people do, you can contribute to one. You can reduce your AGI by contributing to one, and any investment growth is tax free as well.

If you’re employed, you can simply get the contributions taken out of your paycheck. Easy enough. If you’re self employed, just report your contributions on that line 25 to get your above the line deduction.

-IRA contribution. This is another nice deduction you can use to reduce your AGI. It’s important to note this deduction refers to Traditional IRA’s. Roth IRA contributions are not tax deductible.

For 2019, you can contribute a maximum of $6,000 to an IRA. This will beef up your retirement savings while reducing your taxable income. A true win-win.

If you’re employed and are offered access to a 401k, you can still contribute to your own Traditional IRA, but there are income limits. If your tax filing status is single and your income is more than $74,000, your contributions are not tax deductible. $123,000 is the limit if married.

But no need to fret. The contribution limit of a 401k plan in 2019 is $19,000. More than triple that of an IRA. That’s income that is not reported on your W2, effectively lowering your AGI. Take full advantage of this if you can.

Student loan debt is not something you want to keep around too long, but it’s nice you can get an above the line deduction for the interest paid. In fact, if you have some low interest loans (below 4% in my book) that don’t keep you up at night, it can make sense to keep some of it around.

The reason being that compound interest from investing is most powerful when you’re young. If you invest early and often while keeping low interest student debt that will give you a little deduction anyway, it can be a nice wealth boost. Just a thought.

If you’re self employed, you have a few more opportunities to get deductions. You can deduct your health insurance premiums and part of the self employment tax.

I’ve been paying COBRA premiums since I recently became self employed. COBRA is much more expensive than what I was paying for health insurance as an employee, so it’s nice that I will be able to deduct that on my tax return.

Take what you can get

Paying more taxes than you should isn’t patriotic. The government lets us take deductions for a reason, so take advantage of them. The two big ones everyone should try to take advantage of are HSA and Traditional IRA contributions.

Almost everyone should be able to contribute to these. And they have the compound effect of increasing your retirement savings and reducing your AGI, possibly opening the door for even more tax credits. Can’t think of a more slam dunk way to increase your wealth.

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The Most Effective Way to Avoid Burnout

Burnout doesn’t really have an official definition. But it can be characterized by bouts of depression, hopelessness and feeling flat from being stressed out at work.

Anyone can experience burnout, but it is pretty common among high income professionals such as doctors, lawyers and dentists.

Doctors are especially prone to feeling burnout out from work. Depending on the specialty, the rate of burnout can be anywhere from 30-40%. This is a popular article by a surgeon in Australia about the particular reasons physicians are feeling stressed and burnt out. Pretty fascinating read.

Burnout is real. So how do we address it? There are a number of ways including increasing morale and decreasing administrative tasks so professionals can actually focus on their job.

But this being a personal finance blog, I’m going to propose a financial way to help deal with burnout. And it’s pretty simple: Make enough money and have a plan for it.

Money = freedom

There are lots of ways people deal with burnout. And most of them involve escaping to something else like alcohol, food, television or medication. All valid ways to deal with stress and burnout.

Valid, but not very effective. In the end, burnout is largely due to lack of control. You can’t control your hours, your co-workers, the weather etc.

Most people also can’t usually control how much money they make. While money isn’t everything, I feel it plays a huge role in the potential for burnout.

Let’s say a doctor is being forced to work hard 80+ hours a week with very little sleep. His salary is $50,000/year. I guarantee you that doctor will start looking for the exits real soon.

How about he magically gets a raise to $500,000? He will definitely stick around that job longer despite the hard work. But he may start looking elsewhere after it just gets to be too much.

Now how about he gets a raise to $5 million? That will be the most loyal doctor you will ever see and burnout will be the farthest thing from his mind.

While this is an extreme example, it does show that if financial security is there, the risk of burnout will decrease. But we all can’t just pull a lever and make more money appear. Increasing income is a long term process that takes some trial and error. But for someone who is staring burnout in the face, time is one luxury that they don’t have.

So the focus should shift to what you can control. Specifically, how you spend your money and your overall financial plan.

Focus on what you can control

People who are stressed usually spend money to make themselves feel better. But it’s only temporary, and then you have less money. Which makes you more stressed.

So the first thing I would recommend is to find your biggest spending leak and plug it. Whether it’s eating out, drinking out or shopping, you need to cut the spending or risk facing burnout.

If you successfully do that, you will have some extra money every month. Now comes the important part: Make a plan for that money. You don’t need a full on financial plan that has retirement projections for multiple scenarios. That will come when you have more time and money.

Just make a simple goal for that money. For example, if you have an extra $200 every month, set up an automated savings plan into a Roth IRA. Or if you need some more in your emergency fund, send the money there every month.

The important thing is to do it and make it automatic. This will be a nice first step to financial independence and allow you to take back some control in your life. Which will eventually help minimize your chances of burnout at work.

Once you’re able to save more money, and hopefully make more as well, you can continue to take some more control by adding more money to your existing plan. Or you can make new goals such as saving for travel, a home or even working a little bit less.

Now that’s real control.

Burnout is Real, but not Inevitable

I have to admit, working in a corporate environment is tough. While I have thankfully never gotten to the point where I just want to walk off the job, I have experienced stressful situations which can make me wonder what I’m doing with my life.

But money can be a good motivator. And if you have a plan for your money that will eventually lead to financial independence, you will be able to tolerate a lot.

Obviously, if you are in an overly stressful and toxic environment which is affecting your health and well being, you should find an exit plan. But having a solid financial foundation will let you make the best decision for yourself and your career.

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Unforgivable Financial Sins

Committing these financial sins is like lighting your money on fire.

Most major religions have the concept of sin.  From my understanding of my own religion and other major world religions, sins are detestable actions that take you further away from the Divine.  Some sins have the double whammy effect of harming your soul and potentially messing up your life on Earth too.  Infidelity or drug use, for example.

Even those who don’t subscribe to a particular religion believe there are some acts that just should not be done.  Murder, theft and oppression come to mind.

I would love to go more into this, but I’ll save that for the theology blog.

I wanted to discuss some financial “sins” that can take you away from the “divine” (financial freedom) and can destroy your life.  While some financial sins can potentially affect your afterlife (think embezzlement and money laundering), the sins discussed here will be more of the mortal world variety.

Committing these sins can derail your finances and can sometimes be a gateway to even more financially devastating actions.  In no particular order, here are some of the more blasphemous things you can do to your finances:

Raiding tax deferred retirement accounts early

Retirement accounts such as 401(k)’s and IRA’s are the backbone of a solid retirement plan.  You contribute into these accounts during your younger working years so that you can hopefully enjoy a stable retirement down the road.

The government has put some restrictions on these accounts so people won’t just withdraw money from them as they please.  A common retirement account is the Traditional IRA.  According to the IRS (no relation to IRA), if you withdraw funds from a Traditional IRA before age 59.5 you will have to include the withdrawal amount in your taxable income along with paying a 10% penalty.

That’s a hefty fine for putting your hand in the retirement cookie jar.  If you are in the 22% federal tax bracket and you withdraw $100,000 from your IRA, you lose $22,000 of it from taxes.  Add the 10% penalty and your $100,000 withdrawal becomes $68,000!!

Think of withdrawing early from your retirement account as robbing an old man version of yourself.  That seems cruel.  You’re also sort of robbing your current self too with the huge tax hit.

So unless you’re in dire straits, don’t consider withdrawing from retirement accounts.  Your older self will thank you.

Carrying credit card debt

There used to be a time when credit cards didn’t exist.  People used to pay for things with cash and for the most part didn’t get into monstrous debt.

Nowadays, credit is easy to get which makes it much easier to get into debt.  Funny how that works.

In 2017, the average household credit card debt was a little over $6,000.  That is a bad enough number, but there are a lot of households that have no credit card debt.  So the ones that do have debt probably have much more debt than $6,000.

The sinful nature of credit card debt has to do with their super high interest rates.  Rates can vary widely, about 7% on the low end and 25% on the high end.  These types of rates will make it almost impossible to make any money investing.  Those high credit card interest rates will wipe out any potential investment gains.

Thankfully there are a lot of options to help you jump start your debt repayment.  You can do a balance transfer to a card that has a 0% promotional rate.  Just make sure to pay it all off before the promo rate ends.

Many companies, such as Lightstream and SoFi, also offer personal loans with much lower rates than a credit card would offer.  You can use these funds to pay off the credit card debt and work on paying back the much lower interest loan.

Buying a home when you can’t afford it

The American Dream of owning a home is alive and swell.  For whatever reason, people don’t think they’ve “made it” unless they own a home.  Which is dangerous because there are lots of people who should be renting instead of owning due to the current state of their finances.

Owning your own home can be downright expensive, especially if you stretched your home buying budget a little too much.  Not only do you have the monthly principal mortgage payment, you also have interest to pay to the bank (rates are rising!), property taxes to pay to the state and homeowners insurance to the insurance company.

Then you need to factor in maintenance costs.  Even if you buy a brand new home, things will break down and light bulbs will need to be changed.  And everything has a shelf life and will eventually need repair or replacement.  That includes the dishwasher, water heater, air conditioner and everything else that keeps your home comfortable.

If all of these potential costs make your head spin, maybe you should reconsider buying a home.  Paying rent is a simple monthly expense with no maintenance costs or strings attached.

The sinful part of buying a home you can’t afford is that it handicaps any other financial or personal goals you may have.  It gets much harder to find money to invest or travel if everything is tied up in the house.

These are three big financial sins that should be avoided by all.  One thing I’ve learned in life is if you can avoid the big sins and make small consistent virtuous decisions along the way, you will be just fine.

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3 Steps From a Negative Net Worth to a Millionaire

Disclaimer:  This post contains affiliate links.

If you finish any kind of professional or graduate school, you’re most likely going to be worth less than you did before you started.  (Worth less, but not worthless!)

Unless you have very wealthy and generous parents who can afford to cover your tuition payments of $50-60K per year, you will probably have a negative net worth coming out of school.  Mainly because you will have student loan debt and not much else.

Getting out of undergrad without student loan debt is doable.  You can get some scholarships, go to an in state school and work a full time job along with your studies.  But graduate schools have much fewer scholarships, higher tuition and a large workload that will prevent most people from working full time.

A typical optometry school graduate will have about $150,000 in debt and minimal savings.  That’s a net worth of -$150,000 right out of school.   You are worth less than you were when you were a baby.

But all is not lost.  With a few critical moves, especially early on in your career, you can reach a net worth of a million dollars in a reasonable amount of time.  Why a million dollars?  I don’t know it just sounds awesome to say you have a million dollars.

Now that you have that shiny new degree, you have the ability to make consistent money and dig yourself out of that hole.  With tuition rates soaring and some industries paying less now than in the past, it can seem like a daunting task to become a millionaire.

But it can be done in a few easy steps.  Just like a Tastee recipe video.

Step 1:  DON’T go on a spending spree out of the gate!

This step is the most critical but also the easiest to forget.  Going from a monthly income of almost nothing to thousands of dollars almost instantaneously can be exhilarating.  You want to do so many things like go out to fancy dinners, get that car you’ve had your eye on for a year and finally get away from living with roommates.

Reigning in your spending after you graduate is absolutely key.  If you get a new car and house and go on a fancy vacation right out of school, you are setting yourself up for financial failure.  You will be getting used to a lifestyle in which you have to spend a certain amount instead of investing and paying off your student loans.

It’s also important to consider that right out of school, you are used to living pretty lean.  So it shouldn’t be a huge adjustment to not live like a baller.  I’m not saying don’t spend any of your newfound money.  Just don’t spend ALL of it.

You can give yourself a luxurious 20% pay raise from your student life and put the rest towards your student loans or investments.  If you do this for just a few years out of school, you will have built the financial muscles that will allow you to become a millionaire very quickly.

For doctors that finished school a few decades ago, this step probably wasn’t all that critical.  Student loan debt was manageable and you could afford to indulge in a few things out of school.  Getting a new luxury car right out of school was not a huge deal.

But times are different.  And unless you change you will become a paycheck to paycheck doctor.

Step 2:  Get your student loans in order.  And start getting rid of them.

I’ve written a lot about student loans and will continue to write about them as long as they continue to be a big problem for new graduates.  It can seem very overwhelming to see a 6 figure debt right out of school.  But the only way to get rid of it is to get your ducks in a row, find a strategy to attack them and just keep at it.

The first thing you want to do is refinance all of your private high rate student loans.  You probably have a decent credit score coming out of school (find out why here), so you should be able to get a better rate.

Click here to get refinance quotes with Credible.  If you end up getting approved by them, you will receive a $200 bonus.

Then you need to figure out if you need to refinance your federal loans as well.  Unless you’re aiming for public service loan forgiveness, you should probably refinance and get a lower interest rate.

After all this work refinancing your loans and getting great interest rates, you have actually done nothing to your debt.  Now comes the hard part: making the payments.  Decide when you want to be debt free.  I think 10 years is a reasonable amount of time since you also need to invest your money and let compounding interest do its thing.  But the bottom line is that making large and consistent payments is the only sure way to pay off student loans.  Refinancing and consolidating may sound nice, but debt payoff is the name of the game.

Some people hate debt and will want to be debt free in 5 years.  More power to you.  The key is to be aggressive and make consistently high payments.  This will also mean you probably will have to postpone that around the world vacation or the new house until you’re debt free.  So be it.  The longer debt has a hold on you the more it will squeeze out of your finances.  Getting rid of it sooner is almost always better.

Step 3:  Invest early and often.

One benefit of making a high income from a professional position such as a doctor or lawyer is that you can use your money to enjoy a very comfortable life.  But once you stop working, the money stops coming in.  And trouble will soon follow.  That’s why investing is important.  It allows you to make money work for you when you can’t, or have no desire, to work anymore

The other benefit of making a high professional income?  Being able to invest more than the average person.  This is important since most professionals don’t start working until a few years after the general population.  We’re already behind the curve when it comes to starting to invest so it’s extremely important to invest early in your career in order to let compound interest do its thing.

And please do not underestimate the effect of compounding interest.  The earlier you invest, the quicker your money will grow and the quicker you can retire.  Or make an around the world trip  Or whatever it is you want.  Investing gives you that choice.

Investing comes in many forms.  It can be buying mutual funds within an employer sponsored retirement account.  Or a Traditional or Roth IRA you open on your own and pick some stocks.  Or it can be in the form of rental properties that you buy and hold.  There are many options, so just pick the ones that interest you and pour your heart, soul and money into them.  Allow that money to grow so you’ll be able to handle anything life throws your way.  Or simply retire at age 50 if you feel like it.

Conclusion

So that’s really all it takes.  Live like a slightly richer student, start attacking your student loans and begin your investing career as early as possible.  It just comes down to these three steps.  Now there are nuances and details within these steps you will need to figure out on your own.

Things such as how much should you allocate to student loan payments and how much to investing?  How much house can you really afford?  When is a good time to have kids?  What is your risk tolerance when it comes to investing?

There is no one size fits all answer to these important questions.  But as long as you get the big things right, you can figure out the details along the way.

And then check your bank accounts to find you’re a millionaire!

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Don’t Fall for the Minimum Payment Scam

Don’t get trapped!

I’ve written a lot about credit cards and their many advantages.  Things like earning rewards, extended warranties, travel benefits and fraud protection just to name a few.  I wrote a post very recently about how credit cards are so much better than debit cards.

But credit cards can also be death to your finances.  If you don’t pay on time and in full, you will be subject to late fees and interest.  A LOT of interest.  Credit card interest rates are easily in the double digits.  And some cards can be in the 20% range.  There is no reason anyone should be paying this much interest.

And consumers know this.  Most adults know that not paying your credit card in full will lead to interest being charged to your balance.  Knowledge isn’t the problem.

The problem is that the credit card companies have made it palatable for consumers to carry a balance and be charged interest along the way.  The way they do this is by offering the “minimum payment.”

And it’s a complete scam that is designed to take money from consumers and turn it directly into profits for the credit card companies.

‘Til Debt Do Us Part

Here is a screenshot from one of my recent credit card bills:

Every credit card statement includes a message like this.  They are literally telling us that making the minimum is bad for our finances and showing us how bad it is.  In this case, the minimum payment was $25.  That’s such a reasonable amount why wouldn’t I take the credit card company up on this offer?

Because the interest rate on this card happens to be 15%, and it would take me 2 years to get out of debt.  And most people have multiple credit cards asking for a minimum payment.  And all of this assumes that you will never spend another cent on your card (which is why it’s called revolving debt by the way.  Debt is being paid off while new debt is being created).

So even with this warning from the credit card company itself, why do so many people just default to just paying the minimums on their cards?  Because it’s just easier.

We live in a monthly payment type of society.  And it just seems a lot cleaner to add your credit card minimum payment to your pile of monthly obligations.  Put it on auto pay along with the car loan, student loan and mortgage.  Just set it and forget it right?  But in this case, forgetting about all of that interest building up in the background will destroy your finances.

Credit Card Debt is an Emergency

There is no such thing as a free meal.  If you get a “free” meal, you will most likely be on the receiving end of a sales pitch.  Just eat, smile, nod and be on your way.

Paying off credit card debt is the closest thing to a financial free meal you can get.  Getting into credit card debt and paying 20% in interest month after month is not ideal.  A situation like that, which many families find themselves in unfortunately, will keep you in financial prison forever.

But once you realize this and commit yourself to getting rid of that debt, no other financial decision matters.  As high as credit card interest rates are, there is no investment out there that would justify you not getting rid of that debt as fast as possible.

If you’re paying 20% interest on a credit card, getting rid of that debt will be the equivalent of getting a 20% return on your money!  While avoiding the debt is a much better first step, paying it off ASAP is the next best thing.

That’s why I consider credit card debt an absolute emergency!  All discretionary spending such as new cars, vacations and fancy dinners out should be put on hold until the debt is gone.  It’s much easier said than done but it’s the only way you’re going to get out of financial hell.

The worst part is that credit card companies don’t want you to feel this.  They want you to feel comfortable shelling out 20% more money than you should each month.  The goal is for credit card debt to become the “new normal”.

But you know better than that.  Take care of credit card debt first and then focus on your other goals.  That’s the closest thing to a financial free lunch you will get.

Enrich Yourself, not Visa

Banks make a TON of money off of credit cards.  That’s why we will keep getting bombarded with credit card offers for as long as we live.

It’s actually pretty absurd.  Banks are simply offering a 30 day loan and charging an exorbitant amount of interest for it.  At least with an auto loan you can enjoy your car and get some use out of it.  But with credit card debt there is no collateral that you can really make use of.  Those fancy dinners out are just a memory at that point.

So don’t fall for the minimum payment scam.  There is no use for it except to keep consumers in debt for their entire life.  It’s all very sinister if you really think about it.  People become depressed and even commit suicide because of debt.  But as long as banks continue to profit off of credit cards, they couldn’t care less.

Free yourself and pay off your debt in full!

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How to Stack Bank Account Bonuses

The result of chasing bank account bonuses.

Banks know how to make money off of regular people.  They get some money every time you swipe a credit card and a lot more money from interest payments.

They get money from ATM fees and from being able to lend out money that we deposit with them at high interest rates.  And many banks also pay out really crappy interest rates to consumers.  So it’s a win-win-win all around for them.

But there is a way we can make some money off the banks.  One way is chasing credit card rewards.  I’ve previously written here and here about the strategies you can use to get credit card rewards.  As long as you don’t spend more than you need and never carry a balance, you can make out pretty well.

Banks also like to give out rewards when you sign up for checking and savings accounts.  Many of them will give a cash bonus if you direct deposit a certain amount or use their debit card a certain number of times.

Just like with credit card rewards, you need to pick the best offers and be pretty organized so you don’t make any mistakes.  Personally, I’ve been able to get close to $1,000 in checking account rewards this year with a little online legwork.  But there are people that get $5,000 or more.

Here are the important things to remember when trying to maximize rewards from bank accounts:

1.  Find the best offers

Most banks offer some type of incentive to sign up for their accounts.  But many offers are not worth the time to chase.  I’ve seen offers as little as $20 to sign up for a checking account at a local credit union.  These types of offers are not worth the time.  Good bonuses will have offers from $100-$500 depending on the amount of hoops to jump through.

My favorite place to look at bank offers is Doctor of Credit.  They have it nicely organized by nationwide offers and state specific offers.  And they’re constantly updating so you can usually find all you need there.  It’s my one stop shop for bank account offers.

2.  Get Organized

Being organized is important in the credit card rewards game.  But it’s even more important in the bank account bonus game.  Many of these offers can have multiple requirements such as direct deposit and debit card swipes.  And you usually have to do them in a certain amount of time.  If you have to keep the account open for a few months, you also have to make sure you don’t get hit with any minimum balance fees.  That;s a lot of stuff to keep track of.

So keep a list of the requirements and date you have to complete them by.  It’s also a good idea to note down the username and password you used to sign up for the account.  Since banks have different password requirements, it can be tough to keep track of them even if you’re using the same password.  Which you probably shouldn’t be.

Make things easy on yourself and keep records of everything.

3.  Early Account Closure Fees

This is a fee that some banks charge if you close an account too soon after opening.  They’re obviously trying to discourage people from opening accounts for the bonus and then closing them, which is what we’re trying to do.

Most early closure fees I’ve seen are assessed 90-180 days after account opening.  If you close the account too early, the bank will take the bonus back.

Simply note the time period in your spreadsheet or list and make sure not to close it before then.  Losing a bonus you earned because you forgot to take the early closure fee into account does not sound like fun.

4.  Electronic Direct Deposit

One thing that can make getting bank account bonuses a lot easier is unfortunately out of your control.  And that is how you change your direct deposit information.

Since most of these bonuses require you to direct deposit a certain amount of money in a certain time frame, being able to edit that online makes the process a lot easier.  However, many employers are stuck in the 20th century and still require you to update direct deposit information by paper.  This could be a major hassle especially if you’re trying to get multiple bank bonuses.

Not being able to edit direct deposit info electronically won’t disqualify for trying for bank bonuses.  But it will increase the hassle factor so it’s something to keep in mind.

5.  Rewards are taxable

Credit card sign up bonuses are great because they’re pretty simple to get and the rewards can be substantial.  Best yet, the rewards are not taxable!  So if you get a sign up bonus of $200 on a credit card, that’s $200 free and clear.  Uncle Sam does not ask for his share.

Bank account bonuses don’t work like this unfortunately.  Bank bonuses usually fall under the “interest payments” category so you will get a tax form to file with the IRS.  So that $200 is more like $150 after taxes, depending on your tax bracket of course.

One way I like to work around this is to deposit any bank account bonuses into our Traditional IRA.  Any deposits will be deducted from our taxes, so it’s kind of a tax free reward I guess.

Conclusion

Credit card rewards can be lucrative and fun to accumulate, but bank account bonuses are something to look into as well.  Even though bank account rewards are usually taxable, some of them are easy to get and if you’re organized, you can make out pretty well.

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Pay Off Debt With a Strategy

Debt is a way of life in America.  It’s easy to acquire and everyone has got it.  The vast majority of people buy homes and cars with debt.  It’s almost impossible to go to college with no student loan debt, especially for any type of graduate or professional school.

People are comfortable with debt, even high interest credit card debt.  And that is a problem.  But that’s for another post.

The problem I want to discuss in this post is how people pay off debt.  And the big problem is that many people, even high income professionals, have no debt payoff strategy.  They usually pay the minimum and then maybe (or maybe not) throw some extra money once in a while at the debt.

This is very inefficient since there are certain types of debt that should be paid off first and there are certain debts that are actually okay to have around.  Some debts should take priority in being paid off over others.

Having a clear debt payoff strategy will allow you to get out of debt faster and, most importantly, minimize the stress associated with having debt.  A debt payoff strategy will allow you to know how much you will end up paying in interest payments and how long you will be paying the debt off.

Here are three debt strategies to consider:

Strategy #1:  Pay the minimum and pray

This seems to be the strategy favored by most Americans.  Safe to say I don’t recommend it.

It can be soul crushing to just get by paying the minimum payment while knowing there are decades of debt in your future.  Probably why most people just try to forget their debt even though it’s eroding their wealth.

Let’s just move on to the next method.

Strategy#2:  Snowball method

The snowball method was popularized by Dave Ramsey and is perpetuated by his rabid followers.  I don’t agree with a lot of things Dave says (such as not having credit cards), but the snowball method is one of the good things he’s put forward.

(Quick tangent:  I’m not a big fan of these finance “icons” or “gurus” like Dave Ramsey or Suze Orman.  The reason is that they are not genuine.  They did not get wealthy by doing what they tell their followers.  Things like “save up a $1,000 emergency fund” and “get your 401k match!” is good advice, but it’s not how Dave Ramsey got rich.

He got rich by putting all of his energy into growing his business.  He got rich by selling products and building his empire, not by creating an emergency fund.  And I’m pretty certain he laughs at the idea of an emergency fund.  Same goes for Suze and any other larger than life finance guru.

They’re business people and they got wealthy by focusing on that.  I would respect these guys a lot more if they were sincere in helping people.  But all they do is create books and courses for the “working man” that have the same old advice in a shiny new package.  Rant over.)

I’m on to you Dave…

The snowball method is simply making a list of your debts by balance, and focusing on paying off the one with the lowest balance.  Obviously, you make the minimum payment on the rest of the loans to keep them current and avoid late fees.

But then you throw everything you can at the loan with the lowest balance.  When that is paid off, you roll (like a snowball!) the minimum payment of the paid off loan into the loan with the next lowest balance.  And proceed to obliterate it with all you have.

I used to dismiss the snowball method because technically it’s not the mathematically best way to get out of debt.  But money is so much about psychology that having a system like this that propels you forward is much better than being discouraged by debt and not having a strategy at all.

Seeing those low balance debts disappear does have a positive effect on your psyche and will keep you in the fight.  For debt payoff novices especially, I would recommend the snowball method.  Just put your head down and plug away at the lowest balance debt and move on to the next.

Strategy#3:  Avalanche method

The absolute mathematically quickest way to get out of debt is the Avalanche method.  It’s the method I use and it has saved me tons in interest.  I’m not sure who coined the term, but I like the idea of an avalanche destroying my debt as opposed to a snowball.

With the Avalanche method, you list your debts in order from highest interest rate to lowest.  Every month you would pay the minimum on all your debts, and focus on eliminating the debt with the highest interest rate.  Then you turn that minimum payment around into the debt with the next highest interest rate.

This is the quickest way to get out of debt.  There’s no argument about that.  But it does require some more upfront work with no apparent payoff in the form of more money.  But once you eliminate the first few higher interest debts, the rest will be engulfed in the avalanche in no time.

The best method

Too many people are in denial about their debt.  I see this a lot regarding student loans.  Doctors and lawyers usually have very high student loan debt.  We’re talking six figures easily.  This kind of debt can seem crushing and it would be easy to turn a blind eye and just make the minimum payment month after month.

That’s a surefire way to pay the most interest possible over your lifetime.  Having a debt payoff plan at all would be great progress for a lot of people.  So using either the snowball or avalanche method is fine by me.  But I think the best way to pay off the debt would be a hybrid version of the two.

How this would work is focus on paying off the first couple of low balance debts to get some progress under your belt.  Once you do that, shift your focus to your highest interest debt to really attack that total balance.  So start with the snowball and switch to the avalanche.  It’ll feel much better to be out of debt in a few years rather than a few decades!

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Plan Out Your Paycheck

The key to getting ahead financially is to spend less than you earn.  There is literally no other way to achieve financial freedom.  This applies to billionaires and regular old working people.

But it’s not easy.  We hear about the athletes and actors who are in debt because of overspending despite making millions of dollars over their careers. If you make $10 million but spend $11 million, you are not in good shape.

However, this is a problem for people of all income levels.  Things like credit cards, mortgages and other personal loans have made it super easy to spend more than you earn.  Easy access to credit makes people more greedy for things like fancy cars and big houses which can create more debt.

A big reason why Americans find it difficult to save our hard earned, and highly taxed (federal tax, state tax AND sales tax!) money is that very little planning is done when receiving that bi-weekly paycheck.  Everyone looks forward to Friday payday but for most people the money hits their checking account with no thought to where it’s going next.

And this is where the trouble begins.  Most of the time that money just gets spent on various bills.  And nothing is left over for savings.  Rinse lather and repeat every 2 weeks.

Now it’s easy to see why lack of planning is a big reason people have a hard time saving.  So what’s the solution?

Checking is the Central Hub

I like to think of my checking account as the control center of my finances.  Money goes in and is then distributed to where it needs to go.  It’s not a place where I like to park money since I like to have my money either invested or paying off debt.

This requires a mindset shift since most people, including my past self, just park their money in checking and paid bills as they came in and tried to save if possible.  Not a real financial strategy since most of the time you’re just trying to keep your head above water.

I consider this a very REACTIVE way to handle your paycheck.  You just kind of pay bills as they show up and have no real savings strategy.  Worse, any extra money that happens to be sitting in checking usually just gets spent.

A more PROACTIVE way to handle your paycheck is to have multiple destinations set up before the money arrives.  That way you can be sure money gets where it needs to be according to your financial goals.

Pay Yourself First Every time

Most people have heard the financial cliche “pay yourself first”.  It’s another core financial concept just like “spend less than you earn”.  While both of these sayings sound fun and useful, they can be difficult to implement.  While most people WANT to save, it just doesn’t end up happening (evidenced by the fact that the average American saves less than 5% of their income).

So if you can’t will your way to save, the next best thing is to get out of your own way and let robots do the work.  This is done through automatic saving and investment plans which are very easy to set up.

Want to save $500 a month in your emergency savings plan?  Set up an automatic monthly deposit.  Finally want to max out your Roth IRA?  Just start a monthly transfer from your brokers website for a $458.33 monthly transfer from your checking account (That’s the $5,500 IRA max divided by 12 months).

You can also set up automatic payments for your credit cards.  This way you’ll never have a late payment and you can use the full grace period the card issuer gives.

It might take a few months to get all of your major goals and bills set up but once you do, money will be moving in and out like clockwork.  You’ll be able to meet your financial goals with a minimal amount of maintenance needed.

And that’s the best way to pay yourself first.  Set up automatic transfers into all of the different accounts you want to save into.  Those transactions should shape how much you spend.  Unfortunately, most people just save whatever they can AFTER they have spent to their heart’s content.

There’s usually not much left for savings after that.

Conclusion

“Spend less than you earn” and “pay yourself first” are two common personal finance phrases that are difficult to put into action.  But these are the two things you have to do in order to meet your financial goals.

The best way I’ve found to do both of these things is to have a plan for any money that hits your checking account.  With technology today it takes a few clicks or smartphone taps to set up automatic transfers from your checking account into your savings account of choice (emergency savings, IRA, brokerage account, student loan accounts to name a few).

Once you get all of these transfers set up, managing your money becomes a breeze.  And you can meet your financial goals with minimal ongoing effort.

Treating your checking account like your money managing robot will make sure your spending less than you earn and paying yourself first month after month.

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Disability Insurance: Yes, You Need It

Insurance is one thing that everyone needs but very few want to sign up for.  And people who sell insurance aren’t exactly the most beloved people on the planet.  But the fact remains, we all need insurance.

There are many different types of insurance.  Everyone is familiar with car insurance and health insurance.  Life insurance is another important one.  (I previously wrote about my life insurance experience here.  Hopefully we’ll never have to use it but I’m glad it’s there.)

The thing with insurance is that we only need it when we need it.  But those times of need can be highly stressful on your family and finances.  Just think of the last time you or your family member got into a car accident.  Insurance was the last thing on your mind, but if you had good coverage, it really gave you piece of mind when the dust settled.

Which is why I highly advocate that everyone, especially high income professionals, get disability insurance.  Not only does it insure against the main engine of your life (your income), but the chances of becoming disabled are much higher than most people think.

Don’t Take A Chance

I’m an optometrist.  Anyone who has been to the optometrist knows that optometrists don’t have one of the more dangerous occupations out there.  It’s a pretty safe environment to practice.  I also am currently devoid of any major health problems such as high blood pressure and diabetes.  And I don’t do skydiving.  So it would seem my chances of a disability are pretty low.

But according to the calculator from the Council of Disability Awareness, I have a 13% chance of being disabled for 3 months or longer at some point in my life.  And the average length of a long term disability for someone with my profile is 78 months.

That’s 6 and a half years of no money being made.  I don’t think there are many families out there that could live off of savings for that amount of time.  This is why disability insurance is so important.  Not having it is putting you and your family at a very great and very real risk.

Like most insurances, disability insurance is a complex product with a lot of moving parts.  Most people would do well to talk to an independent agent and get as much information as they can.  There are also many online providers out there that will help you sign up for disability insurance.  I signed up with Quotacy, who I also used for life insurance.  The process was easy and the agent was very helpful every step of the way.

But two very important aspects of disability insurance, especially for high income earners, is knowing how much insurance you need and making sure you have a policy which gives you the most specific definition of being disabled, namely an “Own Occupation” policy.

How Much Should You Buy

Once you decide to sign up for any type of insurance, the next big question is to decide how much insurance you need.  Disability insurance is no different.

If you’re deemed disabled by the insurance company, they will pay out a monthly amount for the amount of time you remain disabled.  The question to answer is exactly how much of a benefit to sign up for.

Most people would assume that you should apply for a monthly amount similar to what you get paid while working.  This is not a good idea for a number of reasons.  One, insurance companies usually won’t even let you sign up for a monthly amount that meets 100% of your income.  They may come close, but that would make your monthly premiums very high.  Most insurers will limit you to 70 or 80% of your income.

Secondly, you probably won’t be spending as much money when you’re disabled as you do when you’re uh, abled.  Things like eating out and traveling probably won’t be on the top of your list as a disabled person.

Instead, you should focus on what you spend.  Tally up your fixed and necessary expenses like rent, food, electricity etc.  Add some for retirement savings if you would like as well.  This is how you should find an appropriate amount of insurance to sign up for.  Being overinsured will just lead to much higher monthly premiums and more money than you could possibly need while disabled.

Own Occupation FTW

Finally, a key aspect of disability insurance is the specific definition of disability by the insurance company.  The worst case scenario is that you become unable to do your job for some reason and the insurance company doesn’t pay out any benefits because you don’t meet their definition of a disability.

The way to avoid this is to look for an Own Occupation plan.  This is especially important for high income professionals like doctors and lawyers.  While they can come in slightly different flavors, an Own Occupation plan in general states that you are disabled if you can’t perform the duties of your specific occupation.  It is a strict definition and this is what you want in a disability plan.

For example, if a doctor and is disabled and can’t perform his duties, an own occupation policy would consider this a full disability and start making monthly payments.  But if the doctor didn’t have a specific Own Occupation policy, the insurance company could contend that he could do another job like a grocery store cashier or a suit salesman, and would refuse to make the monthly payments.  That sounds like a bad situation.

So it’s in your best interest to get a policy that has a definition of disability that is specific for your profession.  Specialists like surgeons should look for even more specific Specialty Own Occupation policies.

Conclusion

Disability insurance is a vital part to any working professionals insurance portfolio.  Becoming disabled is actually more common than people think.  Something as simple as a fall can cause a total disability.  It is essentially income protection in case the unthinkable happens and you aren’t able to work for an extended period of time.

Pay attention to your expenses when deciding how much insurance you’ll need.  You probably won’t be spending as much money while disabled.  Also, it’s important to sign up for an Own Occupation policy to ensure you will get the proper payout.

Finding disability insurance isn’t as easy as car or life insurance.  But it’s not that hard.  I used Quotacy and it was pretty easy to do it online.  You can also look for an independent agent that will shop policies for you as well.  A good policy isn’t as cheap as life insurance, but it is not too expensive and is definitely worth it for peace of mind for you and your family.

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