Archives for 2010

Will The Bush Tax Cuts Be Extended? We Should Have An Answer Soon.

A few weeks back I wrote about how the 2001 and 2003 Bush tax cuts will be expiring at the end of the year. At the time it really seemed quite possible that the tax cuts would be allowed to expire, and we would ALL be paying higher taxes come January 1st, 2011. Contrary to popular belief the tax cuts weren't just for the most wealthy, but in fact were put in place for everyone who pays taxes.

President Obama has made it known that he would like to renew the tax cuts for everyone, except those who make over $250,000. Personally I'd like to see the tax cuts renewed for everyone, and government spending slashed across the board.

So the question remains, will congress take up the issue of the Bush tax cuts before the November elections? Will they take it up at all, or just let them expire?

Will Congress Renew The Bush Tax Cuts?

This week we finally got some word on whether Congress will debate the tax cuts. It sounds like they'll be looking into it after the August recess.

Senate Democrats will hold a September showdown over trillions of dollars in expiring tax cuts passed under President George W. Bush.

Senior Democrats had expected the controversial issue to be postponed until after the election, but Senate Majority Leader Harry Reid (D-Nev.) plans to bring it up when lawmakers return from a five-week August recess.

That would make tax cuts a front-and-center issue in the days leading up to the midterm election. The debate promises to be contentious, pitting Democrats against Republicans, liberals against centrists and the Senate against the House.

“I expect it to be on the floor in September,” said Reid spokesman Jim Manley.

Senate Finance Committee Chairman Max Baucus (D-Mont.) acknowledged the Senate Democratic Conference remains uncertain how it will proceed, say sources familiar with talks about a package to extend tax cuts.

“Some members only want to extend the tax cuts for the middle class; some members want to extend all the tax cuts,” said a Democratic aide in reference to differences of opinion within the conference.

“We’re surveying members to see what could be in a package that wins 60 votes and protects the middle class,” said the source.
Democratic and Republican staffs on the Finance Committee have begun talks on how to mark up a tax extensions package. But Finance panel staffers have yet to delve into serious discussions over the substance of the bill.

So Harry Reid has said that we can expect to have the tax cuts brought up after the 5 week August recess. There are still a lot of questions about what type of an extension would be approved – whether it is one where all the tax cuts are extended, or one where they are extended for everyone except for the “wealthy”.

Extension Of Tax Cuts For Everyone, Or Just Some?

Republicans are fighting to have all of the tax cuts extended, while Democrats seem split – with some wanting to extend all of them, others wanting to extend only some, with still others wanting to let them expire completely.

Speaker Nancy Pelosi (D-Calif.)said she expects the Senate to take the lead on extending expiring tax-relief provisions.

Midwestern centrists such as Sens. Kent Conrad (D-N.D.) and Evan Bayh (D-Ind.) have called for an extension of all of Bush’s tax cuts, including those benefiting individuals earning more than $200,000 and families earning over $250,000 annually.

Other Democrats say they would consider raising taxes on individuals and families earning below those thresholds, despite President Obama’s promise that middle-class families would not see their taxes increase.

…

Republicans on Wednesday launched a pre-emptive attack against a partial extension of tax relief.

“They proposed to raise taxes on the top two brackets,” Senate Republican Leader Mitch McConnell (Ky.) said of Democrats during an afternoon press conference.

McConnell said increasing the tax burden on those brackets would affect 50 percent of small-business income and employees who make up 25 percent of the workforce.

McConnell said raising taxes in the middle of a recession would have a “devastating impact.”

So at this point, it sounds like Congress is leaning towards an extension of tax cuts, at least to some degree. The only thing that remains to be seen is whether they'll extend them for everyone, or if the top income brackets will see their taxes go up in 2011.

Conclusion

At this point a lot of people are waiting in limbo to see if their taxes will go up in 2011. (see how much they could go up here). For a lot of small business owners and other high income earners the different between having the tax cuts and not having them could mean a substantial amount of money lost or gained, so for them the stakes are especially high.

What effect will extending the tax cuts have? Some have said that raising taxes now in the middle of a downturn could be disastrous, while others claim that without the added tax revenues the economy will be sunk. I tend to lean more towards the side of tax increases right now being a bad idea – after all, the high income earners, small business owners and others are the ones who are creating jobs for others – and taxing them at ever higher rates will backfire at some point.

What do you think about the Bush tax cuts? Should they be extended, and extended for everyone? Do you think Congress will actually take action, or do you think they'll allow them to expire? Tell us your thoughts in the comments.

What Kind Of Insurance Do I Need To Have?

By Mr. Money 2 Comments

I haven't talked about insurance very much on this site, but I do think it is one of the more under-appreciated aspects of personal finance, and one that far too many people neglect. Insurance is so wonderful because it takes the monetary risks associated with a catastrophic life event, and transfers the risks of those events to the insurance company. The insurance company is banking on the fact that most people won't need to use their insurance, but if you're the one who needs it, you'll be glad you have it.

Insurance is your safety net while walking the high wire of life.

My wife and I have had pretty good insurance coverage in all aspects pretty much since we were married. We've got homeowners insurance, life insurance, auto insurance and of course health insurance. We're extremely glad that we had the insurance coverage – especially our health insurance as my wife ended up having a major medical situation 2 years ago where she almost died because of a blood clot in her leg. In the end we ended up spending almost $300,000 on medical care since 2008. Without our good health coverage, we would have been in a horrible situation where our medical debt could have ruined us.

With So Many Kinds Of Insurance – What Kinds Should I Have?

they types of insurance you carry will depend on your personal situation, how secure you are in your finances, and whether or not you actually need to have insurance. Some people may be wealthy enough to actually self-insure. If you're not to that point yet, here are some insurance types that I'd suggest getting:

health insurance
life insurance
disability insurance
homeowner’s insurance
auto insurance
long term care insurance

Health Insurance

As I already mentioned my wife and I have had in excess of $300,000 in unexpected medical bills in the last 2 years. Since we had health insurance we ended up only paying about $4,000 or so of those bills, and insurance covered the rest.

Before we had my wife's medical situation, I may have been tempted to think that health insurance wasn't really needed by everyone – for example, for someone young and healthy. But after my healthy 27 year old wife with no history of health issues got sick and almost died, it quickly changed my thinking on this. I realize that just because you're healthy now doesn't mean you can't have an accident, or have a new health issue crop up. Better to get the insurance now while you're healthy and the rates are lower!

I now believe that health insurance is one of the most important types of insurance to carry. The number of people who are forced into bankruptcy or serious financial straits because of medical debt is staggering. Don't become one of the statistics – get insurance!

So where to get your health coverage? For us the first place we checked was with our employers. Since my wife's place of employment didn't have coverage, we were both covered under my work's health care plan. Since my workplace has a group plan our rates are lower than if we were to buy insurance on our own.

If you don't have group coverage through your work available you might want to think about getting a HSA or Health Savings Account. A HSA basically will give you a tax-exempt savings account to pay for your own health care expenses – and it is usually paired up with a high deductible insurance plan of some sort. The insurance plan would cover any major health care expenses that might otherwise be catastrophic – like my wife's situation.

Of course, all of this information surrounding health care coverage could change drastically over the next couple of years as we go down the road of government sponsored health care. Stay tuned.

Term Life Insurance

I didn't get term life insurance until we were expecting our first child because my wife and I were dual income with no kids – and if I were to pass my wife would have been able to continue paying her bills – same as before. Now that we've got another mouth to feed and someone else to think of and provide for – I bought life insurance to help cover costs in case of my untimely end.

This is one that I’ve thought was a good idea, but didn’t pursue until I found out we were expecting our first child. Now that I know we have another family member to provide for, it’s way past time that I got life insurance to help them out in case of my untimely demise.

Term life insurance is extremly cheap nowadays, so there really is no reason not to get it. I was able to get ten times my yearly income in coverage for only around $30/month!

Disability Insurance

Another type of insurance that I don't currently have, but highly recommend (I'm looking for some!) is disability insurance. If you’re hurt and aren’t able to work, who is going to pay your bills and put food on the table?

In my opinion it's important to have own occupation long term disability insurance that will allow you to protect your family in case you are injured and unable to perform your normal work duties.

Quite often you can get disability insurance via your employer at an extremely cheap rate, so check into that first. After that, you can do a search online to find some affordable rates.

Long Term Care Insurance

Once you're over 60 and still in reasonably good health, you may want to consider getting a long term care insurance policy. If you end up having to go to an assisted living facility the costs can be amazingly high – and if you don’t have insurance it can run through your entire life savings in short order. Having an insurance policy will mean you’re covered and your family protected in case you need to move into a facility. Hope for the best and plan for the worst!

Are there other types of insurance that you think pare important? What types of coverage do you have? Tell us your thoughts on insurance in the comments!

Credit Card Companies Find New Ways To Take Your Money After Passage Of CARD Act Of 2009

By Mr. Money 2 Comments

Earlier this year in February 2010, Credit Card Accountability, Responsibility and Disclosure Act (CARD) of 2009 took effect. The law was supposed to be a a consumer friendly piece of legislation that aimed to put some limits on what the credit card companies could do in regards to charging exorbitant fees, upping interest rates with no reason, in the end was supposed to force them to be more transparent with their customers.

For a few months at least the outcomes seemed to be headed in the right direction, but now the credit card companies have started finding new ways to make up their lost revenues.

Credit Card Companies Find Revenue In New Places

Even though they have been forced to stop some controversial billing practices due to the 2009 CARD act, the credit card companies seem to still be one step ahead of the law. They've found new ways to make money:

Whomever President Barack Obama taps to head the new Bureau of Consumer Financial Protection could find it difficult to keep ahead of the credit-card industry … some of the biggest card issuers in the U.S., including Citigroup Inc., J.P. Morgan Chase & Co. and Discover Financial Services, are already rolling out a slew of fees designed to recapture some of their lost income, in part by skirting the new rules. Some banks may even be violating the law outright, say consumer advocates.

“Card companies are figuring out how to replace old fees with new ones,” says Victor Stango, an associate economist with the Federal Reserve Bank of Chicago and a professor at the University of California, Davis, who has been analyzing how the Card Act will affect consumer banking. “It's a race between regulators writing ever-more-complex laws and credit-card companies setting up ever-more-complex fees.”

The banks have a big gap to fill. The Card Act is expected to wipe out about $390 million a year in fee revenue, according to David Robertson, the publisher of industry newsletter Nilson Report. On July 16, during its second-quarter earnings call with analysts, Bank of America Corp. Chief Financial Officer Charles Noski warned that the Card Act and other regulatory changes would prompt the bank, the nation's largest in assets, to write off up to $10 billion in the third quarter.

“If you have every major issuer saying that we are losing our shirt, then that speaks volumes,” Mr. Robertson says. “Proportionately, these fees should be understood as almost inconsequential compared to the losses.”

So the banks are getting aggressive. According to a July 22 report from Pew Charitable Trusts, a nonpartisan research group, the industry's median annual fee on bank credit cards jumped 18% to $59 between July 2009 and March 2010. At credit unions, annual fees soared 67% to $25. During the same period, the median cash-advance and balance-transfer fees jumped by 33%.

The credit card companies are losing a ton of revenue because of the new laws, and now they're doing what they can to make up those revenues. They're charging higher annual fees for the cards, cash advance and balance transfer fees are going up and credit unions have had to raise their rates.

All of these increases are perfectly legal, of course. Banks and other issuers would have a difficult time extending credit to consumers, even at high interest rates, if they couldn't augment those revenues with fee income. “We're coming out of a deep recession that issuers are still working through,” says Peter Garuccio, a spokesman for the American Bankers Association.

We understand that the banks have to make money. But some of the banks are going a bit too far, and are doing things that are now illegal, or at least a bit iffy – under the 2009 credit card law.

some banks may be going too far. In a July 7 letter to the Office of the Comptroller of the Currency, which regulates many of the biggest U.S. banks, a coalition of consumer groups including the National Consumer Law Center, the Consumer Federation of America and Consumer Action flagged several “potential violations of the Credit Card Act.”

Other banks are ramping up their marketing of so-called professional cards. These are like corporate cards but can carry the same terms as consumer cards—and aren't covered under the new law. In the first quarter of this year, issuers sent out 47 million professional-card offers to U.S. households, up from 13.2 million in the corresponding period last year, according to research firm Synovate.

“This can be a very easy way around the Card Act,” says Josh Frank, a senior researcher at the Center for Responsible Lending, a consumer group.

The upshot: Borrowers must be more vigilant than ever—even before they make their first charge on a new credit card.

Other Ways To Get Revenue

Other things that the banks have been doing that seem the skirt the edge of legal and illegal?

Playing fast and loose with late payment fees and payment deadlines: the Card Act stipulates that late-payment fees shouldn't be triggered on a Sunday or holiday, when there is no mail delivery, however, some banks are saying that because they accept payments 7 days a week online, that they are in compliance with the Card act.
Rebate cards allow banks to jack up rates: These types of credit cards find the credit card companies offering to refund up to 70% of finance charges if a customer pays on time. Problem is that rebate offers aren't governed by the Card act, so the companies can revoke the card or hit the cardholder with high charges at any time.
Shortening the billing cycle: Despite the requirement of the Card act that companies provide a window of at least 21 days from when a statement is mailed to when a payment is due, some consumers are alleging that their billing cycles have been shortened to fewer than 21 days.

Credit Card Companies Aren't Your Friend. Be Wary.

Credit card companies are for profit entities, and as such they're usually going to find as many ways as they can, and as many instruments as they can to make money. The credit card companies are not your friend, and if you think they've got your best interests in mind, you've got another think coming. They only want to get their hands on as much of your money as they can.

When signing up for a credit card, remember that if it isn't used correctly, it can lead you down a road to debt, bankruptcy and foreclosure – so be careful. And remember, the best way to live is to live with a cash only mindset!

What do you think about the new ways the credit card companies are trying to make money? Does it surprise you? Is it to be expected? Tell us your thoughts in the comments.

How Does A Flexible Spending Account (FSA) Work?

By Mr. Money 11 Comments

This year my company informed us that our company's health care costs were starting to get out of control. Premiums for employees and for the company's portion of the bill were rising. With all the uncertainty that has come with Obama's Health Care plan and as to what will be covered in the future, this year the company decided to kick the can down the road on making hard decisions with the company's health care plan and do a few things to help us save money this year. One thing that they implemented for employees this year was a flexible spending account or FSA. By using this FSA our family will save hundreds of dollars this year on our taxes.

While the FSA has worked out great for us because of our high health care spending at our household this year (we had a baby), it may not be the right option for everyone. We'll explain below.

So What Is A Flexible Spending Account (FSA)?

Flexible Spending Accounts aren't something you're going to find at all places of employment because not everyone offers them. In addition if you're self employed, you aren't able to participate in a FSA plan.

Usually how the FSA plan will work is your company will have an open enrollment period where you can sign up for the company's plan. Our company had that enrollment period earlier this year when we jumped on the opportunity because we knew we were going to have a lot of medical expenses this year with a baby on the way.

When you sign up for your company's plan you'll need to elect an amount that you want deducted pre-tax from your paycheck. That amount you elect to have deducted from your pay will then be split up into your pay periods and deducted from each check. By deducting the money pre-tax it means that you're saving a good amount of money on taxes for the year. The more you deduct for your expected medical expenses, the more you'll save.

Normally you can’t change your amount you’ve elected to deduct from your pay during the year unless certain life events have happened and there has been a change in your employment or family status. (you have a baby or get a new job)

FSA Contributions

As mentioned above when signing up for your FSA you'll need to tell your employer how much you want to contribute to your account for that year. To do that you'll want to estimate how much money you think you'll be paying on medical expenses for the year out of pocket for things like doctor's visits, prescriptions, dental care, and so on.

The government doesn't currently have a limit for the amount that you can add to your FSA account, although most employers will cap the FSA account at a certain percentage or around $5000. My company plan has a limit of $5000, although we designated less than that at $3000 for the year. With that amount we were reasonably sure that we would be able to spend all the money as we were having a baby this year. Remember, you need to be careful about how much you designate for your account, because you have to spend the money – or risk losing it! More on that in the next section.

Our plan has a maximum of $5000 that you can contribute, and at this time we’re contributing $3000. We are expecting our first child this year, and we expect to have substantial medical bills because of that, so using a FSA this year is a good choice for us. With the life change event in July when the baby is born we can elect to increase our contributions if needed. If we expect to use all $5000 of the maximum allowed, we can add the extra contributions to our plan at that time.

FSA Contributions – Use It Or Lose It

FSA plans in most cases have a rule that you must spend the funds added to your account during the year, or you'll lose the money to the plan where it will be used to help cover costs of other plan users who have left their job during the year (before they could add all their funds to the account – even though they've used up their total amount already).

Since funds are subject to forefeit you'll want to make extra sure that you are careful about estimating your health care costs and that you come as close as possible to the reality of what your costs are. For us, we knew just about what we would spend this year based on our spending last year, and the estimated costs of having a baby at our local hospital. In the end we'll end up spending a bit more than we have in our account, but I would rather under-estimate than over estimate – and lose the funds.

FSA Funds Can Be Used At Any Time – The FSA Loophole

One thing that is nice about adding money to a FSA is that you can use your elected funds at any time after you sign up. For example, we have only put in about $1000 in our account so far this year, but within the next couple of weeks we'll have submitted for reimbursements from our account for the full $3000 amount. As long as you've signed up for the account, and are in the plan, you can use up to your full plan election amount at any time.

This point of the FSA has been referred to as the FSA loophole because if you end up leaving a job only part of the way into the year, you no longer have to make contributions to your FSA, even though you’ve used all of your money for the year. The negative balance in your account is balanced out by funds not used by other plan members who have forfeited their funds at the end of the year.

You will sometimes see people who are planning on leaving their company sign up for the FSA plan anyway, knowing they can take advantage of the loophole.

Getting Reimbursed For FSA Approved Expenses

For most FSA plans how it works is you'll pay for all of your health care expenses out of your own pocket, and then once you pay you just submit a claim for reimbursement. Usually you'll get reimbursed in one of three ways.

By Check: You submit documentation of your approved expenses, and within a couple of weeks you'll receive a check in the mail. If something isn't approved or you need further documentation, you'll receive notice.
Direct Deposit: Again, submit your documentation proving your expenses, and if they're approved you'll have the money deposited directly into your account. For us, this is the way our plan works – we submit a fax to the Flex Spending plan administrator and they approve our expenses or ask for more documentation.
FSA debit card: Some plans will just give you a debit card for your flex spending account that allows you to use it to buy approved expenses directly using your funds.

Changes To Flex Spending Accounts Due To Obama Care

After the health care law was passed earlier this year there were a couple of pretty big changes made (for the worse in my opinion).

Over the counter medicines: Starting next year in 2011, flexible spending account money cannot be used for over-the-counter meds unless they are specifically prescribed by a doctor. In current law your FSA funds can be used for over the counter drugs and other items such as eyeglasses, contact solution, bandages and non-prescription forms of birth control.
Limits on your contributions: Starting in 2013, your contributions to your FSA will be capped at $2,500 each year with annual inflation increases. Although there are currently no limits, most employers cap the maximum somewhere around $5,000.

Why are these changes being made? Because they want to collect as much tax money as possible in order to help pay for the trillion dollar Health Care plan. Personally I'm not happy about it as it means I'll most likely end up having to pay for more taxes.

Why FSAs Are Great

If you know that your family will be incurring substantial medical costs during the year, using a FSA plan sponsored by your employer is a great idea. If you estimate how much you'll spend, or even if you know that you'll be leaving your job and want to take advantage of the FSA loophole, you can come out substantially ahead. At our house this year we estimated the amount we were going to spend at around $3000, and in the end we'll end up saving almost $1000 in taxes. Want to figure out how much you could save, check out this FSA Savings calculator.

Do you have a flexible spending account? How much were you able to save in taxes due to your FSA? Tell us your FSA experience, or ask us questions in the comments!

Personal Finance Basics: The Power Of Compound Interest

By Mr. Money 6 Comments

We've all probably heard that we need to think about retirement, even from a young age.

We're told that we need to get a retirement account, and start saving – the earlier the better!

Have you ever wondered why you're better off if you start saving for your future earlier? It's the wonders of compound interest!

Compound interest is the eighth wonder of the world. He who understands it, earns it.. he who doesn't.. pays it.

– Albert Einstein

What Is Compound Interest?

Everyone knows that earning interest on your money is a great thing – but what are the different kinds of interest you can earn?

Simple interest: Simple interest charges interest only based on principle value; Let's say you lend $1000 to someone you know. If you lend it to them on a 5% rate per year on simple interest – that friend would owe you $50 each year before they pay you back.
Compound interest: Compounding interest charges interest on the principle value as well as the value of any interest previously accrued. So in the same example, if you charged your friend a 5% yearly compounding rate, he'd owe you $50 the first year, then 5% of $1050 the second year – $52.50 – (if no payments were made), and so on. The end result is that your friend would owe you increasingly more under compounding interest the longer it took for him to pay you back.

Here is the formula for calculating compound interest – from Wikipedia:

Where,

P = principal amount (initial investment)

r = annual nominal interest rate (as a decimal)

n = number of times the interest is compounded per year

t = number of years

A = amount after time t

So here's an example:
An amount of $1500.00 is deposited in a bank paying an annual interest rate of 4.3%, compounded quarterly. Find the balance after 6 years.
A. Using the formula above, with P = 1500, r = 4.3/100 = 0.043, n = 4, and t = 6:

So, the balance after 6 years is approximately $1,938.op.

Why Is Compound Interest So Great?

The reason why compound interest is so great is because not only do you earn interest on your principal balance, or the money you started with – but you also earn interest on your interest! If you are looking to grow wealth over a long period of time, compounding will definitely work in your favor and help you to achieve some exponential gains.

In fact, if you have a long enough time horizon and depending upon the interest rate, the money earned off of the interest alone can be greater than the principal invested at the start! See this chart for details:

Chart via thetaoofmakingmoney

Remember, however, that compound interest can work against you as well, so make sure that you're the one holding the reins, and like Einstein said, that you're earning it and not paying it.

What do you think about compound interest? Are you earning it or paying it? Tell us your thoughts in the comments!

Want to find out more about compound interest? Check out this great post and infographic about compound interest: Compound Interest Infographic.

When You Make Financial Mistakes, Don’t Allow It To Snowball

By Mr. Money 3 Comments

I was thinking earlier this week about why sometimes people will find themselves in dire financial straights – situations where they can't seem to get out, even when they seem to have the resources or the smarts to be able to. After thinking about it, I realized that a lot of the problems we get ourselves into, and the reasons why we can't get out of them, are really just psychological battles. We allow ourselves to believe negative things about ourselves or our situations that keep us in trouble. We end up not having the discipline to get ourselves out.

We All Make Mistakes

We all make financial mistakes in our lives. Some of us make big ones. We do things like buying expensive homes that we can't afford because we've fallen in love with the house – and we imagine ourselves living there. Or we buy an expensive car because we can imagine ourselves living a glamorous lifestyle while driving that car. Others make small mistakes like forgetting to pay a bill, or spending too much while on vacation.

It's fine to make mistakes – we all do it. What sets the successful apart from those who can't seem to find their way out of debt is that they learn from their mistakes, and they move on.

Poor Decisions Can Lead To More Poor Decisions

Far too often I've seen friends who have made poor financial decisions take a mistake that they've made, and turn it into an even bigger mistake. Instead of admitting they've made a mistake, they double down and continue the poor decision making.

I remember one friend in college who made some poor spending decisions, and found that he was going to be short on his rent payment that month. If he had made a wise decision he probably could have admitted his mistake, and tried finding ways to make up his shortage. He could have sold some of his video games, or got a quickie part time job to help make up the difference.

Instead, he allowed it to get him down, and he decided instead to go on a week long spring break trip – all paid for on his credit card. Because he allowed his poor decision to get in his head and depress him, he tried to make himself feel better by spending even more money that he didn't have. In the end he was only able to get out of trouble by begging his parents for a loan – which I'm pretty sure he never paid back.

Learn From Your Mistakes

Instead of allowing your mistakes to get the best of you, and before the snowball gets rolling down that hill, nip it in the bud. Don't let your mistake get in the way of your future. Don't allow one mistake to beget another.

Instead, admit the gaffe, and do what you can to turn things around. Make a plan for change and think about ways you can ensure that the problems don't arise again. Forgive yourself and move on. Don't be destroyed by guilt, and don't allow your guilt to consume you to the degree that you give up.

If you bought a house you can't afford, cut your losses while you still can and sell the house. If you've bought a car that is out of your price range, return it or sell it! And if the mistake can't be remedied – at least don't compound it by making new mistakes!

Have you ever made a financial mistake, and then compounded the problem by allowing it to consume you – and pushing you to do something else stupid? What are you thoughts on how problems can snowball out of control?

Main Menu