3 Strategies To Help With Your Tax Fears

March 15, 2017

I’m going to go out on a limb and say that tax time is pretty much everyone’s least favorite time of year. Even for me, a CPA and former tax preparer – I dread the process of digging up all our information and organizing it in order to complete our taxes and I especially dread the verdict of how much we’ll owe. It’s no surprise that nearly 1/3rd of all tax returns were filed in the last two weeks of the 2015 tax deadline. Whether it’s due to fear, procrastination or waiting on that last bit of information, tax time is stressful. My colleague Teig Stanley offers the top 3 fears that we help people address and a strategy to overcome each of them:

Fear #1:  It’s Confusing/Overwhelming

Your strategy: Overcome this barrier by writing a short, step-by-step plan to file. Set a date and time well in advance of the deadline (April 18th this year) when you will start your tax filing and decide if you are going to use a tax preparer or do your taxes yourself.

Then, organize your documents. Use a tax preparation checklist or ask your tax preparer for one and start making an inventory of the documents you’ve saved. If you’re like most, almost all of your documents are in paper form, so make these files for them:

  • Income
  • Charitable contributions
  • Taxes paid
  • Receipts
  • Miscellaneous

Fear #2:  I Might Not Get a Refund

Your strategy: If you’re afraid you’ll owe, the sooner you know the better. Even if you file your taxes in February, that balance isn’t due until April 18th so go ahead and file as early as possible and use the extra time to make a plan to pay what you owe. If it’s more than you can afford, you can contact the IRS to arrange a payment plan or borrow from another source.  Just be sure to compare interest rates to get the lowest possible cost.

If you’ll be receiving a refund – great! Get those tax returns in quickly to receive the money sooner. Asking for direct deposit makes it even faster. If that refund is large, consider filing a new W-4 form with your payroll department to increase your exemptions and take more money home in your paycheck throughout the year.

Fear #3:  What If I Get Audited

Your strategy: Statistically, less than 1% of tax returns for those reporting under $200,000 in income (and more than $0) are chosen for an audit by the IRS each year. If you are concerned about an audit, work with a professional tax preparer who will agree in writing to provide audit support if one is requested.

The bottom line is that while tax time is no fun for anyone, it’s not something you should be fearing. If you haven’t already, get down to it and get it done. If you’re going it alone in preparing your own taxes and need help, contact your tax software provider or search for free tax prep help through local community organizations and national non-profits. You may even qualify for free preparation if you have a moderate to low income.

 

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

 

How To Save Money on Your Homeowners Insurance

March 08, 2017

When my husband and I shopped for homeowners insurance back when we bought our condo a couple of years ago, I knew from my CFP® training that all homeowners policies are required to cover the basics. I also knew that if we wanted coverage of things like flooding from a backed up toilet or frozen pipes, we’d need to ask for those. But beyond that, we wanted to make sure we were adequately covered without over-paying.

Now as our premiums go up about 6% per year, purportedly to account for the increase in what it would cost for the insurance to cover a loss (if only wages kept up with this supposed increase in costs!), we are shopping around to make sure we’re still getting the best value for our money. If it’s been several years since you’ve shopped your homeowners insurance policy around, it could be a great place to find some extra money in your budget. Here are some tips from my colleague Teig Stanley on how to go about doing that:

First, you’ll need your “DEC page,” which is short for “declarations” page. Then, take the following 5 steps:

1. Use a broker to shop for coverage. There is no need for you to go through all the time/effort yourself. Ask the broker to provide three quotes compared side by side so you can compare apples-to-apples.

2. Make sure the quotes have the same criteria:

Deductible – This should include the separate deductible for wind/hail/water or other events that are geographically specific.

Home Value – If it’s been several years, this probably needs to be adjusted since your home has probably increased in value. Most insurance companies’ software will assign a value automatically based on actuarial data specific to the address.

Cost – Is the payment quoted monthly, annual, quarterly, etc?

Replacement Cost Coverage – Some policies replace up to 100% of the benefit for which they’re written. Others replace 125% – 150% if the home is a “total” loss.

3. See if you can apply any special discounts – military, occupation, no recent claims, alarm systems, etc.

4. Contact insurance companies that don’t broker out (like USAA) if you qualify so you can obtain a quote to compare.

5. Give the broker a copy of your current DEC page and cost (don’t worry, they can’t do anything manipulative with the premium) as well as permission to pull your credit so they can get accurate quotes. It’s a “soft” credit hit, so it won’t have a negative effect on your credit score.

Finally, you can find some additional insight and tips in this post from another colleague, Greg Ward. He shopped around himself and found a much better deal. Of course, I would be remiss if I didn’t point out that any cost savings you realize from this process should be used to either increase high-interest debt payments or bump up your savings rate toward your emergency fund, retirement or other goals.

 

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

What Are Miscellaneous Itemized Deductions and Are They Worth Tracking?

March 01, 2017

Editor’s note: Please note that all miscellaneous deductions were eliminated with the passing of the Tax Cuts and Jobs Act of 2018, but would still apply for tax year 2017 and prior.

Whenever I’m asked for “little known” tax tips, I can’t help but be a little annoyed. Part of the reason they are little known is because they apply to so few people, at least when it comes to deductions that fall under the “miscellaneous itemized deductions” umbrella. Things like tax preparation fees, unreimbursed business expenses and the home office deduction for employed workers – these are all deductions that I personally have in my life and yet I see no tax benefit because the only way they are actually deductible is if they exceed 2% of my adjusted gross income. In other words, a married couple who makes a combined $100,000 would only be able to deduct miscellaneous items that exceed $2,000, which is 2% of their income. That’s a lot of unreimbursed expenses.

However, I still track mine just in case. I probably won’t have a deduction in a normal year, but should something big come up or we have a year of unexpectedly low income, I want to be able to take whatever deductions are available. Here are the common deductions that may be worth tracking, even if you don’t get to write them off, as well as some expenses that people think are deductible but aren’t:

Common deductions worth tracking

Unreimbursed business expenses. Anything you pay out of your own pocket that applies directly to your job but you can’t put on your work expense report falls in this category. For example, when I travel for work, we have daily meal allowances. They’re reasonable, but sometimes I like to treat myself to a nicer dinner than the guidelines allow. I keep track of the amount I spend over the per diem limit as an unreimbursed expense.

Another example is a professional organization I belong to here in Chicago. My membership doesn’t fit my company’s expense guidelines, but it’s still work-related. I wouldn’t be a member of this group if I didn’t have my job. Other examples would be if your employer doesn’t reimburse at the full IRS-allowable mileage rate or if you subscribe to any magazines for your field. The full IRS list is here.

Tax preparation fees. Even if you do your own taxes, chances are you have to pay for the software or at least filing fees. Make a note of this expense in your tax files just in case you have other miscellaneous deductions that you can add on for a deduction.

Appraisal fees. If you made a gift to a charity that required an appraisal or if you had a casualty loss that required you to get an appraisal for insurance purposes, those are deductible in this category.

Any of these expenses. Many of the expenses that qualify may be one-time things that you didn’t know you could deduct, like repayments of Social Security benefits. It’s worth reviewing the list each year to see if you paid any of these things, in case they push you over the limit.

What’s not considered a miscellaneous deduction

Funeral expenses. If you prepaid your funeral expenses or purchased your burial lot ahead of time, those are not tax deductions, contrary to popular belief. However, once you’re gone, if you have a taxable estate, those expenses may be applicable there (something worth noting for executors of estates.)

Commissions paid to a broker. Fees for investment advice are deductible, leading many to believe that they can also deduct commissions. Instead, commissions become part of the cost basis of the investment purchased, so you’ll realize the tax benefit when the commission reduces the amount of your capital gain when the investment is sold.

Lost or misplaced cash or property. Losing something is not the same as someone stealing it or having it ruined due to a fire, flood or other event, which would make it a casualty loss (reported on Form 4684.) But just leaving your phone somewhere and not having it returned to you or dropping your wallet on the street is not deductible. There are no tax benefits for being careless…

Any of these expenses. Claiming a deduction for any of these items on your tax return could result in a tax levy from the IRS or sometimes even a full audit. While it seems like you should be able to write some of these things off, the bad news is that you can’t. C’est la vie.

I keep a file for receipts that would apply should I end up in a tax year where the total of these expenses might exceed 2% of my AGI. As I prepare to file taxes at the end of the year, I just do a quick review of the expenses that qualify to make sure I’m not forgetting anything, then recycle those receipts if they don’t add up to enough. So what do you think? Are these expenses worth tracking to you?

 

Kelley Long is a Resident Financial Planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

 

 

Can You Deduct Your Student Loan Interest?

February 22, 2017

Don’t you just hate making student loan payments? Besides the fact that your student loans (hopefully) enabled you to earn a degree that allows you to command a higher income than you would without it, at least there is a small tax benefit to those loans for those who qualify. Here’s the skinny on what you need to know to maximize your deduction:

There are income limits. If you’re single and your AGI exceeds $80,000 or you’re married and your combined AGI is over $160,000, you can’t take any deduction at all. There are also phase-outs, which means you can still take some of the deduction but not all of it. Those limits start at $65k for single and $130k for married people. If you use tax software or a tax professional to prepare your taxes, the amount will be figured for you.

You can only deduct the first $2,500 paid in interest each year. Probably the biggest mistake I’ve seen here is when people think they can deduct payments. It’s actually only the interest you can deduct, so even if you’ve made well in excess of $2,500 in actual payments, you may not have a $2,500 deduction.

Your loan provider will tell you how much interest you paid. You don’t have to do the math to figure out what portion of your payments were for interest and which went toward the principal. Just look for Form 1098-E from each of your lenders. If you’re signed up for electronic delivery of statements, then you’ll probably have to log in to find your form. Look for a link to “Tax Documents” if your lender doesn’t make it obvious on their home page.

You can deduct interest from multiple loans, but they have to be qualified. If you have multiple loan accounts or lenders, you can add up all those Form 1098-E amounts for your total deduction. But the loan has to be considered a qualified student loan. If you refinanced by taking out a home equity  or 401(k) loan or even just borrowed from a family member to lower your rate, you can’t deduct that interest.

If you claim student loan interest on your tax form and the IRS doesn’t receive a corresponding 1098-E from a lender, you can count on getting a letter asking you to prove the interest was paid on a qualified student loan. If you’re not sure if your loan is considered qualified or not, ask them for your Form 1098-E. If they are unable to provide one, it’s not qualified.

I know that paying student loans is no fun. Hopefully, this small tax benefit will offer a little silver lining though. (In addition, reflect on what your finances would be like if you hadn’t earned that degree.)

 

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

 

How To Deduct Your Home Office On Your Tax Return

February 15, 2017

Updated in 2018 for the Tax Cuts and Jobs Act of 2017

If you have any self-employment income AND you have a home office that serves as a primary place you do “office work,” then the home office deduction is most likely available to you provided you meet the IRS qualifications. In order to qualify as a home office for tax purposes, your space must meet two requirements:

  1. Regular and exclusive use: The space you are claiming as your home office must only be used for that so if you work at your kitchen table, that wouldn’t qualify. I sectioned off a corner of our family room for my office. That qualifies because no one else uses that specific space for anything but my work.
  2. Principal place of business: You have to show that your home is your primary place of business, although there are some situations where you may still qualify even if you have a separate place where you also do business. Check the IRS regulations to see if you qualify.

If you’ve determined that you indeed do have a home office for tax purposes, then it’s important to understand how to calculate what you can deduct. There are two methods for calculating your deduction, and you can use a different method from year to year.

The Actual Expense Method

This is best for taxpayers who have a large amount of space and keep meticulous records of expenses. (The home office deduction is reputed to be a red flag for audit, although the IRS does not corroborate this.) The actual expense method is pretty self-explanatory. You deduct the actual amount of the expenses related to your home office.

Home office expenses

Figuring the percentage

To determine the percentage of your home that qualifies for business use, you need to measure the space compared to the total size of your home. The IRS offers these two examples:

Example 1

  • Your office is 240 square feet (12 feet x 20 feet).
  • Your home is 1,200 square feet.
  • Your office would be 20% (240/1,200), so that is also your business percentage.

Example 2

  • You use one entire room in your home for business.
  • Your home has 10 rooms, all equal in size.
  • Your office would be 10% (1/10), so that is also your business percentage.

The Safe Harbor Method

This is best for people whose office space is 300 square feet or less and don’t want to hassle with tracking records. Here’s how the safe harbor method works:

You calculate your deduction by multiplying the square footage of your home office (but not to exceed 300 square feet) by $5. That’s it! In other words, the maximum amount you could claim each year would be $1,500.

A few final things to consider

  • Your home office deduction cannot exceed your gross business income for the year, but if you use the actual expense method, you can carry over any amounts that you are unable to deduct to future years where you also use the actual expense method.
  • IRS Publication 587 has more information, including several easy-to-use worksheets that can help you figure your deduction.

 

This post is not meant to replace the advice of a paid tax professional who can give you specific guidance on your own unique situation. Please consult your CPA or tax preparer if you are not certain whether you qualify to take this deduction.

 

 

Should You Care About a Mutual Fund’s Past Performance?

February 08, 2017

The primary reason that investors choose to subject their hard-earned savings to the ups and downs of the stock market is that history has shown that over long periods of time, it’s one of the best ways to grow your savings in order to outpace inflation and maintain purchasing power. One of the biggest investing mistakes I see though is what we call “performance chasing” or making investment choices based solely on the past performance of a particular investment. I’d argue that past performance is actually the last criteria anyone should consider when deciding which funds to buy and is almost completely irrelevant when looking at index funds. Here’s what I mean.

Past performance is often the first thing people look at when presented with a list of mutual funds, like in their 401(k) account. I get it. You want the best and you want your money to grow as much as possible!

But this is a key mistake that can actually lead to losses rather than gains over time. The problem is that the fund that did the best last year or over the past three to five years is statistically LESS likely to be the best next year, so by buying the “best” based on the past, you may actually be buying high, which is the opposite of everyone’s favorite stock market adage: “Buy low, sell high.” This chart shows that. Just follow the orange square representing “MSCI Emerging Markets” over the 7 years shown:

chart

An investor who chases performance and buys the MCSI Emerging Markets at the end of 2007 because it was the “best” would have lost half their money over 2008. That same investor may be likely to sell at the end of 2008 because they wanted to “stop losing money” and therefore would have completely missed out on the recovery of that sector, when it “won” again in 2009! That’s an extreme example, but follow any of the colored squares over the years and understand a little better why it’s a losing game to only invest in what’s done the best in the recent past. Instead try to spread your investments out over all parts of the market and just “let it ride.”

For investors who like to put their money into actively managed mutual funds, there is a reason past performance matters – so that you can see if the fund is meeting its objective to match or exceed its benchmark. Past performance means nothing without the context of its benchmark. For example, let’s say you’re looking at a mutual fund with the objective of outpacing the S&P 500. Such a fund may include words like “Large Cap” or “US Large Company” or “Capital Appreciation” in its title.

When researching any fund’s performance, look for a chart on the fund fact sheet that shows its performance alongside its benchmark. Here’s one example, showing a fund that is matching its benchmark quite well:

Fund performance graph

If the lines moves pretty much in tandem together or the fund line is consistently higher than the benchmark line, it means the fund managers are doing their jobs consistently well. If you were to look at a chart and see the fund losing to the benchmark as a pattern, then you may want to reconsider it as an investment, even if the fund is in positive territory. In other words, even if your investment is up 10% this year, if its benchmark is hitting 15%, your fund is failing you.

Likewise, if your fund value is down, it doesn’t necessarily mean you’re in the wrong fund. Markets go up and down. As long as the fund’s benchmark is down as far or further, you’re okay to stick with it.

So what does matter when choosing a mutual fund?

The one guarantee about mutual fund investing is the most important criteria in fund selection: fees. You will pay fees, guaranteed. But you can control how much. That doesn’t mean you want to select funds based solely on the criteria of the lowest fees, but if you’ve taken your risk tolerance quiz to determine a suitable mix of stocks and bonds (see the chart at the very end of the questionnaire for suggestions) and have more than one fund option to fulfill your investing allocation, then fees should be one of the deciding criteria.

What if you’re investing in index funds? Then the only use that past performance really has for you is in helping you to set realistic expectations for how your money will do over the long haul. Look at the performance numbers over the past 10 years or more and that should give you a reasonable idea of the growth you can expect for your own money. Assuming you’re only investing money that you don’t need for 10 years or more, you really shouldn’t care what happens over the next one, three or even five years.

 

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Should You Be Making Catch-Up Contributions?

February 01, 2017

Turning age 50 is definitely a milestone – one that some people celebrate and some mourn while others remain ambivalent. No matter how you may feel about it, there’s at least one minor thing to celebrate from a financial planning perspective: 50 is the age when the annual contribution limits to retirement savings accounts is increased for savers via what’s called “catch-up contributions.” Here’s how they work.

Each type of retirement savings account has an annual limit that savers can contribute to each year. Catch-up contributions are intended to allow people who perhaps got a late start to “catch up” by giving them the ability to save above and beyond those annual limits:

catch up contributions 2017

So someone with a workplace retirement plan and a Roth IRA over the age of 50 could conceivably tuck $30,500 away after age 50 versus the lower $23,500 that younger workers are limited to. Even if you’re right on track with your retirement goal, the catch-up contributions can help to lower your taxable income and accelerate that financial independence day.

A strategy for 401(k) and 403(b) savers

For workers who are contributing to 401(k) or 403(b) accounts via payroll deductions at work, the catch-up contribution is typically a separate election that must be made in dollar amounts versus the regular contributions where you must elect a percentage of income. For workers whose pay varies due to hourly wages or commissions, it can be challenging to budget for these contributions or ensure that a certain amount is going in each pay period. The good news is that you don’t have to be maxing out your regular contributions in order to elect catch-up contributions.

So if you’re looking to bump your contributions up by a certain dollar amount and don’t feel like doing the math to figure out what percentage that is, you can just enter it as a catch-up amount. A small consolation for hitting that half-century mark? I think so.

Of course, I would always recommend trying to get the maximum amount into your retirement account each year, but that’s not always realistic for lower income workers or people with competing priorities like family needs or high interest debt. If you’re over 50 and thinking about making catch-up contributions, run a retirement estimate to see how they can help you get to your retirement goal sooner. Then start catching up today!

 

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Do You Need a Cohabitation Agreement?

January 25, 2017

As more and more couples choose to live together without going through the formality of getting married, a new term has cropped up in the legal world: the cohabitation agreement. Similar to a prenuptial agreement, the cohabitation agreement is a legal document that both partners sign clarifying things like how bills will be paid and other logistics of the relationship, along with the division of any assets and custody of any children should the relationship end. Many couples who move in together do so as a sort of test to their compatibility – before taking the legal plunge into marriage, they want to make sure they can actually live together peacefully.

I can relate. After my first marriage went down in flames for reasons that would have been sniffed out had we lived together prior to the wedding, I knew that I would move in with any future prospective husband before he put a ring on it. These situations don’t always call for a cohabitation agreement, but some couples may still choose to have one just in case the experiment fails.

Couples who, for whatever reason, decide to forgo marriage altogether and simply make a life together may choose to sign a cohabitation agreement in order to provide a level of protection should things turn sour down the road or one partner passes away. Each state’s divorce laws provide this protection when a legal marriage exists. The cohabitation agreement serves as sort of a replacement for this protection.

For example, let’s say a couple purchases a home together then breaks up. If they were married, the judge presiding over their divorce case would see that the home was fairly split between them according to their state’s laws. When there is no marital law to apply, it can lead to costly legal battles even if the home was jointly owned. A cohabitation agreement helps to clarify and hopefully avoid such battles by stating ahead of time what would happen to the home should the couple split up or one person die.

Cohabitation agreements also served as a sort of prenuptial agreement for same sex couples before they were legally allowed to marry, but there are still instances where a same sex couple who is married may still need the protection of a cohabitation agreement or similar document: for example, when they have a child in a state that doesn’t allow adoption by same sex parents. I have friends who had to consider this when each of them gave birth to a daughter from the same sperm donor, making their daughters half-sisters with different mothers who are married to each other. One of the reasons they chose to live where they do is that their state of residence allowed the other mom to adopt her non-biological daughter so that if something happens to the biological mom, there would be no concerns about the surviving mom retaining custody of both girls.

Here are the aspects of your life that a cohabitation agreement could cover:

  • Distribution of property (both individually and jointly owned ) should you break up or one person die. For couples with large income and/or wealth disparities, this can help avoid conflicts during and after the relationship about who pays what and who gets what.
  • Financial support during or after the relationship. For example, many romantic partnerships are forged out of business partnerships or vice versa. This can get very messy should the relationship end, so a cohabitation agreement provides a level of clarity and protection for both parties in that case.
  • Support, custody, etc of minor children. Family courts can override these agreements if it’s in the best interest of the child, but having an agreement ahead of time can provide peace of mind, especially if the child is not a biological child of both partners.
  • Health insurance responsibility. Many employers allow coverage of domestic partners, so a breakup could lead to loss of coverage for one of the partners.

Wills and powers of attorney can be used to cover most of these topics in the case of death, so cohabitating partners should still take those steps as well. In fact, it could be even more important to establish an estate plan when you’re NOT married as your partner may not be entitled to anything should you pass.

There are mixed opinions in the legal community about the enforceability of cohabitation agreements. This article is not meant to serve as a substitute for paid legal advice from an attorney. Should you decide that you and your partner need a cohabitation agreement, I strongly recommend you hire an attorney to draft it to maximize its effectiveness should you need it down the road.

 

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How to Pay College Bills Not Covered by Financial Aid

January 18, 2017

Worried about paying college bills? Considering that the average balance in a 529 college savings plan is only $21,000, it’s no surprise that one of the most frequently asked questions we get at Financial Finesse is, “How should I pay for my kids’ college?” Here are some ideas, along with the benefits and pitfalls of each.

529 College Savings Plans

529 plans have become the most popular way for parents to save for future college expenses due to the tax advantages of both tax-free growth (as long as funds are used for qualified expenses) and in some cases, state income tax deductions for contributions.

Pros: They offer tax advantages, ease of saving, and have less of an effect on financial aid than savings in the child’s name.

Cons: They must be used for qualified education expenses to avoid a 10% penalty plus taxation of withdrawals. Funds held in a grandparent’s or other non-parent’s name are treated as income in the year distributed, which can affect future years’ applications for aid.

UTMA/UGMA Custodial Accounts or Other Savings in Your Child’s Name

Any account in your child’s name, even their own savings from summer jobs, will have the greatest impact on the availability of aid. If these assets are intended to be spent on college anyway, consider transferring them into a 529 plan to reduce the impact. Otherwise, spend what you’re going to spend from these accounts first to lower that impact.

Pros: Any capital gains from the sale of investments are treated as income to your child instead of you (beware kiddie tax rules though) and funds can also be used for things like a new laptop for school or eventually, your child’s first home or wedding.

Cons: 20% of the value is counted in aid formulas, potentially reducing the amount offered to your child. Once your child reaches the age of majority in the state where they are going to school, they’ll have unfettered access to the funds.

Taxable Investment Accounts

Any investments you own outside of retirement accounts are included in the financial aid formula and should be spent before dipping into retirement savings. If you have to sell investments for a gain, consider gifting them to your child first so that they could potentially pay a lower capital gains rate than you would. Doing this right before your child enters college, but after you’ve counted it as your asset on the FAFSA, nets the best benefit in terms of how it affects financial aid as the income won’t come into play until your child’s junior year package. However, if your investments are at a loss, keep them in your name to reap the benefit of up to $3,000 per year of capital losses.

Pros: There are possible tax benefits but no early withdrawal penalty.

Cons: Taxable gains could affect future aid offerings.

Home Equity

As long as interest rates stay low and you are able to deduct any interest paid on a home equity loan or line of credit, you may consider tapping this source if it’s available rather than having your child take out higher rate student loans. Of course you’ll be on the hook to pay it off even if your kid drops out mid-semester, but that’s a different kind of planning conversation to have with your child.

Pros: They have relatively low interest rates and there’s a potential income tax deduction for interest.

Cons: Your home is now collateral for your child’s education whether they graduate or not.

401(k) Loan

Rather than requesting a hardship withdrawal from your 401(k), which would incur income taxes and possibly an early withdrawal penalty if you’re under age 59 ½, borrowing from your 401(k) may be an option worth considering.

Pros: There’s no credit check, you pay yourself back the interest, and they generally have lower interest rates than student loans.

Cons: Your plan most likely limits the amount you can borrow to the lesser of $50,000 or 50% of your vested account value and you typically have to pay it back in 5 years or less. If you leave your job, you may also be on the hook for any balance due or risk negative tax consequences.

IRAs

Traditional and Roth IRAs allow penalty-free early withdrawals for qualified education expenses, although you’d still have to pay taxes on any traditional IRA withdrawals and any growth in your Roth IRA.

Pros: You don’t have to pay it back and there are no penalties for early withdrawal. Roth IRAs also let you withdraw up to the total amount of contributions without any tax consequences, so you could leave any growth in the account to continue growing for your retirement.

Cons: You can’t pay the money back as you’re still limited to annual contribution limits and most likely, you will have to pay income taxes on withdrawals unless you’re just using your Roth IRA contributions.

Student Loans

At the end of the day, you may need to ask yourself if you should even be contributing much at all, particularly if doing so would compromise your ability to retire at a reasonable age. As our CEO Liz Davidson likes to say, they don’t give out loans for retirement and you can’t “work through” it either. I also like to remind parents that sacrificing retirement so that your child can graduate debt-free may be a great way to negate the possibility that they’ll end up back at home sleeping on your couch, but it could mean that one day you’ll find yourself sleeping on THEIR couch.

Student loans are there for a reason (and no, they’re not “financial aid,”) and have provisions in place to account for the fact that your child may not be earning a ton of money right out of school or they may face difficulty in finding a job after graduation. Help your child reduce these chances by helping them choose a lucrative major. Then consider this college funding plan that many of my friends are choosing for their own children: they plan to fund about half of their kids’ educations on a semester-by-semester basis and expect their child to fund the other half either through working, loans, work-study programs or whatever means work for their student. This method worked to keep them motivated to do well and graduate on time and the hope is that it will serve the same purpose for their children.

 

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How Long Should You Keep Financial Documents?

January 11, 2017

When sorting through paperwork or electronic statements and other records, you may be wondering how long to keep what. Generally speaking, if you can access something online, like a bank account statement, bill or insurance claims letter, you don’t need to keep a paper copy. As long as you’re able to log into an account and download statements, shred the paper (and discontinue receiving paper statements) and reduce clutter.

For other things like receipts and tax returns, a scanned electronic copy also suffices when needed, so if you want to organize your files electronically, have at it. Just make sure you have a secure place to store digital assets like an external hard drive or encrypted cloud-based account. However, there are still a few things that require the originals, such as a will, marriage license, Social Security card, etc. While there are no hard and fast rules for all documents, following are some commonly suggested guidelines for how long you need to keep even the digital copies:

Tax Returns: Seven years is the general rule of thumb for keeping tax returns and the related documentation like W-2s, receipts for charitable donations and other paperwork to support income and deductions claimed. The basis for this is that the IRS has three years to audit your return for any reason from the date of filing. If during an audit, the IRS finds a substantial omission, such as under reporting income by 25% or more, it has six years to challenge your return, so you want to have those documents available to address the challenge.

Life Insurance Policies:  Keep the original policy for the life of the policy plus 3 years.

Medical Records: For medical expenses you paid using a health savings or flexible spending account, you’ll want to keep receipts for up to seven years to show that the funds were spent on qualified expenses in case the IRS audits those accounts. Many HSA or FSA providers allow you to upload receipts for them to track. In that case, you can shred the receipts, but make sure you keep your online access for at least three years after you’ve spent the funds, just in case.

Receipts for Home Improvements: Any remodel projects or improvements that could enhance the value of your home can be added to your basis and possibly reduce any taxable gain when you sell your home, so keep these as long as you own the home for maximum tax savings.

Home Sale Documents: Once you’ve sold a home, you may be tempted to toss all the paperwork you signed back when you bought it, but keep the closing statement that shows you no longer own it in case a future mortgage lender asks for proof or there is any type of future title dispute on your old home.

Bank Statements/Credit Card Statements: Generally, it is recommended that you maintain one year’s worth of statements, unless they are easily accessible online through your bank.  If the statements support tax deductions, they should be maintained for seven years along with your tax files.

Utility Bills: If utility bills support deductions made on your tax return, they should be kept for seven years from the end of the year in which they were claimed. All other bills can be shredded after three months as long as you’ve verified they’ve been paid.

Pay Stubs: If you still receive paper pay statements, keep the latest stub if it contains the year-to-date salary history or keep a year’s worth of stubs until you receive the year-end check that recaps the entire 12 months of pay and the taxes withheld. This is especially important to consider if you’re planning to apply for a mortgage in the coming year so that you can prove your income. Once you receive your W-2 and verify that it matches your pay stubs, you can safely shred your old stubs.

Warranty Documents:  Dispose of these when the warranty expires or you get rid of the item under warranty.

Receipts for Purchases: Once you’ve verified that a charge to your bank account or credit card matches the purchase receipt, you may dispose of the receipt unless you need it for a future merchandise return. Pay special attention to restaurant receipts to ensure that the tip amount you wrote matches the charge to your account. Your receipt will serve as your proof if a wayward server inflates his/her tip.

Investment-Related Paperwork: It’s important to maintain a record of investment purchases in any taxable brokerage account so that you can properly figure any capital gains or losses when you sell. If you have stocks or mutual funds set up for dividend reinvestment, you’ll have multiple purchase transactions to track, so consider making a spreadsheet and keeping the statements as a back-up. You can get rid of any prospectuses you receive though (or sign up for electronic delivery and then delete the email). Investment management companies are required to provide these, but you can always find them online.

Things Not Worth Keeping: User manuals, which you can find online now and ATM receipts.

Things to Keep Forever in a Fireproof Safe or Bank Safety Deposit Box:

  • Birth certificates
  • Marriage certificates
  • Divorce decrees
  • Military discharge paperwork
  • Certificates of authenticity for any original artwork or other valuable property
  • Deed, car title – any document that would be difficult or impossible to replace

Once you determine which records you no longer need to keep, it’s important to properly dispose of them. Shredding the documents before putting them in recycling or the trash will help prevent identity theft. Then go and enjoy your less cluttered life!

 

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5 Steps To Sell Stuff Online

January 04, 2017

Do you have a lot of stuff to get rid of? Several years ago, when I made a big move from Cincinnati to Chicago, I pretty much sold everything I owned online, including my car. Whether you’re de-cluttering in an effort to live more simply, preparing for a big move or even just looking to find some extra cash, here’s how I did it.

1. Decide if it’s worth selling. Growing up, we often held garage sales to pass along stuff that still had a useful life, but I lived in an apartment – no garage available. So I had to be a bit more discerning about what I would go through the effort to sell. My criteria was that I had to get at least $20 for each item. I put anything worth less in a pile in an empty corner of my apartment to eventually document and donate to charity.

2. Choose the best market. I considered three different places to sell: consignment, eBay or Facebook Marketplace. Here’s how I decided.

Consignment: This is where I took any brand name clothing and higher end furniture. It’s definitely the easiest option. You drop your stuff off and pick up a check a couple months later. The downside is that you have to pay a commission, sometimes up to 50% of the selling price, but that can still be worth it.

There are lots of apps that help with this too. Poshmark is one I’ve used for brand name clothing. It’s just not as much of a sure thing.

eBay: It’s best for collectibles, in-demand accessories and some electronics – items that people will compete to buy. To figure out pricing, search for similar items and price accordingly to sell. Keep in mind that your item must be new or like-new or it probably won’t sell on this platform.

Facebook Marketplace: It’s best for just about anything, as long as you’re willing to spend the time! Best of all, it’s free. Speaking of free, if you have stuff that’s pretty worthless or that you don’t want to haul to a donation center, the free category is a quick way to get someone else to do your hauling. Just be prepared. Your phone or email will light up as soon as you post, so only list when you’re ready for people to come and pick stuff up at that moment.

3. Use best practices for selling online. Here are the guidelines I used when creating listings:

Write a winning headline. Avoid using ALL CAPS or lots of exclamation points. Think about what words you would search for when looking for the item and put them in the headline.

Take photos that sell. Include one full-length of your item and a few close-ups. If you’re selling brand-name stuff, include a picture of the label.

Use clear descriptions that include measurements and bulleted features.

Know your price but prepare for haggling if selling on Facebook. My very first sale, I had a guy talk me down to 50% of my asking price by the time he walked out the door with my dining room set. That’s still on my list of top 5 regrets in life. List for $5-$10 more than you really want for smaller items, more if you’re listing for several hundred dollars.

4. Take care when dealing with the public. There’s a reason that most of my buyers brought their mom or significant other with them when I invited them to my apartment to pick things up, but that shouldn’t preclude you from using the website to make some money from your stuff. Here’s what I kept in mind:

Keep a spreadsheet. Mine included the item, listing price, date posted and the email address of the first three people who inquired. I learned very quickly that people say they want something then don’t show, so it was good to be able to reach out to the next person in line without digging through deleted emails, DMs and comments. Plus it allowed me to track how much I made, which was fun.

Be clear on delivery in your item listing. I always included guidelines for pick-up so that no one even bothered to ask if I would deliver: “If interested, you are responsible for picking it up from a mutually agreed-upon location. Pick-ups available M-F 6–8 PM or weekends.”

Beware of scammers. This is more of an issue on Craigslist, but beware of anyone asking you to click on an attachment or link to complete more information. Real people who want your stuff are going to send normal messages asking things like, “Is this still available?” To be sure, Google the person’s name or check their profile.

But be flexible. I had a shower curtain that was part of a collection that had been discontinued and a guy in California reached out asking if I’d take a PayPal payment for the price plus shipping. He was willing to pay me before I shipped, so I knew it wasn’t a scam. Just don’t give anyone your bank account number.

And stay open to selling other stuff. I had a lady come to my apartment to pick up a piece of furniture (I always had someone there with me) who ended up walking out with all my bed linens, bath towels and an old vacuum. She saw my pile of donations in the corner and asked if I was selling that stuff too, so I said sure. She collected what she wanted and made me an offer. The lesson here: keep your donations visible if you’re having people come to your house since you never know when your trash could be their treasure!

5. Make the most of your donations. If you’re taking a big load to a thrift store, take the extra time to document and get the receipts. You may be able to get a tax deduction!

With a little time and organization, you may be surprised by how much your unwanted stuff can net. I was able to pay my last month’s rent with my sales. That’s not too bad for stuff I wanted to get rid of anyway.

How to Make 2017 the Year of Financial Security

December 28, 2016

According to Fidelity’s annual study on New Year’s resolutions, the number of Americans considering a financial resolution for 2017 increased significantly over last year. If you are one of those who are hoping that 2017 will be the Year of Financial Security, I suggest a quick review of 2016 as a starting point. Ask yourself four questions to get started:

1. How much did you save? Before you start on a mission to save more money next year, take a look at how you did over the past year. Are you better off this year than last? Could you have saved more money? Were your expectations of how much you could save realistic?

Don’t let a small balance in your savings account discourage you from continuing your efforts. Make saving automatic by scheduling a recurring transfer on payday so you never miss the money. If you don’t yet have 6 months of your expenses tucked away in a savings account, that’s a good goal to start with.

2. How is your 401(k) or IRA doing? If you haven’t checked on your retirement account lately, this is a good time to log in and check your asset allocation. If nothing else, you should make sure you’re re-balancing your investments to account for changes in the stock market.

But you should also make changes to your allocation as you approach retirement. Someone who only has 5 years until retirement will have a lot more of their assets invested in fixed income funds versus someone with 30 years to go. It’s also a good time to run a retirement calculator to see if you’re on track to retire when you want to.

3. Did you reduce debt? Raise your hand if your financial resolution includes reducing or eliminating debt. Extenuating circumstances aside, if your total amount of debt increased or stayed the same in 2016, then it’s time to take a look at how you are going to make that number go down for the coming year. The first step in eliminating credit card debt is to stop using credit cards, so start thinking now about how you will shift your spending to cash only while you tackle your debt. Then make a plan and stick with it.

4. Has your financial outlook changed? Perhaps 2016 was a year of change for you. Perhaps you got married, got a raise, switched careers, etc. As you prepare your plans for 2017, cover these questions to set you up for financial success in the coming year:

  • What are your greatest concerns? What keeps you up at night about your life and money? It might be something totally different from last year. This will affect your financial goals.
  • Is there specific financial guidance you need? Perhaps you received a promotion and have a lot more money to throw around so you finally need investing help or maybe now you’re caring for a relative. Does that affect your taxes? Consider seeking out a professional to help you with any big changes you’ve encountered. Your workplace financial wellness program is a great place to start.
  • Have your goals changed? Did you get married, have a baby, move to a new city, or decide to go back to grad school? All of these will affect your long-term goals. Hopefully, you’ve already examined how these changes affect your finances, but if not, now is the time to take a look and make any changes needed.
  • Do you need to revise your budget? If you did have any major life events in 2016 or if you’re setting a “stretch goal” for yourself for 2017, you probably need to revise your budget. Take a look at those expenditures that have become routine such as stops at Starbucks or taking Uber home from work and decide whether you need to reconsider those activities. For me, I have a renewed focus on my health after a rough 2016. I’m planning to spend more money on fitness activities like specialty classes and less money dining out.

Goal-setting for the New Year can be overwhelming. Make sure you give yourself some time and head space so that you are able to mindfully set goals that are realistic, achievable and motivational! Happy New Year!

 

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What I Really Want for Christmas

December 21, 2016

It’s the most wonderful time of the year: that time when we all give thanks for what we already have, then storm the malls for 30-ish days to buy more stuff. We’re constantly asked what we want for Christmas and then the rest of the year, we try to reconcile our consumer culture with our desire to be content with what we have. So when I’m asked for my wish list, I confess that instead of thinking of presents, I wax idealistic and think in terms of what I would want if it weren’t for that pesky reality issue. In no particular order, this is all I want for Christmas — or ever:  

1. A couple do-overs

I actually don’t regret the headline “mistakes” of my life — like saying “I do” when we didn’t or changing my college major in order to graduate on time. Those things have led me to where I am today, which is exactly where I want to be. It’s those little things I’d like to go back and fix like the time in 4th grade when the kids on the bus were teasing my little brother and I chimed in rather than stood up for him or skipping my best friend Jenny’s bridal luncheon because I didn’t want my boyfriend at the time to be bored. A mulligan wouldn’t change the course of my life, but it could have made a big difference to someone I care about.

2. Everyone to give a crap about the environment

It’s the only earth we have. I don’t get why some people are able to turn off their give-a-darn when it comes to taking care of it — like the woman who told me that recycling is “impossible” at her house because she has two teenagers. Nice excuse, but don’t teenagers typically care more about that stuff than their parents?

I’d even be satisfied if everyone just turned off the water while brushing their teeth. I see people lamenting global warming but then toting around disposable plastic water bottles. Just one small change can make a difference.

3. No more homeless pets

At one time in my life, I actually lived with four cats. I dream of opening our home to a dog or two once we have a yard and won’t have to walk up three flights of stairs for every walk. It kills me to go by the shelter and see those poor puppies and kitties waiting for some love and attention. Please spay and neuter your pets. And the next time you want a furry friend, adopt from the shelter instead of buying from the store.

4. Money to cease being taboo

I always say that if people walked around with their credit card balances displayed, everyone would feel better about their financial situation. It saddens me how many wonderful, successful people I know are secretly freaking out inside about money. They feel trapped in a lifestyle that is destroying them financially. If we were more honest with each other about our fiscal challenges, we’d all find it easier to resolve the problems and focus our energy on the things that really matter to us.

Of course I’d love to see world peace, an end to greed, and the ability to time travel, but let’s not get carried away. These four wishes are near and dear to my heart. What would you put on your suspended-reality wish list? I’d love to hear your answer on Facebook. And happy holidays!

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Will Refinancing Save You Money?

December 14, 2016

The general rule of thumb is that if you can refinance to a new mortgage rate that is at least 1% lower than your current rate, it’s a good idea. But there are other things to consider in that decision, namely any closing costs associated with completing the refinance. This refinance calculator will tell you exactly how many months it would take you to recoup the closing costs through decreased interest, which is useful for a few reasons.

First, if you’re planning to move in the foreseeable future, you may find that the breakeven date is beyond when you may actually get there. This is what we found when we evaluated a refinance opportunity. Assuming you’re planning to stay in your house indefinitely, then knowing the breakeven date can help you decide how to actually fund those closing costs. If you have the cash in a savings account, it also lets you know how long it will take to rebuild your balance, assuming you take the monthly interest savings and deposit it to your savings.

What if you don’t actually have the cash available? It can be tempting to roll the closing costs into the new loan, but then you’re paying interest on that as well. An alternative strategy could be to use a 0% interest credit card to pay the closing costs (beware of any fees if you have to use it for a cash advance) then use your savings to pay off the card.

Where the breakeven date comes in handy is that it tells you whether or not this strategy will work. If you have a card with a promo rate that runs out in 10 months but your breakeven is 12 months, then it may be a bum deal. You’ll be paying credit card interest for those last two months, so make sure you enter that into your calculation.

Refinancing can be a great way to lower your payment. Try to keep the new loan term as close to your original loan’s term as well. Otherwise, you may have a lower rate and lower payment, but the total interest could still be higher if you spread it out over more years.

Finally, I find that a lot of people avoid finding out what rate they qualify for because they’re concerned that the hard inquiry into their credit will lower their score. It’s true that too many hard inquiries (when a lender actually pulls your credit to evaluate you for a loan) can have a detrimental effect on your credit score, but the character of the inquiry matters too. Applying for a mortgage refinance is unlikely to knock your score down enough to make a difference. What hurts is when you hit the mall and open up multiple store cards to save on your purchase. Take a break from those types of credit applications within six months of applying for any type of loan.

 

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The Fastest Way To Pay Off Credit Card Debt

December 07, 2016

Is one of your financial goals getting out of credit card debt so that you can start directing that money toward something more fun like a new home, college education or retirement? Throwing away money on credit card interest is an incredible waste. The best way to avoid this, besides staying out of debt in the first place, is to work to lower your interest rates as much as possible while paying off your debt as quickly as possible. Here’s how I dug myself out of $8,000 worth of credit card debt after college:

  1. I listed all of my accounts in order of interest rates, starting with the highest.
  2. I started paying the minimum on all cards except for the one with the highest rate. I paid as much as I could afford on that account, initially starting out with a fixed $200 per month payment.
  3. When I received an offer to open a new card with a 0% promotional interest rate on balance transfers, I applied and received a card with a $2,000 credit limit.
  4. I transferred $2,000 from the highest rate card to the new card but kept paying the highest amount on the original card.
  5. Once that card was paid off, I added $200 to the amount I was paying on the card with the next highest interest rate.
  6. I marked my calendar for when the 0% promo rate was to expire and a month before, I opened a new 0% card and transferred the balance over.
  7. I continued to pay down my other cards that charged interest with gusto.
  8. Anytime I came across extra money such as a tax refund or a signing bonus for a new job, I sent the money straight toward my highest interest rate credit card.
  9. Eventually, I was just left with the balance on the 0% card. I continued to pay it down aggressively, and when the promo rate expired, I continued to open new accounts at promo rates to transfer the balance.
  10. Within about five years, I was debt free.

Now, there are a few things to consider here. First, every time I applied for and opened a new account, my credit score took a hit. This only worked for me because I had excellent credit, which I maintained through on-time payments for all my debt, including my student loans, car payment and even utilities.

Second, each balance transfer incurred a fee that was typically a percentage of the balance I was transferring. I had to make sure the interest I was saving by transferring the balance was more than I paid in a balance transfer fee. Finally, I had to actually stop using credit cards in order for this to work. Once I was out of the debt, I did go back to using credit cards, but I kept a close eye on the balance so that I was able to pay it off each month.

If your credit isn’t great, you may not qualify for low promotional rate cards. If that’s the case, then consider calling up your credit card companies and request that they lower your rate. You may even suggest that if they lower your rate, you’ll transfer other balances onto that card. Remind them of your on-time payment history and threaten to transfer your balance away if they don’t work with you.

The key to success here is never wavering on that large payment amount. Being strategic about how you pay off your cards can also trim months or even years off your debt. Use this Debt Blaster to calculate the difference it will make.

 

 

7 Ways to Earn More Money Without Quitting Your Day Job

November 30, 2016

When you hear the word “budget,” what do you think of? Chances are it makes you think of things like sacrificing, cutting back, going without or other restrictive terms that are often associated with budgeting. But a budget is simply a tool to help us achieve our life goals in a more deliberate and successful way. Sure, one way to balance a budget is to cut back, but another way is to increase income. Here are seven ways to do that – several of them that I’ve done myself.

1. Become a Tasker on TaskRabbit. Have you learned how to read the language of IKEA assembly directions or do you get a special thrill from the sound of the vacuum sucking up debris? These are just two of many everyday skills that can be put to flexible and lucrative use via the TaskRabbit app, which connects people who have more money than time to people like you, who have more time than money these days.

2. Babysit. Do you have any idea how much over-worked parents are willing to pay a teenager to watch their kids for a night out? Imagine what they’d pay a fully-employed responsible adult, even for just a few hours on weeknights… easy money!

There are even services like Care, Sittercity and BabysitEase that connect you with families seeking help. I was a sitter for BabysitEase back in my Cincinnati days and it was great! If I had a Saturday night with no plans, I just logged into the website and signed up for whichever family looked like the most fun for me.

3. Take care of cats and dogs. If kids aren’t your thing, consider offering your services as a pet sitter. This is another side gig I held until recently.

I signed up for a local pet sitting franchise that performed a background check on me and then offered me the chance to check in on people’s cats and dogs while they were out of town. I only did the ones I wanted to and they did all the work of collecting the money, providing insurance in case something happened, etc. This was an especially great way to make money when I was in town for the holidays.

4. Teach others your hobby. Are you the person your friends and family turn to with questions about technology, fitness or even just how to properly apply their makeup? Services like Dabble (not to be confused with the dating app) are a great way to teach other people how to do the thing you love while making some extra cash. I have an acquaintance that makes great use of Dabble to teach other crafters how to knit and crochet on weekend afternoons.

5. Sell the products of your hobby. Several years ago, I signed up for a booth at a local craft fair where I sold fingerless hand-warmers that I had knitted myself while binge-watching The OC on DVD. One of my ongoing coaching clients uses Etsy to sell her original paintings in an effort to escape her paycheck-to-paycheck lifestyle without having to leave her beloved apartment. It doesn’t cost anything to set up your store.

6. Blog about your hobby. I have a good friend with a day job who started a food blog several years ago to share recipes and entertaining ideas with friends and family. After building up a decent following on social media, she’s now able to pitch large brands for sponsored posts, which has helped her to pay down several thousand dollars in credit card debt!

7. Charge for your carpool. I’ve met some of the most interesting people while riding around town in rideshare cars via Uber and Lyft. They are authors, nurses, and even office workers who just give one ride each day after work before heading home.

No matter what way you decide to earn some extra cash, make sure you take the extra step and actually apply that cash toward your savings goals. While the money you earn may seem like just a little, it adds up. Make the most of your spare time to help get you where you want to go faster.

 

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How Being Grateful Can Help Make You Richer

November 23, 2016

It’s easy to practice gratitude during the month of November when much of the month’s activities center around an actual day of giving thanks, but carrying that feeling with you year-round can be more of a challenge. However, scientific evidence is mounting that the simple practice of giving thanks can have myriad positive benefits in life. In fact, a regular practice of gratefulness can actually help with your finances.

What is Gratitude?

First, it’s important to understand that gratitude is actually made up of two parts, according to Robert Emmons, Ph.D, who is considered to be the leading scientific expert on gratitude. The first is what most of us already know: it’s an affirmation of goodness in our lives, even when there are things going wrong. An example is giving thanks for access to clean water and abundant food, even if you’re struggling with a health issue.

But the second part is where it can really manifest in more of what you really want. It’s recognizing that the sources of that goodness come from outside ourselves. It means we realize that the gifts for which we are giving thanks came from other people or in some cases, a higher power, should you believe in one. We can certainly appreciate the traits we have that help us in life, but real gratitude is the humble acknowledgment that much of what we have is due to the generosity and goodness of others.

How Does It Work?

Dr. Emmons has found that gratitude brings several benefits: increased happiness, stronger relationships, less anxiety, longer sleep, and better overall health and resiliency. It’s that final piece, resiliency, that can really help you find more financial success when you’re able to quickly bounce back from setbacks such as earning too little, spending too much or finding yourself overwhelmed with debt. Gratitude also helps block negative emotions and helps you to quickly find solutions and get working on them. With that in mind, here are three ways to add more gratitude to your daily life, all year long.

1. Keep a daily gratitude journal. My friend Ellen Rogin observes in her book Picture Your Prosperity that people who were overspenders in her practice talked a lot about what they didn’t have in their lives, while good savers talked about what they were thankful for. In one study, people who kept a gratitude journal reported increased well-being, better health, more exercise, and increased optimism.

When we acknowledge and give thanks for what we do have, instead of lamenting what we don’t, we open ourselves up to receiving more of what we want. As you’re keeping your journal, think of the positive aspects of your finances. Perhaps you are working to pay down debt, but you can still give thanks for the ability to make your payments on time each month.

2. Foster an attitude of abundance. Don’t just write about what you’re grateful for. Expect more of what’s good and it will appear. The Law of Attraction says that what we focus our attention and energy on will manifest itself in our lives.

I experienced this myself. When I was first working to dig myself out of credit card debt, all I could see was how long it was going to take me to pay it off and I was preoccupied with what else I could be doing with that money. I was on the financial struggle bus. But when I shifted my mindset to placing my debt payments in the category of “just another bill,” and trusted the plan I had put together, I was better able to enjoy the money I wasn’t spending on debt and actually found myself able to pay off the debt sooner than I’d planned.

3. Give some away. Hopefully you already know how great it feels to give to others, but research by Arthur Brooks, Ph.D., finds that as people give more, their incomes actually increase. Of course, people who make more give more, but Dr. Brooks found that as people’s charitable contributions increased, so did their income. A study comparing two similar families where one family simply donated $100 more than the other, found that the higher-giving family will earn an average of $375 more income that year than the other one!

It sounds a little crazy, but consider this: giving money away or spending it on others has a tendency to make you feel more wealthy. This causes you to feel happier, and greater happiness tends to lead to greater career success, so there you have it. Consider building some charitable giving into your budget.

What methods do you use to practice gratitude year round? I’d love to know so that I can practice them myself! Please send me an email or let me know on Twitter.

 

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Should You File Your Taxes Jointly?

November 16, 2016

Post updated 1/17/2018

I remember the first year after my brother got married, when he called to ask me a tax question and shared that he and his new wife had decided to file “single” status because that way they both got refunds. I felt like a real jerk crushing their refund joy when I told them that they don’t actually get to choose. Once you’re married, your choices are narrowed to “married filing jointly” or “married filing separately” (or MFJ versus MFS).

Generally speaking, the government wants married people to file joint returns, so they make it pretty unattractive to file separately (although that’s gotten better with the new tax rules), even though the “marriage penalty” is real when it comes to tax brackets and other limitations. For most married couples, it makes the most sense to file jointly. But there are some instances when it might make sense to file separately: (You can switch from year to year.)

One spouse has high medical expenses but a low income: This would make it easier for the doctor bills to exceed the 7.5% threshold necessary to deduct medical costs.

One spouse explores more creative methods of tax avoidance: When you sign a joint return, you’re accepting legal responsibility for everything on the return. If you know your spouse takes liberties with tax deductions, you may want to file separately to protect yourself if the IRS comes calling. There is such a thing as innocent spouse relief, but you have to prove you actually didn’t know of the questionable practices to qualify.

You’re heading for single status anyway: Your filing status is determined based on your marriage status on December 31st. If you’re in the process of getting divorced, but it isn’t final by the end of the year, you may choose to file separately to avoid being tied together by tax issues after the marriage is over. When I got divorced many years ago, we filed in December, but the divorce wasn’t final until January. We filed a joint return that last year and agreed to split the refund, but that only worked because we still had a modicum of trust with each other on financial issues.

However, most couples choose to file jointly as there are many drawback to filing separately:

Tax brackets may be less favorable. MFS marginal brackets have taxpayers jumping up to higher brackets at lower incomes than MFJ taxpayers.

You may have lower deductions and credits. If one spouse itemizes, both have to even if one spouse would receive a higher deduction using the standard amount. Spouses split joint deductions like mortgage interest for a mortgage in both names, but charitable deductions and other itemized deductions go on the return of the spouse that paid them, which could leave a spouse with very few itemized deductions claiming less than they’d get as a single taxpayer.

If you file MFS, you also cannot claim many credits and deductions such as the earned income credit, adoption expenses, child and dependent care and education credits, and the student loan interest deduction. In addition, the child tax credit is reduced and you can only deduct $1,500 of capital losses per year versus $3,000 for MFJ.

For most people, filing jointly will make the most sense. The best way to decide would be to figure out your taxes both ways. Many tax software programs do this analysis for you. Then file according to the method that leads to the lowest overall tax bill for your family.

 

 

Do You Need a Will?

November 09, 2016

One of the five components of a complete financial plan is estate planning, the foundation of which is a last will & testament. Most people don’t really start thinking about a will until they have kids, but really, everyone should have one, even if it’s simply written on a napkin. Here’s what you need to know:

What is a will? Your will is a legal document that directs what happens to your stuff, names your executor (the person who will be in charge of making sure your stuff gets to whom you direct), and also names your preferred guardian for any minor children you leave behind.

Where can I get a will? First, check to see if your employer offers any type of legal benefit. Even small employers sometimes give you access to an online portal where you can complete a questionnaire and have a basic will created, which is how my husband and I did our first drafts just to get something on paper. Other employers offer the ability to pay a small payroll deduction for access to discount programs. Depending on the cost, it may make sense to join for one benefit year and then have your key estate planning documents drafted to get the full value.

You can also draft and print a will online through a couple of different services like Nolo or Legal Zoom. My first will was done this way and while an attorney reviews your document to ensure it complies with your state’s laws, it’s easy to mess up. I had just moved and put the wrong county of residence on mine, an error I didn’t know I’d made until it was too late to change it. I’m lucky that I don’t know if it would have made a difference, but that’s the big pitfall of the DIY will. A lawyer checks that it complies with legal standards, but would not be able to verify its correctness.

For people who own businesses, have blended families or even just a notable amount of wealth amassed, hiring an estate planning attorney is usually worth the additional cost to make sure the nuances that come along with more complex lives are properly addressed according to your wishes. My husband and I recently signed new wills with an attorney. She not only made sure our plan coordinated with our various savings and distribution wishes, but pointed out provisions we hadn’t thought of such as including money for our future children’s potential guardian to expand her home if needed to accommodate the added family members or allocating money for our future kids to travel to visit other family members like their aunts and uncles. Most lawyers charge a flat fee for this service, ranging from hundreds to thousands of dollars, depending on where you live and what other documents you also need drafted.

What makes a will valid? Each state has laws that dictate the rules. Yes, you can write your wishes on a cocktail napkin, but you have to sign it and many states require you to have two non-named witnesses also sign that you were the person that signed it.

This was actually a bit of a comical complicating factor in the signing of our wills. My husband and I had trouble finding a time when we were both available at the same time as our attorney when we could also have two non-named witnesses present. We finally met our attorney at my local health club where we asked other gym members to witness as we signed! A bit goofy, but it got the job done. A more common place to find witnesses is your local bank.

Me actually signing my will
Me actually signing my will

What happens if I don’t have a will when I die? Dying without a will is called dying “intestate,” and your estate is distributed according to your state’s laws. If you’re married, at least part of your estate will go to your spouse in all states. But if you’re not or heaven forbid, you both die at the same time, then the laws vary from state to state. In Illinois where I live, a person who is not married with no children would have their estate split equally between surviving parents and siblings.

I had a college friend whose live-in boyfriend died tragically in his 20’s. His parents weren’t fans of their living arrangement, so she was completely cut out of the funeral arrangements and of course, left high and dry when it came to his stuff. He owned the house they lived in, so she was suddenly homeless too. No one likes to think about dying too young, but a will would have at least made sure she could keep some physical mementos of his.

Can I change it? Yes, and that is an important point to remember. You want to draft your will for how your life is today. Then as life happens, you can always update your will for your new circumstances. Key events that should cause you to make an update would include marriage or divorce, birth or death of a named beneficiary or even a falling out with one of the administrators of your estate like your executor or guardian.

The bottom line is that life can get complicated very quickly, and dying without a will leaves the settlement of your estate to the county probate court where you live. You probably don’t want them making critical decisions for your loved ones. Do your family a favor and put your wishes in writing just to be sure.

 

 

How to Make an Offer for a Home

November 02, 2016

If you’re a fan of home-buying shows that follow couples who are seeking a home in a new city, looking for a deal to flip or even searching for a much smaller home to live more simply (how do they do that???), then you’re probably familiar with some of the factors that go into looking for a home that provides a good value without over-paying. But one thing those shows don’t broadcast are the negotiations for price and how people actually arrive at what they will offer. Making an offer for a house is not just a wild guess. There are some things you and your real estate agent can do to find a price that will be accepted without overpaying. Here are some expert tips:

First, ask your agent to do a comparative market analysis (CMA). This is basically a mathematical analysis of homes that are similar to the one you’re looking at, including the number of bedrooms and baths, the square footage, the neighborhood, etc. and evaluates whether yours is priced in line with recent sales and other current listings. The CMA report will include the specifics of the properties used in the comparison so you can use your judgment as to how relevant the comparable pricing may be.

Keep in mind that it’s the sales price that matters, not the list price. There’s a rehabbed home in my neighborhood that’s listed for 50% more than the buyers paid a year ago. Sure they’ve done a lot of work to the property, but enough to double its price? Since it’s been on the market for several months now, I’d say that prospective buyers feel the same. Once the home sells, then we’ll know what it’s really worth.

As you’re deciding on what price to offer for “your” property, pay attention to the adjusted average sales price in your CMA. First, throw out comparables that are extreme, like a teardown/rebuild that was sold as a foreclosure or on the higher end of the spectrum, homes that are overly upgraded or way nicer than the one you’re looking at. Then adjust the average price by how the remaining comparables actually compare to yours:

  • Are they smaller or larger? More beds/baths or less?
  • Do they contain similar upgrades and features? (When we bought our top-floor condo, we felt it was only comparable to other top-floor units, even though many of the similar sales in our neighborhood were middle or ground floor. We were willing to pay a premium to not have footsteps overhead)
  • Are they actually in the same neighborhood? Depending on where you are looking, one street over can make a difference in price, so pay attention to proximity.
  • How long ago were they sold? The more recent the sales transaction, the more relevant the sales price.

Use your powers of reasoning to decide how comparable these other homes actually are. The averages aren’t worth much if there’s nothing nearby that’s similar to yours. That’s one of the issues with estimator sites like Zillow. It uses publicly available information to estimate values, but doesn’t adjust for things like inferior location or big upgrades post sale.

For example, Zillow shows our property losing $25k in value in the two years since we purchased due to several foreclosures and low sales prices on our street in the past year. What Zillow doesn’t “know” is that this is one of the hottest neighborhoods in the US right now and all of those properties were teardowns being rebuilt into multi-unit condo buildings similar to ours that will sell for possibly $100k more than our purchase price. Once those condos sell, I expect the estimated value of our place to far exceed what we paid.

Finally, knowing where the market is in terms of trends will play an important role in determining your offer price. Here are some factors to consider:

  • Buyer’s market versus seller’s market: If it’s a seller’s market, you may find yourself competing with other buyers and making several offers. In a buyer’s market, you’ll have more time to do analysis.
  • Number of days on the market: If you’re looking at a home that’s been on the market for a couple months, especially in a seller’s market, you’ll definitely be able to offer a lower price than if the property was just listed.
  • Timing: Generally speaking, spring and summer are hotter markets than fall or winter. The other timing factor is interest rates. Don’t buy a house just because rates might go up soon, but if you’re planning to buy, potential rate increases could add a sense of urgency that limits your bargaining potential.
  • Seller’s motivation: If you can suss out why the current owners are selling and you learn that it’s due to a pending divorce, job relocation or other more urgent need, you’ll know you can probably go lower than if they were just seeing if they could sell.

At the end of the day, your agent will be a tremendous source of guidance and advice in this area, which is one reason it’s important to find someone who specializes in the neighborhood you’re looking in. Here are two final tips when making your offer:

Make your best offer on your first offer. Assuming the sellers will counter could lead to a flat out denial, especially if you’re competing with other potential buyers. It can be tempting to play the “how low can we go” game, but if you really want the house, don’t play the game.

Don’t offer more than what the property can appraise for. Plenty of people learned this the hard way back in 2008–2010 after they paid top dollar for homes that ended up appraising tens of thousands of dollars less than they owed after the bubble burst. If a seller accepts your too-high offer and the appraisal comes back lower, you could end up back to square one without a deal.

Stick to what you can afford and accept that if you don’t get the house you want, it wasn’t meant to be. We had this experience with the first offer we made and our agent saved us from making a big mistake. We lost to someone who offered $25k more than the listing price, which in retrospect was a bad move… for the other buyer.

 

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