Category: Personal Finance

Money and Marriage

Since 2007 money has topped the list of sources of stress for Americans, with almost two-thirds reporting that money caused them very significant or somewhat significant stress.

Money is also the leading cause of stress in relationships, with 70% of married couples arguing about money. According to research arguments about money are by far the top predictor of divorce, and fights around money take longer to recover from than any other type of argument.

Reading all of that might make everything seem hopeless. After all, don’t all married couples fight about money? No! My wife and I have been married for almost 20 years and we have never had a fight about money. We had a lot to learn about money together, but we have never fought about money.

In addition, I have been counseling individuals and couples about money for close to 20 years and have learned a lot about what works and what doesn’t work. Through personal experience, counseling experience, and research, I have discovered many things that financially healthy couples do with money.

Here are my top ten tips for couples:

1. Find a financial counselor that can help you walk through everything. A trained financial counselor understands the financial side of money and the emotional side of money. I strongly suggest couples work with an Accredited Financial Counselor, which can be found at http://afcpe.org/find-an-afc. If you are not married yet, see a Financial Counselor as part of your pre-marital counseling.

2. Meet as a couple on a regular basis and discuss (discuss – not fight) your budget, goals, dreams, and creative solutions to your financial challenges.

3. Each partner in the couple should take the online Money Habitudes assessment. This tool will help you understand your money habits and attitudes, and will give you important tools and knowledge to discuss with each other and your financial counselor. You can learn more here: https://online.moneyhabitudes.com/

4. Set financial goals together and work towards achieving those goals.

5. Make sure each partner has money they can spend on whatever they want.

6. Set some money aside for each partner to be able to grow and develop their talents. For example, if your spouse wants to learn to play tennis, they could sign up for lessons. If you want to learn how to cook healthy meals, you could take a class. Even better, see if there is a class you both would enjoy.

7. Spend money on experiences, not things.

8. Be sure there is absolutely NO financial infidelity in your marriage (financial lies). Few things will destroy trust in a marriage faster than lying about money.

9. Review both partners credit reports on a regular basis (at least once a year).

10. Learn about money together – listen to podcasts and read books together. A few suggestions for podcasts include Stacking Benjamins, You Need a Budget, The Ric Edelman Show, and Money Tree Investing. A few books I recommend are You Need a Budget, The Difference, and How Rich People Think.

What other tips do you have for making money work in your marriage or relationship? Please share in the comments below or on Facebook at https://www.facebook.com/RyanHLawBlog/

 

Sources:

American Psychological Association (2017, November 1). APA Stress in America survey. Retrieved from http://www.apa.org/news/press/releases/2017/11/lowest-point.aspx

Jacques, S. (2013, July 12). Researcher find correlation between financial arguments, decreased relationship satisfaction. Retrieved from https://www.k-state.edu/media/newsreleases/jul13/predictingdivorce71113.html

MagnifyMoney (2017, February 13). 21% of divorcees cite money as the cause of their divorce, MagnifyMoney survey shows. Retrieved from https://www.magnifymoney.com/blog/featured/money-causes-21-percent-divorces925885150/

Money (2014, June 1). Poll: How husbands and wives really feel about their finances. Retrieved from http://time.com/money/2800576/love-money-by-the-numbers/.

Vincent, S., (2015, February 4). Love and money: People say they save, partner spends, according to SunTrust survey. Retrieved from http://investors.suntrust.com/news/news-details/2015/Love-and-Money-People-Say-They-Save-Partner-Spends-According-to-SunTrust-Survey/default.aspx

Beanie Babies, Baseball Cards & Bitcoin

What do Beanie Babies, Baseball Cards and Bitcoin have in common?

None of them are a good investment.

For those unfamiliar with Beanie Babies, they are a stuffed animal that became a fad in the mid-90’s. Ty Warner, Inc. created the toys but strategically only produced a limited amount of each new stuffed animal and retired them regularly. People would wait for hours and hours for the chance to buy one of the limited ones, then they would sell them for as much as ten times the price, mainly on Ebay. At one point Beanie Babies made up 10% of Ebay’s sales!1 People spent fortunes buying and carefully storing them. The bubble, of course, burst, and now those bins of Beanie Babies are essentially worthless. There are stories of people going bankrupt after spending over $100,000 on the toys2 or carefully sorting their Beanie Babies in a divorce.3

 

And how about baseball cards? This was a fad of the late 80’s and early 90’s. Topps, Score, Donruss and Upper Deck were among the companies that printed millions of cards and were religiously collected by almost every boy in America (myself included). Baseball card shops opened up all over the nation, and a price guide printed monthly by Beckett detailed how much each card was worth, often driving the market by setting prices. While a Mickey Mantle or Honus Wagner card might be worth a lot, the remainder are essentially worthless. It was a bubble that was bound to burst.4

Both Beanie Babies and baseball cards produced no real value – they were hyped up by the market and the prices were artificially inflated. Again – these items held no intrinsic value – they did not produce any further value. If you like Beanie Babies or baseball cards because you enjoy them, great, but if you bought them as an investment it was a bad gamble.

Enter Bitcoin.

Without getting technical, Bitcoin is a form of currency (called cryptocurrency). It is “mined” by massive computers running complex algorithms. According to a Bitcoin forum5 someone trying to mine bitcoins on a home computer will mine about 0.00001406 bitcoins per week, which means it will take well over 1,000 years to mine 1 Bitcoin.

Clearly mining isn’t the way to make money.

The basic idea behind cryptocurrencies like Bitcoin is that there is no bank or government or currency backing it up. If you own a Bitcoin you own an electronic coin that you can (hypothetically) use to purchase items (although the documentary Life on Bitcoin6 shows how hard that can be).

The basic idea would be that if a Bitcoin was worth $1, you could buy a $1 drink for 1 Bitcoin. You transfer ownership of that Bitcoin to the company selling you the drink. If a Bitcoin is worth $2 you would transfer ½ a Bitcoin to buy that drink. The new owner can either spend it or save it.

People buy Bitcoins in hopes that they will go up.

For early adopters, it went well. In 2010 the highest price was 39 cents. Bitcoin hit its high price on December 17, 2017 at $19,843.11.7 If you bought 100 Bitcoins at 39 cents each and sold them on December 17, 2017 you would have made $1,984,272 ($1,984,311 minus $39 initial investment). Not bad, right?

Wait – you didn’t buy any when it was 39 cents?!? Too bad. I didn’t either.

Let’s say you wanted to buy Bitcoin starting in 2018. On January 1 it closed at $13,500. It reached a high on January 6 at $17,152. On January 22 it closed at $10,823. Will it go back above $13,500? It’s hard to say. It might, but it might drop back down to $100.

By the way, let’s say you owned one Bitcoin when it was worth $10,289.26. To buy that same $1 drink with Bitcoin you would transfer 0.000097 Bitcoins. There’s some fun math for you!

However, people aren’t buying Bitcoin to buy a $1 drink (there are few places in the world where one can do that). They are buying Bitcoins in hopes that someone else will buy them for more. It is a purely speculative investment, with far more risk than most people should take on.

Maybe I’m wrong.

Maybe you can buy one Bitcoin today at $10,832 and it will be worth $100,000 next year.

Maybe it will be worth 39 cents.

That’s what speculative investments do.

Yes, there are cryptocurrency millionaires. There are also others who have lost far more than they could afford to. When people realize that there is no intrinsic value in Bitcoins they will have nothing.

Hopefully they can find comfort in their Maple Bear Beanie Baby while holding their Daryl Strawberry rookie card.

I recommend that you stick to real investments where real value is being created. Slow and steady wins the race. If you really, really want to buy Bitcoin never invest more than you can afford to lose, and speculative investments should never make up more than about 5% of your total portfolio.

Analysis of the Revised Tax Cuts & Jobs Act

I don’t know how they did it. The House passed a terrible tax bill. The Senate passed one that was almost as bad. To reconcile the two bills a House and Senate Conference Committee was created. I had extremely low expectations. What they came out with was the revised Tax Cuts & Jobs Act (TCJA), and it is, quite frankly, a great bill for almost everyone.

If you want to read the full bill, you can do so here: http://www.cnn.com/2017/12/15/politics/text-read-tax-plan-republicans/index.html?iid=EL

Before I jump into the highlights, I want to make a few important points:

  • As of this writing, it is not a law yet, so no changes have actually been made. It will likely become law before the end of the year, though, but current tax laws will be in place for your 2017 return that you will be working on in a few months.
  • I am not a CPA or tax attorney, so nothing in this article should be construed as tax advice. This article is for informational purposes only. For information about your own taxes you should consult a tax professional.
  • Page numbers refer to the page in the bill where you can find the information.

Let’s run through some highlights for individuals and families:

  • Reduces all but two tax brackets (page 12):
    Current Law10%15%25%28%33%35%39.6%
    TCJA10%12%22%24%32%35%37%
  • Increases the standard deduction to $12,000 for singles and $24,000 for married filing joint (MFJ) (page 17):
    • With the increase in the standard deduction, personal exemptions are going away. Under current law you get a personal exemption of $4,050 per individual (which would lower your taxable income).
  • If you choose to itemize, you can still deduct sales, income and property taxes up to $10,000 (page 81).
  • If you choose to itemize you can still deduct mortgage interest for home values up to $750,000 (page 78).
    • Deductions for the interest on a home equity lines of credit, however, will no longer be deductible.
  • Increases the Child Tax Credit to $2,000 per child, with $1,400 of that being refundable for most taxpayers (page 43).
  • College savings plans (529 plans) may now be used for elementary, secondary, homeschool and higher education (page 63).
  • Qualified moving expenses are no longer deductible unless you are part of the Armed Forces (pages 102, 110).
  • Alimony is no longer deductible to the payor (page 100).
  • Eliminates most personal casualty and theft losses from itemized deductions (page 81).
  • Because taxes will be easier to file for many (most will take the standard deduction) you can no longer deduct the cost of paying someone to prepare your taxes (page 99).
  • Simplifies the rules for the Alternative Minimum Tax and essentially doubles the amount you can pass to your heirs income tax-free (Estate or Death Tax).
  • If you have a pass-through business (S corp, LLC, Partnership, or Sole Proprietorship) all gains made in the business currently pass through to your individual tax form where you pay taxes on the gain as though it were income. Under the TCJA you can reduce the amount that flows through by 20% (1). For example, if you have a home-based business and you make $20,000, only $16,000 of that will flow through to your personal taxes. Because of this and other tax-friendly portions of the law, the National Federation of Independent Business, who initially opposed the House and Senate bills, is in full support of the revised bill and is encouraging both Chambers to pass the bill quickly (2).
  • The tax rate for corporations is reduced from 35% to 21%.

There are several provisions which were in either the House or Senate bill that did not make it into the final bill. These include:

  • Modification of the exclusion of the gain or sale of a principal residence (Sec 121 of the tax bill):
    • Currently if you live in your home for 2 out of the last 5 years you can exclude the gain up to $250K (single) or $500K (MFJ).
    • Both the House and Senate planned to increase this to 5 out of the last 8 years.
    • The joint bill contains no provision for this, so it will stay at 2 out of 5 years (page 109).
  • Qualified tuition reduction for graduate students continues to be excluded from income (page 68).
  • Up to $5,250 of employer provided education assistance continues to be excluded from income (page 70).
  • The Adoption Assistance Credit is retained (page 112).
  • Continues to allow taxpayers to deduct student loan interest and tuition and fees, and the American Opportunity Credit is retained.

It is important to note that all individual provisions expire after 2025. The plan is that the next President and Congress will extend these provisions for all individuals and families. It is a bit of a gamble, but it is the only way, under current rules, to pass the bill with a simple majority.

What you probably want to know is, what will this bill do to your taxes? People much smarter than me in taxation will figure that out, but in the meantime, there are several calculators you can use to estimate your tax burden. Again, this is an estimate, not a guarantee. I used two calculators to run several scenarios:

Here is what I found for five scenarios. I ran all with the standard deduction (3):

Scenario 1: Married Filing Jointly (MFJ) with four children; $85,000 in ordinary income.

  • Current tax liability: $2,288
  • TCJA tax liability: $0
  • Savings of $2,288 under TCJA

Scenario 2: MFJ with 2 children; $75,000 in ordinary income; $200 in investment income.

  • Current: $3,982
  • TCJA: $1,739
  • Savings: $2,243

Scenario 3: Single; $75,000 income; $200 investment income.

  • Current: $11,889
  • TCJA: $9,800
  • Savings: $2,089

Scenario 4: Single, $55,000 ordinary income; $20,000 home-business income; $200 investment income.

  • Current: $11,889
  • TCJA: $8,920
  • Savings: $2,969

Scenario 5: MFJ with 5 children, $100,000 ordinary income; $20,000 home-business income; $200 investment income.

  • Current: $6,715
  • TCJA: $2,119
  • Savings: $4,596

As more information is released I will continue to update this article and post updates on my Facebook page at https://www.facebook.com/RyanHLawBlog/.

 


(1)  This provision is eliminated for higher-income individuals and certain service businesses.

(2) https://www.nfib.com/content/press-release/national/small-business-supports-conference-tax-bill/

(3) These calculators get updated as more information becomes available. If you run these same scenarios at a different times you might get slightly different results. If the numbers change dramatically I will update the article. The numbers are correct as on December 17, 2017.

The Republican tax bill – a burden to families, homeowners, and students

DECEMBER 18, 2017 UPDATE: This bill, and therefore this article, are now irrelevant as the Senate also passed a bill, then a committee was formed to reconcile the two bills. For an analysis of the revised bill, read https://ryanhlaw.com/revised-tax-cuts-jobs-act/.

Important note: I am not a CPA or tax attorney and I don’t play one on TV. My explanations and descriptions of the proposed changes to the tax code are simplified (which is the goal of this blog). Nothing contained here should be construed as tax advice. I also want to note that I am a Conservative, and I am firmly against this bill.

In early November, 2017, the Republican party released their version of tax reform. You can find the full text of the tax code here: https://waysandmeansforms.house.gov/uploadedfiles/bill_text.pdf. Most people agree that the tax code needs some simplification and that some loopholes need to be closed. While there are a few positive aspects of the bill, the bill, as a whole, is a disaster and should not be passed.  Let’s start with the positive aspects of the proposed bill:

  • Tax brackets are reduced from seven to four, which could lower taxes for some.
  • The standard deduction is doubled, which will make taxes easier for many individuals and families.
  • Repeal of the Alternative Minimum Tax (AMT).
  • Repeal of the estate tax.
  • An increase in the child tax credit from $1,000 to $1,600.
  • Corporate tax rate lowered from 35% to 20%.

Now for the negatives:

  • Removal of the personal exemption (currently $4,050 per person). You can find this removal on page 33 of the tax bill. The doubling of the standard deduction is supposed to make up for the removal of the personal exemption, which you get for each dependent and taxpayer on a return. In my family, with five children, we get seven personal exemptions. In 2016 the personal exemption was $4,050, which equates to $28,350. We would get this on top of the standard deduction, which was $12,600, for a total of $40,950. Our deduction under the new bill will be $24,000. This bill penalizes anyone with children, and certainly penalizes large families. Even with the increased child tax credit we still come out behind. I thought Republicans were in favor of families.
  • Mortgage interest deduction would be capped on homes up to $500,000 (see page 100 of the tax bill). In many areas of the country $500,000 is an average home[i]. This only applies to new mortgages, so if you have a mortgage now and the value of your home is $1,000,000 or less, it won’t affect you. Republicans obviously don’t want you to buy a more expensive home.
  • Under current laws, as long as you are using your home as your primary residency, you can move every two years and not pay capital gains taxes on the increase in value on your home. The new tax plan increases that to five years (see page 137). This will be devastating to the starter home market, and challenging for many others. For most individuals that tax will be 15% of the gain. For some reason, Republicans don’t want you to move very often.
  • Graduate students often pay for their tuition by doing research and teaching undergraduate courses. In exchange, they are paid a wage (which average $20,000 – $30,000 a year) and receive a tuition waiver (which averages $12,000 – $50,000 a year). Under current law, the wages are taxed, while the tuition waiver is not. Under the proposed changes, both the wages and tuition waiver become taxable income (see page 98 in the tax bill). This will dis-incentivize students from going to graduate school, and raising their tax bill by a large amount, especially for those that go to more expensive schools.[ii] An analysis by Forbes shows that an in-state University of Florida grad student pays about $1,424 a year in taxes currently, but under the new plan they will pay $4,052 a year, which is 17.6% of their income. A Princeton grad student pays $2,849 (8.8% of their income) now, while under the GOP plan they will pay $13,499 (41.9% of their income)[iii]. That is a heavy, and unacceptable, tax burden on those trying to get an education. For an excellent analysis of how this would affect students, click here.  Why do Republicans not want individuals to go to grad school?
  • Elimination of state and local tax deduction (see page 105).
  • If your employer offers adoption assistance that is not currently reported as income. This bill repeals that and it will now be reported as income. NOTE: This was included in the original bill (see page 142), but has since been removed.
  • If your employer offers tuition assistance, it is currently not reported as income. That benefit will be repealed and it will now be reported as income (see page 96-98). Again, this will discourage individuals from going to school.
  • If you work at an educational institution you or your children may get reduced or free tuition. Currently this is not reported as income. Under the new bill it will be (see page 96). For example, as an employee benefit my children get free tuition at Utah Valley University. Their tuition would be reported as income.
  • The student loan interest deduction will be repealed (see page 96 – Section 221).
  • The itemized deduction for medical expenses will be repealed (see page 113).
  • The bill adds a “Chained CPI” to the tax code, which essentially means that Social Security income will grow at a slower rate than true inflation[iv].

This tax bill is terrible and should not be passed. However, remember that this bill is not a law yet! I encourage you to contact your elected officials and encourage them to scrap this bill entirely. You can find contact information here:

https://www.usa.gov/elected-officials

Call them, e-mail them, post on their social media pages. Let them know you don’t support this bill.

I conclude with two quotes:

“This is a Republican plan that targets people wanting to adopt children, homeowners, small businesses and people with high medical bills.” – Carol Markowitz[v]

“If the goal of the new tax plan is to shift the tax burden from wealthy, older Americans onto young, already-indebted students pursuing their higher education dreams, it’s poised to be a smashing success.” – Ethan Siegel[vi]

 

END NOTE: If you are looking for a comprehensive review of the GOP tax bill you can find that here: https://www.kitces.com/blog/tax-cuts-and-jobs-act-2018-house-gop-tax-reform-proposal/

 

[i] In Los Angeles county, for example, 23% of mortgages are over $500,000. In San Francisco that number jumps to 56.6%. http://www.latimes.com/visuals/graphics/la-na-g-mortgage-interest-deduction-tax-calculator-20171106-htmlstory.html

[ii] https://www.wired.com/story/grad-students-are-freaking-out-about-the-gops-tax-plan-they-should-be/

[iii] https://www.forbes.com/sites/startswithabang/2017/11/07/the-gop-tax-plan-will-destroy-graduate-education/#427787703d2f

[iv] https://newrepublic.com/article/145688/biggest-trojan-horse-republican-tax-plan

[v] http://www.foxnews.com/opinion/2017/11/07/im-conservative-and-hate-republican-tax-plan.html

[vi] https://www.forbes.com/sites/startswithabang/2017/11/07/the-gop-tax-plan-will-destroy-graduate-education/#7c929ce63d2f

How to protect yourself after the Equifax data breach

equifax data breachFollowing the news of the hurricanes, news of the Equifax security breach has been all over the news. Financial data of 143 million Americans has been stolen, and in many cases it means that the victims are at-risk of becoming victims of identity theft for the remainder of their lives. That’s right, you, and if you have them, your children, could be at risk for the rest of your life. The hackers got names, Social Security numbers, birth dates, addresses, credit card numbers, and some driver’s license numbers.

The breach ticks me off – this never should have happened. Clearly Equifax has some major vulnerability in their system which they should have known about and protected. A credit bureau should be utilizing the highest level of security at every level. Your information with them should be as secure as a vault. On top of that, to add insult to injury, three of Equifax’s executives (including the CFO) sold nearly $2 million worth of stock after the breach, but before they told the public about it. That’s right – here’s a timeline for you:

  • Between mid-May and July, 2017 – breach happens
  • July 29, 2017 – the hack was discovered
  • Aug 1-2, 2017 – executives sell almost $2 million worth of stock
  • Sept 7, 2017 – the public is informed of the breach (thank you, Equifax, for waiting more than a month before letting us know)
  • Sept 8, 2017 – Equifax stock drops by double-digits

Equifax cliams that these executives had no knowledge of the hack when they sold their shares, but I don’t buy it. You’re telling me the CFO didn’t know about this? If he didn’t know, then who did? I’m sure that the timing of the sale will be part of any investigation.

The breach has happened, though, and you need to take specific steps to be sure you protect yourself. Let me warn you now, the few hours you spend on this are not going to be the most fun, but it is critical you take care of it now. It will be much, much worse if you wait and are a victim of identity theft.

I’ll try to make it as easy as possible for you with links and instructions.

  • First, don’t sign up for the protection that Equifax is offering. It only lasts a year, and, unless you opt-out of it, means you can’t be part of suing Equifax later on. I also don’t trust the company that just had the biggest data breach in history to be able to protect my data. Pass. Due to the severity of the breach, they should offer identity theft protection for life.
  • Sign up for Credit Karma (https://www.creditkarma.com/). You will get free credit scores and free monitoring of your credit reports. If anything unusual happens, they will contact you. It’s a free service and you should sign up for all adult members of your family.
  • Credit Karma logo

  • Place a credit freeze on all three of your credit bureau files. A credit freeze is THE SINGLE MOST IMPORTANT THING YOU CAN DO TO PROTECT YOURSELF. It literally locks your credit bureau files so NO ONE, including you, will be approved for new credit. A thief could have your information and they will apply rapidly for credit, all of which will be denied. They will eventually move on. Depending on the state you live in, there will be a $0-$15 fee to set this up, and you need to do this for each adult member of your family.Here are the links:
    https://www.freeze.equifax.com/Freeze/jsp/SFF_PersonalIDInfo.jsp
    https://www.transunion.com/credit-freeze/place-credit-freeze
    https://www.experian.com/freeze/center.html

    Because millions of people are setting these up the systems are not all working. I was able to set up Equifax and Experian, but not TransUnion. I will keep trying throughout the next day or so, and if it doesn’t work I will take care of it via mail.If you need to apply for credit later, you can un-freeze your reports for a limited period of time, after which it will re-freeze.

  • Place a fraud alert on your accounts. This is simply an extra step that puts an alert on your credit report that you might be a victim of identity theft, and that creditors need to call you before any credit application can be approved. It only lasts 90 days, but you can put the alert on there repeatedly. I already have a note on my calendar 90 days from today to renew the alert. You only need to place the alert with one company then they will place the alert with the other two. I recommend you use TransUnions fraud alert system – I found it to be the easiest one: https://www.transunion.com/fraud-victim-resource/place-fraud-alert
  • fraud alert

  • Sign up for Zander Insurance identity theft insurance. For $145 a year it protects your entire family, including your children. They have a 100% recovery success rate and protect you against all types of ID theft, including tax fraud, medical ID theft, and, of course, financial fraud. If your identity is stolen as a result of the Equifax, or any other breach or identity theft, they will take over and fix everything. It is well worth every penny. You can sign up for that here: https://www.zanderins.com/idtheft2
  • logo_zander

  • Speaking of children, does it make sense to freeze their reports? The credit bureaus don’t want you to be able to do that, but some states have made it mandatory. All three bureaus are falling in line, but none will allow you to do it online. TransUnion will do a search, for free, to see if your children have credit reports. You can find that here: https://www.transunion.com/credit-disputes/child-identity-theft-inquiry-form.
  • Utah is taking things one step further – they have set up a Child Identity Protection Program through the Attorney General’s office that registers your children’s Social Security numbers as a number belonging to a minor, which will help protect their data. You can find that program here: https://cip.utah.gov/cip/SessionInit.action. If you live in a different state encourage your attorney general to create a similar program. Because I live in Utah and have this option, along with the Zander protection, I don’t feel that I need to freeze their credit, but if I lived outside of Utah I would absolutely take that step.
  • utah cip

  • Because credit card numbers were stolen, I recommend calling the toll-free number on the back of each credit card you have and requesting a new number. It’s a pro-active step you can take to prevent unauthorized charges in the future.

Again, I realize this isn’t fun – it’s a lot of work to set these things up, but I wouldn’t delay. Take a couple of hours today and get all of this done. Taking these steps is like building a brick wall between you and identity thieves.

Financial Filing Systems

Think about all the financial paperwork you receive each month – either digitally or in the mail. In a typical month you might receive an investment statement, credit card bills, bank statements, and more. Some need to be checked for accuracy while others need to be filed for tax season.

If it is tax season you will get even more financial documents each month. In addition to new ones you are receiving you also have documents that you keep a copy such as previous year tax returns, real estate documents and your will.

While there are countless financial filing “systems” that individuals have created and discuss on their blog, two stand out that were developed by financial authors or planners – David Bach’s File Folder System and the HomeFile Financial Planning Organizer Kit.


David Bach’s File Folder System

Bach’s system consists of 14 hanging folders and approximately 50 file folders. Each hanging folder is labeled with a different category such as:

  • Tax Returns
  • Retirement Accounts
  • Household
  • Credit Card DEBT
  • Insurance
  • Savings and Checking Accounts

As documents are received they are placed in the corresponding folder.

Bach’s system is simple and, beyond the cost of the folders, is free. Bach discusses his system in more details at http://www.oprah.com/money/david-bachs-file-folder-system.


HomeFile Financial Planning Organizer Kit

HomeFile was developed by financial planners J. Michael Martin and Mary E. Martin. It contains 22 laminated cards that are pre-labeled and are similar, though more detailed than, Bach’s system. Some examples include:

  • Autos
  • Charities
  • Credit
  • Employment
  • Personal
  • Real Estate

Each card is labeled with what is filed there, what is not filed there and when you can remove the document. The system includes a quick-find index so you can locate a document easily and a 48-page handbook with instructions and forms.

The system is $29.95 for one kit. You can learn more at http://www.homefileorganizer.com/.

It is recommended that these types of files are kept in a file-proof locking box or safe. It may be advantageous to make it a portable box so it can be taken with you if needed.

 

Paying for College – 529 plans

College can be paid for in a number of different ways – you can save up in advance, you can work and pay along the way, you can excel in academics, sports or other areas and get scholarships, you can pay with grants or loans or you might just have a rich relative that is willing to pay it for you.

In today’s article I want to cover the first option – saving up in advance.

In 2013 the Center for Social Development did a study called “Small-Dollar Children’s Savings Accounts, Income, and College Outcomes”(1) where they share some interesting findings:

  • 61% of low- and moderate-income (LMI) children have no savings account for college.
  • An LMI with savings for college is three times more likely to enroll in college than a child with no savings, and more than four and a half times more likely to graduate.
  • Only 5% of LMI’s with no savings will graduate, while 25% of those with savings of $1-$499 will graduate, and 33% of those with $500 or more set aside will graduate.

These numbers are significant – compared to their peers from a similar socioeconomic background, setting aside between $1-$499 for your child or grandchild makes them three times more likely to enroll in college and four and a half times more likely to graduate. That’s not a lot of money for those outcomes.

In addition, the government has provided some great tax benefits to saving for college in special accounts called 529 plans. Each state has at least one 529 plan, but they all share these benefits:

  • Tax-free investment growth
  • Tax-free withdrawals for qualified expenses
    • Qualified expenses include tuition, fees, room and board, textbooks, computer, printer and software as well as any other required fee from a university or college
  • You can use the money to pay for education expenses in any state
  • The account holder maintains ownership of the account
  • You can change the beneficiary any time you want
  • If your child gets a scholarship you can withdraw up to the amount of the scholarship and just pay taxes on the earnings
    • Non-qualified withdrawals (i.e. those not for qualified expenses) are subject to taxes and a 10% penalty on the earnings
  • Legally there is no maximum amount, though in reality most people want to keep the annual contribution below $14,000 if you are single, and $28,000 if you are married(2)

Many states offer a tax deduction or credit of some kind if you live in that state and invest in that state’s 529 plan. NerdWallet has created a list of which states offer a deduction or credit here:

https://www.nerdwallet.com/blog/investing/529-plans-list/

Which plan should you invest in? You want to find a plan with low fees, direct-investing (which means you pay no commissions on the investment) and, if possible, a tax deduction or credit.

Consumer expert Clark Howard said, “Utah is by far the single best plan in the country.” He also lists Iowa, New York, Georgia and Michigan as great plans.(3) Morningstar rates Utah’s plan as “…one of the best in the U.S.”(4)

You can explore your state’s plan further from the NerdWallet link above, but if you are looking for a great plan you can’t go wrong with the Utah Educational Savings Plan (https://uesp.org/). It is direct-sold, has low-fees, and has good investment options with Vanguard. There is no fee to open the account, there is no minimum investment and Utah residents can get a Utah State tax credit for contributions.(5)

Remember – saving as little as $1-$499 for your child’s college education dramatically increases the odds of them going to, and graduating from, college, which will increase their lifetime earnings, decrease their chances of living in poverty and decrease their chances of being unemployed.(6)

 


  1. https://csd.wustl.edu/publications/documents/wp13-06.pdf
  2. Note that it could actually be much higher than this if your plan allows it, but that gets into estate planning issues, which we aren’t going to get into here.
  3. http://clark.com/education/clark-updates-his-529-guide-for-2010/
  4. https://uesp.org/morningstar-utah-educational-savings-plan-is-one-of-the-best-in-the-u-s/
  5. This is not tax advice – check with your tax advisor or preparer to ensure you get the maximum benefit.
  6. This is assuming they choose the right major, but that will have to be covered in another article.

Are You Financially Fragile?

What would happen to you and your family if:

  • your fridge broke down?
  • your car transmission went out?
  • the primary breadwinner in your family dies?
  • the primary breadwinner in your family becomes disabled?
  • the Social Security fund goes bankrupt and you will no longer receive a Social Security check?

As many as 76% of Americans live paycheck-to-paycheck – they have little to no savings and they spend more than they earn each month. These people are the Financially Fragile.

Financially FragileWhen one of the above events happens it can be challenging for anyone, but it is devastating for the Financially Fragile.

If you are living this way, you can take a few steps to become Financially Resilient. Being Financially Resilient means that you are able to withstand or recover quickly from difficult financial conditions, such as your car transmission going out. Again, that can be difficult for anyone, but the Financially Resilient will recover quickly while it can destroy the Financially Fragile.

Here are some things I recommend to start down the path to becoming Financially Resilient:

  • Have an emergency fund – start out with $1,000
  • Use a budget[i]
  • Spend less than you earn
  • Have adequate insurance
  • Pay off debt
  • Use a Revolving Savings account[ii]
  • Have some “fun money” or “mad money”
  • Pay attention to your credit score[iii]

For more information on these topics, see the links below. I encourage you to take steps to become more Financially Resilient.


[i] Guide to Budgeting

[ii] https://ryanhlaw.com/revolving-savings/

[iii] https://ryanhlaw.com/know-your-score/

Budgeting Software

Budgeting software

Budgeting is the foundation of financial wellness and success. Budgeting puts you in control of your money and helps you achieve your goals.

A few years back two professors did the largest research study on millionaires in the United States. They studied how they made their money, what their family structure was, what kind of car they drove, what kind of watch they had and on and on. After they compiled the research they wrote a great book titled “The Millionaire Next Door.” One of the key findings of the book was about budgeting:

“Millionaires became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.”

That’s right – they set a goal to become a millionaire then the budget was the tool they used to get them there.

Maybe you have a goal to become a millionaire, maybe you don’t. You have financial goals, though, even if you haven’t attached a dollar amount to it yet. Do you want to retire someday? That’s a financial goal. Do you want to travel? Go on vacation next year? Buy a better car? Buy a house? Those are all financial goals, and you will achieve those through your budget. Once you attach a dollar amount and a deadline to the goal your budget can start to really work for you.

In this day and age there is no reason not to use budgeting software. It is cheap (or free) and does all the hard work for you.

In today’s post I want to do a review of the top three budgeting programs – Mint, You Need a Budget and EveryDollar. All three are online, have great mobile apps and are very secure.

The basic premise of all three programs is that you budget based on what you actually have – it’s not a projection in the future or a record of the past. If you just got paid and you have $2,000 in the bank then you budget $2,000. In all three programs the $2,000 will go at the top of the page and you give every dollar of the $2,000 a job or a name.

If $1,000 of that is allocated to the mortgage category you put $1,000 in the mortgage category and you have $1,000 remaining. Let’s say you take the remaining $1,000 and put $500 in groceries, $250 in utilities, $200 to a car payment and $50 to entertainment.

At this point your mindset needs to shift. You no longer have $2,000 in the bank – you have $1,000 allocated to your mortgage, $500 in the grocery category, $250 in the utility category, $200 for your car payment and $50 for entertainment. Your bank balance is irrelevant – all that matters is having categories that are funded.

Let’s move on now to what some of the differences are, the costs involved and pros and cons.

everydollarEveryDollar

EveryDollar was developed by Dave Ramsey and his team at Ramsey Solutions.

EveryDollar has two versions – a free version and a paid version. The paid version is $99 a year. The paid version gives you the software and app and the paid version connects to your bank account and imports transactions, which is vital in my opinion. The free version also has a lot of ads pushing you to use the paid version.

EveryDollar recommends you:

  1. Budget before the month begins in a team meeting with your spouse if you are married.
  2. Budget to $0 – or give every dollar a name.
  3. Track your transactions – you enter them manually or with the paid version you import them and assign them to a category.

In addition to the ads pushing you toward the paid version, there are ads for Dave’s ELPs, or Endorsed Local Providers. For example, on the sample budget I set up ads came up for auto insurance, home insurance and life insurance.

EveryDollar comes with a good 15-page Guide to Budgeting that teaches you how to use the software.

I found the interface to be clean and very easy to use. Entering transactions was simple. You can set or change the categories any way you want – adding, deleting, or renaming.

The big problems I see with the software are:

  • Neither version tracks your bank account. The paid one pulls transactions in, but it doesn’t track your account. You would have to log in to each one to be sure your balances are the same. Other software acts as a bank register in addition to the budget. Using EveryDollar gives you an extra step.
  • The ads for the paid version and ELPs got annoying.
  • The paid version is expensive for what you are getting.
  • In most of the categories money doesn’t roll over from month-to-month. If you have $10 left in “gas” at the end of the month it is gone on the first of the next month. I think that is a major flaw. When I looked up why they did that it says that there shouldn’t be any extra money at the end of the month. If there is $10 leftover you should apply it towards your goals. I get that, but I still think it should roll over. What if I am putting extra in the gas category to save for the gas for our vacation?

    There is an exception to this – the “goals” categories do roll over. Put $100 in a category labeled “Emergency Fund” and it will roll over. Supposedly you can also turn any category into a “Fund” and it will roll over. When I tried doing that, though, nothing rolled over. It is possible I got frustrated too early and didn’t learn how to fully use it, though.

While it is clean and simple to use, I think the cons outweigh the positive features. I don’t think it fully does what you want a budget to do.

mintlogo_link_presspgMint

Mint was one of the original players in the online budgeting software game. They were acquired by Intuit a few years back who really hasn’t done much with it. My guess is that they bought Mint to market its other products to the users, of which Mint has over 300 million.

Mint is 100% free. It is supported by ads that can get quite intrusive.

When you first sign up the first step is to link it with your bank account. You can’t move past the first screen until you link it. I don’t like that at all. I think they should let people take it for a spin before they commit, but I think we should also read bills before we pass them. I do wonder how many of their 300 million users signed up, then never actually linked an account.

Because I didn’t want to link an account today, my review is based on how the software used to function. However, just last week I tried to help someone with their Mint account, and it looked the same and had the same limitations it used to have, so my review should be fairly accurate.

Mint will allow you to connect all of your accounts, so it can act like a Financial Dashboard for you. As I mentioned, it is also free.

For me that is where the pros stop. I found Mint to be incredibly inflexible and not user-friendly at all, starting from page one where you can’t see what you are getting unless you link your account. Want to rename a category? Nope. Mint fixes the categories and you can’t change them, which means you have to fit your budget around their predetermined account names. Here is their fixed list: https://www.mint.com/mint-categories.

“Honey, which category in Mint is the money we’re saving for a snowblower?” “It’s the laundry category.” It’s about like that.

Returning things and getting credits to your account throws the budget off as well. If you return $50 worth of clothing it sees that as income. I found full blog posts about how to manipulate the software so it isn’t treated as income. It shouldn’t be that hard.

Remember, though, Mint IS free. If you can’t afford a paid version and you want it to link to your accounts (and you do want to), then Mint is a good option.

ynab-logoYou Need a Budget

You Need a Budget, or YNAB for short, was developed by Jesse Mecham while he was a student at BYU. He had taken an Excel class and created a spreadsheet that he used to track their family budget. He decided to try to sell it and to his surprise it sold – a lot. Jesse has a full team working on YNAB now and it has moved far beyond the Excel spreadsheet. It is now a web-based app with an Android and Apple app. YNAB focuses on one thing – budgeting – and they do it extremely well.

YNAB has four rules for making your budget work:

  1. Give every dollar a job. You budget just the money that you have on hand by asking yourself, “What should this money do before I’m paid again?” You follow this rule by connecting your bank and credit card accounts to YNAB, setting up spending categories, putting money in the categories and tracking your expenses.
  2. Embrace your true expenses. Think about your less-frequent expenses such as Christmas and insurance. You set a goal with a deadline and a dollar amount to meet those goals. The software tells you if you are on-track or not. See my blog post at https://ryanhlaw.com/revolving-savings/ for more details.
  3. Roll with the punches. When you need to change your budget, just change it.
  4. Age your money. Work towards spending money that you earned at least 30 days ago – that way you aren’t living paycheck to paycheck anymore. The software displays an “Age of Money” number at the top of your budget.

YNAB is free for 34 days, then you can pay either $5 a month or $50 a year. Students can get a copy for free for a year by emailing student@ynab.com.

YNAB is simple to use, and in my opinion it is the most powerful budgeting software out there. The only downsides I can think of are:

  • The Android and Apple apps need some more developing. I happen to know that this is a feature they are working on right now.
  • It has a bit of a learning curve. While they have user guides, they could benefit from a simple booklet like EveryDollar puts out with their software. However, they have free online classes (over 100 per week) – including some early in the morning and others in the evening. You should be able to find a class time that works for you. There are currently 13 different classes – from Getting Started to Learn From Reports (https://www.youneedabudget.com/classes/).

Conclusion

If you need a free solution I recommend Mint. If you are willing to pay for a far superior product, though, I recommend YNAB. I have been using YNAB for years now and I recommend it all the time. It is the most powerful and versatile option. You will get far more from YNAB than you will from either other software package.

With any budgeting software, though, it only works if you put in the time. EveryDollar recommends a weekly meeting and check-in. This will work for most people. Being the budgeting nerd that I am, though, I actually log in each morning, pull transactions in from the previous day, and make sure everything is up-to-date. It takes just a few minutes, then I can be sure that all of our budget categories reflect correct numbers.

You can learn more about any of these solutions at:

http://www.everydollar.com

http://www.mint.com

http://www.youneedabudget.com (NOTE: If you sign-up for YNAB through this link you will get your free 34-day trial plus another month for free.)

Droids or Tax Time?

Have you started receiving forms with names that sound like droids from Star Wars?

I’m fairly certain that all these droids will be in Star Wars episode 18:

  • W-2
  • 1099
  • 1098
  • W-4P

That can only mean one of two things. Droids are finally making their long awaited arrival on Earth, or it is tax time.

Droids or Tax Time

 

Just in case it is tax time, here are some answers to common questions to help make tax season a little less taxing.

1. How early can I file my taxes?

Wait to file your taxes until you have ALL the tax forms. This includes W-2s, 1099s, Interest statements, etc. Employers and companies have until January 31 to send you everything, so you should have everything shortly after that. Make a list of what you should receive and wait to start until you have it. The most common forms are:

  • Form W-2: You should receive one from each of your employers
  • Form 1098: If you paid interest on a home or student loan or paid college tuition you will receive a 1098
  • Form 1099-DIV: If you received dividends, distributions or capital gains on any investments, watch for one of these to grace your mailbox
  • Form 1099-INT: Any interest paid to you, such as interest on a CD or bank account, will be reported on this form.
  • 1099-MISC: If you did work as an independent contractor you’ll get one of these.
  • If you donated to a charity they will either provide you a receipt when you donated, or an end of year statement.

There’s other forms as well, but those are some of the most common ones.

Here’s a great printable checklist from TurboTax:

http://images.turbotax.intuit.com/iqcms/marketing/lib/TurboTax_TaxPrepChecklist.pdf

 

2. Should I file my own taxes or have someone do it for me?

There’s a few different ways you can file your taxes:

  • On paper
    • I don’t recommend this – calculations can be complicated
  • Software such as TaxAct, TurboTax or H&R Block at home
    • As long as you use top-rated software you’ll find it’s intuitive and simple. You’ll enter your tax forms in and the software will search for possible errors. I personally use TaxAct.
  • Discount tax preparation services, such as H&R Block or Jackson-Hewitt
    • These companies have their place, but can be expensive. Their tax preparers are trained, but basically use similar software that you can use on your own. If you want the peace of mind from having someone do your taxes, this can be a good option.
  • Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE)
    • VITA and TCE volunteers are IRS-certified and will file your taxes for free. You read that correct. It’s free, and there’s no catch. VITA is available for anyone that makes under $54,000, and TCE is available for those over age 60. You can find them here: https://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers. Both VITA and TCE tend to fill up quickly, and many are first-come, first-served.
  • Accountant or CPA
    • Unless you run a business you probably don’t need an accountant or CPA to prepare your return. I have several small businesses, and we still file our own, but if your business starts to move beyond small you should work with the accountant or CPA throughout the year.

3. What is the due date to file my tax return?

It’s normally April 15, but this year it is Tuesday, April 18. Why? The 15th is a Saturday, and anytime tax day falls on a weekend it is pushed to Monday. However on Monday the 17th Washington DC has a holiday (Emancipation Day), therefore tax day gets moved to the next business day.

 

To close up this week’s article, I strongly encourage you to check out one of the VITA sites if you make less than $54,000 a year. Almost anyone who uses a discount tax preparer could have their taxes filed for free instead.

One last note – don’t ever get a Tax Refund Anticipation Loan. Companies will offer to give you your tax refund right then, for a fee that ranges between $30 and $150. Don’t fall for it – if you file electronically you’ll have your refund in 1-2 weeks.