I have heard it is said that people spend more with credit cards than with cash. I believe those statistics based on my personal experience. However, there is something to be said for the convenience of the credit card because there are advantages of credit cards over cash. One way to minimize the cost of credit cards is by avoiding common credit card mistakes and by doing a review of every transaction each and every month.

Photo by Asim Bijarani via Flickr.

Four Reasons Why it is Essential to Review your Credit Card Statement Each Month

1. To be sure you are not signed up for any ongoing charges or subscription-based services, which you no longer use. While reading Permission Marketing: Turning Strangers Into Friends And Friends Into Customers by the status about the number of people who automatically subscribe for a service and continue paying for that service even after they no longer use the product. In addition there may be services for which you may have unintentionally subscribed. Perhaps you did subscribe, but thought the service was free.
2. To protect yourself against downright shady practices. You may be charged for credit card services that you never approved (at least not intentionally).
3. To check for human error. It is possible for a merchant to accidentally double charged your card. It is possible also that your card is accidentally used to processed a different purchase. And of course, these things can also happen intentionally.
4. To verify that your card has not been used fraudulently.

How to Review your Monthly Credit Card Statement

1. You should go through your bill each month and read (don’t scan) every “Merchant Name or Transaction Description” and “Amount”. If you have a paper copy, you might find it helpful to use a ruler to be sure your eyes are not jumping down the line. Put a small checkmark or highlight every charge that your recognize. If you have PDF statements use a highlight feature for charges you recognize. If you use and computer budgeting system you will be required to manually approve / categorize each transaction.

2. Probably your first time through you have approved 80-90% of the transactions. The majority of the remaining items will likely be charges you forgot, but you must verify that. Now, got back through the list of and find the first item you did not check. Back up and read the “date” column. You will need to juggle your memory to verify if the purchase is legitimate. Here are some suggestions:

• Check your calendar — is there something there that makes sense regarding your purchase.
• Ask your spouse or someone else close if “$15.00″ at Hank’s Mart sounds familiar.
• Talk to every other card members on your account. This is essential.

3. If you still cannot verify the purchase call your credit card company (or get online) and ask for more details on the transaction. They will be able to give you a purchase order / transaction approval number and possibly even the company phone number.

4. If none of the information from the credit card company sounds right or familiar you will need to call the actual merchant in question. If the credit card company does not have a number on record just Google the company name and the phone number will come up. Say something like the following:

Hi, I was reviewing my credit card statement and saw a charge from your organization. Unfortunately, I am having a little trouble confirming some of the details around the purchase. Do you think you would be able to help me get some information?

Remember: There is no need to be accusatory. No need to be defensive. At this point there is a good possibility that you just plain forgot something bought.

5. If you come to find out that you did indeed make the purchase, check it off on your statement and continue on the next purchase you did not initially recognize.

6. However, you come to find out that you did not or could not have made the purchase you should either:

• Tell the person on the phone that the charge doesn’t seem legitimate, but you need a few minutes to confirm things
• Tell the company representative that you are certain you did not authorize those charges. Be firm, but not rude. Be sure also to share the reasons for your certainty. You were out of town on the mentioned date. You have absolutely no interest in the product. Kindly request that the charge be refunded to your account. At this point they will respond in one of two ways (typically depending on the nature of their product and their company philosophy). First, they might apologize and reverse the charges or offer to give you more information. Second, they might simply say, “There is nothing that they can do.”

Remember: If there are other card members on your account you will need to proceed cautiously. It is possible someone did make the purchase and forgot or even just plain lied about it. Don’t claim someone did something wrong until you are certain.

7. Your final step will be to contact your credit card company and file a dispute claim. Inform them:

• What the purchase in question was,
• How you know that purchase is not legitimate or why you feel it is not legitimate.

Say something similar to the following:

Hi. I was in the process of looking over my statement when I noticed a discrepancy. I contacted the merchant, but they were unable to help me because _______. I am certain I did not make / authorize that transaction because __________. I was just wondering if you could help me resolve this issue?

Remember: The credit card company may not just lay down and play dead. You will need to be persistent. However, even the little guy can win a few with the credit card company.

My Experience

I have had to do credit card disputes three times. Here are the results.

1. A magazine company continued charging me after I canceled my subscription. They would not refund the money. I called my credit card and they reversed the charges. Resolution time: 15 –20 minutes.
2. Somehow I was signed up for some extra services through a credit card offer. You know the kind of coverage if you loose your job and can’t make a payment. I called the credit card company and after a little force, they reversed the charges. Resolution time: 30 –45 minutes.
3. I was doing business with an Internet company and canceled my service. I called the Internet company and they claimed to have resolved the issue and claimed to be offering me a refund. After a month the charges kept appearing and there was no refund. I called the credit card company and they reversed the charges. Resolution time: 20-25 minutes.

If you are a credit card user it is absolutely essential that you monitor and personal verify each and every one of your purchases.

Anyone else had a charge on their account that you needed to dispute? What happened?

Do you have a financial question? Ask it now at Moolanomy Answers!

Copyright © 2007 – 2009 Pinyo B. This feed is provided for the convenience of Moolanomy’s subscribers. You are not allowed to reproduce the content within this feed in any manner.

Please visit Moolanomy Personal Finance Blog, Moolanomy Finance Directory, and Moolanomy Answers for more great content.

Source: Moolanomy Personal Finance

Most financial advisors will recommend against any attempts to time the market. It can’t be done, they will tell you, and I agree. Timing the market or specifically identifying market tops or bottoms as opportunities to buy or sell is usually a futile effort. What financial advisors fail to tell you, however, is that market awareness is important and should be a factor in your investing decisions and strategies.

Photo by gadl via Flickr

What is market awareness?

To be aware of the market means to follow the market, even if at a very basic level. This doesn’t mean you need to know the exact level of the Dow or the NASDAQ each day, but it does mean you have a good feel for the current level and trends of the broad stock market. For example, you should be aware that we hit historic lows back in March of 2009 and in the last six months, we have had a fierce rally of over 50%.

Now, a market timer would typically try and identify a top at this point and perhaps sell their positions or maybe even go short against the market or specific positions. This is not the recommended strategy because it is too difficult to identify a market top to make a move this bold. Bold moves require a high level of certainty, and future predictions of broad market direction will rarely have such a high level of certainty.

Altering your buying or selling based on this awareness

Most professionals will recommend consistent buying of stocks over a long period of time. This dollar-cost averaging approach will prevent you from being over-exposed to a bad timing of purchases. Many will even recommend blindly continuing this approach no matter what the stock market has done or is currently doing. I disagree with this approach.

Going back to our current example, I would recommend using market awareness to adjust an investor’s buying activities. In a market that is up 50% in six months, I would not want to buy as much as I have been buying as the market has gone up over the last several months; therefore, I would cut my buying activities in half at current levels. If the market continues to go up, then you’ll continue to do well. If the market corrects and moves lower, you’ll be well positioned to buy larger “chunks” at lower, more attractive prices.

Remember, you want to buy low and sell high. Most people tend to buy high and attempt to sell higher, but in many cases, this doesn’t work. Since you’re probably focused on the long term, selling is not really on your mind, but this doesn’t mean you shouldn’t attempt to maximize lower prices and minimize your purchases at high levels.

Financial advisors aren’t likely to recommend this strategy

Remember, a financial advisor is the professional or the expert in your relationship; therefore, they want to be the ones making strategic decisions. Furthermore, if you slow your buying when the stock market is high, you will be accumulating cash. Financial advisors typically don’t make money on idle cash. They want you to be fully invested at all times. Is that in your best interest or the financial advisor’s best interest?

To sum up, nobody is recommending becoming a market timer, but being aware of the stock market levels and trends can boost your long-term returns by helping you buy stocks or funds at more attractive levels over time.

Do you have a financial question? Ask it now at Moolanomy Answers!

Copyright © 2007 – 2009 Pinyo B. This feed is provided for the convenience of Moolanomy’s subscribers. You are not allowed to reproduce the content within this feed in any manner.

Please visit Moolanomy Personal Finance Blog, Moolanomy Finance Directory, and Moolanomy Answers for more great content.

Source: Moolanomy Personal Finance

Up until about 10 years ago, there was one type of IRA, the traditional IRA which was deducted from your taxable income, grows tax deferred, and upon withdrawal, is taxed at whatever rate you find yourself. Its cousin, the Roth IRA is the mirror image, the money you put in is after tax money, but you never pay tax again on it, at least according to current rules. So the distinction can be summed up as our Uncle Sam saying, “You can pay me now, or pay me later.”

Three Approaches To Minimizing Your Taxes With Tradition IRA And Roth IRA

Now, it’s easy to understand what tax bracket you are in now, or at least where you were on your 2008 tax return. Take a look at your taxable income toward the end of the return, and take a peek at Fairmark.com, and from that table, you’ll know your rate now. The tough part is to forecast your tax rate at withdrawal. The truth is, unless you are close to retiring, you can’t know, and even if you are, our friends in congress are able to change things just when you think you have your plan in place.

So what’s an investor to do? There are three approaches you can take, each has its advantage.

1. Tax Diversification

The first is Tax Diversification. Mike Piper does a great job discussing this method.

2. Full Pre-Tax Savings (Traditional IRA or 401k)

Next, let’s discuss the concept of going full pre-tax.

How much would you need to save for this to be the ‘wrong’ choice?

Today, a retired couple is in the 15% bracket for taxable income up to (but not over) $67,900. Taxable. They also have a standard deduction of $11,400 as well as their two exemptions, $3,650 each. The grand total is $86,600. To generate this much income, even if you are withdrawing 5% per year (most advisors suggest 4% as the maximum withdrawal each year) it would take over $1.7 million.

Given the current average retiree’s account is nowhere near this number, this strategy actually has some appeal. On your 40 year journey to retirement, the road is rarely without bumps. You can take advantage of periods of unemployment or underemployment to convert some money to a Roth IRA, and pay taxes in the year your bracket drops. If disabled, you can take it out without penalty, using your standard deduction and exemption to have some tax free income.

3. Roth IRA Savings

Last is a bit of a different approach. If you find that you are in the 10% or 15% bracket, more than half of us are, you should choose the Roth path.

Optimize Your Tax Savings By Living In The 15% Bracket

There’s a good chance that by just paying attention to your finances and reading this, you are not average. You are above average in both motivation and intelligence. Thus, the chance that you earn your way right into the 25% bracket and beyond are higher for you than the data suggests. Whether it’s five or ten years from now, or sooner than that, you will find yourself in the 25% bracket. At that point choose pre-tax savings.

When you right at the edge, it can be tricky, using a combination of both Pre-Tax IRA along with Roth to get your taxable income right at the edge of the bracket, so the next dollar of income would be taxed at 25%, but the last was taxed at 15%. You may find that when you buy your first home, the combination of mortgage interest, property tax, and state income tax is enough to put you back in the 15% bracket. Back to a Roth for you.

If you are well within the 15% bracket, you could also use Roth IRA Conversion, where you take some pre-tax IRA money, and pay the tax, turning that money into Roth IRA dollars.

See where I’m going with this? There are a large number of people for whom this is the optimum strategy. This will have you “living in the 15% bracket” and it’s worth the time to understand your tax bracket to get the most benefit from these retirement accounts.

IRA Phase Out Limits

Before we finish this discussion, it’s important to understand the income thresholds that might limit your options. If you are married, the phase out for Traditional IRA contributions is $89,000-$109,000, for Roth, it’s $166,000-$176,000. If you are single, the phaseout for Traditional IRA contributions is $55,000-$65, for Roth, it’s $101,000-$116,000. So for those who are above the traditional limits, your only choice is Roth. Take advantage of the options available to you.

Any question on this topic, please ask here or at Moolanomy Answers, and I’ll help you understand.

Do you have a financial question? Ask it now at Moolanomy Answers!

Copyright © 2007 – 2009 Pinyo B. This feed is provided for the convenience of Moolanomy’s subscribers. You are not allowed to reproduce the content within this feed in any manner.

Please visit Moolanomy Personal Finance Blog, Moolanomy Finance Directory, and Moolanomy Answers for more great content.

Source: Moolanomy Personal Finance

After I have to work hard, I need to relax and the first thing that comes across my brain is shopping. If you are a woman or want to know what woman wants, you can follow me.

First of all, I’d like to tell you that the most wanted stuff for now is some comfortable shoes. Do you have any favorite brands? For me, when I think of shoes, the first one is Kate spade shoes especially for the flat or patent that I can use many times in everyday of my life. Another good brand for me is kors shoes. For this one, I like its boots including tall boots which I can’t miss in Winter. Not only the trendy style but it was also made by goodly leather.

Anyway, for someone who don’t have enough time to go to the department store; don’t worry about it because I have some way out. No need to take too much time and have a leg ache with shopping at some mall, you just search your interested items via the internet, there are many shop online that’ re waiting for you.

Source: Personal loan Information : Auto loan, Home loan, Internet bank, Mortgage

Welcome to the Best of Money Carnival, a weekly listing of the top 10 personal finance posts. The carnival gathers submissions from some of the best personal finance and investing bloggers on the web, and permits the hosting blogger the privilege of choosing his or her top ten favorite articles. Below are the ones I selected as the top 10 in a reversed order.

Photo by lepiaf.geo via flickr

10. Why My Phone Company is Afraid of Me (and You) Now at The Wealth Pilgrim

I finally pulled the plug on my land line. Here are some innovative solutions I found that allows me to use my cell phone and save money at the same time.

9. Are Debit Cards Evil, Too? at Get Rich Slowly

Banks have turned to overdraft fees as an essential profit center in the midst of this recession. Will debit cards be the next target of reform for our government?

8. Little Tips Make for Big Savings at Fine-Tuned Finance

Finding ways to save money is a necessity for most people. A good number of people will agree that while saving money is a challenge it is also critical to making that dream vacation a reality or simply to make ends meet. Saving doesn’t have to mean doing without but rather spending smarter. Making a habit of saving on the little things can make a great impact over time.

7. Six Habits of the Financially Fit at Money Help For Christians

We know that there are certain criteria to being physically fit. The two most obvious factors are diet and exercise. Today I want us to look at those who are financially fit and determine what habits lead to people being or becoming financially fit.

6. Should I Invest While Still In Debt? at Debt Free Adventure

Investing while still in debt is usually not a wise strategy because it is likely that you are paying more in interest on debt than you would earn in interest on investments. That is not always the case, but it is the most common case. So is investing while you are in debt ever a good idea?

5. Your Kid’s Allowance: How Much To Give Your Child at The Digerati Life

When do we start giving our child an allowance? I looked at an interesting study on allowances: who gives the “better” allowance and how much do people give?

4. How Much Life Insurance Do You Need For Stay At Home Mom or Parent? at Good Financial Cents

For those that do decide to be a stay at home parent, that doesn’t mean that life insurance is not needed for them.

3. I find that the harder I work, the more luck I seem to have posted at Budgets are Sexy

The thing I like about hard work is that it forces you to LEARN how the world works. You make exceptional mistakes, but then you turn around and blow the socks off something!

2. Truth, the highest thing that man may keep at Funny About Money

Most people are habitually truthful. But should you always tell the truth, especially about financial and other personal matters? This post argues that in many circumstances you should resist revealing any more facts that absolutely necessary, even — when pushed — going so far as to provide disinformation.

1. The “Shit-That-Doesn’t-Inspire-You” Factor at Man vs. Debt

You’ve probably heard of the Latte Factor. But for me that doesn’t quite cut it. I’m having much more luck implementing the “sh**-that-doesn’t-inspire-you” factor!”

That’s it for this week’s Best of Money Carnival. If you’d like to be considered for next week’s carnival at Free Money Finance, simply submit your post to through blog carnival. If you’d like to host a future carnival, send FMF an email asking for a slot.

Do you have a financial question? Ask it now at Moolanomy Answers!

Copyright © 2007 – 2009 Pinyo B. This feed is provided for the convenience of Moolanomy’s subscribers. You are not allowed to reproduce the content within this feed in any manner.

Please visit Moolanomy Personal Finance Blog, Moolanomy Finance Directory, and Moolanomy Answers for more great content.

Source: Moolanomy Personal Finance

Today was supposed to be a picnic at the apple orchard day, but the cold weather and rain put a stop to that idea. So I guess it will be another blogging day for me. Last week was the first time that Moolanomy featured articles written by staff writer. Please let us know what you think about our new direction — i.e., becoming a multi-author blog.

Intuit And NYC PF Bloggers Meetup

Thanks to Flexo of Consumerism Commentary, I had a chance to meet several personal finance bloggers, the great folks from Intuit who sponsored the event, and a journalist from the Wall Street Journal. Although it wasn’t the intention, it was a nice going away dinner before I move to Virginia. The dinner at the Mercer Kitchen was awesome and the company was great. Amongst the participants are

• Kelly from The Centsible Life,
• Darwin from Darwin’s Finance,
• Jon from Betterment,
• Mapgirl’s Fiscal Challenge,
• My Journey To Millions,
• Shawanda from You Have More Than You Think,
• Christian from Money Obedience,
• Chelsea Marti, Ashley, and Emily Johnston from Intuit TurboTax, and finally
• Mary Pilon from The Wall Street Journal.

I know we called it NYC Meetup, but in fact there were people from Pennsylvania, New Jersey, Washington DC, and even San Diego!

The Most Wicked Funny Personal Finance Book of 2009

Usually, people don’t associate the words: clever, wicked, funny, or hilarious with personal finance. But there is actually such a book and it’s called Secrets of a Stingy Scoundrel: 100 Dirty Little Money-Grubbing Secrets by Phil Villarreal. Of course, I am too lame to use most of Phil’s secret, but it’s still a good feeling to imagine myself being an awesome Frugal Ninja like Phil.

In this book, Phil teaches you 100 ways to save money and get things for free — not all are kosher but probably wouldn’t hurt if you want to try each of them once or twice.

If you dare to try any of these ideas out, please let us know.

Weekly Highlights

Here are some great articles to check out this week:

• The Zero Hour Workweek at Illuminated Mind
• Hitler Tries Financial Blogging at Fabulously Broke — So funny and so true.
• How NOT To Suck At Blogging at Man vs. Debt — Not about personal finance, but a must read if you want to start a blog for income.
• What to Look for in an Options Trading Course by PFIncome
• Get real: Downsize your money goals by Liz Weston on MSN Money
• The New Credit Card Rewards at U.S. News Alpha Consumer
• Where to Open a Roth IRA Account at Cash Money Life
• The History of Credit Cards at CardOffers.com

Carnivals

This is another light carnival week for me with one submission to Carnival of Twenty Something Finances.

Do you have a financial question? Ask it now at Moolanomy Answers!

Copyright © 2007 – 2009 Pinyo B. This feed is provided for the convenience of Moolanomy’s subscribers. You are not allowed to reproduce the content within this feed in any manner.

Please visit Moolanomy Personal Finance Blog, Moolanomy Finance Directory, and Moolanomy Answers for more great content.

Source: Moolanomy Personal Finance

Who doesn’t need some extra money, even if it’s just to increase your savings? As the latest economic downturn has shown, no one ever seems to have enough savings, and many of us have none, so having some extra cash to save without having to take an outside job is never a bad idea. There are several things you can do to make extra money from home, especially if you already have a hobby that could be turned into a money maker.

Photo by Jeff Kubina via Flickr

1. Sell Handcrafted Items Online.

Sites like Etsy, Craigslist, and eBay can be used to sell some of those craft items you’ve been making and hoarding for years. You won’t get rich, but a couple of hundred extra dollars a month is well within reason if you work at it.

2. Get Paid to Write Online.

There are many sites where you can earn money just by teaching others what you already know. Some pay per article, some pay upfront for articles plus a bonus for page views every month, and some pay based on ad revenue sharing. It’s not too difficult to make from $100-$400 a month once you get some upfront article and residual income payments going.

3. Sell What You Grow.

Are you a gardener who loves to share plants? Instead of giving them away, sell them on sites like Craigslist and eBay. There are a few online auction sites especially for plant and seed sales. A growing home-based business is the sale of fresh organically grown herbs to local restaurants. Take into consideration that if you live in a colder climate, this may be a seasonal income.

4. Start a blog with affiliate and AdSense ads.

Affiliate ads got a bad name when everyone was trying to sell ebooks about how to get rich online, but now major companies are getting into the act, and affiliate advertising is big business. Affiliate catalog sites have hundreds of retailers to choose from, so you’re bound to find something that will suit your blog content.

Amazon and eBay also have affiliate programs, and sites like Hubpages allow you to use those two affiliates on your articles, as well as giving you a share of AdSense income.

5. Start a Sitting Service.

Babysitting, pet sitting, elder sitting or house sitting are four possibilities. You can limit your available hours as you need, and hourly pay is relatively good. It’s not hard to make $100-$300 a month doing this in your spare time.

These are just five of the more popular options. The possibilities for making money from home are endless, depending on your talents and abilities. Put your mind to it, and you too can grow that savings account, or have extra money to spend on a monthly basis.

Do you have a financial question? Ask it now at Moolanomy Answers!

Copyright © 2007 – 2009 Pinyo B. This feed is provided for the convenience of Moolanomy’s subscribers. You are not allowed to reproduce the content within this feed in any manner.

Please visit Moolanomy Personal Finance Blog, Moolanomy Finance Directory, and Moolanomy Answers for more great content.

Source: Moolanomy Personal Finance

Everyone knows that healthy personal finances requires debt reduction. However, paying down debt can become discouraging when you have a great deal of it, from a variety of sources. Paying a little bit extra every month on each of your debts doesn’t seem to make a dent, thanks to high interest charges. Instead, you can make more effective use of your debt repayment funds if you concentrate on retiring one debt at a time. This can also simplify matters and help you focus your efforts. But how do you prioritize your debt?

Photo by Redvers via Flickr

Considerations for prioritizing debt repayment

Most people are familiar with Dave Ramsey’s Debt Snowball. While it is possible to prioritize your debt according to smallest balance, this is not the only consideration. Three other factors to consider when organizing a debt repayment schedule include:

1. High interest rates: While it can be emotionally gratifying to pay off your smallest balance first, and give you a reason to celebrate sooner, it may not save you the most money. High interest rates on some debts can mean that you are paying more over the long run. Instead of paying off $500 at 12.99%, you might consider tackling the $800 at 19.99% first. Otherwise, you are spending more money in interest each month, for a longer period of time.
2. Variable interest rates: When you have a fixed rate, you know exactly how much of your money is going to pay interest, and how much will actually pay down the principal each month. It adds stability. Variable interest rates, though, can stick it to you on a whim. If your rate goes up, all of a sudden your payments are less effective at reducing debt. Getting rid of variable rate debt ahead of fixed rate debt can help you eliminate a source of frustration and possible inefficiency up front.
3. Tax benefits: For those who are interested in consider their home equity loans and first mortgages as part of the debt they want to pay off as quickly as possible, it is important to consider tax benefits. Student loans also fall into this category. You can get a tax deduction for the interest you pay, so tackling these types of debt first may not be completely efficient. Debt is still debt, but at least some of the disadvantages of paying interest are offset by the tax advantages.

Deciding which debts to pay off first

Gather up all of the information on your debts, and consider the factors above. This can help you make a priority list. If your primary concern is motivation, go ahead and use the Debt Snowball method for your credit card and payday loans first, and then start the process again for your other types of debt.

If you want to save as much money as possible, though, consider prioritizing your debt with a different method. Categorize your debt according to interest rate. Look at your highest rate debts first. Do some of those debts have variable interest rates? Move those to the top of the list. Some of your debts may have variable rates, but be relatively low, like student loans. These types of debt also come with tax advantages. You can move this kind of debt lower on the list.

In the end, you have to determine which debt is likely to be more damaging and costly to you in the long run. (If you are considering your credit score, most of the high interest debt is most damaging, so paying it off first can help you improve how you look on paper.) Here is a sample of an order you might consider for paying of your debts:

1. Title loans and payday loans: Usually have the highest interest rates.
2. Credit cards: High interest rates that are likely variable.
3. Personal loans from financial institutions: Somewhat high interest that may be variable.
4. Auto loans: Usually fixed rate, and reasonably low interest rates.
5. Unsubsidized student loans: Often have reasonably low interest rates, and could be variable. Might be worth considering switching with auto loans if you have private loans with higher rates.
6. Home equity loans and lines of credit: Has a tax benefit, but is often variable with interest rates that are only moderately low.
7. Subsidized student loans: Usually have quite low interest rates. If they are consolidated, the rate is often fixed. Plus, you get a tax deduction.
8. First mortgage: Low, fixed rate with tax advantage. If your subsidized student loans have a much lower rate, it might be worth it to pay the mortgage off first — unless your mortgage interest deduction is helping to keep you in a lower tax bracket.

Naturally, prioritizing your debt repayment has a lot to do with your individual financial situation, and what you hope to accomplish. But by looking at more than one factor, you will be more likely to prioritize your debt repayment in the way that will benefit you the most (or do the least amount of damage).

Do you have a financial question? Ask it now at Moolanomy Answers!

Copyright © 2007 – 2009 Pinyo B. This feed is provided for the convenience of Moolanomy’s subscribers. You are not allowed to reproduce the content within this feed in any manner.

Please visit Moolanomy Personal Finance Blog, Moolanomy Finance Directory, and Moolanomy Answers for more great content.

Source: Moolanomy Personal Finance

We hear a lot about diversifying across asset classes — owning stocks, bonds, real estate, etc. We also hear a lot about diversifying within asset classes — owning mutual funds of hundreds of stocks rather than owning a few individual stocks. But there’s another, lesser-known form of diversification from which you could benefit: Tax diversification.

Photo by Angelray via Flickr

What is Tax Diversification?

Tax diversification is the strategy of spreading your investments out across each of the different types of accounts:

1. Taxable accounts
2. Tax-deferred accounts (i.e., traditional IRAs, 401(k) accounts, or 403(b) accounts)
3. Tax-free accounts (i.e., Roth IRAs or Roth options within a 401(k) account)

When deciding between tax-deferred accounts or tax-free accounts, you’re answering the question “Do I want to be taxed on this now, or would I rather be taxed on this later?” In its simplest form, the decision comes down to how your current tax bracket compares to the tax bracket you expect to be in when you withdraw the money.

• If you expect to be in a higher tax bracket in retirement, it makes sense to put the money in a tax-free account (like a Roth IRA).
• If you expect to be in a lower tax bracket in retirement, it makes sense to put the money in a tax-deferred account (like a traditional IRA).

Two Reasons It Pays to Tax Diversify

The first and most obvious reason for tax diversifying is that it’s impossible to know precisely what your tax rate will be in retirement, especially if retirement is still many years away. Based on current tax rates you may be able to say that your retirement tax bracket will be lower than your current one. But who’s to say that tax rates won’t change?

By spreading your investments across both tax-deferred and tax-free accounts, you can minimize the risk that you’ll be caught off guard by a significant change in tax rates. The second reason it pays to tax diversify is simple math: Putting all of your investments in either tax-free accounts or tax-deferred accounts is unlikely to be the most tax-efficient strategy.

For example, imagine an extreme scenario in which an investor has all of his retirement savings in a Roth IRA. Once he retires, none of his withdrawals would be taxable. At first glance, this may sound wonderful, but it’s really a huge waste.

If the investor had forgone some of his Roth contributions in order to contribute to a 401(k) or traditional IRA, he would have increased his taxable income in his low tax bracket years in exchange for reducing his taxable income during his high tax bracket years. That sounds like a good trade-off to me.

How to Tax Diversify

Because of all the variables involved, there’s no way to know precisely which breakdown of tax-deferred, tax-free, and taxable accounts is best. The strategy I suggest for most investors is to allocate their investment dollars in the following order:

1. Take full advantage of your employer’s 401(k) match,
2. Max out your Roth IRA,
3. Go back to your 401(k) and max it out,
4. Invest in taxable accounts.

This way you’ll be taking advantage of your employer-provided match, taking advantage of the low-cost investment options in an IRA (as compared to the high-cost funds frequently offered in a 401k), and achieving tax diversification all at once.

Do you have a financial question? Ask it now at Moolanomy Answers!

Copyright © 2007 – 2009 Pinyo B. This feed is provided for the convenience of Moolanomy’s subscribers. You are not allowed to reproduce the content within this feed in any manner.

Please visit Moolanomy Personal Finance Blog, Moolanomy Finance Directory, and Moolanomy Answers for more great content.

Source: Moolanomy Personal Finance

I never thought I would find myself in this seat. What seat, you ask? The seat where I am sitting across the table from a recent graduate giving them advice on “What now?” I have written a list of 10 things to do when you graduate but that mainly goes over short-term things that you can accomplish quickly. What about the more conceptual “What now?”

Photo by Brian Lane Winfield Moore via Flickr

The question seems so simple. And it is simply… complex. If that makes any sense. Where do you go from here? Should you drown yourself in business etiquette books? Should you make sure you are the last person to leave the office? Or did your friend tell you that leaving last makes it seem like you can’t get your work done in time… so you should leave when everyone else does. But does that mean you are just following the herd? Ahhhh!

Some Tips For Recent Graduates

With all of those stress inducing questions flowing through your head, what does a was-recent grad have to offer you?

1. Plan, plan, plan. But not too much.

I’m sure you are thinking, “Darn you!” Just give me some advice that will solve all of my problems! I wish it was that simple. I give you advice, you follow it, and everything works out picture perfect. Unfortunately, it doesn’t work out that way. So what do I mean by this whole “planning, but not really?”

Everyone has heard of goals. And if you have ever gone through a goal setting exercise, you usually have short-term, near-term, and long-term goals. Short-term would be goals that you would consider month-to-month. Near-term may be semi-annual or annual. And long-term goals would stretch to five or ten years or even more.

My advice is to sit down and write down all of your ST, NT, and LT goals. If you’ve started off with your ST goals and are moving towards your LT goals… do yourself a favor and start over. This time start with your LT goals and move backwards. For example, let’s say you want to be a Supply Chain Manager in five years. Then, using reverse engineering on your goals, what do you need to do? By Year 2 or 3, you should ideally be a supervisor of some capacity in either the warehouse or transport producing outstanding (and measurable) results. How do you get there? By Year 1 or 2, you should be getting a promotion into the supervisory role from your first role out of college. And how did this happen? Month by month, you need to perform above par and produce great results. My example isn’t as detailed or measurable as you should make your goals, but I just wanted to get the idea across. Make sure all of your goals are SMART goals.

What happens if you only follow 50% of that plan? Don’t worry; it is merely a draft of what your intentions are. Your intentions change, so don’t limit yourself because of a goal setting exercise.

2. Find a mentor and take advantage of the experience.

I’ve previously written about the importance of finding the right mentor. A mentorship is another relationship that you must build to be successful. The operative word is relationship. You must add value to the relationship just as they will add value by showing you the ropes.

Whether the mentor is assigned to you via your company (which sometimes leads to compatibility issues) or you connect with them yourself, make sure you both have a clear idea of what you are gaining from the relationship. Most seasoned employees know that mentoring newer employees is good for the business and themselves. It gives both parties an engaged audience to troubleshoot with and bounce ideas off of. Opportunities may open up through your mentor and you may ask some questions that they hadn’t thought of.

Start scoping out possible mentors as soon as you start working and keep your eyes open at every turn. I wouldn’t have found my mentor had I not specifically went and sat with him during my first week to learn what he does.

3. Be a Yes Man

Have you seen the movie “Yes Man” with Jim Carey? The concept is simple: Say yes to new situations that you encounter and leave the negativism aside. In order to make the movie more comedic, Jim Carey takes this to the extreme and says “Yes!” to every question. But think about the root concept in play.

If you are shy and all your co-workers go out to happy hour after work, say “Yes!” When the boss asks if you would mind traveling for a temporary project, saying “Yes!” might help your career. In fact, I did one of those temporary traveling assignments about a month and a half before I got promoted. Saying “Yes!” can make you more visible to people in your company as a positive, dependable, hard-working, go to person.

Obviously you need to evaluate your situation and use good judgment, but think about every question as an opportunity. If something good could come of it, it might be worth it to try.

4. Advice is Just That…

Not all advice is right, and most isn’t applicable.

Quite a conundrum we are in, huh? Here I am writing a post with 4 bits of advice for a recent graduate and one of the tips is that advice isn’t worth the paper it’s printed on.

And really, that’s what it all boils down too. In my 10 reasons post, I listed things like getting a used car and continuing to rent. But in the end, that may not be right for YOU. I can’t possibly know your situation, so I listed generic advice. It works for me. It works for a lot of people I know. But I can’t claim that it’s applicable to everyone.

That’s why this post has only 4 tips. They are large scale and conceptual tips. Planning, but not stressing about plans. Engaging in a valuable mentorship relationship. Saying “Yes!” to situations that will enable you to grow and develop. These are all tips that all of us can follow and use to develop. And then of course, the last tip: Be careful of the advice you follow.

A conundrum indeed.

Any More Tips?

Does anyone else have any large scale, big picture, conceptual tips for our recent grads? I think they hear enough financial tips about 401k’s and IRAs, let’s give them something meatier.

Do you have a financial question? Ask it now at Moolanomy Answers!

Copyright © 2007 – 2009 Pinyo B. This feed is provided for the convenience of Moolanomy’s subscribers. You are not allowed to reproduce the content within this feed in any manner.

Please visit Moolanomy Personal Finance Blog, Moolanomy Finance Directory, and Moolanomy Answers for more great content.

Source: Moolanomy Personal Finance