personal finance 101, exploring personal finance basics and best practices

how financially healthy are you you may
already know some or even all News or perhaps things aren’t quite as
bad as they seem when was the last time you sat down surrounded by all your
personal and financial documents and took stock of your overall financial
situation including reviewing your spending savings future goals and
insurance if you’re like most people you’ve either never done this exercise
or you did so a long time ago financial problems like many medical problems are
best detected early clean-living doesn’t hurt either
human beings were born to procrastinate that’s why we have deadlines
unfortunately you may have no explicit deadlines with your overall finances you
can allow your credit card debt to accumulate or you can leave your savings
sitting in lousy investments for years you can pay higher taxes leave gaps in
your retirement and insurance coverage and overpay for financial products of
course planning your finances isn’t as much fun as planning a vacation but
doing the former can help you take more of the latter simple arithmetic helps
you determine that savings is the difference between what you earn and
what you spend assuming that you’re not spending more than you’re earning to
increase your savings you either have to work more increase your earning power
through education or job advancement or spend less for most of us especially
over the short-term the thrifty approach is the key to building savings and
wealth even with the benefit of today’s lower interest rates carrying a balanced
month to month on your credit card or buying a car on credit means that even
more of your future earnings are going to be earmarked for debt repayment
buying on credit encourages you to spend more than you can really afford most
people say that they want to retire by their mid-60s or sooner but in order to
accomplish this goal most people need to save a reasonable chunk around 10% of
their incomes starting sooner rather than later the longer you wait to start
saving for retirement the harder reaching your goal will be and you’ll
pay much more in taxes if you don’t take advantage of the tax benefits of
investing through particular retirement accounts great deals that can’t wait for
a little reflection or a second opinion are often disasters waiting to happen
steer clear of people who pressure you to make decisions promise you high
investment returns and lack the proper training and experience to help you to
get the best deal you need to shop around read reviews and get advice from
disinterested objective third parties you need to check references and track
records so that you don’t hire incompetent self-serving or fraudulent
financial advisors but with all the different financial products available
making informed financial decisions has become an overwhelming task you’re most
vulnerable to making the wrong moves financially after a major life change a
job loss or divorce for example or when you feel pressure maybe your investments
plunged in value or perhaps a recent divorce has you fearing that you won’t
be able to afford to retire when you planned so you pour thousands of dollars
into some newfangled financial product take your time and keep your emotions
out of the picture in any field in which you’re not an expert you run the danger
of following the advice of someone who you think is an expert but really isn’t
if you look in the mirror you see the person who is best able to manage your
personal finances educate and trust yourself you’re vulnerable if you and
your family don’t have insurance to pay for financially devastating losses
people without a savings reserve and support network can end up homeless many
people lack sufficient insurance coverage to replace their income don’t
wait for a tragedy to strike to find out whether you have the right insurance
coverages placing too much emphasis on making and saving money can warp your
perspective on what’s important in life money is not the first or even second
priority in happy people’s lives your health relationships with family and
friends career satisfaction and fulfilling interests should be more
important most problems can be fixed over time with changes in your behavior your financial net worth is an important
barometer of your monetary health your net worth indicates your capacity to
accomplish major financial goals such as buying a home retiring and withstanding
unexpected expenses or loss of income your financial net worth has absolutely
positively no relationship to your worth as a human being this is not a test you
don’t have to compare your number with your neighbors financial net worth isn’t
the scorecard of life your net worth is your financial assets minus your
financial liabilities a financial asset is real money or an investment you can
convert to hard dollars that you can use to buy things now or in the future
financial assets generally include the money you have in bank accounts stocks
bonds and mutual fund accounts money that you have in retirement accounts
including those with your employer and the value of any businesses or real
estate that you own are also included assets can also include your future
expected Social Security benefits and pension payments if your employer has
such a plan these assets are usually quoted in dollars per month rather than
in a lump sum value consumer items such as your car clothing stereo and wine
collection don’t count as financial assets to arrive at your financial net
worth you must subtract your financial liabilities from your assets liabilities
include loans and debts outstanding such as credit card and auto loan debts when
figuring your liabilities include money you borrowed from family and friends
include mortgage debt on your home as a liability only if you include the value
of your home in your asset list be sure to also include debt owed on other real
estate no matter what because you counted the value of investment real
estate as an asset your net worth is important and useful only to you and
your unique situation and goals what seems like a lot of money to a person
with a simple lifestyle may seem like a pittance to a person with high
expectations and a desire for an opulent lifestyle if your net worth excluding
expected monthly retirement benefits such as those from Social Security and
pensions is negative or less than half your annual
income take notice if you’re in your 20s and you’re just starting to work a low
net worth is less concerning getting rid of your debts the highest interest ones
first is the most important thing then you need to build a safety Reserve equal
to three to six months of living expenses
you should definitely find out more about getting out of debt reducing your
spending and developing tax wise ways to save and invest your future earnings you may not know it or care but you
probably have a personal credit report and a credit score lenders examine your
credit report and score before granting you a loan or credit line a credit
report contains information such as personal identifying information
includes name address social security number and so on record of credit
accounts details when each account was opened latest balance payment history
and so on bankruptcy filings if you filed
bankruptcy in recent years enquiries lists who has pulled your credit report
because you’ve applied for credit your credit score which is not the same as
your credit report is a three-digit score based on the report lenders use
your credit score as a predictor of your likelihood of defaulting on repaying
your borrowings as such your credit score has a major impact on whether a
lender is willing to extend you a particular loan and at what interest
rate the higher your credit score the lower your predicted likelihood of
defaulting on a loan the rate of credit delinquency refers to the percentage of
consumers who will become 90 days late or later in repaying a creditor within
the next two years consumers with low credit scores have dramatically higher
rates of falling behind in their loans thus low credit scores are considered
much riskier borrowers and fewer lenders will be willing to offer you a given
loan those who do will charge you relatively high rates you will generally
qualify for the best lending rates if your credit score is 620 or higher
credit scores below 620 are not considered good and lenders consider
these loans risky with some types of loans such as home equity loans to
qualify for your best rates you may need a credit score of at least seven sixty
or 780 given the importance of your personal credit report you may be
pleased to know that you’re entitled to receive a free copy of your credit
report annually from each of the three credit bureaus Equifax Experian and
TransUnion when you receive your reports the best first step is to examine them
for possible mistakes you may be surprised to find that your credit
reports don’t include your credit score thus if you wish to obtain your credit
score it’s going to cost you here are the most important actions that you can
take to boost your attractiveness to lenders get all three of your credit
reports and be sure each is accurate correct errors and be especially sure to
get accounts removed if they aren’t yours and they show late payments or are
in collection if your report includes late or missed payments more than seven
years old ask to have those removed ditto for a bankruptcy more than ten
years ago pay all your bills on time to ensure
on-time payments sign up for automatic bill payment which most companies like
phone and utility providers enable you to use be loyal if it doesn’t cost you
the older the age of loan accounts you have open the better for your credit
rating closing old accounts and opening a bunch of new ones generally lowers
your credit score but don’t be loyal if it costs you for example if you can
refinance your mortgage and save some good money by all means do so the same
logic applies if you’re carrying credit card debt at a high interest rate and
want to transfer that balance to a lower rate card if your current credit card
provider refuses to match a lower rate you find elsewhere move your balance and
save yourself some money limit your debt and debt accounts the more loans
especially consumer loans that you hold and the higher the balances the lower
your credit score will be work to pay down consumer revolving debt such as on
credit cards if you obtain your credit report and find a boo-boo on it that you
don’t recognize as being your mistake or fault
don’t assume that the information is correct credit reporting bureaus and the
creditors who report credit information to these bureaus often make mistakes if
the bad information on your report is completely foreign looking to you tell
the credit bureau and explain that you need more information because you don’t
recognize the creditor if the creditor made a mistake you need to write or call
the creditor to get them to correct the erroneous information that they sent to
the credit bureau phoning first usually works best the credit bureau should be
able to tell you how to reach the creditor if you don’t know how if
necessary follow up with a letter remember if your problems are fixable
you can fix them yourself and you don’t need to pay a company
big bucks to do it why do you borrow money usually you
borrow money because you don’t have enough to buy something you want or need
like a college education if you want to buy a four-year college education you
can easily spend $100,000 $150,000 or more not too many people have that kind
of spare cash so borrowing money to finance part of that cost enables you to
buy the education how about a new car a trip to your friendly local car dealer
shows you that a new set of wheels will set you back $20,000 plus although more
people may have the money to pay for that than save a college education what
if you don’t should you finance the car the way you finance the education the
auto dealers and bankers who are eager to make you an auto loan say that you
deserve and can afford to drive a nice new car and they tell you to borrow away
or lease which I don’t love either there’s a big difference between
borrowing for something that represents a long-term investment and borrowing for
short-term consumption if you get into the habit of borrowing and paying all
that interest for vacations cars clothing and other consumer items you’ll
spend more of your future income paying back the debt and interest leaving you
with less money for vacations and all your other goals the relatively high
interest rates that banks and other lenders charge for bad consumer debt is
one of the reasons you’re less able to save money when using such debt not only
does money borrowed through credit cards auto loans and other types of consumer
loans carry a relatively high interest rate but it also isn’t tax deductible
I’m not saying that you should never borrow money and that all debt is bad
good debt such as that used to buy real estate and small businesses is generally
available at lower interest rates than bad debt and is usually tax deductible
if well managed these investments may also increase in value borrowing to pay
for educational expenses can also make sense education is generally a good
long-term investment because it can increase your earning potential and
student loan interest is tax deductible subject to certain limitations
calculating how much debt you have relative to your annual income is a
useful way to size up your debt load ignore for now good debt the loans you
may owe on real estate a business and education and so on to calculate your
bad debt danger ratio divide your bad debt by your annual income when your bad
debt danger ratio starts to push beyond 25% it can spell real trouble such high
levels of high interest consumer debt on credit cards and auto loans grow like
cancer the growth of the debt can snowball and get out of control unless
something significant intervenes how much good debt is acceptable the answer
varies a key question is are you able to save sufficiently to accomplish your
goals borrow money only for investments good debt for purchasing things that
retain and hopefully increase in value over the long term such as an education
real estate or your own business don’t borrow money for a consumption bad debt
for spending on things that decrease in value and eventually become financially
worthless such as cars clothing vacations and so on as with good food of
course you can get too much of a good thing when you incur debt for investment
purposes to buy real estate for small business even your education you hope to
see a positive return on your invested dollars but some real estate investments
don’t work out some small businesses crash and burn and some educational
degrees and programs don’t help in the way that some hope that they could
there’s no magic formula for determining when you have too much good debt here
are two important questions to ponder and discuss with your loved ones about
the seemingly good debt you’re taking on are you and your loved ones able to
sleep well at night and function well during the day free from great worry
about how you’re going to meet next month’s expenses are you and your loved
ones financially able to save what you’d like to work towards your goals when you
charge on a credit card that does not have an outstanding balance carried over
from the prior month you typically have several weeks known as the grace period
from the date of your charge to the time when you must pay your bill this is
called playing the float had you paid for this purchase by cash or cheque you
would have had to shell out the money sooner if you have difficulty saving
money and plastic tends to burn holes through your budget
forget the float game you’re better off not using credit cards the same applies
to those who pay their bills in full but spend more because it’s so easy to do
with a piece of plastic the first step she’s saving more of the
income that you work so hard for is to figure out where that income typically
gets spent you should do the spending analysis if any of the following apply
to you you aren’t saving enough money to meet your financial goals you feel as
though your spending is out of control or you don’t really know where all your
income goes you’re anticipating a significant life change for example
marriage leaving your job to start a business having children retiring and so
on if you’re already a good saver you may not need to complete the spending
analysis if you’re saving enough to accomplish your goals I don’t see much
value in continually tracking your spending doing a spending analysis is a
little bit like being a detective your goal is to reconstruct the crime of
spending you probably have some major clues at your fingertips or piled
somewhere on the desk or table where you pay bills unless you keep meticulous
records that detail every dollar you spend you won’t have perfect information
a number of available sources should allow you to reconstruct where you’ve
been spending the bulk of your money to get started
get out your recent pay stubs tax returns checkbook register or cancelled
checks and monthly debit card transactions credit and charge card
bills ideally you want to assemble the documents needed to track one year’s 12
months spending if you take a major vacation or spend a large amount on
gifts during certain months of the year make sure that you include these months
in your analysis over the course of a week or perhaps even a month you could
keep a record of everything you buy with cash
tracking cash can be an enlightening exercise but it can also be a hassle
software programs can assist you with paying bills and tracking your spending
the main advantage of using software is that you can continually track your
spending as long as you keep entering the information these software packages
can even help speed up the check writing process after you figure out how to use
them which isn’t always an easy thing to do but you don’t need a computer and
fancy software to pay your bills and figure out where you’re spending money
if try you’re spending is what you’re after you
need to enter information from the bills you pay by check and the expenses you
pay by credit card and cash like home exercise equipment and exotic kitchen
appliances such software often ends up in a consumer graveyard paper pencil and
a calculator worked just fine for tracking your spending if you’re busy
consider ways to reduce the amount of time you spend on mundane financial
tasks like bill paying many companies for example allow you to pay your
monthly bills electronically via your bank checking account or your credit
card don’t use this option unless you pay your credit card bill in full each
month the fewer bills you have to pay the fewer separate checks and envelopes
you must process each month that translates into more free time and fewer
paper cuts pick up just about any major financial magazine or newspaper or scan
stories on the internet and you’ll quickly see our culture’s obsession with
financial wealth the more money financial executives movie stars or
professional athletes have the more publicity and attention they seem to get
in fact many publications go as far as ranking those people who earn the most
or have amassed the greatest wealth money can’t buy happiness it’s tempting
to think that if you could only make 20% more or twice as much money you’d be
happier balancing your financial goals with other important life goals is key
to your happiness what’s the point for example of staying in a well-paying
admired profession if you don’t care for the work and you’re mainly doing it for
the financial rewards life is too short and precious for you to squander away
your days so please consider your higher life goals and purposes what are your
non-financial priorities family friends causes and how can you best accomplish
your goals with the financial resources you do have because many of us get
caught up and the responsibilities of our daily lives we often don’t have time
for reflection people who identify their goals and then work toward them which
often requires changing some habits are the ones who accomplish their goals
where possible you should try to save and invest in accounts that offer you a
tax advantage this is precisely what retirement
accounts offer you these accounts known by such enlightening acronyms and names
as 401 K 403 B SEP IRAs Kiyo’s and so on offer tax breaks to people of all
economic means consider the following advantages to investing in retirement
accounts contributions are usually tax-deductible by putting your money in
a retirement account not only do you plan wisely for your future but you also
get an immediate financial reward lower taxes and lower taxes mean more money
available for saving and investing retirement account contributions are
generally not taxed at either the federal or state income tax levels until
withdrawal but they’re still subject to Social Security and Medicare taxes when
earned another advantage is that returns on your investment compound over time
without taxation after you put money into a retirement account any interest
dividends and appreciation add to your account without being taxed these
accounts don’t allow for a complete tax avoidance you get to defer taxes on all
the accumulating gains and profits until you withdraw the money down the road
thus more money is working for you over a longer period of time the newer Roth
IRA offers no upfront tax breaks but does allow future tax-free withdrawal of
investment earnings a final advantage is that in some company retirement accounts
companies match a portion of your own contributions thus in addition to tax
breaks you get free extra money courtesy of your employer because you don’t know what the future
holds preparing for the unexpected is financially wise conventional wisdom
says that you should have approximately six months of living expenses put away
for an emergency this particular amount may or may not be right for you because
it depends of course on how expensive the emergency is unfortunately no hard
and fast rules exist how much of an emergency stash you need depends on your
situation three months living expenses choose this option if you have other
accounts such as a 401k or family members and close friends whom you can
tap for a short-term loan this minimalist approach makes sense when
you’re trying to maximize investments elsewhere for example in retirement
accounts or you have stable sources of income employment or otherwise six
months living expenses this amount is appropriate if you don’t have other
places to turn for a loan or if you have some instability in your employment
situation or a source of income up to one years living expenses set aside this
much if your income fluctuates wildly from year to year or if your profession
involves a high risk of job loss finding another job could take you a long time
and you don’t have other places to turn for a loan in the event that your only
current source of emergency funds is a high interest credit card you should
first save at least three months worth of living expenses in an accessible
account before funding a retirement account or saving for other goals when
you’re starting out financially deciding whether to save money to buy a home or
to put money into a retirement account presents a dilemma in the long run
owning your own home is a wise financial move on the other hand savings sooner
for retirement makes achieving your goal easier presuming both goals are
important to you you should be saving toward both buying a home and for
retirement if you’re eager to own a home you can throw all your savings toward
achieving that goal and temporarily put your retirement savings on hold
save for both purposes simultaneously if you’re not in a rush you may be able to
eat your cake and have it too if you work for an employer that allows
borrowing against retirement account balances you can save money in the
timon account and then borrow against it for the downpayment of a home be careful
though retirement account loans typically must be paid back within a set
number of years check with your employer or immediately if you quit or lose your
job you’re also allowed to make penalty-free withdrawals of up to ten
thousand dollars from individual retirement accounts toward a first-time
home purchase when saving money for starting or buying a business
most people encounter the same dilemma they face when deciding to save to buy a
house if you fund your retirement accounts to the exclusion of earmarking
money for your small business dreams your entrepreneurial aspirations may
never become a reality generally I advocate hedging your bets
by saving money in your tax sheltered retirement accounts as well as towards
your business venture an investment in your own small business can produce
great rewards so you may feel comfortable focusing your savings on
your own business wanting to provide for your children’s future is perfectly
natural but doing so before you saved adequately toward your own goals can be
a major financial mistake the college financial aid system effectively
penalizes you for saving money outside of retirement accounts and penalizes you
even more if the money’s invested in the child’s name this concept may sound
selfish but you need to take care of your future first you should first take
advantage of saving through your tax sheltered retirement accounts before you
set aside money in custodial savings accounts for your kids this practice
isn’t selfish do you really want to have to leech off your kids when you’re old
and frail because you didn’t save any money for yourself if you want to buy a
car a canoe or a plane ticket to France do
not I repeat do not buy such things with consumer credit that is carried debt
month-to-month to finance the purchase on a credit card or auto loan cars boats
vacations and the like our consumer items not wealth building investments
such as real estate or small businesses a car begins to depreciate the moment
you drive it off the sales lot a plane ticket to France is worthless the moment
you arrive back home I know your memories will be priceless
but they won’t pay the bills paying for high interest consumer debt can cripple
your ability not only to save for long-term goals but
also to make major purchases in the future interest on consumer debt is
exorbitantly expensive up to 18% for most credit cards when contemplating the
purchase of a consumer item on credit add up the total interest you end up
paying on your debt and call it the price of instant gratification don’t
deny yourself gratification just learn how to delay it get into the habit of
saving for your larger consumer purchases to avoid paying for them over
time with high interest consumer credit if you want to retire by your mid-60s
when social security kicks in you need to save enough money to support yourself
for 20 years maybe longer two decades is a long time to live off your savings
you’re going to need a good sized chunk of money more than most people realize
the earlier you hope to retire the more money you need to set aside and the
sooner you have to start saving unless you plan to work part time in retirement
to earn more income if you’re like most working people you need to increase your
savings rate for retirement investing your money is just one and not even the
most important aspect of preparing for your retirement in order to enjoy the
lifestyle that your retirement savings will provide you you need to invest
energy into other areas of your life as well
few things are more important than your health without your health enjoying the
good things in life can be hard unfortunately many people aren’t
motivated to care about their health until after they discover problems by
then it may be too late although exercising regularly eating a balanced
and nutritious diet and avoiding substance abuse can’t guarantee you a
healthful future these good habits go a long way toward preventing many of the
most common causes of death and debilitating disease regular medical
exams also are important in detecting problems early in addition to your
physical health be sure to invest in your psychological
health people live longer and have happier and healthier lives when they
have a circle of family and friends around them for support unfortunately
many people become more isolated and lose regular contact with business
associates friends and family members as they grow older
happy retirees tend to stay active getting involved in volunteer
organizations and new social circles they may travel to see old friends or
younger relatives who may be too busy to visit them treat retirement life like a
bubbly inviting hot tub set at 102 degrees you want to ease yourself in
nice and slow jumping in hastily can take most of the pleasantness out of the
experience abruptly leaving your job without some sort of plan for spending
all that free time is an invitation to board
and depression everyone needs a sense of purpose and a sense of routine
establishing hobbies volunteer work or a sideline business while gradually
cutting back your regular work schedule can be a terrific way to ease into
retirement lower yourself into the tubs slowly take some time to get used to the
temperature change if you hope to someday reduce the time you spend
working or cease working altogether you’ll need sufficient savings to
support yourself many people particularly young people and to those
who don’t work well with numbers underestimate the amount of money needed
to retire to figure out how much you should save per month to achieve your
retirement goals you need to crunch a few numbers don’t worry this number
crunching should be easier than doing your taxes luckily for you you don’t
have to start cold studies show how people typically spend money before and
during retirement most people need about 70 to 80 percent of their pre-retirement
income throughout retirement to maintain their standard of living the following
three profiles provide a rough estimate of the percentage of your pre-retirement
income you’re going to need during retirement pick the one that most
accurately describes your situation if you fall between two descriptions pick a
percentage that fits in between the two to maintain your standard of living in
retirement you need 65 percent of your pre-retirement income if you save a
large amount 15% or more of your annual earnings are a high income earner will
own your home free of debt by the time you retire do not anticipate leading a
lifestyle in retirement that reflects your current high income if you’re an
especially high income earner who lives well beneath your means you may be able
to do just fine with even less than 65 percent pick an annual dollar amount or
percentage of your current income that will allow the kind of retirement
lifestyle you desire 75 percent of your pre-retirement income if you save a
reasonable amount five to fourteen percent of your annual earnings will
still have some mortgage debt or a modest rent to pay by the time you
retire anticipate having a standard of living in retirement that’s comparable
to what you have today eighty-five percent of your pre-retirement income if
you save little or none of your annual earnings less than five
we’ll have a relatively significant mortgage payment or sizable rent to pay
in retirement anticipate wanting or needing to maintain your current
lifestyle throughout retirement of course you can use a more precise
approach to figure out how much you need per year in retirement be forewarned
though that this more personalized method is far more time consuming and
because you’re making projections into an uncertain future it may not be any
more accurate than the simple method I just explained if your data oriented you
may feel comfortable tackling this method you need to figure out where
you’re spending your money today and then work up some projections for your
expected spending needs in retirement if the amount you need to save per month to
reach your retirement goals seems daunting all is not lost
remember winners never quit and quitters never win here are my top
recommendations for making up for lost time question your spending you have two
ways to boost your savings earn more money or cut your spending or do both
most people don’t spend their money nearly as thoughtfully as they earn it
be more realistic about your retirement age if you extend the age at which you
plan to retire you get a double benefit you’re earning and saving money for more
years and you’re spending your nest egg over fewer years of course if your job
is making you crazy this option may not be too appealing try to find work that
makes you happy and consider working at least part time during the early years
typically considered the retirement years use your home equity the prospect
of tapping the cash in your home can be troubling after getting together the
down payment you probably worked for many years to pay off that sucker you’re
delighted not to have to mail a mortgage payment to the bank anymore but what’s
the use of owning a house free of mortgage debt when you lack sufficient
retirement reserves all the money that’s tied up in the house can be used to help
increase your standard of living in retirement you have a number of ways to
tap your home’s equity you can sell your home and either move to a lower-cost
property or rent an apartment tax laws allow you to realize up to $250,000 in
tax-free profit from the sale of your house $500,000 if you’re married another
option is a reverse mortgage in which you get a monthly income check as you
build a loan balance against the value of your home
the loan is paid when your home is finally sold get your investments
growing the faster your money grows and compounds the less you need to save each
year to reach your goals earning just a few extra percentage points per year on
your investments can dramatically slash the amount you need to save the younger
you are the more powerful the effect of compounding interest for example if
you’re in your mid 30s and your investments appreciate 6% per year
rather than 4% faster than the rate of inflation the amount you need to save
each month to reach your retirement goals drops by about 40% turn a hobby
into supplemental retirement income even if you’ve earned a living in the same
career over many decades you have skills that are portable and can be put to
profitable use pick something you enjoy and are good at develop a business plan
and get smart about how to market your services and wares remember as people
get busier more specialized services are created to support their hectic lives a
demand for quality home made goods of all varieties also exists be creative
you never know you may wind up profiled in a business publication invest to gain
tax-free and other free money by investing in a tax wise fashion you can
boost the effective rate of return on your investments without taking on
additional risk in addition to the tax benefits you gain from funding most
types of retirement accounts some employers offer free matching money also
the government now offers tax credits for low and moderate income earners who
utilize retirement accounts asked for money outside of tax sheltered
retirement accounts if you’re in a relatively high tax bracket you may earn
more by investing in tax-free investments and other vehicles that
minimize highly taxed distributions think about inheritances although you
should never count on an inheritance to support your retirement you may inherit
money someday before you decide which debt
strategies make sense for you you must first consider your overall financial
situation and assess your alternatives many people build a mental brick wall
between their savings and investment accounts and their consumer debt
accounts by failing to view their finances holistically they simply fall
into the habit of looking at these accounts individually the thought of
putting a door in that big brick wall doesn’t occur to them if you have the
savings to pay off consumer debt like high interest credit card and auto loans
do so make sure you pay off the loans with the highest interest rates first
sure you diminish your savings but you also reduce your debts although your
savings and investments may be earning decent returns odds are good that the
interest you’re paying on your consumer debts is higher paying off consumer
loans on a credit card at say 12% is like finding an investment with a
guaranteed return of 12% tax-free you would actually need to find an
investment that yielded even more around 18% to net 12% after paying taxes in
order to justify not paying off your 12% loans the higher your tax bracket the
higher the return you need on your investments to justify keeping high
interest consumer debt even if you think that you’re an investment genius and you
can earn more on your investments swallow your ego and pay down your
consumer debts anyway in order to chase that higher potential return from
investments you need to take substantial risk you may earn more investing in that
hot stock tip or that bargain real estate located on a toxic waste site but
more than likely you won’t if you use your savings to pay down consumer debts
be careful to leave yourself enough of an emergency cushion you want to be in a
position to withstand an unexpected large expense or temporary loss of
income on the other hand if you use savings to pay down credit card debt you
can run your credit card balances back up in a financial pinch unless your card
gets cancelled or you can turn to a family member or wealthy friend for a
low-interest loan if you were approached by a life insurance agent he or she
probably sold you a cash value policy because it pays high commissions to
insurance agents or perhaps your parents bought one of these policies for you
when you were a borrow against the cash value to pay
down your debts you may want to consider discontinuing your cash value policy
altogether and simply withdraw the cash balance cell investments held outside of
retirement accounts maybe you have some shares of stock or a Treasury bond
gathering dust in your safety deposit box consider cashing in these
investments to pay down your consumer loans just be sure to consider the tax
consequences of selling these investments if possible sell only those
investments that won’t generate a big tax bill borrow against the equity in
your home if you’re a homeowner you may be able to tap into your home’s equity
which is the difference between the property’s market value and outstanding
loan balance you can generally borrow against real estate at a lower interest
rate and get a tax deduction to boot you must take care to ensure that you don’t
over borrow on your home and risk losing it to foreclosure borrow against your
employer’s retirement account check with your employers benefits department to
see whether you can borrow against your retirement account balance the interest
rate is usually reasonable be careful though if you leave your job or if
you’re asked to leave you may have to repay the loan within only 60 days also
recognize that you’ll miss out on investment returns on the money borrowed
borrow from friends and family they know you love you realize your shortcomings
and probably won’t be as cold-hearted as some bankers money borrowed from family
members can have strings attached of course treating the obligation seriously
is important to avoid misunderstandings write up a simple agreement listing the
terms and conditions of the loan unless your family members are like the worst
bankers I know you’ll probably get a fair interest rate and your family will
have the satisfaction of helping you out if you lack savings to throw at your
consumer debts not surprisingly you have some work to do if you’re currently
spending all your income and more you need to figure out how you can decrease
your spending and/or increase your income in the meantime you need to slow
the growth of your debt different credit cards charge different interest rates
why in the world should you pay 14 16 or 18 percent or more when you can pay less
the credit card business has become quite competitive gone are the days
where all banks charge 18% or more for a Visa and MasterCard
until you get your debt paid off slow the growth of your debt by reducing the
interest rate you’re paying here are sound ways to do that apply for a lower
rate credit card if you’re earning a decent income you’re not too burdened
with debt and you have a clean credit record qualifying for lower rate cards
is relatively painless some persistence and cleanup work may be required if you
have income and debt problems or nicks in your credit report after you’re
approved for a new lower interest rate card you can simply transfer your
outstanding balance from your higher rate card among the banks with
consistently low interest rate credit cards card web coms website has a credit
card locator tool that you may find useful
ww card slash card locator in addition the site presents monthly
surveys of low interest rate and no annual fee cards among others including
secured cards call the bank or banks that issued your current high interest
rate credit card or cards and say that you want to cancel your card or cards
because you found a competitor that offers no annual fee and a lower
interest rate your bank may choose to match the terms of the competitor rather
than lose you as a customer for consumers in over their heads the
realization that their monthly income is increasingly exceeded by their bill
payments is usually a traumatic one in many cases years can pass before people
consider drastic measures like filing bankruptcy both financial and emotional
issues come into play in one of the most difficult and painful yet potentially
beneficial decisions with bankruptcy certain types of debts can be completely
eliminated or discharged debts that typically can be discharged include
credit card medical auto utilities and rent debts that may not be canceled
generally include child support alimony student loans taxes and court-ordered
damages for example drunk driving settlements eliminating your debt also
allows you to start working towards your financial goals depending on the amount
of debt you have outstanding relative to your income you may need a decade or
more to pay it all off filing bankruptcy needless to say has a number of
drawbacks first bankruptcy appears on your credit report for up to 10 years so
you’ll have difficulty obtaining credit especially in the years immediately
following your filing however if you already have problems on your credit
report because of late payments or a failure to pay previous debts the damage
has already been done and without savings you’re probably not going to be
making major purchases such as a home in the next several years anyway if you do
file bankruptcy getting credit in the future is still possible you may be able
to obtain a secured credit card which requires you to deposit money in a bank
account equal to the credit limit on your credit card of course you’ll be
better off without the temptation of any credit cards and better served with a
debit card also know that if you can hold down a stable job most creditors
will be willing to give you loans within a few years of your filing bankruptcy
almost all lenders ignore bankruptcy after five to seven years and finally
most people find that filing bankruptcy causes emotional stress admitting that
your personal income can’t keep pace with your debt obligations is a painful
thing to do although filing bankruptcy clears the
decks of debt and gives you a fresh financial start feeling a profound sense
of failure and sometimes shame is common despite the increasing incidence of
bankruptcy bankruptcy filers are reluctant to talk about it with others
including family and friends another part of the emotional side of filing
bankruptcy is that you must open your personal financial affairs to court
scrutiny and court control during the several months it takes to administer a
bankruptcy a court-appointed bankruptcy trustee oversees your case and tries to
recover as much of your property as possible to satisfy the creditors those
to whom you owe money some people also feel that they’re shirking
responsibility by filing for bankruptcy so if you file for bankruptcy don’t feel
bad about not paying back the bank the nice merchants from whom you bought the
merchandise have already been paid charge-offs the bankers term for taking
the loss on debt that you discharged through bankruptcy are the bankers cost
which is another reason why the interest rate is so high on credit cards and why
you shouldn’t borrow on credit cards regardless of how you deal with paying
off your debt you’re in real danger of falling back into old habits backsliding
happens not only to people who filed bankruptcy but also to those who use
savings or home equity to eliminate their debt this section speaks to that
risk and tells you what to do about it getting out of debt can be challenging
but I have confidence that you can do it with my tips and advice in addition to
the ideas such as eliminating all your credit cards and getting a debit card
the following list provides some additional tactics you can use to limit
the influence credit cards hold over your life reduce your credit limit if
you’re not going to take the advice I give you and get rid of all your credit
cards or a secured a debit card be sure to keep a lid on your credit cards
credit limit the maximum balance allowed on your card you don’t have to accept
the increase just because your bank keeps raising your credit limit to
reward you for being such a profitable customer call your credit card services
toll-free phone number and lower your credit limit to a level you’re
comfortable with replace your credit card with a charge card a charge card
such as the American Express card requires you to pay your balance in full
each billing period you have no credit line or interest charges of course
spending more than you can afford to pay when the bill comes due is possible but
you’ll be much less likely to overspend if you know you have to pay in full
monthly never buy anything on credit that depreciates in value
mewls out cars clothing and shoes all depreciate in value never buy these
things on credit borrow money only for sound investments education real estate
or your own business for example think in terms of total cost everything sounds
cheaper in terms of monthly payments that’s how salespeople entice you into
buying things you can’t afford take a calculator along if necessary to tally
up the sticker price interest charges and upkeep the total cost will scare you
it should stop the junk mail avalanche look at your daily mail you can save
some trees and time sorting junk mail by it removing yourself from most mailing
lists limit what you can spend go shopping with a small amount of cash and
no plastic or cheques that way you can spend only what little
cash you have with you no matter how hard they try to break the habit some
people become addicted to spending and accumulating debt it becomes a chronic
problem that starts to interfere with other aspects of their lives financial
problems can lead to problems at work and with family and friends making wise investments doesn’t have to
be complicated however many investors get bogged down in the morass of the
thousands of investment choices out there and the often conflicting
perspectives on how to invest before you select a specific investment first
determine your investment needs and goals why are you saving money what are
you going to use it for you don’t need to earmark every dollar but you should
set some major objectives establishing objectives is important because the
expected use of the money helps you determine how long to invest it and that
in turn helps you determine which investments to choose the risk level of
your investments should factor in your time frame and your comfort level
investing in high-risk vehicles doesn’t make sense if you’ll have to spend all
your profits on stress-induced medical bills for example suppose you’ve been
accumulating money for a down payment on a home you want to buy in a few years
you can’t afford much risk with that money you’re going to need that money
sooner rather than later putting that money in the stock market then is
probably not a wise move the stock market can drop a lot in a year or over
several consecutive years so stocks are probably too risky a place
to invest money you plan to use soon perhaps you’re saving toward a
longer-term goal such as retirement that’s 20 or 30 years away in this case
you’re in a position to make riskier investments because your holdings have
more time to bounce back from temporary losses or setbacks you may want to
consider investing in growth investments such as stocks in a retirement account
that you leave alone for 20 years or longer you can tolerate year-to-year
volatility in the market you have time on your side for a moment forget all the
buzzwords jargon and product names you’ve heard tossed around in the
investment world in many cases they’re only meant to obscure what an investment
really is and to hide the hefty fees and commissions the investment world is
really just as simple you have only two major investment choices you can be a
lender or an owner you’re a lender when you invest your money in a bank
certificate of deposit CD a Treasury bill or a bond issued by a company like
General Motors for example in each case you lend your money to an organization a
bank the federal government or GM you’re paid and agreed-upon rate of interest
for lending your money the organization also promises to have your original
investment the principle returned to you on a specific date getting paid all the
interest in addition to your original investment as promised is the best that
can happen with a lending investment given that the investment landscape is
littered with carcasses of failed investments this is not a results you
take for granted the worst that can happen with a lending investment is that
you don’t get everything you’re promised promises can be broken under extenuating
circumstances when a company goes bankrupt for example you can lose all or
part of your original investment another risk associated with lending
investments is that even though you get what you were promised the ravages of
inflation may make your money worth less it has less purchasing power than you
thought it would some conservative minded investors make a common mistake
of thinking that they are diversifying their long term investment money by
buying several bonds some CDs and an annuity the problem however is that all
these investments pay a relatively low fixed rate of return that’s exposed to
the vagaries of inflation a final drawback to lending investments is that
you don’t share in the success of the organization to which you lend your
money if the company doubles or triples in size and profits your principal and
interest rate don’t double or triple in size along with it they stay the same of
course such success should ensure that you get your promised interest and
principal you’re an owner when you invest your money in an asset such as a
company or real estate that has the ability to generate earnings or profits
suppose that you own 100 shares of Verizon Communications stock with
billions of shares of stock outstanding Verizon is a mighty big company your 100
shares represent a tiny piece of it what do you get for your small slice of
Verizon as a stockholder although you don’t get free calling you do share in
the profits of a company in the form of annual dividends and an increase you
hope in the stock price if the
company grows and becomes more profitable of course you receive these
benefits if things are going well if Verizon’s business declines your stock
may be worth less real estate is another one of my favorite financially rewarding
and time-honored ownership investments real estate can produce profits when
it’s rented out for more than the expense of owning the property or sold
at a price higher than what you paid for it the value of real estate depends not
only on the particulars of the individual property but also on the
health and performance of the local economy when companies in the community
are growing and more jobs are being produced at higher wages real estate
often does well when local employers are laying people off and excess housing is
sitting vacant because of previous over building rent and property values are
likely to fall finally many Americans have also built substantial wealth
through small business according to Forbes magazine more of the United
States and the world’s wealthiest individuals have built their wealth
through their stake in small businesses than through any other vehicle small
business is the engine that drives much of our economic growth
although firms with fewer than 20 employees account for about one-quarter
of all employees such small firms were responsible for nearly half of all new
jobs created in the past two decades you can participate in small business in a
variety of ways you can start your own business buy and operate an existing
business or simply invest in promising small businesses many investors have a sim
understanding of what risk means and how to apply it to their investment
decisions for example when compared to the yo-yo motions of the stock market a
bank savings account may seem like a less risky place to put your money over
the long term however the stock market usually beats the rate of inflation
while the interest rate on the savings account does not thus if you’re saving
your money for a long-term goal like retirement a savings account can be a
riskier place to put your money before you invest ask yourself these questions
what am i saving and investing this money for in other words what’s my goal
what is my timeline for this investment when will I use this money what is the
historical volatility of the investment I’m considering and does that suit my
comfort level and timeline for this investment after you answer these
questions you’ll have a better understanding of risk and you’ll be able
to match your savings goals to their most appropriate investment vehicles the
risk with ownership investments is the short-term fluctuations in their value
during the last century stocks declined on average by more than 10 percent in
one particular year every five years drops and stock prices of more than 20
percent occurred on average once every 10 years real estate prices suffer
similar periodic setbacks therefore in order to earn those generous long-term
returns from ownership investments like stocks and real estate you must be
willing to tolerate volatility you absolutely should not put all your money
in the stock or real estate market you should not invest your emergency money
or money you expect to use within the next five years in such volatile
investments the shorter the time period that you have for holding your money in
investment the less likely that growth oriented investments like stocks will
beat out lending type investments like bombs despite what professors teach in
the nation’s leading Business and Finance graduate school programs
low-risk investments that almost certainly lead to high returns are
available paying off consumer debt if you’re paying 10 14 or 18 percent
interest on an outstanding credit card or other consumer loan pay it off before
investing to get a comparable return through other investment vehicles after
the government takes it share of your profits you’d have to
start a new career as a loan shark if between federal and state taxes
you’re in a 33 percent tax bracket and you’re paying 12 percent interest on
consumer debt you’d need to annually earn a whopping 18 percent on your
investments pre-tax to justify not paying off the debt when your only
source of funds for paying off debt is a small emergency Reserve equal to a few
months living expenses paying off your debt may involve some risk tap into your
emergency reserves only if you have a backup source for example the ability to
borrow from a willing family member or against a retirement account balance
investing in your health eat healthy exercise and relax
investing in friends and family invest time and effort in improving your
relationships with loved ones investing in personal and career development pick
up a new hobby improve your communication skills or read widely take
an adult education course or go back to school for a degree your investment
should lead to greater happiness and perhaps even higher paychecks diversification is one of the most
powerful investment concepts it refers to saving your eggs or investments in
different baskets diversification requires you to place your money in
different investments with returns that are not completely correlated this is a
fancy way of saying that when some of your investments are down in value odds
are that others are up in value to decrease the chances of all of your
investments getting clobbered at the same time you must put your money in
different types of investments such as bonds stocks real estate and small
business you can further diversify your investments by investing in domestic as
well as international markets within a given class of investments such as
stocks investing in different types of stocks that perform well under various
economic conditions is important for this reason mutual funds which are
diversified portfolios of securities such as stocks or bonds are a highly
useful investment vehicle when you buy into a mutual fund your money is pooled
with the money of many others and invested in a vast array of stocks or
bonds you can look at the benefits of diversification in two ways
diversification reduces the volatility in the value of your whole portfolio in
other words your portfolio can achieve the same rate of return that a single
investment can provide with less fluctuation in value
diversification allows you to obtain a higher rate of return for a given level
of risk keep in mind that no one no matter whom he works for or what
credentials he has can guarantee returns on an investment you can do good
research and get lucky but no one is free from the risk of losing money
diversification allows you to hedge the risk of your investments because the
future can’t be predicted diversifying your money into different investments is
safer thousands of firms sell investments and manage money banks
mutual fund companies securities brokerage firms and even insurance
companies all vie for your dollars just to make matters more complicated each
industry plays in the other’s back yards you can find mutual fund companies that
offer securities brokerage insurance firms that are in the mutual fund
business and mutual fund companies that offer bank
like accounts and services you may benefit from this competition and
one-stop shopping convenience on the other hand some firms are novices at
particular businesses and count on some people’s shopping by brand-name
recognition make sure that you do business with a firm that offers the
best value investments in comparison to their competitors value is the
combination of performance including service and cost given the level of risk
that you’re comfortable with you want investments that offer higher rates of
return but you don’t want to have to pay a small fortune for them commissions
management fees maintenance fees and other charges can’t earn a high
performance investment into a mediocre or poor one also look for a firm that
employs representatives who don’t have an inherent self-interest in steering
you into a particular type of investment this criterion has nothing to do with
whether an investment firm hires polite well-educated or well dressed people the
most important factor is the way the company compensates its employees if the
investment firms personnel are paid on commission pass on that firm give
preference to investing firms that don’t tempt their employees to push one
investment over another in order to generate more fees mutual funds are an
ideal investment vehicle for most investors no-load mutual fund companies
are firms through which you can invest in mutual funds without paying sales
commissions in other words every dollar you invest goes to work in the mutual
funds you choose nothing is siphoned off to pay sales commissions in other words
no matter which brokerage firm an investor did business with the cost of
the firm services was set and the level of commissions was high competition
inevitably resulted in more and better choices many new brokerage firms that
didn’t do business the old way opened they were dubbed discount brokers
because the fees they charged customers were substantially lower than what
brokers charged under the old fixed fee system even more important than saving
customers money discount brokers established a vastly improved
compensation system that greatly reduced conflicts of interest discount brokers
generally pay the salaries of their brokers the term discount broker is
actually not an enlightening one it’s certainly true that this new breed
of brokerage firm saves you lots of money when you invest you can easily
save 50 to 80 percent through the major discount brokers but these firms
investments are not on sale or second rate discount brokers are simply brokers
without major conflicts of interest of course like any other for-profit
enterprise they’re in business to make money but they’re much less likely to
steer you wrong for their own benefit be careful of discount brokers selling load
mutual funds the worst places to invest are those that charge you a lot have
mediocre or poor performing investments and have major conflicts of interest the
prime conflict of interest arises when investment firms pay their brokers
commissions on the basis of what and how much they sell the result the investment
firms sell lots of stuff that pays fat commissions and they churn or cause a
rapid turnover of your account because each transaction has a fee the more you
buy and sell the more money they make financial consultants also known as
stockbrokers financial planners and others who sell
investment products can have enormous conflicts of interest when recommending
strategies and specific investment products commissions and other financial
incentives can’t help but skew the advice of even the most earnest and
otherwise well-intentioned salespeople if you like the idea of spreading your
money around you may want to invest through a number of different firms with
a discount brokerage account you can eat your cake and have it too
you can diversify across different mutual fund companies through one
brokerage firm however you’ll pay small transaction fees on some of your
purchases and sales of funds unless you work in the industry you may
find insurance to be a dreadfully boring topic most people associate insurance
with disease death and disaster and would rather do just about anything
other than review or spend money on insurance but because you won’t want to
deal with money hassles when you’re coping with catastrophes illness
disability death fires floods earthquakes and so on you have to secure
insurance well before you need it insurance is probably the most
misunderstood and least monitored area of personal finance most people are
overwhelmed by all the jargon and sales and policy statements
thus they pay more than necessary for their policies and fail to get coverage
through the best companies law one insure for the big stuff don’t sweat the
small stuff the point of insurance is to protect
against losses that would be financially catastrophic to you not to smooth out
the bumps of everyday life you should insure against what could be a huge
financial loss for you or your dependents the price of insurance isn’t
cheap but it is relatively small in comparison to the potential total loss
from a financial catastrophe the beauty of insurance is that it spreads risk
over millions of other people should your home burn to the ground
paying the rebuilding cost out of your own pocket probably would be a financial
catastrophe if you have insurance the premiums paid by you and all the other
homeowners collectively can easily pay the bills think for a moment about what
your most valuable assets are also consider potential large expenses
perhaps they include the following future income during your working years
your most valuable asset is probably your future earnings if you are disabled
and unable to work what would you live on long-term
disability insurance exists to help you handle this type of situation if you
have a family that’s financially dependent on your earnings
how would your family manage if you died life insurance can fill the monetary
void left by your death business if you’re a business owner what would
happen if you were sued for hundreds of thousands of dollars or a million
dollars or more for negligence in some work that
stop liability insurance can bail you out health in this age of soaring
medical costs you can easily rack up $100,000 hospital bill in a short order
major medical health insurance coverage helps you handle such expenses and yet a
surprising number of people don’t carry any health insurance particularly those
who work in small businesses psychologically buying insurance
coverage for the little things that are more likely to occur is tempting you
don’t want to feel like you’re wasting your insurance dollars you want to get
some of your money back darn it you’re more likely to get into a fender bender
with your car or have a package lost in the mail then you are to lose your home
to fire or suffer a long-term disability but if the fender bender costs $500
which you end up paying out of your pocket because you took my advice to
take a high deductible or the Postal Service loses a package worth $50 or
$100 you won’t be facing a financial disaster on the other hand if you lose
your ability to earn an income because of a disability or if you’re sued for a
million dollars and you’re not insured against such catastrophes not only will
you be extremely unhappy but you’ll also face financial ruin I agree that the
odds of this happening are quite low but the risk is there the problem is that
you just don’t know what or when bad luck may befall you and don’t make the
mistake of thinking that you can figure the odds better than the insurance
companies can the insurance companies predict the probability of you’re making
a claim large or small with a great deal of accuracy
they employ armies of number crunching actuaries to calculate the odds of bad
things happening and the frequency of current policyholders making particular
types of claims the companies then price their policies accordingly so buying or
not buying insurance based on your perception of the likelihood of needing
the coverage is foolish insurance companies aren’t stupid in fact they’re
ruthlessly smart when insurance companies priced policies they look at a
number of factors to determine the likelihood of your filing a claim most
insurance policies have deductibles the maximum amount you must pay in the event
of a loss before your insurance coverage kicks in on many policies
such as and homeowners renters coverage most
folks opt for a $100 to $250 deductible here are two benefits to taking a higher
deductible you save premium dollars year in and year out you can enjoy the lower
cost of an insurance policy with a high deductible you don’t have the hassles of
filing small claims filing an insurance claim can be an aggravating experience
that takes hours of time in some cases you may even have your claim denied
after jumping through all the necessary hoops getting your due may require
prolonged haggling when you have low deductibles you may file more claims
although this doesn’t necessarily mean that you’ll get more money after filing
more claims you may be rewarded with higher premiums in addition to the
headache you get from preparing all those blasted forms filing more claims
may even cause cancellation of your coverage you pay a lot of money in taxes probably
more than you realize believe it or not few people know just
how much they pay in taxes each year most people remember only whether they
received a refund or owed money on their return but when you file your tax return
all you’re doing is settling up with tax authorities over the amount of taxes you
paid during the year versus the total tax that you owe based on your income
and deductions some people feel lucky when they get a refund but all a refund
really indicates is that you overpaid in taxes during the year you should have
had this money in your own account all along if you’re consistently getting big
refunds you need to pay less tax throughout the year fill out a simple
tax form the w-4 to determine how much you should be paying in taxes throughout
the year you can obtain a w-4 through your employer’s payroll department if
you’re self-employed you can obtain form 1040 EES by calling the IRS at 800 tax
form 808 – 9 36 76 or visiting its website at WWF gov instead of focusing
on whether you’re going to get a refund when you complete your annual tax return
you should concentrate on the total taxes you pay to find out the total
taxes you pay you need to get out your federal and state tax returns on each of
those returns is a line that shows the total tax if you add up the totals from
your federal and state tax returns you’ll probably see one of your largest
expenses understanding the tax system is the key to reducing your tax burden if
you don’t you’ll surely pay more taxes than necessary your tax ignorant can
lead to mistakes which can be costly if the IRS and state government catch your
underpayment errors with the proliferation of computerized
information and data tracking discovering mistakes has never been
easier the tax system like other public policy is built around incentives to
encourage desirable behavior and activity home ownership for example is
considered desirable because it encourages people to take more
responsibility for maintaining buildings and neighborhoods clean orderly
neighborhoods are often the result of homeownership
therefore the government offers all sorts of tax perks to encourage people
to buy homes not all people follow the path the government encourages after all
it’s a free country however the fewer desirable activities
you engage in the more you pay in taxes if you understand the options you can
choose the ones that meet your needs as you approach different stages of your
financial life when it comes to taxes not all income is treated equally this
fact is far from self-evident if you work for an employer and earn a constant
salary during the course of a year a steady and equal amount of federal and
state taxes is deducted from each paycheck thus it appears as though all
that earned income is being taxed equally in reality however you pay less
tax on your first dollars of earnings and more tax on your last dollars of
earnings for example if you’re single and your taxable income totals $45,000
during 2006 you pay federal tax at the rate of 10% on the first
7550 dollars of taxable income 15% on income between seven thousand five
hundred fifty dollars and thirty thousand six hundred fifty dollars and
25 percent on income from 30 thousand six hundred fifty dollars up to forty
five thousand dollars your marginal tax rate is the rate of tax you pay on your
last or so-called highest dollars of income in the example of a single person
with taxable income of forty five thousand dollars that person’s federal
marginal tax rate is 25 percent marginal tax rates are a powerful concept your
marginal tax rate allows you to quickly calculate the additional taxes you’d
have to pay on additional income conversely you can delight in
quantifying the amount of taxes you save by reducing your taxable income either
by decreasing your income or by increasing your deductions as you’re
probably already painfully aware you pay not only federal income taxes but also
state income taxes your total marginal rate includes your federal and state tax
rates you can look up your state tax rate in your current state income tax
preparation booklet taxable income the amount of income on which you
actually pay income taxes the following reasons explain why you don’t pay taxes
on your total income not all income is taxable for example you pay federal tax
on the interest you earn on a bank savings account but not on the interest
you earn from municipal bonds some income such as from stock dividends at
long-term capital gains is taxed at lower rates you get to subtract
deductions from your income some deductions are available just for being
a living breathing human being people over age 65 and those who are blind get
a slightly higher deduction other expenses such as mortgage interest and
property taxes are deductible in the event that these so called itemized
deductions exceed the standard deductions when you contribute to
qualified retirement plans you also effectively get a deduction you

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