Credit Card Churning and a Free Credit Score

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Know the score

Know the score

I love samurai movies.  My favorite movie of ALL TIME is The Last Samurai.  I also love the classics like Seven Samurai.  I also really enjoy the fantasy genre.  I can’t tell you how many times I have watched Lord of the Rings and how many times I will continue to watch it.  I also really enjoy martial arts.  I have dabbled in Aikido, Taekwondo and Muay Thai, and my ultimate goal in life is to become a full time martial artist.  I greatly admire Bruce Lee and his work ethic.

So why am I giving you all the proof you need to call me a nerd?  That’s because it helps me break down things in life into a battle of good against evil.  It makes really dull subjects sound pretty darn epic.  I previously wrote about how inflation is a beast and you need to slay it.  I’ve also written about the monstrous nature of student loans and the need to keep attacking them.  Noticing a pattern?

The next beast I would like to attack is credit cards.  But this is not just simple attacking and killing it by not getting into credit card debt.  We are actually going to take this beast and make it our pet, turning it into an easy source of tax free income year after year.  How do we accomplish such sorcery?  Through credit card churning of course.

Battle plan

It is said that the battle is won even before the first strike.  This usually means that victory goes to the most prepared.  When it comes to credit card churning, I couldn’t agree more.  We want credit cards to work for us, but the fact is that most people end up working for credit cards.  This is not an easy task but all it takes is a good battle plan and good execution.

For the uninitiated, many credit card companies offer sign up bonuses with their most popular cards.  For example, one of my favorite credit cards is the Chase Ink Plus.  It gives you 5 points for every dollar spent on TV/internet bills and purchases at office supply stores.  This is a decent percentage of my monthly expenses, so it helps me to use it every month.  But the key point is the sign up bonus.  Currently, Chase is offering 50,000 Ultimate Reward points for signing up for this card and spending $5,000 in 3 months.  That seems like a lot, but it comes out to spending $1,666.67 a month for 3 months.  Some people spend that much in a week.

50,000 Ultimate Reward points translates into $500 cash back at the minimum, and can save you even more if redeemed for travel.  To keep things simple, let’s assume we’re only using the points for cash back, as redeeming for travel presents a whole other realm of possibilities.  So in essence, you got $500 for doing your normal spending.  Not a bad deal.  Now find another credit card with a sign up bonus and repeat.  This is what credit card churning essentially is.  It sounds like a dangerous game, and it really can be if you’re not careful.  But if you follow just two rules, you’ll be be able to turn this dangerous beast into your little pet puppy:

1.  Know your Credit Score

This is the most important weapon to have in your utility belt.  Having a GREAT credit score will almost ensure your approval for many of the awesome sign up bonuses out there.  Having a poor credit score will keep you out of the credit card rewards game entirely.  There are a number of factors that help in increasing your credit score, but one of the most important things is to be able to monitor your score.  You can get your score from the FICO website for $20 a pop, but that can get to be a little pricey if you want to check your score every month or so.

Credit Sesame allows you to access your free credit score anytime.  I have been using it for a couple of years and it works great.  It uses some demographic that you provide to get your score.  While it is not an “official” score, it is almost exactly the same as my real score.

I’m a skeptical person by nature, because I know companies offer sales or “free” products in order to make some money for themselves.  So what’s the catch?  The catch, if you could call it that, is that Credit Sesame makes its money by suggesting certain credit cards or accounts that may benefit you based on your information.  You certainly don’t have to accept those offers, and even if you don’t, the credit score is always free.  Pretty simple business model.

2.  DO NOT OVERSPEND

Credit card debt is one of the worst things in the world.  Credit cards charge very high interest rates and you usually have nothing to show for the debt except clothes and electronics that go stale in a few weeks.  Don’t start spending more than usual and get into debt because of it.  If you don’t want the pet dragon to turn against you, you would be wise to remember this.  Just do what you’re comfortable with.  If you only want to do one sign up bonus every 4 months, that’s fine.  If you feel confident in hitting sign up bonuses for 6 cards every 3 months, that’s fine too.  I’m somewhere in the middle, around 3 cards every 4 months or so.

Again, do what you’re comfortable with.  It’s not worth a few hundred dollars in rewards to find yourself in debt to Visa.  I find credit card churning fun, and once you start overspending, the fun is over.  That’s when you call it quits and focus on getting your spending back in order.

This post provides a very basic overview of credit card churning to get sweet, sweet sign up bonuses over and over again.  There is SO much more to the process, such as finding the best sign up bonuses and ways to meet spending requirements without actually “spending” money, but those topics will be for future posts.

Just remember to keep an eye on your credit score to make sure it’s nice and high, and absolutely do not spend more than you usually do.  With this knowledge in hand, the beast doesn’t stand a chance!  Get your credit score and get started.  Remember that you can ignore the other offers and stick to just getting your free score.

Get your free Credit Score and More

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Filed Under: Credit cards, Investing, Money Savers

My Financial Kryptonite

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This hood ornament only cost me $20,000!

This hood ornament only cost me $20,000!

There are so many ridiculous things people buy in this world which makes them less of a person.  There are people that buy cigarettes regularly every day.  These will burn a hole in your wallet as well as your lungs.  Then there are those who get endless subscriptions to magazines they never read, costing them money every month and destroying forests in the process.  There are also the people who sit in idling cars every day to get their daily fast food fix.  This wastes gas and makes you fat and lazy.

There are many more crazy things out there that people spend money on, but there is one object of people’s affection that is my biggest financial foe.  I call it my Financial Kryptonite.  Not because my finances are like Superman, far from it.  But because I want to stay as far away from this purchase as I can because I know the destruction it will cause, not just on my current finances but on my future as well.  And that bane of my existence is:  luxury cars.

When you spend thousands of dollars on something, you want that thing to be very useful and to (hopefully) appreciate in value.  A house, for example, is such a thing.  You and your family can live in it for years and years and have lots of lasting memories.  Many people in the world don’t have a roof over their head, so if you have one, count yourself among the fortunate.  Houses can also appreciate in value over time, hopefully turning you a profit when it comes time to sell.  This, generally, makes buying a house a good investment.

This is unfortunately not true with cars.  Cars certainly are useful.  They allow people to get to work and run errands to keep their house and lives in order.  They allow you to travel to friends houses and new locales to keep life exciting and fresh.  But what they don’t usually do is appreciate in value.  As soon as you sign the contract for a new car, it IMMEDIATELY loses value because now it’s a used car.  Every mile you drive it and each piece of wear and tear will lead to a further decrease in value.  While this doesn’t sound too appealing, cars are almost a necessity for people who don’t live in cities and don’t have access to reliable public transportation.

The luxury curse

Now, are you interested in wasting EVEN MORE of your money for something to get you from Point A to Point B?  Get a luxury car.  Luxury cars are simply slightly souped up models of your every day Toyota and Nissan, and usually only souped up on appearances.  I’m not exactly a car nut (and I’m glad because that’s an insanely expensive hobby), but from some conversations with car nuts I have found out that luxury models and their corresponding mainstream models are almost exactly the same under the hood.  What you’re paying for is strictly appearances, and boy will you pay.  Here are some ways you’ll end up paying more by going with a luxury brand over a mainstream one:

–Higher sticker price.  An Internet search found that a 2014 Toyota Camry runs for about $22,000.  A 2014 Lexus RS, which is essentially the same car except shiner and more leathery, is about $36,000.  That means you’re paying $14,000 extra for shiny!

–Higher gas prices.  Many luxury car makers say you need to use premium gasoline for their cars.  While this is debatable in some circles, a gallon of premium gas is around 40 cents higher than regular.  That comes to about $5 more per tank of gas for the privilege of driving luxury.

–Higher maintenance and repairs.  While luxury cars are almost identical to their mainstream counterparts, many luxury cars use parts that will only work in luxury cars, and those parts are usually more expensive or bought through the dealer.  In any case, you will be paying more for 4 new tires on your Acura than on your Honda.  Even regular maintenance, such as an oil change, costs more with a luxury brand.  Again, paying more for the “privilege” of driving luxury.

–Higher insurance.  Car insurance companies will factor in nearly everything to determine your premium, and that includes if you drive a luxury car or not.  Luxury cars are usually more pricier, so it stands to reason that you will pay more to have them insured.  Yet another sneaky increase in cost of ownership of a luxury car.

Conclusion

The higher sticker price should scare most people away from buying a luxury brands, but knowing how much more the cost of ownership is should send everybody running for the hills.  But it doesn’t.  And that’s because the luxury car makers are marketing geniuses.  Luxury car commercials throw around words like “elegance” and “refined” to describe their cars.  This makes people feel good and will get that dopamine flowing once you sit in one for a test drive.  They play to our emotions and desire to be pampered, which keeps people coming back.  As I’ve heard from many people who have bought luxury cars themselves, once you go luxury, you don’t go back.

Now I’m not one to find joy in shaming people’s financial decisions.  While it can be fun at times,  everybody makes mistakes and everybody has purchases that they regret, myself included.  But I will make an exception for luxury car consumers.  If you consistently buy luxury car brands, you’re in need of therapy.  Your money can be used for so much good for yourself, such as paying off debt or investing for your future.  The fact that you’re risking your family’s financial future for some pieces of leather and a temporary pang of superiority shows that you have went off the deep end.  Your Lexus is exactly the same as your neighbor’s Camry, but the difference is your neighbor can afford to drive himself and his family on vacation a few times a year while you can shuffle your car to and from work to make up the price difference.

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Filed Under: Investing, Money Savers, Student Loans

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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Filed Under: Credit cards, Money Savers, 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

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

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

Standard Deduction or Itemize?

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

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

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

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

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

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

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

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

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

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

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

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

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Filed Under: Banking, Money Savers

Frugality Can Make you Wealthy

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They should call him "Froog" Mc Duck

They should call him “Froog” Mc Duck

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

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

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

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

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

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

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

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Filed Under: Investing, Money Savers, Self Building

It’s Easy to Save Money on Your Meds

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

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

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

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

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

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

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

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

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

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

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

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Filed Under: Money Savers

You Are Your Own Worst Enemy

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

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

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

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

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

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

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

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

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

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Filed Under: Investing, Money Savers, Self Building
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