So you’re thinking about purchasing a home. Big decision. Some people at this point say things like “good for you”, or “now you won’t be throwing money away on rent”. Codswallop. Sometimes you’re financially better off renting. It’s just a fact. People in general would rather own than rent, but that doesn’t alone make it better. You’re also a Thousandaire and you have all of this extra money after putting down a down-payment (if not, you might be better off renting, a great calculator to help you decide is available here). The lender starts talking about “points” should you buy them?
What are points?
Points come in two flavors: discount points and origination points. One point corresponds to 1% of your total loan amount. So if you are buying a $200,000 home and you put 20% down that leaves you with a $160,000 loan and 1 point is costs $1,600. Now for that $1,600 what do you get? Well, for origination points you get the lender to originate your loan. This is basically a fee they are charging you. Sucks. Shop around, but basically if you want the lender to originate the loan you have to pay these. (Like everything else in life it is negotiable!) Discount points are usually what folks are talking about regarding points. You pay that $1,600 and your interest rate gets reduced by some amount (like 0.25% per point or something).
The hope here is that you are able to reduce the interest rate by enough to pay back that money you spent on the discount point. How do we calculate if this is worth it? Well, any reasonable mortgage calculator will be able to tell you what the reduction in monthly payment will be. We can work a quick example. Let’s say that you’re buying that $200,000 house. The interest rate would be 4%, but you purchase a point for $1,600 and the interest rate is now 3.75% ($1,600 might realistically buy you more or less of an interest rate reduction, ask your lender). The payment at the 4% rate is $764, the payment at the 3.75% rate is $741. This works out to a difference of $276 per year.
Naively you might be inclined to simply divide the cost of the point ($1,600) by the annual savings ($276) and figure, “well, if I’m not going to sell the house or refinance for 5.8 years then its a good deal.” The problem with this is that you aren’t considering what that $1,600 would earn you otherwise. At the very least you could earn 4% on that money by applying it to your loan immediately! If we’re a little loose and dirty with the calculation we could just go ahead and figure that at 4% $1600 would produce an “income” of $64 annually. Therefore, let’s go ahead and divide that $1,600 figure by $212 (276 – 64) instead. This means that the break-even point is pushed out to 7.5 years. We can do even better if we assume that the money would be invested in the stock market at a rough rate of return of 8% per year. This gives a break even point of 10.8 years.
So, do I buy points or what?
Probably not. It seems to me that the lender is simply counting on you refinancing or moving within about 11 years. Frankly, I think you’ll move or refinance within 11 years. The, “or refinance” is an important point here. I used to think interest rates couldn’t go lower, yet somehow they continue to march downward. There’s a couple in denmark paying a negative interest rate on their mortgage. There’s a decent chance that at some point in the next 11 years interest rates will be lower. Sure, maybe interest rates will be only be higher, but if you know what direction interest rates will move over then next 11 years, buying discount points on your mortgage has got to be the worst way to profit from your powers of precognition. Of course, this all changes if your lender offers you more than a 0.25% reduction per discount point, but now you have a quick back-of-the-envelope method for figuring if it is in the ballpark of a good idea.
Powered by Linky Tools
Click here to enter your link and view this Linky Tools list…
Today we have a guest post for you from Listen Money Matters about how young people can finally get over their fear of investing. Enjoy!
Internal Revenue Service statistics show that in the past two years they have sent out around 40 million tax refunds each year. If you are one of the lucky millions expecting to receive a refund this year, you may be trying to figure out how to use your tax refund the smart way. Here are several options for you to consider:
1 Wait until It’s in the Bank
Have you ever heard the expression, “Don’t count your chicks until they’ve hatched?” It’s true for many things, including tax refunds. Don’t book a non-refundable vacation or go on a shopping spree simply because you are expecting a good sized refund on your taxes this year. One reason not to do this is because your refund could fall short of what you have anticipated resulting in debt. Some better uses for your refund are listed below. Please read on.
2 Start Some Sinking Funds
A sinking fund is an account you have opened for a specific purpose to be used at a future time. You “sink” your money into this account to build a “fund” to be used for whatever purpose you have chosen, such as an emergency fund, a car fund, or a home improvement fund, just to name a few. Online there are banks that allow accounts to be set up that will pay you interest with no minimum balance and no fees, which are perfect for sinking fund, and a great way to invest in your future needs.
3 Pay Off Debt
Paying off debt is a great way to use your tax refund. A good way to decrease your debt the fastest is to start by paying all or as much as you can of whatever debt has the highest interest rate. Then proceed to the next debt having the next highest interest rate and so on. Next, resolve not to accumulate more debt and follow the same process of debt reduction next year. Continue to do this for several years and you should gain some financial freedom.
There are many different ways to invest your tax refund. For instance, a few ways you could invest are real estate, stocks, bonds, or a Roth IRA. The degree of risk associated with each type of investment differs, so research each to ensure you are making the best choice for your investment dollars.
5 Home Improvements
If you want the greatest return on your investment dollars, think about using your refund for basic maintenance such as siding, a new roof or a new energy efficient furnace rather than a new updated kitchen with all the bells and whistles. Of course, if your home is already in good condition, you could instead use your tax refund to make some updates in other areas. Keep in mind the current value of your home as well as others in your area. The current housing market in your neighborhood will also affect the value of your home. Before doing any remodeling, research other homes in the area in order to make decisions that will give you the greatest return on your investment.
6 Start a College Savings Fund
Another good use of your tax refund dollars would be to start a college saving fund for your children or grandchildren. You can open a 529 plan and save tax dollars on the earnings as well as on any money taken out for college expenses, as long as you follow all of the rules of the plan. The plans vary from state to state, so look everything over carefully before making your decision.
7 Start a Business
Using your refund to start a business could give you an enormous return on your investment if you make sound business decisions. Do your homework before you spend any money and avoid anything that sounds like a get rich quick scheme because if it sounds too good to be true, it probably is.
Hopefully the tips we have provided will enable you to use your tax refund this year in a way that will give you greater financial security in the future.
Do you have other ideas of how to use your tax refund the smart way?
Kayla is a personal finance blogger in her mid-20s who loves to write about money topics of all kinds.
An effective financial plan is one that incorporates all aspects of financial life and that includes goals that are specific, measurable, achievable, realistic and time-bound (SMART).
The 4 basic elements of an effective financial plan are situation analysis, goal setting, implementation and assessment. Each of these elements are important and interrelated and should be given proper attention.
The key to achieving financial freedom and success lies not only in the quality of the financial plan, but in the implementation of those plans. In addition, your financial plan must be documented and updated on a regular basis and should include short, medium and long term goals.
The following is an example of a financial plan template that is easy to use and that is color coded for short, medium and long term financial goals:
A simple financial plan such as this one may be created using Excel. In this example, short term goals are coded in yellow, medium term goals are coded in green and long term goals are coded in blue.
An effective financial plan begins with a current situation analysis. Since each person’s financial situation is different depending on income, financial obligations, and stage of life; the financial plan should be tailored to take those particular circumstances into account. For example, someone who is heavily indebted would need to take a different approach to financial planning from someone who has little or no debts at all. Similarly, someone who has more than one source of income may be able to take on more financial responsibilities than someone with only a single source of income. Situation analysis should involve taking a look at where you are financially in terms of your assets, your liabilities, your income and your expenses. This exercise will form the basis of all your financial planning decisions. At the end of the day, the aim of financial planning should be to at least put yourself in a situation of positive net worth and sufficient liquidity to comfortably cover your daily expenses. The situation analysis will help you to determine how hard you have to work to get to where you want to be and what it will require financially to get there.
Goal setting is an essential aspect of financial planning. As mentioned earlier, your financial goals should be specific, measurable, attainable or achievable, realistic and time-bound. The example above is an excellent example of effective goal setting. Being specific means that you need to establish definite dollar figures for your financial goals. In the example, definite dollar figures were established for each and every financial goal eg. $30,000 for an emergency fund. This is a much more powerful and effective goal than simply saying that you want to set up an emergency fund. Also, you should be able to state exactly what you are working to achieve. For example, I want to save 6 months income as an emergency fund.
Establishing a dollar figure also means that your goal is measurable. A goal that cannot be measured is almost impossible to achieve because you will never know whether or not you have achieved it.
Your financial goals should also be attainable and realistic. In other words, if you earn $3000 per month, it may not be realistic to try to save $2500 per month. You must take your current reality into account as well as your future expectations. Goals that are not realistic or achievable will cause frustration and eventual failure. So be realistic even if it means that you will not achieve your goals as quickly as you would like to.
Your financial goals must have definite target completion dates. You must have a timeline within which you plan to achieve your financial goals. Otherwise you are likely to lose your motivation for accomplishing them. Setting a deadline gives you something to work towards and something to look forward to. It will allow you to make adjustments along the way if necessary so that you are still able to achieve your goals within the established timeframe.
Implementation of the Financial Plan
A financial plan without implementation is just a useless dream or wishful thinking. Unless you actually implement your plans, you will never achieve your financial goals. You must put measures in place to ensure that everything goes according to plan. Setting up an arrangement where your employer automatically deducts an amount from your salary for savings on your behalf, is a great idea if you don’t have the discipline to save on your own. Also, you can always make arrangements with your bank to transfer funds from your checking account to established savings accounts on your behalf. If you have a side job or do freelancing to make extra income, you need to develop the discipline to set aside amounts that will help you to achieve your goals. Funds that have been earmarked for something should never be used to do something else. Implementation of your financial plan will require great discipline.
For any financial plan to work, you must do periodic assessment to ascertain whether or not you are on track towards achieving your goals as planned. This assessment will give you the chance to make changes if necessary in order to ensure that your goals are met as intended. If your financial situation changes during the process, you may need to make adjustments to your goals. It is advisable that you conduct assessments at least on a monthly basis.
Life Insurance is essential for any financial plan. Since nobody knows with 100% certainty what will happen in the future, it is important that you obtain life insurance so that your dependents will have a source of income should you pass on unexpectedly. Disability insurance and medical insurance are also great to have to help with unforeseen disability or terminal illness.
At the end of the day, a financial plan is only as good as the quality of the plan and your ability to implement those plans effectively. Each step in the financial planning process is important and careful attention should be dedicated to carrying out each step efficiently and effectively. Follow these steps and you will be well on your way towards achieving your financial goals.
Whether you want to supplement the income from your 9 to 5 job or escape that job altogether, freelancing comes with some definite perks. You’re in charge of your schedule, you can set your own rates and every day is Casual Friday.
While freelancing can give you a new level of freedom professionally, it does have a downside. Instead of relying on your employer to take taxes out of your paycheck, it’s up to you to make sure you give Uncle Sam his fair share.
If you’re new to the freelancing game, learn a few things about taxes to avoid landing in hot water with the IRS. Here are some tips to help you keep your filing as hassle-free as possible.
Understand the filing requirements
Freelancing, whether you work part-time as an independent contractor or full-time as a sole proprietor, means you’re self-employed in the eyes of the IRS. Being self-employed adds a new layer of responsibility where your tax filing is concerned.
Generally, you have to file an income tax return if you make $400 or more from self-employment. On top of income tax, you also have to pay self-employment tax. Self-employment tax is similar to the Social Security and Medicare withholding that your employer would take out of your paycheck at a regular job.
As of 2016, the self-employment tax rate is 15.3%. This tax applies to your net freelance earnings, which is your gross income minus any deductions for business expenses. The IRS also impose an additional 0.9% Medicare surtax for single filers who make more than $200,000 annually or married couples who break the $250,000 income mark.
Be clear on which forms you have to file
Once you know (generally) what taxes you’ll be on the hook for, find out which tax forms you need to fill out. Generally, if your freelance business is set up as a sole proprietorship or an LLC or if you’re just doing it as a side hustle in addition to a day job, you’d use Form 1040 and file a Schedule C.
If you freelance on a larger scale incorporating might make more sense, but that will means more paperwork to fill out at tax time. For example, if you set up an S-corp, you have to file Form 1120S and create a Schedule K-1. This form is what you use to prepare your 1040. Remember, any forms you file for your federal taxes also must be filed for your state.
Know the due dates
For most taxpayers, the only deadline they worry about is April 15th, which is when federal and state returns are due. If you’re freelancing, however, your calendar’s going to look a little different.
When you’re self-employed, the IRS expects you to spread out your tax payments throughout the year. Estimated payments of what you think you’ll owe are due on a quarterly basis. Here’s how the due dates break down:
- For income earned between 1/31 and 3/31 – April 15th
- For income earned between 4/1 and 5/31 – June 15th
- For income earned between 6/1 and 8/31 – September 15th
- For income earned between 9/1 and 12/31 – January 15th of the following year
If you still owe regular income tax after you prepare your return, that money will also be due on April 15th. Underpaying estimated taxes or paying them late can result in a tax penalty. The same is true if you don’t file your annual income tax return on time or fail to pay what you owe by the April deadline.
If you plan to pay your tax bill with a credit card, understand the fees and interest. Pay the card on time each month to avoid damage to your credit score.
You can check your credit report and score for free with Credit Sesame.
Figure out what’s deductible
The IRS has two basic requirements for deducting business expenses as a freelancer. First, they have to be ordinary, which means it’s something that’s common for the kind of business you have. Second, the expense has to be necessary for doing business. If you’re a freelancer writer, for example, a laptop is something you’d likely need to do your work.
Some of the most common expenses a freelancer may deduct include:
- Domain or web hosting (if you have a personal website or run a blog)
- Telephone and Internet expenses
- Advertising costs
- Computer software
- Home office expenses
- Office supplies
- Business-related vehicle expenses (i.e., mileage, gas, etc.)
- Education and training expenses
- Professional membership fees
- Business meals and travel
Aside from these work-related expenses, freelancers have a few other write-offs at tax time. If you pay out of pocket for your health insurance, for example, you can deduct the cost of the premiums as long as you’re not eligible for coverage under your spouse’s insurance plan. Retirement plan contributions are also deductible if you’re socking money away into a SEP IRA, Simple IRA or Solo 401(k).
Document your expenses
Claiming every deduction you’re eligible for is a smart way to cut your tax bill, but you have to be able to prove those expenses were related to self-employment. If you write off a bunch of expenses and the IRS decides to take a closer look at your return, you could end up owing money without a paper trail to show what you spent the money on.
If you don’t want to keep up with piles of paper, use an expense tracking app. The good ones allow you to photograph and then discard your receipts. Either way, establishing a solid record-keeping system is the best thing you can do if you want to get your freelance career started on the right foot tax-wise.
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.