I got about halfway through using H&R Block to do my taxes when I got stuck trying to enter the correct deduction in at one point. I was trying to use the free edition of H&R Block because I couldn’t see my way to paying for it and after about 20 minutes of frustratingly unclear googling I gave up and decided that I was going to do my own taxes this year.
It has so far taken my about two hours every night for the last four nights to try to slog through all of my taxes. Ultimately, I’ve got to file a 1040 along with schedule B, C, and D and associated forms. I’m still not quite done. I’m very nervous about making some sort of mistake and triple-checking everything is quite cumbersome. (For example, do you know what precise percentage of your phone plan went towards business use in 2015? I do now.) If you don’t have a straightforward tax situation this takes a bunch of time. I can almost understand a refusal to sell investments on a basis that you then have to deal with them on your taxes!
All told I will probably save about $100 this year. Since having an accountant doing your taxes isn’t tax deductible this is like earning an extra $120 pre-tax for my tax bracket. As a second bonus I’m sure learning a great deal of the ins-and-outs of the tax code. It turns out, that for all the flak the IRS gets about being confusing is that it really just isn’t that bad. You just need to actually read the rules. Any literate person with the ability to work a pocket calculator can manage to do it. Additionally, the rules, once you understand them are actually pretty reasonable. (I almost feel as though I’m going to have my libertarian card revoked writing this, but fortunately we’re far too busy arguing about who gets to build the roads to police memberships.)
Two hours times four nights goes into 120 dollars how many times? Yeah, I’m doing this for $15 per hour (pre-tax equivalent earnings) and I’m still not done. Those aren’t good numbers, and did I mention that I haven’t even started on my state taxes yet? Whoops. Fortunately, I could just file an extension.
This is a cool little detail. If you need more time to file your federal tax return you can request an extension which will give you an extra six months to file your federal return. You need to fill out form 4868. It does not give you extra time to pay your taxes. Even though you might not know exactly how much you have to pay, you’d better get at least the right amount to the IRS before April 18th, 2016. Since most people expect a refund, you’ll probably not need to worry too much about that. I, however, always try to cut it as close as I can so that the IRS and I are even on by the last tax date.
Filing your own taxes is a pain. It’s probably something you should learn how to do correctly at least once in your life. While I’m not getting appropriately compensated for it, at least I know what goes into it in the future. At least in the future I’ll know what a fair price to pay for the service is!
I keep my IRA at Tradeking and I tell all of my friends to use Vanguard. The customer service has been great and all of the problems I have with them are small and don’t apply to average people. The first question you should probably consider when choosing a broker for your IRA is whether you intend on being an active investor or a passive investor. If you plan on being a passive investor then you simply want to get the IRA which has the lowest all-in fee structure on the investments you plan on purchasing. If you plan on being an active investor then you have all sorts of other questions to deal with. Costs are still important, but probably most important is figuring out the type of investments you plan on making.
- Tradeking’s main claim to fame here is dirt-cheap trades ($4.95), no special IRA fees, and very responsive customer service. They also allow for dividend reinvestment if that’s the sort of thing you’re into. Unfortunately, it isn’t very easy to participate in corporate actions like odd-lot tenders because they charge a $50 fee which will destroy almost all of the profits in that sort of operation. I also have had no luck trying to buy specific junk bonds.
- OptionsXpress doesn’t make trades as cheaply as tradeking but they do have one major advantage. Corporate actions including participating in tender offers for free! Thus, just starting out with my investing I use them in order to take advantage of trades which depend on having a small capital base.
- Vanguard’s name is a byword in the passive investing world. If you use their brokerage you get the ability to trade a variety of super-low cost index funds for free. They’ve run into some trouble lately: http://www.reuters.com/article/vanguard-lawsuit-idUSL4N0Q05JG20140726, but this will probably be resolved. There could even be upside if Vanguard ends up becoming a private company.
- If your IRA is relatively large and you want to buy and hold individual stocks I could see an argument for putting everything in sharebuilder. They allow you to set up an automatic investment plan for a reasonable monthly fee. You then have to make a monthly contribution which sharebuilder will then sweep into stocks of your choice. Dividends can also be automatically reinvested. This is a great choice for someone skeptical of index funds. If you’re into dividend investing, this would be a good broker for your IRA. (Only because Loyal3 and Robinhood don’t appear to offer an IRA option just yet.)
Of the above brokers I have an account at Tradeking (my IRA), OptionsXpress (taxable account), and Vanguard (my 401k). I’ve found that they’re all very good at different things, however, if most of the things we’ve discussed in this article have flown over your head, or you’re just getting into investing. I think opening an account with Vanguard and using index funds like the Vanguard Total Market fund would be the best idea. In general “active” investing (buying and selling individual stocks) is a suckers bet and the majority of folks who do it would have been better off if they invested in random stocks and never sold.
Of course, for those of us just starting out, the biggest impact to our retirement account is how much we save, and not how much we make. If you’re maxing out your IRA every year you’re on the right track.
Let’s suppose you have a side business earning $20,000 per year. You also have a regular job where you make $40,000 per year. Your regular job has a 401(k) plan and you can contribute up to the annual maximum to that 401(k) plan (2016: $18,000). On top of that you can also contribute 25% of your W2 (from your side business) as well. If your W2 income for the side business is something like $14,000 you can contribute up to $3,500 to a Solo 401k. This can act as yet another tax advantaged bucket for taxpayers.
Solo 401K – Roth Upside
One of the big advantages of the Solo 401K over the SEP IRA and the Simple IRA (other reasonable options for saving toward retirement for the self employed) is that the Solo 401K has a Roth option. This is particularly good if you think that tax rates are likely to increase in the future or if you expect to be making substantially more money in the future.
The biggest caveat with the roth option is that profit sharing contributions (that’s you when you’re wearing the owner hat) cannot be roth contributions. They can only be made pre-tax. If you wish to have a Roth solo 401k that’s something to keep careful eye on.
This is pretty simple if your side business employs only you. If you have other employee’s then the solo 401k is no longer allowed. Most people I know with side businesses generally aren’t also employing folk, so this might not even come up in your situation. Additionally, anecdotally Solo 401k plans seem to be more expensive in terms of administration. It doesn’t help to have slightly better tax savings if you end up giving it all away on the other end. The setup is also somewhat more complicated and its important to check with your tax professional.
The contribution limit on the employer end of the SEP-IRA (stands for Simplified Employee Pension, though why you’d want anything other than the acronym rattling around in your brain-box is beyond me) is the same as the Solo 401k. The important thing to note here is that contributions made wearing your employee hat count towards your IRA limit. If you’re looking at doing this for your side business and you can already contribute to a 401k then this probably doesn’t matter a lot for you, you still have the same amount of total tax advantaged space.
Not having a Roth option can kinda suck if you are on the lower end of the tax bracket spectrum, or if you believe that you will be in a higher tax bracket post retirement.
But What About the Simple IRA?
Why didn’t I bring up the simple IRA? Well, if you have another line of work that allows a retirement account you simply (hardy-har-har) can’t do it. I try not to worry about stuff that isn’t an option for me, an approach which I heartily suggest. If you are a freelancer or aren’t covered by any sort of retirement plan at your work I’d definitely recommend checking it out. Otherwise research time spent on something that doesn’t work for you is research time wasted.
Solo 401k Wins
The flexibility here just makes it largely better. Unfortunately, this may mean slightly more administration. Fortunately, there are a few providers which will manage a solo-401k plan without a setup cost and without maintenance fees. (Fidelity in particular comes to mind). If you’re young you’re probably not in your peak earning years, but you could very well be in your peak saving years. The Roth option here is too nice to pass up.
If you get health insurance through your work, great, you’re pretty much done. You need not read this article. For those of you who need to buy health insurance through an Obamacare health insurance marketplace, read on.
First thing that you need to keep in mind is that the premiums that you see on a website like: connectforhealthcolorado.com are not the actual premiums you will be paying. There are significant tax credits which subsidize the cost of the health insurance for you. While it may appear that your health insurance coverage will cost $400 or $500 per month the real cost might be substantially lower, say, $150 to $200 per month. If you make less than 400% of the federal poverty guideline then you could be eligible for a tax credit to help pay for premiums on a monthly basis. What is the federal poverty guideline?
- $11,880 for individuals ($47,520)
- $16,020 for a family of 2 ($64,080)
- $20,160 for a family of 3 ($80,640)
- $24,300 for a family of 4 ($97,200)
- $28,440 for a family of 5 ($113,760)
So if you’re an individual that makes less than $47,520 you may be able to get a tax credit for some of the health care premium you have to pay. How much? Well, it depends. The tax credit is the difference between the amount the government thinks you can afford to spend on healthcare and the cost of the second cheapest silver health insurance plan available. So, if the government thinks you can afford $400 per month, and the second cheapest silver plan is $500 per month, then you get a tax credit of $100 per month. This caps out at the amount you actually spend on premiums. You can’t then buy a bronze plan that costs $50 per month and pocket the extra $50.
How much does the government think you can afford to spend on health insurance? Well, if you’re poor, it’s figured to be about 2%, that value scales continuously up to about 9.5% once you hit 300% of the federal poverty level. So, the maximum annual income for an individual to qualify is $47,520. 9.5% of that is about $4,500. That means, on a monthly basis you’re expected to shell out $376 for health insurance premiums. In my state the second cheapest silver plan is cheaper than that for 20 somethings. This means I would receive no tax credit even though I’m at 400% of the poverty level.
The best and craziest news about this is that all of this is based on your MAGI, or your modified adjusted gross income. In a taxation sense you don’t have much control over your gross income, and you pretty much always want it to be higher, it is very rare in our tax code for an additional dollar of income not to be worth additional money. Your MAGI however, you have some control over, and since you have some control you can optimize it. The main difference for ACA purposes is that the MAGI doesn’t include retirement contributions. This is where the craziness begins. If you’re self employed you can contribute up to 25% of your salary towards a SEP-IRA as the employer end of the contribution. On the employee end you can then go ahead and contribute the regular $5,500 to a traditional IRA, and also $3,000 for a Health Savings Account (HSA). This means that if you made $47,520 your MAGI could be as low as $29,516. Using our Colorado example again that’d bring us from an annual credit of $0 to an annual credit of $360. If I were instead 45 that annual credit would be $1,404! This means that the older you are (and the higher your health insurance premiums are), the more value you’re going to see out of making retirement contributions as far as the ACA goes.
Bronze, Silver, why is my healthcare metallic?
My only assumption is that the author of the ACA must have been a huge D&D fan and wanted to name the different tiers of health insurance after Dragons.
The healthcare tiers are Bronze, Silver, Gold, and Platinum. These tiers correspond to different amounts of “actuarial value”. The actuarial value of a plan is the expected contribution of the health plan towards healthcare costs compared to the total healthcare cost. For example, let suppose that the average person in a particular health care plan incurs $100 of doctor/hospital bills. If the actuarial value of the plan is 60% that means that the insurer is, on average, covering $60 and the customer is, on average, covering $40. This is supposed to give customers a quick way of comparing two different plans. The theory is that two silver plans should be comparable and two gold plans should be comparable. The actuarial value of the different tiers are: Bronze – 60%, Silver – 70%, Gold – 80%, and Platinum – 90%. My generic advice is that folks that are generally healthy should aim for cheaper, on average, plans. If you have a big health expense coming up, shell out for a more expensive plan (better yet carefully calculate these costs in advance). You should note, that because the tax credit is based on a silver plan there is a relative advantage to getting a cheaper plan. The government is just giving you a flat dollar value of tax credit. If you’re getting $100 per month you might find that this pays for 50% of your bronze plan, but only 10% of a platinum plan. In order to determine what sort of health plan is right for you, you might consider checking out our article on High Deductible Health Plans.
Being Rich: The Thousandaire’s Guide for Middle Class Millennials in the US
Making the Most of What You Have (When What You Have is Already Ridiculously Good)
Thousandaire’s Note: If you know the article I’m paraphrasing, you’re awesome and have even fewer excuses than everyone else. Furthermore, I’m going to be making some assumptions in this article. First, that you were born in the US. Second, that you went to college. Third, that you’re reasonably healthy. Fourth, that you’re a millennial. If these don’t apply to you, then feel free to ignore the stern talking-to everyone else is about to get. The people that these assumptions do apply to are generally thought of as being self-important little skid-marks on the underwear of society. Politifact would rate this statement as Mostly True.
The Basics of Being a Middle Class Millenial
So, you’re a middle class millennial. Or rather, you’re a 27 year old, you’ve got some student debt, and a college degree. You’re underpaid and overworked and everyone has expectations that are too high, including yourself. Weren’t you supposed to be running things by now? Your parents grew up in an idyllic time, houses were cheap and one parent could raise a family of six working a few hours per week at McDonald’s. Immigrants, automation, and/or foreigners are taking all the jobs depending on which party you’ve decided to vote for. Times are different now and you got a raw deal, right?
Wrong. You’ve got a college degree and you live in America. You’re youngish now which means, due to your student debt or some mistakes made with a credit card, some of the poorest people in the world technically have a larger net worth than you. By the time you’re middle aged you’re going to be “poor” to the same extent that Donald Trump’s hair is natural.
As a middle class millennial, you don’t have a lot of money right now, unless you got an engineering degree, you probably aren’t making a lot of money either. Due to inflation in the housing, education, and healthcare sectors you probably can’t afford the housing arrangement you’d like to have right now. You also want to make money at some job that allows you to be fully self-actualized (as you should!) while still raking in mountains of cash.
If you’re a millennial you probably don’t need this update. You already know that housing’s too expensive and that your degree in creative writing totally wasn’t intended for driving an uber around all day.
The Millennial and his Personal Finance Situation, AKA “The Math That Buys Things For You, Stops You From Wasting Money, And Gets You Money When You Need It, While You Do All Your Important Life Stuff”
Traditional personal finance advice is about controlling three simple things. Handling money you spend, money you keep, and money you make. We’re going to add one more, making sure you have a good time doing it.
Your job is to do whatever it is that makes you happy, excites you, or makes you feel fulfilled, unless it falls into the category of “spending money”, “handling money”, or “making money that isn’t being shoveled at you simply because you’re fulfilling yourself”. Since this is the US, people often think that, “whatever it is that makes you happy” will mostly be spending money on things or “experiences” (If an important component to of things/experiences is that you spent money on them, please never contact me, we have nothing in common). Occasionally you do need money to fulfill your dreams and to this end, you will handle your finances in a sensible fashion, making use of the three major advantages you have over basically every person on the planet. Your US citizenship, your degree, and your status as a healthy human being.
The median college starting salary is $45,000. The median starting salary for liberal arts/humanities major (news flash, this group has the lowest starting salary of college grads) is $36,347. Assuming that you’re getting an income somewhat below the typical humanities major we’ll look at the 25th percentile salary: $33,471. Where does this put us relative to the rest of the US? Top 71%. Now you might understand why some older folk are calling you a “self-important skid-mark”, 70% of the country makes less than you. How does this compare world-wide? You aren’t going to like it. To be in the top 1% of worldwide income you need to make ~$35,000 per year. You might be inclined to say, well, stuff’s really cheap in poor countries. Turns out economists account for stuff like that when they do calculations like this. Who’da thunk? Now if you make $33,000, technically you’re still part of the global 99%. Technically the Earth isn’t a sphere, it’s a shape called a geoid (the hypothetical surface of mean sea level worldwide if water could flow freely through continents) plus local topography. That may be true, but if you bring it up all the time you’re eventually going to get your teeth punched in.
So why is it that $33,000 feels so poor when in reality its so rich? This is just about the oldest story in the world. Fellow makes $X, “needs” to spend $X+1, wants to spend $2X. This was an old story when it showed up in Richest Man in Babylon, making this one officially older than sliced bread. If you feel poor and you’re in the global 1%, you probably need to review your budget and take a look at what you’re spending your money on.
You probably spend money. Money can do lots of different things. There are several general categories of spending:
–Housing: This is shelter. It helps you rest without being eaten at night. It also makes it more difficult for weather to kill you. It also provides a good place to sleep and throw wild parties. If you’ve got a typical salary for a college educated millennial, figure out how to spend between $300 – $600 monthly on this. You spent all of college telling people that your philosophy degree (possibly the best degree, in my view) was going to equip you with great critical thinking ability, use it.
–Food: Stuff that provides you with energy to make more money and also do everything else interesting. Bonus, it usually tastes good. You want to spend between $100 and $200 monthly on this. You can probably do better than that. This is an area where skill can often substitute for money to get an equivalently healthy and tasty dish. Whenever you can substitute skill for money you should. If only because it makes you a more interesting person. (Of course I can’t cook my way out of a paper bag, but that also explains why this area is my biggest bit of spending idiocy.)
–Healthcare: This helps make sure that you don’t die of some awful infection just because you got a scratch one day. You might be healthy now, but you will always be the oldest you have ever been. In turn that probably means that you’re always at your highest risk of having some dumb health thing happen to you. This is important. Don’t skimp. If you’re healthy that means spend whatever it costs to get a health insurance premium appropriate for your temperament. You will get a tax refund for some of this premium if you’re as poor as you think you are. Don’t be surprised about anything up to $500 per month. Also, put aside at least 1/12th of your annual deductible every month. If you have a high deductible plan this money goes in an HSA.
–Investments and Assets: This category includes anything that does something that saves you money, or directly makes you money. Budget about half of your money for this. If you’ve ever played a video game in your life you know why. If you haven’t…I guess I just have no words.
—Stocks: These are basically a method by which you share in the profits of a going-concern (read: company). This is good because profits are what you’re trying to make with investments. There’s no budget in here for selling stocks. You’re trying to own pieces of businesses. It doesn’t get any easier if you end up selling a bunch of them. Example: A Coca-Cola dividend reinvestment plan.
—Mutual Funds: These aren’t exactly stocks, but they might as well be. It’s cheap diversification across many companies, and it makes your profits somewhat less swingy. The rule of thumb with these is that cheaper is better and more generic is better. A 3x oil fund with a 2% expense ratio is probably pretty terrible. A Total Stock Market fund with a 0.1% expense ratio is pretty good. Example: An S&P 500 Index Fund.
—Bonds: These don’t make very much money, but they certainly make it a lot more consistently. Investment grade bonds and bond funds are a category. If you include junk bonds the line between these and stocks is pretty blurry. Right now interest rates are low, which means bonds are expensive. Of course a couple years ago I was saying that bonds couldn’t go higher because interest rates were so close to zero, then in many places they went negative. That tells you exactly how valuable my advice on the bond market is.
—Annuities and Life Insurance: As investments, these by and large, suck. Occasionally, they’re useful, but when a good millennial wants money, he makes it from investments in actual businesses. If it’s a lot of money, he works himself. You do need to have life insurance if you have dependents to make sure they don’t starve if you die, but that is an expense, like health insurance and you get term life insurance. Anyone who says that whole life insurance is some kind of investment is selling.
—Cost Reduction Tools: These investments change spending in your favor. They make it cheaper to do the things you have to do or otherwise get you what you want more cheaply, they save you time (assuming you use that time to make more money, otherwise this is just an expense!), and so on. Examples: Solar Panels, Paying off a loan.
—Local/Your Own Business: These investments do bad things to people, and people often can’t do a damn thing about it. Plenty of people have invested in their uncle’s automated toilette paper dispenser only to see their investment go up in smoke. Running your own business well is also often how people get stupid rich in this country (it’s hard to find anyone on the billionaires list who didn’t get there by doing this). Not too many of that kind of opportunity, but they’re so damn good. This is one of the main benefits of a US citizenship. Compared to many other countries in the world, it is really easy to start a business, lose all your money, pick yourself up, dust yourself off, start another one, lose all your money again, start a third one and earn an embarrassingly large amount of money. Fortunately, you also have some degree of control over the risk you put into this. In most businesses sweat can be substituted for cash. If you made it through college you at least know how to do that much.
–Transportation: This is good because sometimes you’d rather be somewhere else. People often justify this as a need because their work is far, and they’re unwilling to spend 5 minutes coming up with some solution other than a $30,000 car. Clever folks don’t make a 2 ton vehicle carry their 0.07 ton body back and forth to work. Healthy folks bike. Smart folks invent a teleporter. Ultimately, you want transportation to cost half of what your housing costs, all-in. This can be tough. If you want somewhere to get started look here.
–Useless Crap: Some spending is just a plain waste, period. This category covers things like bottle service, luxury candles, 3-D movie tickets, and a storage unit to shove it all in. (I admit it, I’m sometimes guilty of spending waaaay too much money on the dubiously labelled “entertainment” category in my budget software of choice.)
$500 on Housing? $200 on Food? Are you insane?
Nope. Fortunately this is all quite achievable, even in more expensive cities. We’ll dig into all of these things in more detail in the coming weeks. Special thanks to Logic Ninja for his very similar guide on an entirely different topic.
For leap day I thought I’d take a break from the stodgy sort of money saving advice I prefer to dispense and point out some of the dumber ideas that I’ve had to save a buck or two. “Dangerous” might well be a bit of a misnomer here. You won’t actually be in physical danger, these are just ideas that, unless you exhibit a great deal of discipline will certainly turn around and bite you in the face. These are hard ways to save money, and really easy ways to waste money. That being said, if you really want the most dangerous ways to save or make money all you really need to do is cancel your health insurance and start smuggling drugs. Be careful with all of these. I fully expect that only one in five of the folks that read this will save money, the rest will probably lose it. Oh well, here we go.
1) Prepay dumb expenses by buying discounted gift cards
If you know that you generally go to a certain restaurant over the course of the year you can go ahead and buy discounted giftcards to it. You can go ahead and get these at gift card granny, or Raise. You can often get 10-25% off at a variety of restaurants. On top of that you can go through iConsumer or ebates to get to Raise in order to add another couple percentage points to the discount. The best part about this is that these are giftcards, so they can be used in combination with regular coupons or discounts (unlike a groupon). My favorite example of this is when I use a Noodles and Company giftcard at 20% off, purchased through the iConsumer portal (3% off), on the citi double cash card (2% off), combined with a buy-one get one coupon (~50% off). These discounts mean that a meal I can ordinarily buy for about $10 instead costs me about $3.80. Supposing that I go to this restaurant once every other week, this will save me roughly $160 annually over retail, the giftcards contribute about $26 to that savings. What could go wrong?
This bit is pretty simple to figure out. When buying giftcards, its pretty easy to go crazy and purchase giftcards for places you wouldn’t have gone anyway. When you only save $26 is pretty easy to blow it by buying an extra giftcard to Applebees (though, why I ask you, why?). The second problem is that its hard for giftcards to feel like real money. If you’re trying to save money, maybe you’d eat at home. If you’ve got a giftcard sitting there and you really don’t feel like making food anyway… The solution here is straightforward, use a budget.
2) 0% APR credit card promotions/Balance Transfers
Many credit cards as a bonus incentive will allow you to put purchases on it without paying interest for an extended period, typically a year. The strategy here is to spend the same amount of money but instead of paying off the credit card every month, carry a balance. Since there are no interest charges you can go ahead and stuff the extra money in a CD or high interest checking account. Supposing you spend about $10,000 per year that can be applied to credit cards you can earn 3% interest this will earn you about $150 in the first year, and roughly $300 annually thereafter. (The first year is a ramp up period, and then I assume that only $10,000 can be maintained on this balance transferring scheme.) If you want to add a nosebleed level of risk, put half of this into the stock market. (Here’s a hell of a tale about how doing this ruined someones life.) (Seriously, go read that, then come back and read the rest of this article.
The issue is that it is real easy to screw yourself over here. If you accidentally miss one minimum payment because you aren’t used to the new credit cards you can lose all of the interest you were planning on making in some kind of credit card fee. If for some reason you accidentally try to transfer these balances onto a credit card that has a fee for its balance transfers (but no interest) you could lose the whole year’s worth of interest as these fees are typically 3%. Similarly it shares an issue with the giftcards. If you are prone to spending money that seems free it is very seductive to go ahead and spend money that you ordinarily wouldn’t knowing that you won’t have to pay it back for a year. The solution here is the same, use a budget.
My tepid suggestion for budgeting is to use mint.com, it has some interface issues. I’ve also heard that you need a budget is quite good. Either way you should make sure that you like one or the other before you get it all set up as it’s kind of a pain to change once you’ve started to use it.