Disclaimer:  I am not an accountant or a tax professional and any advice here should be verified with a professional before acting upon it.

I’m doing my taxes this week.  It’s going to be painful and I’m not going to like the answers it gives me, but I might as well bite the bullet.  If you’re in the same boat you may be looking for strategies to help you minimize your taxes this year.  There are several categories of expenses that we should consider as possible sources of tax deductions:

Business Expenses

Most of the minimization strategies you will see are for people with small businesses.  You open up a world of deductions by starting a business, however this who area of deductions doesn’t apply to most of us.  Consider starting a business if you have one in mind, but we’ll cover individual deductions instead since they are of the broadest interest.

Tax Time is Coming

Why use an accountant when you have to do most of the work yourself anyway. Get started with Turbo Tax for FREE!

Tax-Deferred Accounts

Make sure you put any money into your IRA, 401(k), HAS or any other tax advantaged accounts you have.  Not having to pay taxes can be a huge savings by itself.  When you throw in the capacity of some of the accounts to grow tax-free, this is a no brainer.

Unemployment

This is very relevant to all of us in this economic climate.  If you lost your job, many of the expenses that you incur in your job search are tax deductable.  Phone calls, agency fees, travel to potential employers as well as costs for printing resumes may all be deductible.  Be sure to take advantage of any opportunities to lessen your tax burden in this climate.

Medical

If you had serious medical expenses in 2009, you may be able to deduct some of them.  Most people will not qualify, but if you spent more than 7.5% of your adjusted gross income on medical expenses, you may be able to deduct the excess.  Once again, this can be beneficial to those of us who are experiencing this kind of hardship.

Charitable Donations

Be sure to keep these in mind as well.  You may have been glad to get rid of that bundle of clothes, but it also had some value and you may be able to deduct that amount.  Did you donate some money to Haiti?  You may have just wanted to help your fellow man, but why forget to take the tax deduction?

House Expenses

Do you still have receipts for any home improvements you did?  People often forget that these are deductible.  You also of course can deduct mortgage interest as well as property taxes.

Conclusion

Sadly there are not as many deductions available to individuals as there are for businesses.  Still it never makes sense to pay more in taxes than you have to.  Be sure to think back long and hard before you assume you didn’t make any donations or have any home improvement expenses.  They’re very commonly forgotten, but can often add up to a fair savings.  Minimizing your taxes is a great way to make your wealth build faster.  Make sure you take the time to make sure you do it well.

Photo Credit: Scott*Eric

Post from: Personal Finance And Investing

Tax Minimization Strategies

I write generally about three topics on this site:

• Personal Finance
• Investing
• Economics

I list them in that order based on what I perceive as the general public’s interest level.  Most people are concerned with getting out of debt and maintaining a budget – Personal finance issues.  Those who have succeeded at those tasks become more interested in how to put their savings to work for them and become interested in investing.  Very few people proceed to an interest in policy and economics, and perhaps rightly so.  It’s certainly not immediately clear that an understanding of economics is beneficial to your personal wealth.

The Case for Economics

There are obvious reasons to believe that an understanding of economics should be a great asset in your financial life.  Inflation is one of the examples.  If I judge accurately what future inflation will look like, this can greatly improve my ability to choose good investments.  If I can look at upcoming legislation and see what its effects will be, I should be able to capitalize on that.  It seems like a slam dunk that an economic view should be a great boon to my financial freedom.

However…

Sadly, economists have a habit of being spectacularly wrong.  Even when they aren’t completely wrong, it’s very difficult to profit off of their decisions.  For example, right now treasuries are already priced very low because of a perception that inflation in the future will be high.  So even if that perception is correct, the expected price change is already “baked into the cake;” and if they’re wrong, there’s a chance for spectacular loss.

So Why Bother?

Despite all this I have a nasty habit of continuing to write about the big picture, particularly policy.  One reason I do this is because I believe that a basic understanding of economics can help you make wise decisions in your day to day life, not just in your investing life.  The law of supply and demand may not be useful in deciding whether to buy Microsoft, but it can be useful in starting a business or in deciding what political policies to pursue.  While the value of economic understanding may be questionable for investing purposes, its value in life is much less questionable.

The More Things Change

Many sage investing professionals have a saying:  The most dangerous words in the English language are this time it’s different. Each time that politicians proudly proclaim that we’ve defeated the boom and bust cycle for example, we know how the story always ends.  The more things change, the more things stay the same.

So perhaps the best things we can learn from economics are the basics.  There’s no point trying to guess what’s going to happen in the short term, and play the game for the long haul.  If you do the things that have always worked, you’ll likely meet with success.  Work hard, save, and be wise with your investments.  An understanding of the economy has many benefits, but probably won’t make you rich overnight.  That doesn’t mean it’s not worth having.

Photo Credit: Chi King

Post from: Personal Finance And Investing

Do Economics Matter?

• Investing First Steps combs the NASDAQ for dividend finds.  While the findings are slim, you’ll note that once you sell calls on the positions the yields look similar to stocks with higher dividends.
• Canadian Finance Blog talks about passive income investing for retirement.  I think this is something really important for most people closing in on retirement to consider.  If you can build “machines” that create a little bit of income for you, your savings for retirement can last dramatically longer.  Think about how much less you need to have to retire if 10% of your expenses are met by passive income.  Can make a huge difference in when you can retire.
• I’ve mentioned before that HSA’s are vital to your financial plan.  I also think they could be a huge part of fixing healthcare.  Free From Broke has a good post about their benefits as well.  All of the points made are good and I think their convenience is something I’ve failed to mention before.  Most of them act like a debit card, how easy is that?
• Miranda Marquit discusses how effective spending can be as important as effective saving as well as discussing 529 savings plans.

Post from: Personal Finance And Investing

Wednesday Links — March 16, 2010

Today’s post is a guest post by David Brown,  a financial writer with Oak view law group

Have you been hit by the money bug? Are you suffocating under the burden of multiple debts? Well, debt consolidation can be one of your options. However, you need to know certain things before you decide to consolidate your debt. Read on to know more:

How can debt consolidation help me?

• If you have a poor monthly income right now then debt consolidation provides you the option of making lower installments over a longer period of time. It might certainly suit your current financial condition

• If you have several loans right now then you might be facing a tough time calculating interest rates. With debt consolidation you take a single loan to pay off all your debts. So you can manage your finances in a more organized manner.

• You need not handle calls from the collection agency. The debt consolidation company does that for you.

What are the shortcomings of debt consolidation?

• In most cases debt consolidation loans are secured loans. This means that you have to pledge some asset (your car or your home) as collateral for the loan. So you risk losing your assets in case you fail to pay back the loan. You should be confident about health, job and other unpredictable issues which can cause financial trouble. To be eligible for unsecured consolidation loans you must have a pretty good credit rating. Even if you manage to get a unsecured consolidation loan with a poor rating, it will probably not be big enough to pay all your debts.

• Many people wrongly assume that all consolidation loans have low interest rates. However it’s a different story altogether. In most cases the payment is lower because of the extended term and not the interest rate. Secured consolidation loans sometimes have a low interest. But it can still cost you if you are taking a long term loan, say for 30 years. In such cases you have to pay interest for a long period of time and over the years the interest might grow even bigger than the original debt amount. Depending on your present debt, the interest rates for these consolidation loans can be more than those on the pre-existing debt. That is what makes debt consolidation a profitable business for your lenders.

• Debt consolidation does not address the root cause of your debt-unwise money management. In most cases after someone consolidates his debt, it grows back. People have deceptive feeling that their debts have evaporated and they refuse to do away their poor financial habits. If you can’t spend less then there is no point in consolidating your debt.

• Sometimes it can take a long time to get a consolidation plan approved by your debtors. Your accounts can go unpaid for that time. They will show as delinquency on your credit report. Sometimes a consolidation company can negotiate debt with your creditors to reduce the amount you have to pay. This again will affect your credit report.

• Finally, if your financial condition is extremely critical then you might not be eligible for debt consolidation at all. With so much debt, you may be refused an additional loan.

Is debt consolidation an answer to your monetary problems? The answer to this question is different for everyone. Analyze your financial condition, consider the above things and then decide whether you really need to consolidate your debt or not.

Photo Credit: Photos8.com

Post from: Personal Finance And Investing

Is Debt consolidation the right solution for you?

• Couldn’t agree more with Miranda on physical gold.  The slippage on entering and leaving physical gold is immense.
• Great article by our friend Fred on green savings strategies, for those rare occasions when your pocketbook and your conscience might align.
• Let’s give Poorer Than You a round of applause for netting four dollars and a Plutus Award!
• Online Investing AI discusses finance apps.   Relevant to me as I’m desperately trying to figure out what phone to get.
• Trend technician discusses the black swan in Greece and why I’d be far too scared to chase it.

Post from: Personal Finance And Investing

Wednesday Links — March 3, 2010

This is a guest post from Fred from Credit Card Finder. Fred helps people to compare and choose the best credit card online.

If you’re in debt with credit cards, or personal loans and a mortgage you may be feeling a little nervous when you think about your lack of savings – but does it make sense to direct funds towards a savings account when the interest earned there will be overshadowed by the interest you are paying on your debt. There are ways to save when you are in debt, and there are financial products which can help specifically with this situation. So here are five years you can save, even if you have debt.

1 Consolidate credit cards to one balance transfer card

Try and avoid using equity or a line of credit on your home loan to pay off your credit card debt because you are in fact just stretching out your credit card debt for another 30 years, when you can target it now and get it out of the way for good. Instead, find a balance transfer card with a low interest rate which will allow you to transfer all of your credit cards to be charged one low rate. In this way you have your debt under control, you have a manageable monthly repayment and you have a payment plan which will help you get rid of your credit card debt.

2 In debt to 9%

Many financial planners and advisors will use the 9% rule – if you have debt which is charging you interest of more than 9%, you should direct as much of your income as you can towards paying down that debt. This means you should continue to pay your home loan as usual as it is unlikely to be charging you more than 9% interest in the current financial climate, and any personal loans you have are probably below 9% too. Instead you can focus your debt repayments on your credit cards as in the first point, after which time it makes sense to start looking at a savings plan.

3 High interest savings accounts

If you are going to save effectively while paying off your debt, you need to be getting the most out of the dollars you are directing towards a savings plan. Therefore, choose a high interest savings account which will give you the best return on the money you are able to put away. .

By depositing your regular savings to a high interest savings account, even if you have debt you are going to be able to earn a regular and attractive interest rate on your savings as the interest is calculated daily and compounds into a monthly payment. Even if the interest rate on your savings can’t top that on your home loan, it is sure to be higher than the balance transfer card you are using to pay off your credit card debt.

4 Save for your retirement

Regardless of any debt you have you should be thinking about your future and about building a retirement fund. Retirement savings accounts and superannuation funds have different tax rates and can make your contributions go even further, even if you are also directing some of your income to pay off debt. In saving for your retirement you can also take advantage of employer or government contribution schemes which will match your personal contributions up to a certain amount. Therefore, make personal contributions to your retirement savings up to this amount, get all of the tax and government incentives you can, and you can still focus on paying off your debt while sticking to a savings plan for your future.

There is no point in directing all of your income to pay off your debts if there is nothing put aside for the future. Therefore, don’t be in a rush to pay off your mortgage in lieu of saving for your retirement, because if you haven’t been contributing to your nest egg, it won’t matter that your nest itself is paid off.

Photo Credit: The Consumerist

Post from: Personal Finance And Investing

How to Save When You’re in Debt

The unemployment statistics in America are confusing.  Sometimes you will see unemployment go down without jobs being created.  How can this be?  As it turns out there are many different definitions of unemployment and the number you see is only one of them.  In fact, if you don’t have a job for a certain amount of time, you’re considered to be “out of the workforce,” and no longer counted in the common measure.  As it turns out, long-term joblessness is a danger to societies and this has implications for many of us in our personal life.

Measures of Unemployment

In understanding the impact of long term joblessness, it’s good to understand how unemployment rates are calculated.  In America there are six different unemployment numbers, U1 through U6:

• U1: Percentage of labor force unemployed 15 weeks or longer.
• U2: Percentage of labor force who lost jobs or completed temporary work.
• U3: Official unemployment rate per ILO definition.
• U4: U3 + “discouraged workers”, or those who have stopped looking for work because current economic conditions make them believe that no work is available for them.
• U5: U4 + other “marginally attached workers”, or “loosely attached workers”, or those who “would like” and are able to work, but have not looked for work recently.
• U6: U5 + Part time workers who want to work full time, but cannot due to economic reasons.^[1]

So as you can see, sometimes a job seeker simply “gives up.”  They’re no longer counted in unemployment statistics, but they certainly don’t have a job.  As it turns out, this is actually the worst kind of unemployment, even though we don’t see it measured very often.

Long Term Havoc

A study by the Cologne Institute for the German Economy is one of many supporting the belief that the longer a person is out of a job, the less likely they are to return to the workforce.^[2] Their job skills atrophy and they lose hope.  They basically get locked into a self-reinforcing cycle of poverty.  You may know someone like this, who used to be in the workforce, but now seems unable to return.

Think of all the ways in which this affects people’s lives.  Think about what being in prison for a few years means for your odds of employment, even disregarding the effect the sentence will have on people’s willingness to hire you.  You have whole communities who don’t believe they can find a job and thus make it true in their own mind.  As a society this kind of long-term unemployment can be decimating, but it also has implications for you personally.

What Does this Mean For You

For individuals like you and I this is something to consider as well.  At some point it may make sense to take a job in which you are underemployed, just to keep your frame of mind as a “worker.”  Rather than become chronically unemployed, it may make sense to do some work that helps you keep your professionalism as well as the mindset of a worker.  This can also help with the bills a little bit.  The only concern is to make sure that taking some temporary work doesn’t deter you from finding a job that truly makes use of your skills.

Photo Credit: Hamner Fotos

Post from: Personal Finance And Investing

Long Term Joblessness

1. Wikipedia — Unemployment
2. German Think Tank Says Joblessness Behind Poverty

• Miranda Marquit writes about FDIC coverage.  Interesting questions about what isn’t covered, which might surprise you.
• FreeFromBroke discusses the CARD act.   This of course would have been a much better piece of legislation if the companies in question weren’t given a 9 month window to undermine all the changes.
• A great article about couponing in Canadian Finance Blog.  I have tried so many times to become a “couponer.”  I feel like I”m leaving a ton of money on the table.  That $1 coupon is worth more than a dollar of cash!
• I thought I’d go ahead and mention an article I did on bank accounts and credit scores.  I actually didn’t know a lot of this information before I did the research.  Summary:  Bank accounts don’t affect credit scores, but lenders have access to other scores that bank accounts do affect.
• Weakonomics discusses inflation and the stock market.  While I wouldn’t go so far as to say I’m not worried about inflation, I do agree that the stock market is a good hedge against inflation.

Post from: Personal Finance And Investing

Wednesday Links – February 24, 2010

Today’s post is by Nick Barber who works for UK discounting site VoucherCodes.co.uk

Personal finance has moved on and people are now roughly separated into two groups; those that are savvy online and those that are not.  There is a myriad of tips of tricks beyond the usual blanket “buy online” advice that can slash your usual monthly spend painlessly by about 20%.  These personal finance tips however can be leveraged in the worlds of investing and of small business too so you offset the hefty start-up costs that are often incumbent on the budding entrepreneur.

Before you know where you are going to make savings however, you need to know exactly how your finances are shaping up. In recent years there has been a proliferation of online software packages that will help you keep your bookkeeping in order. Mint is a great example. Once you sign up and enter your details, it will automatically pull in your balances from different accounts, updating in real time, so you can always keep on top of how much you are laying out each month. This information can then be used in conjunction with their budgeting software and there is even functionality to check how your investments are doing.  What is more – it’s completely free!

The second tip for knowing where you stand financially is to check your credit report. Your credit report is, put simply, a record of all the debts you have taken out in the last 6 years, right down to cell phone contracts, as well as a record of how well you have managed to repay them. Experian offer a free credit report when you register with them. It is essential to check for mistakes – which happen more regularly than you think. Even the smallest error can reflect badly on you which is especially important with banks having access to your records. If it seems you have missed just a few payments, this can result in a much higher rate of interest on your mortgage and other borrowings. Correcting mistakes can result in savings of hundreds of dollars a month; as well as opening up more finance to you.

Now you know where you stand; it’s time to make savings. One painless way is to use online coupons which became something of an online phenomenon in 2009. They are, in a nutshell, a revamp of the old cut out coupon.  In the main they are offered on a B2C basis. However FedEx, Dell and many stationers offer such codes which can lead to reductions of anywhere up to 50% when setting up a small business of a home office as a hub to run your investments from. A simple Google search for “Coupons” will bring up lots of sites dedicated to bringing together such discounts in one place.

If you are new to investment too there are many financial spread sites offering sign up bonuses. So long as you remain disciplined, this can give you a great introduction to get the feel for the markets with no risk. TradeFair – part of a British company that has won numerous awards including the coveted Queen’s Award for Enterprise – are offering a £100 ($160) sign up bonus, and will send you introductory guides to spread betting as well as having many introductory materials around their site.

Lastly, if you looking to make the jump from amateur investor to becoming self employed, or even if you are just looking to ramp up your investing activities then you will no doubt be looking at a fair bit of admin work too. However, recent years have seen the rise of “virtual PAs”. These are companies of remote personal assistants who will complete admin tasks you send to them.  They can usually be hired on an hourly basis so can provide very flexible work that can be invaluable when just starting out. Similarly if you are looking to research an investment then Amazons “Mechanical Turk” could be the answer. This service gives you access to a scalable workforce. You simply load in the task you want such as “Information on X business’ financial results”, and set the price you will pay for each piece of information (often just cents per item).  Combined these two tips can give you access to resource that can be unlocked at any time you need for a very cheap price; a hidden army for the new entrepreneur.

All in all a little bit of web knowledge can help you cut costs and increase resource at the same time, so you can put yourself in the best possible position whether you are a seasoned pro of the investment world or just starting.

Photo Credit: Wonderlane

Post from: Personal Finance And Investing

Web 2.0 Personal Finance

As a general rule I think options are a terrible idea for the casual investor.  For those who are simply trying to match the markets without spending a tremendous time watching their investments, options represent a significant danger.  Even for those who have experience with options, understanding all the implications of buying or selling an option can be confusing.  Covered calls however, may have a useful place in the typical investor’s portfolio.

Option Terminology

Options are defined by several values.  For the purposes of discussing options here we will assume we’re talking about an options contract on a stock, which is not always the case.  First of all, be aware that an options contract is for 100 shares of the stock.  Thus you don’t deal in tremendously small lots when dealing with options.

Each option is either a call or a put.  A call option is an option to buy a stock at a particular price on or before a particular date.  A put option is an option to sell a stock at a particular price on or before a particular date.  In both cases the date by which the decision must be made is the expiration date and the price at which you have the option to buy or sell is called the strike price.  These options also have a price which is listed in terms of a price per share.  So for example if you see a price quoted as $0.25, that means twenty-five cents per share, or $25 for the full contract, since contracts are for 100 shares.

If all of this sounds confusing let’s look at an example:

Supposing we have a stock X which is currently trading at $35 per share and it is currently January 1^st.  Now suppose I buy 10 call contracts on this stock with a strike price of $37.50 and an expiration date of February 23^rd (Note that expiration dates are the third Friday of a month).  Let’s suppose I pay a price $1 per share for each of these options ($100 total for each and $1,000 total since I’m buying 10 contracts) and look at what happens depending on how stock X’s price changes in that time.

If stock X does not exceed $37.50 before February 23^rd my options will expire as worthless and I will lose 100 percent of my investment, assuming I do not sell the contracts before then.  If on February 23^rd the price of the stock is higher than $37.50, I will be able to buy the stock at a discount, which will hopefully exceed my $1,000 investment.  So for example if the stock is at $42.00 I will make $4.50 per share on the 100 shares per contract for 10 contracts, thus making $4,500 less my initial $1,000 investment.  This means I made $3,500 on a $1,000 investment.  As you can see, options have a high risk and high reward.

In general, people often close their position before the expiration date, which of course affects the economics as well.  If I have a call option, for example, with some time left before the expiration date and the option is already “in the money” (meaning the share price is higher than the strike price for a call), then I will probably be able to sell it at a premium to the difference in the prices, because of the potential to make more money before the expiration date.

Covered Calls

So now let’s suppose instead that I want to sell a call on stock X.  I can do this without owning one; I simply have to buy it back before the expiration date.  This is very similar to shorting a stock.  Let’s look at the economics of this.  If I sell a $37.50 call for $1 per share then I make $100 per contract.   As long as the stock doesn’t go above $37.50 before the expiration date, I will get to pocket that $100 per contract.  However if the stock goes skyrocketing I will have to pay the difference between the price and my $37.50 strike price.  As you can see, this is very risky.  However, I can make this a much safer bet if I already own the stock.

Suppose I have 1,000 shares of stock X and I do not expect the price to rise significantly.  I might go ahead and sell a call with a strike price a bit above the current price.  Thus if the stock price doesn’t move above that strike price I will pocket a little money.  If the stock price does move I will still make money because of the difference between the current price and the strike price and the premium I was paid when I sold the contract (the contract’s price).

Thus if the stock goes down, I’m better off than I would have been without the call because I get the money for selling the contract.  If the stock stays flat I’m better off for the same reason.  The only time I lose is if the price goes enough above the strike price to exceed the value I was paid for the contract.  Thus I’m limiting my downside, but I’m also limiting my upside.  If stock X doubles, I’m only going to get my strike price for it, which could be thoroughly discouraging.

Why Sell Covered Calls?

There are many reasons you might not be bullish about a stock price in the short term, but not ready to sell the stock.  Tax considerations could be one example.  Another might be that the stock pays a dividend, but you’d like to limit your exposure to the stock going down in the meantime.  In fact, combining covered calls with dividend stocks can be a good way to increase your yield and limit your risk.  You might also simply want to limit your risk when entering a position by reducing your downside and upside at the same time.

Obviously there is much more to understanding the risks and benefits of covered calls, however they represent one of the few options strategies that might make sense for a casual investor.  Be sure that you thoroughly understand them before considering them however.  The vast number of variables and outcomes can confuse even the most seasoned investor.

Post from: Personal Finance And Investing

Selling Covered Calls