Innovative Ways to Obtain Cash for a House Downpayment

“I want to buy a house, but I just don’t have the cash for the downpayment.”

This phrase is a familiar tune that people hear around the world. However, there are some innovative ways to get access to cash you probably didn’t know you had that I wanted to share with you today!

Glossary – The IRS’s definition of a first time home-buyer/purchase is that you, or your spouse, has not owned a principal residence in the past two years. You don’t actually have to be buying your first house. Awesome!

For first time home-purchases, the IRS allows you to tap in to two retirement resources of yours at an early age, without penalty: Your IRA(s) and 401k retirement accounts.

So, let’s look at the all-important details that you will need to know to access these funds to buy your first house.

Cash from your 401k Retirement Fund
As stated previously, the government allows people to withdraw money from their 401k account to buy a first-time residence. This cash will be given in the form of a loan to yourself. Generally, the loan must be paid back over five years, although this can be extended for a home purchase. You are usually allowed to borrow up to 50% of your vested account balance to a maximum of $50,000.

Additionally, loan payments can be deducted from payroll checks (another added benefit). While interest rates vary by plan, the rate most often used is what is termed the “prime rate” plus one percent. The current prime rate is 3.25%, meaning that an estimate for the current interest rate you would pay on the 401k loan is 4.25%. Again, you have to remember that this is a loan to yourself, and therefore, the interest you pay is to yourself as well!

Another great thing is that money obtained from 401k loans are not subject to income tax or the 10% early withdrawal penalty, unless you stop your employment with your 401k employer.

See the link below for a great list of pros and cons to mull through before taking out a 401k loan.
Get a Loan from Your 401k

Cash from Your IRA (Individual Retirement Account)

According to Bankrate.com (Using IRA’s for Home Buying), both Roth IRAs and Traditional IRAs can be used for homepurchase expenses. However, they are treated a little differently. So, let’s address the stipulations for each individually.

Roth IRA-
With Roth IRAs, the IRS rules dictate that you can withdraw up to $10,000 from your account for first time home-purchases, provided that you have had the Roth IRA account open for a minimum of 5 years.

Hint – this is another benefit that can be created by getting your children to invest early!

If you meet these qualifications, the $10,000 will be tax and penalty free.

Traditional IRA
For Traditional IRA’s, each individual can withdraw up to $10,000 towards the purchase of that “first-home” tax and penalty free. However, the IRS’s rules are even more lenient for Traditional IRAs. The IRS says the “first-time homebuyer” using your IRA funds for a down payment can be you, your spouse, one of your children, a grandchild, or a parent.

Just be careful about the timing of withdrawing the funds. If the funds are not used for an eligible home expense within 120 days, taxes and penalties will apply.

What are eligible expenses?
Turns out, you can use the funds from your IRA for more than the downpayment; you can also use them for closing costs, financing costs, settlement costs, and construction costs.

So, all in all, it turns out that Uncle Sam does want us to own our own houses after all!

Keep on learning!

Jacob

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Online Money Market Savings Account Applications

In a previous post (see link below), I detailed the reasons why I use online money market savings accounts for my cash saving needs. However, what I didn’t discuss in that post was applications the online money market savings account should be used for.

My Money Blog – Choosing a Bank – Part 2 – Savings Options

I use an online money market savings account for the following three purposes:

1) Accumulating cash for the 5% cash portion of my target asset allocation (this was described in a previous post –  My Money Blog – Index Funds and Current Asset Allocation)
2) Saving for long term spending
3) An emergency cash fund – “saving for a rainy day” (most important)

Note: In my opinion, even though all three of these accounts are with the same bank (Dollarsavingsdirect.com in my case); I believe it works best to have three separate accounts, one for each use above. It is a lot easier to keep an eye on what is going on this way!

Since No. 1 above was already explained in the Asset Allocation post on My Money Blog, let’s investigate the other two uses.

Saving for Long Term Spending
This is the account that is designated as cash needed for future large purchases. Examples could possibly include house down-payments, cars, boats, a wedding ring, vacation, etc.

The key here is to make sure that the money you dedicate to certain future purchases remains dedicated to those items. For example, you wouldn’t want to save for a house down payment for 10 years, and then spend it all on an expensive trip to Paris one summer. See what I mean?

Emergency Cash Fund
This is, hands down, without a doubt, the single most important use of the online money market account. It is also one of the reasons why I wanted my account to be FDIC insured. As my previous post mentions (My Money Blog – Account Hierarchy Order), having an emergency cash fund is the 2nd highest priority on your financial hierarchy list.

Why do you need an emergency fund?
The purpose of this account is to have enough a safety cushion to cover your monthly living expenses in the event that you lose your job or cannot work due to an injury for an extended period.

How much do you need to put in it?
The most widely excepted answer for how much you need in the account is 6-9 months of living expenses. However, there are possible exceptions to this rule. For example, if you are in graduate school and still receiving monetary support from your parents, you could probably get away with less than the 6 month minimum.

However, no one should under any circumstance have an emergency fund with less than 3 months of expenses in it.

Calculating how much you need for the emergency fund is a fairly simple exercise, provided that you are comfortable tabulating your monthly expenses. They are some really handy dandy calculators out there on the internet for this very purpose. One of my favorite ones can be found at the link below:

Calculate Your Emergency Fund Quantity

Once you have calculated how much money you will need, you can use the calculator at the link below to figure out how long it will take you to save/reach your emergency fund total goal:

Bloomberd Calculator – How Long to Reach Emergency Fund Savings Goal

There you go! You are on your way to wisely saving cash! That wasn’t so painful was it? Let me know if you all have any questions.

Keep on learning!

Jacob

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Donating Money to Charity

So far, on this blog, I have spent a lot of time talking about beneficial ways to make and save money. However, another very important piece of the puzzle of financial success is making donations to charitable organizations.

Reasons to donate your money

In my mind, donating my money is perhaps one of the most fulfilling things about HAVING MONEY. It’s fulfilling because I get to decide where to distribute the money so that it will do the most good for what I am interested in.

If the very fact that you get to help out worthwhile causes of your choosing doesn’t appeal to you, let me appeal to your more greedy side. (**Evil laugh**)

In a book I read several years ago by T. Harv Eker titled, “Secrets of the Millionaire Mind,” the author reveals the following characteristic/secret of rich people: Most, if not all of them, donate money to worthwhile causes. He does not delve in to the reasons behind this. However, his main point is that if you want to have the mind of a millionaire, you might as well start donating money NOW to get used to the idea. Quite an interesting concept, and it is one that I definitely took to heart.

Note: click on the Amazon link below to pick up a cheap, used copy of T’s book. Definitely worth the quick read that it is!

How much to donate

In 2001, the average percentage of personal income donated to charity was 1.58% (see article link below). However, in T. Harv Eker’s book, he states that the rich donate approximately 10% of their personal income to charity.

Average Percentage of Income Donated to Charity

My advice to you? If you don’t currently donate money to charity, pick the 1.58% number and start from there. The key takeaway is that donating ANY amount to charity is great!

How to donate

I would recommend either paying by credit card or check. Both of these methods will provide a written record of your payment that can be tracked in case your donation is ever questioned. I personally prefer to donate by credit card because I get cash back when I use my Chase Freedom^SM Credit Card (see link below to cash back credit card post)

My Money Blog – Favorite Cash Back Credit Cards

Finding Worthwhile Charities

There are several easy ways that you can find worthwhile charities to which you can donate money and/or personal property.

Church / Tithing – Tithing is basically donating to a church to help them with their programs, salaries, etc. While I do not personally tithe, I do believe that this a great cause. My parents tithe every week.

Interesting fact I came across –
According to the link below from nj.com, data collected by The Center of Philanthropy at Indiana University has found that 37 percent of churches nationwide saw an increase in donations in 2009 and only 7 percent of churches surveyed were forced to lay off full-time employees, despite the recession conditions.

Church Tithing Statistics

I searched extensively to find the total yearly donation amount to churches nationwide, but I could not find such a number. However, I did find that in New Jersey, the Archdiocese of Newark, which supports 1.5 million Catholics in Bergen, Essex, Hudson and Union Counties raised $9.6 million in 2009.

The Internet – The internet has made it extremely easy to find charities that you are interested in. I use a website called Charity Navigator because it has a great category search feature. Since I am a big fan of health research charities, I just select the Health category at the top of the main screen, and the link below resulted. I can then find all sorts of charities to evaluate!

Charity Navigator Health Charity Category Search

Fundraising Events – This is probably the most common manner that I donate money. I receive many emails each year from my friends requesting funding support for a charity event they are doing. Examples include such events as the Multiple Sclerosis 150 Bike Ride, Walk for Babies, Leukemia and Lymphoma Society Half Marathons, and others. All are great causes that I like!

A great thing about giving money in support of friends doing these events is that they often return the favor by donating money to support me during the fundraiser I do in June each year. An added bonus!

Update on 9-Mar-2010 – I have now registered and gotten my personal donation page updated for this year’s National Multiple Sclerosis 150 Mile Bike ride event. This takes place in June of this year, and proceeds will go to support MS research and support programs.

If you are interested in making a tax-deductible donation, click on the link below!

Donate to Support My Ride to Get Rid of Multiple Sclerosis

Company Matching

By now, you’ve realized the benefits of donating, found a charity, and donated money using your cash-back credit card or a check. What’s the next step? See if you can request a match for your donation from the company you work for!

These days, many private companies have very generous matching programs because they get tax write-off benefits from donating money. You should definitely take advantage of this!

The best way to do this is to call your Human Resources department at the organization you work for, and perform the following steps
• See if the company does donation matching
• If they do, find out if the charity you donated to is eligible for company match.
• If the charity is eligible, fill out the matching donation forms either online or hardcopy, and submit them.
• Be patient. It may take several months to be processed. But, eventually, it will go through, and the charity of your choice will have even more funding! Viola!

How to Deduct Donations On Your Taxes to Lower Your Taxable Income
At a high level, you have two options for deductions to your taxable income.

• You can take the standard deduction, which was $5700 for Single (non-married) individuals in 2009 (see link for standard deduction amounts Standard Deduction Amounts)
• Or, itemize all of your deductions using IRS Form 1040, Schedule A.

Note: You are not eligible to take the standard deduction if you do not meet certain income and other criteria. It also would not be wise to take the standard deduction if your itemized deductions are greater, since itemizing your deductions will result in paying fewer taxes.

If you do decide to itemize your deductions, download a Schedule A form (link can be found below), and fill it out.
Download a Schedule A Form and Itemize Your Donations

For a great, comprehensive list of eligible expenses that you can itemize on your IRA Form 1040, see the link below:
Comprehensive List of Tax Deductible Expenses for Form 1040
Well, I hope this post gets you started on the great exercise of donating your money! Remember, the key is just to get started, even if it is a small amount!

Keep on learning!

Jacob

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Choosing a Bank – Part 2 – Savings Options

Should I choose a regular savings account, money market savings account, money market mutual fund, or CD?

The short answer to this is that, personally, I believe that money market savings accounts are the best option at the current time. To outline my reasoning, let’s take a look at each product individually.

Regular Savings Accounts
• Are FDIC insured.
• Provide flexibility to add and withdraw money, generally as many times as needed
• Many can even have checks written against their balances.
• Typically offer very low interest rates (example – Bank of America’s current return is 0.1%).

CDs
• Locks in your money for a set period of time
• Fees are incurred if you withdraw money before holding period is over
• Typically, CDs have higher minimum balance requirements than other instruments
• Offer a slightly higher national average interest rate of 1.386% with an average minimum deposit of $5,171 (Bank of America’s current 12 month CD interest rate is 0.8%)
• Are FDIC insured

Money Market Mutual Funds
• Not FDIC insured. However, these are considered VERY safe. In fact, no instituation has ever defaulted on a money market mutual fund, to my knoweldge.
• Will have an expense ratio associated with it since it is a mutual fund
• The returns that I have found so far are generally lower. Example – Vanguard’s current 1 year return on its Prime Money Market Fund (symbol – VMMXX – Vanguard Money Market Mutual Funds) is 0.28%.

Money Market Savings Accounts
• Most are FDIC insured.
• No fees or expense ratios.
• Deposits and/or withdraws can be made at any time without penalties.
• High interest rate returns
• Generally do not have check writing ability.

Obviously, as always, you have to pick the correct savings instrument suited to your needs. However, the thing that I would put my money in is the Money Market Savings Account.

To recap, so far, I’ve detailed the pros and cons of different savings instruments. Now, the choice becomes, where do I open the account?

Should I open a money market savings account at an online or brick/mortar bank?

According to the link below, the current average national interest rate for Money Market and Savings Accounts is 0.902%, with a minimum opening balance requirement of $2,108. An initial review of the highest rate search results shows that most of the banks offering the highest rates are online-based. However, let’s dig a little deeper, shall we?

Highest Money Market Savings Account Interest Rates

I wonder how my favorite brick and mortar bank, Bank of America, stacks up against this average. By clicking on the link below, it is pretty apparent that it fails this test. The average interest rate you can earn on a money market savings account is 0.15%. Not good at all!

Bank of America Rates

Now, let’s compare my two favorite online banks (Dollarsavingsdirect.com and Ingdirect.com) to see if their rates are higher, lower, or the same.

Dollarsavingsdirect offers a no fees, $1000 minimum to open, 1.40% interest money market savings account that is FDIC insured. ING Direct offers similar features, with a 1.10% interest rate with no minimum balance requirements. Both of these interest rates are significantly higher than what Bank of America offers.

Dollarsavingsdirect.com
IngDirect (click on the picture below to visit their page)

Note: to receive a $20 bonus for signing up for an INGDirect.com checking account, send me an email at Irwin.jacob@gmail.com with your name and email address, and I can send you a link to use to redeem your money.

From this comparison, it looks like online banks are the way to go for your money market savings account needs. This is provided that you are all right with limited-to-no face to face interaction with your online bank.

Key Takeaways

So, what’s the bottom line here? We have learned that online money market savings accounts typically offer higher returns than the other savings options.

I hope this helps get you on the road to saving your cash more effectively! Please let me know if you have any questions. Also, keep an eye out for a post coming soon about the reasons why you need an emergency cash fund available and the proper amount to place in it.

To view Part 3 of this series, click on the link below.

Choosing a Bank Part 3 – Savings Accounts vs. Checking Accounts

Build Your Credit Score From Nothing – Part 4

How to Review Your Credit Report
The key here is to look for anything that is inaccurate or that might indicate identity fraud.

• Ensure that all of your accounts are in “Satisfactory Account” status. If they are not, review those and make sure you agree and can remember the reason stated for the account not being satisfactory.
• Review the past due amounts on loans and credit cards you have to make sure they are accurate.
• Review the inquiries that were made to your credit report and ensure that no unauthorized access occurred.
• Monitor the “closed accounts” section of your report. Frequent closing of accounts can negatively impact your credit score.

Well, that’s all! You did it! You built your credit score and are on the road to maintaining it for life! Congrats!

If any one has any questions about any of these credit building methods, feel free to post them to get some conversation going. It has been a pleasure delivering these techniques to you.

What’s Your College Degree Worth?

One of the most daunting tasks upon teenagers entering college (and their parents I suppose) is deciding which degree/career to pursue.

For the most part, I feel that there is already enough advice on this topic floating around the internet and college campuses. It is well know that students should pick a degree/career that is 1) something they will enjoy and 2) something that will provide value to society. It is also known that there are certain careers/degrees that pay more than others (see links below).

Useful links
2009 Highest Earning Degrees
CNBC 2010 Highest Earning Degrees

However, what I do NOT see nearly enough of is guidance on the financial ramifications of the fact that in the real world, multiple types of degrees can perform similar and/or the same job. This idea was never really brought up to me as I was going through school.

To shed light on what I am referring to, let’s look at an example.

As it says at the top of my blog, I work in the pharmeceutical industry. In my current position, I work with a mix of biomedical engineers, chemical engineers, electrical engineers, and civil engineers. Interesting mix eh for people performing a similar job?

Looking at the “2009 Highest Earning Degrees” link above, we can find the highest and lowest average starting salaries for these degrees:

• Biomedical Engineering – $54,158
• Chemical Engineering – $64,902

Imaginary Scenario
Let’s now assume that two engineers graduate with the degrees above at age 22. They work until they are age 65, earning a 10% raise every year (they are STELLAR workers). Each year, the engineers contribute 15% of their salary to their retirement accounts.

Assuming the standard return of 12.4% on these contributions and that the above pattern continues, the engineers have the following amounts at retirement:

• Biomedical Engineer – $31,190,995.64
• Chemical Engineer –  $37,378,743.66

As you can see, this results in a difference of about $6 MM.

Key Takeaways
Basically, I am trying to stress the point that obtaining a certain degree doesn’t restrict you to single job. And, to that same end, if there is a similar field (that you could still enjoy learning about) that will end up paying more money, it is at least worth considering!

Keep on learning!

Jacob

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2000 Site Visitors!!!!

Choosing a Bank – Part 1 – Local vs. National

• Easy account access if you move. This was probably the biggest factor in my decision to choose Bank of America for my main checking account. They have branches all across the US, and if you have been moving as frequently as I have the past couple of years, it makes life a lot easier to not change banks.
• Easy account access on vacations within the US. National banks also have affiliations with foreign banks to avoid ATM fees when you are abroad. This comes in very useful if you are traveling out of the country!
• A top notch online banking system backed by a team of computer network geniuses.
• Money is safe and FDIC insured.

• Less personal service.
• Expect to be encouraged to use the ATM for deposits and withdraws, and be discouraged to go inside to the tellers unless you have a special circumstance.

• Super personal service. Many local banks even know you by name when you walk in the door.
• More likely to take a chance on you if your credit history is only “so-so” for loans. This is done because it is important for their future business to retain you as a customer.
• More likely to give you a personal loan to build your credit. See previous post on that topic at the following link: Part 3 – Build Your Credit History From Nothing
• Money is safe and FDIC insured.

• Essentially the opposite of the pros of national banks shown above. You will have to change banks when you move if you have your account with a local bank.
• You will not have your local bank’s ATMs available when you go on vacation. This could result in ATM usage fees at other banks if cash is needed in a pinch. However, local banks are catching on to this gap these days, and are setting up aggreements with other banks that allows you to avoid this ATM usage fee. Stay tuned for a future post about that topic!

• Relating to interest rates on savings accounts, unfortuantely, there is no clear winner here. According to this link Bank Rate Comparison of Savings Interest Rates, the highest interest rates in the country come from a mixuture of local and national banks.
• The verdict is also still out on where to go for the lowest interest rate on a home equity loan. The key here is to shop around as much as you can to compare the rates of different loans that met your specific criteria. For example, I performed an interest rate search on bankrate.com (see the following link Charlottesville, VA home loan rate search) to get a feel for the lowest interest rates available in the area. Then, no matter if you are working with a local bank, national bank, or mortgage broker, you would want to make sure you are getting a comparitive deal. It is also important to keep in mind that you do not have to get your home equity mortgage from the same place your checking and savings accounts are, although you sometimes can benefits from combining accounts under one institution.

What Taxes Do You Have to Pay As A Graduate Student?

Are assistantship stipends taxable?
The simple answer to this is YES. They are reported to the IRS as taxable income. However, depending on the state, the rules change slightly.

For example, in Virginia (see grads.vt.edu link below), federal and state withholding taxes will be taken out of each paycheck. International students are subject to different rate schedules and filing procedures unless specifically exempted by a tax treaty.

On the other hand, at the University of Pennsylvania, full time graduate students in engineering departments are considered Research Fellows. Their stipend is subject to Federal income tax, but not Pennsylvania personal income tax. One-half of the stipend is also subject to City of Philadelphia wage tax. In addition, as a full-time graduate student a Research Fellow’s stipend is exempt from FICA/Medicare tax. (see finance.upenn.edu link below)

Furthermore, in North Carolina, ful time graduate students on assistantships are subject to federal and state withholding taxes, but are exempt from FICA taxes (see acs.ncsu.edu link below).

Useful Links

In looking at the IRS.gov website below, it is pretty definitive what the answer to this is — You can deduct the follow things:

• Tuition and fees required for enrollment or attendance; and
• Fees, books, supplies, and equipment required for courses.

***You cannot exclude any part of a scholarship used for room and board expenses. (Dang!!!)

http://www.irs.gov/individuals/students/article/0,,id=96674,00.html
http://www.grads.vt.edu/financial/taxes.html

As you might have figured out by now, since in most engineering and science programs, almost all of your student experiences are fully taken care of by the department, it looks like there won’t be much tax deducting on major expenditures. However, if you are in a program where you are paying for everything yourself, remember to deduct the items above from your income at tax time in April.

Keep on learning!

Review of Amazon Prime Program

Saturday Greetings to Everyone!

I have received several requests recently to investigate and discuss Amazon.com Amazon Prime Program. To tell you the truth, before doing a detailed investigation in to what this program offers, I didn’t think too much of it. I thought it was just another way for me to pay Amazon $80 all at once for a new program.

However, after looking over my current shopping pattern at Amazon and what the program offers, I immediately realized that I needed to sign up for this. There are two ways that I wanted to explain this program to everyone, so I’ll detail those one at a time in a moment.

First, let’s take a look at what the Amazon Prime Membership gives you.

• Unlimited FREE 2-day shipping
• The ability to upgrade to one-day shipping for only $3.99 for domestic US purchase destinations
• No minimum order size.
• You can even share your membership with someone else in your household (they just have to know your birthday).

Start Your FREE Three Month Amazon Prime Trial

How Many Purchases Would I have to Make to Recover My Investment of $79?
2) As you all might have guessed, I am an avid Amazon user/buyer. You simply cannot beat the prices and the ease of finding things on the site.

So, here’s the approach I took at determining if this program is right for me. I went on the Amazon website, and in my buying history, I found that I bought 20 items in the past year on Amazon.

The total I paid for shipping for all of these items was $101. Wow!! That’s a lot more than I would have thought!

So, for me, the next thing I proceeded to do was start my free trial. I’m going to evaluate if I like it or not, and then decide to keep it after the 3 month period.

How should you proceed? I would do the following: 1) Sign up for the trial – there’s nothing to lose 2) After that, go through your Amazon account, evaluate how many items you bought over a year’s time, add up the total shipping, and see if that comes in over $79 per year.

Click Here to Start Your FREE Trial of Amazon Prime

Keep on learning!

Jacob

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