Winter Driving Tips

Winter time has come once again to us in the Northern Hemisphere!  All that snow may look pretty from the comfort of your home, but now is as good a time as any to remind you that driving in the stuff can be dangerous if you don’t take precautions.

There are a lot of ways you can prevent (or significantly decrease your chances of) getting into an accident in the winter, which includes the following steps:

• When accelerating or decelerating, do so slowly. No need to step on the gas or the breaks hard in the winter—if you do, you’ll be much more likely to skid out of control.
• Keep your following distance longer than you would on dry roads. You should increase the distance between you and the car in front of you to 8-10 seconds, instead of the usual 3-4 seconds on dry roads.
• Try to avoid powering up a hill. Stepping on the gas hard to get up a hill can cause skidding/slipping in the snow, so getting a little inertia going before you hit the hill so you have a “running start” would be better.
• Don’t stop going up a hill. Once you stop on the uphill in the snow/ice, it’ll be very tough to get going again without skidding/slipping.

What happens to your insurance if you do get in an accident because of snowy weather?

Hopefully, it never happens to you, but let’s say you do get into an accident during a snowstorm or other bad winter weather.  Say you’re coming up to a stop light but because of the snowy weather you skid into the car waiting just in front of you.  Is it your fault?  Or the weather’s fault?  How will your insurance be affected?

Well, unfortunately, there is almost always someone at fault, and it’s almost always not the weather.  According to most auto insurance companies, it is the driver’s responsibility to adjust his/her driving to avoid an accident in inclement weather, and if you do happen to skid into another car, it’s likely your fault since you should have known to take steps X, Y, and Z to avoid it in the first place.

If you are deemed at-fault in the accident, you can always fight the ruling, though simply citing the weather as the culprit likely won’t get you very far.

Depending upon your particular insurance, your premiums could go up after the accident, leaving you to not only pay for the damages done but also more out of pocket every month as a result.

The best thing you can do to avoid getting into an accident and having your insurance premiums go up is to follow safe winter driving practices and learn all you can about adjusting your driving habits when you go out in the snow.  Ideally, if you are able to just stay put instead of driving that would be the best thing, but if you have to drive in the snow, learn how to do so safely to avoid an accident.

Two Important Strategies for Successfully Earning (and Living) on Just One Income

The following post is by MPFJ staff writer, Melissa Batai.  Melissa is a freelance writer who covers topics ranging from personal finance to business to organics to food.  She blogs at Mom’s Plans where she shares her family’s journey to healthier living and paying down debt.

From the time I was little, I knew I wanted to stay home and raise my kids when I eventually had them. But life doesn’t always turn out the way we plan.

Instead, when our first child was born, I was working full-time while my husband worked part-time and attended graduate school full-time. It would take another long six years and two more children before I was able to realize my dream of being a stay-at-home mom.

But, like so many people who drastically cut their salaries when one parent decides to become a stay-at-home parent, my husband and I didn’t change our lifestyle. We still lived as if we had my good full-time salary and his part-time salary. We had lost at least 50% of our old income, but we spent like we hadn’t lost any income.

We continued to pay for our oldest child’s last year of private school, we went out to eat, we had cable, I bought adorable outfits for the babies (on sale and with a coupon, but still, we didn’t have the money for them).

In the first 18 months after I quit my job, we racked up so much debt, we’re still paying it down. (Though to be fair, that amount does include my husband’s student loans during that time.)

Here’s the simple truth—if you want to have one person become the stay-at-home parent, you have to learn to live on one income. The sooner you do this (even while both partners are still employed) the better.)

I don’t have a time machine to go back and change those early years of living on one income (though I wish I did!). However, we’ve now been primarily a one-income family for five years, and we’ve learned to live within our means. Better late than never.

If you’re new to learning to live on one income, successfully doing so depends on two factors.

Finding Contentment

Like I did for so many years, you may dream of being a stay-at-home parent. Then, once it happens, you might find yourself fighting discontentment.

At first, I found myself a bit bored staying home all day. I tempered that boredom by spending. No, I didn’t go out on a clothing spree or anything like that, but I went to the grocery store too often so I’d have something to do.

I also found myself a bit disgruntled at our lower income. I’ll be honest here—I was spoiled. I wanted the privilege of staying home with my kids without the sacrifice of losing my income. I wanted to stay home, but I didn’t want to change my lifestyle.

What I should have done then, and what I try to do now, is find contentment in my situation. Many, many parents want to stay home with their children but don’t have the opportunity to do so. I am lucky.

Over the years, as I’ve practiced contentment, I’ve learned to appreciate things that would have bothered me when I worked and we had a higher income. For instance, our minivan is 11 years old, has 160,000+ miles on it, and has a broken back door handle on one side and a broken coil on the other back sliding door. I can’t get the kids in the car unless I open up the driver’s side door and reach behind and open the back door from the inside.

Is this embarrassing? Yes. And a few years ago, I would have just focused on how old and decrepit the car is. Now, I’m grateful that the car is paid for and that it still runs and gets us around town.

Gratitude can make all of the difference in how you feel about staying home and living on a limited budget.

Be Frugal and Know that You Can Always Cut More

While we weren’t frugal the first 18 months after I quit my job, we had to rein in our spending when the debt started accruing.

We now do many frugal activities that we should have started five years ago:

• We air dry clothes instead of drying them in the dryer,
• We go out to eat for birthdays only,
• We cook at home,
• We don’t buy convenience foods,
• We buy secondhand clothes and homeschool materials,
• We drive an 11 year old paid for vehicle with 160,000 miles on it,
• We only have one car,
• We buy groceries that are on sale and plan meals around those items (rather than buying what we think sounds good for the week)
• We have flip phones instead of smart phones which we use only in emergencies.

Living this way has allowed us to avoid accruing any new debt and to make headway paying off debt we have.

Yet, we don’t have a lot of wiggle room in our budget, and we want to buy a new-to-us car without taking out a loan. I started searching for ways to cut our lifestyle even further, when it occurred to me. We should live like we’re in the 1950s.

The 1950s—Living on One Income, without Debt

Why the 1950s? That is probably the last era when one-income households were common. Families then had relatively little debt outside of their mortgages. Credit cards weren’t frequently used.

While we may romanticize that time in history, the lifestyle back then was much different than we are accustomed to now. Consider what life was like for a family of four or five in the 1950s:

• They lived in a house that was likely less than 1,000 square feet. They all usually shared one bathroom, and if there were three children in the family, at least two of them shared a room through their entire childhood.
• There were no cell phones.
• There was no Internet or cable television (or even televisions period for much of the 1950s).
• Vacations, if taken, were usually within the family’s home state or within the United States. Elaborate trips to Disney or Europe or any other expensive destination was rare.
• Two-car families were unusual.
• Long commutes were unlikely. Many families lived close to where the family breadwinner worked.
• Families rarely ate at restaurants.
• Parents cooked at home with natural ingredients and did not have convenience foods to rely on.

Wow. Looking at this list, life in the 1950s doesn’t seem so romantic. Can you imagine life without your cell phone or the Internet?

Probably not.

Some things we have now like the Internet are necessary to function in modern life. Still, most of us could look at this list and find ways to scale back.

When I really researched how people used to live even just sixty to seventy years ago, I once again realized how truly blessed we are.

Rather than feeling sorry for myself because we bought a house that need cosmetic fixes that we haven’t been able to afford to make yet, I find myself grateful that we not only have a house but one that is 1.5x bigger than the houses most families had in the 1950s.

Many houses back then didn’t have central air. How lucky we are to have that.

There are many conveniences and luxuries that we have today that people even just a decade or two ago didn’t have. We all need to take the time to realize how much we do have, even when it feels like we don’t have enough.

If you want to stay home and successfully live on one income, take the time to realize how truly lucky you are and understand that your lifestyle will likely not match the neighbors’ who have both spouses working full-time. That’s okay. You just made a different choice.

How about you all? Do you or your partner stay home with the kids? If so, how did you adjust to the difference in income and lifestyle compared to what you were used to or wanted?

Share your experiences by commenting below!

***Photo courtesy https://pixabay.com/en/happiness-kids-mom-sye-987394/

Make These Moves Now To Lower 2015 Income Taxes

The following is a post by MPFJ staff writer, Toi Williams, who is a professional personal finance blogger of Fine Tuned Finances. She has backgrounds in personal finance, sales, and real estate.

As the year draws to a close, there are still many opportunities available to lower 2015 income taxes. Taking these steps before the end of the year has the potential to lower your tax bill by hundreds or thousands of dollars, depending on your income. It is important to act fast since once the year is over, it will be too late to do much about your tax bill. Fortunately, there are no significant tax changes looming as 2015 winds down that could trip you up.

Here are some effective ways to lower 2015 income taxes before the end of the year.

Boost Retirement Plan Contributions

If you haven’t maxed out contributions to your 401(k) or 403(b) retirement plan, consider doing so before year-end to lower your taxable income. The maximum amount of money you can sock away in these plans this year is $18,000. If you are not already contributing to a workplace retirement plan, you may be able to reduce your 2015 income taxes considerably if you set up a 401(k) plan through your employer by December 31.

Minimize Adjusted Gross Income

Make your adjusted gross income for 2015 as low as possible by making pretax contributions to health, dependent-care or retirement plans. The 3.8 percent surtax on net investment income and the 0.9 percent Medicare surtax typically only applies when the adjusted gross income of a married couple exceeds $250,000 (or $200,000 for a single filer). Itemized deductions on Schedule A, such as for mortgage interest or charitable gifts, generally cannot be used to lower your adjusted gross income because these write-offs are taken after your adjusted gross income is calculated.

Maximize Your Deductions

You can lower 2015 income taxes considerably by taking everything that you can as an expense and making sure that deductible payments are made by the end of the year. Qualified expenses may include payments for rent, mortgage payments, phone bill payments, and car payments. If you pay your January 2016 mortgage bill in December, you can deduct that mortgage interest on your 2015 income taxes. Second mortgages, home equity loans and lines of credit can also be used for deductions, but those deductions are limited and depend on a number of factors

Don’t Neglect These Medical Deductions

Many people are surprised by the number of medical deductions allowed by the IRS. You are currently allowed to deduct unreimbursed medical costs that exceed 10 percent of your adjusted gross income (or that exceeds 7.5 percent for people 65 and older). In addition to doctor’s bills, hospital charges, and expenses for prescribed medical devices, you can also deduct a portion of assisted-living expenses, most skilled-nursing-home costs, and certain expenses for special education. IRS Publication 502 has the full list of qualified medical expenses.

Split Large Taxable Gains

Large taxable gains have the potential to raise your adjusted gross income into phase-out or surtax territory. You can split large taxable gains over two years by selling or donating shares this year. The resulting savings could be considerable for investors facing this choice.

Offset Capital Gains With Capital Losses

Tax-loss harvesting involves selling securities in your portfolio at a loss to offset capitals gains, thereby lessening or eliminating that tax burden. Before the end of the year, examine your taxable accounts for gains and losses that can be used to offset each other. Taxpayers are allowed to use realized capital losses to offset realized capital gains, plus $3,000 of ordinary income such as wages, annually. Taxpayers are also allowed to carry forward unused losses for use in the future.

Make Charitable Donations

You can lower 2015 income taxes by making charitable donations by year-end. These charitable donations can be in cash, in property, or in stock, according to current IRS rules. Donors who make a charitable donation of stock often get a deduction for the full market value of the shares while avoiding tax on capital gains.

Make A Tax Free Gift

Each taxpayer is allowed to make tax-free transfers of up to $14,000 annually to recipients. One partner of a married couple can make $28,000 in tax free gifts if the other partner doesn’t make any. Givers can typically take the full deduction for the gift in the year it is made. If the gift is made to a qualified 529 college-savings account, federal law allows givers to bundle five years of annual $14,000 gifts, or $70,000, in a single year.

Pay Estimated Taxes Before Year End

If your taxes aren’t withheld through payroll and you are paying estimated taxes, which are due each quarter, falling behind can result in interest charges and penalties. If you settle your tax debt in the last quarter of the year using IRA distributions, you can avoid paying any additional fees.

One Last Note:

If your taxes are complicated, you can benefit from talking to a tax professional who knows what they’re doing. These tax professionals can help you develop a strategy that fits with your overall financial plan while helping you lower 2015 income taxes. It is important to use someone who is familiar with the tax laws in your state, as state tax laws can vary considerably. Choose someone that comes highly recommended and who won’t charge you an arm and a leg for their advice.

How about you all? Have you tried any of these items and have been successful in lowering your income taxes? Do you have other tricks that have worked in the past?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/86530412@N02/8266136492

Advice For Investing In Bitcoin: 4 Tips

The following is a guest post. Enjoy! 

The purchase and storage of Bitcoin has become a major factor for investors who manage their own accounts online. Despite widespread skepticism as to the digital currency’s place in the future, its persistent relevance is beginning to speak for itself. Bitcoin may or may not become the mainstream currency alternative advocates have long predicted it to be, but it is already a significant investable resource poised to gain greater influence in the years ahead.

However, as a relatively new concept traded digitally and operating with an uncertain future, Bitcoin poses unique challenges to investors. So here are four of the best tips I’ve gathered for how to handle investment in the crypto-currency.

Treat Bitcoin As A Long-Term Play

I would argue that this is the most significant tip to keep in mind if you are considering adding a stash of Bitcoin to your portfolio. Said famed billionaire investor Reid Hoffman on the topic, “When I invest, I think, ‘What is the way the world should be and is this investment part of that end?’…. So that’s minimum five years. When it comes to Bitcoin, that’s the framework that I think about it in.” This quote was part an Entrepreneur feature in which Hoffman was interviewed about his interest in Bitcoin. While the advice was meant in a more general sense, it’s a very important concept to keep in mind with regard to Bitcoin. This is one investment in which day-to-day fluctuations should not be a major concern, because you’re in it for the long-term.

Prepare For Volatile Fluctuation

As an add-on to the initial point about looking at Bitcoin as a long-term play, anyone looking to invest in the crypto-currency should be prepared for volatile fluctuations in day-to-day prices. As explained in an article on the history of Bitcoin, “Because Bitcoin is still a relatively small market in comparison with existing models, the market price of Bitcoins may go up or down in response to relatively insignificant amounts of money … This means that fluctuations in the price of Bitcoin can be quite volatile.” Simply put, Bitcoin is still small enough to be significantly affected by major purchases or sales, and investors should understand this and not be alarmed.

Don’t Predict – Analyze

This is actually a tip I’m borrowing from a Financial post featuring their five favorite quotes about investment. Specifically, the tip came from Ben Graham: “The individual investor should act consistently as an investor and not as a speculator.” In other words, act based on facts and real analysis, rather than predictions, hopes, or hunches. This is important advice regarding any sort of investment, but it is particularly significant with regard to something like Bitcoin, which is still in its infancy and attached to a great deal of passion and lofty expectations. There are fewer facts and pieces of genuine data available when dealing with a new or young resource, and investors must take care to heed real information.

Research Platform Potential

Regarding actual data that can be useful in making decisions about Bitcoin investment, consider the potential of the crypto-currency as a foundation for additional platforms. Venturebeat addressed this idea in an article encouraging readers to consider Bitcoin, specifically with regard to the common comparison of the currency to digital payment service PayPal. “Bitcoin can be used for this service,” the article acknowledged, “but it can also implement new and innovative financial services. The protocol allows for a significant degree of programmability…”

In other words, don’t think of Bitcoin solely as a currency or payment service, but as a technology with multiple potential applications that have not yet been realized. As additional platforms are created and new services and companies take advantage of Bitcoin, the currency itself will gain value. So, when investing, look to concrete data about emerging platforms and functionality for indications of performance.

Like any other financial transaction, investing in Bitcoin is a personal decision, and must be approached with regard to each individual’s particular situation. But for those considering a move in this sector, these bits of advice can help to clarify the market.

7 Ways to Maintain the Value of Your Car

The following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

Even if you aren’t a car buff, you have a vested financial interest in maintaining the value of your car. At a minimum, you’ll need to either trade it in or sell it to provide at least part of the down payment on the next car that you will buy. You will want to keep the car in top shape, so that it will command its maximum value.

Age, condition, options, and mileage all figure significantly in determining the resale value of your car. You can even check how much impact each will have on your car’s value on websites such as Kelly Blue Book and Edmunds.com. You can run different value scenarios on either site to determine the value of your car, whether for trade-in or for sale to a private party.

With that in mind, here are seven ways to maintain the value of your car.

1. Keep to the Recommended Maintenance Schedule – and Keep Records

Your car owner’s manual should have a maintenance schedule, that will let you know when it’s time to change the oil, change the filters, have the brakes checked, and perform more serious maintenance. You should follow the schedule closely. Not only will it keep your engine running more smoothly, but it will prevent more severe repairs that can result from neglect.

In addition, the better the car runs, the more resale value it will have, particularly if it is more than a few years old. You should also keep a file with all of your maintenance records. A prospective buyer would be interested to know that the car has been well cared for.

2. Fix Whatever Is Broken as Soon as Possible

One of the unfortunate realities of automobile ownership is that problems don’t get better with age. Little problems can become big problems, and big problems can also have a negative effect on other systems in your car.

For that reason, fix whatever is broken as soon as possible. That will prevent the domino effect of car repairs that often causes the owner to sell the vehicle prematurely.

3. A Little Wash and Wax Goes a Long Way – And So Does Periodic Detailing

The appearance of your car will have a major impact on its resale value. All other things being equal, the prettier car will sell faster and for more money.

Much as is the case with buying a home, buying a car is largely an emotional decision. A person might make the choice to buy your car just because it has more curb appeal.

In order to have that curve appeal, it’s important to keep up appearances with your car throughout the time that you own it. Have the car washed and waxed regularly, so that with the paint job will get maximum protection from the elements. And having the car fully detailed at least once or twice per year will help prevent discoloration, wear and tear, and the accumulation of dirt that could make a car look a lot older than it really is.

And here’s another bit of maintenance advice I was given by a mechanic – if you live in a area that gets a lot of snowfall, have the undercarriage of the car washed a couple of times a year. Road salt can corrode the undercarriage in a few short years, causing serious damage.

4. Keep Your Mileage to a Minimum

In some cases, mileage plays a bigger role in the resale value of your car than the age does. For example, a 10-year-old car with 80,000 miles on it may have more market value than a seven-year-old car with 120,000 miles.

This creates a compelling reason to keep your mileage to a minimum. The average driver will drive between 10,000 and 15,000 miles per year. To the degree that your vehicle reflects higher usage, the value will drop according.

Get in the habit of consolidating trips, alternating vehicles, renting a car for long trips, and keeping casual cruising to a minimum. All of these habits can chop a couple thousand miles per year off your odometer. And that will make a big difference when it comes time to sell the car.

5. Drive It Easy

Cars have an uncomfortable habit of reflecting their owner’s driving patterns. Drive a car hard, and it will look the part. Drive it easy, and it will reflect more gentle ownership.

Let’s face it, not only does hard-driving cause parts and systems to wear out more quickly, but it often result in more dents, dings, cracks and scratches too.

Do your best to drive within speed limits, go easy on your brakes, and be careful where you park your car. All can have an impact on how well your car ages. You want to make sure that happens gracefully.

6. Give Your Car Periodic Facelifts

Maybe once a year, take a stroll around your car, and look at it as if you were going to buy it. Are there scratches or dents? Worn carpet or seats? Do the speaker buzz when the radio is on? Are the wheel covers cracked? Are any light bulbs out?

None of these items may bother you as the owner of the car. After all, none affect the driveability of the vehicle. But a buyer will look at each of those, and give them exaggerated importance. As the saying goes you are what you drive, and no one wants to think of themselves as tired and worn out, as reflected by the car they own.

Do this critical inspection once a year, and fix those small items that will likely infuriate a potential buyer. By doing it periodically, you can minimize the cost. But if you wait until just before you’re going to sell the car, it could cost hundreds more.

7. Use Your Garage for it’s Intended Purpose

I don’t have any hard and fast numbers here, nor do I know if a poll has ever been taken on this issue, but I’d be willing to bet that at least 50% of the people who have garages use them for some purpose other than storing their vehicles. Extra storage space is a common usage, as is a play area for children, or even use as a workshop. Some people even convert the garage into extra living space, which real estate agents always advise is a bad move (but that is a topic for another article!).

But if you have a garage, and you still park the car in the driveway or on the street, you are exposing it to the elements. That means scorching sunshine, whipping winds, rain, snow, hail, and even falling branches. At a minimum, that kind of exposure will gradually dull the paint job on the car. Worst-case scenario, it can result in very noticeable damage that will hurt the value of the car.

If you’re fortunate enough to have a garage, by all means, park your car in it. It’s a completely passive way to improve the value of your car.

Maintaining the value of your car is an ongoing activity. Put these strategies into use as early in your car’s life as possible. It will pay off in the end in the form of a higher resale value.

How about you all? Do you have another tip for maintaining the value of your car? What do you do to keep with the upkeep of your car?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/greggjerdingen/14924958287/

4 Reasons A Line Of Credit Is NOT A Good Emergency Fund

The following post is by MPFJ staff writer Travis, who blogs at Enemy of Debt where he candidly shares his family’s financial struggles, failures and successes. As a father and husband, he provides a unique perspective on balancing debt, finances, and family.

The subject line on the email read, “Be prepared for the unexpected.” The email from my bank was a solicitation for a line of credit. The email tried to convince me to click on the link to the online application by describing the line of credit as a way to be prepared for all those little unexpected things life throws your way.   What my bank was suggesting is that I use a line of credit as my emergency fund.

Having a line of credit for an emergency fund is a terrible idea for several reasons:

1. Used For More Than Unexpected Expenses

The marketing material claims that the bank is trying to help its customers be prepared for the unexpected with a line of credit.  I think it’s fairly obvious that they have a different motivation behind the product for a couple of different reasons:

• Credit Limit: The standard statement is that a $1000 emergency fund will handle 90% of all unexpected expenses.  The credit limit range for the offered line of credit is $3000 to $100,000.  Except for a medical crisis, I can’t think of a single unexpected expense that would cost $100,000.  Even in that case, I certainly wouldn’t be using a line of credit with a high interest rate to pay for it.

• Profitability : Banks make their money from customers paying interest when they carry a balance from month to month.  Unexpected expenses are by definition infrequent.  If the line of credit was truly meant to be a simply for unexpected expenses, use of the account would be infrequent, and most of the time be for a relatively small amount of money that could hopefully be paid off quickly.  These scenarios would not be a big money maker for the bank.

My bank is trying to get me to apply for a line of credit hoping I’ll use it for much more than the occasional unexpected expense.  With a potentially large line of credit, they’re hoping I use it for everyday use or for things much more grand such as home renovations or vacations.

2. Promotes Financial Laziness

A person building up an emergency fund must exhibit two very important financial behaviors:

• Regulate Spending : A emergency fund can only be built if a person spends less than the amount of money left over after paying all bills.  This is best accomplished through paying yourself first.  Or in other words, making savings a part of your required budget, ensuring that money is directed towards savings from each and every paycheck.

• Emergency Funds Are Off limits : Once a significant amount of money has been built up in an emergency fund, there is a temptation to use it to buy something instead.  To be fully prepared for an unexpected expense, a person has to practice financial self control to not touch those funds.

Depending on a line of credit as an emergency fund when a financial crisis arises requires neither of these behaviors.  It allows a person to spend every penny they have with reckless abandon.  It allows a person to live without planning financially for the future, with the perspective of dealing with any unexpected expenses if and when they arise.

3. Extends The Crisis

If a fully funded emergency fund is in place, not only can the unexpected expense be paid in full,  but the structure is already in place in that person’s financial behavior to begin to rebuild it.  The unexpected expense is taken care of, and a financial crisis is avoided.

A person with a line of credit for an emergency fund has not practiced the planning and self-control needed to build an emergency fund for unexpected expenses.  The expense is financed using the line of credit. They now have the difficult task of reducing their lifestyle to make line of credit payments for an indeterminate amount of time.  If only the minimum payment is made each month, it could take years to put the financial crisis fully behind them

4. Increases Cost Of The Crisis

Currently, most personal lines of credit have an interest rate of 10 to 12 percent.  Interest will start to accumulate immediately, increasing the overall cost of the financial crisis each month it takes to pay off the line of credit.  If at any time a payment is missed or late, the interest rate will likely be increased causing the cost of the unexpected expense to grow even more.

It really comes down to how a person wants to handle unexpected expenses.  A person can either be proactive, or reactive.  Using a line of credit as an emergency fund falls under the category of being reactive.  Such a methodology trades financial responsibility now, for budgetary and financial turmoil when an actual unexpected expense happens later.

How about you all? Do you have a line of credit as your emergency fund?

Share your experiences by commenting below! 

***Image courtesy of Stuart Miles at FreeDigitalPhotos.net

A Review of My 2014 Income Tax Results and 2015 Tax Planning

The past year has been quite a whirlwind. I finished my PhD program in Virginia, got married, went on an awesome honeymoon to Belize (great place to go by the way!), did the post-PhD job search/interview process, moved to Colorado to start the post-PhD job, bought a house in Colorado, and now have our first child on the way (due January 12th, his name is Alex – see picture below!).

Anyhow, all of that is to say that I am a bit behind on getting this post out. Normally, I do this post in around the April-May time-frame, but better late than never, right?!

In general, the results of filing my wife and my [married filing jointly] 2014 taxes were very good, as I felt like we leveraged the tax code to the best of our ability in order to maximize wealth. As has become my habit over the past few years, I feel that by analyzing some of the finer details/numbers, I can better plan for how to approach my tax planning for the 2015 and beyond year.

2014 Income Breakdown

Our combined total 2014 gross income can be broken down in to the following components:

• 47% from W2-reported wages / income.
• 8% from dividends, capital gains, and interest from investments.
• 25% from untaxed fellowship/wage income for my work as a graduate student.
• 20% from Schedule C self-employed business income.

2014 Deductions

Since the married-filing-jointly standard deduction was greater than our itemized deductions, we took the standard deduction of $12,400 for 2014.

After subtracting the 2 personal exemptions we get for myself and my wife (with no kids, filing jointly), we arrived at a taxable income that was only 68% of our original/total gross income that we started with.

2014 Federal Taxes

Having established our taxable income, our total personal federal taxes were computed. Next, self-employment taxes were added on top of the personal taxes.

This resulted in our total Federal taxes owed for 2014 being ~11% of our overall/total gross income.Nice! I am surprised this percentage is so low!

If we calculate this based on our AGI or taxable income, the percentages become 11% and 16%, respectively.

2014 State Taxes

Since we lived in Virginia January-November and then Colorado during December, we got to pay state taxes in two states for the respective portions of the year.

Our 2014 total state (combined for Virginia and Colorado) taxes owed was calculated to be 4% of my overall/total gross income. If we calculate this based on my federal AGI or federal taxable income, the percentages become 5% and 6%, respectively.

2014 Total (State + Federal) Taxes

If we put everything together from both state and federal taxes, we can find something useful for planning purposes going forward:

• We paid a total tax amount for 2014 equal to 15% of our overall/total gross income.
• Our marginal tax bracket was 15%.

2014 Taxes Owed / Tax Refunds Received

When everything was said and done, we unfortunately had overpaid quite significantly in taxes during the 2014 year. As a result, we received almost a $3,000 in federal tax refund, $800 in a Virginia state tax refund, and we owed $93 for Colorado state tax (since we underpaid slightly).

The primary root cause for the overpayment in federal taxes was paying too much quarterly estimated taxes for my self employment income. This was due to my self employed income dropping in 2014 compared to 2013, and my 2013 taxes owed still being used as the basis for calculating 2014 taxes.

2015 Estimated Taxes – Prospective Planning

One of the nice things that my accountant does do for me each year is to calculate/prepare my estimated taxes for the following tax year (so 2014 was prepared during the 2013 tax preparation round).

Due to our significant overpayment in both state and federal taxes in 2014, our accountant advised us in April 2015 that we did not need to pay quarterly estimated tax payments for our self-employed income for 2015. He did, however, recommend that if we were “having a banner year” and earning much more self employed income than previous years, that I would need to look in to increasing my tax withholding from my post-grad school W2 income.

2015 Estimated Taxes – How It Actually Happened

So, now let’s fast forward 6 months to October 1st, 2015. This is the day I had marked on my calendar to assess our self-employed income and my regular W2 income and tax withholding year-to-date to determine if we were paying enough taxes (since the accountant advised that we didn’t need to send quarterly estimated taxes for 2015).

I proceed to add up my projected W2 income, our combined self-employed income, taxable interest, ordinary dividends, and capital gains. I then subtracted out the deductible part of self employed income taxes, student loan interest deductions, the standard married filing jointly deduction, and our two personal exemptions.

Upon arriving at our approximate taxable income and taxes owed, I was quite surprised to find out that, without changes/intervention, we were en route to be $8-10k behind in federal taxes owed for 2015 (state taxes owed were on track). As this is greater than 10% of our total taxes owed for 2015, an underpayment penalty would apply come April 2016 when we file our 2015 tax return.

Clearly, some drastic changes were needed to correct this. As such, since October, our main focus financially has been to 1) increase the amount of taxes withheld from my regular W2 income and 2) decrease our taxable income to as close as we can possibly get to the 15% marginal tax bracket level.

Specifically, listed below are the actions we took starting in October:

• Dropped the number of exemptions for my W2 income from 2 to 0 to increase the amount of taxes withdrawn from each paycheck.
• Requested that $1,000 additional federal taxes be withheld from each of my biweekly paychecks.
• Contributed as much as possible to regular/pre-tax retirement accounts to reduce our taxable income:
  • As we had already maxed out our Roth IRA contributions this year, we could not contribute any additional funds to our regular IRAs.
  • We stopped contributing to my job’s Roth 401k and our Vanguard Self Employed Roth 401ks, and instead have been contributing to our regular 401ks.
    • $5,250 contributed YTD to my wife’s pre-tax self employed 401k.
    • $935 contributed YTD to my job’s pre-tax 401k.
    • $1,774 contributed YTD to my pre-tax self employed 401k.

With these drastic actions, my wife and I are now on track with our federal taxes and should not have to pay penalties when we file for 2015.

Plan for 2015 Tax Filing – Accountant or Online Software?

Overall, 2015 has been a year of big changes from a financial perspective, as I went from a graduate school income to having a real job and my wife has been earning more self-employment income the past few months, in spite of becoming increasingly pregnant! 🙂

Because of all these financial changes, it’s understandable that our taxes experienced a bit of a “windfall,” and we are now having to play a little catch-up. However, it sort of makes you wonder – should our accountant who did our 2014 tax return advised us a little better and anticipated these changes? After all, they did advise that estimated tax payment likely wouldn’t be required.

In thinking about it, I don’t blame the accountant for a lack of attention or not doing a complete job. However, at the same time, I am not overly impressed, and it does make me question the value proposition, especially given that the accountant tax prep fee for 2014 was $685, whereas in previous years, I was charged a prep fee of $250.

Given the considerations above and the fact that we have moved from Virginia to Colorado (and we do not yet have an accountant here in Colorado yet), I believe that I will try my hand at using an online tax preparation software for filing our 2015 taxes.

The question then becomes, which online platform should I use?

As I found in my previous detailed explorations of Tax Act, H&R Block, and Turbotax, my favorite online tax preparation platform was Tax Act. As such, I believe I will use Tax Act for filing my 2015 returns.

How about you all? Are you on track with your 2015 taxes? Do you expect to have a tax refund or owe taxes when you file? Will you file using an online tax prep platform or use an accountant?

Share your experiences by commenting below!

How to Plan for Retirement in Your 20’s

The following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

If you’re in your 20s, planning for retirement is probably not very high on your list of things to do. Starting and advancing your career certainly seems more relevant, as does buying the things that you need to live your life.

But somewhere in the mix there needs to be an emphasis on retirement planning. Retirement is one of those areas of life where the sooner you start, the better you finish. It has everything to do with the time value of money, and you should want to get that working in your favor as early in life as possible.

Here are some ways to plan for retirement in your 20s. Most don’t require a lot of money to do either, but are based instead on getting into good money habits.

Save Up to the Employer Match on Your 401(k) Plan

If you have an employer sponsored retirement plan, you should participate in it, at least at a very low level. The most important step when it comes to a savings plan of any kind is just getting started. If 2% of your pay is all that you can afford, then go with it, and increase it over time.

One way to do this is by increasing your retirement contribution each time you get a raise. Let’s say that you start contributing 2% of your pay into your employer’s 401(k) plan. One year from now you get a 2% increase in pay. Cut that in half, allocating 1% to your 401(k) plan contribution – increasing it to 3% – and keep the remaining 1% in your regular budget.

Under ideal circumstances, you should aim to participate in the employer plan to the point you maximize the employer matching contribution. For example, if your employer has a 50% match (3%) up to a contribution by you of 6%, your goal should be to contribute 6%. The employer match is like free money. You’ll get $1 added to your plan by your employer for every $2 that you contribute. That’s too good to a pass up.

If you delay participating in retirement savings until a time when you can afford it, you’ll probably never get started. Throughout your life, there will always be major expenses and challenges that will compete for your income. The only way to rise above it is to start saving money as soon as possible – as in now.

If You Don’t Have an Employer Plan Start an IRA – Even a Small One

Not all employers have a 401(k) plan. If yours doesn’t, create an alternative strategy by setting up a self-directed IRA. You can contribute up to $5,500 to an IRA each year, and your contributions will be tax-deductible if you do not have an employer plan (and may be partially or completely tax-deductible if your income is within certain limits).

Don’t worry that you can’t make the maximum contribution. Start by adding $50 per pay period. If you are paid twice a month, that will be $100 per month, or $1,200 per year. As your income increases, allocate a larger amount of money to go into your IRA.

Just as is the case with a 401(k), getting started is more than half the battle.

Make Getting Out of Debt a Priority

This is certainly a tall order when you’re in your 20s. After all, if you already have student loan debt, and you need to buy a car, you’re virtually guaranteed to be in debt. But as difficult as it is to avoid the debt trap as a young adult, avoid it you must.

There are two major reasons why getting out of debt is important when you’re in your 20s:

1. Debt becomes a pattern early in life – if you “get comfortable” being in debt in your 20s, you might spend the rest of your life there, and it can get progressively worse
2. By getting out of debt, you gain full control of your income, and free up money to invest for retirement and for your long-term prosperity.

This isn’t necessarily to say that you need to make getting out of debt an all-consuming activity – seeing it through until the last dollar of debt is paid in full. But you should establish a pattern of paying down your debts ahead of schedule. The idea to set a goal of getting out of debt within a specific time. You can make that five years from now, or at a certain age, say when you turn 30.

The sooner you defeat the debt monster, the easier it will be to do all things financial in your life, including preparing for retirement. And as you get your debt situation under control, be sure not to add any new debt to your life. Once again, you’re trying to avoid bad habits that can become a lifestyle.

Develop a Life of Thrift

Now is a good time to spend a couple of minutes on the topic of lifestyle inflation. If you’re in your 20s, you’re likely to see a steady increase in your income in the coming years. Lifestyle inflation describes a financial process in which your standard of living rises as your income increases. You get a promotion with a substantial increase in pay, and you upgrade your car, move into a more expensive living arrangement, and adopt some expensive hobbies.

That’s a typical pattern, but it’s also one of the major reasons why people find that they don’t have any more money even though they’re earning more, often a lot more. Lifestyle inflation is one of those habits that’s best avoided when planning for retirement, or working out any financial goal you can think of.

The basic idea should be to keep your living expenses as low as possible, while using pay increases to fund saving and investing, and getting out of debt. And again it’s important to remember that this point in your life, you should be trying to establish the kinds of habits that will enable you to move forward, rather than getting trapped in a financial mess.

Don’t Try to Beat the Market

Millions of people – including investment managers – try to beat the market, and fail miserably. Unless you work in investments professionally, it’s probably not worth your time to even try to figure it out. In fact, you can lose a lot of money trying to learn how to beat the market. That’s probably something you don’t want to try to do until you have a large portfolio, and can allocate a small percentage of it into a small secondary account where you can try your hand at it.

In the meantime, and especially as a new investor, stay with funds, particularly exchange traded index funds. You won’t beat the market with these, but you won’t get clobbered by it either.

And if you would like to try active management, look into low cost robo advisors, like Wealthfront and Betterment, that offer professional management at very low fees and are specifically tailored for new and small investors.

At this stage in your life, retirement may seem so far away that you have plenty of time to ignore it. But it’s worth repeating – when it comes to retirement planning, or any other financial endeavor, the sooner you start, the better you finish. Get working on retirement planning now.

How about you all? If you’re in your 20s, have you started saving for retirement? What age did you start your retirement planning process?

Share your experiences by commenting below! 

***Photo courtesy of https://www.flickr.com/photos/digitalsextant/4491928640/sizes/n/

7 Ways Keep From Becoming House-Poor

The following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

Mortgage lenders operate with a litany of guidelines within which they will make loans to homebuyers. But here’s a newsflash: the fact that you qualify for a mortgage under those guidelines won’t protect you from becoming house-poor. It’s important to understand that mortgage lending guidelines aren’t necessarily designed to make sure that you can comfortably afford to own a certain home. No, they’re mostly aimed at stimulating homeownership on a national level. That may not do much good for your own personal finances.

Why should you worry about becoming house-poor? Apart from the very real possibility that it can land you in foreclosure, it’s not a very comfortable way to live.

Picture these scenarios:

• You’ve been faithfully cooking your meals at home for two weeks and would like to go out to dinner on Friday night – but you can’t, because the house payment is due on Monday and you’re already squeezed
• You need to get braces for one of your kids, but you put it off because the house needs a new roof
• You’re about to forgo summer vacation for the third year in a row, because the house payment and utilities are eating up any extra in your budget
• You’re having trouble paying down your credit cards, because there’s simply no fat left in your budget to cut
• Your emergency fund is empty, and has been for months

These are very real situations that can develop when too much of your budget is tied up in your house. For that reason, here are seven ways to keep from becoming house-poor. Most of them involve making a smart purchase decision upfront.

1. Buy a House That’s a Little Beneath Your Means

Forget about the $600,000 McMansions that all of your friends seem to be buying. If you qualify to buy a $300,000 house, buy a $250,000 house – or even a $200,000 house – instead.

Understand that the amount that you pay for your home will set in motion a long list of expenses, many of which will be directly or indirectly tied to the price of the home. Property taxes are a prominent example, but so is homeowners insurance. And since a higher price generally means a larger home, your utilities will be higher as well.

You can avoid the major factors that lead to being house-poor just by being more conservative in your choice of a home purchase. You will only have one opportunity to make that smart choice – don’t let it pass!

2. NEVER Close Broke!

I realize that it is virtually the American Way to break open every last cookie jar in order to buy a house. Unfortunately, if you’re broke when you leave the closing table, it could set a pattern in motion in which you’re perpetually broke thereafter.

The common mortgage lender guideline is that you have two months “reserves” after closing. In mortgage parlance, this means that you should have liquid assets equal to at least two months of your new house payment. But that’s pretty minimal.

A better idea is to go with the consensus on an emergency fund, that you should have at least three months of living expenses – which includes your new house payment – sitting in a very liquid account. And once you are in the house, keep that emergency fund growing – along with other savings vehicles.

3. Keep Your House Payment to Not More than 28% of Your Income

A common mortgage industry guideline is that your house payment should not exceed 28% of your stable monthly income. However, mortgage lenders will often allow you to exceed this percentage for various forms of “good behavior” in other areas of your financial profile (good credit, large down payment, long employment history, etc.).

The best advice however is to view the 28% guideline as the upper limit of your house payment, and not as a limit that you want to exceed. Even at 28%, more than a quarter of your gross monthly income will be going just for your base house payment – and that’s a lot to allocate for a single expense, even housing.

4. Keep Your House Payment Well Below 28% of Your Income

Forget about what a mortgage lender will allow you to do, set your own house payment limit, and make sure that it’s below 28%. Make it 25%, or 20% or even 15%. Always remember that the less of your income that is going into housing, the more you will have available for investing, for paying off debt, and for living the non-housing part of your life.

5. Qualify on Your Base Income Only

This is another area where homebuyers stretch the limits, and where mortgage lenders are perfectly willing to cooperate. They will often include extra income, such as bonuses, occasional commission payments, or a part-time job or business as part of your qualifying income.

The better strategy however is to qualify on your base income only. That will match up best with a fixed monthly payment, since it is almost certainly the most stable and predictable source of your income. That will also free up the extra income sources to handle contingencies and for non housing expenses.

6. Qualify Based on a Single Income

If you’re a couple, and each of you has an income, qualify on one income rather than on both. There are several advantages to this approach:

• In the event that one job is lost, you’ll be able to comfortably survive on one income
• Should a child arrive in your household, one partner would be able to handle the child-rearing responsibilities, without threatening family finances
• If one of you decides that you just need some time off, you can take it without fear that you might lose your home

I’ll admit that this is an unconventional way to qualify for buying a home, but it involves taking a more considerate view of what can or might happen in the future. And it builds flexibility into your finances – which is always well advised.

7. Keep Your Non-Housing Debt to a Minimum

Buying and owning a home is almost always more expensive than renting. Even if the house payment itself isn’t higher than rent, it’s still almost certain that your utilities will be higher, as will maintenance and repair costs, to say nothing of periodic major repairs.

For that reason, your non housing debt needs to be at an absolute minimum when you buy a home. Rest assured that if you are struggling with debt payments before buying a home, it won’t get any better later. And if you end up having to tap credit lines to pay unexpected housing expenses, the debt problem can get progressively more intense.

Payoff as much debt as you can before buying a home, and vow to become debt free, or as close to it as possible while you are a homeowner.

One final thought – it’s much easier to become house-poor than it is to escape it. So take at least some of these strategies and put them into action early in the game. Your future self will deeply appreciated it!

How about you all? Do you have other tips that have helped you or someone you know avoid becoming house-poor? What has or hasn’t worked for you in the past?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/shankaronline/11932005065/sizes/q/

Why Millennials Need To Save For Retirement

The following is a post by MPFJ staff writer, Jeff.  Jeff writes about reducing waste, saving money and building freedom at his website, Sustainable Life Blog.

With incomes stagnating and expenses for larger cities where jobs are easier to come by constantly going up, millennials are getting squeezed financially from both ends, making it difficult to save. Everyday, a decision must be made on what to prioritize and what to cut out or spend less on, and seemingly people in the millennial generation choose to forgo retirement saving, to their great detriment.

Being a millennial myself, I am familiar with the tug of student loans, consumer debt, as well as basic expenses like food and rent that seem to be advancing at a steady clip. With all of those budget pressures and retirement so far off, who has the leftover money to save?

Unfortunately, with that attitude, millennials are giving up their biggest advantage in saving for retirement: Time. A long time horizon (~40 years) can help your money grow and compound beyond what you can imagine now, but if you’re not putting anything away for retirement, you wont get any of that benefit and could find yourself in your mid 40s worrying about whether or not you’ll have enough money, and wanting to go back in time to kick yourself for not saving. With all that extra time, even the smallest bit matters when it comes to retirement.

To give you a quick lesson on how powerful time is, consider this: 1 dollar invested at the year end of 1929 grew to $1,188 dollars in 2010, by year end. That’s a 9.1% return Year Over Year. While that time frame of 80 years is about double the amount of time that you have, I think it perfectly illustrates how powerful time can be.

Build a Solid Foundation to Take Risks

Even early in their careers, millennials are already taking more career risks and moving for jobs with more responsibilities and bigger paychecks at far quicker rates than their parents did. In my 6 years in the workforce, I’ve switched jobs 3 times (stayed in the same industry though), which is about 3x more companies that I’ve been employed by than my dad, and he’s been working almost 8x as long as I have.

If you start saving early (both for retirement and general savings) you can build yourself a solid cash cushion and allow yourself to take more risks in the future. Perhaps switching to a job that you would thoroughly enjoy or get a lot out of that doesn’t pay as well as your current career, or perhaps you’d use that savings to strike out on your own.

Even if you don’t end up doing either of these things, since you’ve got a big cash cushion, you’ll be free to make that decision.

No One Else Will Do It For You

As it stands right now, something will have to change with the social security program for it to continue paying out benefits. At some point in the future (experts think it will be around 2037) social security will start having to pay out 75 cents for every dollar of expected benefit. Of course, that is a ways away and many things can change between now and then (such as taxes being raised or benefits being lowered) but as a millennial, you should not assume that you’ll be able to get a significant portion of your retirement needs met by social security. Sure, things could change, but who knows when and what that will look like.

Even though things are tough with rent, food, student loans and other bills, it’s important to take advantage of the time that you have in front of you before retirement and save some money while you can – even if it’s a small amount.

How about you all? How much are you saving for retirement, and if you’re a millennial, what’s the biggest challenge you’re facing? How are you getting around that challenge?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/68751915@N05/6870886851/