What Is Bitcoin Is It Worth It?

Finance Gourmet on January 22, 2015

Bitcoin is a topic that pops up in the news every now and then. It’s also the kind of thing a freelance writer with ADD might get distracted by when he was supposed to be rebuilding the content on an old website. In fact, he might feel guilty for spending so much time looking into it that he would have to write several articles about Bitcoin as a way to make it seem more like work.

* Ahem. *

What Is Bitcoin?

Explaining Bitcoin is a little bit tricky. In essence, Bitcoin is a digital currency. There are no actual coins, only computer data. In many ways, this is not unlike most of the US currency, which exists electronically on bank computers and balance sheets, not in stacks of hundred dollar bills in the basement of GE headquarters.

Bitcoin has no intrinsic value. That is, that there is no organization or group that gives it a value. Instead, it is simply a means by which bitcoins are generated in a limited supply. Like anything else, supply and demand can set a price for Bitcoins in other currency, including US Dollars.

How you convert Bitcoins to Dollars is that you find someone (actually some company) willing to give you Dollars in exchange for Bitcoins. Like any currency exchange, this comes with some fees and potentially, with some spread in the transaction rates. This is no different than converting Dollars to Euros. Where you do the conversion determines exactly how many Euros you get regardless of what the current market rate is.

Is Bitcoin a Good Investment?

The history of the exchange rate, or price of Bitcoins is the perfect way to answer the question about whether or not Bitcoins are a good investment. One of the things that makes Bitcoins so interesting to a public that usually couldn’t care less about potential new currencies, is the gold rush vibe behind the whole thing. The media was full of the story of the college student who bought a handful of Bitcoins for $20 a decade ago and suddently finds out they are worth hundreds of thousands of dollars (assuming he cashed out closer to $1,000 per bitcoin).

bitcoin investing prices

As you can see, Bitcoin prices in the last few years have ranged from over $1,000 per bitcoin in late 2013 back down to the $200 per bitcoin range today. Investing in Bitcoin is a very volatile ride, and should probably be undertaken with extreme caution and a small amount of money that would not be detrimental to your finances if it was all lost.

Some people, like distracted writers, have found a way to play in the Bitcoin space without having to invest actual dollars in a crazy market. It turns out with a lot of perseverance, and some time to figure out a few computer programs, you can actually “mine” bitcoins with your computer. The odds of finding bitcoins on your own is pretty high but if you have a computer to use, and you don’t mind wasting the electricity, you can always try and get lucky. Or, you can join a mining pool, and slowly but surely acquire a few dollars at a time.

Then, if the price did shoot back up to $1,000, that little gamble, and little electricity, might just pay off.


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Finance Gourmet on January 20, 2015

Social Security is a supplemental retirement income program run by the federal government. The idea is simple. While you are working, you pay money into the Social Security system in the form of FICA tax. When you retire, you get a monthly income check from the Social Security system. Social Security is full of political controversy, and we aren’t interested in that here. This is about personal finance and your actual retirement plan, not about what should or should not be according to someone.

Social Security While Working

Once upon a time, 65 years old was the mandatory retirement age in many fields. In addition, most people didn’t live much past 65. These days, plenty of people live long past 65 years old, and plenty of people also work long past the age of 65. This introduces some new wrinkles to the Social Security program.

social security while working

First, with people living longer, Social Security was paying out more benefits than it used to. So, Congress passed a law that changes the retirement age for Social Security.

If you were born between 1943 and 1954, your full retirement age is 66 years old, not 65. You can start collecting Social Security retirement benefits as young as 62 years old, however your benefit amount will be reduced. For example, if you start collecting Social Security at age 62, you will only get 75% of the full benefit amount you would get if you waited to start collecting until age 66.

Reduced Social Security Benefit While Still Working

What if you are still working when you start collecting Social Security? If you are still employed when you start taking Social Security, your benefit payment may be reduced.

First, if you are full retirement age (age 66 if you were born between 1943 and 1955), then you get to keep your entire Social Security benefit amount even if you are still working. There is no reduction based on income for people who have already reached full retirement age, no matter how much money you make.

Now, if you are not at full retirement age, your Social Security can be reduced depending upon how old you are, and how much you make.

If you make more than $15,480, then your Social Security is reduced by $1 for every $2 you earn above $15,480. This is best understood with examples.

  • If you make less than $15,480, then your Social Security is not lowered by any amount. You get to keep the full benefit.
  • If you make more than $15,480 then you lose $1 for every $2 ABOVE $15,480.
  • So, if you make $30,000 and you qualify for a $900 per month Social Security payment ($900 * 12 = $10,800 for the year)
    • $30,000 – $15,480 = $14,520 (this is the amount you make over the threshold)
    • You lose $1 for every $2 over $15,480, or $7,260 ($14,520 / 2)
    • Your paid benefit is $10,800 – $7,260 = $3,540

The way you lose the money is odd. They don’t calculate your new amount and then change your monthly payment. Instead, they do not pay you until you have paid off your reduction.

In our example, you would normally receive $900 per month for 12 months. Instead, since your benefit is reduced, they just won’t pay you for the first eight months of the year. Then, you’ll get $800 per month for the rest of the year. If your reduction means that you would get a partial month of payment, you will NOT get paid for the partial month right away. Instead, they’ll carry forward any fraction and pay you that amount in January of the next year.

The rules are different during the year you actually reach full retirement age in which case, the reduction is $1 for every $3 you earn above $41,400 until your birthday. In other words if you turn 66 in September, your reduction would be based upon the above from January to September, then in October, you would get your full benefit. (You still get the lower benefit from starting early, but no reduction based upon income.)

As you can see, if you are still earning much of an income, it probably doesn’t make sense to start taking your Social Security early without a very good reason.

Taxes On Social Security

Paying income taxes on Social Security is different. It does not matter how old you are, or if you have reached full retirement age, if you are still working, your total income may make some or all of your benefit taxable.

If you are married filing joint and your income is lower than $32,000 then your Social Security payments are not taxable.

If you are married filing joint, and your income is between $32,000 and $44,000 then up to 50 percent of your benefits is taxable.

If you are married filing joint and your income is over $44,000 then up to 85 percent of your Social Security benefits are taxable.

Note, this is not the tax rate you way. It does not mean that you pay 50% tax (or 85% tax) on your benefits. It means that much is considered taxable at your normal income tax rate (with the additional income added.)

In other words, if your combined income is $60,000 and you get a $1,000 per month benefit, then 85 percent of $12,000, or $10,200 is taxable. You’ll pay your usual tax rate on an extra $10,200 of income.

Calculating your “combined income” to see where you fall in the above income levels includes one-half of your Social Security income.

So, if you make $28,000 per year at a job, and then you get $1,000 per month ($12,000 per year) in Social Security, then your combined income is $25,000 + $6,000 (1/2 of $12,000) = $34,000 and 50% of your benefit is taxable.

As always, a program like TurboTax or an accountant can do the actual math for you.

Information in this article is for educational and planning purposes only. It is not tax advice. Consult a tax professional for actual tax advice on your specific situation.


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Finance Gourmet on January 15, 2015

Patreon is a website that allows people to contribute funds to support the work of artists and creators. Let’s start from the beginning.

Patreon is deliberately misspelled, likely because patron.com was already taken and whoever owned it wanted too much money for it. A patron, as in patron of the arts, is (or was) a person who supports artists or art causes. The most famous patrons of all time were the Medici family, who supported numerous artists, including Leonardo da Vinci. The idea behind the website is arguably similar.

taxes on patreon

The Patreon website allows people to support “creators” by pledging a certain payment per month. In exchange, the creator may (but is not obligated to) offer various “rewards” for said contributions. The question is are Patreon payments considered taxable income for income tax filing purposes.

Patreon Contributions Not Tax Deductible

Let’s start with the easier question. No matter how much you like artists, and no matter how much supporting them feels like charity, such contributions are typically not tax deductible contributions in the eyes of the IRS. IRS Publication 526 deals with charitable contributions and it specifically says,

“You cannot deduct contributions to individuals including… contributions to individuals who are needy or worthy.”

If the recipient of the contributions is established as a 501(c)(3) organization with a valid Tax ID number for that organization then contributions may be tax deductible. However, to be a fully deductible charity contribution, the person making the contribution cannot receive any benefit in exchange. Thus, even Patreon contributions made to charitable organizations may not be tax deductible if any of the rewards received by the contributor are of value. In that case, the value of any benefits received may not be deducted.

So, for example, if you do manage to find a qualified organization on Patreon and contribute $50 per month, but you get a t-shirt worth $10 each month, you could only deduct $40 per month as a charitable contribution.

Is Money From Patreon Taxable Income?

While the question about tax deductions is relatively simple to answer, the converse about whether or not such contributions are taxed as income is trickier to answer.

The overriding section of a tax code says,

“Except as otherwise provided… income means all income from whatever source derived.”

In other words, EVERYTHING is consider income for tax purposes unless it fits under a defined exception. Gambling winnings, drug deals, if you got money for selling your kidney, it doesn’t matter, income from pretty much any source, legal or illegal, online, offline, traditional, or new economy all counts as income.

At first blush, this makes Patreon payments taxable. It also makes Patreon’s cut, or service fee, a business expense, if you are running a small business and filing a Schedule C. The things that are exempt from being income are very limited. Almost none of them can even come close to being stretched to allow Patreon contributions to be non-taxable.

The one exception is gifts. Gifts are one of the things that is excepted from being income. So, if the contribution through Patreon is a gift, then it is not taxable. If it is ANYTHING ELSE it is taxable. (Note: there is such a thing as a gift tax. However, gift tax is paid by the person giving the gift, not the recipient, but only if it exceeds the annual gift tax limit: $14,000 for 2015.)

Here is the really important part though, GIFTS are tax-free, DONATIONS are not.

Are contributions from Patreon considered gifts?

This is the sticky part. When users of Patreon offer various benefits in exchange for contributions, it becomes easier to claim that the contributions are not gifts, rather they are payment for something. However, the value of many of those gifts is negligible and if someone wanted to argue that as such the contributions are still really just gifts, then there would mean no taxes. But, even then just the fact that the recipient does SOMETHING at all in exchange means that they are not gifts. Gifts are never”for” something. At best, you could claim that the contribution above the part of what was received is a gift.

Patreon by its very nature is about an artist or a creator DOING SOMETHING which is supported by others. That is income, even if the contributor doesn’t specifically “get” anything, the fact that you produced the podcast in exchange for those contributions means it’s taxable income, no matter how worthy or noble.

Remember, the exception for income purposes here is GIFTS not DONATIONS. You, an individual, cannot receive tax-free donations, you can only receive gifts. The distinction matters. Grandma giving you $200 because it’s your birthday is a gift (you did nothing, she expects nothing.) A $20 monthly contribution for your online comic is not a gift (you did something, contributors expect the comic will be made.)

Note: Although this is not spelled out anywhere, the IRS is more likely to believe something is a gift when it comes from someone you have an association with. One total stranger handing you money as a gift if believable, but 50 total strangers handing over cash and expecting nothing in return? That’s a tougher sell.

There are a lot of theories out there about whether or not you can count them as gits. If you are just curious, then, hypothetically, yes contributions could, possibly, maybe, be considered gifts.

However, for practical purposes, this all comes down to what gets reported to the IRS. If Patreon sends you a 1099-K or other tax reporting form for filing your taxes, that means they reported the transactions to the IRS. The IRS will assume that these payments are income, and sooner or later, the computers will flag that you are not reporting all your income. If they have the manpower, and it is deemed worth enough, you’ll get an audit letter. It is at this point that you can make your argument that it’s a gift. This is highly unlikely to sway the IRS agent in charge of your account, which means you would have to go to Tax Court and win. This isn’t a cheap proposition, which only makes it worth it if you are getting a lot of money. Ironically, if you are getting a lot of money, it makes it more likely that they’ll come asking questions, so… your call. Even worse, drawing this much attention increases the odds that you’re whole return will get a full going over, so be double sure everything else is squeaky clean if you go down this road.

Even if Patreon does NOT report your payments, they are technically still taxable, but whether anyone ever notices is a whole other question. The IRS audits a really low percentage of taxpayers, and thanks to budget cuts, it’s about to get even lower. So, in this case, if you didn’t include your Patreon contributions because you, in good faith, consider them gifts, and no one ever says otherwise, then, you are right by default, but that’s a risk (albeit a small one) you’ll have to take.

The best bet then is to keep careful track of all your expenses because you can deduct them to help with the additional taxes on your Patreon income. If you get a small amount, chances are there are enough small business expenses to wipe out most of the additional income. This is so much easier if you set up a business. I recommend an LLC for a small side project. Consult a tax professional if you want to go the C Corp or partnership route.

If your income gets reported, then you should report it too, unless you are willing to go to tax court in which case, go ahead and take one for the team. Maybe you’ll win and no one will have to report their Patreon contributions. If your Patreon contributions do not get reported (that is, you don’t get any sort of 1099 from Patreon or their assigned) then, it’s your call. I won’t sit here and tell you not to report income, but if you really believe it is not income, then you should do what you think is correct.

The one thing you do NOT want to do is report it and then try and back it out with some sort of deduction or credit. That WILL NOT hold up. Either report it or don’t. Don’t try and get cute.

All information contained here is for educational purposes only. It is not advice on your specific tax situation. You are responsible for your income taxes. Consult with a tax professional for advice specific to you.







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Finance Gourmet on January 13, 2015

If you are an American, chances are you have started receiving tax forms and reports from various companies. Recently, many companies, banks, brokerages, mortgage companies, and charities have started providing tax reports and forms electronically. Ironically, you may get a notice in the mail from these entities telling you that you will get your tax documents electronically.

Forms Required to File Taxes

Exactly which forms you need to file your income taxes depends upon your individual tax situation. People who own their own business have more tax forms they need. Likewise, people with more deductions, or various financial vehicles such as trusts require additional documents as well. If you have any financial accounts or situations that are not “standard” you’ll need to check with an accountant or tax professional to find out what is required for you to file you taxes.

Employed by an Employer

If you, or you and your spouse, are not self employed, then you will need a W2 Form from your employer to file your taxes. The W2 form lists several numbers including your total wages for the year, as well as various contributions to things such as 401k plans, or cafeteria accounts, or pre-tax insurance payments.

If you worked for more than one employer, you will need a W2 Form from each employer you worked for during 2014. Your employer is required to send your W2 Form to you no later than January 31st.

Self-Employed or Contractor

If you own your own business, or if you work for someone as an independent contractor, you’ll require some additional forms for your income. The most common form is a 1099-MISC Form.

form 1099-misc

If you are a contractor, you’re employer will include your taxes on line #7 Nonemployee Compensation. Then, you’ll be on the hook for self-employment taxes, but you can deduct various expenses as well.

If you a freelancer or otherwise self-employed in the business of providing services to another party, you will require a Form 1099-MISC from everyone who paid you more than $600 during 2014. Also, writers and other artists require a 1099 from everyone who paid you more than $10 in royalties (Line #2) during 2014. This kind of income will also generate self-employment taxes. Be sure to deduct any equipment or business purchases. The Section 179 deduction limits for 2014 are higher than they will be for 2015.

If you own a business as part of a partnership or as an S-Corporation, income and revenue will be reported on a Schedule K-1 form.

For taxpayers with investing income, or interest income, there are forms required for those as well. The Form 1099-DIV is used to report dividend income and interest income. Form 1099-S is usually used to report income from sales of stock.

You will also receive forms for any withdrawals from qualified retirement accounts such as an IRA, or 401k account on a Form 1099-R.

Some states issue state income tax refunds. Since you typically deduct the amount of your state income taxes on your federal income taxes, the IRS requires you to put the amount of any refund back into your income. You’ll get this tax reporting document as a Form 1099-G Government Payments. Do be sure to NOT add the state refund back into any calculation for your state income taxes. You may also get a 1099-G if you received unemployment insurance during 2014.

If you get Social Security income, you’ll need Form 1099-SSA.

Tax Deduction Forms

While many tax deductions require document such as a receipts, other, typically larger, tax deductions also require reporting from the company that handles the transactions giving you the deductions.

If you plan to deduct mortgage interest on your taxes, your mortgage company will send you a Form 1098 with the amount of interest you paid for your mortgage during 2014. This form will also list your property taxes paid for deducting, if you pay them through your mortgage company. If you have a second mortgage, you will get a different 1098 from each company.

Student loan interest will also be reported by your loan servicer. For deducing your student loan interest, you will get a 1098-E from each company that you have a loan with. Box 1 shows the amount of interest received by the lender. There is an income phase-out for this deduction, so make sure to do the calculation and plan accordingly. If you have deductible payments for current educational expenses, you will receive a Form 1098-T.

If you contribute to a Health Savings Account, you’ll get a Form 5498-SA.

Taxpayers DO receive forms reporting their IRA contributions, however, these forms are NOT always sent by the April 15 filing deadline. You can deduct your contribution anyway. When you get the Form 5498, save it with the rest of your 2014 tax documentation.

Other Tax Forms Needed to File Taxes

Of course, there are literally hundreds of other forms for various special situations. If you get income from a trust, there is a form for that. If you get income from land or mineral rights, there are forms for you as well.

Once you have the main forms listed here, you can start working on your taxes. As you go along, you may notice that you need additional forms. Don’t hesitate to contact anyone who had not sent you required forms in a timely manner. Although you do not have to submit most of these forms when you file your taxes, the numbers are cross checked by computer when you file, so you need to ensure that the information matches.




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Finance Gourmet on January 6, 2015

There is a lot of new lately about lower oil prices hurting the stock market. This comes as a shock to casual investors who are used to HIGHER oil prices hurting the stock market. If lower oil prices are good for consumers, and the consumer drives the American economy, then why would lower oil prices hurt stocks?

Short-Term Stock Price Movements

falling oil prices pictureFirst, never forget that short-term stock price movements are much more about speculators maneuvering for quick profits than about the actual value or prospects of the stocks in question.

One way to calculate a company’s value is it’s market capitalization which is the number of shares outstanding the company has times the company’s share price.  As I write this, for example, IBM has a market capitalization of $154.76 billion dollars. However, it’s stock is down approximately $3 per share from yesterday. That means that, theoretically, the company was worth $157.85 billion dollars yesterday.

No matter what the price of oil is, there is no way that anything changed enough to make IBM worth $3 billion dollars less than yesterday. Short-term price fluctuations are the result of supply and demand. And, since a large majority of daily trades are actually between computers, in a very real way, you could say that short-term price movements in any stock are nothing more than the variables in differing computer programs.

What Cheap Oil Means for Stocks

That being said, the concept behind both computer trading programs, and actual investors buying and selling stock is that various events or company actions can, and do, ultimately impact the value, or worth, of a company and it’s shares.

When it comes to oil, different stocks react differently to changes in prices. For example, it should come as no shock that oil companies do better when oil prices are higher. When you are pulling a commodity out of the ground the approximate cost of doing so remains constant. So, the more you can sell it for, the higher your profit.

On the other hand, companies that use oil such as airlines and transportation companies do better when oil is cheaper. Filling a truck with gasoline and driving it across the country is cheaper when oil is cheaper. Assuming prices remain the same, then profits would increase with cheaper fuel expenses.

Furthermore, consumers are often cited as the real power behind the American economy, and cheaper gas means lower expenses for consumers. From this standpoint, cheaper oil is good for the economy and stocks in general.

So, why does cheap oil mess up stocks so much?


I once heard a professional financial analyst say that everything is worth something. The trick, is knowing what that something is.

To find out what something is worth, you take a look at all the data you have about that something and then project that against all the data you have about how that something will fit in the world. That gives you a value.

The more data you have and the more patterns you have to compare it against the better your projections can be. Conversely, the less of these things you have, the greater the margin for error. Which brings us to falling oil prices.

For the last several years, the world has gotten very used to oil in the neighborhood of $100 a barrel, give or take $10 or $20. We know what happens when oil is priced like this. However, with oil down near $50 per barrel, that is a whole new variable that no one is sure exactly how to deal with. When you don’t know, you need more room for error.

In addition, the economy had adjusted and settled into higher oil prices. There are enough companies, jobs, and transportation to handle $90 per barrel oil prices. With oil at $50 per barrel, the math changes. Perhaps there are too many companies, too many workers, too many suppliers, etc… As the economy adjusts that means changes. And, those changes are what many investors are trying to get out in front of.

Right now, that means bailing on oil companies, and pretty much anything that has anything to do with oil. If you want to take that one step further, than means getting out of anything that will be negatively affected by those companies or issues. Banks that have a large amount of loans out to oil industry companies, might be riskier now. What about big equipment makers? Oil shipping? Refineries?

Politicians in North Dakota have been tripping over themselves to take credit for the being the state with the fastest growing economy. But, if oil prices stay low and the oil industry has issues, which state do you think would have the fastest declining economy? (Think they’ll still try and take credit for that?)

Big Oil is Big

The other issue is simply size. It isn’t politicians just blowing smoke when they say “big oil.” The Fortune 500 ranks the top U.S. companies by sales. Guess how many are oil companies? Other than Wal-Mart, the two biggest companies in America are oil companies. Five of the top 25, or 20 percent of the biggest U.S. companies are directly involved in oil.

#2 Exxon Mobil

#3 Chevron

#6 Phillips 66

#10 Valero Energy

#25 Marathon Petroleum

Oil In Stock Indexes

Never forget that when the new gives it’s fifty-five second money segment is relies heavily on indexes when talking about the stock market.

The Dow Jones Industrial Average and the S&P 500 Index are the most widely reported. The Dow includes both Chevron and ExxonMobil, and since the Dow is a price-weighted index, and those companies are two and three in size, every movement of them causes out-sized moves in the Dow as well.

Long-Term Stock Market Impact

The markets frequently go through upheavels like this. That does not mean that lower oil prices are bad for stocks, or the economy in the long-term. Assuming prices remain low, the economy, and the companies in it, will adjust. There will be winners and losers. Oil companies, and those companies heavily dependent on them will suffer. Companies that use oil and gas will do better. In the end, however, cheaper oil is probably better for the U.S overall.

Once everyone gets there money where they think it should be based on cheaper oil, things will settle down. Until then, remember that there hasn’t been a correction (10% decline) in this market in a very long time. Stocks don’t go straight up, and when they do, that just sets up trouble down the road. Pretty much everyone is waiting for the shoe to drop, and cheaper oil might just be the excuse the market needs to take a healthy dip.



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Finance Gourmet on December 28, 2014

You are probably aware that all three credit bureaus are required by federal law to provide you with a free credit report annually. Each year you can request a free credit report from Transunion, Equifax, and Experian. You may think that the best way to get your free credit report is to call the major credit bureaus directly, but actually the best way is to use the FTC approved free annual credit report website.

Free Credit Report Website

Unfortunately, as with everything, there are a lot of free credit report scams out there hoping to trick unsuspecting users with official looking websites purporting to offer “free” credit reports. If you look closely, you’ll find some find print saying that these are not the officially, federally endorsed, websites to offer free annual credit reports, but if you just start clicking the big, inviting buttons, you’ll end up on the hook for some expensive services to go along with your “free” services.

Free Credit Report Scams

First of all, do NOT go to freeannualcreditreport.com or anything with the word FREE in it. The free government mandated credit report website does NOT have the word FREE in it’s name. If you go to any site with the word free in it, prepare to be scammed or signed up for expensive credit monitoring services. The real credit report website is annualcreditreport.com. Notice that there is no “free” in that domain name.

The most common free credit report scam is to offer you a free credit score or free credit report that actually is a trial subscription to an expensive credit monitoring service. This is true both of blatant, fraudulent scammers, and all of the legitimate credit bureaus and myFICO. Be very, very careful to read all of the fine print and make sure that you do not see anything about a trial period, or a subscription before clicking OK. The easiest way to avoid the scam is to NOT enter your credit card number or bank information. You do not have to enter chargable information to get your free credit report.

If you are entering a credit card number, or a bank routing number and account number FOR ANY REASON, including “verification” you are opening yourself up for a big bank charge and an ongoing scam.

Legitimate Free Annual Credit Reports

Unfortunately, even once you get to the true free credit report website, you still are not home free. The three major credit bureaus have taken advantage of this federal law to try and generate even more revenue at the expense of customers looking to improve their credit score and clean up their credit reports.

This is what the current annual credit report website looks like. Can you spot the free credit reports all three credit bureaus are required to offer you by law?

annual credit report website

90% Sales, 10% Required By Law – Would You Expect Any Different?

Once you click that red button, you will have to enter identifying information to retrieve your credit report, including your full-name, social security number, address and so on. That’s why it is so important to get the right website. All of that information is an identity theft gold mine.

You have to request each credit report individually. There is no way to get an all three credit bureaus credit report at the same time. They could do this, but they don’t want to. They would rather have three separate chances to sell you expensive additional services.

After you choose which credit bureau’s credit report you want, they will AGAIN try and get you to sign up for some sort of on-going credit monitoring, “free” credit score, or other pay service in addition to providing your credit report. Again, do not enter your credit card information. If it is asking for a credit card, you have clicked the wrong button, or have checked the wrong box and are signing up for a service you don’t want or need.

Free Annual Credit Score

Many people are confused by the fact that there is NO LAW requiring anyone to give you a free credit SCORE. You are only entitled to a free credit report. There are some services that offer a free credit score, but you’ll want to be careful using them as well. They’ll likely try and sell you something as well.

Credit Karma offers free credit scores. Credit Karma is legit, but it’s scores are estimates based on only one credit report. Credit Sesame also offers a free estimated credit score. You will want to be very careful with services like Credit Check Total which actually sign you up for costly credit monitoring when you get a “free” credit score from them.

The best way to get a legitimate free credit score is from your bank or credit union. Many financial institutions monitor your credit score on an ongoing basis. Sometimes, getting the last score they pulled for you is as simple as just asking, or check the website.

As with all things related to money on the internet, it is important to be informed and to know exactly what you are looking for, and making sure you get to the right place. Another good precaution is to generate a temporary or limited credit card number if your credit card company allows it. That way, even if you do fall for a scam, your liability is limited.


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Finance Gourmet on December 19, 2014

I have written here before about how people are not robots and that earning, spending, savings and investing money is seldom done in an emotionless vacuum. Of course, that doesn’t mean you shouldn’t understand what is the “right” move according to an unemotional spreadsheet, but actually living with your money and personal finance is much more important than trying to pretend you should strive toward never doing anything but what the calculator says is right.

Spending My Values

The concept of spending your values, is not mine. I’m not sure where it came from originally, but now that I’ve heard of it from someone else, I thought it would be interesting to take a look at it, and pass the idea on to you.

When we look at spending money responsibly, the first thing we do is look at a budget, whether formally written down and calculated, or just sort of sketched out mentally. The main component of spending responsibly is not spending more than you have. After that, personal finance at its most basic level is paying your obligations in any given month, and then, determining where to spend and save whatever is left over.

For many of us, there are certain unconscious value judgements made along the way whether we realize them or not. For example, saying something like, “I shouldn’t be spending that much money eating out,” or that much money on shoes, or clothes, or movies, or whatever, comes from an unarticulated value system inside of you. After all, you are the one that determines how much spending on clothes, or restaurants, or happy hours, is “right” and how much is “too much.”  If you ever examined the same ideas from others, you would likely find much different answers.

Part of this stems from what we consider to be luxury versus necessity. But, here too, there are a lot of different ways to value such things. For example, food is necessary, but one can spend more or less on groceries depending upon what is important to them. For example, I spend more money on organic milk because my children drink a lot of it, and I’m concerned about all the stuff they put in it. That makes my mile cost about a $1 more than the other milk. I’m fine with this because I feel that it is “worth it.” On the other hand, I don’t buy certain other things because they are “too expensive” even if that is what they cost.

In a real way, this is spending your values. I buy organic milk because my values say that is an important thing to do for me and my children.

But, have you ever thought about the rest of your values?

For example, a friend of mine, who brought up the concept of spending your values to me, is a big believer in the arts, in particular performing arts. Now, before, she would do her budget just like I do, with various categories of bills, gas, food, etc…

At the end, she would have an “entertainment” or “extras” category. It was from that money that she would buy things like tickets to shows or concerts. But, it dawned on her one day that those events and purchases were the most important things to her. So, she decided to spend her values by allocating more money to those types of events, than to things she valued less such as clothes or wine.

When developing a budget, tricks like spending your values are important because they give you the willpower to hold true to your budget. When the decision is between buying those boots or not is just between it is or isn’t in the budget, the decision can be tough. But, when the same decision is between valuing boots over a holiday performance at the local orchestra, well, that’s a different thought process entirely.

If you have trouble sticking to your budget, try consciously attaching your values to how you categories and spend your money. Make sure what is really important to you doesn’t end up in the “extra” or “leftover” category. It just might help you find the will to stick to your budget better.

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Finance Gourmet on December 15, 2014

As a former Certified Financial Planner, or CFP, I tend, like many other financial experts, to think (and write) in terms of the tricky, the convoluted, and the complex. The truth is that money and personal finance can be very intricate and complex. However, it is also true that the biggest bang for the buck financial planning wise comes from doing the most basic things. Too often, we get caught up in things that actually end up being tiny details of your overall financial life.

For example, many people shop endlessly for higher savings account interest rates. Whether you have a high-yield savings account, a regular savings account, or even a kids savings account, the interest rate matters far less than how much money  you put in it.

If you have $10,000 and you put it in a regular savings account earning 0.5 percent, your interest for the year will be approximately, $50. If you got double that rate, 1.0%, then you’d have $100 in interest. In either case, you would still basically just have $10,000 at the end of the year, $10,050 or $10,100, respectively. Neither has a meaningful impact on your overall financial status. On the other hand, if you saved $100 per month for that same year, you would have amassed an additional $1,200. While that doesn’t change you from middle class to wealthy, the difference between $10,000 and $11,200 is actually meaningful. In other words, what really matters is finding a way to save, not finding the highest rate, especially when you are often talking about tenths of a percent between accounts most times, rather than the mythical “double.”

So, just what would a basic financial plan look like for someone who has managed to get their personal finances to the stage where they can save and invest some money, and they want to go beyond just sticking it in a savings bond, bank account or CD account? Actually, it’s pretty simple. Just a few moving parts to get started, and then plenty of room to grow into a more advanced personal financial plan when the money starts building up.

Starter Financial Plan

Step 1: 401k Retirement Plan

Most people will tell you to build up some savings first. That is the correct advice for robots, spreadsheets, and humans without any emotions toward money. For everyone else, I’m here to tell you that real people “figure it out” when it comes to things like covering their expenses. Figuring it out almost always involves eventually raiding your savings. That means that your savings are not a long-term financial building block for you, not yet.

Instead, you should start saving in your 401k. A 401k not only helps you save for retirement, and helps you save money on taxes, it also prevents you from robbing the money you work so hard to save in response to life. There is a 10 percent tax penalty on early withdrawals, plus you have to fill out paperwork, and go talk to that lady in accounting. Trust me when I tell you that for most people, the difficulty of raiding a 401k plan means they don’t end up doing it. You figure something else out, and that is why it is the one place regular Americans actually build up wealth over time. I’ve seen it over, and over again.

If you work a decent job with a professional company, they almost certainly offer a 401k. If your employer does not offer a 401k, chances are you need a better job for long-term financial success. That doesn’t have to happen today, but accept that reality and start working toward it somehow.

Opening a 401k plan is usually pretty easy because your company’s HR department will help you with the paperwork. The two main things you’ll need to figure out are

  1. How much money to put in your 401k
  2. Where to invest your 401k

I’m going to tell you a big secret of long-term financial planning like retirement planning. What you do with #1 matters WAY MORE than what you do with #2. Most people think it is the other way around, but the truth is that putting in 10 percent instead of 5 percent will matter much more over the long run than if you pick the investment that earns 8 percent over the one that pays 10 percent.

Your goal is to eventually save 10 percent of your income into your 401k plan. That is probably impossible as you start today. That isn’t a problem. Pick an amount and start getting it in there. Even 2 percent is fine.

The secret is to increase it as you get the opportunity. Did you spouse start a new job?  Great, boost your 401k by 1 percent before you get used to the extra money. Did you get a raise? Great, boost your 401k contributions by 1 percent. Keep going. If you do the math, you are only 8 raises away from a 10 percent contribution rate if you start at 2 percent.

Now, here is the key to financial planning for retirement. No matter what ad you see, no matter what some finance guy tells you, no matter what you hear about taxes in retirement, or whatever the song is, do not do ANYTHING ELSE for retirement until you are contributing 10 percent of your salary into your 401k. Then, AND ONLY THEN, should you worry about stuff like an IRA, or some kind of life insurance or annuity, or anything else.

The truth is that those other things are good ideas and a good way to save money for retirement, but every single one of them should be done AFTER you are putting 10% into your 401k, and not a penny before. (I’ll try and cover this in more detail another time, but for now, your basic financial plan success depends on you getting 10 percent of your salary into your 401k plan as soon as you can.)

Where To Invest Your 401k Plan Money

Too many people get hung up on where to invest. The actual key to financial planning success is how much you invest, and for how long. Your plan will have several different choices. If it is too confusing and you just don’t want to deal with it, pick one of the Asset Allocation, or Target Date funds. These funds choose the investments for you and adjust them as you get older. However, these funds are pretty much always too conservative, almost to a fault. So, pick the one above where you think you should be.

That is, if you plan to retire in 2040, pick the 2050 target plan. If you think you are a Moderate investor, pick the Moderate-Aggressive plan.

If you want to pick your own investments, feel free. Since this is a basic financial plan for everyone, we won’t go into that right now, but read some of the investing and retirement plan articles on this site to help educate yourself. Whatever you do, do not trade in your 401k plan account. Each year, at the end of the year, rebalance your money so that you don’t get overloaded into any one investment, but that is it. Let time and the market do the work for you.

No matter what you do, DO NOT pull your money out of your investments when the stock market goes down. It will go down again. It always does, but it always goes back up too. Even more importantly, do NOT stop contributing or lower your contribution when the market looks bad. It will feel like the right thing to do, but it isn’t. Buying while the market is going down is buying LOW. That’s a good thing, remember?

stock market recovery

Look at this chart. You’ll notice that if you bought at the very top before the crash that led to the Great Recession, you made all of your money back, no losses, in just 5 1/2 years. But, even more importantly, every single dollar you contributed to your 401k plan during those 5 1/2 years isn’t just recovered back to zero losses, everyone of those dollars is making a profit. The money you contributed there when things were bottoming out has has almost doubled in value. Bet you wish you could go back and put more in then, not less.

401k Part of Financial Plan Steps

  1. Open your 401k plan
  2. Start contributing what you can
  3. Increase your contributions whenever you can
  4. Keep contributing
  5. Don’t stop contributing
  6. Seriously, don’t stop contributing

Next Step? Savings, banking, and credit cards.

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Finance Gourmet on December 10, 2014

OK, I get asked all the time about where to get the best rates for a savings account.  First off, you want a money market account, not a savings account.   Money market accounts pay better rates in exchange for restrictions that should be very easy for you to meet. (You can check here for information about kids savings accounts.)

The Online Banks

Next, if you are purely interested in rates, then online banks are the way to go.  There is a catch, but it isn’t what you think.  99% of the online banks you will find through a reputable source are backed by real banks with real assets offering better rates in exchange for not having to hire tellers to process your transactions.  The catch is that you probably still need a regular local bank of some sort to handle certain things.  The time it takes to transfer money from your local bank to your online bank is usually 3 or 4 business days, so we are not talking about instant access to your cash.  However, many online accounts come with ATM cards, so if you just need $40 for gas, no problem, but if you need $800 to cover your mortgage payment, then you’ll need to plan ahead.

If you haven’t shopped for savings rates in a while, you might be in for a little shock.  As you may have noticed, the Fed has been slashing interest rates in an effort to prop up the sluggish economy.  That means loan rates are down (good news), but so are savings rates (bad news).  Right now, you’ll be looking at 1% for the highest yielding accounts and closer to 1/2% for your more standard accounts.  As always, you can get higher rates with higher balances.

The best place to find online savings rates is at Bankrate.com.  If you aren’t familiar with Bankrate, you probably should be.  Overall, it is a pretty honest site without too much flash or smoke.  Yes, there are ads, but they tend to be non-intrusive.  Skip the articles or whatever on the front page and click to go right to what you are looking for whether it is home equity loans, car loans, or bank rates.  Don’t take these rates as the gospel, but they will give you a solid ballpark of what you are going to be looking at when you are ready to move forward.

Choose the minimum balance you are looking at and click next.  Be sure to watch the fine print for introductory rates or other tricks.  You aren’t some sucker who is going to get all dazzled by a high rate for 3 or 6 months.  You are a savvy customer who wants the goods, not the gimmicks.  Again, don’t take this chart as set in stone.  Use it as a place to start your research.

The Fine Print

Watch out for the fine print.  Most commonly you’ll find things like being required to also have a checking account, or being required to have a direct deposit.  Before you sign up make sure that all the fine print and monthly fees makes sense for you.

Remember, don’t fall for intro rates, and read all the terms and conditions.  It might sound like legal mumbo jumbo, but somewhere in there you will clearly understand if you are required to have direct deposit or make 3 ATM withdrawals per month.  Whatever account you choose, be sure it fits how you use your money.

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Finance Gourmet on December 4, 2014

OK, if you have already opened a 529 plan, and you have chosen which investments to use in your 529 plan, then the next step is to actually start getting money into your college savings account. And, it is here where the most important thing about saving money for college comes into play. The most important thing, more important than choosing the right college savings plan, more important than choosing which investments to use in your college savings plan, and more important that updating your higher education financial plan, is consistently automatically investing money in your college savings accounts.

Let me go into a little more detail, it’s that important. We get caught up in the notion that what matters when saving or investing money are things like investment returns, taxes, using the right account, or getting the right financial advice. None of those things matters nearly as much as consistently investing more. When I was a financial advisor some of the biggest 401k accounts, or 457 plans, I ever saw were from people who didn’t know a thing about them. These people opened the account when they were hired, set some sort of amount to contribute, picked an investment, or just used the default, and then never touched it again. The reason these people were so successful had nothing to do with their understanding of investments or knowing everything about 401k accounts. Every single bit of their success came from putting 5 percent (or whatever) of their paycheck into their 401k retirement plan, every single paycheck without fail.

I’ve talked before about how compound interest and investing returns take a VERY LONG time to add up to real money, so I won’t recover it here (click that link if you want the proof) but what really speeds things up is to keep investing, keep saving, without delay, and without excuses.

So, in a very real way, setting up your saving and investing schedule for your 529 plan is the most important thing about saving for college.

Automatically Save Monthly into 529 Plan

Fortunately, pretty much every 529 savings plan out there allows you to save automatically in one way or another. The Colorado 529 College Invest Plan that we have been using as an example allows you to save via payroll deduction (if your employer allows) or via ACH, which is the technically term for an automatic withdrawal from your checking account. (You could theoretically set up an ACH from a savings account, but federal regulations limit those accounts to just six withdrawals per month, so usually that isn’t recommended.)

529 plan automatic contributions

The best way to save for college in your 529 plan is to setup automatic monthly withdrawals (called an AIP, or automatic investment program, by the folks at college invest.) For most people the best time to setup automatic payments or investments is right after you get paid. Some people like to call this, “paying yourself first.” The idea is that we are creatures of emotion and impulse, and we don’t live our daily lives according to a budget spreadsheet. That means that if you wait until later to save, you may find out that you are off of budget, that you don’t have enough money to save that month for college. This is the biggest impediment to your building up a big college savings account. Every month you skip is money you not only lose by not saving, but money you don’t earn any interest or investment returns on. Don’t kid yourself that you will “make it up.” In all the years I was involved in personal finance and planning, the number of people who ever made it up was minuscule. If you don’t have extra money now, you won’t have extra money later. The people who did eventually make it up, usually did so out of an unexpected windfall of some sort.

If you get paid on the 1st or the 31st, then set up your automatic investment for the 2nd or 3rd (this allows you to avoid any issues with weekends or holidays). Make it automatic, that way you don’t have to remember. There is another reason to make it automatic. You know how I just told you that we are creatures of emotion and sometimes we don’t roboticly follow our budget? We are also creatures of effort. In order to make a non-automatic investment, you not only have to remember, but you have to actually sit down and do it. How many times do you remember things while you are in the shower, or the car, or at work, and then they don’t get done because you forget about them by the time you get home, or wherever you need to be to actually do it?

If you have an automatic investment, you not only won’t forget, but you’ll be less likely to cancel it either. Just like you have to remember and then actually do it to make a non-automatic investment, you have to remember and then actually do it to cancel an automatic one. If it takes that much extra effort to cancel and investment, you are less likely to do it. That is using human behavior to your advantage, rather than the other way around.

If you get paid weekly or bi-weekly, that can be trickier. Still, you can set up an automatic investment just the same. Figure out when you have a peak in your checking account. Maybe it’s a time of month far away from when your mortgage payment or rent is due. Ideally, if you keep some extra cash in your checking account, this issue would be moot.

Annual AIP Increase

You remember those people with the big 401k accounts when they retired who didn’t know anything about investing or retirement planning I was telling you about. One of the other advantages they had is that 401k contributions are typically done via a percentage of your salary. The brilliant thing about using a percentage for your salary deferrals into a 401k retirement plan is that your contributions automatically increase when you get more income. Very few people contributing something like 8% of their salary to a 401k savings plan go back in and lower the percentage when they get a raise in order to keep contributing the same amount. Instead, they start contributing more, before they ever have a chance to notice or get used to what the higher pay is like. Again, that’s using human nature to your benefit.

529 college investment increase

Which brings us to an interesting feature of the College Invest 529 savings plan. Although this is not unique, not all plans have this. It’s called an Automatic AIP increase. It works by automatically increasing the amount you invest in your college education fund. You pick a month, and an amount and every year, they will automatically start taking more money from your account. Again, use this feature to take advantage of human nature. Even if you don’t feel like doing an increase in a year, it will happen automatically. What are the odds you’ll actually go back in and change it when it happens? On the other hand, if you don’t use this feature, what are the odds you’ll go back in and increase in a year, instead of it being 18 month, or 3 years, or never?

Click the AIP button and choose a month. If you usually get a raise in December, then pick January. The increase should be meaningful, but doesn’t have to be huge. If you are contributing $100 per month, maybe make a $10 increase. That’s 10 percent. If you can do more, then do it. Don’t forget to manually increase it, or contribute a lump sum when you get a bonus or tax refund, all the way up to your maximum 529 plan contribution.

Remember, contributing automatically, consistently has the biggest impact on your overall success.

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