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3 Things New Professionals Need to Know About Taxes

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My note:  The following is a gracious guest post from Kathryn, who has an excellent blog called Making Your Money Matter.  If you want a complete financial lesson on any and every financial topic from an actual financial professional, head on over to her website.  Honestly, this is the type of information that I’ve seen only available in paid courses, but you can get everything on her site free and clear.

Without further ado, here is a fantastic post by Kathryn talking about some essential tax tips for professionals.

Kathryn Hanna is a CPA and specialized in business and personal taxes when she worked in public accounting.  She currently stays home with her 3 children and blogs at www.makingyourmoneymatter.com to help people improve their understanding of personal finance and thereby improve their lives.  She loves all things money and especially spreadsheets.

If the only sure things in life are death and taxes, I’m sure we can all concur that it’s more fun to talk about taxes than death.  The basic formula for taxes is really quite simple, it’s just the fact that there are so many exceptions and rules that make it incredibly complicated.  Fortunately, you don’t have to know all the rules, just the ones that you need for your own personal taxes!

There are 3 things that I believe will be most beneficial for every new (or even not so new!) professional to know related to taxes.  These are things that will help you reduce taxes and build as much wealth as possible.

1. TAXES MAY BE YOUR SINGLE LARGEST EXPENSE

Once you’ve gotten used to the huge chunk of money being taken out of your paycheck for taxes, you might just ignore taxes altogether (at least until April each year!).  However, FICA, federal and state taxes alone will likely be upwards of 15-20% of your pay.  I calculated my total taxes as a percentage of my income for 2016 and found that over 25% of my income goes toward various types of taxes.  This is my largest expense, exceeding my total housing expenses including utilities!  Likely, taxes just might be your largest expense as well!

While I acknowledge the importance of tax funds to keep our country running, I’m all about minimizing my taxes to not have to pay more than my legal share.  By learning more about how taxes impact various decisions, you can minimize your taxes and keep more of your money in your pocket.

The first step is to get a really good understanding of your current tax situation.  Go through your most recent tax return and make sure you understand, line by line, each and every income, deduction, credit, and tax calculation.  If you have any new financial situation come up, research and make sure you understand the tax consequences.

2.  ALL INCOME IS NOT CREATED EQUAL FOR TAX PURPOSES

As a new grad, you were probably super excited about having any sort of income.  A paycheck large enough to cover eating out instead of sitting at home with Ramen noodles or a tuna sandwich is life-changing.  Earning income is great!

However, that salary you are getting is the nearly the most expensive type of income there is.  First, you’ll be paying Social Security and Medicare taxes on it at a rate of 7.65%.  Then, you’ll need to pay federal income taxes on your salary likely in the range of at least 10-15% if you’re a single person just starting out.  Also, your state will want their cut of taxes, which will add another few percent (the tax rate is 4.25% in my home state of Michigan).  That’s a lot of your hard-earned money going to taxes.

The only income that is even more expensive to you than employment income is self-employment income due to having to pay twice the Social Security and Medicare taxes.  However, being self-employed can increase your income at much higher levels than working for someone else, so I’m definitely not discouraging it!

Most types of income are taxed at ordinary tax rates for federal and state purposes but are not subject to FICA taxes.  Examples of these types of income include:

  • interest income
  • short-term capital gains on investment assets held for less than a year
  • rental property income
  • retirement distributions (someday!)

There are also types of income that are not subject to FICA taxes and are also taxed at lower tax rates.  These types of income are actually taxed at a 0% rate for those in the 10-15% tax bracket (single filers up to $37,950 adjusted gross income for 2017).  Then they are taxed at only 15% for most people.  These types of income include:

  • qualified dividends
  • long-term capital gains on investment assets held for at least a year

There are even income streams that are not taxable at all for federal income tax purposes:

  • interest from municipal bonds (although this may be taxable in some states)
  • gifts, bequests, and inheritances

The moral of the story here is to increase your other income streams in addition to increasing your salary.  Taxes make a significant difference in the amount of your income that you actually keep, so increasing your portfolio income will help you get ahead in the long run.  In addition, saving money in retirement accounts will help you to defer your tax on that income for 30+ years or more.  It will make a huge difference in helping those funds grow more quickly for your future retirement.

3.  HOW TO CALCULATE YOUR MARGINAL TAX RATE

Another vital piece of knowledge is understanding your marginal tax rate.  Your marginal tax rate is the percentage of tax you will pay on your next dollar of earned income.  This is not to be confused with your effective tax rate, which is determined by dividing your total federal tax liability by your total income.

The main reason that there is often a large difference in the marginal versus effective tax rate is because the U.S. has a progressive tax system.  A progressive tax system is where the tax rates increase with higher income levels.  Those with high income are still taxed on the lower rates for the lower portion of their income.  This is shown in the tax rate brackets shown in the example below.

In addition, the difference in effective and marginal rates may also be due to a substantial amount of non-taxable income items or tax deductions and credits that decrease income.

An explanation of marginal and effective tax rates is best explained through a simple example.  Assume the following information for 2016:

  • Your annual salary is $55,000
  • You contribute $5,000 to a traditional 401(k) account
  • You have paid $1,000 in student loan interest
  • The standard deduction is $6,300
  • The personal exemption amount is $4,050

This quick tax summary shows your tax liability of $5,435 for 2016:

The effective rate you are paying on your taxes is only 9.9%, which is calculated as $5,435 in total tax divided by $55,000 gross income.

However, your marginal tax rate is 25%.  Your next dollar of income will actually be taxed at a 25% rate, assuming it doesn’t give rise to additional deductions (for example, if you contribute this “extra” money to retirement accounts, it will not be taxed currently).  The marginal tax rate is determined by looking at the highest tax bracket, as determined by your taxable income.

Looking at the tax rate table below, you can see that with a taxable income of $38,650, this would put you in the $37,650-$91,150 bracket, which is taxed at a rate of 25%.

Looking at the tax table, you can also see that you can earn an additional $52,500 in income before increasing your marginal tax rate to 28% ($91,150 less $38,650).

Understanding your marginal tax rate will give you a realistic view of how much that raise or bonus is actually going to be on a cash basis for you.  It also will hopefully encourage you to contribute more to retirement accounts as your marginal tax rate goes up and those tax deductions become worth even more.

FINAL THOUGHTS

Understanding income taxes is key to building your wealth through the years.  Because of the progressive tax structure in the Unites States, it is even more important to understand your taxes as your income grows throughout the years and the value of your tax deductions increases.

Start now by looking at your current tax situation, making a plan to increase your passive income streams and determining your marginal tax rate.  Future you will thank you!

This information is meant for educational purposes and does not represent individual tax advice.  If you have questions about your personal tax situation, it is highly recommended to meet with a tax advisor or attorney.

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Filed Under: Investing

What I Would Tell My College Self

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If only we could go back in time…

At some point in our lives, we wish we could go back in time and give ourselves some advice.  If we performed better in some key points in life, who knows how different everything could be?

Life’s all about the journey as the saying goes, but it would be nice if I was able to tell my 20 year old self the winning lotto numbers.  Might be a more luxurious journey at least.

But I’ve watched enough movies to know that telling ourselves winning lotto numbers or sporting event results would disrupt the space time continuum.  (Back To the Future 2 anyone??!!)

So I would be content with teaching my college self a few solid life lessons.  College is a critical crossroads for many.  Make the right choices and getting your degree will most likely get you a nice job.  Drop out and start a company and you will become the next Mark Zuckerberg.

If only it were that easy.  There are a few lessons I would like to impart to my college self (geez has it been 15 years???):

Figure Out What You Want Before You Start

I didn’t really know what I wanted to do as a college freshman.  I started with a general “business” major, then Philosophy and finally settled on Biology after I decided to become an optometrist.  This was a 2 year process that should have been completed before I got into school.

I tell you, my college bound self,  decide what you want to do with your life before you start college.  That way you can have laser like focus on what classes you need to take.  Taking classes you don’t need for your degree is a waste of time and money.

It will also allow you to work on your career outside of the classroom.  You could find a mentor, look at potential graduate schools or find out how you want to live your life in your chosen career.  This is a much better use of your time than eating mediocre nachos on campus while thinking about what the heck you want to do with your life!

So figure out what you want to do early on, and make that the focus of your time at college.

Student Loans are Easy to Acquire, but Hard to be Rid of

Think about how you want to pay for college before you get in.  If student loans will be your primary tool, so be it.  Just remember that you will be able to get a LOT more money than you really need.  And that can get you in a lot of trouble once real life starts.

When you get that sweet looking award letter, don’t be fooled by all the money the school will want to give you.  You don’t need all of it no matter what the projections say.  All you have to do is sign on the dotted line and your school will benevolently give you as much money as you want.

Only it’s not your school that’s giving it.  It’s most likely the government.  And the government always gets its money back.

So make that sacrifice by eating cheap meals at home rather than eating out every day.  Try to walk or bike whenever you can instead of saddling yourself with a car payment in school.  And ask family for help.  There is no shame in using your brother’s old sofa for your living room.

Consider Refinancing As Early As Possible

College self didn’t know too much about personal finance.  During my second year of graduate school, we were informed that the interest rate on student loans will be going up from around 2% to 6%.  I thought nothing of it at the time, but those 6% loans are the ones that seem to keep hanging around after all these years.

Education is key, so learn about how loans and debt repayment work as early as possible.  Preferably before you get into school.  Along the way you will find out about refinancing, and it is a wonderful thing.

Plan to pay off your debt by paying off the highest interest loan and then moving down the list.  This will allow you to pay off your loans in the most efficient manner possible.

Consider refinancing your loans to get that interest rate down lower so you can pay the loans off even faster.  I didn’t even think about refinancing until about 5 years after school.  Dreaming of the money I could have saved makes me hate student loans even more.

Where to refinance?  Earnest is a great company to work with.  I have had a couple of loans refinanced with them and the process has been great.  They were able to cut my interest rate by a couple of points and I saved hundreds of dollars in interest payments by refinancing with them.  If your goal is to pay off your loans as quickly as possible, what’s not to like?

College is a time for discovery and growth.  It’s when students explore new horizons and find themselves.  But it would be nice if future me just found me pulled me aside and gave me the lowdown on how to prepare for life the right way.  I’m sure he would mention the wonders of student loan refinancing.

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Filed Under: Student Loans

4 Things You Forgot About Personal Finance

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mr-forgetful

We all forget simple things sometimes.  The other day when I was trying to login to my system at work, I could not remember my password for the life of me.  I always typed it in without hesitation and without thinking about it.  But for some reason that day I could not remember it.

My memory lapse (aka brain fart) was so bad I even had to get my password reset.  And when I remembered it later that day I couldn’t believe I forgot it in the first place.

But it happens.  We are fallible.  Even billionaires like Donald Trump make mistakes.  Or lots of them.

The same thing applies to personal finance.  I have done so much reading on finance the past few years sometimes I forget the basics.  And I know others do the same.  Life happens and sometimes we can lose sight of what’s important.

So here are four fantastic pieces of personal finance knowledge that we may have forgotten:

1. No interest is better than low interest

It is very easy to get into debt in our society.  If I wanted to, I could just visit a few websites and sign up for a car loan, mortgage and personal loan in just a few hours.  And if you have kneecaps that you don’t mind losing, payday loans are always an option!

Debt has become such a normal part of society, that people don’t really mind keeping “low” interest debt laying around.  This especially includes tax friendly debts such as mortgage debt and student loan debt.  What’s the harm in keeping around a mortgage that is “only” at 4% and where you can deduct the interest paid from your taxes?

The harm is that you are effectively giving the bank a dollar so you can get back a quarter.  If you have the funds to pay off debt quickly, you will be SO MUCH farther ahead if you pay down the principal faster rather than keep the debt around because you can save some money on taxes.  The only one’s getting richer in that situation are the banks.

Debt is so easy to obtain and even more dangerous to keep around, even the “low interest” kind.  Don’t get lackadaisical in  and pay it off as quick as you can.

2. Delayed gratification really works

Awesome personal finance habits can take a while to learn.  That’s why they’re called habits.  Depends on what school of thought/guru you follow, habits can take 21 days, 28 days, 30 days, 40 days or 2 months to fully form.

The bottom line is that they take time, and this really applies to the essential habit of delayed gratification.

But the problem is that our society is very impatient.  We want things now, now now.  And waiting to buy something you want just seems silly to most people.  But if you keep spending money every time you see something you like, you are sabotaging your financial future.

Spending money frivolously means you can’t put extra money towards debt paydown.  It means you can’t make that home improvement you’ve always wanted.  It means you don’t have enough money to start your business.  But if you save money for a period of time and live lean, you can do whatever your heart desires.

The best way to delay gratification is to save until it hurts.  If you’re saving so much money into your retirement plans, savings accounts HSA’s and self education that you can’t seem to find the money to buy that new Apple Watch, you’re doing well.  Just know that over time those accounts will grow and grow and you can do whatever you want with your money

3. Marketers know us better than we know ourselves

Walk into any major department or clothing store in the country, and you will be bombarded by sights, smells and sounds that are engineered to keep you in there.  Lights will accentuate the sharp curves of the newest smartphone.  Catchy music will be playing at a volume that will keep your ears perked up just enough.

And you will quickly forget that you popped into the store to pick up just one thing.

Making a list before going out to help keep your spending under control is a tried and true personal finance hack.  But companies know this and they hire very smart people that know how to keep us engaged.

Knowing this really is half the battle.  We need to realize that these companies need to keep making higher and higher profits every year, so they will keep looking for innovative ways to keep us in the store and handing over our money.  Keep this in mind next time you get caught in their web!

4. Focus on the big wins in life

As the old saying goes, don’t lose sight of the forest for the trees.  Going through life day to day, it can be easy to lose sight of our big goals.  We’ll hear a co-worker or family member talk about this amazing sale or this incredible new way to save some money on groceries.

The fact is, our brain bandwith is finite, so it’s important to keep the bigger goals in mind.  Things like debt repayment, family and friends and spirituality are some of the important things in my life.  But it’s easy to lose sight of that when the latest savings fad or mind numbing game or TV show comes around.

The things that have made people lots of money in the past are pretty much the same things that make people lots of money today.  Getting an advanced degree, building a business, paying off debt and investing are still the best ways to become richer.

Obsessing over things like cutting out lattes and draining the last bit of toothpaste out of the tube will save you some money in the short term.  But it could come at the expense of the real big wins.  Keep your actions geared towards those.

Personal finance has been an evolving subject for me.  I learn new things all the time and that’s really exciting.  But some things I’ve learned on day 1 are still the most important.  Sometimes all you need is a refresher!

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Don’t Be Your Own Worst Enemy

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Stop getting in your own way!

Stop getting in your own way!

Investing can be a tricky business.  You have to determine why you’re investing and what you’ll be investing in.  Then you have to make investing a habit and do it regularly.  But you also have to watch yourself and make sure you don’t abandon your well thought out plan and change your investments around once the going gets rough.

It has been normal as of late to experience a 2% gain one day followed by a 2.5% loss the next day, and vice versa. Listening to most financial news outlets, you would believe that these are the darkest days the market has seen in a long time.

While it is true that the S&P has seen some dramatic ups and downs as of late, it has not reached the “correction” stage as many financial television stars have been breathlessly predicting the past few months.  Even after the infamous Brexit vote, the stock market actually GAINED ground for the week after a big single day loss after the vote.

For those heavily invested in the stock market, watching these wild swings can be dizzying. But the market goes up, and the markets go down. That’s what it has always done and that’s what it will always do. The important thing for investors to remember is to stay with the plan through thick and thin.

Stick to the Plan

If you and your financial advisor have already formulated a long term investing plan, you can be sure that volatility, or the ups and down of investing, has been taken into account. While timing the market is usually an exercise in futility, the market has historically been pretty predictable as a whole.

Taking a long term view, let’s say 30 years or more, the market has always gone up in any such period. After bear markets and periods of volatility, the market has rebounded to new heights. This was most likely taken into account when forming your financial plan, so there is no need to abandon the plan if a little volatility rears its head.

In fact, doing so would be foolish and harmful to your wealth. To make money with any investment, you need to buy low and sell high. By abandoning stocks in your 401k when there is a downturn, you are essentially buying high and selling low, exactly the opposite of what you should be doing.

Manage your Behavior

Staying the course sounds great in theory, but it can get old after a while and start to wear you down. Listening to the doom and gloom of the mainstream media and talking to people who are making big market moves can make it tempting to pull the trigger.

Pushing that panic button could torpedo your entire financial plan. Sitting on the sidelines during dramatic market swings can actually wear an investor out, and the idea of keeping your money “safe and sound” in a money market account sounds really enticing.

But, again, it’s important to remind yourself that markets go up and down. That is simply the nature of the beast. Find a way to tune out the noise to avoid any volatility fatigue. This could mean not watching any financial media for a few days, getting a pep talk from your advisor or reading a common sense investing book. You can be your own worst enemy when it comes to making investment decisions.

Conclusion

Sometimes, the best course of action in times of turmoil is to do nothing. Let others head for the hills and abandon their stocks, which will invariably happen as we see a rush of investors dumping equities and heading to bonds.

Sticking to your plan will allow you to pick up stocks at a bargain and be poised to gain tremendously when the next market upswing occurs. So while others will be scrambling to get in on the gains, you will already be locked in. Think about that when the idea of staying the course starts to wear on you.

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Filed Under: Investing

If You Don’t Want to Work Forever, You HAVE to Start Investing

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Investing_money

Investing for retirement is usually not a topic of discussion among new graduates.  Most Millennials would rather talk about Pokemon Go or Game of Thrones,  Two things I have thankfully not gotten sucked into yet.

A discussion about student loans may follow.  And then maybe how crappy the economy is and how hard it is to find a good job or start a business.

But talking about retirement or when to stop working full time is not usually a riveting discussion.  Some just don’t understand how retirement accounts investments work, and they don’t care to learn.  Others dismiss the idea of retirement altogether, claiming that they will just work for the rest of their lives.

Sounds like committing yourself to a life sentence.

If you’re self employed or work for a large company, you need to talk about retirement.  If you have the most fulfilling and rewarding job ever, you still need to talk about retirement.  That amazing job may not seem to fulfilling 20 years from now.

In the business world, you need an exit strategy.  You have to plan for how you’re going to leave your work and set things up so you have enough money to live on.  This is what retirement planning is in a nutshell and the earlier you get a plan set up, the better off you will be.

And the ONLY way to give yourself a shot at a great life post work is to invest.

Why is Investing Necessary?

Being able to save money is an essential step to having good retirement income.  And finding a way to make that money grow is just as essential.  But why?  Can’t you just put money into a savings account or under your mattress and not bother taking investment risk?

No, you can’t.  If someone makes $100,000 per year and is able to save 10% of their income into a regular old savings account every year from age 30 until when they retire at age 60, they will have $300,000 saved up.  Not a bad sum right?

Wrong.  This person was living on $90,000 per year during their working years.  Having $300,000 in the bank mean they can live the same type of life for a little over 3 years.  Even if they cut their cost of living in half to $45,000, that’s still just over 6 years worth of money.  Average life expectancy is around 78, so this person still has a decade or so to live with no money in the bank.

So this person was able to save a decent amount of money for decades and will only be able to survive on their own for 3 years?  How can anyone live a long and fulfilling retirement?  By investing their money, that’s how.

Run Your Numbers

It’s all a numbers game at this point.  This person could decide to either work a lot longer, save a lot more or live on a lot less.  Saving 10% per year for 30 years is actually a pretty good savings rate in this day and age, so I’m not sure how many people would be willing or able to do more.

Obviously, we should always be trying to save more and live on less.  That is the cornerstone of personal finance.  But even better would be to combine those ideals with investing, which allows your money to grow and compound over time.

What would change if this person decided to invest that $10,000 a year into a retirement account instead of a savings account?  After running through some retirement calculators I found that at a conservative rate of return of 6%, this person would have a little over $637,000 to spend in retirement after taxes are accounted for.

You read that right, just by putting their money into a retirement account instead of a savings account, you are able to more than DOUBLE your money.  Now being able to invest like this does require some education and up front work, but not really too much.  And I would say it’s well worth it if you can double your money.

This is the power of investing and this is why everyone, even new grads saddled with student loan debt, needs to start investing early and give their accounts lots of time to grow.

Where to Start?

Stocks, bonds and mutual funds.  Investment properties, house flipping and wholesaling.  Commodities, start ups, local businesses, your own business Bitcoin, and peer to peer lending are just SOME of the ways you can invest.  Where is a new investor supposed to start?

It can be overwhelming when you look at all of the options out there.  And each type of investment has its own world of information to learn.  But the best place to start would be a 401k.  If you work for a company they probably have one and if you’re self employed you can open one for your business.

The reason I recommend starting with a 401k (or a Traditional IRA if your workplace doesn’t have one) is because the contributions you make are tax deferred and so is any growth in the account.  This is very advantageous especially if you start contributing early in your career and give the account time to grow.  Once you choose what type of investments you want, start contributing regularly and watch your net worth skyrocket over time.

My next piece of advice would be to do research!  No one can walk you through investing step by step because there is just so much information available.  Do some research on different ways to invest, such as real estate or dividend investing.  If something strikes your fancy, look into it some more and see if it’s worth putting your money in.

Investing is one of those things that are east to get into but difficult to master.  But you don’t have to be a master to have a stable retirement.  You just have to start early and let your money grow.

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Filed Under: Investing

Get a 2%+ Return on Every Credit Card Purchase

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credit cards

The idea of getting something for nothing has always been the holy grail.

The goose that lays golden eggs.  The Fountain of Youth.  Turning lead into gold.  All these stuffs of legend involve getting something amazing without having to expend any resources.

We usually have to spend our time or money in order to get something of value.  If you could find something that automatically rewards you while not expending any effort, you will be immortalized into greatness.

However, there is something pretty close.  And almost anyone can do it: Using reward credit cards for all of your purchases.

Many people use credit cards to make purchases at the grocery store, doctor’s office or shopping online.  Why not use a credit card that earns you rewards for those purchases you make anyway?

It’s almost like getting something for nothing.

But there is a little upfront work that needs to be done.  Not too much work, but once everything is in place, anyone can easily get at least a 2% return on every single purchase they make without paying any extra to a credit card company.

But it all begins with a plan.

Have a Strategy

Anyone who uses credit cards needs to have a strategy.  At best, using any random card just because you have it will not really get you anywhere.  At worst, it can get you into credit card debt.

If you don’t have a coherent credit card strategy, you might as well save yourself the trouble and just use cash.

The lowest credit rate interest rates I’ve seen are around 8%.  The highest I’ve seen are about 30%.  There is absolutely no reason to get into credit card debt if you’re somewhat mindful of your spending and you have a strategy.

My philosophy on credit cards is pretty simple:

-Use credit cards for every purchase for great purchase protection that cash will never give you.

-Look at each statement as it comes in to track your spending and make sure you’re not busting your budget.

-Use a rewards credit card that will give you the best reward depending on what you’re buying.  For example, if a card gives you 3% cash back on gas, only use that card and not another one when you buy gas.

–Pay off your complete statement balance in full each and every time.  If you don’t do this step and start building up credit card debt,  then you have no business using a credit card.

-Bonus:  I like to submit my payment one week before the due date.  That way, I’m taking full advantage of the interest free loan the credit card company is giving me without having to worry about the payment being late.

When it comes to deciding which rewards card to use, analyze what you spend the most money on and pick a card that maximizes that.

If you cook at home and have kids, you probably spend a lot at the grocery store so pick a credit card that gives rewards for grocery purchases.

If you tend to eat out a lot, pick a card that gives you rewards for restaurant purchases.

If you travel a lot on a specific airline or stay at a specific hotel for work, pick a card for that airline or hotel to get the maximum benefit.

Once you have your strategy to stay out of debt and figure out where you spend the most money, it’s time to sign up for your cards and use them to optimize your rewards.

My Credit Card Choices

Every few months, I sign up for new credit cards with big sign up bonuses.  Some of these sign up bonuses can be worth several hundreds of dollars so it is well worth my time to do this.

But when I’m not chasing sign up bonuses, I have some cards I fall back on for my regular spending.  You can click on the links to learn more about the cards.  They are not affiliate links so I receive nothing if you decide to sign up:

–Citi Double Cash Card:  This is my default everyday card.  It gives 2% cash back (1% when you buy something and 1% when you pay off the bill).  You can redeem the card for a check in the mail or a statement credit.  Really easy to use.  And no annual fee which is great.

–American Express Blue Cash Preferred:  I use this card for grocery purchases.  It gives you 6% cash back on purchases at any grocery store (except warehouse stores) up to $6,000 for the year.  It has an annual fee of $95, which brings the actual cash back percentage to around 4.5%, which is still pretty good.

–Bank of America Cash Rewards:  I use this card for gas purchases.  It gives 3% cash back for money spent at gas stations.  I also get a tiny 10% bonus for having the cash back deposited into my Bank of America checking account.

–Chase Freedom:  This is one card you have to pay attention to.  It gives 1% cash back on all purchases, nothing special, but has 5% cash back categories which change every quarter.  They have some good categories like gas, groceries, restaurants, and Amazon purchases.

Discover It:  Similar to Chase Freedom, this card also has rotating 5% categories.  They usually have different categories from each other, so if you have both cards you’ll probably have at least one 5% category that applies to you per quarter.

And that’s pretty much it.  Using these cards strategically gets me 2.5% cash back easy on all of my purchases for the month.  Some months are even better depending on what I’m buying.  I especially like the Blue Cash Preferred card since you can buy so many different things at grocery stores.  Like gift cards!

There are also many travel specific cards that will give you things like airline points or travel reimbursements instead of cash back.  Using credit cards for travel can get complicated so check out one of the many travel blogs available ot find out more.  A couple of my favorite are Million Mile Secrets and The Frequent Miler.

Choose what works for you and get some easy money.

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Everyone Should Consider Student Loan Refinancing

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Unshackle your life

Unshackle your life

Few opportunities in life will allow you to keep more of your own money year after year with very little work on your part.

You can call your cable company to negotiate a better price.  That can save you $50 bucks or so per month.  But you have to look for new deals every few years and stay on top of the company to make sure they don’t tack on any extras.

Negotiating down a price for a car is another example.  You can potentially save thousands of dollars off the sticker price, but cars go way down in value anyway and you have to rinse and repeat when it’s time to buy another one.

These are both great ways to save money but do require a good amount upfront work and some checking in to make sure you’re not getting fleeced.

But for recent graduates with student loan debt, there is an even better way to create perpetual savings with very little work or maintenance:

Refinance your student loans.

Why You Should Consider Refinancing

Student loans are a big problem in this country.  While student loan interest rates are not nearly as high and murderous as credit card rates, a LOT of people are saddled with student loan debt and the amount of debt is pretty high.  Professional school debt can easily get into six digits (hence, The Broke Professional)

How high?  About $1.3 trillion.  You can even see it go up every second if you have some free time.  Pretty cool.  But also NOT COOL.

The other big issue is that it can take time for many graduates to actually get their careers going.  But lenders really don’t care.  They will give a few months grace period and then you need to start paying.

There also used to be a time when student loan interest rates were really low.  During my undergraduate years in the early 2000’s they hovered around 1-2%.  Now the rates are around 5-7% or even higher depending on the type of loans you take out.

So higher rates and higher balances that affect a large chunk of the population.  This is a problem.

Student loan refinancing is a great potential solution.  While it may not be the final solution for everyone (some value the various government benefits that come with federal loans), every single person with student loan debt needs to look into refinancing.

Refinancing may not be the right option for everyone.  But it doesn’t hurt to get some quotes and find out!

Benefits of Refinancing

Some people are a little confused about what a student loan refinance is.  Really simply, the company you decide to refinance with will send a check to your original lenders and pay off your loans.  You are now a customer of the refinancing company and you have to make payments to them.

Pretty simple, but what are the benefits of moving your debt from one entity to another?  There are many, but the biggest benefit is that you will (most likely) be paying much less in interest payments over the life of the loan.  The bigger the interest rate difference from your original lender and your new lender, the more beneficial refinancing will be for you.

Depending on the interest rate difference and the amount of your balance, you can potentially save a lot of money.

As a real life example, let me walk you through how much I saved with my refinance.  Since my time in school spanned some interest rate changes, I had some loans with lower rates and some with higher rates.

I decided it would be most beneficial to refinance my one loan which had a higher interest rate than the rest and had the largest balance as well.  Let’s do some simple math to check out the savings I received:

Original loan:  $36,667 @6.8% interest

Original term:  25 years

Total payments:  $76,346 ($39,679 interest)

That’s a long time to be in debt and a lot of extra interest to pay.  Now here are the terms of the refinanced loan:

Refinanced loan:  $36,667 @3.45% interest

Refinanced term: 20 years

Total payments:  $50,811 ($14,144 interest)

So over the life of the loan, I would end up saving $25,535 in interest payments!

With the refinanced loan, I had the option of a 5, 10 or 20 year term.  For the sake of the example I showed the 20 year term since the monthly payments were just slightly higher than the original loan.

Simply getting a lower interest rate with pretty much the same monthly payment would save me about $25,000 over the life of the loan!

But I want to get out of debt quick, so I went with the 5 year option since I could handle the increased monthly payment.  Going with this option will save me $36,374 in total payments.  I’m liking the sound of that.

I only had one loan with an interest rate of 6.8%.  Graduates nowadays have multiple loans with interest rates around 6%.  Being able to refinance their entire balance with an interest rate cut in half can produce significant savings.

Another great benefit of going with a new company to refinance your student loans is better customer service.

I’ve dealt with a number of refinance companies and every single one had better customer service than my original lender, whose customer service is almost non-existent.

My original lender would do shady things like apply extra payments towards interest and not the principal, even though I specifically asked them not to.  And it took forever to get a live person on the phone.

Many of these new refinance companies are young and growing, so they put customer service at the forefront of their business plan.  My two favorite companies, SoFi and Earnest, have phenomenal customer service and very user friendly websites.

Who Should I Refinance With?

There are a lot of student loan refinance companies popping up nowadays, but the two that are at the top of the industry and that I highly recommend are Earnest and SoFi.  They are essentially 1 and 1A.

If you’re already convinced and want to get the refinance train moving, click here to get a quote from Earnest, the company that ultimately got my business on my first refinance.  (If you end up getting approved for a refinance by using this link, we both get a $200 bonus)

I also recommend clicking through SoFi, as they have slightly different underwriting standards and you may receive different quotes from either.  (If you use this link and get approved, you will get a $100 bonus)

I would suggest comparing the two and going with the company that gives you the most favorable rate.  They are both very good.

If you still need a little more hand holding, my next post will detail the step by step process of refinancing your student loans and I will tell you why I went with Earnest for my first student loan refinance.

Until then, get some quotes and save some money!

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Educating from the Exam Room to the Blogosphere

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Blogging is not as easy as most people make it out to be. It takes consistent time and effort to produce a quality blog, let alone one that makes some money.

But the most important thing needed to become a successful blogger is passion for your subject. Dr. Jennifer Lyerly, a fellow optometrist from North Carolina, blogs about various issues in the field of optometry. Her knowledge and passion for the profession is evident from every post she puts up on her blog, Eyedolatry.

I asked Dr Lyerly some questions about her life and blogging career. Read on to learn more about what drives Dr Lyerly to produce consistent quality content for fellow optometrists and anyone looking to learn more about the profession:

Tell me a little about yourself and your career:

profile

I graduated from the Southern College of Optometry in 2011 and started blogging right after graduation. I’ve been working in group private practices since graduating, and I’ve found I really enjoy working with a team of doctors and having a personal relationship with a boss who is also an optometrist. I’m constantly learning from doctors with more experience where I work at Triangle Visions Optometry, and I also feel like I bring something new and insightful to the table as a millennial doctor on the team.

When and why did you start blogging and who is your primary audience?

I was studying to take North Carolina boards, and also organizing my thoughts on patient care for my first job when I decided to write my first blog post. The blog was a great way to think about a topic and work out how I would describe a medical condition or an optics question to a patient. Most readers on my blog are curious patients, wanting to learn more about their eyes. Since I’ve been putting more focus on women’s issues in optometry, I have seen a huge influx of readers that are new graduates and student ODs. My goal is to make the blog informative to people with various levels of education in eyecare, so that an optometrist, a student, and someone completely inexperienced with our profession would all feel like they took away valuable information from a post.

How do you manage your time between blogging and seeing patients?

It’s difficult! My rule is that I never mix blogging with work. At work I see patients and am a doctor only. When I leave the office, I don’t take home patient care so I’m free to work on anything I want. I try to write 1 good quality post a week. More than that, and I just don’t have time to research and edit enough to feel like I’m delivering quality information.

What has been the biggest challenge in your blogging career?

Dealing with criticism has been tough. When you put yourself out there, you’re going to have people who don’t agree with you. I’ve had a surprising number of people criticize my support of daily contact lenses on the blog, or leave a comment meant to insult me or belittle me about “not being a real doctor.” I was even blocked on Facebook for a few months when someone upset about how many posts I’ve done about daily disposable contact lenses (they wear their Biomedics contact lenses 4-5 months at a time and are just fine!!) reported me as a bad URL.

Any negative feedback I get just drives me to want to write better and better articles. The world is largely uninformed about what we do as optometrists and what is true about their eye health, and I feel like my blog gives patients at least one place where they can get true, medically supported information. Not everyone will agree with the science, but that doesn’t mean they don’t need to hear it.

If you could give some advice to your first year optometry school self, what would you tell her?

I was so focused on classroom excellence in school, I didn’t participate in leadership groups as much as I should have. Looking back now, optometry school is truly a place of social connections as much as learning. As a natural introvert, it took me being out of school and having to talk to new people every 20 minutes in patient care to realize that making connections with people isn’t scary or intimidating — it’s actually pretty easy and very rewarding. I’ve almost become an extrovert at this point and life is so much more fun this way!

What are some of the major challenges that young optometrists face nowadays?

Where I practice in North Carolina, the choices of where to work seem to be getting smaller and smaller every year. Our industry is going through major ownership consolidation and I fear that lack of competition and choice for where to work will drive down our salaries and our quality of life as doctors. Negotiating what you want is essential from your very first contract – not just for you, but for every doctor that comes after you. We have to stand up for what our education and skills are worth.

Have you always enjoyed writing?

In elementary school, I wanted to become an author when I grew up. I haven’t written a book (fail), but blog – author has to count for something.

Are there any blogs you visit regularly?

With industry blogs I consistently read Eye See Euphoria, Maino’s Memos, Eyecing on the Cake, Optomly, and of course, The Broke Professional.

Where do you see yourself professionally in 5 years?

I plan to keep practicing, blogging, speaking, and serving the profession of optometry in anyway that I can. I’m passionate about the success of our profession and I am excited about any opportunity I get to make our future brighter. I hope in 5 years I can look back and feel like I’ve been making a difference in our profession, no matter how small the impact is.

Where do you see your blog in 5 years?

I started the blog as a way to supplement my learning, and I can’t picture a time where there isn’t a topic I want to learn more about. But in addition to educational articles, I also want to use the blog to help our profession. I want to work with companies and industry leaders for the next generation of young female ODs to champion the future of our industry. I’m really passionate about making private practice survive in optometry, and embracing social media is the best way for independent doctors to compete with large corporate entities — you need a personal, unique presence and you need to connect with people!

Through the blog and the social media experience I’ve had, I’ve also started a new business with Dr. Glover at Eye See Euphoria where we are offering social media management for exclusively optometrists at Defocus Media. It’s impossible to know what the social media landscape will be in 5 years, but I want to be right there, representing optometry and connecting with other doctors and patients to grow our profession.

What is your favorite book?

This is always a hard question for me — I love reading and there are so many books that have spoken to me. I really love The Bell Jar by Sylvia Plath because I think many young women go through the feelings the main character has in that book — feeling confused about what and who you’re supposed to become and how you’re supposed to do it all, feeling like what you’re creating or delivering to the world is not valued. Knowing other women before me were overwhelmed with expectations from society, their families, and themselves makes me feel more comfortable with imperfection and not being able to do it all.

What do you enjoy doing when you’re not blogging or seeing patients?

Traveling, eating, and dancing at weddings. Being married to my best friend, I feel like we are always planning our next adventure.

Any words of advice for young professionals seeking to make an online presence?

Don’t judge your worth by the number of readers or number of followers you have. Don’t judge your worth by one person’s negative comment. If you look at what you’re doing online, be it blogging or on social media, and you are proud of it, then you are success! And you know what, if you’re producing good content, your readership and followers will grow naturally anyway.

Big thanks to Dr Lyerly for the interview and giving some insight on what it takes to build a successful blog while holding down a full time job.

Her blog is called Eyedolatry.  Check it out for consistent quality information about eye conditions and the field of optometry.

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How to Get an Amazing Return on your Savings Account

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Savings accounts will save your life.

The financial services industry is enormous.  There are countless magazines, commercials, shows and blogs that talk about financial products and services (I do that also, but only with products I use and trust.  Like Digit.)

Companies like Fidelity , Vanguard and Charles Schwab will talk about their mutual fund options all day long.  Life insurance companies will be happy to show you their complex whole life insurance and annuity plans.  If you turn on any business news channel, you’ll start believing that the world is going to end and you need to entrust your financial life to a specific company.

All of this marketing is designed to separate you from your money, and will ultimately enrich the companies in the form of fees and commissions, regardless of your own personal performance.  Marketing is a powerful tool and the odds are stacked against the average consumer.

But what if I told you there is a financial product available that is virtually risk free and will give you great returns throughout your entire life?  This product is not heavily advertised in the financial world and will only get a cursory mention by financial advisers.

That product is the humble emergency savings account.

Savings account?  Really?

Yes really.  And it has nothing to do with the interest rate.

Most people have savings accounts and don’t even know it.  Many banks sign you up for one when you get their checking account, although most people don’t give it a second thought. But they can be a powerful wealth building tool.  How can that be when the interest rates are so low?

A savings account with Bank of America will get you a maximum interest rate of .03%  That’s right, 3 hundreths of a percent.  Almost nothing.

An online savings account with Ally, which I currently use, gives a 1% interest rate.  A LOT higher compared to a Bank of America account, but still not too high in the grand scheme of things.

(By the way, sign up for an online savings account if you don’t have one.  You’re just leaving money on the table if you don’t)

The beauty of a savings account doesn’t lie in the interest rate.  Savings accounts are awesome because they can enhance your financial life by providing positive returns in so many ways.  Here are some examples:

Higher deductibles:  Insurance is a game of risk.  This is true for any type of insurance, including health, auto and homeowners.  If you take on more risk, you pay less in premiums to the insurance company.  If you take on less risk, you pay more in premiums.

Assuming coverage remains the same, the best way to take on more risk, and thus decrease your premiums, is by increasing your deductible.  This will be how much you pay out of pocket before the insurance company starts paying.  The higher deductible you pay, the lower premiums you pay.

What a large savings account does is that it allows you to set a higher deductible because you will be able to cover that deductible payment if need be.  I believe the role of insurance is to help you out in catastrophic cases, such as a car accident or major illness.  In the case of a car accident, having a low $100 deductible is not really a big benefit since the cost of replacing a car can run well into the tens of thousands.

For example, I have car insurance with Geico.  If I choose a $1,000 deductible on one of my cars, which is an amount any decent savings account should have, my 6 month premium is $285.  Not bad at all.  If I leave the coverage the same and change the deductible amount to $100, the 6 month premium jumps to $395.

An extra $110 for 6 months is not bad, but if you have a large savings account, there is no need to spend that extra money.  Apply this principle to all your cars and all of your various insurances (especially your health plan), and you can easily save hundreds of dollars per month just for having money in a savings account to cover those deductible payments.

Bulk Purchases:  This is an easy one.  Buying in bulk is almost always cheaper than not, especially with groceries.  And having money in the bank allows you to do this anytime you want.

If you see something you regularly purchase on sale at the grocery store for half off, you can save a lot of money by buying enough of that item to last you for the month instead of coming back every week and paying the regular price again.

Your savings account just helped you slash your grocery bill.

Pay in cash:  With things like cars, home repairs, remodeling and appliances, most people just assume you have to take out a loan.  That’s just how things are done.  But not if you have cash in your savings account.

We recently got an estimate for a painting job from a number of contractors.  All the estimates were for about $1,000.  Since I will be paying in cash, this will be an easy transaction.  Just transfer from my savings account and pay the contractor.

Most people go would go the loan route.  A good rate for a personal loan would be 6%.  If I could get a 6% loan with a 5 year term, the monthly payment would be $19.33.  What a steal!

Actually, not a steal at all.  The extra interest you would pay over the 5 years would be $159.97.  So having a savings account that could cover that amount right off the bat will save me $160 compared to having to take out a loan.

Leave investments alone:  This is where having a savings account can potentially help you keep a whole lot of your money.  Everyone needs to invest whatever they can as early as they can.  Compounding interest early in life produces great returns later.  This has been proven extensively.

But what if you have been investing so much that you totally neglect your savings account and now you owe someone $5,000?  You’re going to have to tap your investments which is going to cost you in 2 ways:  Transaction costs and diminished investment returns.

If you have to withdraw from a retirement account, add a penalty payment and extra income tax on top of that.  And all the while you are missing out on returns your $5,000 could have been getting if it remained invested.  Not a good situation.

So even if you’re the most gung-ho investor and you’re super excited to get in the game, make sure to set aside some cash just in case.  It will actually help you keep more of your money.

With all the savings to be had from higher deductibles, bulk purchases, not having to get a personal loan or withdraw from your investments, I hope you’re convinced that having cash set aside in a savings account is a good idea.

I hear many people rail against savings accounts because of the low interest rates and how the “opportunity cost” is too high since you could be getting a higher rate of return elsewhere.  But no other account allows you to withdraw money as needed and gives you the peace of mind found in all the previous examples.

So help keep your financial house in order and open an online savings account.  Make sure to keep replenishing it because it is not a matter of if you’ll need it, but when you’ll need it.

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Financial Lessons Learned During a Blizzard

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My Sunday/Monday/Tuesday workout

My Sunday/Monday/Tuesday workout

The East Coast is now recovering and digging out from one of the worst blizzards it has seen in years.  In the MD/DC/VA area we got the brunt of it, so digging out has been a process for sure.

While being at home with my family for days was fun, cabin fever started to set in after a while, especially with my 3 year old son.  He begged us to take him to the nearby park which was covered in snow and he absolutely loved it!

It was an interesting and sometimes character building experience trying to dig ourselves out.  I saw the spectrum of humanity out there.  From neighbors helping each other shovel out of their driveways to guys taking selfies of themselves in their clean driveways and not lifting a finger to help others in need right next door.

Shoveling snow is kind of a cathartic experience because things are very quiet and still all around.  And all you’re left with is your thoughts while repetitively shoveling and pushing snow around.

In between thinking about my mortality and wondering if we had enough eggs to last the next few days, I did draw some financial analogies related to the blizzard:

1.  Debt keeps you from moving forward

Seeing the magnitude of the storm when it was finished and how helpless everything looked, I realized that this is what debt can do to your financial life.  If you have debt lying around all around you, it becomes very difficult to just take a step towards financial freedom.

Once you can stop the debt from piling on, the next action step should be to get rid of that crushing debt so you can actually move on and advance with your life.  Which brings me to my next realization:

2.  Large goals are best completed in stages

Once I got my gear on and opened the door to take a look outside, it was incredible to see how much snow there was.  My Corolla was almost completely covered and the mounds of snow in the driveway and on the sidewalk were enormous.  I thought to myself that we’re never going to be able to get out of this.

But once I started working, I just made a goal to clear off certain sections and take breaks every so often.  Before I knew it, I had most of the driveway clean that day and two days later the car is able to get out and the sidewalk is passable.

This concept can be applied to pretty much anything in life, be it paying off debt or starting a new business.  The final goal can seem daunting and even unattainable at first, but if you break it up into smaller goals and work on them consistently, the end goal will become much clearer.

3.  Focus on your own situation and don’t keep up with the Joneses

It’s interesting to see how differently people approach shoveling.  Some perfectly healthy people can’t be bothered and will hire somebody to clean.  Some people are out during the storm itself and to get a head start.  And some people just wait until the plows come by to get started.

People also have different levels of preparation.  Some are using their rickety old shovels that have lasted them for years.  Others are eager to start up their brand new snowblowers.  Everyone has different situations but my philosophy is to do what you can with your situation and help those who need it.

If you were unprepared for this storm, just do what you can and prepare better for the next storm.  Financially, constantly having your eyes towards those who have more will just make you feel worse and affect how you deal with your current situation.

4.  Having a partner helps.  A LOT.

Shoveling snow by yourself is repetitive, boring and time consuming.  I noticed when I had one or two more people helping, all with the same goal, things were just more fun and work got done more effectively.  Even if one of the other people was my 3 year old son with a sand shovel, it was still fun having him out there.

In the same way, I think it’s important to have a partner when it comes to your finances.  This could be an accountability partner, a spouse who is on the same page or just a friend who enjoys talking about finances (I’m taking applications if you’re looking for one.)

There’s a nice synergy that is created when you’re working with someone towards the same goal.  You feed off of each other and new ideas can be found during the journey.

Luckily the forecast is calling for temperatures to be in the mid 40’s this week, so hopefully we will have a lot less snow to contend with this time next week.

Now only if there was an act of God that could evaporate everyone’s student loan debt…

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