Thursday, January 31, 2008

Ing IRA follow-up

Recently, I wrote about my frustration with my Ing IRA, and how it’s simply not performing. As a very novice investor, I looked to some other personal finance bloggers for advice. I sent emails briefly outlining my predicament (do I keep the Ing IRA and wait for it to increase value before cashing it out? Do I take the loss and just move it out now?). Of the seven people I emailed, I received responses from four (which, honestly, is better than I expected).

The general advice was to wait and see what happens, as the funds may turn around next year, and Ciaran from Chance Favors recommended to create “a solid diversified portfolio” to balance out the funds that underperform in a given year. Though, Moolanomy did point out that the Ing fund fees are a bit high, so if my desire was to move the money to a lower-fee IRA, that was valid. One blogger said my idea of waiting until the fund was above my initial contribution amounts (and then moving it elsewhere) sounded like “market timing” – though I don’t really agree (the idea was based simply on recouping my initial investment – it wasn’t about planning to change IRAs on a particular day or if I could achieve $x return, and it wasn’t based on any kind of a timeline).

Something that wasn’t clear to some of the respondents was that my Vanguard account is not an IRA – it is simply a previous 401k I’ve held on to and not rolled over. When I left the hi-tech company, I had the option to leave the money where it was (because the account was over a certain dollar amount), and so I did. I admit I did that more out of not knowing where else to put it, and not wanting to take the time to research rollover IRAs. Too, the Vanguard fund management team has done a particularly good job at what they do, so I’m happy to leave it there (if I had $3000 on hand right now, I’d open my Roth with them).

While the general consensus was to use the “wait and see” approach to the Ing IRA, I’m still not convinced. The Dow Jones Index finished 2007 with a 6.4% gain, and the NASDAQ finished with a 9.8% gain. I know the performance my 401k is not indicative of the rest of the market. Too, it’s just scary seeing your mutual funds not perform in any way similar to the two major US stock indices.

I’m not entirely convinced that I just had bad luck-of-the-draw in the funds I chose for my Ing IRA, though I’ve pretty much decided to hold on to the Ing, and take the “wait and see” approach. I do admit to having a certain laziness with investing (I just want to choose some funds and be done with it for a while, and just do a major check-in once a year, because honestly, if my investment earns just 8%, I’m happy), and this works well with a long-term approach. I’m also still in the early research stages of choosing where to start a Roth IRA. Though, one additional question I have is this: do I continue to contribute to the Ing IRA while I search for a new Roth? Or do I continue to stockpile my money set aside for my IRA until and have decided on which Roth I want?

None of the people I asked for advice mentioned the lack of correlation between the major stock indices and the performance of my Ing IRA. This is an interesting point to me and it was something I expected people would comment on. A couple the people who responded said it could [sic] “just have been a bad year for those particular funds,” but there wasn’t any surprise that the IRA finished negatively, when the major indices finished positively. Though maybe I’m just personally missing something here (which is entirely possible, since this is my first foray into paying attention to my retirement investments, and also because the money was only across a few funds, as opposed to the old 401k which has money in about a dozen funds).

Many thanks to the writers (Ciaran at Chance Favors, Boston Gal at Boston Gal's Open Wallet, Trent at The Simple Dollar, and Pinyo at Moolanomy) who answered my questions, and especially to Pinyo, who asked further questions of me and provided the most in-depth answers and thoughts that I received. I’ll post more about my search for the perfect Roth IRA as the search continues.

p.s. In case you’re wondering, here are the stats: in 2007, I put $2250 into the Ing IRA; at the end of 2007, the balance was about $2025 (+/- $10); today, the balance is $2065.

Monday, January 28, 2008

Tales From the Self-Employed: Tax Woes

In 2006, I saved about 30% of my earnings, and I ended up with about $3k leftover when I paid my 2006 taxes. Last year, I adjusted that percentage to 20%, because I roughly figured that I’d paid about 22% in taxes. 20% was too low! I’ve done a preliminary, very rough draft tax return [using one of the online services], and I owe about $2000 more than I have put aside.

Ouch.

So, I’m going to up my tax savings withdrawal from my current earnings to 35%, to help cover this added expense. My emergency fund has already recently taken a hit because of my recent spate of unemployment, and while what I currently still have saved would cover the extra tax bill, it would leave my emergency fund at a level I am not comfortable with.

I should also mention that I, recalcitrant that I often am, did not make estimated tax payments throughout last year. Because of that, my tax bill will be a few hundred dollars more… I’ve learned that lesson, and I’ve set the Treasury Dept as a payee in my online bank account and just sent a big wad of cash to them. That payment will help lessen the underpayment penalty I will be assessed.

The lessons I’ve learned from this, is that 1. I will start saving a flat 25% of my earnings, to pay my tax bill (once I’ve saved up enough to finish paying off last year’s tax bill); and 2. I will start paying my estimated taxes on time. When you’re looking at a tax bill over $5000, it’s easy to say “well, it’s only maybe $400 more…” and then just pay the penalty without looking too closely at the amount. However, I could easily use that money to buy a ticket to Mexico in March (I need a vacation, and I want a nice, quiet beach vacation); or I could put it on my debt.

And I’m not one to let the tax man stand in front of a beach vacation. At least, not willingly!

Sunday, January 27, 2008

Little Money Trick #3

I recently realized that something I do for health reasons, is actually a great little money trick.

At least once per week, I buy big bags of frozen corn, peas, and green beans. At least a cup of one or a mix of these is added to most lunch/dinner meals I tend to cook at home. Because I generally cook for just myself, I tend to eat a lot of pasta or pasta-based dishes. If I’m making something with a white sauce, I’ll throw in about a cup of frozen corn. If I’m making something with a red sauce, I’ll throw in about a cup of green peas. I also tend to eat (though I know they are high in sodium) the Stouffer’s meal-in-a-bag meals. With those, I always put in a mix of veggies – usually totaling more than one cup.

Now, I started doing this just to add more vegetables the meals I cook on my own. Because I usually only cook for myself, fresh vegs often turn before I can use all or part of them. As such, if I’m really craving a salad, I’ll go out for that. After a while, I realized that when I was particularly hungry, I was boosting the portion size from one serving to two, simply based on adding the vegs, and that I was snacking less after meals I’d prepared.

Some easy pasta mixes that I make:

Bow-tie pasta, marinara sauce, green peas
Campanelle pasta (bell-shaped), alfredo sauce, corn
White cheddar mac and cheese, corn, ham steak chunks

I usually just add the frozen veg to the water once the pasta is almost finished cooking, and the boiling water cooks it through enough so the vegs are warm-hot.

In the past, when I successfully planned my meals a little better, I would often lightly sauté mushrooms, garlic, and red peppers, add that to spaghetti noodles (with either just a lick of olive oil as the “sauce” or I would add the sauté mix to a little bit of alfredo sauce and let that simmer about five minutes), and then also add some corn.

For parents, I can imagine this might be an easier way to get kids to eat vegs, since it’s all mixed together. I’m not a fan of the recently-made-mainstream idea “hiding” vegs in food, and I cringe at the idea of spinach in my brownies!

So, something I did to ensure I ate more vegs when I cooked at home has saved me money (because I can cook larger portions for less money, and I’m more likely to have leftovers), has saved me from over-eating heavy meals, has provided a greater personal satiety to my meals, and has also been a factor in the weight I lost last year. I’ve found that I’m more satisfied once I finish the meal, and even if I had been hungry and then ate too much, at least I know it was only a large serving because of the vegs added to the dish.

This is really more than just a money trick – it’s a food trick, and a diet trick, too.

Please share any similar tricks that you have, too!

Thursday, January 24, 2008

Why I'm Not a Fan of the Tax Rebate

I actually cringed upon hearing that we will receive tax rebates. I'm not an economics person, but I don't think the tax rebates are the best way to stimulate the economy. I, for one, will take maybe $100 and use it as mad money, and then split the rest evenly between my downpayment fund and my debt.

Here's what will likely get me in to trouble with some people: I am incensed that people who do not pay income tax will get a rebate. These are people that are tax-exempt -- people and families that don't make much money or are the working poor. A rebate is a refund of something paid. Since the tax-exempt are, well, tax-exempt and not actually paying taxes, they should not get a rebate! So, instead of everyone who actually pays taxes getting a rebate (it's phased out for single people with an income greater than $75k), those people are being denied the rebate so that someone who hasn't actually paid income tax can get free money. In addition, the rebate that people will receive is smaller because the tax-exempt will receive rebates.

Say what?

Yes, I know that if someone is making $75k, the rebate is not likely to make a huge difference in their lifestyle, whereas it can make a big impact for the working poor. I get that.

The lower classes are statistically far more likely to actually spend the rebate, and get that money back into the economy. I get that, too.

I still don't agree with it. It feels like a sort of punishment to anyone middle-class or above. "Oh, well you have a regular job and make a reasonable income, so we're going to take part of your rebate and give it to someone who doesn't in fact pay income tax, and you over there, you make too much money so you're not going to get anything." Niiice. Punished for success or enforced charitable giving?

I've read several articles online saying how middle and upper classes generally saved the 2001 rebate or put it towards debt, and how the lower classes were far more likely to go out and immediately spend the money. One statistic that I've seen several times, is that only 2/3 of the total 2001 tax rebate monies were actually spent and put back in the economy.

It's not my goal with this to sound elitist or discriminatory -- not at all, because I'm not. It just simply doesn't make sense to call something a rebate when it's being distributed in part to people who didn't actually contribute.

Hooray for Mo Money!

Yay! Yip yip yip! I successfully negotiated a rate increase with my primary client yesterday. I'm so thrilled and excited!

It all started like this: I handed him a printed copy of The Impossible Beta Document, and he praised me repeatedly (including phrases like "not everyone can have a Shana on their team") on completing as much as I did, in the incredibly limited timespan and with incredibly limited resources. After we finished discussing aspects of The Impossible Beta Document, and he finished his praise (and also the pride he was going to have at today's management meeting where he was going to drop the document on the table and be the first to say "well, my part is complete"), it went something like this:

Me: So, about my rate. Can we negotiate that?
Client: OK. What are you thinking?
Me: $X
Client: What is your current rate?
Me: $Q
Client: [looks ponderous for a moment, mumbles a few calculations]
Client: OK. How's that?
Me: Great. Thanks!

There was slightly more to the negotiation conversation than that, but maybe only 3-5 sentences, and those were after he'd agreed to the rate increase. It really was that quick, and that easy to raise my rate. Though, I've been doing work for them for nearly two years, and this is my first rate increase. I also had just turned in The Impossible Beta Document. Did I time my request? You bet I did!

Hooray for mo money!

Tuesday, January 22, 2008

Do I Need a Class in Remedial Investing?

I’ve heard friend say it, and I’ve read it countless times: Don’t invest what you can’t afford to lose.

Doesn’t this go against why most people are investing in the first place? I think that far more people are investing so they can live happier and more secure retirements.

Whenever I hear “don’t invest what you can’t afford to lose” my first impression is either the person is being highly condescending because they have money “to thrown around in the stock market”.

Where is the balance? I want to invest for my future (condo and retirement), but I “can’t afford to lose” that money. If I were to follow this popular idea, I wouldn’t invest my money in anything that wasn’t guaranteed…and then I would have less money in the long run (probably). I’m (right now) all in a snit about this, after having read 5 Hot Tips For First Time Investors . If you’re not supposed to invest anything you’re not willing to say goodbye to, how do you invest? Where do you find a balance between secure investments (e.g. savings bonds, CDs) and insecure investments? How does anyone who really believes this suggest someone plans for their future? Yes, the author of the article above says to not invest what you need for your monthly expenses. How are people supposed to save big for the future if they don’t invest in stocks or bonds? Personally, I can’t afford to lose the money I put in my IRA (and at last check a week ago it was down ~10% from my initial deposits). If I can’t afford to lose the money in my IRA, how am I supposed to save for retirement? The stock market is currently on a downward cycle, so should I invest more in my IRA and be optimistic it will eventually have a reasonable return? Investing solely in CDs or government savings bonds simply won’t provide enough income to put me where I want to be financially when I retire.

Note: I do think the author’s other four suggestions sound very intelligent and sound – it’s just this one that irks me – as it has every single time I’ve heard it before. This post is not a rant against the author – just against this bit of financial advice.

Where is the balance between investing for your future and “not investing what you can’t afford to lose”? How is one supposed to invest if they don’t have buckets of money and all their Big Expenses (e.g. home, retirement) already taken care of? It would be one thing if I (or anyone else) already had enough money to live off interest, but like most people, I don’t.

Or is the advice meant as “invest a little when you can, after you’ve funded your retirement fund and have a healthy emergency fund”? I’ve done some googling, and I can’t find anything that really provides more information [than a brief paragraph] on the execution of this concept.

So where does this leave me? How does someone who can’t afford to lose anything invest? I admit that aside from my IRA and 401k, I’m very much a novice to investing, so perhaps I’m interpreting this phrase all wrong. It’s just every time I’ve seen it, I haven’t seen anything that follows up with how to invest when you’re not already financially solid and set for life. I want to invest, but this “well-known” advice makes me think I shouldn’t invest.

Sunday, January 20, 2008

2007 Debt Redux (aka A Cause for Celebration)

Last year, I used 20% of my income to pay down 40% of my debt. No kidding.

I definitely went without some things I really wanted, though I learned and practiced different techniques to help me work towards a debt-free, higher-asset financial position. The greatest factor in me accomplishing this was staying true to my Crack Spreadsheet. Each week, I would deposit my pay and then immediately go to the spreadsheet and move the money to the specified savings and debt accounts. It was (and still is) highly addictive. I added a little calculator that tells me exactly what dollar amount I’ve paid off, how much is left, and what percentage of the original amount I’ve paid down.

Can I repeat it again? I paid off 40% of my debt last year! That is not an insignificant sum (it’s around $10k) – especially in light of how much I actually made last year (not as much as I expected or hoped). I mastered the art of living frugally a few years ago, and I’ve maintained that since I started earning more money.

Now, this is not to say I don’t still use my credit card…because I do, and I did last year. I don’t use it wantonly, and I most often pay down the amount I’ve charged each month – in addition to my regularly scheduled debt payments [as outlined on my budget spreadsheet]. I use my credit card when I’m in a jam, or if I’ve simply forgotten my debit card at home (I sometimes switch purses several times each week). I also used it to buy a new laptop (which was mostly a work-related expense). Though, one of my financial goals for this year is to use cash instead of my debit card (and so far it’s gone reasonably well). I know that I can also go in to a store that has things I like and would love to have, and not walk out the door with them and a credit card receipt.

I’ve realized that it’s necessary to have a balance between your debt, your savings, and your budget and that you can’t focus solely on one to the exclusion of the others. Sometimes I went over budget in a particular week, other times I was under budget. So, while I aggressively paid down my debt, I was also funding my emergency fund [to 3+ months expenses], starting an IRA, and still using my credit card for the occasional purchase.

It’s taken a lot of hard work and some sacrifices to do this. However, in a way I’m glad I’ve had to go through this, as it shows exactly what I can do financially when I set my mind to it. I've also learned how I need to approach my budgeting for me to be happy, in addition to paying down my debt (which makes me happy, but not in the same way as going on a proper vacation).

Wednesday, January 16, 2008

Over $50 Saved, Plus a Re-Adjusted APR in Under 10 Minutes

Wow. I've had some nasty experiences with Bank of ("we have a lot of fraud") America in the past (and yes, a financial rep actually said that quote to me once).

Now, I've just had one of the most painless and happy experiences with them. I believe I've mentioned I've not been working much recently (until this week, which has been off the charts crazy). As such, I've not kept up with my budgeting spreadsheet recently.

I'm accustomed to paying parts of all my debt nearly every week. Earlier this month, I paid about half of what was due on my Bank of America credit card. About 15 minutes ago, I checked their website because I thought the rest of my payment was due in a couple days, only to find out it was due yesterday. Aside from the nasty $39 late fee, I was also worried about the APR, as the bulk of that balance was a 1% balance transfer promo rate.

In something that restores my faith that there are nice, kind, reasonable bank employees, a rockstar of a customer service rep just did the following: 1. when I asked if the late fee would affect the APR, she said yes, and then she said she would reverse that so the promo APR would come back, and any fees accrued between yesterday and tomorrow will be refunded; 2. without me even getting to this question, she pre-empted me and said she'd also reverse the late fee; Finally, 3. she offered to post a payment for me, over the phone, using their expedited service (which is normally something like $15), again she waived the fee. I was only going to ask to have the late fee reversed...(and then I was going to balance transfer to my other credit card on the next phone call).

A little charm and kindness can go a very, very long way. I thanked her profusely, and very briefly explained how I'm self-employed and have only just started working again [after not for a while], and she totally understood because she'd just left the freelance world and went back to corporate work again. All this came about after she'd started the fee reversing and promo rate re-instatement, but I could tell it made a little difference in how she talked to me. She was very much "I totally understand what it's like" and very, very sympathetic.

As a side note, I believe in keeping at least one credit card long-term (I've had this one for around eight years, though I've only ever used it for balance transfers), because you do get certain benefits [if you use the card] -- such as them being so accommodating when you call up asking for a favor. I was fully prepared to use the "I've had this card for ages...can you work with me here?" tactic.

I have had nasty experiences with Bank of America in the past, and I've read far too many first-person horror stories for me to ever consider doing my regular banking with them. Yet, I'm still glowing from the customer service I just received and completely in awe that this whole thing just happened!

This just goes to show: you never know until you ask, and sometimes you get some pretty wonderful surprises from the unlikeliest of sources.

So, with what I can only describe as a massive (albeit, surely, temporary) change of heart: I heart Bank of America customer service reps!

What Do You Do With an IRA like an Ing IRA?

The good news: last year, I opened a traditional IRA (it was the better choice for me, based on a couple different IRA calculators).

The bad news: my IRA sucks.

My Ing IRA ended with a balance lower than the amount of money I put into it last year. Now, if it was a bad market year, I’d just bite the bullet and say “this is part of what happens.” However, my Vanguard 401k account [from my hi-tech days] earned 19% last year. A friend of mine disclosed that his 401k (I don't know which provider) earned about 17% last year. As such, I can only take this to mean that the investment options at Ing are, well, crappy.[Disclosure 1: it’s unhealthy and unwise, I know, but I check my IRA balance at the end of most business days. Because of this, I can tell you the number of days my IRA balance has been more than $2 above what I’ve contributed – in the last nine or so months – has been probably 10 or less. Disclosure 2: I have other savings accounts with Ing, and I love those.]

My IRA allocations are diversified into five different funds, ranging from bonds (the only one doing “well” – which means that it’s actually in the black, though I attribute that more to the dividends it’s paid as opposed to its overall market earnings), to medium and large cap funds, in addition to a couple other funds. I don’t think I’m under-diversified for the amount I contributed. I specifically chose a mix of stocks and bonds, and a variety of different [risk/performance level] stock funds.

I’ve been saving my IRA-tagged money in a bank savings account, and when it hits $1000 again, I’m going to open a Roth IRA elsewhere. If you have recommendations for a broker service that has done well (anything from 7%+ earned last year), please share that. I’ll shortly be embarking on the Great IRA Research Project, and any helpful guidance is much appreciated. I will also be enlisting the advice of some other personal finance bloggers (whom I respect), and I hope to write a future post with their wisdom and feedback.

The question now is this: leave the money in the existing IRA until it reaches the amount that I originally invested into it, or take the loss and roll it over into a new, fresh account?

Monday, January 14, 2008

Q: How Do I Get Out of Debt? A: Make More Money

I'm a massive advocate of "if something isn't right, then fix it." This can mean spending less on frivolities if you have a debt problem. But what about the family or individual that is living frugally and would be hard-pressed to cut anything more from an already lean budget? The answer: find more money.

Finding more money can be done in different ways, with differing levels of ease. Some people mention "snowflaking" (adding additional streams of income to supplement the primary income), and that's an excellent idea. Though, several references I've seen to this involve doing (generally) low-profit, high time investment tasks like online surveys. I recommend capitalizing on doing something you already enjoy.

For me, I like pets, and unfortunately don't live with any, so petsitting allows me time with animals and a way to earn some extra cash. The money I earned from one petsitting client in 2006 is what paid for my plane ticket to Argentina that year -- and that was for only three stints of caring for his cats!

This is just one example of how I've taken something I enjoy and made it into something that earns me extra cash. At other times, I've made and sold greeting cards, written one-off articles, sold books and music CDs online. With the greeting cards, that was a fluke that turned into a minor side business for a couple years. A friend had admired the holiday card I'd made the year before, he ordered many for himself, and I later sold cards to a variety of other people, too.

"But I don't have any skills!" you say. I say: you probably have more skills and knowledge than you think! Most people I've met are good at something that they enjoy as a hobby or just something they're interested in (e.g. collecting anything). So, it doesn't require being a full-time entrepreneur to set up an additional stream of income. For me, I enjoy pets and do some petsitting; I've also sold art/greeting cards. I didn't start petsitting or painting in order to make more money, I did these things originally purely for enjoyment – it was just a bonus that I was/am able to make some money from doing these things.

Real Life Example 1: A friend of a friend started a side business selling used car parts [that he bought cheap from the junkyard], and it ended up being more profitable than his hi-tech job and so he quit to just sell used car parts on ebay.

Real Life Example 2: A former roommate of mine would go to Goodwill on Mondays (tag sale/discount day where she lived) and buy men's suits cheaply (I don't think she ever paid more than $5-10 for a suit). Without cleaning the suits, she would post them on ebay. She was very, very successful, and this project took little of her time (it probably took more storage space...).

Real Life Examples (You!): Maybe you do crafts and can sell them online (e.g. etsy or ebay). If you have a truck and some physical strength, you can help people move or do dump runs for people. If you have time during the days, you could do freelance housecleaning or shopping. If you like gardening, you can do that, too. If you’re good with computers, you could do upgrades and minor fixes. Or maybe you like to sew and can perfectly hem a skirt or trouser in minutes. If the craigslist site in your area is robust, you can often find well-paid focus group assignments (I've seen several in my area, and they generally seem to pay between $40-75 for 30-90 minutes of someone's time). Research things you know about on ebay. The possibilities are staggering and don't require that you commit to a certain number of hours per day/week/month!

I also strongly advocate education as a way to learn more skills and up earning power -- and yes, I know that for some people this involves incurring some or more debt. I know from personal experience that taking classes while working is tough and demanding (I once attended classes four nights a week, after working 8-hr days immediately beforehand -- my social life evaporated for those months, and I rarely saw my boyfriend), and I know that actually quitting your job to return to school is a big, big life change (I did this at 24). Yet for me, finishing my Bachelor's degree was one of the best things I did at that time. I'd been working at a job with very limited advancement opportunities, and I was very low paid. Now, I make 4-5 times what I made then. Since I started working for myself, I make over twice what I was making when I worked in hi-tech, and what I made immediately before going solo.

It's difficult to be in a position where you're not making enough money. I really, truly know this. I also know that it takes guts and drive to change that situation. It took me a full two months to find my first client, and I was scared during those months. I did a little temp work while I was searching for freelance, but only very occasionally. Instead, I worked at upping my writing portfolio, and sending many emails to potential clients. In the end, it paid off very, very well.

I know that going freelance [full-time] isn't the best option for everyone, for a variety of reasons. Yet, I do know that working outside the 9-5 box is what will get someone ahead financially. Please share any success stories of your own!

Saturday, January 12, 2008

Where's the cash?

So. I was out shopping with my mother today, in a (cringe) mall. We were in JC Penny's and she was buying a necklace. When she pulled out cash to pay for it, they had to check a couple different registers to see which had cash in it (the third register had cash).

Say what?

I was really surprised. Then, I realized how much everyone uses plastic these days -- the woman in front of us actually wrote a check(!). Even the clerk seemed a bit surprised when my mother handed her cash.

I can only assume that they simply had just opened up some of those registers (though it was after 1pm), and that's why they didn't have any cash. I'd really rather not consider that cash is so rare they think they don't need it at all their registers.

Or is this just a sign of how much American consumption has veered away from using cash?? Has anyone had this happen?

Wednesday, January 9, 2008

Credit Cards: Necessary Evil or Unnecessary?

I see a lot of people writing about how much they despise credit cards. How they will never use them again once they’re paid off. There's been some discussion in the pf world about this lately, starting with Lynnae, then got picked up in debate by MyDollarPlan and Ana at Debtfree-Revolution (which has a wealth of links to other bloggers writing on this topic).

My response to cutting up your credit cards is: Whoa!

I know that some people have problems with credit cards, but cutting up the cards is not the answer! The answer lies in altering your behavior about money and credit. If someone can’t control their use of a credit card, they’re not likely to be able to manage with cash much better – though they will have a built-in ‘stop’ point with cash.

There have been articles and books about the psychology of money, and they are worth visiting or re-visiting. I’ve not read any such books, personally, though my mother highly praises what she read in Suze Orman’s The 9 Steps to Financial Freedom: Practical and Spiritual Steps So You Can Stop Worrying. While I hate the shame/blame tack she takes towards women’s finances (I cringed mightily when I saw her TV show about this), I do like her strategies for discovering the type of money personality you have. My mother, who after living on cash while she was raising me and only got credit cards well after I left home, read Orman’s book and realized some crucial ideas about where her views on money, and money management, came from, and it helped her.

Let’s look at a few hypothetical examples: you’ve just paid off your debt, sliced your credit cards, and then your mother/dear aunt/brother who lives across the country is suddenly dead. You only have $500 in your emergency fund, you have no credit card, and the last-minute plane ticket to get to the funeral costs $1000. What do you do?

What about your car? Most people I know that have to pay for car repairs end up paying between $1-2k. What do you do if it’s winter and you can’t close your passenger window, and you need your car to get to work (e.g. good bus service not available) or you, in fact, need your car to do your work?

What about your house? I live in Seattle, and a year ago there were some massive, massive storms, and many people had to do partial or complete re-roofing of their houses, or repairs because of floods. This is a definitely a necessity and something that can't be put off. If you own a house, what do you do if this happens? If the water heater fails? If your septic tank cracks?

Credit cards serve a very useful function. They can provide little loans for when you don’t have the cash on hand. I’ve used credit cards when I’ve inadvertently not had my debit card with me, and was somewhere like the grocery store (and when I got home I would immediately transfer that amount to my credit card), when I’ve been places without a cash machine that wasn’t with my bank (so I could save on the fees). A couple times when I’ve been travelling, I’ve been in cities where I couldn’t find an ATM that would accept my debit card (though the first time that happened, I was able to get a cash advance on my debit card, without that bank or my bank assessing a fee for that service – which I consider very lucky). A recent example of this for me is this: yesterday, I went to the dentist and because I haven’t been working much lately, I was very hesitant to use money in my savings account to pay the bill. So, I used my credit card (instead of paying in installments). Because I paid the balance in full yesterday, I got a discount of about $70. That is a far larger savings than I will either pay in interest, or if I had opted for the installment option [and paid using my debit card], and I also have a greater piece of mind in not taking that money from my savings.

If you use credit cards “Because I deserve to have this mp3 player/dress/vacation/whatever” then yes, you have a problem. That problem is not the credit card – it’s how you use the credit card. There is a very, very big difference between the credit card and the use of the credit card. All too often, I see personal finance writers (and blog commenters) blame the credit card as the problem. I can’t stress how much I disagree.

I have a girlfriend who has an airline credit card, and she uses it as often as she can, and then pays it off in full each month. She uses the card to get frequent flyer miles and free upgrades and airline tickets. What she does is very smart, and she uses the credit card as a tool to get something she wants (flight upgrades and free airline tickets).

Personally, I use my two credit cards for low balance transfer rates, so I can pay my principal down quicker.

To be sure, credit card companies prey on people who have issues with money. I don’t disagree, and neither do I approve of this. However, this is how it is and changing that is not my fight to fight. Part of smartly using a credit card is understanding its terms. My fight to fight is to (hopefully) provide some kind of wisdom [based on my personal experience and those of the people who’ve shared theirs with me] so that others can benefit. To that end, I want to reiterate: the credit card is not the problem.

If someone uses credit cards “because they don’t make enough to live the life [I] want” they will never make enough for that. I do believe it’s a good idea to know what you need to make, to ensure all your bills are paid, your retirement account is fully funded, and also to have enough left over to live a reasonable life. Earning enough to live a reasonable life is a valid, healthy goal. The trick is, though, when you get to that point that you don’t adjust your standard of living so much that you start living outside your means…and then have to count on getting a raise ‘just to get by.’ One thing I’m very thankful for, is that since I’ve been earning more money [per hour] than I ever have before, I’ve maintained the lifestyle I had when I earned less [aka frugality]. I’m not saying I make a lot of money. I didn’t make as much as I thought I would last year, and it wasn’t too different overall from my hi-tech days, though I did have a lot more free time (which is important to me), and I live well below my means (my cost of living is less than my hi-tech days). Yes, I know I’m single and without kids, and that factor is significant for me and my situation.

But I’m digressing a bit. The point is this: if you don’t learn to manage how to use credit for the tool it is, you will never be fully comfortable with money. I actually think it’s a very good thing for young people to rack up some debt, so they can have a better appreciation of money and to also learn the lesson and importance of budgeting.

Credit cards are only a trap if you allow them to be. Imagine if you worked in a cookie shop (which I did, once). Is it the fault of the cookies if you constantly eat them and gain weight? Or is it the fault of you not having enough self-control to not eat six (or more) cookies every shift? Is food the fault for someone being overweight? Budgeting and money management is a lot like dieting: the right balance needs to be found and self-control must be exerted.

There are no easy fixes to learning how to successfully and continually manage how credit cards can and should be used. It is, however, possible -- just like learning to live within your means or on a budget. It just takes time and self-control.

Friday, January 4, 2008

Special for the self-employed: HSAs, SEPs, and whether it's better to be a Sole Proprietor or to LLC/S-Corp

So. Today I spent a mind bending, and highly informative, 90 minutes with a tax advisor. I needed more information on my tax situation, and I wanted to know if it was better for me to LLC or S-Corp myself, or to remain the Sole Proprietorship that I already am.

I also learned some sneaky tricks, with HSAs and SEPs (Health Savings Accounts and Simplified Employee Pension plan). With an HSA, you fund it, and then reimburse yourself for medical/dental/eye care costs not covered by the insurance. This is also highly relevant to me, as I learned that any non-premium healthcare expenses are not deductible in my taxes (I thought they were). However, with an HSA, the money you put in is not taxed, and when you reimburse yourself for a healthcare expense, you are not taxed on that money. The amount you can contribute each year is dependent on the amount your insurance deductible, and depending on your healthcare needs, this can be quite a significant tax savings. Also, unlike flexcare accounts, the money deposited does not have an expiration date. Instead, you can put it in to an interest-bearing account and let it sit there gathering interest until you actually need it. Interesting tidbit: even buying small things, like Neosporin or cough drops, is covered by an HSA!

With the SEP, it’s a bit more complicated. For someone self-employed (e.g. ME), an SEP is a way to get the dual action of investing in two retirement accounts each year. This is a similar idea to a permanent employee contributing to both an IRA and a company-sponsored 401k in the same year. One of the big pluses to the SEP is that the contribution limit is much higher than an IRA. To wit, one can contribute 25% of their income, or $46,000, whichever is lesser. So even if you're uber-successful and earning $300k per year and are locked out of contributing to an IRA, you can still contribute to an SEP. In addition, it is possible to fund an SEP up until October of the following year! For example, if you realize you are going to have a banner year [before submitting your taxes on 15 April], you can have your CPA complete (NOT file) your taxes and submit your tax payment. Then, when you contribute the forecasted amount to your SEP account (no later than 15 October), your CPA can then file your taxes (if you contribute more, you will also receive a refund, because SEP contributions garner a tax break). My advisor today noted that if you haven’t already maxed out your IRA, it’s not really beneficial to take so much time to fund an SEP (though there's nothing that says you can't) – it’s better to do this if you realize you are going to have a significant amount of income that would allow you to do this (aka a windfall, or more money than you know what to do with) in addition to fully funding an IRA. SEP funds are taxed when they are withdrawn, so self-employed folks get a tax break the year(s) they contribute to an SEP. Many thanks to the patient and unfathomably knowledgable Jonathan at H&R Block who spent 90 minutes explaining and re-explaining everything until I properly understood this (and everything else)!

Back to my original question to Jonathan: is it smarter for me to LLC/S-Corp or remain a Sole Proprietorship? The answer is a little fuzzy. I’m right at the breaking point for whether or not incorporating makes a noticeable difference in my tax bill. As it stands with my projected income for this year, I could have an extra $600-800 at the end of the year if I LLC/S-Corp myself. "That’s great!" You might think. However, with that savings comes an inordinate amount of paperwork (payroll taxes, social security payments, FICA, etc – yippee!). This is also based on a projection of what I hope to earn this year, which is about 30% more than 2007. For me, I also have to take into account that my contact at my primary client is in negotiations with the other executives to make me a full-time, permanent job offer. While I’m loathe to give up my freedom, I’m keen to have a steady, full-time income (for a couple years anyway)…so I will consider any offer they make (I already know my No, Maybe, and Yes prices).

On another note about tax implications of LLC/S-Corp'ing, you can lower your taxes this way: give yourself a reasonable (stress the reasonable) salary, and then everything else is profit. You will not pay taxes on the profit. Again, you have to have a reasonable salary -- $1 is not a reasonable salary. Definitely talk to your tax advisor on this one so that you fully understand how this works, but know that this is a good way to minimize your tax bill.

More information about SEPs can be found at: the IRS website about SEPs.

The appropriateness of a Sole Proprietorship vs LLC/S-Corp is something that an individual should talk to their tax advisor about. The above is what I learned today and how it reflects on my personal situation, and I will likely make a decision in the next month or so, based on whether or not I receive and accept the possible offer from my primary client. As to the HSA and SEP information, that is for all us freelancers out there (though definitely talk with a tax advisor before setting up either account, so you know exactly how it works, and how it will work for you and your personal financial situation).

Is it snowing in here?

So, after reading about the much-ballyhooed idea of snowflaking, I'm going to give it a go.

For those unfamiliar with snowflaking, the premise is this: any extra money earned goes directly to debt (extra money earned can include savings from sales/coupons, in addition to any income source that is not your primary income). This is related to the premise of snowballing, wherein debt with the highest balance/APR (depending on the indebted's personal preference) is paid most and other debt receives only minimum amount due.

My original goal is to use the snowflakes to pay down different debts each week. In addition, and this is definitely a break from all the snowflaking rules I've seen to date, I'm going to periodically use it to fund my Travel and Home accounts.

I recently got an amazing deal at Walgreen's (two boxes of hair color for under $5, when a single box is normally $10), and I thought "I should snowflake this money." This thought was a bit surprising to me, as I hadn't really been thinking about it. Though I must admit that I've read several bloggers talking about snowflaking (most notably at I've Paid for this Twice Already) , and it obviously got stuck in my head.

But I have a question: do you snowflake the money from sales only if it is something you would normally buy? There are things I won't buy at full price (e.g. different foods at the grocery), but I will if they're on sale. Do I include the $5 I negotiated in price on a Banana Republic cardigan missing a couple hook closures at Value Village count? Does the $2 I won on scratch (lottery) tickets count?

Carnival of Personal Finance: 2008 Goals Edition

My post on financial goals for 2008 is included (yay!) in this week's pf blog carnival over at BeingFrugal.net.

To see the entire carnival, with a bevy of posts on both financial goals and how to meet the goals, head on over to Carnival of Financial Goals at BeingFrugal.net.

More posts are coming soon (here), so stay tuned!

Wednesday, January 2, 2008

10 Financial Goals for 2008

It's that time of year, and I want to share what I plan to accomplish this year. 2007 was a landmark year for me, in that I took serious control of my finances and started a very aggressive debt eradication plan. I paid down 40% of my debt, and I realized today that that amount was about 20% of what I earned.

1. Pay off an additional 40% of my [original] debt. I actually hope to pay off my entire debt, but I’m being conservative because I don’t know how much I will actually work.

2. Diversify my income. Occasionally, I petsit for pay. I’m also building a basic website for a client, and I hope that this can turn in to another skill I use to pick up side projects. I’ve also been thinking about making jewelry (not because it’s high profit, but simply because I enjoy it). I’m also hoping that I will generate a steady income from this blog. I’ve thought about working again at selling books [that I’ve finished reading] online, but this has been real hit or miss in the past, and I’m not sure it’s valuable enough for how I value my time.

3. Make more money. I will be raising my hourly rate sometime in January and I’m going to start working on following through on the other things I’d like to do (outlined in #2).

4. Work more. This goes along with items 2 and 3. While I greatly enjoy working only part time, I feel I could have used my off time in a more productive manner. I want to pursue doing things I enjoy (but maybe not necessarily greatly profitable) as a way to use that spare time. I also now have this blog, so I also want to write and stockpile articles during the downtimes, so I’m better prepared to provide articles when I’m busy with my clients.

5. Invest. Once I re-fund my emergency fund to 3-4 months living expenses, I plan to start investing some of the money I would normally save. The stocks I watch have done very well over the last several years, and I want to start taking advantage of that. I also just want to diversify my portfolio, so that it is not so tied up in the one stock I already own, my 401k, my IRA, and cash accounts. Part of the reason of this is also to (hopefully) earn some good profits, so that I can use that (in addition to what I’ve already saved – which isn’t anywhere near as much as I’d like) towards a down payment on a condo.

6. Open and fully fund a new (Roth) IRA. I opened a Traditional IRA in 2007, because all the online calculators I used said it was better for me. However, after reading more and talking to friends, I’m going to switch to a Roth IRA. I’m also going to abandon contributing to my existing Traditional IRA, because it hasn’t been getting any noticeable returns (at year end, it was at a lower balance than all the money I contributed over 8-9 months…).

7. Use cash only. This will be hard, as I'm hardwired to use my debit card when I'm at home. The only time I ever consistently carry [more than $20] cash is when I travel. I'd like to play a trick on myself and not take out the full amount each week (so I could stash the rest), but I don't know how well that will work. In a perfect world, I just won't carry my debit card with me, though I would probably carry the credit card to take care of emergencies.

8. Travel. With most of my financial focus in 2007 being on debt reduction, I didn’t really do anything big for myself. The laptop I bought was a necessity for my work. I only went on two small trips. I’d really like to go to Iceland, and I’ve been thinking about parts of Asia. I will definitely have to create a projection of what I hope to afford, after I update my budget for this year. Regardless, I definitely plan to take a proper Get Out of Town vacation and travel more than 300 miles from Seattle!

9. Build up the readership for this blog and cultivate a daily readership of 500 readers. While I do hope to earn some money with this blog, it’s more important to me to share my point of view and experiences. I’ve mentioned previously that I never found another personal finance blog that was written from the point of view of someone self-employed (though I’m certain some exist – I just couldn’t find any), and I want to share the lessons I’ve learned since I started working for myself, in addition to more universal personal finance topics.

10. Help my mother sort out her finances. I started looking at my mother's finances a couple months ago, but didn't finish fully analyzing them. I found out she's in a better position than I thought, though her portfolio could definitely use some re-structuring (she's slated to retire in a few years). My mother has had a pretty hands-off approach to her finances and investing (e.g. choose the fund once and just let the money stay there without really tracking the fund's performance), and I want to help make sure that what she already has saved is optimized for her retirement.

Tuesday, January 1, 2008

House Envy and Earning Potential

Last night, I went to two different parties in two incredible houses.

The first house was well over 2000sf, and filled with great art, spacious rooms, wraparound decks. It was an older house, and the people living there (a couple? I'm not sure) have a history of buying homes, fixing them up and then selling them. I don't think they're flippers, but that they live in the houses while they do the upgrades.

The second house was just as large as the first, if not larger. It was also in a fairly expensive neighborhood, and the couple living there clearly had a certain amount of money. Lots of original artwork, beautiful furnishings, and just other small signs that the place had money, without there being a lot of flashy objects and electronics.

My friend and I both had extreme house envy in both places (the homeowners were friends with my friend's new boyfriend). We sighed. We ooohed. He was certainly thinking he couldn't afford to upgrade to the first house. I was thinking it would take me eons to save a downpayment for either (which at 20% would be over $100k).

What does this mean to personal finance readers? The inhabitants of those houses were all self-employed. To be employed in a traditional job, with the skills those people had, none of them (except maybe the RE agent) would probably be able to afford to live where they do based solely on salary alone.

I know it's incredibly easy to just let someone else make your financial decisions -- aka what your worth is and how much you will be paid. People working at regular jobs have consistent incomes, but they also (most often) have very limited raises each year and they don't have spikes for periods of high productivity. I think the most important thing is that self-employed people set their own value. There are few people I've ever met who feel they are overpaid for what they do, or that they are paid even enough. I know that for years I was underpaid, based on research I did about my area and skills, and I knew the hi-tech company wasn't going to pay me more...and I stayed at that job because it seemed "easier" than finding another one (I hadn't even considered what my skills were that could allow me to work for myself).

Whenever you hire yourself out, you have the potential to make far more than what you would as an employee. When I was in initial contact with my primary client, he sent me an email asking what my rate was. I did some research online, figured out what I'd want to make if I were a permanent employee, added the 10% or so to cover benefits and similar expenses, and then rounded up to the nearest $5 mark. When I spoke briefly with this client about raising my rate in the new year, he didn't have any hesitancy. We didn't speak about how much, but I plan on raising my rate by $5/hr. To me, this doesn't seem a lot -- in fact, I wonder if I should raise it more, though I probably won't. I know people that would be happy with $1/hr raise, at their permanent jobs. When you work for yourself, making what others see as Good Money doesn't seem like a lot. I often think that I don't make that much, when I only know of a couple friends who definitely make more than I do (based on what I make working full-time at my current rate). I'm sure I have friends that I out-earn, even based on the fact that I only work part-time. I know people who make less in a month than I would make in a week of working full-time... My primary client told me something to the effect of: he always makes people tell him their worth before he hires them. If someone answer the question of what their rate is with "well, I don't know" (note: he occasionally hires teens to do personal projects for him), he'll say "well, so is five cents an hour fine?" and they end up negotiating.

What does this all mean? It's simple: if you set your own worth, you make more money.

What's more, all of the people living in the houses I visited get paid very well for doing things they love to do. I get paid for doing what amounts to a form of play (for me, personally).

I know it's difficult to even think about being freelance, especially when you have debt and other financial responsibilities. Yet, if you have a skill that could be marketed (and I think many more people do have such skills, than the number of people who recognize and capitalize on their skills), it's not that big a jump to being self-employed (in many cases). Being self-employed takes a certain amount of imagination (e.g. what can I do that people will pay me Good Money for?) and perseverance (e.g. making all the contacts to get the projects coming in). Then, once you establish a reputation, you get referred and others flock to you. As an example, I've done petsitting for years -- sometimes for pay (I don't charge my best friend, and I've not charged other people in the past). In the past month, I've been referred or approached by other people 3-4 times. I haven't actually taken care of any pets yet, and I turned down one job because I would be out of town those days. My secondary client [for my technical writing] is someone I know, who after hearing about how much my primary client loves my work, gave me a project. My contact at my primary client, who has a couple of his own side businesses, likes my work so much that he gave me a project outside of my primary skills -- just because he likes my "stick-with-it-ness" and my work style. It all just snowballs.

When people are more actively able to control how much they earn and how much they work, their income is vastly different than a hired company employee, and is most often significantly higher than the hired company employee. This means more financial freedom, and more freedom to live in houses that others ridiculously envy.