Realize America’s Tax Situation

Obviously first you must assess our tax situation for yourself. You need to know how taxes are affecting you today, and how they might affect you in the future. This may seem simple, but put some thought into what size portfolio you are attempting to build or how much money you plan to withdraw each year during retirement. These would affect what tax rate you might get hit with.

Avoid Tax-Deductible Retirement Accounts

This may seem insane, but I would stop contributing to my tax-deductible retirement accounts. In fact I’ve done just that. For the average American these tax-deductible retirements accounts are traditional 401k and traditional IRA accounts.

Here’s how these tax-deductible accounts work. Your paycheck is typically $1,000 before taxes and fall in the 25% tax bracket. Normally you would pay $250 in taxes and you would net $750. Now if you put $100 into your tax-deductible account your before-tax amount would fall to $900 and your taxes would drop to $225. You would net $675. You just saved $25 in taxes.

That sounds great, right? You just saved $25 for free.

But you’ve got to pay those taxes when you retire and start withdrawing those funds for your annual income. That’s all well and good if your tax rate is the same or less than it was when you initially put the money into the account.

Remember, tax rates have to go up eventually. Our government cannot continue to print IOUs. We, as a nation, have to bring in additional income to pay for our deficits. What if your tax rate is 30%, 40%, or 50% when you retire?

You had the option of paying at 25% and knowing what the cost would be. Waiting may turn out in your favor… then again with our budget deficits it may not. I’d rather pay now and know that I won’t have to pay again.

Don’t Forget to Get Your Match

Don’t drop your 401k completely. You still need to get any employer match offered. Unfortunately in this economy many employers have slashed or eliminated their match so perhaps this isn’t as big of a deal for you.

But if you’re still getting a match make sure you continue to contribute just enough to get the full match. Otherwise you are leaving money on the table.

Other Investment Options

Roth IRA

Primarily you will be looking at after-tax retirement options. The best option available to almost everyone is the Roth IRA. I say almost everyone because your ability to contribute to a Roth IRA is limited by your income. As a single person if you make less than $105,000 per year you’ll have no problem contributing the maximum amount of $5,000 per year ($6,000 if you are age 50 or above). From $105k to $120k your ability to contribute is slowly reduced. From $120,001 on up you won’t be able to use a Roth IRA.

Your Roth IRA is funded with post-tax money, so you’ve already paid tax on it. This means you won’t pay federal income tax on the money ever again. (Although I’m not holding my breath. I’m sure they could figure out some new way to tax you on it again!)

No need for fancy accounting to figure out how much your portfolio is really worth after taxes. Just look at the total. That’s how much it is worth. (State tax situations will, naturally, vary by state.)

Roth 401k

The Roth 401k is slowly growing in popularity. Unlike the Roth IRA you can’t give yourself this option. You must wait (or encourage!) your employer to adopt it.

What’s the difference between a Roth 401k and a Traditional 401k? The same as the difference between Traditional IRAs and Roth IRAs. A Roth 401k is a post-tax retirement account. Money is deposited directly from your paycheck into the account and your employer picks who runs the account.

My employer offers this option and it is what I use. (Unfortunately since our 401k match is pathetic I only contribute enough to get the match.)

Prepare for Tomorrow… Today

It is easy to mentally dismiss your tax planning for retirement. For many of you that is 10, 20, or 30 years down the road. But just as with any other type of financial planning the steps you take today will make your life that much easier tomorrow.

Even if tomorrow is in thirty years.

For the uninitiated, every Saturday I do an interview with another blogger. That blogger also interviews me and posts that interview on their website.We then tell our readers — hey, I think this guy is interesting, you should subscribe to his blog for a week.

This week I’m interviewing Saving to Invest. I highly encourage all of my readers to subscribe to his blog and see if you like what you find! Read more about Subscriber Swap Saturday at the link above. His questions for me are up on his blog.

Andy is the brains behind the blog – Saving to Invest, a personal finance blog covering topics from investing, frugality to economics. You can subscribe to his blog by RSS or e-mail.

Question (No Debt Plan): You mention that until last year you were on track to be a millionaire by age 40. Two questions: how hard of an impact did 2008 have on you, and are you including any real estate holdings in your potential millionaire status?

Answer (Saving to Invest): The perils of writing one’s goals! Last year my portfolio was down by 50%, and since I have a lot of my assets overseas (moved from Australia a few years ago, and since I was earning 7% on my ING account there, kept most of my savings there), I took an even bigger hit as the US dollar strengthened. This year has been better and overall stocks/401K portfolio is up about 25%. In regards to being a millionaire by 40, I am still on target to be an “asset” millionaire – which includes real estate holdings. Being a “liquid” millionaire (i.e. ex-primary home) may take a little bit longer. Particularly if we have another year like 2008.

Q: Where did you get your personal finance knowledge? Did it come from wise parents, a sage professor, or just reading on your own?

A: A few factors. My parents were not particularly rich growing up, and while I had a great up bringing, I was never spoilt and learnt the value of money and saving for what I wanted from an early age. This provided a good grounding for my personal finance knowledge. I then stumbled on to this personal finance blogging thing shortly after moving to America and discovered content which I could really relate. But honestly, the best personal finance (and generally all) lessons I learnt were from mistakes I made. I try not to repeat them though, as one lesson is enough!

Q: You make a good bit of change from blogging. How have you pulled that off in such a small period of time and what do you do with your blogging income?

A: I am still surprised/amazed at the fact that I can actually make a nice chunk of change from blogging. I have written a number of articles on blogging characteristics and success factors, but I think that from a revenue perspective the reason for my success has been focusing on 2 or 3 advertising/affiliate partners (focused but diverse stream of income), writing articles that are relevant in the popular media and spending some time publicizing my articles through various channels. I am always surprised at how many people write great stuff, but spend so little time promoting it. At the end of the day, search traffic to one’s website equals revenue. The more links you have to your article, the more traffic you are likely to get. I also keep tinkering with layout and ads to see what works best. Finally, when thinking about revenue, put yourself in the shoes of someone coming from your website (not what you think looks nice!). Would they click an Ad or banner? Why? Then make sure you check you stats regularly to see how your new ads/placements are working. Going from $1 a day to $100 a day in revenue is definitely possible, but it does take hard work and experience is the best teacher.

Q: Being a married guy, how do you and your wife handle finances? Joint accounts, separate accounts, or …?

A: For better or worse, I do all the finances in my household (joint accounts in most things). I keep a monthly budget and generally use the “pay my self-first” principle (i.e. automatic savings and 401K contributions) so that any money left over can be spent without worrying about our financial future. We also have a rule to let each other know if we plan to spend more $100 in a single transaction, so that we can give each other a reality check to see if really nice the item or service. She does however provide a good balance to my sometimes overly frugal nature.

Q: where do you want to take Saving to Invest? Continue to grow your income and go full-time blogging, eventually sell it, or keep it as a nice side hobby?

A: Good question. I have been thinking of that a lot of late. I don’t think it will be able to replace my current job any time soon and from an income perspective I think I will earn more in my corporate career than through blogging. My blog would have to grow significantly in size to replace my salary and benefits – which in the highly saturated blogging market will be hard to achieve. Right now I see my blog as a passive or back-up source of income. Selling down the road is possible, if I get a good offer. But more likely than not I will just start another blog because I like to write, have an opinion and love the dynamic aspect of the internet.

* * * *

Thanks for the interview, Andy!

Hey bloggers, interested in being featured in Subscriber Swap Saturday? Check out the requirements and drop me an e-mail.

Our government is in the same situation some of you are currently facing right this very moment. Some of you have conquered this moment in the past and have moved on.

But our government hasn’t. Right now we are spending more than we earn. Plain and simple.

Blame the Economic Crisis

Tax revenues down (or flat) and expenses up, up, and up some more. Sure the economic downturn has something to do with increasing the deficit. Even if you take the bailout out of the equation you would have a lot less tax revenue because revenues are down at companies everywhere. Add in that many companies have laid off workers or shut down and unemployment hits 9.5%. That’s less individual tax income. More people are on social programs, both federal and state, so you might expect a deficit.

But the economy is not the only thing to blame for our current predicament. Our spending ways are the main culprit. And it’s not sustainable.

Spend, Spend, Spend

You see we had a spending problem long before the financial crisis of 2008. Long before all the bailouts there was concern that Social Security and Medicare would run out in twenty years or so.

Did we have a solution? No, just sweep it under the rug and let the next administration and group of Congressmen deal with it.

CNN had a great article about how health care reform still won’t get rid of the deficit. I have no problem with reforming health care if it fixed our system and lowered costs across the board. Who wouldn’t want that? (Other than insurance companies.)

But it isn’t going to solve the problem!

A Taxing Solution

I see no way around this. As deficits continue to climb and the value of the dollar continues to fall (due to the deficits and international fears that we won’t be able to pay back all of those IOUs we are sending out) the tax rate will become the primary lever to make up big holes.

It won’t be a popular solution and I’m sure the political parties at the time will somberly explain to us why they need to tax us more here, here, and over there. There won’t be any grand ceremonies to sign the new taxes into law. But it is bound to happen.

Why? Because no one in Congress is going to brave enough to cut spending in such a dramatic fashion to fix our problem.

We’re spending more than we earn. We won’t spend less. There’s only one other side of the equation: earn more. How do governments earn more? Higher taxes.

As an individual there are several ways you can prepare for an America with higher taxes. I’ll discuss this on Monday when I give you tips on how to prepare for higher taxes. Stay tuned and have a great weekend!

Net Worth:

• 2.76% increase from last month
• 59.49% increase since we started tracking in December 2007
• 16.25% increase since beginning of 2009

July should be another great month simply because I get paid weekly and there are five paychecks in July. Sweet!

We’re getting closer and closer to the mythical six figure net worth mark. In the end this is a mostly useless number because there are many factors you simply can’t track.

For example the value of my house is truly determined when it sells, not when the tax assessor or appraiser comes by to tell me what it is worth. Then you have to factor in real estate agent commissions, possibly paying closing costs for the buyer, etc.

Nonetheless as long as we keep what we are tracking the same (that is, the same variables tracked in the same way every month) we get an accurate representation of how we are progressing.

What is a remortgage?

You’ve heard of a remortgage — you just don’t know it. A remortgage is also called a refinance. (The light bulb went on for me.)

At the end of the day with a remortgage you pay off your current home mortgage balance with a new loan. That new loan, of course, usually comes with a lower interest rate or some other perk that gives you the incentive to give up your current mortgage.

Steps to Remortgage

There are certain steps you need to take to remortgage, or refinance, your home. These are the basic steps you’ll have to go through.

Assess Your Current Mortgage Situation

Before you can decide what type of remortgage loan you want you need to understand how your current loan is structured.

You need to know:

• current balance
• current interest rate
• current payment
• current term (is it a 15-year or a 30-year mortgage?)

Once you’ve gathered this information (which you should know already!) you can make an informed decision moving forward.

Compare Rates

There are tons of ways to compare rates. Call your local banks and credit unions and speak with a loan officer. Check Bankrate.com’s mortgage rate section to get an idea of what you should be paying. Look at different national bank websites as they generally list generic rates.

Remember as you do your research that the rate you end up with is dependent on many variables such as your credit score, the amount of the loan compared to the value of the house (loan-to-value ratio), and the individual bank.

Consider Remortgage Costs

You also must consider how much a remortgage is going to cost you. If the closing costs involved with getting a new loan are too high, it might make sense to stay in the higher interest rate loan. That sounds crazy, but here’s an example.

Let’s say to close on a loan that will drop your rate 1.00% and save you $100 per month you will pay closing costs of $5,000. That means it will take 50 months of saving that $100 you get every month from refinancing to pay for the closing costs. That’s over 4 years of diligent saving.

Is it worth it? You have to decide. Will you be in the house more than 4 years? If you plan to never move again then sure it makes sense — you’re still saving $100. But the cost is high and you might want to shop around some more.

Get Appraisal

Once you’ve decided on a lender to work with they will send out an appraiser to value your home. Up to this point you’ve probably given them figures about how much you paid for the home, what you think it is worth, and how homes are selling in the neighborhood. If you’ve got a ton of equity in your house this isn’t something to be worried about. Only when you get close to the loan ratios that would break a deal (you’ve got less than 10% equity, or something like that) should you start to worry.

An appraiser simply comes out and measures the home to verify square footage, and then gives an assessment as to the value. Is your yard trashed? Is the siding in need of replacement? Or have you upgraded everything and it really stands out as a great home in the neighborhood? All these (and many more) will affect the value of your home. (And the value of your home affects how much money you can get to refinance with.)

Close the Remortgage Deal

This falls under the should-be-easy-but-is-kind-of-stressful category. You’ll go to the closing office and bring your check for remortgage closing costs. The bank and title agent will be there. You’ll sign away your life — again — on a mortgage. In 30 minutes or so you walk away, new mortgage, interest rate, and lower payment in hand.

With unemployment recently at an announced 9.5% nationwide, I’m curious. Did your family take a staycation this holiday weekend?

Staycations are growing in popularity. In short a staycation is what it sounds like: you stay at home and visit interesting places around your home. This could be parks, free concerts, or the neighborhood pool.

Benefits of Staycations

Obviously if you are looking to save money then not going some place is going to be a great step in that direction.

With staycations you save money on all kinds of travel costs. You don’t pay $100 or $150 per night for a hotel. Generally you spend less on travel costs unless you drive all over your current area and run up a high gas bill.

Unless you go on a vacation in some sort of condo with a kitchen available, you’re going to eat out. Eating out is much more costly than eating in. With a staycation you can continue to cook meals at home even while splurging on a special meal out on the town. (Saving on two meals and spending on one is still better than spending on all three meals.)

In short the money you save on travel, food, and lodging can be applied to fun events in your town. An added bonus is any money you spend in your town benefits your local economy even at the smallest level.

Downsides of Staycations

Let’s be honest. You go on vacation to get away. You want a change of venue, a change of scenery, or a change in temperature. (The weather in Tennessee was gorgeous. At least 10 degrees cooler than where we live.)

To that end staying at home on a staycation can take a little bit of the excitement out of a vacation. If you’ve had to do this type of thing in the past then you may feel like you’ve seen everything there is to see in your town.

Staycations are What You Make of Them

At the end of the day a staycation — just as with a vacation — is what you make of it. You can make it fun, relaxing, and exciting… or you can be bummed out and disappointed.

You may not have a choice either if money is tight. So why not decide to be happy and make the most of what you’ve got?

The timing of the Fortunate 50 couldn’t be better for me personally. I’m in the midst of my last MBA class — entrepreneurship — and I’m working on a business plan that directly relates to athletes. Not necessarily ones making all the money though. More along the lines of this other amazing Sports Illustrated article on how athletes go broke.

Looking at the list you will quickly discover — and probably be appalled — at how much money athletes make from their profession versus simply endorsing products.

Tiger Woods is the prime example coming in at #1.

His salary/winnings came in at $7,737,626. But his endorsements hit $92 million. Yes, $92 million. He earned almost twelve times as much in endorsements than he did playing golf.

This seems to be common for golf as Phil Mickelson hits the list at #2 with salary/winnings of $6.35 million and endorsements of $46.6 million. The other sports seem more evenly balanced between the salary of actually playing the sport compared to the endorsements. Except for LeBron James at #3 the rest of the list earns more playing their sport than endorsing products.

Do these athletes have financial advisors? Good ones that aren’t out to get rich off of them? I sure hope so.

It does make you wonder. Where does all the money go? Tiger Woods earned $100 million last year. Is it sitting in an investment account? Or does he write checks off of it?

I’m curious as to your motivation to stop [the CD ladder].  I get that rates were falling, but wouldn’t you also have caught the rates on the way back up?

It seems that building the ladder is such an involved process – it takes a year to set it it up – that stopping puzzles me.

I’m not against your motives or reasoning – holding cash with immediate access at a time of need is a great line of thinking.  But, as stated, the ladder topic is very interesting to me and I’ve never heard of someone stopping or a ladder falling apart.

I applaud your candor and hope you don’t mind my line of question.

Thanks for sharing

CD Ladders are Open to Interpretation

If you asked five people about what CD laddering really is you would likely get several different answers. A CD ladder at the end of the day is a group of Certificates of Deposit (CDs) that you have built up over time. You don’t put all of your available money into one CD with one fixed rate. Instead you spread the money around over several CDs over time.

For example, if you had $10,000 land in your lap that you wanted to CD ladder you wouldn’t put all $10,000 into one CD at today’s 1.50% interest rate. Instead over some time frame that you define you add chunks of the money and put it into CDs.

The key is the distance between the CDs.

You Define the Distance Between Rungs on Your CD Ladder

All ladders have rungs on them that you step on on your way to the top.

The rungs on a CD ladder are… CDs. All you have to do is figure out how far apart you want the rungs to be.

Many people choose to position their rungs so that they have a CD mature every year. That might look something like this:

We Chose Short Rungs for Our CD Ladder

We were putting a chunk of our emergency fund into a CD ladder specifically to earn a higher rate of return than what we were getting with our high-yield savings account at ING Direct. We wanted a short term so that if we had a true emergency we could live off of our current savings and then wait for the CDs to mature to bring in additional funds.

For that reason we opened 6 month CDs. If we opened 6 of them in a row we would essentially have a very short ladder — every six months a CD would be maturing and we could put the money back into another CD.

Then the financial crisis hit and rates for both high-yield savings and CDs dropped like a rock. We let the CD ladder fall apart because it wasn’t meeting our goals at the time — 6 month CD rates were actually lower than high-yield savings rates (and still are). Right now ING offers a 6 month CD at 1.25% and the regular savings account is 1.5%.

Are We Being Shortsighted?

Your first response should be much like Dave’s: why did you stop? Isn’t that the point of the CD ladder — to help get through flucuating rates?

Absolutely.

But for us this money held a sizeable chunk of our emergency fund. We were looking for a higher return and at the time a higher return wasn’t available. Plus I’ll admit we got a bit spooked and would much rather have the money liquid and available in our savings account.

Send in Your Questions

I’m always looking for great questions to spark a discussion and lead to writing an article for the rest of the community to see. Got something to say? Drop a comment in this thread or just contact me.

As a society we’ve lost TV pitchman Billy Mays (heart disease), entertainer Michael Jackson (who knows), actress Farrah Fawcett (cancer), entertainer Ed McMahon (no formal reason given), and comedian Fred Travalena (cancer).

Death isn’t a fun topic, but I think there are some lessons to be learned from these celebrity deaths. Here’s a list to start with.

5 Financial Lessons from Celebrity Deaths

1. Money isn’t everything. All the money in the world doesn’t matter. All five of these celebrities made a ton of money during their lifetimes. As nice of a lifestyle as they got to live using that money it still did not prevent death. (Hint: nothing prevents death forever.) The pursuit of money, in the end, is fruitless.

2. If you don’t have your health, you have nothing. Of the five listed above only one, Ed McMahon, likely died of old age. The rest died of some sort of medical issue. Mays and Jackson were just 50 years old. In theory they should have had many more years to live on this earth. All the money in the world can’t stop cancer.

3. Life insurance and health insurance are really important. The likelihood of average folks like you and I having to worry about millions of dollars is slim-to-none. But we may suffer from the same health issues that these celebrities did. Heart disease in America? Check. Cancer? Check.

Now imagine if you didn’t wake up from going to sleep last night. Would your family be covered with a term-life insurance policy on you? If you were diagnosed with cancer today would you have health insurance to cover your treatments? Bottom line: skimping on insurance is not the way to go.

4. Having an estate plan is key. Again, imagine you didn’t wake up this morning. Does your spouse know where the will is? (Do you have a will?) An estate plan maps out for the courts exactly how you want your estate — your belongings and money — handed out. Do you want to give it all to your spouse? Do you want to leave some for the kids? Have you appointed a guardian for the kids?

The Jackson case is a perfect example of this — his mother has won temporary custody of the children and control of the estate. But is that what the will said to do?

5. Get your financial house in order. You can be “rich”, but still severely in debt. There is a significant difference between appearing wealthy and being wealthy. Jackson was $400 million in debt when he died last week. Ed McMahon was in the news a few months back for being on the brink of foreclosure on his mansion. These are two individuals that made millions upon millions of dollars and still were in debt.

The Correct Financial Path

This blog is about teaching you how to get out of debt, stay out of debt, and build wealth. Here’s an idea: spend less than you earn. These principles apply no matter your income level. You hear stories of professional athletes that get paid millions of dollars in bonuses and salaries… and ten years later they are filing for bankruptcy. Turn around and you hear stories of school teachers retiring on a healthy nest egg, then donating millions of dollars to their schools.

Use these deaths as a reminder that you’re not going to live forever. That today could be your last day living. Use this knowledge to not only make the most of every day, but to get your finances straightened out now rather than later.

What other lessons should we learn from these celebrity deaths?

Hello readers,

You should know that Saturday morning in our house equals cleaning.  Actually any time of the week can mean cleaning.  Kevin often lovingly refers to me as “Monica”, in reference to our all-time favorite show Friends.  She is the compulsive neat freak on the show who characterizes me to a T.  So what better topic for me to discuss with you than carpet care?

Who Should Buy a Steam Cleaner

I remember a few months after we moved into our house some workmen came over to do paint touch ups in the master bathroom.  The contractor (who had kindly taken his shoes off) complimented me on our spotless white carpet and asked how did I keep it so pristine?  I’m sure I was blushing with pride and said “Oh you know, all I do is vacuum.”

However, this was pre-summertime and pre-puppy.  Gone are the days when I could just vacuum and still maintain perfectly white carpet.  After about one year of living in our house I determined that it made good sense for us to purchase a steam cleaner.

But I wouldn’t say that every household requires one.  So here are my criteria:

You may benefit from a steam cleaner if…

• Your flooring is mainly carpet in a shade of white
• You have several high traffic areas where shoes track in the dirty outdoors
• You have pets (even indoor ones; they track stuff in too!)
• You have children who are prone to making messes (haven’t dealt with this one yet)
• You suffer from indoor allergies

Our machine does a wonderful job of cleaning up spills, removing pet hair, and getting down to the nitty gritty stuff that lives in your carpet which may be invisible to the human eye (remember those middle school science class videos, yuck!)

You can probably live without a steam cleaner if…

• You have mostly hardwood floors, tile, or a thick stain-resistant carpet
• You have several large area rugs (although these will require regular cleaning too)
• You have no pets and your family is consistent about taking their shoes off inside
• You are not bothered by stains and perhaps you are planning to replace the carpet anyway

Where Do I Go From Here

So you went down the checklist and decided it may be a good idea for you to buy your own steam cleaner.  But you’re thinking, “those things are expensive, how can this be frugal?”

Before choosing a machine to purchase we did our research and weighed the cost.  Some would argue that it could be just as easy to rent a Rug Doctor from the local grocery store.  But even if you only do that once a year you will easily spend $30 on the rental, and to my knowledge it doesn’t come with the cleaning solution so you may end up paying another $10 for the bottle of solution.

For us, we figured that if we used the cleaner at least 4 times it would pay for itself.  And believe me I’ve used it way more than that!

Steam cleaners can range from about $99-$399 depending on how many settings you want, different kinds of attachments, etc.  We found one on the lower end called the Bissell PowerSteamer Turbo (very similar to this Bissell 9500 available on Amazon, but not quite as expensive). I would also recommend looking at the Bissell and Hoover websites to see what fits your household needs best.

Ours came from Target and cost us $150.  I was a little concerned that it might not work so well because it didn’t have its own heating element — you have to add already hot water.  But it has worked like a charm so far.  Using the steam cleaner isn’t difficult at all. With ours you add the cleaning solution and hot water first, then you vacuum each area while holding down a trigger on the cleaner that dispenses the solution. Make a couple of passes with the vacuum to suck up the water left behind and you move on to the next section of carpet.

The Rewards

Well even if you’re not a neat freak like me you can still appreciate having a clean, healthy place for your family to live.  And as long as you use your steam cleaner once a year (I would recommend at least twice a year) it will definitely be a good investment.

I’ll leave you with this final thought: it might sound weird, but there is something so satisfying about pouring that ugly dirty water down the drain and knowing that the stuff you were once walking on, laying on, and breathing in is now disappeared!