Diamonds in the Rough Roundup 9/5/14

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Ah the NFL season is finally here.  Can’t wait until Monday night when the New York Giants make their season debut against the Lions.  Here are some great posts to read in the meantime:

–Three Ideas for September by Dividend Mantra:  Jason was spot on in the intro of this post.  There was some time that most thought that the S&P was too high and a downturn was evident.  Sometimes it happened but for the most part, it didn’t.  That seems to be the sentiment nowadays as nearly everyone is calling for a correction, but to a long term investor, none of that matters.  If you stay the course and stick to your investing plan, you will more than likely reach your goals.

–The True Cost of Home Ownership by See Debt Run:  Before we bought our house, I realized from talking to other homeowners that there are lots of additional costs.  And boy were they right.  Even though we have a new home, things come up that need fixing and you can’t just call the maintenance guy up to come take care of it for free.  But as long as you plan for those costs, you should come out ahead versus renting.

–What’s Your Make or Break Number by The Broke and Beautiful Life:  Great way to focus on what’s most important in your financial plan:  debt repayment, investing and cost cutting.

–How I Graduated from College with 100k in Savings by First Quarter Finance.com:  There are too many stories of graduating with high amounts of student loan debt (yours truly included).  Nice to read a story about someone who graduated college with some savings.  Moral of the story:  Start making money when you’re 10 years old.

–3 Steps to Completely Offsetting the Cost of a Child by Mom and Dad Money:  Great post showing the power of saving on 3 usually big costs:  housing, transportation and investment costs.

–Ask J.Money Anything Day by Budgets Are Sexy:  A collection of great personal finance questions answered by the man himself.

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Why The US Government Should Read Personal Finance Blogs

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We like blaming the government for a lot of things that go wrong in our life.  From Obamacare to yearly tax law changes, many people start thinking that the government is out to get us.  All they want is our hard earned money and those greedy bureaucrats will do anything to get it.  While I do agree that greed is the name of the game in politics, I don’t think that every law the government makes is a cohesive concentrated effort to steal money from its citizens.  That’s because the US government really has no idea what it’s doing.

After perusing any reliable financial books and/or blogs, you will come across certain themes.  Spend less than you earn, cut your expenses and save for a rainy day.  I really think the members of the Federal government need to start taking a look at the many great financial blogs out there because they are breaking every rule in the book.  According to a recent report by the Congressional Budget Office (go ahead and read the whole thing here if you have a free 5 hours), it is almost inevitable that the US is heading towards a fiscal crisis.  While the country’s deficit has gotten a little smaller since the recession in 2009, the report states that there is NO scenario that the debt will decrease in the next decade.  That sounds pretty grim.

The Big 3 Expenses

What really shocked me was reading about how the expenses of the US government are divided.  Every individual, family, company and government has expenses.  There is no way around them.  We just need to minimize them as much as we can.  But according to the report, 85 percent of the governments expenses come from only three things:  health care, Social Security and interest payments on loans.  That means only 15% of the country’s money goes to little details like keeping roads maintained and national defense.  This is mind boggling but it does remind me of a predicament that a lot of people find themselves in personally.  There are a few expenses that can really dominate, and the big ones that come to mind are mortgages, transportation (car loans, gas and maintenance) and debt.  If you’re not careful, these expenses can really bust your budget and affect how much money you really bring in.

The way to tackle this is to take a long and hard look at your biggest money suckers and find ways to decrease them.  Bought a shiny new gas guzzler that’s taking a toll on your monthly budget?  Sell it and get a more fuel efficient used model.  Bought too much house and living in a high cost of living area?  Try to downsize while moving to a lower cost of living area if possible.  Can’t get a handle on your credit card debt?  List all of your debts in order and attack the one with the highest interest rate.  There are simple fixes to all of these personal finance issues that the members of Congress would do well to apply to our government’s expense problems.  But there is a problem.

It will never work.

And that’s because the members of Congress would like to remain members of Congress.  When you and I cut an expense that’s siphoning money from our accounts, there may be a little resistance just because old habits are hard to break but we know that it will be for the good of our financial future.  It might even be unpopular with our spouse or children but we know it’s for the good of the long term financial health of the family.  Congress doesn’t think like that because they are only making decisions based on the next election cycle.  They want their constituents to vote them in office again, so proposing to make any major changes to any type of government program will result in a backlash, most likely losing them their seat in the next election.  This can be seen with the passage of the Affordable Care Act as many people are calling for the President to be impeached!

The bottom line is, the only way to make your financial situation better is to make more and spend less.  If Congress tries to make more (raise taxes) or spend less (cut Social Security), they will make millions of people angry.  Instead, they enact short term fixes year after year and “kick the can” down the road.  Unless a group of lawmakers buckle down and make the hard choices when it comes to the budget, the US is in for a tough few decades ahead.  I will forward my blog to Congress and see if that can get things going.

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Roth IRA: A Love Story

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This is a story of love found, lost and found once again.  The characters are The Broke Professional (yours truly), and the most seductive of retirement saving vehicles, the Roth IRA.  It’s a story full of sleepless nights, laughter, heartbreak and utter contentment, and not necessarily in that order.  Allow me to take you on a journey that will hopefully end in a joyous and carefree retirement.

There are a number of different types of retirement savings vehicles.  While retirement seems a long way away for many people, and may never come for others, what makes these accounts so attractive is the tax savings that they can bring, specifically not taxing the growth of your accounts right away.  No other accounts do this (besides the amazing HSA).    There are essentially three points at which your contributions can be taxed:  first is when you put your money in, second is when your money grows within the account and third is when you pull money out of the account.  Let’s take the bastion of employer retirement accounts, the 401k.  Contributions to a 401k are made with pretax dollars and growth in the account isn’t taxed either.  You’re taxed when you pull money out of the account later in life.  While being taxed is a bummer, at least with this account your contributions and growth are not taxed.

A Traditional IRA works in essentially the same way as a 401k when it comes to taxes.  You are taxed on withdrawal of funds but not on contributions (given you meet the income requirements) or growth of your investments.  Traditional IRA’s allow more freedom in choosing investments, however, as 401k’s usually have funds that have been preselected by your employer.  I personally contribute regularly to my 401k (my employer offers free money) and don’t contribute to a traditional IRA because I exceed the income limits to take a tax deduction (guess that’s a good and bad thing depending on how you look at it).

This leaves us with the true object of my affection, the Roth IRA.  Just like everyone wants to know the key data before you make a decision on a potential life partner, let me quickly go through the relevant nitty gritty of the Roth IRA account:

Vital information

-The Roth IRA was established by the Tax Payer Relief Act of 1997 and is named after its main legislative sponsor, Senator William Roth from Delaware (God bless him).

-As stated before, contributions to a Roth IRA are not tax deductible

-Growth in the account and withdrawals are not taxed if you meet eligibility requirements, mainly having the account for at least 5 years AND being 59.5 years old.

–Direct contributions (not earnings) can be withdrawn anytime without penalty.  This a one of the main features that helped me fall back in love with the Roth.

-For a couple who is married and files a joint tax return, they are eligible to contribute the full maximum amount of $5,500 (for 2014) if they make less than $181,000.  This makes the Roth highly accessible to middle/upper middle class families.

-There is also a higher “catch up” contribution limit of $6,500 for those 50 and older (man I can’t wait to turn 50).

Without further ado, here is a dramatic re-telling of my journey back into the arms of the Roth IRA.

The Story

For whatever reason, the Roth IRA seems to bring out a lot of emotion in the world of personal finance.  Most finance writers agree that 401k’s which provide a match to your contributions and have decent investment options are a good thing.  No one will really argue against Flexible Spending Accounts and HSA’s for healthcare.  The Roth IRA, however, is truly a love it or hate it affair.  Sam at Financial Samurai has a number of posts stating his reasons against the Roth IRA.  They are all very convincing, especially this one (It currently has 363 comments!).  Jeff Rose, another prominent personal finance blogger as well as a Certified Financial Planner, is on the other side of the spectrum.  He absolutely LOVES the Roth IRA, and even started a Roth IRA Movement to get the word around to everybody that would listen.  So right there you have two respected writers who have made a career out of finance and have such differing views on the Roth IRA.  

So now comes my story.  I opened my first Roth IRA in July 2010.  It was a year after I graduated optometry school so I figured I should do something with all that cash sitting in my checking account.  I was contributing to my 401k to get the employer match and I exceeded the income requirements to get a tax deduction with a Traditional IRA, so I decided to do some research on what else I could do with my money.  A number of sites I visited recommended The Bogleheads’ Guide to Investing as an essential read for investing newbies.  I picked it up and couldn’t put it down.  It really resonated with me.  That book provided me with the foundation for my investment knowledge, and I still refer to it from time to time.  John Bogle is the founder of Vanguard, so I naturally decided to open up my first Roth IRA with them. 

They truly do have the lowest fees and expense ratios out there, which doesn’t make a HUGE difference in your investment results early on but can really diminish your returns when you have a sizable amount of money in your portfolio.  Vanguard also makes investing pretty easy and transparent, which is important to newbie investors.  I already had a full time job, so I didn’t want to have to spend too much of my free time worrying about investments.  Since I knew this was money I wasn’t going to need for a very long time, I decided to fully invest in Vanguard’s Total Stock Market Fund (which I’m still with by the way) to get the most growth potential with very very low fees.  I dumped what extra money I had into my shiny new Roth IRA and set up regular monthly contributions.

This initial fling went on for about 2 years, which is when I realized I really really hate student loans.  I was faithfully paying the minimum on all my loans but it seemed like the balances weren’t moving.  Some of them were actually going higher!  I appreciate my education and everything, but I don’t like the idea of a big bank siphoning a chunk of my income month after month.  I did some reading on debt repayment strategies and found that the Avalanche method was the best way to get rid of student loans.  I started working a few extra days a month, stopped my Roth IRA contributions and put whatever extra I could towards my highest rate student loan.  I got rid of the first one in a few months and started attacking the second one.  It was great seeing those balances actually start going south for a change.

While I was attacking student loans with all of my might, my Roth IRA was gathering dust.  I even withdrew some of my contributions to pay off a student loan that was almost finished and was bothering me.  I abandoned her.  For two whole years.  I did check in on the account from time to time (which was actually growing well since the stock market was going wild), but never really thought to start contributing again.  But then I realized I was making a mistake.  It wasn’t because the stock market was going up.  I know enough not to focus on a few years of growth for money that I will not need for a few decades.  I forgot how awesome compound interest was.  By reinvesting dividends and letting the account grow tax free for decades, I realized I could probably do a lot better than the interest rate I was getting by paying off my student loans early.  I also get a tax deduction every year on interest paid on my student loans, so I can still take advantage of that while it’s still around.

Another realization I came too was that in my fervor to pay off student loans early, I saw that I did not have a whole lot of liquid cash available.  I’m still contributing regularly to my 401k so I had a decent amount in there, but I can’t touch that until I’m 60.  Most of my free cash was going to pay off student loans, which is great but I’m not going to see that increased cash flow for a few years down the road.  While it is not advisable to touch the money in a Roth IRA, the fact that you can withdraw contributions penalty free at any time provides a lot of piece in mind.  I do have a regular emergency fund in an online savings account, but in case I may need some more for whatever reason, it’s nice to know the Roth is there.

So as of a few months ago, I decided to start contributing to my Roth IRA again, and it feels great.  The good part is that I can still attack my student loans because I decided to trim some expenses and use those savings to contribute to the Roth.  I’m not contributing up to the max yet, but my goal is to be able to contribute enough in 2015 (and beyond) to be able to max out my Roth IRA.  This combination of increasing my investment contributions, attacking my higher interest student loan debts and trimming my expenses will be the best actions I can take to speed up my journey to financial independence.  Any extra money I will see in the form of bonuses, credit card rewards etc will go straight to eliminating student loans or increasing investment.

So there you have it.  The tale of my relationship with the Roth IRA is now out in the open for everyone to gawk at.  It felt good to get that off my chest as it gives me motivation to keep my financial situation on the right path and hopefully provide some guidance to anyone who will listen.

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Filed Under: Investing, Self Building

How much do you REALLY make?

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Pay To

The ability to manage and master your finances is simply based on two factors: what you bring in and what goes out.  Income versus expenses.  Earning versus spending.  Though this may seem like an oversimplification, this is essentially what personal finance boils down to.  If you spend more than you earn, this puts you in debt and leads to a precarious financial situation.  This is the unfortunate truth for many in America today, as the allure of easy credit and excessive consumption keeps many in debt.  On the other hand, earning more than you spend puts you in a position to save and invest, and saving enough will help you weather almost any financial storm or life changing event that comes your way.

Getting that first job after college and seeing all those numbers that represent your yearly salary can be exciting at first.  It’s usually more money than you have ever seen before, so it can be an exhilarating time.  But appearances can be deceiving.  Though that nice big round number may look nice, it’s not all going to hit your checking account.  If you’re not careful, you might not even get half of it.  To make things simple for the purpose of this post, we will not be considering the effect that taxes have on your take home income.  For the purpose of your life, you should not do that.

There are many associated, and often times hidden, costs for any job.  They will of course vary depending on the person’s situation, but some associated costs jump right out at us.  Knowing what these costs are will help you determine your real hourly wage, that is, what you make per hour after all of the associated work expenses.  The fact is, if you were not working at that particular job, you would not have to spend money on all of the associated expenses.  The biggest factor people usually associate with jobs is the commute.  Whether it is driving or taking public transportation, there is going to be some cost of commuting to your job, unless you work from home of course.  Most of us would just calculate how much we spend for gas and be done with it.  But there are other hidden costs to commuting such as wear and tear on the car which can lead to increased trips to the shop, money spent on tolls, and increased frequency of oil changes due to driving every day.

Another big factor is money spent on food.  This is not just money spent on lunches, which can be pretty high in some cases, but also includes the daily coffee we get from the shop on the way to work, “rewarding” ourselves with a treat after a stressful day, and money spent on take out when we do not have time or are too tired to prepare dinner at home.  All of these are associated costs relating to food.  There are many other costs which would take up too much space here such as the need to take vacations from a stressful job, hiring outside help such as yard workers, maids, and tutors, money spent on entertainment to unwind from the stresses at work and the list can go on.  Let us go through a simplified example to see how much having a certain job can actually cost you.

Let us say you have a friend who makes 20 dollars per hour.  They tell you they seem to be struggling to make ends meet but they are not sure why.  You ask him how much he makes per week.  He simply multiplies 20 dollars an hour by 40 hours per week to get 800 dollars per week.  But knowing what we know about job associated costs, we go deeper and find out what he is actually making.  We calculate that with money paid for gas, tolls, and wear and tear on his car, he is spending an average of 100 dollars per week on commuting related expenses.  We then move to food and find out that with his daily latte, occasional lunches and eating out with co-workers, he is spending an average of 50 dollars a week on food directly related to his job.  We also find out that he has a habit of seeing a movie with a co-worker after a long day of work and rents movies weekly to decompress after work.  This comes out to 30 dollars per week.

His job also has a dress code, and sometimes he has to wear a suit to meetings.  He is normally a T-shirt and jeans kind of guy so he is spending an average of 20 dollars per week on work related clothes.  He also takes a yearly vacation just to get away from it all which averages out to 40 dollars a week over the year.  Last but not least, he also hires a cleaning service because he has no time to thoroughly clean his apartment.  This comes to about 25 dollars a week.  There are other associated costs but these are the ones that stick out so let us work with these.  Our friend said that he makes 800 dollars per week.  After applying just these associated costs we went over, we find out that he is actually making $535 per week after work related expenses.   This means after associated costs, he is actually making a little over $13 an hour instead of $20!

Though this example had simplified numbers and categories, it shows that job related expenses can really take a bite out of your bottom line.  Now most importantly, what can we do with this information?  Right off the bat it is easy to see how we can use this when comparing multiple job offers or contemplating getting a new job.  If we see our real hourly wage, we can more easily find which job will be best for us.  We can also use this information to examine our destructive money habits and try our best to change them.  In our example, if our friend just made coffee at home and stopped going to the theaters to watch movies after work, that could easily save 30 dollars or so a week.  Making little positive changes here and there can really add up and help to improve our situation.  Visually seeing what steps we can take to improve our financial situation is very empowering, and this exercise can provide that.

Finally, this exercise can show us how important it is to spend our money on the things that matter most.  If we know that our real hourly wage is 12 dollars an hour instead of 20, maybe we will think twice before we drop down 20 bucks for a movie ticket and popcorn for 2 hours of fun or 40 bucks for a video game we will only play once in a while.  Instead of spending our money on frivolous things, maybe we can save it and spend some time exercising, learning a new skill or just spending time with our family.

Successfully graduating with a bachelor’s or any advanced degree takes a lot of work.  It is vital to find the job that suits  you rather than going for the first big salary you see and later realizing you’re not making as much as you thought.

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Filed Under: Money Savers, Self Building

Diamonds in the Rough Roundup 8/15/14

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NFL preaseason is underway.  Which means real football is right around the corner.  With all the unrest going on around the country and the world, it’s almost nice to know that football is near.  Is it a distraction or maybe an opportunity for togetherness and peace?  I guess it all depends on how you look at it.

–Are You Just Treading Water? by Dividend Mantra:  Excellent post talking about the dismal savings rate in this country and just why people seem ok with “getting by”.  It really pays to sit down every few months or so and evaluate your current expenses to see where you can save.

–3 Common Money Worries by Cat Alford:  Everyone worries about money at some point.  Be it retirement, education, healthcare or housing, there is almost always something to worry about.  The key is not to let the worries take you over but let it spur you to take positive action.

–If You Produce Nothing How Can You Expect to Make any Money? by Financial Samurai:  Most people like to whine and complain.  That’s why most people don’t become successful  You need to work hard and create something of value to be a lasting success.

–Do You Ask for the Order? by BrokeMillenial:  Great post on the importance of asking what you want.  It can produce amazing results.

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How Much Cash Do You Carry?

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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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Filed Under: Credit cards, Money Savers

Navigating Life After Graduation

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Times they definitely are a changing.  And it couldn’t be more true for those that are graduating with a professional degree.  Be it a new graduate in medicine, law, engineering, dentistry or optometry (my profession of choice), there is a whole different world to face after the years of living in the university bubble.  And it can sometimes be a new and cruel world.  Now I’m not trying to garner sympathy for these new graduates.  After all they usually end up in pretty high paying jobs with plenty of room for advancement.  But there is also a unique set of challenges that face newly minted professionals that they should be aware of.

Lifestyle inflation.  This is arguably the BIGGEST reason for new professional graduates getting into financial trouble.  To become an optometrist, for example, you have to complete your prerequisite classes in college and get a Bachelor’s degree along the way.  This usually takes about 4 years.  After the grueling process of applying to schools and flying out for interviews, when you finally get into optometry school, 4 years of even more intense studying and clinical work await you.  After completing these 4 years (and passing the nerve wracking board exams), you are finally free to find a job or open a practice and finally start making some money.

After years of schooling and (hopefully) living like a poor student, it’s only natural for one to get in the I “deserve” this mindset right out of school.  As in, I “deserve” a new BMW because of all the work I put in (along with the $700 monthly lease payment).  And I “deserve” a sweet new fancy townhouse since I’ve been living like a pauper the past few years (and the $2500 monthly payment plus maintenance that goes along with it).  The examples are endless.  With inflation eroding buying power over the years and incomes not rising in the same manner, a dollar doesn’t buy you as much now as it did 10 years ago.  This is an essential point to realize, as simply having a certain title doesn’t enable you to get the goods right out of the gate.

Student loan debt.  The issue of the high cost of tuition and subsequent massive amounts of student loan debt is a hotly debated one.  And for good reason.  Tuition is increasingly rapidly year after year, widely outpacing inflation.  College was once thought to be an essential stepping stone for success.  Sky high tuition prices are making many re-think that.  While student loan debt is a big problem for all students, it is an especially big one for professional school graduates.  For the graduating class of 2012, the average student loan debt was $29,400.  This is not an amount to sneeze at, but I probably incurred that much debt sitting through my first 5 classes in optometry school.

While my final student loan debt (undergrad and optometry school) was around $140K, many of my colleagues were well into $200K.  So my student loan debt was almost 5 times the national average.  That’s a huge discrepancy and a problem that needs to be tackled hard.  Many students, myself included, underestimate the effect of student loan debt while in school.  And who can blame them?  With tests every week and sweat inducing clinical practicals to prepare for, who has the time to prepare for life after graduation?

Student loan payments will make up a substantial chunk of a new grad’s monthly payments.  In a lot of cases it can be the largest payment one has to make per month.  And if the banks have their way, this will continue for decades.  That can end up being tens of thousands of dollars in interest payments.  That’s money that you earn but you will never be able to use because it is lining the coffers of the country’s biggest banks.  As if their coffers need lining.  Students and new grads should be prepared for the hit that student loan debt brings and get ready to hit right back.  This means cutting back on your consumption and throwing whatever extra money you can towards your highest interest loan and then moving to the next one (also called the Avalanche Method).  If you can be diligent in this process, you can reduce the time you pay student loans by years and save thousands and thousands of dollars in interest payments.

Building a good credit score.  Unfortunately, the importance of a good credit score is lost on many.  Most people don’t know the difference between a credit score and a credit report, and why they should even bother checking them.  I’ve noticed that this is especially widespread among new grads, as they’re focusing on finding their place in the world and spending their new found money.  Eventually, most people end up applying for a mortgage or a car loan.  Even if it’s not in the near future, it will most likely happen.  This is the best time to improve your credit score, as it can potentially save you tens of thousands of dollars over your lifetime.

Applying for a mortgage or credit card will initiate a credit inquiry by the lender.  They want to look at your past history to make sure you’ll pay them back.  Instead of hiring a private investigator, your credit score gives them this info in a nutshell.  A low score means you’re not a good borrower.  You get the highest interest rate possible on your loan.  A high score means you are a pretty dependable borrower, so you get the lowest interest rate offered.  On a big purchase like a house, the difference between a low interest rate and a high interest rate can cost you potentially hundreds of thousands of dollars.  That’s a lot of cheddar.  Giving your credit score some attention even for just a few years will get it right where it needs to be.

A professional degree isn’t a ticket to a lifetime of riches like it used to be.  Many new grads are falling into financial trouble by not paying attention to these three big issues.  If you can weather the student loan debt storm and resist lifestyle inflation early on in your career, you will be setting yourself up for a lifetime of success.

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Filed Under: Investing, Self Building, Student Loans

Diamonds in the Rough Roundup 8/1/14

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Can’t wait for the NFL season to start.  That is all:

–A Singular Focus of Paying Off Debt Leads to Peace by Luke 1428:  What a great post on the almost spiritual effect of paying off debt.  While I can’t wait for the day my student loans are done, I can’t ignore the allure of investing into my HSA and 401k matches.  High interest debt should definitely be a priority, but giving up on easy and lucrative low hanging fruit like contributing to an HSA could be a mistake.

–Destroy the 40 Hour Workweek by Frugaling:  Great post that shows why the 40 hour workweek is so prevalent in this country.  This post went viral, and for good reason.

–Should You Stop Carrying Cash by MoneyNing:  We live in an a world where you can be a highly functional member of society without ever having any cash.  Banking, purchases and bill pay can all be done online now, and with all the awesome credit cards out there, there is not much need to use actual cash.  Once in a while I’ll come across situations where cash is needed, so I always try to carry a few dollars around.

–Four Reasons I Haven’t Paid Off My Student Loans Yet by Dividend Mantra:  A new-to-me blog I subscribed to that has some great posts.  There is something about Jason’s writing style that really resonates with me.  Anyway, this post gives a situation where you might not want to pay off your student loans super aggressively.  I hate student loans a lot, but not so much that I would want to get rid of them if I was fairly sure I could make more investing, especially in a tax advantaged account.  And the landscape may change (for example the student loan interest deduction could be eliminated) where I might not want to pay off the loans as aggressively as possible.

–Amazon: A Great Example of How Not to Live Your Life by The Wealth Gospel:  Somewhat eyebrow raising numbers on one of the biggest companies in the world, but I’m pretty sure they’re not in any trouble.  They are leveraging their present for future gains, which is a good move for companies and individuals with lots of money on hand.

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Tax Savings For Having a Little One

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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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Filed Under: Money Savers

Student Loan Repayment is a Marathon

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I’ll be running (and hopefully finishing) my first half marathon in a couple of months.  Having played sports like basketball for most of my life, I’m no stranger to tough workouts and feeling physically exhausted.  Marathon training is a little different in that it is not collapse to the floor physically draining, but it is LONG and TEDIOUS.  The workouts themselves aren’t tough individually, but the challenge lies in staying focused throughout the workouts and being able to do them consistently day after day.  This reminded me of the effort it takes to pay off my student loans as well.

Besides the fact they both can make you want to puke, there are more similarities between student loan repayment and marathon training:

Both require a plan.  Training for a half marathon can’t be done haphazardly for most mere mortals.  It helps to have a training plan a few months before the race to get your body and mind ready.  At the least you should have an idea of how many times you want to train per week and how you want to ramp up the distances you run.  Not having a plan can greatly decrease your chance of finishing a race.

The same thing is needed to pay off student loans.  You have a certain amount of debt and you want to get out of it as soon as you can.  You can’t just make random payments and hope they’ll be gone soon.  On top of making the minimum payments for all of your loans, apply anything extra to the highest interest loan to get the most bang for your buck.  This is called the Avalanche method and is the only sure fire way to pay the least amount of total interest and get out of debt sooner.  Ready for Zero is also a great program to get you on top of your debts and can even tell you the exact day you will be debt free.

Take one day at a time.  One of the more frustrating parts of running for me is the monotony of it.  I could play basketball for 10 days in a row and have a different experience each time.  But with running each day is more or less the same, especially if you use a treadmill.  But it’s really important to remember to take one day at a time and focus on making a great effort on that day.  That’s because every day of training will contribute to your success (or failure) on the day of the race.  If you give a consistent good effort on each day of training, you will most likely be able to finish the race and run well.  Each day you run well prepares your body and mind a little more for that race.  It may be tough to detect on a day to day basis, but your heart will work more efficiently and your muscles and tendons will be able to handle all that pavement pounding a little bit more.

Keeping the big picture in mind is also important when paying off student loans.  Even if it’s going to take a few years to pay off those loans, realize that some lenders want you stuck paying minimum payments for 25 years!  It’s definitely tough seeing that big balance go down slowly, but each payment you make will get you that much closer.  Since most of your payments early on will be paying a lot of interest, it seems that the principal is not going down that much.  But for every payment you make the principal goes down which means you will pay less interest on the next payment.  Each payment is definitely making a difference so it’s important not to get lackadaisical and miss some payments here and there.  As time goes on you will see that principal go down faster and faster, which will hopefully motivate you to make some more money and pay the damn thing off!

The end will be oh so sweet.  When training for a race it’s important to visualize yourself finishing the race and how good it will feel.  If any of you have trained for a race and finished it, you know what I mean.  It’s a great idea to try to bottle that feeling and go to it whenever you lose motivation or decide you want to take today’s workout a little easy.  It’s also important to celebrate your accomplishment.  Go out and get something nice to eat and relax for the rest of the day.  You’ve earned it.

I imagine making my last payment on my student loans.  There will be fireworks and fan fare and a marching band.  Or I will just click the mouse and quietly ride off into the sunset.  In either case, it will certainly be a great feeling that I can’t wait to experience.  Though it may seem far away, having a plan certainly helps because I know each months payment will get me closer and closer to that fateful day when the heavens will open up.  Keeping that day in mind keeps me going on my plan and wanting to get rid of these loans even faster.

That’s my latest installment of me finding ways to equate sports and finances.  If you just can’t get enough, check out my other posts about baseball and soccer.

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Filed Under: Self Building, Student Loans
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