Do You Have To Carry A Balance For The Best Credit Score?

July 31, 2018

One of the more confusing parts about maintaining an ideal credit score is how a credit card’s utilization is measured. It’s true that lenders want to see that you have open lines of credit that you’re actually using, but does that necessarily mean you have to keep a balance on a credit card to prove that? The answer is a definitive no, but let me review a few key things to further drive that point home.

Credit card companies report users’ information monthly

While it may seem like the slightest slip-up in your credit behavior has an overnight effect, most credit card companies actually only report account information on a monthly basis. They are reporting the timeliness of your recent payments, the current balance and whether or not the account is in good standing.

How this can help you

Since your credit card company probably doesn’t pick the exact date that your payment is due, as long as you’re using your card on occasion, your credit report will likely still show a balance on your card even if you pay it off each month. As long as you’re paying it off on time each month, that fact is also reported, and the account will most likely boost your score due to responsible usage and on-time payments.

How this might hurt you

If you’re regularly maxing your card out and leaving it that way until your next payment is due, even if you pay it off every month, there’s a strong chance that the utilization of that credit line could be hurting your score.

How to play this to your advantage

  • First of all, try to avoid maxing out your card, even if you can pay it off each month. If you have to do that and having a great score is important at the same time, just try to pay the balance off ASAP, rather than waiting until the payment due date.
  • Second, if you’re just looking to show proper behavior, simply use your card for one or two expenses you already have, such as filling up with gas or paying your cell phone bill. It’s easiest to maintain the habit of paying it off each month if you only use it for relatively predictable expenses, which allows you to better budget your payments.
  • In other words, where people mess this one up is when they rationalize that using their card to splurge on a trip to a favorite store or restaurant will keep their score high, neglecting to factor the extra spending into their budget.

The bottom line is that you DON’T have to carry a balance over from month to month, which typically incurs interest charges, in order to maintain a high credit score. Do your best to pay your card off each month, and enjoy a high score while also keeping your other important financial numbers high.

What Makes An ‘Ideal’ Credit Score?

June 27, 2018

Besides knowing what counts and doesn’t count toward your credit score, what is the ideal situation that earns you that coveted high-700’s rating and all the low interest rates and amazing credit offers that come along with it? Here’s how it works:

 

What makes your ideal credit score:

  • 3 – 4 revolving credit cards each with high lines of credit ($10,000 or more) with a low balance carried on one. (note that you can – and SHOULD – pay this balance off each month!)
  • All types of credit on your report are at least 6 months old, with at least one that is 3 years old or more.
  • NO delinquent items on your report.
  • 1 – 3 or less hard inquiries over the past 6 months
  • All other loans are in good standing (car, mortgage, student loans, etc.)

Working to get there

As you can see, a lot of these criteria really have to do with letting time pass, and all are the result of consistent “good” money behavior — paying bills on time and using credit responsibly. If you’re planning to buy a house or take out some other type of loan in the future and you don’t have all of these conditions in place, it’s best to start ASAP with working toward it.

For example, if you only have 2 cards in your name, open another one then also call the other two and see if they will increase your limit to $10,000 or more – these are all actions that will result in “hard” inquiries, so you’ll want to do this at least 6 months before applying for your loan.

You don’t have to actually use that new card, or your increased limit (in fact, you shouldn’t if your goal is to get a higher score), although using one card to pay some of your regularly occurring expenses and then paying it off each month will demonstrate that you are able to use credit in the way its intended.

Beyond that, if you’re just looking for the best score you can get, remember that there’s more to financial success than just a high credit score – try not to get too obsessed. Don’t forget the other, more important number to your overall financial security.

How Your Social Security Benefit Is Calculated

June 18, 2018

Most people know that the amount of your Social Security benefit depends on two things:

  1. The age you are when you elect to begin receiving payments
  2. The highest 35 years of your earnings

However, there is a lot of confusion around how your benefit is affected if you work past age 62, especially if you’re in your highest earning years.

Here’s what you need to know

Your earnings are indexed for economy wide wage growth

In other words, you may be making the most total dollar amount of your working years right now, but that might not mean it’s your highest year for SS purposes.

What that means is that Social Security plugs your annual earnings into a table over all of your years of working and multiplies the earnings by an index to get everything in current dollars. Then they take the 35 highest years from that table to calculate your benefit.

Figuring out your 35 highest earning years

To figure out your 35 highest years, go to this website, then enter the year you will first become eligible to receive payments (the year you turn 62). I was born in 1977, so will turn 62 in the year 2039. Once I have the index factors, I can pull out my earnings report (which you can access through your SS account) and multiply each year’s earnings by the indexing factor.

For example, the first year I had wages was 1992, when I earned a whopping $136. The indexing factor for 1992 is 4.8442967, which means that $659 is the amount used in figuring my highest 35. Do this for each year, then add up the highest 35 (or for me, since I don’t yet have 35 years, I just add them all up), then divide by the total number of months in those years. This is your average indexed monthly earnings (AIME).

If you have 35 years of earnings, you just divide by 420. Since I’ve only had 26 years to date, I’d use 312 for now. So if you add up all your indexed years and get $3,000,000 and divide by total months of 420, your AIME would be $7,143.

Plugging your 35 highest years into the formula

Once you’ve added up the highest indexed 35 years and divided by the total months you’re counting to get your average earnings, you plug it into a formula. Using the example above, here’s how the formula works:

90% of first $885 of earnings: ($885 x .9) =$796.50 Remaining earnings: $6,258
32% of earnings above $885 up to $5,336 ($4,451 x .32) =$1,424.32 Remaining earnings: $922
15% of everything above $5,336 ($992 x .15) =$138.30 TOTAL: $2,359.12

 How to use this information

The good news is that the Social Security Administration does this work for you, but knowing how the formula works can help you if you are trying to figure out whether continuing to work will actually increase your benefit and if so, by how much.

In order to figure it out, you basically have to take a look at your indexed earnings so far, then make sure you’d be able to out-earn your 35th lowest year.

You may be surprised to find that your lowest earning year in actual dollars may NOT be your lowest indexed year. Likewise, your highest indexed year could very well have taken place many years ago, even though you’re earning more in actual dollars today.

Is it worth it?

Finally, even if your projected earnings are substantially higher than your lowest 35th year, you may find that the increase to your benefit would be minimal. When I ran a few examples of a worker just matching highest actual dollar years in continuing to work, the monthly benefit increased by less than $15.

Depending on your projected monthly retirement expenses, that additional $180 per year could make a difference, but most people I know in their 60’s would pay $180 per year in order to retire sooner, no?

 

Is Pet Insurance Worth It?

June 08, 2018

My parents adopted a puppy this summer and as part of their preparation for her arrival, we discussed whether they need to invest in pet insurance. In fact, many companies even offer discounted pet insurance for employees. But do you really need it? It depends. On one hand, it’s heart-breaking to have to make decisions about your beloved pet’s life solely for financial reasons, but on the other hand, it’s often not worth it. Here are the things to consider.

You’re more of a dog person

Reasons you may want to buy it

  • The policy covers things like annual dental cleanings and required vaccines and costs less than your vet charges for that stuff.
  • You have a big breed that may be prone to problems (although that risk could be factored in to the price of the policy).
  • You live in a busy area where it’s more likely for your dog to have an accident.
  • You’re adopting a younger dog with no known issues.
  • You’re conservative with your money and prefer to protect against all potential risks.

Reasons you might not buy it

  • You’re adopting an older dog — if you’re even able to get coverage, the cost may exceed any possible benefit.
  • Your dog has already been diagnosed with an issue — just like you probably won’t qualify for long-term care insurance once you’ve started showing signs of dementia, a pet insurance policy is unlikely to cover a pre-existing condition.
  • You have a robust emergency fund that could pay for any type of expensive procedure.
  • Paying the premium would require you to take on credit card debt or compromise other goals like saving for retirement.

If cats are more your bag

Reasons may want to buy it

  • If it covers dental and you have a breed that has teeth issues (like a flat-faced Persian), assuming the cost of the premiums is less than your vet would charge out-of-pocket.
  • Your cat goes outdoors.
  • You’re conservative with your money and prefer to protect against all potential risks.

Reasons you might not buy it

  • You have indoor cats who aren’t exposed to other pets.
  • If, like me, you don’t believe in subjecting cats to extreme treatments like chemotherapy — from what I understand, once we figure out a cat has cancer, it’s usually too late because they have such little bodies. Putting them through stressful treatments is unlikely to cure them, and really only prolongs the possibility of pain.
  • You have a robust emergency fund that could pay for any type of expensive procedure.
  • Paying the premium would require you to take on credit card debt or compromise other goals like saving for retirement.

Make sure you know what’s covered and more importantly, what’s not

A common complaint about pet insurance is that the things that it covers are limiting to the point of the policy being relatively useless when the big dollars are due. Before purchasing a policy, make sure you’re clear on what’s covered but also what instances it wouldn’t pay out. Nothing is more frustrating than keeping an insurance policy in place for years, only to find that it doesn’t pay for what you need.

My personal preference

I personally wouldn’t purchase pet insurance for anything besides a care plan that would provide me with discounted routine care, but I do set aside money to cover my cats in case of emergency. One suggestion I often make is to find out how much an insurance policy would cost per month, then just set up a separate account where you automatically save that amount each month toward future bills.

For example, according to this site, the average monthly cost is about $27 for cats and $43 for dogs. If I were to save that amount each month into a savings account from the day I adopted a kitten, I’d have over $4,500 saved by the time my cat turned 12, which is the age that a lot of health issues pop up for cats. Of course this doesn’t factor in the routine visits to the vet, but pet owners really should be factoring that into their ongoing spending plan.

How To Avoid The Number One Budget Breaker

May 30, 2018

One important step in setting financial goals is establishing or reviewing your budget. After all, how can you tell your money where to go if you don’t know where it’s been?

Pay attention to this as you look back

Notice that as you review your spending on a month by month basis, there is most likely something that negated your efforts to save – a last minute gift, celebratory dinner, travel for the holidays, a kids activity, even just a party had to bring supplies to. These things cost money and not an insignificant amount. And this is where all that extra money is going. It’s not the daily latte or ordering take-out or a splurge at Target that kills most of our budgets. It’s the happy fun things – the things that, I think, make life worth living. It’s these things that we end up spending our “extra” money on instead of putting those funds toward our financial goals.

 It’s not the daily latte or ordering take-out or a splurge at Target that kills most of our budgets.

But I’m not saying you shouldn’t spend that money. What I’m saying is you can actually plan for these expenditures so you can still stick to your savings goals. You knew that most of these expenditures were going to happen way before the money left your account. In fact, I bet you can probably predict most of them for the coming year right now.

How to better plan for upcoming expenditures

It’s easy to budget for the monthly bills — even though the electric bill may vary wildly depending on the weather, you have a general idea of how much to reserve to pay it. It’s these other things that are tough to put into a neat monthly bucket. Rather than tearing your hair out trying to stick to spending limits in different life categories, try this way of getting ahead of “life stuff.”

Instead of trying to work these things into your everyday spending, make them part of your financial plan by mapping them out in advance. Here’s how:

  1. Get out a blank calendar
  2. Get out your date book/iCalendar/house calendar
  3. Write down all the commitments you’ve already made outside your normal routine
  4. Include weddings, vacations, graduations, holidays, babies that are due, etc.
  5. Then go back and write in all the regular stuff that comes up: trips to the vet for the dog, vehicle registrations, kids’ sport fees, etc. You might want to use last year’s spending to make sure you don’t miss anything
  6. Assign an estimated dollar amount to every single thing
  7. Add it all up and divide by 12
  8. Set that amount aside each month in a separate savings account

When I did this, I realized that almost every month I had some type of travel planned already. I also realized that my dreams of spontaneous camping weekends in Wisconsin may remain dreams unless I start planning them right now. You’re busier than you think!

Things cost more than you think

This month it’s a weekend in New Orleans, which was booked on airline and hotel points, but will still require several hundred dollars in order to enjoy the culinary mecca. This is money that I might otherwise allocate toward my goal of buying a new tennis racket. Next month, it’s a trip home for Father’s Day. That’s at least $100 in gas money not to mention a gift for my dad and greens fees when I pay for us to shoot a round of golf.

While I’ve already budgeted for a trip to Oregon wine country with my mom this fall, seeing that listed along with the other little weekend things coming up was a huge financial eye-opener. And we don’t even have kids stuff to budget for! (although every trip does require a cat sitter, so there’s that) It’s these things, these happy life things, that are your biggest budget busters.

It’s these things, these happy life things, that are your biggest budget busters.

Pay attention to these seemingly financially insignificant events on your calendar and put them into your spending plan now. This process also helps you gauge whether your savings goals are realistic.

By doing this advance planning, you should still be able to achieve whatever financial goals you are working toward such as paying off debt or building up your savings – those less “fun” but still essential goals. Knowing in advance that this money will be spent anyway actually does motivate me to cut back on my wine or clothing budget in a way that just trying to “make it all work” doesn’t. Try it and let me know how it works for you.

This Millennial Learned The Downsides of Private Student Loans The Hard Way

May 07, 2018

I recently spoke to a young man who was evaluating his options regarding a private student loan that was in default. He had attended a prestigious school where his mother was a professor, which allowed him to attend tuition-free. However, his family had not saved to cover the other costs of college, including room and board, books and fees, so he found himself taking on student loan debt in order to cover those costs. Due to his mom’s employment and his family’s financial situation, he was offered very little in federal loans, requiring him to turn to the private market to fill the gap.

Fast forward to graduation, when he moved across the country to a high-cost-of-living city to seek a job in a competitive field, and he found himself still looking for work when the 6 month grace period expired on his student loans.

What happened next

At this point he learned very quickly how federal and private loans differed — while he was able to defer his payments on the federal loans until he found employment, and then was able to choose an income-based payment plan to accommodate the fact that he was in a field that starts out with very low pay, with room for rapid salary growth, the lender of his private loans was less sympathetic. Within months, he was in default on all of his private loans, despite numerous attempts to work with the lenders to work out a way to stay in good standing.

Where he is today

Ten years into his career, this young man has been very financially successful. So much so that he’s been able to completely pay off his federal loan, but the private loans continue to plague his credit score. Despite the loans being considered in default, he has been making payments on them ever since he found employment, but due to the fees and interest that had accrued during those early months of unemployment, the payments barely make a dent. The rub is that the lender is unwilling to work with him to put the loans back in good standing unless he is able to catch up on all the missed payments from all those years before first.

Evaluating his options

One thing he’s been considering is whether to settle the defaulted loans, by offering to pay a lump sum and call the loans “Paid as Agreed.” The upside to this is that it will start the clock on those defaulted loans falling off his credit report after 7 years, with the negative effects on his credit score softening with each passing year. The downside is that in the near-term, his credit score won’t really see any boost — having a settled debt on your record is actually just as bad as having a defaulted debt on your record. But in the long run, settling will make the default history, eventually. He was disappointed to learn this, as he had been hoping that settling would at least show that he’d paid, but alas, that’s not how prospective lenders see it.

What he would have done differently

The key take-away from this tale of debt is not just that private student loans should be used with caution, as the flexibility offered by federal loans simply doesn’t exist, but also what he shared with me about his regrets. When talking through these consequences, he lamented that he wished that he and his parents had known what they were getting in to when they accepted these loans in the first place. He had borrowed this money in order to take advantage of a study abroad program, as well as to live on campus, when he could have just as easily lived at home.

In other words, if he’d known then what he knows now, he would have simply not taken the loans as he didn’t NEED them, they just enabled him to do some really cool things that other students (like me, for example) didn’t get to do because they simply couldn’t afford it. In retrospect, he actually couldn’t afford those things either, which just reinforces one of my favorite financial planning mantras: student loans are NOT financial aid.

 

 

Why You Should Max Out Your HSA Before Your 401(k)

April 25, 2018

Updated for 2021 limits

Considering that most employers are offering a high-deductible HSA-eligible health insurance plan these days, chances are that you’ve at least heard of health saving accounts (“HSAs”) even if you’re not already enrolled in one. People who are used to more robust coverage under HMO or PPO plans may be hesitant to sign up for insurance that puts the first couple thousand dollars or more of health care expenses on them, but as the plans gain in popularity in the benefits world, more and more people are realizing the benefit of selecting an HSA plan over a PPO or other higher premium, lower deductible options.

For people with very low health costs, HSAs are almost a no-brainer, especially in situations where their employer contributes to their account to help offset the deductible (like mine does). If you don’t spend that money, it’s yours to keep and rolls over year after year for when you do eventually need it, perhaps in retirement to help pay Medicare Part B or long-term care insurance premiums.

Not just for super healthy people

But HSAs can still be a great deal even if you have higher health costs. I reached the out-of-pocket maximum in my healthcare plan last year, and yet I continue to choose the high-deductible plan solely because I want the ability to max out the HSA contribution. Higher income participants looking for any way to reduce taxable income appreciate the ability to exclude up to $7,200 per year from taxes for family coverage (plus another $1,000 if turning age 55 or older), even if they end up spending the entire amount each year. It beats the much lower FSA (flexible spending account) limit of $2,750 even if out-of-pocket costs may be higher

Even more tax benefits than your 401(k)
Because HSA rules allow funds to carryover indefinitely with the triple tax-free benefit of funds going in tax-free, growing tax-free and coming out tax-free for qualified medical expenses, I have yet to find a reason that someone wouldn’t choose to max out their HSA before funding their 401(k) or other retirement account beyond their employer’s match. Health care costs are one of the biggest uncertainties both while working and when it comes to retirement planning.

A large medical expense for people without adequate emergency savings often leads to 401(k) loans or even worse, early withdrawals, incurring additional tax and early withdrawal penalties to add to the financial woes. Directing that savings instead to an HSA helps ensure that not only are funds available when such expenses come up, but participants actually save on taxes rather than cause additional tax burdens.

Heading off future medical expenses
The same consideration goes for healthcare costs in retirement. Having tax-free funds available to pay those costs rather than requiring a taxable 401(k) or IRA distribution can make a huge difference to retirees with limited funds. Should you find yourself robustly healthy in your later years with little need for healthcare-specific savings, HSA funds are also accessible for distribution for any purpose without penalty once the owner reaches age 65. Non-qualified withdrawals are taxable, but so are withdrawals from pre-tax retirement accounts, making the HSA a fantastic alternative to saving for retirement.

Making the most of all your savings options

To summarize, when prioritizing long-term savings while enrolled in HSA-eligible healthcare plans, I would strongly suggest that the order of dollars should go as follows:

  1. Contribute enough to any workplace retirement plan to earn your maximum match.
  2. Then max out your HSA. (For 2021, the maximum annual contribution, including employer contributions, is $3,600 for single coverage and $7,200 for family coverage, plus a $1,000 catch-up contribution for HSA holders age 55 and older.)
  3. Finally, go back and fund other retirement savings like a Roth IRA (if you’re eligible) or your workplace plan.

Contributing via payroll versus lump sum deposits
Remember that HSA contributions can be made via payroll deduction if your plan is through your employer, and contributions can be changed at any time. You can also make contributions via lump sum through your HSA provider, although funds deposited that way do not save you the 7.65% FICA tax as they would when depositing via payroll.

The bottom line is that when deciding between HSA healthcare plans and other plans, there’s more to consider than just current healthcare costs. An HSA can be an important part of your long-term retirement savings and have a big impact on your lifetime income tax bill. Ignore it at your peril.

How To Attend Every Wedding This Year Without Going Broke

April 24, 2018

I was chatting with one of our Client Service Managers, Cassie Brunelle, about how expensive it can be to have great friends in your 20’s — everyone’s either getting married or celebrating milestone birthdays, and these days that involves a lot more than just showing up to a hotel ballroom with a gift off the couple’s registry. Cassie may not be a financial coach, but she’s a great role model for everyone else in showing that you can make it to all of these events without compromising your other goals like paying off debt, building up your emergency fund and capturing your full match at work. Here’s how she’s doing it this year:

Like many people my age (mid-late twenties) the era of weddings has set in full force. Not just attending weddings, but being involved in them as a member of the bridal party, while also attending and planning bach trips and occasionally the bridal or couples shower. Between May 2017-October 2018, I will have attended 7 weddings, 4 bachelorette weekends, 3 engagement parties, and 2 bridal showers, four of which I will have been a bridesmaid.

Adding up the costs

The dollars amounts attached to these events can sometimes feel completely ridiculous, but is there a real price tag on an unforgettable weekend celebrating with your friends? Yes there is, but the question is, is it worth it?

In my case, I have successfully justified the expenses, but at what cost? I have had to forgo some other plans and adjust my timeline to some personal financial goals to make it work, but I’ve also employed a number of tactics, tips, and reminders that I’ve compiled below to keep me from having to get a roommate or take on high interest credit card debt.

How I’m avoiding FOMO without taking on massive debt

If you’re reading this and you’re like me, and want to support your friends as they enter a new chapter (and also just don’t want to miss out on a weekend full of memories), then I hope you use some of these ideas to make it a little easier on yourself.

1. How to save when you’re in the bridal party

Being a bridesmaid/groomsman is an honor, but also comes with a commitment to be there for various events, to purchase a particular dress or suit, provide emotional support, and be a team player whether that be setting up and breaking down parts of the wedding or reception, running last minute errands, or making sure the bride/groom eats something (and doesn’t overindulge). Here’s how I’ve been able to do this on a budget:

  • Buy second hand. Yes, you might actually be able to find the dress the bride chose without having to buy it off the rack. Most designer bridesmaid dresses have triple digit price tags, and for a dress you will likely wear once, that can be tough money to spend. I’ve used sites like Tradesy, Poshmark, and Bridesmaid Trade to find the same dress that someone else had to buy and wear once. You have to pay close attention to the details, such as color and sizing (since you can’t return), and make sure there is no obvious wear and tear, but it can save you a ton. The upside is also you can resell your dress on these sites after the wedding too.
  • Do your own hair and makeup. The beauty bill attached to being a bridesmaid can easily reach $300 between hair, makeup, nails, a spray tan, and other grooming, just for one weekend! To avoid this, I’ve planned my haircut/color appointments to occur right before I have these events and have also invested in some high quality makeup, nail polish, and hair tools that I can travel with and do my own hair, makeup and nails. So instead of paying $300 per wedding, I invested around that same amount into products and hair appointments to last me through three weddings.
  • Have real conversations with the bride/groom. You may see a different side of your friend when it comes to wedding planning. For some it’s emotional and overwhelming, and sometimes they may feel unheard especially if their respective families are very involved. It’s important to have a real conversation of what they expect from their bridal party, and perhaps what areas they are flexible so you know what won’t disappoint them. Be realistic with what you can commit to and understand that it’s better to be honest from the beginning than hold onto resentment through various events that are meant to be fun!
  • Reduce the extra. I’ve seen bach parties quickly spiral into too much decor, too much food, and in rare cases, too much alcohol. If you are attending a bach weekend, something my friends have instilled is that everyone contributes something — it can be a game, decorations, party favors, or planning some activity, but this takes the onus off one person (usually the maid of honor/best man) and helps spread the love (and the cost). If we are purchasing something that we expect others to chip in (either an activity, personalized hats, or tattoos with the groom’s face on them) that expense needs to be approved by the group. We have tried to stay in homes or Airbnbs as much as possible so we can make meals at the house and split a grocery bill instead of splitting meals at restaurants.

2. Saving on travel and accommodations

If you are like me and you have to travel to the majority of these weddings, which includes the cost of airfare and hotel, here a few money saving tips:

  • Get used to sharing. Hotel blocks for weddings can be expensive, so sharing rooms with friends is a great way to reduce costs. If you want to forgo the hotel (which can have added costs with amenities and late night room service), booking a large Airbnb to share with friends is a great way to reduce the expense and spend time together. There’s usually a kitchen too, so meals can be prepared instead of ordering from restaurants.
  • Use your credit card points. If you know you have travel coming up, find a credit card that will earn you bonus miles for opening the account (be careful here as there is always a minimum amount to spend in order to earn the miles, and watch out for fees). Whether you have a card with a specific airline or one that earns you miles, it can be advantageous to stockpile these points to use for wedding related travel. It’s important to be mindful that these cards often carry higher interest rates, so make sure whatever expenses you put on the card are within your budget to pay off each month.
  • Stay with friends! Typically the bride and groom get married in one of their hometowns, which can mean free rooms to stay in should you want to forgo a hotel or Airbnb.
  • Plan ahead. Try to get as many details as possible for destination weddings and jump on booking a hotel or Airbnb ASAP, and try not to procrastinate booking flights. My friend group has booked places 6 months in advance so we can break up our payments into 2 or 3 chunks instead of having a larger expense all at once. You’ll be prepared and have peace of mind knowing when you arrive that the payment has already been taken care of.
  • Book your flights with arrival times in mind! Reduce the cost of Uber/Lyft from the airport by arriving at the same time as other guests. Airports can be far from the destination hotel so if you are traveling alone, try to link up with at least one person at the airport so you can avoid the trek alone, and if you are in an urban area you can take public transit together.

3. Other areas you can save

  • Gifting. Sometimes it can feel like a lot to travel for a wedding, buy a new outfit, pay to stay somewhere, and get the bride and groom a gift. Group gifts are great because each person can contribute the amount they are comfortable with toward either a gift card or toward a larger gift such as a grill, couch, or personalized decor. Or if you simply can’t afford it all, take advantage of the one-year rule, which gives you up to one year to send a gift to newlyweds and still consider it timely.
  • Buy a good pair of (neutral) dancing shoes. Having versatile outfits and a good pair of shoes will make it easier to pack for each wedding, and if you only have to buy one pair of good shoes to wear to every wedding, it will be a worthy investment.
  • Have an accountability partner. Am I the only one guilty of feeling more generous than usual during wedding season? Especially if it involves traveling and seeing friends I haven’t seen in awhile, the splitting of bills and rounds of drinks can get a little messy. This is where Venmo is a great in the moment way to make sure you don’t get stuck with the entire bill, and having someone remind you that maybe you don’t need to buy a round at the after-party just because you’re drunk with love for everyone in the room. Leaving your credit cards behind and carrying cash can help combat this impulse. I’ve made a plan for wedding weekends that involve multiple nights of fun and spending to have a friend to check in with on our spending; no one wants to see those surprise charges on their credit card the next morning.
  • Remember you can say no. I know it can be very hard to decline an invite to a wedding, bachelorette party or other event related to an impending marriage, but you still can in a tactful and clear way. It’s a delicate balance of being there for your friends and also doing what’s best for you. Having a clear conversation up front should your friend ask you to be in the wedding party or play any role that puts a financial commitment on you is important in setting boundaries and managing expectations.

    If you want to really be there for your friend, but know it will cause you undue stress because of other commitments in your life (maybe you’re planning a wedding for yourself!) be realistic with your loved one up front. If you’re not, it can lead to resentment and misunderstanding in the future, and you don’t want to lose a friend over events that are meant to be joyous and fun.

These are just the things I’ve done, but here are tons of other tips for saving as a wedding guest from Refinery 29, Money Crashers, Loverly, and even the NY Times.

Just know that you’re not alone, and take some extra time to find little ways to save. Life can get busy, and missing out on big events can be a bummer so preparation, planning ahead, and voicing any concerns up front will help you have the most fun celebrating with your friends this year!

4 Myths About Filing Your Taxes After April 15th

April 13, 2018

Every year around tax time when I’m talking with people about filing their taxes on time, I’m reminded of an old friend of mine who, no matter what, always extended his taxes. He was always due a refund, but he just never got it together in time to file by the April deadline. It confounded me — why wouldn’t he want to get his refund ASAP? He just laughed it off and chalked it up to procrastination. I chalk it up to diff’rent strokes for diff’rent folks.

Most people who delay filing have better reasons than procrastination: they’re still waiting on something, they thought they could do their own but realized too late they needed a pro, etc. Whatever the reason, here are a few myths I’ve heard about the US tax deadline, along with the truth.

Myth #1: Extending your return due date means you’re filing late

This is decidedly untrue — as long as you let the IRS know by filing Form 4868 that you’re putting it off, you’re not considered late. It’s like the difference between an excused absence and unexcused — often an excused absence just means you made sure the authority keeping attendance knew you wouldn’t be there, and then you’re excused.

You’re considered late (and therefore could be assessed a late filing penalty) if:

  • You don’t file Form 4868 by midnight on the April filing deadline
  • You file 4868 on time, but then fail to actually file your return by October 15th, which is the final deadline, no matter what

Myth #2: Extending your return due date means you don’t have to pay until later

This is probably the biggest mistake people make. Filing an extension request gives you 6 more months to turn your form in, but if you end up owing anything at that point, you’ll pay a late fee and interest.

How do you know how much you’ll owe if you don’t have all the information?

Great question. You’ll need to make your best estimate, erring on the side of over-paying, in order to avoid the penalties. Let’s say, for example, you’re extending because you’re still waiting on a corrected W-2 from your employer. You can use your last paycheck stub of the prior year to fill out a draft of your tax return, while using all of the other information you have, to see what your projected payment due might be.

The bad news is that while the IRS expects you to pay them on time even if you file late, they won’t be sending you your refund until you send in your final return.

Myth #3: You have to have a valid reason to request an extension

Nope, you can extend just because you like to be late. But you do have to submit that form to formally request it.

Myth #4: Filing later is a red flag for audit

Untrue. In fact, it’s a commonly held belief in the CPA world that filing an extension may actually reduce your chances for a random audit, since those types of audit can be determined on a first-come, first-served basis. That doesn’t mean you won’t ever be audited, particularly if you have other potential red flags on your return, but requesting an extension does not rouse suspicion with the IRS.

The most important point about filing after the April tax deadline

If you only remember one thing when it comes to filing and paying your taxes, it’s that any balance you may owe the IRS on taxes for the prior year will always be due by April 15th (or whatever date you’re required to file that year), no matter when you submit the supporting tax return. Beyond that, if you’re expecting a refund and decide to delay your filing until after the April due date, that’s fine, just make sure you submit the form. The IRS will assess a late filing penalty if you didn’t officially notify them of your need for extension (in other words, you’ll suffer for unexcused absences).

How College Financial Aid Packages Are Affected By What You Own

April 09, 2018

If you have a graduating high school senior and haven’t completed the FAFSA form yet, it’s time to get moving — some aid is given out on a first-come, first-served basis, and since you can now start filing as early as October of the year prior to the school year where the aid will be used, time is of the essence. As you prepare to complete the form, it’s important to understand how different assets, such as your retirement savings or a 529 plan, will affect your eligibility for aid.

File, no matter what

Even if you don’t think you’ll qualify, it’s worth it to file. Families with significant savings can be offered aid, depending on circumstances.

Because the rules recently changed to have the upcoming school year’s aid based on the tax situation almost two years prior (so fall 2018 aid is based on your 2016 tax return), any income planning you may be contemplating for middle school and early high school-aged kids, like maxing out retirement accounts in the years leading up (knowing that retirement account contributions made during the base year are added back for expected family contribution calculation purposes), needs to take place during your child’s freshman spring/sophomore fall year or earlier.

FAFSA Base Year
Tax Year School Year Status
2016 2018-2019 freshman
2017 2019-2020 sophomore
2018 2020-2021 junior
2019 2021-2022 senior

This change not only makes tax time less frantic, but in cases where grandparents or other non-parental family members wish to help out with costs, it’s especially favorable due to the fact that such gifts are considered income to the student, which has the most detrimental effect on aid calculations.

A student’s aid package can be reduced by up to 50% of the student’s income during the base year. Since there’s now an almost 2-year lag between income and aid, anything after your child’s sophomore year of college won’t affect the FAFSA (assuming your child is on the 4-year graduation plan). Besides income, the FAFSA asks about a variety of different savings and asset values. Here’s how each affects the aid package that is offered to your student:

529 College Savings Plans and Coverdell ESAs

The value of 529 plans and ESAs are counted as parental assets if the parent is the owner. This is a good thing because only a single-digit percentage of a parent’s assets are considered available to spend on one student’s college. Investments or other savings in your child’s name count much higher at 20%! 529 accounts owned by grandparents or other non-immediate family members are not included as assets, but are treated as income to the student when distributions from these accounts are used to pay expenses.

You may want to wait until the second half of their sophomore year or later to use the grandparents’ 529 plan to pay expenses, if possible.

Retirement accounts

You do not have to list the value of any retirement accounts like your 401(k) and traditional or Roth IRAs. However, if you take advantage of the Roth IRA’s penalty-free distribution feature to help pay for college, that amount will count as income on the FAFSA two years after. Consider waiting until spring semester of sophomore year or later to exercise this option if needed, similar to using a 529 owned by a grandparent or other non-parent.

Savings in your child’s name

Custodial accounts, UGMA/UTMA accounts, etc. are counted as assets of your child and 20% of the value is expected to be contributed toward educational expenses each year. If these assets are for college purposes anyway, consider transferring them into a 529 savings plan, where they will count as parental assets and have a less detrimental effect on aid offered (and you might receive a state income tax benefit as well).

Keep in mind that any interest, dividends or capital gains earned from accounts in your child’s name is considered your child’s income, of which 50% is expected to be contributed toward educational expenses.

Taxable investment accounts

Mutual funds and other brokerage assets held by parents are counted on the FAFSA. Dividends and capital gains earned in taxable brokerage accounts count as income. Distributions from a mutual fund or brokerage account to pay for college count as income.

Life insurance and annuities

Any cash value built up in insurance policies does not have to be included. Before you move any of your child’s money into an annuity though, consider that if you have to use the funds to pay for college, the distribution will show up as income in future years. This is more detrimental than just holding the funds in savings or transferring to a 529 plan.

Other assets

Home equity or the difference between what your home is worth and what you owe is NOT counted on the FAFSA. Keep in mind, however, that certain schools may still ask for this information when figuring eligibility for need-based aid from the school. If more than 50% of a business is owned by your family and there are 100 or fewer full-time employees, you do not have to include the value of your small business.

The bottom line is that if you have middle school aged kids, knowing which year is the first base year for the FAFSA may alter your family’s plans to do things like take capital gains or convert pre-tax retirement assets to Roth. Both are income-producing activities that can reduce the amount of aid offered your child. Additionally, if you have funds in your child’s name that you intend to use for college anyway, it may make sense to shift those into 529 plans simply to reduce their effect on aid offered.

The Real Income Number That Matters When It Comes To Taxes

March 19, 2018

One of the things that is toughest to grasp about taxes for non-tax professionals is the difference between income (a.k.a. gross income), adjusted gross income (a.k.a. AGI), modified adjusted gross income (or MAGI) and taxable income (the amount that actually determines your marginal tax rate).

Gross income is actually (kind of) irrelevant

We all know that our gross income is really only just a number on paper. No one actually takes home the total amount of income they earn (at least no one complying with the tax laws in the U.S.), but understanding how that number translates into the amount of taxes they pay each year is a mystery that most leave to the tax geeks of the world like me and my fellow CPAs.

Unless figuring out the tax code intrigues you, there is no need to become an expert on how it all fits together, but I do think it’s important to have a general understanding of the different terms. Why? Because you’ll be able to make better financial decisions that ideally may lead to tax savings. Here are a few key concepts to better understand:

Adjusted Gross Income or “AGI”

Why it’s important:

Your AGI is the basis for several tax thresholds, including:

  • Determining whether you qualify for certain tax credits
  • Determining whether you can deduct medical expenses, all your itemized deductions and/or miscellaneous itemized expenses (at least for tax years 2017 and prior)

Your AGI is also the starting point for most states in figuring out your state income taxes.

How it’s calculated:

To put it simply, it’s all your income from working, investments, retirement accounts, rental property, etc. minus all the expenses considered “above the line” such as IRA contributions, student loan interest and HSA deposits. Here’s the full list from the 2021 Schedule 1, which is part of the Form 1040:

Modified Adjusted Gross Income (“MAGI”)

Why it’s important:

Your MAGI adds back some of the “above the line” deductions mentioned earlier, and determines things like your eligibility to: contribute to a Roth IRA, take a tuition and fees deduction (which was resurrected for tax years 2018 – 2020), and deduct contributions to a traditional IRA (when you have an employer-sponsored retirement savings plan, like a 401(k), available to you).

Why you should care

Here are just a few examples of reasons you should have a rough idea of what your AGI and MAGI is:

  • You rule out making Roth IRA contributions because your salary exceeds the income limits, not understanding that the limit is based on your MAGI for IRAs. If you make contributions to your 401(k) at work, deposit funds to your HSA or even pay alimony, your MAGI may fall below the limits and allow you to contribute.
  • You sold a stock holding that was gifted to you many years ago from a relative and the gain from the sale pushes you over the MAGI limit resulting in additional net investment income tax. If you’d known before, you could have taken steps to minimize that additional tax.
  • You are retired and decide to make a last-minute withdrawal from your IRA right before the end of the year, not realizing that the withdrawal increases your AGI, subjecting more of your Social Security income to taxation.

Avoiding these situations requires careful tax planning and the assistance of an expert. But these are just examples of why we should all try to be a little more knowledgeable about how the income tax system works so that we will know when to look further into certain financial moves before we make them.

After all, who wants to pay more taxes than they have to?

Disclaimer: The author of this post is not a practicing tax professional; the content of this post is for informational purposes only and should not be construed as tax advice. Taxpayers should always consult a tax professional for tax planning services and/or tax-related questions.

4 Steps Women Can Take To Keep Their Life Options Open

March 08, 2018

It’s no doubt that there is no greater time to be a woman in the history of our civilization — I agree that there’s still a lot of work to be done, but I can’t help but feel an overwhelming sense of gratitude to be alive right now as who I am today. It’s true that there continue to be barriers for women, particularly women of color, but generally speaking, we have more choices today than ever before. In fact, we have so many choices that it can often lead to a tremendous amount of second-guessing and anxiety.

Saying yes is also saying no

As Elizabeth Gilbert (whom I consider to be one of my personal mentors, even though she doesn’t know it) put it once, when we make a choice in life, we are also saying, “no” to hundreds of other choices — saying yes to becoming a financial coach for me was saying no to opportunities in musical performance, environmental work and fitness. In today’s society where we get to see how everyone else’s choices play out on carefully curated Instagram feeds, it’s waaaay too easy to get caught up in second-guessing our choices.

“Should I have broken up with that guy sooner so I could have kids? Should I have pursued that opportunity to champion recycling at governmental facilities? Do I really want to close the chapter on teaching fitness?” These are questions I’ve asked myself and the reason I have quotes all over my house reminding me that, “All things happen in God’s perfect timing,” and “…no doubt the universe is unfolding as it should.”

Keeping your options open

Many of my friends, colleagues and people I’ve had the honor of working with express similar doubts, although often not as deep — sometimes it’s as simple as, “I just wish I hadn’t used my credit card to fund that shopping spree last year.” Regardless of your certainty (or lack thereof) of your life choices so far and the future you’re embarking upon, there are some financial moves that you can make in the meantime that will keep your options open as you navigate this time of tremendous opportunity for women.

4 steps women can take to keep their life options open

1. Eliminate debt ASAP. When I was first starting my career, nothing stressed me out as much as the self-flagellation I endured every time I thought about what else I could be doing with the $300 per month I was paying on my credit card that I’d run up on stupid things like clothes and food. In the three years it took me to get to balance: $0, I limited pretty much anything optional in life. But it was worth it — being debt-free allowed me to leave a marriage I hated and also later allowed me to leave a job I hated.

2. Get confident about investing. Studies have shown that women are better investors than men, but we’d never know it — it’s by default because we are more cautious and shy away from going big in areas where we don’t feel 100% confident that we know what the heck is going on. The majority of the women I work with on investing choices and education are actually doing everything just fine, they just don’t know it. The sooner you can find the certainty that you’re doing fine with investing (because you’re putting money away for retirement, right???), the easier your mind will rest. And the more your early saving will help keep your future options open.

How to get more confident about investing

The simplest way would be to use Target Date Funds, understanding that the entire purpose of these mutual funds is to diversify your investments in a way that is appropriate for someone planning to need the money in the year named in the fund. In other words, I use Target Retirement Fund 2040, which is the closest year to when I’ll most likely be retiring. I know then that the fund will put my dollars in the appropriate mix of stocks and bonds, allowing me to take advantage of market growth over the years, without taking too much risk for my age.

If you want to get more hands-on, start reading. I like the books The 5 Mistakes Every Investor Makes and How to Avoid Them as well as Picture Your Prosperity. I’d also be remiss not to mention What Your Financial Advisor Isn’t Telling You: The 10 Essential Truths You Need to Know About Your Money, which was written by our CEO Liz Davidson. And of course, I invite you to poke around this blog for more insights from my brilliant colleagues.

Pick one and stick with it

Finally, know that there are as many investing philosophies and strategies out there as there are make-up tutorials on YouTube — the key to confidence and success is choosing the one that resonates most with you and sticking with it. Much like I stated above about the dichotomy of choice, saying yes to one means saying no to many others, you just have to go with it. And just like you can change your mind on many of life’s choices (including your eye shadow pallet), you can change your mind on investing strategies, but monkeying around with it too much can obliterate any progress.

3. Stockpile savings in a Health Savings Account (HSA). This is one of my top financial regrets — when HSA’s were first introduced, all I saw was the high-deductible that was required in order to start an HSA and I shied away. What I didn’t recognize was that I NEVER went to the doctor, so having a deductible wasn’t an issue. I played it TOO safe by sticking with an HMO plan for too many years, and missed out on literally thousands of dollars from employers who would’ve funded my HSA over the years. Not to mention I missed out on the tax savings of putting my own money in the account.

Why saving in an HSA can be so powerful for young women

Fast-forward almost 20 years into my career and I’ve literally spent over $10,000 in the past 2 years on various healthcare stuff — everything from acupuncture for fertility to having skin cancer removed from my arm and my scalp to seeing a physical therapist for IT band syndrome. Ask any 40-year old woman about her health and she’ll most likely tell you that it’s been a lot more expensive than she thought. If only I could go back and save some of the money I spent at Old Navy and re-direct it to my future healthcare expenses, I’d still be ahead of the game.

If you are planning to have kids one day, this becomes doubly as powerful, even for guys — maternity care is expensive, kids go to the doctor a lot, and you never know when an emergency appendectomy will have you headed to the OR. (just ask a couple of my colleagues who’ve had to deal with this recently)

4. Take care of yourself but don’t be too Type A about it. If I had a dollar for every stressed-out looking but perfectly sculpted adorable young woman I saw at the yoga studio I frequent, I’d be able to afford the unlimited membership — one of the things we’ve done well as a society is instilled the importance of good health in young women. I often worry though that they are putting so much pressure on themselves to do all that stuff perfectly that they’re missing out on the fun of life. It’s not about getting it all “right” all of the time,  it’s about enjoying the journey. The easier my life gets, the more I realize it’s the challenges that make it worth living.

Enjoy some cheese fries, for Pete’s sake, just don’t charge it to your card unless you’re paying it off each month.

How To Get Late Fees Reversed Even If You Actually Paid Late

February 28, 2018

First of all, I need to clarify that I would never advocate paying bills late — not only can it become costly, but it can quickly ruin your credit score — even after you’ve paid a late bill, once it’s on your report as a late payment, it stays; only time will heal that wound. This post is specific to rare instances where you realize you forgot to make a payment and less than one billing cycle has passed (past due accounts are typically reported on a monthly basis to credit bureaus).

The story

A couple of weeks ago, I logged in to my bank account and realized that the payment for my credit card hadn’t posted and it was at least 3 days after it was due. A feeling of dread took over as I slowly logged in to my credit card to find that yep, I had a late fee and interest charges assessed on my entire balance. (Now that I’m debt-free, I pay my card off every month and just enjoy the cash back rewards)

I SWORE I had scheduled the payment weeks before, but as I searched my email, I couldn’t find any confirmation. The reality was, I’d forgotten. A costly mistake as the late fee alone was $35, plus interest for that month’s charges, which happened to be a month where I had a lot of work travel, so a higher balance than normal.

You may have a get out of jail free card

Most people, upon realizing that the error was truly their own, would be likely to just pay the fee and interest and then set a reminder to make sure this Never. Happens. Again. However, I figured it couldn’t hurt to plead for mercy. Here’s what I did:

  • Submitted a payment for the full balance immediately.
  • Opened an online chat window with a card company rep.
  • Explained that I’d simply forgotten to schedule the payment but had since paid in full.
  • Pointed out my long history as a cardholder as well as my record of on-time payments.
  • Asked if there was any way I could have the fee and/or interest reversed?

After a brief pause while the agent looked into it, I got the best news: as a valued card member, they were happy to make this one-time exception and reverse all charges. Success!

I had to wait about a week for all the charges to reverse, and then the following month, more interest charges showed up for the few days that I’d carried that balance over into the next statement cycle, but a quick chat message with a reminder of the previous conversation was all it took to have that reversed as well.

You’ll never know if you don’t ask

The lesson here isn’t to be sloppy with making bill payments – do it too many times and not only will those fees add up, but it could also really hurt your credit score. However, if you’re diligent about paying on time and happen to have a little brain fart like I did, it doesn’t hurt to ask for mercy. And with online chat windows, you may not even have to pick up the phone!

Scheduling autopayments

You may find yourself asking why I don’t just set up my bills to go on auto-pay, which is a legitimate question. I do use auto-pay for my bills that have a consistent amount due, like my cell phone and even electric bills, but for credit cards, I prefer to keep it manual because the amounts can fluctuate greatly, so I want to be sure that there will be enough in my account to cover the payments. Sometimes that requires me to move funds from my savings, especially when I’ve charged something that I’d been saving for like a vacation. Another reason I do it this way: because I enjoy it. (nerd alert!)

If you tend to keep a bigger cushion in your checking account (my Type A personality has me keeping the “cushion” in an attached savings with a higher interest rate), then scheduling auto-pay for everything may be an alternate solution. Just make sure you’re still logging in periodically (ideally at least once a month) to check that things are working!

Are You Limiting Your Retirement Savings With These Misconceptions?

February 21, 2018

In case you missed it, the IRS gave retirement savers a little boost this year by increasing the limit you can contribute to a 401(k) or 403(b) to $18,500 (the catch-up contribution stays the same, so 50+ can now save a total of $24,500). However, there are a few common misconceptions about this limit I’d like to clear up:

  • If your job’s retirement plan allows you to pick between pre-tax/traditional contributions or after-tax/Roth, that limit is the total between the two. So if you decide to split your savings between both, you can only put a total of $18,500 between both. Also, income limits don’t apply to Roth 401(k) like they do to the Roth IRA, so higher earners, get on board!
  • If your employer deposits money in your account via match or other contributions, this DOES NOT AFFECT your limit — you can put $18,500 plus whatever they put in. (some companies even let people put more in above that limit, called “after-tax voluntary” to get to the total IRS limit of $55,000 for 2018)
  • What you put into your 401(k) doesn’t affect how much you can contribute to an outside IRA (although your income could limit your ability to fully take advantage). EVERYONE can put up to $5,500 in a pre-tax/traditional IRA ($6,500 for the 50+ crowd), although not everyone will be able to deduct that deposit from their income taxes.

If you have your contributions set to max out based on last year’s limit of $18,000, you may want to log into your account to bump up your contributions to take advantage of the additional $500 you can save this year.

 

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How We Avoid Money Fights In My Marriage

February 14, 2018

Many years ago while attending a wedding, I overheard the couple’s accountant (it was a HUGE wedding where literally everyone the couple knew was invited) tell them that the best way for them to manage their money was to just, “go all in, combine it from day 1.” The couple looked skeptical, and for good reason — what works for one couple when it comes to money very rarely works for the next.

The truth is that there is no right or wrong way to manage money in a marriage — the perfect way is the way that works for your specific relationship. And what works will most likely evolve over the years as your marriage changes. However, there are basically three different ways to do it, each with its own pros and cons. Here they are:

Method 1: Go “all in” and combine everything

Plenty of couples choose to do this and it works great. For others, putting everything in one pot leads to endless fights about differing spending and saving priorities. Regardless, the most important key to success if you choose this method is that both partners know what’s going on with the money and that you agree on your financial goals.

My husband and I were in our late 30’s when we married, so this was not even something we considered at the outset. However, as we are celebrating our third anniversary, we are definitely getting closer than when we first married.

Pros of going “all in”

  • No worrying about who pays for what
  • Easier to budget
  • Could save a “spender” from him/herself
  • Easiest to manage — if one person likes handling the money more than the other
  • Harder to hide financial issues from each other — forces honesty
  • Forces you to get on the same page with financial goals

Cons of going “all in”

  • No autonomy — you can’t surprise each other with gifts
  • Potential for fights about perceived over-spending or differing priorities
  • Could put one person in a power position if the other person doesn’t get involved in the finances
  • Can lead to resentment if one partner brings a lot of debt into the relationship

Who it works best for

  • Younger couples who haven’t yet had a chance to establish habits and mindsets
  • Families with one working spouse and one spouse who cares for the family — no need for an “allowance”
  • Couples with nearly identical money personalities, especially if both are savers
  • Situations where money is tight — no room for over-spending, so you feel like you’re ‘in this together’
  • Couples where a spender requests that a saver help him/her to be a better saver (not so much if the spender isn’t on board)

Method 2: Keep everything separate

There are people out there who will tell you that couples who keep all their money separate are headed for failure and that they must have something fundamentally wrong with their relationship. My parents, however, are a testament to just how untrue that is — for 45 years they have kept their finances separate, divvying up the household expenses according to who has the financial capacity to handle it. The key to this method’s success is that they still have shared goals and they never go into big purchasing decisions without consulting each other.

Pros of keeping it separate

  • Complete autonomy
  • No need to justify spending (or saving)
  • Helps ensure both partners know how to handle cash flow
  • Avoids fights for couples who have opposite money personalities
  • Can prevent issues surrounding debt that’s brought into the marriage

Cons of keeping it separate

  • Allows for money secrets — could lead to trust issues
  • Potential for resentment if there is a large income disparity
  • More challenging to work toward common financial goals
  • Shared expenses can be complicated

Who it works best for

  • Couples with kids from prior relationships
  • Couples who have established financial habits and don’t want to change
  • Dual career couples with ample income

Method 3: Hybrid using three accounts

This is probably the most common method I see these days among peers, and also the method my husband and I use. We have a joint checking account where we pay all of our shared expenses, including the obvious things like housing and utilities, but also food and entertainment, as long as we are both benefiting. We contribute proportionately to this account, which can be a little complicated to figure, but once the numbers are set, we only have to adjust them when there’s a big change to income or expenses. For example, I carry my husband on my health insurance through work, including contributing to a Health Savings Account, so he puts more into our bills account to make up for the reduction in my paycheck for covering our healthcare.

Pros to the hybrid method

  • Still gives autonomy while allowing shared expenses to be shared
  • Feels fair — we both have about the same left over each month to spend on what we want
  • Avoids fights about differences in spending — I like to spend money on wine and Athleta clothing, my husband prefers to spend his on bourbon and concerts
  • Keeps us both engaged in the household finances

Cons to the hybrid method

  • Can get complicated figuring out how much you each contribute to shared stuff, especially if there’s an income disparity
  • Expenses outside the norm such as vacations or home maintenance require discussion about who will pitch in extra to cover
  • Doesn’t necessarily solve for common fight areas, like gifts — we agreed that gifts for family would be a joint expense, but we have differing ideas of how much to spend
  • Could lead to resentment if one partner tends to save all his/her “extra,” while the other partner spends
  • Still have to designate one person to be “in charge” of the joint expenses to ensure you’re not making double payments

Who it works best for

  • Dual income couples where income is pretty equal
  • Couples who want to ease in to combining finances
  • Couples who just can’t get on the same page about discretionary spending, although they are on the same page about what they can afford with shared expenses

Non-negotiables for everyone

Regardless of which method you choose, it’s essential that you both have a clue what’s going on with all the money coming in and out of your house. I’ve seen too many situations where the “non-money” spouse ends up in a panic trying to figure things out because the “money spouse” is gone, either due to death, divorce or even just a traumatic accident. It’s up to both of you to make sure that should something happen to one of you, the other would be able to quickly get up to speed and manage the household expenses.

One final way we avoid money fights

The only money fights that we’ve ever had have been when I’ve sprung a financial question or decision on my husband over breakfast or in the car — he wasn’t prepared to discuss it at that point, and therefore tended to react negatively regardless of the question. We quickly learned to designate what we call “office hours” to discuss stuff like this. It’s a standing appointment on our shared iCalendar, and we keep a running agenda of what we need to discuss in the notes.

Setting aside time to specifically discuss financial issues gets us both in an open and trusting mindset and that has made all the difference. Currently on our agenda: taxes, planning an international trip, adopting a dog and completing some household repairs. These may not be specifically about money, but they all involve money and are areas we may have differing ideas or opinions.

 

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Why Tax Refund Anticipation Loans Are A Bad Deal

January 17, 2018

It might sound like a great deal to get your hands on your refund money today versus waiting until you’ve not only filed your taxes, but the IRS has issued the check, but it’s a bad deal all around. The storefront tax preparation companies that offer these deals are no longer allowed to charge the outrageous interest rates of prior years, but they still make a great deal of money off of these by charging fees that, when added up, can total a significant portion of your refund.

Back when we all mailed our returns in and had to wait for the IRS to send us a check, sometimes months later, these loans maybe made more sense for people. These days though, they are really just a way to make money off of less-informed people, which is what really gets my goat.

Rather than using a refund anticipation loan charged by a preparer, try one of these options:

  • File online for yourself. If you make less than $66,000, you qualify for free online filing and should take advantage rather than paying a storefront to do it for you. Planning point: if you qualify for the Earned Income Credit, the IRS is required to hold your refund until mid-February. This is not a reason to take out a loan though — just don’t count on that money yet!
  • Have your refund direct deposited. Rather than waiting for a check to come in the mail then having to take it to the bank, have the IRS deposit the money straight into your bank account. This will really speed up your refund – the IRS says that most people should have their direct deposit within 3 weeks or less of filing. Plus, no more worrying about your check being stolen or lost.
  • Consider same as cash deals, with caution. If you’re planning to use your refund to make a big purchase such as an appliance or furniture, check to see if the store is offering any type of “same as cash” deal, where you have a certain period of time to make payments interest free, usually 90 days or more. The key to this working is that you actually pay the store credit off with your refund before the interest-free period expires. Otherwise, it can be just as bad of a deal as a refund anticipation loan.

The bottom line is that paying any type of fee or interest to a bank or business in order to get part of your tax refund early is almost always a bad deal. Before you sign up for one, make sure you fully understand what it’s costing you and consider waiting to just get the money from the IRS if at all possible.

 

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Can You Open A Roth IRA For Your Child?

January 10, 2018

The short answer is, yes, as long as your child has earned income, you can open a Roth IRA in their name and contribute up to the lower of either their total earned income or the annual limit ($5,500 for 2018). But there are some watch-outs to be aware of first.

Defining earned income

The key here is that the money you’re depositing into the Roth IRA is earned. That includes doing things like mowing the lawn, baby-sitting, cleaning the house (thinking back to when my parents paid me $12 to clean the whole house each week — holy inflation!), etc., you just have to be sure to document it. A part-time job where your kid receives a W-2 is a no-brainer — that’s 100% earned income.

What’s not earned income

Investment earnings, which are actually taxed differently, as well as gifts and allowance do not qualify as earned income and therefore cannot be counted toward the amount your child can contribute to a Roth IRA. In other words, you can’t just put $5,500 in a Roth IRA in your kid’s name, then say that they earned it by “being a good kid.” That’s a gift.

However, if they actually earned $5,500, even if they spent it on things like clothes and video games, you can still put that amount in their Roth IRA — the IRS only cares that the amount was actually earned by the account owner. Think of it like a match: you go get a job and learn some responsibility, and I’ll match those earnings in your Roth. A win-win!

Documenting earned income

If you’re using money your child earned doing tasks around the house rather than for a formal employer, one way to document it is to keep detailed records. You’ll want to document:

  • How much was earned
  • What was done to earn it
  • When it was earned

So for example, you could have a log that simply says: “1/1/2018, Baby-sitting for the neighbors on New Year’s Eve, $100.” You could file a tax return to really formalize the documentation, but it’s not required.

However, once your dependent child’s earned income exceeds the annual limit ($6,350 for 2017), they are required to file their own federal income tax return, regardless of the source of the income. There are reasons to file if their income was less, particularly if federal income taxes were withheld, so that they can have that money refunded. I always get a kick out of seeing my Social Security statement, which lists my first working year’s earnings as $136 from my first couple months working at McDonald’s!

Setting your child up for future financial independence

The bottom line is, one way to help your kid establish good savings habits from an early age is to open that Roth IRA as soon as he/she can legitimately earn money — in some families, that could be as early as 3 years old. You’ll have to open a custodial account until your kid is over age 18 (or 21, depending on your state), but most of the large investment companies allow these types of accounts. Keep in mind that because this is technically a retirement account, these savings wouldn’t even count again you when it comes to filing for college financial aid.

What better way to get your kids off on the right financial foot?

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How To Do A Spending Cleanse

January 03, 2018

After the gluttony of the holidays, it’s no surprise that the word “cleanse” is floating around my world. While my waistline wouldn’t mind a little food cleanse, I’m more apt to try a spending cleanse after the spend-y days of December.

You don’t have to go cold turkey

Going on a spending cleanse doesn’t mean you don’t get to buy anything, it just means you’re limiting financial outlays to the bare necessities. There’s a difference — buying is picking up the things you need, like groceries, transportation, paying bills, etc. Spending is a choice to purchase something you don’t really need at that exact moment.

Examples of ‘spending’

  • Going to Home Depot to purchase replacement blinds for the ones in your bedroom that broke, then taking a detour down the clearance aisle to see if you can score any deals on holiday items after wandering through the succulents and picking out a few cute ones for the living room — that’s spending.
  • Heading to Costco fill up on gas, then stopping into the store and stocking up on that shirt your husband’s mom got you for Christmas that you’ve literally been living in ever since — that’s spending.
  • Stopping by the pet store to buy cat food and walking out with a new bed and toys for said cat — that’s spending.
  • Bagging the plan to make the meal you planned for dinner and ordering sushi instead — that’s spending.

The bottom line is that mindless spending is a habit. It’s not to say that I’ll never buy myself anything fun again, I’m just trying to reign in the stuff collecting and instead set that money aside for my bigger 2018 goals.

The rules of a spending cleanse

  1. Timeline: one week.
  2. Make sure you have necessities taken care of, like gas in the car, bills paid, etc. It’s not about not buying anything, it’s about avoiding unneeded spending to break a habit.
  3. For that week, when you leave the house, take just your ID and twenty dollars max. You can tuck a card away somewhere in case of emergency, but the point is not to use it unless you’re literally stranded or starving.
  4. If you have to dine out for work, that’s fine, just make sure you stick to any per diem rules you have so that you’ll be reimbursed.
  5. No online shopping or in-app purchases.

It’s supposed to feel extreme

If it feels weird to go out without any real money, that’s the point — it’s supposed to be a bit extreme, just like drinking juice for three days makes it feel like three months since you’ve last chewed anything. I’m going to try it — I’ll be traveling for work, which will actually increase the challenge as I tend to engage in retail therapy when I’m stressed. Obviously I’ll have to take my credit card with me in order to rent a car, pay for my room and eat, but beyond that, I’ll be keeping it in my wallet.

Join me?

 

2017 By The Numbers

January 01, 2018

Happy New Year!

As we launch into 2018 here at Financial Finesse, we are reflecting on a successful 2017 — a year of tremendous growth in our business as well as in the number of lives we’ve had the privilege and honor to change for the better. We hope that this blog, written by our own financial planner team, has helped you to have a more prosperous year. Here’s a breakdown of what our readers loved this year, by the numbers:

Total pageviews for the year:

157,121

Most popular posts from 2017:

  1. What Are Your Health Insurance Options When Retiring Early? – 1,378 views
  2. How To Have The Money Talk – 1,250 views
  3. How To Avoid Borrowing From Your Retirement – 1,037 views
  4. Do You Need A Cohabitation Agreement? – 805 views

Most popular posts from previous years:

  1. Is Paying Off Your Mortgage Worth Losing The Tax Deduction? – 8,106 views
  2. What An Accident Taught Me About Car Rental Insurance – 5,939 views
  3. How To Be Financially Independent In 5 Years No Matter What Age – 5,275 views

Most shared on Facebook:

  1. Even Jay-Z Has Investing Regrets
  2. The Trouble With More
  3. How My Money Attitude Was Keeping Me Poor
  4. 3 Important Adulting Lessons I Taught My Daughters

Most shared on LinkedIn:

  1. Should You Go Into Debt To Get Pregnant?
  2. The 5 Things You Should Do Right Now To Protect Your Identity
  3. Why You Shouldn’t Worry About Investing At The Top
  4. How Much Will A Hybrid Car Actually Save You?

Readership by city:

New York: 5,638 readers

Chicago: 4,032 readers

Los Angeles: 3,995 readers

Hartford, CT: 2,248 readers

Golden Valley, MN: 1,686 readers

Lives changed:

Countless

Thank you for being a part of our amazing year! Here’s wishing us all a happy, healthy and financially well 2018!

Why I’m Calling My 2018 Intention ‘The 3 T’s’

December 27, 2017

Note from the editor: As we round out 2017, many people will be setting goals and intentions for the year ahead. To help with that, our blog team will be sharing their take on goals throughout the week — we all have a different opinion! We hope you enjoy hearing how each of us approaches the idea of goal-setting and New Year’s resolutions. From Kelley:

I’ll admit that I’m the Queen of failed resolutions, although I also know that I share that throne with countless others. Regardless, I still believe in the power of goal-setting and optimism that comes along with New Year’s resolutions. As always, many of my intentions for January are health-related, but for 2018 I also have three more concrete goals that will require financial trade-offs and intentional action. I’m calling it the “3 T’s;” here they are:

1. Tennis

I took tennis lessons as a teen and played a little in college and enjoyed myself, but I’ve always felt like tennis is a bit like golf: you have to play often or you lose your skills. I’m at a place in life where I’d like a more committed activity, so my first goal for 2018 is to get back into tennis.

Financial implications: It may seem like tennis is a relatively inexpensive sport, right? You just need a racket and some balls to hit around. I’ll wait until I’m certain that this is a sport I’d like to play regularly before I invest in all the cute clothing and a fancy racket, but for me the financial commitment will be my husband and I joining a club that offers indoor tennis plus a few lessons to make sure I’m doing it right. As you can imagine, clubs that have indoor courts are not the $30/month places, so in order to afford a relatively high-end athletic club, we have to make some trade-offs.

The trade-off: Assuming we find a club that we like, we’ve decided to forego our weekly Friday date night, which is typically a meal out at a nice restaurant, and instead have Saturday morning tennis dates. We’ll have to pay to reserve courts during the winter, so I’m a bit embarrassed to admit that it will be a pretty equal trade-off.

2. Travel

One of the only upsides to our failed attempts at IVF this year is that we achieved a Companion Pass on Southwest Airlines for all of 2018, and we intend to make full use of it. One of my life goals is to visit all 50 states, and I still have 14 to go. My goal for 2018 is to check 3 more off that list, starting with a ski trip to Utah in February.

Financial implications: While we will be able to fly for free anywhere we go, we still have to account for all the other costs of travel such as lodging, local transportation, meals, etc. We like to stay in Airbnb’s when possible, which helps with the costs, and then we take many staples with us such as coffee supplies and snacks, which helps us avoid paying for 3 full meals each day.

The trade-off: We usually take a “big” vacation every year, either to an international destination, or somewhere a bit more luxurious, but in order to afford our increased travel via Southwest, we will be skipping an extended trip in lieu of several shorter vacations. I’m also going to be going on a clothing cleanse, which I’ll be detailing in a future post, in order to balance our household budget for the year.

3. Tail

To keep with the ‘T’ theme of my 2018 goals, my third goal is all about adding a tail to the family — one that’s attached to a dog. Adopting a dog is a catalyst for several other things that have to happen first, so the goal for 2018 is simply to get those wheels in motion.

Most importantly, since we live on the 3rd floor of a walk-up condo building, we have to move. That seems relatively simple, but we agree that when we move from our current home, it will most likely be to another state, which is not so simple.

Financial implications: Beyond the obvious financial aspect of buying and selling a home, the most important financial aspect of such a decision is my husband’s work. I’m privileged to be able to work from anywhere that’s within a reasonable drive of an airport, but my husband would have to find a new job. Luckily he’s in a field where that’s not a problem, but he loves his current job, so finding a replacement could prove more of a challenge. Therefore we need to be in a financial position to allow him time to find the right position.

The trade-off: Obviously traveling a lot and having a dog don’t go hand-in-hand, so the 2018 aspect is to simply put a plan in place and begin preparing for a move. Once we figure out where we want to go, the rest includes setting money aside for him to possibly go without pay for a month or two. We’ll also begin to prepare our home for sale in hopes that we’ll sell it for enough to afford a down payment on a home with a yard, a garage and a basement — the three major things missing from our lovely condo in the city.

Sticking to it

I realize that these are pretty lofty goals — realistically, in order to achieve all three, they will have to be my primary focus outside of work and daily life. However, I’m hopeful — when you set intentions that are in line with your values, then put pieces in place that set you up for success (such as scheduling ahead and having someone to hold you accountable), it’s easy to stick to it. That’s one of the reasons I came up with a dorky catchphrase — it will be easier to recenter myself around what’s important when the busy-ness of daily life takes over.

How do you set and stick to your intentions? I’m always interested in hearing what others do. Please send me a note on Facebook or tweet me @kclmoneycoach.

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