Non-Essential Expenses…Why Wait to Save Money?

Sometimes Hollywood accurately portrays real life. I was watching a movie where several people had lost their jobs as their employer was “cutting costs”. A couple of the individuals who were affected made the comment to their spouse’s that they would have to cut out the non-essentials. Unfortunately, I’ve heard this same reaction from friends going through the same ordeal.  

I can’t help but wonder why were they ever paying for non-essentials? Why not cut them out before you lose your job, and save the money. If you do lose your job, the saved money would really come in handy.  

So, I’ve come up with a list that you may or may not consider non-essential items. I’m just trying to get you to think about ways to save money without changing your lifestyle. A good mental exercise is to imagine that you get laid off from work. What are the first things that you would cut?

1.      Unused gym memberships – The gym I go to is packed in January and starts to thin out in February. By March, it’s back to its old self. Many people don’t cancel because they are too lazy to go to the gym and fill out the form. This could be costing you $400 to $1000 per year.

2.      Cable/Satellite TV with Premium Channels – It’s easy to spend over a $1000 per year to watch television. Many people comment that they only watch about 12 channels, yet they are paying for over 200 channels, plus premium channels. With Redbox charging about a dollar to rent a DVD, it’s hard to justify paying for the premium “movie” channels.

3.      Weekly Haircuts – Really? At $30-$40 a pop, this translates to $1500 to over $2000 per year. I bet you can stretch out the frequency to every 2 months without anyone really noticing.

4.      Cell Phones – Easily $1000 per year. Carriers will sell you everything under the sun, need it or not. If you don’t talk a lot on your cell, consider using a pre-paid plan. Also, scrutinize the features that you are paying for, and see if you are really using them.

5.     Dry Cleaning – Ok, I’m not telling you to wash your suit. But most men’s shirts can be put through the washer and dryer.  Think about have many shirts you have dry cleaned over a year and ask yourself if it’s worth it. This goes for jeans too.

6.     Eating Out – When I council people about how to save money, I ask them to list their expenses. Almost 100% of the time, they are shocked by how much they spend over a year’s time on restaurants. If you eat out for lunch every day, it really adds up. If you spend $10 a day, 5 days a week, 52 weeks a year, then your lunch tab is $2,600. If you ate out every other day, you could cut out $1,300.

7.      Designer Coffee – If your employer offers free coffee, you really don’t have to swing by Starbuck’s every day.  $4 per cup times 5 days per week times 52 weeks per year equals $1040. Even if you did it every other day, you could save over $500.

8.     Afternoon Soda – If you buy a soda from a vending machine, it’s probably costing you 75 cents to a dollar per can. If you buy from a grocery store, it’s about 33 cents per can. Buy a 12 pack and put a can in the break room fridge.  It’ll be nice and cold by the time the afternoon comes around. You can save about $100 a year.

9.      Land Line – A lot of people have started to get rid of their land line because they use their cell phone almost exclusively. If you feel that you need a land line, look to see what options you are paying for. The last time I looked, caller-id was $12 month ($144 per year).  It cheaper to just let answer machine pick up and decide if you want to talk.

10.   Insurance deductible – One of the biggest knobs for adjusting the cost of either auto or homeowners insurance is the deductible. If you have your deductible set to $250, you probably can save a few hundred dollars a year by raising the deductible. Put the money you save in a savings account to pay for the higher deductible, in case you have a claim. By the way, if you’ve had the same insurance carrier for several years, you probably can save even more money by checking out the costs of other carriers. Fifteen minutes on the phone might save you several hundred dollars per year.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor

Deciphering Auto Liability Insurance Limits

If you are in an accident involving your car, you’re going to be looking at your auto insurance policy to see what your coverage is. If you are at fault, it falls under the liability side. If you live in Texas, the minimum coverage is 30/60/25.

30/60/25 refers to 3 different items. The first number, 30, refers to how much money the insurance company will pay to any one person, not including you, for bodily injury in an accident that you caused. The 30 translates to 30 thousand dollars. So if you injure someone while driving your car, your insurance company will pay up to $30 thousand to that person.

The second number, 60, refers to the total amount of dollars that your insurance company will pay to two or more people that you injure while driving your car. It means that up to $60 thousand will be paid to the injured parties. Let’s say that you injure 3 people in an auto accident, and each one sustains $30,000 in bodily injuries. Even though their claims against you total $90,000 (3 times $30,000), your insurance company will only pay out the maximum $60 thousand. And, no one will receive more than $30 thousand.  

The third number, 25, refers to a property damage payment of up to $25 thousand.  Property damage includes the car(s) you ran into, and other structures that you may have damaged. So, if you total a luxury car like a Mercedes, you may have to get out your check book to make up the difference.

As you may have noticed, if you have only the minimum of liability insurance, you are probably woefully underinsured.   If you injure someone and they need to go into the hospital, it won’t take long to exceed the minimum $30 thousand coverage. Then, you’ll be liable for amounts beyond the $30 thousand.

If you have the minimum liability insurance now, consider talking to an insurance agent and asking how much it would cost to increase the liability limits. Protecting your assets and future income may not be as expensive as you think.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor Representative

10 Tax Free Sources of Income

According to the IRS, all income is taxable unless they tell you that it isn’t. That’s a pretty good blanket to toss over everyone.  So, if you are wondering if income you received is taxable, assume that it is unless a financial advisor or tax pro tells you that it isn’t.

It turns out that there are a lot of income sources that are not taxable. Here is a short incomplete list of non-taxable income streams.

Municipal Bond Interest

This is still a nice income stream, particularly for individuals in high tax brackets.  For example, suppose that you are in the 28% tax bracket, and the muni is paying 6%.  When you take your tax bracket into account, your effective interest rate is 8.33% because the interest payment is tax free.

Life Insurance Proceeds

If you are the beneficiary of life insurance proceeds that are paid because someone has died, then the payment is generally income tax free. Since proceeds from life insurance may be subject to estate tax, I used the word generally.  However, in many cases a life insurance payment to the policy’s beneficiary is tax free.

Gifts

Wow, if someone gives you a $100,000 gift, you probably don’t have to pay taxes on it. However, the donor may have to pay gift tax. If he doesn’t pay the gift tax owed, the IRS may come after you for collection.   

Inheritance

Most items that you receive such as cash and property are not subject to income tax. Notable exceptions are retirement accounts.  

Social Security Income

In many, many cases social security income is non-taxable. However, it becomes taxable if your income from other sources is high.  The IRS uses something called modified adjusted gross income (MAGI) to determine if your benefits are taxable or not. If your filing status is married filing jointly, your benefits start become taxable if your MAGI exceeds $32,000, otherwise it’s $25,000.

Workers’ Compensation

 If you are receiving benefits under a workers’ compensation act or statute because you are sick or injured, then those payments are not taxable. Okay, good to know.

Veterans’ Benefits

If the Department of Veterans’ Affairs (VA) is making payments to you, then you don’t have to report those payments as income. This is a well-deserved tax break.

Disability Payments

If you paid the premiums for short or long-term disability insurance, then the received payments due to your disability are not subject to income tax and do not need to be included on your income tax return. However, if your employer pays part or the entire premium for the insurance, the benefit is taxable to the extent of your employer’s contribution.

Grants and Scholarships

These are generally tax free to the extent that they are used for qualified educational expenses. If the grant/scholarship you received is more than your qualified educational expenses are, then the excess is subject to income tax.    

Cash Rebates from a Dealer or Manufacturer

That big check you received as a rebate for buying a car is not taxable. But, the basis of your purchase must be lowered by the rebate amount.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor Representative

How to Save Money on Long Distance Calls

If you use a conventional (non-internet based) land line in your home, you are probably being charged for long distance calls.  A company like ATT offers long distance plans with different pricing options. In my area, they have the following 3 plans:

 1)      Unlimited Nationwide Calling - $25+taxes/month
 2)      One Rate Nationwide $5+taxes/month + 7₵ per minute
 3)      All Distance $40+taxes/month – unlimited calling + popular features.

Notice the “+ taxes” by every price.  I don’t know what the taxes will be, but I’m usually overwhelmed by the taxes on my monthly phone bill. So, I’m guessing that they are not insignificant. If it’s been a while since you looked at the details on your phone bill, have another look. But, you may want to sit down first.  

So, here is my proposal. Consider buying a Prepaid Long Distance phone card. I bought one from Verizon for $20+tax that has 700 minutes. I know it’s a pain to have to punch in the numbers before you actually get to the phone number that you want to call. But, I found a solution to that. Many phones have “memory” buttons on them labeled as M1, M2, M3, etc. I’ve programmed two of the buttons to handle the 800 access number and the PIN. I dug around to find the phone manual to figure how to program the phone, but could never find it. So, I got on the internet and searched for the manual by phone brand and model. Still, didn’t find it…I think my phone is too old. But, I did find one for the same brand and used those instructions…it worked.

Here is a table that shows the annual cost of the different options based off of the number of minutes you use in a month.   

Minutes/  Month	Verizon	Unlimited	One Rate	All Distance
58	$22	$330	$115	$528
233	$88	$330	$262	$528
350	$132	$330	$360	$528
525	$198	$330	$507	$528
817	$308	$330	$752	$528
1050	$396	$330	$948	$528

As you can see, the Verizon pre-paid plan costs less annually compared to all plans if you use less than 800 minutes per month. Since I don’t know what the taxes are, I assumed they were 10%.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor Representative

Use Caution When Borrowing from Your 401(k)

Many people who need a loan, turn to their 401(k). Although this is tempting, there are potential pitfalls that can really mess things up for you.  Here is a short discussion of the loan characteristics.

Loan Generalities:
Specifics of the loan are determined by your plan administrator. However, here are some general loan characteristics. Usually, there is a loan initiation fee, less than $100. For most loans, the term is 5 years. But, there is an exception if you are purchasing a house as your main residence, the term is longer.

You can borrow up to $50,000 or 50% of your vested balance, whichever is less. However, there is a 12 month look back period that can reduce the new loan amount by the highest balance of the previous loan.  There may be a minimum loan amount; the plan administrator does not want to be processing $100 loans.

What’s Good About It?           

In essence, you are borrowing from yourself. The interest that you are paying is going into your account. Also, the loan does not show up on your credit report (maybe good or bad).  If you meet the loan requirements, it’s pretty much a guarantee that you will get the loan.  Usually, there is no talking to a loan officer to qualify. In many cases, everything is handled online.

What’s Bad About It?

Like most loans, problems arise when you can’t pay off the loan. However, a 401(k) loan has some additional “thorns”.

If you leave your job, for any reason, you have 60 days to repay the loan in full. If you don’t, the loan becomes a distribution. This means that you are going to owe income tax on the loan balance. And, if you are under 59 ½, you will probably be assessed a 10% penalty on the balance. In a worst case scenario, you lose your job, you can’t pay back the loan, and you owe taxes and penalties on the loan. These are extra bills at a really bad time.

Remember, you are removing money from your investments. So you are losing a potential capital appreciation.

From an income tax standpoint, there are some subtle negatives. When you pay back the loan you have to do it with post-tax funds. So that post-tax money gets into you pre-tax 401(k). And, when you finally start taking distributions during your retirement you will be taxed again on that post-tax money that you paid back the loan with. So, you've kind of paid tax twice on the loan.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor

What Impacts Your FICO Score?

If you are like most people you’re concerned about your credit score, aka FICO score.  The score ranges from 300 to 850, with the average being about 720. A FICO score is composed of 5 data categories, with 2 categories representing 65% of the impact on the score.

Payment History:

This is number 1 in terms of importance, impacting 35% of your score.  There are many items in this category like bankruptcies, liens, late payments, amounts past due, accounts in collection, etc. In the end, you can have a positive impact on your score just by making your payments on time.

Amounts Owed:

This is a close 2^nd, impacting 30% of your score.  It has to do with how many people you owe, as well as how much you owe them. It also considers how close your credit is to being “maxed out”. You can have a positive impact on your score by not having too many loans, keep the balances low, and stay well below your credit limit.

Length of Credit History:

This is a distant 3^rd, impacting 15% of your score.  It has to do with how long accounts have been opened and the time since the most recent activity. The longer your credit history, the better it is for you.

  

New Credit:

In 4^th place is New Credit, with a 10% impact.  It looks at the number of recently opened accounts, the number of credit inquiries and time since. Also, re-establishing positive credit history following past payment problems helps your score.

Types of Credit Used:

This also impacts your score by 10%. It has to do with the types of accounts you have. For example, loans like a mortgage, credit card, and installment loan.

You can visit the FICO website, www.myfico.com, for more information.

 

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor Representative

Not Married & Splitting Up ---- Watch Out, You May need a Divorce

If you live in Texas, you probably know about common law marriage.  It is a way to become legally married, without going through a legally recognized ceremony. Although today there are over 20 million people in the State, the area is huge and still sparsely populated in the west and panhandle. You can imagine that 100 years ago it took a long time for a circuit judge or a minister to make his way across the state and marry eager couples.  To fill in the gaps, Texas allows a common law marriage. There are myths around what constitutes a common law marriage. In Texas, there are 3 elements that create the common law marriage.

1)      You must have agreed to be married

      2)      You must have held yourselves out as husband and wife.
      3)      You must have lived together in Texas as husband and wife.

You must satisfy all 3 elements.  If you do and are splitting up, you may want to consult an attorney and see if you need a formal divorce.  For the Texas Q&A on the topic, refer to FAQ.     

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor Representative