Financial Wellness @ Work

What Are You Hiding From?

2012-02-03T17:04:53Z

So……this Sunday is the Super Bowl!!! The game will be watched by more people than ever before. Madonna is performing at the halftime show. (I have so much to say about that but because this is a work-related blog I’ll decline to comment…for now). The whole sports world (and many people who don’t like football but are invited to parties or want to simply watch the commercials) will stop for 3-4 hours on Sunday as the NFL crowns a new champion.

While that’s going on publicly, behind the scenes there may be a player or 2 during the game who sustains a head injury. Recently, this article and others have publicly talked about something that has long been a hidden thing in the sports world: concussions and their potential long term impact. Currently, there are several lawsuits in the early stages and they are being started by former NFL players who are claiming long term damage from head injuries sustained during their playing days. The league is constantly trying to improve player safety and every year new rules and new equipment help to make progress toward making the sport safer. But still, players hide their injuries from teammates, coaches, and doctors.

That doesn’t surprise me. I played sports at the collegiate level and there were times that I probably shouldn’t have been on the field because of a head injury. (Feel free to make comments about how that’s impacted my writing or my thought process; my friends often do…) The expression “I got my bell rung” was pretty common then; only later did we realize that it meant we had most likely sustained a concussion.

But we didn’t want to leave the field and let our teammates down. I can’t imagine how much more motivated to stay on the field I would have felt if I were getting paid to play. I totally understand why players hide their injuries but it still doesn’t mean it’s the right thing to do. Go ahead, point out my hypocrisy…

The concept of hiding things came up in a conversation I had recently with an employee of a big company. He had called our financial helpline to talk about his financial situation. He spends more than he makes each paycheck, he funds the excess with credit cards, and now he is getting phone calls from bill collectors on a regular basis. How does he handle all of this right now? He hides from it! He doesn’t log in to his bank’s website to check his balances. He throws credit card statements in the trash because he doesn’t want to see the balances and the late fees. He doesn’t answer his phone unless he recognizes the number so that he doesn’t have to talk to the collections agencies. He is in full fledged denial. He is hiding from his financial life the way that I hid from concussions in college & the way many NFL players do today. Guess what? Here’s a news flash: hiding from it doesn’t make it better!!!

I don’t care if it’s a concussion, your debt situation, or your medical situation (my mother is terrified to see a doctor because she’s afraid of what they might find so she typically cancels 3 or 4 appointments before finally going in), the first thing you can do in order to make an improvement in your quality of life is to face the situation honestly. Hiding from things is a product of fear and doubt. The person who was throwing away his credit card statements was afraid of what the statements said. He had significant doubt about how and where to start to change his situation.

During our conversation, we broke through the fear and doubt and he promised to himself that he would no longer hide from his financial life. He decided to make a change. It started with the man in the mirror. (Thank you, Michael Jackson!) His first step is to organize his financial life using a simple Debt Inventory or Financial Organizer. Once he is able to look in the mirror, tell himself he’s done hiding, and put together some basic facts about where he stands financially, we can take the next steps toward making progress. The first step is deciding that changing your situation is important and worth pursuing! I’m talking with him again shortly and I’ll let you know what his “next steps” are.

How to Plan for an Extreme Early Retirement

2012-02-02T08:54:42Z

My most popular blog post (and the most popular one on our whole blog) called “How to Be Financially Independent in 5 Years (No Matter What Age You Are)” was about a concept called “Early Retirement Extreme” in which people save very large percentages of their income to be financially independent before they even turn 40. For example, if you save 75% of your take-home pay and earn a 5% real rate of return, you would have enough savings in just 5 years to maintain that standard of living for the rest of your life (assuming a standard 4% safe withdrawal rate of your initial savings amount and adjusted each year for inflation). While this would probably not be realistic for most people, the more you can save, the sooner you can be financially independent to use your time as you see fit. (The author of the blog that inspired my post actually ended up going back to work but out of enjoyment rather than financial necessity.) But in addition to the challenge of living on much less income than we’re used to, there are some other considerations facing anyone looking to retire extremely early:

You can’t invest as aggressively. Even though many extreme retirement savers are young, they should invest a lot more conservatively than someone they’re age planning to retire in 30-40 years. For one thing, the math of early retirement makes the savings rate much more important than the rate of return. Earning a few extra percentage points over a few years will help you a little but losing 30-40% of the savings you worked so hard to accumulate would hurt you a lot. Either stick to more conservative dividend-paying stocks (more on that later) or use lower risk asset allocation strategies like the “permanent portfolio.”

A lot of your savings might be tied up until you’re 59 ½. Retirement plans weren’t designed for people retiring at 35. This doesn’t mean you shouldn’t contribute to your 401(k) though. In fact, pre-tax accounts can be especially beneficial for you because you’ll be in such a low tax bracket when you retire. There are a couple of ways to avoid the 10% early withdrawal penalty. One is to make substantially equal periodic payments for the longer of 5 years or until you turn 59 ½, which is roughly what you’ll want to do for steady income anyway. If you want more flexibility in your withdrawals, you can start converting your pre-tax accounts to Roth IRAs once you stop working. You’ll have to pay taxes on the conversions but by spreading them out over time, you can keep the tax rates low. After 5 years, you can start withdrawing the converted amounts from your Roth IRA without tax or penalty.

Don’t expect much from Social Security. That’s not just because the system is going bankrupt. The larger issue is that your Social Security projections assume you continue to work until you start collecting. Since your work history will be much shorter, you’ll get much less once you are eligible. Plan for retirement without it and consider anything you do get to be a bonus.

You’ll have to pay for your own health insurance. One of the advantages of working until 65 is having employer-provided group health insurance and then qualifying for Medicare. Otherwise, you’re on your own. The good news is that President Obama’s health care plan could be a lot of help because you won’t have to worry about not being able to get coverage due to pre-existing conditions and your low income could even make you eligible for a premium subsidy. The bad news is that the program’s mandates could make insurance more expensive if you’re young and healthy.

Your money will need to last much longer than normal retirees. A typical retirement plan based on your assets being drawn down over 40 years may work for a 65 year old but not for a 35 year old. Annuities will be less attractive too because your young age and long life expectancy mean much lower payments. Instead, you’ll need to make sure your nest eggs grows more than you withdraw each year to minimize the need to touch your principal. One way to do that is to invest in high-dividend paying stocks yielding 3-4% income and live off the dividend income. Dividends tend to be much more stable than stock prices and generally rise faster than inflation. Qualified dividends are also currently taxed at only 5% for people in the 10 or 15% tax bracket (where you’re likely to be in retirement) and 15% for higher brackets. Unfortunately, dividends are scheduled to return to ordinary rates next year but if GOP front-runner Mitt Romney is elected president, he wants to eliminate taxes on capital gains and dividends altogether for everyone earning under $200k (or $250k for couples). Finally, if you buy them in a fund, just be sure to pick one with low expenses since a 1% fee can reduce your income by 25-33%.

Retiring early is mostly about saving a lot but as you can see, there are other things that make retiring at 35 different from retiring at 65. In short, you can’t plan for retirement like everyone else. (You’ll also probably be the only person hoping for both Obama’s health care plan and Romney’s tax plan.)

One of the Biggest Challenges Facing Financial Planners

2012-02-01T18:12:09Z

One of the biggest challenges I face in my line of work is deciding when to explain things in more detailed technical terms and when to explain them in more understandable “practical” terms. For example, when discussing the income limits for traditional and Roth IRA contributions, most financial professionals will tell you the limits are based on your adjusted gross income (AGI) when technically they are based on your modified adjusted gross income (MAGI). In many cases, such as this one, the difference between the practical and the technical may be so small that it’s just easier to speak in practical terms. The problem is that if you don’t know the technical stuff, it’s easy to make a financial mistake.

Take for instance estate taxes. Most financial professionals want you to know that if your assets are worth less than $5,120,000 then you don’t have much to worry about, and in a practical sense that is very true. But technically speaking, there is a lot more to it than that. Here is a brief overview of some of the technical side of estate taxes:

When you hear someone refer to the “estate” tax what they are referring to is a tax that is assessed when assets are transferred at death. In other words, the estate tax is technically a form of “transfer” tax. Assets can be transferred during your lifetime (subject to a “gift” tax), or they can be transferred when you pass away (subject to an estate tax). This is a very important thing to understand because the government offers a lifetime transfer tax credit that taxpayers may use to offset any gift or estate taxes owed. It is because of this transfer tax credit that someone can leave a $5,120,000 estate to beneficiaries this year without incurring an estate tax, but ONLY if none of the transfer tax credit has been used during the deceased’s lifetime.

Without going any further, you can already see that this topic is highly complex and can be easily misunderstood. People often think that they have to pay a tax on a gift or an inheritance that they receive rather than on what they give away because they see it as a form of income. There’s also the misconception that gifts that exceed the annual exclusion are immediately taxable rather than a reduction in the lifetime transfer tax credit.

To make matters worse, tax laws change constantly. This year, the lifetime transfer tax credit would cover the tax liability on transfers up to $5,120,000, but that credit may not stay around forever. If it changes (as it is scheduled to do next year) taxpayers with sizeable estates (greater than $1,000,000) could miss out on the opportunity to transfer some of their wealth and thereby take advantage of the relatively high lifetime transfer tax credit that applies this year.

Actions taken in one financial area can also impact others. When someone applies for Medicaid benefits, Medicaid will look to see if any assets were transferred within the last five years and include those transferred assets in the calculation of Medicaid eligibility. If a parent or grandparent suspects that they may need Medicaid benefits in the future, they should plan on transferring assets sooner rather than later. These assets would fall under the gift tax rules, which are directly related to estate taxes.

Practically speaking, most people don’t want to know much about gift and estate taxes. Instead, they just simply want to know how much their estate can be worth before they owe an estate tax. But as you can see, what you don’t know can hurt. Don’t settle for just a superficial understanding of things. Challenge yourself to learn the details and use that knowledge to educate others. Not only will you impress your friends, but you might just save them from making the financial mistake of a lifetime.

What Would You Do With 19 More Hours of Free Time During the Week?

2012-01-31T18:50:59Z

That’s the question I asked myself after recently reading an article suggesting that we shorten the standard work week from 40 hours to 21. With nineteen more hours during the week, I know there would be a lot more things I would do. I’d spend more time outdoors, enjoying fresh air and walks in the park. I’d learn new skills, like a new language and woodworking. And I’d spend more time with my family and friends, the people that make life worth living. Whatever you can imagine doing with more free time, it’s likely something that would make your life better and happier.

Instead, most of us use a lot of our time to work to earn money to buy things, things that we may believe are essential to our happiness and the way we live. These things include a nicer house, a nicer car, a nicer tv, and other stuff we might not be able to see ourselves living without. The problem is that most of us (myself included) aren’t able to afford the luxury of having both more things and more free time. And often when we buy more things, we ignore the hidden price we pay, which is the time we give up to work to earn the money to buy them. A good example is the common practice of buying a larger, more expensive house farther from where we work instead of a cheaper, smaller house that would be closer. We get excited about the bigger house but ignore the hours wasted in traffic commuting back and forth, as well as the hours needed to earn more money to pay for the higher gas, tolls, and maintenance for our car. The happiness that the house may bring us is often outweighed by giving up the time we’ve spent to pay for it

That’s why it’s so useful to try thinking specifically about what you’d do with nineteen more hours in your life, rather than just dreaming of having more free time. Try comparing the value you’d expect to get from what you’d be able to do with that much more time to the value you’re getting now from the things you’ve given up your time to buy. Where do you think you’d get more value? Do you think you’d feel richer from having more time or more stuff? If you said more time, you’re probably not alone. Research has suggested that we tend to overestimate the happiness we get from buying things, which is usually temporary and fades quickly, but underestimate the happiness we’d get from having more time to do what we want. If you think about your own life, there’s probably very little you’ve bought in the last month or year that has as much value as things you enjoy doing but don’t have enough time to do, like practicing hobbies or spending more time with loved ones.

I was catching up with a friend from high school this week, and after telling me about the three jobs he’s working to support his lifestyle choices, he said with a heavy resignation that working more and spending more was apparently the only path in life. I felt terrible for him and wished there was a way I could show him and everyone else that there is another way to live. The good news is that even if the forty hour work week isn’t changing right away, you can start taking back control over your time right now by making better choices about how much you’re spending. If you’re able to live on less, you won’t have to work as many hours to support an expensive lifestyle. You’ll also be able to save money you otherwise would be spending. Eventually you’ll have enough savings to work only part time if you want to, or if you prefer retire early altogether. Imagine what you could do with that much time. I even read a blog post today that said that saving just half your income while living on the other half could allow you to retire in just 17 years.

But hold on, you might say. Wouldn’t reducing spending hurt too much? Now that we’ve learned to see richness not just as owning stuff but also as having free time, I’d suggest you’d ask yourself instead whether not buying something would hurt more than the time you give up to buy it. Before I buy anything, I always ask myself whether the thing will make me feel happier and richer than the time I have to work to pay for it. For example, when I told the friend I ran into from high school that I don’t own a car, he gave me a strange look and wondered how I could do things he felt you needed a car for, like getting to work or buying groceries. I told him I lived a five minute walk from a grocery store and I enjoyed taking mass transit to get where I was going because it freed my hands and my mind to read or do something else. That’s when he started to understand some of the perks that come with not owning a car, like not spending money on gas, tolls, or maintenance, and not spending time in traffic.

Not owning a car might not be the solution that’s right for you but my point is that you shouldn’t feel bound to anyone’s expectations of what you need to own. Don’t be afraid to challenge any purchase in your life by asking yourself whether it’s worth the time you gave up to get it. If we all made better financial decisions that gave us more control over our time, we’d probably be all feel a lot happier and richer for it.

Employee Tax Education: Are Prep Fees Too Taxing on Your Lower Income Workforce?

2012-01-31T09:47:21Z

For many lower income employees, their yearly tax return provides more than just a refund of their tax withholding – it can include refundable tax credits that can add thousands of additional dollars to their bank account. The Earned Income Credit http://www.irs.gov/individuals/article/0,,id=150513,00.html (EIC) can add up to $5,751 for a working parent with 3 or more children making a yearly income of less than $43,998 and if the kids are under age 17 there could be up to an additional $1,000 child tax credit for each. Because of these large refunds, many tax preparation services aggressively go after these taxpayers with the temptation of getting their refund immediately, instead of waiting the average 2 weeks it takes to get their tax refund directly deposited by the IRS.

However, there is a big price to pay for these immediate refunds, called “refund anticipation loans”, commonly nicknamed RALs. The cost for these RALs can add up to be hundreds of dollars of fees and interest . I’ve seen disclosure forms from a few of these RALs that had an annual finance charge expressed as over 400%, which is so high because the banks backing these RALs are essentially loaning the amount of the refund upfront for just the several days it takes for the IRS to send out the refund. Wouldn’t it be much better if your employees could keep all of the refund in their own pocket instead of having to share a portion with the tax preparation service?

Workers that earned less than $57,000 of adjusted gross income in 2011 are eligible for the IRS FreeFile program this tax season, which allows them to access free online software for their federal tax filing. After completing the FreeFile program online, they can get their federal refund in as quickly as ten days. Employers can help by spreading the word – the IRS offers a FreeFile widget http://www.widgetbox.com/widget/irs-free-file-tax-countdown that can be embedded on your company intranet, and it’s even available in a Spanish version!

Another way to help your workforce become more comfortable with taking on the task of doing their own tax return is by offering tax basics as part of an ongoing workplace financial education program. This makes lots of sense since many of the most common tax reduction strategies are through payroll deduction, including 401k deferral, FSA and HSA contributions, and un-reimbursed employee expenses. Just be cautious of who you invite into your worksite to offer this education. A local CPA or tax preparer may say they are only there to educate, but could actually be looking for potential clients so try to avoid this type of conflict of interest.

As an added bonus for all the taxpayers out there that wait until the tax filing deadline, we get an extra 2 days this year to procrastinate: April 17th is the filing deadline in 2012.

12 Important Financial Steps to Take in 2012

2012-01-30T07:04:08Z

By now, everyone has broken their New Year’s resolutions. Never fear, taking one financial action step each month is easy and you still have time to finish January’s step. Taken together these steps can have a tremendous impact on your finances in 2012.

January – Check your credit report. Like going to the doctor for your annual physical, it’s always a good idea to check your credit report once a year to see how you are doing. You can get a free copy of your credit report from all three credit reporting bureaus at www.annualcreditreport.com. You should look over each report carefully to make sure there is no unauthorized activity.

It was announced last week that Zappos had a major security breach and 24 million customers were compromised. I quickly double checked to see if I had an account with them (and I don’t). If you do or just to be safe, look for unauthorized activity on your credit cards – that could be a sign of identity theft. If you suspect someone is committing identity theft against you, you may add a fraud alert to your credit file through any one of the three reporting bureaus: www.experian.com, www.transunion.com or www.equifax.com. If you want to get your actual score, it isn’t that expensive. You can pay about $9 to one of the credit bureaus to get it or sign up for a credit monitoring service and your credit score comes with it.

February – Prepare a personal net worth statement. By this time, financial institutions will have sent out all of the year-end tax statements for 2011. With that information handy, compile a net worth statement to see where you stand financially. Subtract your liabilities (e.g. your mortgage, loans, credit card debt) from your assets to determine your net worth. Set goals for how much you would like to grow your wealth in 2012.

March – Open a Roth or Traditional IRA, or add to an existing one. You have until April 17^th (you get a few extra days this year) to fund your IRA for 2011 (but you don’t have to wait until 3 pm on the last day) and you can already contribute for 2012. To make it even more effective, set up automatic contributions from your checking account. Also consider systematically investing in a mutual fund or brokerage account for wealth building outside of a retirement plan.

April – Review your cash management system. Getting a tax refund? Did you get one last year and it disappeared into thin air? Look over where your money is going to determine if your cash flow supports your goals and your values so you keep more of it this year. Determine where you can cut expenses that are unnecessary or aren’t bringing you the desired results. Rather than looking at only a week or a month’s worth of expenses, use a reasonable sample by averaging your expenses over three months to see where your money is going. If you don’t already do so, enroll on a cash tracking site such as mint.com or quicken.com to track your expenses and follow your spending targets.

May – Reduce your debts. Review your net worth statement and determine which debts you’d like to eliminate. Start with the one with the highest interest rate and use some of the money you found in April to pay extra on that debt until it is paid off completely. When it is paid off, take the whole amount you were paying and add it to the next debt (and so on) until they are paid off completely.

June – Have an important conversation with your parents. This Father’s Day, ask your Dad (and Mom) if they have their important paperwork in order and ask them to show you where it is in case you need to step in to help them during an emergency. If they have a financial power of attorney and a medical power of attorney, someone can make decisions for them if they are unable to. If these aren’t in order, it will be extremely difficult – much more difficult than having the conversation.

July – Do a retirement reality check. Check your contribution rate to your retirement plan. Are you saving at least 10% of your income or at minimum, up to any company match? Use a retirement calculator to determine if you are on track to retire using as much information as you can gather – your current savings deferral rate, your current balances in investments, any pension income and Social Security. If you aren’t contributing the maximum and want to ease into a higher savings percentage, set up your plan at work to automatically increase by 1% each year. Don’t have that feature at work? Simply send yourself an annual reminder on Outlook to make the increase every year!

August – Pack your lunch and save for college. A small investment here and there can make a big difference when saving for long-term goals. If you have a child or want to have one in the future, consider bringing your lunch to work three times a week (cost $3 for bagged lunch compared to $6.50) and save the difference in a 529 plan for 18 years at 7%—you’d have $17,779 in the college account. Not bad, especially if you like peanut butter sandwiches.

http://www.bankrate.com/calculators/savings/bring-lunch-savings-calculator.aspx

September – Spend time with the one you love. You don’t have to be married to become a millionaire, but in Thomas Stanley’s famous book The Millionaire Next Door, he cites 95% of the millionaires he interviewed are married. Linda Waite and Maggie Gallagher make the case for marriage in their book The Case for Marriage: Why Married People are Happier, Healthier, and Better off Financially. If you are married or have a significant other, spend some time this month making your relationship better.

October – Take care of yourself by reviewing your disability and long-term care. Who is going to take care of you if you are injured or really sick? A 45-year old has a 1-in-5 chance of being disabled for more than 3 months before they are 65. Check to see if you are covered in case of a disability or severe illness where you need around-the-clock care. Do you have long-term disability coverage or a group long-term care plan available at work? Review your coverage and sign up during next month’s open enrollment period.

November – Get your estate in order. If you don’t have a will or a trust, look into getting one. Don’t forget to include financial and medical powers of attorney in case you are ill and unable to make decisions for yourself. If you have your documents in order, review them, and when your family is all gathered around for Thanksgiving, review them with your family. Let your executors know where your documents are located and make a copy for them.

December – Celebrate!

Look back over what you have accomplished for 2012 and pat yourself on the back. There will be 8,760 hours in 2012 – many of them will be spent sleeping, commuting, standing in line, and in meetings. Just think how you can maximize a few hours each month during the year so you end the year with a plan for emergencies, a net worth statement, an insurance review, a retirement readiness plan, an IRA or investment savings account, your parents’ paperwork in order (what a relief), and to top it off, a date with your mate. Those are hours well spent.

What I Learned Watching the NFL Playoffs

2012-01-27T17:04:23Z

Last weekend, the final 4 teams left in the NFL playoffs squared off to see who would make it to the Super Bowl. This year, it’s the New England Patriots vs. New York Giants playing in the season’s final game. 2 teams, 1 trophy……….I can’t wait. I’m almost as excited about the commercials as I am the game. My favorite team was eliminated, so there won’t be a championship parade for me to attend this year. That made me think. The NFL has 32 teams. Only 1 wins the Super Bowl. Only 1 is considered “successful”. The other 31??? They all failed to meet their goals and have to wait another year to try to reach them.

Luckily for us, we don’t have to wait a whole year when we don’t meet a goal. NFL teams have to go back to their plans for the season, see what they learned, and try to improve in the off-season. They have 1 clear goal. Win the Super Bowl. And it’s really easy to see if they make their goal or not. Millions of us will watch the game and see which one team had the ultimate success. As an individual, no one except me usually knows what my goals are. I’m a big fan of setting goals, tracking progress, and finding a way to bring in a means of accountability.

Here’s a non-financial example……fitness / weight loss. Let’s assume I find myself 10 pounds heavier than I’d like to be. (If it were only 10……..!) I could keep doing what I’m doing, hanging out w/my best friends Ben & Jerry, and find myself even further away from my goal. Or, I could set a specific goal (Drop 10 lbs. by St. Patrick’s Day), track my progress (hop on a scale once or twice per week) and find a way to bring in accountability (tell my kids what my weight is so that they can put it on a chart & show me the graph). Knowing that they expect the number reported to them, and if they don’t get it they ask, makes me think about putting down the spoon when Ben or Jerry start calling my name from the freezer. Set the goal, have a plan, measure results and have accountability. That’s a recipe for success. (Anyone have a recipe for low calorie ice cream that tastes really good?)

What are your goals? If it’s to be in a position to retire comfortably at age 65, to have $1,000,000 in assets before you retire, to lose a few pounds, to take a few classes, to get out of debt completely…..no matter what your goal is, the same principles apply.

First, have a clearly defined goal. Know exactly what it is and when you want to reach it.
Then, do the work toward reaching it.
As you’re doing the work, track & measure your progress.
Most importantly, hold yourself accountable. Find a way. Tell a friend. Tell your significant other. Write a blog! Whatever works for you….

Accountability is just as important, if not more important, than creating the goal in the first place. You and I don’t have a scoreboard and a national TV audience to tell us if we’ve reached our goals or not. In sports, the scoreboard is the ultimate success measure and system of accountability. What is yours? When you have the answer to that question, you can reach any goal you set.

Are You Paying Too Much On Your Phone Bill?

2012-01-26T14:42:54Z

We often review people’s budgets to help them find savings and one area that I consistently find people spending more than they probably need to is on their phone bill. The average landline bill is probably only about $20 but most people also have a cell phone bill that averages about $50 per month. As people switch to smartphones with more expensive data plans, that cell bill will only increase. The average smartphone user now spends over $100 per month.

The first opportunity to save is with your landline. Cell phones are arguably sending the traditional landline the way of the VHS tape and most young people I know have already ditched their landline altogether. On the other hand, if you talk on the phone a lot, a landline can cut down on the number of minutes you need on your cell phone plan. There are also concerns about the health risks of long term exposure to cell phone radiation and emergency services having better response to a landline.

One way to keep your landline while cutting your bill is to switch to a VOIP phone system in which your phone calls are routed over your Internet connection. There are lots of options but my personal favorite is a device called an ooma. Unlike some of the other VOIP options, you’re not sacrificing quality. By using a HD Voice technology to transmit twice as much speech information as a standard landline call, the call quality on your ooma can actually be better than your current landline. You just need a high-speed Internet connection (which can also save you money on movies and cable tv).

The ooma has a one-time cost of about $250 but allows you to make and receive high-quality domestic calls for free and international calls at very low rates. You can divide that $250 by your current landline bill to see how many months it would take to break even. After that, you have a landline phone without the monthly bill.

You can use the same approach of paying more upfront to save money in the long run with your cell phone bill too. There are a variety of pre-paid phone companies that offer cell phone service with much lower monthly bills. The catch is that you may pay more upfront for your cell phone but once again, you can save more in the long run. These plans are popular in Europe but still haven’t caught on in the same way in the U.S. yet.

When choosing a pre-paid phone plan, I like to stick with ones that use a network from one of the Big 4 (Verizon, AT&T, Sprint, and T-Mobile) so that you don’t have the coverage limitations found on smaller networks. As someone who needs mobile access to my email (Google GPS navigation is essential for me too), I also look for ones that offer smartphone data plans. My personal favorite here is Virgin Mobile, which is owned by Sprint and uses their network. I travel extensively all over the country, including many remote areas, and I’ve yet to have a dropped call or lose signal (except for a brief time driving on a highway in a rural part of CA). Best of all, I only pay $25 a month for 300 minutes (I rarely go over the 300 minutes but when I do, additional minutes are only .10 each.) and unlimited text and data. There are also pre-paid plans from companies like Boost (also owned by Sprint) and T-Mobile with unlimited minutes as well as data for $35-55.

The “catch” with pre-paid plans is that the phones are unsubsidized and the choice of phones is more limited. The idea is that you pay full price and hence more for your phone upfront but then save money in the long run because of the much lower monthly fees. That being said, I only spent about $120 for my Android phone and it does everything I need it to do and more. In fact, I‘m happier than if I had bought the latest and greatest smartphone, only to feel buyer’s remorse after a better one inevitably came out the following month. As it is now, I can be content to know that I got the best phone available for the price I pay.

Innovation in mobile technology is causing people to spend more on their phone bills but technology can be made to work for your wallet instead of against it. You can keep your landline while dropping your monthly bill and unless you absolutely need to be on Verizon or AT&T’s network or can’t live without an iPhone, you can also enjoy the luxury of a smartphone without paying an arm and a leg for it. Talk may not be cheap now, but it can be.

The Basics of Income Taxes

2012-01-25T00:32:23Z

Every year around this time we at Financial Finesse see an increase in demand for our Tax Basics workshop. The thing about our Tax Basics workshop is that it is exactly what it says it is—basic. We don’t discuss tax theory. We don’t attempt to understand the alternative minimum tax. Instead we focus on the tax concepts that affect the majority of taxpayers across the U.S. Understanding things like tax credits, exemptions, and deductions is critical to making sure you don’t end up on an H&R Block commercial finding out that you “voluntarily” let the government have over $8,000 because you didn’t know the tax benefits of education (in case you are interested, see IRS publication 970, Tax Benefits for Education).

I’m not sure why there is such mystique around personal income taxes. Maybe it’s because no one ever taught us this stuff in school. Perhaps it’s because of the sheer size of the tax code (71,684 pages according to this website). Whatever the reason, we’ve got to get over it. “Tax basics” is not an oxymoron.

I’m not saying there isn’t a need for tax preparers, enrolled agents, or CPAs. I’m just suggesting that for most taxpayers their federal (and in many cases, state) income taxes may not be as complicated as they may seem. If you have never prepared your own taxes, either by hand or with the help of software, I challenge you to give it a try. You may discover a whole new appreciation for our tax code.

Here are some simple steps to get you started on preparing your 2011 federal tax return:

Step 1: Gather your tax papers

Before you tackle the 1040, make sure you gather all of the paperwork and tax forms you will need. W-2’s, 1099s, and 1098s are just some of the more common tax forms that are mailed to you at the beginning of the year letting you know what information has been reported to the IRS. Payroll information like W-2s and 1099s (if you’re an independent contractor) should be received sometime before the end of January, so if you haven’t gotten anything by then, give your payroll department a call. For help knowing what tax forms you may need, check out this tax preparation checklist: http://tax.yahoo.com/checklist.html. If you prefer using software, here is a comparison of some of the major products: http://tax-software-review.toptenreviews.com/

Step 2: Prepare your return

Once you’ve gathered all of the appropriate documents, it’s time to start preparing your return. The most common federal income tax form is the 1040, but for less complicated returns there is the 1040A and the 1040EZ. If you’re not sure which form to use, the IRS offers guidelines on their website: http://www.irs.gov/newsroom/article/0,,id=251988,00.html.

Step 3: Have a tax preparer review your filing (optional)

Since this may be the first time you have attempted to file your own return, you may be a little nervous. That’s okay. If it would make you feel better, have a tax professional review your return. There are several advantages to doing this. For starters, you may have a lot of questions your tax preparer can answer for you. Also, since you may have done a bulk of the work in preparing the return, you preparer may not have to charge as much for simply “reviewing” your return. Another advantage is peace of mind. For tips on choosing a tax return preparer, visit http://www.irs.gov/newsroom/article/0,,id=251962,00.html

Step 4: File your return (not optional)

Whether or not you have a preparer review your return, you must file your 2011 return no later than April 17^th, 2012. If you have it reviewed by a preparer, your preparer may offer to file it for you as part of their services, but there may be a fee involved. Under the IRS Free File Program, ALL taxpayers are eligible to file electronically for free. In addition, taxpayers with less than $57,000 in adjusted gross income may use Free File software which can save you even more.

I realize that this only scratches the surface, but for many taxpayers the surface is the most they’ll ever need to scratch. As I said earlier, there is plenty of work for tax professionals, and depending on the complexity of your personal situation, their services may be very valuable, but you may never know how valuable until you give it a try on your own. Remember, there are a ton of resources out there to help you, including the IRS website, so visit http://www.irs.gov/newsroom/content/0,,id=104608,00.html for additional tax tips, and find out for yourself how “basic” taxes can really be.

How to Handle Old Debt and Debt Collection Agencies

2012-01-25T17:48:29Z

With identity theft and fraud being such common threats, it’s important to exercise caution in every facet of your financial life. You likely know not to give out your social security number to anyone you don’t trust, nor should you ever invest in any get-rich-quick work or investment schemes. The list goes on.

If you have debt issues, you may be further at risk of having your identity or financial information stolen. You may also be pressed for payment for a debt for which you are, in fact, not liable, despite what a debt collection agency may say. If you have any old debt or are faced with the hassle of dealing with a debt collection agency, there are a number of ways you can deal with the situation.

Monitor Your Credit

Monitoring your credit is very important to not only avoid accruing debt, but to check and see if you have any old outstanding debt that is weighing you down. Be sure to review your credit report and continue to check it on a regular basis.

Forget about the companies that want to charge you a fee for this service – you can request a free copy of your report once per year from all three credit reporting agencies via AnnualCreditReport.com. If you have any debt from the past seven years, this is where you will find it. Any debt older than seven years should not appear on your credit report.

Know the Law

It is important to realize that there is a statute of limitations on old debt, which varies by state. Usually, it ranges from three to six years.

Next, understand that if you do have old debt, the collection agency must send you a written notice explaining the amount of money you owe and to whom. If you respond to them within 30 days to dispute the debt, they cannot contact you again until they verify the debt. Send your response via certified mail and keep copies of all correspondence.

Know What Debt Collection Agencies Cannot Do

Here is a list of tactics that debt collectors are not allowed to employ:

Call before 8am or after 9pm
Use obscene language
Call you at your place of employment after you ask them to stop
Falsely claim to be someone else (such as a lawyer or someone associated with law enforcement)
Threaten to have you arrested
Continue to harass you after you’ve asked them to stop
Talk with friends, family, or professional references concerning the debt – they can only talk to you or your lawyer
Threaten you with wage garnishments unless they have the authority to do so (check with your state guidelines)
Threaten to sue, unless it is allowed in your state – in some states, suing is not an option

Hypothetical Situations

Here are four hypothetical debt situations and how to handle them:

Debt that is older than seven years and outside the statute of limitations: There is no liability here whatsoever. Due to the statute of limitations, no collection agency can come after you for payment, and it should no longer be included on your credit report. If it is, dispute it and get it removed.
Debt that occurred within the last seven years but is outside the statue of limitations: You may want to consider settling this debt to have it removed from your credit report. However, before you pay the entire amount, consider negotiating a settlement with the collection agency by offering to pay back a percentage of the total owed. However, realize that if you opt for a settlement (rather than paying the debt in full) this will more significantly hurt your credit score.
Debt that is older than seven years but is not outside the state of limitiations: This is a very rare occurrence. Such a debt will no longer have an affect on your credit rating, but you still are exposed regarding collection agencies. Use your best judgment here as to whether you should pay off the debt in full or via a settlement.
Debt that occurred within the last seven years and is not outside the statute of limitations: Pay this debt in its entirety if you have the ability to do so. It is damaging your credit score, and collection agencies are legally authorized to come after you for it.

Additional Tips

If you are ever contacted by a collection agency, say as little as possible over the phone, and just hang up if anything makes you uncomfortable. Never agree to pay back the debt (even verbally), and do not acknowledge the validity of the debt over the phone. If you do either one of these, it could actually reactivate the debt and put you on the hook for the amount owed.

If you do get taken to court over an old debt, you must show up in court, regardless of the validity of the debt. Not showing up could result in a claim against you.

Finally, keep in mind that older unpaid debt cannot hurt you nearly as much as new or recent debt. If you have debt issues, focus on the more recent ones.

Final Thoughts

No matter the age of your debt, there is always the moral obligation to pay it back. You can address this issue as you wish; however, I would not suggest that you avoid paying back any valid debts in your life just because there is a loophole. But remember that there are many predatory collection agencies out there that may come after you for “zombie debt” that you do not technically owe.

Do yourself a favor: If faced with the issue of old debt, educate yourself. Know the ins and outs of the entire scenario before making any final decision, and do what’s best for you.

Do you have any old debt horror stories? What are your tips for dealing with collection agencies?