boy time

February 19, 2009

One day last week I was feeling bored, melancholy, down in the dumps.  Nothing in particular was going on, just another day of fruitless job searching and web surfing.  I got it into my head that I should run to town and bum around.  I could go to the electronics store that’s going out of business to see if I could find any good deals.  I could go to the book store and poke through some new titles.  I could grab a sandwich at my favorite lunch joint.  And just so it wasn’t a completely wasted trip, I could stop at the grocery store and pick up some things my wife wanted.  It would get me out of the house, give me something interesting to do, and I wouldn’t have to eat leftovers for lunch.  A perfect plan.

The plan started to fall apart, however, when my son asked if he could go along.  It seems hanging out with mom all day is no longer real exciting for an eight year old.  If I was going, he was going too.  But this was no longer exciting for me because I couldn’t linger over the Bluetooth headsets and the just-released hardbacks.  He would be bored.  Also, if I bought anything for myself – like lunch – I’d have to buy one for him too.  Being out of work, I could justify one lunch, but two?  That would probably break the bank.  And to top it all off, my wife thought of a couple other things I could do for her in town.

So now I had a choice.  I could go to town, but not do any of the fun time-wasters I had in mind, or I could just stay home, disappointing my wife and son.

Wanting to get out of the house more than anything, I chose to take my son and do the errands laid out for me.  In the end, I didn’t spend a bunch of money I didn’t have, I saved my wife a lot of running around on her own, and I got to spend some significant time with my son.  Although we didn’t have any earth-shattering conversations or discover the cure for cancer, we were together – which was all he wanted.  The day was spent much better than I had planned, and I was much happier than if I had spent a bunch of time by myself and bought a bunch of things.

It turns out, being selfish isn’t really what I wanted.  I wanted to be useful.  And needed.  If you’re out of work, or otherwise have a bunch of time on your hands, look for ways to give of yourself.  Sacrifice your time and money and desires.  Don’t waste the opportunity to create situations and relationships that you’ll value for years.  Boys need their dads.  And I think dads need their boys just as much.

This article originally appeared in the February 18, 2009, edition of the Greenhorn Valley View.

winds of trouble

February 12, 2009

It’s windy. The wind is blowing through the valley, knocking over trash cans, blowing shingles off roofs, and blowing right through the windows in my bedroom. I toss and turn wondering if the windows are going to make it through the night. Wind can do a lot of damage if it’s powerful enough.

The economy is kind of like the wind. People are losing jobs, retirement accounts are worth half what they used to be worth, and people are nervous, worried and anxious about how they’re going to survive.

I have a friend that has a trampoline. A big one. The kind of trampoline that can hold a whole birthday party full of kids, and the dog too. During one of our windstorms last year, he woke up and found his trampoline a few blocks over, the surface was chewed up and the legs were bent and twisted. So he brought it home, fixed it up, and anchored it into the ground. His trampoline hasn’t wandered since.

What can we do to anchor our finances to the ground in this windy economy? Whether or not you’re getting through this recession in one piece, now might be a good time to go over the basics of financial planning, and make sure all your ducks are in a row.

Pay off debt

Debt is the opposite of an anchor. If you want to be immovable, pay off your debt. With no debt payments to make, you can withstand a lot of economic abuse. A job loss or a shrinking retirement account won’t worry you, because you won’t need as much to live. And it goes without saying that you can’t incur any new debt. Put the plastic in your underwear drawer and forget about it. When the cash in your wallet is all you have until the next payday, you’ll think twice about spending it.

Emergency fund

A good emergency fund is too often forgotten about, until the water heater goes out or the car needs a new alternator. Charge those expenses to your credit cards, and you’ll be blown away by the next violent wind. But an emergency fund is an anchor that brings peace of mind. No burned out water heater will keep you up at night.

Control spending

If you don’t have much money at the moment, be careful how you spend it. Buy only what you need, and even if you have a little left over, don’t spend it. The wind will eventually stop blowing and then you can splurge a little, but you can’t be sure how much damage you’ll suffer before then.

Give freely

On the other hand, don’t be stingy with your money. If you have some left over and know someone who could use a little extra, lay it on them. Giving money away pays great returns. It’s encouraging to the receiver, and it builds a community of people who know they can always depend on each other.

Spend some time right now thinking about your financial anchors and how you can make them stronger.

This article originally appeared in the February 11, 2009, edition of the Greenhorn Valley View.

first time home buyer’s tax credit

February 4, 2009

There is a new tax credit this year, aimed at first time home buyers.  If you bought your first home last year, you can claim a special $7500 tax credit on this year’s tax return.  If you are already getting a refund, even without this credit, the credit just adds to your refund.  If you owe money to the IRS, this credit will be reduced by what you owe.

The credit is available to anyone who purchased their first home between April 9, 2008 and July 1, 2009.  If you bought your first home between April 9 and the end of 2008, you can claim the credit on your 2008 tax return.  If you buy your first home between the first of 2009 and July 1, you can claim the credit on your 2009 return.  Which means there is still time.  If you’d like to buy a home, but are not sure if you can afford it, this credit might be just enough to put you over the line if you can do it in the first half of this year.  Of course, be sensible – don’t jump in over your head just to claim the credit.

What is a first time home buyer?

For purposes of this tax credit, “first time home buyer” means you can’t have owned your own home at any time during the past three years.  Which means if you owned your home in the past, had a three-year string of incredibly bad luck, during which time you rented, but now you are in position to buy again, you too can claim this credit.

Credit or loan?

Although this credit is called a “credit,” it is actually an interest free loan from the government.  You’ll get the $7500 now, but you’ll have to start paying it back in two years.  You’ll pay it back at a rate of $500 a year for 15 years.  This payback will either reduce your refund or increase the amount you owe on future tax returns.

One very sweet way to take advantage of the credit, and remove some of the sting of the loan, is to go ahead and claim the credit on your return, but then just sit on the money.  Park the $7500 in a bank or invest in a well-structured CD ladder.  The interest you earn is yours to keep.  It’s not much, but it’s more than you would have had without the credit.  You just have to make sure you have $500 available each year to pay back the government.

As narrowly defined as this credit is, I don’t imagine many people will be able to benefit from it.  If you were able to claim the credit, what did you think?  Was it worth it?  Let me know what you think.

This article originally appeared in the February 4, 2009, edition of the Greenhorn Valley View.

mysteries of the 1040 revealed

January 31, 2009

When you report your taxes to the government, the form you use is called “1040”.  This is true whether you do your own taxes, buy a software program, or hire a professional to do them for you.  The 1040 is a surprisingly simple, two-sided form, that lists all your income, the deductions and credits to which you are entitled, and the refund you are owed, or the payment you owe.  Even if you get a software program or a professional to fill it out for you, you still need to understand the basics of the 1040, so you can be sure it’s right.  Fortunately, it’s not difficult to understand.

The front side of the form is all about your income.  In the first section, lines 7-21, you list all your income.  This could include income reported on a W2 or 1099, and from a variety of sources, e.g., employment, contract work, interest, dividends, rents, alimony, social security payments, and unemployment compensation, to name a few.  When you add all these up, your total income is shown on line 22.  Don’t panic, the tax you pay isn’t based on this number.

Now you get to adjust your income.  As much as this sounds like a maneuver your shady accountant would recommend, adjusting your income is perfectly legit.  On lines 23-35, you can subtract from your total income things like moving expenses, contributions to health savings accounts and IRAs, student loan interest paid, and alimony paid.  The government wants to encourage you to do these things, so they allow you to reduce your income accordingly.  When you add up all your adjustments, and subtract it from your total income, the result is your adjusted gross income, on line 37.

The back side of the form is where we get down to the nitty gritty – how much tax you actually owe.  But before you do, you get another chance to reduce your income.  The government allows a “deduction” to your income.  The standard deduction is $5,450 for an individual, or $10,900 if you are married and filing a joint return.  Or, if you think you have more deductions available to you than the standard deduction, you can itemize your deductions.  Things you can itemize include mortgage interest paid, and gifts to charities.  Again, the government wants to encourage you to do these things, so it lets you lower your tax bill if you do.  If your total itemized deductions are greater than your standard deduction, then it makes sense to itemize.  You enter your deduction on line 40, your exemptions on line 42, subtract both of those from your adjusted gross income, and the result is your taxable income, shown on line 43.

The amount of tax you owe is a percentage of your taxable income, but must be calculated from one of the tables or forms specified on the 1040.  Once you know the number, it goes on line 44.

But don’t panic yet.  You can subtract from your tax certain credits for child care, elderly care, and education.  Read about these credits carefully.  Since credits directly offset your tax, dollar for dollar, you don’t want to miss any credits you are entitled to.  After subtracting credits, and adding self-employment tax, your total tax is shown on line 61.  But it’s still not time to panic.

In lines 62-70, you add up the amount you have already paid to the government.  The largest part of this is usually the withholding shown on your W2, or your quarterly payments, if you are self-employed.  The government requires your employer to send in a portion of your paycheck every they pay you.  This insures the government that they will get your money.  Your total payments is listed on line 71, and hopefully, this amount is greater than your total tax.  If so, you get a refund.  If not, you may now panic – you have to pay more to the government.  The government would rather owe you a refund than wait around with bated breath hoping you send in the extra you owe, so there will be an additional penalty if you didn’t have enough withheld.

So there it is, the 1040 in a nutshell.  As always, I suppose I should tell you that I am not a professional, and this is not legal advice.  But I think if you spend a few minutes looking at the 1040 and what each line means, you’ll learn a lot about yourself and your government.

Also, it turns out, accountants don’t like the term “shady”.

This article originally appeared in the January 28, 2009, edition of the Greenhorn Valley View.

tax forms

January 31, 2009

Among the potentially confusing, but important, tax documents that have probably already begun arriving in your mailbox, and will continue arriving for the rest of this month, are the familiar sounding W-2, 1099, and 1098. These are the most common documents, and of course, there are other forms and documents that you may receive, but I want to focus on these three for a minute.

If you are a salaried employee of a company, you will receive a W-2. “W-2” is the arbitrary number assigned to the form by the IRS. You will get a W-2 from each company that you worked for in 2008. The W-2 shows the total amount that the company paid you throughout the whole year. It also shows how much of your income was withheld to pay your income tax bill. The income shown on your W-2 (or all of them together, if you get more than one) must be reported on your tax return. It is this income that will be used as a starting point for figuring out how much tax you owe.

A 1099 is similar to the W-2. It shows income you earned, but not from a company you were employed by. A person hired to do a single, temporary job typically has their income from that job reported on a 1099. Interest and dividends you earned from bank accounts or investments is also reported on a 1099. Just like the W-2, you’ll have to add up the income shown on all your 1099s and report it on your tax return.

A 1098 shows tax-deductible interest you paid during 2008. The most common 1098 is from the bank that holds your mortgage. The form will show all the mortgage interest you paid. You’ll want to be very careful not to miss any 1098s. All the interest you paid, shown on all the 1098s you receive, is tax-deductible, which means you can subtract every dollar in interest from your taxable income. And lower income means lower taxes.

One final word about these tax forms – the IRS gets duplicate copies of them. They will compare the numbers on the forms they receive with the numbers you report on your tax returns. If you’re thinking about not reporting some income shown on one of your forms, you can count on the IRS noticing and following up with you.

This article originally appeared in the January 21, 2009, edition of the Greenhorn Valley View.

refund anticipation loans

January 31, 2009

It’s almost tax time again.  Before the end of the month, you’ll receive W2s, 1099s, and other complex sounding forms from your employers, contract employers, banks, brokerage firms, and a lot of other companies you didn’t know you had relationships with.  Then you’ll have to wade through a 1040, Schedule A, Schedule C, countless other forms and worksheets, and software that may or may not be getting it right (how would you know?).

If you’re the kind of person who throws all this stuff in a file folder and takes it to a tax preparation agency, good for you.  The service will cost you a little bit, but what price is the peace of mind you’ll be buying.

There is one thing to be aware of though.  If you use a commercial tax preparation agency this year, and you discover you get a refund, you’ll almost certainly be offered a refund anticipation loan, or RAL.  An RAL sounds very attractive.  The tax preparation agency, for a small fee, gives you the amount of your refund – on the spot, in some cases.  No waiting!  Then when your refund arrives, the agency keeps it to pay back the loan.

The problem, of course, is the “small fee.”  The fee doesn’t seem like much, especially when it comes directly out of the loan and you don’t have to pay it out-of-pocket.  But when expressed as an annual percentage rate, the fee can be as high as 113%.  RALs are second only to payday loans in the World’s Worst Way to Borrow Money category.  Would you take out any other loan at that rate?  Probably not.  (And if you would – Hey, I have some money I’d like to lend you!)

And don’t forget, customers who e-file, which includes you if you use a tax preparation agency, can get their refunds from the IRS in as little as eleven days.  So not only are you paying a high rate to borrow money, you’re doing it just to get the money a couple weeks sooner.  So do yourself a favor and skip the refund anticipation loan this year.

This article originally appeared in the January 14, 2009, edition of the Greenhorn Valley View.

impulse spending

January 31, 2009

You know the feeling. You’re shopping and you see that one thing that you can’t live without. You’re surfing the web and there’s that one thing, and it could be yours with a click. That new iPhone app could be yours with a flick. That new book could be on your Kindle in under a minute. You know the feeling.

The problem, of course, is that all of these things cost you money. Not much money, but $0.99 here, a couple bucks there, $10 for a whole album or a new book, and it adds up quickly. Cutting out all impulse spending would solve the problem, but going cold turkey in never easy. How do you control impulse spending without cutting all the fun out of shopping and browsing?

Plan ahead
Before you hit the store, or the web site, recognize you are going to see a lot of tempting items, a lot of enticing ads. Since you know ahead of time that it’s going to happen, you can plan how you will handle them. Steel yourself now. Prepare yourself mentally to ignore anything but what you’re there to get. If you’re going to for a present for your folks, get the present and get out of there. Pay no attention to the “People who bought this also bought…” messages.

Make a list
Speaking of getting only what you need, make a list of items you intend to buy before you go to the store or web site. A list is a very handy tool for keeping you focused on the goal, and it can be used just like a To Do list. As you get each item you can check it off your list, and when all the items are checked, you get to come home.

10 second rule
The ten second rule is for those times when you pick up something interesting that wasn’t on your list. Spend ten seconds asking yourself questions like, “Do I really need this?” or “Could this money be better spent elsewhere?” or “What value will this add to my day?” It will be obvious, after ten seconds, what you should do with most of the things you pick up.

Sweet rewards
And, of course, don’t forget to reward yourself. Every time you successfully resist the temptation to buy something you don’t need, take the money you would have spent and apply it toward one of your debts. Or just put it in your piggy bank. I think you’ll be surprised how quickly the savings add up.

This article originally appeared in the January 7, 2009, edition of the Greenhorn Valley View.