Nathon's Old Xanga Site

Hello Fellow Xangans,

My time with Xanga has been a rewarding one.  When I started blogging back in 2003 with Xanga, I had no idea how much I’d enjoy writing or if I was any good at it.  I have to thank Xanga for fostering in me a love of writing that I never knew I had.  From writing to just a few friends and meeting dozens of new ones… to being featured several times to even writing officially for revelife as one of the original “arboreal” writers… it has been a wonderful journey.

I have now decided to go out on my own and become one of the hoard of personal finance blogs out there.  I have to credit Xanga for giving me a world of experience and a wonderful community from which this seed was planted.  I never would have had the courage to do anything like this without the positive feedback from my many friends here in Xanga.  I will never forget my experience here.

I will likely return here whenever I feel the urge to write about something non-finance related, but please drop by my personal finance blog if you have a moment.  To show my appreciation to the Xanga community, if you come to the site and have a specific topic you’d like for me to address, I will try my best to do so (leave a comment in the “about” page).

Here are some of the recent articles I have already written:

Roth IRA as Emergency Savings – You Can Have Both

Five Minute Method to Estimate Your Emergency Savings Requirements

Should You Itemize Your Deductions?

Really Simple Ways to Slay the Energy Eaters in Your Home

Why Is Your Bank Calling You to Refinance Your Home?

The Pros and Cons of Medical Flexible Spending Accounts

Donating Stock:  How to Make Your Giving Worth More

One Way to Curb Your Dining-out Spending

Beware of the “Gold” Buffalo Coin

Leave a comment and say “Hi! from Xanga!”  I’d love to hear from you.

When I speak to young twenty-somethings about their (usually limited) finances, one of the biggest issues is what’s the best place to put what little extra cash they have.  One of the big choices is whether they should fund retirement or to try to build up 3-6 months’ salary in savings because they can’t do both.  Or can they?

It’s pretty well-known fact is that in retirement, because after-tax money was used to fund it, proceeds from a Roth IRA are completely tax-free.  But a slightly less well-known fact is this:  You are allowed to withdraw any contributions you made into a Roth IRA tax and penalty-free at any time… (that and you should never go against a Sicilian when death is on the line).

This means that if you put in $1000 into your Roth IRA, you can pull up to $1000 out of it for any reason.  Granted, if your investments lost money, you can only pull out as much money as you have in the account.

“Big deal,” you think, “I can do that in a savings account.” 

Yes you can, but the one thing your savings account can’t do for you is give you retirement income that is tax free.  Add to this your relatively small likelihood of having to raid this Roth IRA “emergency fund,” and you have your proverbial cake that you can eat too.

There are also a few other practical reasons why this is a good idea if you’re considering using a Roth IRA as your emergency savings.

1.  Years from now you can’t catch up on your Roth IRA contributions.  Well, you’re allowed a little bit of catch up once you hit 50, but by then all the benefits of compounding interest are gone.  You are allowed a fixed dollar amount to contribute to your Roth IRA each year, and you can’t make up for previous years.  So all the time you’re spending building your emergency fund is time that you can’t get back maximizing your contributions to your Roth.  Granted I don’t know too many twenty-somethings who have $5k to max out their Roth IRA contributions, but someday they will and will regret not doing it sooner.

2.  It’s harder to get to.  This is good because it will prevent you from raiding your “emergency” savings for that ferret you’ve always wanted.  You don’t have a debit card that’s directly tied to your Roth IRA funds.  As a matter of fact, you likely will have to sell some investments within your Roth IRA to get the cash.  Also, once it’s out, it’s out.  You can’t put it back in above the max for the current year.  So if you pulled out $8k thinking that you can put it back in next year… sorry, you can only put in $5k as a part of your max contribution for that year.

3.  If you never use the emergency funds, guess what… you have a well-funded retirement plan that had the benefit of the years of growth that it sat there.

Especially for young people, it is crucial to get started early in a Roth IRA.  This is because they will likely be in the lowest tax bracket in their entire lives at that age, and the amount of taxes being taken out of the money they would use to fund their Roth IRAs is relatively low.  Then with the incredible power of compounding interest over the next 40 years, they can potentially have millions of tax-free dollars waiting for them in retirement… where they can buy a ton of cake to have AND eat.

Last year I did something I thought only millionaires did.  No, it wasn’t swimming in a pool filled with gold doubloons… which actually sounds pretty painful if you ask me.  I donated shares of stock to a charity.  A few years ago I bought shares of BIDU when it was at around $128 a share.  A 10-for-1 stock split and a climb to $138 later (cha-ching!) and I had the mixed blessings of capital gains.  If I were to sell the stock (after holding onto it for over a year) over 90% of the sale would have been taxed at 15%.

If you know me, you know that I absolutely hate giving any money to Uncle Sam… because he spends it on so many needless and expensive things.  So to keep that money away from him and into more worthy hands, I decided to donate the stock to a non-profit charity.  Not only did the charity benefit but I was able to give more because if I had sold the stock and donated the resultant cash, it would be minus the 15% in taxes. 

But here’s the best part.  I could deduct the full value of the stock at the time of donation from my personal income as long as I held the stock longer than a year (if less than a year, you can only deduct the original cost at which you bought the stock).  This means that you also get the benefit of reducing your tax burden by the value of the stock you donated.  For me this felt like donating money I never had (since it was 90% gains) AND deducting the money out of my income for tax purposes.  All in all, in that one transaction, I would say that I saved approximately 40% of the value of the stock in taxes alone (in not having to pay capital gains and being able to deduct the value of the donation from my income).

A little confusing?  Allow me to illustrate:

Let’s say I bought $1k of stock 2 years ago.  Let’s say it increased to $10k (uh… your results may vary).

If I were to sell it, I would have to pay long-term capital gains on the $9k that it increased (currently 15%).  In other words $9k x 0.15 = $1350

Now, let’s say my marginal income tax rate is about 28%… add to that about 5% state tax rate (for a total of 33%)… by donating $10k to charity, you save about $3300 in taxes.

Therefore, $1350 saved from not having to pay capital gains and $3300 saved from your generous donation… and voila.  You just increased your refund by $4680 by donating $10k worth of stock… (off an original $1k investment, mind you).  Not bad at all.

If this is something that you’re considering doing, to maximize the benefit of doing it there are some things to keep in mind.

Make sure the charity has a way of accepting stock

The charity I chose actually was not set up to do this.  I had to wait until they set up a brokerage account to accept the shares.  This is especially important if you want to be able to take the tax deduction in a certain year.  Do not simply sell the shares and donate the cash.  You will have to pay capital gains tax (if you have gains) by doing this.  Also make sure they give you some sort of receipt that this transaction took place.

It’s best if you have gains

While not required, if you want to take advantage of not having to pay taxes on your donation, make sure you have gains when you transfer the stock.  You can still donate stock you have losses in, but then it’s actually better if you sell the stock and claim the capital losses.  You can’t claim losses on donated stock.  Also, make sure the gains are long-term gains (held for over a year) because if you sell stock that you held for less than a year, you can only value it at the cost at time of purchase.  For example, if you bought stock at a cost of $5k and it went up to a value of $6k 3 months later when you donate it.  You can only deduct $5k in your taxes.  While it’s good for the charity that they get $6k worth of stock for your $5k investment, for you it’s like you just donated $5k in cash (not $6k).

Know what the stock is worth when you donate it

I know this sounds like a no-brainer, but if the value of the stock is fluctuating around the cost when you first bought it, you don’t know if it will take a nose-dive right before you actually make the transfer.  If you’re this close anyway, you may just want to avoid the hassle of reporting the stock donation on tax form 8283 and just donate the cash.  Also, and this took some searching because my broker didn’t even know, the price that you set for the value of the stock when you donate it is the average of the high and low value on the day that you trade the stock.  This matters less if you’re donating something that uses a NAV for the price because then it is just the NAV for the day (e.g. mutual funds).

It’s best if you itemize deductions

Obviously all this is predicated on the fact that you itemize your deductions.  If your donation is not large enough or if you don’t have enough other deductions to make itemizing worthwhile, then none of this matters in terms of maximizing your tax benefit, other than simply not having to pay capital gains.  You may just want the charity to benefit from your good fortune, which is more than a good enough reason to do it. 

How would you like anywhere from a 20 to 40 percent discount on all your medical expenses without having comparison shop, clip coupons, or volunteering for drug testing?  Many employers offer medical flexible spending accounts (FSA) as a benefit to their employees.  How it works is that usually you have a certain dollar amount taken out of every paycheck before they apply your income taxes and put it into a spending account.  You then have by the end of the calendar year to use up the funds within the account.  Most of the time, if you agree to have regular deductions from your paycheck, they will advance credit you a full year so that you don’t run out of money early while the deposits build.  If you don’t use up all of the funds by the end of the year (sometimes there is a grace period into the following year), you forfeit the remainder (i.e. use or lose).

I’ve titled this entry “pros and cons,” but really there’s only one big “pro”, and that it is pre-tax money that you are using on these medical expenses.  Depending on your effective tax rate, this could be anywhere from a 20 to 40 percent savings.

Various plans have long lists of allowable and unallowable expenses, but the big ones usually are the following:

• Medical procedures
• Co-pays
• Prescriptions
• Deductibles
• Eye Care, including glasses and contact lens supplies
• Dental Care, including orthodontia
• First-aid supplies, including non-athletic bandages

Non-prescription pain medication and cold remedies used to be covered, but starting in 2011 most, if not all, FSA accounts stopped covering these items.

Now, let’s talk about the “cons”, of which there are several, but with some thought can be overcome.

You don’t spend all your funds

This is probably the biggest “con”.  To overcome this, it takes careful consideration of what you will likely spend on covered medical expenses in a given year.  Some are easy to predict such as regular doctor’s visits, ongoing prescriptions, and contact lens maintenance.  But there is some degree of variance on how much you get sick or if there is an unforeseen medical need.  When determining how much you will need, it is a good idea to err on the conservative side.  Don’t try to anticipate every medical expense you may or may not have in a given year.  If you have a personal finance software tool or application, start using it to track your medical expenses and use that as a baseline.  If it’s your first year using an FSA, undershoot the amount you think you need by 50%.  Then see how quickly the account runs dry.  If it’s in April, consider increasing it the following year.  If it’s in October, consider staying put.  It’s much better to dry out your FSA than to lose what you don’t use.  However, even if you lose some amount, don’t fret too much.  Considering you had significant savings for the amount you used, over the course of the year, you likely saved more than the amount you eventually lost.

If you are approaching the end-date, consider stocking up on certain allowable expenses.  This doesn’t mean that you should get that cosmetic “rapper’s grill” you’ve been contemplating (which is not covered, FYI).  It used to be that people would buy a decade’s worth of Advil to avoid losing the funds, but recent changes stopped this.  However, some non-perishable things such as adhesive bandages and contact lens solution are still covered and could be worth stocking up on.  This is also probably why every December, you’ll see the band-aid shelves somewhat bare… so try not to handle sharp objects until February.

Your expenses are not covered

It used to be that many more things were covered as allowable expenses, such as Aspirin, weight-loss products, or even cough drops, but as these plans got more popular, they pulled the reigns on that.  Even so, most of the time if you can get a prescription or a doctor’s note for it, it is covered… including the aforementioned products.  I suppose they figure if you went through the trouble to see a doctor about getting some Slim-fast, they might as well let you spend your FSA funds for it.

Access to the funds is a hassle

I remember when I first started using FSAs several years ago, I had to make copies of the claim form, fill it out by hand, make copies of all my receipts, mail it out and then wait to get the reimbursement check.  Sometimes it was just more trouble than it was worth and was the primary reason I stopped doing it.  Then Al Gore came by, and the internet happened.  This breathed new life into FSAs.  Now you can fill out these forms online.  Some really good plans actually give you a debit card that you can use to purchase things directly.  And since most stores or doctor’s offices also categorize their products for the transactions, there is usually no need to submit receipts.  My plan actually has a smartphone app that will notify you within minutes if the charge you just made is allowable and, if a receipt is required, you can take a photo of it and submit it directly in the app.  Amazing.

Overall the effort is a hassle

Granted, in order to maximize this benefit, you have to be somewhat diligent.  You have to know how much you want to fund it for… you have to keep track of how much you have left… you have to keep in mind what is covered and what is not… all stealing precious minutes out of your already taxed (pardon the pun) schedule.  But with time and practice this could become as routine as funding your Roth IRA (uh… gotta get on that too, huh?).  Especially with technology making this increasingly easier, think of it as an investment of time to potentially save hundreds if not thousands.

A friend and co-worker approached me the other day saying that her bank called and asked if she would like to refinance her mortgage with them at a lower interest rate and no costs.  She felt it was too good to be true.  Why would a bank want to lend you money at a lower rate than they’re currently lending you and not ask for anything in return?  No fees, no points, no extended term…

Usually when it sounds too good to be true, it is.  Especially these days when people trust big banks about as much as they trust a used car salesman who used to be a politician, it’s no surprise that my friend was hesitant.  Now, there are legitimate reasons to be concerned when someone says you’ll get something for nothing.  Sometimes banks offer to refinance your loan, but with these caveats that don’t actually make it “free”

They roll the fees into the new loan

Usually this will not be framed as a “no-cost” loan but rather as a “no-cash needed” loan.  That’s because they’re essentially “robbing Peter to pay Paul” (I wonder if Paul knows he’s receiving stolen merchandise).  You don’t see the fees up-front because they are now a tiny part of every payment you make until the end of the loan.  Even if your payment is lower, the bank benefits because you essentially owe them more money in the principal.  Some people don’t mind this because if you keep the loan longer to benefit from the lower interest rate it can be win-win.  But don’t do this if you plan on selling in the foreseeable future.

They extend the length of the loan

Let’s say you had a 30-year mortgage in which you’ve been faithfully paying for 6 years.  If you refinance and take out another 30-year mortgage, your payments will definitely be lower, but it will be over a greater length of time.  “GRRREAT!” you say in your best Tony the Tiger voice, “I don’t plan on living in the house the full term of the loan anyway.”  Well, put down your bowl of Frosted Flakes for a moment and realize lower payments don’t actually mean that you owe any less.  You will be paying down less of your principal every month than if you stuck with your old loan, which means though you have a lower interest rate, that interest rate is being applied to a greater amount of principal.

There may be even lower rates out there

This is sometimes the source of “pre-emptive strikes” by your bank. Especially if you have a good payment history and have a decent amount of equity in your house, they want to keep you from having wandering eyes to that other bank down the street with the piercing eyes and rock-hard abs.  If it’s been a while, and you have a good credit rating, it may be worthwhile to shop around for mortgage rates.  This would also have the ironic opposite effect of their call in the first place.

The government is making them do it

A few years ago, the government created the Housing Affordable Refinance Program (HARP), which was supposed to make it easier for troubled borrowers who may be “upside down” in their Fannie Mae and Freddie Mac mortgages to make home ownership more bearable.  The program has been criticized as not having made any real difference because of the small number of loans actually modified by the program and the fact that the banks were cherry-picking low-risk customers to offer this to.  In late 2011, HARP 2.0 re-tooled the original plan to try to overcome these shortcomings, and 2012 should see a renewed thrust to get loans modified.

So if your bank called you to make you “an offer you can’t refuse,” after checking your bed for horse heads, make sure you know what their true motivation is and if you’re willing to live with that.  It’s true that you rarely get something for nothing, but it could be worth your while if the cost is limited to forgoing a slightly lower interest rate at another bank (who will likely charge fees and closing costs anyway) or if it’s because Congress is nudging them from behind.

The first bill I receive from the utility companies after the first cold snap or heat wave of the year always makes me cringe as I open it.  After being lulled into complacency with months of mild weather and dormant air conditioners and furnaces, we’ve all experienced this sort of sticker-shock.  So for the following weeks we go around our homes turning off every light, computer, and life-support system in the house.  Wouldn’t it be great if there were an easy way to remember which appliances are the ones that suck the most money out of your wallet?  Well, there is.

Just ask yourself these two questions:

1.  Does it heat or cool anything?

2.  Does it run constantly?

This is where you should devote your energy (pun entirely intended).

Right off the bat, what comes to mind?  A/C… furnace… refrigerator… stove… Then there are things that you might not be considering – your water heater, dish washer (especially if you use the “heat dry” feature), dryer, clothes iron, hair dryer…

Turning off that 75 watt light means nothing if you’re blasting your 3000 watt A/C all day.  And if you’re using CFL’s (which you SHOULD be), your equivalent 19 watt consumption per bulb means even less.  Even if your A/C only runs 1/2 of the time, this means that it is consuming the same amount of electricity as leaving 80 CFL’s on 24 hours a day.

Now most people will tell you the best way to save on these large energy consumers would be to either add insulation to your house… or caulk your windows… or buy new energy-efficient appliances… or get new windows and the like.  This is true, but who really does this?  Here are some things you can do today without having to visit Home Depot or hire a contractor or become Bob Villa.

Turn down your hot water heater

Electric water heaters consume between 3000 and 5000 watts per hour of operation.  A lot of that energy is spent KEEPING the water in the tank hot.  This is why on-demand hot water heaters are becoming more and more popular.  But if you’re not looking to invest in this, consider just turning it down (there’s a dial).  If your water is scalding hot when you shower, it’s too hot.  Turn down your water heater enough so that you have to turn the faucet so that you’re using almost no cold water.  Granted, you will have to tweak this depending on how much hot water you need throughout the day.  Also, it would be good if your family could spread out its use of hot water so that you don’t run out (e.g. half the family bathing in the evening instead of the morning).  Also remember that changing the setting on your hot water heater will take time to adjust so spread out this experiment over several days.  Another advantage of doing this is that your husband/wife/roommate/stalker won’t give you third degree burns if they flush the toilet while you’re showering.

Keep your refrigerator full

We won’t go into college-level fluid dynamics here (I still have flashbacks), but imagine the cold air inside your refrigerator as a liquid.  What happens every time you open it?  All that cool air that you spent your hard-earned money paying for enters the warmer room… and if it’s winter, you’re also taxing your furnace ever so slightly.  If your refrigerator is full, there’s less room for air and the items act like ice packs that hold onto that precious coolness.  That crate of 120 cans of soda you got at Costco?  Store it in your nearly-empty fridge.  Or, if your refrigerator is empty almost all of the time, consider just storing your empty 2-liter bottles in there… anything that takes up space. (And for your mechanical engineers out there who actually passed Thermodynamics 101… yes, I know that “coldness” doesn’t go anywhere).

Don’t preheat your oven

For broiling it’s completely unnecessary because you’re using direct heat anyway.  For baking it’s only necessary for things that will spend less than 20 minutes in the oven.  Preheating is a waste for two reasons.  One, you’re heating nothing but air during that warm-up time that could be used to heat your food.  Two, guess what happens to a lot of that hot air when you open your oven door to finally put the food in (see above).

Do smaller dryer loads and use heat dry less

A lot of energy in your dryer load is used making your clothes hot.  Generating that heat drains a lot of electricity… considerably more than the energy needed to run the motor that tumbles your load.  Try using the heat cycle for a shorter time and finishing with just the air-tumble-dry setting.

Don’t use the heat-dry setting on your dishwasher

Most of the energy used in a dishwasher is not in agitating the water; it’s in heating the water and drying.  If you don’t need the dishes right away and if air-drying does not cause spots (or if you can live with them), forgo the heated drying.

Close doors to rooms not needing heating or cooling

It’s a hassle climbing on top of something to reach the damper on your vents in each room.  In most houses, though there are output vents in almost every room, there are only a few return vents.  Find out where these are.  They will be the ones that you can’t use a damper to adjust.  If there are rooms where there are only output vents and you’re not using them, close the door to that room.  It will act like a damper and will redirect the heated or cooled air to the rooms that need it.  A caveat to this is that if you have a central thermostat, make sure the air is flowing into the room that has it.

Turning off unused lights is nice, but to really save money you have to concentrate on these much larger energy consuming appliances.  It’s like trying to save money by re-using paper towels but going out to eat every night.  You think you’re doing something worthwhile when your other behaviors are sabotaging your effort.  Hopefully these tips will ease the trepidation of opening that envelope come January or July.

Ah, the days of using the one-page 1040EZ tax form… life was simpler back then.  There were no mortgages, no student loans, no retirement plans.  My biggest decision come tax time was – do I use a pencil or throw caution to the wind and use a pen on my one-page tax return?  Twenty years, a wife, a child, two mortgages, a rental property, and a consulting business later… Boom!  My tax return is now 36 pages long.  But somewhere on that red-tape trail of life, I realized that I was giving up hundreds of dollars by not using ONE more page of paper… my favorite tax form and yours… the Schedule A, better known as the itemized deductions page.

I know what you’re thinking Mr./Ms. 1040EZ user… “sigh… but I LIKE being able to fill out my taxes using only my W-2 and my lunch hour… besides, a lot of websites let you file your 1040EZ for FREE!“

Yes, indeed the form lives up to its two-letter homonym, but would you be willing to spend an extra hour or so to possibly get back hundreds of dollars?  Think of it as a temporary micro-job that could pay the equivalent of a CEO’s salary minus the stock options, corporate jet, and Occupy Wall Street ire.

I know what you’re thinking… “sigh… but how many deductions could I possibly have?  C’mon… the government is my friend and wants to give me as much money as possible back through the standard deduction, right?“

To that I say…  NO, the government has a multi-trillion dollar debt.  They want every penny they could possibly squeeze out of you.  The reason for the EZ is not to make YOUR life easier… it’s to make THEIR lives easier.

You might think, “sigh… how do I know I will benefit from itemizing my deductions?  It sounds really complicated.  I wouldn’t even know where to start.“

And to that I would reply… You should really see someone about that sighing issue you have… and that is where I can help you.

Standard Deductions for 2011:
Single – $5,700
Married Filing Jointly – $11,400
Head of Household – $8,400
Married Filing Separately – $5,700
Qualifying Widow(er) – $11,400  I’ve always wondered… what’s an UNqualifying Widow(er)?

Do you live in a high tax state?

If you live in a state that has a relatively high tax rate, it might be worth it just for that reason alone.  Just look at your W-2 and look in boxes 17 (and maybe add box 19).  If that amount is more than your standard deduction, you should itemize.  In the state and county I live in, if I were single and making $75k or more, I would get a larger refund by itemizing deductions.  That’s it.  By simply living where I live, I may benefit from itemizing.

Do you donate to charity?

If you donate even a modest amount of money or goods to a charity, adding to your state and local tax mentioned above, it might benefit you to itemize.  For tithing Christians who live in my state and county, making as little as $35k would make it worthwhile to itemize deductions.

Do you have student loans?

Yep, interest is deductible.  Even a modest $50k student loan at 5% interest might make it worthwhile to itemize.

Do you have a mortgage?

If you own a home with a mortgage, stop reading.  You should itemize.  The mortgage interest and property taxes you can deduct alone would likely save you many thousands of dollars by itemizing.  Even if you hire a professional to fill out this one page form for you, it would be worth it by a mile.  And for you mortgage payers who are still reading… you’re either very rebellious or very curious.

“Sigh… but really, how much could I be saving by itemizing,” you might protest.

Sigh… let’s put it this way… last year the difference in my taxes by filling out a Schedule A versus if I hadn’t translated to about $5000 in cold, hard cash.  I estimate that filling out that form took about an extra half hour.  If you translate that to a full-time job, my equivalent annual salary for that half-hour would be $20 million… the envy of most CEOs out there.  For that half-hour, I was a member of the 1%.

Pass the caviar… okay, now take it back because I have to buy diapers this week.