DIY Financial Planning

Here's a great article from DailyWorth.com on financial planning. It tackles issues I've talked briefly about like taxes, creating a will, investing, and saving.

Credit for the article goes to Jocelyn Black Hodes.

DIY Financial Planning

Tax Season Tips for Beginners

Tax time is around the corner, and it's one of the least favorite times of an average person's year. Whether you're filing as an individual, married, or as a business, the task seems daunting. And unless you're a tax professional, and you don't want to use tax software like TurboTax, then it is quite a pain. But fear not! Here are a few tips that will help the average person when it comes time to sit down and crunch the numbers.

Know the Difference Between Taxable and Non-Taxable Income

Taxable income includes the following:

• Dividends on investments
• Lottery winnings, royalties, gambling gains
• Interest from bank accounts, and all bonds except municipal bonds
• Unemployment compensation
• Your salary, sick pay, or severance pay from your employer
• Capital gains on investments
• Withdrawals from an IRA
• Bonuses and tips

Non-taxable income includes:

• Contributions to an IRA
• Gifts
• Return of invested capital
• 401(k) rollover
• Child support receipts
• Money received as payment for a loan

Make use of adjustments

Adjustments are used to lower your total taxable income. Some examples include

• Expenses you incur moving for a new job at least 50 miles away
• Classroom expenses for teachers
• Qualified performing artists
• Traditional IRA deductions
• Student loan interest deduction
• Several others. Here's a link to the IRS page on adjustments.

Be Smart About Your Deductions

There are many deductions, and a little research or help from a tax professional can save you a lot of money. If you have a relatively simple financial situation, as in you don't run a business or own property, then you'll be better off taking the standard deduction. The government allows all citizens to reduce their taxable income by at least the standard deduction, even if they don't participate in activities deemed deductible. For a list of deductions, go here.

Be Sure You Have to File at All

There are several factors that go in to filing a return, and not every single person that received income has to file. Here's an informative chart from Forbes:

 

Basically, it reads right to left, and if you hit those criteria, you have to file a return.

I hope these tips help in your tax filings!

5 Ways to Avoid Online Scams

We all know the internet can be a dangerous place, what with all the people on there and everything. For every Nigerian Prince asking you to do him a favor, there has to be at least half of a decent person out there, right? I’d like to think so, but people keep coming up with creative ways to coax you into parting with your money. I've compiled a list of questions to ask yourself if you ever come across a website or email that just sounds too good to resist.

1. Is it Too Good to be True?

So you've clicked on an ad that promises to get you ripped in four weeks. Pretty enticing, so long as you don’t know anything about the human body or, you know, physics. That little ad you clicked on then takes you to a different site. And hey! Look at that, they’re trying to sell you something. Most of the time it’s pretty generic stuff: a new supplement that will magically give you muscles with little to no effort, a new way to learn a language in just a week, or how to erase 20 years of your face. If these products worked, then we’d all be ripped twenty-somethings, speaking Cantonese in France, and sharing stock market secrets that have made literally everyone rich. The only people making money, not so ironically, are the ones behind the ad.

2. Has Anyone Heard of This “Miracle” Product?

There are several substances that claim to be breakthroughs in their respective fields. Real things, like aerogel or carbon nanotubes. Those things get media coverage, and a hefty amount of Google search results. The shady-looking product claiming to boost testosterone or give you your hair back with one application, or both, probably isn't real or its benefits have been hilariously taken out of context. Always be sure to fact-check. There are usually plenty of reviews online by people who have already fallen for these traps. Learn from their mistakes.

3. But How Could It be Bad If Its Free?

The first thing that comes to mind here is the website freecreditreport.com. Their marketing campaign consisted of an unknown band singing catchy tunes about the dangers of not knowing your credit score every day. When you sign up for the site, you’re not signing up for a one-time viewing of your credit report. You’re actually signing up for a monthly service that allows you to view your credit score whenever you feel like it. The company happily bills you on a monthly basis for something you didn't even know you had, and would be perfectly content if you just forgot about it. Oh, and it’s ridiculously hard to cancel the service you started once you realize its draining your bank account. The funny thing here is, you actually can check your credit score for free, once a year, at annualcreditreport.com. That site is legitimate, and the concept of knowing your up-to-the-minute credit score is ridiculous, because it actually doesn't change that much.

“Free” things are normally notated with asterisks, or “*”, and are contingent on the completion of some kind of offer. So no, unfortunately there are no feel-good companies out there that just give away iPads all day.

4. Is the source credible?

There are several ads claiming that their product or service has been featured on CBS, ABC, Telemundo, or any national media outlet they feel like slapping on there. If this makes you wonder, “Wow, I don’t remember ever hearing about this!”, it’s because you haven’t. Ever. People will fake credentials like this all the time, because it’s the internet and no one can stop them. They’re anonymous snake-oil salesmen, only these days they’re claiming even the snakes are using it.

5. Is this email/website trustworthy?

There are so many fake email and fake website scams it’s hard to keep up. The best thing is you can avoid their many versions using the same set of tactics. If it’s from someone you don’t know, from a strange sounding web address, it might be a good idea to ignore it. If the website you’re on looks slightly different, or the text in the address bar just isn't right, then don’t enter your info. Is there a green “lock” icon, or other similar symbol synonymous with internet safety? No? Don’t enter your credit card number or any private information. Simple! Here’s a more expansive list of scams that you can avoid in the future. Top Ten Online Scams

Psychological Factors That Make Us Spend

The human brain is an amazing thing. Unfortunately, there are a bunch of logical fallacies that make us act stupid, especially when it comes to managing our money. These fallacies are often exploited and used against us. Ever wonder why prices at stores are never in whole dollar amounts but always end in .99 or .95? That's called odd-even pricing, and it's a dirty little trick that retailers use to make items look cheaper. When most people see the price of $9.99, their brains automatically tell them that the product is not $10, but more in the $9 range. There are many more logical deficiencies in finance, but I'll only cover a few here.

1. The Promise of Free
   All too often consumers are lead into making purchases they otherwise would not have made, just because something free was included. This explains why so many people sign up for "free" credit cards with no annual fee and a 15% interest rate instead of a credit card with a $50 annual fee and a 10% interest rate. Whenever you see the term 'free,' consider it a warning to slow down and consider your choice very carefully. Do the math and always consider what you are giving up when you choose the item attached to something "free." Usually -- but not always -- there is a real cost to something touted as "free."
2. Anchor-Pricing
   Whenever we are introduced into an unfamiliar product category, we're not exactly sure what the items are worth. For example, when a real estate agent shows you two expensive homes and two less expensive ones after that, the last two seem like bargains, but they may still be overpriced. This happens because your brain latches on to the first price it sees and sets the anchor, then all other prices are compared against it. This little mind trick takes away the complicated decision of determining what something is really worth.
3. Instant Gratification
   People know they need to save for retirement, or that beach trip they want to take next year, but they rarely do. Why is that? Because buying something today is much more satisfying than saving up for future purchases. This is also a huge factor in some peoples' inability to lose weight. They enjoy the instant satisfaction of delicious food rather than the long-term benefits of being healthy and fit. A good way to avoid this mistake is to use the 24-hour rule. When you're about to make a purchase, make yourself wait at least 24 hours and see if you still just have to have it. Also, keep pictures of things you want in the future (new car, vacation) in your wallet and pull it out every time you're about to spend money you should be saving.
4. Dollars-to-doughnuts
   Consider this classic economics puzzle. You go to a store to buy a $100 lamp. You then learn that the same lamp is on sale for $50 at another store a mile away. Would you drive one mile to save $50? Now imagine you're considering a dining room set for $5,000. You learn that the identical set is selling for $4,950 at a store one mile away. Do you make the drive? Hopefully you said yes in each situation. However, many people say no, they would not make the effort in the second example. Why? Because 50 percent of $100 ($50) instinctively seems more valuable than 1 percent of $5,000 (also $50).Don't confuse dollars and donuts. Constantly remind yourself that a dollar is a dollar -- just because it's a small percentage doesn't mean it's not still real money. If you're willing to clip coupons to save $10, you should also be willing to find ways to cut $10 off the price of a refrigerator or increase your retirement portfolio's earnings by $10. Or ask yourself: Would I be willing to go to a different store to buy this item if they were handing out $50 bills (or whatever the savings would be)? Picturing your savings in cash makes it seem more worthwhile.
5. The Lost Money Fallacy
   Once we own something -- a house, an investment stock, a car -- we often irrationally keep it or even put more money into it, even when it's time to walk away. That's exactly why folks are often hesitant to sell losing stocks. Although everyone knows stocks aren't guaranteed, some people irrationally want to hold on to loser stocks 'until they earn their money back.' This can be especially dangerous for people with very few stocks in their portfolio, since they don't have much diversification to begin with. However, while they wait for the stock's price to go up, they could actually lose money on more appropriate investments. Other examples: You continue making expensive repairs to your older car because you don't want to "lose" the repair money you invested in the car last month, three months earlier and six months before that. In today's market, you might also be wary about selling your house for 15 percent less than you bought it, even though you know the sale price is reasonable today. Remind yourself that spent money no longer figures into your financial decisions. It's gone. Would you buy that losing stock today, given its performance, if you didn't already own it? If not, it's time to sell. Next time, establish a stop-loss limit (the price at which you will sell a stock) as soon as you buy it, before you get attached to it. Finally, would you put $1,000 into repairing that beater car if a relative had given it to you for free last week? If not, leave the mechanic's shop -- now. You're trying to financially prop up a sinking ship.
   
    
   
    
   
    

 

 

Making Money Online

I know you a lot of scams out there promising several thousands of dollars a week working from home and actually only doing about two hours of work each day. Those offers are certainly too good to be true, but there are legitimate ways to make money online. This isn't a list of "get rich quick schemes" and some will take considerable time and effort to generate a decent payout.

1. Blogging - Some of you may be asking, "How on Earth do you make money just by writing a weblog?" It's very simple. See the ads to the right and at the bottom of this post? Those ads are hosted by Google Adsense, and anyone can simply create an account with them and post the ads right on their site or blog. Every time a link is clicked, Google pays out a certain amount to the account holder. It's a very effective way to earn a little extra income, and visiting people's Adsense advertisements helps support the site and ensures new content can be developed and written.
2. Affiliate marketing - If you become an affiliate with a website, be it clickbank.org or amazon.com, you can post direct links to products that you yourself are interested in or think other people might be interested in. Once you link is posted, anyone who uses it and actually makes a purchase puts a little money in your pocket. When a sale is generated through your link, the respective website will give you a pre-determined cut of the sale.
3. Sell your unwanted stuff online - eBay has been around for a while, and just about everyone should know what it is by now. It's basically an internet auction site where sellers post their products and buyers bid up the prices. You can either try to sell just a few unwanted things on the site, or you could make a full-blown business out of it by ordering products wholesale and selling the individual items at a 30% mark-up.
4. iStockPhoto - This a website that offers stock photographs for a small price. Anyone can sign up, and if you're an aspiring photographer, this can be an invaluable asset. All you have to do is take some high-quality photos of generic or really specific things (it's surprising the things people need pictures of), post them on the site, and any time someone pays for your picture the funds are deposited in your Paypal account. This is truly a set it and forget it service. 
5. Post online reviews - If you're good at breaking things down in an easy to explain way, critiquing, and criticizing, then certain companies will allow you to write reviews of their products. They can pay up to $50 per review, so I'd figure the reviews would have to be fairly in-depth.

If you have the time and motivation, i would try all of these ideas and more. There are plenty of other ways to make a little cash on the side on the internet, and all it takes is a simple Google search.

The Envelope System

Now that you've made your budget, you'll want to make sure you stick to it and don't overspend. A great way to do this is to go on the envelope system. Basically, you'll be labeling a bunch of envelopes with different categories, putting in the budgeted money, and spending only that amount of money. There is something psychological about having all your cash out in front of you that makes you not want to let it go. In today's card-swiping culture, people don't really register the amounts of money they're paying. But on a cash system, paying for things hurts a lot worse. On average, people who switch to a cash system spend one-third less each year. Here it is in steps:

1. Budget each paycheck – I went over budgeting in my last post, so for more specific budgeting information, please refer to that.
   
2. Sort your expenses – There will be bills that you can't make envelopes for, like bills paid by check or automatic withdrawal. You can create categories for food, gas, clothes, and entertainment. Be sure to only create categories that it makes sense to pay cash for.
   
3. Put in the money – Now it's time to actually take all your cash and divide it up in your envelopes according to your budgeted amounts. For example, if you budgeted $250 for food, put $250 cash is the envelope marked "Food".
   
4. Once it's gone, it's gone – Once you've spent all the money you allotted for one category, you can't spend any more money in that area. If you go out and blow all your clothes money in one day, that's it. You won't allowed to spend any more on clothes for the month. That means no trips to the ATM to get more money.
   
5. Resist urges – While paying with debit cards doesn't usually land you in a pile of debt, they can make you overspend. Like I said earlier, paying cash hurts more than swiping a little plastic card. When you spend cash only, spending less and resisting impulse buys becomes a habit.
   
6. Give it time – It will take a few months for you to perfect your envelope system. Don't give up after a month or two if it's not clicking. You'll get the hang of it and see how beneficial the envelope system is as you dump debt, build wealth, and achieve financial peace! See ... simple!
   

Certainly, some bills may come in at different times of the month, so you'll need to adjust your written game plan to take it one step further. You need to plan the budget based upon your pay periods. Say that you get paid twice a month. If you can write down which bills you plan on paying from each paycheck, you will not be left with a surprise bill. Spend each month's income and each individual paycheck on paper before it comes in.

If you can afford it, and you and your spouse can agree on it, make an envelope just for money to have fun with! This fun money can be anything you want to be, and there are no rules on how you spend it.

Alright, so after you've got your envelopes and you've been using them for a little while, you discover you're spending less money in almost all categories. So what do you do with the leftover money? One option, probably the best one, is to take all the extra money at the end of the month and deposit it into an interest-bearing account, whether it be a standard savings account, a CD, a money market, or even an IRA. Also, if you need to you can take the extra money and add it to categories that need a little extra cash, but you should still be saving as much as possible!

Much of this article was written with information from Dave Ramsey's website. The envelope system is a key component of his Total Money Makeover system, which is worth a look.

The Total Money Makeover: A Proven Plan for Financial Fitness


 

The Importance of Budgeting

A budget is necessary for successful financial planning. The common financial problems of overusing credit, lacking a regular savings program, and failing to ensure future financial security can be minimized through budgeting. The main purposes of a budget are to help you:

• Live within your income.
• Spend your money wisely.
• Reach your financial goals.
• Prepare for financial emergencies.
• Develop wise financial management habits

The Budgeting Process
In order to make and keep a budget, you'll have to put in some time and effort, but in the long run it will be worth it. The most common budgeting mistakes people make are failing to save, never making a budget, underestimating expenses, and not planning for large costs (vacations, auto repairs, etc.). The cause of these problems is people believe creating a budget is just too difficult or they don't have enough time. To make it easier, you can break it down into steps:

1. Set Financial Goals
   I've said this before, and I'll say it again because it's important. You must set financial goals for yourself. Goals can help you build long-term wealth, and not having any can lead to financial disaster. Your goals should be specific, realistic, and have a definite time frame.
2. Estimate Your Income
   This one should be easy. Just add up all the income you get in an average month, and use that to start planning your finances. Be sure not to include any income that isn't guaranteed, like gifts, bonuses, and overtime pay. Budgeting income may be difficult if your earnings vary by season or are irregular. In these cases, try to estimate your income based on last year and on your expectations for the current year. Estimating your income on the low side will he;p you avoid overspending and other financial difficulties.
3. Budget for an Emergency Saving Fund
   Dave Ramsey says this a lot, and it's good advice. Everyone should have at least $1,000 in an emergency fund in case something completely random happens (your car breaking down, surprise hospital bills, your roof collapsing). Obviously, the bigger the emergency fund, the better. The size of your fund will be largely determined by your lifestyle and employment stability. The ideal emergency fund will be large enough to support you for about 3 to 6 months of no income.
4. Budget Fixed Expenses
   Pretty self-explanatory, but theses should be listed first because they rarely change. Things like a mortgage, auto loan, insurance payments are fixed expenses. Unfortunately, they're the hardest to bring down.
5. Budget Variable Expenses
   Another self-explanatory one. These expenses are harder to budget for because they fluctuate, or vary (see the correlation there?), often. Budgeting high for these costs is often a good idea. If you don't spend as much as predicted, you'll have money left over to put into other areas of the budget.
6. Record Spending Amounts
   Make sure you keep track of how much you spend on certain items so you can compare your actual spending to the amount in your budget. If you overspend, don't sweat it. When people overspend, they feel like they failed and end up stopping making budgets altogether. Just accept that you spent over your expectations, and try to do better next month.
7. Review Spending and Saving Patterns
   Budgeting is a circular, on-going process. You will need to review you budget periodically and perhaps revise it if your spending habits have changed.

Microsoft Excel (or Numbers on a Mac) is an invaluable tool for budgeting and financial planning. It can simplify the process, and make analysis a breeze.